England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		November 21 2003

Mr Justice Lawrence Collins:

I Introduction

1. This is an appeal by the Local Authorities Mutual Investment Trust ("LAMIT") under section 11(1) of the Tribunals and Inquiries Act 1992 from the decision of the VAT and Duties Tribunal ("the Decision") released on February 18, 2003.
2. The Decision was on an appeal from the decision of the Commissioners contained in a letter of November 28, 2001, refusing LAMIT's claim to recover input tax of £144,308.33, on the grounds that the claim was time-barred, being made more than three years and one month after the end of the accounting period in which the expenditure giving rise to the input tax was incurred. The Tribunal dismissed the appeal.
3. The issue in this case is whether the restrictions on the right to recover input tax introduced by the Value Added Tax Regulations 1995, SI 1995 No. 2518 ("the 1995 Regulations"), Regulation 29(1), (1A), with effect from 1 May 1997 are in conformity with Community law, and with the Human Rights Act 1998.

II The facts

4. LAMIT acts as trustee for charities and public authority pension funds, including the Local Authorities' Property Fund ("LAPF"). The assets of LAPF comprise commercial properties. In the case of some of these properties LAMIT as landlord has opted to charge VAT on the rents. Accordingly, LAMIT accounts for VAT on the rents of the opted properties and recovers input VAT on the costs incurred in making the taxable supply of the land.
5. In June 2001, LAMIT changed its method of accounting for VAT. It had previously accounted for VAT on an invoice basis (that is, it issued an invoice for rent and service charges on its taxable properties that included VAT; and it accounted to the Commissioners for that VAT in the quarter in which the invoice was issued even though the invoice might be paid only later on). Under the new basis, LAMIT issued a VAT invoice only when it received payment of the rent and service charge.
6. As a result of the change, LAMIT had to reconcile previous payments of VAT so as to ensure that there was no double counting and were no omissions. In the course of that exercise, LAMIT discovered that it had failed to claim credit in its VAT returns for a number of items of input tax for the periods 02/98 to 5/01 (the calendar period running from December 1, 1997 to May 31, 2001).
7. The errors were discovered after June 2001. This necessitated an extensive accounting review which was only completed in November 2001.
8. The review resulted in calculations which showed (for the periods 02/98, 05/98, and 08/98) output tax of £8,750 and input tax of £153,058.33, with a net balance of £144,308.33. LAMIT submitted a voluntary declaration to correct the errors on November 20, 2001. The Commissioners allowed a claim for later periods but refused the claim for the 1998 periods.

III The legal framework

9. The obligation to account for output tax and the right to recover input tax derive from the Sixth VAT Directive (77/388/EEC), Article 17 of which provides:

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

(2) In so far as the goods and services are used for the purpose of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;

…"

10. Article 18 deals with the exercise of the right of deduction:

"(1) To exercise his right of deduction a taxable person must:

(a) in respect of deductions pursuant to Article 17(2)(a), hold an invoice drawn up in accordance with Article 22(3);

…

(2) The taxable person shall effect the deduction by subtracting from the total amount of tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

…

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

…

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

…"

11. By Article 22(4)(a): "Every taxable person shall submit a return by a deadline to be determined by Member States …"
12. By section 25(1) of the Value Added Tax Act 1994 ("the 1994 Act"):

"(1) A taxable person shall … account for and pay VAT by reference to such periods (in this Act referred to as 'prescribed accounting periods') at such time and in such manner as may be determined by or under Regulations …'

(2) Subject to the provisions of this section, he is entitled at the end of each preceding 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 which is due from him.

(3) If … the amount of the credit exceeds that of the output tax, then … the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due to him under this subsection is referred to in this Act as a 'VAT credit' ".

13. By section 26:

"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is on supplies, acquisitions and importations in the period) as is allowable by or under Regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable supplies …'

