Faculty of law blogs / UNIVERSITY OF OXFORD

Tax Restitution Claims Curtailed by the Supreme Court’s Limitation Discoverability Doctrine

Author(s)

Samuel Beswick
Assistant Professor, University of British Columbia

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4 Minutes

Jazztel Plc v HMRC [2022] EWCA Civ 232 is the first judgment to apply the discoverability doctrine from Test Claimants in the Franked Investment Income Group Litigation v HMRC [2020] UKSC 47 (FII) to a pleading to postpone limitation on the basis of mistake of law. Discoverability is a principle for construing limitation periods. Under the Limitation Act 1980 (E&W), typically a limitation period commences from the date at which a cause of action accrued. In some cases, a cause of action might be latent or concealed and might accrue before a plaintiff could reasonably discover it. The Act provides mechanisms that postpone a limitation period from commencing until, broadly speaking, a plaintiff discovered, or could with reasonable diligence have discovered, their cause of action.

FII is the (now) leading authority on the Limitation Act’s discoverability mechanisms. It already seems unpopular, having affirmed a ratio that neither party to that case had wanted. Professor Adrian Zuckerman contends that the FII precedent encourages ‘speculative and wasteful litigation’. Christoforos Tsavatopoulos argues it is ‘plagued with inherent vagueness and various impracticalities’. While Jazztel could be taken to vindicate these critiques, I think Jazztel can show how FII’s discoverability doctrine is principled and workable.

By way of background, English common law recognises a cause of action for restitution of money (including taxes) paid under a mistake of law: Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349. A 2006 judgment, Deutsche Morgan Grenfell Group plc v IRC [2007] 1 AC 558 (DMG), had held that in claims for restitution of money mistakenly paid under ‘a point of law which is being actively disputed in current litigation’, the limitation clock begins to run once ‘the point has been authoritatively resolved by a final court’. That interpretation of the limitation discoverability rule in s 32(1)(c) of the Limitation Act 1980 had been criticised by Lord Brown, as well as by Professor Duncan Sheehan and me. Recognising that the DMG rule was ‘illogical’ and exposed defendants to potential liability ‘for an indefinite period of time’, the Supreme Court in FII overturned it. A majority held that in such claims the limitation clock commences once a reasonably diligent claimant could have recognised ‘that a worthwhile claim arises’.

FII guides how discoverability limitation extensions apply to all civil cases in England and Wales. In the mistake of law context, relative to the DMG test, FII significantly constrains the scope of many active tax restitution cases, including Jazztel.

Jazztel was a claim for restitution of stamp duty reserve tax (SDRT) paid to HMRC between January 2000 and May 2008. Jazztel’s solicitors, Linklaters LLP, had advised before facilitating its initial payment that Jazztel’s SDRT liability might be challengeable as contrary to EU law. It informed HMRC of this stance at various stages. However, Jazztel only filed proceedings in 2013 after a CJEU judgment impugned the UK SDRT regime. Jazztel claimed it had paid SDRT under the mistaken belief that it was lawfully levied. Because most of the payments fell outside the ordinary six-year limitation period, Jazztel invoked s 32(1)(c) to extend time. Its claim failed. The Court of Appeal held that, given Linklaters’ advice, Jazztel had discovered its mistake over SDRT liability at least by the January 2000 initial payment. Its claim was substantially time-barred.

The judgment will help to determine the resolution of the Stamp Taxes Group Litigation as well as other active tax restitution proceedings.

In my view, while the Court of Appeal reached the correct result, it erred in resting on Jazztel’s subjective belief of its legal position. The Court used Linklaters’ letter to determine when Jazztel had discovered its mistake. But when Jazztel discovered its mistake is not the most pertinent question. FII stresses that s 32(1)(c) is an objective test—one of discoverability: [255]. By default, limitation runs from the date of payment. Claimants bear the burden of proving that limitation must be extended because a reasonably diligent claimant in their shoes could not have discovered their mistake at the date of payment: [203].

I have elsewhere outlined four possible arguments that claimants might try to advance to meet that burden. In this case, each one leads to the same conclusion: that there was no basis for postponing limitation from running on Jazztel’s claims.

First, Jazztel might argue that no ‘worthwhile claim’ arose when it first paid SDRT in January 2000. But why not? A reasonably diligent claimant would be aware of the European treaties and directives, the SDRT legislation and regulations, and the fact it was making substantial payments under these laws. Nothing more was needed to test the waters by drafting a legal claim. Certainly, judicial precedent on point was not needed: someone had to be the first-mover to challenge the UK tax laws and set the precedent.

Second, Jazztel might argue that it could not have had ‘sufficient confidence to justify embarking on the preliminaries to the issue of a writ’, such as by taking legal advice. But that is implausible. A reasonably diligent claimant would seek legal advice when parting with substantial amounts of money under a complex tax regime. (Jazztel in fact received advice noting that a claim against HMRC was arguable.)

Third, Jazztel might argue there were no reasonable grounds to challenge their payment of SDRT in January 2000. Any such claim would have been struck out at that time, so limitation should be postponed until such time as a claim would be arguable. But this argument too falls apart. The obvious response, noted during the FII hearing, is that in the face of a novel claim, ‘The judge is going to say, ‘if that’s what you believe—[that] the law is wrong on this—you’re entitled to test it.’’ Just because an argument for recovery of money might, at the time, seem weak does not mean it could not still be pleaded and litigated before the courts.

Fourth, Jazztel might argue that the validity of SDRT was settled law until the litigation before the CJEU in 2009. Limitation should not run until the law became unsettled. But that argument unravels once it is recognised that litigation itself can precipitate instability in the law. A reasonably diligent claimant could take the initiative of litigating novel questions of law, just as Linklaters took the initiative of canvassing Jazztel’s possible legal arguments.

This analysis might lead us to conclude, as Sheehan does, that mistakes of law must always be ‘reasonably discoverable when made’ and so limitation should always run from the date of payment. Or we might conclude, as Zuckerman and Tsavatopoulos do, that s 32(1)(c) should not apply to mistakes of law at all.

I maintain that FII is a sensible interpretation of s 32(1)(c). It sets a rebuttable strong presumption in favour of time running from the date of the transaction—rebuttable only in exceptional but potentially important cases where justice requires postponing limitation. Owing to its objective test, it should not lead to wasteful fact-finding hearings (Jazztel was decided on the available evidence). FII aligns s 32(1)(c) with the eight principles of discoverability that guide the interpretation of other limitation provisions. It also aligns English law with a principled interpretation of comparable limitation laws.

Samuel Beswick is an Assistant Professor at Peter A. Allard School of Law, The University of British Columbia.

Disclosure: In 2015-16 the author contracted legal services to HM Revenue & Customs’ Solicitor’s Office. The views expressed are solely the author’s.

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