England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

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

The Hon. Mr. Justice Evans-Lombe :

1. This is an appeal by Michael Fleming trading as Bodycraft ("the Appellant") under section 11(1) of the Tribunals and Inquiries Act 1992 from the decision of the Value Added Tax and Duties Tribunal ("the Tribunal") released on the 23^rd April 2004 whereby the Tribunal dismissed the Appellant's appeal from the decision of the Commissioners of Customs and Excise ("The Commissioners") to refuse to repay to the Appellant input tax on three new Aston Martin motor cars out of a batch of thirteen such cars purchased by the Appellant from a supplier in 1989 and 1990 upon which purchases he had paid Value Added Tax ("VAT") as an input.
2. In 1997 new or revised time limits for all adjustment claims in respect of VAT were introduced. In particular by the VAT (Amendment) Regulations SI 1997/1086, and with effect from the 1^st May 1997, Regulation 29 of the Value Added Tax Regulations, SI 1995/2518 was amended so as to provide:-

"29(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 three years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made.

(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –

a) A supply from another taxable person, hold the document which is required to be provided under regulation 13…

Provided that where the Commissioners so direct either generally or in relation to particular cases or classes of cases a claimant shall hold or provide such other… evidence of the charge to VAT as the Commissioners may direct."

3. It is now clear from authority, and not in issue in this appeal, that regulation 29 governs all claims for the deduction or repayment of input tax. The document referred to in paragraph 2(a) is a VAT invoice.
4. The events from which this appeal arises are also not in issue and are accurately set out in paragraph 2 of the transcript of the tribunal's decision ("the decision"). Briefly summarised they are that when the Appellant purchased the thirteen cars he did not obtain, for reasons which are immaterial to this judgment, VAT invoices in respect of those cars. Article 18 of the 6^th Directive (77/388/EEC) requires a VAT taxable person to hold a VAT invoice drawn up in accordance with article 22 (3) in order to be able to deduct or obtain repayment of VAT previously paid. Article 18 (3) delegates to Member States the determining of "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) of the Article, namely, by holding a VAT invoice and being in a position to effect a 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…". In the United Kingdom those regulations are made under Schedule 11 of the Value Added Taxes Act 1994. It is not necessary for the purpose of this judgment for me to set out the relevant regulations. Suffice it to say that in September 1993, complying with those regulations the Appellant made voluntary disclosure claiming repayment of input tax paid on ten of the thirteen cars in question totalling £464,622. After investigation that claim was paid by the Commissioners on the 12^th April 1994.
5. On the 23^rd October 2000 the Appellant repeated the process with relation to the three remaining cars claiming £127,173, but his claim was refused. It is the Commissioners' refusal to allow this claim that was the subject of the appeal on the 24^th August 2001 to the Tribunal who heard the appeal on the 5^th April 2004 handing down their decision on the 23^rd April 2004. It is the appeal from that decision which is before me.
6. The only reason given by the Commissioners for their decision to refuse the Appellant's claim of the 23^rd October 2000 was failure to comply with regulation 29 (1A) of the Value Added Tax regulations.
7. It is not in issue that a right to deduct or obtain repayment of previously paid input tax is a right of property of the payer, enjoyment of which is protected by European law. The Appellant acquired such rights in respect of the input tax paid by him on the three cars, remaining unsold after the sale of the first batch of ten, in 1989/90 in respect of the input tax paid by him on the purchase of those cars. Accordingly he had a vested right which accrued before the coming into force of regulation 29(1A) imposing a limitation period of three years at a time when there was no time limit for the bringing of claims to recover input tax. For reasons which are not fully explained the Appellant made no attempt to reclaim the input tax on the acquisition of the three cars until October 2000. At any rate it is not suggested that the delay in making the second repayment claim was caused by the way in which the new limitation period was imposed or any misrepresentation by the Commissioners or misapprehension by the Appellant which could be blamed on the Commissioners.
8. In their decision the Tribunal first rejected a submission by the Appellant that the claim made by him on 23^rd October 2000 was part of his earlier claim in respect of the ten cars made in September 1993. There is no appeal from that rejection.
9. The Tribunal then proceeded to consider the effect of Community Law on the retroactive imposition of the limitation period on claims to recover input tax already existing, by reason of the provisions of regulation 29(1A). In the result the Tribunal accepted the submission of Mr Southern that because of the "Marks & Spencer principle the three year cap cannot be relied upon by the Commissioners in this case" to defeat the Appellant's claim. (The reference to Marks & Spencer is to the decision of the European Court of Justice in a case involving that company case C-62/00 [2002] STC 1036.) The submission of Mr Southern which the tribunal accepted is set out at paragraph 7 of the decision that in the Marks & Spencer case "the court recognised the need for transitional arrangements where a limitation period shorter than that previously in force retroactively deprived individuals of their right to repayment… the Appellant had a vested right to input tax which could not be taken away without adequate transitional arrangements."
10. In arriving at that conclusion the Tribunal relied on passages from the judgment of Lord Justice Auld in the decision of the Court of Appeal in University of Sussex v Customs and Excise Commissioners 2004 STC p1. That was a case where the University was seeking to reclaim by a claim dated November 1996 input tax paid between 1973 and 1996 i.e. over a substantial number of years. The imposition of a three year time limit by the amendment of section 80 of the 1994 Act as to output tax took effect from July 1996. Regulation 29(1A) as to input tax did not come into force until May 1997 after the claim was made. The tribunal relied on the passage from the judgment of Lord Justice Auld at paragraph 173 where he is recorded as saying:-

