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Totel Ltd v Revenue & Customs [2006] UKVAT V19578 (19 May 2006)

VALUE ADDED TAX — input tax — suspected carousel or MTIC fraud — input tax repayment withheld pending ECJ judgment in Optigen and others — input tax paid with repayment supplement shortly after release of judgment — whether interest payable in addition — yes — whether rate of interest to be abated because of payment of repayment supplement — no — whether interest at borrower's or lender's rate —commercial, borrower's rate adopted — whether interest to be simple or compounded — compounded — VATA 1994, ss 78, 79, 84, Senior Courts Act 1981, s 35A

MANCHESTER TRIBUNAL CENTRE

TOTEL LIMITED

Appellant

– and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Manchester on 20 February 2006

Michael Patchett-Joyce, counsel, instructed by Hassan Khan & Co, for the Appellant

Andrew Macnab, counsel, instructed by Acting Solicitor of HMRC, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

This was, originally, an appeal against the Respondents' refusal to pay to the Appellant, Totel Limited, the sum of £217,525 claimed by Totel as recoverable input tax in its return for the month of October 2003. The Respondents' contention was that the input tax was incurred by Totel in the acquisition of mobile telephones which were being used, without Totel's knowledge, in the perpetration of what is commonly known as a carousel, or MTIC, fraud. They relied for their refusal on the decision of this tribunal in Bond House Systems Ltd v Customs and Excise Commissioners [2003] V & DR 210. However, when the judgment of the European Court of Justice in that case and the linked cases of Optigen Ltd and Fulcrum Electronics Ltd (Joined Cases C-354/03, C-355/03 and C-484/03) was delivered, in January 2006 (see [2006] STC 419), the Respondents recognised that their stance could no longer be justified and they agreed to pay the amount of Totel's claim, together with repayment supplement. The remaining questions which I am now asked to decide are whether the Respondents are required to pay interest in addition and, if so, from what date that interest should run, whether it should be compound or simple interest and at what rate it should be calculated.

I approach those questions with a measure of hesitation since I am aware that the same, or similar, questions are under consideration elsewhere, and that guidance may soon be provided by a court superior to this tribunal. Nevertheless, I heard full argument on the subject—from Michael Patchett-Joyce for Totel, and Andrew Macnab for the Respondents—and I think it appropriate that I should provide an answer.

It is necessary to begin with the chronology. Totel's VAT return for October 2003 was received by the Respondents on 14 November 2003. It was a repayment return; the total sum claimed was £696,495.86. Notification that the Respondents were making enquiries before deciding whether to authorise payment of the whole sum was given on 8 December 2003; an undisputed sum was paid then or soon after. A further payment was made in January 2004. On 8 February 2004 a letter containing the decision which was the subject of the appeal was sent by the Respondents to Totel; the letter indicated that of the total sum claimed, £217,525 would not be repaid, on the grounds that the Respondents considered that the transactions which gave rise to it formed part of a carousel. Notice of appeal was lodged on 24 May 2004. The appeal was listed to be heard, in order that the tribunal could determine whether the factual basis of the Respondents' refusal was correct, on 3 and 4 March 2005. That hearing was postponed, for various reasons set out in a direction released on 21 March 2005 (VAT Decision 18988).

Thereafter, the appeal was eventually listed to be heard on 20 and 21 February 2006 but, when the judgment of the European Court to which I have referred was delivered on 12 January the Respondents reviewed this case (and many others like it). They came to the conclusion that their decision to refuse Totel's claim could no longer stand and, shortly before the hearing was due to begin, they informed Totel's advisers that the claim would be met and that repayment supplement would be paid in accordance with section 79 of the Value Added Tax Act 1994, to which I shall return. They indicated that interest would not be paid in addition. They also sought a postponement of the hearing of the appeal on the grounds that the substantive issue had been conceded, arguing that the remaining subsidiary issues could be resolved between the parties without the need for a hearing. The request for postponement was resisted by Totel and the application came before me on the first of the scheduled hearing days. Mr Macnab did not pursue the application for postponement and, as I have indicated, I heard full argument from both sides on those remaining issues.

