England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		15 October2002

Mr Justice Stanley Burnton:

Introduction

1. This is my judgment on preliminary issues ordered to be determined by the consent order of Burton J, as limited by agreement between the parties. I was told that this is a test case, on which others depend. (Indeed, much of the correspondence before me relates not to the Claimant Council, but to Renfrewshire Council.) In order to understand the issues I have to determine, it is necessary to summarise the facts and refer to the relevant legislative provisions.

The legislation in outline

2. The EC Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes requires the economic activities of producers, traders and persons applying services to be subject to value added tax. Persons who independently carry on such activities are “taxable persons”: see Article 4.1. Public Authorities are not taxable persons in respect of their activities as such. Article 4.5 of the Directive is as follows:

“States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out in such a small scale as to be negligible. …”

None of the activities referred to in Annex D to the Directive is relevant to this case; nor is the final paragraph of Article 4.5.

3. The provisions of the Sixth Council Directive are, of course, reflected in our domestic legislation. Section 4(1) of the Value Added Tax Act 1994 (“the Act”) provides:

“VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.”

“Business” denotes activities of a private economic nature, and does not include those of public authorities as such. Section 94 defines “business” as including “any trade, profession or vocation”. Furthermore, “supply” in general does not include anything done otherwise than for a consideration. The activities of public authorities acting as such are not, in general, the carrying on of “any trade, profession or vocation”. A “taxable person”, an important concept in the VAT legislation, for present purposes can be defined as a person whose taxable supplies made in the course or furtherance of his business exceed or are reasonably expected to exceed in value prescribed sums during prescribed periods: see Schedule 1 to the Act. Taxable persons are required to register and to account to the Commissioners in respect of their taxable supplies: see section 25, to which I shall have to refer below. It can be seen that a public authority that carries on no business activity does not make any taxable supplies and is not a taxable person.

4. Public authorities such as local authorities pay VAT on the goods and services they acquire for the purposes of their public functions. The Act makes provision, in section 33, for them to be able to reclaim that tax, even though they may not be taxable persons and therefore are not liable to register as such. So far as is relevant section 33 provides as follows:

“(1) Subject to the following provisions of this section, where –

(a) VAT is chargeable on the supply of goods or services to a body to which this section applies, on the acquisition of any goods by such a body from another member State or on the importation of any goods by such a body from a place outside the member States, and

(b) the supply, acquisition or importation is not for the purpose of any business carried on by the body,

the Commissioners shall, on a claim made by the body at such time and in such form and manner as the Commissioners may determine, refund to it the amount of the VAT so chargeable.

(3) The bodies to which this section applies are –

(a) a local authority; …”

In the case of local authorities, the effect of section 33 is that VAT on supplies for their governmental functions is not a burden on council taxpayers, and that the VAT income of central government is correspondingly reduced.

5. However, the activities of many authorities to which section 33 applies are not restricted to non-business activities. Local authorities, for example, may operate car parks and cafés or cafeterias, which are, for the purposes of VAT, business activities. (C.f. the position of “hybrid” public authorities under section 6(3)(b) and (5) of the Human Rights Act 1998.) If the supplies of the local authority for the purpose or in furtherance of its business activities exceed the prescribed value, it will be a taxable person in respect of those supplies, and bound to account for its output tax accordingly.
6. Generally, taxable persons are entitled to deduct their allowable input tax from their output tax when they account to the Commissioners for the latter. Section 25 provides, so far as relevant:

“(2) Subject to the provisions of this section, (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.

(3) If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax, then, subject to subsections (4) and (5) below, the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners, and an amount which is due under this subsection is referred to in this Act as a ‘VAT credit’.”

Input tax is VAT on “goods or services used or to be used for the purposes of any business carried on or to be carried on by” a taxable person. Section 33 refunds are not claims for input tax, because a claim under section 33 is by definition not for goods or services used or to be used for the purposes of any business carried on or to be carried on by a taxable person. Not all input tax may be the subject of credit: hence the qualification in section 25 to input tax allowable under section 26. That qualification is not relevant to these proceedings.

