United Kingdom VAT & Duties Tribunals Decisions

Scottish Equitable Plc v Revenue and Customs [2006] UKVAT V19418 (10 January 2006)

19418

Value added tax – claim for deduction of input tax – pension review services supplied – tax paid for services between 1/1/95 and 31/1/98 – subsequent determination that such services exempt – whether tax could be reclaimed, having regard to the provisions of the Finance Act 1997 s.47 and VATA s.80 – no transitional period in legislation – whether legislation unlawful and requires to be disapplied as contrary to community law rights of deduction. Whether previous limitation period remained in force. Appeal allowed.

EDINBURGH TRIBUNAL CENTRE

SCOTTISH EQUITABLE PLC Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): T Gordon Coutts, QC

(Member): Mr K W Pritchard, OBE., BL., WS

Sitting in Edinburgh on Wednesday 16 and Thursday 17 November 2005

for the Appellant Michael Conlon, QC

for the Respondents Aidan O'Neill, QC; Julian Ghosh, Advocate

© CROWN COPYRIGHT 2006.

DECISION

Introductory

This appeal concerns the entitlement of the Appellant to recover a total of £173,602.64 which was an amount paid by way of VAT to the Respondents. A claim for repayment was made by voluntary disclosure dated 13 September 2002. The Respondents refused to meet the claim by their letter of 18 September 2002. The facts relating to the case and the chronology of the legislation and subsequent activity by the Respondents modifying that legislation is set out below.

The Appellant was represented by Michael Conlon, QC, of the English Bar, the Respondents by Mr Aidan O'Neill, QC and Mr Julian Ghosh both members of the Scottish Bar as well as the Bar of England and Wales. The evidence before the Tribunal was in the form of an Agreed Statement of Facts referring to produced documents.

Factual Background

The Appellant has at all material times carried on the business of providing insurance and insurance related services from its offices in Edinburgh and is registered for value added tax with effect from 1 July 1988.

On or about 1995 the Appellant was appointed as an insurance agent by Royal Scottish Assurance plc to carry out certain pension review services (hereinafter "the Services"). Royal Scottish Assurance plc is and was at all material times a member of a group registration for VAT purposes of which the Royal Bank of Scotland Group plc is the representative member ("the RBS Group").

The Appellant and the RBS Group are not connected within the meaning of Section 839 of the Income and Corporation Taxes Act 1988.

Between January 1995 and December 1998 the Appellant supplied the Services to the RBS Group. The Appellant issued invoices to the RBS Group showing amounts due in respect of VAT, which the RBS Group paid to the Appellant.

The Appellant accounted for, and paid, such VAT to the Commissioners on its returns for its VAT accounting periods from 1 January 1995 to 31 January 1998.

The Services were at all material times VAT exempt within Group 2, Schedule 9 to the Value Added Tax Act 1994 and, accordingly, VAT was charged to the RBS Group by mistake (parties agreed wording).

That mistake was common to both parties.

Overview of the imposition of time limits for recovery of overpaid VAT

From 1 January 1990, VAT legislation provided a statutory entitlement to reclaim from the Commissioners amounts paid by way of VAT which were not VAT due to the Commissioners. No amount could be claimed after the expiry of 6 years from the date on which it was paid except in cases of mistake (where the 6 year limitation period ran from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it).

On 18 July 1996 the Commissioners issued C&E Press Notice 42/96 purporting to shorten the time limit for claiming VAT overpayments to three years (regardless of when the overpayment or claim was made).

On 19 March 1997 Parliament enacted Section 47 of the Finance Act 1997 amending Section 80 of the Value Added Tax Act 1994 ("VATA"). Section 47(1) deemed the amendments to have come into force on 18 July 1996 for the purposes of all claims (including those made before that date and claims relating to payments made before that date).

Challenges to three year time limit

Following enactment of the three year time limit, a number of challenges were brought by other taxpayers against the legality and application of the new rules, in particular in respect of VAT overpaid before the amendments to Section 80(4) were enacted and the lack of adequate transitional measures as respects such overpayments.

