United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19795

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Purple International plc v Revenue & Customs [2006] UKVAT V19795 (28 September 2006)

19795

VALUE ADDED TAX – INPUT TAX – Input tax withheld pending ECJ judgment in Optigen and Others – input tax paid with repayment supplement following release of judgment – whether interest payable in addition – yes – interest rate commercial on borrowers' rate – interest compounded – rate base plus 2.5% with quarterly rests – no abatement because of repayment supplement – commencement 30 days in respect of first two claims 16 days thereafter –section 84(8) VATA 1994

LONDON TRIBUNAL CENTRE

PURPLE INTERNATIONAL PLC Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

JO NEILL (Member)

Sitting in public in London on 8 May 2006, 29 June 2006, Final Submissions by 20 July 2006

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

Andrew MacNab, Counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION

The Appeal

1. The Appellant appealed against the Respondents' refusal to repay claims for input tax in the sums of £400,691.73 (January 2003), £215,758,78 (February 2003), £113,793.75 (October 2003) and £187,482.25 (June 2004).
2. Following the judgment of the European Court of Justice in Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v Commissioners of Customs and Excise [2006] STC 419 the Respondents accepted that the Appellant was entitled to the disputed input tax. Consequently they withdrew the disputed decisions, repaid the input tax together with a repayment supplement of five per cent and agreed to pay the Appellant's reasonable costs in connection with the Appeal.
3. The Appellant applied to the Tribunal to exercise its powers under section 84(8) of the VAT Act 1994 to order interest on the sums of money repaid as input tax arising from its Appeal.

The Dispute

4. The issues in dispute were:

(1) The rate of interest.

(2) Whether the Tribunal had the power to award compound interest?

(3) Whether the Tribunal should take into account the repayment supplement in determining the rate of interest?

(4) The time from when interest should run.

Legislation

5. Section 84(8) which is in Part V of the VAT Act 1994 headed: "Appeals", provides that

"Where on an Appeal it is found –

(b) that the whole of 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 ….

6. Under Part 1V of the Act headed: "Administration, Collection and Enforcement", section 74 provides for interest on VAT recovered by assessment, whilst section 78 provides for interest in certain cases of official error. The rate of interest payable under sections 74 and 78 shall be that determined by section 197 of the Finance Act 1996. Essentially the interest rates are calculated from the reference rate under S.I 1998 No 1461. Under section 74, interest payable to Revenue and Customs, the rate is the reference rate plus 1.5 per cent. Under section 78, interest payable to the taxpayer, the rate is the reference rate minus one per cent.
7. Section 79, in essence, requires Revenue and Customs to make a repayment supplement of 5 per cent of the amount owed where there is a delay of 30 days or more in the repayment of a VAT credit.

The Evidence

8. We received no oral evidence. The evidence took the form of documents comprised in an agreed bundle.

Background

9. The principal activity of the Appellant company was that of dealers in electronic telecommunications, trading as a global wholesaler of GSM handsets. Essentially the Appellant operated as a broker in the bulk sales of mobile telephones. Although the Appellant's monetary turnover was large, the scale of its operations was small, working from one office employing five members of staff (including the two directors) at its trading peak in 2002.
10. The Appellant commenced trading on 17 March 2000. It experienced rapid growth in 2002 with a turnover of £243 million and gross profit of £7 million for the year ended June 2002. During 2003 the Appellant encountered significant cash flow difficulties ostensibly arising from the Respondents' refusal to repay its claim for input tax which led to the withdrawal of its overdraft facility of £2 million on 6 May 2003. The Appellant did not trade in May and June 2003 with the result that its turnover and gross profit for the year ended June 2003 reduced to £167 million and £4 million respectively.
11. The Appellant secured funding from a range of alternative sources which enabled it to recommence trading in July 2003 but at significantly reduced levels. Prior to the withholding of VAT by the Respondents in January 2003 the Appellant averaged 41 deals per month, whereas from July 2003 the number of monthly deals fell to seven.
12. The Respondents continued to refuse the Appellant's claims for input tax with the result that the Appellant ceased trading on 31 March 2004. The accounts for year ended 2004 showed a turnover of £12 million and a gross profit of £255,000.

