[2011] UKFTT 117 (TC)

 

TC00993

 

 

Appeal number:  MAN/2008/840

 

VAT – Claim for repayment of overpaid output tax – Cultural services exemption – Three year cap - Whether claim constituted an “abusive claim” (No) – Whether claim was subject to reduction under s 81(3A) VATA 1994 (Yes) – Appeal dismissed

 

 

FIRST-TIER TRIBUNAL

TAX

 

 

         BIRMINGHAM HIPPODROME THEATRE TRUST LIMITED                   

                                                                                                                          Appellant

 

                                                                      - and -

 

                                THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS                                                 

                                                                                                                                Respondents

 

 

DECISION NOTICE: full findings of fact and reasons for the decision

 

 

                                                TRIBUNAL: Judge Peter Kempster

                                                                        Ms Helen Folorunso

                                                                       

                                                                       

Sitting in public at Bedford Square, London on 27 & 28 April 2010

 

 

Mr David Milne QC and Mr David Yates, instructed by Baker Tilly, for the Appellant

 

Miss Philippa Whipple QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2011

DECISION

 

 

CONTENTS

Paragraphs
1-24	Background
	3-13      The cultural services exemption
	14-24    The three year cap
25-35	The Facts
36-58	Legal arguments
	37-43    HMRC’s case on the “abusive claim” argument
	44-45    The Theatre’s case on the “abusive claim” argument
	46-51    Section 81(3A)
	52-54    HMRC’s case on the s 81(3A) argument
	55-57    The Theatre’s case on the s 81(3A) argument
	58         Other points
59-78	Consideration and conclusions
	59-67     The “abusive claim” argument
	68-78      The s 81(3A) argument
79	Decision
80-88	Costs
89-90	Appeals

 

 

1.      The Appellant (“the Theatre”) is a Registered Charity.  It operates the Birmingham Hippodrome Theatre and runs a programme of community outreach services.  Following a series of events described in this decision notice, it became apparent that the Theatre had overpaid VAT in respect of the period January 1990 to May 1996 inclusive.  The Respondents (“HMRC”) rejected the Theatre’s repayment claim and the Theatre has appealed that decision to this Tribunal.

2.      Before setting out the facts of this case we describe the relevant legal background which comprises two parallel matters: the cultural services exemption and the three year cap.

Background 1:  The cultural services exemption

3.      In this decision notice references to EC directives are to those extant at the time of the relevant transactions (rather than the principal VAT directive 2006/112/EC which came into force on 1 January 2007).  Also, the Respondents are referred to as “HMRC”, which shall include their predecessor department HM Customs & Excise.

4.      The provisions relating to the general system of VAT and a trader’s right to deduct VAT borne on his cost components are contained in Article 2 of EC Council Directive 67/227 (the First Directive) and  Article 17 of EC Council Directive 77/388 (the Sixth Directive).  The relevant provisions of UK domestic law are sections 24 and 26 of the VAT Act 1994 (“VATA”).  The principle can in relation to this appeal be stated uncontroversially as: a trader who makes taxable output supplies is entitled to deduct his input tax; a trader who makes exempt output supplies is not entitled to deduct his input tax; and a trader who makes a mix of taxable and exempt output supplies (a partially exempt trader) is entitled to deduct only that part of his input tax that is attributable to his taxable output supplies.

The UK’s implementation of the exemption in Article 13.A(1)(n)

5.      Article 13.A(1) of the Sixth Directive states (so far as relevant):

“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse: …

(n) certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the Member State concerned; …”

 

6.      The UK should have implemented that exemption no later than 1 January 1990 (pursuant to Article 1 of Council Directive 89/465/EEC) but, in breach of its Community law obligations, it took no action until 1996.

7.      With effect from 1 June 1996 the VAT (Cultural Services) Order 1996 (SI 1996/1256) inserted Group 13 into Schedule 9 to the VAT Act 1994 (“VATA”), which states (so far as relevant):

“GROUP 13 —CULTURAL SERVICES ETC

Item No

…

2 The supply by an eligible body of a right of admission to—  

(a) a museum, gallery, art exhibition or zoo; or  

(b) a theatrical, musical or choreographic performance of a cultural nature.

NOTES

…

(2) For the purposes of item 2 “eligible body” means any body (other than a public body) which—  

(a) is precluded from distributing, and does not distribute, any profit it makes;  

(b) applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies; and  

(c) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities.”

 

HMRC’s 1996 Notice

8.      Also in 1996 HMRC published Notice 701/47 (“the 1996 Notice”) setting out their explanation of the new Group 13.  Section 4 of the 1996 Notice set out HMRC’s understanding of the meaning of the restriction in Note 2 (c) to Group 13, and advised that payment of any person involved in the general management and administration of a cultural body would disqualify that organisation from being an eligible body within Group 13 – and thus admission ticket sales would continue to be standard rated for VAT purposes.

9.      Section 1 of the 1996 Notice explained:

“… the exemption came into force on 1 June 1996.  However in some limited circumstances it may be possible to backdate the exemption to 1 January 1990 and claim a refund of VAT for the period 1 January 1990 to 31 May 1996.  These arrangements are explained in section 7 and Annex C.”

That facility arose because of the direct applicability of the exemption conferred by Article 13 of the Sixth Directive. 

10.  Section 7 of the 1996 Notice explained, in relation to such retrospective claims:

“Is it necessary to recalculate the input VAT for the period of claim based on the newly exempt admission charges? 

Yes.  Any claim to repayment of output tax for quarterly periods must be reduced by the amounts of any related input VAT, which would not have been deductible, if exemption had been in force during those periods.”

11.  Annex C to the 1996 Notice gave more information on “Repayment claims arising from backdating of the exemption” (as the 1996 Notice is no longer in force and thus not generally available, the text of Annex C is set out in full):

“How far back can I claim repayment of VAT on cultural services and fund-raising activities which became exempt from 1 June 1996?

1.         You can recalculate your VAT liability as if exemption had come into effect from 1 January 1990.

When calculating the amount of overpaid VAT, do I have to take account of any partial exemption restriction which would have applied if exemption had been introduced from 1 January 1990?

2.         Yes.  Any repayments of output VAT for quarterly periods must be reduced by the amount of any related input VAT for the corresponding periods which would not have been deductible, if exemption had been in force during those periods.  You will need to calculate not only the amount of output VAT which should not have been charged but also the amount of input VAT which you would not have been able to deduct if exemption had been in force.

3.         This will put you in the position you would have been in if exemption had been introduced from 1 January 1990, except where this would result in your owing VAT to Customs.

4.         You may wish to know that the partial exemption arrangements changed on 1 April 1992 and 1 December 1994.  If you need information concerning partial exemption arrangements between 1 January 1999 and 31 May 1996 you should contact your local VAT Business Advice Centre for details.

Do I have to recalculate the VAT liability for the period 1 January 1990 to 31 May 1996?

5.         Only if you wish to claim any repayment for that period.

6.         If you do not wish to submit a repayment claim or if the net result of your recalculation is that you owe VAT to Customs, no backdating will be required.

Do I have to recalculate the VAT liability on a quarter by quarter basis or can I prepare a single claim covering the whole of the period for which repayment is due?

 7.        Irrespective of whether partial exemption restrictions apply, Customs will have to identify the amount of the repayments for each quarter in order to calculate the interest due (see paragraph 12 below).

Can I select the quarterly periods between 1 January 1990 and 31 May 1996 in respect of which I wish to reclaim VAT and ignore those periods where the recalculations would show a net amount of VAT owing to Customs?

8.         No, you cannot pick and choose; any repayment claim must cover a continuous period up to 31 May 1996.

Can I choose a starting date after 1 January 1990 for any repayment claim?

9.         Yes, but the repayment claim then has to be for a continuous period from the date you choose up to 31 May 1996.

Can cultural bodies deregister from VAT with effect from 1 January 1990, where exemption from that date would have rendered registration unnecessary?

10.        No.  If you make taxable supplies in addition to exempt supplies retrospective deregistration is not allowed.  Deregistration can only be allowed from a current date if you can satisfy Customs that the value of your taxable supplies in the next twelve months will not exceed £45,000.  However, you can submit your repayment claim to the VAT office in the normal way.

Can cultural bodies no longer registered for VAT claim repayment?

11.        Yes, provided you were registered for VAT at some time between 1 January 1990 and 31 May 1996, in which case you should send any repayment claim to the VAT office with which you were registered.

Will the repayments be accompanied by interest?

12.        Yes.  The rate is prescribed by Treasury Order and varies periodically.  The amount of interest will be calculated by your local VAT office and will be paid separately from and later than the repayment of VAT.

Does the organisation have to pass the repayable VAT on to the users of its services?

13.        Where Customs does not refuse repayment on the grounds of “unjust enrichment”, this will be a matter for the organisation and its users to decide and not for Customs.

How can I go about claiming repayment for my organisation?

14.        Recalculate your VAT liability for each quarterly period including any partial exemption restrictions and send a copy of your calculations to the local VAT office with which you are registered.

Do I need to adopt any particular format in preparing any recalculations?

15.               No, but your calculations need to show how the revised amounts of VAT for each quarter have been arrived at.

[Remainder describes administrative issues not relevant here.]”

 

The London Zoo case and Business Brief 28/03

12.  In March 2002 the European Court of Justice (“ECJ”) gave its decision in Customs and Excise Commissioners v Zoological Society of London (Case C-267/00) [2002] STC 521.  The ECJ contradicted HMRC’s interpretation of the restriction in Note 2(c) to Group 13, ruling that the persons who must have no financial interest in the body’s activities are confined to persons who are designated in the body’s constitution to direct it at the highest level – and not persons carrying out purely executory tasks.

13.  In December 2003 HMRC published Business Brief 28/03 ([2003] STI (Issue 50)) setting out their revised policy on qualification as an eligible body for the purposes of the exemption of admission charges.  They announced they would replace the 1996 Notice with a new Notice.  They stated:

“Making claims or adjustments

Cultural bodies that think they now qualify as an eligible body and wish to make a claim for overpaid VAT in respect of past periods may do so using one of the following methods, subject to statutory time limits.  

1     …  

2     If the net value of adjustments is more than £2,000, a separate claim for payment must be submitted to their local VAT Office.

…

All adjustments or claims must take into account any over-claimed input tax and are limited to a three-year period as detailed in Notice 700/45. Such claims will be considered subject to the conditions set out below—  

–          Bodies must be able to produce suitable evidence (eg constitution, minutes, annual accounts) that they satisfy all the conditions for eligible body status outlined above, and must be able to substantiate the amount of any claim made.  

–          Bodies will need to look back at earlier attributions of input tax (any input tax incurred on goods and services—including capital items—used exclusively for supplying exempt admission rights to the specified services is now attributable to an exempt supply), substituting exempt values for taxable values in the partial exemption calculation and deducting the resulting “exempt input tax” from overpaid output tax in determining the amount of the claim.  

