United Kingdom VAT & Duties Tribunals Decisions

RSPCA and RSPCA Propertes Ltd v Revenue and Customs [2006] UKVAT V19440 (01 February 2006)

19440

Interest – Appeal against refusal of input tax credit – Decision withdrawn – Determination of rate of interest under s.84(8) – Whether repayment supplement relevant – No borrowing by Appellant – Whether s.78 rate relevant – Determination of period for which interest payable – Relevance of delays – VATA 1994 s.84(8)

Costs – Date of decision – Whether earlier appealable decision

LONDON TRIBUNAL CENTRE

RSPCA Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

RSPCA PROPERTIES LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

Sitting in public in London on 3 November 2005 and 12 and 17 January 2006

Philippa Whipple, counsel, instructed by Deloittes, for the Appellants

Kieron Beal, counsel, instructed by the Acting Solicitor, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. This decision is concerned with interest under section 84(8) of the VAT Act 1994 and costs following the withdrawal by Customs of decisions refusing input tax repayment claims by the Appellants against which both Appellants had appealed on 8 February 2002 .
2. On 20 October 2004 £4,338,328 was repaid to RSPCA in respect of the periods 03/01 to 09/03, of which £4,319,759 was attributable to periods 03/01, 09/01 and 12/01.
3. RSPCA Properties Ltd ("Properties") assert that £106,629 was repaid to it in April 2004; however the amount and date of payment are not agreed by Customs. In any event it is clear that the amount involved is much smaller than in the case of RSPCA.
4. Apart from the details of the repayment to Properties, the underlying facts giving rise to the repayment claims are not in dispute. Both counsel produced helpful chronologies.
5. RSPCA is a well known registered charity. Its activities are part business and part non-business for VAT purposes. The business activities comprise mainly taxable supplies, however RSPCA also makes a small amount of exempt supplies. At the relevant time RSPCA normally recovered about a third of the VAT which it incurred under its usual method of apportionment and attribution.
6. In early 2000 work started on the construction of a new headquarters building at Horsham on a freehold site which RSPCA had acquired in 1998. RSPCA entered into arm's length contracts for the construction work under which it incurred input tax. In its VAT return for period 03/01 RSPCA claimed £2,317,425 input tax, the greater part of which related to the new headquarters building, on the basis that such part was fully recoverable as attributable to an intended taxable supply to Properties.
7. On 23 April 2001 RSPCA entered into a purchase and development agreement with Properties, a recently incorporated wholly owned subsidiary which was separately registered for VAT. Both companies had made elections to waive exemption under Schedule 10, paragraph 2. Under the agreement RSPCA agreed to transfer the land and partly completed building to Properties, Properties agreed to complete the building and both parties agreed that the land and completed building would be sold or leased back to RSPCA. RSPCA invoiced Properties on 23 April 2001 for the sale of the land and partly completed building for £11,842,703 plus VAT of £2,072,473; these sums were loaned by RSPCA to Properties. The agreements between RSPCA and contractors were novated to Properties.
8. Deloitte & Touche had written to Customs on 10 May 2000 outlining proposals which were broadly in line with what was later done. In the intervening period the sale to Properties had been approved by the Charity Commissioners. Further details of the proposals were given to Mrs Halliday of Customs at a meeting on 25 February 2001 when she asked for draft documents.
9. On 21 May 2001 Mrs Halliday wrote to RSPCA stating that the 03/01 return had been referred to her and asking for information and the documents so as to fully understand the arrangements. She stated that she was unable at that stage to authorise repayment of £2,317,425 input tax claimed for period 03/01, asked what proportion related to the new building and asked for a schedule showing how the amounts were arrived at. The Appellant responded by return stating that £1,396,532 related to the new HQ. On 25 May 2001 Mrs Halliday asked for the signed sale documents.
10. Properties made returns monthly. In its return for 04/01 Properties claimed repayment of the £2,072,473 input VAT on the purchase from RSPCA. In its subsequent returns Properties claimed the input tax on its payments to the contractors under the novated contracts.
11. On 21 June 2001 Mrs Halliday wrote to RSPCA outlining her understanding of the arrangements and seeking extensive documents and information. Her letter referred to the then recent decision of the Tribunal in Halifax plc v Commissioners of Customs and Excise [2001] V&DR 73. She asked for copies of any written advice given by internal or external advisers and copies of any documents for meetings of the trustees of RSPCA and minutes relevant to the decision to enter into the arrangements. She concluded, "I look forward to receiving the documents and information requested herein, so that I can come to a decision on your claim."
12. On 25 June 2001 Deloittes wrote providing copies of the contracts and the Order of the Charity Commissioners. The letter stated that RSPCA would account for output tax on the cost of providing the building for non-business use after the sale or lease back by Properties on a periodic basis on the Lennartz principle. Deloittes declined to provide copies of its advice. Deloittes wrote further on 12 July contending that the circumstances of the Appellants were not similar to those of Halifax. Further material including the invoice for the sale to Properties was provided on 16 July.
13. On 18 July 2001 Mrs Halliday wrote stating that not all the documents requested had been received and repeated her request for a copy of Deloittes' advice. She stated that until the material was provided she was unable to give further consideration to the repayment claims for 03/01 by RSPCA and 04/01 by Properties.
14. On 15 August 2001 Properties raised an invoice to RSPCA for £9,605,500 plus £1,680,962 VAT in respect of "an agreed part payment for the sale of the new RSPCA Headquarters Building". RSPCA had included £2,072,473 output tax on the sale in April to Properties in its return for 06/01 and had paid the tax. RSPCA claimed input tax on the full amount of the invoice from Properties dated 15 August on its 09/01 return.
15. Properties made monthly returns for 05/01 onwards, reclaiming a total of £513,612 up to 07/01 which was withheld by Customs. Properties included the output tax on the invoice of 15 August in its 08/01 return, showing £132,847 as due after £1,548,115 credit for input tax, but made no payment as the total inputs claimed at that point exceeded outputs declared.
16. Deloittes wrote on 23 August 2001 with the rest of the documents requested apart from the advice. They stated that contracts were exchanged for the sale by Properties to RSPCA on 15 August. They pressed for a definite decision to release the sums claimed for 03/01 by RSPCA and for 04/01 by Properties, stating that £620,024 of the 03/01 claim by RSPCA was unrelated to the new building.
