COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
VAT INTEREST CARS GROUP LITIGATION
THE HONOURABLE MR JUSTICE HENDERSON
LOWER COURT NO: HC07C00681/HC08C00662
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE ETHERTON
LORD JUSTICE PATTEN
| (1) F.J. CHALKE LIMITED
(2) A.C. BARNES (WOKINGHAM) LIMITED
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS
Mr Jonathan Swift and Mr Peter Mantle and Mr Philip Woolfe (instructed by HMRC Solicitor's Office) for the Respondents
Hearing dates : 13, 14, 15 January 2010
Crown Copyright ©
Lord Justice Etherton :
The VAT history
"12. VAT was first introduced in the United Kingdom with effect from 1 April 1973 by the Finance Act 1972, in fulfilment of one of the conditions of the UK's accession to the European Communities. In the most basic terms, VAT is charged on the supply of goods and services by reference to the value of the supply. The tax is underpinned by the principle of fiscal neutrality, the object of which is to ensure that the burden of the tax is borne only by the final consumer. At all earlier stages in the chain of supply, a trader is in principle entitled to deduct from the output tax which he charges on his turnover (i.e. the supplies which he makes to his customers) the input tax which he has incurred on the purchase of his raw materials and other goods and services for the purposes of his business. In this way the burden of the tax is passed on up the chain to the ultimate consumer, and the amount of output tax due at each stage increases in line with the value which has been added to the supply.
13. One problem which a tax of this nature has to address is how to deal with supplies of goods which have, or may have, a mixed business and private use. Company cars supplied to employees are an obvious example. Less obviously, demonstrator cars purchased by a dealer may also in many cases be used by authorised members of staff for private purposes when they are not in use for demonstration purposes. For example, the car may be used as a runabout for shopping, or for collecting children from school, or for travel to and from an employee's home outside business hours.
14. In common with a number of other member states, the UK decided from the earliest days of VAT to tax the private use of business cars by the draconian expedient of blocking the deduction or recovery of input tax on the purchase of the car. In other words, as one of the Commissioners' witnesses, Mr David Easton, explains in paragraph 6 of his witness statement:
"If the business is blocked from recovering input tax on its purchase of the car, the car will effectively be subject to VAT in the hands of the business, as if it were a final consumer. The private use of that car, whilst it is in the possession of the business will then be subject to tax, without the need for a complicated or burdensome system of accounting for the private use of the vehicle by employees."
15. This solution had the effect of treating all demonstrator cars as if they had been purchased for exclusively private use, regardless of the extent (if at all) to which they were in fact so used. It is important to note, however, that the blocking of input tax in this way has at all times been permitted under Community law, and this remains the position today. Article 11(4) of the Second Council Directive of 11 April 1967 relating to turnover taxes (67/228/ECC) ("the Second Directive") provided that:
"Certain goods and services may be excluded from the deduction system [i.e. the system of deduction of input tax], in particular those capable of being exclusively or partially used for the private needs of the taxable person or of his staff."
16. Article 17(6) of the Sixth Directive then provided as follows:
"Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of Value Added Tax. Value Added Tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force."
The four year transitional period envisaged by Article 17(6) elapsed without any rules having been introduced by the Council, and the question therefore arose whether it was open to the UK to maintain the prohibition on the recovery of input tax on the purchase of motor cars which had been provided for in a succession of statutory instruments. If so, further questions arose whether the prohibition could be maintained if the cars were in fact used exclusively for business purposes, or in various circumstances of mixed business and private use. On a reference for a preliminary ruling from the Court of Appeal, the ECJ answered these questions in favour of the Commissioners, holding that the expiry of the transitional period did not preclude member states from maintaining an input tax block on the purchase of motor cars, and that they could do so even where the cars "were essential tools in the business of the taxable person concerned": see Case C-305/97 Royscot Leasing Limited and others v Customs and Excise Commissioners  1 WLR 1151,  STC 998, especially at paragraphs 26 and 28 to 32 of the judgment of the court.
17. Despite the block on input tax for demonstrator cars, to a private purchaser output tax should still be charged, although only on the difference, or "margin", between the purchase price and the sale price. This system was generally known as "the margin scheme", and is described as follows by Mr Easton in paragraph 6 of his statement:
"However, in the case of a car dealer, selling a demonstrator, the car will normally be sold on relatively quickly in the course of business to a customer at (usually) a higher price than the dealer bought it for. Since the dealer has already borne VAT on the amount of the purchase price he had to pay, the Commissioners took the view that it would not be appropriate for the sale by the dealer to carry VAT on the full amount of the sale price. Rather, United Kingdom law required the dealer only to account for VAT on the "margin" between his purchase price and the sale price."
Before the decision of the ECJ in the Italian Republic case (see below), the block on input tax recovery on cars and the operation of the margin scheme were both contained in the Value Added Tax (Input Tax) Order 1992, SI 1992/3222.
