England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 May 2005

Mr Justice Lightman:

INTRODUCTION

1. I have before me two applications by British Telecommunications Plc ("BT") for judicial review of decisions ("the Decisions") of the Commissioners of Customs and Excise, the predecessor body to HM Commissioners for Revenue and Customs ("the Revenue"), see the Commissioners for Revenue and Customs Act 2005, sections 5(1)(b), 48(2) and 51(3). The applications arise out of an overpayment by BT to the Revenue of £40,350,221.33 ("the Overpayment") in respect of VAT as a result of an error in its accounting software. The Revenue have repaid £16,259,376.46 ("the Repayment"). By the Decisions the Revenue denies the entitlement of BT to repayment of the balance ("the Balance") as statute barred and to payment of interest on the Repayment under English domestic law. BT challenges the Decisions on the grounds that the entitlement is not statute barred by reason of a published concession by the Revenue ("the Concession") and that it is entitled to interest on the whole of the £40,350,221.33 under European law.

FACTS

2. In 1991 BT introduced for customers as an option the Monthly Payment Plan ("the MPP"). Under the MPP customers pay for their telephone usage by means of a monthly fixed payment (generally, but not always, in advance). These payments are set at a rate designed to cover the cost of the customer's telephone usage each month. If the payments fall short of actual usage, the amount of the monthly payment can be increased or the customer can make a one-off payment to clear the backlog. If the payments are in excess of actual usage, the monthly payment can be reduced to clear the credit balance or the customer can receive a repayment of the net credit on his account.
3. On the termination of an MPP account before September 2002 (when the system changed), if the balance on the account was negative a final payment would be sought from the customer, and if the balance of the account was positive (i.e. the account was in credit) the customer was paid the balance.
4. BT is a taxable person whose business involves (amongst other things) the supply of telecommunication services. It is obliged to charge output tax on those supplies and account for that output tax to the Revenue. BT accounts to the Revenue for VAT (as it is obliged to) on a cash received basis. Each month, when BT receives a payment from an MPP customer, three things happen: (1) the internal balance of the customer's MPP account is increased; (2) a positive entry is made on the BT accounting system to an account named "GL 64138" of the VAT fraction (i.e. 7/47) of the payment; and (3) a corresponding positive entry is made to an account named "GL 73120" which is BT's VAT output account. The entry of an amount in account GL 73120 triggers a payment to the Revenue at the end of the appropriate period.
5. When on the termination of an MPP account which was in credit a balance was repaid to a customer, a negative entry equal to the VAT fraction of that payment should have been posted to account GL 64138 because the effect of that payment was to reduce the consideration which BT had received from that customer for supplying telecommunication services to him. In turn this would have caused a negative entry to be posted to account GL 73120 and reduced BT's overall VAT liability in accordance with regulation 38 of the VAT Regulations 1995. But unfortunately because of an error in BT's accounting software until the error was discovered, on termination of an MPP account with a positive balance a positive amount was posted to account GL 73120 causing the overpayment of the £40 million VAT to the Revenue over the eleven year period. The overpayment was only discovered in September 2003 when a reconciliation was carried out between the balance of the MPP accounts and account GL 64138.
6. There are some 4.5 million residential customers using the MPP, which represents 20% of BT's residential customer base. There are also a relatively small number (approximately 135,000) of business customers who use MPP. None of them was in any way prejudiced by the computing error.
7. VAT is a self assessed tax which accounts for about 20% of Central Government Revenue.

THE CONCESSION

8. References in this judgment to sections and schedules are to sections and schedules in the Value Added Tax Act 1994 (as amended). Section 80 so far as material reads as follows:

"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.

…

(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.

…

(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."

9. The time limits for repayment claims in section 80 as originally enacted were practically open ended. In place of the present section 80(4), sections 80(4) and (5) read as follows:

"…

(4) No amount may be claimed under this section after the expiry of six 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 six years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it."

10. Most claims for repayment arise because a mistake has been made. Therefore subsection (5) (as originally enacted) applied and the Commissioners were often liable to repay sums paid over many years, sometimes even going back to the introduction of VAT in 1973, provided the claim had been made within six years of discovery of the mistake or whenever it could reasonably have been discovered. By 1996 there were a number of large VAT disputes before the courts and the VAT Tribunal and it was recognised that, if several issues were ultimately decided against the Commissioners, there could be a revenue loss to the Exchequer running into many hundreds of millions of pounds. Claims were being made which in some cases went right back to the introduction of VAT in 1973 for repayment of tax that had been paid and collected in good faith. Recognising the scale of the potential revenue loss, it was decided to introduce a new three-year limitation period for repayment claims, which was to run from the date that the incorrect payment was made.
11. The three year cap was not well received by the business community. In response to concerns raised, the Revenue published Business Brief BB/9A/97 and in May 1997 an amendment to Public Notice 700/45 "How to Correct Errors You Find on Your VAT Return" which included the Concession. The Concession then read as follows:

"Exceptions to the three year time limit.

