Thanks, Charles, for the reference to Henderson J's judgment in Test Claimants in the FII Group Litigation v HMRC [2008] EWHC 2893 (Ch). The application of the defence of change of position on the facts is very interesting, in part because, in the immortal words, "there is an Irish case" where the Supreme Court did the same thing.

In Murphy v AG [1982] IR 241, the Supreme Court held that provisions of the Income Tax Act by which married couples paid more tax than unmarried couples contravened the constitutional obligation on the State "to guard with special care the institution of marriage" (Article 41.3). Henchy J (Griffin and Parke JJ concurring) held that, in these circumstances, the plaintiffs and those in similar circumstances had claims in restitution to recover their overpaid taxes, and that the State could nevertheless rely on the defence of change of position against most of those claims. (O'Higgins CJ held that this striking down should be prospective only, but the other four members of the Supreme Court rejected this approach. The fifth judge, Kenny J, held that the plaintiffs had a claim in restitution, but did not consider whether the State could rely on the defence of change of position.)

I've always wondered about this, for at least two reasons. First, Henchy J took an extremely generous understanding of when the State's receipt is in good faith: in his view, it was only after each individual taxpayer objected that the State's receipt of that taxpayer's tax was not in good faith. And second, he took the view that the mere fact of the State's expenditure (that is, expenditure in the ordinary course of the affairs of State) was a sufficient change of position. These two factors combined to defeat the vast majority of possible claims. For those who are interested, I reproduce the relevant extracts from his judgment at the end of this email. By way of comparison or contrast, it doesn't seem to me to that Henderson J spent much time on the question of whether or how the Revenue's receipt could be said to be in good faith. Rather, it seems that his focus was on whether expenditure could be said to be causally related to receipt, with an acknowledgement that expenditure in the ordinary course is insufficient ([322] and [343]). In the event, his view of the necessary causal link between the receipt and expenditure was just as generous as Henchy J's views of the other elements of the defence:

[344] ... As a matter of causation, no precise link can be demonstrated between particular receipts and particular items of government expenditure, but common sense again suggests that planned government expenditure would not have taken place at the level which it did but for the availability of the tax receipts which were taken into account in fixing departmental budgets. If all concerned, both the government and the taxpayers, proceeded on the footing that the tax was validly levied, I ask myself what is wrong with the argument that it would now be inequitable to require the Revenue to make restitution for the tax which was paid by mistake, because the money in question has long ago been spent in the public interest, and everybody assumed in good faith that it had been validly levied? I confess that, once the question is stated in these terms, the answer to it seems to me to be obvious. It would in my judgment be inequitable to require repayment in such circumstances, ...

And he ultimately concluded that in respect of those claims in which it could be pleaded, the defence of change of position would likely be successful [445]. But it seems to me that Henchy J in Murphy and Henderson J in FII both afford to the State the benefit of extraordinarily generous views of the defence of change of position.

As a lawyer, that hardly seems an accurate application of the terms of the defence. Worse, as a taxpayer, that hardly seems fair to me.

What do others think?

Eoin

Quoting "Mitchell, Charles":

List members will find much to interest them in Henderson J's judgment in Test Claimants in the FII Group Litigation v HMRC [2008] EWHC 2893 (Ch). Among other things he holds that the change of position defence should be available to the Revenue in respect of money paid as tax which was not due, a finding which could make a difference to HMRC of between £2 billion and £5 billion: a nice illustration of Bill Cornish's comment that a change of position / fiscal chaos defence 'seems to contain the imperative that, if governments are to exceed their taxing powers, this should be done on the grandest scale' (WR Cornish, '"Colour of Office": Restitutionary Redress against Public authority' [1987] J of Mal and Comp Law 41, 52).

Bearing out Monica Chowdry's various articles on this subject, the judge also holds that HMRC are precluded from relying upon the curtailed limitation period for mistake-based claims introduced by section 320 of the Finance Act 2004, and retrospectively extended by section 107 of the Finance Act 2007, because in breach of Community law these sections purported to curtail the limitation period applicable to mistake claims without providing any transitional arrangements. The sums at stake, and the controversial nature of some of Henderson J's findings, guarantee that this case is destined for the House of Lords.

Murphy v AG    [1982] IR 247, 318 (Henchy J):

In my judgment, the plaintiffs' right to recover the sums by which they claim the State was unjustly enriched, by the collection of the taxes that have now been held to have been unconstitutionally imposed, begins for the year 1978-9, that is, the first year for which they effectively objected to the flow of those taxes into the central fund. Up to that year the State was entitled, in the absence of any claim of unconstitutionality, to act on the assumption that the taxes in question were validly imposed, that they were properly transmissible to the central fund, and that from there they were liable to be expended, according to the will of Parliament, for the multiplicity of purposes for which drawings are made on the central fund of the State. Equally, every taxpayer whose income tax was deducted from his earnings throughout a particular tax year, no matter how grudgingly or unwillingly he allowed the deductions to be made from his weekly or monthly income, could not avoid having imputed to him the knowledge that the tax he was paying was liable to be immediately spent by the State. As time went by, his right to complain of the State's unjust enrichment ran the risk of being extinguished by laches on his part. As Snell's Principles of Equity (27th ed., p. 35) puts it: "Laches essentially consists of a substantial lapse of time coupled with the existence of circumstances which make it inequitable to enforce the claim." What is a "substantial lapse of time" must depend on the circumstances of the particular case.

