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Cite as: [2005] UKVAT V19398

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Bristol Street Group Ltd v Revenue and Customs [2005] UKVAT V19398 (23 December 2005)

19398

Value added tax – output tax recovery – S.80 VATA 1994 – whether Appellant able to recover overpaid tax for 23 year period outside the three year time period on supplies of demonstrator cars – no claim made for 3 year period – whether Appellant influenced by possible effect of partial exemption – whether the right question is whether BSG 'would have' or whether 'could have' made such a claim had there been an appropriate transitional period – Conde Nast Publications Ltd v HMRC considered – appeal allowed

LONDON TRIBUNAL CENTRE

BRISTOL STREET GROUP LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: MISS J C GORT (Chairman)

MR S DAS LLM, ACIS

Sitting in public in London on 24, 25 and 26 October 2005

Mr J Peacock QC of counsel instructed by Deloittes for BSG

Miss P Whipple of counsel, instructed by the Solicitor's office for the Respondents

© CROWN COPYRIGHT 2005

DECISION

This is an appeal against a decision of the Commissioners contained in a letter dated 9 July 2004 not to repay overpaid output tax. The Bristol Street Group Ltd ("BSG") appeals as a representative member on behalf of a number of companies within its corporate structure, all of which were party to a claim under section 80 of the VAT Act 1994 ("the Act") submitted by way of voluntary disclosure on 30 June 2003 and subsequently amended by a letter dated 27 April 2004. This claim related to overpayments of output tax during the period 1 April 1973 to 30 June 1997 in the amount of £7,571,776.35 plus statutory interest. The claim was rejected under section 80(4) of the Act on the grounds that the amounts in question were paid more than three years before the claim was made.

At the outset of the hearing Miss Whipple had applied for the Tribunal to adjourn the case, either in its entirety or for the Tribunal to decide the factual issue and adjourn the legal argument until after the appeal in the case of Condé Nast, which is to be heard in the Court of Appeal on 23-25 January 2006, had been decided, and until after the judgment of the Court of Appeal in the case of Fleming had been handed down. Because it was not certain that the Court of Appeal would deal with the specific issue in this case in either the case of Condé Nast, or in the case of Fleming, it was decided to hear this appeal in full, but to adjourn a decision on the legal matter until the decision in Fleming was handed down by the Court of Appeal, in the expectation that that would take place some three weeks after the conclusion of the present case. In the event that did not happen, within that time period it was decided that the Tribunal would proceed to determine this appeal in full, which it now does.

The background

BSG is a motor retail group which sells cars to the UK consumer market from various sites throughout the UK. The original business dates from the 1930s and was, prior to a management buy-out in 1997, a part of a larger group headed by Britax International Ltd. As part of its car retail operations BSG operates demonstrator cars and courtesy cars for use in the business, which are also available for private use by employees.

Prior to April 1996 there was no VAT registered group, only a series of individual companies within a corporate group, all of whom were separately registered for VAT.

Until 1 December 1999, BSG blocked input tax recovery on the demonstrator vehicles that were used by employees and accounted for output tax by reference to the margin it made on the sale of such vehicles in accordance with the then law in the UK. Significant profits were often achieved on the sales of demonstrator cars by BSG and output tax had to be accounted for thereon. The UK VAT system was, in this respect, inconsistent with community law.

The legislative background

Prior to 18 July 1996, if a trader discovered that he had paid more VAT than he ought to have, he had six years from the date on which the overpayment was made or six years from the date on which he discovered his error in which to make a claim to recover it. Where claims were made within six years of the date of discovery of an overpayment the trader could go back to the inception of the tax in 1973.

On 18 July 1996, the then Paymaster General announced that the time limit for reclaiming overpayments of VAT was to be reduced to three years. This meant that amounts overpaid more than three years before the date on which a claim was made could not be recovered. This change was applied to all claims made on or after 18 July 1996 and all claims which had been made before that date but which had not yet been processed and paid. The capping legislation is contained in the section 80 of the Act. This change was enacted on 4 December 1996 by a resolution passed by Parliament under the Provisional Collection of Taxes Act 1968, which deemed the change to have had effect from 18 July 1996.

The manner in which this three year time limit was introduced, by the Finance Act 1997 section 47(2), was challenged in the courts by Marks & Spencer Plc and, during the course of this litigation, the Court of Appeal sought the guidance of the ECJ on whether the manner of the introduction of the three-year time limit was contrary to the principles of Community law. As a result of this litigation, Business Brief 22/02 was published on 5 August 2002 which introduced a retrospective transitional period from 4 December 1996 to 31 March 1997. Subsequently Business Brief 27/02 was published which extended the transitional period by three months until 30 June 1997. Customs invited all taxpayers to submit claims to their local VAT offices 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; in all cases the overpayments of VAT were made before 4 December 1996.