7. Regulation 29 of the Value Added Tax Regulations 1995 (“the Regulations”) in general requires a person claiming deduction of input tax under section 25(2) to do so on a return for the prescribed accounting period in which the VAT became chargeable. The return is normally made in the familiar prescribed form VAT 100.
8. Regulations 31 and 32 require a taxable person to keep and maintain his VAT account. For each accounting period, the VAT account must comprise, among other things, the total of output tax due from him for that period and the total of the input tax allowable for that period under section 26 of the Act. The account must also include every correction or adjustment to the VAT payable portion or to the VAT allowable proportion of the VAT account which is required or allowed by regulations 34, 35 or 38.
9. Regulation 35 is as follows:

“Where a taxable person had 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, he shall correct it in such manner and within such time as the Commissioners may require.”

Notice 700/45/93 imposes a 3-year time limit on such corrections.

10. In principle, a public authority to which section 33 applies and which carried on sufficiently large business activities to be also a taxable person would have the following accounting position in relation to the Commissioners:

(a) It would be entitled to claim under section 33 the VAT it had incurred on goods and services it acquired for non-business purposes.

(b) It would be liable to account to the Commissioners under section 25 for its output tax on its business supplies, and to pay that VAT to them, subject to (c).

(c) It would be entitled to credit for its input tax (i.e. the tax incurred by it on business supplies) when accounting for and paying its output tax.

11. The VAT legislation makes provision for taxable persons to reclaim tax in excess of that which they were liable to account to or to pay to the Commissioners. So far as is relevant, section 80 provides as follows:

“(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.

(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.

(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 provisions 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.”

12. As can be seen, section 80 is, by virtue of subsection (7), the exclusive remedy of a taxable person for repayment of “an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them”. Prior to 18 July 1996, the limitation period provided by section 80(4) was 6 years from the date the tax was paid, with provision for an extension of that period on the ground of mistake. With effect from 18 July 1996, the limitation period was reduced to 3 years by the retrospective operation of the Finance Act 1997. In Marks & Spencer v Commissioners for Customs and Excise (Case C-62-00, judgment of 11 July 2002, [2002] STC 1036), the European Court of Justice held that the retrospective operation of the legislation was contrary to European law. The parties indicated that they would consider the potential impact of that case on their respective rights and liabilities. It is common ground that I need not consider, for the purposes of the preliminary issues, the effect (if any) of that decision on the issues under domestic law which I have to determine.
13. There are other provisions imposing 3-year time limits relevant to claims for sums overpaid or accounted for by way of VAT: see Regulation 29(1A) (claims for input tax), and Regulations 34 and 35 (corrections on VAT returns). Registration 34 is irrelevant: it applies only to small claims, of sums less than £2,000 during a prescribed accounting period. By the Commissioners’ Notice 700/45/93, a 3-year time limit was applied to corrections of VAT returns with effect from 1 May 1997.
14. However, until 1 April 2000, there was no similar limitation on claims under section 33 by authorities to which that section applied. Pursuant to section 33(1), the Commissioners’ Business Brief 26A/99 imposed a 3-year time limit on section 33 claims lodged after 31 March 2000: more precisely, the Commissioners required claims to be made within 3 years of the due date of the return for the prescribed accounting period in which the VAT became chargeable. For claims lodged by a section 33 authority on or before 31 March 2000 for VAT paid or accounted for more than 3 years previously, therefore, it is crucial to determine whether the claim falls under section 80 or section 33, or some other and if so what provision, or was the subject of some other, and if so what, time limit.
15. Section 80 applies “Where a person has … paid an amount to the Commissioners by way of VAT which was not VAT due to them …”. One of the issues before me is whether that reference to payment includes the satisfaction of a liability or perceived liability by set off. Section 81 requires set off between amounts due from the Commissioners to any person under any provision of the Act and that person’s liability to the Commissioners for, among other things, VAT. In so far as relevant, it provides:

“(3) Subject to subsection (1) above, in any case where –

(a) an amount is due from the Commissioners to any person under any provision of this Act, and

(b) that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the person concerned shall be discharged.

(3A) Where –

(a) the Commissioners are liable to pay or repay any amount to any person under this Act,

(b) that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person; and

(c) by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,

any limitation on the time within which the Commissioners are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to be set against the amount mentioned in paragraph (a) above.”