17. On 12 September 2001 Mrs Halliday pressed again for the advice of Deloittes and certain other documents including documents for and minutes of trustees meetings. She included a draft notice of demand to produce documents under Schedule 11, paragraph 7. She stated that she was authorising the repayment of £620,024.
18. On 5 October 2001 Deloittes asked for more time to take legal advice on the production of the documents accepting that no repayments would be made during the extension requested.
19. Practical completion was certified as being on 3 October 2001. In October 2001 Properties raised a final invoice to RSPCA for £7,193,195 plus £1,255,309 VAT in respect of the sale. Properties made a payment of £191,231 with its 10/01 return dated 28 November being the net tax due on its monthly returns from 04/01 to 10/01. RSPCA claimed the October invoice as input tax on its 12/01 return and accounted for a quarterly output tax charge of £10,535 for non-business usage of the building under Schedule 4, paragraph 5(4) of the VAT Act 1994 calculated in accordance with Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514; it had accounted for £4,801 output tax under Lennartz in the 09/01 return.
20. Shortly before Christmas various documents including the advice were provided to Mrs Halliday.
21. On 11 January 2002 Mrs Halliday gave the decision against which the appeals were lodged. She decided that the transactions between RSPCA and Properties did not give rise to supplies made in the course of business because the sole purpose was VAT avoidance, since RSPCA would recover over 90 per cent of the VAT on the construction works compared with its normal recovery rate of 32 per cent. Alternatively, she concluded that the EC principle of abuse of right applied. She stated that the immediate consequence was that the balance of the repayment claims by RSPCA for periods 03/01 and 09/01 would not be paid. She set out other adjustments to RSPCA's returns which were necessary. She stated that she did not have details of period 12/01 but invited RSPCA to make VAT returns in accordance with her decision, making section 80 claims if it believed VAT to be overpaid. She said that the correct VAT position for Properties was nil.
22. On 8 February 2002 both RSPCA and Properties appealed against the decision issued on 11 January 2002 disallowing input tax. The notices of appeal stated that they were in time.
23. On 28 March 2002 Mrs Halliday disallowed the input tax claim by RSPCA for period 12/01 on the October invoice by Properties but invited RSPCA to reclaim its normal recovery percentage of the amounts actually claimed by Properties in respect of construction; she stated that the Lennartz calculation was not appropriate. On 11 April RSPCA accepted this suggestion without prejudice to the ongoing appeals, submitting a reclaim for £222,853 although maintaining that Lennartz should apply. On 24 May 2002 Mrs Halliday wrote that in order to protect the Commissioners' position if Appellants' appeals succeeded it would be necessary to enter into a Deed in respect of a repayment. No agreement was reached as to a Deed.
24. The appeals were stood over following the reference by the Tribunal to the European Court of Justice in Halifax plc v Commissioners of Customs and Excise [2002] V&DR 117. In the event no Statement of Case was ever served. The decision in Halifax has not yet been given.
25. On 17 June 2002 Mrs Halliday issued decisions on the same basis in respect of RSPCA for period 03/02 and in respect of Properties for periods 01/02 to 03/02. No appeals were made at that point but reconsideration was requested.
26. On 17 January 2003 in an 11 page letter Mr Bryant of the Anti-Avoidance Team confirmed the disputed decisions that the transactions between RSPCA and Properties were not in the course of an economic activity. He also asserted that Lennartz was limited to purchases of goods and did not cover supplies of construction services.
27. On 28 July 2003 the Appellants' Solicitors applied to amend the appeals to include any further input tax on the supplies of the buildings and to contend that input tax incurred by RSPCA should be allowed on the Lennartz principle. The application contended that those matters arose from the original decision. Customs did not object to the amendment which was allowed.
28. On 30 September 2003 Mrs Halliday notified a second alternative decision that, if RSPCA was liable to account for output tax on the Lennartz principle, the construction costs were incurred by RSPCA and should be included in the Lennartz calculation. In the same letter she notified a third alternative decision that a Lennartz charge should be based on the amounts charged by Properties to RSPCA. She raised the alternative assessments on 23 December 2003 with interest under section 74 on the excess over the Lennartz charge which RSPCA had accounted for in its returns calculated on a 20 year period. Those letters were said to be without prejudice.
29. On 19 November 2003 following the decision on 8 May 2003 of the Court of Justice in Seeling v Finanzamt Starnberg (Case C-269/00) [2003] STC 805, Customs issued Business Brief 22/03 announcing a change of practice where capital goods are acquired both for business and non-business purposes, accepting the application of the Lennartz principle in the case of land and buildings.
30. On 29 December 2003 six days after the second and third alternative assessments by Mrs Halliday for periods 12/01 to 09/03, Mr Colford of the Anti-Avoidance Team notified the Appellants that Customs had decided to withdraw the assessments under appeal. He accepted that the transactions between RSPCA and Properties had been correctly treated as supplies in the course of economic activities. Mr Colford wrote that this did not resolve the length of time for the Lennartz calculation which should be over a 20 year period.
31. On 20 February 2004 Customs notified the Appellants that £4,351,606 input tax had now been credited to RSPCA and that £2,714,383 input tax had been credited and £7,872 output tax debited to Properties. The letter stated that the Appellants would be notified further as to repayment supplement/interest. On 4 March the Appellants accepted figures in the letter of 20 February, however on 10 March Customs wrote that before the repayment could be made an adjustment was needed to the above figures to take full account of partial exemption. Following an analysis provided by the Appellants on 11 August, the credit to RSPCA was adjusted on 13 August to £4,338,328 for the periods up to 09/03, a reduction of £13,278; the exempt component varied from 0.21 per cent to 0.45 per cent.
32. Meanwhile, on 22 March 2004 RSPCA appealed (LON/2004/250) against a decision that RSPCA, while entitled to input tax on the amounts charged by Properties, was liable to account for output tax on the non-business use of the building based on the cost of the transfer spread over 20 years as per the Business Brief 22/03 as opposed to a longer period. The Respondents were given eight stand overs for negotiations and served a Statement of Case on 12 January 2005. That appeal is currently stood over pending a decision of the Court of Justice in Wollny & Wollny v Finanzgericht Landshut (Case C-72/05).
33. The sum of £4,333,328 was repaid to RSPCA on 20 October 2004. The periods, the dates on the return and the repayment attributable to each period were as follows:

03/01 30.04.01 £1,396,532

09/01 29.10.01 £1,673,399

12/01 30.01.02 £1,249,828

03/02 30.04.02 £ 3,496

06/02 26.07.02 £ 1,712

12/02 29.01.03 £ 51

03/03 30.04.03 £ 6,079

09/03 30.10.03 £ 7,231

34. On 14 March 2005 Deloitte & Touche were informed that £216,964 repayment supplement was being paid to RSPCA. This was marginally more than 5% per cent of £4,338,328 because the £50 minimum applied for period 12/02.
35. On 13 July 2005 the Appellants applied to the Tribunal for interest in respect of the disallowed input tax from the due date for the returns to the date of payment at 8 per cent compound interest together with costs under Rule 29(1)(a).
36. Customs served a notice of objection to the application contending at paragraphs 11 and 12 that although RSPCA was entitled to interest under section 84(8), in the absence of evidence of borrowing to support a higher rate than under section 78, the interest claimed had already been met by the repayment supplement; the notice also contended that RSPCA was only entitled to its costs of filing the notice of appeal and thereafter and stated that the RSPCA was put to strict proof of costs from 29 December 2003 when the decision was taken to withdraw the contested decision.

Submissions on interest

37. Miss Whipple, for the two Appellant companies, said that the Appellants were entitled to interest under section 84(8) because it was found on appeal that VAT credit due had not been paid : the requirement to pay interest is mandatory. Section 78, providing for interest in certain cases of official error, does not apply to the extent that Customs are liable to pay interest apart from that section, see subsection (1), and does not therefore apply if section 84(8) applies. Although no interest is payable under section 78 on an amount on which supplement is payable under section 79, there is no provision to the like effect in section 84(8). The fact that repayment supplement had been paid by Customs does not affect the Appellants' entitlement to interest under Section 84(8).
38. She said that the rate of interest is to be determined by the Tribunal. Section 197 of the Finance Act 1997 providing for rates of interest to be specified applies to interest under sections 74 and 78 of the VAT Act but not to interest under section 84(8); the rates specified in the Air Passenger Duty and Other Indirect Taxes (Interest Rates) Regulations 1998, S.I. No 1461 do not apply in this case. She submitted that the High Court judgment rate had been 8 per cent since 1993; the Appellants would be content with the 7½ per cent awarded by the Tribunal in Olympia Technology Ltd v HMRC (2005) No 19145. In UK Tradecorp Ltd v Customs and Excise Commissioners [2004] V&DR 195 the Tribunal gave 6¼ per cent and in Bank Austria Trade Services Gmbh v Customs and Excise Commissioners (2000) No 16918 the rate set was 8 per cent. She said that, once Customs forces an Appellant to appeal in order to obtain the VAT credit to which it is entitled, a proper commercial rate of interest should be paid. The interest should run from 10 days after the receipt of the Appellants' returns, as in Olympia Technology.
39. Miss Whipple submitted that the rate determined under section 84(8) does not have to be a single rate, although that is normal. She did not pursue the claim for compound interest.
40. She said that R (Elite Mobile plc) v Customs and Excise Commissioners [2005] STC 275 was not concerned with interest under section 84(8) but with section 35A of the Supreme Court Act 1981. Lindsay J made no reference either to section 74 or to section 84. Although Lindsay J said at paragraph 35 that it was convenient and just to fix the rate as that due under section 78, that was expressly stated as not binding in other cases and concerned section 35A interest.
41. Miss Whipple said that the rate under section 78 is not a commercial rate being 1 per cent below the average of the base lending rates of the six large clearing banks. Furthermore those base lending rates are on a compound basis and therefore lower than simple interest rates. In Sempra Metals Ltd v IRC [2005] STC 687 the Court of Appeal upheld an award of compound interest as compensation where UK law had refused group relief because the parent company was non-resident. She referred to Chadwick LJ at [43] onwards; commercial rates assumed periodic payment of interest.
42. Mr Beal, for Customs, submitted that the starting point for determination of interest should be the rate prescribed for official error under section 78 which varied over the relevant period from 3 to 5 per cent. An adjustment should be made to reflect the payment of section 79 supplement; this should not be a straight deduction of 5 per cent but a proportion of 5 per cent because interest was due for a number of years. He said that no evidence had been provided by the Appellants to justify departure from the section 78 rate: it was accepted that RSPCA had not borrowed money and that if the repayments had been made the money would not have been invested to produce a return; RSPCA was not to be equated with a commercial concern.
43. He said that the starting date for interest should be the date of the refusal decision. Customs were entitled to make proper inquiries before making a repayment. Until December 2001 there was not sufficient material for a decision. He said that it was irrelevant that the decision proved to be incorrect : the inquiries were justified. Delay caused by a trader is left out of account for interest under section 78, see subsection (8); the same principle should follow for interest under section 84(8). He referred to Customs and Excise Commissioners v Musashi Autoparts Europe Ltd [2004] STC 220.
44. He said that the Tribunal should consider the net position of the Appellants. Here the output tax charged by RSPCA had been financed by a loan to Properties; the output tax declared by RSPCA had been claimed as input tax by Properties. In answer to the Tribunal, he said that the Tribunal should set a rate of interest to apply to the amounts by which each Appellant separately was out of pocket and accepted that on the facts of this case each Appellant must be considered separately.
45. Mr Beal said that the Appellants should have mitigated their loss of interest by accepting the offer by Customs to make a partial repayment subject to a Deed as a safeguard to Customs.
46. He said that, although Customs notified the Appellants on 20 February 2004 that the disputed input tax had been credited to their accounts with Customs, the input tax claimed on the construction costs had not taken account of partial exemption. The adjusted calculations were only provided by the Appellants on 11 August 2004. He accepted that there was a delay in payment from August until October, but said that the delay between February and August was attributable to the Appellant. As a pragmatic approach he said that interest should run from December 2001 to May 2004.