On 25 June 1997 the European Court of Justice delivered a judgment in case C-45/95 EC Commission v Italian Republic [1997] STC 1062 ("the Italian Republic case"). This had implications for the United Kingdom's treatment of the disposal of cars by a taxable person which had been subject to an input tax block by virtue of section 25(7) of the 1994 Act. It became clear that sales of cars on which the recovery of input tax had been blocked should be treated as not giving rise to an obligation to account for output tax. Business Brief 23/97 was published on 10 October 1997 inviting traders to make claims for overpaid VAT. As a result of the Italian Republic case, the Commissioners believed that any claim might be subject to the Partial Exemption Regulations. Subsequently, following the case of the Commissioners v JDL Ltd [2002] STC 1, it was established that the sale of ex-demonstrator cars should be excluded from the Partial Exemption calculations.

In Business Brief 23/97 it was stated:

"Customs' interpretation of the ECJ judgment is that the Sixth Directive requires the onward sale of input tax blocked goods to be treated as exempt, regardless of whether a profit is made. The Commissioners are still considering the full implications of the judgment and what changes to United Kingdom legislation may be necessary.

"The Commissioners will accept claims for refunded tax that have been overpaid … refunds will be due to those businesses that have accounted for output tax on input tax blocked cars which they have sold at a profit. Such refunds will be subject to the three-year cap on VAT claims."

Motor traders were given the choice by the Commissioners of continuing to treat the ex-demonstrator cars as taxable and account for VAT under the margin scheme, or treating them as exempt with the consequential impact on the trader's input tax position. BSG pursued the former course and treated the supply of its ex-demonstrator models as taxable, and accounted for tax under the margin scheme. BSG made no claim for the VAT overpaid at that time.

The Commissioners' ability to cap claims to recover overpaid VAT to overpayments made within the three years preceding the claim was challenged in the European Court in the case C-62/00 Marks & Spencer Plc [2002] STC 1036 and in the High Court in Condé Nast Publications Ltd v HMRC [2005] STC 1327, it was held that this was limited by certain principles of Community law.

No changes were made to the UK legislation up to 30 November 1999. However the option given to the traders in the Business Brief 23/97 (see above) continued until 28 February 2000, albeit that certain changes to the applicable régime were made with effect from 1 December 1999 (changes as to the circumstances in which input tax was blocked).

In this period BSG continued to operate the margin scheme until 1 December 1999. From 1 December 1999 BSG opted to treat all its demonstrator cars as exempt. By a letter dated 30 June 2003 BSG claimed to recover overpayments of output tax for the period 1 April 1973 until 30 June 1997. By a letter dated 9 July 2004 Customs rejected the claim on the basis that BSG would not have made a claim in 1997 had it been able to do so in a transitional period.

Following the cases of Marks & Spencer and Condé Nast (supra) it became clear that there should have been a transitional period at the time of the introduction of the three-year cap. Such a period had in certain circumstances been provided by Customs in their Business Briefs 22/02 and 27/02. This retrospective transitional period ran from 4 December 1996 to (eventually) 30 June 1997 and taxpayers were given until 30 June 2003 to make the claims that they could have made in 1997 had there been a transitional period.

The law

Prior to new legislation being brought into force on 1 December 1999 (amendment to SI 1992/3222 by SI 1999/2930), section 25(7) of the Act applied a block on input tax recovery to most business motorcars which are capable of private use. When a taxable person eventually sold a car on which they could not recover input tax as a result of this block, the sale was subject to a compulsory input tax margin scheme (Article 7(4) VAT (Input Tax) Order 1992, SI No.3222).

The effect of this provision was that, if a car was sold at a profit, VAT was accounted for on the profit margin only. If however, the car was sold at a loss then the sale was treated as being outside the scope of tax and no VAT was chargeable.

The issue of partial exemption depended upon the Customs' view that the sales of demonstrators were part of exempt sales and should not be treated as sales of capital assets (Reg. 101(3) VAT Regulations 1995). This was resolved in CCE v JDL Ltd [2002] STC 1 when the High Court upheld the Tribunal's decision that demonstrators were capital assets and their sale had no impact on the partial exemption calculation.

Following the Italian Republic case (supra) the UK law was changed with effect from 1 December 1999 by virtue of SI 1999/2932 and from that date all such sales are exempt from VAT.

On 10 October 1997 the Commissioners issued Business Brief 23/97 referred to above. On 5 August 2002 the Commissioners published Business Brief 22/2002, in which they set out how it was intended to give effect to the judgment of the ECJ in the case of Marks & Spencer (supra).

On 7 October 2002 the Commissioners issued Business Brief 27/2002 which extended the transitional period set out in Business Brief 22/2002 by three months and was deemed to have run from 4 December 1996 to 30 June 1997. Taxpayers were invited to submit or resubmit claims as set out above.

The Issues

It was not disputed by the Commissioners that BSG could have made a claim had there been a proper retrospective transitional period for claims under section 80 as recognised in Business Briefs 22/2002 and 27/2002. The two questions for the Tribunal are:

(a) Is BSG required to show not just that it could have made a claim in 1997 but that it would have done so?