There is no time limit for correcting the following types of errors:

simple duplication of output tax:

tax point errors, that is where you have declared an amount of VAT on the return which immediately precedes or follows the return for which the amount was due. "

12. The Revenue published a new version of Public Notice 70/45 in January 2000 in which the Concession appears at paragraph 2.5 and another new version in March 2002 in which the Concession appears at paragraph 4.5.
13. In September 2002 by agreement with the Revenue BT changed the basis of its VAT accounting. In September 2003 BT discovered the Overpayment. On the 30^th October 2003 BT wrote to the Revenue asking for repayment of the Overpayment. After a meeting on the 17^th December 2003, on the 14^th January 2004 the Revenue wrote to BT informing it of its decision not to apply the Concession. The Revenue made the Repayment as to £9,820,471.71 on the 22^nd January 2004 and as to £6,438,904.72 on the 3^rd February 2004 in respect of overpayments made during the three year limitation period.
14. On the 26^th February 2004 BT sent a letter before action to the Revenue in accordance with the Judicial Review Pre-Action Protocol ("the Protocol") in respect of the decision not to apply the Concession and on the 16^th March 2004 applied for, and on the 11^th May 2004 obtained, permission to apply for judicial review of that decision in claim CO/1355/2004.
15. Meanwhile on the 30^th April 2004 BT wrote to the Revenue claiming interest of £1,904,676 on the Repayment. The Revenue rejected this claim on the 27^th May 2004. On the 16^th June 2004 BT sent a letter before action to the Revenue in accordance with the Protocol in respect of this decision. The Revenue replied on the 1^st July 2004. On the 22^nd October 2004 BT obtained permission to apply for judicial review of that decision in claim C/O 3503/2004 and a direction was given that both applications for judicial review should be heard together.
16. Meanwhile on the 4^th October 2004 the Revenue published Business Brief 27/04 in which they announced that the Concession was to be withdrawn with effect from the 1^st July 2005.

SKELETON ARGUMENTS

17. Detailed skeleton arguments were exchanged by the parties which helpfully ventilated the arguments of both parties on a number of issues raised by them. The exchange proved productive, for in consequence at the hearing the parties were able to agree to limit the issues to be determined to two. The Revenue's skeleton arguments were signed, as well as by Counsel representing them at the hearing, by Mr Hugh McKay who acted as junior counsel for the Revenue until his untimely death in March this year. His willing and valuable assistance in Revenue cases will be sorely missed by the court.

ISSUES

The Concession.

18. The first question is whether the Concession exempts the Overpayment from the operation of section 80(4).
19. Pursuant to the powers of care and management conferred on the Revenue by paragraph 1(1) of Schedule 11 there is vested in the Revenue a wide managerial discretion:

"to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time"

per Lord Hoffmann in R v. HM Commissioners of Inland Revenue ex p. Wilkinson [2005] UKHL 30 at para 21.

20. It is pursuant to this discretion that the Commissioners have power to publish and apply concessions. It is common ground that the Revenue lawfully exercised its discretion in publishing the Concession. It is well established that a concession is available only to those who fall clearly within its terms: per Bingham LJ in R v. CIR ex p. MFK Ltd 62 TC 607 at 643. The Concession is not (and could not lawfully be intended) to exempt from the three year cap every taxpayer who has paid too much output tax, which would erase the statutory time limits for claims for repayment of erroneous overpayments. The limits on the exemption must be fully respected.
21. The Concession applies if the Overpayment was a "simple duplication of output tax". To constitute a "simple duplication of output tax" there must be: (1) a duplication; (2) of output tax; and (3) the duplication must be simple.
22. The term "duplication" means doubling up of payment. The term "output tax" means the tax payable on a taxable supply of goods and services. There have been two suggestions to me as to the possible meaning of the term "simple" in this context. It may mean "only duplication and nothing else" and it may mean "uncomplicated". In the context of the Concession plainly the former meaning is preferable and applicable. The Concession only bites if the overpayment is a duplication (or doubling up) of payment of output tax and the Concession cannot possibly be intended to require examination and evaluation of the degree of complication of any exercise to be undertaken.
23. Mr Milne, counsel for BT, submits that BT paid output tax on receipt of payment by its MPP customers and that it then accounted for that output tax a second time when, on termination of accounts by MPP customers who were in credit, it made the repayment to the customer. But the facts as set out in the application for judicial review and the evidence in support, as Mr Brennan, counsel for the Revenue points out, are to the effect that the erroneous payment by BT was calculated by reference to the amount being refunded (namely the balance on the customer's account on termination) and not to any taxable supply by BT to the customer. After I had reserved judgment, Mr Milne restored the application before me. He told me that a representative of BT, who had attended the hearing and listened to his argument, had told him after the hearing that the facts as stated in the application and evidence and as represented to the Revenue when the Revenue made its decision in respect of the Concession were wrong and that the true facts established that the overpayment was indeed a second payment of VAT in respect of the last monthly fixed payment by the customer.
24. In these circumstances the proper course must be for me to dismiss the application for judicial review in respect of the decision not to apply the Concession. That decision cannot be open to challenge by BT on the newly raised factual ground which is inconsistent with the basis on which BT presented its case to the Revenue. It may be open to BT to make a fresh application on the facts as they now say they are to the Revenue to apply the Concession. On such an application the Revenue may reasonably be expected vigorously to investigate the new basis of claim.

