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The case concerned claims for compound interest in respect of unlawfully levied ACT which had been set off against lawful MCT: in other words, claims falling within category (a) above. Ratio |
The CJEU made it clear that it was for domestic law to determine the juridical basis of the claims: in particular, whether they lay in restitution or in damages. Ratio |
On the hypothesis that, under domestic law, the appropriate basis was restitution, the CJEU stated: 87 In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the reimbursement of that which was impro... |
The national court has said that it is in dispute whether English law provides for restitution in respect of damage arising from loss of the use of sums of money where no principal sum is due. Ratio |
It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax. Ratio |
Equally, on the hypothesis that the claim properly lay in damages, the argument that the claimants could not be awarded interest could not be accepted. Ratio |
Giving effect to the judgment of the CJEU, the lower courts held that the claimants were entitled to recover compound interest on the ACT in respect of the period between the date of payment and the date of set-off. Ratio |
They also expressed the view, obiter, that the same principles should apply to claims in respect of unutilised ACT, falling within category (b) above. Ratio |
HMRCs appeal to the House of Lords was dismissed ([2008] AC 561). Ratio |
For varying reasons, the House held, by a majority, that a claim would lie in unjust enrichment for restitution of compound interest on money which had been paid prematurely as the consequence of a mistake, and that the appropriate measure of restitution in the instant case was compound interest calculated on a convent... |
The House also held that compound interest was available as damages, where it was the measure of the loss foreseeably suffered by the claimant from the loss of the use of his funds. Ratio |
That aspect of the decision is not in issue in the present case and need not be considered. Ratio |
Lord Nicholls of Birkenhead and Lord Hope of Craighead, who were in the majority on the question of unjust enrichment, emphasised that the interest was not ancillary to a claim for the recovery of a principal sum: rather, the interest was itself the principal sum, claimed as restitution of the time value of money. Rati... |
They interpreted the CJEUs judgment in Metallgesellschaft as meaning that EU law required, as Lord Hope put it at para 9, that the companies must be provided with a remedy in domestic law which will enable them to recover a sum equal to the interest which would have been generated by the advance payments from the date ... |
In that regard, both Lord Hope and Lord Nicholls referred to para 88 of the judgment of the CJEU, cited above. Ratio |
Lord Nicholls identified the crux of the dispute, at paras 71-73, as being whether the provision English law made for the payment of interest satisfied the EU principle of effectiveness. Ratio |
Lord Hope and Lord Nicholls adopted similar analyses of the basis of the claim in unjust enrichment, at paras 33 and 102 respectively. Ratio |
Lord Hope described the Revenues enrichment at para 33 as the opportunity to turn the money to account during the period of the enrichment. Ratio |
Lord Nicholls analysed the issue in terms of Professor Birkss theory of unjust enrichment by subtraction (that is, at the expense of the claimant), and stated at para 102: The benefits transferred by Sempra to the Inland Revenue comprised, in short, (1) the amounts of tax paid to the Inland Revenue and, consequentially... |
The Inland Revenue was enriched by the latter head in addition to the former. Ratio |
The payment of ACT was the equivalent of a massive interest free loan. Ratio |
Restitution, if it is to be complete, must encompass both heads. Ratio |
Restitution by the Revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity. Ratio |
Since the enrichment which had to be undone was the opportunity to turn the money to account during the period before it was lawfully due, it followed that the measure of the enrichment did not depend on what HMRC actually did with the money during that period (Lord Hope at para 33, Lord Nicholls at para 117). Ratio |
In that connection, Lord Nicholls drew an analogy at para 116 with the award of user damages, although such awards are based on wrongdoing and are designed to compensate for loss: One Step (Support) Ltd v Morris-Garner [2018] UKSC 20; [2018] 2 WLR 1353, para 30. Ratio |
In the ordinary course, the market value of the benefit arising from having the use of money was said to be the cost the defendant would have incurred in borrowing the amount in question for the relevant period: a sum which, like all borrowings, would inevitably be calculated in terms of compound interest (Lord Nicholl... |
