England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
AND THE CHANCERY DIVISION
Mr. Justice Moses & Mr. Justice Neuberger

		Royal Courts of Justice Strand, London, WC2A 2LL
		21 October 2003

Lord Justice Auld :

General Introduction To Both Appeals
1. These two appeals, in which the Commissioners of Customs & Excise ("the Commissioners") are respectively Respondents and Appellants, are concerned with: 1) the direct enforceability in this country of European Community law rights of Value Added Tax ("VAT") taxpayers to repayment of sums to which they claim to be entitled in respect of past VAT accounting periods; and 2) with the effect on the taxpayers' claims, exercising such rights, of retrospective time limits introduced by the United Kingdom Government in 1996 and 1997.
2. In both appeals, in relation to the 1996 retrospective limit which was introduced without transitional arrangements, there are issues whether United Kingdom taxpayers have a directly enforceable Community law right to payment of the claimed sums and, if so, outside the new limit. Those common issues turn on two main questions. The first is as to the width to be given to a decision of the European Court of Justice on a reference by the Court of Appeal in the appeal of Marks & Spencer PLC ("Marks & Spencer"), of which this is a resumed hearing, on the first of the two Becker (Becker v. Finanzamt Munster-Innenstadt [1982] ECR 53) conditions: namely that a right conferred by a Community directive may be directly enforceable in a Member State if that State has not implemented it. The second common question is whether the right claimed by the taxpayers in the two appeals to overcome the retrospective time limit in question satisfies the second Becker condition that the provisions of the directive upon which reliance is placed should be "unconditional and sufficiently precise".
3. The appeals raise other issues that are not common to both. In the first appeal, in which Marks & Spencer is the appellant, the claim is in respect of output tax that the Commissioners have wrongly charged it in respect of its supply of certain goods. In addition to whether Marks & Spencer has a directly enforceable Community law right not to have its right to repayment curtailed by a retrospective reduction of an earlier time limit, there are questions as to the Commissioners' entitlement to rely on a new statutory defence of unjust enrichment to decline to make full return of any overpaid tax that might otherwise be recoverable. In the case of the second appeal, in which the University of Sussex is the Respondent, the University's claim is for past unclaimed input tax for setting-off against later output tax. The main question, which is one of United Kingdom domestic law, is as to the nature of the right to deduct input tax, so as, in the first alternative, to be unaffected by either of the new time limits, and in the second alternative to engage the first of them. The second question only arises if the claim falls within the second alternative, namely, whether the claim is for a directly enforceable Community law right and, if so, whether, in the light of the European Court's reasoning in the Marks & Spencer reference, it is compatible with Community law to subject it to the new time limit.

The VAT System

4. The United Kingdom, on becoming a Member State of the European Community ("EC") in 1972, introduced VAT by the Finance Act 1972, with effect from 1^st April 1973. It did so in compliance with the VAT model set out in the First EC VAT Directive (Directive 67/227), as further explained in the Second VAT Directive (Directive 67/228). Since 1^st January 1978 the Sixth VAT Directive (Directive 77/388) has governed in some detail the VAT systems to be established and maintained in all Member States. United Kingdom VAT primary legislation has now been consolidated in the Value Added Tax Act 1994 ("the 1994 Act"), and its main subsidiary legislation is contained in the Value Added Tax Regulations 1995 ("the 1995 Regulations").
5. The issues raised in each of these appeals concern in large part the relationship between Community law and our domestic law in the operation of the VAT system as a whole and in particular respects. In the case of the Marks & Spencer appeal, the focus is on chargeability and rates of and exemptions from the tax, which are dealt with in Articles 10 to 13 and 28 of the Sixth Directive, sections 30 and 80 of the 1994 Act and regulation 35 of the 1995 Regulations. And in the University of Sussex appeal the focus is on deductions (input tax) and accountability for payment of tax, which are dealt with in Articles 17 to 22 of the Sixth Directive, sections 25 and 26 of the 1994 Act and regulations 25, 29, 32, 34, 35 and 39 of the 1995 Regulations.
6. As I have also indicated, a common issue is the entitlement of the two taxpayers to overcome statutory retrospective limitation periods of three years introduced in 1996 and 1997 in respect of their claims against the Commissioners. In the Marks & Spencer appeal the relevant statutory provision is section 80 of the 1994 Act, which provides for recovery of overpaid VAT. In the University of Sussex appeal, there are two possibilities, which the Commissioners, but not the University, regard as mutually exclusive, namely section 80 and regulation 29 of the 1995 Regulations.
7. Before turning to the facts and to the law on which the issues raised in each of the appeals turn, I should summarise briefly the VAT scheme as a matter of Community and United Kingdom domestic law.
8. European Community legislation in the form of the VAT Directives defines the principle of VAT and sets out detailed harmonising rules for much of its basic aspects. One fundamental principle of the system is that VAT is chargeable on each transaction in the production and distribution process after deduction of the VAT directly borne by the various cost components; see (Case C – 16/00, Cibo Participations SA v. Directeur Regional des Impots du Nord-Pas-de-Calais, [2002] STC 460. Put another way, the system involves a deduction of input tax at each stage in the chain of transactions of the production and distribution process leading to the final consumer. Article 2 of the First VAT Directive puts this fundamental principle at the forefront of its description of the system. It states:

"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."

9. That definition has been developed in some detail in succeeding VAT Directives, most notably the Sixth Directive. Its essential feature is that for each supplier in the chain, the effect of paying the tax (the input tax) and charging the tax (the output tax) should be neutral, leaving the ultimate consumer at the end of chain as the effective payer of the tax (subject to certain transitional arrangements permitting Member States to exempt or to charge different rates of tax for certain supplies). Depending on the nature of a taxpayer's business and/or on his pattern of trading, the value of his taxable outputs in any accounting period may be greater or less than the value of his inputs. If the former, he accounts for and pays tax to the Commissioners for that period, in respect of which he is termed "a payment trader"; if the latter, he is entitled to claim the excess of his input tax over his output tax for that period, in respect of which he is termed "a repayment trader".
10. Directives must be implemented and applied by Member States by the date specified in them for the purpose. In the case of each directive, the Member State's relevant domestic measure, usually in the form of legislation, if fully and properly implementing the directive and if properly applied for that purpose, governs the rights and duties of persons and bodies within each Member State. The function of the directive is then a source of guidance for the drafting and later construction of the domestic implementing measures. Wherever possible, the domestic measures should be construed in such a way as to be compatible with the provisions of the directive; see Case C-106/89, Marleasing SA v. La Comercial Internacional de Alimentacion SA [1990] ECR 1891; and Webb v. Emo Air Cargo Ltd. [1993] 1 WLR 49, HL, at 59F-60D. As I have indicated, the 1994 Act and the 1995 Regulations are the current measures implementing the Sixth Directive in this country.
11. If a domestic measure does not fully or properly implement the directive, or if it does so, but the Member State misapplies or fails to apply its provisions may have direct effect within the Member State concerned imposing directly enforceable duties and conferring directly enforceable rights for the purpose. However, the VAT Directives do not provide a complete code of VAT law. Some aspects, usually as to the way in which or the procedure by which the rights are to be secured, are left to the discretion of each Member State.
The Marks & Spencer Appeal
12. This appeal returns to this Court, pursuant to an order of the Court, differently constituted (Stuart-Smith, Ward and Schiemann LJJ ("the first Court of Appeal")) of 22nd December 1999, following its judgment of 14^th December 1999, [2000] STC 16, referring one of the issues raised in the appeal to the European Court of Justice under Article 234 (formerly 177) of the Treaty, and in the light of the judgment of that Court of 11^th July 2002, [2002] STC 1036.
13. The main question raised by the appeal is whether Marks & Spencer had an enforceable Community law right, in respect of its supplies of gift-vouchers and tea-cakes, to recover, under section 80 of the 1994 Act, overpaid VAT from the Commissioners outside a new three year limitation period introduced by section 47 of the Finance Act 1997 retrospectively, with effect from 18^th July 1996 and without transitional arrangements. The new provision was by way of a substituted sub-section (4) replacing both the six-year limitation period provided by its predecessor and a provision for extension of the limitation period for overpayments made by mistake (the former section 80 (5); see paragraph 15 below). Section 80, which first appeared as section 24 of the Finance Act 1989, was in part declaratory of the common law right to recovery of overpaid tax and in part replaced that right (see section 80(7)), with certain restrictions, insofar as it applied to overpaid VAT; see Woolwich Equitable Building Society v IRC. [1992] STC 657, HL. Before turning to the facts and to the issues in this appeal, I should set out the relevant Community and United Kingdom legislation.

Community and United Kingdom legislation

14. The relevant Community legislation is contained in Articles 17 of the Second Directive and Articles 10 to 13 and 28 of the Sixth Directive. These provide, so far as material:

Second Directive

"17. With a view to the transition from the present system of turnover taxes to the common system of value added tax, Member States may: …. – provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the relief applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer, and may not remain in force after the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States."

Sixth Directive

"10.1 (a) 'Chargeable event' shall mean the occurrence by virtue of which the legal conditions necessary for the tax to become chargeable are fulfilled.

(b) The tax becomes 'chargeable' when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred."

"11A.1 The taxable amount shall be: (a) in respect of supplies of goods and services …. everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies; …."

"12.1 The rate applicable to taxable transactions shall be that in force at the time of the chargeable event …."

"12.3 (a) The standard rate of value added tax shall be fixed by each Member State as a percentage of the taxable amount … From 1 January 1997 to 31 December 1998, this percentage may not be less than 15%. …"

Member States may also apply either one or two reduced rates. These rates should all be fixed as a percentage of the taxable amount which may not be less than 5% and shall apply only to supplies of the categories of goods and services specified in Annex H." [see also 12.3(b) and (c) for similar provisions for reduced rates]

"13A.1 Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse: …"

"28.2 Notwithstanding Article 12.3, the following provisions shall apply during the transitional period referred to in Article 28.l

(a) Exemptions with refund of the tax paid at the preceding stage and reduced rates lower than the minimum rate laid down in Article 12(3) in respect of the reduced rates, which were in force on 1 January 1991 and which are in accordance with Community law and satisfy the conditions stated in the last indent of Article 17 of the second Council Directive of 11 April 1967, may be maintained. …" [my emphasis]

"28.3. During the transitional period … Member States may: … (b) continue to exempt the activities set out in Annex F under conditions existing in the Member State concerned; …" [my emphasis]

15. The relevant provisions of the 1994 Act, so far as material, are sections 30 and 80:

"30 Zero-rating

"(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section-

"(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply;

and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified. …"

"80. Recovery of overpaid VAT

"(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant. ….

(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim. …

[(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it." [repealed by section 47(1) of the Finance Act 1997 and substituted along with the former sub-section (4) by the present sub-section (4) reducing the limitation period from six to three years.]]

(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.

(7) Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them. "

16. The relevant provisions in the 1994 Regulations are regulations 29(1) and (1A) and 35, which, so far as material, provide:

"29(1) Subject to paragraph.. (1A) … below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

(1A) The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made."

"35. Where a taxable person has made an error-

a) In accounting for VAT, or

b) In any return made by him,

Then, unless he corrects that error in accordance with regulation 34 [Correction of errors], he shall correct it in such manner and within such time as the Commissioners may require."

The facts

17. The facts giving rise to Marks & Spencer's claim and the proceedings to date are, in summary, as follows. As is well known, Marks & Spencer is a large high street retailer in the United Kingdom, specialising in the sale of food and clothing. For some years Marks & Spencer paid substantial amounts by way of output tax which, because it was not properly chargeable, was not VAT due to the Commissioners. When Marks & Spencer, in early 1995 and late 1996, claimed repayments in respect of the amounts overpaid in the case of gift-vouchers and teacakes, the Commissioners, whilst accepting that the amounts claimed had not been due as VAT, declined to pay them all back. In doing so, they relied on the new time limit of three years in section 80(4) of the 1994 Act substituted with retrospective effect for the previous six-year limit for which it had provided. Additionally, in the case of the teacakes, they relied on the "unjust enrichment" defence in section 80(3) of the 1994 Act, designed to prevent VAT registered traders, who had passed on to their customers the burden of tax wrongly charged, from obtaining double recovery.
18. The manner in which the new time limit for the old was substituted is of importance, both in the Marks & Spencer claim and that of the University of Sussex. On 18^th July 1996 the Paymaster General announced the Government's intention to introduce with immediate retrospective effect a new three-year limit for claims for repayment of overpaid VAT, subject to Parliamentary approval. Parliament gave that approval in form of section 47(1) and (2) of the Finance Act 1997, which provided:

"(1) For subsections (4) and (5) of section 80 of the Value Added Tax Act 1994 (time limit for making claim for a repayment of an overpayment) there shall be substituted the following subsection-

'(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.'

(2) Subject to subsections (3) and (4) below, subsection (1) above, shall be deemed to have come into force on 18^th July 1996 as a provision applying, for the purposes of the making of any repayment on or after that date, to all claims under section 80 of the Value Added Tax Act 1994, including claims made before that date and claims relating to payments made before that date.

19. The gift vouchers claim - From May 1991 Marks & Spencer had sold gift vouchers in different denominations to its customers, which they could exchange for goods sold by it. Some of them it sold at a discounted price to corporate customers. However, from May 1991 to the end of October 1996 it had charged VAT on those discounted vouchers on their full face value rather than on the value of the cash it received for them.
20. The early vouchers - For the first year or so of that period until 31^st July 1992, although Article 11A(1) of the Sixth VAT Directive had required that VAT should only be charged on their discounted value, the then United Kingdom legislative provision, section 10(3) of the Value Added Tax Act 1983, had not properly transposed that Community obligation into English law. Accordingly, during that first period, although the Commissioners had correctly construed the domestic legislation, they had acted in breach of Community Law in charging tax at the face value of the gift vouchers.
21. The later vouchers - Section 10(3) of the 1989 Act had then been amended so as properly to transpose Article 11A(1), but the Commissioners had nevertheless continued over the next four years – the second period – to charge VAT on the face value of the vouchers. They stopped doing so from the end of October 1996, as a result of the decision of the European Court of Justice in Case C-288/94, Argos Distributors Ltd. v. Commissioners of Customs & Excise [1996] ECR I-5311, that VAT should only be charged on the cash received for a gift voucher. Marks & Spencer then claimed a repayment of about £2.8m overpayment by way of VAT on the discounted value of the vouchers over the whole six years period, namely for the early period of improper legislative transposition of the Directive and for the later period of misapplication by the Commissioners of the properly transposed Directive. The Commissioners agreed to repay about £1.9m, after having applied the new retrospective three years capping limit to the balance of about £900,000.
22. The teacakes claim - For over twenty years, between April 1973 and October 1994, Marks & Spencer had wrongly accounted for VAT at the standard rate on sales of teacakes as a result of an error of its supplier caused by erroneous advice from the Commissioners. At the end of that period the Commissioners acknowledged that the supplies should have been zero-rated throughout. In early 1995 Marks & Spencer sought repayment of the £3.5m. overpaid. As I have indicated, the Commissioners invoked the unjust enrichment defence provided by section 80(3) of the 1994 Act on the basis that Marks & Spencer would mostly have passed on and recovered the excess tax in the prices that it had charged its customers for the teacakes. They applied the defence to 90% of the claim, which, after their capping of the balance of 10%, left £88,440, with interest, for repayment to Marks & Spencer.
23. Marks & Spencer challenged those determinations in separate appeals to the Value Added Tax and Duties Tribunal. In the first in time, that of the Commissioners' denial, in reliance on the unjust enrichment defence, of Marks & Spencer's entitlement to repayment of any more than 10% in respect of the teacakes, the Tribunal dismissed the appeal ([1997] V&DTR 85). In the second in time, by a preliminary decision, the Tribunal decided that it had no jurisdiction to declare unlawful the manner in which the Commissioners had applied the new section 80(4), but could consider an appeal based on directly enforceable Community law rights ([1997] V&DR 93). In the full hearing of that second appeal to the Tribunal in respect of the capping of the gift vouchers claim and of the remaining 10% of the teacakes claim, the Tribunal upheld the Commissioners' decisions. ([1998] V &DR 235).
24. Moses J. dismissed Marks & Spencer's consolidated appeals against those Tribunal decisions ([1999] STC 205).

The appeal to Moses J

25. Moses J., in dismissing Marks & Spencer's appeals from the Tribunal, held that:

1) a tax payer is entitled to a refund of tax charged by a Member State in breach of an enforceable Community law right;

2) as to the gift vouchers claim, in respect of the first period of overpayment, Marks & Spencer had a directly enforceable Community law claim because, during that period, the United Kingdom had incorrectly transposed the Sixth Directive; but in respect of the second, Marks & Spencer only had a domestic law claim because, by this time, the United Kingdom had correctly transposed the Directive and the Commissioners' misapplication of the law did not meet the first Becker condition for creating a directly enforceable Community law right;

3) as to the teacakes claim, there was no enforceable Community law right upon which Marks & Spencer could rely because neither of the Becker conditions was satisfied; the Sixth Directive, in the relevant articles, 10 to 13 and 28, had been correctly transposed, and, having regard to the powers given in Article 28(2)(a), the claimed right was not sufficiently direct and precise enough to give Marks & Spencer a Community law right to zero-rating of its teacakes, as required by the second Becker condition.

4) the retrospective introduction of the three year limitation period on the Community law right to repayment in respect of the vouchers did not infringe any Community law right on any of the arguments advanced by Marks & Spencer in reliance on general Community law principles, namely: effectiveness, legal certainty, legitimate expectation, equivalence, non-discrimination or the right to property under Article 1 of the First Protocol of the Convention;

5) as to the Commissioners' defence of unjust enrichment in respect of the teacakes claim, the Tribunal had been entitled to find on the evidence before it that Marks & Spencer had passed on 90% of the amount charged by way of VAT to its customers and had, therefore, save as to 10%, suffered no loss of profit.

26. In the light of his ruling that Marks & Spencer had no enforceable Community law right in respect of the teacakes claim, Moses J. did not deal with a further argument on behalf of the company that the unjust enrichment provision of section 80(3) was discriminatory because it applied to "payment traders" like it, not to "repayment traders" who sell mainly zero-rated food. And he declined to refer any questions to the European Court of Justice.

The "first Court of Appeal"

27. On Marks & Spencer's appeal to the Court of Appeal, ("the first Court of Appeal") Schiemann LJ, with whom Ward and Stuart-Smith LJJ agreed, held:

1) Subject to the question of the effect of retrospective removal of accrued rights, Marks & Spencer had a directly enforceable Community law right to repayment of monies overpaid by way of VAT in respect of the early vouchers, because the United Kingdom had failed correctly to transpose the Sixth Directive.

2) Marks & Spencer could not succeed in respect of the later vouchers claims. The United Kingdom had, by then, correctly transposed the Directive, so that the first Becker condition for assertion of a directly enforceable Community law right was not satisfied. The Commissioners had misapplied the correctly transposed law, and Marks & Spencer should have challenged that misapplication by asserting its rights in the United Kingdom courts under our domestic law at the material time, which it had not done.

3) Marks & Spencer could not succeed in respect of the teacakes claim because it satisfied neither of the two Becker conditions. As to the first, the claimed Community law right had been correctly transposed into our national law and, as in the case of the later vouchers claim, the fact that that law had been misapplied did not satisfy it. And as to the second, the claimed right was neither unconditional nor sufficiently precise, because its content, as to exemption or zero-rating of supplies had been left by Article 28(2)(a) of the Directive to the discretion of the United Kingdom.

4) While the general principles of Community law could be relied on in the protection of enforceable Community rights that existed independently of them, in general they could not be relied on to create an enforceable Community right that did not exist prior to the infringement of the general principle on which reliance was placed. There was no right under the EC Treaty or any regulations made under it on which Marks & Spencer could rely to found a complaint based on infringement of the general principles of Community law in respect of the later vouchers or teacakes claims.

