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On 18 July 2007 the House of Lords gave judgment in Sempra Metals Ltd v. HMRC [2007] UKHL 34, the latest instalment in the long running Advance Corporation Tax (‘ACT’) group litigation. The decision has already been described as having rewritten the law on debt repayment (The Times, 18 July 2007).
Sempra, formerly Metallgesellschaft Ltd., was one of the original claimants in the EC challenge to the UK’s ACT regime, part of which the ECJ held to be contrary to the right of establishment under Article 43 EC. After the ECJ decision in 2001, five test cases proceeded, in order to resolve various issues arising out of the numerous claims for compensation by foreign companies and UK subsidiaries in respect of premature payments of ACT made between 1973 and 1999. Four of the test cases have now progressed through the domestic courts and been decided by the House of Lords (Pirelli [2006] UKHL 4; Deutsche Morgan Grenfell [2006] UKHL 49; Boake Allen [2007] UKHL 25 and Sempra). The fifth case, Test Claimants in Class IV, was referred by the High Court back to the ECJ, which delivered judgment in December 2006.
The appeal in Sempra raised two issues. The first was the effect of the ECJ’s decision in Metallgesellschaft, on which the Court of Appeal had taken the view that the ECJ decision required the English courts to award compound interest to Sempra, regardless of the position in national law. The House of Lords unanimously rejected that view, agreeing with the Revenue that the appropriate remedy was a question to be determined by national law, subject only to EC principles of ‘equivalence’ and ‘effectiveness’.
Secondly, the Revenue contended that Sempra had no cause of action in English law by which it could recover compound interest. On this point, their Lordships sided with Sempra: Lords Hope and Nicholls concluded that there is a right at common law to recover compound interest representing the objective ‘time value of money’ as personal restitutionary relief in a claim for money paid under a mistake of law. Lords Mance and Walker agreed that compound interest was available, but as an equitable discretionary remedy, rather than as of right at common law. Lord Scott dissented, taking the view that compound interest could be claimed as damages but that Sempra had no restitutionary claim for interest based on a breach of EC law. Lord Scott agreed with Lords Hope and Nicholls, however, that such a claim, if it existed, should be as of right at common law, and not available purely as a discretionary equitable remedy.
Their Lordships also disagreed on the appropriate measure of recovery: Lords Mance and Scott dissented from the majority view that recovery should reflect the objective ‘time value of money’, reasoning that Sempra could only recover the interest the Revenue actually earned in the relevant period. All agreed, however, that a claimant may recover compound interest as damages, and the majority took the view that such a claim is available in all cases of late payment of debts. On the particular facts of this case, their Lordships also agreed that recovery should be calculated by reference to the government borrowing rate, rather than the higher market borrowing rate contended for by Sempra.
Gerry Facenna is acting as junior counsel for HM Revenue & Customs in two of the five ACT group litigation test cases, Sempra and Pirelli.
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Gerry Facenna