On 11 July 2002 the Court of Justice of the European Communities gave judgment in Case C-62/00 Marks & Spencer plc v CCE [2002] STC 1036, a decision with far reaching consequences and of importance in the matter of UK legislation and the role of the UK legislature in relation to directly effective Community rights. We revert to this below.

The Appellant's Initial Claim

In about May 1998 Century Life plc challenged the VAT liability of pension review services. The challenge was ultimately successful, having initially failed before the VAT Tribunal, which decision was reversed by Moses J. That reversal was appealed by the Commissioners, but on 19 December 2000 the Court of Appeal ruled that such services were VAT exempt, [2001] STC 38.

On 21 February 2001 the Commissioners issued Business Brief 03/01 inviting claims for overpaid VAT on pension review services falling within the "Century Life criteria" and noting that "adjustments and refunds are subject to capping after three years".

On 20 December 2001, in reliance on Business Brief 03/01, the Appellant made a voluntary disclosure for VAT overpaid on the Services for VAT accounting periods between 1 September 1997 and March 1999, totalling £106,634.21. This was calculated as a claim for a period backdated from the Court's decision in Century Life limited to three years.

By a letter dated 27 December 2001 the Commissioners accepted that the Appellant's claim fulfilled the "Century Life" criteria. The Commissioners subsequently repaid £34,029.53 of the claim (for periods from 1 September 1998 to 31 March 1999) but refused to repay the balance of £72,604.68 as it related to VAT accounting periods going back to 1 September 1997.

On 5 August 2002 the Commissioners issued Business Brief 22/02. This purported retrospectively to allow claims to be made for overpayments made before 4 December 1996 provided the claims were submitted by 31 March 2003, perhaps by way of paying lipservice to the ECJ decision in Marks & Spencer.

Appellant's Revised Claim

By voluntary disclosure dated 13 September 2002, the Appellant submitted a revised claim, for VAT incorrectly charged on the Services for VAT accounting periods between 1 July 1995 and 30 September 1998, totalling £173,602.64. That claim included periods (12/97 to 09/98) which had already been refused by the letter of 27 December 2001.

By the disputed decision dated 18 September 2002, the Commissioners refused the Appellant's revised claim.

On 7 October 2002 the Commissioners issued Business Brief 27/02. This amended Business Brief 22/02 by purporting to allow claims to be made for overpayments made before 30 June 1997 provided claims were submitted by 30 June 2003; another attempt to salvage the Respondents position while purporting to be guided by the Marks & Spencer case and clutching at some of the dicta in Grundig Italiana (discussed below).

The Appellant's initial claim and revised claim are made in the form prescribed by or under section 80 VATA.

By letter dated 20 December 2001 the Appellant has undertaken to the Commissioners that any repayments will be reimbursed to the Appellant's customer, the RBS Group.

The relevant case law

The history of the Marks & Spencer reference to the ECJ is instructive. The reference was originally a limited one, the Court of Appeal having decided, in effect that part of the legislation restricting the Appellant's community rights was valid and only referring another part. It is instructive to note however, particularly in light of the argument noted below presented by the Respondents, that the Court felt no difficulty in reformulating the question in order to speak in general terms of principle, thereby enlarging the case presented to them. The decision in Marks & Spencer, while holding that the national court had jurisdiction to lay down detailed procedural rules governing actions for safeguarding rights derived from community law stated plainly (para 34) that these rules had to be not less favourable than those governing similar domestic actions and, secondly, that they did not render virtually impossible and excessively difficult the exercise of rights conferred by community law. A discussion seems to have taken place only in relation to the second of the above observations although it appears to this Tribunal that the rules governing "similar domestic actions" might be equivalent to rules regarding prescription and limitation, which at least in Scotland have never been introduced without allowing a transitional period of the length of the restriction. In other words if six years were to be reduced to three it can be strongly argued that three years is an appropriate transitional period. The ECJ were not however principally concerned with the principle of equivalence in that decision.