5) As to the early vouchers claim, Community law was unclear whether it was permissible to introduce a retrospective time limit, that is in this case, to introduce with immediate effect a shorter time limit than was previously applicable so as to deprive Marks & Spencer of its accrued right under domestic law to reclaim overpaid VAT within the old, but outside the new, limit.

6) In relation to the early vouchers claim, the only claim in respect of which the Court found that Marks & Spencer had directly enforceable rights, it was unclear whether the United Kingdom law's different treatment for the purpose of repayment of overpaid VAT of traders according to whether they were payment or repayment traders was compatible with the principle of fiscal neutrality. But it was not necessary to decide that on the facts because there was no evidence to show that repayment traders in competition with Marks & Spencer in respect of the early vouchers claim had in fact been treated any differently from Marks & Spencer.

7) As to the 90% of the teacakes claim that the Tribunal had held irrecoverable under the unjust enrichment defence provided by section 80(3) of the 1994 Act, the Court agreed with Moses J. that the Tribunal's approach on that issue was permissible; the Court did not itself express a view on it.

28. In the result, the first Court of Appeal dismissed the claims in respect of the later vouchers and the teacakes. As to the early vouchers claim, it decided to refer to the European Court of Justice the question of immediate effect of the retrospective curtailment of accrued rights and postponed its decision on that claim pending the outcome of that reference.

The reference to the European Court

29. Standing back from the detail of the claims by Marks & Spencer, it should be noted, as an academic commentator, Sara Drake, has pointed out in an able and helpful analysis,^[1] that there were two separate, though complementary, Community law issues. The first went to the direct effect of a Community directive, which had been correctly transposed but incorrectly applied. The first Court of Appeal considered it was acte claire that it did not satisfy the first Becker condition, and did not seek a referral. The second issue went to the question whether the manner of application of a new retrospective time limit, rendering ineffective an otherwise directly enforceable Community law right, complied with Community law. The first Court of Appeal did not consider it to be acte claire and sought a reference. In the event, the Advocate General and the European Court dealt explicitly with both issues.
30. The reference, as drawn by the first Court of Appeal, was in the following terms:

"In the circumstances in which a Member State has failed to implement properly in its domestic legislation art 11.A of …[the Sixth Directive], is it compatible with the principle of the effectiveness of the rights that a taxable person derives from art 11.A, or with the principle of the protection of legitimate expectations, to enforce legislation which removes with retrospective effect a right under national law to reclaim sums paid, by way of VAT, more than three years before the claim is made?"

31. However, the question, as reformulated by the European Court in paragraph 33 of its judgment, and to which it answered yes, was wider, namely:

" … whether national legislation retroactively curtailing the period within which repayment may be sought of sums paid by way of VAT collected in breach of provisions of the Sixth Directive with direct effect, such as those contained in Art 11A(1) of that directive, is compatible with the principles of effectiveness and of the protection of legitimate expectations." [my emphasis]

The European Court, adopting the same view as that of the Advocate General in paragraphs 36 to 44 of his Opinion, felt obliged to reformulate the reference in that way because of the premise in the Court of Appeal's approach to the first Becker condition, distinguishing between the incorrect transposition of the Sixth Directive (applicable to the early vouchers claim) and misapplication of it after correct transposition (applicable to the later vouchers and teacakes claims).

32. In paragraphs 22 – 33 of its judgment, under the heading "The Question Referred", the Court, in explaining its reformulation, clearly rejected the materiality of that distinction. In applying the two Becker conditions for the establishment of a directly enforceable Community law right, it held as to the first, implementation in domestic law, that it was not sufficient for a Member State merely to transpose the Community law right into domestic law without giving effect to it. And as to the second, unconditionality and sufficient precision, it noted its ruling in Case C- 62/93, BP Supergas v. Greece [1995] STC 805, and other case law of the Court, that Article 11A(1) of the Sixth Directive, which fixes the taxable amount by reference to the consideration for the supply, conferred a directly enforceable right on taxpayers to pay no more than the taxable amount, which carried with it a directly enforceable right to obtain a refund of tax charged in breach of it.

"22. As a preliminary remark, it is important to note that it is clear from the order for reference that the Court of Appeal considers that art 11A(1) of the Sixth Directive is unconditional and sufficiently precise and that it therefore gives Marks & Spencer rights on which it may rely before a national court, albeit only as regards the period during which that provision had not yet been correctly implemented in the domestic law of the United Kingdom, that is to say before 1 August 1992. That is why the court of Appeal limited its question to the case where a member state has not properly implemented art 11A of the Sixth Directive.

23 The referring court proceeded on the premiss that if a member state has correctly implemented the provisions of a directive, such as art 11A(1) of the Sixth Directive, in domestic law, individuals are thereby deprived of the possibility of relying before the courts of that member state on the rights which they may derive from those provisions.

24. In that regard, it should be remembered, first, that the member states' obligation under a directive to achieve the result envisaged by the directive and their duty under art 5 of the EC Treaty (now art 10 EC) to take all appropriate measures, whether general or particular, to ensure fulfilment of that obligation are binding on all the authorities of the member states, including, for matters within their jurisdiction, the courts. … It follows that in applying domestic law the national court called upon to interpret that law is required to do so, as far as possible, in the light of the wording and purpose of the directive, in order to achieve the purpose of the directive and thereby comply with the third paragraph of art 189 of the EC Treaty (now the third paragraph of art 249 EC) …

26. … it has been consistently held that implementation of a directive must be such as to ensure its application in full ….

27. Consequently, the adoption of national measures correctly implementing a directive does not exhaust the effects of the directive. Member states remain bound actually to ensure full application of the directive even before the adoption of those measures. Individuals are therefore entitled to rely before national courts, against the state, on the provisions of a directive which appear, so far as their subject matter is concerned, to be unconditional and sufficiently precise whenever the full application of the directive is not in fact secured, that is to say, not only where the directive has not been implemented or has been implemented incorrectly, but also where the national measures correctly implementing the directive are not being applied in such a way as to achieve the result sought by it."

"28. As the Advocate General noted in para 40 of his opinion, it would be inconsistent with the community legal order for individuals to be able to rely on a directive where it has been implemented incorrectly but not to be able to do so where the national authorities apply the national measures implementing the directive in a manner incompatible with it."

"31. It follows from all those considerations that the fact that a member state correctly implemented the provisions of art 11A(1) of the Sixth Directive in domestic law does not deprive individuals of the possibility of relying, before the courts of that state, on the rights which they derive from those provisions and, in particular, the right to recover amounts collected by a member state in breach of them." [my emphases]

The issues on this resumed hearing of the appeal

33. The appeal, on its return to this Court, raised the following issues:

1) Whether, in the light of the European Court's ruling on the reference, Marks & Spencer had a directly enforceable Community law right to repayment of monies overpaid by way of VAT in respect of the later vouchers claim because of the United Kingdom's misapplication of the correctly transposed provisions of the Sixth Directive;

2) whether, in the light of the European Court's ruling on the reference, Marks & Spencer had a directly enforceable Community law right to zero-rating of its teacakes and, therefore, to repayment of monies overpaid in respect of them by way of VAT;

3) the effect, if any, of the European Court's ruling on the reference to the immediate retrospective capping of the claims in respect of the later vouchers and teacakes;

4) if Marks & Spencer had a directly enforceable Community law right to zero-rating of its teacakes, whether, in the light of the European Court's reasoning on the reference, the statutory introduction of a retrospective unjust enrichment defence (except for claims received before the date of introduction) was incompatible with that right whether or not it had made a claim before that date; and

5) whether the Commissioner's claimed unjust enrichment defence is compatible with the Community law principle of fiscal neutrality.

34. Shortly before the opening of the resumed hearing of the appeal, the Commissioners accepted as a matter of law that, in the light of the European Court's ruling on the reference, the retrospective aspect of the new three-year time limit does not apply to claims based on a directly enforceable provision of the Sixth Directive. The Commissioners, therefore, conceded that Marks & Spencer was entitled to recover on the entirety of the vouchers claim, thus removing in respect of that claim issues 1) and 3). However, they maintained, and maintain, as a matter of law that all claims for overpaid VAT which were not directly enforceable claims under the Sixth Directive – including Marks & Spencer's teacakes claim - were untouched by the European Court's ruling and that the new three-year cap continued to apply retrospectively to them. Nevertheless, in August 2002, shortly after the European Court's ruling, the Commissioners, through the medium of its Business Brief 22/02, had indicated its intention to treat all claims under section 80 in the same way, whether or not based on a directly enforceable provision of the Sixth Directive. Consistently with that indication, in the resumed hearing of the appeal, they made an extra-statutory concession of the teacakes claim (issues 2 and 3), save as to the 90% they had retained as part of their unjust enrichment defence (issue 4). They have duly paid the vouchers claim in full and the teacakes claim as to the 10% not affected by that defence. They maintain, therefore, that the only outstanding area of contention is as to the 90% of the teacakes claim retained by them pursuant to that defence (issues 4 and 5), and that, as the European Court's judgment on the reference had no relevance to that claim, the ruling of the first Court of Appeal upholding the Tribunal's decision on it should stand.
35. Marks & Spencer maintains that, despite the Commissioners' concessions, the European Court's judgment on the reference requires this Court to reconsider the important point of principle considered and rejected by the first Court of Appeal as to the direct enforceability in Community law of its claim in respect of the erroneous zero-rating of its teacakes (issue 2) and as to the incompatibility with Community law of applying the new retrospective time limit to that claim without adequate transitional arrangements (issue 3).
36. In my view, and notwithstanding the concessions made by the Commissioners, this Court should rule on the effect of the European Court's judgment on the reference on the direct enforceability of the later vouchers claim and on its effect, if any, on the teacakes claim (issues 1 and 2). We should also rule whether it is compatible with Community law to apply the new retrospective time limit without adequate transitional arrangements to the later vouchers claim and, if appropriate, to the teacakes claim (issue 3). And we should consider and, to the extent that it is necessary to do so, rule or give our views on the Commissioners' defence, in relation to the teacakes claim, of unjust enrichment (issues 4 and 5).
37. 1) and 3) The effect of the European Court's judgment on the reference on the later vouchers claim

The submissions

38. Mr. David Milne, QC, on behalf of Marks & Spencer, submitted that the rationale of the European Court's judgment is that, contrary to the view of the first Court of Appeal, there is no distinction in principle between the early vouchers claim - which is based on the incorrect transposition of Article 11A(1)(a) of the Sixth Directive (see paragraph 14 above) into United Kingdom legislation – and the later vouchers claim, which is based on misapplication by the Commissioners of the correctly transposed provision. It follows, he said, that the fact that the United Kingdom has correctly transposed a directly enforceable article of the Sixth Directive does not prevent taxpayers from relying on rights they derive from that Article and, in particular, the right to recover overpayments by way of VAT collected by the Commissioners in breach of those rights. He relied on paragraphs 36 to 40 of the Advocate General's Opinion on the reference and on the passages from the European Court's judgment that I have set out in paragraph 32 above. He added that Moses J's acceptance, at page 217 of his judgment, as "settled law" that the first Becker condition was confined to failure properly to transpose a directive into domestic legislation, was based on a misunderstanding of the case law, as explained by the Advocate General in paragraphs 32, 33 and 41 of his Opinion:

"32. According to settled case law on art. 234 EC the court considers itself bound by the preliminary questions referred to it and does not depart from the substantive framework of those questions. None the less, the view of the matter taken in the judgments of the High Court and the Court of Appeal prior to the order for reference prompt me to make a preliminary observation. …"

"33. Two issues of principle arise here. The first is the question as to when a directive may be deemed to have been correctly implemented, and the second is whether individuals may continue to rely on rights conferred on them by a directive after the directive has been implemented in national legislation."

"41. … the Becker judgment … concerned a case in which the member state concerned had failed to implement a directive within the prescribed period and the question arising was whether in such a case individuals could rely on the directive. With that situation in mind the court laid down the two conditions and the individual there had to rely on the directly effective obligation. It cannot be inferred therefrom, as the United Kingdom courts are plainly inferring, that if a member state has adopted the requisite measures but then goes on to apply them in a manner inconsistent with the directive, an individual may no longer derive any rights from the directive. In that case as well the directive cannot be said to have been properly implemented."

39. Mr. Milne submitted that the effect of the European Court's ruling on the entirety of the vouchers claim is that: 1) it is in respect of a directly enforceable Community law right; 2) the right arises immediately on the overpayment of VAT in breach of Community law; and 3) it carries with it an immediate right to repayment, regardless of if and when the claim is made. Such a right carries with it, he also submitted, a Community law entitlement, based on the principles of effectiveness and legitimate expectations, not to be deprived of the right, save by a reasonable time limit introduced with adequate transitional arrangements. He did not contend that the new retrospective three-year limit was unreasonable, but maintained that its introduction without adequate transitional arrangements was incompatible with those principles. He was able to point to passages in the Advocate General's Opinion, at paragraphs 49 to 52, 62 (effectiveness) and 69 (legitimate expectations) and in the Court's judgment, at paragraphs 30, 36 to 40 and 42, strongly supportive of that proposition: For example, the Advocate General said:

"49. It is … established … that under the court's settled case law M & S is entitled to repayment of VAT paid in breach of provisions of Community law. ….the right to repayment of amounts charged by a member state in breach of the rules of Community law is the consequence and complement of the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties and the application of national charges in a discriminatory fashion as interpreted by the Court … The member state is therefore as a matter of principle required to repay charges levied in breach of Community law. …"

"51. … A deliberate distinction is drawn, in the court's case law, between the right, or claim, to repayment of amounts paid to national authorities in breach of Community law and the national provisions giving effect to that right or claim. Those provisions may apply to the procedure to be followed, designation of the authority charged with repayment, the period within which the claims must be made and verification thereof."

"69. … The view that individuals acquire a right to repayment of unduly paid amounts only after they have satisfied the applicable national requirements governing the making of a claim and that therefore the principle of the protection of legitimate expectations should in such a case be regarded merely as a 'national' legal principle cannot be reconciled with the court's case law …"

40. The Court, in addition to the passage at paragraph 22 of its judgment that I have set out in paragraph 32 above, made observations to similar general effect, for example:

"36. … national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with community law. … the time set for its application must be sufficient to ensure that the right to repayment is effective. …

37. … that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time limit is to apply immediately to all claims made after the date of enactment of that legislation …

38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right." [see also para. 46 for the same point based on the principle of legitimate expectations]

"40. Accordingly, legislation such as that at issue in the main proceedings, the retroactive effect of which deprives individuals of any possibility of exercising a right which they previously enjoyed with regard to repayment of VAT collected in breach of provisions of the Sixth Directive with direct effect must be held to be incompatible with the principle of effectiveness."

"44. … the court has consistently held that the principle of the protection of legitimate expectations forms part of the Community legal order and must be observed by the member states when they exercise the powers conferred on them by community directives. …"

"45. The court has held, in particular, that a legislative amendment retroactively depriving a taxable person of a right to deduction he has derived from the Sixth Directive is incompatible with the principle of the protection of legitimate expectations. …"

"46. Likewise, in a situation such as that in the main proceedings, the principle of the protection of legitimate expectations applies so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to the amendment to obtain repayment of taxes collected in breach of provisions of the Sixth Directive with direct effect."

Mr. Milne drew attention to the similar treatment in United Kingdom law of overpaid direct tax; referring the Court, by way of example, to the Woolwich Equitable Building Society case.

41. On the question how this Court should now deal with the matter, Mr. Milne submitted that, as the European Court's judgment has shown much of the first Court of Appeal's provisional ruling on the matter to be incorrect, the Court, as now constituted should not grant Marks & Spencer permission to appeal to the House of Lords for their Lordships to "put it right". Rather, the Court should withdraw the first Court's provisional judgment on the later vouchers claim and also its judgment in respect of the teacakes claim, and issue a new one taking into account the European Court's ruling.
42. As I have indicated, Mr. Paul Lasok, QC, on behalf of the Commissioners, indicated that, in the light of the European Court's judgment, the Commissioners concede that the retrospective application of the three-year time bar to the later as well as the early vouchers claims is incompatible with Community law. He said that, given that concession, and with the consent of the parties, it would be appropriate for this Court to amend the first Court's order accordingly. However, despite that concession, he sought to limit the effect of the European Court's ruling to claims based on a directly effective provision of the Sixth Directive and to preserve generally the retrospective effect of the three year limitation period under section 80(4) of the 1994 Act. He submitted that, having regard to the European Court's description, particularly in paragraph 27 of its judgment (see paragraph 32 above), of the directly enforceable rights in issue before it, section 47(2), which, with section 47(1) of the Finance Act 1997, introduced the retrospective three-year time bar, should be read as backdating that bar save as to directly enforceable claims derived from the Sixth Directive relating to payments made before 4^th December 1996. He said that, in relation to such claims, a claimant would at that time have had an adequate period for submitting a claim within the previous six-year period for which the old section 80(4) had provided.
43. Nevertheless, he informed the Court that, by way of the extra-statutory concession in the Commissioners' Business Brief 22/2002, to which I have referred, they had decided to treat all claims under section 80 in the same way, because, as the Brief explained, if they:

"had provided for a transitional regime at the time when the three-year limit was introduced, it would not have been applied in such a selective manner. Customs will not, therefore, restrict payment of claims only to those who would benefit from a strict interpretation of the ECJ's judgment in Marks & Spencer."

Conclusion

44. Before expressing my conclusion on this issue, I should say something about the nature of the Becker conditions. As Schiemann LJ acknowledged at page 26f-g of his judgment on this issue, Becker itself does not require satisfaction of the two conditions for a Community directive to create directly enforceable rights. It merely states that when the two conditions are satisfied such rights are created. See also Three Rivers District Council v. Bank of England (No. 3) [2000] 2 WLR 1220, HL, per Lord Hope of Craighead at 1238C-1242F. Nevertheless, Schiemann LJ, after reviewing the authorities, including Case C-127/95, Norbrook Laboratories Ltd. v. Ministry of Agriculture, Fisheries and Food [1998] ECR I-1531, and the Three Rivers case in the Court of Appeal [1999] Eu LR 211, held, at pages 30f-g and 32h-j, not only that satisfaction of both conditions was a condition precedent to establishing a directly enforceable Community right under a directive, but also, at page 29j-30h, that the first condition was limited to non-transposition or mis-transposition of a provision of a directive, and did not include misapplication of a properly transposed provision. Misapplication, as here, resulting from misconstruction of the properly transposed provision, did not, he concluded, at page 30f, deprive a taxpayer who has, in consequence overpaid tax, of any right, since he could assert that right before a national court. As, in this case, Marks & Spencer had not done that at the time, he said that it had not satisfied the first Becker condition in the case of the later vouchers. And, as it could not rely independently on any right under the Treaty or regulations made under it, that claim failed.
45. As I have indicated, the European Court's judgment establishes that the first Court of Appeal was wrong in concluding that the first Becker condition was limited to legislative non-transposition or mis-transposition. It follows that, as the Commissioners misapplied Article 11A(1) of the Sixth Directive in their treatment of the later vouchers claim, and as there is no issue in that claim as to satisfaction of the second Becker condition of unconditionality and precision - or any other material issue between them - Marks & Spencer has a directly enforceable Community law right in respect of the later vouchers as well as the early vouchers. It also follows that the new retrospective three-year time limit introduced without adequate transitional arrangements falls foul of that Community law right in that it renders it ineffective. It may also be said to be in breach of Marks & Spencer's legitimate expectations.
46. Accordingly, I consider that that the Commissioners' concession in respect of the later vouchers claim is properly made. With or without their consent, I would re-open this part of the first Court of Appeal's order and allow Marks & Spencer's appeal in respect of the entirety of the vouchers claim.
47. I can see no procedural objection to that course. The Court's order, as ultimately made on 22^nd December 1999, referred in paragraph 1 to a draft order, scheduled to the order, for dismissal of Marks & Spencer's appeals save as to the early vouchers claim, but which was not to take effect until final judgment on that claim. It was accompanied, in paragraph 2, with a stay on "[a]ll further proceedings" "until the European Court of Justice has given its ruling on the said question or until further order", and in paragraph 4 with a direction that the draft order was not to take effect until this Court gives its final judgment on the early vouchers claim. Moreover, the question for reference, even as drawn by the first Court of Appeal, was not itself so confined. As I have said, it was reformulated by the European Court so as to enable it to consider provisions "such as" those in Article 11A (1) of the Sixth Directive and also, in the light of its reasoning, the question of misapplication of such provisions when properly transposed. The latter of those considerations was, of course, relevant to the later, but not to the early vouchers, claim.
48. Accordingly, in my view, the remainder of the order has not been perfected. The first Court of Appeal's dismissal of the claims in respect of the later vouchers and the teacakes was subject to the stay and, in any event, to the postponement directed in paragraph 4 of the order itself. It may be that the Court adopted the course of postponement lest the outcome of the reference should unseat in some way its general reasoning as to the immediate effect of the retrospective curtailment of the rights to repayment. If it were otherwise, the Court could have made an immediate order dismissing Marks & Spencer's claims in respect of the later vouchers and the teacakes.
49. Even if there were final judgment in respect of the later vouchers claim, the Court would, in my view, be justified in re-opening on Taylor v Lawrence principles ([2002] 2 All ER 353, CA) any part of the first Court of Appeal's ruling unseated by the reasoning of the European Court on the reference. But for the Commissioners' concession, significant injustice could otherwise ensue to Marks & Spencer or to other taxpayers to whom the concession might not be made, and the only alternative remedies would be to make a further reference to the European Court seeking unnecessary clarification or leave it, equally unnecessarily, to the House of Lords to resolve as a post reference issue.
50. Accordingly, I would allow Marks & Spencer's appeal on the later vouchers claim and re-draw the first Court of Appeal's order accordingly.

