England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		27 November 2003

Mr Justice David Richards:

1. This is an appeal by the Commissioners of Customs and Excise from a decision of the VAT and Duties Tribunal (Chairman : Mr Colin Bishop) released on 19 December 2002. The issue in the case arose as a result of the reversal of the decision of the Court of Appeal in Primback Ltd v Customs and Excise Commissioners [1996] STC 757 following the ruling of the European Court of Justice ([2001] STC 803). The appeal raises a point on the interpretation and application of section 73(2) of the Value Added Tax Act 1994.
2. The respondent taxpayer (Laura Ashley) is a high street retailer, which sells (or at the material time sold) some of its goods on "interest-free" credit terms. If the purchaser decided to buy in that way, he paid the normal retail price of the goods, by instalments, to a finance house. By a separate agreement to which the customer was not a party, the finance house paid to Laura Ashley a lump sum which was smaller than the retail price of the goods. The difference between the normal retail price and the amount paid by the finance house represented the latter's charge for providing the credit to the customer.
3. In common with most retailers who offered "interest-free" credit terms, Laura Ashley accounted to the Commissioners for output tax on the full retail price of the goods. However, in about 1992 another retailer, Primback Limited, challenged the requirement that it should account for tax on that price, rather than upon the lesser sum which it received from the finance house. Its challenge succeeded in the Court of Appeal, where the majority determined that it should account for tax only on the lower sum. The House of Lords referred the matter to the European Court of Justice, which ruled that traders in this position must account for output tax on the full selling price. About five years passed between the decision of the Court of Appeal in 1996 and the of the judgment of the European Court of Justice in 2001.
4. Although they appealed, the Commissioners decided that they must respect the judgment of the Court of Appeal, and repay to those affected traders who requested it the amount of tax which (assuming the Court of Appeal was right) had been overpaid. Laura Ashley was one of those traders which asked for such repayment. It did so by means of a voluntary disclosure which was sent to the Commissioners on 20 October 1999. The disclosure sought the repayment of tax for each of the appellant's accounting periods from October 1996 to July 1999 inclusive. The Commissioners thereafter made a number of enquiries, designed to satisfy themselves that Laura Ashley's situation was the same as that of Primback; after those enquiries the claims were admitted and the sums claimed were paid, or credited, to Laura Ashley in March 2000.
5. Of the accounting periods referred to in the voluntary disclosure, those ended 26 October 1996 (10/96 period) and 26 October 1997 (10/97 period) differ from the remainder. Normally, as a retailer of standard-rate goods, Laura Ashley is a payment trader, that is, its output tax exceeds its input tax. However, in the late summer and early autumn of each year it buys in large quantities of stock for its expected Christmas sales and in those two periods its purchases are on such a scale that it becomes a repayment trader, i.e. it is due a refund of VAT or a VAT credit equal to the excess of input tax over output tax.
6. In October 2000, before the hearing of the Primback case in the European Court of Justice, but no doubt to cover the position if they succeeded, the Commissioners issued an assessment to Laura Ashley for the sums which had been repaid in March of that year. The assessment was notified by letter dated 12 October 2000. An individual assessment was made under section 80(4A) of the Value Added Tax Act 1994 for each of the periods referred to in the voluntary disclosure, save for the 10/96 and 10/97 periods. Laura Ashley accepts that the assessments relating to the periods other than 10/96 and 10/97 were correct and nothing turns on that part of the letter. However the letter separately dealt with the credits in the 10/96 and 10/97 periods, in the following terms:

"In pursuance of powers under s 73(2) VAT Act 1994 an assessment has been made for the total sum of £35,853.00

The assessment relates to the tax period ending 31 October 1999 being the tax period in which your voluntary disclosure (dated 20 October 1999) was received. It consists of the following amounts:

Original return(s)

Period 10/96 £ 7,020.00 Due to C&E

Period 10/97 £28,833.00 Due to C&E

£35,853.00 Total amount due to C&E"

