Mistake of law: is time running out for HMRC?
On 25 October 2006, the House of Lords decided, in a landmark judgment, that Deutsche Morgan Grenfell Group plc (DMG) was entitled to reclaim from HM Revenue & Customs (HMRC), previously the Inland Revenue, payments of advance corporation tax (ACT) which DMG had paid under a mistake of law.
In addition, the House of Lords held that the limitation period for DMG’s claim began to run from the point when DMG discovered its mistake, which was the date of the European Court of Justice’s (ECJ) ruling in the Hoechst/Metallgesellschaft cases that certain aspects of the ACT regime were unlawful (see “Triggering the time period” below).
The judgment is important as it establishes that HMRC is not protected from claims for repayment of tax paid under a mistake of law. It is also a judgment which has profound implications: specifically, for other ACT Group Litigation Order (GLO) claimants, but more generally for all companies that have paid taxes under legislation which is later found to be unlawful.
Triggering the time period
Under the ACT regime, which was abolished in 1999, UK resident subsidiaries with parent companies resident in another EU member state were required to pay corporation tax in advance, by way of ACT. By contrast, UK resident subsidiaries of UK resident parent companies were able to avoid early payments of corporation tax by making a group income election under section 247 of the Income and Corporation Taxes Act 1988.
On 8 March 2001, the ECJ held in Metallgesellschaft and others v Commissioners of Inland Revenue and another (Joined Cases C-397/98) and Hoechst AG and another v Commissioners of Inland Revenue and another (C-410/98) that certain aspects of the ACT regime were contrary to Article 43 (formerly Article 52) of the EC Treaty and discriminated against companies resident in other member states (www.practicallaw.com/5-101-4268).
Following the ECJ’s decision, a substantial number of claims were made against HMRC in respect of payments of ACT made under the unlawful legislation, and these were brought together under the ACT GLO. DMG was appointed test claimant on the question of the applicable limitation periods for claims against HMRC arising from the Hoechst/Metallgesellschaft decision (see box “Chronology”).
Mistake of law
Following the Hoechst/Metallgesellschaft decision, it was common ground that DMG, and other companies in the same position, could bring their claims both by way of a claim for compensation for breach of statutory duty and by way of a claim in restitution for taxes extracted pursuant to an unlawful demand. It was also common ground that the limitation period for each of those claims was six years, and that the limitation period in respect of each payment of ACT started to run from the date on which the relevant payment was made. However, DMG also argued that:
It was entitled to bring a restitutionary claim based on mistake of law following Kleinwort Benson Ltd v Lincoln City Council, in which the House of Lords held that the rule in English law that a party could not recover a payment made as a result of a mistake of fact or law should no longer be maintained ( 2 AC 349; www.practicallaw.com/3-100-9300).
The limitation period ran from discovery of the mistake, not from the relevant payment date.
At the time it had made each payment of ACT, it had mistakenly thought that the relevant statutory provisions were lawful, and so had made the ACT payments under a mistake of law.
It did not discover, and could not have discovered, its mistake until the ECJ’s Hoechst/Metallgesellschaft decision. As section 32(1)(c) of the Limitation Act 1980 (section 32(1)(c)) effectively delays the start of the limitation period for mistake claims until the mistake is discovered (or should have been discovered), the limitation period did not start to run until the date of that decision.
The House of Lords found in favour of DMG, holding that, under English law, there is a general right to recover money paid under a mistake of law or fact, including from HMRC. DMG had mistakenly believed that the ACT regime was lawful at the time it made the ACT payments and was entitled to rely on section 32(1)(c). It also found that DMG continued to be mistaken as to the true state of the law until the ECJ ruled in the Hoechst/Metallgesellschaft cases in 2001 that certain aspects of the ACT regime discriminated unlawfully against companies with parents resident in other member states. Accordingly, the limitation period for DMG’s claim did not start to run until the date of the ECJ’s Hoechst/Metallgesellschaft judgment.
This decision is clearly of direct relevance to those companies which have issued claims under the ACT GLO and made payments of ACT more than six years before the issue of their claim. In addition, since the ECJ’s decision in Hoechst/Metallgesellschaft and the making of the ACT GLO, the High Court has made five further GLOs in respect of challenges to other aspects of UK tax legislation alleged to be discriminatory and a significant number of claims have been issued.
Following this decision, all companies that have paid taxes under legislation which is subsequently found to be unlawful will have a potential claim against HMRC regardless of when the tax was paid, subject to section 320 of the Finance Act 2004 (section 320), which provides that parties who issue claims against HMRC based on mistake will not be able to rely on section 32(1)(c) unless those claims were issued on or before 8 March 2003. However, the lawfulness of section 320, which was introduced after DMG was successful in the High Court, is currently itself under challenge (Aegis Group plc v Inland Revenue Commissioners  EWHC 1468). If the section 320 challenge is successful, then parties who have issued mistake claims after the section 320 cut-off date will also benefit from the House of Lords’ DMG decision.
Advance corporation tax (ACT) is introduced (section 84, Finance Act 1972).
Hoechst and Metallgesellschaft issue claims challenging the validity of section 247 of the Income and Corporation Taxes Act 1988 (section 247).
ACT is abolished (section 31 and paragraph 8, Schedule 3, Finance Act 1998).
18 October 2000
Deutsche Morgan Grenfell Group plc (DMG) issues claim.
8 March 2001
The European Court of Justice holds that section 247 is contrary to the EC Treaty to the extent that it limits availability of a group income election to companies with UK resident parent companies (Metallgesellschaft and others v Commissioners of Inland Revenue and another (Joined Cases C-397/98); Hoechst AG and another v Commissioners of Inland Revenue and another (C-410/98); www.practicallaw.com/5-101-4268).
26 November 2001
The ACT Group Litigation Order is made.
12 March 2002
DMG is appointed as a test case on so-called EU limitation issues.
18 July 2003
The High Court finds in favour of DMG (www.practicallaw.com/9-102-4166).
8 September 2003
The introduction of section 320 of the Finance Act 2004 (section 320) is announced, in response to the High Court’s decision.
22 July 2004
Section 320 comes into force.
4 February 2005
The Court of Appeal overturns the High Court’s decision and holds that taxpayers who make a payment to HM Revenue & Customs (HMRC) under a mistake of law are not entitled to a restitutionary remedy against HMRC (www.practicallaw.com/3-200-5532).
25 October 2006
The House of Lords overturns the Court of Appeal’s decision.
Caroline Edwards is a senior associate in the dispute resolution department at Slaughter and May.
DMG Group plc v HM Commissioners of Inland Revenue and another  UKHL 49.