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House of Lords rules in favour of Deutsche Morgan Grenfell

In a landmark decision of 25 October 2006, the House of Lords reversed the Court of Appeal’s decision and found in favour of the taxpayer in the Deutsche Morgan Grenfell (DMG) case.

The ruling considered whether a claim to recover tax paid more than six years ago could be based on a mistake of law – in this case, when UK rules are in breach of European law. The decision enables DMG to recover tax paid more than six years ago – the six-year time limit for claiming running not from the date on which the tax was wrongly paid but when the mistake was, or could reasonably have been, discovered.

This decision has wide implications. It will not only impact upon claims under European legislation, such as taxpayers currently challenging the UK’s group relief rules, CFC rules or taxation of overseas dividends rules as being contrary to the provisions of the EC Treaty, it also applies generally to claims for repayment of tax brought against HM Revenue & Customs (HMRC).

The level of concern shown by the UK government as to the implications of this case is clear from the fact that it introduced blocking legislation in the Finance Act 2004 to remove a taxpayers’ right to reclaim from HMRC tax paid under a mistake of law.

The effect of the law change is to restrict claim time limits for claims brought after the introduction of the blocking legislation, which took effect retrospectively from September 2003, to six years. The legality of the blocking legislation is itself currently being challenged in the courts.

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