Mr Patchett-Joyce's argument, in summary, was that interest was payable pursuant to the mandatory provisions of section 84(8) of the 1994 Act, and that the amount of the interest was entirely in the tribunal's discretion, unfettered in any way other than that the discretion must be exercised judicially. There was no basis upon which the tribunal should feel confined to allowing only simple interest; it should instead direct the Respondents to pay a normal, commercial rate reflecting Totel's loss of use of the money. The fact that repayment supplement was also to be paid was irrelevant, as section 79 was directed at a different purpose. In addition, interest should run from the day when, in ordinary circumstances, the claim would have been met which, in accordance with the Respondents' own guidelines, was no more than 10 working days following receipt of the return.

Mr Macnab accepted that section 84(8) is in mandatory terms and that interest was due but, he said, in assessing the rate I should not lose sight of a number of factors. These were that Totel had not in fact borrowed; that other statutory provisions relating to awards of interest did confine, or restrict, the discretion of the courts and tribunals and, in the interests of consistency, should be taken into account; and that Totel would receive repayment supplement which, even if due for other reasons, was nevertheless compensation for delay in payment.

I shall deal first with the date from which interest should run (it is common ground, indeed obvious, that it should cease to run when payment is made), and then turn to the relevance of the repayment supplement, before concluding with the appropriate rate of interest, and whether or not it should be compounded. It is appropriate to begin by setting out the relevant statutory provisions.

Those provisions of the VAT Act are to be found in sections 78, 79 and 84. There are also provisions in section 74, relating to the recovery of interest by the Commissioners from traders, but I think they can be disregarded for present purposes. So much of sections 78, 79 and 84 as is presently material reads as follows:

"78 Interest in certain cases of official error

(1) Where, due to an error on the part of the Commissioners, a person has— …

(d) suffered delay in receiving payment of an amount due to him from them in connection with VAT,

then, if and to the extent that they would not be liable to do so apart from this section, they shall pay interest to him on that amount for the applicable period, but subject to the following provisions of this section.

(1A) In subsection (1) above—

(a) references to an amount which the Commissioners are liable in consequence of any matter to pay or repay to any person are references, where a claim for the payment or repayment has to be made, to only so much of that amount as is the subject of a claim that the Commissioners are required to satisfy or have satisfied; and

(b) the amounts referred to in paragraph (d) do not include any amount payable under this section.

(2) Nothing in subsection (1) above requires the Commissioners to pay interest—

(a) on any amount which falls to be increased by a supplement under section 79; or

(b) where an amount is increased under that section, on so much of the increased amount as represents the supplement.

(3) Interest under this section shall be payable at the rate applicable under section 197 of the Finance Act 1996 …

(7) The 'applicable period' in a case falling within subsection (1)(d) above is the period—

(a) beginning with the date on which, apart from the error, the Commissioners might reasonably have been expected to authorise payment of the amount on which the interest is payable, and

(b) ending with the date on which they in fact authorise payment of that amount …

79 Repayment supplement in respect of certain delayed payments or refunds

(1) In any case where—

(a) a person is entitled to a VAT credit …

and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater.

(2) The said conditions are—

(a) that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and

(b) that a written instruction directing the making of the payment or refund is not issued by the Commissioners within the relevant period, and

(c) that the amount shown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250, whichever is the greater.

(2A) The relevant period in relation to a return or claim is the period of 30 days beginning with the later of—

(a) the day after the last day of the prescribed accounting period to which the return or claim relates, and

(b) the date of the receipt by the Commissioners of the return or claim.

