Further Supreme Court decision in long running FII group litigation
A Supreme Court judgment in the FII group litigation addresses issues of tax on overseas dividends, reliefs, interest and EU law.
A Supreme Court judgment in the FII group litigation addresses issues of tax on overseas..
On 23 July 2021, the Supreme Court handed down judgment in Test Claimants in the Franked Investment Income Group Litigation v HMRC  UKSC 31. Broadly, the litigation concerns the tax treatment of dividends paid to UK resident companies by their non-resident subsidiaries. Key issues determined by the Supreme Court included the application of the standstill provision to the old Schedule D Case V (DV) provisions (relevant to third country dividends received after 31 March 2001) and the ability to carry forward double tax relief (DTR) credits. We expect these two issues to have wider implications for other taxpayers outside the formal group litigation process, for example, where they have excess foreign nominal rate (FNR) credits due to the utilisation of reliefs such as group relief and management expenses. Other points were covered on restitution, interest and whether HMRC was barred from raising an issue due to the litigation to date.
Third Country Dividends
The Supreme Court considered the application of the principle of free movement of capital to third country dividends. Specifically, whether the DV provisions were permitted by virtue of the standstill provision for free movement of capital purposes or if the introduction of the eligible unrelieved foreign tax (EUFT) regime created a new restriction.
Overturning the Court of Appeal’s decision, the Supreme Court held that the standstill provision ceased to have effect from the introduction of EUFT, thus allowing the taxpayer to rely upon the free movement of capital in relation to the DV regime from that date. This means that an FNR DTR credit may be available for third country dividends received after 31 March 2001.
Utilisation of Reliefs
Another issue before the Supreme Court was the extent to which a remedy was required by EU law in respect of the set off of DTR credits. This concerned the position where certain reliefs may have been used to reduce taxable profits, such that only a portion of an FNR credit was used to meet the remaining DV tax liability. In such circumstances the reliefs used had been ‘lost’ and it would not have been possible to use the excess FNR credit elsewhere.
The Supreme Court held that where tax had been paid as a result of an inability to carry forward unused DTR credits a claim would lie in restitution for the overpaid tax. Otherwise, where no tax was paid, unused DTR FNR credits (capped at the UK corporation tax rate) would be regarded as remaining available. The Supreme Court considered that the latter could be effected by disapplying the requirement that a DTR credit had to be set against the same income on which it was computed, where that prevented unused FNR DTR credits from being carried forward and applied against tax liabilities arising in subsequent years.
Primarily, the judgment dealt with matters of principle, rather than the mechanics of quantification. As a result, the Supreme Court’s decision may not be the end of the road. In early 2020, HMRC issued guidance on settling FII claims. Further guidance may be released in light of this judgment in due course to provide clarification on how the points of principle in this judgment will be applied by HMRC more widely.
Taxpayers with unresolved issues in relation to overseas dividend taxation, including third country dividends and the use of reliefs, are likely to wish to consider the practical impact of the judgment on their quantification.