(B) CHANGE OF POSITION

The application of the defence of change of position¹⁵¹ means that, where a public authority can show that it has so changed its position in reliance on the receipt of money that it would be inequitable to require it to make restitution, it should have a defence to the extent of that change of position. The application of the defence to claims against public authorities is restricted for the following reasons. First, where the claim for restitution is a San Giorgio claim, involving restitution of taxes the receipt of which is unlawful by EU law, the defence of change of position does not apply regardless of whether the claim is formulated with reference to the Woolwich ground or mistake,¹⁵² because the defence is considered to be incompatible with the principle of effectiveness.¹⁵³

Secondly, in Test Claimants in the FII Group Litigation v HMRC (No 1)¹⁵⁴ Henderson J had recognized that the defence of change of position is not available for a claim based on the Woolwich ground, but is available for claims founded on mistake. This was because the Woolwich ground is founded on the unlawful levying of tax, which he considered to be a legal wrong so that the Revenue is a wrongdoer in receiving the tax, and the defence of change of position is unavailable to such a defendant.¹⁵⁵ This is, however, a controversial conclusion, since unlawful receipt of tax does not obviously involve the commission of any wrong. This is even more dubious after the decision of the Supreme Court in FII that the Woolwich ground does not even require proof of a demand for payment, so the Revenue established at first instance, since finality would only be achieved with the decision of the final court of appeal, and even though the claimant had brought proceedings for restitution earlier: ibid, [461].

• 145 Limitation Act 1980, s 32(1)(c). ¹⁴⁶ See further p 737, below.
• 147 Case C-362/12 Test Claimants in the FII Group Litigation v HMRC [2014] 2 CMLR 33, [33]. A limitation period of three years is considered reasonable: ibid, [34]. ¹⁴⁸ See p 406, above.
• 149 Finance Act 2004, s 320 for payments made before 8 September 2003 but where the claim was commenced after that date; Finance Act 2007, s 107 where the claim was commenced before that date.
• 150 As recognized in Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19, [2012] AC 337 concerning Finance Act 2007, s 107; Test Claimants in the FII Group Litigation v IRC and another (Case C-362/ 12) [2014] 2 CMLR 33 concerning Finance Act 2004, s 320.
• 151 See Chapter 25 for detailed exposition of this defence.
• 152 Test Claimants in the FII Group Litigation v HMRC (No 2) [2014] EWHC 4302 (Ch), [406] (Henderson J).
• 153 Prudential Assurance Co Ltd v HMRC [2013] EWHC 3249 (Ch), [2014] 2 CMLR 10, [188] (Henderson J);
• 154 [2008] EWHC 2893 (Ch), [2009] STC 254, [339]. This was not considered by the Court of Appeal or the Supreme Court. See also Littlewoods Retail Ltd v HMRC [2010] EWHC 1071 (Ch), [2010] STC 2072, [105] (Vos J).
• 155 Lipkin Gorman (a firm) v Karpnale Ltd [1991] AC 546. See p 692, below.

may simply have passively received the unlawful payment rather than actively sought it. Subsequently, in Test Claimants in the FII Group Litigation v HMRC (No 2),^{[1] [2] [3]} although Henderson J affirmed that the Revenue in that case had been a wrongdoer in receiving tax in breach of EU law, he acknowledged that the reason why the change of position defence is not available to a claim founded on the Woolwich ground is not because the defendant had committed a wrong, because no wrong may have been committed by the Revenue, but because the defence would stultify or undermine the high constitutional policy which underpins the recognition of the Woolwich ground.^{157 *}

Thirdly, in Test Claimants in the FII Group Litigation v HMRC (No 2)¹⁵⁸ Henderson J left open whether the change of position defence is available where the restitutionary claim is grounded on mistake, although he had previously held that the defence was available in such circumstances.^[4] Allowing the defence where the ground of restitution is mistake, even where the defendant is a public authority, but denying it where the Woolwich ground is engaged, would reflect the difference between a purely private law ground of restitution and a hybrid ground which is justified by its essentially public law nature.

Fourthly, the change of position defence requires proof of an extraordinary change of position which would not have been incurred had the payment not been received by the defendant. In Test Claimants in the FII Group Litigation v HMRC (No 2)^[5] Henderson J recognized that the essential test is whether the award of restitution would make the Revenue worse off than if the tax had not been paid in the first place. The Revenue does not bear any greater burden than the ordinary defendant in establishing the defence, so it is sufficient that, but for the receipt of the tax, the Revenue’s position would not have changed. This will, however, be very difficult for the Revenue to establish. It is highly unlikely that the receipt of the tax payment from the claimant would have affected the Government’s budgetary process or its expenditure.^[6] Consequently, as regards claims grounded on mistake, it will be difficult for the Government to establish the defence, and, in FII, Henderson J held that the Revenue had not been able to show that its position had changed as a result of the receipt of tax payments. It has, however, been recognized that, in respect of Government expenditure, it is not necessary to show a precise link between particular receipt and particular items of expenditure.^[7] Rather, it is possible

to infer that planned 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. In such circumstances it would be inequitable to require restitution to be made for tax which was paid by mistake when the money has long ago been spent in the public interest and everybody assumed in good faith that it had been validly levied.^[8]

But it is unclear why the application of the defence should be weighted in favour of the public authority in this way. Indeed, Cleary^[9] has argued that the defence should not be available in principle to public authorities, by virtue of the need to protect the proprietary rights of the taxpayer. This follows from Article 1 of the First Protocol to the European Convention on Human Rights, by virtue of which the State can only justify the expropriation of assets where it is proportionate to an objectively identifiable aim. Generally a public authority will not be able to establish this because, as Cleary argues, the cost to the public should not be regarded as a sufficient justification for expropriation of assets, save perhaps in cases where there would be serious adverse consequences for public finances if restitution was awarded and no other revenue raising measure would be reasonably effective to achieve the same result.^[10]

• [1] [2014] EWHC 4302 (Ch).
• [2] Ibid, [315]. Relying on the analysis of E Bant, ‘Restitution from the Revenue and Change of Position’
• [3] [2009] LMCLQ 166, 172. 158 [2014] EWHC 4302 (Ch).
• [4] In TestClaimantsin theFII GroupLitigationvHMRC (Nol) [2008] EWHC2893 (Ch), [2009] STC254.Seealso Bloomsbury International Ltd v Sea Fish Industry Authority [2009] EWHC 1721, [133]—[144] (Hamblen J).
• [5] [2014] EWCH 4302 (Ch), [347].
• [6] Littlewoods Retail Ltd v HMRC [2010] EWHC 1071 (Ch), [2010] STC 2072, [111] (Vos J).
• [7] Bloomsbury International Ltd v Sea Fish Industry Authority [2009] EWHC 1721 (QB), [2010] 1 CMLR12, [137] (Hamblen J); Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), [356](Henderson J).
• [8] Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), [356] (Henderson J).
• [9] N Cleary, ‘Property, Proportionality and the Change of Position Defence’ in S Elliott, B Hacker, andC Mitchell (eds), Restitution of Overpaid Tax (Oxford: Hart Publishing, 2013), ch 5.
• [10] cf у Hu, ‘Change of Position and the Revenue’ [2011] RLR 112 who argues that there should be apresumption in favour of restitution which would be rebutted if the public authority established that the awardwould result in fiscal chaos.