18. According to Mr Easton, the policy view held by the Input Tax Branch of the Commissioners was that the combination of the block on input tax and the margin scheme represented "a pragmatic way of implementing the principle that VAT is a tax on the final consumption of goods", and was compatible with Article 13B of the Sixth Directive. Article 13 dealt with exemptions within the territory of a member state, and so far as material Article 13B provided as follows:
"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 the exemption and of preventing any possible evasion, avoidance or abuse:
(c) supplies … of goods on the acquisition or production of which, by virtue of Article 17(6), value added tax did not become deductible;"
19. This view was, however, shown to be untenable by the decision of the ECJ on 25 June 1997 in Case C-45/95 EC Commission v Italian Republic  STC 1062 ("Italian Republic"). In that case the Commission brought infraction proceedings against Italy under Article 169 of the EC Treaty, alleging that Italy had failed to fulfil its obligations under Article 13B of the Sixth Directive. In upholding the Commission's complaint, the ECJ held (para 16) that the final part of Article 13B(c) requires member states to exempt the supply of goods in respect of which, by virtue of Article 17(6), VAT did not become deductible when they were previously acquired or produced by the taxable person, and (para 19) that Article 13B(c) does not allow member states to treat a transaction which is to be exempted as one which falls wholly outside the scope of VAT. It clearly follows from this reasoning that the United Kingdom should at all material times have treated sales of demonstrator cars as exempt supplies in respect of which no output tax could be charged, and that the margin scheme was therefore unlawful. The implications of the decision were soon realised, and on 10 October 1997 the Commissioners published Business Brief 23/97 in which they explained that, while consideration was given to what changes to UK legislation might be necessary, businesses could choose either to continue to use the margin scheme or to rely upon the ECJ judgment and treat the sale of input tax blocked cars as being exempt. The business brief went on to say that the Commissioners would accept claims for refunds of tax that had been overpaid as a result of the UK applying a margin scheme as opposed to an exemption, but that such refunds would be subject to the three year cap which was by then in force.
20. Mr Easton goes on to explain how consideration was then given to the question of how best to tax the private use of demonstrator cars and (more generally) the private use of vehicles by employees. Following consultation with motor industry trade bodies, proposals for new legislation relating to the VAT treatment of cars were published in April 1999, and new regulations were then introduced with effect from 1 March 2000, by the Value Added Tax (Supplies of Goods where Input Tax cannot be recovered) Order 1999, SI 1999 No. 2833. The general effect of these regulations was to remove the input tax block and to require private use to be accounted for by means of a notional self-supply. The margin scheme was abolished with effect from the same date.
21. I now turn to the treatment of manufacturers' bonuses. Before the judgment of the ECJ in the Elida Gibbs case (see below), the Commissioners took the view that, as a matter of law, bonuses paid by car manufacturers to dealers on demonstrator vehicles, or to dealers or other customers on bulk orders, were to be treated as payments for a supply of services by the dealer or customer to the manufacturer. The normal practice seems to have been that the dealer would invoice the manufacturer for a supply of services including VAT, or alternatively the manufacturer would raise a self-bill invoice for the supply of services including VAT. Either way, the manufacturer would be entitled to deduct input tax on the supposed supply of services, but the dealer would of course have to account to the Commissioners for the output tax. With the benefit of hindsight, it can be seen that there were at least two difficulties with this treatment. First, the nature of the supposed services supplied by the dealer to the manufacturer in return for the bonus was elusive, and in many cases appears to have been an artificial construct invented to account for the fact that money was passing between two persons in a business relationship. Secondly, if it was right to regard the bonus as a discount from the price of the supply by the manufacturer, the principle of fiscal neutrality would appear to require that the taxable consideration for the original supply should be reduced by the amount of the discount.
22. On a preliminary reference by the VAT and Duties Tribunal in London, the ECJ held in Case C-317/94 Elida Gibbs Limited v Customs and Excise Commissioners  QB 499,  STC 1387 ("Elida Gibbs"), that retrospective discounts given by a manufacturer of toiletries under two coupon schemes (the first of which offered consumers a price reduction at the point of sale on the production of money-off coupons circulated in magazines or newspapers, and the second of which allowed the consumer to obtain a cash refund from the company by returning cash-back coupons which were printed on the label of the products) were indeed to be treated as reducing the taxable price at which the manufacturer had sold the goods in the first place. The reasoning of the ECJ appears sufficiently from the following paragraphs in the judgment:
"28. In circumstances such as those in the main proceedings, the manufacturer, who has refunded the value of the money-off coupon to the retailer or the value of the cash-back coupon to the final consumer, receives, on completion of the transaction, a sum corresponding to the sale price paid by the wholesalers or retailers for his goods, less the value of those coupons. It would not therefore be in conformity with the [Sixth Directive] for the taxable amount used to calculate the VAT chargeable to the manufacturer, as a taxable person, to exceed the sum finally received by him. Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the manufacturer is one, would not be complied with.
29. Consequently, the taxable amount attributable to the manufacturer as a taxable person must be the amount corresponding to the price at which he sold the goods to the wholesalers or retailers, less the value of those coupons.
30. That interpretation is borne out by article 11C(1) of the Sixth Directive which, in order to ensure the neutrality of the taxable person's position, provides that, in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount is to be reduced accordingly under conditions to be determined by the member states."
