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Another EU cost - The Franked Investment Income (FII) case (C-362/12)


The FII could cost the Exchequer in the region of £30 billion

9th November 2016
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The European Union has cost the UK Treasury £ billions in lost income.

1.       The CJEU’s decision in the FII case (C-362/12) is likely to cost the UK Government in the region of £30bn, and 

2.       The FII case was wrongly decided. 


Executive Summary

1.         The UK Government has told the courts that the FII case will cost of £5-7bn.  However, these estimates were made before the UK Government realised that it would have to pay compound interest on these claims.   As these claims date back to 1973, the cost of paying compound interest increases these claims by a factor of 5-6.   The Bank of England base rate was on average 12% from 1973 to 1991, and 6% from 1992 to 2008.  It is only since 2008 that interest rates have fallen to such historically low levels.

2.         Sir Professor Alan Dashwood QC (Emeritus Professor of EU law at Cambridge University) is of the opinion that EU law has been misapplied to the facts of FII (Professor Dashwood is practising barrister specialising in EU constitutional law, who has represented the Government on several occasions before the CJEU). 

The CJEU would not have held the UK to be in breach of EU if the English courts and Parliament had acted as one and created at the same time a remedy with an appropriate limitation period.  It is the inability of these two organs of state to act in unison that gave rise to the breach of EU law in the FII case (C-362/12).  The UK was held to have breached EU law in this case because it was, mistakenly, adjudicated on the basis of being a civil law jurisdiction.


Part 1 – The Cost of FII (C-362/12) to the UK Government

The UK Government has made the following quotes concerning the potential cost of the FII case:

“Finally, the UK government states that the potential value of claims at issue could amount to £7bn, which costs would be exacerbated by the complexity involved in having to settle claims dating back to 1974.”   

Advocate General Geelhoed’s Opinion, paragraph 140, C-446/04 Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue


“I was told that the maximum amount of the claims advanced in the FII Group Litigation is of the order of £5 billion.”

Justice Henderson 2008, paragraph 8, Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2008] EWHC 2893 (Ch)

These statements were made by the UK Government before the courts decided the Littlewoods case (2015).  In this case, the courts held that to satisfy the obligation under EU law to provide an “adequate indemnity”, compound interest should be paid on restitution payments.   In the Littlewoods case, which also dates back to 1974, a claim of £204m was increased to £1.2bn with the inclusion of compound interest.  [The Bank of England’s base rate from 1973 to 1991 was in the region of 12%, and from 1991 to 2008 was in the region of 6%.  It is only since 2008 that interest rates have fallen to such a historically low level.]  This means that a claim of, say £6bn, could be increased by a factor of 5-6 by the obligation to pay compound interest.

The following table shows the amounts which HMRC has set aside in its accounts to cover the potential cost of covering legal disputes.  In 2016, HMRC had to increase is contingent reserve from £35.6m to £49.1bn because as the Comptroller & Auditor General states in its report:

“Contingent liabilities increased by 37.9% to £49.1 billion at 31 March 2016 (2014-15: £35.6 billion) largely because HMRC revised its previous estimates of the calculation of interest that may need to be paid for those cases that make up the contingent liability balance.”

HMRC – cost of settling legal disputes

Year ending 31st March

Provisions for Legal Claims


Contingent Liabilities




2016 £5.900 £49.1 £55.000
2015 £7.181 £35.6 £42.781
2014 £5.390 £29.2 £34.590
2013 £4.184 £14.5 £18.684
2012 £2.081 £14.5 £16.581
2011 £4.381 £9.7 £14.081
2010 £4.919 £5.5 £10.419

Source: HMRC Annual Report & Accounts

As the name of this case implies “Test Claimants in the FII Group Litigation” this is a test case, which has been brought by twenty five large UK multi-national companies.  [The law firm Joseph Hage Aaronson holds the names of the twenty five companies, and it is required to make them available on request.]  One of these companies, British American Tobacco, states on page 145 of its 2015 Annual Report and Accounts under the heading “(b) Franked Investment Income Group Litigation Order:”

During 2015, HMRC paid to the Group a gross amount of £1,224 million in two separate payments.”