–          The usual rules on unjust enrichment explained in Notice 700/45 Section 14.

…”

The references to time limits are explained in the next section of this decision notice.

 

Background 2: The three year cap

14.  On 18 July 1996 the UK Government announced its intention to legislate to reduce the time period for repayment claims of overpaid output tax from six years to three years.  As explained by the Advocate General in Marks and Spencer plc v Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036 (at 1042):

 “7. On 18 July 1996, Her Majesty's Paymaster General announced in Parliament that, in view of the increasing amounts of revenue at risk as a result of retrospective claims for the refund of sums collected erroneously by way of tax, it was the government's intention to introduce a three-year limitation period for retrospective refund claims, applying to VAT and to other indirect taxes, with effect from 18 July 1996. The proposed change in the law was intended to take effect from the date of the announcement so as to prevent the change from being deprived of its effect by the passage of time before the parliamentary process could be concluded.

8. On 4 December 1996, the House of Commons voted in favour of the government's budget proposals (including the proposal announced on 18 July 1996, which was included in the Finance Bill as [clause] 47).

9. The Finance Act 1997 (the 1997 Act) was enacted on 19 March 1997. Section 47(1) of the 1997 Act amended s 80 of the 1994 Act. Section 80(5) was repealed in its entirety. Section 80(4) was amended so as to provide as follows:

'The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.'

10. So far as is here relevant, s 47(2) of the 1997 Act provides—

'… subsection (1) above shall be deemed to have come into force on 18th July 1996 as a provision applying, for the purposes of the making of any repayment on or after that date, to all claims under section 80 of the Value Added Tax Act 1994, including claims made before that date and claims relating to payments made before that date.'

11. Section 47(2) to (5) of the 1997 Act also contained transitional provisions. Under those provisions, the three-year limitation period does not apply to any claim made after 18 July 1996 that was consequential upon a (successful) challenge to a decision of the commissioners, as long as the legal proceedings in which the decision was challenged had been brought before 18 July 1996. In that event, the claim would be limited only to amounts paid (by mistake) to the commissioners less than three years before the commencement of those proceedings.”

15.  The amendments introduced by Finance Act 1997 are examined later in this decision notice.

The 2002 Marks and Spencer case and Business Briefs 22/02 and 27/02

16.  In Marks and Spencer plc (above) (“M&S 2002”) the taxpayer challenged the three year cap and our Court of Appeal referred the following question to the ECJ (above citation at 1044):

'In the circumstances in which a member state has failed to implement properly in its domestic legislation the Sixth Directive, is it compatible with the principle of the effectiveness of the rights that a taxable person derives from art 11A, or with the principle of the protection of legitimate expectations, to enforce legislation which removes with retrospective effect a right under national law to reclaim sums paid, by way of VAT, more than three years before the claim is made?'

17.  Certain details of the ECJ’s decision are examined later in this decision notice, but the answer to the question referred was as follows (references are to paragraph numbers in the ECJ’s decision (commences at above citation at 1053)):

(1)   Member states were required as a matter of principle to repay taxes collected in breach of Community law. By way of exception to that principle, fixing a reasonable period for claiming repayment was compatible with Community law, as being in the interests of legal certainty. However, in order to serve their purpose of ensuring legal certainty, limitation periods had to be fixed in advance.  (Paras 35 & 39)

(2)   Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law might be sought was not incompatible with the principle of effectiveness, it was subject to the condition not only that the new limitation period was reasonable but also that the new legislation included transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements were necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some persons of their right to repayment or of allowing them too short a period for asserting that right.  (Paras 36 & 38)

(3)   National legislation which reduced from six to three years the period within which repayment might be sought of VAT wrongly paid, by providing that the new time limit was to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date (being that of the entry into force of the legislation), as well as to claims for repayment made before the date of entry into force which were still pending on that date, did not ensure that the right to repayment was effective.  (Paras 37 & 40)

(4)   The principle of the protection of legitimate expectations formed part of the Community legal order and had to be observed by member states when they exercised the powers conferred on them by Directives. That principle applied so as to preclude a national legislative amendment which retroactively deprived a person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of the provisions of the Sixth Directive with direct effect.  (Paras 44 to 47)

18.  In August 2002 HMRC published Business Brief 22/02 ([2002] STI 1148 (Issue 33)) setting out their view of the effect of M&S 2002.  This stated:

“Practical effects of the judgement

Customs will now give effect, albeit retrospectively, to a transitional regime for when the three year time limit was introduced in 1996 to allow taxpayers to make the claims that they ought to have been able to make at the time. This transitional regime will apply from 4 December 1996 to 31 March 1997.

…

Taxpayers can now make claims under VATA 1994 s 80 for repayment of amounts overpaid, regardless of the cause of the overpayment, subject to the following criteria.

Claims

Customs are now inviting all taxpayers to submit claims to their local VAT offices where—  

●     they made claims before 31 March 1997, which were capped (either by Customs or by them in expectation that no more than three years would be paid); or  

●     they made claims before 31 March 1997, which were repaid in full and amounts more than three years old were then clawed back by Customs by means of a recovery assessment; or  

●     they made no claim but can demonstrate that they discovered the error before 31 March 1997; and  

●     in all cases, the overpayments of VAT were made before 4 December 1996.

If you consider that you fall within the above parameters, you will have until 31 March 2003 to submit claims.

Claims may be refused in whole or in part if Customs are satisfied that repayment would lead to the unjust enrichment of the claimant.

…

Form of claim

…  

Claims should only be made for the net amount overpaid for any given prescribed accounting period. If you overpaid output tax during an accounting period on supplies which ought to have been exempted, and in the same accounting period you recovered more input tax than you ought, you should only submit a claim for that period for the amount of output tax over declared, less the amount of input tax over deducted i.e. the net overpayment.

Assessments

When the time limit for making claims for overpaid VAT was reduced from six years to three, with effect from 18 July 1996, Customs' power to make assessments was also reduced by the same amount with effect from the same date. This remains unchanged.”

19.  In October 2002 HMRC published Business Brief 27/02 ([2002] STI 1356 (Issue 42)) amending Business Brief 22/02 in the light of the ECJ decision in Grundig Italiana SpA v Ministero delle Finanze (Case 255/00) [2003] All ER (EC) 176, which held that where time limits for claiming overpayments of tax are shortened, provision must be made for a transitional period of at least six months.  Business Brief 27/02 stated:

“As a result, the transitional period set out in Business Brief 22/02 is extended by three months and will now be deemed to have run from 4 December 1996 to 30 June 1997 and taxpayers are now invited to submit, or resubmit, claims where:  

●     they made claims before 30 June 1997, which were capped (either by Customs or by them in expectation that no more than three years would be paid);  

●     or they made claims before 30 June 1997, which were repaid in full and amounts more than three years old were then clawed back by Customs by means of a recovery assessment;  

●     or they made no claim but can demonstrate that they discovered the error before 30 June 1997; and in all cases, the overpayments of VAT were made before 4 December 1996.

The deadline for making claims is also extended by three months to 30 June 2003.”

20.  This was the understood position in relation to the three year cap as at the time of Business Brief 28/03 relating to the London Zoo case – paragraph 13 above.

 

 

The Fleming and Condé Nast cases and Business Briefs 13/06 and 07/08

21.  In 2006 the Court of Appeal decided the cases of Michael Fleming (t/a Bodycraft) v CRC [2006] STC 864, and Condé Nast Publications Ltd v CRC [2006] STC 1721.  In Fleming the Court of Appeal (by a majority) held that persons whose right to deduct input tax arose before 1 May 1997 (the date on which the three year cap was enacted) should be allowed to claim without imposition of the three year cap – see Ward LJ at paragraph 81.  Fleming was followed in Condé Nast.

22.  In August 2006 HMRC published Business Brief 13/06 ([2006] STI (Issue 34)) explaining their position on the three year cap following those two Court of Appeal decisions.  HMRC reserved their position in case the House of Lords reversed the Court of Appeal, but in fact the Court of Appeal decisions were later upheld: [2008] STC 324.  Business Brief 13/06 stated:

“Making a Claim

Taxpayers who believe that they are entitled to benefit from the Court of Appeal's judgment in Fleming, and who wish to claim without waiting until the matter is finally determined in the House of Lords, should proceed as follows—

Where a claim, relating to an event more than three years earlier, has already been made and remains “active”, either because no appealable decision has yet been given by HMRC or because the matter is subject to appeal, taxpayers should write to HMRC (see the address below) asking for their claim to be considered in accordance with this Business Brief.

In all other cases, a fresh claim can be made where an amount—  

●     has been improperly paid as VAT before 4 December 1996;   

●     has been overdeclared as output tax in an accounting period ending before 4 December 1996; or   

●     became deductible as input tax on or before 30 April 1997 and has not yet been deducted.

In all cases, the claimant must sign an undertaking to the effect that, if the ultimate determination of litigation removes his entitlement, any credit given, or money paid, to him, will be returned to HMRC with interest. A copy of the undertaking is provided at the Annexe.

Claims falling within the scope of VATA 1994 s 80 will be paid only where HMRC are satisfied that to pay the claim will not result in the unjust enrichment of the claimant.

Form of claim

…

Claims (whether made under VATA 1994 s 80 or under SI 1995/2518, reg 29) will only be paid or credited on a net basis. For example, if you overdeclared output tax during a given accounting period on supplies which ought to have been exempt, and in the same accounting period you recovered more input tax than you ought, the input tax wrongly recovered will be set off against the overdeclared output tax and only the balance will be paid or credited. Conversely, if, in a given accounting period you have understated your input tax entitlement but you have also understated your output tax liability, your claim should be for any net credit due.”

 

23.  Following the House of Lords’ dismissal of the appeals from the Court of Appeal decisions, HMRC published in February 2008 Business Brief 07/08 ([2008] STI 311 (Issue 8)) which, in effect, confirmed the views set out in Business Brief 13/06.

24.  Litigation continues on various aspects of the three year cap but the above reflects the state of the relevant jurisprudence as at the date of hearing of the Theatre’s appeal.

 

The Facts

25.  None of the facts were in dispute, and a chronology is as follows. 

26.  The Theatre is a registered charity.  It first registered for VAT purposes in October 1979 and has remained registered since then – it entered a group VAT registration in 2005. 

27.  From October 1979 the Theatre treated its ticket sales as standard rated output supplies, charging VAT to its customers.  Between January 2000 and November 2001 the Theatre was closed for a major refurbishment; during that period the Theatre submitted VAT repayment claims totalling almost £5 million.