Critically at para 38 of the judgment the court 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 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.

In that connection it should be noted that member states are required as a matter of principle to repay taxes collected in breach of Community law (see Société Comateb v Directeur General des Douanes et Droits Indirects and related references (Joined cases C-192/95 to C-218/95) [1997] STC 1006, 1997] ECR I-165, para 20, and Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR I-579, para 23), and whilst the court has acknowledged that, by way of exception to that principle, fixing a reasonable period for claiming repayment is compatible with Community law, that is in the interests of legal certainty, as was noted in para 35 hereof. However, in order to serve their purpose of ensuring legal certainty limitation periods must be fixed in advance (see ACF Chemiefarma NV v EC Commission (Case 41/69) [1970] ECR 661, para 19).

In Grundig Italiana SPA the question was not whether it was correct to have no transitional period but whether the period allowed was adequate if transitional period had been enacted. At para 37 the court said:

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 (Case C-62/00 Marks & Spencer [2002] ECR I-6325, paragraph 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.

A transitional period of 90 days prior to the retroactive application of a period of three years for initiating proceedings in place of a ten- or five-year period is clearly insufficient. If an initial period of five years is taken as a reference, 90 days leaves taxpayers whose rights accrued approximately three years earlier in a position of having to act within three months when they had thought that almost another two years were still available.

Where a period of ten or five years for initiating proceedings is reduced to three year, the minimum transitional period required to ensure that rights conferred by Community law can be effectively exercised and that normally diligent taxpayers can familiarise themselves with the new regime and prepare and commence proceedings in circumstances which do not compromise their chances of success can be reasonably assessed at six months.

However, the facts that the national court has found that a transitional period fixed by its national legislature such as that in issue in the main proceedings is insufficient does not necessarily mean that the new period for initiating proceedings cannot be applied retroactively at all. The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, event where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period.

The answer to the national court must therefore be that Community law precludes the retroactive application of a time-limit that is shorter and, as the case may be, more restrictive for the claimant than the period for initiating proceedings that was previously applicable to claims for the recovery of national taxes contrary to Community law where no adequate transitional period is provided during which claims relating to sums paid before the entry into force of the legislation introducing the new time-limit may still be brought within the old period. Where a limitation period of five years is replaced by a time-limit of three years, a transitional period of 90 days must be regarded as insufficient and six months must be regarded as the minimum period required to ensure that the exercise of rights of recovery is not rendered excessively difficult.

The authoritative discussion of the decision in Marks & Spencer is to be found in Marks & Spencer and University of Sussex v the Commissioners 2004 STC1. In that comprehensive decision a view was expressed although, perhaps, strictly obiter about the effect of the Court of Justice's judgment in Marks & Spencer reference. That is to be found between paras 160 and the end of the case. In particular at para 180 Auld LJ said:

Armed with the hindsight given to us – but not to Neuberger J – by the Court of Justice's judgment in the Marks & Spencer reference, I would have held that reliance by the Commissioners on the introduction in s.80(4) of the new three-year time limit without any such transitional provisions would have been unlawful under Community Law.

He followed that through in para 185 in which paragraph the opinion was given, paraphrasing, that the unlawful alteration of the previous six year cap and the repeal of the former Section 80(5), which allowed for the extension of the time limit where an overpayment had been made as the result of a mistake only discovered more than six years after the overpayment, did not leave a time limit vacuum and sweep away all time limits but merely meant that the alteration or rather the legislation purporting to effect the alteration was unlawful.

Subsequent to that decision there have been several cases in which the legitimacy of the observations in the above noted business briefs have been considered. This Tribunal has already expressed a view in relation to the lawfulness of a judicial body, be it Tribunal or Court, purporting to determine and give effect to a transitional period, which would vary from case to case instead of the legislature fixing such a thing in advance see Abercromby and in England Conde Nast LAMIT and Fleming.

