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Tricell UK Ltd v Revenue & Customs [2003] UKVAT V18127 (17 April 2003)

VALUE ADDED TAX – input tax — "carousel" fraud alleged by Commissioners — appellant unwitting participant — appellant's input tax claim "suspended" — subsequently part paid — whether appeals competent — whether "decision" to withhold balance — yes

TRIBUNAL — jurisdiction — VAT Tribunals Rules 1986 r 19(3) — whether apt to direct payment of withheld input tax claim — legitimate expectation — proportionality — interim relief — tribunal's powers

HARDSHIP — whether established

MANCHESTER TRIBUNAL CENTRE

TRICELL UK LIMITED

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in Manchester on 11 March 2003

Michael Patchett-Joyce and Piers Gardner of counsel, instructed by Deloitte & Touche, for the appellant

Andrew MacNab of counsel, instructed by their solicitor's office, for the respondents

© CROWN COPYRIGHT 2003

DECISION

Background

This decision relates to a number of applications made at an interlocutory stage of an appeal. In the ordinary way the applications were heard in private but the parties, through their respective counsel – Michael Patchett-Joyce and Piers Gardner for the appellant, Andrew MacNab for the respondents – have agreed that, as the applications raise matters of general interest, the decision should be published, and I so direct.

The appellant is a dealer in mobile telephones, buying and selling in bulk. For reasons immaterial to this application, it buys from an associated company which itself buys within the United Kingdom. The appellant's sales are, almost exclusively, to traders in other European Union Member States. The appellant's purchases are standard-rated and it thus pays VAT to its associated company supplier (the two companies, though associated, are not members of the same VAT group) and, in principle, acquires a right to claim input tax credit. Its sales to dealers in other Member States, however, are zero-rated and the amount of output tax for which the appellant must account is negligible, being limited to the tax charged on such sales as it makes within the United Kingdom. It makes monthly VAT returns, and claims a refund – that is, payment to it by the Commissioners of the excess of the input tax it has incurred over the output tax for which it must account – each month.

The Commissioners "suspended" (their own word) the repayment claimed by the appellant in its November 2002 return, amounting to £3,737,702.48. The reason they gave was that it appeared to them that some of the appellant's supplies had come from what they described as a "non-legitimate" source. In January 2003, however, they made a payment of £3,316,833.43, without prejudice to enquiries they were pursuing. They have, so far, refused to pay the remaining £420,869.05. That sum represents the input tax incurred by the appellant in obtaining the telephones it sold in November 2002 (by three separate transactions) to a Dutch company, Paramax BV. Though accepting that there is no evidence of wrongdoing by the appellant or its associated company, the Commissioners maintain that the transactions are devoid of economic substance and are outside the scope of the VAT regime; in essence, they suspect that the transactions are part of what is commonly termed a "carousel" fraud. They have taken the same stance in relation to the appellant's returns for December 2002 and January 2003, for which periods they have hitherto refused to pay £166,934.40 and £345,142.68 respectively, although in each case the bulk of the claim has been met. The appellant now appeals, by separate notices of appeal, against those three refusals.

The sequence of events relating to the appellant's November 2002 claim was this: the return was submitted on or about 5 December; the Commissioners wrote to the appellant on 20 December saying that the entire repayment had been "suspended"; the appellant then instructed Deloitte & Touche, who made representations on its behalf; the Commissioners made a telephone call to Deloitte & Touche on 30 January 2003 but, in the absence of the person dealing with the matter, left a message that £3,316,833.43 was to be repaid and the balance withheld; there was a telephone conversation between those dealing with the matter for the appellant and the Commissioners respectively on the following day, when the figures were confirmed and reasons were given for the Commissioners' decision to pay only part of the sum claimed at that stage; there was a meeting between the parties on 7 February when those reasons were debated at evident length; and there then followed further correspondence and exchanges of e-mails. Among the correspondence were two letters identified specifically in the grounds of appeal relating to the first appeal; the relevant parts of those letters are set out later in this decision.

According to the grounds of appeal served with the appellant's various notices, the first appeal (dated 25 February 2003) has been made against "a decision of the Commissioners dated 30 January 2003, which decision was communicated to it verbally, through its advisors on said date and confirmed by letters of 14 and 21 February 2003". The second (dated 4 March 2003) is against "a decision of the Commissioners dated 4 February 2003, which decision was communicated to it verbally, through its advisors on said date. Written evidence of this decision is a bank statement showing partial repayment on 10 February 2003 of the appellant's entitlement to credit for input tax". The third appeal (also dated 4 March 2003) is in identical terms, save that the dates of communication and repayment differ. Each notice of appeal contains a second paragraph:

"2 The appellant contends that said decision is an assessment under section 73 of the Value Added Tax Act 1994, the Commissioners having decided that the appellant's returns were incomplete or incorrect."

