The Court of Appeal (CoA) heard a case on the allocation of an interim payment following the reversal of a summary judgement.
Facts:
In 2002, Evonik and other members of its corporate group brought claims against HMRC alleging that certain aspects of the UK corporation tax regime infringed EU law. Of greatest relevance for present purposes, the claims challenged those rules that levied advance corporation tax (ACT) on the payment of dividends and other distributions.
In 2016, Henderson J granted Evonik summary judgement limited to the final investment decision (FID) element, awarding compound interest based on the Sempra case. Pursuant to this, HMRC paid Evonik approximately £6.4m on 23 March 2016.
Subsequently, in 2021 (in FII SC3), the Supreme Court overturned the Sempra approach for this type of claim, ruling that only simple interest at a lower statutory rate, as per Section 85 of the Finance Act 2019, was due, and consequently set aside the 2016 money payment order. However, later determinations established that Evonik’s overall final claim against HMRC (including surplus ACT on non-FID dividends, subject to a higher interest rate under Section 35A of the Senior Courts Act (SCA) 1981) was substantially larger than the 2016 6.4m payment, rising to £13.76m.
The core dispute was how to treat the £6.4m payment. Evonik argued it should be allocated entirely against the accrued interest on the larger claim, ensuring that the full principal continued to accrue interest. HMRC argued they were entitled to restitution plus interest on the £6.4m, or that it must be allocated against the principal of Evonik’s claim, which would severely reduce the ongoing interest payable to Evonik. Richards J found in favour of Evonik, allocating the payment to interest. HMRC appealed.
Decision:
The CoA dismissed HMRC’s appeal, thus upholding the final order made by Richards J. This means that Evonik retains the full benefit of the £6.4m payment, while the full principal of its final, larger claim continues to accrue the higher statutory interest rate from 2016 until the date of the final judgement.
The Court agreed that setting aside the order gave HMRC an entitlement to restitution of the £6.4m principal. This is a sui generis right inherent in the appellate process, one not strictly based on unjust enrichment. Crucially, the Court rejected the premise that this right to restitution carried an automatic entitlement to interest on the sum. The power to award interest derives from the Court’s inherent jurisdiction and depends entirely on “what justice requires in the particular case”. Since HMRC was ultimately established to be a much larger debtor to Evonik (the total claim exceeding £22m), justice did not require any award of interest to HMRC on the £6.4m payment.
Implications:
The most practical implication is the firm endorsement of the “rule of thumb” for allocating part payments. Where a large final judgement is made on a debt that has been accruing simple interest (per Section 35A SCA 1981), any prior interim payment or credit must first be allocated against the accrued interest rather than the principal.
This prevents debtors, in this instance the HMRC, from reducing their overall interest liability by having an early payment artificially reduce the principal that continues to accrue interest during prolonged litigation. The ruling ensures that the creditor (Evonik) receives fair compensation for the full period for which they were deprived of the principal.