(3) Regulations may provide that, in computing the period of 30 days referred to in subsection (2A) above, there shall be left out of account periods determined in accordance with the regulations …

84 Further provisions relating to appeals

(1) References in this section to an appeal are references to an appeal under section 83 …

(8) Where on an appeal it is found— …

(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; …"

The scheme of these provisions is that, absent an appeal to this tribunal, a taxpayer entitled to a payment which is delayed is entitled to interest in what the Act describes as "certain cases of official error" (section 78) and repayment supplement if he receives a "delayed payment or refund" (section 79). There may be cases in which the taxpayer, despite error or delay, is entitled to neither interest nor repayment supplement, because the qualifying conditions are not satisfied, but I do not need to examine that possibility here. I do, however, see the force of the point made by the tribunal in RSPCA and RSPCA Properties Ltd v HMRC (2006, VAT Decision 19440), at paragraph 64, that "It is not easy to discern a fully coherent scheme".

What is, however, clear is that because in this case section 84(8) applies, section 78(1) cannot; the mere fact that interest is payable for other reasons excludes its operation. Additionally, in Olympia Technology Ltd v Customs and Excise Commissioners (2005, VAT Decision 19145) the tribunal concluded (at paragraph 11) that "section 84(8) stands on its own and is unaffected by the operation of sections 78 and 79": thus subsection 78(2) is not to be applied, even by analogy, and the fact that repayment supplement may be due is to be disregarded. In coming to that view it accepted the earlier decision to the same effect of the tribunal in UK Tradecorp Ltd v Customs and Excise Commissioners [2004] V & DR 195. In that case it also concluded that section 84(8) applied not only when the tribunal had decided a contested appeal, but when (as in the instant case) an appeal was compromised. The latter conclusion seems to me to be plainly correct, and the only possible consequence in this context of section 85 of the 1994 Act (which provides for the settling of appeals by agreement). Although the Respondents sought (unsuccessfully) to argue the contrary in Olympia Technology, Mr Macnab did not attempt to do so in this case.

Having disposed of those preliminary points, I come to the first of the issues I have identified. Section 78(7) provides for the determination of the dates from which the running of any interest due in accordance with that section begins and on which it ends. Because repayment supplement is paid at a flat rate regardless of the passage of time, section 79 provides only for the period of delay which must occur before the liability arises. There is no provision corresponding to section 78(7) in section 84(8) and the starting date is, therefore, a matter entirely within the tribunal's discretion. Mr Patchett-Joyce's argument was that the start date should be the day on which, had it not been for their error about the applicable law, the Respondents would have paid, namely within 10 working days or, in the relevant month, 16 calendar days of their receipt of the return on 14 November, so that interest should run from 30 November 2003. He relied on Public Notice 700-58 which, at paragraph 5.1, states that traders can expect the Respondents to "authorise payment of at least 90% of correct repayment returns within 10 working days of their receipt in the VAT Central Unit." Save for the Respondents' mistaken belief about the legal character of Totel's transactions, he said, there was no reason why this return could not have been processed within that timescale. There was no suggestion that there was any error in it, nor any other cause of a justifiable delay.

Mr Macnab, however, argued that the more appropriate approach to the determination of the starting date was to be found in sections 78 and 79. Even though it was accepted that Totel was innocent of any involvement in a fraud, the Respondents were right to be suspicious that the relevant transactions were circular and formed part of a chain one or more of whose participants had a fraudulent purpose, and were entitled, if not bound, to investigate those transactions. They should be allowed a reasonable time to do so. Therefore the provision of sections 78 and 79 should be adopted by analogy: 10 working days might be the norm in a straightforward case, but this was not such a case. In R (on the application of Mobile Export 365 Limited and another) v HMRC [2006] EWHC 311 Admin Collins J, in a similar case and faced with arguments by the trader that 16 days should be allowed, and by the Commissioners that 30 days was an appropriate period, preferred the latter, as he took the view that the Respondents should have a reasonable period to make the necessary investigations in cases where a claim might be tainted by fraud. He mentioned also the caveat of the European Court of Justice in Optigen that a trader, even if not directly implicated, would lose his right to a payment if he had the "means of knowledge" of the fraud. Although that is not suggested here, it seems to me obvious that the Respondents will require a period of time to satisfy themselves that a trader such as Totel did not have any means of knowledge.