The facts

16. The Claimant is by definition an authority to which section 33 applies. Most of its activities are not business activities for the purposes of the Act. However, like many, if not most, local authorities, it also carries on business activities and is a taxable person in relation to its taxable supplies.
17. The VAT legislation does not require a section 33 authority which is not also a taxable person to submit VAT returns: such claims are paid by the Commissioners on receipt of a completed claim in the prescribed form. However, since the Council was a taxable person, and therefore was required as such to submit periodic VAT returns. For convenience, by their Notice 749 the Commissioners directed the Claimant (and similar authorities) to claim its section 33 refund in the same way and in the same document as it accounted for its output tax and claimed credit for its input tax, i.e., in the prescribed periodical VAT return known as form VAT 100, in boxes 4 and 5, in the manner in which the Council in fact did so as summarised below.
18. Under the Housing Grants, Construction and Regeneration Act 1996 and the Local Government Housing Act 1989, the Claimant provided grants towards the cost of works for the improvement and repair of homes. The grant was means-tested, and in practice government funded the vast majority of the works. The recipient of a grant (“the grantee”) was free to appoint any suitable professional person or organisation to manage the work on his behalf and to assist in the completion of the necessary documentation. However, in virtually all cases, the grantee appointed Cardiff County Council Grant Agency, a division of the Council, to oversee the works. Whether the grantee appointed the Grant Agency or a private firm of surveyors or the like, a grant was available from the Claimant to meet the fees for supervising the works. Where the Council’s Grant Agency supervised the works, payment of the grant was made by the Council directly to the building contractor, against his invoices to the grantee. Where the Council was paying the whole of the cost of the works, the Grant Agency did not issue any invoices to the grantee in respect of any supervision fee in respect of its supervision of the works, because the grantee made no payment to the Agency: if any payment were to have been made, the Council would have been paying itself. In some cases, the means test resulted in some payment being made by the grantee to the Council in respect of the Agency fee; normally, however, this was a small proportion of the fee that might have been charged on an arm’s length basis. However, the Council’s practice was to bring into existence internal accounting entries showing an “agency fee” calculated at 13% of the total value of the works undertaken, irrespective of whether any payment had been or was to be made by the grantee. No invoice was issued by the Council for the notional agency fee. However, the Council treated that “fee” as a taxable output, on which VAT was payable, and it accounted for that VAT accordingly to the Commissioners, and took credit for input tax attributable to its supervision of the works.
19. During the period in question in these proceedings, the Council accounted for VAT on the notional agency fees for the provision of its supervisory services, rather than on the payments it actually received from grantees. That VAT was declared through the Council’s VAT returns. It is accepted by the Commissioners, for the purposes of this claim, that the practice of the Council to account for VAT on the notional agency fees as if they were fees actually paid by grantees was incorrect, and that no VAT was payable on those notional fees. It is similarly common ground that the input tax accounted for in relation to the unpaid agency services should not have been so accounted for.
20. For all accounting periods in question (apart from one, namely April 1996, which I shall ignore for the purposes of the discussion of principle in order to avoid unnecessary complication), the amounts to which the Council was entitled to be paid by the Commissioners under section 33 exceeded its output tax on its business activities. Because the Council did not claim section 33 refunds separately from its VAT returns made by it in relation to its business activities, the sums entered in Box 4 in Form 100 were an amalgamation of section 33 claims and claims for credit for input tax, and the sum claimed by the Council by submitting its returns consisted of the VAT which it considered to be due in the period in question on sales and other outputs (box 1), less section 33 claims and input tax, undifferentiated (box 4); and the difference between those two sums was entered in the return in box 5 as “Net VAT … reclaimed by (the Council)”. Because the sums entered in box 3 always exceeded the sums entered in box 4, the Council never paid money to the Commissioners: the Commissioners would pay to the Council the sum entered in Box 5.
21. Each of the returns therefore included the following errors:

(a) Box 1 (VAT due on sales and other outputs) included the amount of output tax that the Council mistakenly recorded as due in respect of the notional fees of the Grant Agency; so did box 3 (total VAT due).

(b) The calculation that produced the amount entered in box 4 included the relatively small sum claimed as a credit for input tax referable to the supervisory work of the Grant Agency for which no fee was actually received. However, since, if the Council had correctly treated the notional fee for Agency services as non-taxable, that sum would in any event have been included in the section 33 claim which was also included in box 4, the figure actually entered in box 4 was correct. (A worked hypothetical example of this is set out in the Commissioners’ letter of 26 March 2001.)

(c) The amount entered in box 5 (i.e. the difference between the amount in box 3 and that in box 4) was correspondingly too small.

