[2010] UKFTT 106 (TC)

TC00418

Appeal number: TC/2009/12852

VAT – preliminary point – whether tribunal should exercise its discretion to grant extension of time to appeal where issue as to time barring of input tax claim made by voluntary disclosure - appeal itself made many months after disputed decision made – application refused

FIRST-TIER TRIBUNAL

TAX

                                NVM PRIVATE EQUITY LIMITED               Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

                                                TRIBUNAL: Nicholas Aleksander (Tribunal Judge)

                                                                        David E. Williams CTA

Sitting in public in London on 3 February 2010

Amanda Brown of KPMG LLP Accountants for the Appellant

James Puzey of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.     This decision relates to an application made by the Appellant, NVM Private Equity Limited ("NVM") for an extension of time in which to lodge their appeal.  The appeal is against a decision of the Respondents ("HMRC") rejecting a claim for repayment of approximately £1.7 million overpaid output tax arising on fund management services provided to a number of venture capital trust companies ("VCTs") and investment trust companies ("ITCs").

2.     NVM were represented by Amanda Brown of KPMG LLP.  HMRC were represented by James Puzey of counsel.  We had before us a witness statement given by Alastair Conn, a director of NVM with responsibility for its VAT affairs, together with a number of exhibits.  HMRC did not challenge or dispute the factual matters set out in Mr Conn's witness statement (although they disagree with the correctness of his inferences and assumptions), and he was not required to give oral evidence.

Background Facts

3.     NVM provides fund management services to investment funds, including ITCs and VCTs, and it charged VAT on its fees.  On 24 May 2005 NVM filed a voluntary disclosure claiming a refund of overpaid output tax on supplies to ITCs and VCTs.  The disclosure related to the period 1 April 2002 to 30 April 2005.

4.     Nothing was heard from HMRC in respect of the disclosure pending the resolution of the case of JP Morgan Fleming Claverhouse Investment Trust plc.  The decision of the ECJ (Case C-363/05) was released on 28 June 2007.  On 5 November HMRC issued Business Brief 65/07 stating that they would be withdrawing from the Claverhouse litigation before it returned to the VAT and Duties Tribunal.  The Business Brief also stated that HMRC's view was that the ECJ's decision related only to ITCs (and not – for example – to VCTs).

5.     On 28 November 2007 NVM had a routine VAT inspection, at which the implications of the Claverhouse case and the 24 May 2005 voluntary disclosure were discussed.  On 30 November 2007 HMRC wrote to NVM accepting the claim for a refund in respect of supplies to ITCs (subject to adjustments to address partial exemption, and satisfying HMRC that there was no element of unjust enrichment).  However the claim in respect of supplies to VCTs was rejected.  We note that the letter did not include any reference to NVM's right to request a review of the decision or NVM's right of appeal.  Ms Brown's submission that it was not clear that this letter represented a final decision of HMRC as regards VCTs is therefore not without merit.

6.     On 2 January 2008, HMRC wrote to KPMG (NVM's accountants) asking when they could expect a response to the letter of 30 November 2007. KPMG's replied on 21 January 2008 submitting an updated voluntary disclosure claiming repayment of overpaid output tax of £1.9 million for the period from 1 January 1990 to 31 March 2002.

7.     On 5 February 2008, HMRC wrote two letters to KPMG (although one was mistakenly dated 5 January 2008).  The first (correctly dated) letter related to the updated voluntary disclosure of 21 January 2008.  It disallowed the claim in respect of supplies to VCTs, and stated that if KPMG disagreed with this decision, it would be open to them to submit an appeal on behalf of NVM, and that if they did not appeal the decision, any future claims would be subject to the three year time limit. The second (incorrectly dated) letter referred to the original voluntary disclosure of 24 May 2005 and HMRC's original letter of 30 November 2007.  It cross referred to the first letter, and stated that any appeal made against the decision in the first letter should – for completeness – also refer to the claims rejected in HMRC's letter of "21 January 2008".  There was no HMRC letter of 21 January 2008, and the reference ought to have been to HMRC's letter of 30 November 2007.  Ms Brown in her submissions says that this typographical error caused confusion for NVM.  However it is clear from Mr Conn's witness statement that he was aware at the time that this was an error, and he read the letter as referring to HMRC's letter of 30 November 2007.  We find that the typographical errors in the second letter did not cause any confusion for either KPMG or NVM, and that both understood that the second letter intended to refer to HMRC's letter of 30 November 2007.