The applications

I am asked to make a number of directions. First, the appellant asks that the three appeals be consolidated (although the word used in the applications is "conjoined"). That application is, in itself, uncontroversial, though whether it is appropriate to make such a direction is dependent upon the outcome of the respondents' applications. It also seeks a direction that each appeal be entertained without deposit or payment of the tax in dispute. The respondents seek a direction that each of the appeals be struck out. A further, formal, application, that the various applications be heard together, was not opposed. It is convenient to deal with the respondents' application first.

The strike-out application

Mr MacNab's argument in support of the application that the appeals be struck out was, in essence, that the appellant could not identify its purported appeals with any of the different "matters" against which an appeal may be brought, set out in the various paragraphs of section 83 of the Value Added Tax Act 1994, the provision by which jurisdiction is conferred on these tribunals. Superficially, the appeals appeared to come within paragraph (c): "the amount of any input tax which may be credited to a person"; if Mr Patchett-Joyce's argument (advanced in the context of the appellant's own applications) that the refusals to pay amounted to assessments, within section 73(1) of the Act, were right, the appellant might bring itself within paragraph (p): "an assessment – (i) under section 73(1) … in respect of a period for which the appellant has made a return under this Act … ". However, he said, whether one argued in favour of paragraph (c) or paragraph (p) was immaterial since an appeal could be brought only against a decision, and the respondents had as yet made no decision – although they had not yet paid the residual amounts of the claims, they had not said that they would not pay, merely that they were continuing with their enquiries.

Mr MacNab founded his argument primarily on a single sentence from the decision of the President of this tribunal in Marks & Spencer plc v Commissioners of Customs and Excise [1998] V & DR 93. At paragraph 9, after considering the competing arguments, he said: "Accordingly I interpret section 83 as requiring there to be a decision of the Commissioners as the necessary prerequisite to our jurisdiction." That interpretation (which Mr Patchett-Joyce did not challenge) was adopted in Colaingrove Ltd v Commissioners of Customs and Excise (2000, Decision No 16981), in which the chairman went on to say (at paragraph 10): "What constitutes a decision is however inevitably a matter of fact and degree. Although almost inconceivable, total silence in response to a repayment claim must constitute a refusal. Equally, repeated refusals to give a straight answer will amount to a refusal. It would be surprising if a trader's only remedy was to obtain an order from the High Court directing a formal decision. In my view such a refusal would amount to an appealable decision."

The earlier (14 February) letter referred to in the first notice of appeal, addressed to Deloitte & Touche, deals with a matter not material for the purposes of this application and then continues:

"You go on to say that, in respect of [the appellant], the vast majority of the supplies to which the input tax relates are not in dispute. This is not accepted and [it] has not been communicated to you that the majority of input tax involved in this case is not in dispute. I can, however, now confirm that on 30 January 2003 the Commissioners authorised a repayment of £3,316,833.43 in respect of the November claim without prejudice to ongoing enquiries into the transactions, their nature and history.

"This leaves an outstanding balance of £420,869.05. In this regard the Case Officer is meeting with our legal advisors today and we should be able to write to you very early next week as to whether that sum is still to be retained pending ongoing enquiries."

The later (21 February) letter, also addressed to Deloitte & Touche, excised of the irrelevant, reads:

"Following legal advice Customs consider that it remains appropriate for them to continue with their enquiries in relation to the transactions which formed the basis of, and which led to, your clients' November return. Such enquiries relate both to the amount already paid to your clients and the outstanding balance.

"Whilst there is no suggestion of fraud on the part of your clients, we are properly looking at the chain of transactions to determine whether they fall within the meaning of the 6^th Directive as 'economic activity' …".

Then, after describing the Commissioners' suspicions, the letter continues:

"… Taken as a whole we consider that the transactions do not appear to have the characteristics of a trading pattern within the scope of the Value Added Tax Act 1994.

"In order to progress the matter Customs is seeking further material within the UK and Europe to further clarify the nature of the series of the transactions which have occurred and the movement of specific goods. We hope to have obtained the relevant material my 20 March 2003, and intend to make a decision in relation to the outstanding balance on the November return, by 28 March 2003. However, any decision will be without prejudice to any ongoing enquiries to verify the VAT credit claimed in your clients' November return, and any ensuing action which may be considered appropriate."

The dates mentioned in the last of those paragraphs fell after these applications were heard (on 11 March) and I do not know what, if any, decision has been made and communicated; I have not been asked to deal with the matter otherwise than in relation to the position as it was at the time of the hearing.

As the second and third notices of appeal indicate, there was no comparable correspondence relating to the December and January claims. It was not suggested by Mr MacNab that different considerations applied to those claims and Mr Patchett-Joyce asked me to treat the payment of part only of the claim as evidence of a decision not to pay the remainder, despite the absence of supporting letters.