2) and 3) The effect, if any, on the teacakes claim of the European Court's judgment on the reference

51. As I have said, the Commissioners accepted, rightly as the first Court of Appeal acknowledged, that they had for many years erroneously charged VAT on Marks & Spencer's teacakes, when, on a proper construction of United Kingdom VAT legislation, they were zero-rated. The relevant provisions of the directives are Articles 17 of the Second Directive and Articles 10.1 (a) and (b), 12.1, 12.3 (a) and 28.2 (a) of the Sixth Directive, which I have set out in paragraph 14 above. In summary, those provisions required each Member State to fix a minimum standard rate of VAT calculated as a percentage of the taxable amount, the rate for the relevant period being a minimum of 15%. But, by Article 28.2(a), Member States were permitted during the transitional period, i.e. from the previous system of turnover taxes to a common system of VAT, to maintain exemptions with refund of tax paid at the preceding stage or lesser rates in force on 1^st January 1991. The United Kingdom's system of zero-rating of certain supplies falls within this provision.
52. Article 12(1) of the Sixth Directive provides that "the rate applicable to taxable transactions shall be that in force at the time of the chargeable event". The material supplies were all made in the transitional period, during which United Kingdom law, in the exercise of the discretion allowed to it under Article 28(2)(a), provided for zero-rating of certain goods, including teacakes, and services. However, as I have said, the Commissioners misapplied that provision. The first Court of Appeal held that the teacakes claim satisfied neither of the two Becker conditions for direct enforceability as a Community law right. It held, as to the first, and wrongly in the light of the European Court's judgment on the reference, that the correct transposition by the United Kingdom of the Directives in section 30 of and Schedule 8 to the 1994 Act left Marks & Spencer with only domestically enforceable rights. And it held that the claim did not satisfy the second Becker condition because the right relied on as springing from the Sixth Directive was neither unconditional nor sufficiently precise.
53. More particularly as to the second Becker condition, the first Court of Appeal held that the effect of Articles 12.1 and 28.2 (a), considered together, was not to define any particular Community law right to zero-rating, but to leave it to the discretion of Member States within the limits identified in Article 17 of the Second Directive. In short, zero-rating under Article 28.2 (a) was permissive and, therefore, Marks & Spencer had no right to rely on it as an enforceable Community law right in respect of the misapplication of United Kingdom law as to its teacakes. This was Schiemann LJ's response, at page 31 of the judgment, to Marks & Spencer's argument that, whilst the United Kingdom maintained that form of exemption during the transitional period, the rate of tax applicable to the sale of teacakes was zero and, therefore, it had a right under Article 12.1 not to be taxed at a rate higher than zero:

"…. (1) Where in respect of any particular transaction there is in force at the relevant time an exemption with refund of tax, there is no 'rate applicable to a taxable transaction'. The relevant transaction is not, in the terms of the Sixth Directive, taxable. (2) Marks and Spencer cannot rely upon art 12(1) because that provision does not define the content of any right that Marks and Spencer has under Community law. Article 12(1) defines no right to any particular rate of tax because the fixing of the rate is entirely within the discretion of the United Kingdom under art. 28(2)(a). In so far as it is legitimate to describe zero as being the rate applicable to the sale of teacakes that rate is not attributable to Community legislation but rather to United Kingdom legislation which is consistent with our obligations under the EC Treaty."

The submissions

54. As to the first Becker condition, Mr. Milne submitted that there is no distinction in principle between the later vouchers claim and the teacakes claim, citing in support the European Commission's argument in its written observations and the Advocate General's Opinion on the reference to the European Court.
55. The European Commission's argument, so far as material, was as follows:

"5. … the reasoning of the Court of Appeal, as regards the teacakes and late vouchers claims, runs counter to the wording of Article 249 (ex 189) EC. … There is only one difference between the early vouchers claim and the other two claims: as regards the early vouchers claim, the national legislation itself contravened the directive, whereas with respect to the other two claims that legislation was unimpeachable in itself but was misapplied. Yet the end result in the two instances was precisely the same: the Directive was breached. Indeed, if the view accepted by the Court of Appeal were correct, then a Member State could escape the consequences of a Directive simply by implementing it correctly and then proceeding to misapply it. …"

"7 .. it would be appropriate, in view of these exceptional circumstances, for the Court to frame its reply to the preliminary question posed in slightly broader terms … [to] enable the Court to rule on the legality of a retrospective measure such as that in issue in the main proceedings, as regards all of M & S's claims, and not merely the early vouchers claim."

And, at paragraph 20 of its observations, the Commission, suggested the following answer:

"Where a Member State has received overpayments as a result of its failure properly to implement and/or apply any provision of the Sixth Directive … having direct effect such as Article 11A.2 [what the taxable amount includes], it may not retrospectively shorten the limitation period laid down for the recovery of those sums."

56. The Advocate General's Opinion, at paragraphs 30 and 44 and in his suggested reply for the Court to the reference at paragraph 78 was to like effect:

30. The order for reference does not mention the claim for repayment of VAT erroneously paid in respect of teacakes. None the less, a similar problem arises in the case of teacakes. In that connection too, the question arises as to whether individuals have rights under Community law where a directive has in itself been correctly transposed into national law but that law is applied in a manner clearly inconsistent with the scope of the directive."

"44. It is manifestly clear from the documents before the court that, in regard to both teacakes and gift vouchers after August 1992, the commissioners applied national tax legislation in a manner inconsistent with the directive. It is also clear that the referring court is not permitting M & S to rely on the directive against that incorrect administrative practice. It follows therefrom, in my view, that in that case both the tax authorities and the competent courts are acting in breach of Community law. Thus, the United Kingdom is failing correctly to implement the relevant part of the Sixth Directive."

"78 Where a member state has received overpayment of tax as a result of the incorrect transposition and/or application of directly effective provisions of the Sixth Directive, such as art 11A(1), the retrospective shortening of the limitation period laid down for recovery of such overpayment is incompatible with the principle of effectiveness and with the principle of the protection of legitimate expectations."

57. As I have noted, in considering the effect of the European Court's judgment on the reference on the later vouchers claim, the Court, in its reasoning, adopted that broader approach (see paragraphs 31 and 32 above). That is to say, it went beyond the issue of retrospectivity of curtailment of a directly enforceable Community law right, to which the Court of Appeal had confined its question, to one of principle as to what satisfies the first Becker condition for the creation of such a right.
58. However, as Mr. Lasok emphasised in his submissions, the European Court said nothing in its judgment on the reference about teacakes or, in the context of zero-rating, about satisfaction of the second Becker condition of unconditionality and sufficient precision. On the zero-rating issue, Mr. Milne's argument was not as straightforward as that in relation to the first Becker condition. He had two obstacles to overcome: first, if the European Court's judgment on the reference did not engage and affect the issue of Marks & Spencer's right to zero-rate its teacakes, we cannot go behind the first Court of Appeal's ruling on that issue; second, and in any event, it has obvious difficulties.
59. This is how Mr. Milne sought to overcome them. He argued that, while the United Kingdom was merely entitled, and not obliged, under the Sixth Directive to apply a zero-rate to certain products, that is not the essential issue. The essential issue is whether, in taxing the teacakes at the standard VAT rate and, thus, not applying the zero-rate, the Commissioners had infringed the principles of the Sixth Directive, in particular Articles 10.1 (a) and (b) and 12.1 (see paragraph 14 above), in requiring Marks & Spencer to pay a VAT rate not fixed by law.
60. Mr. Milne submitted that it was a breach of those provisions and of the general principles of Community law for the United Kingdom, through the Commissioners, to exact VAT at the standard rate for teacakes when, under United Kingdom law, it was not chargeable and was thus not, in the words of Article 12.1, "a rate applicable to taxable transactions … in force at the time of the chargeable event". Accordingly, in the light of the European Court's judgment on the reference that in such cases both legislative provisions and administrative actions had to comply with Community law, the administrative imposition on Marks & Spencer of VAT at the standard rate in breach of those provisions of the Sixth Directive was a breach of their Community law right not to pay it. Put at its most general, Mr. Milne's submission was that the taxpayers of all Member States have a direct enforceable Community law right not to be taxed VAT otherwise than in accordance with the law and principles of Community law, including the various VAT Directives and general principles.
61. Mr. Milne added that, in any event, the power to retain the zero-rate under Article 28.2(a) (see paragraph 14 above) is materially different from the power to retain exemption under Article 28.2(b), in that Article 28.2(a) expressly requires the power to be exercised in accordance with Community law and to satisfy the specified conditions in Article 17 of the Second VAT Directive, namely to be for clearly defined social reasons and for the benefit of the final consumer, in particular, to comply with the general principle of fiscal neutrality. He cited, as examples of the effect of those restrictions: Case 16/85 Commission v. United Kingdom [1988] ECR 3127; and Case 481/98, Commission v. France [2000] 1 ECR 609, in the latter of which, at paragraph. 21, the Court said:

"According to art 28(2)(a) of the Sixth Directive, the maintenance of reduced rates of VAT lower than the minimum rate laid down in art 12(3)(a) of that directive must be consistent with Community legislation. It follows that the introduction and maintenance of a rate of 2.1% for reimbursable medicinal products, whereas the supply of non-reimbursable medicinal products is subject to a rate of 5.5%, are permissible only in so far as they are consistent with the principle of fiscal neutrality inherent in the common system of VAT and in compliance with which the member states are required to transpose the Sixth Directive."

62. Accordingly, he submitted that it is clear, as stated by the European Commission and the Advocate General in the European Court, and as implicitly acknowledged by the Commissioners in their extra-statutory concession on the issue, that, in the case of teacakes as well as the later vouchers, they had misapplied our Community law compliant domestic legislation so as to infringe Marks & Spencer's directly enforceable Community law right to zero rating of the former. He added that if there is any doubt about the matter, it should be referred back to the European Court under the preliminary reference procedure in Article 234 of the Treaty. However, as Mr. Lasok observed, although those two European Court authorities are authorities for the proposition that it is consistent with Community law to maintain reduced rates as provided by Article 19, it does not follow that such reduced rates are a directly enforceable Community law right.
63. Mr. Lasok maintained that the European Court's ruling on the reference cannot affect the Court of Appeal's judgment that the teacakes claim is covered by the immediate retrospective three year cap, because the United Kingdom zero-rating provision, on which it (unlike the vouchers claim) is based, does not satisfy the second Becker condition of creating an unconditional and sufficiently precise Community law right. Zero-rating of teacakes in the United Kingdom was not a Community law right of taxpayers to whose supplies it was applied. The Sixth Directive authorised, but did not oblige, the United Kingdom to zero-rate them. The fact that it is a domestic statutory concession consistent with Community law enabling the United Kingdom, in its discretion, to zero-rate subject to certain conditions, does not make it a directly enforceable Community law right. He referred the Court to the European Court's decision in Case 36/99, Ideal Tourisme v. Belgium [2000] ECR I-6049, on the partial harmonisation of the Community system of VAT, which concerned Article 28.3(b) of the Sixth Directive, a provision granting a different power of exemption and, as I have said, not encumbered by the conditions in Article 17 of the Sixth Directive as is that in Article 28.2(a). In that case the European Court noted:

"37…the Community system of VAT is the result of a gradual harmonisation of national laws in the context of Articles 99 and 100 of the EC Treaty (now Articles 93EC and 94EC). … this harmonisation, as brought about by successive directives and in particular by the Sixth Directive, is still only partial …

38. ... the harmonisation envisaged has not yet been achieved, in so far as the Sixth Directive, by virtue of Article 28(3)(b), unreservedly authorises the Member States to retain certain provisions of their national legislation predating the Sixth Directive which would, without that authorisation, be incompatible with that directive. Consequently, in so far as a Member State retains such provisions, it does not transpose the Sixth Directive and thus does not infringe either that directive or the general Community principles which Member States must, according to Klensch [Joined Cases 201/85 and 202/85, Klensch & Ors. v. Secretaire d'Etat a l'Agriculture et a la Viticulture [1986] ECR 3477], comply with when implementing Community legislation." [my emphases]

64. Mr. Lasok reminded the Court that, under the harmonised part of the VAT system set out in the Sixth Directive, supplies of goods and services in the United Kingdom cannot lawfully be zero-rated. Some are zero-rated because, as in the Ideal Tourisme case, the Directive, in Article 28.3(b), authorised Member States to continue to exempt certain clearly specified activities during the transitional period. Article 28.3(b), like Article 28(2)(a), is permissive, not mandatory. Member States "may" act as they provide, they are not obliged by the Directive to do so. Accordingly, submitted Mr. Lasok, the zero-rating of teacakes is outside the scope of the harmonised system, with the result that member states are not obliged to achieve it when implementing the Sixth Directive. As he put it, a Member State's act of authorisation is not a transposition of Article 28.2(a) or 28.3(b) in that it does not define the result intended by the Directive. Therefore, there is no basis upon which the European Court's judgment on the reference can have any effect on the Court of Appeal's ruling on the teacakes claim.
65. I should interpolate here that Mr. Milne's response to Mr. Lasok's reliance on the Ideal Tourisme case was that it is not to the point because it concerned a different question, namely alleged discrimination between one form of transport benefiting from exemption from VAT and another form of transport which was subject to VAT. Whereas, here, the question is as to the illegal collection of VAT that was not due. He added that, in any event, the Ideal Tourisme case is simply authority for the proposition that Belgium had not breached the Sixth Directive or Community principles by not taxing those transactions for which the retention of the exemption was clearly and unambiguously authorised by Article 28(3)(b).
66. Returning to Mr. Lasok's submissions on this issue, he emphasised that the Commissioners, in agreeing to pay the teacakes claim as to the 10% unaffected by the unjust enrichment issue and uncapped, did so only as an "extra-statutory concession". They did not acknowledge that Marks & Spencer was entitled to that sum as a matter of Community law. In that context, he said that the European Commission, in its observations on the reference to the European Court, had misunderstood the Commissioners' case as to the teacakes claim, a misunderstanding leading the Advocate General to adopt the same reasoning on this claim. The misunderstanding was that the parties appeared to be at one as regards both teacakes and the later vouchers claims that the United Kingdom legislation, though compatible with the Sixth Directive, had been misapplied. He noted that, although the Court, in its answer to the reference, followed the Commission and the Advocate General as to the later vouchers claim, it did not do so as to teacakes, on which its answer was silent.

Conclusion

67. Assuming for the moment that the only criteria of direct effectiveness in the circumstances are the two Becker conditions, Marks & Spencer's claim satisfied the first Becker condition as developed by the European Court and as applied by it on the reference. The first Court of Appeal's wrong decision that the claim did not do so because the United Kingdom had correctly transposed Directives, left Marks & Spencer with only domestically enforceable rights.
68. Thus far, I would treat the decision in the same way as the later vouchers claim. As to the first Becker condition, the effect of the European Court's reformulation of the reference and its answer to it is that the teacakes claim should be treated in the same way as the later vouchers claim. The reference, as the European Court reasoned and reformulated it, was one of principle, not confined to the subject matter of the claim that the Court of Appeal, acting under a mistake of law, had in mind when making the reference. Accordingly, rights "such as those contained in Article 11A(1)" of the Sixth Directive of sums wrongly paid by way of VAT resulting from misapplication of correctly transposed Community legislation, are capable of having direct effect. And, if so, any national legislation retrospectively curtailing without adequate transitional arrangements the period within which repayment may be sought is as incompatible with the principles of effectiveness and of the protection of legitimate expectation, as it is for those resulting only from incorrect transposition.
69. However, as Mr. Lasok submitted, the European Court's reasoning on the reference did not engage the second Becker condition of unconditionality and sufficiency of precision in the context of a United Kingdom trader's right to zero-rating - the basis of the teacakes claim. And, because Article 28.2(a) (see paragraph 14 above) is not unconditional and sufficiently precise to meet that condition, I do not consider that it fits the Court's important reference in its answer to provisions "such as those contained in Article 11A(1)" of the Sixth Directive. If I am right about that, we are not entitled to re-open the first Court of Appeal's ruling that Article 28.2(a) of the Sixth Directive (see paragraph 14 above) left Member States with a discretion whether to maintain exemptions during the transitional period and, therefore, that the United Kingdom's provision for them in the case of teacakes was a domestic, not a directly enforceable Community law right. Nor do I consider that Mr. Milne's argument, based on Articles 10 and 12 of the Sixth Directive (see paragraph 14 above) are a way of avoiding that conclusion. As a matter of logic, and in the light of the European Court's reasoning in Ideal Tourisme, a Member State's breach of its own domestic law maintained consistently with, but not as a requirement of Community law, is not a breach of a Community law requirement to charge only a rate fixed by law within the meaning of Articles 10.1(a) and (b) and 12.1.
70. In addition, a zero-rate is a United Kingdom antonym; it is no rate at all within the meaning of the words in Article 12.1, "[t]he rate … in force at the time of the chargeable event". And, as Schiemann LJ noted at page 31f-g of his judgment (see paragraph 53 above), Article 12.1 does not define the content of any right to any particular rate of tax under Community law, because the fixing of the rate, if any, is entirely within the discretion of the United Kingdom under Article 28.2(a). For those reasons, I agree with the first Court of Appeal's ruling that the teacakes claim did not satisfy the second Becker condition.
71. For the sake of clarity, I should note that, before the first Court of Appeal, Mr. Milne relied on an alternative, "fall-back" argument in support of the later vouchers and teacakes claims. It was an argument similar to that upon which Mr. Roderick Cordara, QC on behalf of the University of Sussex, strongly relied in the University of Sussex appeal (see paragraphs 168-170) below. It was that whenever a Member State acts within the scope of Community law it must comply with its general principles, including those of non-retrospectivity, legal certainty, non-discrimination, protection of legitimate expectations and rights of property. The first Court of Appeal rejected that argument, holding that, in general, such, or any of such, principles could not on their own found a directly enforceable Community law right. Schiemann LJ said, at 32h-j:

"In my judgment, while the general principles of Community law can be relied upon in protection of enforceable Community rights which exist independently of them, in general at least, they cannot be relied upon to create an enforceable Community right, which did not exist prior to the infringement of the general principle upon which reliance is based. So far as the teacakes and later vouchers claims are concerned, Marks and Spencer, because they cannot fulfil the Becker conditions and because they cannot rely on any right given to them by the Treaty or regulations made thereunder, lack any basis upon which to found a complaint that there has been an infringement of the general principles of Community law."