(b) If the answer to (a) is "Yes" has BSG shown on the evidence that it would have made a claim had there been a proper transitional period?

It is BSG's case that the proper test is whether it "could" and not whether it "would" have made such a claim. If it fails on this point, then it is BSG's contention that in any event the evidence shows that it would have made such a claim had there been a proper retrospective transitional period.

The facts

The parties produced an agreed bundle of documents. Patrick Smiley, the finance director of BSG, and John Owen, the group financial controller, both gave evidence on behalf of BSG. Ray Docherty, an officer formerly employed as a National Business Manager by the Commissioners' Large Business Group, gave evidence on behalf of the Commissioners.

Mr Docherty wrote the decision letter of 9 July 2004. In that letter he stated inter alia:

"The purpose of the retrospective transitional period is to give businesses the opportunity to now make claims they could and would have made, but were prevented or discouraged from making by the manner in which Customs introduced the capping provisions in 1996.

In respect of the VAT Group for claim for overpayments made since August 1996 Customs do not see that the introduction of the three-year cap could have had any effect on it. The Group was not prevented from making a claim in 1996/97 by the absence of a transitional period as any overpayments made by the Group were well within time for a refund; this refund of course would have been capped. Whatever prevented the Group from making a claim, it was not the capping provision. In the 1998 visit report, which we have made available to you, the Group's financial director told Morgan Lewis that KPMG had approached them with a view to making a claim. However, the offer had not been taken up. We were also told that the Group 'had no interest in applying the ECJ ruling at present'.

It was our understanding that the Group did not want the consequential partial exemption implications. It took the decision not to adopt the ECJ judgment but to continue the treat the supplies as taxable, accounting for VAT under the margin scheme, until the UK legislation changed."

Whilst Mr Docherty was an experienced officer, who, until June 2005 had been employed in the section of the Commissioners which was responsible for the VAT and indirect tax affairs of the largest 1000 businesses in the United Kingdom, it was only in this capacity that he came in contact with BSG. He had no direct experience of the company during the relevant period, namely 1996 to 1998. The officer concerned with the company's VAT affairs was a Mr Morgan Lewis. Mr Lewis did not give evidence to the Tribunal, although a note of a control visit made by him to the BSG's head office was in the bundle of documents and was a document considered by Mr Docherty when making his decision. That visit report states inter alia:

"JO (John Owen) stated that he had no interest in applying the ECJ ruling at present. JO confirms that they had been approached by tax advisers KPMG in order to put in a claim but this had not been taken up."

Mr Docherty took over responsibility for BSG in June 2004. In carrying out his review Mr Docherty not only referred to Mr Lewis' notes of this meeting but also to an e-mail sent from the Customs and Excise errors and assessments policy team on 11 June 2004. The e-mail was in response to a referral by Mr Lewis to the errors and assessments branch on 10 May 2004. The report he submitted was included in the documents in the case and in that report Mr Lewis wrote inter alia:

"It is clear that the managers were focussed on the buy-out and organising the new business and it sheds a lot of doubt on the premise that a claim under the Italian Republic would have been made at the time given the considerable amount of work that would have been involved. It is easy for Bristol Street Group to say now that they would have made a claim at the time but my feeling is that their view would have been that it would not warrant the time and effort involved given the other priorities and the partial exemption implications that apply at the time.."

Mr Lewis continued by stating that he considered that any claim made by the BSG might be considered opportunistic. The e-mail sent in reply stated inter alia:

"I understand you were told that the Group 'had no interest in applying the ECJ ruling at present'. I gather from the papers and from our conversation that the Group did not want the consequential partial exemption implications."

Mr Docherty records in his witness statement that he considered it essential to look at the behaviour of the Bristol Street Group when the original ECJ decision in the Italian Republic case was announced on 27 June 1997.

In the course of his review Mr Docherty concluded that, by not making a capped claim in 1997, BSG had given up approximately £300,000 with interest. He concluded that this represented the profit on the sale of some 400 plus cars and he queried why BSG would have forgone such a sum of money. The only conclusion that he could come to was that they had reviewed the situation and considered it was not worth the outcome they would have achieved. He then considered that to make such a claim would have entailed a very straightforward extraction from their records of demonstrator cars, and the profit that was made on them. In his opinion this would not have been an onerous task. From his own knowledge of the industry, but without any direct in-depth knowledge of how BSG maintained their records, he estimated that this would have been two to three days' work and was basically a clerical task requiring very little intervention at management level. Considerably less time would have been required if the records were computerised.