Please Note: this figure does not include any payment for compound interest.

If one test claimant, albeit one of the largest claimants, has received £1.224bn as a result of the CJEU’s decision in the FII case, it is not difficult to see that the UK Government’s estimate of this case costing the Exchequer £5-7bn (before compound interest) is realistic. 

HMRC’s liability is not limited to the twenty five test claimants.  The large accounting firms will be encouraging other smaller claimants to submit claims.

The CJEU’s decision in FII has also given rise to a number of other related claims which HMRC will in due course be obliged to settle in favour of the taxpayers.

The FII case is to HMRC what PPI claims are to the banks.  Both entail claims that go a long way back in time, and it is difficult to accurately estimate the number of claimants.

Part 2 - Why was the FII case wrongly decided?

Introductory comment

Sir Professor Alan Dashwood QC thinks that this case has been wrongly decided by the courts, and that the UK Government should have sought a second preliminary ruling from the CJEU.

EU law – background

  • EU law is civil law.This is because EU law is derived from the legal traditions and constitution of the founding member states, all of which are civil law countries

  • Most EU countries are civil law jurisdictions.Apart from the UK, the only other common law jurisdictions are Ireland, Malta and Cyprus.

  • Most EU judges are civil law jurists.As each EU Member State is able to nominate an EU judge it follows that most EU judges are civil law jurists.

  • Because most EU countries are civil law jurisdictions, most members of the Commission also come from civil law jurisdictions.This is a potential problem because each EU State and the EU Commission are able to make representations to the CJEU on how EU law should be applied to the facts of a case.

  • Most EU cases have facts which have either arisen, or could have arisen, in a civil law jurisdiction.

  • Under the principle of “sincere cooperation” the English courts are obliged to apply EU law in the same manner as the CJEU.This means that the English courts have limited freedom to deviate from the precedents set by the CJEU.

For the above reasons, EU law tends to be viewed from a civil law perspective.

Key to FII case

Lord Sumption said in his judgement, the FII case:

“is a problem that could only arise in a common law country such as England, where the law of restitution has been the piecemeal creation of judges while limitation is exclusively the creature of statute”.

EU law

EU law requires the State to provide an adequate period of notice before changing an existing limitation period.

This is not an unreasonable law in the context of what happens in a civil law jurisdiction.

Civil law jurisdiction

In a civil law jurisdiction only the State is able to create a restitutionary remedy against itself, especially in the area of taxation.  This means that the State has the opportunity to set an appropriate limitation period at the same time that it creates a new remedy.  Under EU law, Member States are required to provide a period of notice before reducing the limitation period, (from, say, one year to six months) because in the absence of such a notice period some claimants might be deprived the benefit of the remedy.  In these circumstances, such a law represents a reasonable balance between the rights of the State and the rights of individuals. 

Common law jurisdiction

In the UK, a new remedy may be created either by Parliament or by the Courts.  If Parliament creates the new remedy it will have the opportunity, at the same time, to set an appropriate limitation period for this remedy, as would be the case in a civil law jurisdiction.  The situation is, however, very different if the courts create a new remedy:

1.       It is impossible for Parliament to set a limitation period at the same time the courts announce their decision creating the new remedy.

2.       Any decision of the courts may be the subject of an appeal.  This means that the status of the new remedy is not certain until the appeal process has been completed.