47. Mr Beal said that the judgment rate of 8 per cent is not directly relevant because an order of the Tribunal is not a judgment for the purposes of the Judgments Act 1838, see Nader v Customs and Excise Commissioners [1993] STC 806. If the judgment rate is to be considered as a factor, the special account rate which was 6 per cent from 31 January 2002 should also be considered, see CPR 7.0.17 He referred also to the guidance in CPR Part 7 on pre-judgment interest and to Chapter 15 of McGregor on Damages, 17^th ed (2003).
48. He said that interest is compensation for the loss of use of money, see Phillips J in Deeny v Gooda Walker (No.3) [1996] Lloyds List LR 168. This approach was echoed in Sempra Metals Ltd v IRC [2005] STC 687 at [30] and [46-47] which supported the need to look at the position of the individual trader. He said that the appropriate rate might be higher or lower in any case depending on the evidence; just as the Appellant must justify a higher rate, so Customs must justify a lower rate.
49. Mr Beal said that in R (Elite Mobile plc) v Customs and Excise Commissioners [2005] STC 275 when considering interest under the Supreme Court Act 1981, s.35A(3) Lindsay J adopted at [35] the rate prescribed under section 78 as being convenient and just. At [37] and [38] Lindsay J rejected the suggestion that section 78 rates were materially out of step with commercial rates; Lindsay J also concluded that it was relevant to take account of a potential payment under section 79.
50. He submitted that Elite is highly persuasive and is to be preferred as a guide in this case to Sempra Metals which was concerned with the remedy for a breach of EU law. He said that having chosen not to pursue the claim for compound interest, RSPCA should not achieve the same result by means of a higher rate of simple interest.
51. He said that in UK Tradecorp Ltd v Customs and Excise Commissioners [2004] V&DR 195 the Tribunal had taken account of the fact that the Appellant had received repayment supplement as well as the fact that it had borrowed at a high rate of interest. He said that, if the Tribunal did not take account of repayment supplement when determining interest, the effective rate would be relatively high. In Kohanzad v Customs and Excise Commissioners (2005) Decision No.19013, the Tribunal took account of the repayment supplement and payment of interest under section 78 when determining a nil rate under section 84(8). The rate of 7.5 per cent determined in Olympia Technology Ltd v HMRC (2005) Decision No.19145 was based on the mistaken conclusion that 7.5 per cent was the rate prescribed for section 78.
52. In reply, Miss Whipple stressed that interest is compensation for the loss by the Appellants of the use of money which was due to them but had been retained by Customs. She said that section 84(8) also provides for interest to be awarded to Customs where tax which is found to be due has not been paid. She submitted that once an appeal is lodged interest under section 84(8) replaces interest under section 74. She submitted that the purpose of section 84(8) is to produce a level playing field between the parties as to interest once there is an appeal; if Parliament had intended account to be taken of the rates under section 74 and section 78, section 84(8) would have referred to those provisions. Interest before an appeal is an administrative matter; however once the Tribunal is seised of an appeal it can take account of the facts of the particular case. She said that the approach should be the same whether the interest is payable to an Appellant or to Customs. The section 74 rate is more appropriate as a factor than the section 78 rate.
53. She said that the Appellants should receive a commercial rate for the whole period they were out of pocket. The 7½ per cent rate determined in Olympia Technology was in fact the section 74 rate at the time.
54. Miss Whipple said that the use of the base lending rate to determine a rate for simple interest would result in an undervalue unless an upward adjustment is made. She offered to provide calculations showing the difference based on monthly compounding.
55. She said that in Elite Mobile, Lindsay J stated at paragraph 35 that nothing which he said was intended to bind other judges in other cases. That decision was before Sempra Metals.
56. She said that the decisions in Bank Austria and Olympia Technology that section 79 is not relevant under section 84(8) were correct. Kohanzad where the appellant was not represented should not be followed on this issue.
57. She said that when considering the period for which interest should run it was misguided to start from the date of the decision letter of 11 January 2002 excluding the enquiry period under section 78(7) by analogy. Section 84(8) is independent of section 78. She accepted that delay by the Appellant could be relevant but submitted that on the facts delay had not be made out. There had been a high level of disclosure before the returns were submitted. The enquiries and the decision were based on the non-business activity and abuse of rights issues on which Customs had later conceded the appeals. She submitted that from an early stage on the basis of Halifax Customs had no intention of paying the claims. She said that in any event all the basic documents had been provided by 23 August 2001.
58. Miss Whipple said that there was no reason to reduce the period of interest by reason of delays by the Appellants after 20 February 2004 arising out of the partial exemption percentage. In civil proceedings an appellant is only penalised by reduced interest when delay is extreme, see McGregor at 15-080. She said that prior to March 2004 neither party had focussed on the partial exemption restriction. It was clear from the outset that any restriction would be less than 1 per cent. It was inequitable for Customs to retain a sum in excess of £4.3 million without interest by reason of such a small partial exemption restriction. She submitted that the judgment rate of 8 per cent was appropriate for that period at least.
59. As to mitigation, she said that RSPCA had in fact incurred costs in taking advice on the Deed proposed by Customs in 2002. The offer had been reasonably declined. The approval of the Charity Commissioners would have been required, itself involving expense. The suggestion by Customs would have involved the Appellants making voluntary disclosures on a basis they considered to be false.