14. Regulation 25(1) of the 1995 Regulations provides that returns are to be made within one month of the end of each three month period.
15. Section 58 of the 1994 Act provides that Schedule 11 shall have effect with respect to the administration, collection and enforcement of VAT. The 1994 Act, Schedule 11, para 2(10)(b),(c), provides for the making of regulations to allow accounting and financial adjustments for earlier accounting periods, including adjustments for the correction of errors. The relevant Regulations include Regulation 35, which provides that where a taxable person has made an error in any return made by him, then, unless he corrects it in accordance with Regulation 34 (which applies only to claims under £2,000), he shall correct it in such manner and within such time as the Commissioners may require.
16. The means of making such adjustments are the extra-statutory mechanisms of voluntary disclosure and credit notes: Notice 700/45/02. A voluntary disclosure of errors on VAT returns is a claim to adjust made on Form VAT 652 or by letter, in cases where the adjustment exceeds £2,000.
17. Section 80 of the 1994 Act was amended by the insertion of (inter alia) section 80(4) by the Finance Act 1997, section 47(1), with effect from July 18, 1996. By section 80(1) of the 1994 Act: "Where a person has … paid an amount to the Commissioners by way of VAT which was not due to them, they shall be liable to repay the amount to them." By section 80(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."
18. The relevant Regulations were also amended. With effect from May 1, 1997 (Value Added Tax (Amendment) Regulations, SI 1997 No. 1086) Regulation 29(1), (1A) read as follows:

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

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

IV The Decision

19. The Tribunal applied the ruling of the European Court in Case C-62/00 Marks and Spencer plc v Customs & Excise Commissioners [2002] ECR I-6325, [2002] STC 1036 in which it had been held that a three year period for recovery of output tax imposed by national authorities was reasonable and in conformity with European law. The Tribunal said:

"15. … While we accept that recovery of excessive output tax collected in breach of European law is different in principle from the claiming of input tax for the first time, where the taxpayer is claiming back his own money which has in effect been the subject of an interest-free loan to the tax authority, in Marks and Spencer the European Court has approved a three year time limit for the recovery of excessive output tax collected in breach of European law in the interests of legal certainty, protecting both the taxpayer and the administration. In this case, in the periods under appeal there is one overpayment of output tax, to which the court's reasoning applies, and six failures to reclaim input tax, to which it does not directly apply. It seems to us that the principle of legal certainty applies just as much to protect the tax authority from late claims for input tax. The right to reclaim input tax applies without qualification to the initial period in which it is incurred. The taxpayer has a continuing right during the next three years subject to conditions which article 18 of the Sixth Directive requires a state to determine, and so during that period there is nothing to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law. After three years with a tax based on three monthly periods, it is reasonable for there to be a time limit even though the effect of it is to prevent recovery of the taxpayer's own money. While the court said nothing about the position on the late recovery of input tax we do not think that the position in this respect is any different. If the court has approved a three year cap on the repayment of tax collected from customers contrary to European law, there is no reason in principle why the cap should not apply to the taxpayer's failure to [make] a claim which it was entitled to make three years earlier; if anything, the former case is the greater restriction on the taxpayer's rights in European law. The interests of legal certainty require that finality should be achieved. Following Marks and Spencer we do not consider that there [is] any doubt about this to warrant a reference to the European Court.

16. On the facts of this case, the failure to recover the input tax could have been discovered at any earlier time if the same investigation had been made earlier. The retrospectivity issue in Marks and Spencer is not applicable here since all the periods in issue are after imposition of the three-year cap; the claim was made 4½ years after the introduction of the cap."

