United Kingdom VAT & Duties Tribunals Decisions

Church of Scientology Religious Education College Inc v Revenue & Customs [2006] UKVAT V19673 (13 September 2006)

19673

Value added tax – appeals – applications for postponement must be made in good time
Value added tax – exempt supplies - refund of input tax – time limits for claims

LONDON TRIBUNAL CENTRE

CHURCH OF SCIENTOLOGY RELIGIOUS EDUCATION Appellant

COLLEGE INC.

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: Dr. David Williams (Chairman)

Mrs L Salisbury (Member)

Sitting in public in London on 2 May 2006

Rupert Baldry of counsel, instructed by Hodkin & Co, solicitors, for the Appellant

Ben Collins of counsel instructed by the Office of the Solicitor to Her Majesty's Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1. The Appellant ("the College") is a non-profit organisation registered as a corporation in South Australia. It is registered in the United Kingdom for value added tax purposes as a religious organisation. These two appeals concern claims of the College that the services it provides to individuals should have been exempt from value added tax throughout the periods relevant to these appeals. The services were provided in return for fixed donations set by the International Church of Scientology, and not by the College.
2. The College has for some years considered that its services are exempt services for the purposes of value added tax, and that it did not make those supplies as a taxable person. The Respondents and their predecessors in law ("HMRC") consistently denied that status, and required the College to account for value added tax on its supplies. It did so.
3. In 2000, following a ruling issued by HMRC to an organisation related to the College, HMRC informed the College that HMRC now agreed that the College was an eligible body within the meaning of Note 1(e) of Group 6 to Schedule 9 to the Value Added Tax Act 1994 (a not for profit body applying any profits to future supplies). HMRC also accepted that the services that the College provided were exempt under Item 1 of Group 6 (provision of education, research and vocational training). That ruling is not in dispute. It confirms that the main supplies by the College were and are exempt from value added tax.

The decisions under appeal

4. Following this ruling, voluntary disclosures by the College, and a site visit, HMRC agreed to repay overpaid value added tax from 1 July 1997. Statutory interest was also paid. The College also asked for repayment of the value added tax overpaid from 1 July 1996 to 30 June 1997. This was refused. The College appealed. That is the first of the two appeals covered by this decision. The main issue in that appeal was that, in the view of HMRC, the claim for repayment was made in 2000. HMRC applied the repayment "cap" to refuse repayments of value added tax paid more than 3 years before the claim. They applied section 80(4) of the Value Added Tax Act 1994 (introduced by the Finance Act 1997). The College contended that its claim was made before the date accepted by HMRC.
5. On 30 June 2003 the College made a detailed further claim for all overpaid value added tax from 1 January 1990 to 30 June 1996. The value added tax reclaimed was £4.1 million. It also made a protective unparticularised claim for earlier periods. This claim was for periods more than three years before the claim. The claim was made following the ruling of the European Court of Justice in Marks & Spencer plc v Commissioners (Case C-62/00) [2002] STC 1036. The claim was made on the last day of the extended period for claims set by HMRC's Business Brief 22/02. That claim was refused entirely. That refusal is the second of the appeals now before the tribunal. Mr Baldry accepted at the hearing that the second appeal superseded the first appeal if it was successful. But the arguments in the first appeal still stood and were not abandoned.

