Revenue changes law on reclaiming overpaid tax

The Inland Revenue has put in place new legislation to protect themselves against the potential effects of a recent judgement in a case that the Revenue lost in the High Court against Deutsche Morgan Grenfell (DMG).

This decision changed the generally accepted practice followed by the Revenue of allowing taxpayers to make claims for up to 6 years of overpaid tax. The judgement allows taxpayers, in the case of an error in law, six years to identify the error and then allows them to reclaim all the overpaid tax.

The DMG case followed the European Court of Justice (ECJ) decision in 2001 in the Metallgesellschaft/Hoechst case (Metallgesellschaft Ltd and others v (1) CIR and (2) HM Attorney General and (1) Hoechst AG and (2) Hoechst United Kingdom Ltd v (1) CIR and (2) HM Attorney General). The ECJ decision was delivered on 8 March 2001 and is reported at [2001] STC 452.

In this case the ECJ held that aspects of the UK's provisions for accounting for Advance Corporation Tax (ACT) were contrary to EU law. The effect is that companies (and others affected by the decision) are entitled to seek compensation or restitution in respect of ACT paid prematurely or incorrectly.

In the High Court Mr Justice Park held that DMG made ACT payments under a mistake of law, that it was entitled under common law to restitution in respect of all the overpaid tax and that court actions could be brought within 6 years of the date of the decision in the Metallgesellschaft/Hoechst case.

The DMG judgement opened up the prospect of millions of pounds worth of claims against the Revenue. Hence ahead of any appeal decision, the Government has included provisions in the Finance Act 2004, which modify the relevant legislation on legal claims (the ‘Limitation Act 1980’) as from 8 September 2003 so as to provide that the provisions of that Act do not apply in relation to “a mistake of law relating to a taxation matter under the care and management of the Commissioners of Inland Revenue.”

The broad thrust of this legislation is to ensure that the Revenue cannot be forced to repay overpaid taxes more than six years after the taxes were paid. There are various issues that normally have a bearing on the time limits for claims for damages. Six years is the usual time limit for damages claims. However, because some damages arise from “latent” faults and defects, which may not be apparent for some time, the Latent Damages Act 1986 allows a plaintiff three years from the time that they first became aware that they have suffered damages, or a maximum of 15 years from the date of the original act or omission that caused the damages.

What is not yet clear under these changes is whether the position will be different if the taxpayer can show that they have always disputed the legality of the tax: i.e. if a taxpayer disputes the tax in year one but it is only found to be an error of law in year 10 can the taxpayer reclaim all the taxes paid in the ten years or only the taxes paid in years 5-10?

Announcing the legislation, the Paymaster General said: "For many years there has been symmetry within the direct tax system: the Inland Revenue normally has the right to go back for 6 years to assess outstanding tax and those who have overpaid tax have the right to make claims to repayment for a similar period. A recent High Court case has the potential to upset this balance. The proposed legislation is designed to restore this.”