7. The letter went on to state that the Commissioners would not enforce payment of any sums which they were seeking to recover at that stage, but would reconsider their position once the final outcome of the Primback case was known. On 8 November 2000, less than a month after the date of the letter setting out the assessments, notice of appeal was lodged by Laura Ashley against the assessment. The appeal was, of course, designed to protect Laura Ashley's position, just as the letter of 12 October 2000 had been designed to protect the Commissioners' position; and it remained in abeyance while the judgment of the European Court of Justice was awaited.
8. The above account of the relevant facts is taken largely from the Tribunal's Decision.
9. The only issue which arises on this appeal is whether the assessment, notified by the Commissioners in their letter dated 12 October 2000 and made for the accounting period ended in October 1999 (the 10/99 period), was made for the correct period in accordance with section 73(2). The principal contention of Laura Ashley both before the Tribunal and on this appeal was that the assessment was invalid, on the grounds that it was made for the wrong period. It submitted that the assessment should have been made for the 10/96 and 10/97 periods as they were the periods to which the relevant VAT credits related, or as an alternative, for the period ended in April 2000 when the credits were given. The Commissioners contend that Laura Ashley was correctly assessed for the 10/99 period, as that was the period in which Laura Ashley made its claim by means of the voluntary disclosure. The Commissioners accept that if the assessment was made for the incorrect period it was invalid and that any subsequent assessment is or would be out of time.
10. The Tribunal found in favour of Laura Ashley, holding that the assessments should have been made for the 10/96 and 10/97 period, and it is from that decision that the Commissioners appeal.
11. Section 73(2) provides as follows:

"In any case where, for any prescribed accounting period, there has been paid or credited to any person-

(a) as being a repayment or refund of VAT, or

(b) as being due to him as VAT credit,

an amount which ought not to have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly "

The sub-section therefore empowers the Commissioners to assess an amount as VAT due from the taxpayer but only "for that period", which refers back to "any prescribed account period" in the opening words of the provision. The relevant prescribed accounting period is the one for which "there has been paid or credited to any person" an amount as being either a repayment or a refund of VAT or due to him as a VAT credit which ought not to have been so paid or credited.

