"Retrospective Legislation and Group Litigation," BNA Inc's Tax Planning International: European Union Focus

At a seminar organised by PricewaterhouseCoopers in January 2005, Dawn Primarolo announced the government’s intention to use the weapon of retrospective legislation to counteract tax planning measures.  Her announcement coincided almost to the day with the first hearing in the High Court of the challenge by taxpayers to the government’s attempt, by s320 of Finance Act 2004, to legislate retrospectively.

The incidence of retrospective legislation in the tax field is of course not new.   In 1987, in response to the decision of the High Court in Padmore (No 1)[1], the Finance Act incorporated provisions retrospectively removing tax relief for partnerships controlled abroad previously available under the taxation agreement with Jersey.   In 1989, the decision in the Union Texas[2]  case led to legislation retrospectively excluding similar claims.   In 1993, following its defeat in the House of Lords in Woolwich Equitable Building Society v Commissioners of Inland Revenue[3] retrospective legislation was introduced to prevent other Building Societies from recovering similar damages deriving from the ultra vires imposition of composite rate tax.

Yet European community law has developed somewhat from those days.   In Marks and Spencer plc v Commissioners of Customs and Excise[4]  the attempt by the last Major government to reduce the limitation period for VAT repayment claims retrospectively in Finance Act 1997 was held, by the European Court of Justice (“ECJ”), to be contrary to community law.   According to the ECJ the principles of the effective enforcement of community rights and the protection of legitimate expectations, while permitting legislation to take effect from a date in the past, nevertheless required any such provisions to allow for a reasonable transitional period to enable taxpayers to make claims under the previous provisions.

Like many of these precursors the retrospective provisions in s320 of Finance Act 2004 seek to overcome a decision of the Courts.  In the DMG case[5] in July 2003, the High Court had held that claims for the restitution of payments of advance corporation tax (“ACT”) and interest on utilised ACT paid under provisions of national law subsequently found to contravene European community law, were claims “for relief from the consequences of a mistake”.  In consequence, the Court held, claimants could rely on s32(1)(c) of the Limitation Act 1980 which had the effect of extending the period for which claims could be made back to 1972.  The Inland Revenue appealed that decision and the judgment of the Court of Appeal is expected shortly.

The possibility that the principles of that judgment might equally be applied to numerous other claims[6], brought in relation to provisions of UK corporation tax said to breach community law, led the government to announce its intention to introduce two retrospective provisions which have become section 320 of FA 2004.  On 8^th September 2003, the Revenue announced that the Finance Act 2004 would exclude from the compass of section 32(1)(c) of the Limitation Act claims relating to taxation matters issued on or after that date.  On 20^th November 2003, the Revenue announced the extension from that date of those intended provisions to the amendment of claims which otherwise would have escaped their effect.

No transitional period was provided for in s320 of FA 2004 and intentionally so, admitted HM Paymaster General: “…a transitional period prior to the commencement date of legislation would invite claims from any taxpayer who could have benefited from the DMG decision but did not commence proceedings before the Government announced their intention to legislate…”[7].  Many commentators responded that the lack of a transitional period might offend community law and possibly the Human Rights Convention[8].  A number of claimants enrolled across all the group litigation orders who were in the process of issuing claims or amending existing claims at the dates of these announcements are potentially affected by section 320.  Shortly after FA 2004 gained Royal Assent a claim was then brought by one of our clients challenging the lawfulness of section 320.

On the 14^th January 2005, Mr Justice Park in the High Court made provision for the conduct of that litigation.  The challenge to the legality of those retrospective provisions is to be heard as a separate issue within the context of the Franked Investment Income Group Litigation.  A test case has been appointed for that purpose, being a claimant who actually issued its claim on the day the retrospective change took effect, 8^th September 2004.  A class has been formed within that group litigation into which claimants with claims which might be affected by section 320 can enroll.  Once the Court of Appeal’s decision in the DMG Case is known, Mr Justice Park will then consider directions for the hearing of this case.

It will be interesting to see to what extent the current Government will make more liberal use of retrospective legislation in the tax field in future.  In the light of Marks and Spencer v Customs and Excise, and the challenge now commenced in the FII Group Litigation, the unwelcome outcome may be that unless a transitional period is allowed - a qualification which the Paymaster General accepts would overcome its purpose - we may find such legislation legal in so far as it bites on wholly domestic transactions but not where the transaction or claim has a European element.