"In my view, regardless of the basis of our domestic law (i.e. section 80 or regulation 29) for the university's claim in respect of its formerly unclaimed input tax, it had accrued rights under articles 17–20 of the Sixth Directive before the retrospective introduction of the three-year cap (for section 80 claims in July 1996 or for regulation 29(1) claims in May 1997). I consider that those provisions are unconditional and sufficiently precise to give rise to a directly effective Community law right."

11. Then continuing at paragraph 175:-

"The existence of an element of discretion in a member state as to how such a right is to be exercised cannot, in my view, sensibly deprive it of direct effect. There is a clear distinction between the existence of a Community law right and the discretion given to a member state as to the manner of its exercise…"

12. The Tribunal then drew attention to the following passages from the judgment of the European Court in the Marks & Spencer case:-

"36 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…the time set for its application must be sufficient to ensure that the right to repayment is effective…

44 …the Court has consistently held that the principle of the protection of legitimate expectations forms part of the Community legal order and must be observed by the Member States when they exercise the powers conferred on them by Community directives…

45 The Court has held, in particular, that a legislative amendment retroactively depriving a taxable person of a right to deduction he has derived from the Sixth Directive is incompatible with the principle of the protection of legitimate expectations…"

13. The Tribunal continued at paragraph 12:-

"12 Had the claim in that case been made after the 1^st May 1997 the court [i.e. The court of Appeal in the University of Sussex case]" would have derived the same assistance from those paragraphs and would have decided that the introduction of the new three year time limit introduced without any transitional provisions would have been unlawful under Community law. Here the position is that before legislation was introduced taking effect on the 1^st May 1997 the Appellant had a legitimate expectation that it could have claimed input tax without any time limit which the Commissioners had a discretion to allow. [That discretion being the limited discretion involved in being satisfied by evidence that a claimant to deduct or obtain repayment of input tax had proved his entitlement to do so notwithstanding he did not hold a VAT invoice] On 1^st May 1997 a claim was immediately out of time because the input tax had been incurred in 1989 and 1990 and there was no transitional arrangement apart from the time between the legislation and its taking effect. We therefore agree with Mr Southern that on the Marks & Spencer principle the three year cap cannot be relied upon by the Commissioners in this case. The only reason why the court did not come to the same conclusion in the University of Sussex case was that the claim in that case was made before the introduction of the three year time limit by regulation 29."

14. However, notwithstanding that conclusion, the Tribunal went on to dismiss the appeal on the ground that if the matter had been sent back to them the Commissioners would inevitably have rejected the claim in the exercise of a discretion which the Tribunal were not prepared to find would have been unreasonable.
15. Neither party before me seeks to uphold the Tribunal's third conclusion. It follows, that before me, the Commissioners were the effective appellants seeking to overturn the Tribunal's second conclusion. For this reason after Mr Southern had briefly opened the facts and the law I asked Miss Foster for the Commissioners to assume the role of appellant with a right of reply to Mr Southern's answer. It also follows that the only issue before me was whether the Tribunal were right in their second conclusion which was adopted and supported by Mr Southern.
16. In my judgment the Tribunal's second conclusion cannot be supported for the reasons which I will now set out.
17. It is established by authority that, notwithstanding that individuals or groups of individuals may acquire established rights under Community law, Member States may regulate the procedure for the recovery of those rights, such as claims for the repayment of input tax not due, by the imposition of time limits for the commencement of those claims. See the Marks & Spencer case before the European Court of Justice ibid at paragraph 34 where the Court is recorded as saying:-

"34. It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness)…

35. As regards the latter principle, the Court has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community law to lay down reasonable time-limits for bringing proceedings…Such time-limits are not liable to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law. In that context, a national limitation period of three years which runs from the date of the contested payment appears to be reasonable."