The court could however depart from the market value approach if it were established that it would produce an unjust outcome (Lord Hope at para 48, Lord Nicholls at para 119). Ratio |
Lord Hope and Lord Nicholls proceeded on the basis of a presumption that the innocent recipient of a mistaken payment has benefited from the use of the money, the value of the benefit being the market cost of borrowing the money over the relevant period. Ratio |
The onus is on the defendant to displace that presumption. Ratio |
The innocent recipient, rather than the mistaken payer, is thus exposed to the risks of litigation. Ratio |
Lord Nicholls acknowledged at para 125 that the decision might have serious consequences for public finances, because of the extended limitation period available in cases of mistake, but considered that the issue had been addressed by legislation: The seriously untoward consequences this may have for the Inland Revenue... |
Parliament has now recognised this extended period should not apply to payments of tax made by mistake: see section 320 of the Finance Act 2004. Ratio |
Lord Walker of Gestingthorpe stated that he was essentially in agreement with Lord Hope and Lord Nicholls (para 154), and that he too would dismiss the appeal, largely for the reasons which they give. Ratio |
He also observed that the crucial insight in their speeches was the recognition that income benefits were more accurately characterised as an integral part of the overall benefit obtained by a defendant who is unjustly enriched (para 178). Ratio |
He went on, however, to state that he must confess that his own inclination would be to extend the equitable jurisdiction to award compound interest, rather than to recognise a restitutionary remedy available as of right at common law (para 184). Ratio |
He added that he felt some apprehension about the suggested conclusion that compound interest should be available as of right, subject only to an exception for subjective devaluation. Ratio |
The other members of the Appellate Committee disagreed with the majority. Ratio |
Lord Scott of Foscote rejected the view that the mere possession of mistakenly paid money - and accordingly the ability to use it if minded to do so - is sufficient to justify not simply a restitutionary remedy for recovery of the money, but a remedy also for recovery of the wholly conceptual benefit of an ability to u... |
A restitutionary remedy could not in his view encompass the recovery of anything other than the money which the defendant had actually received. Ratio |
In reality, in his view, Sempra was asserting a claim for compensation for its loss of the use of the money, dressed up as a claim in restitution in order to take advantage of the more generous limitation period allowed by section 32(1)(c) of the Limitation Act 1980 (the 1980 Act). Ratio |
Lord Mance also noted the practical context of the issue. Ratio |
The basis on which Sempra principally put their claim was that they had paid the ACT under a mistake of law. Ratio |
On that basis, section 32(1)(c) of the 1980 Act would postpone the commencement of the limitation period until the time when Sempra discovered or could with reasonable diligence have discovered that the ACT was not due: a time which they identified with the date in 2001 when the CJEU issued its judgment in the Metallge... |
Lord Mance commented (para 200) that the appropriateness of an extended time limit in this context was questionable. Ratio |
As he noted, Lord Hoffmann had recognised in the Kleinwort Benson case (Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 401) that allowing recovery for mistake of law without qualification, even taking into account the defence of change of position, may be thought to tilt the balance too far against the pu... |
Like Lord Nicholls, Lord Mance noted that, as regards the future (although not as regards the instant case), section 320 of the Finance Act 2004 meant that section 32(1)(c) of the 1980 Act would no longer apply to mistakes of law relating to a taxation matter under the care and management of HMRC. Ratio |
Like Lord Walker, Lord Mance cautioned against a radical reshaping of the law, observing at para 205 that we must navigate using the reference points of precedent, Parliamentary intervention and analogy, and we should bear in mind the limitations of judicial knowledge and the assistance offered by a series of Law Commi... |
European law left it, in his view, to national law to provide an effective remedy and did not prescribe that this should be by way of compound, rather than simple, interest (paras 201-204). Ratio |
The common law had recognised a claim for money had and received, but not a claim for the use of money had and received. Ratio |
A claim of the latter kind faced a long line of authority over a period of nearly 200 years, including the recent decision of the House in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (paras 203-220). Ratio |