I would consider that a taxpayer who allowed his PAYE tax [319] contributions to be deducted from his earnings, every week or every month, for the whole of a tax year, without bringing proceedings to assert the unconstitutionality of such deductions, should (in the absence of exceptional and excusing circumstances) be held barred from recovering the sums unwarrantedly collected during that tax year. The circumstance that tax payments are liable to be quickly absorbed into the financial system of the State, and not to be amenable to extraction and repayment without considerable disruption and unfairness, has led United States authorities to treat such payments as being so unique in character that repayments have been legislatively held to be barred by laches of periods as short as thirty days: see Field on The Recovery of Illegal and Unconstitutional Taxes, 45 Harvard Law Review 501, at p. 519. For my part, I consider that, in the absence of special circumstances (which have not been shown to exist in this case), payment of PAYE taxes during the whole of a tax year, without instituting proceedings to have the taxes invalidated on the ground of unconstitutionality, should be held to defeat a claim made later to recover the taxes paid during that year.

It is one of the first principles of the law of restitution on the ground of unjust enrichment that the defendant should not be compelled to make restitution, or at least full restitution when, after receiving the money in good faith, his circumstances have so changed that it would be inequitable to compel him to make full restitution. The American Restatement of Restitution (§142) states the general rule thus:— "The right of a person to restitution from another because of a benefit received is terminated or diminished if, after the receipt of the benefit, circumstances have so changed that it would be inequitable to require the other to make full restitution."

A New Zealand statute (cited in Goff and Jones's The Law of Restitution, 2nd ed., p. 546) puts the matter perhaps more clearly when it states that payments made under a mistake may not be recoverable "if the person from whom the relief is sought receives the payment in good faith and has so altered his position in reliance on the validity of the payment that in the opinion of the Court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be."

Applying that general principle (which is widely supported by judicial authorities ranging from Lord Mansfield to Lord Denning) to the present case, it is beyond question that the State in its executive capacity received the moneys in question in good faith, in reliance on the presumption that the [320] now-condemned sections were favoured with constitutionality. In every tax year from the enactment of the Income Tax Act, 1967, until the institution of these proceedings in March, 1978, the State justifiably altered its position by spending the taxes thus collected and by arranging its fiscal and taxation policies and programmes accordingly.

At the end of each tax year up to and including the tax year 1977-78, those charged by the State with auditing, controlling or planning the finances of the State were, in the absence of any formulated proceedings or any other sound reason for doubting the validity of the taxes in question, entitled to close their books for that year in the justified assurance that, if any of the taxes that had been collected, allocated, spent or been made the basis of projections for future taxation or fiscal policy, were to become at some future date judicially faulted for having been unconstitutionally exacted, restitution of those taxes would not be ordered.

For a variety of reasons it would be inequitable, if not impractical, to expect restitution. Each tax year involves a different group of taxpayers, if only because of the deaths of some taxpayers and the accession of new persons to the lists of taxpayers. Restitution could be effected only by means of a special statutory provision, which would involve the imposition of fresh taxation to meet what would become an unquantifiable number of claims with the passage of time. The primary purpose of an order of restitution is to restore the status quo, in so far as the repayment of money can do so. But when, as happened here, the State was led to believe, by the protracted absence of a claim to the contrary, that it was legally and constitutionally proper to spend the money thus collected, the position had become so altered, the logistics of reparation so weighted and distorted by factors such as inflation and interest, the prima facie right of the taxpayers to be recouped so devalued by the fact that, as members of the community, and more particularly as married couples, they had benefited from the taxes thus collected, that it would be inequitable, unjust and unreal to expect the State to make full restitution.

Whether the taxpayer's action be framed as a common-law action in quasi-contract for money had and received, or as an equitable claim for restitution of money by which the State was unjustly enriched, there is ample authority for the conclusion that the radical change of circumstances of the kind I have indicated would be sufficient to defeat, at least in part, the taxpayers' claim: see Jones's Change of Circumstances in Quasi-Contract, (1957) 73 L.Q.R. 48. [321] In this case, whether the claim be treated as one in quasi-contractor as one in equity, I would consider the enforceable cause of action to have arisen at the beginning of the tax year 1978-9. ... [324] Since my opinion is that ss. 192 to 198 (inclusive) of the Income Tax Act, 1967, were invalid from the date of their enactment, I would hold, on the evidence as it stands, that moneys collected for income tax on an income based on an aggregation of the income of the plaintiffs is not recoverable by them for any period prior to the tax year 1978-9, which was the tax year in respect of which the constitutionality of those sections was first effectively impugned. The period to be covered by any necessary accounts and inquiries, therefore, would appear to be the tax years 1978-9 and 1979-80.

The evidence given in the High Court did not disclose that a claim had been formulated on behalf of any other taxpayers impugning the sections in question or seeking the recovery of any taxes collected under them. If that be the true position, it would seem that, in the events that have happened and for the reasons given in this judgment, no taxpayers other than the plaintiffs would have the standing necessary to maintain a claim that the State should reimburse them for any taxes collected under the condemned sections.