72. Nothing said by the European Court on the reference bears directly or indirectly on that conclusion, and Mr. Milne, recognising in the circumstances that this Court cannot re-open the point, has not sought to persuade us to do so. However, the general principle upon which Mr. Milne relied does fall, contingently, for consideration in a different context in the University of Sussex appeal (see paragraphs 170-172 and 179 below).
73. I would accordingly dismiss Marks & Spencer's appeal against the decision of Moses J. on the teacakes claim, but only for want of direct enforceability due to its inability to satisfy the second Becker condition of unconditionality and sufficient precision.

4) and 5) The Commissioner' defence of unjust enrichment

74. If, contrary to my view, Marks & Spencer could satisfy both Becker conditions, or if it could establish in some other way a Community law right to be zero-rated in relation to its supply of teacakes, Marks & Spencer would seek to overcome, as to the whole of the claim, the Commissioners' reliance on the unjust enrichment defence provided by section 80(3) of the 1994 Act (see paragraph 15 above). It would do so on two alternative bases: first, that the Commissioners are not entitled to rely on a retrospective application of that defence to deprive it of accrued rights to repayment of overpaid tax; and second, that the defence is discriminatory as between payment and repayment traders and thereby infringes the Community law principle of fiscal neutrality.

4) Teacakes: the unjust enrichment defence and accrued rights

75. The question is whether, in the light of the European Court's reasoning on the reference, the introduction of the retrospective unjust enrichment defence on 1^st January 1990, except for claims received before that date, was incompatible with any accrued directly enforceable Community law right that Marks & Spencer might establish to zero-rating of its teacakes, even where it had not made a claim before that date. As this issue concerns only the teacakes claim and the first Court of Appeal ruled that Marks & Spencer had no Community law rights in relation to it, the European Court did not need to, and did not, rule on the issue.
76. The issue, put more precisely on the facts of this case, is whether the Commissioners are entitled to invoke the unjust enrichment defence in respect of overpayments by Marks & Spencer before 1^st January 1990, the date of introduction by section 24(3) of the 1989 Act (now section 80(3) of the 1994 Act) of the defence to claims for repayment of overpaid tax. The introduction of the defence was retrospective. Section 24(3) of the 1989 Act provided:

"The preceding provisions of this section apply to an amount paid before, as well as to an amount paid after, the day on which this section comes into force, except where the Commissioners' have received a claim for repayment of the amount before that day."

Submissions

77. On the assumption that Marks & Spencer could establish directly enforceable Community law rights to repayment of tax for its zero-rated teacakes, it maintains that, at 1^st January 1990, it had such rights in respect of its supplies of teacakes before that date. Its case is that, whether or not it had claimed repayment before that date, it cannot be deprived of it by the purported retrospective introduction of the unjust enrichment defence in the manner indicated. Mr. Milne, in his short elaboration of the argument, submitted that, insofar as the 1990 change in the law purported retrospectively to remove that right, it was in breach of Community law principles of effectiveness and legitimate expectations articulated by the European Court on the reference.
78. Mr. Milne acknowledged that Marks & Spencer did not raise this issue before Moses J. or on appeal to the first Court of Appeal, but said that it if had done so, given the apparent state of Community law at the time, both courts would have given it short shrift. However, he sought to rely on the Advocate-General's opinion and the European Court's judgment on the reference in this case as "clarification" for the proposition that the very act of overpayment created in Community law an immediate right to repayment, regardless of when it was claimed, and sought permission to rely upon it as a further ground of appeal at this stage.
79. The European Court's "clarification" of the law upon which Mr. Milne relied is to be found in paragraphs 30, 36, 37, 40 and 46 of its judgment (see paragraph 80 below) to the effect that the existence of a Community law right to repayment of overpaid tax does not depend on whether it is exercised by way of a claim. That proposition is of particular importance in this case, where the claim by Marks & Spencer is for overpaid tax under section 80, subsection (2) of which provides:

"The Commissioners shall only be liable to repay an amount under this section on a claim made being made for the purpose."

80. The European Court, adopting similar reasoning to that of the Advocate General in paragraphs 49 to 52, 62, 68 and 69 of his Opinion, expressed the proposition upon which Mr. Milne relied in the following paragraphs of its judgment, some of which, for convenience, I repeat with my own emphases, from paragraph 40 above:

"30 According to well-established case law, the right to obtain a refund of charges levied in a member state in breach of rules of Community law is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the court. …."

"36. …national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the court has held that legislation which is not in fact retrospective in scope complies with that condition."

"37. … that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time limit is to apply immediately to all claims made after the date of enactment of that legislation …"

"40. Accordingly, legislation such as that at issue in the main proceedings, the retroactive effect of which deprives individuals of any possibility of exercising a right which they previously enjoyed with regard to repayment of VAT collected in breach of provisions of the Sixth Directive with direct effect must be held to be incompatible with the principle of effectiveness."

"46. Likewise, in a situation such as that in the main proceedings, the principle of the protection of legitimate expectations applies so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of provisions in the Sixth Directive with direct effect." [my emphases]

81. The Commissioners, apart from their main contention that Marks & Spencer had no such accrued and directly enforceable Community law right to zero-rating, have two short replies to Mr. Milne's argument. First, they say that if there were such a right enforceable notwithstanding the delay, Marks & Spencer would not be entitled to assert it so as unjustly to enrich itself. Second, they maintain that Marks & Spencer could not have been entitled to claim under the previous statutory regime for more than an "adequate period" after the introduction of the unjust enrichment defence on 1^st January 1990, and that that claim, first made in 1995, was well out of time.
82. As to the first of those replies, Mr. Lasok relied on the following passage from the judgment of the European Court in Cases C-192/95 to C-218/95, Comateb v. Directeur General des Douanes et Droits Indirects [1997] ECR I-165, at paras 20-23 of the judgment:

"20…. entitlement to the repayment of charges levied by a Member State in breach of Community law is a consequence of, and an adjunct to, the right conferred on individuals by the Community provisions prohibiting such charges. The Member State is therefore in principle required to repay charges levied in breach of Community law.

21. There is, however, an exception to that principle. ,… the protection of the rights so guaranteed by the Community legal order does not require repayment of taxes, charges and duties levied in breach of Community law where it is established that the person required to pay such charges has actually passed them on to other persons.

22. In such circumstances, the burden of the charge levied but not due has been borne not by the trader, but by the purchaser to whom the cost has been passed on. Therefore, to repay the trader the amount of the charge already received from the purchaser would be tantamount to paying him twice over, which may be described as unjust enrichment, whilst in no way remedying the consequences for the purchaser of the illegality of the charge."

83. Whilst it is true, as Mr. Milne pointed out, the Court made those observations in the context of a ruling that Member States were entitled to introduce an unjust enrichment defence, they also serve, as Mr. Lasok said, to indicate the scope or limit of a Community law right to repayment of overpaid tax, namely that it should not entitle taxpayers to double recovery. He added, in reliance on those passages and also on observations of the Court in Case 199/82, Amministrazione delle Finanze dello Stato v. Spa San Giorgio [1983] ECR I-3595, at 3612-7, paras 11-13., that the unjust enrichment principle has been "lurking" in Community law for some time.

Conclusions

84. If, contrary to the First Court of Appeal's ruling and my view, Marks & Spencer were able to satisfy the second as well as the first Becker condition, or to establish a directly enforceable right on some other Community law basis in relation to the teacakes claim, I consider that we would be entitled to re-open this issue in the light of the European Court's reasoning on the reference, and would hold that the existence of the right does not depend on its exercise by way of a claim. Certainly, that is how the Court itself expressed the matter in paragraphs 30, 36, 37, 40 and 46 of its judgment. Any other interpretation would be absurd in a context in which a court has to consider whether a national law purporting to curtail a directly enforceable Community law right by limiting the time in which it may be claimed is incompatible with the existence of the right. The Advocate General's more explicit observations to that effect in paras 49 to 52, 62, 68 and 69 of his Opinion make exactly the same point. Such an approach is reassuringly of a piece with our common law principle that overpaid tax is prima facie recoverable by the taxpayer as of right immediately after it was paid, as money had and received; see Woolwich Equitable Building Society.
85. However, as to the first of the Commissioners' contingent responses on this issue, I do not consider that Marks & Spencer could argue, on the strength of a claim to an accrued right to repayment of overpaid tax, that it could not be countered, where appropriate on the facts, with a defence of unjust enrichment. That would amount to an assertion of a right to be unjustly enriched, as distinct from a right, which the taxpayer has, under domestic law to challenge the fact of such enrichment; see Comateb, paras 21- 23; and Joined Cases C – 441/98 and 442/98, Kapniki Mikhailidis AE v. IKA [2000] ECR I-7145, paras 30 –33. And, as to the second response of the Commissioners, there is force in Mr. Lasok's point that Marks & Spencer's 1995 claim in respect of the teacakes was made some five years after the introduction of the defence of unjust enrichment, well outside what might be regarded as an adequate transitional period for making back claims. In short, even if, contrary to my view, Marks & Spencer had satisfied the second Becker condition in relation to the teacakes claim, I consider that both or either of Mr. Lasok's arguments would have been an answer to it.

5) Teacakes - the unjust enrichment defence and fiscal neutrality

86. Marks & Spencer's second answer to the Commissioner's contingent reliance on the unjust enrichment defence to the teacakes claim is that it is discriminatory, having effect in this context in the different and legally unjustifiable treatment of two comparable sets of VAT registered traders, "payment traders" and "repayment traders". Given such effect, it maintains that the defence is incompatible with Community law principles of fiscal neutrality and equal treatment.
87. As Schiemann LJ explained in his judgment, at page 39h, in any particular accounting period there are payment traders, namely those whose output tax exceeds their input tax and who, therefore, pay tax for that period; and there are repayment traders, those whose input tax exceeds their output tax and are, therefore, entitled to reclaim tax for that period. The starting point for consideration of this issue is section 80(1) of the 1994 Act, which I have set out in paragraph 15 above, but which, for convenience, I repeat here:

"80(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him."

The machinery created by section 80 in this provision, and which, in section 80(3), also gives the Commissioners the unjust enrichment defence to claims under it, clearly provides for recovery of overpaid tax as a result of overstated output tax. On the Commissioners' argument, but contrary to Neuberger J's ruling in the University of Sussex appeal (see paragraphs 127(1) and 146-148 below), it also provides for recovery of overpaid tax as a result of under-claimed input tax.

88. The Commissioners appear to operate separate repayment regimes according to whether the claimant was a payment or repayment trader and to confine the application of section 80 to those who in any accounting period are payment traders. Claims of repayment traders, either as a result of wrongly included output tax and/or wrongly under-claimed input tax, are not treated as claims for overpayment of tax under section 80(1) - because none has been paid. They are treated respectively as a correction of an error under regulation 35 of the VAT Regulations 1995 or as a "late" claim for input tax under regulation 29 (1) (see paragraph 16 above).
89. The potential difference arises because the defence of unjust enrichment applies only to claims for overpayments under section 80(3) of the 1994 Act. In respect of claims by payment traders under section 80, the defence of unjust enrichment was introduced from 1^st January 1990, originally as section 24(3) of the 1989 Act. And, in respect of claims by repayment traders not amounting to, or treated by the Commissioners as amounting to, claims for overpaid tax under section 80, there was and still is no provision for a defence of unjust enrichment.
90. Marks & Spencer maintains, in reliance on this differential treatment of taxpayers, according to whether they are payment or repayment traders, that United Kingdom law unfairly discriminates between them so as to breach the Community principle of fiscal neutrality. It is common ground that the defence, if the Commissioners need and are entitled to rely on it, applies to Marks & Spencer, which was a payment trader for all or most of the material period. The questions are whether it also applied to repayment traders with which Marks & Spencer was in competition at the material time and, if not, whether its application to Marks & Spencer as a payment trader unfairly discriminated against it so as to breach the Community principle of fiscal neutrality.
91. Moses J., at first instance and in the context of the different timing of the introduction of the three year limitation periods under section 80 and regulation 29 respectively, identified, at page 233f of his judgment, the distinction between a payment trader and a repayment trader. He said that it was no more than a distinction between a trader whose output tax exceeds its input tax in an accounting period and one whose input tax exceeds its output tax. He added that there was otherwise no economic distinction between them. However, after setting out the legislation, he followed the Tribunal in holding that, because the legislative procedures for reimbursement of overpaid tax for payment and repayment traders was different, the operation of the three year limitation period did not unfairly discriminate between them. He, said at page 234a:

"It seems to me, from this analysis of the legislation, that no comparison can properly be made between payment traders and repayment traders. An erroneous excessive calculation of the VAT chargeable affects the position of one whose output tax exceeds input tax in a different way. That trader must make a claim based on s. 80 of the VATA 1994. The repayment trader, on the other hand, will not have received that which is due to him from the Commissioners in an earlier period and his position is regulated within the legislative regime founded upon the Sixth Directive itself. Marks and Spencer happens to have been in the position of a payment trader because the majority of its sales are not of food but rather of clothing, which, apart from young children's clothing, attracts VAT. Its major competitors have, hitherto, been far more widely concerned in the sale of food which does not attract VAT …. The position has already changed and many of Marks and Spencer's rivals now have to make payment returns due to the change in the nature of their business. Thus, although I accept, that both payment and repayment traders who have overpaid tax seek reimbursement and the economic effects of such reimbursement will be the same, in my judgment they are governed by different legislative procedures because their position is distinct within the VAT regime. For those reasons, I reject the assertion that the three-year cap discriminates unfairly between payment and repayment traders." [my emphasis]

92. The point was considered by the first Court of Appeal, but only as to the early vouchers claim - because it considered it the only candidate for a directly enforceable Community law right - and even then only inconclusively (see pages 39d, 39j and 40a). The Court appears to have accepted that United Kingdom law, in its procedures for repayment, did treat them differently, but regarded it as unclear whether that difference was compatible with the Community law principle of fiscal neutrality or equality. No doubt and for the same reasons, it would have been equally inconclusive on the issue in relation to the later vouchers and to the corresponding issue in the context of the unjust enrichment in the teacakes claim if it had considered necessary to discuss them, given its rulings against Marks & Spencer on those claims. For the same reason, it was not part of the reference to the European Court, and the Court did not deal with it or say anything that might bear upon it.
93. There is thus no decision of the first Court of Appeal on the point of principle of discrimination as between payment and repayment traders, either in the context of differential introduction of the limitation period or as to the availability of the defence of unjust enrichment against the former but not the latter. If the point were critical to our decision on the teacakes claim, it would be necessary to reach a decision on it or consider a further reference to the European Court - not leave it undecided as the first Court of Appeal felt able to do in relation to the vouchers and, sub silentio, the teacakes claim. However, if I am right in my view that Marks & Spencer has no directly enforceable Community law right in support of the teacakes claim, the point still does not call for determination on this resumption of the appeal.
94. Nevertheless, in deference to counsel's careful submissions on the point, and because it also requires consideration, in the context of "late" claims for input tax, in the University of Sussex case, I should say a little about the competing arguments of principle, and venture a general view on its contingent impact on the defence of unjust enrichment in this case.
95. As to the facts, Schiemann LJ noted, at page 39h, that Marks and Spencer was a payment trader for all of the early vouchers period and for most of the rest and that most, if not all, of its competitors were repayment traders over the same period. Relevantly to our consideration of the teacakes claim, he said, at page 41j, that he did not regard the law as clear on the point. However, as to the vouchers claim (only the early part of which the first Court of Appeal considered to be still in play), he added that it was not necessary to decide the point because there was no evidence to show that any repayment traders in competition with Marks & Spencer had in fact made any such claims so as to secure differential treatment. Equally, although the Court did not comment on it, there appears to have been no evidence of any such differential treatment in relation to teacakes. It is seemingly common ground that at least one of Marks & Spencer's major competitors, Tesco, was a repayment trader over at least some of the material period, though Marks & Spencer made no claim that Tesco had been unjustly enriched by securing double recovery. But, arguably, it is unnecessary to show actual or potential unfair discrimination on the facts, since a law that is capable of unfairly discriminating between two categories of trader is of itself unenforceable as a matter of Community law.
96. As to the law, Mr. Milne submitted that in the case of teacakes the factual position as to repayment claims by rivals was different from that in the case of vouchers and that, subject to direct enforceability under Community law of the teacakes claim, the issue called for resolution. He said that, though the issue could properly be the subject of a further reference, the incompatibility with Community law of our regime, distinguishing between payment and repayment traders in this respect is sufficiently plain for this Court to be able to resolve it itself. He added that, as with the vouchers claims, so with the teacakes claim, a domestic law discriminating between two categories of traders so as to infringe principles of fiscal neutrality and equal treatment is ipso facto unenforceable and that, therefore, Marks & Spencer was not required to adduce evidence of competitors having secured an advantage as a result of such discrimination.
97. On the issue of principle, Mr. Milne criticised the reasoning of Moses J. and that of the Commissioners, as circular in relying on the very difference in legislative procedures to justify the differential treatment of which Marks & Spencer complains. He also criticised the focus of their reasoning on the different procedural routes for repayment rather than on the breadth of the principle of fiscal neutrality as applied to economic activities of the same or a similar character. Whilst he acknowledged the legislative differences between output tax and input tax, he submitted that there is no justification in the Sixth Directive or anywhere else for different and discriminatory treatment of a claim for repayment or payment of money wrongly accounted for as output tax, depending purely upon whether, in a particular accounting period, a trader's output tax happens to exceed his input tax or vice versa. He maintained too that Moses J's interpretation or application to these circumstances of the principle of equal treatment does not accord with the case law of the European Court, which is that comparable situations may only be differentiated by reference to objective criteria.
98. Mr. Milne cited, as the first of two examples of that case law, Case C-330/91, R v. IRC, ex p. Commerzbank [1993] ECR I-1195, in which the European Court held that the fact that non-resident United Kingdom companies generally enjoyed a preferential tax treatment when compared with resident companies did not justify the United Kingdom depriving them of the right to repayment of overpaid tax with interest, whilst allowing it to resident companies; it was discriminatory. This is how the Court dealt with the issue at paragraphs 16 to 19 of its judgment:

"16 In order to justify the national provision at issue …the United Kingdom Government argues that, far from suffering discrimination under the United Kingdom tax rules, non-resident companies which are in Commerzbank's situation enjoy privileged treatment. They are exempt from tax normally payable by resident companies. In those circumstances, there is no discrimination with respect to repayment supplement: resident companies and non-resident companies are treated differently because, for the purposes of corporation tax, they are in different situations.

17. That argument cannot be upheld.

18. A national provision such as the one in question entails unequal treatment. Where a non-resident company is deprived of the right to repayment supplement on overpaid tax to which resident companies are always entitled, it is placed at a disadvantage by comparison with the latter.

19. The fact that the exemption from tax which gave rise to the refund was available only to non-resident companies cannot justify a rule of a general nature withholding the benefit. That rule is therefore discriminatory."