The common law rule had been recognised and effectively endorsed by the Law Revision Committee, whose recommendations on interest in their Second Interim Report, 1934 (Cmd 4546) were implemented by provisions of the Law Reform (Miscellaneous Provisions) Act 1934 (later replaced by section 35A of the 1981 Act) (paras 21... |
There were in addition policy reasons making it unwise to introduce an absolute right to compound interest in restitution. Ratio |
As the Law Commission had noted, compound interest evoked deep-seated fears, because it increased in an exponential rather than a linear way, especially during periods of high inflation (para 222). Ratio |
In the light of such concerns, the Law Commission had made a number of recommendations relating to the introduction of a right to compound interest on a restricted basis. Ratio |
Those recommendations had not been acted on (para 224). Ratio |
The decision of the House on the issues relevant to the present appeal can therefore be summarised as follows: (1) By a majority consisting of Lord Hope, Lord Nicholls and Lord Walker, the House held that the court had jurisdiction at common law (Lord Hope and Lord Nicholls) or at least in equity (Lord Walker) to make ... |
The basis of the award was that the benefit by which the recipient of the money was enriched was the time value of the money. RLC |
The benefit was presumptively quantified as the market value of the use of the money during the period before it was lawfully due, that is, the cost of borrowing an equivalent amount in the market. RLC |
(2) The same majority held that: in the instant case, the presumption that the Government had (a) benefited from the premature payment of the tax had not been displaced; but (b) the Government was in a different position from ordinary commercial borrowers, in that it could borrow at more favourable rates; and according... |
Legal developments since Sempra Metals Ratio |
A number of relevant developments in the law have occurred since Sempra Metals. Ratio |
First, the jurisprudence of the CJEU has developed since its Metallgesellschaft judgment. Ratio |
As was noted above, that judgment described the sum due under EU law, where tax was paid prematurely, and on the hypothesis that the appropriate remedy in domestic law lay in restitution, as the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the... |
More recent judgments have provided greater clarity. Ratio |
For example, in Littlewoods Retail Ltd v Revenue and Customs Comrs (Case C-591/10) EU:C:2012:478; [2012] STC 1714, the CJEU stated at para 27 that it is for the internal legal order of each member state to lay down the conditions in which such interest [that is, interest on amounts levied in breach of EU law] must be p... |
The CJEU also made it clear, in relation to the principle of effectiveness, that national rules in relation to the calculation of interest should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned (para 29). PRE |
In Littlewoods Ltd v Revenue and Customs Comrs [2017] 3 WLR 1401, this court held that an award of simple interest was sufficient to comply with that requirement, and that an award of compound interest on overpaid tax was therefore not required by the EU law principle of effectiveness. PRE |
Recognition that an award of compound interest is not necessary in order to comply with the EU principle of effectiveness affects the context in which these issues have to be considered. PRE |
Secondly, the Littlewoods case also revealed a conflict between the decision in Sempra Metals and prior legislation. Ratio |
Long before Sempra Metals was decided, Parliament had created a scheme for the repayment of overpaid VAT, currently set out in section 80 of the Value Added Tax Act 1994 (the 1994 Act), with provision for the payment of simple interest in section 78. Ratio |
That section requires HMRC to pay interest on the repaid tax if and to the extent that they would not be liable to do so apart from this section. Ratio |
Entitlement to interest under section 78 is subject to limitations which would be defeated if it were possible for taxpayers to bring a common law claim for interest on mistaken payments. Ratio |
Until Sempra Metals, it had been settled law for about 200 years that no such claim could be brought. PRE |
In enacting section 78, Parliament legislated on that basis. PRE |
In deciding Sempra Metals as it did, however, the House of Lords failed to have regard to the scheme which Parliament had established. PRE |
Nor did it take account of section 826 of ICTA, which also provides for the payment of simple interest on overpaid tax, and covers a range of direct taxes, including ACT and MCT. PRE |
These provisions are matched by corresponding provisions limiting the liability of taxpayers towards HMRC to simple interest on underpaid tax: see section 74 of the 1994 Act and section 826 of ICTA. PRE |
