Judgments - Fleming (t/a Bodycraft) (Respondent) v
Her Majesty's Revenue and Customs (Appellants) Conde Nast Publications
Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)
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HOUSE OF LORDS SESSION 2007-08 [2008] UKHL 2 on appeal from: [2006] EWCA Civ 70 OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Fleming (t/a Bodycraft) (Respondent) v Her Majesty’s Revenue and Customs (Appellants) Condé Nast Publications Limited (Respondents) v Her Majesty’s Revenue and Customs (Appellants) Appellate Committee Lord Hope of Craighead Lord Scott of Foscote Lord Walker of Gestingthorpe Lord Carswell Lord Neuberger of Abbotsbury Counsel Appellants: (Fleming) Alison Foster QC Adam Robb (Condé Nast) Christopher Vajda QC Valentina Sloane (Instructed by Her Majesty’s Revenue and Customs Solicitors Office) Respondents: (Fleming) David Southern Denis Edwards (Condé Nast) Jonathan Peacock QC Jolyon Maugham (Instructed by Hepburns (Fleming) and Forbes Hall (Condé Nast)) Hearing date: 12, 13 & 14 NOVEMBER 2007 ON WEDNESDAY 23 JANUARY 2008 HOUSE OF LORDS OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Fleming (t/a Bodycraft) (Respondent) v Her Majesty’s Revenue and Customs (Appellants) Condé Nast Publications Limited (Respondents) v Her Majesty’s Revenue and Customs (Appellants) [2008] UKHL 2 LORD HOPE OF CRAIGHEAD My Lords, |
LORD SCOTT OF FOSCOTE
My Lords,
"…are 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 individuals of their right to repayment, or of allowing them too short a period for asserting that right."
And, in paragraph 39, the Court said that, in order to serve the purpose of legal certainty, "limitation periods must be fixed in advance".
"…it is settled case law that the incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. Mere administrative practices cannot be regarded as constituting the proper fulfilment of obligations under Community law".
The UK’s obligation is to put in place a legal scheme for the bringing of claims for repayment of input tax. Regulation 29 constitutes the legal scheme. If, as is the case, paragraph (1A) cannot, consistently with Community law, be applied against a certain class of taxpayers, into which class both Mr Fleming and Condé Nast fall, the defect cannot, in my opinion, be cured by "mere administrative practices". The Business Briefs fall, in my opinion, under that heading.
"The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, even where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period."
My Lords, the ECJ in this passage was dealing with the principle of effectiveness. But that is not the only principle in play. The principle of certainty, too, must be taken into account. Taxpayers are entitled to know from the statutory scheme what input tax repayment claims they can bring under regulation 29. In the absence of any statutory transitional provision, how are they to know whether pre 1 May 1997 claims that are more than three years old can be brought or, as to claims based on input tax paid between 1 May 1994 and 1 May 1997, within what period they can be brought? It is no answer to the requirement of certainty to be told that the claims can be brought within "an adequate transitional period." There is also the constitutional point, which may or may not apply to judges sitting in Italian courts. It is the function of judges sitting in UK courts to construe primary and secondary legislation. It is the function of judges sitting in UK courts to disapply UK legislation that is inconsistent with Community law. It is not the function of judges sitting in UK courts to amend UK legislation that is inconsistent with Community law. Moreover, the passage I have already cited from the ECJ judgment in EC Commission v United Kingdom seems to me pertinent here too: "…incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended." "Mere administrative practices" cannot do this. Nor can judges.
LORD WALKER OF GESTINGTHORPE
My Lords,
Disapplication of national legislation
"without prejudice to the directly enforceable Community rights of nationals of any member state of the EEC."
The principle has often been recognised your Lordships’ House, including (in the context of taxes) Imperial Chemical Industries plc v Colmer (No 2) [1999] 1 WLR 2035, 2041 (Lord Nolan) and recently Autologic Holdings plc v Inland Revenue Commissioners [2006] 1 AC 118, paras 16-17 (Lord Nicholls of Birkenhead).