V LAMIT's case

20. The principal arguments, in summary, are these: (1) Regulation 29 does not correctly implement Articles 17 and 18 of the Sixth Directive, because there is no vires in Article 18(3) for Regulation 29(1),(1A); (2) national legislation may impose special limitation periods for restricted categories of cases, in particular to prevent serious disturbance as regards the past, but there are no such special circumstances here; (3) the time limits imposed by Regulation 29 are unreasonable, i.e. disproportionate, in terms of Community law; (4) the right to recover input tax is a "possession" within Article 1 of the First Protocol in Part II of the Schedule to the Human Rights Act 1998, and peaceful enjoyment of that possession is a Convention right within section 1(1). Regulation 29(1A) infringes the exercise of that right in a manner which is not necessary to secure the general interest or payment of taxes.
21. The right of deduction of input tax is central to the "neutrality" principle: Case 268/83 Rompelman v Minister van Financien [1985] ECR 655; Case 50/87 Commission v France [1988] ECR 4797; Case C-361/96 Société Générale des Grandes Sources d'Eaux Minérales Françaises v Bundesamt für Finanzen [1998] ECR I-3495, at 3505, para 21, per Cosmas AG; Joined Cases C-286/94 etc Garage Molenheide v Belgium [1997] ECR I-7281, at 7300, para 36, per Fennelly AG.
22. The taxpayer has a running account with the tax authority: Garage Molenheide [1997] ECR I-7281 at 7303, para 40, per Fennelly AG. The Directive does not specify when a VAT invoice is to be issued. Hence the chargeable event and the issue of the VAT invoice may not occur in the same accounting period. The taxpayer who fails to recover his input tax when able to do so is not depriving the Exchequer of money to which it is entitled, but is making an interest free loan to the government, which converts into a windfall if not repaid.
23. Articles 17 and 18 of the Sixth Directive distinguish between (a) the right to deduct arising (when expense is incurred); (b) the right becoming exercisable (when the customer "holds" a VAT invoice); and (c) the right to deduct being exercised (when the taxpayer makes his VAT return).
24. Article 17(1) provides that the right to deduct arises at the time when the deductible tax becomes chargeable (as to which see Article 10). Article 18(1) provides that in order to exercise his right of recovery, the taxpayer must hold a VAT invoice. Article 18(2) provides how the right of deduction is to be exercised, once the conditions specified in Articles 17(1) and 18(1) have been satisfied. It is not time specific. It does not say that the right must be exercised in the first accounting period it is possible to do so. The right to deduct can be exercised when (a) the right has arisen, and (b) an invoice is held "during the same period".
25. Article 18(3) is intended to cover cases where recovery of input tax has not been undertaken, i.e. "authorised," under Article 18(1), (2). An obvious example is where the taxpayer does not hold a VAT invoice. Article 18(3) has nothing to do with time limits.
26. Regulation 29(1) requires the right of deduction to be exercised in the return for the accounting period during which the right has arisen. Article 29(2)(a) says that the right will only be exercisable if the taxpayer holds a VAT invoice when he makes his return. Hence, in all cases where (a) the right to recover input tax has arisen in one accounting period, but (b) the taxpayer only receives a VAT invoice after he has completed his VAT return for that period, the recovery of input tax becomes a matter of discretion not a matter of right. For example, a taxpayer's accounting period ends on November 30. He orders goods on November 30. He completes his VAT return on December 14. He receives the VAT invoice on December 21. In the Commissioners' view, and on the wording of Regulation 29, he has no automatic right to recover input tax under Article 18(2). He can only recover the tax under Article 18(3). Such a result does not accord with Article 18(1), (2) which makes the right of recovery automatic in such circumstances.
27. Where the Sixth Directive allows a Member State to impose "conditions" as in Article 18(3), these relate to evidential and procedural matters. They do not allow a Member State to cut down a right as such: Joined Cases 286/94 etc Garage Molenheide [1997] ECR I-7281; Case C-427/98 Commission v Germany [2003] STC 301, 314-315, paras 70-74, per Jacobs AG.
28. In General Motors Acceptance Corporation (UK) plc v Customs and Excise Commissioners, January 28, 2003, the VAT and Duties Tribunal held, with regard to the three-year time limit introduced into Regulation 38(1A) at the same time as Regulation 29(1A), that the 3 year cap was not a "condition" authorised by Article 11C.1. This reasoning applies to Article 18(3) which thus deals with such matters as evidence and procedure, and not time-limits.
29. If Regulation 29 is unreasonable and does not accord with the substantive Community law, it cannot be rescued by a discretion. If the Sixth Directive has not been correctly implemented in this regard, the time limits which Regulation 29 contains are ineffective. The Commissioners will not have exercised a discretion but made an unauthorised derogation.
