BAT Industries PLC & Ors v Commissioners of Inland Revenue & Anor

It is appropriate to start the analysis of this issue by considering the relevant attributes of the hypothetical “well-advised multi-national”. The whole function of this construct is to enable the court to consider what would have been discovered, and when, if the Claimants had exercised “reasonable diligence”.

Since that question arises in the context of the DV Challenge and the ACT Challenge, the well-advised multi-national should, for the purposes of the comparison relevant to a DV Challenge, be assumed to be in receipt of overseas dividends on which there was a UK tax charge because DTR was insufficient to eliminate the UK corporation tax liability on those dividends. For the purposes of the comparison relevant to the ACT Challenge, the well-advised multi-national would have surplus ACT that it could not use for reasons similar to those set out in paragraph ‎10.ii) above.

Therefore, the hypothetical well-advised multi-national would have a structural issue. The UK tax issues summarised in paragraph ‎52 were fundamental and arose because of its very multi-national status. There was ample evidence as to the depth of the concern of multi-national groups who found themselves in a structural surplus ACT position. In the 1980s, a “surplus ACT sufferers’ club” was organised that included BAT. That group lobbied extensively for changes in the law to alleviate the situation. BAT was quite prepared to undertake tax planning transactions and litigate them as a means of reducing its surplus ACT. These matters demonstrate that the well-advised multi-national would be eager indeed to find some way of dealing with tax issues that it faced.

All sides were agreed that a well-advised multi-national would take some kind of professional advice. However, they were not agreed on the questions that it would put to its advisers, or indeed on the characteristics of the advisers that they would instruct (for example whether those advisers would be pure UK tax advisers, pure advisers on matters of EU law, or a mixture of both).

As noted in paragraph ‎21.i), the test of “reasonable diligence” focuses on discoveries relevant to the Claimants’ pleaded case. Moreover, the well-advised multi-national is assumed to want to discover whether any mistake has been made. Accordingly, the well-advised multi-national should be assumed to be asking for advice on whether the Relevant UK Law was compatible with EU law. A taxpayer asking that question in 1973, when the UK first joined the EEC, would have been far-sighted indeed since there was at that time very little to suggest that the Relevant UK Law was not compatible with EU law. However, by July 1996 which, on HMRC’s case, was the latest date for any constructive discovery, there was an appreciation that even direct tax measures, ostensibly within the competence of member states, could contravene Treaty freedoms (see, for example Avoir Fiscal). Therefore, while there is no evidence as to whether the Claimants were actually asking advisers about whether the Relevant UK Law was compatible with EU law in July 1996, I do not consider that any conceptual difficulties arise in considering what they could have discovered if they had asked that question.

That leads naturally to the question of who a well-advised multi-national would approach for advice. There was debate as to whether advice would come from an “EU law generalist” or from a “tax specialist”. However, it is clear to me from the evidence of both Mr Gammie and Dr Whitehead that the adviser consulted would have to have expertise in both tax and EU law matters. It does not matter greatly whether that expertise was held by a single individual (such as Mr Gammie himself) or by a team of individuals. Nor does it matter greatly who the multi-national approached initially: if a “tax specialist” was initially approached who lacked EU law expertise, he or she would necessarily involve someone with the necessary EU expertise. If an “EU law generalist” was initially approached, he or she would necessarily involve a tax specialist given that any view on whether there was a “worthwhile claim” would have to be grounded in a detailed appreciation of the UK tax regime applicable to both domestic and overseas dividends.

I conclude, therefore, that a well-advised multi-national exercising reasonable diligence would take professional advice as to whether a DV Challenge or an ACT Challenge would be worthwhile. That professional advice would be given by an adviser, or team of advisers, (“the Appropriate Adviser”) having expertise both in the UK tax system applicable to domestic and overseas dividends and in EU law matters.

The Appropriate Adviser would know and understand salient features of the UK tax regime applicable to overseas dividends and ACT including, but not limited to, those matters summarised in paragraph ‎8 above. Therefore, the Appropriate Adviser would understand that there was a difference between the way in which a UK resident company was taxed on receipt of overseas dividends, as compared with the receipt of a dividend from another UK company. The Appropriate Adviser would appreciate that there was, at least in UK tax terms, a rationale for that difference in treatment which I have summarised in paragraph ‎9.

The Appropriate Adviser would know that the Treaty contained no provision that required member states to harmonise their direct tax regimes applicable to cross-border dividends. The Appropriate Adviser would recognise that Article 73d of the Treaty, that took effect from 1 January 1994, expressly envisaged that member states were entitled to apply relevant provisions of their tax law to distinguish between taxpayers with different places of residence, while noting that this did not afford member states the power to engage in arbitrary discrimination or a disguised restriction on the free movement of capital. The Appropriate Adviser would also understand that, whereas Article 99 of the EEC Treaty as in force in July 1996 contained a specific legal basis for the harmonisation of indirect taxes, there was no equivalent provision applicable to direct taxes. Moreover, the Appropriate Adviser would realise that, when the requirement that single market measures be taken unanimously by the Council was relaxed following the Maastricht Treaty, Article 100a of the EEC Treaty was added to exclude fiscal provisions from the scope of that relaxation.

Accordingly, the Appropriate Adviser would consider that there were a number of provisions of EU law that appeared to give member states a good degree of flexibility in formulating a system for the taxation of cross-border dividends. That said, the Appropriate Adviser would realise that member states who adopted an imputation system would be implementing a regime that had the ability to distort cross-border investment by providing a more favourable regime to companies receiving domestic dividends as compared with those receiving overseas dividends. That feature was at odds with the aspirations of the EU dating back to 1973 and even earlier. It was for that reason that EU institutions had made various attempts prior to 1996 to harmonise the tax treatment of cross-border dividend flows without success.

The Appropriate Adviser would be aware of the “Parent/Subsidiary Directive” that was implemented in 1990. That required member states to apply one of two regimes when a parent company received a dividend from a subsidiary resident in a different member state but fell short of imposing a single harmonised system on all member states. The Appropriate Adviser would consider that to be a form of negotiated compromise that was, at least in 1990, acceptable to member states who were jealously guarding their competence to legislate on tax matters and to the European Commission which aspired to a more harmonised tax regime applicable to cross-border dividend flows.