"(1) To exercise his right of deduction, a taxable person must:
(a) in respect of deductions pursuant to Article 17(2)(a) [ordinary input tax], hold an invoice drawn up in accordance with Article 22(3);
(2) The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1….
(3) Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2….
(4) Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine."
It is common ground that article 18 gives taxpayers directly enforceable Community rights. The United Kingdom has opted (under article 18(4)) to permit refunds; and it has carried out its task, under article 18(3), of laying down the "conditions and procedures" for obtaining credit for input tax which is not dealt with by the normal, regular procedure in paragraphs (1) and (2) of article 18 (that is, by having a proper tax invoice as a voucher and by deducting the input tax from output tax payable in respect of the same quarterly accounting period).
"The principle of effectiveness
34 It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness) (see, inter alia, Aprile srl v Amministrazione delle Finanze dello Stato (No 2) Case C-228/96 [1998] ECR I-7141 [2000] 1 WLR 126 para 18, and the judgments cited above in Dilexport srl v Amministrazione delle Finanze dello Stato [1999] ECR I-579, para 25, and Metallgesellschaft Ltd v Inland Revenue Commissioners joined Cases C -397/98 and C - 410/98 [2001], ECR I - 1727, [2001] Ch 620, para 85).
35 As regards the latter principle, the court has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community law to lay down reasonable time limits for bringing proceedings (see Aprile para 19, and the case law cited therein). Such time limits are not liable to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law. In that context, a national limitation period of three years which runs from the date of the contested payment appears to be reasonable (see, in particular, Aprile, para 19, and Dilexport, para 26).
36 Moreover, it is clear from the judgments in Aprile (para 28) and Dilexport (paras 41 and 42) that national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the court has held that legislation which is not in fact retrospective in scope complies with that condition."
Section 80 and regulation 29
"(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.
(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.
(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.
(4) No amount shall be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.
(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.
(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.
(7) Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them."
Thus there was a six-year period for claims, capable of extension where a mistake had been made. Section 80 was directed, it should be emphasised, to a payment "which was not VAT due to [the Commissioners]".
"Claims for input tax
(1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of [VATA 1994] shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of -
(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;..."
There was no time limit other than the Commissioners’ discretion in cases outside section 25(2). Section 25(2) provided for the normal procedure by which a "payment trader" claimed credit for input tax by means of deduction on the making of his quarterly return. It was not therefore obvious (to say the least) that regulation 29 was providing for the less normal case of a payment trader claiming credit otherwise than under section 25(2), still less for a "repayment trader" claiming a refund of input tax. Indeed the Commissioners’ considered view was that regulation 29 did not apply to those cases. That was the point that was litigated as far as the Court of Appeal in the University of Sussex case. The Commissioners did not attempt to bring University of Sussex on appeal to this House but its determined stance as far as the Court of Appeal is a significant complication in these appeals.
"42. The issue does not appear to me to be straightforward. There is obvious force in the commissioners’ simple point that, whether caused by too high a figure for output tax or too low a figure for input tax, a consequential payment by a taxpayer to the commissioners is ‘an amount...by way of VAT which was not VAT due...'. In other words, where a payment trader pays a sum to the commissioners, that sum is arrived at by taking into account both his output tax and his input tax for the relevant period, and the net figure is the VAT he pays, and in so far as that figure is too high, he is entitled to reclaim it, pursuant to, and subject to the provisions of, section 80.
43. So far as repayment traders are concerned, it is common ground that they cannot fall within section 80; that is because by definition, they will not have ‘paid the Commissioners...VAT'. The 1994 Act does not appear specifically to consider repayment traders who have under-claimed input tax. Sections 25(2) and 26(1) provide that a taxpayer is liable to take into account input tax in his return for the period during which the supplies were actually provided (see in particular the bracketed words in section 26(1). The 1994 Act contains no provision equivalent to section 80 so far as repayment traders are concerned. However, section 25(1)—echoed in the opening words of section 25(2)—indicates that it is contemplated that regulations will or may be introduced to deal with cases where inputs are not claimed for the relevant period in accordance with section 26(1).