30. According to the principle in Case 33/76 Rewe v Landwirtschaftskammer Saarland [1976] ECR 1989 at 1997-1998, paras 5 and 6 (as applied and developed in many subsequent cases) limitation periods laid down in national rules relating to Community law claims must: (a) be reasonable, i.e. proportionate; (b) not be less favourable than those governing similar domestic actions (principle of equivalence); (c) not render virtually impossible or excessively difficult the exercise of Community law rights (principle of effectiveness); (d) take account of the potential costs and legal uncertainty of late or retrospective claims and the potential unjust enrichment of the recipients.
31. As regards the principle of equivalence, it is necessary to distinguish special limitation periods (i.e. which only apply in respect of claims based on Community law) from general limitation periods (which apply generally to Community law and national law claims alike). In the case of special limitation periods, it is necessary to find a comparator in national law: Case C-88/99 Roquettes Frères [2000] ECR I-10465, at 10493, para 30; Case 130/79 Express Dairy Foods Ltd v Intervention Board for Agricultural Produce [1980] ECR 1887 at 1900, para 12; Case C-231/96 EDIS v Ministero delle Finanze [1998] ECR I-4951 at 4991, paras 37-38; Case C-261/95 Palmisani v INPS [1997] ECR I-4025, at 4047-9, paras 32-38.
32. Where a shorter time limit is introduced, it must apply equally to claims under Community law and claims under national law. Case 62/93 BP Supergas v Greece [1995] ECR I- 1883, at 1904, para 58, per Jacobs AG; Case C-88/99 Roquette Frères at 10493, para 30.
33. Under the Limitation Act 1980, section 9(1), a limitation period of six years applies to an "action to recover any sum recoverable by virtue of any enactment". This does not apply to claims by the Crown for the recovery of tax but does apply to claims against the Crown: section 37(2)(a). For direct taxes the normal limitation period is five years and ten months: Taxes Management Act 1970, sections 33(1), 34(1). A claim to recover input tax is comparable with such claims.
34. As regards the principle of effectiveness, national time limits may not strike at the very essence of rights conferred by the Community legal order and make them impossible to exercise: Case C-246/96 Magorrian v Eastern Health and Social Services Board [1997] ECR I-7153, at 7187-7188, para 44.
35. In cases where special time limits have been upheld it will normally be found that (1) the restriction is needed to prevent limitless retrospective claims, i.e. "serious effects … as regards the past": Case 61/79 Amministrazione delle Finanze dello Stato v Denkavit Italiana srl [1980] ECR 1205, at 1223-4, paras 17 and 24; (2) the claim would involve unjust enrichment of the taxpayer, who has long ago passed on the extra charge to his customers, so that restitutio in integrum would prove "more harmful than the damage for which it is intended to compensate": Palmisani at 4034, para 34, per Cosmas AG.
36. The observations of the European Court in Case C-62/00 Marks and Spencer plc v Customs & Excise Commissioners [2002] ECR I-6325, [2002] STC 1036 on which the Tribunal relied are concerned with a different situation. Overpaid output tax and under-claimed input tax are distinct. In the nature of the VAT system the number of cases where there are late claims to recovery of input tax will be restricted. The person making the claim will have to hold a valid tax invoice. There is no risk of loss of tax, or of unjust enrichment. On the contrary, if the taxpayer does not recover his input tax, he will have been taxed as a consumer. This area can safely be left to general limitation rules. The special limitation period is an unjustified restriction of the Community law right.
37. Accordingly, Regulation 29(1A) does not satisfy the principles of either equivalence or effectiveness.
38. A limitation period must also be reasonable, and proportionate: Garage Molenheide at 7329, paras 46-48; C.R.Smith (Dunfermline) Ltd v Customs and Excise Commissioners [2003] STC 419 (H.L.).
39. Any restriction must (a) be consistent with the scheme and objectives of the Directive; (b) not render the right of recovery ineffective; (c) confine itself to what is strictly necessary to attain its objective; (d) be based on reasons; (e) be subject to effective judicial control. Regulation 29(1),(1A) make the right to deduct ineffective, on a basis which is inconsistent with the wording and scheme of the Directive, without justification and without judicial control.
40. The time-limit is in breach of the right of peaceful enjoyment of property under Article 1 of the First Protocol to the European Convention on Human Rights. The right to reclaim output tax wrongly imposed is a "possession", and so a right protected under the Convention: SA Dangeville v France [2003] STC 771. The interference cannot be justified, since, in the case of input tax, the tax authority has had the benefit of the taxpayer's own money.