Submissions as to Costs

60. Miss Whipple submitted that although the notices of appeal were against the decision of 11 January 2002 there had been a de facto decision in May 2001 once the claims were not paid within the usual time. Silence could constitute refusal giving rise to an appealable decision, see Colaingrove Ltd v Customs and Excise Commissioners (2000) Decision 16981. She submitted that once there was an appealable decision costs could run even if the appeal came later. She said that there was plainly a dispute by August 2001 on the Halifax issue. It would be unfortunate if an appellant is encouraged to appeal first and talk after, in order to protect its costs position. She said that the Appellants should be entitled to the costs of the hearings as to section 84(8) interest because they had been obliged to come to the Tribunal in order to obtain any interest at all. The notice of objection contested any interest in addition to the repayment supplement. Customs had only conceded that any interest at all was due on the second day of the hearing.
61. Mr Beal said that the power to award costs was limited to costs of and incidental to the appeal and could not start until there was an appealable decision, see Customs and Excise Commissioners v Dave [2002] STC 900. No decision was made until 11 January 2002.

Conclusions

62. Section 84(8) of the VAT Act 1994 provides as follows:

"(8) Where on an appeal it is found –

(a) that the whole or part of any amount paid or deposited in pursuance of subsection (3) above is not due; or

(b) that the whole or part of any VAT credit due to the appellant has not been paid,

so much of that amount as is found not to be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the commissioners to be payable as tax has not been paid or deposited and it is found on the appeal that that amount is due the tribunal may, if it thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction."

This provision is virtually unchanged from section 40(4) of the Finance Act 1972 when VAT was originally introduced.