44. When one turns to the 1995 regulations, it seems to me, indeed it appears to be common ground, that regulation 29 does enable a repayment trader, who has understated his input tax, to make a late claim for under-claimed input tax, albeit in terms which are pretty unspecific, particularly when contrasted with section 80. Regulation 29(1) appears to make it clear that the input tax should in principle be claimed in the return relating to the period in which the relevant goods or services were provided. However, the words ‘save as the Commissioners may otherwise allow’ indicate that this does not represent an absolute requirement. That point appears to me to be supported by the provisions of section 25(1) and regulation 25(5), and indeed by article 18(3) of the Sixth Directive. Accordingly, at least until regulation 29(1A) was introduced, the commissioners enjoyed a relatively unfettered discretion as to whether, and if so how, to accommodate a repayment trader whose original return understated the input tax, and who subsequently claimed a credit or payment in respect of that input tax.
"although the taxpayer could have paid less VAT pursuant to the earlier return if he had claimed all his input tax, that fact does not render any of the VAT so paid ‘VAT [not] due to the Commissioners’".
The Court of Appeal (Auld and Chadwick LJJ and Newman J) upheld that decision in a judgment given on 21 October 2003 [2004] STC 1, paras 107 ff. It had been hoped that the appeal would be heard sooner but it was listed with the second Court of Appeal hearing in Marks and Spencer plc v Customs and Excise Commissioners ("Marks and Spencer III") following the decision of the ECJ in Marks and Spencer II. This delayed the disposal of the appeal in University of Sussex.
The 1996-7 amendments
"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."
Section 47(2) of the Finance Act 1997 provided that this amendment:
"shall be deemed to have come into force on 18 July 1996 as a provision applying, for the purposes of making any repayment on or after that date, to all claims under section 80 of [VATA 1994], including claims made before that date and claims relating to payments made before that date."
"The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made."
The Business Brief (No 9/97) reflected the restrictive view which the Commissioners took, at that time, as to the scope of regulation 29.
The Marks and Spencer litigation
(1) where a claim had been made before 31 March 1997, but had been capped by the amending legislation;
(2) where a claim had been made and paid before 31 March 1997, but had been clawed back by a recovery assessment (under section 84A of VATA 1994); and
(3) where a mistake had been discovered before 31 March 1997, though no claim had been made.
In each case the overpayment of tax must have been made before 4 December 1996.
Grundig Italiana
"36. Given that the detailed rules governing the recovery of national taxes levied though not due are a matter for the national legislature, the question whether such rules may apply retroactively is equally a question of national law, provided that any such retroactive application does not contravene the principle of effectiveness.
37. In that regard, whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of the effectiveness, this is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are 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 individuals of their right to repayment, or of allowing them too short a period for asserting that right (Case C-62/00 Marks & Spencer [2002] ECR I-6325, para 38).
38. Thus, the transitional period must be sufficient to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time. In any event, they must not be compelled to prepare their action with the haste imposed by an obligation to act in circumstances of urgency unrelated to the time-limit on which they could initially count.
39. A transitional period of 90 days prior to the retroactive application of a period of three years for initiating proceedings in place of a ten-year or five-year period is clearly insufficient. If an initial period of five years is taken as a reference, 90 days leaves taxpayers whose rights accrued approximately three years earlier in a position of having to act within three months when they had thought that almost another two years were still available.
40. Where a period of ten or five years for initiating proceedings is reduced to three years, the minimum transitional period required to ensure that rights conferred by Community law can be effectively exercised and that normally diligent taxpayers can familiarise themselves with the new regime and prepare and commence proceedings in circumstances which do not compromise their chances of success can be reasonably assessed at six months.
41. However, the fact that the national court has found that a transitional period fixed by its national legislature such as that in issue in the main proceedings is insufficient does not necessarily mean that the new period for initiating proceedings cannot be applied retroactively at all. The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, even where those actions concern the recovery of sums before the entry into force of the legislation laying down the new period."