On 10 March 2005 the ECJ delivered their opinion in EC Commission v the United Kingdom 2005 STC 582. There they said at para 25 of the judgment:

As regards the United Kingdom Government's argument that the practice adopted by the tax authorities guarantees the existence of an obligatory link between the employer's right to deduct VAT and the use of the fuel by the employees for the employer's taxed operations, it must be borne in mind that it is settled case law that the incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. Mere administrative practices cannot be regarded as constituting the proper fulfilment of obligations under Community law (EC Commission v France (Case C-197/96) [1997] ECR I-1489, para 14; EC Commission v Italy (Case C-358/98) [2000] ECR I-1255, para 17, and EC Commission v Italy (Case C-145/99) [2002] ECR I-2235, para 30).

Contentions for the Appellant

The Appellant's contention, succinctly put in the grounds of appeal, was that the manner of introduction of the three year time limit was contrary to the principles of community law. The new time limit should have been introduced with a transitional period going forward, not with retrospective effect and accordingly the purported restriction of the opportunities given to taxpayers of claiming repayment within 6 years of the original payment or of the discovery of the mistake which led to that payment had not been validly or lawfully altered and should be dis-applied.

At the Tribunal the Appellant also presented an argument based upon the case of Emmott v Minister for Social Welfare and the Attorney General (Case C-208/90) ECR 1-4 296 as modified by the subsequent cases of Fantask A S v Industriministeriet (1997 ECR1-6783) and EDIS v Ministero della Finanze1998 ECR1-4951 from those cases he argued that the cumulative effect of the authorities conduct in the present case, the way in which they conducted themselves after Marks & Spencer would entitle the Tribunal to follow the inert approach as explained by Fantask and the hold that the domestic time limit of 3 years must be dis-applied. In Fantask and EDIS the only factor was a failure fully to transpose a Directive into domestic law. In the present case the authorities misconduct went further and was more nearly in tune with the decision in Emmott which has always been fit to be correctly decided upon its own facts.

Contentions for the Respondent

On a proper reading of the Marks & Spencer case time limits could be imposed which could be retrospective if adequate transitional arrangements were granted to protect directly effective rights already accrued.

Accordingly, from 4 December 1996 to 31 March 1997, a transitional period was given effect retrospectively in respect of overpayments of VAT made before 4 December 1996 for which a capped claim had previously been made or in respect of which it could be demonstrated that the error was discovered before 31 March 1997 (Business Brief 22/2002). Following the decision of the ECJ in the case of Grundig Italiana SpA v Ministero della Finanze (Case C-255/00), the transitional period was further extended to 30 June 1997 (Business Brief 27/2002). The ECJ in Grundig Italiana also confirmed that a transitional period could be applied retrospectively.

The repayment claims made by the Appellant were both made after the expiry of any reasonable transitional period that could have been required pursuant to Community law and, furthermore, a significant time after the expiry of the retrospective transitional period introduced by the Commissioners in their Business Briefs 22/2002 and 27/2002.

The UK Parliament is a sovereign body. The ECJ does not and cannot declare national legislation void. It may dis-apply it in particular cases but does not make statements about national legislation of universal, general, binding force. Marks & Spencer was a particular case and requires to be confined to its own context and its particular facts. That decision along with the decision in Grundig was pronounced by the Court under its Article 234 EC jurisdiction to give preliminary rulings concerning the proper interpretation of provisions of EU law to allow a Court or Tribunal in the member state to give judgment in the case before it. The Court will not give a consultative opinion on a general or hypothetical question in that jurisdiction. Accordingly the Court of justice was not ruling nor was it within its Article 234 jurisdiction to rule that the absence of transitional arrangements rendered the national provisions in each and every case void or in some general sense ultra vires. The most that can be taken from those decisions is that persons whose enforceable legitimate expectations for repayment were adversely affected by the fact that no proper transitional arrangements for the change in national time limits have been put in place may have a claim to have those legitimate expectations duly recognised by the national authorities. Legislative action on a part of each member state is not required in order to recognise such individual EU law rights so long as the legal position under national law is made sufficiently precise and clear and that individuals are made fully aware of all their EU rights and may rely on them before the National Courts.