8.     On 3 March 2008, HMRC wrote again to KPMG to summarise the position in relation to the claims, and asking whether NVM intended to appeal against HMRC's decision.  On 6 March 2008, Mr Stobo of KPMG telephoned HMRC.  Mr Stobo subsequently spoke to Mr Conn about the call. In his witness statement, Mr Conn says that he was told by Mr Stobo of KPMG that he (Mr Stobo) "explained  … that [NVM] intended to request reconsideration of the decisions contained in the letters of 30 November 2007 and 5 February 2008 …".  It has been suggested that the telephone call might have amounted to a request for a reconsideration by HMRC of their decisions – rather than just a statement of an intention to make such a request in the future.  We find that no request for a reconsideration was ever made – either orally (during the telephone conversation) or in writing subsequently, nor was there any reason for either NVM or KPMG to believe that such a request had been made.  Mr Conn's witness statement says that KPMG only stated an intention to make a request.  This is supported by the fact that there was no follow-up from KPMG - if Mr Stobo had thought that he had requested a reconsideration, we would have expected KPMG to have asked HMRC about progress on the reconsideration at some point in the months that followed.

9.     The Budget was a few days later on 12 March, and Budget Notice BN74 announced that the VAT exemption for fund management would be extended (prospectively) to include VCTs.  On 24 July 2008, HMRC released Revenue & Customs Brief 35/08 which confirmed the extension of VAT exemption to supplies to VCTs.  In August 2008, HMRC announced that the exemption would apply retrospectively.

10.  NVM never submitted any request for reconsideration.  However, in the light of the announcements by HMRC, a further updated voluntary disclosure was sent to HMRC on 26 September 2008 covering the period March 2004 to 30 June 2008.  This confirmed the output tax figures from the previous disclosures and also took into account increased irrecoverable input VAT.  By a letter dated 15 October 2008, HMRC rejected these claims as being out of time.  Reconsideration of this decision was requested in a letter to HMRC dated 13 November 2008.  HMRC's reviewing officer responded on 10 December 2008 upholding the 15 October 2008 decision to reject.  An appeal against the review decision was made to the VAT and Duties Tribunal on 21 December 2008.

11.  Over the same period as NVM and KPMG were in discussion with the HMRC district office, the Association of Investment Companies ("AIC") were in discussion with the policy team at HMRC head office about the implication of the Claverhouse litigation.  The AIC is the representative organisation for ITCs and VCTs.  The VCTs and ITC to which NVM provided its services are all members of the AIC, and Mr Conn is a member of the AIC's VCT technical committee.  The AIC provides regular updates to its members about tax (amongst other things). 

12.  On 2 November 2007 the AIC issued a press release confirming and explaining the decision of the ECJ in the Claverhouse litigation, and announcing that it would lobby the government to affirm that the decision (and the relevant VAT exemption) also applied to VCTs.  As a member of the VCT Technical Committee, Mr Conn was aware that the AIC was in discussion with HMRC and that Government ministers and officials were believed to be considering the possibility of legislation to exempt VCT management fees from VAT. Following the release of Revenue & Customs Brief 35/08 there were a series of press releases from the AIC and the Investment Management Association welcoming HMRC's decision to extend VAT exemption to supplies to VCTs, and seeking full retrospective effect for the exemption.  On 5 August 2008 the AIC issued a press release reporting that HMRC had finally agreed to give the VAT exemption retrospective effect.