28.  By a letter dated 30 June 2003 the Theatre’s then advisers, Deloitte & Touche (“Deloitte”), notified HMRC of the Theatre’s intention to submit a voluntary disclosure in relation to VAT on ticket income.  This was effectively a protective claim following the London Zoo case (paragraph 12 above) stating that quantification of the disclosure would not be possible until HMRC published formal guidance, and requesting an extension of time for making the disclosure until then. 

29.  HMRC’s Business Brief 28/2003 followed in December 2003 (paragraph 13 above).  By a letter dated 23 March 2004 Deloitte stated to HMRC:

“We are still in the process of reviewing the Theatre’s position with regard to cultural exemption and at this stage we believe the Theatre is likely to be exempt in accordance with [Group 13].  In addition, we have reviewed the Theatre’s position in light of [the London Zoo case] and considered the details outlined in Business Brief 28/2003.

We have considered the merits of the Theatre submitting a retrospective claim in respect of its box office income.  However, as the Theatre was closed between 1 January 2000 and 1 November 2001 to undertake a significant capital project, it is necessary to consider the impact that a retrospective claim would have in terms of the Theatre’s input VAT recovery position.  Taking into account the necessary input tax and output tax adjustments the Theatre has decided not to submit a retrospective claim.” 

That letter went on to consider the implications of the VAT capital goods scheme – an aspect of the problem that is not before the Tribunal for consideration.

30.  So the Theatre’s position in March 2004 was that it understood it could submit a reclaim for VAT incorrectly charged on ticket sales; however, that would be outweighed by the corresponding obligation to repay the input tax already reclaimed on the refurbishment works – it was better off not making any retrospective claim in relation to the London Zoo case.  This was after M&S 2002 (and Grundig) but before Fleming, so the position was as stated in Business Briefs 22/02 (paragraph 18 above), 27/02 (paragraph 19 above) and 28/03 (paragraph 13 above).

31.  With effect from 1 June 2004 the Theatre treated ticket sales as exempt supplies for VAT purposes.

32.  By a letter dated 14 May 2007 the Theatre’s new advisers, Baker Tilly, submitted to HMRC,

 “... a claim for overpaid VAT declared on theatre admission income from 1 January 1990 to 4 December 1996.  The claim, totalling £980,011, is outlined on the attached schedule and, for the avoidance of doubt, is net of VAT incurred that would become irrecoverable or partly irrecoverable on the basis of the exempt admissions income.” 

The letter also claimed statutory interest pursuant to s 78 VATA.

33.  The Theatre’s position had changed because of Fleming.  Baker Tilly’s letter expressly referred to Business Brief 13/06 (see paragraph 22 above) and, as above, confirmed it was being made on the “net basis” referred to in Business Brief 13/06.

34.  Subsequent events may be briefly recited.  The amount of the claim was refined to £1,108,802.  On 2 June 2008 HMRC rejected the claim.  On 25 June 2008 the Theatre formally appealed against that decision.  HMRC confirmed their decision on 17 November 2008.  The Theatre’s appeal comes before this Tribunal.

35.  The Tribunal would summarise the Theatre’s VAT profile over time as follows:

(1)   October 1979 to December 1999 – Ticket sales treated as taxable, with reclaim of input tax.

(2)   January 2000 to October 2001 – Theatre closed for refurbishment, reclaim of input tax on refurbishment costs of approximately £5 million.

(3)   November 2001 to May 2004 – Ticket sales treated as taxable, with reclaim of input tax.

(4)   June 2004 onwards – Ticket sales exempt, reclaim of input tax restricted. 

 

From October 1979 to December 1989 everything had been done correctly.  But from January 1990 to May 2004 there had been incorrect accounting for output tax.

 

 

 

The Legal Arguments

36.  Miss Whipple for HMRC put forward two alternative arguments for HMRC’s refusal of the Theatre’s claim:

(1)   The claim is an “abusive” claim.

(2)   The claim is barred by the terms of s 81(3A) VATA.

 

First Argument: The claim is an “abusive” claim

 

HMRC’s case on the “abusive claim” argument

37.  Miss Whipple addressed this argument as follows:

(1)   HMRC’s view of the economic effect of the claim.

(2)   Community law cannot be relied upon for abusive or fraudulent ends. 

(3)   Taxpayers must take the burden and not just the benefit of the tax.

(4)   The measure of any claim for breach of a person’s Community law rights is the loss in fact sustained by that person. 

(5)   Offset is not limited to countervailing benefits obtained in the same prescribed accounting period.

HMRC’s view of the economic effect of the claim

 

38.  The Tribunal finds helpful the following table, derived and simplified from an Annex to HMRC’s decision letter dated 2 June 2008.

Item	Period		£ million
1	January 1990 to November 1996	Net overpayment – the subject of the appeal before the Tribunal	1.1
2	December 1996 to December 1999	Net overpayment; out-of-time	0.9
3	January 2000 to November 2001	Net repayment of input tax - Theatre closed for refurbishment	(5.0)
4	December 2001 to May 2004	Net overpayment; out-of-time	1.0
	Net position		(2.0)

 

39.  Miss Whipple submitted:

(1)   The claim is for overpaid VAT for the period 1990-1996 (Item 1 in the table).  But that period represents only one part of the whole period (1990-2004) during which the Theatre mistakenly treated itself as fully taxable and reclaimed input tax in full.  The effect of a claim limited to 1990-1996 is to disregard the consequences of that same mistake in the years 1996-2004. 

(2)   The effect of the Theatre’s claim is to give it a significant windfall advantage.  It would recover the output tax overpaid during the years 1990-1996 (Item 1), but would not have to repay the input tax overcredited in 2000-2001 (Item 3), even taking account of continuing overpayment of output tax in the years 1996–1999 (Item 2) and 2001-2004 (Item 4).  That is even though the overpayment of output tax and the overcrediting of input tax throughout the whole period (1990-2004) were consequent on the same mistake as to the VAT liability of the ticket sales.

(3)     Any Fleming claim now advanced by the Theatre must be subject to offsetting the benefits the Theatre has gained, in the same or different periods, by virtue of that same mistake as to liability.  To do otherwise offends a basic sense of fairness: the Theatre should not now be put in a better position than it would otherwise have been in had the mistake not been made. 

(4)   HMRC’s reasonable approach in its decision letter involved looking at both sides of the Theatre’s VAT account, on the basis that the mistake had not been made, throughout the whole period 1990–2004.  The Theatre had been given “credit” for all overpaid output tax, against which overdeducted input tax has been set off.  But even on that approach the Theatre gains £2 million to which it would not have been entitled had the mistake as to liability not been made.  The Theatre has already had that; there is nothing HMRC can do to recover that amount and the Theatre stands to retain it on any view, as a consequence of the liability mistake.  However, by its disputed claim the Theatre seeks an additional £1.1 million by way of repayment of the overpaid VAT in the Fleming period (Item 1).  It is an entirely artificial figure arrived at by selecting only some of the periods when the Theatre was mistakenly treated as a taxable person.  That is a windfall in the Theatre’s hands that would have to be met by the public purse, which cannot be right.  

 

Community law cannot be relied upon for abusive or fraudulent ends. 

40.  Miss Whipple submitted:

(1)     Preventing possible tax evasion, avoidance and abuse is an objective recognised by the Sixth Directive.  There was no suggestion of fraud or evasion in relation to the current appeal, but any claim that ignores principles of Community law is abusive and should not go forward.

(2)   The principle is a general one in Community law.  In Firma Peter Cremer v Bundesanstalt für Landwirtschaftliche Marktordnung (Case 125/76) [1977] ECR 1593 a company claimed an export refund by manipulating ingredients so as to claim refunds on animal feeding stuffs containing cereals.  In answer to a question referred by the German Court, the ECJ concluded (at para 14) that it:

“… was for the competent national authorities to judge the facts with a view to preventing undue payment of refunds as a result of manipulation by the producers of the proportion of the ingredients of compound animal feeding-stuffs.” 

(3)   In DEKA Getreideprodukte GmbH & Co KG iL v EEC (Case 250/78) [1983] ECR 421 the ECJ labelled an assignment of a trader’s claims against the authorities as “abusive”, in circumstances where the assignor was insolvent and its director had obtained fraudulent export refunds which the Commission was seeking to recover.  The assignment was invalid against the Community authorities.  Having identified the abuse, the ECJ went on to say (para 20):

“so far as the Applicant’s original claim is concerned, it is sufficient to make a finding that the claim for compensation is extinguished by way of set-off.”

(4)   In  I/S Fini H v Skatteministeriet (Case C-32/03) [2005] STC 903 the ECJ confirmed that Community law cannot be relied on for abusive or fraudulent ends (see para 32, citing Kefalas v Greece (Case C-367/96) [1998] ECR I-2843, and Diamantis v Greece (Case C-373/97) [2000] ECR I-1705), and went on (at para 32) to define that to be the case:

“… for example, if Fini H, whilst relying on the right to deduct VAT in respect of the payment of rent and charges relating to the payment after the cessation of the restaurant business, continued to use the premises previously used as a restaurant for purely private purposes”.      

(5)   Based on the general proposition that non-abuse is a principle of Community Law, the ECJ has developed the principle of “abuse of law” which finds its clearest expression in Halifax v CCE (Case C-255/02) [2006] STC 919.  To quote from Miss Whipple’s skeleton argument: “[HMRC] do not suggest that [the Theatre] has structured its transactions in a way to “abuse the law” within the Halifax principle.  [HMRC] invoke wider principles of abuse, which share common origins with Halifax but are not within that specific line of case law.” Miss Whipple submitted that “abusive practices” exist in the sphere of VAT if the transactions concerned resulted in the accrual of a tax advantage, the grant of which would be contrary to the purpose of the Sixth Directive and national legislation transposing it (para 74 of Halifax).  What that abuse consisted of on the facts in Halifax was drawn out at para 80 of the judgment:

“To allow taxable persons to deduct all input VAT even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them only to deduct a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules”. 

(6)     Accordingly, there is strong authority for the proposition that the obtaining of input tax deduction when the normal commercial operations of a taxpayer did not include the making of taxable supplies, is contrary to the purpose of the Sixth Directive and constitutes an abuse. 

(7)   Abuse can exist even where the abuse is of domestic legislation, and even if that domestic legislation imperfectly transposes the Directive (see WHA v RCC [2007] STC 1695 at para 44).  The principle of non-abuse is a general Community principle, with which domestic legislation must be read to conform: see R (IDT Card Services Ireland Ltd) v RCC [2006] STC 1252 at para 95. 

 

Taxpayers must take the burden and not just the benefit of the tax

41.  Miss Whipple submitted:

(1)     The cornerstone of the system of VAT is the neutrality of the tax, by which the trader is relieved of the burden of the tax provided that they are themselves subject in principle to VAT (see Halifax, para 78).  The benefit of input tax deduction is only available if the burden of output tax is accepted.  If a trader chooses (or has available to him) the benefit of non-taxation (in the form of exemption of his supplies), then he must suffer the burden of input tax. 

