England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH, ADMINISTRATIVE COURT
MR JUSTICE TUGENDHAT
[2008] EWHC 713 (Admin)

		Royal Courts of Justice Strand, London, WC2A 2LL
		29th August 2008

Lord Justice Rimer:

1. The appellants are The Commissioners for Her Majesty's Revenue and Customs ("HMRC"). The respondent is BMW AG ("BMW"). On 23 June 2008, Mummery LJ gave HMRC permission to appeal against an order of 9 May 2008 made by Tugendhat J in the Administrative Court, expressing the view that the appeal has a real prospect of success. He also ordered a stay of the judge's order and, as is usual, gave liberty to BMW to apply for a lifting or variation of the stay. BMW subsequently filed a Respondent's Notice, by which it seeks, amongst other things, to uphold the judge's order on at least three additional grounds which did not find favour with him; and, by section 8, it applied for a lifting of the stay with effect from 23 June 2008. That application, opposed by HMRC, is now before me.
2. The background to this litigation, which involves Value Added Tax ("VAT"), is as follows. By way of a general introduction, I cite first from the opening paragraphs of Tugendhat J's judgment of 9 May 2008. He said:

"1. … Most traders account for VAT quarterly. At one month after the end of each accounting period they account to [HMRC] for the tax due on what they have supplied during the accounting period to their customers ('output tax'), after deducting the tax that they have paid to their suppliers ('input tax'). The balance will normally be in favour of HMRC. Traders in that position are known as 'payment traders'. Some supplies, including exports, are zero rated. A trader whose business is largely exporting will therefore find that the balance at the end of his VAT accounting period will normally be in his favour. In other words, he will be entitled to repayment from HMRC of the input tax he has paid to his suppliers after deducting any output tax he may have received from his customers. Traders in that position are known as 'repayment traders'. Exporters, and other repayment traders, commonly account for VAT monthly.

2. A payment trader who pays his suppliers on delivery to him, and is paid by his customers on delivery by him, will enjoy a cash flow benefit. He will have the use of the output tax (less the input tax) for a period before he has to pay it over to HMRC. Whether a particular trader actually enjoys that cash flow benefit, and if so to what extent, will naturally depend upon the dates on which he in fact pays his suppliers, and is in fact paid by his customers. The later he pays his suppliers, and the sooner he is paid by his customers, the greater the cash flow benefit to the trader, and vice versa. In the case of large payment traders there is a scheme requiring the trader to make payments on account, and where this applies it will reduce any cash flow benefit that the trader enjoys.

3. A repayment trader will be in a very different cash flow position, because his customers will not pay to him any tax on his outputs. If he pays his suppliers on delivery to him, he will have to fund the input tax on those supplies from his own resources until he is refunded by HMRC. But again, whether a particular trader actually suffers that cash flow burden, and if so to what extent, will depend upon the dates on which he in fact pays his suppliers.

4. Since VAT was introduced in 1972 provision has been made to alleviate the cash flow burden potentially falling upon repayment traders by permitting them to adopt monthly accounting periods. This benefit to repayment traders is, of course, exactly matched by a corresponding burden to the Revenue. HMRC commonly has to refund to the repayment trader the input tax on supplies to him before receiving payment from his supplier of the output tax on the supplies of the same goods."