24. The implications of Elida Gibbs in the context of bonuses given by car manufacturers understandably took some time to consider, but on 21 July 1997 the Commissioners issued business brief 16/97 accepting that such bonuses should normally be treated as discounts by the manufacturers which reduced the value of their supplies. Businesses which believed that they had as a result overpaid VAT in the past three years were invited to contact their local VAT business advice centre.
25. The result of the decisions of the ECJ in Italian Republic and Elida Gibbs was that dealerships with demonstrator cars were likely to have overpaid VAT both (a) in respect of manufacturers' bonus payments which they had received, whether for the purchase of demonstrator cars or the achievement of specified sales volumes, and (b) in respect of the onward sale of demonstrator cars, when the margin scheme operated. It is not disputed by the Commissioners that the overpaid VAT was unlawfully levied, at any rate with effect from 1 January 1978, and that the claimants were entitled to have it repaid in full once the unlawfulness under Community law of the three year cap had been established in Marks & Spencer I ."
"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) No amount may be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.
(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.
(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."
"78. Interest in certain cases of official error
(1) Where, due to an error on the part of the Commissioners, a person has –
(a) accounted to them for an amount by way of output tax which was not output tax due from him and which they are in consequence liable to repay to him, or
(b) failed to claim credit under section 25 for an amount for which he was entitled so to claim credit and which they are in consequence liable to pay to him, or
(c) (otherwise than in a case falling within paragraph (a) or (b) above) paid to them by way of VAT an amount that was not VAT due and which they are in consequence liable to repay to him, or
(d) suffered delay in receiving payment of an amount due to him from them in connection with VAT,
then, if and to the extent that they would not be liable to do so apart from this section, they shall pay interest to him on that amount for the applicable period, but subject to the following provisions of this section.
(3) Interest under this section shall be payable at such rates as may from time to time be prescribed by order made by the Treasury; …
(10) The Commissioners shall only be liable to pay interest under this section on a claim made in writing for that purpose.
(11) No claim shall be made under this section after the expiry of 6 years from the date on which the claimant discovered the error or could with reasonable diligence have discovered it.
"(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."
In section 78, subsection (11) was replaced with the following:
"(11) A claim under this section shall not be made more than three years after the end of the applicable period to which it relates."
Factual history of the claims
"42. The restitutionary claim proceeds by the following stages. First, by enacting and maintaining legislation which imposed VAT on manufacturers' bonus payments and which did not exempt from VAT the onward sales of demonstrator cars on the purchase of which input tax recovery had been blocked, the UK acted in breach of the directly effective Community law rights of Chalke, as articulated by the ECJ in Elida Gibbs and Italian Republic.
43. Secondly, it is alleged that Chalke laboured under three mistaken beliefs:
(a) the belief that it was liable to account for the principal sums as output tax, which continued until the judgments of the ECJ in Elida Gibbs and Italian Republic;
(b) the mistaken belief, which continued until Chalke made the uncapped claim, that its claim for the principal sums was limited by the retrospective three-year limitation period; and
(c) the mistaken belief, which continued until the making of the current claim, that its claim for a remedy was limited to the return of the principal sums with simple interest only.
It will be convenient to refer to these three alleged mistakes, although they are not definitions employed by Chalke in the particulars of claim, as "the liability mistake", "the time limit mistake" and "the simple interest mistake" respectively.
44. Thirdly, as from the date of the overpayments Chalke has been deprived of the use of the principal sums, and the Commissioners have had the benefit and use of the principal sums, and have thereby been unjustly enriched.
45. Fourthly, the Commissioners have repaid the principal sums together with simple interest thereon, but they continue to be unjustly enriched to the extent that they have failed to account for the full benefits obtained by them from the use of the principal sums.
46. Restitution is then claimed of the benefits obtained by the Commissioners in the form of compound interest at a rate calculated by reference to the average cost of Government borrowing during the relevant periods going back to 1973, or alternatively to the introduction of the Sixth Directive in 1978. Calculations of the interest so claimed are set out in an annexe to the particulars, using a rate of 1% above the Bank of England's base rate and compounding the interest with daily, or alternatively quarterly, rests. The maximum value of the claim down to the end of January 2008, with daily rests and after deducting the simple interest already paid, is £229,513.46. With quarterly rests, the amount claimed is some £9,000 less, namely £220,533.27. If interest is payable only from January 1978 onwards, the corresponding figures are £197,829.70 and £190,189.77.
47. Paragraph 30 then anticipates the Commissioners' limitation defence by advancing two contentions. First, by virtue of section 32(1)(c) of the Limitation Act 1980, the six year limitation period began to run when Chalke discovered its simple interest mistake. This mistake could not have been discovered with reasonable diligence until the House of Lords had given judgment in Sempra. Secondly, in respect of the interest due on the uncapped claim, the payment of the principal amount of that claim on 16 August 2004 (or alternatively the issue of business brief 22/02 on 5 August 2002) is to be treated as an acknowledgment for the purposes of section 29(5) of the Limitation Act 1980, with the consequence that the six year limitation period began to run afresh on those dates.