(2)     The point is made by the ECJ in Case C-8/81, Ursula Becker v Finanzamt Judgment 19^th January 1982, at para 44:

“… it should be pointed out that the scheme of the Directive is such that on the one hand by availing themselves of an exemption persons entitled thereto necessarily waive the right to claim a deduction in respect of input and on the other hand, having been exempted from the tax, they are unable to pass on any charge whatsoever to the person following them in the chain of supply”. 

(3)     This proposition had been accepted by the VAT Tribunal, which concluded that “a trader has no Community Law right or legitimate expectation to elective application of direct effect” (Barclays Bank plc v CCE [2003] UKVAT V18410, at para 29). 

(4)   Any attempt to take the benefit of the tax without also taking the burden - ie to recover input tax without paying output tax - is potentially abusive: this is the paradigm abusive practice identified in Fini, and  Halifax (and disallowed by the ECJ in both cases).  The offence caused by the Theatre’s claim is to preserve the advantage of the input tax reclaimed on refurbishment whilst at the same time recovering tax overpaid on outputs.  The Theatre has a choice: either take the benefit of non-taxation (in which case it must bear the burden of input tax), or take the burden of taxation (in which case it can have the benefit of input tax recovery).  What it cannot do is to have both benefits free of burden.  That offends the principle of neutrality and is contrary to the purposes of the Sixth Directive.     

 

The measure of any claim for breach of a person’s Community Law rights is the loss in fact sustained by that person. 

 

42.  Miss Whipple submitted:

(1)     A variety of claims have come before the ECJ and domestic courts by which a taxpayer seeks reparation for the State’s breach of his Community Law rights.  That is the shape of the Theatre’s claim which stems from the HMRC’s (accepted) breach of the Theatre’s right to be exempt from tax on its sales of tickets between 1990 and 1996. 

(2)   Those various claims take different forms: claims for adjustment of VAT, claims for damages, and claims for restitution.  But the basic principle by which such claims are measured is that the taxpayer is entitled to reparation for loss and damage actually sustained.  It is by that means that the Community principle of effectiveness is upheld.

(3)   In BP Supergas v Greece (Case C-62/93) [1995] STC 805, the taxpayer argued for reparation of residual input tax foregone as a result of the Greek government’s misimplementation of a Directive as it related to petroleum products.  The Advocate General (“AG”) (Jacobs) noted at para 30 that the taxpayer was not making any claim for a refund of the input tax on petroleum products which it had incurred, even though it had a right to do so:

“in my view the plaintiff correctly limits its claim in that way.  Under the Greek rules the plaintiff neither pays VAT to the tax authorities on its sales of petroleum products nor deducts VAT on the purchase of such products.  ... While under the rules of the Sixth Directive it would be entitled to deduct VAT on the purchase of the products, the benefit of the deduction would be wholly cancelled out by the output tax which it would be obliged to pay on the sale of the products.  Consequently, the plaintiff does not incur any additional VAT burden as a result of being unable to deduct VAT on the petroleum products themselves.”   

          The AG carried on to say, at para 31:

“...in the case of a directive such as the Sixth Directive, which lays down a comprehensive scheme of taxation, it is in my view possible to determine whether a taxable person has overpaid tax under national rules only by considering the combined effect of all relevant provisions of the directive on the transactions in question and by comparing the resultant liability with that arising under the national rules.  The provision determining the liability of a taxable person in respect of particular transactions must be regarded as an inseparable whole.”   

 

(4)   In Swedish State v Stockholm Lindöpark (Case C-150/99) [2001] STC 103 the AG (Jacobs again) noted (at para 48) that the taxpayer had issued a claim for damages, and stated: “it should be pointed out in that connection that where a taxable person has wrongly been prevented from deducting VAT, the remedy may often be a retroactive adjustment of the tax situation” for which member states were required to make provision in their national laws.  That adjustment, in the same way as an action for damages, follows from the member state’s breach of the taxpayer’s directly effective community law rights.  The AG went on to agree with the taxpayer that it had a right to reclaim input tax on the basis that the right to deduct is enshrined in Community law and is a right enforceable by the individual against the state (para 56).  However, when it came to the quantum of that claim, the AG noted that there was an apparent agreement between the parties which was the amount of VAT which the taxpayer was unable to deduct during the relevant period (para 79).  The AG disagreed with a quantification on that basis because it failed to take account of the output tax liability the taxpayer would have faced if the supplies had, as they ought to have, been subject to tax (at para 80):

“... it should be pointed out that in principle reparation for loss caused to individuals as a result of breaches of Community law must be commensurate with that loss...In the case of an unjustified exemption from VAT on outputs leading to an inability to deduct VAT on inputs, the loss sustained will in general be the difference between the amount of input tax which could have been deducted and the amount of output tax which would have had to be accounted for...”  

The ECJ supported the approach, concluding both that the claim was one which should properly have been brought as a result of the direct effect of Community law (ie for adjustment of VAT) rather than damages (para 35), but that on any view the state could be held liable for loss and damage caused to individuals as a result of breaches of Community law (para 36). 

(5)     The essential feature of any claim brought to redress a breach of community law rights is that it compensates for loss and damage thereby caused: see Transportes Urbanos y Servicios Generales SA v Administracion del Estado (Case C-118/08) [2010] All ER (D) 06 (Feb) in which the taxpayer had sought damages against the state in circumstances where his claim to adjust his VAT returns was timebarred under Spanish law.  The AG (Fennelly) noted that on the facts of that case “the damage or loss for which reparation is sought in nothing other than the amount of VAT, with the addition of interest at the statutory rate, which the applicant in the main proceedings had to pay in breach of Community Law”.  The ECJ upheld the claim on grounds of equivalence (by comparing the damages claim, which was time-barred, with an essentially similar constitutional claim, which would not have been time-barred: para 37), whilst emphasising that the ECJ’s settled case law is that the State has liability for “loss and damage caused to individuals as a result of breaches of Community Law” (para 29).   

(6)   From these cases, in summary:

(a)    The measure of any repayment for overpaid tax is the loss which the taxpayer has sustained; and

(b)   In establishing that loss, it is necessary to have regard to the whole scheme of taxation including input tax and output tax consequences. 

(7)     The difficulty for the Theatre is that once the input tax consequences of the mistake are taken into account, there is no loss at all.  There is nothing to compensate and no reparation due.  The Theatre’s claim only succeeds if a selective approach is taken, which has regard to output tax without looking at the input tax side of the equation.  That is at odds with Community law.  It can hardly be said to be an effective application of Community law for a taxpayer to find himself in a better position than he would have been in but for the mistake, with the additional cost borne by public funds, and inevitably creating distortion between that taxpayer and others who have not received such a windfall. 

(8)   The ECJ has examined the principles by which reparation for breach of Community law obligations is to be calculated in contexts other than VAT.  In the franked investment income litigation, the ECJ has endorsed the right of taxpayers to be compensated for the losses sustained as a result of national legislation which breached Community law: see Metallgesellschaft Ltd v IRC (Cases C-397/98 and C-410/98) [2001] STC 452 (at para 96):

“Where a subsidiary resident in one member state has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime which allowed them to avoid that obligation, art 52 of the EC Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state have benefited as a result of the advance payment of tax by the subsidiaries”  

However, establishing the measure of that loss has been highly problematic, not least because the House of Lords has recognised that in the context of a breach which consisted of the denial of a right to non-UK resident parents to make a group income election (such an election being available to UK-resident parent companies), it is necessary to take account of the benefits received by the non-resident parent companies in the form of tax credits, which would not have been received but for the Article 52 breach which gave rise to their subsidiaries’ claims in relation to the payment of ACT: Pirelli Cable Holding NV v IRC [2006] STC 548.  Lord Hope (at para 43):

“The language that the European Court uses ... shows that the loss for which an effective legal remedy is to be made available is the loss which was sustained by the subsidiaries and their parent companies as members of a group.  This is because the taxation regime which was denied to them was a regime that was available to a group under the domestic system.  The effect of the breach of art 52 which denied the opportunity to opt for that regime to the Pirelli companies cannot be assessed without looking at both sides of that regime - at the differences that it would have made to the receiving companies within the same group as well as to those companies that were paying the dividends...it would be artificial, and therefore wrong, to look only to the effect on the subsidiaries that opting for that regime would have had without having regard to its effect on the parent companies within the same group also”   

(9)   If both sides of the tax regime must be taken into account in determining the extent of loss in the context of rectifying errors in the domestic provisions enabling a group income election, then a fortiori must both sides of the tax regime be taken into account in determining the extent of loss incurred by a single taxpayer as a result of a mistake in the liability of outputs made over time. 

(10)                       The VAT Tribunal had accepted the principle of offset in cases such as Sunningdale Golf Club [1997] V&DR 79, and Barclays Bank plc [2003] UKVAT V18410; also, when the facts require it, that the offset should travel across prescribed accounting periods: Laing the Jeweller Ltd VAT Decision 18841 (2004).

(11)                       The Tribunal has an obligation to ensure that the rules of Community law are enforced.  As the AG stated in Amministrazione dell'Economia e delle Finanze and another v Fallimento Olimpiclub Srl (Case C-2/08) [2009] All ER (D) 33 (Sep):

“The Court has specified, as regards the obligations entailed by the principle of the primacy of Community law, that it is both for the national administrative bodies and for all the courts to ensure observance of the rules of Community law within their respective spheres of competence and, if necessary, to refuse of their own motion to apply any national rule which is an obstacle to the full effectiveness of Community law” (para 42).

 

Offset is not limited to countervailing benefits obtained in the same prescribed accounting period

 

43.  Miss Whipple submitted:

(1)   There is no basis for the Theatre to assert that input tax offset is only permissible so long as it is within the same prescribed accounting period.  It is accepted that the offset at least applies to same period input tax; but it is not so limited.  Such a limit would be inconsistent with and in breach of the Community law principles outlined above. 

(2)   VAT accounting periods are just an accounting mechanism, with detailed rules determined by national legislation.  The overriding concept of neutrality must be achieved by looking at the position throughout the whole period of the mistake. 

The Theatre’s Case on the “abusive claim” argument

The Theatre’s claim was not “abusive”

44.  Mr Milne for the Theatre submitted:

(1)   The Theatre’s claim could not be said to be “abusive” in the sense that it is commonly understood in a VAT context – namely where a taxpayer carries out operations with the sole purpose of obtaining a tax advantage and without pursuing any independent economic objective (as in Halifax). HMRC did not appear to suggest that the Theatre’s activities constituted an “abusive structure”. 