Background to FII

Breach of EU Law

  • In 2001, in the Metallgesellschaft case, the CJEU decides that Advance Corporation Tax (ACT), levied from 1973 to 1999, was contrary to EU law

Remedy – Restitution of Tax

  • Woolwich remedy – In 2001, the only restitutionary remedy available was the Woolwich remedy with a limitation period of 6 years from date of payment of tax.This allowed taxpayers to reclaim illegally levied ACT from 1995 to 1999.Claims from 1973 to 1994 statute barred (this remedy alone satisfied the EU law requirements to provide an adequate remedy)

  • Deutsche Morgan Grenfell remedy - On 18th July 2003, Park J created a new remedy to recover tax paid as a result of a mistaken interpretation of the law.This remedy by default was attached to s.32(1)(c) Limitation Act 1980 – limitation period 6 years from date of discovery of mistake.Park J’s decision was upheld by House of Lords in 2006.

  • When Section 32(1)(c) Limitation Act 1980 was enacted Parliament only intended it to apply to ‘mistakes of fact’ because at the time there was no remedy for ‘mistake law’ in English law.This limitation period was wholly inappropriate for the field of tax because it allowed a taxpayer to recover tax paid at any point in history but which was only discovered as mistakenly paid in the last 6 years.

Facts of FII

  • 8 September 2003 (A.M.) - FII claimants submit claim for restitution of ACT from 1973 to 1994 relying on the new Deutsche Morgan Grenfell remedy created by Park J

  • 8 September 2003 (P.M.) - Paymaster General announced the UK’s intention to amend section 32(1)(c) so that it does not apply to taxation (later became s.320 Finance Act 2004)

English Courts

  • FII claimants argue before the English courts that EU law requires the UK to give them notice before they change s.32(1)(c) Limitation Act 1980 and so s.320 FA 2004 breaches this EU law requirement.

  • The Supreme Court were unable to agree on how EU law should apply to the facts of FII, so they sought a “preliminary ruling” from the CJEU i.e. they asked the CJEU certain questions.

CJEU’s Decision (Case C-362/12)

  • S 320 FA 2004 breached EU law because it was introduced without providing a period of notice, citing its decision in the Marks & Spencer case (C-62/00) as the precedent for its decision.


  • The UK has to indemnify taxpayers for illegally levying ACT from 1973 to 1994.This means that the effect of the CJEU’s decision is to reopen claims that were statute barred.

  • To satisfy the obligation under EU law to provide an “adequate indemnity”, HMRC has to pay compound interest on these claims.The total cost of the FII case is likely to be in the region of £30-40bn

Mis-application of EU law

  • The CJEU mistakenly assumed that the UK is a civil law jurisdiction.

  • The precedent cited by the CJEU for its decision in FII was the Marks & Spencer Case (62/00), the facts of which could have arisen in a civil law jurisdiction.

  • There are two forms of discrimination under EU law: one is to treat the same facts differently, the other is to treat different facts the same.Adjudicating the facts of FII on the basis that they arose in a civil law jurisdiction, falls within the second category.

  • EU law has been applied in a harsher manner to the UK than to any other civil law jurisdiction.For example, in civil law jurisdictions EU law has:

1.       Not been engaged to deprive the State the opportunity to set an appropriate limitation period for a new remedy;

2.       Not been engaged unless the limitation period was intended by the State to apply to the remedy;

3.       Not been engaged when the limitation period was widely expected to be amended

4.       Not been engaged when the status of the remedy is uncertain under domestic law; and

5.       Not been used to reopen claims that were statute barred under domestic law;

  • The CJEU did not consider Article 4(2) of the Treaty on European Union 2009, and as a consequence its decision violated the provision in this Article e.g. to respect the UK’s national identity, which includes the UK’s system of common law, and to treat the UK equally with other Member States.

Article 4(2) Treaty on the European Union

The relevant aspect of this Article is:

The Union shall respect the equality of Member States before the Treaties as well as their national identities, inherent in their fundamental structures, political and constitutional, inclusive of regional and local self-government.

The principle of equality

  • EU law recognises that discrimination may take one of two forms: one is to treat the same facts differently, the other is to treat different facts the same.