VI The Commissioners' case

41. The Commissioners do not dispute the fact that, when a Member State implements a Directive, its implementing measures must respect the general principles of Community law, including the principle of proportionality. The selection of the appropriate limitation period is a matter of legislative choice. Judicial control over the exercise of such a discretion is therefore limited.
42. The setting of reasonable limitation periods is consistent with the requirements of Community law: e.g. Case C-88/99 Roquette Frères [2000] ECR I-10465, at 10490, para 22. The legislative choice as to the selection of the appropriate limitation period can be attacked under the general principles of Community law on the ground that the choice is discriminatory (where the period applicable to rights derived from Community law is less favourable than the period applicable to rights derived from domestic law) or that it renders the exercise of a right conferred by Community law impossible or excessively difficult: e.g. Case 386/87 Bessin et Salson v Administration des douanes et droits indirects [1989] ECR 3551, at 3576, paras 15-18.
43. A limitation period cannot be regarded as rendering virtually impossible or excessively difficult the exercise of rights conferred by Community law merely because it cuts off all or part of a claim: Roquette Frères, at 10491, para 23. A limitation period of three years also cannot be regarded as having that effect: Bessin et Salson, loc. cit.; Case C-62/00 Marks and Spencer plc v Commissioners of Customs and Excise [2002] ECR I-6325, [2002] STC 1036, para 35.
44. Regulation 29(1A) did not render it impossible or excessively difficult for LAMIT to make its input tax claim: LAMIT discovered the errors in question in a relatively short period of time after it embarked on the exercise of checking its books.
45. In order to sustain the argument that there is no power to impose any limitation period at all, LAMIT must show that it has an unfettered and indefeasible directly effective right under the Sixth VAT Directive to make an input tax claim after the period in which the input tax became chargeable. In order to assert such a right, it must be able to point to a provision of the Sixth Directive that so provides in unconditional and sufficiently precise terms: Marks and Spencer case, para 25. There is no such provision.
46. Accordingly, the Sixth VAT Directive does not give rise to an enduring right that cannot be taken away; and Member States can impose time limits on late input tax claims: University of Sussex v Commissioners of Customs and Excise [2001] STC 1495, 1508-1509, paras 51-52.
47. The assertion made by LAMIT that the word "conditions" in the Sixth VAT Directive relates to evidential and procedural matters is misconceived. Limitation periods are classified as procedural matters, and the cases relied on by LAMIT are concerned with provisions of the Sixth VAT Directive which obliged Member States to produce a defined result (whether it be an exemption or a reduction of the taxable amount). The "conditions" that the Member States were empowered to adopt could not frustrate the obtaining of that result. In the present case, the Member States are not obliged by Article 18(3) of the Sixth Directive to uphold each and every input tax claim made otherwise than in accordance with Article 18(2). Therefore, there is no basis for construing "conditions and procedures" in the limited way contended for by LAMIT. In any event, if Article 18(3) does not include a power to impose time limits, it is settled law that where Community law creates a directly effective right and says nothing about time limits, then Member States may impose time limits subject to the conditions established by the European Court.
48. There is no basis for asserting in the present case that Regulation 29(1A) is fundamentally flawed: (a) Regulation 29(1A) is not retrospective; (b) LAMIT's input tax claims arose long after Regulation 29(1A) came into effect; (c) LAMIT's claims are not based upon any directly effective Community law right – they arise from errors made by LAMIT, not from any failure on the part of the United Kingdom to implement or apply, properly or at all, any unconditional and sufficiently precise provision of the Sixth VAT Directive.