63. Sections 74, providing for interest on VAT recovered or recoverable by assessment, and section 79, providing for repayment supplement in respect of certain delayed payments or refunds, were introduced by sections 18 and 20 of the Finance Act 1985 following the report of the Keith Committee. Repayment supplement was recommended as a concomitant to the surcharge regime (see para. 24.5.8). Section 78, providing for interest in certain cases of official error, was introduced subsequently by section 17 of the Finance Act 1991.
64. It is not easy to discern a fully coherent scheme. For example, it is far from clear whether the last sentence in section 84(8) displaces section 74 when an assessment is upheld in circumstances when the tax has not been paid because of a hardship application. Unlike section 78, section 74(1) is unqualified. If section 74 still applies in such circumstances, the final sentence in section 84(8) appears to be redundant unless either it is to cover interest exceeding 3 years which falls outside section 74 or it enables interest to be awarded on top of that under section 74. I am not aware that this has ever been suggested..
65. Section 84(8) stands alone and contains no reference to sections 74, 78 or 79. Similarly none of those sections contains any direct reference to section 84(8), although by its express terms section 78 only applies if Customs are not liable to pay interest apart from that section. In my judgment section 84(8) requires the Tribunal to determine a rate of interest by reference to the facts of the particular case where this is possible.
66. In the present case the result of the withdrawal by Customs of the decision refusing the repayment claim then under appeal was that it was conceded that VAT credit due has not been paid and I so find, see Olympia Technology at paragraph 7. This has the effect that the payment of interest by Customs under section 84(8) is mandatory. Since Customs are liable to pay interest under section 84(8), section 78 does not apply.
67. Apart from section 74 and section 84(8) the VAT legislation does not contain any other provision under which Customs may be liable to pay interest. It seems most unlikely that the limitation in section 78 was inserted to cover circumstances such as in Elite Mobile where the High Court was asked to award interest not under the VAT legislation but under the Supreme Court Act 1981, s.35A on an application for judicial review. It is clear that it was specifically intended that once section 84(8) applies section 78 would cease to apply in relation to the amount and period for which interest is payable under section 84(8).
68. Whereas payment of repayment supplement under section 79 excludes section 78 interest, it does not preclude an award of interest under section 84(8), see Bank Austria, UK Tradecorp Ltd and Olympia Technology. The repayment supplement is not interest. It is "a spur to efficiency on the part of the Commissioners", see Auld J in Customs and Excise Commissioners v L Rowland (Retail) [1992] STC 647 at 655g.
69. Mr Beal submitted that repayment supplement should be taken into account when determining section 84(8) interest by reducing that interest. He said that if interest is directed for (say) three years one-third of 5 per cent should be deducted from the annual rate. It seems to me however that such an approach would defeat the purpose of section 79. Indeed any adjustment to the rate determined under section 84(8) would pro tanto deprive section 79 of its intended effect. It would mean that the amount received by an appellant under sections 79 and section 84(8) combined would be the same whether or not there had been delay attracting a section 79 payment. Although Parliament excluded section 78 interest where there is a section 79 payment, it made no similar provision in section 84(8). In those circumstances I conclude that, when determining the rate of interest under section 84(8), no adjustment should be made to take account of a supplement under section 79.
70. Although Mr Beal accepted that the Tribunal has a discretion as to the rate under section 84(8), he said that it should adopt the section 78 rate in the absence of evidence in a particular case. As Miss Whipple pointed out, however, if this had been intended the wording of section 84(8) could have been modified.
71. Essentially the submissions for Customs rely on the decision of Lindsay J in Elite Mobile [2005] STC 275 where he adopted the section 78 rate when fixing the appropriate rate under section 35A(3) of the Supreme Court Act 1981.
72. In Elite Mobile Customs had accepted that Elite was entitled to credit for input tax claimed on two returns but, instead of repaying the tax, set it off against the tax on another assessment which was under appeal but where hardship had been accepted under section 84(3). Elite applied for judicial review of the decision to set-off the tax rather than repay it and asked for further relief. There was no appeal to the Tribunal because the entitlement to the input tax was never in dispute so that no question of section 84(8) interest arose. Before the application by Elite was heard Customs repaid the input tax and stated that interest would be paid under section 78. In the judicial review proceedings Elite claimed a higher rate of interest as further relief relying on section 35A; Elite asked for 8 per cent interest, compared with 2 to 3 per cent at the relevant time under section 78. Lindsay J decided that section 35A(3) gave the court an unfettered discretion as to interest.
73. His Lordship considered that, if interest excess of the section 78 rate was fixed under section 35A(3) on the footing that no interest was due under section 78 because the amount "falls to be increased" by a section 79 supplement, but in the event no supplement proved to be payable, then the excess over section 78 ordered under section 35A(3) would be repayable. He said at [33] that he had not been taken to any provisions for refund and continued,

"Had it been foreseen by the legislature that interest might become payable under section 35A at rates higher than the section 78 rate one might reasonably have expected to find such provisions."

He said that the absence of such provisions pointed towards a view that the rate until the section 79 position was established should be the section 78 rate.

74. Pausing there, I observe that here there is no question of repayment by the Appellants of section 84(8) interest once determined because once Customs are liable to pay interest under section 84(8) no interest is payable under section 78.
75. Lindsay J accepted that the provisions in the VAT Act 1994 and section 78 are not an all embracing code as to interest but said that this did not mean that regard need not be had to the rates prescribed under section 78. At [34] he said this,

"[34] There is nothing, in my judgment, that precludes a court, when fixing a rate of interest under the discretion conferred by section 35A(3), from having in mind that Parliament has in some instances – i.e. under section 78 – prescribed rates of interest as to repayment of VAT."

