[2011] UKFTT 31 (TC)

TC00908

 

 

Appeal number: MAN/2006/0120

 

VAT – agents’ commissions in respect of third party purchases paid in cash by mail order companies – whether directly applicable right under Second Directive to retrospective reduction in consideration for goods supplied between 1 April 1973 and 31 December 1977 – whether question to be referred to the ECJ

 

Remedy – whether directly effective EU right to compound interest – whether satisfied by payment in accordance with s 78 VATA – binding effect of John Wilkins – whether EU law requires the remedy to be available under VATA and enforceable in the Tribunal – whether questions to be referred to the ECJ - Littlewoods

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

GRATTAN PLC Appellant

 

- and -

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: JUDGE ROGER BERNER

JULIAN STAFFORD (Member)

 

Sitting in public at 45 Bedford Square, London WC1 on 6 – 10 December 2010

 

 

Dr Paul Lasok QC and Rebecca Haynes, instructed by KPMG LLP, for the Appellant

 

Jonathan Swift QC, Peter Mantle and Philip Woolfe, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

© CROWN COPYRIGHT 2011

DECISION

 

1.       This is the consolidated appeal of Grattan plc (“Grattan”) against decisions of the Commissioners (“HMRC”, which expression we use to include the former Commissioners of Customs and Excise), firstly not to repay to Grattan part of the amount claimed by it under s 80 of the Value Added Tax Act 1994 (“VATA”) in respect of VAT claimed to have been overpaid on certain supplies made before 1978, and secondly to pay only simple interest pursuant to s 78 VATA (and not compound interest) on principal amounts repaid to Grattan by HMRC under s 80.

2.       Grattan was represented by Dr Paul Lasok QC and Rebecca Haynes.  Jonathan Swift QC, Peter Mantle and Philip Woolfe appeared for HMRC.

Background

3.       Grattan is the representative member of a VAT group whose members carry on the business of retailing goods by mail order.  In the course of that business companies that are now within the Grattan group used the services of persons described as “agents”.  Those agents earned commissions (or credits) in relation both to their own purchases of goods from the mail order catalogue (Agents’ Own Purchases or “AOP”) and purchases by third parties, (Third Party Purchases or “3PP”).  That commission, which was credited to the agents’ accounts with the relevant mail order company, was calculated as a percentage of the payments received by the relevant mail order company in respect of the relevant purchases, and could be taken in goods or in cash.

4.       According to evidence of Mrs Patricia Vann, a consultant to Grattan who was Grattan’s indirect tax manager from April 2001 to July 2008, which was not contested, in a traditional agency situation the agent would hold one account and have a limited number of third party “sub-customers” to whom she would pass the catalogues.  The agent would place the sub-customers’ orders by telephoning the call-centre or by sending off an order form.  Unless an alternative delivery address was specified, the goods ordered would be delivered to the agent, for onward distribution to sub-customers.  Payment for goods, usually in instalments, would be collected by the agent from the sub-customers and periodically remitted to the mail order company.

5.       We heard that the Grattan and Freemans brands (both within the Grattan group) operated different customer systems.  In a traditional agency situation, the Grattan brands would not know who the sub-customers were.  However, the more complex customer system operated by the Freemans brands identified the sub-customers and held details of their orders and payments.  When Freemans joined the Grattan group (on 27 February 2000), both systems continued to operate in tandem.

6.       The agents earned commission in relation to the goods they bought for themselves and the goods purchased by their sub-customers.  Goods were generally paid for in instalments and agents were provided with statements every 28 days.  For the Grattan brands, agents would be issued with collection cards enabling them to keep their own records of sub-customers’ orders and payments which could then be tallied up and compared with the statements received from Grattan.

7.       The agents earned commission of 10% based on the amounts paid by themselves and their sub-customers.  The commission would be credited to an account and the agent could then claim it as a cheque payment, as a credit against their account balance or as a full or part payment against the purchase of further goods (“secondary goods”).  One of the brands within Grattan, “Look Again”, provided a further 2.5% commission if the agent used the commission to purchase further goods.

8.       Originally, in accounting for VAT, the commissions paid in relation to 3PP were treated as consideration for a supply of services by the agent and not as a discount or discounts reducing the consideration for, or taxable amount of, the relevant supplies of goods.  The companies later disputed this treatment and made a series of claims under s 80 VATA in respect of VAT that was said to have been overpaid.  Further claims were made following the Court of Appeal judgment in Customs and Excise Commissioners v Littlewoods Organisation plc [2001] STC 1568 (“Littlewoods 2001 CA”), and then after Marks and Spencer plc v Commissioners of Customs and Excise [2002] STC 1036 the claims extended back to the inception of VAT in the UK on 1 April 1973.

9.       Certain payments have been made by HMRC in respect of the claims, together with simple interest calculated in accordance with s 78 VATA.  However, not all claims have been met, and there is an issue about the appropriate measure of interest to be applied to the whole of the amounts that have either been repaid or, as a result of this appeal, are found to be repayable.

Issues

10.    In the part of this appeal that concerns the right to repayment of a principal amount, the only circumstance at issue is that of the agent receiving commission in respect of 3PP transactions in cash.  For the period since 1 January 1978 it has been accepted by HMRC that, following Freemans plc v Customs and Excise Commissioners (Case C-86/99) [2001] STC 960 and, more particularly, Littlewoods 2001 CA, the effect of Article 11C(1) of the Sixth Council Directive of 17 May 1977 (77/388/EEC) is that 3PP commission taken in cash reduces the value of the taxable supplies of goods made by the mail order company after those supplies have taken place.

11.    At issue in this appeal are supplies made before 1 January 1978, the date from which, according to Article 1 of the Sixth Directive, at the latest Member States were required to implement the Sixth Directive.  Prior to that the applicable directives were the First Council Directive of 11 April 1967 (67/227/EEC), and in particular the Second Council Directive of 11 April 1967 (67/228/EEC).  Grattan’s case essentially is that, either under domestic law, or pursuant to a directly applicable right under the Second Directive, it was entitled in the period from 1 April 1973 to 31 December 1977 to a retrospective reduction in the value of its supplies when 3PP commission was taken in cash; in other words that there is no difference in the positions pre- and post-1 January 1978.  This is disputed by HMRC.

12.    The second issue concerns Grattan’s claim to compound interest in respect of all amounts of VAT that have been overpaid, and accordingly are recoverable as such.  It breaks down into two parts.  The first concerns the existence and extent of an EU right to interest when VAT has been collected in breach of a directly effective EU right.  The second, which applies to the extent such an EU right is found to exist, and to the extent that it is not satisfied by payment in accordance with s 78 VATA, concerns the means whereby that right may effectively be enforced.  Grattan says that this should be enforced under the statutory scheme in VATA, and that a claimant should not be required to commence two sets of proceedings, one under the statutory scheme in respect of the principal amount claimed, and another before the High Court for the related interest.  HMRC say that the Upper Tribunal has decided in John Wilkins v Revenue and Customs Commissioners [2009] STC 2485 that even accounting for purposive construction an EU right cannot be accommodated within s 78 VATA and that all cases to date (both in the Upper Tribunal and in the High Court) demonstrate that, if the EU right exists, and if it goes further than s 78 VATA, it is a right that can effectively be realised through a common law restitution claim in the High Court.