Loan Facilities

13. In July 2002 the Appellant agreed an overdraft facility with the Royal Bank of Scotland (RBS) in the sum of £2 million which was withdrawn in May 2003. The interest charged on the facility was base rate plus 2.5 per cent per annum. The Appellant relied on the RBS document "Advice of debit interest for the period 17 March 2003 to 15 June 2003" to demonstrate that the interest charged was compound with quarterly rests.
14. After the withdrawal of the overdraft facility the Appellant obtained loans from three different sources in order to maintain its cash flow up to the date it ceased trading in March 2004.
15. The first source was the Appellant's unapproved pension scheme which granted loans of £77,000 on 31 October 2003 and £125,000 on 15 December 2003. The second source was Global Traders Limited which gave loans of £200,000 on 24 November 2003, £100,000 on 28 November 2003 and £210,000 on 14 January 2004.
16. The loans with the pension scheme and Global Traders took the form of "Series A Unsecured Non-Interest Bearing Loan Notes. On redemption the loan note required the payment of a premium which annually represented 10 per cent of the principal amount of the loan.
17. The final source was Harold Baron who lent the Appellant £250,000 on 19 November 2003 unsecured at an interest rate of 18 per cent per annum. Under the terms of the loan the principal sum was to be repaid in full at the expiry of three months from the date of the agreement. The Appellant made part-payments in the sums of £99,000 on 24 April 2004 and £80,000 on 9 June 2004. The Appellant repaid the balance of the loan in March 2006.
18. Nils Barton Wager was the principal shareholder and managing director of the Appellant company. Mr Wager received a salary of £3.5 million in 2002; £2.6 million in 2003, and £1.4 million in 2004. Mr Wager was the sole beneficiary of the Appellant's unapproved pension scheme. In 2002 the Appellant made a contribution of £1.4 million to the pension fund.
19. Global Traders Limited was a company registered in Gibralter. It had close links with the Appellant acting as its marketing agent promoting the sales of mobile telephones overseas. Global Traders employed Mr Wager, the Appellant's principal shareholder and managing director, as an employee.
20. Mr Baron was an employee of the Appellant company between December 2002 and April 2004.

Lochroe Reports

21. The Appellant commissioned reports from Lochroe, an independent business banking and finance specialist, to conduct a marketing review assessing the sources of finance that would have been available to a company with the Appellant's commercial profile in mid-2003.
22. Lochroe reported on 27 February 2006 that during 2002 the Appellant's finances and trading relied on the monthly VAT reclaim amount, against which RBS provided a closed bridging facility to provide the company with working capital. This facility was available at a rate of base plus 2.5 per cent which reflected the reasonably low risk that the Appellant company posed at the time.
23. According to Lochroe when the Respondents refused the Appellant's input tax reclaim its commercial profile moved from low to high risk which resulted in the withdrawal of its closed bridging facility. In those circumstances Lochroe concluded from its survey of five major banks that the Appellant would be highly unlikely to obtain a loan facility in the form of a conventional bank debt. Thus the only loan market open to the Appellant was the sub-prime market where the going monthly interest rate at the time was 1.5 per cent or 18 per cent per annum.
24. Lochroe arrived at the interest rate of 18 per cent without knowledge of the Appellant's loan with Harold Baron.
25. Lochroe confirmed in a subsequent report dated 29 May 2006 after discussions with a broker working in the sub-prime loan market that interest on loans from this market would almost without exception be compounded on either a monthly, quarterly or annual basis.
26. Lochroe acknowledged that their conclusions were based on a hypothetical situation occurring three years ago.

