#6747 - Deutche Morgan Greenfell Group V. Irc - Restitution of Unjust Enrichment BCL

Deutche Morgan Greenfell Group v. Inland Revenue Commissioners

Facts

Under provisions of the Income and Corporation Taxes Act 1988, as in force until April 1999, certain distributions made by companies resident in the United Kingdom were subject to advance corporation tax which was payable quarterly. Tax so paid could later be set off against any liability to mainstream corporation tax. The legislation also provided that two companies resident in the United Kingdom, one of which owned at least 51% of the other, could make a group income election, a consequence of which was that the subsidiary company was not obliged to account for advance corporation tax on dividends paid to the parent company. In March 2001, the Court of Justice of the European Communities held that a tax regime permitting resident parent companies but not non-resident ones to receive dividends from their resident subsidiaries without payment of advance corporation tax created a cashflow disadvantage and was an unwarranted restriction on freedom of establishment. The court also held that in respect of payments of advance corporation tax already made, Community law conferred a right of compensation or restitution. The claimant, a UK subsidiary of a German parent company, had been able to set off the advance corporation tax it had paid against its liability to mainstream corporation tax, but had suffered a disadvantage of timing.

The claimant contended that it had made the payments under a mistake of law so that under section 32(1)(c) of the Limitation Act 19801, the limitation period began to run from the date it had discovered its mistake, or could with reasonable diligence, have discovered it.

Deutsche Morgan Grenfell Group plc ("DMG") claims compensation for having had to pay ACT on three dividends paid to its German parent company between 1993 and 1996: in October 1993, February 1995 and January 1996. Note that it is not the principal sum that is being demanded here as that has already been set off against Mainstream Corporate Tax.

Holding

Lord Hoffmann

Lord Goff’s Debatable Passage

I must deal with the opinion attributed by the Court of Appeal to Lord Goff. Both Jonathan Parker LJ and Buxton LJ subjected his speeches in the Woolwich and Kleinwort Benson cases to a detailed analysis which I have read more than once with attention and respect. The chief support for Mr Glick's argument is to be found in the following passage in the Kleinwort Benson case [1999] 2 AC 349 (cites Lord’s Goff’s passage).

There is no doubt that the regimes are different. Both the Woolwich principle and section 33 apply only to the recovery of money paid as taxes or the like. They do not apply to "private transactions". The Woolwich principle is indifferent as to whether the taxpayer paid the tax because he was mistaken or, as in the Woolwich case, for some other reason. And section 33 has its own rules. So the regime for taxes is certainly different. But the question is whether Lord Goff meant to say that the remedies provided by the two regimes are mutually exclusive. Woolwich and section 33 are available only for "taxes and other similar charges". Does it follow that the common law rule for recovery of payments made by mistake, as applied to private transactions in the Kleinwort Benson case, does not apply to taxes? That would be going a good deal further. It is one thing to say that the regimes are different and another to say that their remedies are mutually exclusive.

But to my mind the context in which Lord Goff made the remarks which I have quoted demonstrates conclusively that he could not have meant what the Court of Appeal thought… early in his speech [1999] 2 AC 349, 367 Lord Goff announced that he proposed to address first the question of whether the rule precluding recovery of money paid under a mistake of law should remain part of English law… Lord Goff then went on to the question of whether it made a difference that the payments were made in accordance with a settled understanding of the law… He uses the distinction between tax payments and private transactions to argue that the case for a settled law exception is stronger in the case of tax payments ("large numbers of taxpayers may be affected" and "there is an element of public interest") than in the case of private transactions. At the end of this discussion, he leaves the door slightly open for an argument that there is such a defence for tax payments. But he rejects it for private payments.

My Lords, this reasoning is quite inconsistent with the absence of a cause of action for recovery of tax on the grounds of mistake of law. What kind of claim did Lord Goff contemplate that a settled law defence might protect the revenue against? Surely, a claim to recover tax on the ground that it had been paid under a mistake of law. Lord Goff was not suddenly turning to the Woolwich cause of action and asking whether it should be subject to a defence that the demand for tax, although ultra vires, was in accordance with a settled understanding of the law.

There would be little point in discussing whether a settled understanding of the law should be a defence to a claim for recovery of a tax payment on the grounds of mistake of law if there was no such cause of action…. In my opinion, Lord Goff's speech in the Kleinwort Benson case does not deny the right to recover tax on the ground that it was paid by mistake. On the contrary, his discussion of a possible settled law defence necessarily entails that he thought that there was such a cause of action. And for the reasons I gave in the Kleinwort Benson case, I do not think that there is an exception for cases in which there is a settled view of the law.

Does the Statute (s. 33) exclude common law remedy?

When a special or qualified statutory remedy is provided, it may well be inferred that Parliament intended to exclude any common law remedy which would or might have arisen on the same facts. But I see no reason to infer that Parliament intended to exclude a common law remedy in all cases of mistake (whether of fact or law) in which the revenue was unjustly enriched but did not fall within section 33.

Whether the money was paid in mistake?

I come back, therefore, to the question of whether DMG made a mistake, against the consequences of which the action seeks relief. The first point to make is that the alleged mistake was one of a very special kind. If DMG had known for certain what the Court of Justice was going to say in the Metallgesellschaft/Hoechst case [2001] Ch 620 on 8 March 2001, it is very unlikely that it would have paid ACT. But it had no means of knowing that. It was only in retrospect that it became clear that the ACT could not lawfully have been exacted.

One is whether judges change the law or merely declare what it has always been. The answer to this question is clear enough. To say that they never change the law is a fiction and to base any practical decision upon such a fiction would indeed be abstract juridical correctitude. But the other question is whether a judicial decision changes the law retrospectively and here the answer is equally clear. It does. It has the immediate practical consequence that the unsuccessful party loses, notwithstanding that, in the nature of things, the relevant events occurred before the court had changed the law. There is nothing abstract about this rule. So the main question in the Kleinwort Benson case [1999] 2 AC 349 was whether a person whose understanding of the law (however reasonable and widely shared at the time) is falsified by a subsequent decision of the courts should, for the purposes of the law of unjust enrichment, be treated as having made a mistake. The majority view in the Kleinwort Benson case was that he should. The effect of the later judgment is that, contrary to his opinion at the time, the money was not owing. It is therefore fair that he should recover it. It may be that this involves extending the concept of a mistake to compensate for the absence of a more general condictio indebiti and perhaps it would make objectors feel better if one said that because the law was now deemed to have been different at the relevant date, he was deemed to have made a mistake. But the reasoning is based upon practical considerations of fairness and not abstract juridical correctitude.

State of Doubt - Mistake

But he said that the commencement of the Hoechst litigation in July 1995 must, at the very lowest, have raised a doubt in the relevant minds of DMG…. So the revenue say that the 1996 payment was made when a state of doubt existed and that this was not a mistake…. There is some authority for the view that a state of doubt does not amount to a mistake.

This was a very compressed remark in the course of a discussion of other matters and I do not think that Lord Hope could have meant that a state of doubt was actually inconsistent with making a mistake. Contestants in quiz shows may have doubts about the answer ("it sounds like Haydn, but then it may be Mozart") but if they then give the wrong answer, they have made a mistake. The real point is whether the person who made the payment took the risk that he might be wrong. If he did, then he cannot recover the money.

Likewise, the circumstances in which a payment is made may show that the person who made the payment took the risk that, if the question was fully litigated, it might turn out that he did not owe the money. Payment under a compromise is an obvious example. I would not regard the fact that the person making the payment had doubts about his...