13.    At the outset of the proceedings there was a third issue before the tribunal, which concerned a dispute over whether commission was provided to agents who made no purchases on their own account.  During the hearing the parties informed us that this issue had been resolved between the parties, and accordingly it no longer falls to be determined by us.

Proposed reference to the Court of Justice

14.    Grattan’s primary submission is that the consolidated appeal should be allowed.  However, it also submits that, viewing matters pragmatically, the real issues between the parties are matters of EU law that are, not only before this tribunal, matters of serious dispute.  In these circumstances Grattan also submits that, instead of deciding the consolidated appeal at this stage, the tribunal should make a reference, on both issues, to the Court of Justice for a preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union, pursuant to s 3(1) of the European Communities Act 1972.  HMRC on the other hand submit that there is no decision in this appeal that requires a reference to be made, and their primary submission is that we should dismiss the appeal.  However, HMRC also recognise that, in relation to the compound interest issue, a reference has recently been made on the basis of similar factual circumstances in Littlewoods Retail Limited v Revenue and Customs Commissioners (“Littlewoods”) (see [2010] STC 2072 for the substantive judgment, and [2010] EWHC 2771 for the referral judgment).  In those circumstances, they submit that as the existence and scope of the claimed EU law right to compound interest is material to the disposal of this appeal, the tribunal should stay this appeal pending the judgment of the ECJ in the reference made in Littlewoods.

15.    In considering whether a reference should be made in this case, and if so the questions that should be referred, we follow the guidance as to the correct approach that was succinctly summarised by Sir Thomas Bingham in R v International Stock Exchange ex parte Else (1982) Ltd [1993] QB 534 (at p 545):

“I understand the correct approach in principle of a national court (other than a final court of appeal) to be quite clear: if the facts have been found and the Community law issue is critical to the court’s final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself.  In considering whether it can with complete confidence resolve the issue itself the national court must be fully mindful of the differences between national and Community legislation, of the pitfalls which face a national court venturing into what may be an unfamiliar field, of the need for uniform interpretation throughout the Community and of the great advantages enjoyed by the Court of Justice in construing Community instruments.  If the national court has any real doubt, it should ordinarily refer.”

Pre-1978 supplies

16.    The issue for accounting periods prior to 1 January 1978 is whether before that time 3PP commission, when taken by agents in cash, operated so that after the time of the supply of goods there should be a retrospective reduction in the value of those supplies made by the mail order companies, so that there was a reduction in the output tax that had to be accounted for and in the amount of VAT that was due to HMRC.  If so there has been an overpayment by Grattan for the relevant period, which Grattan is entitled to recover under s 80 VATA.  HMRC’s case is that Grattan accounted for VAT correctly, and did not have a relevant directly effective right under the Second Directive to a retrospective reduction in the value of supplies when 3PP commission was taken in cash.

17.    This issue requires consideration of both domestic law and EU law.  We start with the EU law question, as if it applies there will be a directly enforceable EU right, which is material to the issue of compound interest as well.  If there is no directly enforceable right under the Second Directive, then we need to examine the domestic law to consider whether that law itself provides for the retrospective reduction in the value of the supply.

The EU law

18.    For periods from 1 January 1978, repayments of overpaid VAT have been made to Grattan on the basis of the direct application of Article 11C(1) of the Sixth Directive.  So far as material to this appeal, Article 11 provides as follows:

A. Within the territory of the country

1.     The taxable amount shall be:

 (a)     in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;

…    

 3.     The taxable amount shall not include:

(a)     price reductions by way of discount for early payment;

(b)    price discounts and rebates allowed to the customer and accounted for at the time of the supply;

…

 C. Miscellaneous provisions

 1.     In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

However, in the case of total or partial non-payment, Member States may derogate from this rule.

19.    Up to 1 January 1978 the applicable directives were the First and Second Directives, and the relevant article was Article 8(a) of the Second Directive:

The basis of assessment shall be:

(a) in the case of supply of goods and of the provision of services, everything which makes up the consideration for the supply of the goods or the provision of services, including all expenses and taxes except the value added tax itself;

20.    Article 8(a) was supplemented by para 13 of Annex A to the Second Directive, which, so far as material, provided as follows:

Regarding Article 8(a)

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance, etc) that is to say not only the cash amounts charged, but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of compensation received …

Discussion

21.    Dr Lasok submitted that the distinction drawn by HMRC between the two periods before and from 1 January 1978 is untenable having regard to the principles of  fiscal neutrality and equal treatment, which are fundamental principles of the VAT law and have been applicable since the inception of VAT in the UK.  He argued that such a distinction fails to take account of the continuity of the VAT system.  In regard to the principles of fiscal neutrality and equal treatment, Dr Lasok referred us to Marks & Spencer plc v Revenue and Customs Commissioners (Case C-309/06) [2008] ECR I-2283; [2008] STC 1408, in particular to para 47 where the ECJ referred to the principle of fiscal neutrality as being a “fundamental principle of the common system of VAT”, and para 49, where the ECJ pointed out that infringement of the general principle of equal treatment might be established, in matters relating to tax, by kinds of discrimination affecting traders who were not in competition but who were nevertheless in a similar situation in other respects.

22.    Relying upon Marks & Spencer, Dr Lasok submitted that, firstly, the principles of fiscal neutrality and equal treatment can be relied upon as direct sources of EU rights; secondly that these principles are an integral part of the VAT system, and have been so from its inception; and thirdly that as a result, there is no basis for discriminating in VAT treatment between the taking of the commission or credit in cash or in any other form.  The credit that is given to an agent in respect of AOP transactions and 3PP transactions, and credit which is taken in cash or goods, is nevertheless a single credit.  If different treatments are applied to the different ways that credit is applied, that is a breach of the principle of neutrality.

23.    Mr Mantle, for HMRC, argued that Marks & Spencer was concerned with zero-rating provisions that were included in the UK law by virtue of Article 28(2) of the Sixth Directive.  The question was whether, where a Member State such as the UK had maintained a zero rating provision under that article, but had failed to interpret it correctly, the general principles of Community law, including that of fiscal neutrality, apply so as to give a trader who has made such supplies a right to recover the sums mistakenly charged in respect of them.  In deciding that those general principles do so apply, the ECJ pointed out (at para 33) that the maintenance of zero rating was permissible only in so far as it complied with the principle of fiscal neutrality  inherent in the VAT system.  Although that principle is inherent in the system, its application in the Marks & Spencer context does not have any parallel with the current issue.

24.    The principle of fiscal neutrality and that of equal treatment were relevant in Marks & Spencer in relation to the system under which the UK’s domestic legislation provided that overpaid tax could not be repaid to the extent that repayment would lead to unjust enrichment of the trader but there was no such provision for a repayment trader (one whose input tax exceeds his output tax for an accounting period, and is thus entitled to a repayment from the tax authorities).  In Marks & Spencer the principle of neutrality was used in the sense of avoiding distortions in competition (see para 48) and the principle of equal treatment to require that similar, though not necessarily competitive, situations are not treated differently unless differentiation is objectively justified (see paras 49 and 50).