13.  At some point following submission of the appeal against the 10 December 2008 review, NVM and their advisors had a concern that the appeal might be dismissed on grounds that the claim for the refund was time barred.  As a protective measure, on 30 June 2009 they therefore lodged a notice of appeal against HMRC's rejection of the repayment claim in the 24 May 2005 voluntary disclosure, together with an application extending the time for filing the appeal.

14.  This decision relates to the application made to permit a late appeal against the rejection of the claim made in the original voluntary disclosure of 24 May 2005.   The appeal against the 10 December 2008 review is proceeding under reference TC/2009/0005 and is stayed pending resolution of this application. 

The law

15.  The appeal which is the subject of this application was filed with the First Tier Tribunal (Tax Chamber) on 30 June 2009, and it is therefore governed by the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 ("the Tribunal Rules").

16.  Section 83G Value Added Tax Act 1994 requires appeals to be made within 30 days of the date of the document notifying the appellant of the decision against which the appeal is made.  Under section 83G(6), the Tribunal can give permission for appeals to be made after the expiry of the 30 day time limit.

17.  Tribunal Rule 5(3)(a) gives the Tribunal discretion to "extend or shorten the time for complying with any rule, practice direction or direction, unless such extension or shortening would conflict with a provision of another enactment setting down a time limit".  Tribunal Rule 20(4) provides for the Tribunal to apply Tribunal Rule 5(3)(a) to allow for an extension of time for the filing of an appeal.

18.  We note that the Value Added Tax Tribunal Rules 1986 (which governed procedure before the former VAT and Duties Tribunal) also included provisions which gave that tribunal discretion to extend the time limit for filing appeals.  Case law relating to the exercise of discretion by the VAT and Duties Tribunal to extend time limits is therefore of relevance to the discretion to be exercised in this case.  We also note that the Civil Procedure Rules 1998 ("CPRs") were introduced in 1999 which changed the factors to be taken into consideration by the English courts in exercising their discretion to extend time limits.  The overriding objectives set out in Tribunal Rule 2 are modelled on the overriding objectives set out in Rule 1.1 of the CPRs. We therefore give greater weight to those cases decided after the introduction of the CPRs.

19.  We were referred to two decisions of the Court of Appeal: Costellow v Somerset County Council [1993] 1 All ER 952 and Norwich and Peterborough Building Society v Steed [1991] 2 All ER 880; and to three decisions of the VAT and Duties Tribunal:  Wan and Wan (1997) 14829, University of Reading (1997) 15387, and Medical House plc (2006) 19859.

20.  Costellow related to an application to strike out a claim for want of prosecution because of a failure of the plaintiff to file a Statement of Claim within the time limits specified in the then rules of court.  It was decided before the introduction of the CPRs. We also note that in a case of a dismissal for want of prosecution, the objective of the party seeking dismissal is to strike out a claim which is prime facie in time, rather than a claim which is already time barred. The Norwich and Peterborough Building Society case was also decided before the introduction of the CPRs, and related to circumstances where the original claim was brought in time, and the application related to a failure to appeal in time due to difficulties in obtaining legal aid where the delay was entirely outside the control of the applicant and his representatives.  For these reasons, we found the two decisions of the Court of Appeal of limited assistance. 

21.  Of the three tribunal cases, we found Medical House the most relevant case, being the only one of these decisions that was made after the introduction of the CPRs.  In that case, the Tribunal took account of the factors set out in CPR Rule 3.9(1) in determining whether to allow an extension of time.  The other two cases were less relevant.  Both Wan and Wan and University of Reading were decided before the introduction of the CPRs, and the two stage approach adopted in both decisions to the question of whether time should be extended for an appeal is inconsistent with the approach taken in the CPRs.