There were also, presumably, corresponding errors in Boxes 6 and 7, but these add nothing relevant.

22. In consequence of these errors, the sums paid by the Commissioners to the Council were smaller than they would otherwise have been. The Commissioners paid the sum entered in box 5 in each return.
23. Although the returns made by the Council did not differentiate between its claims for section 33 refunds and its claims for credit for input tax, the amounts it believed to have been entitled to by way of credit for input tax should, and I assume were, recorded in its VAT account, as were the sums it considered to be the total of output tax for which it was liable to account in each period. Correction of these accounts would involve reducing the sum recorded as input tax in each accounting period, and more significantly reducing the sum recorded as output tax.
24. In December 1999, the Commissioners announced, in BB/26A/99, that VAT refund claims made under section 33 and lodged after 31 March 2000 would be subject to a three year time limit.
25. By letter dated 30 March 2000, Price Waterhouse Coopers (“PWC”) on behalf of the Claimant claimed from the Defendants over £800,000 by way of VAT that the Claimant had mistakenly accounted for to the Defendants between 1 January 1991 and 29 February 2000. The Defendants accept, for the purposes of this claim, that the Claimant did mistakenly account to them for sums in excess of their legal obligation. They have paid to the Claimant the sums mistakenly accounted for between 1 April 1997 and 29 February 2000, but they have rejected their liability in respect of sums over accounted for more than 3 years from the date of the claim on the ground that their liability is limited to sums mistakenly accounted for within 3 years of the date of the claim.
26. In these proceedings, the Claimant seeks judicial review of the decision of the Commissioners to reject their claim for sums for which it over-accounted to them more than 3 years before the date of the claim contained in the letter of 30 March 2000. The parties have agreed that the preliminary issues to be decided by me are the following:

(i) Was the Claimant’s claim for a payment within section 33 of the Value Added Tax Act 1994?

(ii) Was the Claimant’s claim time-barred by virtue of :

(a) Section 80 of the Act?

(b) Regulation 35 of the VAT Regulations 1995?

These issues are narrower than those ordered to be determined by the Order of Burton J of 6 March 2002, and that order will therefore be amended accordingly.

Discussion

27. The Council’s claim is both a claim for output tax for which it over-accounted and for the unpaid VAT refund to which it was entitled under section 33. The over-declaration of output tax led to an insufficient claim for section 33 refund (although that claim was not differentiated in the Council’s returns from the credit it claimed for input tax), and therefore an underpayment by the Commissioners of that refund. Thus the answer to issue (i) is affirmative; but the dual nature of the claim must not be overlooked. Nor must the fact that to a minor extent there was, albeit not express, an excessive claim for input tax, i.e. the input tax thought by the Council to be referable to the Agency fees. Although the claim for input tax was not separately quantified in the return, the Council’s perceived input tax should have been shown in the VAT account maintained by the Council under Regulation 32.
28. It may be that in an orderly system, the classification of the underpayment, its causes, and the statutory basis of the Council’s claim to be put in the financial position it would have been in if no mistake had been made by it, would be irrelevant; unfortunately, because of differences in the timing of the introduction of the 3-year limitation period, the statutory basis of the claim may be decisive; and the observation in the first sentence of the previous paragraph does not resolve the issue.
29. Before addressing the preliminary issues, I mention two points that go to the merits of the parties’ cases. The Council, asserts that it is simply trying to be put into the position in which it should have been if it had not made a mistake as to the VAT treatment of its agency service. The Commissioners make the point that if they had not for convenience required the Council’s section 33 claims to be amalgamated with its VAT returns, and the payment of the sums (a) under section 33, and (b) to or from the Council as a taxable person, amalgamated, the present claims would unquestionably have been capped by section 80; and it is odd that the form of return adopted for convenience should have a substantive affect on the parties’ rights and liabilities.
30. It is convenient first to address the issues raised in relation to section 80.