From the above Mr Docherty concluded that there had to be some other reason for BSG to have made a positive decision not to make a claim for approximately £300,000 in 1997. Because at that time the Commissioners had taken the (erroneous) view that the exempt sale of demonstrator cars would have made the business partially exempt, a partial exemption calculation would have been required. Mr Docherty believed that the only conclusion he could come to was that BSG had looked at the partial exemption implications of making the claim and decided that, after making the partial exemption adjustments, there was very little benefit in making such a claim, and therefore, if there was very little in a three year claim, there was very little in a twenty-three year claim, considering all the extra effort that would have gone into the making of such a claim.

Included in the bundle of documents is a memo from a Mr Marco Criscuolo, of the errors and assessments team. This memo was sent to a Kam Cheema and was copied to Mr Docherty amongst others. Mr Criscuolo refers at the outset to a note he had first sent on 11 June 2003 to Mr Lewis in which he set out his views on the manner in which the claims ought to be handled. He repeats those views in his later memo and refers to the judgments of the ECJ in the Marks & Spencer case, Grundig Italiana SpA v Ministero delle Finanze [2002] EU ECJ C-255/00 and ECF Chemie Farma NV v The Commissioners of the European Communities, CJEC Case 41/69, which have the combined effect that where time limits are introduced or are shortened a transitional period must be provided during which citizens are entitled to exercise their rights in accordance with the old time limits. He continues:

"In Grundig Italiana the Court held that such transitional periods, where a time limit is shortened from, e.g., five or ten years to three, should last for at least six months.

We clearly didn't do that and are required to allow taxpayers to make claims now that they ought to have been allowed to make at the time.

This all boils down to the Community law principle of effectiveness. We must not make it excessively difficult or impossible in practice for a citizen to exercise rights bestowed upon him by Community law."

Mr Criscuolo then looked at various other decisions of the European Court and stated:

"We have accepted, for these purposes, that the delivery of the AG's opinion would have acted as a trigger for claims had it been delivered during the course of the transitional period. The reason for taking this stance is that both judgments were given substantial coverage in both the Trade Press and the Professional Press and, as a result, it is more likely than not that motor traders were aware of the judgments and their broad principles."

He continued to say that the Commissioners can look at a taxpayer's reaction to the relevant Business Briefs and stated:

"However, the fact that he didn't make such claims within those time frames does not mean that we take the view that he wouldn't have made a claim … we ought not to be looking for reasons not to pay. We must look for reasons to pay. As I said in my note to Bob Lewis, that is not money to which the taxpayer is not, in principle, entitled. It is money to which we are not entitled."

The memo continues:

"There are a number of imperatives buried in this process. One of the more important ones is this. If a taxpayer asserts that he made a judgment at the time, without doing any work to calculate any potential claim, that it was not worth his while to make a claim, that to make a claim would be uneconomic, but when the claim is actually calculated now it turns out that it would probably have been very worthwhile, we cannot impugn the judgment he made in 1996/97 on the basis of the knowledge he has acquired now. If he stands up before the tribunal and says that, with his knowledge of his business, he made an honest judgment and concluded that a three-year claim would not be worth making, we must be able to refute that with real facts if we are going to discredit his statement.

…

If a claimant made no motor trade claim at all before 1 March 2000 but it is clear that he knew of the possibility of making one, that he is a compliant and conscientious businessman, his VAT affairs are always well in order, and he has generally reacted positively where errors have been drawn to his attention, etc, we are bound to accept, I think, that he would have made a claim

…

We are asking them to prove the negative. We must bear this in mind when dealing with these claims. What we are asking them to do, if we take it to the nth degree, is absolutely impossible. The level of proof is on a balance of probabilities. They only have to demonstrate that it is more likely than not that they would have made a claim."

Mr Docherty said that he was not aware of this memo sent to Mr Lewis in 2003, but he first became aware of it when it was copied to him in January 2005.

Mr Docherty's evidence was that, whilst he had written the decision letter, he was advised by the policy team. It was a convention that, whilst he confirmed the decision of the policy unit it was seen as his own decision.

Mr Docherty accepted that, given that prior to 1986 the company had not been formed into a VAT group and therefore it was likely that the individual companies would be de minimis for the purposes of partial exemption. He was not aware of a proposal made by Pricewaterhouse in 1997 that, with regard to past claims, the Commissioners might be prepared to abate claims by 2% to take account of partial exemption effects. This was proposed because partial exemption gave immaterial amounts of revenue. Whilst Mr Docherty accepted that for many that would be the case, he considered that with some 200 companies he would expect a different situation, and that it would be the case for BSG.

It was only at the conclusion of Mr Docherty's evidence that Miss Whipple made a decision not to call Mr Lewis, and, after some consideration, Mr Peacock did not apply for a witness summons but proposed that the exhibits to Mr Lewis' witness statement should be treated as evidence in the case, which was the course adopted.

Mr Patrick Smiley had been Finance Director of BSG since April 1997, following the management buy-out of the vehicle distribution division of Britax International Plc. He had worked at Britax since 1973 and from 1975 had held the position of Group Financial Controller where his areas of responsibility covered, amongst other things, corporate taxation affairs, including VAT. He had been in regular receipt of trade publications and had received mailings from professional firms such as KPMG in relation to significant issues which impacted on the motor industry in general and BSG's business in particular.