INTEREST

25. The second question raised is whether BT is entitled under European law to interest and indeed compound interest on the Repayment and (if held payable) the Balance. It is common ground that under English domestic law no interest is payable on the Repayment because it was made before the institution of proceedings for its recovery and that, if the Balance were held payable, only simple, and not compound, interest could be awarded. BT however contends that it is entitled to interest, and indeed compound interest, on the Repayment and on any order for payment of the Balance. The issue between the parties is whether BT has entitlement to those payments of interest under European law. BT acknowledges that, if such a right is to be established, it can only be found in the jurisprudence of the European Court of Justice ("the ECJ").
26. Decisions of the ECJ establish with one voice (what has been described as a "mantra") that European law protects and provides redress when charges or taxes (including VAT) are improperly levied: individuals have the right under European law to obtain repayment and redress (which may include compound interest): see e.g. Metallgesellschaft v. CIR [2001] ECR 1-1727 at paras 83-87. But they lend no support for the proposition that the individual has any right under European (as opposed to national law) in respect of payments of charges or taxes voluntarily (albeit mistakenly) made.
27. BT have plucked an ambiguous sentence from the judgment of the ECJ in Dilexport v. Amministrazione delle Finanze dello Stato [1999] ECR 1-579 at para 24 on p.611 as suggesting the possibility that European law might recognise a right to repayment of charges paid when not due without any requirement that they have been improperly levied. The relevant paragraphs in the judgment read as follows:

"23. It should be borne in mind that, according to settled case-law of the Court, the right to a refund of charges levied in a Member State in breach of rules of Community law is the complement of 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 domestic charges, as interpreted by the Court of Justice. The Member State is therefore required in principle to repay charges levied in breach of Community law.

24. However, the Court has also observed on several occasions that the problem of disputing charges which have been unlawfully claimed or refunding charges which have been paid when not due is settled in different ways in the various Member States, and even within a single Member State, according to the various kinds of taxes or charges in question….

25. This diversity between national systems derives mainly from the lack of Community rules on the refund of national charges levied through not due. In such circumstances, 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, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness)."

28. But it is plain from the context and the later authorities in which that case is cited (e.g. Metallgesellschaft v. CIR above) that it establishes nothing further than that a remedy is available in case of unlawful levies in breach of Community law. It is for national law to provide remedies where the payment is voluntary, though European law may provide a default remedy in case national law is deficient in this regard.
29. In my judgment BT has established no entitlement to interest under European law and the decision of the Revenue that no interest is payable was clearly correct.

CONCLUSION

30. I have already heard arguments on costs and in particular the application of the Revenue for the costs of the claim CO/1355/2004 to be assessed on the indemnity basis and I am asked to give my decision on costs in this judgment. In my view the Revenue as the successful party is entitled to the costs of both applications and these should be assessed in case of claim CO/1355/2004 on an indemnity basis and in case of claim CO/3503/2004 on the standard basis. The order for payment of indemnity costs in case of CO/1355/2004 is appropriate because this is a case which is out of the ordinary that requires an order that BT pay the costs on an indemnity basis. The hearing of the application in that case has been aborted by the failure of BT to lend proper attention to the factual basis on which the application was made and permission obtained until after I had reserved judgment. This is totally unacceptable. The Revenue should be indemnified against the entire costs of the futile exercise.