Court of Appeal decision highlights complexities in group litigation orders

The Court of Appeal recently delivered a decision that forms part of a long-running dispute concerning the EU law compatibility of the UK’s previous tax regime for controlled foreign companies (CFCs) and foreign dividends. The case concerned claims by AXA Sun Life Plc and others (‘the claimants’) and deals with preliminary issues arising in their dispute, which had been stayed behind the test cases in the GLO.

Civil Procedure Rule (CPR) 19 provides that a test case ruling is binding on the parties to all other claims that are on the group register at the time the test case judgment is given, unless the court orders otherwise. This case is an example of the exceptional circumstances where the court may be persuaded to order otherwise.

The claimants in this case were part of a GLO that questioned the compatibility of the UK’s tax regime with EU law, specifically focusing on the treatment of dividends received by UK companies from non-UK resident companies. The GLO, established in 2003, has seen numerous legal battles, including a Supreme Court decision in 2018 and related decisions in the Franked Investment Income GLO, the last of which was in 2021.

The Court of Appeal was tasked with considering three preliminary issues that had been previously addressed by the High Court in 2023. The court considered whether the claims brought were within the applicable limitation period, any entitlement to interest where there had been a set-off, and whether the claimants had sufficiently pleaded a claim in restitution.

On the limitation issue, the question was whether the GLO decisions in the test cases had conclusively established that the claims brought by the claimants in this appeal were in time. The High Court in the Axa claims had decided that there had not been a conclusive decision that all such claims were in time. The Court of Appeal dismissed the Axa claimants' appeal in relation to the limitation issue because the test case decision - at the High Court level as this was the highest level at which the relevant question of limitation was considered - did not include an appropriately framed “GLO issue” that would have determined this question. It only decided that the test claimants' claims had been in time.

The Court of Appeal observed that the issues as set out in the GLO “with the benefit of hindsight…might not have been suitable for determination as GLO issues”; it also criticised the “bundling” of the decision on the GLO issue and the extent to which the decision applied to the facts in the particular case. The order issued by the High Court in the test case had effectively answered those questions together in one short sentence, which had “complicated the case”.

The interest and set-off issue arose because HM Revenue and Customs (HMRC) had conceded, in the test cases, that compound interest was due in circumstances where the unlawfully charged ACT had been set off prior to the claim. This concession was made because there was an existing House of Lords decision in Sempra Metals that gave this conclusion. However, the later Supreme Court decision had overturned Sempra Metals, with the result that the current state of the law is that only simple interest should be paid. The Axa claimants here argued that this concession should apply to them as well. The Court of Appeal agreed that the issue had been determined as a GLO issue against HMRC in the previous test case but decided that it was appropriate to “order otherwise” in this exceptional case, as applying the concession would mean applying the law in a way that is now known to be incorrect and because it could not have been conceived at the point of the earlier appeal that the Supreme Court would override a House of Lords ruling only seven years later.

The final issue concerned whether the claimants had sufficiently pleaded their claims prior to 2010, when there was a change in law. The claimants had to show that they had pleaded that they were entitled to restitution of a later tax charge in circumstances where they had not paid the unlawfully charged ACT because they had available loss relief, but this gave rise to a higher tax bill in later years. The High Court had found in favour of the claimants, but the Court of Appeal allowed HMRC’s appeal. It was found that claims for the period 2016-2017 could not have been pleaded before 2010 because it is not possible to make a claim in relation to future facts. The claims for the 1996-1999 period had also not been sufficiently pleaded because they were for tax in the year the unlawful ACT would have been charged, not for tax in later years. The court acknowledged that a litigant should not normally be penalised for failing to predict how the law would develop over such protracted litigation but felt constrained by the fact that the question was only whether it had been pleaded prior to the 2010 law change.

This decision highlights the complexities involved in GLOs. It serves as a reminder of the challenges in managing mass actions as well as the necessity for clear and precise legal frameworks to handle such complex litigation effectively.