Limitation Act 1980 and Mistake of Law

A majority in the Supreme Court held today that section 32(1)(c) Limitation Act 1980 applied to claims for the restitution of money paid under a mistake of law.

Time began to run when the claimant discovered, or could with reasonable diligence have discovered, their mistake in the sense of recognising that they had a worthwhile claim: Test Claimants in the Franked Investment Income Group Litigation and others (Respondents) v Commissioners for Her Majesty’s Revenue and Customs (Appellant)(1) Test Claimants in the Franked Investment Income Group Litigation and others (Respondents) v Commissioners for Her Majesty’s Revenue and Customs (Appellant)(2) [2020] UKSC 47 (Per Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Hamblen).

The minority would have held that section 32(1)(c) had no application to mistakes of law (Lord Carnwath, Lord Briggs and Lord Sales).

The Test Claimants’ case was that the differences between their tax treatment and that of wholly UK-resident groups of companies breached EU Treaty provisions which guaranteed freedom of establishment and free movement of capital.

They sought repayment by HMRC of the tax wrongly paid, together with interest, dating back to the UK’s entry to the EU in 1973.

Restitutionary claims for the recovery of money must normally be brought within six years from the date on which the money was paid.

As an exception to the general rule, section 32(1)(c) Limitation Act 1980 provided that, in respect of an “action for relief from the consequences of mistake”, the limitation period only began to run when the claimant “had discovered the … mistake … or could with reasonable diligence have discovered it.”

The Court rejected the Test Claimants’ various objections to HMRC arguing at this stage of the proceedings that section 32(1)(c) Limitation Act 1980 did not apply to mistakes of law.

Neither cause of action estoppel nor issue estoppel prevented HMRC from making the challenge at this stage.

Further, HMRC’s challenge did not amount to an abuse of process seen in the context of group litigation which raised issues of unparalleled complexity.

Those factors, the substantial value of the claims, the importance of the issue to other claimants within and outside the FII Group Litigation, and the potential to remedy any prejudice through an order for costs enabled HMRC to withdraw their concession that section 32(1)(c) applied to mistakes of law and now make the contrary case.

That placed in question two of the most important decisions on the law of limitation in recent times: Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49; [2007] 1 AC 558 and Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349.

In Deutsche Morgan Grenfell the House of Lords tied the date of discoverability of a mistake of law to the date when “the truth” as to whether the claimant had a well-founded cause of action was established by a decision of a court of final jurisdiction.

Section 32(1)(c) could not be intended to have that effect, as limitation periods applied regardless of whether the substance of the claim was disputed, and regardless of whether there was in truth a well-founded cause of action.

Such an approach also had the illogical consequence that mistakes were not discoverable by a claimant until after he had issued a claim on the basis of mistake.

It perpetuated the problems associated with distinguishing between matters of fact and matters of law.

It was appropriate for the Court to depart from the decision in Deutsche Morgan Grenfell in relation to discoverability.

The correct approach was that time began to run under section 32(1)(c) when the claimant discovered, or could with reasonable diligence discover, his mistake in the sense of recognising that a worthwhile claim arose.

That approach brought section 32(1)(c) into line with section 32(1)(a), and with other analogous provisions of the 1980 Act.

Section 32(1)(c) applied to mistakes of law, as the House of Lords decided in Kleinwort Benson.

Although that decision was not supported by convincing reasoning, and although when section 32(1)(c) was enacted it was not contemplated that it might extend to actions for the restitution of money paid under a mistake of law, the ordinary meaning of the words of that provision included such actions.

Excluding claims based on a mistake of law would frustrate the purpose of section 32(1)(c) which was to relieve claimants from the necessity of complying with a time limit at a time when they could not reasonably be expected to do so.

Including such claims did not have unacceptable consequences for legal certainty, particularly now that the approach to discoverability in Deutsche Morgan Grenfell was departed from.

HMRC’s appeal was allowed because the Court of Appeal applied the approach to discoverability wrongly established in Deutsche Morgan Grenfell.

The Supreme Court could not, however, determine in the abstract the point in time when the Test Claimants could with reasonable diligence have discovered their mistake.

That question was left for the High Court to determine after the parties had an opportunity to amend their pleadings.