99. Mr. Milne's second example was Case C-330/95, Goldsmiths (Jewellery) Ltd. v. CCE [1996] STC 1073, a case concerning differential tax treatment for VAT refunds according to whether a transaction was for cash or by way of barter. The Court held that such different treatment was discriminatory, observing in paragraph 23 of its judgment that,

"[s]ince the two situations are, economically and commercially speaking, identical, the Sixth Directive treats the two kinds of consideration in the same way."

The Court, in so holding, applied the principle articulated by the Advocate General La Pergola in the same case, at paragraph 28 of his opinion, where he said that the principle of fiscal neutrality:

"… is intimately bound up with the principle of non-discrimination … Fiscal neutrality requires equal treatment for those different economic activities in order to avoid distortion of the more general VAT system caused by the drawing of unimportant unjustified distinctions."

See also Case C-111/92, Lange v. Finanzamt Furstenfeldbruck [1993] ECR I-4677; and Case C-283/95, Fischer v. Finanzamt Donaueschingenn [1998] STC 708.

100. Mr. Lasok's main response was that the argument is of no assistance to Marks & Spencer because it is based on the mistaken premise that it has a directly effective Community law right to zero-rating of its teacakes, a premise that is wrong for the reasons that he advanced, and with which, as I have said, I agree. However, he had two other substantial arguments against Mr. Milne's reliance on the different treatment of payment and repayment traders on the issue of compatibility of the defence of unjust enrichment with Community law principles of fiscal neutrality.
101. The first was that the principle of fiscal neutrality is not engaged since it is concerned with the tax treatment of similar activities and of taxable persons regardless of their country of residence or of origin, not with the method of reimbursing sums overpaid. He submitted that, as a matter of law and regardless of the Commissioners' extra-statutory concession, the different procedures for claims for repayment between payment and repayment traders did not engage the principle of fiscal neutrality so as to prevent the Commissioners from relying on the defence of unjust enrichment in the case of payment traders such as Marks & Spencer.
102. Second, Mr. Lasok submitted that, even if Marks & Spencer was able to show that the difference in treatment was discriminatory as between payment and repayment traders, it would not of itself make the Commissioners' unjust enrichment defence unlawful. It would be necessary to consider which of the two bases is the lawful one for aligning the treatment of payment and repayment traders. He submitted that, since the rationale of the unjust enrichment defence is to eliminate double recovery by the taxpayer of the tax, any unlawfulness would lie in the failure to apply the defence to repayment traders, a circumstance that could not justify not applying it to payment traders.
103. If, contrary to my view, Marks & Spencer did have a directly enforceable Community law right to zero-rating of its teacakes, I would hold that section 80, including sub-section (3), applies only to payment traders at the time of the overpayment in respect of which the claim is made, and then only when the claim is for previously overstated output tax. (I agree with Neuberger J. in the University of Sussex appeal that, where the claim is for previously unclaimed or under-claimed input tax, it falls to be dealt with quite separately under regulation 29(1) (see paragraphs 110 and 146-152 below)). It follows that, as between payment traders and repayment traders, there would be a possibility, either in law or in the way the Commissioners deal with claims, of unjust enrichment of the latter through double recovery. In such a circumstance I would hold that the provisions are capable of discriminating against claims by payment traders under section 80, where the defence of unjust enrichment is available - as against claims by repayment traders, where it would not be available - and would, therefore, be incompatible with Community law. In my view, the reasoning of the European Court in the Commerzbank and Goldsmiths cases is to outlaw discriminatory treatment in the burden of tax as between similar economic activities and not to permit it by reference to matters that do not affect the nature or substance of those activities, such as the non-resident status of the tax payer in Commerzbank, or the form of consideration for transactions as in Goldsmiths, or procedural routes to repayment of overpaid tax according to the pattern of trading in any particular accounting period, as here.
104. However, I consider that there is force in Mr. Lasok's second, pragmatic point that it is questionable whether, even if Marks & Spencer had a directly enforceable Community law right in respect of the teacakes claim and a sound challenge to the compatibility with Community law of the unjust enrichment defence based on its discriminatory effect against payment traders, the prevention of double recovery at which that defence is aimed would require its application to both rather than its non-application to one.

Summary of conclusions on the Marks & Spencer claims

105. In summary:

1) As to the later vouchers claim, I would rule, in the light of the European Court's ruling on the reference (and regardless of the Commissioner's extra-statutory concession), that: (a) Marks & Spencer has a directly enforceable Community law right to recover the overpaid tax; (b) that it has a corresponding entitlement not to have that right curtailed by the introduction of a retrospective time limit on claims without adequate transitional arrangements; and (c) the Court should re-open that part of Marks & Spencer's appeal to correct the first Court of Appeal's decision on it.

2) As to the teacakes claim, I would rule that, for want of satisfaction of the second Becker condition on which, in any event, we cannot go behind the first Court of Appeal's ruling, there is no directly enforceable Community law right to which the European Court's reasoning in the reference can apply so as to render the retrospective curtailment of the right to claim repayment incompatible with Community law.

3) If, contrary to the first Court of Appeal's ruling and my view, Marks & Spencer were able to establish a directly enforceable Community law claim to zero-rating of its teacakes, I would hold held that we would be entitled to re-open the issue in the light of that part of the European Court's reasoning on the reference that identified the existence of a right to repayment of overpaid tax independently of its exercise by way of a claim. But I would also hold that: (a) though the defence of unjust enrichment could operate in a discriminatory way as between payment and repayment traders where the overpayment resulted from, inter alia, failure to zero-rate outputs, its incompatibility with Community law would lie in its non-application repayment traders, not in its application to payment traders; and (b) in any event, the claim would be barred under the new time limit because it was made well outside an adequate period after its introduction.

106. Accordingly, I would allow Marks & Spencer's appeal as to the entirety of the vouchers claim, but not in respect of any of the teacakes claim.
The University of Sussex
107. This is an appeal by the Commissioners of Customs & Excise against the judgment of Neuberger J. of 10^th October 2001 holding that the Commissioners had unlawfully rejected the University of Sussex's claim for repayment of sums on account of input tax that the University had deliberately not claimed for many years. The matter came before him by way of the University's appeal from a decision of a VAT and Duties Tribunal dismissing its appeal against the Commissioners' rejection of its claim.
108. This appeal concerns the right to deduct input tax, for which Title XI of the Sixth Directive, under the heading "Deductions", makes provision. In summary, it states in Article 17 that the right to deduct arises when the input tax becomes chargeable to the taxpayer, that is, at the time of the supply to him. And it sets out in Articles 18 and following Articles when and how he can deduct it and also provision for later adjustments. In the barest outline, it requires the taxpayer to claim the input tax against his output tax in respect of, and at the end, of each accounting period; and it requires Member States to determine conditions and procedure for, inter alia, claiming it at a later date. I now look in a little more detail at those provisions and those of the 1994 Act and 1995 Regulations implementing them.
109. The main issues in the appeal arise out of the introduction for the first time, in May 1997, by the insertion of regulation 29(1A) into the 1995 Regulations, of a retrospective time limit for claims to deduct previously unclaimed input tax. It followed the substitution with effect from July 1996 of three years for the previous six-year retrospective time limit for claims for overpaid VAT in section 80(4) of the 1994 Act (see paragraphs 15 and 16 above). The three-year retrospective time limit for input claims introduced ten months later in May 1997 by regulation 29(1A) post-dated by some five months the University's claim, which it made in November 1996. It should be noted that the manner of introduction of the new limitation period in regulation 29(1A) for input claims differed from that for "overpaid tax" under section 80(4) in that taxpayers were given several months advance notice of the change, enabling them to present claims, as the University did, without limit of time before it took effect.
110. The first main issue ("the output/input issue") is whether the "late" input claim was for "overpaid" VAT under section 80 or for deduction of input tax under regulation 29, not also amounting to a claim for overpaid VAT under section 80. If it was purely a regulation 29 claim, no question arises as to the curtailment of a directly enforceable Community law right to repayment of overpaid tax as a result of the introduction of the retrospective time limit in the new section 80(4), which was the main subject of the European Court's ruling on the Marks & Spencer reference. If, on the other hand, it was a section 80 claim, similar questions arise to those in the Marks & Spencer appeal as to whether the claim is directly enforceable in Community law and, if so, whether the more rigorous retrospective time limit introduced by the new section 80(4) is compatible with Community law.

Community and United Kingdom legislation

111. Article 17, the first Article in Title XI of the Sixth Directive, under the heading "Origin and scope of the right to deduct", provides in paragraphs 1 and 5, so far as material:

"1.The right to deduct shall arise at the time when the deductible tax becomes chargeable."

"5. As regards goods and services to be used by a taxable person … in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transaction.

112. Article 18, headed "Rules governing the exercise of the right to deduct", provides, so far as material:

"2. The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1 [which, identifies what a taxable person must do in order to exercise the right of deduction] …

3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2. …

4.Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine."

113. Article 19 provides for provisional calculation of the attributable input tax, that is, the deductible proportion under Article 17.5, and on the basis of the preceding year's transactions. Article 19.3 states:

"The provisional proportion for a year shall be that calculated on the basis of the preceding year's transactions. … Deductions made on the basis of such provisional proportion shall be adjusted when the final proportion is fixed during the next year."

114. Article 20, under the heading "Adjustments of deductions" provides:

"1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

"(a) where that deduction was higher or lower than that to which the taxable person was entitled; …."

115. Article 22, headed "Obligations under the internal system", provides, in paragraph 4(a) that "[e]very taxable person shall submit a return by a deadline to be determined by Member States … not more than two months later than the end of each tax period", such period to be fixed by each Member State but not to exceed one year. And, in paragraph 4(b), it provides that taxable persons must submit a return for each tax period, which must set out all information needed to calculate the tax that has become chargeable and the deductions to be made, and states in paragraphs 5 and 6:

"5. Every taxable person shall pay the net amount of the value of the value added tax when submitting the regular return. … .

"6(a) Member States may require a taxable person to submit a statement, including all the particulars specified in paragraph 4, concerning all transactions carried out in the preceding year. That statement shall provide all the information necessary for any adjustments." [my emphasis]

116. Mr. Lasok's description of the scheme based on those provisions was that, reading Article 18.2 together with Article 22.4 and 5, the Directive envisages that, under its "normal working", the correct tax payable in any given tax period is the difference between the output tax and the input tax for that period. However, as Article 18.3 and 4 and Article 20 contemplate, it also permits Member States to provide for the making by taxpayers of deductions outside the tax period to which it relates and for adjustments of the initial deduction claimed.
117. The United Kingdom domestic legislation, in the 1994 Act, follows the scheme of the Directive. By section 25(1), it requires a taxable person to account for and pay VAT by reference to prescribed accounting periods, and by section 25(2) he is "entitled" at the end of each such period to "credit" for his allowable input tax and, subject to section 25(6), "then to deduct that amount from any input tax … due from him". Section 25(6), as provided by Articles 18 and 22.4 of the Sixth Directive, requires a taxpayer to exercise his right of deduction or VAT "credit" of allowable input tax, that is, the amount attributable to supplies in respect of which it is allowable under section 26(1), by claiming it "in such manner and at such time as may determined by or under regulations". As these are important provisions in this appeal, I set out section 25(2) and (6) so far as they are material:

"(2) Subject to the provisions of this section, he [i.e. a taxable person] is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him."

"(6) A deduction under subsection (2) above and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations; …"

118. When the University made its claim in November 1996 to deduct the input tax in issue in this appeal, regulation 29(1) of the 1995 Regulations required taxpayers, subject to the Commissioners' power by direction to permit later claims and to certain restrictions, to claim the deduction on their returns for the accounting period in which the VAT became chargeable. One of those restrictions was to be the three-year time limit bar introduced, with effect from May 1997, of regulation 29(1A). Those two provisions, which for convenience I set out again here, read as follows:

"29(1) Subject to the paragraphs (1A) … below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable. [my emphasis]

29(1A) The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made."

119. I should also refer, in this context, to regulations 32(1) - (4) and regulation 39. Regulation 32(1) – (4) provide, so far as material:

"(1) Every taxable person shall keep and maintain, in accordance with this regulation, an account to be known as the VAT account.

(2) The VAT account shall be divided into separate parts relating to the prescribed accounting periods of the taxable person and each such part shall be further divided into 2 portions to be known as 'the VAT payable portion' and 'the VAT allowable portion.

(3) The VAT payable portion for each prescribed accounting period shall comprise – (a) a total of the output tax due from the taxable person for that period, …

The VAT allowable portion for each prescribed period shall comprise – (a) a total of the input tax allowable to the taxable person for that period by virtue of section 26 of the Act, …"

120. Regulation 39 is concerned with the calculation of amounts on a return, and regulation 39(2) and (3) requires entry on it of the aggregates of all the entries in the VAT payable and allowable portions respectively of that part of the VAT account for the prescribed accounting period for which the return is made.
121. Quite apart from the difference between the terms of section 80(4) and regulation 29(1A) as to the immediacy of their retrospective effect, the two regimes for which they respectively provide differ in other important respects. First, under section 80, the taxpayer is entitled to repayment of overpaid tax subject to satisfaction of the provision's requirements. Whereas, under regulation 29, the Commissioners had a discretion whether to accept a late claim for input tax, that is one made in an accounting period after which it became chargeable. Second, the retrospective three-year limitation period in section 80(4) took effect from July 1996; that under regulation 29 took effect, ten months later, in May 1997. Third, under section 80, there had previously been a statutory limitation period of six years before the making of the claim; whereas for claims under regulation 29, there had been no statutory time bar.

The facts

122. The University has been a registered trader for VAT purposes in respect of its taxable supplies since the inception of the tax on 1^st April 1973. Most of its own supplies have been and are exempt and so not chargeable to output tax. It used some of the supplies bearing VAT that it received, in part for making taxable supplies and in part in making exempt supplies, only those used for the former purpose being deductible from its output tax. As a registered trader the University was obliged to account to the Commissioners for VAT in respect of every accounting period. It duly submitted VAT returns and accounted for the tax in respect of quarterly prescribed accounting periods from 1973 to 1996. In each period it claimed credit for input tax, deducted that amount from the output tax on the taxable outputs made by it and accounted to the Commissioners for the balance. In most of the accounting periods in question, and on the basis of its VAT returns, its output tax exceeded its input tax. and accordingly, it made payments to the Commissioners by way of VAT.
123. The issue has arisen because from the early 1970s the University, with the knowledge and agreement of the Commissioners, deliberately did not claim all the allowable input tax on its periodic returns. So, its returns and payments made to the Commissioners reflected part only of the input tax that it could have deducted. It thus paid more tax than it need have done. In the early years there were two reasons for the University's decision not to claim input tax to which it was entitled. First, the formula under which universities were publicly funded in those days enabled them to recover, in enhanced grants, sums that could otherwise have been claimed as input tax. Second, the formula then applied to the calculation of input tax attributable to its taxable outputs ("attributable input tax"), pursuant to Articles 17.5 and 19 of the Sixth Directive (see paragraphs 109 and 111 above), was so restrictive as to reduce to very low levels the amounts that they were allowed to deduct in respect of input tax. As the years passed, these circumstances changed so as to make it worthwhile for universities to claim their full entitlement to attributable input tax.
124. In the mid 1990s the University resolved to claim the input tax that, for those, albeit diminishing, reasons, it had not claimed since the inception of VAT in 1973. It made its first claim by letter of 25^th November 1996, basing it on its understatements of input tax in each of the relevant accounting periods over the twenty three-year period. The Commissioners, who treated the claim as made under section 80, not under regulation 29, rejected the claim to the extent that it related to payments for periods more than three years before the claim had been made, relying on the limitation period of three years for which section 80(4) of the 1994 Act, as amended in 1997, had provided with retrospective effect from 18^th July 1996, in respect of any sum "by way of VAT which was not VAT due to them". The main battleground for much of this litigation has been whether the University's claim fell within that provision.
125. The Commissioners maintained that it did fall within section 80 because, in the case of a payment trader, as the University mostly was, it was a claim for repayment of VAT overpaid, albeit that the claim only arose for want of a claim for the full amount of allowable input tax. And they contended that, by reason of section 80(2) and (7) (see paragraph 15 above), which provided that they were only liable to make repayment under the section "on a claim being made for the purpose", that liability first arose when the University made its claim in November 1996, that is, some five months after the new section 80(4) time limit took effect, and was thus barred in respect of any sums included in it that could have been claimed more than three years earlier. The University contended before the Tribunal that its claim was under regulation 29 and not within the scope of section 80(1) and in the alternative argued that it could not be retrospectively deprived of its right under Articles 17 and 18 to repayment without prior notice. The Tribunal, accepting the Commissioners' submission that the University's claim was within the scope of section 80, held that the Commissioners were entitled to refuse to meet the bulk of the claim in reliance on the new, shorter three year limitation period. When the matter reached Neuberger J. the University claimed that a section 80 claim for overpaid VAT had a narrower meaning than the one which it had been content to accept before the Tribunal. It maintained that it could only relate to a claim for overpaid output tax, not one arising, inter alia, as a result of unclaimed input tax, and that its claim, therefore, fell within the regulation 29 regime and, because of its timing, was not subject to that regime's new three-year time limit either. In the light of Neuberger's J's ruling in favour of the University, the Commissioners paid to the University the whole of its claim, that is, extending to unclaimed input tax back to 1973.
126. Mr. Lasok said that, if the University's claim is a section 80 claim, in the light of the European Court's judgment on the Marks & Spencer reference, it is caught by the three-year limitation period insofar as it is based on domestic law and by the previous six-year period if and insofar as it is based on a directly effective right under the Sixth VAT Directive and if made within an adequate period running from 4^th December 1996. However, he maintained that the difference in those positions ceased to be relevant after the Commissioners' issue of their Business Brief in August 2002 (see paragraph 34 above) and their indication in correspondence with the University that, even if they are successful on this appeal, they will not seek repayment of the sums relating to the six-year period before the University made its section 80 claim. He said that, if the claim is within section 80 of the 1994 Act, the University retains only the amount reflecting overpayments made in the six years preceding its claim, but if the claim falls within regulation 29, the University is entitled to the whole of its claim.

Neuberger J.

127. The University's primary argument before Neuberger J. was, therefore, that its claim for previously under-claimed input tax was an "input claim" within a separate regime provided by regulations 29(1). Under that regime the University's claim was not barred, since, properly regarded, it was a claim for adjustment of previous under-claims under Articles 18 and 20 of the Directive, and had been presented before the new time limit took effect in May 1997. The University also argued, in the alternative, that if it was a section 80 claim for overpaid tax, the retrospective time limit, in the way in which it was imposed without transitional arrangements, infringed its vested Community law right, derived from a directly enforceable entitlement under Article 17 of the Sixth Directive to claim deduction of input tax from the time it became chargeable.
128. Neuberger J. upheld the University's contention that the claim was a regulation 29(1) claim and, therefore, within time, but said that he would have referred the second, Community law, issue to the European Court if he had been of the view that it was governed by section 80. In a little more detail, the Judge held that:

1) the University's claim for repayment of input tax that it had not claimed from 1973 fell within regulation 29, not under section 80, because, on his view, the right to deduct input tax in respect of any accounting period only arises when a taxpayer exercises his right to deduct [sic] and, therefore, that an omission to deduct, whether or not deliberate, did not amount to an overpayment of VAT (paragraphs 73 and 76 of his judgment);

2) it was not, therefore, subject to the time bar under section 80 or, at the material time, to any time bar under the Regulations (paragraph 74);

3) the Commissioners were not entitled to reject to the claim, either on the basis of an unfettered discretion whether or not to accept it or because it was not made in the form in which it should have been made (paragraphs 76-81);

4) if the claim had been within section 80 as well as, or instead of regulation 29, it would have been effectively invalid by reason of the time bar in section 80(4) (paragraphs. 46 and 98.3);

5) if, as he had ruled, the claim was governed by regulation 29, but that, contrary to his view, that provision entitled the Commissioners to reject a late claim, he would have referred the issue to the ECJ ... paragraph 82)

6) similarly, if, contrary to his view, the claim was governed by section 80, he would have referred to the ECJ the question whether the retrospective introduction of the time bar in section 80(4) without any transitional provision was lawful under EC law (paragraph 83); and

7) if, contrary to his view, the claim was governed by section 80, there was no evidence to show that indirect state aid resulting from the consequential differential in time limits for late claims as between payment and repayment traders amounted to unlawful state aid and that, even if it had, it would not support the University's claim to impeach the time limit in section 80(4) (paragraphs 87-97).