Reasons for Our Decision

Rate of Interest

The Representations

27. The parties accepted that in relation to this Appeal that the Tribunal's power to award interest under section 84(8) of the VAT Act 1994 was mandatory. The Respondents, however, pointed out that it was open to the Tribunal to award interest at a nil rate.
28. The parties also agreed that section 84(8) was a self standing provision and the discretion to determine the rate of interest was not affected by sections 78 and 79 of the VAT Act 1994. The Tribunal's discretion under section 84(8), however, to determine the rate of interest must be exercised judicially.
29. The Respondents argued that in exercising our discretion we should take account of other provisions in the VAT Act dealing with interest, in particular the reference rate minus one per cent payable by the Respondents to the taxpayer under section 78 of the 1994 Act. Counsel contended that it would be illogical to treat taxpayers differently simply on the basis that an Appeal has been lodged. In Counsel's opinion it would create a perverse incentive for taxpayers to ignore the possibility of administrative resolution of their case, if the Tribunal was perceived to apply a consistently higher rate of interest than that prescribed under section 78.
30. According to the Respondents, the Tribunal should also have regard to conventional practice in commercial cases which was to award interest at base rate plus one per cent. Respondents' counsel conceded that a higher rate may be justified dependent upon the evidence and proof that the claimant in fact borrowed funds at a higher rate.
31. Respondents' counsel was sceptical of the value of the Appellant's evidence regarding its borrowings. Counsel pointed out that the RBS documents did not specify that the interest was compounded. Further, given that RBS withdrew the facility in May 2003, the rate of base plus 2.5 per cent was not actually paid by the Appellant.
32. The loans with the Appellant's unapproved pension scheme and Global Traders Limited were not arms length agreements, and it was not clear from the documentation that interest was payable on the loans, since the documents referred to premiums rather than interest. Likewise the loan with Mr Baron was arguably not a "commercial" loan because of his relationship as an employee with the Appellant.
33. Respondents' counsel considered the three Lochroe reports unnecessary, adding nothing to the Appeal. They were not a substitute for the Appellant's evidence about actual borrowing.
34. Appellant's counsel considered that the calculation of interest should be a relatively straightforward matter. The purpose of the order for interest was to cover the cost of loss of the use of the sums wrongly withheld. The loss was assessed to the cost of borrowing, no distinction was drawn between a party in cash surplus or one who was a net borrower.
35. Counsel submitted that the rate of interest payable under sections 74, 78, and 79, part 1V of the 1994 Act were not relevant to the determination of the rate of interest under section 84(8) which was in Part V of the Act. Part 1V concerned the administrative powers of HM Revenue and Customs, which were fundamentally different from the judicial powers under part V. In Counsel's view there was a world of difference between an administrative resolution of a matter, which would have the virtues of speed and cheapness, and resolution through recourse to litigation, which would not share the same virtues as for administrative resolution. In short, sections 74, 78 and 79 formed part of one regime under the 1994 Act, and section 84(8) part of a wholly different regime: different regimes, different applicable principles, and different outcomes.
36. Counsel relied on the Court of Appeal judgment in Ahmed v Jaura [2002] EWCA 210 as authority for the proposition that the applicable interest rate should broadly reflect the rate at which the successful party would have had to borrow the amount recovered over the period in question. Where there was cogent evidence of actual borrowing, it displaced the applicability of the conventional rate of interest used in the commercial court.
37. Counsel considered that the Tribunal had ample evidence of the Appellant's actual borrowings during the period after which its input tax claims were refused. In counsel's opinion the evidence demonstrated that the Appellant was forced to borrow money at a rate of 18 per cent, with monthly rests, which was the order that the Appellant requested from the Tribunal.

Starting Point

38. We are examining at this stage of our judgment the appropriate rate of interest. The issue whether that rate should be compounded is considered in the next section.
39. Respondent's counsel suggested that the starting point for the appropriate rate of interest should be the section 78 rates of interest. The VAT and Tribunal Decision in RSPCA v Revenue and Customs [2006] VAT decision number 19440 decided that as the purpose of interest was to compensate for loss of use of money, the appropriate rate should be a commercial one, and in this respect the reference rate under SI 1998 No 1461 provided a convenient starting point.
40. After considering the approaches taken by the VAT and Duties Tribunal in awarding interest under section 84(8) including the RSPCA case Mr Justice Collins in R (on the application of Mobile Export 365 Ltd and another) v Revenue and Customs Commissioners [2006] EWHC 311(Admin) applied the commercial rate of interest of base plus one per cent as his starting point:

"The transactions at issue were commercial transactions and accordingly a commercial rate of interest should be applied under section 35A(1) of the Supreme Court Act 1981. The standard for the commercial rate was base plus one per cent".

41. The factual circumstances of this Appeal were essentially the same as those considered by Collins J in Mobile Export. The Appellants in both cases were refused credit for input tax by the Respondents on the ground that the relevant transactions formed part of a chain of supply which involved a defaulting trader. The transactions at issue in this Appeal were commercial transactions. In those circumstances we see no reason to depart from Mr Justice Collins' starting point of the commercial rate of interest, albeit we are dealing with the award of interest under a different statutory power of section 84(8) VAT Act 1994. Thus we adopt as our starting point in this Appeal the commercial rate of interest of base rate plus one per cent.