In late 1995 and early 1996 the vehicle distribution business of Britax was subject to a management buy-out that was completed in April 1997, and this formed the nucleus of what is now BSG. This was a major project for both Britax and BSG's management. Mr Smiley was heavily involved, initially as a Britax executive and subsequently, from June 1996, as part of the management buy-out team. Before and after the introduction of the three-year cap the entire management team of BSG was engaged with various advisers looking to negotiate terms and complete the management buy-out.

It was Mr Smiley's clear evidence, which the Tribunal accepts, that as a direct result of the above involvement it was not felt necessary or reasonable to prioritise retrospective claims in respect of demonstrator cars pursuant to the Italian Republic case during the management buy-out negotiations. These claims were considered to be of lower priority than the successful completion of the management buy-out. Mr Smiley had considered at that time that such claims could be left until after the management buy-out had been completed. At the time he was not aware that any such claims would have had to be lodged before 18 July 1996, nor could he have been so aware, as the three-year cap was introduced without prior notice or consultation. After 18 July 1996 he became aware that only three-year claims could be submitted. Before 18 July 1996 no claim was made because of his belief that there was no urgency and the management buy-out was more pressing, after 18 July 1996, no three-year claim was made because all the management time was taken up by the buy-out and because the sums involved were not considered to be significant and did not make the claim a high priority for BSG.

Mr Smiley made the point that, had the Commissioners introduced adequate transitional provisions for the three-year cap, then claims for a twenty-three period would have been lodged within that period, because the management of BSG would have been in breach of their duty as directors not to make a claim in respect of such a large amount. Mr Smiley believed that the amount of the claim for a twenty-three year period would have amounted to around £4,400,000, excluding statutory interest and ignoring any possible impact of partial exemption. He believed that claims by BSG for a three-year period would have amounted to around £285,000 in total, excluding statutory interest and ignoring the impact of partial exemption. The exact figures were not calculated at the time, but were capable of being calculated; the approximate size of the figure would have influenced BSG's management in their decision as to whether a claim should be made at that time. The cost and effort required to make claims for a twenty-three year period would have been worth the amount of money at stake and a claim of over £4 million would have been prioritised, even against the background of the management buy-out.

Mr Smiley pointed to the fact that BSG had made the claim within the concessionary régime laid down by Business Briefs 22/02 and 27/02 as demonstrating that BSG would have taken advantage of a transitional régime had one been in place for the overpayment of output tax. In addition he was certain that the professional advisers would have advised BSG to submit a claim had such a transitional period existed and that advice would have been followed. There is evidence in the form of a letter from KPMG dated 25 April 1997 that Mr Smiley had been in contact with professional advisers at that time.

Mr Smiley was not contacted by Mr Lewis or any one else from Customs at the relevant time, but had he been contacted, he is certain that he would have made clear that BSG still considered themselves entitled to make an Italian Republic claim. He would also have made it clear that, had there been a transitional period introduced with the three-year cap in 1996, then BSG would have lodged a twenty-three year claim within that transitional period.

It was Mr Smiley's opinion that it was unreasonable for the Commissioners to take the view that the same decision-making process would have been applied to a claim covering twenty-three years as applied to a claim covering only three years. That approach ignored commercial reality and the duties of the directors to the relevant companies and their shareholders. It also ignored the fact that, prior to 18 July 1996, there was no immediate urgency to make such claims, as there was no cap applicable and no indication that one would be introduced.

BSG had been aware that the Commissioners intended introducing new provisions relating to the VAT accounting on demonstrator cars which was clearly stated in Business Brief 23/97 where, as cited above, it is stated:

"Customs interpretation of the ECJ judgment is that the Sixth Directive requires the onward sale of input tax blocked goods be treated as exempt regardless of whether a profit is made. The Commissioners are still considering the full implications of the judgment and what changes to United Kingdom legislation may be necessary."

In the event these changes were not introduced until December 1999. Being aware of this Business Brief, a decision on lodging a claim was deferred pending Customs' confirmation of the new arrangements. It was a view taken by management that any changes in procedure would result in major accounting changes which would be best implemented within the group in a single process, rather than by trying to make two or possibly more changes within a very short period. The management was reluctant to make any changes to the accounting system unless and until it became absolutely necessary. In 1997 a decision had been taken to invest in Kerridge Software. The cost of this system was £4 million. There was a pilot period running for six months in 1997, and it was finally rolled out in late 1999. The process of implementing the new accounting system was complicated by the acquisition and disposal of a number of dealerships within the group during that period. In addition the accounting package was 'off the shelf' and it would have been extremely difficult for the provider to make the necessary changes at that time and therefore the old basis of accounting continued until December 1999.

