Unjust enrichment in the case of Sempra Metals Ltd v IRC, the UK House of Lords
In Sempra Metals v IRC, the House of Lords held that, as a matter of the law of unjust enrichment, a taxpayer could recover compound interest on taxes prematurely levied in breach of EU law. However, in July of this year, the Supreme Court in Prudential Assurance v HMRCoverruled Sempra Metals.
This post looks at the Supreme Court’s decision and what it means.
What is unjust enrichment?
The law of unjust enrichment concerns the reversal of normatively defective transfers of value. For example, if I mistakenly pay you £50, the law of unjust enrichment says that you have to give it back to me.
Under English law, a claimant will have an unjust enrichment claim where
(1) the defendant was enriched,
(2) the enrichment was at the claimant’s expense,
(3) the enrichment was unjust and
(4) the defendant has no defences.
Where the above conditions are satisfied, the claimant has a right to restitution of the enrichment.
In 2001, the ECJ held that the ICTA infringed EU law insofar as it permitted corporate groups wholly resident in the UK to defer payment of corporations tax on intragroup dividends without extending the same advantage to corporate groups containing parents resident elsewhere in the EU.
The remedial consequences under English law of the ECJ’s ruling were examined in Sempra Metals. The House of Lords held, by majority, that the claimant-taxpayer had a claim in unjust enrichment to recover compound interest on the prematurely levied tax. The essential reasoning was that – in receiving the tax – the Revenue had been enriched not only by the money itself but also the opportunity to use the money ahead of time. The value of the latter enrichment (use of the money) was the saving of the compound interest which the Revenue would have had to pay to borrow an equivalent amount. In circumstances where this enrichment had been unjust – because the taxpayer had paid the tax under a mistake of law as to its ability to defer payment – the Revenue had to give it back.
But all this has changed thanks to Prudential Assurance.
There – following an ECJ ruling that the ICTA breached EU law in providing for differential tax treatment of UK-sourced dividends and foreign-sourced dividends – the claimant-taxpayer sought compound interest on taxes unlawfully levied on dividends received from foreign subsidiaries. Overruling Sempra Metals, the Supreme Court held that the taxpayer was confined to simple statutory interest and could not recover compound interest (save in respect of one class of amounts where the Revenue conceded – incorrectly it turned out – that compound interest should be awarded).
In reaching this conclusion, the Supreme Court pointed out that, since Sempra Metals, there had been various developments in the law of unjust enrichment including as to the requirement that the enrichment be at the claimant’s expense. In particular, that requirement had been interpreted as requiring a direct transfer of value from the claimant to the defendant. This was said to call into question the reasoning in Sempra Metalsthat, where the tax was prematurely paid, there was an additional and simultaneous transfer of value comprising the opportunity to use the money. The opportunity to use the money – the Supreme Court said – was a consequence of the transfer of the money but could not itself be regarded as an additional transfer of value capable of grounding an unjust enrichment claim.
With respect, this is difficult to accept. If I steal your bike, can it really be said that the opportunity to ride the bike has not been transferred from you to me? In this example, my gain in being able to ride the bike corresponds to your loss in no longer being able to ride the bike. There is a direct transfer of value. The same must surely be true of cases involving the opportunity to use money. The Supreme Court’s reasoning appears to have confused the opportunity to use money with the use to which the money is actually put.
It is clear from the judgment that the Supreme Court’s decision to overrule Sempra Metalswas also based on considerations sitting outside the law of unjust enrichment. For example, the Supreme Court noted that later decisions had revealed the severe disruption to public finances that Sempra Metalscould cause. Thus, in one case concerning VAT unlawfully levied between 1973 and 2004, the difference between awarding compound interest and simple interest equated to £17 billion. The Supreme Court also observed that Sempra Metalshad caused problems in light of limitation rules which provided that an unjust enrichment claim based on mistake could be brought within six years of the mistake being discovered irrespective of how long ago the payment was made. While Parliament had tried to address these problems using retroactive legislation, those attempts had themselves fallen foul of EU law.
The immediate effect of the Supreme Court’s decision in Prudential Assuranceis that a taxpayer can no longer rely on unjust enrichment to recover compound interest on unlawfully levied tax. But the decision’s effects travel beyond this. This is because the Supreme Court’s reasoning was not limited to the tax cases; instead, it applies to all cases where a claimant seeks the restitution of money on the basis of unjust enrichment. In these cases, going forward, a successful claimant will be able to get back the money’s face value (plus simple interest) but not the money’s use value. While there are sound policy reasons for not awarding compound interest in cases of unlawfully levied taxes (including, as the Supreme Court noted, the disturbance to public finances), such reasons are absent in the private contexts in which unjust enrichment law more typically operates. Not awarding compound interest in those contexts runs the risk of denying full restitution to a successful claimant.