The Appropriate Adviser would realise that the European Commission had not given up on efforts to impose greater harmonisation going beyond the Parent/Subsidiary Directive. It had established the Ruding Committee to examine the tax environment for companies in the EU and to make recommendations for further EU action in the company tax field. One of the Ruding Committee’s recommendations when it reported in 1992 was that the existing discrimination between the tax treatment of dividends received within the same member state, as compared with dividends received from another member state, be dealt with by requiring member states, on a reciprocal basis, to give an imputation credit reflecting tax paid in the member state in which the dividend payer was established. However, there was little enthusiasm for taking forward the Ruding Committee’s recommendations.

The Appropriate Adviser would not, however, believe that the UK was free to legislate entirely as it saw fit in relation to overseas dividends. Direct tax was not an enclave to which Treaty freedoms were inapplicable. That much was clear from as long ago as 1986 with the judgment of the CJEU in Avoir Fiscal. It had been reinforced in judgments of the CJEU in Case (81/87) Daily Mail, R v Inland Revenue Commissioners ex p Commerzbank AG (Case C-330/91) [1994] QB 219, and in Halliburton Services BV v Staatssecretaris Financiën (Case C-1/93) [1994] E.C.R I-1137. The fact that direct tax law was not a “no-go zone” for the purposes of Treaty freedoms was further emphasised by the publication in 1994 of the first edition of EC Tax Law by Farmer & Lyal (“Farmer & Lyal”). That textbook contained much discussion of principles of direct tax law, notwithstanding that this area was not harmonised within the EU, which would have emphasised to the Appropriate Adviser that EU law was of some relevance to direct tax matters that were ostensibly within the competence of individual member states.

The judgment of the CJEU in Schumacker would have been of real interest to the Appropriate Adviser since, as Mr Gammie accepted in cross-examination, it was a “sort of invitation” to probe the extent to which member states truly were exercising their competence in direct tax matters in a manner that was consistent with the Treaty.

Moreover, the Appropriate Adviser would be aware that multi-national groups were taking up the “invitation” to which Mr Gammie refers. Shortly after the CJEU gave judgment in Schumacker, Hoechst AG and its UK subsidiary Hoechst UK Limited (“Hoechst UK”) commenced proceedings in the High Court challenging two features of the UK tax regime applicable to cross-border dividends:

Despite both Mr Gammie and Professor Barnard performing a meticulous review of academic and professional literature, neither the Claimant nor HMRC invite me to conclude that there was any contemporaneous publication by July 1996 indicating with any precision that Relevant UK Law was, or was not, compatible with the freedoms set out in the Treaty. It follows that the Appropriate Adviser would not be aware of any academic or professional suggestion that Relevant UK Law was incompatible.

In her expert report, Professor Barnard set out a detailed survey of judgments of the CJEU in a variety of areas extending well beyond direct tax and including decisions relating to matters as diverse as employment rights and fishing quotas. In their closing submissions, HMRC placed little specific reliance on judgments of the CJEU falling outside the tax arena. They did, however, invite me to conclude that the Appropriate Adviser would approach matters in the same way as an EU lawyer by concluding that any difference between the tax treatment of a UK dividend and an overseas dividend would “look like a straightforward case of discrimination”.

I will not make that finding. A general EU lawyer in July 1996 would appreciate that any treatment that “discriminated” between the situations of a resident of one member state and a resident of another would not inevitably infringe Treaty freedoms. That was because the applicable principle of EU law was that discrimination was only objectionable if it involved different treatment of comparable situations. That concept applied differently in cases of a breach of the Treaty freedom of establishment to the way it applied to a breach of the principle of free movement of capital, but no party suggests that the differences are material. Therefore, an Appropriate Adviser considering the difference between the UK tax treatment of UK dividends, as compared with the treatment of non-UK dividends, would not consider the difference in treatment to be conclusive of discrimination. Rather, the Appropriate Adviser would ask whether a UK-resident company paying a dividend to a UK resident parent was in a comparable situation to that of a non-UK resident paying a similar dividend.

In their closing submissions, HMRC point to the fact that Mr Verkooijen must have made his challenge to the Netherlands tax regime applicable to individuals receiving dividends from another member state some time in 1992 or 1993. They also observed paragraph 6 of the Advocate General’s opinion in Verkooijen shows that a domestic court in the Netherlands (the Gerechsthof te ‘s-Gravenhage) had determined the challenge in Mr Verkooijen’s favour. While I have found that the Appropriate Adviser would be aware of Hoechst’s challenge to the UK tax system referred to in paragraph ‎65 above, I conclude that the Appropriate Adviser would not be aware of the Netherlands proceedings instituted by Mr Verkooijen in July 1996. There was no suggestion in Mr Gammie’s expert report that he personally was aware of domestic proceedings in the Netherlands. I do not consider that an Appropriate Adviser being asked to express a view on whether there was a “worthwhile claim” would conduct a survey of authorities from a non-UK jurisdiction.

In my judgment, an Appropriate Adviser would have advised in July 1996 that there was no worthwhile claim of the kind that the Claimants have pleaded.

That conclusion follows from the following opinions that Mr Gammie expressed as to the state of legal thinking which I accept and prefer to Professor Barnard’s contrary analysis:

Mr Gammie expressed his opinions summarised in paragraphs ‎71.i) to ‎71.iii) above by reference to the position “at the start of 1996”. However, in my judgment there was no material difference between the position at the start of 1996 and the position as at 11 July 1996 (noting the points in paragraph ‎30 as to how HMRC came to alight on this date).

In the remainder of this section, I test the conclusion set out in paragraph ‎70 against various contra-indications on which HMRC rely.

HMRC suggested that Mr Gammie conceded in cross-examination that a worthwhile claim could be brought by the mid-1990s. Reliance was placed on a passage of cross-examination in the transcript for Day 3, page 82 lines 1 to 20. I do not consider that to be an accurate interpretation of what Mr Gammie accepted. Throughout his evidence, Mr Gammie used a metaphor of climbing a mountain shrouded in mist to represent the task of making a successful DV Challenge or ACT Challenge. While the mist remained in place, he said that no one was aware that there was even a mountain to climb. Once the mist had cleared, the mountain could be identified, but it still remained uncertain whether it could be climbed. Mr Gammie certainly accepted that the mists began to clear in the mid-1990s, but he did not accept, continuing with his metaphor, that there was any worthwhile possibility of the mountain being climbed in the mid-1990s.