Section 80

31. Section 80 applies only to those who have “paid” to the Commissioners “an amount by way of VAT that was not (in fact) VAT due to them”: subsections (1) and (7). The word “paid” and like expressions (“pay”, “payment”) are protean. They may be construed as being restricted to the actual transfer of money as cash or funds at a bank; or they may include other means of satisfying debts, including the satisfaction of debts by means of set off or the settlement of accounts. Examples of the wider interpretation of such expressions are Spargo’s Case (1873) 8 Ch App 407, in which the expression “payment in cash” was held to include payment to the company of the nominal value of shares by an agreed set off of mutual debts; and White v Elmdene Estates Ltd [1959] 3 WLR 185, in which the landlord’s requirement that the tenants sell their house to an associated property company at a price that was £500 less than its market value was held to constitute “the payment of (a) premium” prohibited by statute. Of course, context is everything. The object of the requirement that shares should be paid in cash was that the company should have received full value for its shares: and in Spargo’s Case the company had done so just as much as if it had paid to the shareholder the sum due to him and he had paid to the company the sum due to it on the shares. In White v Elmdene Estates Ltd the court was concerned with an arrangement that would have circumvented legislation protective of residential tenants in times of a shortage of accommodation: from that point of view, there was no difference between requiring payment by a tenant and requiring him to transfer property at an undervalue.
32. Since section 80 imposes an express obligation on the Commissioners to repay sums, to which they were not entitled, one might have thought that it would be widely construed; but it has not been. Hitherto, “paid” has been construed as restricted to actual payment, and not to include the satisfaction of a taxable person’s right to input tax by its deduction from his output tax pursuant to section 25. It appears curious that the rights of taxable persons who overpay VAT should have been different (by reason of the limitation period or “cap” in section 80(7)) from those of persons who did not actually pay tax, but received an inadequate repayment from the Commissioners. Be that as it may, the restriction of section 80 to those who made actual payments led to a distinction being drawn between so-called payment traders, whose output tax exceeded input tax, so that they made payments to the Commissioners by way of VAT when they made their returns, and repayment traders, whose input tax exceeded their output tax, and therefore received payment of their tax credits from the Commissioners after submitting their returns. Claims by payment traders for refunds of tax overpaid by them were regarded as capped by section 80; claims by repayment traders, for additional tax credits, were not, because they had not made any payment by way of VAT to the Commissioners.
33. The concepts of payment and repayment traders are not to be found in the legislation, and are unhelpful. There is no dichotomy. While some traders are always the one or the other, others will sometimes make payments with their returns and at other times (because, for example, of a large purchase resulting in unusually large amount of input tax) receive a tax credit. Whether there has been an actual overpayment of (or insufficient credit for) tax must be determined by reference to the individual VAT return that resulted in it. The position is further complicated because a claim against the Commissioners may be partly for the refund of tax actually paid and partly for an insufficient tax credit, as where a trader has mistakenly accounted for £250 more of output tax than he in fact paid or incurred during his accounting period, and his return showed an excess of output tax over input tax of £100, which he had paid to the Commissioners. In such a case, if section 80 is construed as restricted to money payments, the trader’s claim is as to £150 under section 80 and as to £100 outside it.
34. The first case in which the narrow interpretation was applied was R v Customs and Excise Commissioners, ex parte Kay & Co Ltd [1996] STC 1500, decided in November 1996. The issue there was whether the Commissioners were entitled to defer repayment of overpaid VAT in order to take advantage of the legislation expected to be introduced to impose the retrospective 3-year limitation period on claims. Not surprisingly, Keene J held that the Commissioners had no power to defer payment without legislative authority. It seems to have been assumed that those who received tax credits under section 25 had not “paid” a sum by way of their output VAT. The payment-by-set-off argument does not appear to have been raised. Rather it was argued for the Commissioners that payment had been made by the taxpayer to the Commissioners by the payment of his input tax to his suppliers.
35. Following the decision in Kay, the Commissioners issued a DCL in January 1997, in which they advised that claims by payment traders only were capped by section 80, and that repayment traders’ claims arising out of their having made too small claims for tax credits were not capped. In a series of FAQs, the DCL stated:

“Q. What about local authorities?

A. Local authorities’ activities are split between business and non-business activities … However, in line with commercial traders, any VAT connected to local authorities’ business activities will be subject to the cap. Output tax mistakenly charged on non-business activities, such as building control fees, will continue to be refunded.”

It seems that this DCL effectively repeated advice given in an earlier DCL dated 7 October 1996, quoted in PCW’s letter to the Commissioners of 30 March 2000.