48. The damages claim alleges the following breaches of Community law by the Commissioners:
(a) the enactment and maintenance in force of the offending VAT legislation relating to manufacturers' bonus payments and the sale of demonstrator cars;
(b) the enactment and maintenance in force of the three year cap, with no transitional period in respect of rights which had accrued prior to 18 July 1996;
(c) the failure to pay compound interest on the overpaid VAT, in breach of the principles of effectiveness and/or equivalence; and
(d) the enactment and maintenance in force of the statutory bar to the payment of compound interest in section 78(3) of VATA 1994.
49. It is then pleaded that the three Factortame conditions for liability in damages by a member state are satisfied, and that Chalke has thereby suffered loss and damage in the form of "the loss of the value of money over time" (paragraph 35). A computation of the compound interest claimed is set out in a second annexe, which is in materially identical terms to the first annexe save that the rate of interest claimed is now 3% above base rate, no doubt intended to reflect the commercial borrowing rates which would have been available to Chalke had it borrowed money to replace the overpaid amounts of VAT. The maximum amount of the claim on this basis, going back to 1973 and compounding with daily rests, is £483,898.57. With quarterly rests, the corresponding figure is £462,477.19.
50. Finally, the same limitation points are made as in respect of the restitution claim (paragraph 36)."
The hearing before Henderson J and his decision
i) The Commissioners submitted that the right to repayment of wrongly paid VAT in section 80 of VATA 1994 was intended by Parliament to be both exhaustive and exclusive of other possible remedies. The claimants did not dispute that contention insofar as it related to the recovery of VAT itself, but did not accept that their claims for compound interest at common law were ousted by the statutory scheme. The Judge rejected the claimants' qualification. He held that, as a matter of domestic law, the statutory scheme for the recovery of overpaid VAT in section 80 of VATA 1994 is an exhaustive one, and that interest may only be recovered on a repayment of overpaid VAT by the Commissioners if it is awarded by the VAT and Duties Tribunal pursuant to its statutory power to do so or pursuant to section 78 of VATA 1994.
ii) The claimants submitted that the Community law principles of effectiveness and equivalence require overpaid VAT, exacted in breach of Community law, to be repaid with compound interest. The Judge agreed that the Community law principle of effectiveness overrides the otherwise exhaustive and exclusive statutory scheme for the payment of interest on overpaid VAT, where the overpayment arose from breach of directly effective provisions of Community law. He held that, subject to the Commissioners' other defences, the claimants were entitled to compound interest on the tax they overpaid, at any rate from 1 January 1978 when the Sixth Directive came into effect, since only in that way could effect be given to the underlying principle that the United Kingdom should not be permitted to profit from the overpaid tax. He decided that the requirement that compound interest should be paid is a requirement of Community law, but the manner in which it should be worked out is a matter for national law. He held that it should therefore be calculated on the basis laid down by the majority of the House of Lords in Sempra, namely by reference to the rates of interest and other terms applicable to government borrowing in the market.
iii) Henderson J held, however, that the restitutionary claims advanced by the claimants for recovery of such interest as money paid under a mistake were time-barred. He considered that the claims were properly to be regarded, for this purpose, as simply one element which remained unsatisfied of the restitutionary claims of Barnes and Chalke arising from the overpayments. The claims fell outside the basic limitation period applicable to restitutionary claims, which was agreed to be (by analogy) the six year period under section 5 of the Limitation Act 1980 ("the 1980 Act") for actions founded on simple contract. The approximate date of the last overpayment of VAT by Barnes was September 1996, and the approximate date of the last overpayment by Chalke was April 1999. Chalke did not issue its High Court claim form until 16 March 2007, nearly 8 years after its last payment. Barnes issued its claim form on 7 March 2008, some 11 and a half years after its last payment. The claimants relied upon the extension to the basic limitation period where the action is for "relief from the consequences of a mistake" within section 32(1)(c) of the 1980 Act, which provides that the limitation period does not begin to run until the claimant has discovered the mistake or could with reasonable diligence have discovered it. The Judge found, on the facts, that Chalke was aware of both the Italian Republic and the Elida Gibbs liability mistakes by the end of June 1997 at the latest. He held that, accordingly, as a matter of English domestic law, the extended period under section 32(1)(c) of the 1980 Act for the commencement of Chalke's restitutionary claim expired no later than the end of June 2003. Furthermore, the ordinary six year limitation period for recovery of its most recent overpayments (April 1999) also expired by around April 2005. In the case of Barnes, the Judge found that it was aware of each of the liability mistakes by June 1997, and accordingly the extended period under section 32(1)(c) also expired in its case no later than the end of June 2003. The ordinary six year period for recovery of its most recent overpayments (September 1996) expired by September 2002.
iv) Henderson J rejected the case of Barnes and Chalke that the payment of their uncapped claims in 2004 amounted to an acknowledgment for the purposes of section 29(5) of the 1980 Act with the consequence that the six year limitation period was to be treated as having accrued on the dates of those payments. The Judge's decision followed from his analysis that the payment by the Commissioners of each uncapped claim was a payment in respect of the claimants' right to repayment under section 80 of VATA 1994, and could not be treated as a payment made in respect of, or which recognised or acknowledged, the non-statutory common law right to compound interest derived from Community law. The alternative pleaded case that the issue by the Commissioners of Business Brief 22/02 on 5 August 2002 amounted to an acknowledgment within section 29(5) was not pressed in oral argument before the Judge, and he therefore said nothing about it.