HMRC also relied on a passage of Mr Gammie’s cross-examination in the transcript for Day 3 between pages 102 and 103. In that passage, Mr Gammie confirmed that (i) Hoechst UK brought its claim described in paragraph ‎65.i) above in 1995; (ii) in 1995, Mr Gammie thought that Hoechst UK’s claim was likely to succeed; (iii) that principles of EU law as applicable to the Hoechst UK claim had not changed much since 1991 and therefore (iv) if Hoechst UK had made its claim in the years before 1995, he would similarly have thought at that stage that it was likely to succeed. However, HMRC’s reliance on Mr Gammie’s concession is misplaced since, as explained in paragraph ‎96 below, Hoechst UK’s claim was very different from the Claimants’ DV Challenge and ACT Challenge.

HMRC attach significance to Mr Gammie’s acceptance in cross-examination that “it may be that out there, there was somebody who thought otherwise [than the consensus he put forward in his expert report]”. I do not consider that to be significant. Mr Gammie had the expertise to describe a consensus, but could not reasonably confirm the views of everybody advising on the issue at the time.

In a similar vein, I do not accept HMRC’s assertion that Dr Whitehead conceded the point in his cross-examination. He certainly accepted that it was conceptually possible that a far-sighted tax manager in a multi-national armed with a keen appreciation of matters of EU law could have spotted the possibility of making a DV Challenge or an ACT Challenge before the Big 4 accounting firms did when they started forming GLOs in the early 2000s. However, that was not an acceptance that a worthwhile claim could have been made in July 1996. Dr Whitehead also accepted in cross-examination that none of the factual evidence served by the Claimants asserted positively that they delayed issuing their claims pending the receipt of tax advice. However, that was simply an acceptance of what the witness evidence said. The question before the court is not what the Claimants actually did but what a well-advised multi-national could have done. Dr Whitehead’s “acceptance” in cross-examination says nothing about the proper question that is before the court.

I have already explained above some general points that have led me to give greater weight to aspects of Mr Gammie’s conclusions than I have to those of Professor Barnard. I also consider that Mr Gammie’s conclusion is more consistent with the situation that both a well-advised multi-national, and the Appropriate Adviser, would have been in on 11 July 1996.

HMRC seek to characterise the consensus that I have described in paragraph ‎71 as being unevidenced because no contemporaneous document has been produced that sets out the consensus in terms. I disagree. Mr Gammie is an experienced tax adviser who was advising on both tax matters and EU law matters at all times relevant to the present proceedings. The evidence as to the existence and nature of the consensus comes from Mr Gammie’s expert report which dealt with matters of which he had first-hand knowledge. I have already explained why Professor Barnard was not well-placed to gainsay Mr Gammie’s conclusions in this regard.

That said, the absence of contemporaneous material setting out the consensus is a relevant consideration. It could indicate that the consensus was so firm that it did not need documenting or that there was no consensus at all. I accept Mr Gammie’s conclusion that the consensus was operative despite not being documented.

In any event, although I agree that the full extent of the consensus that Mr Gammie described was not set out in the contemporaneous material that I was shown, there were contemporaneous allusions to it. Chapter 6 of Farmer & Lyal, entitled “The Impact of the Fundamental Freedoms”, contains just such an allusion. In that Chapter, the authors caution against precisely the broad approach to the Avoir Fiscal judgment that Professor Barnard, with the benefit of hindsight, advocates in her expert report saying:

It is important to appreciate that [Avoir Fiscal] was based on the fact that under French tax law the positions of the two types of taxpayer were substantially the same. The Court expressly left open the possibility that distinctions based on residence might in some cases be justified. That would, for example, probably apply to a refusal to grant tax credits on dividends paid by a resident subsidiary to its parent company resident in another Member State since the non-residence of the parent company would place it in a different tax position from a domestic parent company: the dividend income of the foreign parent company would not be taxable in the Member State of the subsidiary. The principle of non-discrimination, on which the judgment in Commission v. France is based, does not oblige a Member State to take account of the fact that a non-resident company may be subject to further taxation on certain income in its state of residence or elsewhere; double taxation arising from conflicts of tax jurisdiction must be resolved by convention or harmonization.

HMRC argue that this passage contains a limited conclusion to the effect that Hoechst AG’s claim for a payable tax credit (see paragraph ‎65.ii) above) was unlikely to succeed. I do not agree. The passage sets out a much broader conclusion that casts significant doubt on whether a UK company receiving a dividend from a non-UK EU resident subsidiary is in a comparable position to a UK company receiving a dividend from a UK subsidiary.

Next, HMRC argue that the point made in paragraph ‎71.i) was incapable of forming part of the consensus Mr Gammie describes since it was conceptually quite possible for “non-compliant” aspect of member states’ tax regimes to be dealt with on a piecemeal basis by the CJEU without the need for Community-wide legislative action. However, that argument overlooks pertinent aspects of the DV Challenges and ACT Challenges. These were not just challenges to particular aspects of a member state’s tax regime which could be seen, without any analysis of wider context, to discriminate unfairly between the treatment of residents and non-residents. Rather, the challenges struck right at the heart of the way in which the UK chose to deal (or not deal) with matters such as economic double taxation and so with the way in which the UK’s tax regime interacted with the tax regimes applicable in other member states. I have already explained factors that would have indicated to the Appropriate Adviser that the UK was to have a high degree of freedom on matters such as this. Neither HMRC’s submissions based on implausibility, nor Professor Barnard’s report, leads me to reject Mr Gammie’s conclusion set out in paragraph ‎71.i).

In a similar vein, I also reject HMRC’s arguments based on the implausibility of aspects of the consensus:

I do not accept HMRC’s argument that the consensus that Mr Gammie describes was simply a “general understanding that a [DV Challenge or an ACT Challenge] would face difficulties.” It was more than that: it was a consensus that such challenges would not be worthwhile.

