Supreme Court Finds There Is No Claim In Unjust Enrichment For Compound Interest On Mistaken Payments

In a recent decision, the Supreme Court held that claimants could not bring claims in unjust enrichment to recover compound interest on taxes paid under a mistake of law: Prudential Assurance Company Ltd v Commissioners for Her Majesty's Revenue and Customs [2018] UKSC 39.

In doing so, the Supreme Court departed from the House of Lords decision in Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, considered here, which held that such a claim was available. In the present case, the court disagreed with the view taken in Sempra Metals that the time value of money could be considered a separate benefit for the purposes of the law of restitution, in addition to the payment of the unlawfully levied tax. Accordingly, the Supreme Court held, there was no additional benefit to be reversed by the award of compound interest once the tax itself had been repaid. Instead, the court could award simple interest under section 35A of the Senior Courts Act 1981.

The Supreme Court noted that, in Sempra Metals, the House of Lords had also held that compound interest was available as damages, where it was the measure of the loss foreseeably suffered by a claimant from the loss of use of his funds. That point was not in issue in the present case and, the court said, nothing in its judgment was intended to question that aspect of the decision.

The decision is significant in clarifying the law on unjust enrichment, and in particular reversing the previous case law under which a claim for compound interest was available. However, it does not affect the question of whether and in what circumstances compound interest may be awarded as damages to compensate a claimant who is out of pocket as a result of a defendant's wrongdoing (such as a breach of contract, or the non-payment of a debt).

Julian Copeman and Ajay Malhotra, a partner and senior associate in our disputes team, consider the decision further below.

Background

This is a test case brought as part of group litigation relating to the tax treatment of dividends received by UK resident companies from non-UK portfolio investments.

One of the issues considered by the Supreme Court is whether the claimant was entitled to compound interest in respect of tax levied in breach of EU law, on the basis that HMRC were unjustly enriched by the opportunity to use the money in question. All of the tax in question had ultimately been repaid by HMRC or set off against lawfully levied tax, and so the claim in...