v) It was then contended on behalf of Barnes and Chalke that the combined effect of the introduction of the three year cap and the principle of Community law that, at least for some purposes, a member state cannot rely on its own wrong was to suspend the running of time under section 32(1)(c) of the 1980 Act from the date of the introduction of the cap at least until the ECJ gave its judgment in Marks & Spencer on 11 July 2002. A further argument, on the basis of the same principle, was mounted on the provisions of section 121(1) of the Finance Act 2008 ("FA 2008"). That sub-section, which by virtue of subsection (4) was treated as having come into force on 19 March 2008, provided that the 3 year cap in section 80(4) of VATA 1994 did not apply to a payment in respect of an accounting period ending before 4 December 1996 if a claim was made before 1 April 2009. It was submitted for Chalke and Barnes that the breach of Community law occasioned by the three year cap remained unremedied in domestic law until the enactment of FA 2008 section 121(1), and, accordingly, it was not open to the United Kingdom prior to that enactment to rely on domestic limitation defences to claims for VAT overpaid before 4 December 1996 . Henderson J rejected those arguments on the ground that the compound interest claims which the claimants are now advancing have nothing whatever to do with the cap, and are not made under section 80 of VATA 1994, and could have been started at any time, whether or not the cap was in place. The Judge also noted that the unlawfulness of the cap under Community law in relation to accrued claims was established by the judgment of the ECJ in Marks & Spencer on 11 July 2002, which still left approximately one year of the extended limitation period within which the claimants could have started proceedings: the decision in Italian Republic having been decided on 25 July 1997, and Business Brief 16/97 dealing with the implications of Elida Gibbs having been issued by the Commissioners on 21 July 1997.
vi) Henderson J then addressed a change of position defence if he was wrong in his conclusion that the restitutionary claims were time-barred. He held that change of position is unavailable as a defence to a claim for the recovery of VAT based on an individually enforceable Community law right, that is a San Giorgio claim (after the principle explained by the ECJ in case C-199/82 Amministrazione delle Finanze dello Stato v San Giorgio Spa  ECR 3595 ("San Giorgio") . He concluded that, since the claimants' compound interest claims come within the scope of the San Giorgio principle and no wider domestic restitutionary claims are advanced, the Commissioners are unable to rely on a change of position defence to the present claims.
vii) Henderson J rejected the claimants' alternative damages claim, partly for reasons of limitation and causation, but also because the breaches of Community law which caused the claimants' loss were not sufficiently serious to found liability.
viii) Finally, the Henderson J considered the question whether the claimants can maintain any claim in relation to the period before the Sixth Directive came into force on 1 January 1978. The claimants rely on Article 2 of the First Directive of 11 April 1969. The Judge did not have to resolve that point because he had already decided that the claimants' pre-1978 claims, in common with their later claims, were time-barred. He considered that the question whether the provisions of Article 2 have direct effect is not clear, and so, had it been necessary to decide the matter, he would have referred it to the ECJ for a preliminary ruling.
ix) The end result, accordingly, was that the Judge dismissed the claims of both Chalke and Barnes.
Grounds of appeal and Respondents' notice
Community law and compound interest
"In that connection it must be pointed out in the first place that entitlement to the repayment of charges levied by a Member State contrary to the rules of Community law is a consequence of, and adjunct to, the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties or, as the case may be, the discriminatory application of internal taxes. Whilst it is true that repayment may be sought only within the framework of the conditions as to both substance and form, laid down by the various national laws applicable thereto, the fact nevertheless remains, as the Court has consistently held, that those conditions may not be less favourable than those relating to similar claims regarding national charges and they may not be so framed as to render virtually impossible the exercise of rights conferred by Community law."
"83. It is important to bear in mind in this regard that what is contrary to Community law, in the disputes in the main proceedings, is not the levying of a tax in the United Kingdom on the payment of dividends by a subsidiary to its parent company but the fact that subsidiaries, resident in the United Kingdom, of parent companies having their seat in another Member State were required to pay that tax in advance whereas resident subsidiaries of resident parent companies were able to avoid that requirement."
[The Court then referred to the San Giorgio principle, and continued:]
"85. In the absence of Community rules on the restitution of national charges that have been improperly levied, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, secondly, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness): [authority was then cited].
86. It is likewise for national law to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, including the rate of interest and the date from which it must be calculated: [reference was made to Case 26/74 Société Roquette Frères v EC Commission  ECR 677 ("Roquette Frères") paras 11 and 12 and to Case 130/79 Express Dairy Foods Limited v Intervention Board for Agricultural Produce  ECR 1887 ("Express Dairy Foods") paras 16 and 17].
87. In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of advance corporation tax is not ancillary, but is the very objective sought by the claimants' actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the "reimbursement" of that which was improperly paid and would appear to be essential in restoring the equal treatment guaranteed by Article 52 of the Treaty.
88. The national court has said that it is in dispute whether English law provides for restitution in respect of damages arising from loss of the use of sums of money where no principal sum is due. It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.