HMRC also seek to downplay the significance of the professional consensus by describing it as an unduly “fixed mindset”. They suggest that a well-advised multi-national would have looked beyond tax advisers with this mindset and have engaged the services of EU law generalists who, unburdened by their tax counterparts’ mindset, would see the DV Challenges and ACT Challenges as obviously worthwhile claims for discrimination.

I do not accept that submission. The Appropriate Adviser would be aware (see paragraph ‎68 above) that a mere difference in treatment between persons based on their nationality did not necessarily result in a contravention of Treaty freedoms. There would be discrimination only if persons in comparable positions were treated differently. Accordingly, even if a well-advised multi-national consulted the kind of EU law generalist to whom HMRC refer in their submissions, that adviser would still need to consider whether the situations of a UK-resident dividend payer and dividend payer resident in a non-UK member state were “comparable”. That question could only be answered by discussing the matter with advisers with expertise in the detail of the UK tax regime. Those discussions would have engaged the professional consensus that I have described.

HMRC suggested that it was significant that Professor Barnard was not cross-examined on the statement in her expert report to the effect that Avoir Fiscal was a “turning point” judgment that “sent a clear message that the EU treaty provisions on the four freedoms could be used as a way of challenging potentially conflicting provisions of national tax law.” Reference was made to the judgment of the Supreme Court in TUI UK Ltd v Griffiths [2023] UKSC 48 on the need for expert opinion to be challenged by way of cross-examination rather than by way of submission. I attach little significance to the absence of cross-examination on this issue. Professor Barnard clearly considers that the Avoir Fiscal judgment was a turning point in CJEU jurisprudence. With the benefit of hindsight that opinion may, or may not, be correct. However, the correctness or otherwise of that opinion as at the date of Professor Barnard’s expert report sheds relatively little light on what an Appropriate Adviser would have thought at the time. That Professor Barnard holds her opinion on the implications of Avoir Fiscal falls far short of compelling the conclusion that, in July 1996, an Appropriate Adviser would consider the Relevant UK Law to give rise to what HMRC refer to as “a straightforward case of discrimination”.

HMRC also invite me to conclude that an Appropriate Adviser in July 1996 would conclude that the “general direction” of the CJEU’s case law was in favour of finding member states’ tax systems to be in breach of the Treaty. I will not make that finding either. As I have explained, an Appropriate Adviser considering whether a well-advised multi-national would have a “worthwhile claim” would not perform the kind of extensive analysis of CJEU authorities that Mr Gammie and Professor Barnard have undertaken. Rather, the Appropriate Adviser would approach the question at a much higher level of generality. As at July 1996, there was no obvious “general direction” in the CJEU’s jurisprudence. Certainly, some provisions of member states’ direct tax regimes were held to be incompatible with the freedoms set out in the Treaty. However, as Professor Tiley had noted in a case commentary prepared for the All England Law Reports in 1994, some cases were decided in member states’ favour:

… while the Court was able to find a clear breach of EC law in Halliburton, they found no breach in Bachmann v Belgian State Case C-204/90 [1994] STC 855. The urgent need is to discover the difference. This difference may lie in the concept of the cohesion of the tax system; a tax system may provide different rules for residents and non-residents if the difference is necessary to protect the cohesion of its tax system…

Professor Barnard’s expert report drew together the strands of an extraordinary number of CJEU authorities spanning over 30 years. However, that exercise does not cause me to doubt Mr Gammie’s opinion. That is because, in my judgment, Professor Barnard’s report does not displace a central conclusion that Mr Gammie reaches namely that in July 1996, an Appropriate Adviser would not have considered the situation of a non-UK EU resident subsidiary paying a dividend to a UK parent as comparable to that of a UK subsidiary paying a similar dividend.

Even though Professor Barnard did not address head-on the question of comparability, she has expressed opinions on when a well-advised multi-national could, with reasonable diligence, have discovered that a DV Challenge and ACT Challenge would be worthwhile. To a significant extent those opinions highlight the deficiency in her report that consists of a lack of detail on what appropriately qualified professional advisers were actually thinking at the relevant time:

In written closing submissions, HMRC emphasised the significance of judgments of the CJEU in Commerzbank and Halliburton. I consider that significance to be overstated with the benefit of hindsight and to be at odds with what practitioners thought at the time, as explained in Mr Gammie’s report.

HMRC note that (i) it was well known since the Avoir Fiscal decision, and indeed before, that despite member states’ competence to legislate on direct tax issues, tax provisions that breached fundamental freedoms could be challenged; (ii) Mr Gammie accepted that the judgment in Schumacker constituted an “open invitation” to hunt out non-compliant tax measures and (iii) Hoechst was known to be taking up that invitation before July 1996. I have considered these points carefully to test whether, since Hoechst had issued proceedings before July 1996 on matters concerning the UK’s dividend tax regime, a well-advised multi-national could have done the same with a DV Challenge or an ACT Challenge.

The points summarised in paragraph ‎93 do not cause me to doubt Mr Gammie’s opinion. First, although Schumacker came to be cited in later judgments of the CJEU as authority for the very general proposition that, although direct taxation falls within the competence of member states, those member states must nonetheless exercise their competence consistently with Community law, the full implications of that proposition were not appreciated by July 1996. Moreover, the facts of Schumacker were stark. Mr Schumacker was a Belgian national, who lived in Belgium with his family. He earned no significant income in Belgium and derived all of his income from paid employment in Germany. When Germany taxed him as a non-resident, and thereby denied him benefits that would be available to resident taxpayers, there was an obvious force to the argument that he was in a comparable position to a German resident even if generally, residents and non-residents were not in comparable positions.

Contemporaneous writing on the Schumacker case emphasised that it set out an exception to the general rule, on the non-comparability of residents and non-residents for direct tax purposes, rather than a new and wide-ranging rule. It also emphasised Mr Schumacker’s relatively unusual position of earning almost all his income from sources in a different member state from the one in which he resided. For example, in her annual review she prepared for the All England Law Reports on interesting EU law cases in 1995, Professor Barnard herself wrote as follows about Schumacker:

In respect of direct taxes [the CJEU] said that the situations of residents and non-residents in a given state were not generally comparable since there were objective differences between them from the point of view of the source of the income and the possibility of taking account of their ability to pay tax or their personal and family circumstances. Since [the applicable German rules] constituted different treatment of non-comparable situations this in itself did not constitute discrimination. However, on the facts of the case, a non-resident taxpayer who received all or almost all of his income in the state where he worked was objectively in the same situation as a resident in that state who did the same work there.

