On 18 December 2014 the High Court (Henderson J) gave judgment on the quantification issues arising in the FII group litigation following a hearing in May and June of this year. In relation to the Schedule D Case V tax charge on EU-source dividends, Henderson J confirmed the finding in his judgment in Prudential (2013) that effect was to be given to the ECJ’s judgments in FII (ECJ) I and II by granting a foreign underlying tax credit at the higher of the nominal and actual rates. However, whereas Prudential’s dividends were from portfolio holdings for which there was no underlying tax information, the FII claimants’ dividends were from holdings in group companies. They could therefore be expected to make proportionate inquiries into the actual and nominal tax rates applicable in the State in which the profits were earned. The nominal rate credit was to be calculated by following as closely as possible the existing statutory machinery; in particular, where dividend income passed through a mixer company a blended nominal rate had to be determined (rather than disaggregating the income as HMRC had argued). The Judge also gave provisional views on two situations which did not arise on the test cases: first, where EU-source income was taxed in an intermediate company on its way to the UK, the relevant nominal rate was that of the intermediate company (if higher than that of the ultimate source country); secondly, while in principle a nominal rate credit was not required for income originating in a third country (even where it was paid to the UK via an EU mixer company), where the income was taxed in the EU on its way to the UK the income would attract a nominal rate credit at the rate of the intermediate company.

The judgment also deals with detailed issues relating to the quantification of the Claimants’ ACT claims. Here again Henderson J followed the principle that the solution adopted should do as little violence as possible to the UK machinery, upholding the Claimants’ methodology based on an adaption of the ACT return (CT61) system. The Judge held further that HMRC had failed to demonstrate that on the facts they had changed their position so as to make restitution unconscionable: there was no short term relationship between taxation and spending and even in the longer term no causal relationship had been shown. The Judge also confirmed his rulings in Prudential that restitution should be by way of compound interest (the parties having agreed that the appropriate rate was the ten year moving average of the yield rate on ten year gilts).

The Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), 18 December 2014