Applications to and directions by the tribunal

6. The appeals were listed for hearing together. The litigation in both the British courts and tribunals and the European Court of Justice caused the appeals to be stayed for some time. As no progress appeared to have been made in the appeals, the tribunal gave directions for a full hearing of the case, and it was listed for hearing over two days in May 2006. That listing was notified to the parties in January 2006 after the usual consultations. A number of procedural directions were made in the usual way to ensure an effective and fair hearing.
7. On the last working day an application was made by HMRC to the tribunal to stand the matter over for a further period. This application was made, HMRC submitted, because of the decision of the Court of Appeal in Fleming (trading as Bodycraft) v HM Revenue and Customs [2006] EWCA Civ 70. The judgments of the Court of Appeal had now been issued. But HMRC were considering seeking permission to appeal to the House of Lords. And they had applied to the Court of Appeal to stay its decision.
8. At the start of the hearing, Mr Baldry for the College objected to that application and made a cross-application to have the appeals allowed without further hearing under rule 19(4) of the Value Added Tax Tribunal Rules 1986. This application was made as a response to the failure of HMRC to comply fully with directions made by the tribunal for the full hearing.
9. Last minute applications are unfortunately something seen increasingly in this jurisdiction. In the current appeals any such application has to be seen in the context both of the time scales involved and the actions taken by the tribunal and parties to get the matter ready for full decision. The first of the two appeals is now significantly old. It arose from a claim first made in 1999. The decision on the claim was made on 2 March 2001, and appealed that month. HMRC stated a case in 2001, and amended it in 2002. The value added tax for which repayment is sought under this dispute relates to the year 1996-97. The other appeal is more recent, but was made in January 2004. HMRC' case was stated in March 2004. During that period the appeals have been subject to repeated applications to extent time, hold over, or stay. After six separate applications for prolonging the time limits issued on application by the tribunal, a direction was made in August 2002 by agreement for the hearing. There were then another five stays, following the last of which the second appeal was made. A further three directions resulted in further standovers totalling 22 months. Two months after the last of those ran out, the solicitors for the College asked for agreed pre-trial directions to be made. The tribunal agreed to them. But no progress was made. The tribunal therefore listed the appeals for a directions hearing, and on 23 January 2006 directed that the case be listed as soon as dates to avoid were received, HMRC being made liable for the costs of that hearing. It was listed immediately following that direction.

The Rule 19(4) application

10. The agreed directions made in September 2005 were in usual form. They set out time limits for witness statements, a statement of agreed facts, bundles of documents and exchange and submission of skeleton arguments and lists. But the directions were not met. HMRC failed to object to witness statements in time, and as a result were left to make an application to the tribunal in an attempt to redress that failure. The statement of facts arrived late, and the bundles later. And HMRC's skeleton argument was delivered to the College 15 minutes before the start of the full hearing.
11. For Mr Baldry, the last minute application to delay the appeals yet longer, and the failure of HMRC to deliver their skeleton were prejudicial. The delays prevented him and those instructing him fairly to consider and prepare their case and the authorities they proposed to use. That prejudice was the cause of his objection to the whole proceedings continuing. It was also to be seen against the long history of the appeals (as the tribunal has recounted above). He therefore made, and the tribunal agreed to hear, an application under rule 19(4) of the Tribunal Rules to allow both appeals without further hearing. He based that on the repeated delays and failures of HMRC in the appeals and the unfairness of the College having to make its case against such prejudicial behaviour.
12. Rule 19(4) of the Value Added Tax Tribunal Rules 1986 provides:

"If any party to an appeal or application or other person fails to comply with any direction of a tribunal, a tribunal may allow or dismiss the appeal or application."

That is a discretionary power for the tribunal. It must be considered alongside Rule 19(5), which gives the tribunal a wide power to waive any breach or non-observance on such terms as it thinks fit. Mr Baldry argued that the failures of HMRC to agree with directions to which they had agreed were such that, in these cases, the tribunal should exercise the discretion to allow the appeals without more. The power of the tribunal under this Rule is a large one and was appropriate here. He drew attention to the decision of the tribunal in Wallis Ltd v Commissioners of Customs and Excise (London, 26-29 November 2002). In that appeal there was also a failure by HMRC to comply with an agreed direction to serve the skeleton argument by a set time. The tribunal in that case did not dismiss the appeal, but decided to consider a penalty and to reserve the costs aspect. The tribunal also stated more generally (at paragraph 67):

"It is important that in the future HMRC ensure that systems are put in place to ensure that directions are not overlooked."