He pointed out at [35] that Elite had led no evidence that the section 78 was unusually inappropriate or that the judgment rate was especially appropriate and continued,

"The discretion to fix a rate of interest that is conferred on the court by section 35A(3) is unfettered save only to the extent that the discretion is to be judicially exercised. Nothing I say here, therefore, can or is intended to bind other judges in other cases but assuming, for the reasons which I have given, that section 35A does apply on the facts before me, … I see it as both convenient and just to fix the appropriate rate or rates as those which would have been from time to time applicable under section 78."

76. In my judgment it is important to note that not only was Elite Mobile not concerned with interest under section 84(8) but the judgment makes no reference to section 84(8). Whereas section 35A(3) interest cannot be awarded if interest runs under section 78, so that in those circumstances section 78 takes absolute priority, if section 84(8) applies no interest is payable under section 78. Section 84(8) is an entirely separate regime. There was in Elite Mobile a pragmatic reason to apply the same rate as under section 78 since the Court considered that any excess over section 78 might become repayable. That consideration is wholly absent in the present case. It is also important that Lindsay J said in terms that he did not intend to bind other judges in other cases.
77. In my judgment it is not appropriate to treat the section 78 rate as the starting point in principle, on the footing that it is the rate prescribed in cases of official error, and to apply it in the absence of contrary evidence.
78. That however leaves the question unresolved of what rate the Tribunal should determine when as here there is no evidence of special circumstances. The Tribunal has a discretion but it is judicial and not arbitrary. Although the Act gives no indication of a starting point, the Tribunal must start from somewhere. VAT is payable on supplies for consideration by persons carrying on a business. The purpose of interest is to compensate for the loss of use of the money. It seems to me that in principle the compensation to a person carrying on business for the loss of use of money should be at a commercial rate. Consequential damage is not relevant. Evidence of actual interest paid or lost by reason of the failure to pay the credit due is relevant. Absent specific evidence, the appropriate rate is a commercial rate. I do not accept the submission that for this purpose RSPCA was not to be equated with a commercial concern. It is only because it was making supplies in the course of business that it was able to recover input tax.
79. I am unable to accept that the High Court judgment rate of 8 per cent is an appropriate starting point. It is substantially in excess of commercial rates and has been throughout the relevant period. It compares with the current clearing bank base rate of 4.5 per cent and a lower gross redemption yield on short-dated government stock.
80. In my judgment the convenient starting point is the reference rate under S.I. 1998 No.1461 which is calculated by averaging the base lending rate of the six largest clearing banks on the monthly reference day rounded to the nearest whole number. This is the rate on which section 78 interest is based but without the deduction of 1 per cent under regulation 5. It has the advantage that it is easily ascertainable.
81. I accept Miss Whipple's submission that these rates are lower being based on compound interest than if they were based on simple interest. Since Customs objected to the Appellants providing calculations after the hearing, I carried out my own calculations. I estimate that over the relevant period the rate of interest would need to be 0.31 per cent higher to produce the same result as monthly compounding and 0.28 per cent to produce the same result as quarterly compounding. The difference is not that great but on a sum in excess of £4 million over a period in excess of three years it is not insignificant.
82. It seems to me that if an appellant produces evidence that it has borrowed money because it has not received a payment to which it is entitled it is entitled to include the interest on the interest. Bank borrowing would certainly be compounded. I see no reason why when a substantial sum is due over an extended period the Tribunal should not make an adjustment to reflect the fact that the interest will be simple as opposed to compound interest.
83. I do not accept the submission by Mr Beal that RSPCA should have mitigated its loss by accepting Mrs Halliday's suggestion of a voluntary disclosure subject to a deed. It would only have covered a small proportion of the repayment claimed and there was no suggestion that the RSPCA would be compensated for the expense. In addition RSPCA would have had to obtain the consent of the Charity Commissioners. On the facts I consider that RSPCA was entirely justified in not accepting the suggestion. Furthermore in my judgment the concept of mitigation applies to damages and is inappropriate to interest to compensate for the loss of the use of money.
84. The next issue is the period for which interest should run. Both parties accept that this is a matter for the determination of the Tribunal under section 84(8).
85. In my judgment just as the burden is on an appellant to adduce evidence of interest incurred to support a higher rate, so the burden is on Customs to show that the period for which interest is awarded should be restricted.
86. The initial repayment claim by RSPCA was dated 30 April 2001 and no doubt received by Customs at the beginning of May. In 90 per cent of cases Customs make repayments within 10 days. I accept that some inquiries were to be expected in view of the size of the claim. It is clear however that from 21 June 2001 at the latest the reason for the delay in payment of the claim was the belief that the transactions between RSPCA and Properties were not business activities in accordance with the Tribunal decision in Halifax [2001] V&DR 73. When the decision in the present case was withdrawn it was accepted that the transactions were supplies in the course of business. This was not a case where new facts had emerged. The clear inference is that the original decision and the inquiries which preceded it were based on an incorrect view of the law. I see no reason why the Appellants having succeeded in their appeals against the decisions should be deprived of interest for the period taken up by the inquiries.
87. I do not accept the proposition that the period to December 2001 should be left out of account on the analogy of section 78(8) because of delay by the Appellants. On the material before me I am not satisfied that there was any substantial delay. Furthermore all that was delayed was the decision by Customs formalising the error and giving rise to the right of appeal.
88. I conclude that interest should run from 21 June 2001 for RSPCA's claim for period 03/01 and from 10 days after receipt of its later claims.
89. Mr Beal submitted that in the case of RSPCA interest should run to May 2004 instead of 20 October 2004 because of delay in submitting partial exemption calculations. No explanation was given as to why the Appellants took so long in submitting the calculations, however I accept the submission by Miss Whipple that it was inequitable for Customs to retain a sum in excess of £4.3 million for over six months by reason of a partial exemption adjustment of £13,278. No evidence was given by Customs as to their knowledge of the partial exemption position of RSPCA, but it is inconceivable that they had no knowledge of the pattern of its activities and it seems to me it must have been apparent that the adjustment would be very small. I conclude that a reduction of one month would be proportionate. Strictly the period to be excluded should be from 10 March 2004, however rather than exclude a period in the middle I direct that the interest should run to 20 September 2004.
90. In the case of both Appellants I determine the rate of interest at 4.30 per cent simple interest. This takes account of the base lending rates over the period with an adjustment because these rates assume compounding.
91. I am unable to determine the periods for Properties because the amounts and dates of repayment are not agreed and no clear figures have been put forward by Properties. I direct that within 14 days Properties notify the Respondents of the dates for which interest is claimed on the basis of this decision and the amounts involved and that within 14 days thereafter the Respondents state whether or not these are accepted. If the dates and amounts cannot be agreed the matter will have to be relisted in which case I direct that witness statements be served exhibiting all necessary material. It would not appear that the partial exemption aspect affected Properties.
92. Finally I turn to costs. Whether or not Customs could or should have given a decision on the repayment claims before 11 January 2002 I find that no decision was in fact given until then. I have considered the correspondence between May and December 2001 and I do not consider that a de facto decision was given. The letter referred to at paragraph 11 of Colaingrove (2000) Decision 16983 went beyond the letters by Mrs Halliday in this case. I conclude that costs run from the receipt of the letter of 11 January 2002.
93. The costs of the application for interest and costs are also costs of and incidental to the appeal. The notice of objection contended that in the absence of evidence of borrowing the interest claimed has already been met by repayment supplement. Although that position was modified in the skeleton argument served at the start of the hearing no offer had been made and no offer as to interest was made at any point. Although the rate which I have determined is less than RSPCA sought it is substantially more than would have been directed on the basis of Mr Beal's submissions. The substantial arguments were decided in favour of RSPCA, particularly as to the relevance of sections 78 and 79.
94. It was most unsatisfactory that Customs were unable to agree the figures on which the claim of interest by RSPCA was based until the last day and never advanced figures of their own. All payments were inevitably within their knowledge. This confused matters and added to the length of the hearing. Initially it was contended by Mr Beal that it was necessary to consider the combined position of the Appellants (see paragraph 34 of the skeleton) although he resiled from this position on the facts of this case.
95. A relatively short time was taken up with submissions as to costs. The submission by Miss Whipple that costs should run from May 2001 was not successful. Although some time was spent in considering the facts as to this decision, most of that material was relevant to the dates from which interest should run on which the Appellant succeeded.
96. I conclude that RSPCA is entitled to 90 per cent of the costs of the application initiated on 13 July 2005 including this hearing and to the entirety of the other costs of and incidental to the appeal. I direct that these costs be assessed by a Taxing Master of the Supreme Court if not agreed.
97. Since the application of Properties is not yet fully resolved I defer making any decision as to costs in its case.