I also accept Mr Gammie’s opinion that, in July 1996, a DV Challenge and an ACT Challenge would be perceived as very different challenges to Hoechst UK’s claim to be able to make a group income election with a non-UK EU-resident parent. At the heart of the Hoechst UK’s claim was a simple proposition that, when it paid a dividend to a German resident parent, it was in a comparable position to that of a UK company paying a dividend to a UK parent. No question of “coherence” arose, because Hoechst UK’s claim, as distinct from the more ambitious claim made by Hoechst AG, did not require the UK both to forgo charging ACT and to confer a tax credit on the recipient of the dividend. Moreover, Hoechst UK’s claim did not raise any question touching on double taxation.

By contrast, both a DV Challenge and an ACT Challenge raised questions touching on the coherence of the UK’s tax system and on double taxation matters. The DV Challenge sought to establish that the UK should refrain altogether from taxing dividends received from non-UK EU resident subsidiaries even though the UK had collected no tax on the profits out of which those dividends were paid. The ACT Challenge sought to establish that the UK should treat EU dividends as FII, with a consequent reduction in the amount of ACT collected, even though no UK tax was payable on the profits out of which the EU dividends were paid and no ACT had been paid when those dividends were paid.

This distinction, which Mr Gammie highlighted in his expert report, is not an after-the-event rationalisation. Professor Tiley’s commentary on Bachmann written in 1994 (referred to in paragraph ‎89 above) was indicative of a contemporaneous view that the concept of the “cohesiveness” of a tax system could be invoked to justify the difference in treatment to which the Relevant UK Law gave rise.

The distinction was alluded to in an article that Mr Gammie wrote together with Mr Guy Brannan of Linklaters in 1995 entitled “EC Law Strikes at the UK Corporation Tax – The Death Knell of UK Imputation?” That article analysed the claims of both Hoechst UK and Hoechst AG. It explained in detail the authors’ view that Hoechst UK’s claim should succeed as it did not involve propositions materially different from those that the CJEU had accepted in Avoir Fiscal but that of Hoechst AG was “speculative”. Moreover, the conclusion of the article was muted, falling short of suggesting that multi-nationals had any worthwhile claims that the UK’s dividend regime breached Treaty freedoms:

the future direction of ec corporate tax policy

What seems clear is that, at the moment, the initiative in corporate tax matters has moved from the Commission and Member States to the hands of the taxpayers and their advisers and the European Court of Justice. Time will tell how far this process will go and whether governments will prove able to take individual or collective measures to deal with the corporate tax issues that European economic and business integration presents.

The significance in this article is not whether it does, or does not, correctly foresee the direction of travel in subsequent CJEU cases. Rather, what is significant is its conclusion (correct in the event) that Hoechst UK’s claim would succeed for reasons similar to those adopted by the CJEU in Avoir Fiscal, that Hoechst AG’s claim was “speculative” and the absence of any suggestion that the UK’s wider system of dividend taxation was likely to contravene Treaty freedoms. It provides contemporaneous support for the opinions that Mr Gammie expresses in his expert report as to how Hoechst’s claims would have been perceived in July 1996.

I have considered the matter carefully but conclude that neither the judgment in Schumacker nor Hoechst bringing a claim in 1995 calls into question the conclusion that I have expressed in paragraph ‎70 above.

The Claimants have received extensive professional advice over the years. They have not waived their privilege in that advice and so I have not been shown it. HMRC do not invite me to draw any adverse inference from the Claimants’ stance but suggest that it makes it difficult for the Claimants to discharge their burden of proof.

I will consider this issue afresh when I address, later in this judgment, whether a constructive discovery was made after July 1996. However, I regard the matter as being of no significance as regards the situation in July 1996. The Claimants have, in my judgment, discharged their burden of proof by reference to Mr Gammie’s expert report.

HMRC referred me to certain observations of Henderson J at [399] and [400] of FII HC1. Those passages formed part of Henderson J’s analysis of whether HMRC or another organ of the UK government had committed a “sufficiently serious breach” of EU law to justify the award of damages under “Francovich” principles. At [399], Henderson J criticised HMRC for failing to give any serious consideration to potential EU law issues arising from the Case V charge after commencement of the Hoechst litigation in 1995. Henderson J went further at [400] indicating that he would have expected HMRC to have initiated a detailed review and “health check” of all of the UK’s tax legislation with a significant cross-border element soon after the judgment of the CJEU in Avoir Fiscal.

However, I consider that those observations shed little light on the state of legal thinking as at July 1996. Henderson J was examining the actual conduct of HMRC and the UK Government rather than the hypothetical conduct of a “well-advised multi-national”. It follows that Henderson J had none of the expert evidence on the state of legal thinking that I have had. Moreover, at [401], Henderson J concluded that the criticisms that he made did not count for very much on an objective appraisal of the situation. I conclude that his observations do not call into question the expert opinion that Mr Gammie has advanced.

My conclusions in the section above lead me to determine that there was no constructive discovery by July 1996. If a well-advised multi-national had consulted an Appropriate Adviser in July 1996, the advice would have been that there was no worthwhile claim.

In their closing submissions, HMRC made a number of points about how advisers actually behaved at or around the time that GLOs challenging aspects of the UK’s tax system were established from 2002 onwards. It was suggested, for example, that advisers viewed those GLOs as a source of revenue, and so were incentivised to keep confidential the basis on which challenges to the UK’s regime could be brought in order to prevent other advisers from establishing competing GLOs. However, to the extent that this or similar behaviour took place at all, it would have been after 2002 and, accordingly, does not call into question the conclusion that I have expressed in paragraph ‎106.