12. It is the submission of Laura Ashley, and it was the view of the Tribunal, that on the ordinary and natural meaning of section 73(2), read in its statutory context as part of the administration of the VAT system, the appropriate accounting period is the one in respect of which the relevant VAT was originally paid or the VAT credit arose, i.e. in this case the 10/96 and 10/97 periods.
13. It was argued for the Commissioners that there was no obvious or natural reading of section 73(2) to be derived from the VAT system as a whole and that its construction had to be informed by sections 73(6) and 77(1) which prescribe the time limits for assessments under section 73(2). Those provisions require an assessment to be made within the later of two years after the end of the relevant prescribed accounting period or one year after evidence of facts sufficient in the opinion of the Commissioners to justify the making of an assessment comes to their knowledge, but subject to an absolute time limit of three years after the end of the relevant accounting period. If the Tribunal's decision is correct, then on the facts of this case, the time limit would expire at the latest on 26 October 1999, being three years after the end of the 10/96 period or 26 October 2000 for the 10/97 period. In the case of the claim for credit for the 10/96 period, this would leave little if any time in which the Commissioners could raise an assessment under section 73(2). It was submitted that this construction therefore has consequences which defy practicality and good sense. It is worth noting at this point that it is not suggested that the Commissioners would have to agree to the claim within that time limit; an assessment in effect reversing acceptance of the claim would be necessary only if, having accepting it, events occurred or facts emerged which showed that it should not have been accepted. These consequences would be avoided if, as the Commissioners contended, the correct accounting period for the purposes of section 73(2) is the one in which the claim was made, in this case the 10/99 period. The Commissioners relied strongly on the decision of the Court of Appeal in Customs and Excise Commissioners v Croydon Hotel and Leisure Co Ltd [1996] STC 1105. They submit that it demonstrates not only that in construing section 73(2) it was right to have regard to the provisions as to time limits but also that the relevant accounting period for the purposes of section 73(2) is the period in which a claim is made. They accept that this conclusion is not the binding effect of the Croydon Hotels case and that there are material distinctions between that decision and this case, but they submit that the logic of the Court of Appeal's approach leads to that conclusion. In short, they say that the period for making an assessment should not start to run before the Commissioners first know of the claim and that "the prescribed accounting period" in section 73(2) should be construed accordingly.
14. I readily accept that part of the statutory context in which section 73(2) must be construed includes the provisions for time limits which are contained in both the same section (section 73(6) ) and in the same group of sections (section 77(1) ). But there must also be taken into account the terms of section 73(2) itself and the wider statutory context of the administration of value added tax.
15. Leaving aside the impact of the time limits which I consider later, the correct accounting period for the purposes of section 73(2) would clearly in my view be the period to which the relevant VAT credit related, that is in this case the 10/96 and 10/97 periods. They were the periods in which the original over-declaration of output tax had been made and to which the VAT credits were attributable. If section 73(2) were drafted so that the phrase "for any prescribed period" appeared not in the opening words but at the end of each of paragraphs (a) and (b), Laura Ashley's case would be unanswerable. The fact that the words do not appear there may make a different view arguable, but it does not affect the conclusion that the natural reading of the sub-section in its general statutory context suggests that in this case the 10/96 and 10/97 periods were the relevant prescribed accounting periods.
16. It is fundamental to the administration of VAT that the tax is accounted for and paid, and VAT credits are given, by reference to prescribed accounting periods: see section 25 of the 1994 Act. The system is based on self-assessment and the taxpayer makes a return for each prescribed accounting period. This is borne out by the provisions of the Value Added Tax Regulations 1995 relating to the correction of errors in returns, to which both counsel referred. Regulation 34 provides that overstatements or understatements of liability in the return for one accounting period should be corrected in the return for the later period in which they are discovered, but only where their net effect does not exceed £2,000. In all other cases, regulation 35 provides for correction in such manner as the Commissioners may require. At the material time the required manner of making such corrections was contained in Notice 700/45/93 – How to correct VAT errors and make adjustments or claims. Paragraph 2 required a voluntary disclosure to be made to the taxpayer's local VAT office, and if accepted the taxpayer's records would be amended. It seems clear that the amendment would be made to the records for the prescribed accounting period to which the disclosure relates. This contrasts with disclosure of errors with a net value of £2,000 or less where, as stated in paragraph 5, "the correction will simply become part of the tax for the period in which it is made". The distinction is clearly made in a later Notice, 700/12/02 – Filling in your VAT return. It is stated in paragraph 3.2 as regards disclosure of errors with a net value of more than £2,000 that a "Notice of Voluntary Disclosure will be issued showing only corrections to the period in which the error occurred", which if applied to the facts of this case would mean the 10/96 and 10/97 periods.
17. These Regulations and Notices evidence the basic structure of VAT as being related to each prescribed accounting period for which a return is made, with errors being related back to the relevant period, except in the case of errors with a net value of £2,000 or less. Read in this context, the reference in section 73(2) to "for any prescribed accounting period" refers most obviously to the period in which the error was made, and to which the relevant VAT or VAT credit related, rather than either the period in which the error was disclosed and a claim was made or the period in which the relevant amount is paid or credited.
18. This was in fact the approach adopted by the Commissioners in the Notice of Voluntary Disclosure dated 1 March 2000 which was issued to Laura Ashley following its voluntary disclosure in October 1999. The Notice states that

"Further to your disclosure notifying the Commissioners of Customs & Excise of your correct tax liability, the following assessment(s) of tax and, where appropriate, interest have been made for the period(s) shown".

The attached Details of Assessments attribute each correction to the period in which an over-declaration of output tax was made and in respect of each period a figure is shown as being the "Total amount due from Customs and Excise for this period". Accordingly, total amounts of £10,161 and £33,506, which include the over-declaration of £7,020 and £28,633 in respect of goods sold on "interest-free" credit terms, are shown as due from the Commissioners for the 10/96 and 10/97 periods. This approach is entirely consistent with the submissions of Laura Ashley and runs counter to the Commissioners' case on this appeal. Counsel for the Commissioners submitted that the Notice of Voluntary Disclosure was not an assessment, but an acceptance of Laura Ashley's voluntary disclosure. This submission is inconsistent with the language of the Notice but, even if correct, the Notice clearly indicates that the relevant VAT credits were being given "for" the 10/96 and 10/97 periods.