25.    It is clear in our view that the principles of neutrality and of equal treatment are inherent in the common system of VAT, and have been since the inception of that system.  However, we do not consider that the comparisons that have been made by Dr Lasok between the different methods by which an agent might obtain value for commission credited are of such a similar nature that would justify equal treatment on the basis of those principles alone.  There is, in our view, a difference between commission which is taken in goods, where the commission is accepted as reducing the taxable amount of those goods (termed secondary goods), and commission taken in cash, where what is said is that the cash amount is to be regarded as a retrospective reduction in the price of primary goods previously supplied, either to the agent or to the third party customer.  The real question in this regard is whether Article 11C(1) of the Sixth Directive, under which from 1 January 1978 commissions taken in cash have been regarded as retrospective reductions in the taxable amount of the primary goods, introduced a new right, outside the principle of neutrality that was already applicable in the context of the Second Directive, or was itself simply an embodiment of a principle that already existed, and which formed the basis of a right under Article 8(a) of the Second Directive.

26.    The ECJ considered the interpretation of both Article 11A(1)(a) and Article 11C(1) of the Sixth Directive in Elida Gibbs Ltd v Customs and Excise Commissioners (C-317/94) [1996] STC 1387.  That case concerned different factual circumstances than this, involving linear transactions where the original supplier was a manufacturer who did not make the supply to the ultimate consumer, but paid amounts on money-off and cash-back coupons, but it is important in the principles it confirmed.  In the context of the Sixth Directive, and Article 11A(1)(a) in particular, the Court held (at para 28) that it would not be in conformity with the directive for the taxable amount used to calculate the VAT chargeable to the supplier (in that case, the manufacturer) to exceed the sum finally received by him.  Furthermore, this interpretation was borne out by Article 11C(1).  The Court said (at para 30) that this provision, under which in cases including where the price is reduced after the supply takes place the taxable amount is to be reduced under conditions to be determined by the Member States, is to ensure the neutrality of the taxable person’s position.  It explained the position more fully in para 31:

“It is true that that provision refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently. The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral. It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.”

27.    The principle that the taxable amount is the consideration which has been or is to be obtained by the supplier from the purchaser was not a new one.  It derived from Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445, a case on Article 8(a) of the Second Directive.  The consideration is the subjective value, namely the value actually received in each case, and not a value estimated according to objective criteria.

28.    It seems to us that a combination of these authorities provides support for the proposition advanced by Mr Lasok.  The principle of fiscal neutrality runs through the VAT system and has done so from its inception.  Articles 11A(1)(a) and 11C(1) reflect that fundamental principle, which also applied in the application of Article 8(a).  There is accordingly no reason why the position before 1 January 1978 should be any different from that from that date.

29.    Mr Mantle argued that whilst Article 11A(1) correlates to Article 8(a) of the Second Directive, there is no counterpart to Article 11C(1) in the Second Directive.  He submitted that it is a specific, more sophisticated, provision which is not inherent in Article 11A(1) of the sixth Directive; otherwise it would be otiose.  Therefore it was not inherent in, or to be implied from, article 8(a) of the Second Directive.  Furthermore, he argued, the same result is not dictated by general principle, particularly given the significantly more limited degree of harmonisation of the common system of VAT before the adoption and coming into force of the Sixth Directive. 

30.    Mr Mantle referred us to the First Directive, which recited the limited harmonisation envisaged at the inception of the system.  In particular he referred to the absence of a requirement to harmonise down to the retail stage.  However, this was effectively a derogation; the more general intention, as also evidenced by the recitals, was for adoption by the Member States of the common VAT system, the only exception being in respect of rates.  Nor do we consider that there is anything in the Second Directive that suggests that harmonisation of the basis of assessment was not intended.  Whilst we accept that the Second Directive itself did not expressly deal with discounts, and that the Sixth Directive provisions in that respect can be regarded as the consequence of an evolving system, with increasing sophistication, we do not accept that this should be regarded as marking a change of principle.  Whilst a distinction can be drawn between a discount at the time of supply, and an agreed price subject to a rebate consequent upon a contingent event, that it seems to us can equally well be a matter of mechanics as one of principle.

31.    Mr Mantle also referred us to the recitals to the Sixth Directive, and argued that these also indicated that, prior to the introduction of that directive, the concept of taxable amount (or “taxable base”) had not yet been fully harmonised by the provisions of the Second Directive.  In particular, the Sixth Directive recited:

“Whereas the taxable base must be harmonized so that the application of the Community rate to taxable transactions leads to comparable results in all the Member States”

We do not read this as supporting Mr Mantle’s argument.  The taxable base is, we consider, a wider concept than that of taxable amount.  It covers, for example, the scope of taxable as against exempt transactions.  This does not therefore indicate that the Sixth Directive was aimed at a harmonisation of the taxable amount that did not exist at the stage of the Second Directive.  Nor do we consider that the reference in the proposal for the Sixth Directive (submitted to the Council by the Commission on 29 June 1973) to “taxable amount” as one of the areas of application for VAT which were to be identical under each national law of the Member States supports a conclusion that Article 11C(1) introduced a novel method of calculating that amount.  The proposal refers to the derogations that remained possible under the First and Second Directives as regards the scope of the application of the tax, and the need for those derogations to be progressively restricted or abolished.  That was the context of the introductory remarks concerning the method of calculating the taxable amount; it does not show that Article 11C(1) introduced an element of that calculation that was not present before. 

32.     Mr Mantle also referred us to the Opinion of the Economic and Social Committee on the proposal for the Sixth Directive (O.J. No C 139/15), which was adopted on 31 January 1974.  The committee recognised that the proposed directive was designed, amongst other things, to “ensure that taxable amounts are identical”.  Furthermore, in referring to the need to harmonise the bases of assessment before harmonisation of rates, Mr Mantle submitted that the committee had made it clear that harmonisation of the bases of assessment was at that stage incomplete.  In commenting on what became Article 11C(1), the committee said:

“Paragraph C(1) leaves it to the Member States to lay down the rules to be applied in the case of goods or services which remains unpaid or are cancelled.  This is regrettable, for some countries, such as France, have adopted provisions which in effect mean that unpaid transactions are partially taxed.  The volume of operations of this kind, especially in periods of recession, should have warranted Community provisions binding on the Member States in keeping with the principle of neutrality on which value added tax is based.”

We accept that the inclusion in Article 11C(1) of provision for the Member States to lay down conditions suggests that the rule is not merely a restatement of an earlier rule, in respect of which no such conditions would have been capable of being specified.  On the other hand, the focus of the ESC’s comments was not on retrospective reductions, but on unpaid amounts and cancellations.

33.    In support of his argument as to the different applications of Articles 11A(1) and 11C(1), Mr Mantle referred to Freemans plc v Customs and Excise Commissioners (Case C-86/99) [2001] STC 960.  In that case the ECJ decided that, where an agent took AOP commission in cash, Article 11C(1) required that the taxable value of the goods supplied to the agent be reduced by the amount of the commission so taken.  However, the Court first held that Article 11A(1) did not entitle Freemans to take the AOP commission into account at the time of the supply (see para 29).  The argument here is that it is Article 11A(1) that is the embodiment in the Sixth Directive of the former Article 8(a) of the Second Directive, and that by confining the effect of a withdrawal of credit by the agent to the application of  Article 11C(1), the Court was recognising that Article 11A(1) applied only in respect of adjustments at the time of supply, and not after the time of supply.  On the logic of this argument, the effect of Article 8(a) would be similarly confined.