(2)   Rather, HMRC’s allegation of “abuse” related to the fact that, due to Parliament disapplying VATA 1994 s 80(4) for claims for output tax paid before 4 December 1996, the Theatre is able to bring a claim for the period 1 January 1990 to 4 December 1996 whereas both the Theatre and HMRC are now time barred (subject to HMRC’s other arguments) from bringing any claim for the period from 5 December 1996 to 1 June 2004.  

(3)   There can be no suggestion of the Theatre “cherrypicking” its claim for the period 1 January 1990 to 4 December 1996.  By the time it realised it could make such a claim (i.e. after 24 August 2006), it was time barred from making any “claim” for the period between 1 January 2000 and 1 November 2001. 

(4)   Similarly, as at 23 March 2004 when Deloitte wrote to HMRC informing them that the Theatre did not intend to make a retrospective claim, the Theatre would not have been able to anticipate the outcome of the Fleming litigation – the position at the time as understood by HMRC was that set out in Business Briefs 22/02 and 27/02, following the ECJ’s judgment in M&S 2002.  In those Business Briefs HMRC sought to introduce retrospectively a transitional period for the introduction of the three year cap, initially to 31 March 1997 and then to 30 June 1997.  The London Zoo ECJ judgment was published on 21 March 2002, and at that time the Theatre had had no opportunity to avail itself of such a retrospective transitional period.

(5)   The Theatre at no point in time was able to choose between making retrospective claims for the periods (i) January 2000 to November 2001 and (ii) 1 January 1990 to 4 December 1996.  The ability to make the latter claim arose at a time when the possibility of making the former claim was excluded under time limits set down in s 80(4) VATA.  As a consequence, any suggestion of abuse on the basis of “cherrypicking” is inappropriate and misconceived.

(6)   HMRC in Business Brief 13/06 actually invited claims such as that made by the Theatre and the Theatre had followed the guidance given by HMRC in its various Business Briefs. 

Computation of the claim

45.  Mr Milne submitted:

(1)   There is no dispute between HMRC and the Theatre that, in relation to the same accounting period, a taxpayer cannot elect to have the benefits of Community law without its corresponding obligations.  This is the ratio of the VAT Tribunal decisions in Sunningdale Golf Club and Barclays Bank Plc.  The Theatre’s claim is only for overpaid net output tax in the period 1 January 1990 to 4 December 1996. 

(2)   HMRC have not identified any Community law authority which provides that a taxpayer when claiming for a net overpayment in one period must also give credit for any tax potentially owing from another period when that other period is otherwise time barred.  Similarly, there is no decision of the ECJ which provides that, as a matter of Community law, a Member State may ignore time limits which it has previously set down in order to raise an otherwise out of time assessment by way of set off to a claim by a taxpayer which is not itself time barred.  To the contrary, the ECJ has on many occasions upheld the use of reasonable time limits where the principles of effectiveness and equivalence are respected (see inter alia Rewe-Zentralfinanz (Case 33/76) [1976] ECR 1989, Denkavit (C-2/94) [1996] ECR I-2827 and Edilizia Industriale Siderurgica Srl (Edis) v. Ministero delle Finanze (Case C-231/96) [1998] ECR 495).

(3)   HMRC’s reliance on cases such as Lindöpark and Pirelli is misplaced.  Both cases concerned an action for compensation and/or in restitution as opposed to a statutory claim for overpaid net output tax where other periods were otherwise time barred.  In Lindöpark, the comments of the AG relied on by HMRC (the ECJ was silent on the matter) only relate to a requirement when assessing “loss” (in the context of a “sufficiently serious breach” by Sweden).  Insofar as Lindöpark argued for compensation on the basis of underclaimed input tax (because its services were wrongly treated as exempt) it had to recognise that for the same periods it would have also had to have accounted for output tax.  The AG did not comment on the position for a repayment claim (as opposed to a loss claim) where the member state attempted a set off for amounts owing from different periods which were otherwise time barred.

(4)   In Pirelli, the House of Lords was discussing the principles of computing compensation in the context of breaches of the principle of freedom of establishment by the UK in respect of the then group income election for the ACT regime (under s 247 ICTA 1988).  In quantifying such compensation the House of Lords held that when claiming a loss by reference to the cashflow disadvantage suffered by the UK subsidiary of paying the ACT, credit also had to be given for the tax credits enjoyed by the EU parent (despite the fact that the subsidiary and parent were two separate entities).  Pirelli is of no application to a claim under s 80 VATA; the principles for assessing compensation for common law claims are not relevant to statutory claims for overpayment of tax. 

(5)   As stated in Annex C to the 1996 Notice (see paragraph 11 above) the taxpayer must choose a continuous period, but can choose to start that period from a date later than 1 January 1990. The Theatre had claimed for the whole period (1990 to 1996) and had deducted input tax in each period – as required by BP Supergas.

(6)   There was nothing in Business Brief 13/06 (see paragraph 22 above) about looking at other accounting periods.  BP Supergas established that one must take the burden as well as the benefit of exemption - but only in relevant accounting periods.

(7)   There had been no cunning plan or improper behaviour. The Theatre objected to being bracketed with fraud cases such as Cremer, DEKA, and Fini.

(8)     None of the ECJ cases cited by HMRC had anything to do with offsetting between accounting periods, nor with time-barred accounting periods.  Transportes Urbanos was an example of a case where the taxpayer missed the deadline for a VAT reclaim, and so had instead to make a claim in damages.  Both Lindöpark and Pirelli were cases concerning damages claims - not VAT reclaim cases. Neither case contained anything going beyond Sunningdale Golf Club, BP Supergas or Barclays Bank.  Olimpiclub concerned res judicata in relation to decisions of certain Italian tax tribunals – it did not assist HMRC. 

Second Argument: The claim is barred by the terms of s 81(3A) VATA.

Section 81(3A) VATA

46.  Section 81(3A) VATA was introduced by s 48(1) Finance Act 1997; it was part of the remedial legislation described by the Advocate General in M&S 2002 (paragraph 14 above).  Section 48(2) Finance Act 1997 provided that the new s 81(3A) VATA:

“... shall be deemed to have come into force on 18th July 1996 as a provision applying for determining the amount of any payment or repayment by the Commissioners on or after that date, including a payment or repayment in respect of a liability arising before that date.”

47.  Sections 81(3) and 81(3A) VATA provide:

“(3)     ... in any case where—

(a)     an amount is due from [HMRC] to any person under any provision of this Act, and

(b)     that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of [HMRC] and the person concerned shall be discharged.

                 (3A)     Where—

(a)     [HMRC] are liable to pay or repay any amount to any person under this Act,

(b)     that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person, and

(c)     by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,

any limitation on the time within which [HMRC] are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to be set against the amount mentioned in paragraph (a) above.”

48.  The Tribunal was referred to three items which purported to interpret s 81(3A).  We list those in chronological order.

49.  First, the Explanatory Notes to clause 48 of the Finance Bill 1997 (which it was accepted had been drafted by HMRC) which stated:

“CLAUSE 48: NEW RULES TO ALLOW OVERCLAIMED AMOUNTS TO BE SET OFF AGAINST REFUNDS

INTRODUCTION

1.   This Clause allows Customs to set off any tax, penalty, interest or surcharge due to them against a payment or repayment due to a taxpayer and to repay only the net amount (if any) due to the taxpayer.  It means that all the consequences of an earlier mistake are taken into account before any repayment is made.  The change is deemed to have come into force on 18 July 1996.

2.   The changes became law on 4 December 1996, retrospectively to 18 July 1996, by virtue of a resolution of the House of Commons having statutory effect under the Provisional Collection of Taxes Act 1968.

DETAILS OF THE CLAUSE

3.   Subsection (1) inserts a new subsection (3A) in Section 81.  It covers circumstances where the Commissioners are liable to pay (or repay) an amount to a taxpayer because of a mistake previously made about the tax due.  In these cases, the Commissioners may set off against their payment, any sum which is due from the taxpayer (including VAT, penalty, interest or surcharge) which arises because of that mistake.  The normal time limits for enabling recovery of such sums of tax, penalty, interest or surcharge (for example, by means of an assessment) will not apply.

4.   Subsection (2) deems new subsection (3A) to come into force on 18 July 1996 in determining the amount of any repayment to be made by the Commissioners on or after 18 July 1996.

BACKGROUND

5.   Previously, where a taxpayer has overpaid tax, but has as a consequence simultaneously overclaimed input tax, Customs cannot set off the overclaimed input tax against the refund due if they are out of time to issue an assessment for the overclaimed input tax.  For example, if supplies have been charged with tax, and the supplies are subsequently ruled to be exempt, Customs can reduce the repayment to take account of input tax reclaimed originally as attributable to the supplies which is now no longer reclaimable.  However, litigation can sometimes take a long time to settle and the time limits for making an assessment can sometimes expire.  This means that Customs might not have been able to recover overclaimed input tax and as a result a business could gain a windfall benefit.

6.   The changes mean that the taxpayer will be back in the position he would have been in, if the mistake had not occurred.  It is not a general netting off provision.  It will only apply to specific supplies where overclaims and overpayments have occurred as a result of the same mistake.”

 

50.  Secondly, extracts from a previous version of HMRC’s VAT Manual – Volume V1-33 “Refunds” – Section 10 “Set-off and net-off provisions”.

“10.2          The set-off provision and VAT refund claims

There was, however, one problem with the legislation as it stood.  There was a particular worry that traders who had incorrectly treated an exempt supply as taxable, were recovering the overpaid output tax but failing to repay the input tax, in effect zero-rating the supply.   In particular there appeared to be no specific legal provision which enabled Customs to net-off those amounts against over-claimed input tax, or under-declared output tax, where we were out of time to issue an assessment.  However, in the case of Sunningdale Golf Club v C&E Commrs, [1997] VATDR 79 (VTD 14899) the Tribunal accepted that the Commissioners did have certain powers of set-off.  Sunningdale Golf Club is a non-profit making sports body which benefited from the introduction of the sporting exemption in April 1994, backdated to 1 January 1990.  As a result the club submitted a refund claim which was paid.

A year after the claim had been paid, the club wrote contending that the Commissioners had no powers to reduce its claim for overpaid output tax by the amount of input tax attributable to relevant supplies.  In effect the club was arguing that whilst the European sporting exemption under the Sixth Directive meant that they shouldn’t have accounted for output tax, the UK law allowed it to recover input tax incurred in those circumstances.

We argued that the club couldn’t cherry pick.  If it wished to rely on European legislation it had to accept that the corresponding disadvantages of doing so.  The Tribunal accepted the argument about cherry-picking and in support pointed to a number of European cases in support such as Becker and BP Supergas v Greece.

However, it could not be certain the Tribunals would take this view in all circumstances.  Therefore subsection (3A) was added to section 81 VAT Act by s.48(1) Finance Act 1997 and provided as follows: ... [text of s 81(3A)].