19. In contrast, there is no obvious basis derived from the terms of Section 73(2) or from the general structure of VAT for the Commissioners' submission that the prescribed accounting period for the purposes of the sub-section is the one in which the voluntary disclosure is made. As the Tribunal noted in paragraph 34 of its Decision, this submission requires the words "where, for any prescribed accounting period, there has been paid or credited to any person" to be construed as if they read "where, in any prescribed accounting period, there has been claimed by any person".
20. However, it is also clearly necessary to have regard to the time limits which are part of the statutory context of section 73(2). Ascertainment of the correct accounting period for section 73(2) will determine the date from which the time limits will run. If the correct periods are the 10/96 and 10/97 periods, the time limits would expire, at the latest, towards the end of October 1999 and October 2000 respectively. On the facts of the present case, it certainly seems strange that, in the case of the disclosure relating to the 10/96 period, the Commissioners would have only a matter of days in which to raise an assessment under section 73(2). In his opening submission, counsel for the Commissioners suggested that unless section 73(2) were construed so that the relevant accounting period was the period in which the claim was made, there would be serious practical consequences. These would include in particular a positive incentive to traders to delay making claims, both to obtain interest on the repayment and to prevent an assessment under section 73(2). Counsel for Laura Ashley demonstrated in her submissions that these adverse consequences were largely illusory. Interest can be claimed by the taxpayer only where there has been an error on the part of the Commissioners: section 78. There is therefore no incentive for a person who believes he has a legitimate claim to delay in making it. If the claim is dubious, the Commissioners are not forced into a quick decision but may, as they did in this case, make further and if necessary extensive enquiries. The facts which arose in the present case are unusual. As the law stood in October 1999 the Commissioners were obliged to accept that Laura Ashley was accountable for output tax only on the selling price to the finance provider but they knew that the position might change, as in fact it did, as a result of their appeal. Counsel for the Commissioners did not submit that the Commissioners could not have protected themselves against this outcome in relation to Laura Ashley and the other traders who accepted the invitation to submit claims. In his reply, Counsel for the Commissioners accepted that fair points had been made against his opening submissions as to the adverse consequences and said that he would not want to exaggerate the number of cases in which difficulties might arise. Those cases would generally be ones where each of the following conditions was satisfied: first a taxpayer realised late that it may be able to make a claim and then made a claim in good faith; secondly, the investigations by the Commissioners, which it is accepted may be undertaken after expiry of the time limit for assessments, do not disclose facts which undermine the claim; and thirdly, such facts are later discovered after the Commissioners have accepted the claim.
21. By the end of argument it was clear that the adverse consequences of construing section 73(2) to refer to the accounting period to which the relevant VAT or VAT credit related were in practice very limited.
22. The Commissioners rely strongly on the reasoning of the Court of Appeal in Customs and Excise v. Croydon Hotel and Leisure Co Ltd. In that case, the taxpayer terminated a hotel management agreement with Holiday Inns on payment of a termination sum to Holiday Inns. The payment was made in the prescribed accounting period ended 31 March 1991. There was a difference between the taxpayer and Holiday Inns as to whether the payment included VAT. The taxpayer's position was that it did, while Holiday Inns contended that the payment was not liable to VAT. If the taxpayer was right it was entitled to a credit for the element of the termination payment which represented input tax, but it could not claim a deduction in the 03/91 period because Holiday Inns refused to supply a VAT invoice. It was however able to include it in its return for the 09/91 period following a direction given by the Commissioners under an alternative procedure available where a tax invoice has not been supplied. In separate proceedings Holiday Inns successfully challenged the Commissioners' assessment for output tax on the termination payment. Accordingly in June 1993 the Commissioners raised an assessment on the taxpayer, in effect to disallow the credit claimed in the 09/91 period for the input tax. The assessment was raised under the statutory predecessor to section 73(2) which was in substantially the same terms. The taxpayer argued that the assessment was out of time, and the issue was whether the relevant prescribed accounting period was the 03/91 period, when the termination payment was made, or the 09/91 period, when as a result of the commissioners' direction the right to claim a deduction first arose and when it was in fact claimed by inclusion in the quarterly return.
23. The Court of Appeal, reversing the decisions below, held that the prescribed accounting period for which the credit had been given was the 09/91 period. The appropriate general approach to the construction of the relevant provision was summarised by Thorpe LJ (with whose judgment the other members of the Court agreed) as follows:

"In my judgment the phrase must be construed in its context in para 4(2) and against the system by which this tax is administered".

The court held that because the input tax was claimed in the return for the 09/91 period which was the first return in which it could be claimed, the credit was given for that period rather than for the period in which the chargeable event occurred. It was not a case in which any correction was made or could be made to the return for an earlier period.

