The Prudential Assurance Company Limited v HMRC (Court of Appeal Decision)

The Court of Appeal decision in the Prudential portfolio dividends and ACT case has been published. The judgement is here and a summary here.

A summary of the summary:

The Court of Appeal dismissed the appeal on issues 1 - 20 but upheld the appeal on issues 21 - 23. As issues 21 - 23 are points of detail (on foreign dividends and the interaction of ACT and mainstream corporation tax), the position is largely as per the High Court judgement, and in particular:

Foreign source portfolio dividends for the periods covered by the GLO are not exempt from UK tax, but

Companies are entitled to credit relief for tax on foreign dividends equal to the higher of the foreign tax actually suffered on the dividend and the nominal rate of tax payable on profits in the dividend paying company's country of residence, capped at the UK rate of corporation tax.

For the purposes of calculating ACT, foreign dividends are to be treated as being FII, including a tax credit equal to the higher of actual foreign tax paid on the profits of the dividend paying company or the nominal rate of tax on profits in the dividend paying company's country of residence.

Basis for the "nominal rate" part of the calculation is that if a UK company ("A") receives a dividend from another UK company "B" and B has paid no corporation tax on the profit from which the dividend is paid then, as there is an exemption for UK dividends,  no tax is paid.  Assume there is a third company "C" resident in a country with a nominal rate of tax equal to the UK rate,  C ,however, pays no tax in its country of residence and pays a dividend to A.  If credit is only  allowed for the actual tax withheld on C's dividend then the dividend will be taxed at the UK rate with no credit relief.  C's dividend has been taxed at a higher rate than B's dividend, to make the taxation of dividends from B and C equivalent credit needs to be given for the nominal rate of tax.

HMRC have indicated they will appeal, this FT article refers.  I have been told (by people who understand these things) that it will be July before we know whether HMRC will be allowed to appeal.

But clear Court of Appeal not happy with the length of time taken in this case or the conduct of the case in general as is shown in paragraph 22 of the judgement:

"As Mr Ewart QC for HMRC opened the appeal to us it soon became clear that the lack of pleadings meant that the parties disagreed about what was the scope of the trial; what were the issues that the judge had to decide; whether points had or had not been raised; whether or not they could be raised on appeal; and even what the judge had decided. This is no way to conduct litigation involving millions of pounds. We were told that this unacceptably cavalier approach to pleadings was a common feature of this kind of litigation. It must stop."