22.  CPR Rule 3.9(1) reads as follows:

 (1) On an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or court order the court will consider all the circumstances including –

(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure;

(e) the extent to which the party in default has complied with other rules, practice directions, court orders and any relevant pre-action protocol;

(f) whether the failure to comply was caused by the party or his legal representative;

(g) whether the trial date or the likely trial date can still be met if relief is granted;

(h) the effect which the failure to comply had on each party; and

(i) the effect which the granting of relief would have on each party.

23.  We address each of these factors in turn.

(a) The interests of the administration of justice

24.  As a result of the Claverhouse decision, HMRC's policy in relation to ITCs and VCTs was shown to be incorrect.  HMRC's initial view of the impact of the Claverhouse decision was too narrow, and it was only in August 2008 that HMRC acknowledged that supplies to VCTs should have been exempt.

25.  NVM submits that HMRC had clearly expressed their intention to review their position at a policy level, and NVM had allowed HMRC to do so without the pressure and cost of litigation.  Accordingly they submit that it would be contrary to the interests of justice to allow HMRC to be unjustly enriched as a result of its own errors and ambiguous correspondence – particularly where the result is to deprive NVM of a directly effective EU law right to recover overpaid output VAT.

26.  HMRC submits that it is in the interests legal certainty and public interest for there to be finality to VAT obligations.  It is prejudicial to HMRC to be required to deal with late applications, and the fact that this appeal would succeed but for the delay is not a "trump card" which can of itself overturn the public interest.  They also submit that HMRC's correspondence was not confusing or ambiguous, a point to which we return below in relation to the reasons for the delay.

27.  We agree with HMRC.  Parliament introduced a three year limitation period within which claims for refunds of VAT must be made.  Subject to transitional issues (not relevant in this appeal), the limitation period has been held to be compatible with EU law.  As regards this factor – the interests of the administration of justice favour respecting the limitation period imposed by Parliament.

(b) Whether the application for relief has been made promptly
(c) Whether the failure to comply was intentional
(d) Whether there is a good explanation for the failure

28.  We note that in the decision in the Medical House case there was a typographical error – and factor (b) is described as whether the application had been made "properly".  Both NVM's  and HMRC's submissions were made on the basis of the factor as incorrectly written in the Medical House case.  However the "promptness" of NVM's application for an extension of time arises also in the context of whether its failure to comply with time limits was intentional, and whether there was a good reason for the delay.  The issue of promptness was therefore addressed by the each party's representative in the context of the two other factors, and for this reason we have considered these three factors together.

29.  NVM submit that their failure to comply with the time limit for filing the appeal was not intentional.  Rather, it was brought about by external factors. NVM and its advisor KPMG were of the understanding that NVM did not need to lodge a formal appeal because of the reference to a request for reconsideration made in the telephone conversation with HMRC on 6 March 2008, the ambiguous and misleading correspondence from HMRC, and the general understanding of HMRC's policy-level consideration of its position following Claverhouse.

30.  We have already addressed the issue of the request for reconsideration made in the 6 March telephone conversation, and for the reasons given earlier, we find that no request for a reconsideration had ever been made, and that neither KPMG nor NVM had any grounds for believing that such a request had been made.

31.  Mr Conn in his witness statement says that he believed that NVM's position was protected – and therefore no formal appeal had to be filed – because of the discussions and reconsiderations going on at a policy level within HMRC – which he believed would include NVM's original voluntary disclosure.  In other words, his belief at the time was that HMRC spoke with one voice, that their policy and district teams were acting in a co-ordinated manner, and that therefore NVM could defer any decision to appeal until such time as HMRC's policy on VCTs had been finalised.  He had also been advised that tactically it would be better not to force HMRC into an adversarial position by lodging an appeal.

32.  We find that NVM had not been misled or confused by correspondence or discussions with HMRC.  Although there were typographical errors in HMRC's letter of 5 February 2008, the errors were obvious and Mr Conn understood the letter perfectly well.   Certainly, by 3 March 2008 it was clear that HMRC had rejected the claim for overpaid output VAT in relation to VCTs and had invited NVM to appeal.  