The decision in Commissioners v United Kingdom 2005 STC 582 that incompatible national legislation could be remedied only by means of national provisions and that mere administrative practices could not be regarded as constituting the fulfilment of obligations under community law was pronounced in an action brought under article 226 by the Commission and cannot be regarded as qualifying the Commissioners argument in this case.

The Appellant is not entitled to argue that the progress of the legislation and its administrative modification disentitles the Commissioners from enforcing the amended time limits. The Commissioners can if it is necessary to do so dis-apply the legislation if directly effective community rights would be rendered impossible or unduly difficult to vindicate by that legislation.

Decision

This Tribunal regards its decision in Abercromby as being reinforced by the recent decision in EC v the UK. The UK legislation was defective. That has been all but conceded as a general matter. There have been various attempts to deal with the incompatible legislation by "concessions" designed to revise its effect, to modify its effect, to extend, at the choice of the Commissioners the time limits and so on. Such an approach was unconvincing. It was illegitimate as has been established by the recent decision in EC v UK. The argument presented by the Commissioners that the decision in EC v UK was made in a case brought under a different Article and type of jurisdiction from Marks & Spencer was equally un-persuasive. It appears to this Tribunal to be incorrect to attempt to say that the ECJ did not lay down a general principle in Marks & Spencer. It appears plain that the Court was not confining itself to the particular facts of the instant case before it. The fact that the Court considered it desirable and considered further that it was able to amend the reference so that the general point of principle they wish to enunciate could be made argues strongly against the view that Marks & Spencer is "case specific".

This Tribunal has formed the view therefore, following dicta in the University of Sussex case, per Auld LJ, that since the pre-requisite of a transitional period, and further an adequate transitional period, was not complied with in Section 47 of the Finance Act 1997 the provisions of that legislation must be dis-applied. As indicated by Auld LJ the effect of this would be not only that the six year limitation stands until properly amended but also, arguably, that the provision in relation to limitation running from the discovery of the error is also still in force.

The Tribunal rejects the attempt to found upon a perceived difference between the ECJ acting as they did in Marks & Spencer under their Article 234 jurisdiction and acting under an Article 226 jurisdiction. The matter of principle appears to be exactly the same whichever article is involved. That matter of principle expounded in Commissioners v UK 2005 STC 582 is that incompatible national legislation can only be remedied by means of national provisions. It follows that the administrative practices adopted by HMRC after the Marks & Spencer decision are of no avail in rectifying the initial error.

With regard to the Appellants' contention that the case of Emmott applied to the present circumstances the Tribunal considers that as now confined in the cases cited to us, the decision in Emmott only applies when specific misconduct on the part of the authorities can be ascertained. In the present case although the actings of the Respondents following Marks & Spencer have been extraordinary and could be said to represent a campaign to try to get round the decision in Marks we do not consider that that goes so far as to amount to misconduct. Vigorously to pursue an erroneous view does not amount to a deliberate or implied intention improperly to deprive a taxpayer of a remedy and does not, we feel, amount to misconduct. We accordingly hold that the case of Emmott has no application in the circumstances of the present case.

Since it is our view that the basis upon which the Appellant's Community right to repayment of input tax has not been validly further circumscribed but can still be available under the former VATA Section 80, the Appeal succeeds.

It appeared from the Statement of Case by the Respondents that they had not verified the amount claimed nor considered the question of undue enrichment. On the latter matter an undertaking has been given in writing that the sums due will be paid over to the client who was charged the VAT in the first place. They will also be entitled to any interest due.

If parties have still a dispute on quantum or interest they may reapply to the Tribunal for a decision on that matter which should however be capable of agreement between sensible parties.

Expenses

Both parties moved for an award of expenses in the event of success. Since the Appellants have succeeded they are entitled to their expenses which, failing agreement, will require to be taxed by the Auditor of the Court of Session in terms of the rules.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE: 10 JANUARY 2006

EDN/02/161