See also the judgment of Lawrence Collins J in Local Authorities Mutual Investment Trust v Customs and Excise Commissioners [2004 STC] p 246 between paragraphs 61 and 63 where, at paragraph 63 the judge concluded that Article 29(1A) is authorised by Article 18(3) of the Sixth Directive.

18. However the requirement that any such time limits imposed by Member States must not offend the principle of effectiveness requires that where appropriate national legislation should include transitional provisions, in particular, to guard against persons with acquired rights being denied those rights as a result of the retrospective effect of any time limit imposed. Thus in the Marks & Spencer case before the European Court the court said at paragraph 36:-

"36 …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…the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the Court has held that legislation which is not in fact retrospective in scope complies with that condition.

37. 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.

38. 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 repayment which persons were entitled to submit under the original legislation… ."

19. See also the passage in the judgment of Lord Justice Auld in the Sussex University case at paragraph 173 which I have set out above.
20. Regulation 29(1A) was imposed without transitional provisions and thus, to the extent that it might prevent individuals with accrued rights from recovering tax not due because, for instance, at the moment the time limit took effect they had an accrued claim but the period of the limit had already expired, those individuals would be entitled to require the taxing authority to repay the tax notwithstanding that their claims would otherwise be barred by limitation.
21. However, breach of a principle of Community law, such as the principle of effectiveness, does not have the effect of striking down the offending legislation. In the LAMIT case Mr Justice Collins said at paragraph 67 of the report:-

"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), and (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 affect 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".

22. The judge then refers to authority including the Marks & Spencer case in the Court of Appeal at paragraph 173 quoted above.
23. In Grundig Italiana SpA v Ministero delle Finanze (case C-255/00) [2002] ECR 1-8003 the European Court of Justice was considering a case referred to it by the Italian court seeking to ascertain whether the establishment of a transitional period of ninety days in which to bring actions for the recovery of tax paid, which, having been subject to a five year limitation period, had, owing to a change in legislation introduced with retroactive effect, become subject to a three year time limit, infringed the principle of effectiveness. In the result the court found that it did but that a transitional period of six months would have been sufficient. At paragraph 41 of the judgment of the court the following passage appears:-

"41. However, the fact that the national court has found that a transitional period fixed by its national legislature such as that in issue in the main proceedings is insufficient does not necessarily mean that the new period for initiating proceedings cannot be applied retroactively at all. The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, even where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period."

24. The Court was considering a case where, what was in issue, was the sufficiency of transitional provisions. It seems to me, however, that the principles, highlighted in that passage from the judgment, are equally applicable where the relevant time limit imposed by the national legislature is not, as in the case of regulation 29(1A) accompanied by any such transitional provisions. The effect of what the court is saying in this case is that, even in the case of individuals whose claims have accrued before the time limits were imposed and who may therefore be in a position to require the national court to disapply the time limits to their claims, if brought within a reasonable time after the imposition of the limits, their privileged position by comparison with those whose rights only accrued after the imposition of the time limits does not continue indefinitely thereafter. If they allow too long a period to go by before making a claim the national court may properly conclude that the principle of finality or legal certainty requires it to refuse to disapply the limitation provisions.
25. In the present case the Appellant's claim for repayment of input tax in relation to the three cars in question has been capable of being made by him since 1990 and he only put it forward three years and five months after the coming into force of regulation 29(1A) of which he must be taken to have had notice. For these reasons it seems to me that the Tribunal's second conclusion was wrong and the Commissioners were justified in refusing the Appellant's claim for repayment. In the result, however, the appeal must be dismissed.
26. From an abundance of caution the Appellant commenced proceedings for judicial review of the Commission's decision to refuse him repayment. He obtained permission to bring those proceedings and they were transferred to this court to be dealt with simultaneously with the appeal. My conclusion means that these proceedings also must be dismissed.