Effectively, this means that where a trader has accounted for tax on an exempt supply and seeks a refund, any refund must take into account input tax which the trader should not have recovered.  This ensures that the trader is not left in an unjustifiably advantageous position because we are out of time to assess.

Note:  We also believe that if a trader had been treating a taxable supply as exempt, any attempt to recover previously blocked input tax would require the trader to account for the appropriate amount of output tax.  If you discover such a situation, please report it to Errors and Assessments Policy Team before taking any action.

10.3           When did the clause come into effect?

Section 48 of the Finance Act 1997 provides that this clause came into effect on 18 July 1996, but that it also applies to refund claims submitted before 18 July and not agreed by that date.

10.4           Can set-offs be made where the input tax and output tax is not connected?

Section 81(3A) was introduced with the specific intention of allowing directly connected input tax and output tax to be set-off against each other.  There are, of course, situations where refund claims are submitted and it is discovered that the trader has undeclared tax which cannot be recovered via assessment action.  Assuming the normal three year assessment provisions apply, we are advised that the claimed refunds cannot be set off against the under-declarations if they are in different accounting periods.  For example, if a refund claim has been submitted for the periods 02/96 and 05/96, but under-declaration against the over-declaration for the period 02/96.  The under-declaration in 11/95 would escape.

Of course, now that there is a three year tie limit both for refunds and assessments there should not be too many examples.  However, it is important to note that the normal set-offs carried out under the Commissioners care and management powers, cannot be used to avoid the three year assessment limits.”

 

51.  Thirdly, HMRC’s VAT Refund Manual - section VR8200.  This was introduced in August 2009 to replace the previous Manual and, so far as relevant, states: 

“Section 81(3A) requires that we set off against amounts for which we are liable to a claimant any amounts which, although not assessed, would have been assessed had the mistake that led to the claim not been made.

For example, Adana Ltd makes a claim on the 30th of June 2007 for output tax overdeclared on the sale of widgets. The claim covers all accounting periods between 1 April 2004 and 30 June 2007.

Section 81(3) requires that we set off against the amount due under the claim all outstanding debts on file.

However, section 81(3A) brings into the equation, for example, input tax that was attributable to the supplies in respect of which output tax is being claimed where it was deducted as a result of the same mistake that led to the overdeclaration of output tax. What's more, the set-off is not limited only to that input tax that was incurred in the accounting periods for which the claim was made.

As a matter of policy, where a claim is not considered to be 'abusive', the section 81(3A) set-off should only be applied to liabilities in the accounting periods which are covered by the claim.”

 

HMRC’s views on “abusive claims” are then set out at section VR2250 of the VAT Refund Manual which, so far as relevant, states: 

“The term ‘abusive claim’ as used here means that the claimant has sought to use EU legislation or the case law of the ECJ (or UK legislation and case law intended to implement the EU provisions) in order to obtain a result which is contrary to the intentions of the EU legislator and contrary to the intention of the ECJ.  That result is an unjustified tax advantage.

A simple example of such a claim might be where, after a judgment that supplies of X are exempt rather than taxable, a trader makes a claim for the output tax that he overdeclared on his supplies of X but doesn’t declare the input tax that he deducted wrongly on the understanding that his supplies were taxable.

The rationale behind the claim is that the claimant has a Community law right to recover the overdeclared output tax and that HMRC are not entitled to recover the input tax because they cannot rely on their failure to implement Community law properly.

Such claims should be brought to the attention of the Anti-Avoidance Group.”

HMRC’s case on the s 81(3A) argument

The effect of s 81(3A)

52.  Miss Whipple for HMRC submitted:

(1)     The normal course of action for HMRC would have been to assess the Theatre under s 73(2) VATA:

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

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

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

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

 

(2)   HMRC accepted that they were out of time to assess under s 73(2) but s 81(3A) addresses (and cures) precisely the mischief which results when a taxpayer puts in a claim to its own benefit, in circumstances where HMRC are out of time to assess any countervailing benefits that the same taxpayer has enjoyed by virtue of the same mistake giving rise to the claim itself.  It matters not whose mistake it was; nor what was the cause of the mistake.  Rather, the provision rectifies the effects of the mistake so as to achieve a fair result. 

(3)     The guidance cited at V1-33 (see paragraph 50 above) was internal and cannot be relied on by taxpayers.  It was wrong.  It had been corrected in August 2009 by the issue of the current guidance in VR8200 (see paragraph 51 above) which correctly stated the position:  “…the set-off is not limited only to that input tax that was incurred in the accounting periods for which the claim was made”. 

(4)   The Explanatory Notes to clause 48 of the Finance Bill 1997 (see paragraph 49 above) state in terms that s 81(3A) is intended to allow offset of “any sum” which is due from the taxpayer which arises because of that mistake; and further that “the changes mean that the taxpayer will be back in the position he would have been in, if the mistake had not occurred.  It is not a general netting off provision.  It will only apply to specific supplies where overclaims and overpayments have occurred as a result of the same mistake”. 

 

Section 81(3A) is not limited to offsets in the same accounting period

53.  Miss Whipple submitted:

(1)   Section 81(3A) is not limited in its application to input tax deducted and output tax falling due within the same prescribed accounting period.  Its limit lies in the offset relating to the same mistake.  If it had been intended to apply to offsetting liabilities within the same prescribed accounting period it would have said so in terms – see for example the language in s 25(1) VATA. 

(2)   As a matter of statutory interpretation, if the Theatre is correct, s 81(3A) must be redundant, because it would duplicate the role of s 80(2A) VATA.  Section 80(2A) requires that “any sums ... under or by virtue of this Act” should be offset against a s 80(1) claim.  Only the balance (if any) is due.  This plainly extends to input tax incurred in the same prescribed accounting period, see s 25(2) VATA.  The Theatre’s acceptance that Section 81(3A) has in fact been used to allow offset across different periods demonstrates this very point - see Laing the Jeweller.    

(3)     The Tribunal should strive to make sense of the legislation rather than to construe it in a way which results in absurdity.  The scheme is clear: s 80(1) permits a claim for overpaid output tax; s 80(2A) requires offset of input tax within the same prescribed accounting period; s 81(3) requires offset of any assessed or crystallised liability, whatever that liability is and in relation to whatever period; s 81(3A) requires offset of any countervailing benefit gained, as a result of the same mistake having been made, even in a different prescribed accounting period.  Thus the full effect of Community law is preserved and the taxpayer will, so far as possible, be in the same position as he would have been in had the mistake not occurred.  A purposive construction of s 81(3A) must lead to the conclusion that it applies to offset of benefits in different periods.  

(4)   The suggestion that the wider reading of Section 81(3A) offends the principle of effectiveness, as the Theatre alleges, is untenable.  A taxpayer has no right (and cannot rely on Community law) to promote an abusive claim.  Section 81(3A) is designed to prevent abuse – it is a defensive measure.  It is wholly consistent with Community law and the principle of effectiveness.  It could not be used to assess additional tax, only to prevent abuse.  (3A) was not applied mechanistically by HMRC – see the self-imposed limitation in VR8200.

Only one mistake

54.  Miss Whipple submitted:

(1)   The mistake at issue is the UK’s failure to implement Article 13A(1)(n) correctly.  There is no distinction to be drawn between the period 1990 to 1996 during which period there was no implementation of that Article, and 1996 to 2004 when there was imperfect implementation.  Throughout the period 1990 to 2004 the Theatre was denied the right of exemption of its supplies. 

(2)   It was true that in M&S 2002 the Court of Appeal did refer to the ECJ only part of the history of the case, but that was because the Court of Appeal had ruled that once the legislation was implemented then citizens lost their right of direct enforceability.  However, the ECJ ruled that the rights remained directly enforceable and this continuing direct effect did not depend on the state of the domestic law (see paras 27 to 31 of the ECJ decision in M&S 2002).  The Theatre was entitled to exemption of ticket sales throughout the period January 1990 to 2004.  Other taxpayers might have been in a different position but for the Theatre there was only one mistake and it continued throughout the period.

The Theatre’s case on the s 81(3A) argument

Section 81(3A) is limited to “same period” adjustments

55.  Mr Milne for the Theatre submitted:

(1)   Section 81(3A) should be interpreted as only permitting HMRC to raise out of time assessments where the relevant liability owing to HMRC arises in the same accounting period as the amount payable to the taxpayer.  This is certainly how HMRC’s original guidance on the section contained in their manual V1-33 at paragraph 10.4 (see paragraph 50 above) viewed its meaning. 

(2)   As section 10.2 of V1-33 states, s 81(3A) was introduced to put the decision in Sunningdale Golf Club on a statutory footing since, as the manual explained “it could not be certain the Tribunals would take this view in all circumstances”.  Sunningdale Golf Club was concerned with a set off in the same period.  Consequently, if s 81(3A) was only intended merely to put this decision beyond dispute (i.e. to achieve consistency throughout the VAT Tribunals), it cannot have (or at least was not intended to have) the meaning which HMRC now seek to place upon it (and indeed only after changing their own guidance).

(3)   HMRC’s position has now changed in their new VAT Refund Manual at VR8200 (see paragraph 51 above).  HMRC now appear to suggest that s 81(3A) will normally be limited to the accounting periods which are covered by a claim by a taxpayer except where HMRC view the claim as “abusive”.  This change of view was a self-serving one, perhaps motivated by the current proceedings or other pending litigation.

(4)   The Theatre’s input tax in 2000 & 2001 (during the construction works) could not relate to the outputs in the period 1990 to 1996.  They could not constitute cost components of those outputs because of the chronology. 

 

(5)   Exceptionally, the Theatre accepts that s 81(3A) might permit HMRC to set off an amount falling outside the periods in which a taxpayer makes a claim for overpaid tax.  Such was the case in Laing the Jeweller Ltd.  The facts of that case were, however, unusual.  In Laing, the taxpayer had in periods 05/98 to 02/99 underdeclared VAT amounting to £61,751 (as a result of underdeclaring output tax and overclaiming input tax).  Rather than correcting the underdeclaration in the required fashion (i.e. by a voluntary disclosure), the taxpayer decided to “self-correct” the mistake by underclaiming input tax in the period 11/00 by the same amount of £61,751.  Following a visit by HMRC on 17 July 2002, the taxpayer then advised the visiting officer that it had overdeclared VAT for the period 05/99 to 02/02 (i.e. excluding the first group of periods 05/98 to 02/99).  Part of the overdeclaration of VAT computed by the taxpayer was the underclaiming of input tax of £61,751.  HMRC accepted that the relevant £61,751 had been overdeclared in 11/00 but contended that they were entitled to set off the previous underdeclaration of the same amount in 05/98 to 02/99 by reason of s 81(3A).  The Tribunal found in favour of HMRC on the grounds that:

“for the purposes of the cumulative provisions of [s 81(3A)] a "mistake" resulted from the Appellant's deciding not to report their earlier under-declarations for the four periods referred to by way of Voluntary Disclosure but instead to deal with this liability by reducing incorrectly in Box 4 of their Return for 11/00 the amount of input tax. Thus liability to make a repayment by reference to the correct amount of input tax arose.”