Relevance of Rates of Interest under sections 74 and 78

42. Regardless of our decision on starting point, Respondents' counsel maintained that the eventual rate of interest decided upon should be in line with the rates of interest in part 1V of the VAT Act 1994. Counsel accepted that section 84(8) was a self standing provision, from which we are entitled to conclude that in reaching our determination under section 84(8) we were not bound by the rates prescribed in sections 74 and 78. Counsel's argument, however, was subtler in that we were exercising a discretion under section 84(8) and as part of that discretion we should have regard to the prevailing rates of interest under sections 74 and 78. Appellant's counsel, on the other hand, stated that these rates of interest were not relevant to the determination of the appropriate interest rate under section 84(8).
43. Respondents' counsel's submissions were supported to an extent by Lindsay J in R (on the application of Elite Mobile PLC) v Customs and Excise Commissioners [2004] EWHC 2923 and the VAT and Duties Tribunal decision under the chairmanship of its President, Stephen Oliver QC in Olympia Technology Limited v Revenue and Customs [2005] VAT decision number 19145.
44. In Elite Mobile Lindsay J held that

"…. there was nothing that precluded a court, when fixing a rate of interest under the discretion conferred by section 35A(3) of the Supreme Court Act 1981 from having in mind that Parliament had in some instances, namely under section 78 of the 1994 Act, prescribed rates of interest as to repayment of value added tax".

45. In Olympia Technology Stephen Oliver QC established that section 84(8) stood on its own and was unaffected by the operation of sections 78 and 79. However, when he came to fixing the rate of interest he considered that following Elite Mobile the section 78 rate should be used unless it was so significantly out of line with current commercial rates that it could only be characterised as unjust. After noting that neither side produced any evidence as to current commercial rates, he applied the rate of interest prescribed by SI 1998/1461 which governed the interest rates for sections 74 and 78 of the 1994 Act.
46. In RSPCA v Revenue and Customs [2006] VAT decision number 19440, a subsequent Tribunal decision to Elite Mobile and Olympia Technology, the Chairman Theodore Wallace found in paragraph 64 that it was difficult to discern a fully coherent scheme regarding interest payments under the 1994 Act. At paragraph 76, he stated that

" 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. The 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".

47. Mr Justice Collins in Mobile Export considered the three decisions in Elite Mobile, Olympia Technology and RSPCA concluding that

"It seems to me that it is also proper to have regard to section 78, but I do not follow Lindsay J entirely. It does not seem to me that it should be regarded at the rate which must apply. However, it is a relevant consideration. It would, after all, have been the rate applicable if proceedings had not been instituted and it was simply a case of the Commissioners delaying payment because they believed they had the legal right to do so, and then discovering that they did not and making the payment in question. One does have to ask oneself the question why the issue of proceedings should make all the difference. But it is clear that it does to some extent, and certainly that is what has been decided by the Tribunal in relation to section 84(8), because one might say that similar considerations could apply in those cases as well" (para. 33).

48. After reaching the above conclusion Mr Justice Collins decided that

"However, although I do not go the whole way with Lindsay J, I do regard the section 78 rates as a material consideration. Parliament has prescribed the rate of 4 per cent where, due to an error, Customs have not paid what is due, and equally 7.5 per cent where there are sums due to the Revenue. Those figures were regarded as material by Mr Oliver, in particular he relied in the end upon the 7.5 per cent rate. The judgment rate of 8 per cent reflects the fact that a judgment of the court has been made, or order of the court based upon an agreement, and accordingly there should be prompt payment of that sum (para. 37).

I return therefore to the commercial rate. I am prepared in the light of evidence to accept that base plus one per cent is somewhat too low. Having regard to the evidence that there is in relation to the position of these claimants, coupled with the rates considered appropriate by Parliament where there is a repayment due by the Commissioners, I would adopt in this case a figure of base plus 2.5 per cent (para. 38)."

49. We have had the benefit of Mr Justice Collins' decision in Mobile Export which was not available to the Tribunal in the RSPCA case^[1]. Unlike Lindsay J, Mr Justice Collins considered section 84(8) in his deliberations. Although Mr Justice Collins was concerned with the exercise of his discretion under section 35 of the Supreme Court Act 1981 we consider that his approach was equally applicable to the exercise of our discretion under section 84(8). Thus, although the interest rates under sections 74 and 78 were not determinative of the issue under section 84(8), they are, however, a relevant consideration when fixing the eventual rate of interest under section 84(8).