VII Conclusions

49. The effect of the decision of the Court of Appeal in Marks and Spencer plc v Customs & Excise Commissioners [2003] EWCA Civ 1448 is that the relevant provision in United Kingdom law for determining time-limits for deduction of input tax is Regulation 29(1A) of the 1995 Regulations and not section 80(4) of the 1994 Act. The reasoning in that decision is that the fact that there has been a failure to claim an input tax deduction does not mean that the gross amount paid to the Commissioners was not due to them, so as to make the payment an overpayment within the meaning of section 80.
50. I accept that the deduction system and the resultant fiscal neutrality is a cornerstone of the VAT system: see Case 268/83 Rompelman v Minister van Financien [1984] ECR 655, at 664, para 19; Case C-50/87 Commission v France [1988] ECR 4797 at 4817, para 15; Joined Cases C-286/94 etc Garage Molenheide v Belgium [1997] ECR I-7281, at 7329, paras 46-47; Case C-427/98 Commission v Germany [2003] STC 301, para 42; Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ 1448, para 173. In the Garage Molenheide case it was held that Member States could not use powers conferred by the Sixth Directive (in that case to determine conditions under Article 18(4) for refund or carry forward in relation to periods in which the deductions exceeded the tax due) in such a way as to have the effect of systematically undermining the right to deduct VAT.
51. It has been established by the European Court since 1974 (Case 41/74 Van Duyn v Home Office [1974] ECR 1337) that directives may have direct effect and may be relied upon by individuals against the Member State, if the provisions are unconditional and sufficiently precise, where the Member State has failed to implement the directive by the end of the period prescribed, or where it has failed to implement the directive correctly. It has been held in several decisions that various provisions of the Sixth Directive are capable of having direct effect, including those relating to the right to deduct input tax: see Case 62/93 BP Supergas v Greece [1995] ECR 1-1883, 1917, para 33; Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ 1448, para 174.
52. It has also now been established that directives may continue to have direct effect even if they have been correctly implemented in national law. In Case C-62/00 Marks and Spencer plc v Customs and Excise Commissioners [2002] ECR I-6325 the European Court held (paras 26 to 28) that the adoption of national measures correctly implementing a directive did not exhaust the effects of the directive. Member States remained bound actually to ensure full application of the directive even after the adoption of those measures. Individuals were therefore entitled to rely before national courts, against the State, on the provisions of a directive which were unconditional and sufficiently precise whenever the full application of the directive was not in fact secured, that is to say, not only where the directive had not been implemented or had been implemented incorrectly, but also where the national measures correctly implementing the directive were not being applied in such a way as to achieve the result sought by it.
53. It has also been held by the European Court in a long line of decisions that, in the absence of Community rules, it is for the domestic legal system of each Member State to determine the procedural conditions governing actions intended to ensure the protection of directly effective rights, including the imposition of time-limits: see e.g. Collins, European Community Law in the United Kingdom, 4^th ed 1990, pp 62-67.
54. The leading cases are Case 33/76 Rewe v Landwirtschaftskammer Saarland [1976] ECR 1989 and Case 45/76 Comet BV v Produktschap voor Siergewassen [1976] ECR 2043, which were argued and decided at the same time. Each concerned the recovery of customs charges contrary to the EEC Treaty. In each case the domestic law of the Member State provided for short time limits for actions for recovery of charges improperly imposed by customs authorities. In Rewe Article 58 of the German Code of Administrative Court Procedure provided for time limits of a month (or in some case, 12 months). In Comet by Dutch law there was a 30 day limit for proceedings against assessments. The European Court ruled that in the absence of Community rules on the subject, it was for the domestic legal system of each Member State to designate the courts having jurisdiction and to determine the procedural conditions governing actions at law intended to ensure the protection of the rights which citizens had from the direct effect of Community law, but such conditions could not be less favourable than those relating to similar actions of a domestic nature. The position would be different if the conditions and time-limits made it impossible in practice to exercise the rights which the national courts were obliged to protect. But that was not the case where reasonable periods of limitation of actions were fixed. The laying down of such time-limits with regard to actions of a fiscal nature was an application of the fundamental principle of legal certainty protecting both the tax-payer and the administration concerned.
