#6843 - Woolwich Equitable Building Society V. Irc - Restitution of Unjust Enrichment BCL

By section 40 of the Finance Act 1985 Parliament terminated as from 5 April 1986 the system of annual voluntary arrangements which had since 1894 regulated the payment by building societies to the Inland Revenue of sums representing income tax on interest and dividends due to depositors and investors. The purpose was to make applicable to building societies the composite rate system which had been in force as respects bank interest since the Finance Act 1984. Parliament did not by primary legislation introduce the new system as regards building society interest and dividends but instead, by adding a new section 343(1A) to the Income and Corporation Taxes Act 1970, authorised the Board of Inland Revenue to do so by regulations made by statutory instrument. So the board made the Income Tax (Building Societies) Regulations 1986 (S.I. 1986 No. 482). The effect of these regulations, so far as the Woolwich Building Society was concerned, was to subject it over a period of 24 months (6 April 1986 to 5 April 1988) to tax on 29 months of income, amounting to an excess of some 76m.

Woolwich challenged by judicial review the validity of the particular regulations which had this effect. Before the case came to a hearing Parliament sought to improve the revenue’s position by enacting with retrospective effect section 47(1) of the Finance Act 1986, but this proved ineffective for the purpose and on 31 July 1987 Nolan J. [1987] S.T.C. 654 decided that the regulations complained of were ultra vires and void in so far as they purported to provide for the imposition of tax on interests and dividends paid by building societies prior to 6 April 1986, and made an order accordingly.

Before the order of Nolan J. was made Woolwich had paid to the revenue sums totalling 56,998,221 claimed by way of tax for the period before 6 April 1986.

On 15 July 1987 Woolwich issued a writ of summons against the Commissioner of Inland Revenue claiming repayment of these sums with interest under section 35A of the Supreme Court Act 1981 from the respective dates of payment. Following the order of Nolan J. negotiations ensued between the parties as a result of which the commissioners repaid to Woolwich the sum of 56,998,221 with interest from 31 July 1987, the date of the order, but refused to pay interest from any earlier date.

Whether or not Woolwich had grounds for claiming interest on the three payments which they had made from their respective dates up to 31 July 1987. The amount of such interest, if due, is agreed between the parties to be 6,730,000. Whether or not Woolwich can claim to be awarded that interest depends on whether it had a cause of action to recover each payment as a debt due to it on the date when the payment was made. If it did have such a cause of action, then the court would have power to award interest from the moment it arose by virtue of section 35A of the Supreme Court Act 1981.

Holding

Revenue relied on a set of letters written by Woolwich to the revenue before it made the payment which essentially suggested that the payment was being made without prejudice to the right of Woolwich to recover the amount by legal proceedings. Revenue suggested that this constituted an implied agreement between the parties to the effect that if the judgment of the court went against them, they would repay the amount. Revenue relied on this limb of reasoning because this would mean that the cause of action arose only when the judgment was delivered by the court in the case.

In my opinion no such implied agreement can properly be inferred. The letters of 12 June and 15 September 1986 did not say that Woolwich was offering the money to the revenue upon the condition that it would be repaid if ultimately found, in the pending litigation, not to be due. The letters said that the payments were made without prejudice to any right to recover them which might arise as a result of legal proceedings. That means that Woolwich were asserting a legal right to recover the payments in the event of the relevant Regulations being held to be ultra vires, and stating that the payments were made without prejudice to such right.

This general principle has however been circumscribed in various ways by decided cases, not least by the rule that money paid under a mistake of law is not recoverable, a rule which, though heavily criticised in academic writings and elsewhere, is in my opinion too deeply embedded in English jurisprudence to be uprooted judicially.

The foregoing review of the native authorities satisfies me that they afford no support for Woolwich’s major proposition. The principle to be derived from them, in my opinion, is that payments not lawfully due cannot be recovered unless they were made as a result of some improper form of pressure. Such pressure may take the form of duress, as in Maskell v. Horner [1915] 3 K.B. 106. It may alternatively take the form of withholding or threatening to withhold the performance of some public duty or the rendering of some public service unless a payment is made which is not lawfully due or is greater than that which is lawfully due, as was the position in the colore officii cases. The mere fact that the payment has been made in response to a demand by a public authority does not emerge in any of the cases as constituting or forming part of the ratio decidendi. Many of the cases appear to turn upon a consideration of whether the payment was voluntary or involuntary. In my opinion that simply involves that the payment was voluntary if no improper pressure was brought to bear, and involuntary if it was. In the present case no pressure to pay was put upon Woolwich by the revenue. Woolwich paid because it calculated that it was in its commercial interest to do so. It could have resisted payment, and the revenue had no means other than the taking of legal proceedings which it might have used to enforce payment. The threat of legal proceedings is not improper pressure. There was no improper pressure by the revenue and in particular there was no duress.

To give effect to Woolwich’s proposition would, in my opinion, amount to a very far reaching exercise of judicial legislation. That would be particularly inappropriate having regard to the considerable number of instances which exist of Parliament having legislated in various fields to define the circumstances under which payments of tax not lawfully due may be recovered, and also in what situations and upon what terms interest on overpayments of tax may be paid.

It seems to me that formulation of the precise grounds upon which overpayments of tax ought to be recoverable and of any exceptions to the right of recovery, may involve nice considerations of policy which are properly the province of Parliament and are not suitable for consideration by the courts. In this connection the question of possible disruption of public finances must obviously be a very material one. Then it is noticeable that existing legislation is restrictive of the extent to which interest on overpaid tax (described as “repayment supplement”) may be recovered. A general right of recovery of overpaid tax could not incorporate any such restriction.

Distinction between lawfully collected tax and payment under mistaken interpretation

I would add that although in the course of argument some distinction was sought to be drawn between overpayment of tax under regulations later shown to be ultra vires and overpayment due to the erroneous interpretation of a statute, no such distinction can, in my view, properly be drawn.

1. Whereas money paid under a mistake of fact is generally recoverable, as a general rule money is not recoverable on the ground that it was paid under a mistake of law.

2. But money paid under compulsion may be recoverable. In particular:

   1. Money paid as a result of actual or threatened duress to the person, or actual or threatened seizure of a person’s goods, is recoverable.

   2. Money paid to a person in a public or quasi-public position to obtain the performance by him of a duty which he is bound to perform for nothing or for less than the sum demanded by him is recoverable to the extent that he is not entitled to it.

   3. Money paid to a person for the performance of a statutory duty, which he is bound to perform for a sum less than that charged by him, is also recoverable to the extent of the overcharge.

3. Where a sum has been paid which is not due, but it has not been paid under a mistake of fact or under compulsion as explained under (2) above, it is generally not recoverable.

However, the subsequent decision of the Court of Appeal in T. and J. Brocklebank Ltd. v. The King [1925] 1 K.B. 52 shows that, in circumstances similar to those of the Wilts United Dairies case, recovery could be, and indeed there was, founded upon compulsion and not upon the simple fact that the money was paid pursuant to an ultra vires demand: see [1925] 1 K.B. 52, 61-62, 67, 72, per Bankes L.J. (accepting the opinion of the trial judge, Avory J. [1924] 1 K.B. 647, 652-653), and per Scrutton and Sargant L.JJ.

But a formidable argument has been developed in recent years by leading academic lawyers that this stream of authority should be the subject of reinterpretation to reveal a different line of thought pointing to the conclusion...