The issues

129. Put at its broadest, the difference between the Commissioners and the University is whether, as the Commissioners contend, United Kingdom law consistently with Community law has as its objective, tax neutrality in respect of each accounting period, or, as the University maintains, that objective, though primary, may be satisfied over the span of a number of accounting periods. As I have already indicated, this may be further broken down into two main issues: first, the output/input issue, namely whether the claim is governed by section 80 or solely by regulation 29; and second, if it is governed by section 80, the legality as a matter of Community law of the retrospective curtailment of the right to recover overpaid tax.
130. Before this Court, Mr Lasok submitted that: 1) the University's input claim fell within section 80 of the 1994 Act, not regulation 29; 2) even it fell within regulation 29 as well as amounting to a claim for overpaid VAT under section 80, it was, by virtue of section 80(7) (see paragraph 15 above), governed by section 80; 3) therefore, the November 1996 claim was caught by the new retrospective three-year time limit in section 80(4) which took effect in July 1996; 4) the claim, whether regarded as a section 80 or a regulation 29 claim was not in respect of a directly enforceable Community law right; and 5) the University could not, therefore, pray in aid the European Court's ruling on the Marks & Spencer reference to argue its incompatibility with Community law because it had not been introduced with adequate transitional arrangements.
131. Mr. Cordara maintained, as he did successfully to Neuberger J., that the claim was a regulation 29 claim and was thus not touched by its time-bar introduced in May 1997, some five months after the University's claim. But, if this Court was to take a different view on that issue, he maintained that the University's right to claim previously unclaimed input tax ran from the end of the accounting period in which the right arose, not from its exercise by way of a claim, that it was, therefore, an accrued and directly enforceable Community law right of which, in the light of the judgment of the European Court on the Marks & Spencer reference, it could not be deprived by the introduction of a retrospective time limit without adequate transitional arrangements. Finally, he argued, still against the possibility that the claim is caught by section 80, that the differential time limits for the two regimes constitutes unlawful state aid affecting inter-state trade in that it favours repayment traders against payment traders.
132. There are thus five main issues in the appeal, all arising from the central issue whether there are, and, if so, the effect of, different time limits for "output" and "input" claims, because of the different dates of inception, July 1996 for section 80 claims and May 1997 for regulation 29 claims, of the new retrospective three-year time limit for repayment of VAT.

1) the output/input point – whether the University's claim in respect of formerly unclaimed input tax is a section 80 claim, thus engaging the retrospective time bar there provided or a regulation 29 claim, or both;

2) whether Neuberger J. was entitled to rule that the Commissioners should have accepted the University's claim under regulation 29(1), given that the Commissioners have a discretion under that provision whether and in what circumstances to accept such claims and that they had not had an opportunity to consider the exercise of that discretion;

3) the vested rights and direct enforceability point - whether, even if the University's claim had fallen within section 80, regardless of the basis of the University's claim, it had vested and directly enforceable rights under Articles 17 – 20 of the Sixth Directive before the introduction of the respective new retrospective limitation periods so that the consequent curtailment of the exercise of those rights contravened Community law;

4) whether, if the claim fell within section 80 and the retrospective three years limitation period is unlawful under Community law, its removal would leave the University with no limitation period at all, so that it could recover the whole of its claim dating back to 1973, or only that arising within the six-year period from the date of its claim in November 1996; and

5) the unlawful state aid point – whether the fact that there are many universities whose late input claims would not be caught by the section 80 time bar has the effect that it operates as an illegitimate state aid?

1) The output/input point

133. As to the first issue, whether this was a section 80 claim, Mr Lasok reasoned that the University has successfully claimed back from the Commissioners sums that would not have been paid to them had the University not made a deliberate decision not to deduct certain amounts by way of input tax in its VAT returns between 1973 and 1996. As a result, the University paid more to the Commissioners by way of VAT over that period than would otherwise have been due. Accordingly, any claim for repayment of the overpaid tax falls within section 80 of the 1994 Act and is, therefore, subject to the condition in section 80(2) that the Commissioners are only liable to repay on a claim under the section for the purpose, and to that in section 80(4) that the overpayment fell within three years before the making of such a claim.
134. This issue is essentially a matter of construction of United Kingdom law, namely whether the University's claim in respect of its formerly unclaimed input tax is a section 80 claim and/or a regulation 29 claim. As Neuberger J. observed at paragraph 75 of his judgment, as a matter of Community law, in particular Articles 17 and 18 of the Sixth Directive, section 80(1) of the 1994 Act could have been framed so as to engage either of the approaches contended for. If the University's claim was only for repayment of overpaid tax under section 80, it was subject to the retrospective three-year limitation period from the making of the claim in November 1996, subject to the effect of Community law on the propriety of its introduction without adequate transitional arrangements. If it was or could be a claim in respect of under-claimed or unclaimed input tax under Regulation 29 of the 1995 Regulations, it was subject to a separate retrospective three-year limitation period, but in respect of which taxpayers had had adequate notice to make their claims before it came into effect, running, as regulation 29(1A) states, from "the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made".
135. Mr. Lasok prefaced his submissions on this and the third issue (vested rights and direct enforceability) by saying that the correct approach to interpretation of the legislation is to consider how the VAT system should have worked if the University had operated it "properly" rather than to resort, as he claimed Neuberger J did, to remedial provisions providing for malfunctioning of the system. He submitted that it is a section 80 claim since, although it was in respect of previously unclaimed input tax, it was, or was capable, of being a claim under section 80 for repayment of an amount "paid … to the Commissioners by way of VAT which was not due to them". That was because the University, in the absence of any directions or permissions from the Commissioners to the contrary, had a duty to account to them in the return for each accounting period for all the allowable input tax for that period. That was also the University's right, period by period, and the right did not depend on the exercise of it by claim. It was enough to constitute an overpayment of tax in respect of an accounting period that there had been a failure to deduct allowable input tax in that period – regardless of when the claim in respect of the input tax was made.
136. Mr. Lasok relied, in support of that analysis and submission, on certain of the provisions of the First and Sixth Directives and the scheme and terms of the 1994 Act and of the 1995 Regulations set out in paragraphs 111 to 120 above.
137. As to the Directives, he maintained that they apply the principles that the right to deduct input tax arises when it becomes chargeable and the duty to deduct it arises in each accounting period, namely from the output tax for that period (see in particular, Sixth Directive, Articles 17.1, 18.1 and 2; the requirement in Article 22.4(a) to submit returns on time; in Article 22(4) to include in them a calculation of the deductions to be made; and in Article 22.5 to pay the "net amount of the value added tax" (see paragraphs 110-114 above). He acknowledged that Article 18.3 enables Member States to permit deductions at later dates and thus, if a Member State so permits, that it is difficult to find a Community duty on a taxpayer to claim input tax promptly. But he maintained that United Kingdom legislation should nevertheless be interpreted so far as possible as to be consistent with those provisions. Article 18.3, he said, should be regarded merely as a remedial provision for any malfunctioning of the system, not as a basis for concluding, as Neuberger J has done in paragraphs 55 and 67 of his judgment, that Member States have a duty to provide for late claims, albeit subject to a discretion as to the manner of exercise of that duty.
138. As to the 1994 Act, he maintained that it was exactly the same in that, by sections 25(1) and (2) and 26(1) (see paragraph 116 above), a taxable person must account for and pay tax at the end of each accounting period by deducting the allowable input tax for that period from his output tax for that period.
139. As to the 1995 Regulations and their predecessors, he referred first to regulations 32(1) and (2) of the 1995 Regulations, which require every taxable person to keep and maintain a VAT account divided into separate parts relating to each prescribed accounting period, each part to be divided into the "the VAT payable portion" and "the VAT allowable portion", the latter setting out the "total" allowable input tax for the period in question (see paragraph 118 above). Second, he drew attention to regulation 39, which is concerned with calculation of amounts on a return, and to regulation 39(3) which requires entry on it of the aggregate of all the entries in the VAT allowable portion of that part of the VAT account that relates to the prescribed accounting period for which the return is made (see paragraph 120 above).
140. He maintained that those provisions are of a piece with the fundamental principle of "tax neutrality" in Articles 2 and 4 of the First VAT Directive underlying the VAT system, that VAT is chargeable on supplies after the deduction of the VAT borne by the various cost components of those supplies. Its effect was, he submitted, that the VAT for which a taxable person must account and pay for in each accounting period can only be established after taking into account his output tax on supplies made by him and the input tax attributable to those supplies. In that way – the normal working of the system – it would achieve its intended and proper aim of paying only that amount of tax properly due to the Commissioners at each link in the chain of transactions, including the end link where the tax falls to be paid by the final consumer. Any failure to account for input tax on the way removes the proportionality of the tax to price of the goods and services required by Articles 2 and 4 of the First VAT Directive, which he said, are still in force along with the more detailed provisions of the Sixth Directive and remain central to the approach of the European Court. He cited by way of example: Case 268/83 Rompelman v. Minister van Financien [1985] ECR 655; Joined Cases C-177/99 Ampafrance SA v. Directeur des Services Fisceaux de Maine-et-Loire (ECJ, unreported, 19^th September 2000), para 34 (input deduction ensures the neutrality of the tax); Case C-16/00 Cibo Participations SA v. Directeur Regional des Impots due Nord-Pas-de-Calais (ECJ, unreported, 27 September 2001).
141. In the result, he submitted that, consistently with Article 18.2 of the Sixth Directive and, in the absence of direction or permission by the Commissioners under regulation 29(1) to do otherwise, a taxpayer had both a right and a duty to exercise its entitlement to deduct allowable input tax by means of the VAT return for the accounting period in which VAT became chargeable. If it failed to do so – as the University did here – there was a malfunctioning of the system producing an overpayment to the Commissioners "by way of VAT which was not VAT due to them" under section 80(1) and was, therefore, subject to the time bar provided in section 80(4).
142. Mr. Cordara, for the University, prefaced his submissions with the imperative of identifying the nature of the tax and when it becomes due. This was his analysis. It is a tax on the ultimate consumer, not on the traders in the chain of supply to the ultimate consumer. Their role is to collect the tax and account for it to the Commissioners after setting off the tax paid to their respective suppliers, thus preserving the tax neutrality for them of the system. He submitted that the mechanics of the scheme are designed and have effect to preserve that tax neutrality rather than a "use it or lose it" discipline for which the Commissioners appeared to contend. Thus, the 1995 Act, consistently with Articles 10, 11 and 12 of the Sixth Directive (see paragraph 14 above), imposes the tax, as output tax, on the gross value of the supply at the time the taxpayer makes it, not on the net profit, having regard to inputs. He incurs a liability to account for that output tax in his quarterly return and to pay it, save and to the extent that he claims input tax in the return, a Community right provided by Article 17 (see paragraph 111 above) and implemented into United Kingdom law by sections 25 and 26 of the 1994 Act (see paragraph 117 above). Any under-claim by him, for whatever reason, increasing the balance of output payable and paid is not, submitted Mr. Cordara, "an amount" under section 80(1) "paid … by way of VAT which was not VAT due" because, unless and until claimed, it could not abate the output tax then "due".
143. Thus, Mr. Cordara submitted, the scheme of the Directives and the 1995 Act is that the taxpayer has a right, but not an obligation to claim to abate his output tax by input tax, a recognition, he maintained, of commercial reality. Traders, for one reason or another, may not be able to make or identify their input claims in the return for the period in which they arose, especially those on shorter than quarterly return periods and those where, as here, the calculation in respect of "non-attributable" input tax is not straightforward. Hence the mandatory provisions in Article 18.3 of the Sixth Directive to facilitate late input tax claims and in Article 19.3, expressly treating all claims in respect of non-attributable input tax as provisional, and in Article 20.1 for adjustment of deductions (see paragraphs 112-114 above)
144. Mr. Cordara submitted that, for those reasons and in keeping with the policy of the Directives to secure tax neutrality for traders in the chain of supply, Member States are obliged to provide a system for the payment of late claims and for later adjustments of claims, a policy that "does not evaporate after the end of the accounting period in which the input is incurred". He said that the right, which is derived from Article 17.1, namely a "right to deduct ... at the time when the deductible tax becomes chargeable" is the same whatever the trading circumstances in which it arises, and its existence does not depend upon or await the making of a claim for it. Thus, the form or lateness of a claim in respect of previously unclaimed input tax cannot affect its nature; in other words, the manner of its exercise, for which Article 18 provides, does not turn it from a claim for deduction of input tax under regulation 29(1) into a claim for overpaid output tax within section 80 any more than it does when a repayment trader becomes permanently or transiently a payment trader. It is merely an unexercised right until the taxpayer exercises it, as provided by sections 25 and 26 of the 1994 Act by making a claim within the period allowed or directed by the Commissioners under and subject to regulation 29(1), as held by Neuberger J.
145. In short, Mr. Cordara submitted, that if, in any accounting period, a taxpayer under-claims or makes no claim for input tax, his properly accounted for output tax is, in section 80(1) terms, "VAT due to" the Commissioners and is not affected by any subsequent claim he may make for under-claimed or unclaimed input tax. The claim is for a set-off against output tax for the accounting period giving rise to that output tax, not against output tax earlier accounted for and paid to the Commissioners.

Conclusions output/input point

146. As I have said, this is an issue of construction of United Kingdom domestic legislation, in particular section 25(2) and (6) of the 1994 Act (see paragraph 117 above) and one on which the European Court's judgment on the Marks & Spencer reference sheds no light. In my view, the Judge correctly accepted Mr. Cordara's analysis of the law.
147. It follows from Articles 22.4(a) and (b) and 22.5 of the Sixth Directive and section 25(2) and (6) of the 1994 Act, with which regulation 29(1) is also consistent, that VAT "due" and paid to the Commissioners in any accounting period under section 80 is the properly charged output for that period for which the taxpayer makes a return less what, if any sum, he claims by way of input tax in the same return. And, consistently with the nature of the right to deduct input tax granted and governed by Articles 17 and 18 of the Directive, the nature of the right given to the taxpayer by those provisions of the 1994 Act and the 1995 Regulations is essentially a right to a credit, which may be by way of a deduction or repayment depending on whether, in the relevant accounting period the taxpayer is a payment or repayment trader. The fact that, for whatever reason, he may not have claimed any or all the input tax to which he was entitled in that return, is no basis for asserting that the amount of tax accounted for and paid was pro rata "not due" so as make the payment an overpayment within the meaning of section 80. (In this connection, it should be noted that section 73 of the 1994 Act, which gives the Commissioners power to make assessments where taxpayers have failed to make returns, is clearly directed to securing payment of the tax, not to ensuring that they receive due credit for unclaimed inputs.) This conclusion does not depend on when the right to deduct accrued. The fact that there was in any accounting period an unexercised right to deduct input tax does not render part of the payment to the Commissioners for the period VAT which was not "due" for that period for the purpose of section 80, any more than it would if, contrary to the argument of both Mr. Lasok and Mr. Cordara, the right did not accrue until it was later claimed. That seems to have been the substance of Neuberger J's acceptance in paragraphs 63 and 68 of his judgment of Mr. Cordara's submissions on this issue, though he appears - through what must have been a slip in the early part of paragraph 63 - to have equated the accrual of the right to deduct input tax in respect of any period with the exercise of it.

"63. Ultimately, the most attractive way … in which the University puts its case is that there was, in fact, no overpayment during the 23 years in question. This is based on the contention that the right to deduct input tax in respect of any period only arises [sic] when the taxpayer exercises his right to deduct. This contention does not depend upon the argument that the University had an unqualified right to claim input at any time. It merely involves saying that, if a taxpayer makes a late, but valid, claim for input tax, which should primarily have been entered in an earlier return, then the claim takes effect in accordance with its terms, and that payment of VAT in accordance with the earlier return involved no overpayment, in other words, although the taxpayer could have paid less VAT pursuant to the earlier return if he had claimed all his input tax, that fact does not render any of the VAT so paid "VAT [not] due to the Commissioners."

148. Neuberger J, in paragraphs 64 to 67 of his judgment, found support for his acceptance of that approach in Articles 17, 18 and 20 of the Sixth Directive, notably in their conferment of a right to claim input tax in respect of each accounting period, but not the imposition of an unqualified obligation to exercise it then or at all, nor to confinement of the right to reduce the output tax for the period in which it, the input tax, became chargeable. Thus, by reference to those provisions of the Directive, he felt able to conclude in paragraph 65:

"…. Thus, in the case of a payment trader, the effect of a valid late claim for a deduction of input tax is to reduce the VAT otherwise payable, or to give rise to a claim for a refund or a credit, on that later occasion, and not to operate as an overpayment claim in relation to the earlier occasion."

149. Neuberger J. then went on, in paragraphs 68 to 73, to reach the same conclusion by reference to the 1994 Act and the 1995 Regulations, both of which he found, when read with the Sixth Directive in this context, consistent with, though not necessarily dictated by, the Directive. This is how he put it in paragraph 69 of his judgment:

"Although the provisions of the 1994 Act may be neutral on this issue if read on their own, when read together with the Sixth Directive and Regulation 29, I believe that the overall effect is in accordance with Mr. Cordara's submission. … Regulation 29(1) repeats the point that the primary course for a taxpayer wishing to claim input tax is to raise his claim in the return in respect of the period in which it was incurred. However, albeit in very general terms, it leaves open the possibility of the input tax being claimed later. Again, this seems to me to be consistent with the notion that a late claim permitted pursuant to the Commissioners' allowance or direction under Regulation 29(1) is not a correction to the earlier relevant return, in the sense that it results in a retrospective overpayment of VAT. Rather, it is a permitted or directed claim, albeit a late claim, for a set off, payment, or credit in respect of the input tax in question. To put the point slightly differently, a late claim for input tax is a self-contained claim which stands or falls on its own merits, and does not bear on the original VAT return in which it should primarily have been included, or any payment of VAT made pursuant thereto."

150. In my view, Neuberger J's overall analysis of the relevant Community and domestic legislation is correct. Its effect is not to require tax neutrality for each registered trader within a single accounting period. That may be the primary objective of the 1994 Act and the 1995 Regulations, but their clear provision, consistently with the Sixth Directive, is to identify from a registered trader's return for each accounting period the tax payable by, or to be credited to, him by reference to declared outputs and his claimed inputs. If he pays more tax than he need because he has under-claimed input tax, he has not overpaid tax for that period; the amount paid is simply the result of a mechanism which sets off against what is due from him what he claims is properly due to him. If and when he seeks to remedy that under-claim in a subsequent accounting period, the 1994 Act and the 1995 Regulations, consistently with the discretion given by the Sixth Directive to Member States in the matter, makes provision for him to exercise his right to that money by claiming to deduct it from his output tax due in future accounting periods.
151. In the face of that statutory scheme, Mr. Lasok's resort to the argument that the legislation should be construed on the basis that its normal function is to set input tax against output tax in the same accounting period that they both became chargeable is no basis for ignoring the principle or the mechanics of it, namely that the net amount "due" to the Commissioners or credited to the taxpayer in any period depends on whether and, if so, how much he properly claims for input tax for that period or any previous period. Nor, as Mr. Cordara has illustrated by reference to the commercial realities for which the tax collection scheme must and does provide, is it apposite to characterise immediate deduction of input tax as the "normal" manner of working of the scheme.
152. Accordingly, I agree with Neuberger J's conclusions that the University's claim is not a claim for overpaid tax under section 80, but is a claim for deduction of input tax under regulation 29(1), albeit made late. It follows that it is not subject to the new three year retrospective time limit in section 80(4), which took effect in July 1996. Nor is the claim, which was made in November 1996, affected by the new retrospective three-year limitation period in regulation 29(1A), which took effect in May 1997. As I have indicated, there are, however, issues whether the claim was validly made under regulation 29 and, if so, whether the Commissioners were bound to accept it.