55. The European Court has continued to affirm that the imposition of time-limits in fiscal claims is an application of the fundamental principle of legal certainty : e.g. Case C-88/99 Roquette Frères [2000] ECR I-10465, at 10490, para 22. The two principles (1) that the conditions and time-limits cannot be less favourable than those relating to similar actions of a domestic nature, and (2) that they cannot make it impossible in practice to exercise the rights which the national courts are obliged to protect, have come to be known as the principles of equivalence and effectiveness: see e.g Case C-261/95 Palmisani v INPS [1997] ECR I-4025, at 4046, para 27; Case 228/96 Aprile Srl v Amministrazione delle Finanze dello Stato [1998] ECR I-7141, at 7173, para 8; Case C-88/99 Roquette Frères SA [2000] I-10465, at 10490, para 21.
56. Any measures taken by Member States must also satisfy the principle of proportionality, that is, they "must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and the principles laid down by the relevant Community legislation": Joined Cases C-286/94 etc Garage Molenheide v Belgium [1997] ECR I-7281, at 7329, para 46. If the measures go further than necessary in order to attain their objective, they would undermine the principles of the common system of VAT and in particular the rules governing deductions which constitute an essential component of that system: ibid para 48. See also C R Smith Glaziers (Dunfermline) Ltd v Customs and Excise Commissioners [2003] STC 419, 427 (H.L.), per Lord Hoffmann.
57. In Case C-231/96 EDIS v Ministero delle Finanze [1998] ECR I-4951, at 4991, paras 36-38, the European Court emphasised that observance of the principle of equivalence implied that the procedural rule at issue applied without distinction to actions alleging infringements of Community law and to those alleging infringement of national law, with respect to the same kind of charges or dues. That principle did not mean that a Member State was obliged to extend its most favourable rules governing recovery under national law to all actions for repayment of charges or duties levied in breach of Community law. See also Case C-228/96 Aprile Srl v Amministrazione delle Finanze dello Stato [1998] ECR I-7141, at 7174, paras 20 to 22; Case C-261/95 Palmisani v INPS [1997] ECR I-4025, at 4048-9, paras 33 to 38; Case C-343/96 Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR I-579, at 613-4, paras 32-33; Case C-88/99 Roquette Frères SA [2000] I-10465, at 10492, para 29.
58. As regards the question whether a time-limit breaches the principle of effectiveness, that is normally a question for the national court, but in some cases the European Court has itself held that a particular time limit is reasonable: Case 386/87 Bessin et Salson v Administration des douanes et droits indirects [1989] ECR 3551, 3576, para 18 (3 years); Palmisani at 4049, para 40 (one year); Case C-88/99 Roquette Frères [2000] I-10465, at 10495, para 37 (4 to 5 year period); Case C-62/00 Marks and Spencer plc v Customs and Excise Commissioners [2002] ECR I-6325, para 35 (the 3 year period in section 80(4) of the 1994 Act).
59. There are a number of cases relied on by LAMIT on the retroactive effect of directly effective rights to equal treatment, in which national law has imposed a temporal limit for the recovery of amounts accrued due in the past. They are not easy to reconcile, but I do not consider that they are of assistance in this case. See Case C-208/90 Emmott v Minister for Social Welfare [1991] ECR I-4269; C-338/91 Steenhorst-Neerings [1993] ECR I-5475; Case C-410/92 Johnson v Chief Adjudication Officer [1994] ECR I-5483; Case C- 246/96 Magorrian v Eastern Health and Social Services Board [1997] ECR I-7153.
60. The Marks and Spencer case is an example of a case where the effectiveness of the directly effective right was impaired by the curtailing of the limitation period with immediate effect. The European Court said (paras 36 to 40):