These paragraphs, and especially the last, have been the subject of closely-reasoned argument before your Lordships’ House.
The two appeals in outline
Four possible analyses (with variants)
(1) six months from the judgment of the ECJ Marks & Spencer II (giving a final date of 11 January 2003);
(2) six months from the publication of BB 22/02 (giving a final date of 5 February 2003); and
(3) the final date for claims under BB 27/02 (30 June 2003).
ECJ jurisprudence
"to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time. In any event, they must not be compelled to prepare their action with the haste imposed by an obligation to act in circumstances of urgency unrelated to the time-limit on which they could initially count"
and (at para 40):
"to ensure that rights conferred by Community law can be effectively exercised and that normally diligent taxpayers can familiarise themselves with the new regime and prepare and commence proceedings in circumstances which do not compromise their chances of success."
The reference to "normally diligent taxpayers" suggests the need for a single objective test. The degree of curtailment of an existing limitation period is also material (paras 39 and 40).
"The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, even where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period."
But in paras 40 and 42 the period of six months was qualified as the minimum period. In my opinion the ECJ cannot have been intending to lay down a mandatory rule, or to do more, in these paragraphs, than offer guidance of the most general sort. Advocate General Colomer had in para 27 of his opinion stated:
"It is not possible to determine whether or not a 90-day transitional period, such as that in the present case, complies with the principle of effectiveness without having regard to all the factual and legal requirements, both procedural and substantive, which the domestic legal order imposes for the bringing of actions for recovery. Only with that overview, which the Italian courts alone have, is it possible to give a definitive answer."
That is, with respect, obviously right and the ECJ cannot have intended to contradict it. Nothing is known, your Lordships were told, of the ultimate disposal of the Grundig Italia litigation.
"68. The Governments’ arguments concerning the financial consequences of Emmott also raise an important point of principle. As they correctly observe, the Emmott ruling, if read literally, would expose Member States to the risk of claims dating back to the final date for implementing a Directive...
69. Moreover, such liability would arise even in the event of a minor or inadvertent breach. Such a result wholly disregards the balance which must be struck in every legal system between the rights of the individual and the collective interest in providing a degree of legal certainty for the State. That applies particularly to matters of taxation and social security, where the public authorities have the special responsibility of routinely applying tax and social security legislation to vast numbers of cases.
70. The scope for error in applying such legislation is considerable. Regrettably that is particularly so in the case of Community legislation, which is often rather loosely drafted....The recent Argos and Elida Gibbs cases provide a further example of how huge repayment claims can arise from a comparatively minor error in implementing a Community tax directive. In those cases the Court found that the fiscal treatment accorded by the United Kingdom to voucher transactions—used extensively in that Member State as a business promotion technique—was not in accordance with the Sixth VAT Directive. The resultant repayment claims are reported to be between £200m and £400m.
71. It might be objected that it is not unreasonable to require Member States to refund over-paid charges given that they were not entitled to collect them in the first place. However, that view disregards the need for States and public bodies to plan their income and expenditure and to ensure that their budgets are not disrupted by huge unforeseen liabilities. That need was particularly clear in Denkavit, in which repayment was sought of the annual levies imposed by the Netherlands Chambers of Trade and Industry in order to finance their activities. As was noted in my Opinion in that case, retrospective claims of up to 20 years would have had catastrophic effects on their finances.
72. In short, therefore, my main reservations about a broad view of the Emmott ruling are that it disregards the need, recognised by all legal systems, for a degree of legal certainty for the State, particularly where infringements are comparatively minor or inadvertent; it goes further than is necessary to give effective protection to directives; and it places rights under directives in an unduly privileged position by comparison with other Community rights. Moreover a broad view cannot be reconciled with the Court’s subsequent case-law on time-limits."
The Advocate General also noted (paras 73-75) that there are different types of time limit in national legislation, and that they may call for different treatment. The ECJ did not comment expressly on these parts of the Advocate General’s opinion, but its judgment was not inconsistent with the Advocate General’s thinking. The importance of maintaining stability in public finances was acknowledged by the ECJ in Marks & Spencer II, [2002] ECR I-6325 para 41.