34.    We do not think that the way in which the ECJ has interpreted the Sixth Directive provisions can be conclusive of the application of the former Second Directive rules.  Where, as in the Sixth Directive, the provisions concerning the ascertainment of the taxable amount have been expanded into a number of self-contained provisions, it is to be expected that the Court, construing the Sixth Directive, would consider the separate application of those provisions, and that those provisions would be regarded as having different applications to different sets of circumstances.  But that does not, in our view, indicate that the more detailed exposition in the Sixth Directive compels the conclusion that the same principle ought not to be adopted on the wording which, without such elaboration, appeared in the Second Directive.

35.    The question whether the terms of Article 8(a) were unconditional and sufficiently precise to have the direct effect that the taxable amount was to be reduced when the price is reduced after the supply of goods takes place or when the full price is never received was considered by the VAT and Duties Tribunal (Chairman, Theodore Wallace) in General Motors Acceptance Corporation (UK) plc (2006; No 19989) (“GMAC 2”).  In that case, in a number of circumstances, the appellant did not receive the full price for the supply of cars on hire purchase terms.  The tribunal took the view that, although Article 8(a) was unconditional it could not be described as precise as to the effect claimed by the appellant.  Accordingly, although the tribunal explained that it could not be wholly confident that it was correct in this view, it decided that the appellant’s directly effective rights did not extend back further than 1 January 1978.  The tribunal considered making a reference to the ECJ, but did not do so, firstly because it had not made a reference on another aspect of the case, and secondly because it considered that such a reference would more appropriately be made by a higher court in light of the conclusions of the House of Lords in Fleming (t/a Bodycraft) v Customs and Excise Commissioners [2008] STC 324.

36.    GMAC 2 was considered by Henderson J in the High Court in F J Chalke Ltd v Revenue and Customs Commissioners [2009] STC 2027 in the course of an argument that Article 2 of the First Directive gave rise to directly effective rights of repayment in that case.  He found that the answer to that question was far from clear.  Whilst Article 2 was clear and precise, he considered that it was far from obvious that there could clearly be extracted from the basic principle – that the tax should be exactly proportional to the price of the goods or services supplied – together with the underlying principle of neutrality and the rule providing for the deduction of directly related input tax, either that the margin scheme at issue in that appeal was unlawful or that manufacturers’ bonuses paid after the relevant supplies should be treated as reducing the value of those original taxable supplies (see Chalke, at [254].  There is some resonance in the question in Chalke with the issue in this case, namely the effect, before the introduction of the Sixth Directive, of retrospective payments on the taxable amount of an earlier supply.  Mr Justice Henderson considered that there was much to be said on both sides of the argument, and he would have referred the issue to the ECJ, but for the fact that all the appellants’ claims were time-barred, and there was accordingly no outstanding issue to be determined.

37.    Taking all the arguments into consideration, our own view would be that in the circumstances of this case, in relation to the period before 1 January 1978, Article 8(a), in the context of the principle of fiscal neutrality, would be directly effective to reduce the taxable amount of the supplies made by the mail order companies by reference to the commissions or credits for 3PP transactions paid in cash.  However, the position is not clear and we cannot with complete confidence resolve that issue ourselves.  Accordingly, and subject to what we say about the application of the domestic law, we will refer this question to the Court of Justice for a preliminary ruling.

The domestic law

38.    The relevant domestic law provision is s 10(2) of the Finance Act 1972:

If the supply is for a consideration in money, its value shall be taken to be such amount as, with the addition of the tax chargeable, is equal to the consideration.

39.    The question here is whether, irrespective of the direct effect of EU law, in the relevant period s 10(2) is itself to be construed as enabling the consideration for the supplies by the mail order companies to be reduced on account of the cash payments of commission or credit in respect of 3PP transactions.  If so, then the reduction may be made without reference to the EU law (although there will remain a question as to the extent of the EU law right for interest purposes).

40.    Mr Mantle argued that there is no basis in the domestic legislation for concluding that, in the circumstances of this case, the consideration for supplies previously made to the agents (or supplies made to third party customers) was required to be reduced when 3PP commission was taken in cash after the supply out of which it arose had been made.  Absent Article 11C(1) of the Sixth Directive, and subject to any application of the Second Directive, the value of supplies previously supplied by the mail order company was not affected by the taking of 3PP commission by the agent in cash.

41.    Mr Lasok submitted that domestic law is to be interpreted and applied consistently with EU law, including the principle of fiscal neutrality.  Accordingly, the treatment of 3PP commission taken in cash before 1 January 1978 was also unlawful by reference to national law.  In particular, he submitted that s 10(2) did not preclude reductions in the consideration.

42.    In our view there is nothing in s 10(2) itself that can provide for retrospective reductions of the nature at issue in this case.  We were referred to a number of published VAT Notices that made reference to practices adopted by the Commissioners in various circumstances, including cash discounts, contingent discounts and trade discounts, and accounting for credits.  None of this in our view can assist the construction of the plain meaning of s 10(2) in the circumstances with which we are here concerned.  Nor for the same reason do we derive any assistance from the notices regarding special schemes for retailers and the references in those notices to the procedure for dealing with refunds and cash discounts.

43.    In our view, on its own and without reference to EU law, s 10(2) cannot, prior to 1 January 1978, be construed so as to enable the consideration for the mail order supplies to be reduced by the 3PP commission taken in cash.  That issue depends upon the direct application of an EU right, which we have decided is a question that ought to be referred to the ECJ.

Pre-1978 question for reference

44.    We will hear further representations from the parties on the form of the reference.  The question suggested by Grattan is:

“In relation to the period before 1 January 1978, do taxable persons have a directly effective right under Article 8(a) of the Second directive and/or the principles of fiscal neutrality and equal treatment to account for VAT in respect of supplies of goods by reference to the consideration that is actually received by the supplier (that is, reduced by any discount or reduction.”

This seems to us to encapsulate the issue before us for the relevant period, but we shall reserve the final wording pending further submissions by the parties.

Compound interest

45.    The question of the existence and extent of an EU law right to interest when VAT has been collected in breach or a directly effective EU law right has been the subject of much controversy.  The latest in a line of cases addressing the issue, from a variety of perspectives, is Littlewoods.  In that case, in the High Court, Vos J considered the claim by members of the Littlewoods group for compound interest on overpayments of VAT in periods between 1973 and October 2004.  Repayments of VAT were made to the Littlewoods companies pursuant to s 80 VATA, and HMRC also paid simple interest at the statutory rates prescribed by s 78.

46.    Unlike Grattan, Littlewoods did not advance their claims for compound interest under the VATA or before the tribunal.  They instead instituted proceedings in the High Court on the basis of restitution according, firstly, to the principle enunciated by the House of Lords in Woolwich Equitable Building Society v IRC [1993] AC 70 (“a Woolwich claim”) and, secondly, on a mistake of law on the principle established by the House of Lords in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (“a mistake-based claim”).  Mr Justice Vos decided that, as a matter of English law, sections 78 and 80 VATA provide a regime for repayment of overpaid VAT and for the payment of interest on such overpayments that excludes the Woolwich claims and the mistake-based claims for restitution.  The issue whether that exclusion is contrary to EU law has been referred to the Court of Justice by means of a series of questions that we will consider later.