Mr MacNab contended that neither of the letters could properly be considered to contain a decision, and that no decision could be inferred from the mere fact that some, but not all, of a repayment claim had been met. He referred me to the decision of Otton J in R v Commissioners of Customs and Excise, ex parte Strangewood Ltd [1987] STC 502. In that case, the taxpayer sought a repayment of input tax (or, more accurately, what it maintained was input tax) which the Commissioners withheld pending their enquiries into the genuineness of the exports which the taxpayer claimed to have made, and which formed the basis of the input tax repayment it sought. The taxpayer's claim that the supply, if genuine, was zero-rated depended on section 16(6) of the Value Added Tax Act 1983, which provided that :

"A supply of goods is zero-rated by virtue of this subsection if the Commissioners are satisfied that the person supplying the goods–

(a) has exported them … "

At [1987] STC 502 at 505 the judge said:

"It is abundantly clear to me from [a Customs officer's] affidavit that the commissioners are not yet satisfied that the goods in question have been exported. It follows that unless and until the commissioners are so satisfied the goods cannot be zero-rated. … Thus the … condition is not fulfilled."

The position was the same here: the Commissioners had not yet determined whether the input tax claimed truly was input tax; and until they had done so, and had come to a firm conclusion, it could not be said that they had made a decision, properly so-called. All that they had done, so far as the November claim was concerned, was to indicate that they were making their enquiries and would come to a decision in due course, while they had done even less in respect of the December and January claims. It did not advance the matter to claim that the Commissioners had made an assessment; since the making of an assessment necessarily involved the making of a decision – section 73 requires an exercise of judgment – the question remained whether the Commissioners had made a decision. For this purpose it was immaterial whether the appeals potentially came within paragraph (p) rather than paragraph (c).

Mr Patchett-Joyce argued that the mere fact that partial payments had been made necessarily implied a decision – that some of the amount claimed should be paid, and some not. That fact should be considered against the background of the legislation: Articles 17 and 18(4) of the Sixth VAT Directive (77/388/EEC) and section 25(2) and (3) of the 1994 Act. Those subsections provided that a taxable person "is entitled" to offset his input tax against his output tax, and that, if the input tax exceeds the output tax, "the amount of the excess shall be paid to the taxable person by the Commissioners". Those provisions were mandatory, and while he was willing to acknowledge that the Commissioners were entitled to make reasonable enquiries and to refuse to meet claims which were not genuine, the simple fact that they had complied with section 25(3) only in respect of part of the amount claimed necessarily meant that a decision to comply only to a certain extent had been taken.

Mr Gardner supported that argument by reliance on Article 1 of the First Protocol to the European Convention on Human Rights, which prohibits the deprivation of a person of his rights – of which the right to an input tax repayment was one – save in defined circumstances. Those circumstances might or might not arise here (though he contended they did not) but in either case, the Commissioners had deprived the appellant of its right to prompt and full repayment and it must follow that they had made a decision to do so.

It seems to me that it is necessary, first, to break down the Commissioners' approach into its two component parts; and, secondly, to analyse what the President said in Marks & Spencer plc in the context of section 83.

The Commissioners' approach depends upon two propositions. There is, first, the issue of fact – the "nature of the series of transactions", as it is put in their second letter. Secondly there is an issue of law – whether, if the Commissioners are correct in their suspicions about the nature of the transactions, they are also correct in their view that such transactions are not, as a matter of law, within the scope of the 1994 Act.

If the only question were the issue of fact the appellant would, I think, be in some difficulty. The Commissioners have made it clear that they are making enquiries into the factual background of the claim; on that point there seems to me to be little difference of substance between this case and ex parte Strangewood Ltd. Even though, there, the test was overtly subjective and here it is objective, the reality in each case is that it will be the Commissioners' opinion of the facts which leads to their ultimate decision. Both Mr Patchett-Joyce and Mr Gardner commented that a failure, or refusal, to make a decision itself amounts to the making of a decision, if only a decision not to decide. That is, in essence, what was said in Colaingrove. Of course, the Commissioners must be allowed a reasonable time to make enquiries, and there is provision in the legislation for that eventuality, relieving the Commissioners of the obligation to pay repayment supplement in defined circumstances: see section 79(3) of the 1994 Act and the VAT Regulations 1995 (SI 1995/2518) regs 198,199). Given the nature of the enquiries described in the letter of 21 February, and the need to direct some of those enquiries to other Member States, it is difficult to say that a reasonable time for making those enquiries had expired by the time the first appeal was lodged only four days later. The argument is, plainly, stronger still in relation to the second and third appeals.

However, it is in my view clear that the Commissioners have come to a concluded view about the law. They are not proposing to ascertain the facts, and then consider the law; if the transactions are as they suspect, the input tax will be disallowed, and if not, it will be allowed. The question is therefore whether that is a sufficient decision for the purposes of section 83.