 

In contrast, in the Theatre’s case there was no common mistake in the relevant VAT returns, as occurred in Laing, which permits HMRC to set off amounts of input tax arising between January 2000 and November 2001 (i.e. the time when construction expenditure was incurred) against overpaid net output tax in the period between January 1990 and November 1996.  The relevant returns were separated by a significant amount of time. 

There were two mistakes, not one mistake

56.  Mr Milne submitted:

(1)   Section 81(3A) requires “a mistake” and it is clear that there has to be a single mistake (ie the same mistake) governing both the repayment (under subsection (3A)(b)) and the underassessment (under subsection (3A)(c)) – see the words “by reason of that mistake” in (3A)(c). 

(2)   Throughout the period January 1990 to May 2004 the Theatre had a directly enforceable Community law right to exemption of its ticket sales.  Throughout that period the Theatre had incorrectly accounted for output tax, due to (a) HMRC’s failure to incorporate the cultural exemption into UK domestic law (January 1990 to May 1996); and (b) HMRC’s incorrect interpretation of Group 13 (June 1996 to May 2004). Those were two separate mistakes. 

(3)   The position was similar to that encountered by Marks & Spencer in M&S 2002.  Marks & Spencer had two claims against HMRC; first, the famous dispute as to whether chocolate-covered teacakes were (between 1973 and 1994) standard-rated chocolate-covered cakes or instead zero-rated chocolate-covered biscuits; secondly, a dispute concerning gift vouchers.  As explained by Lord Walker in a later episode of the M&S litigation - [2009] STC 452 at para [8] onwards:

“[8] M&S had a quite separate claim against [HMRC] for repayment of VAT in connection with gift vouchers sold at a discount to their face value. The correct VAT treatment of such vouchers was in some doubt until the decision of the [ECJ in] Argos Distributors Ltd v Customs and Excise Commrs (Case C-288/94) [1996] STC 1359.  This was despite an amendment made in 1992 to s 10(3) of the Value Added Tax Act 1983, which was intended to correct an error in transposing the Sixth Directive into national law. M&S claimed repayment of £2.8m, part of it in respect of vouchers issued before the amendment correcting the error in transposition ('early vouchers') and the rest in respect of vouchers issued after the amendment ('late vouchers'). During the period while the early vouchers were being issued the national legislature had failed to transpose the Sixth Directive correctly; during the later period the national legislation had been corrected but [HMRC] continued to apply the law incorrectly (the amendment had in fact been made to meet a rather different point).

[9] The final complication is that both of M&S's claims were threatened with being reduced by retrospective legislation. The Finance Act 1997 introduced a new s 80(4) of the Value Added Tax Act 1994 imposing a retrospective three-year limit on repayment claims (the teacakes claim, it will be recalled, went back to 1973). ...

[10] In due course both claims came before the Court of Appeal on an appeal by M&S from Moses J ([1999] STC 205). The Court of Appeal (Stuart-Smith, Ward and Schiemann LJJ) held, so far as now material ([2000] STC 16):  

(1)     that M&S's challenge to s 80(4) (as infringing EU law) failed, as regards the teacakes claim, because the Becker conditions were not satisfied (Becker v Finanzamt Münster-Innenstadt (Case 8/81) [1982] ECR 53, [1982] 1 CMLR 499) and general principles of Community law could not be relied on in the absence of a directly enforceable right;  

(2)     M&S's challenge to s 80(4) failed, as regards the late vouchers claim, for similar reasons, since [HMRC’s] failure to apply the amended statute correctly was not equivalent to incorrect transposition; and  

(3)     M&S's challenge to s 80(4), as regards the early vouchers, should be referred to the [ECJ]. ... 

[11] The [ECJ] was not happy with the terms of the first reference. Both Advocate General Geelhoed and the [ECJ] rejected the distinction, accepted by the Court of Appeal, between the early vouchers claim and the late vouchers claim. The court stated ([2002] STC 1036,  para 28 of the judgment):

'As the Advocate General has noted in para 40 of his opinion, it would be inconsistent with the Community legal order for individuals to be able to rely on a directive where it has been implemented incorrectly but not to be able to do so where the national authorities apply the national measures implementing the directive in a manner incompatible with it.'

The [ECJ] answered the referred question in general terms which did not distinguish between the two categories of voucher.

[12] The Advocate General also cast doubt on the Court of Appeal's conclusion about the teacakes claim ... “ 

 

(4)   Thus M&S suffered the first mistake as to correct implementation of the Sixth Directive on the early vouchers, as the Theatre suffered it for tickets sold in the period January 1990 to May 1996.  M&S then suffered the second mistake as to HMRC’s incorrect interpretation of the legislative amendments in relation to the late vouchers, as the Theatre suffered it for tickets sold in the period June 1996 to December 2003 (when the UK law had been amended to incorporate the relevant requirements of the Sixth Directive but it was misinterpreted by HMRC, until London Zoo and Business Brief 28/03). 

(5)   At most s 81(3A) would only permit HMRC to set off against the Theatre’s claim for the period 1 June 1996 (when the domestic legislation belatedly implemented the Sixth Directive) to 4 December 1996 (the effective date of the three year cap).

Community law principles

57.  Mr Milne submitted:

(1)   The Tribunal should adopt a purposive approach so as to ensure that s 81(3A) does not contravene Community law.  Section 81(3A) was introduced retroactively with effect from 18 July 1996 without any transitional period.  Insofar as the correct interpretation of s 81(3A) means that it goes beyond merely implementing Sunningdale Golf Club (i.e. to make express in domestic law existing rules of Community law), and permits HMRC to set off amounts said to be owing to them in any other accounting period, this would give rise to the same concerns about breaching the principle of effectiveness as occurred in Fleming and Condé Nast in relation to the introduction of a three year cap.  Whilst the Theatre does not seek to rely on disapplication in relation to its own facts, the Tribunal, given a choice between a compliant or non-compliant interpretation of s 81(3A) for general purposes, should adopt a purposive approach to interpretation so as to achieve the former.

(2)   HMRC’s interpretation would allow them to recalculate back to 1973 if that was in their favour, but otherwise the taxpayer is confined to a time-limited retrospective reclaim.  That was unfair and too broad and would breach the Community law principle of effectiveness.

Other points

58.  Although it did not form part of the formal arguments of either side, Mr Milne for the Theatre made reference to the “unjust enrichment” provisions in s 80(3) VATA.  Mr Milne maintained that if HMRC believed the taxpayer would achieve some unfair advantage through a refund then they should defend that on unjust enrichment principles.  They had chosen not to do so because of the technical difficulties they would face given the charitable status of the Theatre – see the VAT Tribunal decisions in Newcastle Theatre Royal Trust Limited (V18952) and Northampton Theatres Trust Limited (V19485) – and the task of providing evidence as to who would benefit from any repayment – see, for example, Baines & Ernst Limited v CCE [2006] STC 1632.  If HMRC would not fight on that basis then they should not attempt to achieve the same result by arguing some novel but vague concept of an abusive claim.  Miss Whipple in reply stated that HMRC did not accept there was any difficulty on unjust enrichment being applicable where a taxpayer is a charity.  

 

Consideration and Conclusions

 

The abuse argument

 

59.  It is clear that Community law cannot be relied on for abusive or fraudulent ends (see, for example, para 68 of the ECJ judgment in Halifax) and that UK domestic legislation should be construed in accordance with Community law principles (see, for example, Arden LJ in IDT Card Services).  HMRC maintain that the Theatre’s Fleming claim for repayment of overpaid output VAT is abusive.  

60.  We gained little assistance from the cited cases of Cremer, DEKA, and Fini, all of which clearly involved transactions tainted by fraud or behaviour of questionable honesty.  No such allegation could be (or has been) made against the Theatre, and it would be misleading to apply comments or conclusions of the ECJ in those cases to the current appeal. 

61.  The Theatre took exception to HMRC’s allegation that it had “cherry picked” the accounting periods to be included in its claim.  While it is true that the Theatre could have chosen not to make any claim at all, once it had decided to make a claim we do not consider that it was selective in relation to the periods in issue – it simply claimed in relation to all the periods open to it, subject to the capping legislation.  The Theatre did net off all periods in the span of the claim – as per BP Supergas and Annex C to the 1996 Notice.  The Theatre did exactly what it had been invited to do by the 1996 Notice and HMRC’s Business Briefs.  

62.  Miss Whipple accepted that the “abuse” alleged by HMRC was not one within the concept of an “abusive practice” as discussed in Halifax.  We agree and conclude that the test laid down by the ECJ in Halifax would not be met in this case (see para 86 of judgment):

“For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”

 

In particular, we consider there is a very real distinction to be drawn between taxpayers who take active (perhaps elaborate) steps to engineer a potential VAT advantage (as in Halifax), and taxpayers who have simply filed claims on a basis invited by HMRC. 

 

63.  HMRC seek to extend the concept of abuse beyond transactions undertaken by taxpayers, to cover also repayment claims made by taxpayers in accordance with their directly enforceable Community law rights.  HMRC say (some) such claims are abusive because of their end result: looked at as a whole, the taxpayer stands to receive a sum that does not reflect its true detriment arising from HMRC’s failure to correctly implement and interpret Community law.  HMRC consider this to be an unjustified windfall. 

64.  We have difficulty in discerning any general principle of “abusive practice” that could be applied to claims such as that made by the Theatre.  Looking at the figures in the Table at paragraph 38 above, it is true that the Theatre’s Fleming claim (Item 1) does not go to any particular economic detriment suffered by the Theatre if one looks at the period 1990 to 2004 as a whole.  But that could be particular to the numbers in the Theatre’s case.  The Tribunal invited HMRC’s views on what the position would have been if the refurbishment reclaim (Item 3) had been not £5 million but only £0.5 million.  Miss Whipple, after taking instructions, confirmed that in that hypothetical case HMRC would not consider the Item 1 claim to be abusive because overall the taxpayer has not received any windfall – its net detriment is £2.5 million (overpayments of £3 million less over-reclaim of £0.5 million) so a Fleming claim of £1.1 million still leaves that hypothetical taxpayer £1.4 million out of pocket.  It is common ground that that taxpayer would have no redress for its remaining detriment – because of the three year cap it could not seek any refund in relation to Items 2 or 4.  The position becomes even less clear if one hypothesises that the refurbishment reclaim (Item 3) had been not £5 million but only £2 million – the hypothetical taxpayer’s net detriment is £1 million (overpayments of £3 million less over-reclaim of £2 million) so a Fleming claim of £1.1 million not only restores the taxpayer’s detriment but slightly exceeds it (by £0.1 million).  Is the whole claim abusive; or is it only partially abusive (as to £0.1 million), assuming that is a meaningful concept?  Miss Whipple, after taking instructions, stated that borderline cases would need to be looked at on a case-by-case basis. 