3. BMW UK Manufacturing Limited ("UKM") is a member of the BMW Group and manufactures cars. UKM accounts for VAT quarterly. It is a payment trader.
4. BMW, the respondent, is another BMW Group member, which purchases the cars manufactured by UKM and exports the majority of them to places outside the United Kingdom. That supply is zero-rated for VAT purposes. It gives rise to no obligation to account for output tax in the UK but does give rise to a right to recover input tax from HMRC. BMW is a repayment trader. It is separately registered for VAT and, until the decision the subject of the proceedings before Tugendhat J, accounted for VAT monthly. On each supply by UKM to BMW, BMW would reclaim input tax from HMRC at the end of each month but UKM would only account for the corresponding output tax to HMRC at the end of each quarter. Such a feature is known, at least to HMRC and no doubt more widely, as "mismatch of prescribed accounting periods" or a "stagger mismatch".
5. On 9 May 2008 Tugendhat J, on BMW's application, quashed a decision dated 22 June 2006 of HMRC to the effect that BMW could no longer make its VAT returns monthly but would instead be required to make them quarterly. The judge's reasoning was that HMRC's decision making process had been flawed in two respects and resulted in an irrational decision. First, it did not consider the effect the decision would have on BMW's ability promptly to recover input tax incurred on transactions with non-associated parties. Secondly it did not consider "whether the export through an associated repayment trader (namely BMW) results in a significant cash flow advantage for the BMW group that it would not obtain if UKM were itself the exporter, and so a repayment trader itself."
6. By its appellant's notice, HMRC challenge both bases for the quashing order, and I have related that Mummery LJ has given permission to appeal. I have also explained how HMRC applied for a stay of the order pending the disposal of the appeal and their application for such a stay accompanied the application for permission to appeal. The stay application was made by a short skeleton argument, the factual basis for which was contained in a witness statement of David Harris, a senior policy adviser with HMRC.
7. The essence of the points made by Mr Harris and summarised in the skeleton argument is as follows. First, if the order was not stayed, HMRC and also BMW would be required to undertake a considerable administrative burden, which would prove to be unnecessary if the appeal is allowed. HMRC would need to issue monthly returns to replace the quarterly returns already on file. For every such monthly return BMW would have to compute the relevant tax and value figures and notify these to HMRC. On receipt of the monthly returns, HMRC's computer system would have to be reconfigured to accept them. A series of manual interventions would also be required to ensure that BMW is not subject to demands for money that HMRC has paid out in respect of quarterly returns now withdrawn. Manual interventions would also be required to deal with any consequences of the retrospective change to BMW's period ends in respect of repayment supplement, any assessments for under-declared VAT and default interest. As for assessments for under-declared VAT, these are required to be made for prescribed accounting periods. Changing the periods retrospectively would mean that assessments would be invalid because they relate to quarterly periods that no longer exist; and HMRC would have to make alternative assessments in respect of the new monthly periods, and might become debarred from making them because of the time limits in sections 73 and 77 of the Value Added Tax 1994.
8. Secondly, the point is made (and it is obviously right) that if the appeal is allowed there will be further administrative work involved in reversing the changes made in the meantime. Thirdly, it is said that BMW is seeking to obtain compensation from HMRC for having obtained only quarterly, rather than monthly, repayments of VAT since the June 2006 decision. Resolving that issue could be time consuming and expensive and will prove to have been unnecessary if the appeal succeeds. Fourthly, if BMW does obtain compensation from HMRC and the appeal is then allowed, the payment would have to be reversed with the additional payment of interest. On the strength of that application, Mummery LJ granted the requested stay.
9. I am told that the appeal has been fixed to be heard on December 2008 with an estimated time of three days. The original estimate, by HMRC, was one day, and I infer that the additional two days reflects the fact that BMW's Respondent's Notice -- apart from seeking to uphold the judge for the reasons he gave -- raises, as I have said, at least three additional points which did not find favour with him. That Respondent's Notice, also asking for a lifting of the stay, was similarly accompanied by a written argument, and the factual basis for it was supported by a witness statement by Neil Wharton, the UK Group Tax Manager for BMW (UK) Holdings Limited. The argument was essentially as follows.
10. The history of the matter was first explained, which I should summarise. BMW originally accounted for VAT quarterly. In October 2002 it applied to HMRC to be placed on monthly VAT returns as it was a repayment trader -- that is, for each period it was entitled to a net repayment on account of VAT paid on purchases to its suppliers. This meant that it suffered the disadvantage of having to fund the payment of the input VAT on its purchases from its own resources until it received a payment from HMRC: it charges no output VAT on its onward sales, or else charges an amount lower than its input VAT. The reason it applied to be placed on monthly returns was to alleviate the disadvantageous cash flow consequence of being a repayment trader: it wanted to reduce the period during which it suffered the loss of use of its input VAT by recovering its input VAT sooner than if it were on quarterly accounting. On 14 November 2002 HMRC agreed to BMW's request. But by the decision of 22 June 2006 they reversed that and, as I have said, directed BMW to make quarterly returns. It was that decision that Tugendhat J quashed.
11. The point is made, although I am not sure it carries any great weight for present purposes, that no application was made to Tugendhat J either for permission to appeal or for a stay of his order. BMW then focused on the prejudice that it would suffer if the stay were to remain in place. It made the point that the cost to it of being on quarterly as opposed to monthly accounting, as from 1 August 2006 to approximately the present time (which it called "the initial period"), is likely to have been more than £1 million. That is the cash flow cost as a result of BMW receiving repayment on account of its input VAT later than it would have done had it been on monthly accounting. The effect of the judge's order is that BMW is now entitled to submit monthly returns. If, however, the stay remains in place until after the disposal of the appeal -- and it is almost certain that judgment will be reserved and probably will not be delivered before some time in January 2009 at the earliest -- BMW will in the meantime have to continue to account quarterly and will suffer a continuing cash flow loss until the disposal of the appeal. The evidence is that if the appeal is heard in, say, February 2009, the further cash flow loss is likely to be more than £1 million, although Mr Lenon QC, for BMW, in his submissions to me this morning corrected that figure to an estimated loss of something in the order of £624,000 if the appeal were disposed of in January 2009.
12. If the appeal fails, HMRC deny that they would be liable to compensate BMW for the cash flow loss that will be occasioned by the consequences of the stay, and they also deny that they are liable to compensate BMW for its cash flow loss suffered during the initial period. Whilst the latter head of loss may fairly be said to be the inevitable consequence of the delays in bringing BMW's claim on for hearing, the former head of loss will be a direct result of the stay and will therefore be avoided if the stay is lifted. As for HMRC's points about the administrative burdens of changing the current accounting arrangements -- and, if the appeal succeeds, having to reverse the changes -- BMW has no problems with the burdens insofar as they will be inflicted on itself and asserts that the steps required of HMRC are not onerous. In response to HMRC's point that it may be prejudiced in making assessments for undeclared VAT, it points out that the normal time limit for assessments is three years and, as the relevant period dates from 22 June 2006, it is said to be unlikely that HMRC will find itself debarred from making any necessary assessments.
13. As for the point that BMW may seek compensation for its cash flow loss and having had to submit quarterly returns since 22 June 2006, BMW recognises that HMRC make a fair point. But it is said that a successful litigant is entitled to the fruits of its success; and if the appeal is allowed and any recovery of compensation has to be reversed, that is a common occurrence in litigation which includes an appeal system.
14. Both sides therefore have points to make in support of their respective positions. The starting point is that the ordinary principle, long established, is that a successful litigant is entitled to receive the fruits of his success, and the launching of an appeal by his opponent does not operate to stay his entitlement. Nor is the contrary suggested. That starting point is, however, by no means also the finishing point, because it is also equally well-established that the court has an unfettered discretion to order a stay of the order under appeal if the justice of the case demands it. In a case in which the question of the ordering of a stay arises, the role of the court is to make the order that best accords with the interests of justice. Where there is a risk of harm to one party or the other, whichever order is made, the court has to balance the alternatives and make a decision as to the course which is likely to occasion the least injustice. In Leicester Circuits Ltd v Coates Brothers Plc [2002] EWCA Civ 474, Potter LJ said, at paragraph 13:

"The proper approach is to make the order which best accords with the interests of justice. Where there is a risk of harm to one party or another, whichever order is made, the court has to balance the alternatives to decide which is less likely to cause injustice. The normal rule is for no stay, but where the justice of that approach is in doubt, the answer may well depend on the perceived strength of the appeal."

15. In this case HMRC place considerable weight on what they urge is the strength of their appeal, and indeed the skeleton argument in opposition to the present application is almost wholly devoted to the merits of their appeal. I accept that HMRC have a good arguable case on their challenge to the grounds on which the judge decided in favour of BMW. But BMW's argument in response shows that the arguments are not all one way and, in addition, BMW raises, by way of the cross-appeal, the additional grounds to which I have referred. For myself, I find it impossible on an application such as this to form any view as to the likely outcome of the appeal, and I have considerable reservations as to the extent to which I ought even to attempt to do so. I accept that if the current stay is lifted, HMRC will be subjected to some degree of administrative burden which may be costly to them and which will necessarily absorb time which it might reasonably wish to devote to other activities. I recognise that their administrative actions in this respect may have to be reversed if the appeal succeeds.
16. On the other hand, BMW will be subject to like costs and burdens and will face a like risk of having to reverse them if the appeal succeeds, yet it has no objection to that. The reason it has no objection is because the maintenance of a stay will be likely to cost it very substantial sums of money, and it is prepared to pay the administrative cost of changing its current accounting systems in order to avoid that loss, the judgment of Tugendhat J having given it the right to do so. If the appeal is unsuccessful, I am unaware of the legal basis on which BMW might be able to recover full compensation for such loss from HMRC, and it was certainly no part of Mr Clayton QC's submissions for HMRC that HMRC would be answerable to BMW in that respect. One solution to the rival positions on the present application might be for HMRC to put their money where their mouth is and, by way of a quid pro quo for the stay they want, to offer a cross-undertaking in damages to compensate BMW for the losses the stay will cause it if the appeal ultimately fails. But there is no question of HMRC doing that and I do not need to consider that matter further.
17. I do not regard the balancing exercise in this case as a difficult one. It seems to me obvious, and I hope it is apparent from the reasons I have given, that the balance comes down comfortably on BMW's side. The basic rule is that a litigant is entitled to enjoy the fruits of its success, and BMW should not be excluded from doing exactly that. The fact that HMRC will themselves suffer administrative inconvenience and expense which will have to be reversed if their appeal is successful does not, in my judgment, outweigh BMW's position that the justice of the case demands that the stay ordered by Mummery LJ should be lifted. I propose accordingly to make an order lifting that stay.

Order: Lifting of stay granted