  • This principle has been disregarded.As has been shown above, EU law has been applied in a harsher manner to the UK than any civil law jurisdiction, without the UK having committed any misdemeanour.

National identity

  • The CJEU has held that a Member State’s national identity includes its constitution, which includes the UK’s system of common law.

  • This obligation has been disregarded.The reason the UK was held to have breached EU law was because it is impossible for Parliament to set an appropriate limitation period at the same time the English courts create a remedy.

The final proof that EU law was mis-applied in FII

If the circumstances in FII were to arise again, how could the UK achieve equality with any one of the majority civil law Member States, without once again being in breach of EU law?   The UK would have to either:

  • prevent the English courts creating restitutionary remedies against the State, or

  • when the English Courts wish to create a new restitutionary remedy against the State, require the Court to refrain from making their decision public, until Parliament has had a reasonable period of time in which to set an appropriate limitation period for that remedy.

This is conclusive proof that the CJEU’s decision in FII is in breach of Article 4(2) TEU.

Disguised discrimination

It is arguably a disguised form of discrimination for the CJEU to apply EU law more harshly against the UK because it is a minority, common law EU country.


Civil law



in FII

Does the State have the opportunity to set an appropriate limitation period at the same time a remedy is created?



Does the State have the opportunity to prevent an old limitation period becoming unintentionally attached to a new remedy?



Is there a “promise” regarding the limitation period applying to the remedy?  This cannot exist when the limitation period is expected to be changed by the State.



Is EU law only engaged when the status of the remedy is certain under domestic law?



Is it the case that EU law has not been used to reopen claims that are statute barred under domestic law?



System of lobbying the CJEU

The EU allows each EU member State and the Commission to make representations to the CJEU on how EU law should be applied to the facts of a case under consideration.  This system allows the majority of civil law countries to exercise their influence of how EU law is developed.    This system of “lobbying” makes it very difficult for EU law to be applied in an unduly harsh manner to a civil law State.  However, when the facts of a case come before the CJEU which are unique to a common law jurisdiction not only is the UK not able to benefit from this system of “lobbying”, but this system operates to its disadvantage.  In the FII case, the arguments of the UK Government before the CJEU were undermined by the “lobbying” of the Commission and Spain.

Advocate General Wathelet – former deputy Prime Minister of Belgium 

The Advocate General is responsible for writing a legal opinion for the benefit of the other judges.  In most cases, the CJEU decide the case on the basis of the Advocate General’s legal opinion.  This is what happened in the FII case.   The Advocate General in the FII case was Melchior Wathelet.  He was a career politician in Belgium from 1977 to 1995.  In fact, prior to being nominated by the Belgian Government to be an EU judge he was the country’s Deputy Prime Minister. 

I am unhappy how such a person is able to have so much influence in declaring the laws enacted by Parliament illegal.  I feel there is a question about the impartiality and the competence of someone who has been a career politician for such a long period.  


What can now be done to rectify this mistake?  [word of caution – not researched thoroughly]

English law

  • Civil Procedure Rule 3.4(2)(b) – prevents HMRC introducing a new line of argument

  • Section 3A, Civil Procedure Act 1997, allows the Lord Chancellor to amend the Civil Procedure Rules

EU law

  • As the FII case relates to the application of EU law, EU law takes precedence over English law

  • The English Courts are required under Article 4(3) Treaty of European Union (TEU) 2009 to:

“…… take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union.”

  • Under Article 13(2) TEU the CJEU is required to:

act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions and objectives set out in them.”

  • The English Courts and the CJEU are under a duty of “sincere co-operation” to satisfy their respective obligations under these Articles.

These Articles provide an obligation on both the English courts and the CJEU to rectify the mistake which has occurred in FII, as to do otherwise would not only result in an injustice, but also bring EU law into disrepute.   


The FII could cost the Exchequer in the region of £30bn, and that court’s decision in this case is flawed.