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Punitive tax rate on restitution interest

11th Aug 2017
Tax writer
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Andy Keates explores why the government clawed back 45% of the restitution interest it was due to pay on a concluded tax dispute with British American Tobacco (BAT Group).

ACT argument

From 1973 to 1999 UK companies were required to pay advance corporation tax (ACT) quarterly, in respect of every dividend paid. The ACT was generally available to off-set against main stream corporation tax (CT), unless the dividends originated in an offshore company and flowed through a UK company. In that case the UK company could not offset the ACT against its CT liability. This discriminated against groups with overseas subsidiaries, and conflicted with EU law with regard to EU-resident companies     

The BAT Group eventually won their argument with HMRC on this point: the courts agreed tax had been wrongfully charged, and must be repaid with restitution interest.

Calculating the interest

HMRC wanted to pay simple interest computed by reference to the additional tax they had received, on the basis of “unjust enrichment”. The BAT Group argued for compound interest, based on the actual economic loss they had suffered, citing the EU concept of “adequate indemnity”. After many more court hearings, in December 2016 the Court of Appeal ordered HMRC to pay compound interest as part of a total compensation package of just under £1.2 billion.

Taxing the interest

Meanwhile, the government enacted CTA 2010, Part 8C, a new law which came into effect from 26 August 2015. This imposes CT at 45% to be withheld from compound interest paid to companies by court order for tax unlawfully collected. This tax on interest is also ring-fenced, which means losses and reliefs can’t be offset against it.

The introduction of this punitive new tax rate was just in time to catch the BAT interest settlement, which was surely not a coincidence. Accordingly, HMRC withheld tax of £261,420,591.92, from the BAT Group settlement, and the Group challenged that decision at the FTT (TC06000).

Arguments before the FTT

The BAT group suggested the new 45% tax rate was a cynical attempt by HMRC to “deprive [them] of the full fruits of their victories”. The FTT refused to go there: the role of the tribunal is not to “go behind the published statements to enquire into the reason why particular legislation has been introduced”.

However, HMRC did state its reasons for introducing the charge. One major point was that CT rates are currently at an all-time low. When CTA 2010, Part 8C was introduced, the CT rate was 20%, compared with CT rates of up to 53% which operated between 1973 and 1982. Calculating the interest on a gross basis and then taxing it all at today’s CT rates would therefore give a far higher pay-out than if the interest had been taxed as it accrued, and the compounding effect had been based on that net figure. This amounted to a so-called windfall.

This “counterfactual” was the target which the 45% CT rate aimed to achieve. 

The objective… was to place the claimants in broadly the same position as a... company who had received the same amount of interest in each relevant accounting period and had paid tax on that interest at the relevant due and payable dates for each accounting period”. 

HMRC had done some heavy number-crunching across a number of settled and potential claims to arrive at the 45% figure. Their model ignored the possibility of any of the earlier years’ tax being reduced by reliefs or losses in those years.

BAT argued that including the effect of reliefs or losses available in the earlier years makes a huge difference. Using their own accounts as evidence, they suggested a more reasonable tax rate on the interest might be as little as 10.77% or even 2.81%. Witnesses from several other companies produced figures of between 0% and 18%.

An effective remedy?

The basic question for the FTT was whether CTA 2010, Part 8C was lawful. This boiled down to whether it blocks BAT’s right to an “effective remedy. This, in turn, hinges on whether the new tax charge has made it “virtually impossible or excessively difficult” for BAT to exercise its right to compensation.

Simply taxing compensation does not violate the concept of effective remedy. If the tax were to be confiscatory in nature, that would be a violation, but as long as the tax is rational and proportionate it will be lawful. Two factors need to be considered: the rate itself and its ring-fencing.

Is the 45% rate rational?

It was not suggested at the FTT that the 45% tax rate is confiscatory. The main argument for suggesting it isn’t rational and proportionate was the fact that it avowedly ignores reliefs and losses which might have been available in the earlier years. This, BAT argued, means it is taxing a windfall which simply isn’t there.

The FTT rejected this. The only way to ensure that every company was only taxed to the extent of its own personal windfall would be a claimant-specific tax rate, which was in fact considered by HMRC but rejected as it would be too unwieldy (or even impossible to implement).

While the “one size fits all” approach may seem unfair to some individual claimants, it is nonetheless an entirely rational way to conduct a tax policy. When looking at a class of taxpayers, each with their own personal circumstances, there will always be winners and losers.

Is ring-fencing rational?

The FTT’s view was that that ring-fencing is a rational approach in that it prevents current reliefs being effectively carried back against income which had arisen in earlier years (when those reliefs might not have existed).


The FTT decided that the government can legitimately charge a 45% levy on compensation interest. While that may be a reasonable approach when, as here, looking back over long periods of time with high historic tax rates, there may be problems in the future. A company wrongfully taxed at 20% might be less than happy to have the interest on its compensation taxed at 45%.

In view of the huge sums involved, and the relatively deep pockets of the BAT Group, an appeal against the FTT decision is likely. We haven’t see the end of this argument.

Replies (2)

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By aman786
08th Jun 2018 13:16

The director told HMRC that he could not produce purchase invoices to support his input tax claims because the information was on two laptops that had supposedly been lost. HMRC did not accept this argument.

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By alaika
21st Dec 2018 12:23
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