13. Mr Collins apologised on behalf of HMRC. He agreed, as he put it, that not everything had been done that should have been done. That would appear to be an understatement, as it became clear that one reason for the delay was that HMRC had lost the entire file after the case was listed for hearing. The papers had been reassembled with the help of the tribunal and the College. A letter to the solicitors for the College stated that HMRC would be applying to the tribunal for an extension of time for the bundle and statement of facts. A letter asking for the extension was said to have been sent to the tribunal, but did not appear to have arrived. In addition, counsel originally instructed for the hearing had had to conflict himself out from acting for HMRC at a late stage, and he, Mr Collins, had been briefed at a late stage. He had not been warned by his instructing solicitor about the requirements for the skeleton argument and he had been supplied with inadequate papers. He had discovered the terms of the direction too late to comply.
14. Turning to Mr Baldry's application, he sought to resist it. He contended that this case was not as serious as that in Wallis Ltd, and that the College was not seriously prejudiced by the failure to supply the skeleton. Those advising the College did know the position, and had been made aware a few days before that there would be an application for a standover. There was no prejudice of substance caused b y the delay.
15. Having heard Mr Baldry again in reply, the tribunal adjourned to consider the matter. It accepted that Mr Baldry was fully justified in making an application to draw the attention of the tribunal specifically to the failures by HMRC. In the view of the tribunal, the conduct of the appeal by HMRC was frankly inadequate if not inept – although it excepted Mr Collins from that comment. Not only was there no evidence at all of the system recommended by the tribunal four years ago, there also appeared to be a problem that led to the entire set of papers had been lost. However, without prejudice to the position on costs, it considered that the appeals should be heard properly. They concerned a significant amount of money, and the substantive issue was one to be decided in part by reference to other appeals. The tribunal also indicated that it reserves its position to reconsider the application in the light of the view it took of the other applications it had to decide before it could move to the full hearing. It did not make a ruling on the application of a penalty at that stage and was not pressed to do so.

The application to stand the appeals over

16. The tribunal then considered the application by HMRC to have the appeals stood over. The application was because the appeals were, HMRC submitted, directly covered by the similar appeal progressing steadily through the appeal courts in the case of Fleming. This was the subject of an application for permission to appeal to the House of Lords and another application, to the Court of Appeal, for a stay. Mr Collins again indicated that he regretted the delay, and accepted that the matter could be dealt with by costs if the application was granted.
17. The tribunal drew Mr Collins' attention to the Practice Statement on Postponement of Hearings made by the President of the Tribunal in January 2006. It asked him to explain how his application could be justified at this late stage by reference to the criteria in the Practice Statement. Mr Collins contended that there should be a standover, despite the late application, because of the need to sort out the issues in fact if HMRC succeeded in an appeal before the House of Lords. HMRC had asked the Court of Appeal to stay the Fleming decision and the only delay need be while that is considered. If the Court of Appeal did not stay that case, then the College could come back to the tribunal. But Mr Collins also accepted that if the tribunal directed that the hearing proceed then HMRC would be ready to deal with the matter.
18. Mr Baldry objected strongly to this application. Again he called in aid the long history of the case, and the last minute nature of the application. He drew attention to the fact that there was nothing new in the application since the application to the Court of Appeal and nothing warranting such a last minute, prejudicial application.
19. The tribunal observed that the application was made on the last working day before the day on which the case was to be opened. It was rightly referred to the tribunal to be heard on the day of hearing. That is in accord with the President's Practice Statement on Postponement of Hearings of January 2006. If HMRC had warned the College that it proposed to make this application, then they had not showed the same courtesy in giving the tribunal the same warning or – more properly – giving the matter proper consideration at an earlier date.
20. The Practice Statement sets out the following practice:

"Late postponement applications

8 Where an application to take a hearing out of the list is received within four working days of the hearing date, the hearing will only be taken out if there is a compelling reason for doing so. In other cases applications to postpone will be heard by the Tribunal at the start of the hearing of the appeal. It should not be assumed that a postponement application will be granted, even if it is agreed by both parties. The parties should be prepared to proceed with the hearing if the application is not granted. The tribunal has power to hear an appeal or application, or to give directions in the absence of a party."