89. Consequently, Article 52 of the Treaty enables a subsidiary resident in the United Kingdom and/or its parent company having its seat in another Member State to obtain interest accrued on the advance corporation tax paid by the subsidiary during the period between the payment of advance corporation tax and the date on which mainstream corporation tax became payable, and that sum may be claimed by way of restitution."
"132. In the present case, it seems to me that, with one exception, the claims described in the national court's sixth question should be considered equivalent to claims for recovery of sums unduly paid, that is to say, claims for recovery of charges unlawfully levied within the meaning of the Court's case law, which the UK is in principle obliged to repay. The underlying principle should be that the UK should not profit and companies (or groups of companies) which have been required to pay the unlawful charge must not suffer loss as a result of the imposition of the charge. As such, in order that the remedy provided to the test claimants should be effective in obtaining reimbursement for reparation of the financial loss which they had sustained and from which the authorities of the member state concerned had benefited, this relief should in my view extend to all direct consequences of the unlawful levying of tax. This includes to my mind: (1) repayment of unlawfully levied corporation tax …; (2) the restoration of any relief applied against such unlawfully levied corporation tax …; (3) the restoration of reliefs foregone in order to set off unlawfully levied corporation tax …; (4) loss of use of money in so far as corporation tax was, due to the breach of Community law, paid earlier than it would otherwise have been … . In each case, it would be for the national court to satisfy itself that the relief claimed was a direct consequence of the unlawful levy charged."
"204. In addition, the Court held in para 96 of its judgment in [Metallgesellschaft], that, where a resident company or its parent have suffered a financial loss from which the authorities of a member state have benefited as the result of a payment of advance corporation tax, levied on the resident company in respect of dividends paid to its non-resident parent but which would not have been levied on a resident company which had paid dividends to a parent company which was also resident in that member state, the Treaty provisions on freedom of movement require that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the loss which they have sustained.
205. It follows from that case law that, where a member state has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax. As the Court held in paras 87 and 88 of [Metallgesellschaft], that also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely.
206. In so far as the rules of national law governing the availability of tax relief have prevented a tax, such as ACT, levied in breach of Community law, from being recovered by a taxpayer who has accounted for it, the latter is entitled to repayment of that tax."
"108. Certain important consequences seem to me to follow from this analysis. In the first place, if an effective remedy requires that the member state should not profit from the unlawful charge, the claimant should in principle be entitled not only to repayment of the tax itself but also to interest. Otherwise the claimant would effectively be compelled to make an interest free loan to the member state for the period between the wrongful exaction of the tax and its repayment. Secondly, no sensible distinction can be drawn in relation to interest between cases where tax is levied prematurely (as in Hoechst) and cases where the tax itself has to be repaid. In each case, the claimant should receive by way of "interest" a sum which represents the loss of use of the money, or (perhaps more accurately) the benefit of the use of the money to the member state, over the relevant period. If anything, common sense suggests that this right should be stronger in cases where the tax itself has to be repaid than in cases where the tax was merely levied prematurely. Thirdly, the measure of such loss of use or benefit, in the context of a restitutionary claim brought in an English court, should normally be compound, not simple, interest, as the majority of the House of Lords (upholding Park J and the Court of Appeal) recognised and held in Sempra: it is only by an award of compound interest that the commercial value of the use of the money over the time when it was retained can be properly reflected. Fourthly, such an award of interest can no longer be regarded as merely ancillary to the repayment of the tax, within the principle of Roquette Frères and Express Dairy Foods (restated in Hoechst at paragraph 86 of the judgment of the Court), because it must now be seen as an integral part of the San Giorgio claim for the repayment of the tax and reimbursement of all directly related benefits retained by the member state."
" 255 …. (2) … the Community law principle of effectiveness overrides the domestic statutory scheme where (as in the present cases) the overpayment of VAT was caused by breach of directly effective provisions of Community law. In those circumstances the San Giorgio principle, as it is now to be understood in the light of the judgments of the ECJ in FII and Thin Cap, requires that compound interest should be paid."
"105. In my judgment the reasoning of the ECJ [in FII] in paragraphs 201 to 207 was in all essential respects the same as that of the Advocate General, and they differed from him only on the question whether a claim for reliefs which had been waived (whatever the precise significance of that rather enigmatic phrase may be) could be classified under Community law as a reimbursement claim. Subject to that relatively minor point of disagreement, it seems to me that the Court agreed with the Advocate General in identifying an underlying principle, first adumbrated in paragraph 96 of its judgment in Hoechst, and in linking it with the principle of effectiveness (see the reference to "an effective legal remedy" at the end of paragraph 204). The general principle, as stated in paragraph 205, is that individuals are entitled to reimbursement "not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax". This may be compared with the Advocate General's view (in paragraph 132 of his opinion) that an effective remedy should "extend to all direct consequences of the unlawful levying of tax". The final sentence of paragraph 205 indicates that the Court, like the Advocate General, viewed the remedy fashioned by the Court in Hoechst as coming within the scope of the general principle thus identified."