"… 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. …[T]he 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.

It is plain, however, that that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time limit is to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date, being that of the entry into force of the legislation, as well as to claims for repayment made before the date of entry into force which are still pending on that date.

Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayments which persons were entitled to submit under the original legislation.

… In that connection it should be noted that member states are required as a matter of principle to repay taxes collected in breach of Community law … and whilst the court has acknowledged that, by way of exception to that principle, fixing a reasonable period for claiming repayment is compatible with Community law, that is in the interests of legal certainty, …"

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

61. By Article 18(3) Member States are to determine "the conditions and procedures" whereby a taxable person may be authorised to make a deduction which he has not made in accordance with those provisions. In University of Sussex v Customs and Excise Commissioners [2001] STC 1495, at 1509 to 1510 (paras 52-56), (affd sub nom Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ 1448) Neuberger J held that under Article 18(3) the United Kingdom was under an obligation to determine procedures whereby late claims for input tax might be made and that those procedures could include time limits and other restrictions, provided that they were reasonable and did not involve rendering the apparent right to make a late claim nugatory.
62. I do not think that it is necessary to resort to the travaux préparatoires for the conclusion that the expression "conditions and procedures" can include time limits. But in any event the travaux préparatoires confirm that conclusion. Article 18(3) came at the end of a process which commenced with a proposal that where by error or omission the taxable person did not make the deduction at the right time, he could exercise the right at any time up to and including December 31 of the year following that in which the deduction should have been made, and against the background of a continuing debate between the European Parliament and the Commission on the fairness of that time limit: see Terra and Kajus, Guide to the European VAT Directives, s.XI.5.3 (1997 ).
63. Accordingly Regulation 29(1A) is authorised by Article 18(3) of the Sixth Directive.
64. In my judgment this conclusion is not affected by the reasoning in the decision of the Tribunal in General Motors Acceptance Corporation (UK) plc v Customs and Excise Commissioners, January 28, 2003. That was a case which was concerned with Article 11C.1, which provides that where the price is reduced after the supply takes place the taxable amount shall be reduced "under conditions which will be determined by the Member States." By Regulation 38(1A) of the 1995 Regulations the United Kingdom provided that the adjustment was not to apply to any increase or decrease in consideration which occurred more than three years after the end of the prescribed accounting period. The Tribunal (Mr Stephen Oliver QC, Chairman) decided that the three year "cap" in Regulation 31(1A) was not a "condition" authorised by Article 11C.1, but was a limitation which removed the basic right of the taxable person to be taxed on the consideration received by him and no more. The Tribunal relied, in particular, on the observation of Jacobs AG in Case C-427/98 Commission v Germany [2003] STC 301 at 315 (para 74) that the word "conditions" in Article 11C.1 related to such matters as evidence required to ensure that no reduction was granted unless it was justified. The Decision is in essence that the three year cap was inconsistent with the basic rule on price adjustment, and does not assist in the present case, despite the similarity of wording between Regulations 29(1A) and 38(1A), and the common use of the word "conditions" in Articles 11.C1 and 18(3) of the Sixth Directive.
65. Even if Article 18(3) did not authorise the imposition of time limits the effect would not be that Community law prohibited time limits, but that it said nothing about them. In that case the Rewe principle would operate, with the consequence that it would be for Member States to lay down time limits conforming with the Rewe principle. There is no basis for limiting the power of national legislation to impose limitation periods in special circumstances, such as cases where it is necessary to prevent serious disturbance as regards the past.
66. It is clear from the Marks and Spencer case that the Rewe principle applies to output tax. In Case C-62/93 BP Supergas v Greece [1995] ECR I-1883, at 1919-1920, para 42, the principle was applied to a case involving input tax, where Jacobs AG had said (at 1903, para 54) that a three year time limit for appeals did not seem unreasonably short.
67. The validity of Regulation 29(1A) is not, in my judgment, affected by the criticism directed at Regulation 29 to the effect that Regulation 29(1) does not properly implement Article 18(1), (2). Even if a taxable person could challenge the application of Regulation 29(1) on the basis of the direct effect of Article 18, the consequence would not be that Regulation 29(1) was invalid, but that the United Kingdom could not, in those circumstances, rely on it. Even if (which it is plainly not necessary to decide on this appeal) Regulation 29(1) could be declared inapplicable in an appropriate case, it cannot effect the validity and application of Regulation 29(1A) in the present case. A national rule which is incompatible with directly effective Community law is not invalid, but the national court must, where it might otherwise apply, disapply the rule: see, e.g. Joined Cases C-10/97 etc. Ministero delle Finanze v IN. CO. GE.'90 SRL [1998] ECR I-6307, 6333, para 21; Imperial Chemical Industries plc v Colmer [1999] STC 1089, 1094-5 (H.L.); Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ 1448, para 173.
68. If Regulation 29(1A) is in principle authorised, either under Article 18(3) or under the general power of the Member States to lay down procedural conditions for the application of European law, I do not consider that it is subject to challenge under European law. Firstly, there is no basis for suggesting that a three year time limit is disproportionate or prevents the effective exercise of directly effective rights. Nor does it breach the principle of equivalence. It is true that it applies only to claims for the deduction of input VAT, and that the ultimate source of the right to deduct is Title XI of the Sixth Directive. But Article 29(1A) applies quite generally to all claims for deduction of input tax made, whether or not based on directly effective Community rights, and I do not think that the mere fact that it applies exclusively to VAT claims and that the Commissioners have not pointed to any other comparable time limits for revenue claims, means that it offends the principle of equivalence. The claim is for deduction of input tax under United Kingdom law, and (but for the time limit) LAMIT would have been entitled to make the deduction under United Kingdom law.
69. It must also follow that the claim that Regulation 29(1A) is contrary to Article 1 of the First Protocol to the European Convention on Human Rights (Human Rights Act 1998, Sched 1, Part II) must fail. By Article 1:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deem necessary … to secure the payment of taxes or other contributions or penalties."

70. In SA Dangeville v France [2003] STC 771 the European Court of Human Rights decided that interference with a right to reimbursement of VAT could engage Article 1. A claim for the repayment of VAT paid in error constituted an asset and was therefore a possession for the purposes of Article 1. There had been an unlawful interference because the effect of a decision of the Conseil d'Etat declaring the taxpayer's claim inadmissible was to deprive the taxpayer of its right to have its claim examined.
71. But the present case, if I am right in my conclusions on the European law aspects, is one of the right being subject to a time limit which is not disproportionate, and which is not unreasonable. The European Court of Human Rights has consistently held, in a line of cases under Article 6(1) (right of access to a court), that the Contracting States enjoy a margin of appreciation in the imposition of time limits, provided that the limitation pursues a legitimate aim, and is proportionate to that aim: e.g. Stubbings v United Kingdom (1996) 23 EHRR 213.
72. In the present case, I do not consider that there can have been an infringement of Article 1 because (a) the right to reimbursement was always subject to the 3 year limitation period, and the application of the limitation period would not be an interference with that right; (b) in any event, the limitation period was imposed for the purposes of legal certainty, which is a legitimate aim, and was proportionate to that aim.
73. The appeal will therefore be dismissed.