Summary of Conclusions

98. (a) Section 84(8) requires the Tribunal to determine a rate of interest by reference to the facts of the particular case where this is possible (paragraph 65);

(b) No adjustment should be made by reason of the payment of supplement under section 79 when determining the rate of interest under section 84(8) (paragraph 69);

(c) It is not appropriate to treat the section 78 rate as a starting point when determining the rate under section 84(8) (paragraph 77);

(d) A convenient starting point under section 84(8) in a case where there is no evidence specific to an appeal is the reference rate under S.I. 1998 No.1461 calculated by averaging the base lending rate of clearing banks (paragraph 80);

(e) Where a substantial sum is due over an extended period, an adjustment is appropriate to take account of the fact that base lending rates are lower because they are to be compounded than they would be for simple interest (paragraph 82);

(f) The concept of mitigation is not appropriate to interest under section 84(8) and does not in any event arise on the facts of this case (paragraph 83);

(g) Interest should run from 21 June 2001 for RSPCA's first claim and thereafter from 10 days from the receipt of the claims (paragraph 88);

(h) Some reduction in the period for which interest is payable should be made because of the need for a partial exemption adjustment but it must be proportionate (paragraph 89);

(i) The rate of interest for both Appellants is determined at 4.30 per cent (paragraph 90);

(j) RSPCA is entitled to its costs of and incidental to its appeal against the decision of 11 January 2002 and to 90 per cent of its application for interest under section 84(8) the costs to be taxed if not agreed.

THEODORE WALLACE

CHAIRMAN

RELEASED: 1 February 2006

LON/02/161&162