"107. I have dealt at considerable length with FII, even at the risk of traversing again much ground which I have already covered in FII Chancery at paragraphs 220 to 235 and 240, because it does in my judgment represent a significant advance on Hoechst in the jurisprudence of the Court. The identification of an underlying general principle, the linking of it to the principle of effectiveness, and the subsuming within the general principle of the loss of use claim in Hoechst, are important new milestones (or perhaps I should say kilometre posts) on a journey that is still far from completed. They are sufficient, however, to make it clear, to my mind, that the San Giorgio principle must now be regarded as entitling a claimant who has paid tax levied in breach of Community law not only to repayment of the tax itself, but also to reimbursement of all directly related benefits retained by the member state as a consequence of the unlawful charge. It is only in this way that the claimant can obtain an effective remedy for its loss, and effect can be given to the underlying principle that the member state should not profit from the imposition of the unlawful charge."
"… the payment of the interest on a capital sum unduly paid is strictly dependent upon the right to repayment of the principal itself… An application for interest is subject to the same criteria as those laid down by the case-law of the Court in respect of the claim for repayment of the capital on which the interest is based. An application for interest must, therefore, be made in accordance with the same procedure as that applicable to recovery of the capital sum."
The nature of the "mistake" within Limitation Act 1980 s32(1)(c)
"(1) Subject to subsection (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, …
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the ... mistake … or could with reasonable diligence have discovered it."
Limitation Act 1980 s.29(5): acknowledgment and part payment.
(5) Subject to subsection (6) below, where any right of action has accrued to recover-
(a) any debt or other liquidated pecuniary claim; or
(b) any claim to the personal estate of a deceased person or to any share or interest in any such estate;
and the person liable or accountable for the claim acknowledges the claim or makes any payment in respect of it the right shall be treated as having accrued on and not before the date of the acknowledgment or payment.
"(7) Subject to subsection (6) above, a current period of limitation may be repeatedly extended under this section by further acknowledgments or payments, but a right of action, once barred by this Act, shall not be revived by any subsequent acknowledgment or payment."
Suspension or modification of the time periods in the Limitation Act 1980.
"34. It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness) (see, inter alia, Aprile Srl (in liquidation) v Amministrazione delle Finanze dello Stato (No 2) (Case C-228/96)  1 WLR 126, para 18, and the judgments in Dilexport Srl v Amministrazione delle Finanze dello Stato  ECR I-579, para 25, and Metallgesellschaft Ltd v IRC  STC 452,  Ch 620, para 85)."
"36. Moreover, it is clear from the judgments in Aprile Srl (in liquidation) v Amministrazione delle Finanze dello Stato (No 2)  1 WLR 126, para 28 and Dilexport Srl v Amministrazione delle Finanze dello Stato  ECR I-579, paras 41-42 that 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."
"20. The Court has thus recognised that it is compatible with Community law to lay down reasonable limitation periods for bringing proceedings in the interests of legal certainty which protects both the taxpayer and the administration concerned (see Rewe, paragraph 5, Comet, paragraphs 17 and 18, and Denkavit Italiana, paragraph 23, all cited above; see also Case C-261/95 Palmisani v INPS  ECR I-4025,  ECR I-4085, paragraph 48). The fact that the Court has given a preliminary ruling on the interpretation of the provision of Community law in question is immaterial in that respect (see, to that effect, Rewe, cited above, paragraph 7)."
"68. The Governments' arguments concerning the financial consequences of Emmott also raise an important point of principle. As they correctly observe, the Emmott ruling, if read literally, would expose Member States to the risk of claims dating back to the final date for implementing a Directive …
69. Moreover, such liability would arise even in the event of a minor or inadvertent breach. Such a result wholly disregards the balance which must be struck in every legal system between the rights of the individual and the collective interest in providing a degree of legal certainty for the state. That applies particularly to matters of taxation and social security, where the public authorities have the special responsibility of routinely applying tax and social security legislation to vast numbers of cases.
70. The scope for error in applying such legislation is considerable. Regrettably that is particularly so in the case of Community legislation, which is often rather loosely drafted … The recent Argos and Elida Gibbs cases provide a further example of how huge repayment claims can arise from a comparatively minor error in implementing a Community tax directive. In those cases the Court found that the fiscal treatment accorded by the United Kingdom to voucher transactions – used extensively in that Member State as a business promotion technique – was not in accordance with the Sixth VAT Directive. The resultant repayment claims are reported to be between £200 and £400 million.
71. It might be objected that it is not unreasonable to require Member States to fund overpaid charges given that they were not entitled to collect them in the first place. However, that view disregards the need for States and public bodies to plan their income and expenditure and to ensure that their budgets are not disrupted by huge unforeseen liabilities. That need was particularly clear in Denkavit, in which repayment was sought of the annual levies imposed by the Netherlands Chambers of Trade and Industry in order to finance their activities. As I noted in my Opinion in that case, retrospective claims of up to 20 years would have had catastrophic effects on their finances.
72. In short, therefore, my main reservations about a broad view of the Emmott ruling are that it disregards the need, recognised by all legal systems, for a degree of legal certainty for the State, particularly where infringements are comparatively minor or inadvertent; it goes further than is necessary to give effective protection to directives; and it places rights under directives in an unduly privileged position by comparison with other Community rights. Moreover a broad view cannot be reconciled with the Court's subsequent case-law on time-limits.