HMRC also referred me to witness statements made earlier in these proceedings, which they submitted showed that employees of certain of the Claimants realised that the UK’s ACT system was potentially discriminatory before professional advisers did. For example, I was referred to paragraph 23 of a witness statement of Mr Bilton, who was a tax manager at BAT, given in 2008 and to paragraph 73 of a witness statement given in 2008 by Mr Hardman, who also worked at BAT. However, neither witness statement demonstrates HMRC’s proposition. Both Mr Bilton and Mr Hardman clearly thought that the UK’s ACT system operated unfairly in the mid-1990s (as it resulted in BAT having a large amount of surplus ACT that it could not use). However, I am not satisfied that these individuals realised that there was a worthwhile claim that UK tax law contravened EU law.

As I have noted in paragraph ‎30, in his oral submissions on behalf of the Claimants, Mr Aaronson accepted that there was a constructive discovery in relation to the DV Challenge on 6 June 2000, the date of the CJEU’s judgment in Verkooijen. The question addressed in this section is whether there was a constructive discovery relating to either the DV Challenge or the ACT Challenge in the period between 11 July 1996 and 6 June 2000.

The Verkooijen case dealt with the Netherlands rules that charged an income tax on dividends received by individuals (as opposed to companies). Under the then applicable Netherlands tax regime, if a company resident in the Netherlands paid a dividend to an individual resident in the Netherlands, the dividend paid was subject to a withholding tax. Where the dividend was paid to a Netherlands resident individual, the amount withheld was treated as a payment on account of the Netherlands income tax (the “dividend tax”) to which Netherlands resident individuals were liable.

Netherlands income tax provided that the first 2,000 Guilders of dividend income received by a Netherlands resident individual was exempt from the dividend tax. However, that exemption was expressed to apply only to dividends from which tax had been withheld on account of the dividend tax. As the CJEU noted in its judgment, this meant that individual investors who received dividends totalling less than 2000 Guilders from Netherlands resident companies escaped the double taxation that would otherwise arise as a consequence of (i) the profits out of which the dividend was paid being subjected to Netherlands tax in the hands of the paying company and (ii) the dividend representing those profits also being subject to dividend tax in the hands of the individual recipient. Netherlands resident individuals receiving larger dividends from Netherlands resident companies suffered a measure of double taxation because the Netherlands operated a “classical” system of dividend taxation for individuals. Its tax rules did not “impute” any of the tax paid by the corporate payer to the individual recipient and did not confer any credit for tax paid at the level of the corporate payer of the dividend.

The formulation of the exemption set out in paragraph ‎111 above meant that the exemption could not apply to dividends that a Netherlands resident individual received from companies resident outside the Netherlands.

Mr Verkooijen had received dividends to the value of 2,337 Guilders from a company resident in Belgium. Because those dividends had not been subjected to any deduction of Netherlands tax, Mr Verkooijen was not entitled under Netherlands tax law to exemption for the first 2000 Guilders of dividends received. He argued that EU law nevertheless required that he be granted this exemption.

The CJEU agreed with the judgment of the domestic court in the Netherlands that Mr Verkooijen was entitled to the exemption he claimed. The CJEU’s reasoning struck right at the heart of the professional consensus that is described in paragraph ‎71 above.

Both the UK and the Netherlands made representations based on Article 73d(1)(a) of the Treaty, arguing that although not in force at the time Mr Verkooijen received his dividends, it represented a codification of EU law previously in force. The UK and the Netherlands therefore argued that the Netherlands tax provisions distinguished in a permissible way between taxpayers according to their place of residence. The CJEU rejected that argument holding that, since Article 73d(1)(a) was not in force at the relevant time, the question had to be determined by reference to the general jurisprudence of the CJEU. The CJEU concluded, by reference to Schumacker, that Mr Verkooijen was in a comparable position to an individual who received dividends from a Netherlands resident company. It concluded that, even if Article 73d(1)(a) had been relevant, it would not have altered the outcome since the Netherlands rules amounted to an arbitrary discrimination or a disguised restriction on the free movement of capital. It rejected arguments based on Bachmann.

The Claimants were clearly right to accept that there must have been a constructive discovery relevant to the DV Challenge by the time of Verkooijen. In my judgment, the significance of Verkooijen was not that it established “the truth” that a successful DV Challenge could be made (since it dealt with the Netherlands taxation system rather than that applicable in the UK and, moreover, dealt with the receipt of dividends by individuals rather than companies). Rather, Verkooijen’s significance was that it dismantled the consensus referred to in paragraph ‎71.

There was, therefore, a constructive discovery relating to a DV Challenge by 6 June 2000 at the latest. The next relevant question is whether the Claimants can discharge their burden of proving that there was no such constructive discovery before 6 June 2000. That involves an analysis of whether something happened before 6 June 2000 to displace the consensus that I have referred to in paragraph ‎71.

Mr Gammie said at [154] of his expert report that, between 1994 and 2000 there was considerable change to the applicable UK tax regime. In particular, in 1999, ACT was abolished and replaced with a system of quarterly instalment payments of corporation tax. Mr Gammie said that professional attention in this period focused on the changes to the UK tax regime and he had been able to identify no published material with a bearing on the state of legal thinking on whether Relevant UK Law was compatible with EU law.

That absence is significant. If there was a material body of opinion that was starting to question the consensus after 11 July 1996, that could reasonably be expected to generate some written material. Academics doubting the consensus would have reason to publish their views to write an article to give the issue prominence and to stimulate debate. Practitioners starting to doubt the consensus might be expected to write something that would bring the point to the attention of their clients with a view to generating instructions. The absence of any such written material containing a clear challenge to the consensus suggests that the consensus remained operative until 6 June 2000.

However, I have considered whether there was nevertheless a partial dismantling of the consensus, unreflected in professional and academic literature, that would have caused an Appropriate Adviser to advise that there was a worthwhile DV Challenge if asked that question sometime between 11 July 1996 and 6 June 2000.

One way to test that is by considering what academics were writing in that period even though that fell short of an express challenge to the consensus. One such article was entitled, “The imputation systems and cross-border dividends – the need for new solutions,” written by Sven-Olof Lodin in the EC Tax Review in 1998. This article considered many of the issues that the CJEU would come to consider in Verkooijen. However, it provides little support for the proposition that the consensus was unravelling. The conclusion expressed at the end of a lengthy article is that discriminatory tax rules, such as those dealing with cross-border dividends, should be amended in the interests of ongoing European economic integration. The article does not suggest that dividend taxation systems such as those of the UK were already in breach of Treaty obligations.