21. The tribunal indicated that its starting point in considering HMRC's application was paragraph 8 of that Practice Statement. It also had in mind the interaction with its view of the Rule 19(4) application. Its view was that if HMRC were to persuade the tribunal at this late stage that the appeals should be stayed yet again in a case with such a long history of stays, then it expected to be given, in the words of the Practice Statement, a compelling reason both for the delay in the application and for the further stay. It invited the views of both parties on those issues.
22. The tribunal then again adjourned to consider this application. Its view was that the College was entirely justified in its submission that the application was simply too late. The application to the Court of Appeal by HMRC was made, the tribunal was informed, on 30 March 2006. No application was made in these appeals at that time. No indication was given on 12 April 2006 by HMRC when they wrote to the College, nor in their contacts at that time with the tribunal. The tribunal could see nothing new in the application that had not been known by HMRC for some weeks and that could not have been anticipated for some time before then. If every appeal before the tribunal were to be held up because of other appeals – and more broadly possible appeals – elsewhere in the system there would be serious problems for all concerned. HMRC accepted that the case was at one on its main point with a case decided by the Court of Appeal. There were no issues of fact to be determined on that basis. The case to adjourn again lost strength significantly because it was made so late, and it was not in the view of the tribunal strong enough to prevail against the need to reach a much-delayed decision in both appeals. It had rejected the Rule 19(4) invitation to have the matter decided without a hearing so that the hearing would proceed. The tribunal directed that the hearing proceed. It did not therefore need to consider the Rule 19(4) application further save as to costs.
23. Before the matter could proceed, Mr Collins made a further application. This was to admit witness evidence from a named officer. It became clear to the tribunal, after submissions from both parties, that this was an attempt to introduce evidence to challenge evidence contained in witness statements produced at the appropriate time by the College, but that HMRC had failed to challenge at the correct time. The tribunal rejected the application. HMRC had had their opportunity both to challenge the evidence for the College, and to produce their own witnesses and evidence at the proper time. There was no overriding need of fairness justifying this late application to displace HMRC's own failure to act properly in accordance with directions HMRC had agreed.

The main appeal

24. Compared with the applications, the substance of the second and main appeal was not in dispute. It must be decided in favour of the College. Both parties accepted, and the tribunal agrees, that the tribunal is bound to decide this because of the decision of the Court of Appeal in Fleming. This requires no further discussion by the tribunal as there is no issue of fact in contention in so deciding as a matter of principle. As the claims for the College are not fully quantified, and there may be other issues of detail not agreed between the parties, the tribunal formally decides the issue in principle only, and both parties are at liberty to bring the matter back to the tribunal for full decision if they cannot agree the precise amounts due as a result of this decision.

The first appeal

25. The tribunal also considers it right to decide the first appeal. Technically, this does not arise as the period covered by this appeal is subsumed fully into the second appeal. Nonetheless the tribunal considers it should decide this long outstanding question without any further delay, to avoid any possible complications arising in the final settlement of these appeals.
26. The issue in the first appeal is limited to the proper date to be taken as the date of claim from which the period of repayment can be calculated under the main rules. The College contends that it is entitled to claim all amounts overpaid as from the quarter beginning in July 1996. HMRC took the view that for section 80 purposes the claim was made only on 2 November 2000, and that therefore the overpayments were due only for the three years back from that date. This is essentially a question of fact, unless the relevant documents disclose some point of interpretation of language other than ordinary English.
27. The College submitted that it made its claim by letter dated 19 July 1999. HMRC submitted that the claim was not made until the College sent in detailed calculations on the date HMRC accepted, 2 November 2000. The College argued that HMRC had previously accepted that its letter of 19 July 1999 was a claim. It drew attention to a letter from HMRC dated 29 July 1999 that, the College contended, clearly showed this.
28. In the view of the tribunal, the issue is simply one of looking at the correspondence and deciding when it was correct to say that a claim had been made. It sees no issue of law involved. Having read the correspondence and other documents in the agreed bundle across the period, including the two documents on which the two parties relied, and having heard the views of both parties on those documents, the tribunal decides that it is clear as a matter of fact that the document accepted as a claim on 2 November 2000 was the operative claim. The correspondence before that date, including the letter of 19 July 1999, was in questioning, discussion and similar terms, and was not in terms or in style or form a claim and correspondence following from a claim. The College must therefore fail in this appeal as a separate or alternative issue.

Costs and applications

29. The College is not entitled to costs for the first appeal, and HMRC made no application related to that appeal. But the College is entitled to seek a direction for costs both in connection with the second appeal and in connection with the applications to which the tribunal was required to direct its attention at the beginning of the full hearing, if agreement cannot be reached with HMRC. The parties are at liberty to apply to the tribunal for a final decision on the amount of the repayment that follows from this decision, if there is no agreement, and also any issues about repayment supplement or interest on which there is no agreement.

DR DAVID WILLIAMS

CHAIRMAN

RELEASED: 21 July 2006

LON/01/390

LON/04/0073