47.    In his judgment Vos J refers (at [7]) to the “formidable legal analysis” that has already been undertaken in this area, and to his reliance upon it save where required for the decision of specific issues before him.  Likewise, we too gratefully adopt his summary of the state of the law, which is contained in paragraphs [27] to [43] of his judgment.  At [40] the learned judge refers to the Upper Tribunal (Tax and Chancery) (Warren J (P) and Judge Bishopp) decision in John Wilkins (Motor Engineers) Limited v Revenue and Customs Commissioners [2009] STC 2485.  There the tribunal held that “interest” in s 78 could not be construed as meaning “compound interest” and that s 78 provided an exhaustive regime for the recovery of interest.  To the extent that the claimants had an EU right to compound interest (which was accepted by HMRC for the purpose of the John Wilkins appeal on the basis of the judgment of Henderson J in F J Chalke v Revenue and Customs Commissioners [2009] STC 2027), the tribunal nevertheless declined to construe VATA, under the principle in Marleasing SA v La Comercial Internacional de Alimentacion SA (Case C-106/89) [1990] ECR 1-4135, as providing for compound interest, whether or not the Sixth Directive provided for compound interest, which it did not (John Wilkins, at [106]).  The payment of interest went against the grain of the statutory scheme for repayment of overpaid VAT and simple interest in VATA (at [120]).  Therefore, although the statutory scheme could be disapplied to the extent necessary to give effect to the claimants’ EU law rights, that did not mean that the claim for compound interest could be enforced in the tribunal.

48.    The position adopted in John Wilkins on the substantive issue has since been overtaken by the judgments of the Court of Appeal in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2010] STC 1251 and Chalke [2010] STC 1640.  In the latter case, Etherton LJ decided (at [41]) that it was desirable for there to be a reference to the ECJ for a preliminary ruling on the issue of whether EU law requires the recipient of an overpayment of tax to pay compensation for the time value of the wrongfully retained tax when it was not lawfully due.  That, in essence, is the issue that has now been referred by the High Court in Littlewoods.

49.    The substantive issue arises in this appeal, although in a different context than that in Littlewoods.  Grattan’s case is that an EU right to compound interest exists.  If it does, it is also their case that the principles of effectiveness and equivalence require such a right to be capable of being given effect to under the VATA and in proceedings before the tribunal.  This submission, put shortly, is that the United Kingdom could not, consistently with its obligations under EU law, channel repayment claims through s 80 VATA without making provision for the award of interest and could not require claimants to commence two sets of proceedings, one under the statutory scheme in respect of the principal amount claimed and another before the High Court for the related interest, where the interest claim falls outside the scope of s 78, literally construed.  Dr Lasok submitted that this tribunal should not regard itself as bound by the contrary judgment in this respect in John Wilkins.  He argued that the decision of the Upper Tribunal in that case is per incuriam in two respects: first, that it was a case argued on interpretation only, and did not consider disapplication; and  secondly, that the Upper Tribunal did not consider the EU principles that could be derived from cases such as Marshall v Southampton and South West Hampshire Area Health Authority (Case C-271/91) [1993] ECR 1-4367 and Impact v Minister for Agriculture and Food and others (Case C-268/06) [2008] ECR 1-2483.

50.    Dr Lasok referred us to ICI plc v Colmer [1999] STC 1089 to illustrate the two ways in which the UK courts could address the problem that arises when an effect of domestic legislation is precluded by EU law.  The first is interpretation, the second disapplication.  Where the offending provision cannot be interpreted in a way that conforms to the EU law, it can nevertheless be disapplied.  The effect, as indicated by Lord Nolan (at p 1094), is as if a subsection were incorporated in the relevant legislative provision to the effect that it was to be without prejudice to the directly enforceable Community rights.  Applying this test, Dr Lasok argued that if s 78 VATA on its true construction provides only for simple interest, and that is not an effective remedy, then the courts, and this tribunal, should apply s 78 without prejudice to the effective remedy required under EU law.  The same argument could be made in relation to s 80, which makes no provision for interest.  If EU law requires both the repayment of overpaid VAT and compensation for the time value of money in the form of compound interest, Dr Lasok argued that the tribunal should apply either s 78 or s 80, or a combination of the two, to give effect to that EU right.

51.    Dr Lasok’s argument in this respect turns on whether the approach of the Upper Tribunal in John Wilkins effectively disregarded the disapplication option.  He referred us to para [57] of the decision, and the reference there to the issue being one of statutory construction.  We do not see how this can lead to the conclusion that the tribunal did not concern itself with disapplication.  In ICI v Colmer Lord Nolan, in referring to disapplication, in accordance with s 2(1) and (4) of the European Communities Act 1972, drew attention to what Lord Bridge said in R v Secretary of State for Transport ex p Factortame Ltd [1990] 2 AC 85; the relevant provision is to be “construed and take effect” subject to directly enforceable rights.  To approach the question as one of statutory construction is not therefore to ignore the issue of disapplication.

52.    In any event, it is clear to us that the tribunal in John Wilkins was very much alert to the disapplication remedy.  It is referred to in para [122] of the decision, where reference is also made to the Chancellor’s judgment in Vodafone 2 v Revenue and Customs Commissioners [2009] EWCA Civ 446 at [26], itself referring to Factortame and to the “without prejudice” nature of disapplication.  John Wilkins cannot be described as per incuriam in this respect.

53.    The Upper Tribunal in John Wilkins declined to read s 78 in a way that departed from its natural meaning or which cut across the statutory scheme in a way that was not compatible with it, or went against the grain.  By contrast, having regard to the existence of the restitutionary remedies, very limited disapplication of s 78 would be required in order to release the claimants from the fetter preventing them from pursuing those remedies.  There was no reason to construe the VATA as if it were the only place where a remedy might be found, and English law does provide a remedy in the form of the restitutionary remedy outside the terms of the statute (see [122], [127] to [129]).

54.    At [130] the tribunal in John Wilkins considered, and rejected, an argument put on behalf of certain of the claimants that both the right to VAT refunds and questions of interest ought properly to be dealt with by the tribunal rather than by the court.  Reliance in this respect was placed on Autologic Holdings plc v IRC [2006] 1 AC 118.  The Upper Tribunal pointed out that Autologic was concerned with the case where the special commissioners and the court were both capable of exercising jurisdiction, and that the conclusion was that the tax appeal system should be used to resolve issues of liability to tax, rather than declaratory relief in proceedings in the High Court.  The tribunal continued:

“In the present case, however, the very question in issue is whether s 78 can be read in a manner which allows for an award of compound interest.  If it can, then the tribunal has exclusive jurisdiction; if it cannot, then the tribunal has no jurisdiction and the right to compound interest must be enforced in the court in a claim for restitution.  There is nothing, in our view, in an argument that seeks to find a substantive right to compound interest in s 78 simply in order to bring the claim within the jurisdiction of the tribunal.”

55.    Undeterred by this Dr Lasok submitted that this produced the strange result that a claim for repayment under s 80 VATA could be determined by the tribunal, but not the interest component of that claim.  It would be necessary for the claimant to bring separate proceedings in the High Court in order to claim common law restitution.  He argued that John Wilkins ought to be distinguished, as it concerns an interest claim only, the s 80 claims having been met in full.  But we do not consider that this can be a distinguishing feature; the relevant “principal” claim is under s 80 whether it is met before the appeal is heard, or only as a result of the tribunal’s determination.