In a similar vein, in comments on the CJEU’s judgment in Gilly v Directeur des Services Fiscaux du Bas-Rhin (C - 336/96) published in 1999 in the All England Annual Review for 1998, Professor Tiley commented that the CJEU had “backed off from a challenge to the system of double tax credit relief”. He went on to suggest that, had the CJEU decided Gilly differently, there might well have been a push by member states to remove the CJEU’s jurisdiction in direct tax matters.

Another way to test whether the consensus was unravelling in a way that was not reflected in contemporaneous literature is to consider the professional and academic responses in the immediate aftermath of Verkooijen itself. If those responses suggested that Verkooijen had confirmed something that people had started to suspect, namely that DV Challenges or ACT Challenges were worthwhile, that might suggest that the consensus had unravelled even before the judgment in Verkooijen itself.

In that connection I was shown an article entitled, “Tax credits and exemptions for all,” written by “Mr David Oliver in the 2000 British Tax Review. That article considered the CJEU’s judgment in Verkooijen in some detail. Mr Oliver’s treatment of Verkooijen was muted, stressing that it was a judgment on the tax treatment of natural persons and saying, “do not think therefore that the decision in this case automatically applies to corporates”.

Moreover, that article expressly considered the situation of a UK resident company investing in shares in a subsidiary incorporated elsewhere in the EU, canvassing the question whether the principles in Verkooijen would compel the UK to exempt dividends received from the subsidiary from corporation tax. The author considered that it might be instructive to consider an alternative structure under which the UK resident company established a branch in the EU member state instead. Since the tax treatment of a dividend would not be significantly different from the UK tax treatment of profits earned by an overseas branch, the author wrote:

[The comparison with the situation of a branch] could be sufficient reason to reject an argument that the exemption method applicable to domestic dividends should be extended to dividends on direct investment in companies established in other European Community states at present relieved by the credit method. Exemption for all? We shall have to wait and see.

In my judgment, this article supports the proposition that the consensus referred to in paragraph ‎71 had not been eroded to a significant extent before the judgment in Verkooijen. If it had been, the article might have been expected to allude to that unravelling, rather than make a relatively downbeat assessment of the prospect of challenging the UK regime applicable to cross-border dividends received by companies.

I recognise that I have referred to just a few contemporaneous articles in this section. However, because of what I consider to be the importance of contemporaneous material, I asked the parties to refer to their “best” academic articles in closing. I was not referred to much more contemporaneous material beyond the articles I have mentioned and the opinions set out in the expert reports of Mr Gammie and Professor Barnard. Moreover, little of Mr Gammie’s cross-examination focused on the period between 1996 to 2000. It was not suggested to Mr Gammie that, contrary to [154] of his expert report, to which I refer in paragraph ‎118 above, there was significant discussion relevant to whether DV Challenges or ACT Challenges were worthwhile between 1996 and 2000.

I note the point made in FII SC2, referred to in paragraph ‎22 above, to the effect that judicial decisions are not made in a vacuum. I have, therefore, considered whether a well-advised multi-national exercising reasonable diligence could have realised, even before the CJEU gave judgment in Verkooijen, that it might reach a conclusion along those lines. However, I have concluded that is not the case. The proceedings in Verkooijen were taking place in the Netherlands, rather than the UK. Moreover, they related to a “classical” system of dividend taxation rather than the “imputation” system that the UK favoured as would have been apparent from examination of the text of the questions referred to the CJEU in Verkooijen. As I have concluded in paragraph ‎69, an Appropriate Adviser would not have known that the proceedings were current in the Netherlands until the judgment of the CJEU (or perhaps the opinion of the Advocate General) was given. Moreover, the Verkooijen proceedings took place in the context of legal thinking that was developing in the Netherlands, rather than in the UK. I accept the opinion that Mr Gammie expressed at [124] of his expert report to the effect that thinking in mainland Europe on the potential for CJEU decisions on Treaty freedoms to influence domestic direct tax systems was, at the time, well ahead of thinking in the UK. I have had no evidence as to the state of legal thinking in the Netherlands from the time that Mr Verkooijen brought his claim. However, even if practitioners in the Netherlands would have thought that Mr Verkooijen had a worthwhile claim before the CJEU gave its judgment, I do not consider that an Appropriate Adviser in the UK would have thought the same.

There was, therefore, no constructive discovery of a DV Challenge earlier than 6 June 2000. The Claimants have succeeded in establishing that by reference to the expert evidence of Mr Gammie. The Claimants’ decision not to waive privilege does not, therefore, prevent them from discharging their burden of proof.

Thus far I have concluded that the date of constructive discovery in relation to a DV Challenge was 6 June 2000 and that there was no constructive discovery in relation to an ACT Challenge before that date. Therefore, the final issue that I need to determine is the date of constructive discovery in relation to the ACT Challenge. The Claimants put their case on this issue in the following way:

It is appropriate to start at the earliest part of the period and work forward. If, at any point, a date of constructive discovery is crystallised it is correspondingly less necessary to consider developments later on in the period. That said, later developments are capable of shedding a light on whether there truly was a constructive discovery earlier in the period.

I have largely based my conclusion that there was no constructive discovery of an ACT Challenge before 6 June 2000 on my acceptance of Mr Gammie’s expert opinion as to the existence up to then of a consensus among appropriately qualified advisers as to fundamental difficulties facing such a challenge.

The judgment in Verkooijen would significantly have undermined the professional consensus that Mr Gammie described. In particular:

The judgment in Verkooijen therefore called into question central propositions on which the consensus was based. In those circucmstances, I would have needed some clear basis, grounded in contemporaneous evidence as to the state of legal thinking, for concluding that, despite the clear dent to the professional consensus that must have arisen following the Verkooijen judgment, a well-advised multi-national would have concluded that there was no worthwhile ACT Challenge on 6 June 2000. The Claimants’ evidence is insufficient for me to reach that conclusion.