With regard to partial exemption, it was Mr Smiley's opinion that any overdeclared output tax in the twenty-three year period would have far outweighed the effects of any input tax restriction which might have occurred. It was his understanding at the time that there would not be a major partial exemption impact, as exempt sales were unlikely to exceed 1% or 2% of turnover, and there was genuine doubt as to whether Customs position on the partial exemption issue was correct, which was subsequently confirmed to be the case by the High Court in the case of C&E Commissioners v JDL.

In cross-examination Mr Smiley accepted that whilst doing the calculations for the claim may have been a clerical task, nonetheless it would have been an onerous one. He had not quantified the amount or the work involved at the time because he was involved in other matters, principally the management buy-out. In formulating such a claim account would have had to be taken of the differing accounting systems operating across the group; which demonstrators had been sold at a profit and the output VAT accounted for on such a profit; the clerical and management time involved and the cost of the operation. The claim had not been on Mr Smiley's list of priorities and it was a commercial decision he had taken at the time not to put in the necessary time and effort. Insofar as calculating the partial exemption aspect, whilst it could have reduced the claim, the amount was never in excess of 1% and it would not have eradicated the claim. He accepted that he had discussed the matter with Mr Owen, and they would have considered any benefit to the company and the partial exemption aspect. The impact of partial exemption was always regarded as minimal and would not have stopped the company from making a twenty-three year claim at that time.

John Owen, who is the group financial controller of BSG, and has held that position since April 1997, gave evidence about the meeting on 6 and 7 October 1998 between BSG and Mr Morgan Lewis of Customs. He accepted that the facts outlined in Mr Lewis' control visit report were substantially accurate, but considered that they were being misinterpreted by Customs. He accepted that it was correct that at that time BSG was still considering whether to submit claims for the previous three years, but that no final decision had been made. There were no discussions concerning what action BSG would take once Customs had determined its policy in practice in relation to Italian Republic claims. Nor was there any discussion as to what actions would have been taken had a transitional period been introduced at the time of the introduction on 18 July 1996 of the three-year cap on claims. There was no discussion as to whether or not BSG would have made a twenty-three year claim in 1996 had there been a transitional period, because this only became relevant in 2002 when a retrospective transitional period was introduced in Business Briefs 22/02 and 27/02. There was discussion of the fact that businesses were generally becoming disadvantaged by the introduction of the three-year cap, and some discussion of the position regarding partial exemption.

Mr Owen accepted that BSG wanted to retain its fully taxable status, and that there was a risk if it had put in a claim that it would become partially exempt, but he considered it very unlikely that prior to April 1996 any company in the corporate group (which would have had to have been looked at individually) would have been above the de minimis threshold. BSG had only become a VAT group on 1 April 1996, previously the individual traders had separate VAT numbers, and each company would have had to put in a claim. It was Mr Owen's opinion that it would have entailed an immense amount of work to put in a claim at that time, although he accepted that in fact it probably would not have entailed a very different amount of work from the present exercise regarding the twenty-three year claim.

There was evidence before the Tribunal in the form of a letter sent out from the Retail Motor Industry Federation to BSG amongst others in which the advice of Pricewaterhouse on the impact of the cases of Elida Gibbs and the Republic of Italy. That letter has a large section on partial exemption and records that many businesses would be within the de minimis levels. Mr Docherty was not aware of this letter nor that it had been sent out to traders in the industry. Mr Docherty had not been aware that BSG was only formed in April 1996 and that previously there was no group for VAT purposes.

The Appellant's case

Mr Peacock submitted that the rule of effectiveness required traders to be given a real opportunity to make claims in the knowledge that if they did not do so they would lose their rights. The limitation period stated that if a taxpayer did not exercise his rights by a certain date, then he would lose them. The Courts were not concerned with whether those rights were exercised, only whether they could be and would be lost if they were not exercised. It required that a trader was put in such a position that he could, if he chose to do so, exercise his rights, and if he did not do so, that was the end of the matter. The question should be asked in terms of 'doing', namely: 'Did the absence of a transitional period stop a trader from doing something?' In the present case it had stopped BSG from exercising rights which it could otherwise have done. It was not possible, as the Commissioners contended, to get to the proposition that it had to be shown that these are rights a taxpayer 'would' have exercised. This contention imposed an intolerable burden on a taxpayer to prove what he would have done in a hypothetical world. This burden was even greater when it was considered that it was the Commissioners' fault that the taxpayer was put in this position in the first place.