In the Marks & Spencer case to which I have already referred (in which the taxpayer sought repayment of incorrectly paid output tax), the President went on to say:

"A decision, in my view, is an official act by the customs authorities pertaining to VAT statutory provisions that gives a ruling in a particular case and has legal effect upon the person at whom it is directed. Here Marks & Spencer made formal claims to have the tax repaid to them. Until the claims were dealt with by acceptance or refusal the legal position of Marks & Spencer remained unchanged, save that they were entitled to have their claims resolved. Once the Commissioners have taken action by allowing or refusing the claim in question, Marks & Spencer's position will have changed. In the former instance they become creditors of the Commissioners; in the latter situation they are denied the status of creditors and are left with the legal remedy of appealing."

I respectfully agree with the thrust of that comment and its indication that a decision must have legal effect, but it does not entirely answer the question with which I must deal, since its substitution of "ruling" for "decision" merely leads to the further question, does the refusal to pay the entire amount claimed amount to a ruling? It is for that reason that I think it is necessary to look more closely at section 83. Since it is the section by which jurisdiction is conferred on the tribunal, it seems to me that the essential characteristic of a decision which comes within the section must be that it identifies an issue on which the tribunal can adjudicate. That may seem a statement of the obvious, but it explains the distinction between this case and ex parte Strangewood. There, no-one doubted what the law was and the tribunal would not have been asked to adjudicate on any issue of law; what mattered was whether the Commissioners were satisfied, on reasonable enquiry, that the factual basis for the making of the claim was established. Although the factual issue in this case is unresolved (or, at least, was unresolved at the time of the hearing) that is not the case so far as the Commissioners' view of the law is concerned. That view is susceptible of review by the tribunal, if necessary as a preliminary issue, and I am therefore satisfied that the decision not to pay immediately, analysed as I have done, amounts to a sufficient decision to afford jurisdiction to the tribunal. Accordingly I dismiss the respondents' applications that the appeals be struck out.

Even if I am wrong in that conclusion I intend to adopt the pragmatic approach of the chairman in Colaingrove, with which I entirely agree. He commented that appeals should not lightly be struck out, and the more so where the consequence of doing so, apart from the waste of time and expense, would be the lodging of another appeal raising precisely the same issues. That argument has even greater force following the coming into effect of the Human Rights Act 1998 and the incorporation in United Kingdom law of Article 6 of the Convention.

Before leaving this topic I should mention a subsidiary point raised by Mr MacNab in his skeleton argument, that the second and third appeals did not comply with rule 3(2)(c) and (d) of the Value Added Tax Tribunals Rules 1986 (SI 1986/590), as amended, which require a notice of appeal to state the date of any document containing the disputed decision and the address to which it was sent, and to have a copy of that document attached. Since there is no written decision in respect of these appeals, the appellant cannot comply with these requirements. Mr MacNab, I am glad to say, did not pursue the point with any enthusiasm, since to my mind it is wholly without merit. It would be manifestly unfair if the Commissioners were able to frustrate the appeal process by communicating decisions only orally – a practice which, of course, they do not adopt. It could be said that an appellant should be excused automatically the need to comply with an impossible requirement but if, technically, there is an irregularity I have no hesitation in exercising the power conferred by rule 19(5) of waiving the breach.

The hardship application

The starting point for this application is section 84(3) of the 1994 Act:

"Where the appeal is against a decision with respect to any of the matters mentioned in section 83(b), (n), (p) or (q) it shall not be entertained unless—

(a) the amount which the Commissioners have determined to be payable as VAT has been paid or deposited with them; or

(b) on being satisfied that the appellant would otherwise suffer hardship the Commissioners agree or the tribunal decides that it should be entertained notwithstanding that that amount has not been so paid or deposited."

The ordinary rule therefore is that an appellant must pay any amount assessed to be due from him before his appeal can be heard – a measure designed to prevent abuse of the appeal system as a device to defer or avoid payment – but the requirement can be waived where its enforcement would cause hardship to the appellant. In practice, the subsection has been interpreted fairly liberally, so that it does not operate as a fetter on the right of appeal. There is a similar provision (section 84(3A)) which applies to recovery assessments within section 78A(5).

The first hurdle facing the appellant is that the Commissioners' decision in this case does not – at least at first sight – come within any of paragraphs (b), (n), (p) or (q) of section 83, and it does not amount to a recovery assessment. The second hurdle is that the appellant is not being required to pay or deposit any tax; it is being required to forego a repayment. There is an obvious difference between requiring a payment, and withholding a repayment.

It is at this point that Mr Patchett-Joyce's argument that the Commissioners' decision in respect of each of the three months for which part of its input tax claim has been withheld amounts to an assessment comes into play. Although, superficially, this was an appeal which came within paragraph (c) of section 83, being one relating to "the amount of any input tax which may be credited to a person", in substance, he maintained, the Commissioners were making an assessment within section 73(1):

"Where any person has failed to make any returns required under this Act … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."