Mr Gammie’s expert report provided relatively little support for such a conclusion. While Mr Gammie had been forthright in his articulation of the state of professional thinking in early 1996 and had also explained why that had not materially changed prior to the judgment in Verkooijen, he was much less forthright about the state of legal thinking following Verkooijen. He did not say that the former consensus survived the Verkooijen judgment or that the relatively downbeat view of Mr Oliver in the article referred to in paragraph ‎124 above represented a “new” consensus on the position following Verkooijen.

It follows that much of the Claimants’ case to the effect that there was no constructive discovery in relation to the ACT Challenge at the time of the Verkooijen judgment is based, not on the state of legal thinking at the time, but rather on a process of reasoning, performed after the event, as to “hurdles” that needed to be overcome for an ACT Challenge to be successful. I have already explained in paragraph ‎31 why I consider this process of reasoning to be of much less value in determining a date of constructive discovery.

The Claimants’ argument summarised in paragraph ‎130.iii) is a specific instance of an argument based on a process of reasoning conducted after the event. The Claimants submit that the CJEU’s conclusion that ACT should be characterised simply as a payment of corporation tax, rather than as having any link to the availability of a tax credit, was absolutely necessary in order for an ACT Challenge to succeed. They argue that the necessary building block was present only following the CJEU’s judgment in Hoechst and so submit that there can have been no constructive discovery until the CJEU’s judgment in Hoechst.

There are two flaws in that argument. The first is that it was not the CJEU in Hoechst that decided that ACT was in the nature of corporation tax. That was a conclusion on the meaning of UK statute law which Neuberger J determined in a judgment given on 2 October 1998 in proceedings settling the terms of the order for reference to the CJEU in Hoechst. Neuberger J determined in his judgment that the matter was put beyond doubt by s14(1) of the Income and Corporation Taxes Act 1988 which, as in force at the relevant time, provided that:

Subject to s.247 where a company resident in the United Kingdom makes a qualifying distribution it shall be liable to pay an amount of corporation tax (“advance corporation tax”) in accordance with sub-section (3) below.

The second flaw in the argument follows on from the first. The Claimants’ argument is, on closer inspection, an assertion that, before the CJEU’s judgment in Hoechst a well-advised multi-national would not have realised the significance that the CJEU would give to ACT’s status as corporation tax. That is little more than an assertion that a well-advised multi-national on 6 June 2000 would not have been able to foresee the precise basis on which the CJEU would ultimately determine the ACT Challenge in the Claimants’ favour in 2006. However, the test for the discovery of a mistake under s32(1)(c) of the Limitation Act does not require potential claimants to foresee in advance all the ways in which a court might ultimately determine a claim in their favour. Rather, as I have explained in paragraph ‎21.iv)a) a relevant aspect of the enquiry is when, having exercised reasonable diligence, a well-advised multi-national would have had sufficient confidence to justify embarking on the preliminaries to the issue of proceedings such as submitting a claim to HMRC, taking advice and collecting evidence. It is quite possible for that threshold to be crossed without foresight of the precise way in which the claim will succeed.

The Claimants argue, by reference to [127] to [131] of the judgments of Newey LJ and Sir Launcelot Henderson in Jazztel plc v HMRC [2022] EWCA Civ 232 that merely having “grounds for questioning” the compatibility of Relevant UK Law with the Treaty freedoms is insufficient to constitute a constructive discovery. I will assume, without deciding, that this submission is correct. However, I do not agree with the Claimants that the judgment in Verkooijen merely gave rise to “grounds for questioning”. The reason there was no constructive discovery prior to 6 June 2000 was because of the professional consensus that Mr Gammie described. The judgment in Verkooijen was inconsistent with a substantial proportion of that consensus. That in itself would have given a well-advised multi-national sufficient confidence to embark on the preliminaries referred to in paragraph ‎21.iv)a) above.

Overall, therefore, I have concluded that the professional consensus on which the Claimants successfully relied prior to 6 June 2000, did not survive the judgment of the CJEU in Verkooijen. I see no other secure basis in the evidence for a conclusion that constructive discovery in relation to an ACT Challenge was postponed beyond 6 June 2000. The date of constructive discovery in relation to the ACT Challenge was, accordingly, 6 June 2000, the same date as the date of constructive discovery for a DV Challenge.

In those circumstances, I do not need to address the Claimants’ arguments that are summarised in paragraphs ‎130.i) and ‎130.ii) above. However, in case the matter goes further I will give reasons why I do not in any event accept those arguments.

I am quite unable to accept that constructive discovery in relation to an ACT Challenge took place as late as September 2004, following the release of the CJEU’s judgment in Manninen. Such a conclusion would result in the very paradox that the Supreme Court identified in FII SC2 since it would result in the limitation period starting to run after the point at which some Claimants had actually commenced proceedings.

The Claimants sought to avoid the force of this objection by submitting that the early ACT Challenges brought by, among others, Evonik, were so speculative as not to be “worthwhile” at the point they were made. However, that submission is at odds with the facts. Evonik obtained professional advice before it brought its ACT Challenge. There has been no waiver of privilege in relation to that professional advice. However, there was evidence from Dr Whitehead as to the procedure he would follow when assisting his clients to bring claims. Dr Whitehead quite properly accepted in cross-examination that he would not advise a client to bring a claim unless he considered the claim was worthwhile. From that I conclude that an Appropriate Adviser would, in 2002, have regarded Evonik’s ACT Challenge as “worthwhile”. Otherwise it would not have been made.

Evonik, therefore was able to make a worthwhile ACT Challenge on 11 July 2002. I do not consider that Evonik was in any materially different position, as regards its ability to bring an ACT Challenge, from other Claimants. Nor do I consider that Evonik had particular relevant attributes that an ordinary well-advised multi-national would not have had. Since Evonik was able to bring a worthwhile ACT Challenge on 11 July 2002, I conclude that a well-advised multi-national exercising reasonable diligence would similarly have realised by 11 July 2002 that it had a worthwhile ACT Challenge.

That conclusion means that I also reject the Claimants’ argument summarised in paragraph ‎130.ii) above. A well-advised multi-national would not need to wait until it was told about the existence of the FII GLO on 6 November 2003. Rather, exercising reasonable diligence, it would like Evonik have realised that there was a worthwhile ACT Challenge by 11 July 2002 at the latest.

Constructive discovery of both a DV Challenge and an ACT Challenge took place on 6 June 2000.