36. The advice in that DCL was revised in BB/2/98, in which the Commissioners advised that the application of section 80 to a claim depended on the individual accounting period and return of the taxable person, rather than his trading pattern as a whole. If a particular return resulted in an overpayment to the Commissioners, section 80 applied to a claim for repayment; if a return resulted in an inadequate a tax credit, section 80 did not apply and the claim for the balance of the tax credit correctly due was not subject to the section 80(7) cap. The Commissioners stated:

“In summary –

– VATA 1994 section 80 only applies in those cases where a business has over ‘paid’ an amount by way of VAT to Customs. ‘Paid’ implies a direct payment from the business to Customs. If you have not made such a payment, section 80 cannot apply to you.”

BB/2/98 did not refer to the position of local authorities.

37. In R v Customs and Excise Commissioners, ex parte Building Societies Ombudsman Co Ltd ([1999] STC 974) Moses J assumed that section 80 applied only to taxable persons who had made actual payments by way of VAT. In the Court of Appeal, the distinction between payment traders and repayment traders and the difference in their respective positions under section 80 was similarly accepted: see the judgment of Rix LJ ([2000] STC 892) at paragraph 140 ff.. The decision of the Court of Appeal in Marks and Spencer plc v Customs and Excise Commissioners [2000] STC 16, proceeded on the basis of that distinction in the application of section 80 as between payment and repayment traders.
38. In Glasgow City Council v Commissioners of Customs and Excise (Decision 16613) a VAT Tribunal considered a claim by Glasgow City Council for payment of VAT that it had in part overpaid and in part under-claimed. As in this case, the taxable person was a local authority to which section 33 applied. The total claim was for some £2 million, and resulted from mistakes made in 5 VAT returns. In 4 of those returns, the Council had been shown as owing money to the Commissioners; in one money was shown as due to the Council. That return should have shown a repayment due by the Commissioners to the Council, and some part of the liability of the Commissioners to the Council arose under section 33. The Council contended that because, looking at the period of its claims as a whole, or year by year, it was a repayment trader, it should be treated as such in respect of all of the individual relevant periods of account. The Tribunal rejected this submission, holding (in my view inevitably) that each return had to be considered individually. They said:

“… Section 80 relates to amounts paid. The period of three years (in section 80(7)) is reckoned by reference to the date of the claim and the date the amount reclaimed was paid. Where a claim is made in relation to different amounts paid on different dates, the capping provisions could be avoided by making one global claim covering amounts paid over many years. Accordingly, each of the five amounts, which are the subject of these proceedings, must be looked at separately. We do not agree that one must review the position annually to determine whether a trader is a payment trader or a repayment trader. The section is concerned and only concerned with amounts paid to the Commissioners. In our view, therefore, one must have regard only to the date on which the overpayment in respect of a particular Return was made.”

The Tribunal held that the Council’s claim under the first 4 returns was capped by section 80, but that it was entitled to recover the amount it had under-claimed under the fifth. The decision as to the fifth return is inconsistent with the Commissioner’s claim before me.