The appellant had put in its returns for the three relevant periods and the Commissioners had decided that they were incorrect in that in each case too great a credit for input tax had been claimed. Such a conclusion was no less an assessment than a determination that a trader owed more tax – that is, was liable to make a greater payment to the Commissioners than his return suggested. Assessments made under section 73(1) come within paragraph (p) of section 83 (as was common ground) and thus section 84(3) was engaged. If that argument is correct, the appellant has overcome the first of the hurdles.

On the second issue, that is whether section 84(3) could have any application to an appeal in which the appellant was not being required to make an immediate payment, the appellant relied upon what Mr Patchett-Joyce maintained were its legitimate expectations (an argument developed by Mr Gardner by reference to the Human Rights Convention) and upon the interpretation I was urged to place upon rule 19(3) of the Tribunal Rules. That sub-rule reads, so far as relevant, as follows:

" … a tribunal may of its own motion or on the application of a party to an appeal or application or other person interested give or make any direction as to the conduct of or as to any matter or thing in connection with the appeal or application which it may think necessary or expedient to ensure the speedy and just determination of the appeal …".

The appellant's legitimate expectations stemmed from a Memorandum of Understanding entered into between the Commissioners and various traders – including the appellant and its associated company – engaged in the mobile telephone industry and a Code of Conduct with which the Memorandum required such traders to comply. The purpose of the Memorandum was to formalise cooperation between the Commissioners and such traders in order that fraud could be tackled and legitimate traders protected. The appellant had complied with the Code and it was entitled to assume that in return its claims for input tax credit would be met. The associated company had accounted for output tax on its sales to the appellant and had paid that output tax, less the input tax for which it was entitled to credit, to the Commissioners who had accepted it; if they were to treat the output tax accounted for by the associated company as true VAT, the appellant must have a legitimate expectation that they would treat the same payments, input tax in its hands, in the same way.

The Human Rights Convention, by Article 6(1), prescribes that a person is entitled to a fair hearing for the determination of his civil rights and obligations within a reasonable time and, by Article 1 of the First Protocol, protects that person against deprivation of his possessions save in defined circumstances. In Matthews v Ministry of Defence [2003] 2 WLR 435 at 443 (paragraph 16) Lord Bingham said "where a right in domestic law exists, any measure restricting its effective exercise must be justified"; and, in the same case, at p 453 (paragraph 53) Lord Hope said "What article 6(1) seeks to do is to protect the individual against anything which restricts or impairs his access to the courts for the determination of a civil right whose existence is at least arguable".

It is well established that the provisions of the Sixth VAT Directive (and in particular Articles 17 and 18, relating to the right to deduct) have direct effect: see Garage Molenheide BVBA v Belgium [1998] STC 126; and, notwithstanding Ferrazzini v Italy [2001] STC 1314 (a decision of the European Court of Human Rights whose applicability in the context of VAT and the relevant European law on the topic has been doubted – see, in particular, Ali & Begum v Commissioners of Customs and Excise [2002] V & DR 71 at 90, paragraph 60) a pecuniary right, such as that to which the appellant was, or at least claimed to be, entitled under Article 18(4) of the Sixth Directive and section 25(3) of the 1994 Act, is a civil right for the purposes of the Human Rights Convention. In Éditions Périscope v France (1992) 14 EHRR 597 at 613 the Court said:

"40 The Court notes that the subject-matter of the applicant's action was 'pecuniary' in nature and that the action was founded on an alleged infringement of right which were likewise pecuniary rights. The right in question was therefore a 'civil right', notwithstanding the origin of the dispute and the fact that the administrative courts had jurisdiction."

Similarly, in National Provincial Building Society and others v United Kingdom (1997) 25 EHRR 127, the Court assumed for the purposes of its decision that a claim for restitution of (it was argued) overpaid tax was a "possession" within the meaning of Article 1 of the First Protocol to the Convention; if so (see paragraphs 97 to 99 of the judgment at pp 176-177) it fell within Article 6 of the Convention, as a civil (or private law) right.

Section 3(1) of the Human Rights Act provides that "So far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights." That provision plainly applies to the tribunal rules, which are subordinate legislation, and the tribunal must give effect to the rules in accordance with that principle. So much I take to be entirely uncontroversial.

The proper approach, therefore, Mr Patchett-Joyce continued, must be to apply rule 19(3) purposively (since what was in question was the exercise of a right conferred by a Directive: see, for example, Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) [1990] ECR I-4135, especially at p 4159, paragraph 8) and in a way which protected the appellant's rights. The Commissioners did not go so far as to deny that the appellant had even an arguable right and therefore (as Lord Hope had indicated in Matthews v Ministry of Defence) rule 19(3) should not be restrictively interpreted in a manner which impeded the appellant's right to receive the repayment to which it was entitled, did not respect the fundamental principle that a taxpayer should pay only the correct amount of tax (see Coleman and others v Commissioners of Customs and Excise [1999] V & DR 133 at 144, paragraph 36), and operated as a fetter on a taxpayer's access to the tribunal.