"it is settled case law that the incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. Mere administrative practices cannot be regarded as constituting the proper fulfilment of obligations under Community law (EC Commission v France, Case C-197/96 [1997] ECR I-1489, para 14; EC Commission v Italy, Case C-358/98 [2000] ECR I-1255, para 17, and EC Commission v Italy, Case C-145/99 [2002] ECR I-2235, para 30)."
However that principle does not in my opinion apply here, for similar reasons to those mentioned in the last paragraph. The issue in this case is not the continuing non-transposition (or incorrect transposition) of a Council Directive; neither counsel put his case that way. Any action to be taken by the United Kingdom government to define a deferred transitional period for claims under regulation 29 (whether in the form of legislation, or the announcement of an official administrative policy) is relevant, not as a transposition of any part of the Sixth Directive, but as bearing on the duration of the "adequate transitional period" referred to in Grundig II.
Disapplication of regulation 29(1A)
"As the court held in BLP Group plc v Customs and Excise Comrs (Case C-4/94) [1996] 1 WLR 174, 199, para 24, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question."
Mr Fleming’s claim
Condé Nast’s claim
Disapplication of section 80
LORD CARSWELL
My Lords,
LORD NEUBERGER OF ABBOTSBURY
My Lords,
a) It is open to the legislature of a Member State to impose a time limit within which a claim for input tax must be bought: Marks & Spencer II para 35;
b) It is further open to the legislature to introduce a new time limit, or to shorten an existing time limit, within which such a claim must be brought, even where the right to claim has already arisen (an "accrued right")when the new time limit (a "retrospective time limit") is introduced: Marks & Spencer II paras 37 and 38;
c) Any such time limits must, however, be "fixed in advance" if they are to "serve their purpose of legal certainty": Marks & Spencer II para 39;
d) Where a retrospective time limit is introduced, the legislation must include transitional provisions to accord those with accrued rights a reasonable time within which to make their claims before the new retrospective time limit applies: Marks & Spencer II para 38 and Grundig II para 38;
e) In so far as the legislature introduces a retrospective time limit without a reasonable transitional provision (as in Grundig II) or without any transitional provision (as in Marks & Spencer II), the national courts cannot enforce the retrospective time limit in relation to accrued right, at least for a reasonable period; otherwise, there would be a breach of Community law: see Autologic plc v Inland Revenue Commissioners [2006] 1 AC 118 paras 16 to 17;
f) The adequacy of the period accorded by the transitional provision ("the transitional period") is to be determined by reference, inter alia, to the principles of effectiveness and legitimate expectation: Marks & Spencer II paras 34 and 46, and Grundig II para 40; in particular, it must not be so short as to render it "practically impossible or excessively difficult" for a person with an accrued right to make a claim: Marks & Spencer II para 34, and Grundig II para 33;
g) It is primarily a matter for the national courts to decide whether the length of any transitional period is adequate, although the ECJ will give a view if the transitional period is "clearly" so short as to be inconsistent with Community law: Grundig II paras 39 and 40;
h) The absence of a transitional period of adequate length is not, however, automatically fatal to the enforcement of the retrospective time limit: Grundig II para 41;
i) Where there is no adequate transitional period, it is for the national court to fashion the remedy necessary to avoid an infringement of Community law: Marks & Spencer II para 34, Grundig II paras 33, 36, 40, and 41, Autologic paras 16 and 17, and the ECJ’s decision in Metallgesellschaft Ltd and ors v Commissioners of Inland Revenue (Joined Cases C-397/98 and C-410/98) [2001] ECR I-1727, at para 85;
j) That remedy would, at least normally, be to disapply (perhaps only for a period) the operation of, the retrospective application of the new time limit to claims based on accrued rights: Marks & Spencer II paras 34 to 41, and Grundig II paras 38 to 40 and especially (with regard to temporary disapplication) para 41.