39. Mr Mantle, for the Commissioners, accepts that section 80 applies only to actual payments, and that under-recovery of refunds or tax credits is not subject to its provisions. However, he submits that there were mandatory set-offs under section 81 between the Council’s section 33 claim and the amount declared by it as output tax; and that a distinction is to be made between the operation of set off under section 81 and the claiming of credit for input tax under section 25: whereas the latter does not result in a payment within the meaning of section 80, the former, a true set off, does. In this connection, he relied on the authorities referred to in paragraph 31 above. Mr Cordara, for the Council, submitted that there was no such distinction, and that in any event, section 81 did not apply to the amounts set out in its returns, in so far as they were in error, because it could only operate on actual cross debts and liabilities, not on mistakenly perceived or recorded debts and liabilities.
40. A claim for credit under section 25 and the operation of set off under section 81 are not identical. The former appears to be a right, to be exercised at the option of the taxable person, and Neuberger J so held in University of Sussex v Commissioners for Customs and Excise [2000] STC 1495. Set-off under section 81, on the other hand, is mandatory. Be that as it may, for section 81 to have operated in this case would have involved its operating in relation to perceived or reported sums rather than objectively due sums. Whether the distinction, for the purposes of section 80, between the operation of section 25 and that of section 81 is valid or not, in my judgment Mr Cordara is right in his submission that section 81 only applies to actual, and not to perceived or reported, debts and liabilities. In order for it to apply to reported or perceived debts and liabilities, additional words have to be read into the section which are not there. Moreover, the effect of section 81 is that to the extent of the set-off, “the obligations of the Commissioners and the person concerned shall be discharged”. I find it difficult to believe that Parliament could have intended the set-off of incorrectly stated (and possibly non-existent) debts and liabilities to lead to actual discharge to the extent of the set-off; and it is not possible to read section 81(3) as creating some kind of perceived or provisional discharge.
41. Furthermore, I do not read the Act or the Regulations as creating a liability on the part of a taxable person to pay the sum he reports as output tax (or output tax less input tax), as distinct from the actual amount of tax (or output tax less input tax). Similarly, I cannot read section 33 as requiring the Commissioners to pay not the true sum of VAT chargeable to a section 33 authority, but the sum claimed by that authority.
42. I therefore reject Mr Mantle’s submission that the Council paid tax by reason of the operation of set-off under section 81.
43. However, there was in practice a setting-off of sums between the Council and the Commissioners. The Council satisfied its perceived liability for output tax by credit against its section 33 claim (and the undifferentiated credit for input tax). In my judgment, that process involved the payment, within the meaning of section 80, of that perceived liability. The expression “paid” in section 80 should be given a practical and commercial meaning. I do not think that it should be given a narrow meaning because of the present provisions of subsection (4): the meaning and scope of subsections (1) and (7) could not have been changed by the amendment of subsection (4). The Council paid its perceived liability to the Commissioners just as effectively as if it had received cash for its section 33 claim and paid its perceived liability as a taxable person separately.
44. Furthermore, although the payment was not of VAT due to the Commissioners, in my judgment it was a payment “by way of VAT”: the difference is obvious from the wording of section 80 and its context.
45. I therefore distinguish between the present case and cases where credit is incorrectly taken solely pursuant to section 25(2), which I take to be a special case. The taking of such credit under the statutory procedure is not the making of a payment.
46. My conclusion is consistent with what I assume would have happened if the Commissioners had not required the section 33 claim to be amalgamated with the section 25(3) claim, and each claim had been accounted for and actually paid separately. In that event, the Commissioners would have paid the section 33 claim in full. The Council would have paid what it considered to be its net liability as a taxable person. It would have made an overpayment. That overpayment would indubitably have been subject to section 80 and the Commissioners’ liability to repay capped by section 80(4). Following the expiration of the limitation period in that subsection, the financial position of the Council would have been the same as I hold it to be.
47. This conclusion has the advantage that no inconsistency is produced between the effect of section 80 and the effect of Regulations 35 and 32. If repayment was due, the Council would be unable lawfully to correct its return under Regulation 35 and its VAT account would remain uncorrected and could not be adjusted by reason of the qualifications to Regulations 32(3)(c) and 32(4)(c), restricting corrections or adjustments to those required or allowed by (for present purposes) Regulation 35, and the limitation period for the correction of errors introduced by the Commissioners’ Notice 700/45/93. The Council’s VAT account would cease to show the true state of its account with the Commissioners. It would be anomalous if a taxable person could receive a repayment of sums paid by way of VAT but not be permitted to correct his VAT account to show that repayment. However, I do not rely on the provisions of the Regulations in order to interpret the Act.
48. Since the claim is for “an amount paid to (the Commissioners) by way of VAT by virtue of the fact that it was not VAT due to them”, the Commissioners are not liable to make repayment under section 33.
49. On the above basis, no separate issue arises in respect of the return for April 1996.
50. My answer to issue (ii)(a) is: Yes.

Regulation 35

51. Regulation 35 does not purport to impose a limitation period on the Commissioners’ liability for tax that it should have paid to the taxable person whose VAT return mistakenly showed an insufficient tax credit due to him. Regulation 29(1A) does impose such a limitation period. Thus, if a taxable person has overpaid VAT to the Commissioners, his liability is capped by section 80(4); if he has failed to claim a sufficient tax credit, the Commissioners liability is capped by Regulation 29(1A). A claim may fall under both provisions, as where there is a failure to claim input tax of £200 in a return showing a (mistaken) liability to the Commissioners of £150. But it is difficult to see why Regulation 35 should be construed as imposing a limitation period when it does not in terms purport to do so, and good reason to require a limitation period on the liability of a tax authority to the taxpayer to be clearly spelt out. I would add that the wording of Regulation 35, requiring correction of a return “within such time as the Commissioners may require”, is more appropriate to the requirement that errors be corrected than a prohibition of late corrections.
52. My answer to issue (ii)(b) is: No.