The Cost of Borrowings

50. The critical factor, particularly from the Appellant's point of view, is that we should have regard to the evidence about its cost of borrowing during the period the Appellant's claim for input tax was denied.
51. Appellant's counsel submitted that the purpose of interest was to cover the cost of the loss of the use of the sum wrongly withheld. That loss was assessed by reference to the cost of borrowing (no distinction being drawn as to whether the party deprived was in cash surplus or net borrower). The Court of Appeal in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners and Another [2005] EWCA Civ 389 at para.47 stated that

"Second, the convention – or at least, the practice in the Commercial Court – when awarding interest under section 35A of the Supreme Court Act 1981, is to treat the claimant as a net borrower; and to award interest at a rate which reflects the cost of borrowing rather than the return on lending. … That approach was followed in this court in Jaura v Ahmed [2002] EWCA Civ 210. In that latter case this court was ready to accept that the law should recognise that the rate of interest at which a small business man could borrow was likely to be higher than that available to a first class international borrower".

52. Jaura concerned an interest award under section 35A of the Supreme Court Act 1981 on damages for wrongful termination of a lease for business premises. Lord Justice Mummery cited with approval the following passage from Tate & Lyle Food and Distribution Limited Greater London Council [1981] 3 All ER 716:

"…. I feel satisfied that in commercial cases the interest is intended to reflect the rate at which the plaintiff would have had to borrow money to supply the place that which was withheld. I am also satisfied that one should not look at any special position in which the plaintiff may have been; one should disregard, for instance, the fact that a particular plaintiff, because of his personal situation, could only borrow money at a very high rate or, on the other hand, was able to borrow money at specially favourable rates. The correct thing to do is to take the rate at which plaintiffs in general could borrow money. This does not, however, to my mind, mean that you exclude entirely all attributes of the plaintiff other than that he is the plaintiff. There is evidence here that large public companies of the size and prestige of these plaintiffs could expert to borrow at one per cent over the minimum lending rate, while for smaller and less prestigious concerns the rate might be as high as three per cent over the minimum lending rate. I would think it would always be right to look at the rate at which plaintiffs with the general attributes of the actual plaintiff in the case (though not of course, with any special or particular attribute) could borrow money as a guide to the appropriate interest rate".