2) The Commissioners' failure to consider the exercise of their discretion under regulation 29(1)

153. This issue concerns the nature of the entitlement in both United Kingdom domestic and Community law to make "late" claims for input tax. As to the former, the answer is largely driven by the reasoning in the previous section of this judgment as to the nature of the right to claim input tax, and, as to the latter, by the answer in the next section of this judgment to the University's alternative argument based on accrued directly enforceable Community law rights. In short, the starting point is that a claim for repayment of input tax, however it is procedurally presented in domestic law, is the exercise of a directly enforceable Community law right. The Commissioners challenge Neuberger J's entitlement to rule, as he did, that the Commissioners should have accepted the claim under regulation 29. This is what he said, in paragraphs 77 – 79 of his judgment:

"77. … it appears to me that, in the literature that they made available to the public up to and including November 1996, when the Claim was made, the Commissioners stated that they were effectively prepared to entertain any application based on payments based on inaccurate returns. There was no indication that a claim would be rejected or treated differently because it was occasioned by an understatement of input tax as opposed to an overstatement of output tax. There was no suggestion that a claim would be rejected because it was due to a decision to under-declare input tax, rather than a mistaken under-declaration of input tax. There was nothing to suggest that a claim based on an understatement of input tax would be rejected because it related to a period more than three years before the claim could or even should be made.

"78. On the contrary, it appears to me that the literature indicated that the Commissioners were prepared to treat all claims, whether based on overstated output tax or understated input tax, whether relatively recent or relatively old, whether accidental or intentional, on the same basis. … It can also be said with some force that that would have been entirely consistent with the spirit of the VAT legislation as embodied in the Sixth Directive, namely that the VAT system should work entirely neutrally, and that any overpayment or underpayments would be effectively ironed out. … "

"79. It seems to me that, at least without specifically so deciding, and having good reason so deciding, the Commissioners cannot impose limitations on late claims. So far as I can see, the Commissioners have not purported to reject the Claim on the ground that they have exercised a discretion to do so under Regulation 29, whether because it was made too late or because it was in the wrong form. Further, no reason or justification for such departure from the terms of their publications has been advanced on their behalf. This conclusion is also consistent with the Commissioners' attitude to the Claim, at least as I understand it. They have throughout rested their case for rejecting the Claim on the statutory time limit in section 80(4), and not on any time limit or other restriction imposed by them under Regulation 29."

154. Mr. Lasok, in his submissions to this Court, agreed that the Commissioners had treated the claim as one under section 80, and had not considered it under their powers in regulation 29(1). However, he submitted that, if they had rejected the University's claim on the wrong basis, they should have an opportunity to consider and decide on it in the exercise of their discretion under that regulation. It followed, he submitted, that Neuberger J. had no jurisdiction to rule as he did, in paragraphs 76 to 81 of his judgment, that they should have accepted the claim under regulation 29(1). In the result, he said that the best that the University could have achieved from this litigation was that the Commissioners could be required to consider the matter again, this time in the exercise of the discretion given to them by regulation 29(1). As I have mentioned, the Commissioners have now, as an extra-statutory concession, accepted the University's claim in its entirety under regulation 29. Their concern in resisting the appeal is, Mr. Lasok explained, to get the law right, since the effect of Neuberger J's decision, if allowed to stand, is to remove their discretion under regulation 29((1) to deal with claims on an individual basis.
155. Alternatively, he submitted that the Judge was wrong to express himself as he did in paragraphs 77 and 78 of his judgment, suggesting that the Commissioners had fettered their discretion under regulation 29(1) by the issue of publications up to November 1996 indicating their willingness to entertain claims for payments based on inaccurate returns. He maintained that the Commissioners did not and could not have fettered their discretion under regulation 29(1) in that way; they were simply indications of the Commissioners' position, not an indicator of what they would decide in the circumstance of every case, in particular, where, as here, there had been knowing and undisclosed failures to deduct for many years.
156. Mr. Cordara's answer to these contentions of Mr. Lasok was short and simple and flowed from his analysis of the VAT scheme, namely that a claim for input tax whenever made is for a directly enforceable Community law right to a credit either in the form of a deduction or repayment according to the taxpayer's trading circumstances at the time the claim is made. It is a right that a Member State can require to be claimed in a particular manner, for example, as to provision of adequate proof or at a particular time, including the imposition of a time limit; see e.g. section 25(6) and regulation 29(1) and (1A). But the discretion given to the Commissioners by those provisions should be narrowly circumscribed so as not to render that right ineffective. The implication of his submissions was that in the circumstances of this claim the Commissioners could not, consistently with Community law, have exercised their discretion in any other way than they now have done.

Conclusions

157. As Neuberger J. clearly considered, there are strong arguments for allowing the whole of the University's claim for previously unclaimed input tax – certainly for going back well beyond the three-year period which has since become applicable to regulation 29 claims. However, it is difficult to put aside the fact that the scheme of our domestic law is for input tax to be claimed for the period in respect of which it became chargeable subject to a discretion given to the Commissioners by regulation 29(1) to "allow" claims to be made in later accounting periods than that in which it became chargeable (as distinct from correction of erroneous returns).
158. In normal circumstances the Commissioners, having properly identified the claim as falling within regulation 29 should, either generally or specially, consider whether they wish to exercise that discretion and, if so, in what circumstances and in respect of what period not statutorily capped. The fact that a late input claim is, for the reasons I have given, the exercise of a domestic and Community law right to repayment does not, it seems to me, override as a matter of Community law, that undoubted discretion. But the discretion is a narrow one, clearly given in the interests of good administration as well as fairness to the taxpayer. It seems to me that it should be exercised reasonably in the circumstances with both those considerations in mind. Where the "lateness" of the claim is a factor, that would best be served by securing a broad parity with the proper operation of the limitation period, if any, applicable at the material time to claims under regulation 29(1) – here there was no time limit applicable to the University's claim. As Neuberger J. observed, at paragraph 82 of his judgment, there could be a real argument that the very wide and unspecific discretion given to the Commissioners under regulation 29(1) and/or the manner of the Commissioners' initial decision-making in this case did not satisfy the requirements of Article 18.3. For reasons that parallel those in paragraphs 175 and 176 of the next section of this judgment, on the issue of accrued rights and direct enforceability, I am of the view that section 25(2) and/or regulation 29(1), to the extent that they could be read or misapplied so as to render ineffective the right to deduct in Article 17 or going beyond the administrative and procedural provisions by a Member State for its exercise envisaged by Article 18.3, would contravene the Directive. But for the fact - as I believe - there is currently a reference before the European Court that may touch on this issue, I would have considered the matter acte claire. In any event, as, in my view, this is not a section 80 claim and, as Mr. Lasok has informed the Court, the Commissioners, if now considering the claim under regulation 29(1), would exercise their discretion in favour of it, the matter is now academic, at least so far as these proceedings are concerned. There is no basis upon which the Court could properly disturb the order of Neuberger J. in this respect and a reference would not, therefore, be justified. I should add that Mr. Lasok has informed the Court that the Commissioners, as a matter of principle, maintain their stance that they cannot in any way fetter their discretion under that provision.
159. That is sufficient to dispose of the appeal in the University's favour. But, as the alternative – section 80 - basis for the University's claim was fully argued by counsel and concerns the reach of the European Court's judgement on the Marks & Spencer reference, it may be helpful for me to express my view on the matter.

3) Accrued rights and direct enforceability – the effect of the European Court's judgment in the Marks & Spencer reference

160. The third main issue is, as I have already indicated, a Community law point. It would arise only if this Court were to reverse the decision of Neuberger J. on the output/input issue and hold that the University's claim is governed by section 80, thus engaging the time limit for which the new section 80(4) provides. The issue is whether, regardless of the basis of the University's claim (i.e. under section 80 or Regulation 29 or both) in respect of its formerly unclaimed input tax, it had accrued and directly enforceable Community law rights to previously unclaimed input tax under Articles 17-20 of the Sixth Directive that could not be curtailed by the retrospective introduction in the new section 80(4) of the three-year time limit without adequate transitional arrangements. A search by counsel of the European Court of Justice's web-site and of Simon's Tax Cases shortly before the conclusion of argument on the appeal did not disclose any authority holding that such a claim is directly enforceable.
161. Neuberger J. held, at paragraphs 51 - 54 of his judgment: 1) that Article 17.1 of the Sixth Directive does not confer an enduring and irremovable right exercisable as of right at any time; 2) but, at paragraphs 55 and 56, that Article 18.3 imposed on the United Kingdom "an obligation to "determine" procedures whereby late claims for, or claims for under-claimed input tax may be made" and that such procedures may include time limits provided that they are reasonable and do not render "the apparent right" to make late claims nugatory; 3), that the United Kingdom had complied with that obligation, both as to payment and repayment traders; and 4) at paragraph 83 of his judgment, that if he had concluded that the claim was for recovery of overpaid VAT under section 80, he would have referred to the European Court the question whether the retrospective introduction of the three-year time bar in section 80(4), without any transitional provisions, was lawful under Community law.

Submissions

162. The University claims that it had vested rights under Community law before 18^th July 1996, relying on Articles 17 and 18 of the Sixth VAT Directive. On that basis it complains of the absence of a transitional period mitigating the effect of the retrospective introduction of the three year limitation period and that the classification of its claim (whether under regulation 29 and/or under section 80) is immaterial because it would be wrong under European law to permit the Commissioners to rely on that new limitation period. It maintains that the judgment of the European Court on the Marks & Spencer reference means that it had a directly effective right to make late claims for input tax even if its claim to repayment falls under section 80. The Commissioners' case is that the European Court's judgment in the Marks & Spencer reference sheds no light on the classification of the University's claim under United Kingdom legislation or as to whether it is based on a directly effective right under the Sixth Directive. Accordingly, they maintain that if, in accordance with their primary case, it is a section 80 claim, it does not qualify for any longer than the new three-year limitation period because it is not based on such or any directly effective Community law right.
163. Mr. Lasok submitted that the European Court's judgment expressly benefits only those with directly enforceable Community law rights, but does not assist the University in its claim to have such rights. He submitted that the European Court's judgment is not capable of giving the University any more than it can look for under the Business Brief, still less any support for an entitlement equivalent to its Regulation 29 claim. He maintained that the provision in the Sixth Directive relevant to the University's claim is Article 18(3) (see paragraph 112 above), is not unconditional and sufficiently precise to give rise to a directly enforceable right. In particular, he argued that, whilst it may have imposed an unconditional obligation on Member States, it was insufficiently precise as to who could make a claim and in what circumstances; see Joined Cases C-6/90 and C-9/90, Francovich & Ors. v. Italy [1991] ECR I-5347, ECJ, para 12.
164. Mr. Lasok added that, even if the University relied on Article 20, which provides for adjustment of deductions (see paragraph 114 above), it still could not opt for the regulation 29 limitation regime because section 80(7) cuts it out. Accordingly, he submitted, the Commissioners have not misapplied the domestic law provisions correctly implementing the Directive. He said that, even if Neuberger J. was correct in holding that Article 18.3 imposed an obligation of Member States to "determine" procedures for late claims to deduct input tax, it did not confer any directly enforceable right to make such claims or to have them satisfied because the obligation did not satisfy either limb of the second Becker condition. He maintained that it is not unconditional, because it requires further action to be taken by a Member State to give it effect, and it is not sufficiently precise because it does not specify the circumstances in which a late deduction may be made or the circumstances in which a deduction shall, as distinct from "may", be authorised.
165. Finally, Mr. Lasok commented that the only possible basis for the University's contrary submission is seemingly that the United Kingdom's failure to provide any transitional arrangements contravened the Sixth Directive. But he said that it is settled law that the Directive says nothing about claims for refund of overpaid VAT. He referred, in particular, to Case C-62/93 BP Supergas v. Greek State [1995] STC 805, a case concerning Greek legislation providing for no deduction of input tax on petroleum products, and which the Advocate General, at paragraph 31 of his Opinion, and the Court, paragraphs 37-42 of its judgment, treated as an overpayment case. The Court said, at para. 38:

"The Sixth Directive does not contain any provisions applicable to claims for refund of VAT unduly paid by taxable persons."

166. Mr. Cordara's response to Mr. Lasok's submission was that, even if the University's claim could be regarded as one for recovery of overpaid VAT under section 80 and not for deduction of input tax under Regulation 29(1), the three-year retrospective time limit provided by section 80(4) could not deprive it of its vested and directly enforceable right in Community law to payment of all its under-claimed input tax, without adequate transitional arrangements. If they were section 80 claims the effect of the judgment of the European Court in the Marks & Spencer case was that they had a directly enforceable right to the repayment of all overpaid tax.
167. Mr. Cordara developed this submission that the right to deduct input tax was a directly enforceable Community law right under two alternative strands: first, that it satisfied both limbs of the second Becker condition; and second, that it was an entitlement within the scope of Community law and derived from its general principles, an argument similar to that advanced by Mr. Milne to the first Court of Appeal in the Marks & Spencer appeal, and rejected by it, in respect of its claim to zero-rating of its teacakes (see paragraphs 71-72 above). In advancing these arguments, Mr. Cordara, adopted the argument of Mr. Milne on the implications of the European Court's judgment on the reference insofar as it could be related to the University's case and suggested that the origin of the University's claims in Articles 17 and 18 was an important additional factor in support of its entitlement to payment of them.
168. As to the second Becker condition, Mr. Cordara submitted that the underlying Community law right from which this input – deduction – claim is derived is to be found in Articles 17 and 18 of the Sixth Directive, both of which, in particular Article 18.3 providing for late deduction and Article 20.1 for adjustments of deductions (implemented in sections 25(2) and (6) and 26 of the 1994 Act), are of direct effect. He relied on a number of authorities in which the European Court has held that the right to deduct in Articles 17.1 and 17.2 is of such effect, including BP Supergas, at para. 36; and the Opinions of the Advocate General in Case C – 10/92, Balocchi v. Ministero delel Finnanze [1997] STC 640, and in Joined Cases – C-286/94, C-340/95 and C-401/95, Molenheide BVBA & Ors. v. Belgium [1998] STC, paras. 47 and 48, that the obligation provided by Article 18.3 on Member States to make provision for late claims, albeit subject to conditions and procedures to be determined by them, is also of direct effect. He drew, in particular, on the following words of the Court at Molenheide, at paragraph. 47 of its judgment:

"Accordingly, whilst it is legitimate for the measures adopted by the member states to seek to preserve the rights of the treasury as effectively as possible, they must not go further than is necessary for that purpose. They may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation."

169. Mr. Cordara acknowledged that there has been no European Court judgment directly on the obligation on Member States to determine the conditions and procedures by which a deduction may be authorised in Article 18.3 or as to adjustments of deductions in Article 20.1. However, he drew attention to three late input claim-related cases in which the European Court applied all the usual statements of principle as to fiscal neutrality etc. of the tax, in which there was no suggestion that the Community law right to deduct input tax was lost once the accounting period in which it had arisen had passed; see BP Supergas; SFI v. Belgium; Case C-400/98, Finanzamt Goslar v. Breitsohl [2001] STC 355, ECJ, paras. 34-41; and Commissioners of Customs & Excise v. Croydon Hotel [1996] STC 1105, CA, in which it was held that the exercise of the right to claim rather than the bare right of repayment is the commencement date for limitation periods. A contrary construction would, he submitted, put the United Kingdom in multiple breach of its Community obligations under the Directive.
170. This argument led Mr. Cordara into his second and alternative submission under this heading, namely that, whether or not the Sixth Directive, in Articles 17 to 20, gives a directly enforceable right to late deduction of input tax, such right can still be found by reference to the "over-arching" test of compliance with the objectives of Community legislation within the scope of which the national rules fall, namely proportionality, legal certainty, non-arbitrariness, non-retrospectivity and non-discrimination. There must, he said, be a system for late claims that conforms with Community law principles which gives effect to the rights of United Kingdom traders to correct errors in earlier claims, and one which applies to all traders whether payment or repayment traders. He cited by way of example: Case C-361/96, Grandes Sources v. Bundezamt fur Finanzen [1998] STC 981, ECJ, paras. 34- 36; and prayed in aid the following observation of the European Court in Case C-267/99, Adam v. Administration de l'enregistrement et des domaines (ECJ unreported, 11^th October 2001), which concerned the rate of VAT charged to the liberal professions, at para. 36:

"Member States must respect the principle of fiscal neutrality. That principle precludes in particular treating similar goods and supplies of services, which are thus in competition with each other, differently for VAT purposes …"

171. Mr. Cordara submitted that, on any view, the University's claims originated as rights to claim input tax that had become claimable some time in the past and, as such, fell within the express scope of Articles 17 and 18. Even if, as the Commissioners contended and Neuberger J. had rejected, those claims became recoverable only by means of an output tax claim, that is a matter of procedure rather than substance. He illustrated the substantive nature of the University's claim by drawing attention to the Commissioners' acceptance of several late input tax claims of the University in accounting periods for which, for transient and random reasons, it was, temporarily, a repayment trader. It could not be seriously argued, he submitted, that the nature of the University's right to overpaid tax changed according to whether its pattern of trading in a particular accounting period turned it from a payment to a repayment trader or vice-versa.
172. Accordingly, Mr. Cordara submitted that, whatever the precise legal classification of the claim, the United Kingdom's failure to mitigate the retrospective impact of the new limitation periods breached general principles of Community law. It followed he said, that, regardless of the stance taken by the Commissioners in their Business Brief issued in August 2002 shortly after the European Court's judgment in the Marks & Spencer reference, the effect of that judgment is that it is immaterial whether the claims are under section 80 or regulation 29(1), since if they are the former they are caught by that judgment, and if the latter the claim is within time.