56.    In Marshall v Southampton and South West Hampshire Area Health Authority an award was made by an industrial tribunal in respect of a directly-effective EU right, which included an amount by way of interest and exceeded a specified limit of compensation under national law.  The authority appealed against the interest award.  The House of Lords referred a number of questions to the ECJ, including the question whether the compensation to be awarded should include an amount of interest on the principal amount of the loss.  The court held that full compensation for the loss and damage sustained as a result of discriminatory dismissal could not leave out of account factors, such as the effluxion of time, that might in fact reduce its value.  At para 31, the court said:

“The award of interest, in accordance with the applicable national rules, must therefore be regarded as an essential component of compensation for the purpose of restoring real equality of treatment.”

57.    It seems to us that in Marshall the interest question that was being answered by the ECJ was essentially the substantive question as to the liability to compensate for the time value of money, and not the question of under which jurisdiction should that right be enforceable.  It is apparent from the ECJ judgment that this question remained one for national law.  In Marshall the proper course determined by the national law was to disapply the limit so as to enable the industrial tribunal to award interest.  Thus far, English law in respect of the compound interest remedy for overpayments of VAT has declined to do that, and has instead determined that, if such a remedy is required, it may be found in restitution.

58.    The jurisdiction of the national courts to determine the appropriate remedies for breach of directly-effective rights is not without limitation.  The remedies must nevertheless conform to the principles of effectiveness and equivalence.  In Edilizia Industriale Siderurgica Srl (Edis) v Ministerio delle Finanze (Case C-231/96) [1998] ECR I-4951, the ECJ said (at para 34):

“[The] diversity between national systems derives mainly from the lack of Community rules on the refunding of national charges levied though not due.  In such circumstances … it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable that those governing similar domestic actions (principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness).”

59.    In Impact, the Irish trade union by that name brought proceedings on behalf of Irish civil servants against the government departments employing them, concerning first their pay and pension conditions as fixed-term workers, and second the conditions for the renewal of certain fixed-term contracts by those departments.  The position was governed, as a matter of Community law, by Directive 1999/70 which Member States were required to give effect to in domestic law by 10 July 2001.  The Irish legislation entered into force on 14 July 2003, and provided for complaints to be made to a Rights Commissioner.  The complaints made by Impact concerned both the period after 14 July 2003, and the period from 10 July 2001 to that date.  The Rights Commissioner took the view that she had jurisdiction to entertain all the complaints, including those from the earlier period.  On appeal to the Labour Court, that court referred certain questions to the ECJ including whether, notwithstanding the absence of any express provision to that effect in the relevant national law, a national court or tribunal, such as the Labour Court or a Rights Commissioner, which is called upon to decide a case concerning an infringement of the legislation transposing the directive is required by Community law to hold that it also has jurisdiction to hear and determine claims based directly on that directive itself, where such claims relate to a period after the deadline for transposing the directive concerned, but before the date of entry into force of the transposing legislation giving it jurisdiction to hear and determine claims based on that legislation.

60.    The Court, in its judgment, referred to the responsibility of the national courts to provide the legal protection which individuals derive from the Community law rules (para 42).  It referred also to the principles of effectiveness and equivalence, and the application of those principles to the designation of the courts and tribunals having jurisdiction to hear and determine actions based on Community law (para 47).  The Court then continued, in a passage that is worth citing in full (at paras 51-54):

“51.  In those circumstances, where the national legislature has chosen to confer on specialised courts jurisdiction to hear and determine actions based on the legislation transposing Directive 1999/70, the obligation which would be placed on individuals in the situation of the complainants—who sought to bring a claim based on an infringement of that legislation before such a specialised court—to bring at the same time a separate action before an ordinary court to assert the rights which they can derive directly from that directive in respect of the period between the deadline for transposing it and the date on which the transposing legislation entered into force, would be contrary to the principle of effectiveness if—which is for the referring court to ascertain—it would result in procedural disadvantages for those individuals, in terms, inter alia, of cost, duration and the rules of representation, such as to render excessively difficult the exercise of rights deriving from that directive.

52.  At the hearing, Ireland claimed that the jurisdiction given to the Rights Commissioners and the Labour Court by the 2003 Act is optional and therefore does not prevent individuals from bringing a single action, based partly on national law and partly on Community law, before an ordinary court.

53. Even if that is so, the fact remains that where individuals intended—as the complainants did in the main proceedings—to rely on the, albeit optional, jurisdiction which the national legislature, when transposing Directive 1999/70, conferred on those specialised courts to hear and determine disputes arising from the 2003 Act, the principle of effectiveness requires that those individuals should also be able to seek before the same courts the protection of the rights which they can derive directly from the directive itself, if it should emerge from the checks undertaken by the referring court that the obligation to divide their action into two separate claims and to bring the claim based directly on the directive before an ordinary court leads to procedural complications liable to render excessively difficult the exercise of those rights conferred on the parties by Community law.

54. If the referring court were to find such an infringement of the principle of effectiveness, it would be for that court to interpret the domestic jurisdictional rules in such a way that, wherever possible, they contribute to the attainment of the objective of ensuring effective judicial protection of an individual's rights under Community law (see, to that effect, Unibet at [44]).”

61.    It is apparent from Impact that, although there is a recognition of the application of the principle of effectiveness in the consideration of the appropriate jurisdiction for a claim, in that case which spanned a period of direct effect of the directive and the application of the national legislation transposing the directive, a single jurisdiction will only be mandated by that principle if the making of separate claims renders the exercise of the Community rights excessively difficult.  Furthermore, that is a matter for the domestic courts.

62.    The ECJ case of Ministero delle Finanze v IN.CO.GE.’90 Srl (Cases C-10/97 to C-22/97) [1998] ECR-I 6307 concerned the repayment of an administrative charge for entering companies on the register of companies which was incompatible with the directive on the indirect taxes on the raising of capital.  IN.CO.GE successfully applied to the Pretura di Roma for orders that the Italian Ministry of Finance repay the overpaid registration charges.  The Ministry of Finance challenged the jurisdiction of the Pretura di Roma, arguing that it did not have the power to hear disputes in tax matters.

63.    The UK government submitted written observations in IN.CO.GE.  It argued that the ECJ did not have jurisdiction to reply to a question to the extent that it concerned the interpretation of Italian and not Community law.  It pointed out that it was for 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.  The ECJ, whilst agreeing that the question of jurisdiction is a matter for the national courts, and not for the ECJ, nevertheless stated that (para 15) “the Court has power to explain to the national court points of Community law which may help to solve the problem of jurisdiction with which that court is faced.”  In that case the essential question which went to the core of the jurisdiction issue was not a simple matter of designation of the appropriate court or tribunal, but whether the incompatibility of the registration charge with EU law had the effect that the relevant national provisions had to be disregarded in their entirety, and thereby divested the registration charge of its fiscal nature.

64.    The ECJ rejected the proposition that the rule of national law would be rendered non-existent, and continued (at para 21):

“Faced with such a situation, the national court is, however, obliged to disapply that rule, provided always that this obligation does not restrict the power of the competent national courts to apply, from among the various procedures available under national law, those which are appropriate for protecting the individual rights conferred by Community law.”