65.  We agree with HMRC that their proposed approach of looking at all the affected years (potentially going back to the introduction of VAT in 1973) in aggregate and discerning the net effect of the admitted mistakes is entirely reasonable and comes as close as possible to achieving a fair result.  It is, of course, the treatment that would be adopted on a normal claim for damages – to put the claimant in the same financial position as if he had never suffered the wrong.  However, we consider that approach ignores an inescapable fact:  in 1997 Parliament legislated for the three year cap.  The cap distorts the landscape; it is a distortion compatible with Community law (see M&S 2002 at paras 34 to 36) and thus fully effective (after further adjustment for a transitional period – (see M&S 2002 at paras 37 to 39)).  Given that the landscape was purposely and legitimately distorted by the three year cap, the implications for both the state and the taxpayer cannot be ignored or overlooked. 

66.  The numerical examples above (and one could devise many more) demonstrate that the three year cap produces losers as well as winners.  The Theatre is clearly a winner; we suspect there are many taxpayers who are losers, whose cases never reach this Tribunal because they are, correctly, advised that their (possibly significant) financial detriment cannot be recovered due to the operation of the cap. 

67.  We conclude that the three year cap applies to both HMRC and taxpayers; that both must accept the cap may work to their advantage or their detriment; and that there is not a generally applicable principle that taxpayer claims that happen to produce an advantageous result for the taxpayer constitute “abusive practices”.

 

 

The s 81(3A) argument

Accounting periods

68.  We do not agree with the Theatre’s contention that s 81(3A) can set-off amounts only within the same accounting period.  That does not follow from general principles and the inclusion of limiting words in other provisions in VATA relating to payments, repayments and credits - for example, s 80 and s 25 - but not in s 81(3A) implies that no such restriction was intended by Parliament. 

69.  We gain no assistance from the Laing case, which involved a taxpayer employing a peculiar attempt at correcting his returns and, in our view, establishes no principle applicable to the current appeal. 

70.  Accordingly, HMRC’s statements in the old VAT Manual V1-33 (see paragraph 50 above) were incorrect.  The correct statement is, belatedly, in the new VAT Refund Manual at VR8200 (see paragraph 51 above).  We make no comment on HMRC’s statement there concerning their purported policy discretion to apply the provision across accounting periods only where claims are “abusive”. 

71.  We conclude that s 81(3A) is not limited to offsets in the same period for which the claim is made.

Mistake

72.  On the Theatre’s submission that s 81(3A) is not applicable because there were two separate mistakes, we do not draw the conclusion from the M&S litigation as was argued for by Mr Milne.  It seems to us that, as advocated by Miss Whipple, the ECJ was discontent with the separation of two issues by our Court of Appeal, and reformulated the question being referred to it – see paras 32 & 33 of the ECJ’s judgment in M&S 2002.  Taxpayers had a right to direct effectiveness of the Sixth Directive, and the state of the UK domestic law was irrelevant.  See paras 30 & 31 of the ECJ’s judgment:

“According to well-established case law, the right to obtain a refund of charges levied in a member state in breach of rules of Community law is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the court ... .   It follows from all those considerations that the fact that a member state has correctly implemented the provisions of art 11A(1) of the Sixth Directive in domestic law does not deprive individuals of the possibility of relying, before the courts of that state, on the rights which they derive from those provisions and, in particular, the right to recover amounts collected by a member state in breach of them.”

 

73.  Taxpayers in the position of the Theatre had a right to direct effectiveness of the Sixth Directive from January 1990.  Per the ECJ in M&S 2002, the state of the UK domestic law was irrelevant.  Thus the mistake for the purposes of s 81(3A) was the failure to accord to UK taxpayers the exemption of ticket sales, and there is no cause to analyse that mistake into more detailed parts.

Effect of s 81(3A)

74.  Having carefully considered the opposing submissions of counsel, we consider that s 81(3A) was designed to do exactly what Miss Whipple has contended for it.  The aim is set out clearly in the Explanatory Note to the Lobby (see paragraph 49 above).  As already concluded (paragraph 70 above) HMRC’s statements in the old VAT Manual V1-33 were mistaken. 

75.  The provision is a one-way street; it allows HMRC to adjust a taxpayer’s claim so as to reduce it for what would (absent the provision) be out-of-time over-credited input tax, but it does not allow a taxpayer to offset against an HMRC assessment overpaid but out-of-time output tax (or surplus input tax).  Mr Milne contended that such a lopsided effect is so manifestly unfair that it either cannot have been intended by Parliament or else must be in breach of Community law principles of fairness. 

76.  Miss Whipple sought to reassure us that the provision was not as draconian as painted by Mr Milne: it could be used only defensively by HMRC; it did not entitle HMRC to assess outside time limits, only to net off other periods where there was the same mistake; and there was the policy limitation in VR8200 relating to abusive claims.  While we appreciate HMRC’s attempts to explain how the worst potential effects of s 81(3A) should not occur in practice, we are reminded of the words of Walton J, uttered in a completely different context, that the citizen should be taxed by law rather than untaxed by concession (Vestey v CIR [1977] STC 414 at 439).  This Tribunal must consider whether the statutory provision has such a clear and unequivocal meaning that it needs no further interpretation. 

77.  The motivation for the introduction of the three year cap was transparently to block potential significant refunds of VAT to UK citizens (see Advocate General in M&S 2002 quoted at paragraph 14 above).  Section 81(3A) is part of the suite of legislative provisions designed to achieve that effect.  Some parts of that suite have been judicially criticised and subsequently adjusted – eg the absence of a transitional period – but s 81(3A) stands as originally enacted.  Despite Mr Milne’s urging that it should be read to give a degree of fairness to the taxpayer, we consider its effect is clear and deliberately intended by Parliament.  A purposive reading of the provision supports HMRC’s interpretation. 

78.  We conclude that s 81(3A) does entitle HMRC to offset against the Theatre’s Fleming claim (for the period 1990 to 1996) the over-repaid input tax in the period 2000 to 2001, so as to reduce the net claim to Nil.

Decision

79.  For the reasons stated at paragraph 78 above, the appeal is dismissed. 

Costs

80.  The appeal was made by a notice of appeal issued on 25 June 2008 and was heard in April 2010.  Thus the appeal constitutes “current proceedings” as defined by paragraph 1(2) of schedule 3 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (SI 2009/56).  Paragraphs 6 and 7 of schedule 3 state (so far as relevant):

“Current proceedings

6.  Any current proceedings are to continue on and after the commencement date as proceedings before the tribunal.

7.—(1) This paragraph applies to current proceedings that are continued before the tribunal by virtue of paragraph 6. ...

(3) The tribunal may give any direction to ensure that proceedings are dealt with fairly and justly and, in particular, may—

(a) apply any provision in procedural rules which applied to the proceedings before the commencement date; or

(b) disapply any provision of Tribunal Procedure Rules.

(4) In sub-paragraph (3) “procedural rules” means any provision (whether called rules or not) regulating practice or procedure before an existing tribunal. ...

(7) An order for costs may only be made if, and to the extent that, an order could have been made before the commencement date (on the assumption, in the case of costs actually incurred after that date, that they had been incurred before that date).”

 

81.  The procedural rules relevant for the purposes of paragraph 7(3)(a) are the VAT Tribunal Rules 1986 (SI 1986/590).

82.  By a Guidance Note issued on 10 March 2009 ([2009] STI Issue 11) HMRC stated:

“Where an appeal was made to the VAT and Duties Tribunal before 1 April 2009, and the new tribunal exercises its discretion to apply the existing costs rules, HMRC will continue to operate the Sheldon practice (under which HMRC do not seek costs from appellants in most cases).”

 

83.  Miss Whipple for HMRC stated that if HMRC won their “abusive claim” argument in the current appeal then they would consider the case to be one which should not benefit from the Sheldon practice.  Miss Whipple made an application for costs. 

84.  Mr Yates for the Theatre referred us to the Tribunal decision in Surestone Ltd v HMRC [2009] UKFTT 352 (TC) and submitted that the fact of whether HMRC would operate the Sheldon principle in a particular case was a matter which we should take into consideration in deciding whether to make an order for costs.

85.  We agree with the views of Sir Stephen Oliver as set out in Surestone at paragraphs 15 to 16 of his judgment:

“These, however, are “current proceedings” within the meaning of that expression in paragraph 1(2) of Schedule 3 to the TTF Order.  Because they are current proceedings, paragraph 7 of Schedule 3 to the TTF Order applies.  Thus, if the Tribunal is satisfied that in the circumstances a costs award is a direction that ensures that the proceedings are dealt with fairly and justly, the Tribunal has the power (on the strength of paragraph 7(3)(a) and (7) of Schedule 3 to the TTF Order) to apply the 1986 Rules (and specifically rule 16(2), so far as it is material, and rule 29).

In principle, and without at this stage examining the particular circumstances of the present proceedings, a costs award is a direction that may come within paragraph 7(3) as ensuring that proceedings are dealt with fairly and justly; it ensures, for example, that the successful party does not lose out financially by being involved in the litigation.  Paragraph 7(7) of Schedule 3 to the TTF Order limits the Tribunal’s powers, wherever granted, in relation to costs orders.  Any order for costs made in pursuance of the power in paragraph 7 of Schedule 3 of TTF Order may, therefore, only be made if and to the extent that an order could have been made before 1 April 2009.  On that basis the Tribunal cannot make a costs award that goes beyond what could have been awarded under the 1986 Rules.  ...  There is, however, no question in the present case of the costs award exceeding the amount permitted by the 1986 Rules.”

86.  We consider we should decide whether to make a costs order by reference to the fairness and justice of such an order in the context of proceedings that have involved issues that, in our opinion, are commensurate with High Court litigation.  Both sides were represented by leading counsel and the issues raised have importance not just for the parties but also for other taxpayers.

87.  Accordingly, we direct:

(1)    Rule 29 (Awards and directions as to costs) of the VAT Tribunals Rules 1986 (SI 1986/590) shall apply to the current proceedings; and

(2)   The Theatre shall pay HMRC’s costs of the appeal on the standard basis, the amount unless agreed to be taxed under Rule 29(1)(b) of those Rules by a Costs Judge of the Senior Courts.

88.  Whether HMRC apply the Sheldon practice, given that they did not succeed before us on their “abusive claim” argument, is a matter for them.

Right of appeal to Upper Tribunal

89.  Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273) provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.

90.  This document contains the full written findings of fact and reasons for the Decision.

 

 

 

 

 

 

PETER KEMPSTER

 

TRIBUNAL JUDGE

 

 

RELEASE DATE: 15 February 2011