As each case turns on its own facts I am not, strictly, bound on this point by the judgment of Collins J but it is of obvious persuasive value and I have concluded that I should follow it. As Lightman J explained in R (on the application of UK Tradecorp Ltd) v Customs and Excise Commissioners [2005] STC 138, trade in mobile telephones and various other commodities has been extensively exploited for the purpose of fraud, and the Respondents are obliged, because of their duty to taxpayers in general, to investigate claims for the repayment of input tax made by those who deal in such goods. I do not think a period of 30 calendar days is excessive. Mr Macnab did not argue for a longer period. I therefore determine that the date from which interest is to run is 14 December 2003, being 30 days after the relevant return was received by the Respondents.

In Mobile Export 365 Collins J made the point that repayment supplement is designed to encourage prompt payment (as Auld LJ had earlier observed in Customs and Excise Commissioners v L Rowland & Co (Retail) Ltd [1992] STC 647 at 655), and went on to say that it is not a substitute for interest, which is compensation for being out of one's money; thus it would not be appropriate to reduce the interest which would otherwise be payable because the taxpayer will receive repayment supplement in addition. The same conclusion was reached by the tribunal in the RSPCA case (although I am aware that the decision is the subject of an appeal) and in the tribunal decision in UK Tradecorp; inferentially the latter decision was approved in Olympia Technology, although it was not necessary for the decision to decide the point.

I am bound by the view of Collins J and, despite Mr Macnab's urging me to the contrary, I shall follow it. Nevertheless, I have to confess to some misgivings about it which I think it appropriate I should express, since I heard argument and the matter is, as I understand, a live issue in the Respondents' appeal against the tribunal's decision in RSPCA. It appears to me to run counter to the general, long-established, rule that double recovery is generally to be avoided, and it disregards the fact that section 78 and 79, together, are designed to provide a mechanism for compensating traders who, by reason of error or culpable delay, have been kept out of their money. Although the causes of their being out of their money may differ, the effect is the same. The two sections may not cover every eventuality, as I have already observed, and the scheme may not be "fully coherent", but one can see the sense behind section 78(2)—the trader may have interest or repayment supplement, but not both. There would be obvious unfairness if a trader who could establish only mistake received interest alone, while another, suffering the same delay in payment but able additionally to satisfy the section 79 conditions, should receive both interest and repayment supplement. Similarly, it seems to me wrong in principle that a trader who qualifies for repayment supplement should be entitled to interest in addition if he appeals to this tribunal, but can claim no interest if he does not appeal. I do not think that a trader's receipt of repayment supplement should disqualify him from receiving any interest—not least because, by the time an appeal is concluded, several years may have elapsed—but I see no reason why a tribunal, exercising the discretion conferred on it, should be precluded from taking repayment supplement into account to the extent it considers appropriate.

I come, therefore, to the rate at which interest should be awarded. Mr Patchett-Joyce contended that it was immaterial whether Totel had borrowed or not; in either case the rate should be determined by reference to the cost of borrowing even though that cost had not actually been incurred. For that proposition he relied on various comments of the Court of Appeal in Ahmed v Jaura [2002] EWCA Civ 260 in which it proceeded upon the basis that the reference point was the rate at which money might be borrowed on commercial terms; the debate focussed on the question whether the claimant could recover at the higher rate at which banks lent to small businessmen (as he was) or at the lower rate charged to larger businesses. The court concluded that the higher rate should be allowed: it awarded interest at 3 per cent above base rate and that, Mr Patchett-Joyce said, should be the rate of interest in this case. He produced evidence in the form of a letter from Totel's bank, Barclays, that, had it borrowed a sum approximating to the amount of input tax withheld, without security, a rate of 3 to 4 per cent above base rate would have been charged. The letter does not state whether simple or compound interest would be required, but I am aware that conventional bank lending is at compound interest, although the frequency of the rests may vary.