BSG relied on the decision of Warren J in Condé Nast Publications Ltd v HMRC [2005] STC 1327 where it was held that the right test was whether a taxpayer could have made a claim and not whether he would have done so (see paragraphs 55-64 of the judgment). Warren J identified that Community law required that taxpayers be given an adequate opportunity to lodge claims they were entitled to make, and that the Community law principle of effectiveness required that rules should not render virtually impossible or excessively difficult the exercise of Community rights

At paragraph 61 he said:

"… The principle of effectiveness is designed to protect a person's rights. As a matter of Community law, taxpayers in the position of CNP had, prior to the introduction of Reg 29(1A), a right to reclaim input tax, that right has been curtailed. The jurisprudence of the ECJ tells us that such rights must be protected for a transitional period. I can detect nothing in the language used in the judgments of the ECJ which describes the purpose of the protection as to put the taxpayer in the same position which he would have been in if the transitional provision had been included. The language is that of protecting rights: if those rights are not properly protected during a transitional period by national laws, then Community law disapplies the national law to the extent necessary to preserve those rights.

62. If it is correct that the second approach discussed … is correct … then the Community law right which a taxpayer had during the transitional period is not to be taken away from him for a reasonable period after he could first reasonably be expected to have asserted it. The fact that he did not have the opportunity to exercise it during the transitional period is entirely the fault of the Member State in failing to comply with its Community law obligations. It would, against that background, make it excessively difficult, in my judgment, for him to exercise his Community law right if it were the rule that a taxpayer had to prove something which might, in its nature, be very difficult to prove, namely that he would have exercised his right had a transitional period been included.

63. This is not to say that, if it is shown that a taxpayer could not have made a claim in the transitional period, then he should be allowed to make it later. If he could not have made it, his Community law rights are not infringed by the absence of the transitional period."

Mr Peacock submitted that these paragraphs represent part of the learned Judge's reasoning in the case and the Judge was exploring another route to the same conclusion, namely that in that case lost because it ought to have realised that time was running against it, and this was another route to the same conclusion, namely that the appeal should be dismissed.

Whilst it was Mr Peacock's view that Condé Nast was binding on the tribunal, if the tribunal held that the remarks of Warren J at paragraphs 55-64 were obiter, then nonetheless, they were highly persuasive, and the Tribunal would need good reason not to follow the Judge's reasoning.

The Business Briefs which set out the circumstances in which claims would be paid merely required that the claimant be aware, by 30 June 1997, that a claim could be made; the claimant had to have "discovered the error" – see Business Brief 22/02 and Business Brief 27/02. Neither Business Brief required a claimant to prove that a claim would have been made. It was not for the Courts or the Tribunal to impose such a requirement.

The Tribunal was referred to the case of Marks & Spencer Plc v Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036. In that case, according to the headnote it was held that:

"The adoption of national measures correctly implementing a Directive did not exhaust the effect of the Directive. Member States remained bound actually to ensure full application even after the adoption of those measures.

In the absence of Community rules on the repayment of national charges wrongly levied it was 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 were not less favourable than those governing similar domestic actions and, secondly, that they did not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness). …

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 taxable 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."

At paragraph 38 the Court had said:

"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 effectiveness, it 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 the claim for repayment which persons were entitled to submit under the original legislation."

It was submitted by Mr Peacock that nowhere in paragraphs 34-42 of the judgment was it said that the court was concerned with depriving an individual of any possibility of exercising a right which he "would have" exercised. There was a breach in that case because the taxpayer was prevented from exercising rights which he could have exercised. At paragraph 46 the Court stated that the principle of the protection of legitimate expectation applied so as to preclude a national legislative amendment which retroactively deprived a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of provisions of the Sixth Directive with direct effect.

The Marks & Spencer case led to the publishing of Business Brief 22/02 which was published on 5 August 2002. In that Business Brief Customs invited all taxpayers to submit claims to their local VAT offices where they "made no claim but can demonstrate that they discovered the error before 31 March 1997". There was no reference to a taxpayer needing to show that he would have made a claim.

The Commissioners sought to derive the 'would have' test from the Grundig case and in particular paragraphs 37 and 38 (set out at paragraph 60 below) of the decision of the Court:

Mr Peacock submitted that this 'would have' principle cannot be derived from those words, the Court does not refer to a situation where a right 'would' be exercised. Similarly in the Business Brief 22/02 Customs referred to claims which taxpayers "ought to have been able to make" at the time. The impression given by Business Brief 22/02 is not corrected in Business Brief 27/02 which extended the period from three to six months and refers to the time when the taxpayer "discovered the error".

The case of JDL Ltd (17050), a decision of the tribunal in 2000, was upheld by the High Court in Customs and Excise Commissioners v JDL Ltd (supra). It was held that demonstrator cars were not capital goods and therefore there should be no partial exemption adjustment in respect of their sale. In the present case the Commissioners had stated that the fear of partial exemption would have prevented BSG from making the very claim itself, not just that it would have cut it down. In Mr Peacock's words it was "a bit rich" of Customs to rely on their own error; whilst it was a factor which had to be borne in mind in determining whether it would have operated on the mind of BSG, the Tribunal must consider whether partial exemption would so have operated on the mind of BSG that it would have been deterred from making a claim in circumstances where the evidence showed that BSG were aware of the trader's challenge in the case of JDL Ltd. This required Customs to say that a person in BSG's position would have accepted Customs' (erroneous) position. It was submitted that the Commissioners faced a very high hurdle.