Dr Lasok sought to persuade us that it follows from this that the restriction on interest in s 78 must simply be set aside, and the tribunal should directly enforce the EU right.  We do not agree.  This passage in IN.CO.GE is doing no more than reiterating that the question of remedies is one for the national courts, and that the whole range of domestic remedies falls, in each particular case, to be considered.  It cannot in our view support a submission that the tribunal should have jurisdiction to award compound interest, in circumstances where the domestic courts have consistently declared that the restitutionary remedies are themselves effective.  As the court went on to hold, subject to the principles of equivalence and effectiveness, both the detailed rules for repayment which are to apply and the classification, for that purpose, are matters which fall to be determined under national law.  This includes special detailed rules governing claims and legal proceedings (see paras 26-27).  The conclusion was that any reclassification of the legal relationship between the tax authorities of a Member State and certain companies in that State when a domestic charge was found to be contrary to Community law is a matter for the national law.

65.    It seems to us that there are three possible courses of action that we might take in relation to the compound interest issue.  The first is to decide, to the extent that we are able to do so without making any reference to the ECJ, issues that arise in these appeals.  The second is to refer such questions as we think fit to the ECJ, in so far as those questions are not already covered by the Littlewoods reference.  The third is to stay these proceedings pending resolution of the Littlewoods questions.

66.    We are unable to decide the substantive compound interest question, as that is a matter of EU law on which a preliminary ruling of the ECJ is required.  Grattan has urged us to refer the following questions in this respect:

“…

(2) Where, due to an error on the part of the tax authorities of a Member State, a taxable person has accounted for VAT that was not VAT due from him:

…

b. Is it contrary to the EU principle of effectiveness for national law to provide for interest to be paid only at a simple rate and/or lower than such rate as would adequately compensate the taxable person for loss of the use of the overpaid amount?

c. Is it contrary to the principle of equivalence for national law either to make no provision for the payment of interest or to provide for interest to be paid at a simple rate where domestic common law claims for the repayment of overpaid tax carry a higher rate of interest than as provided for in the statutory regime applicable to VAT?”

67.    Mr Justice Vos has referred three questions to the Court of Justice in Littlewoods that relate to the issue (Issue (2) in that case) whether, if the Woolwich claims and/or the mistake-based claims are excluded by sections 78 and 80 VATA (which he has held they are), that exclusion is contrary to EU law.  The questions are:

“Question 1: Where a taxable person has overpaid VAT which was collected by the Member State contrary to the requirements of EU VAT legislation, does the remedy provided by a Member State accord with EU law if that remedy provides only for (a) reimbursement of the principal sums overpaid, and (b) simple interest on those sums in accordance with national legislation, such as section 78 of the Value Added Tax Act 1994?

Question 2: If not, does EU law require that the remedy provided by a Member State should provide for (a) reimbursement of the principal sums overpaid, and (b) payment of compound interest as the measure of the use value of the sums overpaid in the hands of the Member State and/or the loss of the use value of the money in the hands of the taxpayer?

Question 3: If the answer to both questions 1 and 2 is in the negative, what must the remedy that EU law requires the Member State to provide include, in addition to the reimbursement of the principal sums overpaid, in respect of the use value of the overpayment and/or interest? ”

68.    Mr Swift submitted that cumulatively these questions were intended to reach across the entire spectrum as to the existence of a remedy and, to the extent that it does exist, its form and extent.  In answer to Dr Lasok’s argument that this case is different in that it is not an action for a common law remedy, but a claim under the statutory provisions, Mr Swift argued that the questions posed in Littlewoods are entirely neutral as to the forum in which the remedy is sought.

69.    We agree in this respect with Mr Swift.  It seems to us that nothing can be added by Grattan’s proposed questions to the three questions that in this respect have been referred in Littlewoods.  The context is different, but there is nothing in the Littlewoods questions that confines the ECJ to consideration of common law restitutionary remedies as opposed to any other.  Specifically in relation to Grattan’s question 2c, which refers to the principle of equivalence, it is clearly the case that a common law restitutionary claim is more favourable than interest under s 78 (which is limited to simple interest at the statutory rates), but the question that needs to be answered is whether EU law requires recovery of an amount greater than the s 78 interest.  That question is addressed in the Littlewoods reference.

70.    We conclude therefore that, as regards the substantive compound interest issue, the proper course is not for this tribunal to refer further questions to the ECJ, but instead to stay these proceedings in that respect pending the judgment of the ECJ on that preliminary ruling.

71.    We move on therefore to the question of jurisdiction.  As a matter of English law,  taking account of the principles laid down by the existing ECJ jurisprudence, we are satisfied, and we regard ourselves as bound to find, that there is no requirement that, if a right to compound interest exists, it must be found in the VATA or be within the jurisdiction of the tribunal.  This is clear from John Wilkins, and the discussion there (at [99] to [106]) on statutory construction in the light of, and to give effect to, EU law.  Referring in particular to the judgment of Arden LJ in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252, citing from Pfeiffer v Deutsches Rotes Kreuz, Kreisverband Waldshut eV (Cases C-397/01 to C-403/01) [2004] ECR I-8835, and the need to consider national law as a whole, the Upper Tribunal concluded (at [106] that no such right would require to be found even if the Sixth Directive had made provision for repayment of charges wrongfully levied (which it does not).  The tribunal concluded in this respect:

“Still less is there any such requirement where the right to compound interest is not found in the Sixth Directive but is a right which arises under general principles of Community law.  It is enough that an appropriate remedy is available under English law which gives full effect to the claimants’ Community entitlement.”

72.    Dr Lasok nevertheless argues that there is a question as to the compatibility of this position with the principle of effectiveness that we ought ourselves to refer to the Court of Justice.  Here the difference between the Littlewoods and Grattan claims becomes marked.  Littlewoods is concerned with claims for restitution, and no argument has been addressed on the possible impact of EU law on the choice of forum.  The choice essentially is between the common law remedies, each of which is enforceable in the High Court and not in the tribunal.  Grattan’s case that the remedy ought to be afforded under VATA, and be enforceable in the tribunal, is not part of the Littlewoods appeal.  This explains the fourth question referred by Vos J:

“Question 4: If the answer to question 1 is in the negative, does the EU law principle of effectiveness require a Member State to disapply national law restrictions (such as sections 78 and 80 of the Value Added Tax Act 1994) on any domestic claims or remedies that would otherwise be available to the taxable person to vindicate the EU law right established in the Court of Justice’s answer to the first three questions, or can the principle of effectiveness be satisfied if the national court disapplies such restrictions only in respect of one of these domestic claims or remedies?

What other principles should guide the national court in giving effect to this EU law right so as to accord with the EU law principle of effectiveness?”

73.    By contrast Grattan seeks a reference of the following question:

(2) Where, due to an error on the part of the tax authorities of a Member State, a taxable person has accounted for VAT that was not VAT due from him:

a. Is it contrary to the EU principle of effectiveness for national law to make no provision for the payment of interest in the statutory provisions governing the making of claims for the repayment of the overpaid amount and the appeals from the administrative decisions on those claims?”