24. In reaching his conclusion Thorpe LJ placed considerable stress on the limitation periods and the need in terms of practicality and good sense for those periods to run only from the date on which the Commissioners first received notice of the taxpayer's claim in its return. The reasoning is set out at p 1109:

A trader such as Croydon Hotels is obliged to keep records of transactions with other traders that involve either the payment or the collection of tax. The trader is under an obligation to present to the commissioners an account at the conclusion of each prescribed accounting period. The account is devoid of all particulars other than the total of all tax paid, the total of all tax collected, and the resulting balance due either by way of payment or by way of repayment. Although the account is principally of tax paid and tax collected, upon transactions occurring within the prescribed accounting period there may be many reasons why sums of tax paid or sums of tax collected may be accounted for in a prescribed accounting period other than that in which the chargeable event occurred. This appeal merely illustrates one such circumstance. Therefore as a matter of practicality and good sense any limitation period to run against the Commissioners would not naturally be expected to run earlier than the date upon which they first receive notice by way of account. Mr Parker readily furnishes four instances of anomalies that might result if the period ran from the date of the accounting period in which the chargeable event occurred rather than the date of the accounting period covered by the return. Mr Cordara asserts that taxpayers are entitled to the clear certainty that except in the absence of open dealing no transaction can be subjected to inquiry or scrutiny more than two years after the event. I cannot see how there could be any injustice to taxpayers in holding that that certainty is deferred until 24 months from the end of the prescribed accounting period covered by the return within which the transaction was included.

I do not find anything within the words of para 4(2) to preclude that practical construction. On the contrary in my judgment it is difficult to read into the words of para 4(5) the meaning which Mr Cordara contends. The right to deduction and the right to claim deduction will usually have a simultaneous origin when the supplier of services furnishes a VAT receipt in exchange for payment. But unusually the right to claim may not accrue until some time after the right to repayment. For the purposes of para 4(2) it is, in my judgment, the exercise of the right to claim rather than the bare right to repayment that provides the essential commencement for limitation periods. For the purposes of para 4(2) the prescribed accounting period is the accounting period in which the right to claim was duly exercised by inclusion within the total in box two on the issued return. The use of the word "credited" in the first line of para 4(2) is a clear pointer to that construction. Furthermore I cannot see that the phrase "for that period" in the penultimate line can be a reference to any period other than that covered by the return in which tax was reclaimed.

The Commissioners rely in particular on the following sentences in the above-cited passage:

"Therefore as a matter of practicality and good sense any limitation period to run against the Commissioners would not naturally be expected to run earlier than the date upon which they first receive notice by way of account "

and

"For the purpose of para 4(2) it is, in my judgment, the exercise of the right to claim rather than the bare right to repayment that provides the essential commencement for limitation periods. For the purposes of para 4(2) the prescribed accounting period is the accounting period in which the right to claim was duly exercised by inclusion within the total in box two on the issued return"

From these sentences the Commissioners deduce the proposition that an amount by way of a repayment or refund of VAT or by way of a VAT credit is paid or credited "for the prescribed accounting period" in which a claim is first made, even if the claim is made in a voluntary disclosure by way of correction to the return for an earlier period. However, in my judgment, this is to divorce those sentences not only from the facts of that case but from the rest of the passage in the judgment from which they come. The claim to input tax was made in the return for the 09/91 period, it was brought into account for that period and it could not have been brought into account for any earlier period. These elements are referred to repeatedly by Thorpe LJ and it was entirely consistent with "the system by which this tax is administered" that the prescribed accounting period for the purposes of section 73(2) was the one to which the relevant return related. Thorpe LJ states that the use of the word "credited" in what is now section 73(2) was a clear pointer to that construction. In the present case it is equally a pointer away from the Commissioners' construction: it is difficult to see the basis on which it is said that any amount was credited "for" the period in which voluntary disclosure was made.

25. In common with the Tribunal, I do not consider that the decision or reasoning in the Croydon Hotels case leads to the conclusion that where a claim is properly made by way of correction or adjustment to the return for an earlier period, the ensuing repayment or credit is paid or given not for that period but for the period in which the claim is made. It is by no means clear that in practice any problems arise from the time limits, but if they do it is accepted that they will not be common. They are not so great as to justify a construction of section 73(2) which would be at odds with the obvious reading of the provision in the context of the system for the administration of VAT.
26. I therefore dismiss the appeal.