85. An important factor in Emmott was that it would have seemed unjust in the particular circumstances of the case to permit the Irish authorities to rely on the time-limit laid down by national law. As I noted in my Opinion in Denkavit, the Court in its rulings in Steenhorst-Neerings and Johnson emphasied the following circumstances; Mrs Emmott had sought payment of the benefits in question on the basis of the court's judgment in McDermott and Cotter; the administrative authorities had declined to adjudicate on her claim until the litigation concerning the directive pending before the national courts had been concluded; and the authorities sought to rely on the time-limit notwithstanding the failure correctly to implement the directive.
86. Consequently, as the Court stated in Johnson 'the solution adopted in Emmott was justified by the particular circumstances of that case, in which a time-bar had the result of depriving the applicant of any opportunity whatever to rely on her right to equal treatment under the directive'.
87. Similar rulings based on principles of equity and good faith are to be found in the case-law of national courts. I do not in fact think it is necessary to develop any new principle of community law in order to explain the result in Emmott. As I suggested in my Opinion in Denkavit, the ruling can be seen as an application, albeit a new application, of the well-established principles laid down in Rewe and subsequent cases, in particular the principle that the exercise of Community rights must not be rendered excessively or unduly difficult. The ruling can be read as standing for the proposition that a Member State cannot rely on a limitation period where it is in default both in failing to implement a directive and in obstructing the exercise of a judicial remedy in reliance upon it, or perhaps where the delay in exercising the remedy is in some other way due to the conduct of the national authorities. In Emmott the Member State's default in obstructing the remedy was compounded by Mrs Emmott's particularly unprotected position as an individual dependent on social welfare.
88. It seems to me that so understood the Emmott principle, although confined to very exceptional circumstances, continues to provide an important safeguard notwithstanding the more recent developments in the case law which I have discussed above. An individual must be allowed to make use of all available remedies. The existence of another claim, for example a claim for damages in the competent courts, cannot justify the obstruction of a repayment or entitlement claim which an individual was seeking to exercise."
"47. As the Court has pointed out in paragraph 39 of this judgment, it is settled case-law that, in the absence of Community rules governing the matter, it is for the domestic legal system of each Member State to lay down the detailed procedural rules for actions seeking the recovery of sums wrongly paid, provided that those rules are not less favourable than those governing similar domestic actions and do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law.
48. The Court has thus acknowledged, in the interests of legal certainty which protects both the taxpayer and the authority concerned, that the setting of reasonable limitation periods for bringing proceedings is compatible with Community law. Such periods cannot be regarded as rendering virtually impossible or excessively difficult the exercise of rights conferred by Community law, even if the expiry of those periods necessarily entails the dismissal, in whole or in part, of the action brought (see, in particular, Case 33/76 Rewe v Landwirtschaftskammer Saarland  ECR 1989, paragraph 5, Case 45/76 Comet v Produktschap voor Siergewassen  ECR 2043, paragraphs 17 and 18, and Case C-261/95 Palmisani v Istituto Nazionale della Previdenza Sociale  ECR I-0000, paragraph 28).
49. The five-year limitation period under Danish law must be considered to be reasonable (Case C-90/94 Haahr Petroleum v ÊAbenrÊa Havn and Others  ECR I-0000, paragraph 49). Furthermore, it is apparent that that period applies without distinction to actions based on Community law and those based on national law.
50. It is true that the Court held in Emmott, at paragraph 23, that until such time as a directive has been properly transposed, a defaulting Member State may not rely on an individual's delay in initiating proceedings against it in order to protect rights conferred upon him by the provisions of the directive and that a period laid down by national law within which proceedings must be initiated cannot begin to run before that time.
51. However, as was confirmed by the judgment in Case C-410/92 Johnson v Chief Adjudication Officer  ECR I-5483, at paragraph 26, it is clear from Case C-338/91 Steenhorst-Neerings v Bestuur van de Bedrijfsvereniging voor Detailhandel, Ambachten en Huisvrouwen  ECR I-5475 that the solution adopted in Emmott was justified by the particular circumstances of that case, in which the time-bar had the result of depriving the applicant of any opportunity whatever to rely on her right to equal treatment under a Community directive (see also Haahr Petroleum, cited above, paragraph 52, and Joined Cases C-114/95 and C-115/95 Texaco and Olieselskabet Danmark  ECR I-4263 , paragraph 48).
52. The reply to the seventh question must therefore be that Community law, as it now stands, does not prevent a Member State which has not properly transposed the Directive from resisting actions for the repayment of charges levied in breach thereof by relying on a limitation period under national law which runs from the date on which the charges in question became payable, provided that such a period is not less favourable for actions based on Community law than for actions based on national law and does not render virtually impossible or excessively difficult the exercise of rights conferred by Community law.
"(1) The requirement in section 80(4) of VATA 1994 that a claim under that section be made within 3 years of the relevant date does not apply to a claim in respect of an amount brought into account, or paid, for a prescribed accounting period ending before 4 December 1996 if the claim is made before 1 April 2009."
Defences to restitutionary claims
Lord Justice Patten
Lord Justice Mummery