Mr Macnab pointed out that Totel had not in fact borrowed at all, and that there was no justification for allowing interest at a rate which did not reflect reality. Moreover, there was no evidence before the tribunal about the consequences, financial or otherwise, to Totel of the delay in payment. I should, he said, apply the rate prescribed for interest payments made pursuant to section 78—currently 3 per cent—in the absence of adequate grounds for allowing more. Ahmed v Jaura could not be taken as authority for the proposition that the cost of borrowing should be allowed, since the claimant in that case had in fact borrowed and it was assumed without argument that borrowing rate was recoverable; the court did not consider the position of a claimant who had not needed to borrow. Section 35A of the Senior Courts Act 1981 restricts the High Court to simple interest when awarding judgment for damages or debt, and in the absence of special circumstances which did not arise here consistency of treatment demanded that the tribunal too should award only simple interest.

I was referred to a number of other authorities, mainly decisions of this tribunal, but I think the only one which I need to mention is the decision of the Court of Appeal in Sempra Metals Ltd v Commissioners of Inland Revenue [2005] STC 687. This, too, was a case in which a payment had been withheld because of an incorrect application of European law. At first instance, Park J decided that a conventional, or market, borrowing rate should be adopted, the same for all claimants regardless of individual circumstances, and that the European law concept of full restitution or compensation favoured compound rather than simple interest. The Court of Appeal concluded that restitutionary awards of interest were not analogous to awards of interest on damages or debt (and thus section 35A of the 1981 Act was of no application), that the appropriate rate of interest was that at which commercial loans were offered to the market (that is, a borrower's rate) and that, since such loans were offered either on the basis that interest would be paid periodically, or that it would be compounded, compound interest should be allowed, although the fact that the interest was to be compounded should be borne in mind when fixing the rate.

Mr Macnab sought to distinguish Sempra Metals on the ground that it dealt with a situation in which United Kingdom domestic law was inconsistent with European law, which was not the position here. I do not accept that there is any such distinction to be drawn. In each case the Commissioners had withheld from the traders payments to which they were entitled as a matter of European law. That in the one case their actions were based on an incorrect legislative implementation of European law, and in the other on an error in its interpretation seems to me to be a difference of no substance or significance. The effect in each case is the same: the traders were deprived of money to which they were entitled.

Since it cannot be distinguished, Sempra Metals is binding on me, and its application to the facts of this case leaves me only to determine the rate of interest and the frequency of the rests. I shall, therefore, direct that the Commissioners pay to Totel interest on the amount for the time being unpaid from 14 December 2003 until payment of the capital sum, such interest to be compounded. The only evidence before me of the rate at which a sum of the appropriate size might be borrowed is the letter from Totel's bankers, to which I have referred. Mr Macnab advanced no argument to the contrary, and I shall therefore adopt the rate set out in it. Although it referred to a rate of 3 to 4 per cent over base rate, Mr Patchett-Joyce, as I have mentioned, was content to accept the lower of those figures (and, in the absence of clear evidence that the rate which would actually have been charged would exceed it I think he was right to do so); accordingly I direct that the rate shall be at 3 per cent above Barclays' base rate from time to time. I was provided with no evidence about the frequency of rests, although Mr Patchett-Joyce suggested they should be quarterly. Since I have no evidence on the point I have come to the conclusion, by impression rather than by scientific means, that quarterly is too frequent while annual is too infrequent, and that the rests should be at six-monthly intervals. I trust that the parties will be able to agree the arithmetic, but in case not, or there is any other matter outstanding, I give permission for this application to be restored in order that those other matters may be resolved. As the parties asked, I also give permission to them to make an application for a direction in respect of the costs of this application.

I was asked to direct that the costs of the appeal itself be paid by the Respondents to Totel and that if the amount of the costs cannot be agreed they are to be subject to detailed assessment, on the standard basis, by a costs judge of the High Court. I so direct.

COLIN BISHOPP

CHAIRMAN

Released: 19 May 2006

MAN/04/0275