In the latest decision in the long-running Franked Investment Income (“FII”) Group Litigation, the Supreme Court has held that, for a claim to recover money paid under a mistake of law, the statutory limitation period begins to run when a claimant could with reasonable diligence have discovered the mistake, in the sense of recognising that it had a “worthwhile claim”: Test Claimants in the Franked Investment Income Group Litigation & Ors v Commissioners for Her Majesty’s Revenue and Customs  UKSC 47.
The court departed from the House of Lords decision in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners  UKHL 49, which had established that (in cases where a payment was made in accordance with the law as it was then understood to be) time did not begin to run until a judicial decision had established that the law was otherwise and, accordingly, the claimant had a well-founded cause of action. The court’s decision brings the law on limitation for claims based on a mistake of law in line with the position for cases of fraud or deliberate concealment, where time starts to run when the claimant knows enough to pursue a claim in fraud or to allege deliberate concealment – not when the fraud or concealment is established by judicial decision.
The Supreme Court was also asked to reconsider the earlier decision of Kleinwort Benson Ltd v Lincoln City Council  2 AC 349, in which the House of Lords concluded that the statutory provision postponing commencement of the limitation period for claims based on a mistake included mistakes of law as well as mistakes of fact. The court affirmed that earlier decision, finding that the purpose of the provision was to relieve a claimant from the need to comply with a time limit at a time when it could not reasonably be expected to do so, and that purpose would be frustrated by excluding mistakes of law from the scope of that provision.
The decision provides a rare example of the Supreme Court overturning one of its own earlier decisions, or an earlier decision of the House of Lords, and in effect has re-written the law of limitation on the discoverability of a mistake of law. By focusing the enquiry on when the claimant recognised (or could with reasonable diligence have recognised) that it had a worthwhile claim, the court’s decision is likely to require evidence to be brought on developments in legal understanding within the relevant category of claimants and their advisers, which may include the need for expert evidence. The court recognised that this approach involves a more nuanced inquiry than a test based on when an authoritative appellate judgment determined the point in issue, but said there was no reason to think this would be unworkable in practice, or too uncertain in its operation to be acceptable.
The FII Group Litigation has been running since 2003 and is concerned with the (now historic) tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, as compared with the treatment of dividends paid and received within UK-resident groups of companies. The test claimants in the FII Group Litigation allege that the differences between their tax treatment and that of UK-resident groups of companies breached EU law, and seek repayment of the tax, with interest, insofar as it was unlawful under EU law. In some cases, the test claimants seek repayment of tax going back to 1973, when the UK joined what is now the EU.
Restitutionary claims for the recovery of money, like those brought by the test claimants, are normally subject to a limitation period under English law of six years from when the cause of action accrued – ie the date on which the tax was paid. Accordingly, many of the FII test claimants’ claims are potentially time-barred. However, section 32(1)(c) of the Limitation Act 1980 (“LA”) postpones the commencement of the limitation period for an action “for relief from the consequences of a mistake” until the claimant has “discovered” the mistake or could “with reasonable diligence” have discovered it.
In Kleinwort Benson, the House of Lords held that it was possible to bring a claim in restitution for money which was paid under a mistake of law (that is, the mistaken belief that payment was required to be paid by law), and held that the limitation period for such a claim could be postponed under section 32(1)(c). Subsequently, in Deutsche Morgan Grenfell, the House of Lords held that, in effect, a mistake of law was only “discoverable” by a claimant when the point was authoritatively determined by the decision of a court of final appeal. Such a conclusion would allow claims to be made for repayment of tax as far back as 1973, as long as the claim was brought within six years of the decision confirming the existence of the mistake of law.
In the present case, Her Majesty’s Revenue and Customs (“HMRC”) asked the Supreme Court to depart from its decision in Deutsche Morgan Grenfell as to when a mistake of law was discoverable, and was also granted permission to appeal on the question of whether Kleinwort Benson was correct that section 32(1)(c) applies to actions based on mistakes of law.
The Supreme Court unanimously allowed HMRC’s appeal, although a minority dissented as to the application of section 32(1)(c) to claims of this sort.
A majority of the court (Lords Reed and Hodge, with whom Lords Lloyd-Jones and Hamblen agreed) affirmed the decision in Kleinwort Benson, ruling that section 32(1)(c) does apply to claims for restitution of money paid under a mistake of law. That conclusion means that the limitation period for such claims begins to run only when a claimant discovers, or could with reasonable diligence have discovered, its mistake.
Whilst the majority held that the decision in Kleinwort Benson was not supported by “convincing reasoning” (as it was based on an inaccurate understanding of the pre-1939 law on limitation), the majority nonetheless agreed with the decision reached in that case. It found that the ordinary meaning of section 32(1)(c) includes actions based on mistakes of law, and that this was consistent with the purpose of the provision, which was to postpone the commencement of the limitation period where, as a result of a mistake, a claimant could not reasonably have known of the circumstances giving rise to the cause of action at the time when it accrued.
A minority of the court (Lords Briggs and Sales, with whom Lord Carnwath agreed) concluded that there was a “clear misstep by the House in Lords in Kleinwort Benson”, and would have allowed HMRC’s appeal on grounds that section 32(1)(c) has no application to mistakes of law.
The court was, however, unanimous on the question of when a mistake of law was “discoverable”, on the assumption that section 32(1)(c) applied. The court reached this conclusion for a number of reasons, including the following:
- Section 32(1)(c) could not have been intended to postpone the commencement of a limitation period until after a claimant discovered, or could discover, that its claim was certain to succeed, or until the proceedings had been completed.
- Limitation periods apply to claims regardless of whether there is in truth a well-founded cause of action. To the extent that it tied the date of the discoverability of a mistake of law to the date on which the “truth” (as to whether a claimant has a well-founded cause of action) is established by a judicial decision, the decision in Deutsche Morgan Grenfell was inconsistent with that proposition.
- It was also inconsistent with the authorities concerned with similar provisions in section 32(1) in relation to fraud and deliberate concealment. The authorities established that, in such cases, time begins to run once the claimant has sufficient information to pursue the claim.
It was therefore appropriate to overturn Deutsche Morgan Grenfell in relation to the discoverability of a mistake in section 32(1)(c). Instead, time starts to run from when the claimant recognised that a worthwhile claim arose (or could with reasonable diligence have done so). In practical terms, this would be when the claimant knew, or could have known, of the mistake with sufficient confidence to justify embarking on the preliminaries to issuing a claim, such as submitting a proposed claim to the intended defendant, taking advice on the claim and collecting evidence.
Although the Supreme Court allowed HMRC’s appeal, it was not in a position to determine “in the abstract” the point in time at which the test claimants could with reasonable diligence have discovered that they had paid tax under a mistaken understanding that they were obliged to do so. The court found that such a conclusion depended on an examination of the evidence, and noted that EU law on the kinds of tax regimes which were relevant to the FII Group Litigation developed through a series of judgments from 2000 onwards (and that some of the claims underlying those judgments had been filed with the European Court of Justice in the 1990s). The relevant question to be determined was at what time the test claimants could with reasonable diligence have discovered that they had a worthwhile claim. That question was remitted for determination by the High Court.