In Garage Molenheide the Advocate General said (at p 146, paragraph 48) "that Community law should not impose an inflexible need for the provision of a full substantive review of the facts and merits of the claim of the fiscal authority at the stage of judicial control of the withholding decision" and (at paragraph 55(3), p 148):

"VAT retention measures must, however, not go beyond what is strictly necessary to protect the fiscal interests of the member states in ensuring the effective collection of VAT and national courts must ensure that a taxable person whose exercise of the right to deduct conferred by art 18(4) of the Sixth Directive is affected by such retention measures is guaranteed effective procedural safeguards prior to the adoption of the measure, which must include, inter alia, reasonable notice of the reasons for the proposed retention and the opportunity of seeking effective judicial control of the measure after its adoption by the VAT administration."

These observations, Mr Patchett-Joyce maintained, were reflected in the Court's conclusions, which also emphasised the need to respect the principle that measures taken by the fiscal authorities must be proportional in that they go no further than is strictly necessary to achieve their objective. Similarly, in National Provincial Building Society, the Court said (at p 171, paragraph 80):

"According to the Court's well-established case law, an interference, including one resulting from a measure to secure the payment of taxes, must strike a 'fair balance' between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must therefore be a reasonable relationship of proportionality between the means employed and the aims pursued."

The principle of proportionality was offended here because the further information the respondents were seeking did not relate to the appellant, or even to its associated company, but to other traders and their activities, matters of which the appellant had no knowledge and over which it could exercise no control. The respondents' refusal to meet its claim must be an unreasonable and disproportionate interference with its rights, the more so when, at the same time, the respondents were treating the output tax for which the associated company had accounted as, or as if it were, VAT. The tribunal should therefore make "directions as to the Commissioners' continued withholding of moneys lawfully due" to the appellant, as its skeleton argument put it. In quite what terms any such direction might be put was left open for further debate.

Mr MacNab's response on this issue rested on the wording of section 84(3). It was, he said, plainly intended to cover only those cases in which a sum was due (absent a successful appeal) from the appellant to the Commissioners; it could not be construed to cover a situation such as the present where the issue was the amount of the appellant's input tax credit entitlement, and where it was not being required to pay any sum at all as the condition of having its appeal entertained. There simply was no mechanism by which the tribunal, in whatever guise, could make a direction which had the effect of compelling the Commissioners to make a payment to a trader. That was so even at the conclusion of an appeal which the tribunal decided in the appellant's favour. Whereas section 87 of the 1994 Act provided for the enforcement of tribunal decisions in the Commissioners' favour, there was no corresponding provision by which a trader could enforce a decision in his favour. In practice the Commissioners respected tribunal decisions and complied with them, but there was no provision within the 1994 Act, or elsewhere, which compelled them to do so. Thus, even if I were to determine that there was merit in the appellant's contentions, there was no jurisdiction to make the directions sought.

That lacuna could not be filled by resort to rule 19(3). Section 3 of the Human Rights Act 1998, on which Mr Gardner had placed some reliance, allowed the tribunal to interpret the rule in a manner consistent with Convention rights; it did not permit it to invent a jurisdiction which it did not have. The rule as it stood could not be interpreted in a way which would allow the tribunal to compel the respondents to make a payment to the appellant. Nor, Mr MacNab continued, could the appellant draw any assistance before the tribunal from what was said by the Court of Justice in R v Secretary of State for Transport ex parte Factortame Ltd (Case C-213/89) [1991] 1 AC 603 at 644 (paragraph 23): "Community law must be interpreted as meaning that a national court which, in a case before it concerning Community law, considers that the sole obstacle which precludes it from granting interim relief is a rule of national law must set aside that rule." That observation had to be read in the light of what the European Court of Human Rights said in National Provincial Building Society, immediately following the remark to which Mr Patchett-Joyce had referred ((1997) 25 EHRR 127 at 171, paragraph 80):

"Furthermore, in determining whether this requirement has been met, it is recognised that a Contracting State, not least when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the Court will respect the legislature's assessment in such matters unless it is devoid of reasonable foundation."

It could not be said that a measure enabling a fiscal authority to make reasonable enquiries into the validity of a claim was, of itself, disproportionate; it came within the Member State's margin of appreciation. So much was apparent from Garage Molenheide, in which the Court of Justice was required to consider whether protective measures provided for by Belgian legislation were incompatible with Article 18(4) of the Sixth Directive. At [1998] STC 93 the Court (which did not go so far as the Advocate General) said:

"45 As regards, next, the effects which the principle of proportionality may have in this context, it must be emphasised that whilst the member states may, in principle, adopt such measures, it is nevertheless the case that those measures are liable to have an impact on the national authorities' obligation to make an immediate refund under art 18(4) of the Sixth Directive.

"46 Thus, in accordance with the principle of proportionality, the member states must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and principles laid down by the relevant Community legislation.

