Income taxation—Corporation tax—Advance corporation tax

 House of Lords
Lord Hope, Lord Nicholls, Lord Scott, Lord Walker and Lord Mance
18 July 2007

The court has a common law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breach of contract and in tort. It may award compound damages as a restitutionary remedy for the time value of money paid under a mistake.

Laurence Rabinowitz QC, Francis Fitzpatrick and Steven Elliott (instructed by Slaughter & May) for the taxpayer.
Ian Glick QC, Rupert Baldry and Gerry Facenna (instructed by the Solicitor for HM Revenue & Customs for the commissioners.

In Metallgesellschaft Ltd v Inland Revenue Commissioners [2001] All ER (EC) 496, the European Court of Justice (ECJ) held that the then applicable UK advance corporation tax regime (ACT) breached Art 52 of the EC Treaty. The breach lay in the fact that companies which had to pay part of their mainstream corporation tax (MCT) prematurely, suffered a timing disadvantage which conferred a corresponding timing advantage on HM Revenue & Customs (HMRC). The breach arose not from the payment of the tax itself but from its being levied prematurely. Community law required that the companies had to be provided with a remedy in domestic law which would enable them to recover a sum equal to the interest which would have been generated by the advance payments from the date of the payment of ACT until the date on which the MCT became chargeable. The form of the remedy was for domestic law to determine.

The instant case was issued as a test claim. It was brought as a claim in tort for breach of statutory duty, and alternatively in restitution under two grounds: tax paid pursuant to an unlawful demand, and payments made under a mistake of law. The claimant sought the time value of the money paid prematurely. The issue arose as to whether the calculation should be effected on the basis of compound interest, as the claimant contended, or of simple interest as submitted by HMRC. The judge held that it should be on a compound basis, as did the Court of Appeal. HMRC appealed to the House of Lords.

LORD NICHOLLS:

His lordship started with the broad proposition of English law that as a general rule a claimant could recover damages for losses caused by a breach of contract or a tort which satisfied the usual remoteness tests. That broad common law principle was subject to an anomalous, that was, unprincipled, exception regarding claims for interest losses by way of damages for breach of a contract to pay a debt: in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 it was decided that at common law a court had no power to award interest by way of damages for the late payment of a debt.

In President of India v La Pintada Compania Navigacion SA [1985] 1 AC 104, [1984] 2 All ER 773 the House held that, contrary to common belief, the London, Chatham and Dover Railway case applied only to claims for interest by way of general damages. It did not extend to claims for special damages.
Unfortunately, that analysis had given rise to its own difficulty. In ordinary legal usage general damages comprised losses which had to be pleaded and proved but which were quantified in money terms by the court. Special damages comprised losses which had to be pleaded and proved in money terms.

The difficulty was that the House had adopted a different criterion when distinguishing general and special damages. It said that in that context the difference between general and special damages corresponded to the difference between damages recoverable under the first part of the rule in Hadley v Baxendale (1854) 9 Exch 341 (general damages) and damages recoverable under the second part of that rule (special damages).
His lordship held that, in principle, it was always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. Those losses would be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness or failure to mitigate.

Therefore, the court had a common law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breach of contract and in tort.
His lordship turned to the two restitutionary causes of action asserted by the claimant. The present state of English law was considered to be that the court had no jurisdiction, that was, no power to make an award of compound interest on a personal claim for restitution of a sum of money paid by mistake or following an unlawful demand.

His lordship considered, inter alia, Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, [1996] 2 All ER 961. He held that there was no good reason why, in a case like the instant, an award of compound interest should be denied to a claimant. An award of compound interest was necessary to achieve full restitution and a just result. In the exercise of its common law restitutionary jurisdiction, the court had power to make such an award.

The law of restitution was sufficiently flexible to achieve a just result. To avoid what would otherwise be an unjust outcome the court could, in an appropriate case, depart from the market value approach when assessing the time value of money or, indeed, when assessing the value of any other benefit gained by a defendant. What was ultimately important in restitution was whether or not, and to what extent, the particular defendant had benefited. A benefit was not always worth its market value to a particular defendant. When it was not it might be unjust to treat the defendant as having received a benefit possessing the value it had to others.
It followed that compound interest was available under English law when quantifying the extent of the claimant’s losses and when quantifying the extent of HMRC’s unjust enrichment.

The appeal would be dismissed.
 
Lord Hope and Lord Walker delivered concurring judgments and Lord Scott and Lord Mance dissented.