33.  As regards KPMG's advice that it would be better not to appeal as it might be regarded as adversarial, this suggests that a considered decision had been made not to appeal, but rather hope for a change of heart by HMRC – and that therefore the failure to lodge a notice of appeal was deliberate.

34.  The only possible grounds for Mr Conn believing that a decision to appeal could be deferred until after HMRC's policy had been finalised, arose as a result of the "inside" information that he possessed through his membership of the AIC's VCT Technical Committee and his knowledge of the discussions going on at a policy level within HMRC and Government (including the possibility that HMRC might change its stated policy to allow retrospective claims for repayment).  However the outcome of those discussions could not be certain – and we do not believe that HMRC would have regarded it as unduly aggressive for NVM to have lodged an appeal on a protective basis.  Indeed HMRC's first letter of 5 February 2008 refers to the risk of the application of the three year cap – and suggests that NVM might wish to lodge an appeal to protect its position and request that its appeal be stood over behind any lead case. Certainly by the time HMRC's letter of 15 October had been received, it was clear that HMRC regarded the original voluntary disclosure of 24 May 2005 as now being out of time – and from that point onwards (if not before), NVM's actions were made in full knowledge of HMRC's position and were deliberate.

35.  For these reasons, we consider that (i) NVM's application for an extension of time in which to file its notice of appeal was not made promptly on it becoming aware of HMRC's position as regards the original voluntary disclosure being out of time; (ii) its failure to file the notice of appeal in time was deliberate – at least from 15 October 2008, if not before; and (iii) there was no good explanation for NVM's failure from 15 October 2008 onwards to either seek a review or lodge an appeal in respect of the voluntary disclosure of 24 May 2005.  This last point was put to Ms Brown in terms by us during the course of the hearing, and Ms Brown was unable to give any explanation. 

(e) Compliance with other rules etc.

36.  This factor is not relevant to this application.

(f) Whether the failure to comply was caused by the party or his legal representative

37.  Ms Brown submits that the failure to comply was caused not solely by NVM or KPMG, but also by HMRC's actions – its confusing correspondence and the general uncertainty about HMRC's position on VCTs.

38.  From the evidence before us, it is unclear who "caused" the failure to comply.  Certainly some of the failure can be laid at the door of NVM's representative, KPMG, and their advice that a formal appeal should not be lodged in case it be regarded as overly adversarial.  We do not consider that HMRC's correspondence confused or misled either NVM or KPMG and in any way contributed to NVM's failure to file its appeal in time.

(g) Whether the trial date or the likely trial date can still be met if relief is granted

39.  This factor is not relevant to this application

(h) the effect which the failure to comply had on each party;
(i) the effect which the granting of relief would have on each party.

40.  These two factors can be best considered together.  The effect of NVM's failure to file its notice of appeal in time has been to deprive it (and its clients) of an entitlement to a refund of approximately £1.2 million of output VAT (after taking account of irrecoverable input VAT), and as a result – say NVM - HMRC will be unjustly enriched by virtue of their ultra vires acts.  Ms Brown submits that NVM may be liable to refund the overpaid output VAT to its clients in any event – which would cause it to suffer the loss. 

41.  No evidence was before us to substantiate the second point, but Ms Brown's first point is not without merit. HMRC imposed VAT on fees charged to VCTs and ITCs in breach of the requirements of the VAT Directives, and have collected tax which was not in fact due.  To the extent that they retain that tax, they can be said to have been unjustly enriched.

42.  However, Parliament has enacted provisions which place a time limit on a taxpayer's ability to claim refunds of overpaid VAT, and those time limits have been held to be compatible with EU law. The law places value on certainty and finality to VAT obligations, and these requirements cannot be ignored by the Tribunal.

Conclusions

43.  Having carefully considered the submissions of both parties, we reject NVM's application.

44.  The Appellant has a right to apply for permission to appeal against this decision.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this Decision Notice.

Nicholas Aleksander

TRIBUNAL JUDGE

RELEASE DATE: 10 March 2010