CJEU confirms UK failed to comply with EU law by retroactively curtailing rights of taxpayers to recover tax unlawfully paid

22 January 2015

The European Commission has succeeded in obtaining a declaration from the CJEU that the UK Government failed to comply with its obligations, under Article 4(3) of the TEU, by retroactively curtailing the right of taxpayers to recover tax levied contrary to European law.


English law provides two common law remedies for the recovery of taxes levied contrary to EU law. These will be familiar to readers as:

  1. a Woolwich[1] cause of action, which permits recovery of tax unlawfully levied; and
  2. a Kleinwort Benson[2] cause of action, which permits the restitution of sums paid under a mistake of law.

Under section 5, Limitation Act 1980, the limitation period for a Woolwich cause of action is six years from the date when the cause of action arose ie the payment of the tax in question. Under section 32(1)(c) of the same Act, the limitation period for a Kleinwort Benson cause of action is six years from the date on which the claimant discovered the mistake of law or could, with reasonable diligence, have discovered it.

This (potentially) longer limitation period was first recognised by the High Court in DMG[3]. Following that decision, on 8 September 2003, the UK Government announced that it would be introducing legislation to restrict the application of the limitation period in relation to proceedings brought on the basis of a Kleinwort Benson cause of action.

Section 320, Finance Act 2004, provided that section 32(1)(c) "does not apply in relation to a mistake of law relating to a taxation matter under the care and management of the Commissioners of Inland Revenue". This had effect in relation to actions brought on or after 8 September 2003.

The effect of section 32(1)(c) was then further amended, retroactively, by section 107, Finance Act 2007, with the effect that section 32(1)(c) would not apply to taxation matters where the action for relief from mistake was brought before 8 September 2003.

On 23 May 2012, the Supreme Court unanimously ruled[4] that section 107 of the Finance Act 2007 infringed EU law. As part of pre-litigation correspondence to the instant proceedings, the UK Government acknowledged that section 107 infringed EU law, and said that the provision would be disapplied each time it proved to be incompatible. Unsatisfied by that response, the Commission sought a declaration from the CJEU.

CJEU's decision

The Commission argued that section 107, Finance Act 2007, was incompatible with the principles of effectiveness and of the protection of legitimate expectations. The Commission cited Marks & Spencer[5], in which the CJEU held that the principle of effectiveness precludes national legislation reducing the period for seeking repayment of sums collected in breach of EU law where the new time-limit is not reasonable and where the legislation does not contain any transitional arrangements. The Commission further argued that even though English law may provide for an alternative remedy in the form of a Woolwich cause of action, it was not permissible for the right of action based on Kleinwort Benson to be abolished without notice, and withdrawn from persons who had already brought proceedings on that basis.

In response, the UK Government stated that section 107 would soon be amended to render the section inapplicable to proceedings already brought.

In the view of the CJEU, section 107 must be deemed incompatible not just with the principle of effectiveness, but also with the principle of the legitimate expectations of taxpayers. A taxpayer who has brought an action seeking a refund of tax (levied in breach of EU law) is entitled to expect that his action will not be declared inadmissible as a result of retroactive legislation. The argument of the UK Government regarding a forthcoming amendment to the section was irrelevant because at the relevant time, for the purposes of the CJEU's judgment, the offending section was still in force.

The CJEU therefore concluded that the UK Government had, by enacting section 107, failed to comply with its obligations under Article 4(3) TEU. The UK Government was also ordered to pay the Commission's costs.


This decision represents a clear restatement from the CJEU of the principles of effectiveness and the protection of legitimate expectations. It is disappointing both that retroactive legislation should have been introduced in the first place, but also that the UK (both the Government and Parliament) have delayed in amending the offending legislation, despite the findings of the Supreme Court in FII back in 2012. This delay has cost the UK taxpayer in the form of legal costs having to be paid to the Commission.

The blog was written by Nigel Brook.

[1] Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70.

[2] Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349.

[3] Deutsche Morgan Grenfell Plc v Inland Revenue Commissioners [2003] 4 All ER 645.

[4] Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue and another [2012] UKSC 19.

[5] C-62/00.

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