"47 Accordingly, whilst it is legitimate for the measures adopted by the member states to seek to preserve the rights of the treasury as effectively as possible, they must not go further than is necessary for that purpose. They may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation."

There was no support there for the proposition that the fiscal authority must, regardless, make an input tax repayment immediately it was claimed, and it could not be said that the Commissioners' attitude in this case was "systematically undermining the right to deduct VAT"; it was no more than a reasonable measure adopted for the determination of the genuineness of a claim. Even if there was some support in Garage Molenheide for the argument that provisions of domestic law incompatible with the Directive should be struck down, or disregarded (see, for example, paragraph 51 of the judgment, at p 94) that argument could not be extended to allow for the creation of a power in the tribunal which did not exist. Nor could it be said that the appellant's legitimate expectation that its rights would be respected allowed the invention of a jurisdiction which had not been conferred on the tribunal.

Mr MacNab also contended that Ferrazzini, following as it did the similar conclusion in Schouten and Meldrum v Netherlands (1994) 19 EHRR 432, was correctly decided and, so far as it concluded that claims such as this did give rise to civil right within Article 6(1) of the Convention, Ali & Begum was wrong. Accordingly the appellant could not rely upon Article 6(1) and section 3 of the 1998 Act, and use them to support its contention that rule 19(3) should be interpreted widely.

If the tribunal did not have the power to grant final relief – as was the case here, as he maintained he had demonstrated – it could not grant interim relief of the same character. The tribunal's power, at the conclusion of an appeal, was limited to the determination of the amount due to or from the appellant; it did not extend to the making of directions for the implementation of that determination. That was so even when the tribunal's decision was in the Commissioners' favour; though section 87 provided for the enforcement of such decisions, it did so by requiring the Commissioners to take action in the High Court. The tribunal's task was limited to the determination of the taxpayer's liability or entitlement, and went no further.

Mr MacNab did not address me specifically on the appellant's argument that the Commissioners' decisions amounted to assessments. I have, however, taken it that Mr Patchett-Joyce's suggestion is not conceded. In my view it is incorrect. Section 73 of the 1994 Act provides for the assessment and recovery of money which has been underpaid by a trader or overpaid by the Commissioners to a trader – by way of excess input tax credit, for example. It deals exclusively with sums payable by the trader to the Commissioners, and it is, in my view, of no application to a case where it is the trader who is seeking a payment from the Commissioners. Input tax credits, in particular, are dealt with at sections 25 and 26, which provide (with the VAT Regulations) for the mechanics by which such claims are handled. There is a defined route of appeal against decisions made by the Commissioners under those provisions, set out at paragraphs 83(c) and (e). There is in my view a clear legislative contrast between those situations in which the taxpayer is said to owe money, which give rise to assessments, and those in which the taxpayer claims the Commissioners owe money; these do not lead to assessments, but to a right of appeal if the claim is not met. In my judgment it is a distortion of language as well as of the legislation to maintain that the Commissioners' decisions in this case amount to assessments. In principle, therefore, the appellant cannot bring itself within paragraph 83(p). That conclusion, however, does not dispose of its applications.

My view of rule 19(3) is that it cannot be construed, as it stands, so as to confer on the tribunal the power to direct that an input tax claim should be met by the Commissioners. The phrase "any matter or thing in connection with the appeal" must, in my judgment, mean matters or things relevant to the prosecution of the appeal. That is clearly the context in which the phrase is used. In my view it would require much clearer words if the rule were to be construed so as to confer on the tribunal a power to grant interim relief, or to make some direction for the enforcement of its decisions. I turn, therefore, to consider whether, notwithstanding the words used, that interpretation is nevertheless open to me.

I share the view expressed in Ali & Begum that Ferrazzini does not sit easily with United Kingdom concepts of what constitute civil rights. At paragraph 25 of the decision ([2002] V & DR 71 at 81) the President said: "… the tax relationship between taxpayer and the State may and frequently will give rise to a civil right and claim against the State; tax recovery rights of 'repayment traders' are an example", and he went on to refer to National and Provincial Building Society v United Kingdom in which the European Court of Human Rights had itself regarded rights to repayments of tax as civil. In addition, I find it impossible to reconcile Ferrazzini with the comment made by the Court of Justice in Garage Molenheide – a case also dealing with the right of deduction – ([1998] STC 126 at 157, paragraph 55): "… in considering whether the adverse effect on the right of deduction is proportionate, the availability of effective judicial review is necessary both in the proceedings on the substance of the case and in those before the judge hearing attachment proceedings." I conclude that the appellant is entitled to the protection of Article 6(1) in this case and that, in principle, it does have the right to effective judicial scrutiny of the decision to withhold part of its claim.