The persuasiveness of the majoritys approach in Sempra Metals is diminished by their failure to have regard to these provisions. Ratio |
As Lord Hoffmann observed in Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518, para 37: judges, in developing the law, must have regard to the policies expressed by Parliament in legislation ... The development of the common law by the judges plays a subsidiary role. Ratio |
Their traditional function is to adapt and modernise the common law. Ratio |
But such developments must be consistent with legislative policy as expressed in statutes. Ratio |
The courts may proceed in harmony with Parliament but there should be no discord. Ratio |
Against the background of the 1994 Act, in particular, the effect of Sempra Metals, was to create discord of a serious character: it rendered section 78 a dead letter, if that provision were given its natural construction. Ratio |
This court therefore decided in Littlewoods that, in order for section 78 to have the effect which Parliament had intended, it was necessary to depart from its natural construction. Ratio |
Thus the approach of the majority in Sempra Metals led, as Lord Mance had predicted, to a dislocation in a related area of the law which the Appellate Committee had not considered. Ratio |
Thirdly, in Kleinwort Benson [1999] 2 AC 349 it was realised that allowing recovery of payments made under a mistake of law could create problems as the law of limitation then stood, since section 32(1)(c) of the 1980 Act would enable claims to be brought within six years of the mistake being discovered, no matter how ... |
For that reason, Lord Browne-Wilkinson considered that the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause o... |
The majority, however, were unpersuaded that reform of the law of restitution should be delayed, and assumed that legislation could be enacted if Parliament considered it desirable to address the limitation question (see, for example, Lord Hoffmann at p 401). Ratio |
Parliament duly enacted such legislation. Ratio |
By the time of the decision in Sempra Metals, the majority therefore considered that the seriously untoward consequences for HMRC (as Lord Nicholls described them at para 125) of claims arising from mistaken payments of tax in the distant past were guarded against by section 320 of the Finance Act 2004, which provided ... |
What has become apparent since Sempra Metals, however, is that the problems in relation to limitation which arise from the retrospective effect of that decision, and the decision in Kleinwort Benson, are incapable of being fully addressed by legislation. Ratio |
Repeated attempts by Parliament to address the retrospective impact of those decisions by introducing a limitation period with retrospective effect have been held to be incompatible with EU law: section 80 of the Value Added Tax Act 1994, as originally enacted, in Fleming (trading as Bodycraft) v Revenue and Customs Co... |
This problem, of which the House of Lords was unaware at the time when Kleinwort Benson and Sempra Metals were decided, illustrates the risks of effecting major changes to the law of restitution by judicial decision. Ratio |
By applying the declaratory theory of adjudication, the law as altered by the decisions was deemed always to have applied, and the previously settled understanding of the law was treated as a mistake for the purposes of limitation. Ratio |
Consistently with that theory, in Kleinwort Benson the House of Lords held that a right of action had arisen when payments were made under a mistake of law, notwithstanding that no such right of action was recognised by the courts at that time. Ratio |
Similarly in Sempra Metals, the right of action in unjust enrichment arose when the defendant obtained the opportunity to use the money mistakenly paid, notwithstanding that no such right was understood to exist at that time. Ratio |
The tension inherent in the decisions is that the House adhered to the declaratory theory for the purpose of finding that a cause of action based on unjust enrichment had accrued in the past, based on a mistake of law capable of invoking section 32(1)(c) of the 1980 Act, while straining the premise of the theory, namel... |
The consequence was that the rights established by those decisions were deemed to have vested in the claimants before the decisions were reached, with the result that, under EU law, they could not be taken away by retrospective legislation excluding or restricting the operation of section 32(1)(c) without a reasonable ... |
The position would have been different if the changes had been effected by legislation, since legislation can, and normally does, take effect prospectively. Ratio |
Fourthly, decisions subsequent to Sempra Metals have demonstrated the degree of disruption to public finances which the decision in that case, taken together with Kleinwort Benson, is capable of causing. Ratio |
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