With regard to the Commissioners' evidence, the officers could give no direct evidence as to what BSG would have done had there been a transitional period. Mr Docherty was not responsible for matters relating to BSG until some seven years later. Customs relied, as support for the conclusion as to what BSG would have done had there been a transitional period allowing a claim for a twenty-three year period, on BSG's actual failure to claim in a period subject to a three-year cap. The absence of a three-year capped claim did not lead to the conclusion that BSG would not have made a twenty-three year claim for around £4.4 million (excluding interest) had there been a transitional period. The very fact that a twenty-three year claim was made at a later date when BSG believed that a transitional period then did apply to it could only lead to the conclusion that a twenty-three claim would have been made had there been an appropriate transitional period.

Mr Smiley in his evidence had made clear that partial exemption was not for BSG a significant factor, even if Customs had succeeded in JDL. Had there been a transitional period, a twenty-three claim would still have been worthwhile for BSG even with an adjustment because of the partial exemption position.

With regard to the burden of proof, it was distasteful that the Commissioners were reduced to relying on their own failure which may have misled the trader into not preserving evidence in the first place. They were also further misleading traders in the Business Brief by saying that traders have to take into consideration the matter of partial exemption, which was subsequently shown not to be the case.

With regard to the evidence, there was no evidence for not accepting Mr Smiley's very clear statement that he would have made a claim if it had been open to him. The Commissioners relied on supposition and speculation by people who were not called to give evidence. Only Mr Docherty was called, and his evidence was based on conversations with people who did not appear as witnesses. It had been submitted by Miss Whipple that actual conduct was the best evidence, which was accepted. When BSG were told there was a transitional period it had made a claim. The relevant factors were:

1. The value of the claim. The only evidence was that it was £4.4 million, it was incumbent on the Commissioners, who disputed the amount, to lead evidence to show it was not really a claim for this amount, and this had not been done.

2. With regard to partial exemption, it became clear in the course of the hearing that prior to August 1996 there was no VAT group. It was believed that partial exemption was unlikely to cause any difficulties because the subsidiaries were de minimis. It was only during the period from 1 April 1996 to 4 December 1996 that there were any partial exemption implications.

3. The relative value of the claim was a relevant matter, but Miss Whipple had made the wrong comparison in that if the claim were successful it would be a contribution to the company's profits, and should not be compared with its turnover as she had done. In any event this was a point which should have been put to Mr Smiley.

4. With regard to the difficulty of getting the relevant figures for output tax and input tax, these could have been obtained from records and then extrapolated. Mr Smiley could have asked an accountant to do it for a small fee, and it could equally well have been done for a twenty-three year claim.

5. There was no evidence that the fear of losing its tax status would have been a factor in dissuading BSG from making a claim.

6. As to the effect for BSG's future tax position with regard to the sale of demonstrators, it was Mr Owens' evidence that he would have made the claim despite that.

7. As to the time factor, Mr Smiley's evidence was that the management buy-out was completed in April which would have left him with three-months to make a twenty-three year claim, and therefore time would not have prevented such a claim being made.

8. With regard to Miss Whipple's complaint that he had been attacking the decision rather than the substance of the Commissioners' case, Mr Peacock referred to the fact that Mr Docherty only had been called, and he in his witness statement did not deal with any direct experience of BSG's business, because he did not have any, but dealt with the making of the decision itself. This led to the conclusion that the Commissioners in part sought to rely on what was said in the decision letter without any evidence to support it.

The Respondents' case

It was accepted by Miss Whipple that if the proper test is whether BSG could have made a claim at the earlier time then BSG must succeed. It was the Respondents' case that the proper test is whether BSG would have made such a claim, and that, on the evidence, it would not have done so.

The Commissioners' argument that "would" is the appropriate test is founded on the European principle of effectiveness as enunciated in part in the case of Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2002] ECR 1-8003 ("Grundig"). At paragraph 33 the European Court stated:

"In the absence of Community rules on the recovery of national charges levied though not due, 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 to those governing similar domestic actions (principle of equivalence) and, secondly that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness)."

In the present case the question was whether the domestic legal system met the question and whether the Commissioners' refusal to pay breached the principle of effectiveness.

In paragraph 36 the Court went on to state that the detailed rules governing the recovery of national taxes levied though not due were a matter for the national legislature, and equally the question of whether such rules may apply retroactively was a question of national law, any such retroactive application must not contravene the principle of effectiveness. To understand what the principle of effectiveness meant, Miss Whipple submitted that the Court in the Grundig case had focussed on the practicality of actually making such claims and not on the hypothetical right or opportunity to make such a claim. The Court had stated:

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 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 (see Marks & Spencer Plc v Customs and Excise Commissioners).

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."

The Commissioners also relied on paragraph 41 of Grundig where it was said that:

"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."