Conclusions

173. In my view, regardless of the basis of our domestic law (i.e. section 80 or regulation 29) for the University's claim in respect of its formerly unclaimed input tax, it had accrued rights under Articles 17 – 20 of the Sixth Directive before the retrospective introduction of the 3 year cap (for section 80 claims in July 1996 or for regulation 29(1) claims in May 1997). The result is that the claim, if it fell within section 80, would engage the three-year time limit in the new section 80(4), but would benefit from the reasoning of the European Court in the Marks & Spencer reference, so as, in the absence of adequate transitional arrangements, to make it incompatible with Community law for the Commissioners to rely on the new limit. See also by way of example, in other contexts: Joined Cases C-10/97 – C-22/97, Ministero delle Finanze v. IN. CO. GE (ECJ, unreported 22 October 1998), paras. 18-21; and Imperial Chemical Industries plc v. Colmer (Inspector of Taxes) [1999] STC 1089, HL, per Lord Nolan (with whom the other Law Lords agreed) at pp.1094j-1095c. I consider that those provisions are unconditional and sufficiently precise to give rise to a directly effective Community law right. I do not derive that from the European Court's ruling on the Marks & Spencer reference since it is for quite separate consideration whether the provisions in Article 17 and 18 as to the right and exercise of the right to make late deductions of input tax are caught by the Court's answer to its re-formulated question as to "repayment … of sums paid by way of VAT, such as those" in Article 11A(1) concerned with the taxable amount. Whilst the subject matter of the reference was a section 80 claim for monies paid by way of VAT "which was not due" and the subject of this claim, in my view, is in effect for an adjustment of VAT which at the time it was paid was "due", the substance of the claim is the same, repayment of tax which, given the provision for late claims for input tax, was when "such" a claim was made, "not due". If, as I understand it, tax neutrality is a fundamental principle of the common system of VAT, then the European Court's use of the words "such as" in the answer to its question should be interpreted so as to include tax which would, in consequence of the right, when exercised, become "not VAT due".
174. In my view, the provisions in Articles 17.1, concerning origin and scope of right to deduct, in Article 18, governing the exercise of that right, and in Article 20.1, for adjustment of "the initial deduction" have direct effect. The mandatory and permissive provisions in Article 18.2 and 3 respectively are procedural and accounting mechanisms going to the exercise of the right to repayment not to the creation of that right. If the United Kingdom did not, as required by Article 18.2 "determine" conditions and procedures for late payments, it would be in breach of the right to deduct conferred by Article 17.1, the right arising, but not limited to "the time when the deductible tax becomes chargeable". The imperative formulation in Article 18.3 "Member States shall determine the conditions and procedures whereby a taxable person may be authorised to" make a late claim for input tax are sufficiently clear and precise to permit of enforcement if a Member State does not do so. It is a similar formula to that under consideration in Becker itself, namely in Article 13B, in respect of which the European Court held that the words "Member States shall exempt … under conditions which they shall lay down" etc. did not prevent direct effect. Cf CR Smith Glaziers (Dunfermline) Ltd. v. Commissioners of Customs & Excise [2003] UKHL 7, HL, per Lord Hoffmann at paras. 23-27 (re Article 13B(a) of the Sixth Directive).
175. The existence of an element of discretion in a Member State as to how such a right is to be exercised cannot, in my view, sensibly deprive it of direct effect. There is a clear distinction between the existence of a Community law right and the discretion given to a Member State as to the manner of its exercise, as the Advocate General in Molenheide acknowledged in the context of Article 18.4 (see paragraph 166 above), which leaves it to Member States to decide for any given period where the deduction exceeds the tax due, either to make a refund or to carry the excess forward to the following period "according to conditions which they shall determine". At paragraphs 35 and 37 of his Opinion, the Advocate General stated:

"35 All of the plaintiffs submit that the discretion afforded to Member States by the first subparagraph of Article 18(4) of the Sixth Directive does not permit them to prescribe substantive conditions for the exercise of the right to a refund. I think that Member States are merely permitted under the first sentence of Article 18(4) to establish the necessary procedures or detailed arrangements concerning such refunds. Indeed, even the fact that a 'multiplicity of alternatives' may be available for the purpose of implementing an obligation imposed by a directive does not prevent it from having direct effect, 'once its content can be determined sufficiently precisely on the basis of the provisions of the directive alone'. Consequently, I am satisfied that the obligation imposed by Article 18(4) is clear, precise and unconditional and capable of direct effect."

"37 I do not think that the direct effect of Article 18(4) of the Sixth Directive, taken on its own, is sufficient to establish the incompatibility of the impugned Belgian measures. The plaintiffs rightly submit that the foundation of the right to 'authorized deductions', within the meaning of Article 18(4), is contained in Articles 17 and 18(1) to (3) and that, 'in the absence of any provision empowering Member States to limit the right of deduction granted to taxable person', the taxpayer must be permitted to exercise that right 'immediately in respect of all the taxes charged on transaction relating to inputs'. Member States are, therefore, only authorized to limit the right of deduction 'where they may rely on one of the derogations provided for in the Sixth Directive'. In case of an excess of authorized deductions over tax due, the neutrality of the Community VAT system means that the taxable person has the right to a refund. However, Member States are not precluded from adopting precautionary measures designed to ensure the veracity of the apparent excess of deductions arising from the information contained in the underlying declaration made by the taxable person. A system of control designed to verify 'authorized' deductions within the meaning of Article 18(4) before making payment is not a repudiation of the taxable person's right to deduct."

176. Any other approach would amount to an improper discrimination between groups of taxpayers undertaking similar economic activities, all of whom have a directly effective right under Article 17 to deduct input tax.
177. For the sake of completeness, I should mention the provision in Articles 20 and 22 (see paragraphs 114 and 115 above) for "Adjustments of deductions", which Neuberger J. contrasted with Article 18 in paragraph 66 of his judgment. Article 20, as he pointed out, is concerned with corrections or retrospective claims:

"… The contrast with the 'right to deduct' in Article 18 generally, and the wording of Article 18.4 more specifically, highlights the point that the rights accorded by Article 18 involve deducting input tax in respect of the period when it is claimed, rather than retrospectively in respect of an earlier period."

See Commissioners of Customs & Excise v. University of Wales College, Cardiff [1995] STC 611, per Carnwath J. at 621j-622b; and Case C-150/99, Sweden v. Stockholm Lindopark AB [2001] STC 103, per the Advocate General at para. 48, citing Case-342/87, Genius Holding BV v. Staatssecreteris van Financien [1991] STC 239, ECJ, at paras. 15-19. However, as Mr. Cordara observed, it is immaterial for this purpose whether the claim is under Article 18.3 or Article 20.1; the value of the contrast between the two is in underlining that the former provides for the exercise of the right after the accounting period in which the input tax became chargeable.

178. Accordingly, if, contrary to my view, "late" claims for input tax fall within section 80 (whether or not they also fall within regulation 29), I would have held that it was at least strongly arguable that it would satisfy both limbs of the second Becker condition, notwithstanding that Member States could subject it to procedural requirements of the sort envisaged by Article 18.3.
179. Despite extensive submissions from Mr. Cordara, I am less confident of the second and alternative basis of the University's argument under this head and share the uncertainty of the first Court of Appeal in the Marks & Spencer appeal. However, if I am right on the first two issues in this appeal, or, in the alternative, as to satisfaction of the Becker conditions under this issue, it is not necessary to decide the question. A reference to the European Court would not, therefore, be justified.
180. Given my view that, as a result of satisfaction of the two Becker conditions, there is a directly enforceable Community law right to make late input claims, the European Court's ruling at paragraphs 36, 44 and 45 of its judgment in the Marks & Spencer reference (paragraph 40 above) is of direct help as to the effect of the retrospectivity of the three-year time limit of the new section 80(4), if section 80 were to govern the claim. The misapplication required to engage the University's recourse to the Directive would be found in the Commissioners' insistence in principle that the right to repayment arises only on a claim being made for it in the accounting period for which it became chargeable within Article 18.2 and section 25(2) and that, when so made, it is subject retrospectively, and without transitional provision, to the new three-year limit. Armed with the hindsight given to us - but not to Neuberger J. - by the European Court's judgment in the Marks & Spencer reference, I would have held that reliance by the Commissioners on the introduction in section 80(4) of the new three-year time limit without any such transitional provisions would have been unlawful under Community law.

4) Whether, if the University's claim falls under section 80, it is subject to any limitation period at all.

The submissions

181. Mr. Lasok submitted that if, contrary to my view, the University's claim falls within section 80, the most the University could achieve from this litigation is a reversion to the previous six-year limitation period, not a claim unlimited in time, he drew attention to the following words of paragraph 38 (see also paragraph 46) of the European Court's judgment on the Marks & Spencer reference (see paragraph 40 above):

"allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation."

182. Mr. Cordara challenged the Commissioners' entitlement to take what he described as an unpleaded point, identified by them in correspondence only two or three months before this resumed hearing of the appeal, that if the claim is a section 80 claim, the best the University can achieve is a reversion to the former six-year time bar. He maintained that hitherto in this lengthy litigation the Commissioners have never suggested any other time-bar than the new three-year period introduced in July 1996. However, he said that, if the University had to meet this point, it had a simple answer to it, namely that the manner in which the new three-year time limit had been introduced had the effect of abolishing the old six-year time limit in July 1996 before the University made its claim in November 1996. He took the Court to the wording of section 47(2) of the Finance Act 1997 (see paragraph 18 above), which, he said, deemed the repeal of the old time limit to have taken place on 18^th July 1996.
183. He submitted that the effect of that provision was to abolish the six-year time bar retrospectively and that, therefore, the only time limit on the statute book when the University made its claim in November 1996 was the three-year time limit, which could not apply to the claim because of the reasoning of the European Court on the Marks & Spencer reference.
184. Although this point was not specifically pleaded by the Commissioners in their notice of appeal - or indeed argued by either side before now - we have allowed it to be fully argued. I can see no need to accede to Mr. Cordara's insistence that the already considerable costs of this largely academic appeal should be augmented by requiring the Commissioners to amend their notice of appeal to plead it. To the extent that it is a new point, it is prompted by the University's reliance on the European Court's judgment on the Marks & Spencer reference.

Conclusion

185. If, contrary to my view, the University's claim falls to be dealt with under section 80, I would reject Mr. Cordara's argument that the repeal of the six-year cap as from 18^th July 1996, and before its claim in November 1996, created a statutory vacuum – that is, no time bar governing that claim. As Mr. Lasok observed in argument, the ruling of the European Court in the Marks & Spencer reference affects only those with directly enforceable Community law rights, it does not sweep away the whole statutory regime (including the former section 80(5)), which allowed for an extension of the then six-year time limit where the overpayment had been made as a result of a mistake only discovered more than six years after the over payment). The University's exercise of the right to claim back input tax by claiming it in November 1996 was not a creation of the right post July 1996; it was a claim in respect of a pre-existing right which, when it was made was still subject to the old regime, but later deemed by section 47(1) and (2) of the 1997 Act, to have been replaced by the time it was made by the new regime. See e.g. IN CO. GE, at paras 18-21; and ICI v. Colmer, per Lord Nolan at 1094j-1095b. Paragraphs 36 and 46 in the European Court's judgment modifying the retrospective effect of the new three-year time bar may not have any direct bearing on whether, as a matter of domestic law, the replacement of the old time limit with the new one left a time limit vacuum as to rights to repayment preceding the replacement. But the University's reliance on the European Court's judgment to give it a directly enforceable Community law transitional right to protection from sudden change from the old to the new more rigorous regime does not sit well with its argument.

Unlawful state aid

Submissions

186. Mr. Paul Key, junior counsel for the University, submitted as a further alternative if and in the event of the University's claim being governed by section 80, that there would have been a period of some ten months between July 1996, when section 80(4) came into force, and May 1997, when regulation 29(1A) came into force (and a further period to cover the transitional application of section 80(4) resulting from the European Court's judgment on the Marks Spencer reference), during which payment and repayment traders would been treated differently as to claims for input tax. Such differential would favour repayment traders and would, he maintained, constitute unlawful state aid affecting inter-state trade, contrary to Articles 92 and 93 of the EC Treaty (now Articles 87 and 88 respectively). Article 92, into which I have inserted numbers to highlight its four constituents, provides that:

"…. [1] any aid [2] granted by a Member State or through State resources in any form whatsoever [3] which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, [4] in so far as it affects trade between Member States, be incompatible with the common market."

And Article 93 provides for the European Commission to police the operation of that provision. It requires the Commission to keep under "constant review" all systems of state aid in Member States, and, where it finds any such system to be incompatible with it, to so decide and, failing corrective action within three months by the State concerned, to refer the matter to European Court.

187. As Neuberger J. held, if there is a different time limit for overpaid tax according to whether claimants were payment or repayment traders, it would be capable of amounting to state aid to repayment traders as against payment traders as giving the former some competitive edge. See, for example, R v. Commissioners of Customs & Excise, ex p. Lunn Poly [1999] STC 350, in which this Court held that differential rates of insurance premium tax imposed by a Member State could constitute state aid granted by it to those charged at the lower rate, since the direct or indirect effect of the difference was distortion which could be expected to affect trade between Member States.
188. Mr. Key maintained that all the requirements set out in that case would be satisfied if repayment traders were given a fiscal advantage over payment traders in making late claims in respect of unclaimed input tax, notwithstanding their comparable economic activities. He said that inter-state trade would be affected because the University, like others in the higher education sector, teaches students from other states. Neuberger J. found against that argument on two grounds.
189. First, he found that the University had not made out its case in two respects, one of evidence and one of Community law. Whilst the first two of the four constituents of Article 92 might have been satisfied, namely state aid granted by the United Kingdom, the Tribunal had found that there was no evidence as to the third and the fourth constituents, namely distortion, or threat of distortion, of competition or that, if there were, it would have affected trade between Member States. Given the shortness of the period, some ten months, of the differential treatment contingently under consideration, he considered, drawing on the approach of the European Court in Italy v. Commission ...unreported, 19^th October 2000), at para. 69 of its judgment, that the Tribunal was entitled to take the view that, in the absence of any evidence as to the effect on different universities, let alone trade between Member States, the third and fourth constituents had not been established; see e.g. IN. CO. GE, at para. 21.
190. Second, Neuberger J. pointed out, in paragraphs 94-97 of his judgment, that a complaint as to state aid goes to stopping it, not to the repayment of tax; as established by the European Court in Case C-36/99, Ideale Tourisme SA v. Belgium [2000] ECR I-6049, in which an international coach operator complained of being subjected to VAT when international air carriers were accorded a more favourable regime. The Court, in paragraphs 26 to 29 of its judgment, declined to rule on the question of taxability, clearly adopting the following reasoning of the Advocate General at paragraph 26 of his Opinion:

"… having regard to the subject-matter of the dispute submitted to the national court, I believe that there is no need to reply to the … question. Thus, Ideal Tourisme's action is aimed at obtaining the reimbursement of the VAT paid and not at having the Belgian tax authorities ordered to stop granting aid to the airlines in the form of exemptions from VAT or having the airline companies thus advantaged repay to the tax authorities the aid at issue granted in breach of Article 93(3) of the EC Treaty …, in which case the raising of this question would be justified and the Court's reply relevant to the resolution of the dispute in the main proceedings. …" ..

191. In his submissions to this Court, Mr. Key sought to challenge the Tribunal's findings against the University on the facts and the propriety of the Judge in upholding of them in reliance on the rule in Edwards v. Bairstow [1956] AC 14, HL. He maintained that it was possible to infer from the statutory differences between the repayment regimes for payment and repayment traders, a presumption in favour of the taxpayer as to establishment of the third and fourth constituents, distortion of competition and consequent effect on trade between Member States. In so submitting, he referred the Court to the following authorities: Case 730/79, Philip Morris Holland BV v. Commission [1980] ECR 2671; Case 234/84, Belgium v. Commission [1986] ECR 2263; Case 305/89, Italy v. Commission [1991] ECR I- 1603; and Joined Cases C-278/92, 279/92 and C-280/92, Spain v. Commission [1994] ECR I –4103. However, none of them is an authority for the proposition that the third and fourth constituents of Article 92 are in effect otiose, so that all that is required is proof of the first two constituents, namely the grant of aid by a Member State. Of course, the grant of aid, depending on its nature, its recipients and the circumstances in which it is granted to them and not to others, may make it a short step to concluding that in a particular case it is a threatened or actual distortion of trade and thereby likely to affect trade between Member States. But it is a matter for decision in each case whether the third and fourth constituents have been made out.
192. None of the arguments or authorities relied on by Mr. Key has unseated the approach of Neuberger J. First, the question whether the third and fourth constituents of Article 92 were established was a question of mixed fact and law. However, I agree with the Judge that, even if the University had evidence that it was or would be the victim of discrimination by reason of the state aid relied on, it could not rely on these provisions in support of its claim for repayment of tax. The appropriate remedy, if it could be established on the facts – or even by means of a presumption, as urged by Mr. Key - would be to seek discontinuance of the state aid and, possibly, for an order that the beneficiaries of the aid pay it back, rather than, as Neuberger J. pointed out, "compounding the unlawfulness be seeking to extend the aid to one specific payment trader". Mr. Key attempted to counter that basic flaw in his argument by submitting that the European Commission was bound to take the steps required of it by Article 93.3, thereby giving the University or any other United Kingdom taxpayer affected a directly enforceable right not to have put into effect the 1997 Act, in its introduction of the new section 80(4), and section 80(4) itself. However, there are also difficulties in that route. First, it does not meet the basic point made by the Judge that the purpose of these provisions is not to secure repayments to individual taxpayers who may consider that they have been wrongly discriminated against in this respect, but to remove such discrimination generally if it exists. Second, if and to the extent that Article 93 might create such a directly enforceable Community law right in the taxpayer, its discriminatory effect as between payment and repayment traders, if any, should be met by the reasoning of the European Court in the Marks & Spencer reference, so rendering Article 93 action by the Commission or further adjudication by the Court, this time under that provision, unnecessary. Third, I have considerable doubt whether the obligation cast on the European Commission by the Article is unconditional or sufficiently precise so as to satisfy the second Becker condition so as to vest in the University or any other individual United Kingdom taxpayer a directly enforceable right of the sort suggested; see e.g. Three Rivers District Council v. Bank of England (No.3) 2000 2 WLR 1220, HL, per Lord Hope at 1241E-1242F.

Summary of conclusions on the University of Sussex claim

193. Accordingly, I would rule:

1) The University's "late" claim for payment of input tax falls to be considered under regulation 29(1) of the 1995 Regulations and not as overpaid tax under section 80 of the 1994 Act,

2) The Commissioners would not, even if they had sought to do so in the exercise of their discretion under section 25(6) of the 1994 Act or regulation 19(1) of the 1995 Regulations, have been entitled as a matter of Community law to refuse any part of the claim, since it was unaffected by the time limit introduced for the first time in regulation 29(1A) for such claims and was not in breach of any reasonable administrative or procedural requirements of the sort envisaged by those provisions,

3) If, contrary to my view, the University's claim falls within section 80:

(a) it would have had a vested and directly enforceable Community law right to acceptance of it subject to the previous time limit of six years, a right which, in the light of the European Court's judgment in the Marks & Spencer reference, could not be curtailed by a new and more rigorous retrospective time limit without adequate transitional arrangements; and,

(b) the University could not, as a matter of construction of domestic legislation or consistently with the reasoning of the European Court in its judgment in the Marks & Spencer reference, secure payment of unclaimed input tax beyond the original six-year retrospective time limit; and,

(c) it could not succeed on the argument that the differential timing of the introduction of the new time limits in section 80(4) and regulation 29(1A) respectively operated as unlawful state aid to repayment traders over payment traders.

Lord Justice Chadwick:

194. I agree with the conclusions set out by Lord Justice Auld at paragraph 105 of his judgment and with the reasoning by which he supports those conclusions. I too would allow the Marks & Spencer appeal as to the entirety of the vouchers claim; but would dismiss that appeal in respect of the teacakes claim.
195. I would dismiss the Commissioners' appeal from the order of Mr Justice Neuberger in the University of Sussex case for the reasons given by Lord Justice Auld in support of his conclusions under (1) and (2) in paragraph 193 of his judgment.

Mr Justice Newman:

196. I also agree, with the reasons given by Lord Justice Auld, his conclusions and the result in each of the appeals.
______________ Order C3/1999/0066, C3/1999/0067: Appeal of Marks & Spencer is allowed as to entirety of vouchers claim, but dismissed in respect of teacakes claim. Order as to costs agreed between the parties: orders of Moses J to be set aside; no order as to costs in this appeal or appeals below. Application for leave to appeal to House of Lords refused. Order C3/2001/2427: Appeal of Commissioners is dismissed. Order as to costs agreed between the parties: appellant to pay respondent's costs of this appeal and appeal below. Application for leave to appeal to House of Lords refused. (Order does not form part of the approved judgment)

Note 1   Sara Drake, Vouchers and VAT: issues of direct effect and national time-limits raised by the Marks and Spencer case (2003) 28 E.L. Rev, 418    [Back]