74.    Judgments of the ECJ have consistently placed the onus of applying the principle of effectiveness onto the national courts.  The hurdle to breach the principle is a high one: the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law will not breach the principle of effectiveness unless the exercise of the rights are rendered virtually impossible or excessively difficult, for example in terms of cost, duration and rules of representation.  It may well be the case that it would be more convenient for a claimant to be able to pursue all of its claims in a single court or tribunal, and not to have to instigate two sets of proceedings.  This may even be a more effective way for the right to be given effect to.  But, having regard to the ECJ authorities, in our view the test so far as EU law is concerned is not one of comparing the respective merits of two methods that as a matter of national law are both effective and available for the purpose of satisfying a claim.  The test involves no such comparison; each method must be independently assessed, by the national court, to test whether as an objective matter it satisfies the principle of effectiveness as consistently encapsulated by the ECJ.

75.    Mr Swift argued that a requirement to commence a common law restitution claim in the High Court could not be said to breach the principle of effectiveness.  This plainly did not render the exercise of any EU law right to compound interest (if one exists) either impossible or excessively difficult.  He referred us to Sempra Metals v IRC [2007] STC 1559, in the House of Lords, and in particular to the judgment of Lord Nicholls at [130] to [131].  Sempra Metals was a case that did not concern the recovery of a principal sum wrongly demanded, nor did it involve proceedings before the tribunal.  It was a case where corporation tax (in the form of advance corporation tax) had been paid early because special arrangements (group income elections) available to UK group companies were not applicable where the parent company was resident outside the UK (but in the EU).  The claim was made in the High Court for the interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely.  Whilst finding that English law provided for compound interest to be awarded to Sempra, in the form of a common law damages claim and restitutionary causes of action in respect of an unlawful demand and mistake of law, the House of Lords did not determine which of the available remedies would be the most effective, nor did it consider the question of the need to institute more than one set of proceedings.

76.    The jurisdiction of the national court to choose which of a number of available domestic remedies it considers to be the most effective is at the root of Question 4 in Littlewoods.  That question is, in its context, confined to existing domestic law remedies.  It does not address the submissions of Grattan in this case, essentially that an inchoate EU law right exists outside of the existing domestic law, to which effect must be given by the VATA and by the tribunal.  Despite arguments on the part of HMRC in Littlewoods that the appropriate extent of the disapplication of national law restrictions to give effect to the EU law right is a question of national law, Vos J nevertheless decided to refer Question 4.  He reasoned that the guidance of the ECJ on the detailed application of the EU law principle of effectiveness might be extremely valuable.  He said at [94]):

“It is one thing to say the national court must not make the exercise of the EU law right practically impossible or excessively difficult.  It is another thing to know whether the national court has been successful in that exercise in any particular case.  It seems to me, at least, that the ECJ might wish to say something about the principles upon which national courts should decide how to implement San Giorgio rights by application of the principle of effectiveness.  The ECJ will plainly not descend to a consideration, for example, of the relative merits of compensation claims versus restitution based claims in national law, or indeed as to the actual choice between two available remedies.  But the ECJ may wish to comment on whether the principle of effectiveness requires national law to dis-apply restrictions on all available causes of action or simply the one that most effectively allows the San Giorgio right in question to be vindicated.  The ECJ’s views on this point will, as I have said, be most useful to this Court when it comes to take its final decision after the reference is decided.”

77.    We have explained that, on the question of the application of English law, we do not consider that John Wilkins failed properly to consider the issue of disapplication or was otherwise per incuriam.  We are bound therefore by that decision to find that, subject to any EU law principle to the contrary, there is no substantive right to compound interest in the VATA, and such a right cannot be enforced in the tribunal.  Furthermore, having regard to the ECJ authorities to which we have been referred, we do not consider that of themselves these could be relied upon to justify any different conclusion, whether on the basis of the principle of equivalence or the principle of effectiveness.  However, having regard to the remarks of Vos J in relation to his referral of Question 4 in Littlewoods, we must take account of the possibility that the ECJ will, if requested to do so, provide further insight into the application of the principles of effectiveness and/or equivalence that will assist us in reaching a final decision on whether the requirement to commence two sets of proceedings (one before the tribunal to recover the principal amount and simple interest and another before the High Court for additional interest up to a compounded rate) and whether a remedy ought to be found within the VATA and apart from the restitutionary remedies.

78.    Against this Mr Swift submitted that such a question is logically distinct from the questions already referred in Littlewoods, and moreover that such a question is contingent on the answers to the Littlewoods reference questions.  He argued that there is no reason for such an issue either to be referred to the Court of Justice or decided at the same time.  Any question of EU law concerning how an EU law right is to be realised in domestic law could, he submitted, only properly be addressed once the existence and scope of the EU law right had been determined.

79.    It will not, in our judgement, suffice simply to stay these proceedings to await the response of the ECJ to the Littlewoods questions.  We do not accept Mr Swift’s argument that an appropriate question on the realisation of an EU law right cannot be framed until the Littlewoods questions on the existence and form of that right have been determined.  In the context of Question 4 in the Littlewoods reference we take the view that the Grattan issue ought to be addressed at the same time and in the same context as the substantive EU law right questions.  Furthermore, given the different circumstances in Littlewoods, Question 4 in that reference on its own is unlikely in our view to provide material assistance in this case.  In Littlewoods it has been accepted that each of the Woolwich claims and the mistake-based claims do satisfy the principles of equivalence and effectiveness.  Issue (3) in Littlewoods, which resulted in Question 4, was concerned only with disapplication of sections 78 and 80 VATA in order to enable one or both of those restitutionary claims to be allowed.  The question relates only to those available remedies, and not to what Grattan argues should be the case, namely a right outside the current scope of English law to enforce such directly-effective EU rights as are found to exist through the VATA itself and in proceedings in the tribunal.  Taking a wider view therefore, Question 4 in Littlewoods is too limited to be relied upon as an aid to our decision on the arguments advanced in this case.

80.    For these reasons, although our own preliminary conclusion, based on both domestic and ECJ authorities, is that, in circumstances where a restitutionary remedy is available under English law, the principles of effectiveness and/or equivalence are not breached by a failure to make provision in the VATA, or through the tribunal, for interest beyond that provided for by s 78 VATA, we cannot, in the light of the arguments that have been raised, and the reference that has been made in Littlewoods, decide this matter with complete confidence, and without seeking the guidance of the ECJ on the application of those principles in this respect.

81.    We will need to hear further representations on the form of the reference, and on the question or questions to be put to the ECJ in this respect.  In our view, the questions will to an extent need to be linked with those in Littlewoods.  Any such question will be relevant only to the extent that Question 1 in Littlewoods is answered in the negative, and should be subject to such an answer.  The question or questions will, in our preliminary view, need to encompass (a) whether the principle of effectiveness and/or of equivalence requires the remedy to be a single remedy for both the reimbursement of the principal sums overpaid and for the use value of the overpayment and/or interest, (b) whether, in circumstances where there are alternative remedies under domestic law, it is a breach of the principle of effectiveness and/or of equivalence for the remedy or remedies not to be in the statutory provisions governing the making of the principal reimbursement claims and the appeals from the administrative decisions on those claims and (c) whether it is a breach of the principle of effectiveness and/or equivalence to require a claimant to pursue the principal reimbursement claim and the claim for simple interest in one set of proceedings before the tribunal and the balance of the remedy required by EU law in respect of the use value of the overpayment and/or interest in separate proceedings before the High Court. 

 

 

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

 

 

 

 

 

 

 

ROGER BERNER

 

TRIBUNAL JUDGE

RELEASE DATE: 12 January 2011