That conclusion does not, however, lead inevitably to the further conclusion that this tribunal has the jurisdiction to undertake that scrutiny, still less that it has the power to direct repayment if it considers that the appropriate course. However, I have been considerably troubled by paragraphs 56 and 57 of the judgment in Garage Molenheide:

"56 Consequently, provisions of laws or regulations which would prevent the judge hearing attachment proceedings from lifting in whole or in part the retention of the refundable VAT balance, even though there is evidence before him which would prima facie justify the conclusion that the findings of the official reports drawn up by the administrative authority were incorrect, should be regarded as going further than is necessary in order to ensure effective recovery and would adversely affect to a disproportionate extent the right of deduction.

"57 Similarly, provisions of laws or regulations which would make it impossible for the court adjudicating on the substance of the case to lift in whole or in part the retention of the refundable VAT balance before the decision on the substance of the case becomes definitive would be disproportionate."

That passage certainly supports the proposition that this tribunal, as the body which will adjudicate on the substance of the case, should have the power to suspend the retention pending that adjudication. Although Mr Patchett-Joyce expressly eschewed the argument, I have also been somewhat concerned by the difference between the treatment of a payment trader who, if hardship is established, may keep and use the disputed tax until his appeal is concluded, and that of the repayment trader who, at least before the tribunal, has (if Mr MacNab is right) no means of obtaining and using the tax for the purposes of his business until his appeal is heard, whatever his level of hardship might be.

However, I do not think that either of these arguments leads to the conclusion that the tribunal can assume the jurisdiction to do as the appellant asks. First, I am satisfied that Mr MacNab is correct in his argument that the tribunal does not have the power to direct repayment after a successful appeal and consequently cannot have that power at an interlocutory stage. Secondly, there is in my view a distinction to be drawn between those cases where a legislative provision precludes the exercise of a power, as in Garage Molenheide, but with the inference that, absent that provision, it would have had that power, and the position in this case, where the tribunal (entirely a creature of statute) has not been granted the power at all. Disregarding, or setting aside, a bar may well be a legitimate course; for this tribunal to assume a jurisdiction where none exists is, in my judgment, not permissible whether one looks for support to Article 6(1) of the Convention, to the direct effect of the Sixth Directive and the explanation of it given by the Court of Justice in Garage Molenheide, to the appellant's legitimate expectations or to the principle of proportionality

This tribunal has very limited supervisory jurisdiction, and in closely defined circumstances only. The power of judicial review, which might allow the court to make a direction of the type sought by the appellant, resides exclusively in the High Court: see Commissioners of Customs and Excise v J H Corbitt (Numismatists) Ltd [1980] STC 231 at 239-240, per Lord Lane. For reasons of expense, if for no other, that is not always the most attractive course for a person aggrieved by an administrative decision, but it is nevertheless an effective remedy in the Article 6 sense and, in my judgment, it is the course the appellant should have adopted in this case.

I have concluded that the appellant cannot bring itself within paragraph 83(p) of the 1994 Act, since the Commissioners have not made an assessment; and that even if it could, this tribunal does not have the jurisdiction to make the directions it seeks. Accordingly I dismiss its hardship applications in principle.

In case I am found elsewhere to have been wrong in that conclusion, I turn to examine the evidence of hardship which was available to me. It consisted of a statement made by the appellant's managing director, Nick Greer. Mr MacNab did not challenge the statement, and merely commented that the evidence of hardship was "thin". Mr Greer explains in his statement that the appellant had a factoring arrangement with its bankers, which allowed it to access, by means of a variable loan, 85% of the amount due to it by way of VAT repayment. There was an additional condition that each month's repayment claim must be met before the appellant was permitted to begin drawing against the next month's accumulating entitlement; it was correspondingly in its interests to claim its repayments as quickly as possible.

The effect of the Commissioners' refusal to meet these claims in full is that the bank has withdrawn the facility altogether. The appellant has not ceased trading, but, as Mr Greer explains, the need to wait until each repayment has been received has had an adverse effect on the appellant's cash flow and its ability to trade; its level of business has reduced substantially. I do not consider it realistic to argue that the appellant should simply look elsewhere for funding; if its bankers will not provide funds, they are unlikely to be readily available from other sources, at least on acceptable terms. I am satisfied from Mr Greer's evidence that the appellant is experiencing significant trading difficulties, that they are a direct consequence of the Commissioners' refusal to meet its repayment claims in full, and that hardship is established.

Conclusion

The directions I make are these:

1 The Commissioners' applications to strike out the appeals are dismissed.

2 The three appeals shall be consolidated under number MAN/03/0157.

3 The technical irregularity that the second and third notices of appeal do not identify, and are not accompanied by, any document containing the disputed decision is waived.

4 The parties have permission to apply for a further direction in respect of the costs of this hearing, either at this stage or, if they prefer, at the conclusion of the substantive appeal.

I make no direction in respect of the appellant's hardship application, which fails, even though I accept that hardship is established. Since I was not addressed on the matter, I also make no further directions for the future conduct of the appeal.

COLIN BISHOPP

CHAIRMAN

RELEASE DATE: 17 April 2003

MAN/02/534