53. Appellant's counsel built upon the decision in Jaura for his proposition that the commercial (open market) cost of borrowing was the proper rate for the Tribunal to adopt for the determination of the interest rate. The fact that the Appellant company was able to borrow money in part from a related source at a rate more advantageous than the prevailing cost of borrowing was irrelevant. The Appellant relied upon the opinion of Lochroe which considered that an interest rate of up to 18 per cent would be the appropriate commercial rate of interest for the risk posed by Appellant company after refusal of its claim for input tax by the Respondents. In the Appellant's view, Lochroe's opinion was supported by the terms of the Appellant's loan with Mr Baron.
54. Respondents' counsel disputed that the open market cost of borrowing was the proper rate. Counsel considered that the proposition was inconsistent with the principle that a claimant may not recover damages for breach of contract or tort in respect of damage which he has not suffered. Jaura did not provide authority for awarding the actual rate of interest which may have been paid by the Appellant. Counsel, however, accepted that a higher rate of interest than the conventional commercial rate might be justified if supported by evidence and proof that the claimant has in fact borrowed funds at higher rate. In this respect the Lochroe reports were irrelevant. Further the loan arrangement with Mr Baron was not commercial because he was not independent of the Appellant. Although Respondents' counsel expressed doubts about the RBS arrangements, in that the rate claimed did not reflect an actual rate paid by the Appellant as the facility was withdrawn in May 2003, he considered that the rate of base plus 2.5 per cent represented the best evidence of the commercial rate available at the time.
55. Appellant's counsel countered by stating that there was ample evidence for the Tribunal to conclude that the Appellant actually borrowed moneys which was consistent with the fact that the Appellant was forced to borrow at a rate of 18 per cent. Jaura was authority for the proposition that the Tribunal should award a higher rate that was typical of the parties in the position of the Appellant. The typical rate was not base rate plus 2.5 per cent but the 18 per cent rate which was the rate of borrowing for a company where the Respondents have refused claims for input VAT credits.
56. We are not persuaded by the arguments of Appellant's counsel. First, we are not convinced by the Appellant's evidence that 18 per cent was the commercial rate of borrowing for the Appellant. Second, we consider that Counsel has placed too wide an interpretation of the Court of Appeal decision in Jura. Third, Counsel's approach has the potential of undermining the straightforward nature of interest rate determinations.
57. The 18 per cent rate was largely derived from the investigation carried out by Lochroe. The key feature of the investigation was that it was based on a hypothetical incident occurring almost three years ago. Further, the main thrust of the report was that a new client with a similar financial profile to the Appellant would not be able to secure funding from five major UK clearing banks. Lochroe concluded from that analysis that the option open to the hypothetical trader would be to approach the secondary lending market where rates of up to 18 per cent would not be unusual. The opinion of 18 per cent was not backed up by a factual analysis of the secondary market. Also Lochroe did not explain what it meant by the secondary market other than it was outside the major lending banks.
58. Counsel contended that the 18 per cent rate was supported by the Appellant's actual borrowings during the period in question. This was not so. Just one of the Appellant's six loans had an interest rate of 18 per cent which was with Mr Baron, an employee of the Appellant company from December 2002 to April 2004. The connection of Mr Baron to the Appellant questioned the commercial status of the loan. The remaining loans, which constituted 74 per cent of its actual borrowings, bore an interest rate of 10 per cent expressed in terms of a premium. The Appellant's accountant stated that the rate of 10 per cent was high. Lochroe qualified the accountant's statement by saying that the rate was only high compared with other inter-company or connected loans.
59. RBS did not give direct evidence as to why the overdraft facility was withdrawn from the Appellant. Their letter of 8 March 2006 addressed to the Appellant's solicitors simply stated that they withdrew the facility orally on 6 May 2003 which was not confirmed in writing. We were not, therefore, certain of the precise reasons for the withdrawal of the facility. Similarly the Appellant did not supply the Tribunal with evidence of whether it had sought loans from the secondary market after the withdrawal of the overdraft facility. The absence of direct evidence undermined the assumptions made by Lochroe in its report. Although Lochroe stated that their assumptions were based on information provided by the Appellant's director and solicitors, Lochroe acknowledged that it had not conducted due diligence on the information supplied.
60. We heard confusing evidence about the status of the Appellant's loan notes with the pension fund and Global Trading Limited. Initially we were told that they were discounted bonds. However, this statement was withdrawn during the hearing. The loan notes used the term premium rather than interest rate.
61. In short the case for a commercial rate of 18 per cent was derived from a retrospective theoretical analysis based on assumptions about a hypothetical company seeking funding in an undefined secondary market. The theoretical analysis was not backed up by direct evidence from the Appellant and did not fully reflect the factual circumstances of the Appellant. We were not satisfied with the reliability of the Lochroe report and not convinced about its probative value for establishing a commercial rate of 18 per cent.
62. We consider that the Appellant's application of Jaura to the facts of this Appeal was flawed. Counsel took the word "typical" in paragraph 25 out of context. The key passage in the decision was the quotation from the Tate and Lyle decision which sets out the legal principles for awards of interest in commercial cases. Essentially an award of interest in excess of the conventional commercial rate would be justified if it reflected the cost of borrowing for a plaintiff with the general attributes of the actual plaintiff but disregarding any special or particular attribute. Appellant's counsel sought to argue that the cash flow difficulties of the Appellant company in mid 2003 were part of its general attributes, and, therefore, the correct commercial rate was the one appropriate to a company in cash flow difficulties. We disagree with the Appellant's analysis. We consider that the cash flow difficulties of the Appellant company were part of its special or particular attributes not a general attribute of a company trading as a global wholesaler of GSM handsets. Thus this Appeal was concerned with the "typical" interest rate of commercial borrowing for companies trading worldwide in mobile telephones not with the "typical" interest rate for companies with cash flow difficulties.
63. The parties agreed that the determination of the rate of interest should be a relatively straightforward matter. An unintended consequence of the Appellant's approach of attempting to establish a commercial rate of interest for a company with cash flow difficulties was a detailed examination of the specific circumstances of the Appellant company. We consider that such a detailed examination was not in line with the approach adopted by the Court of Appeal in Jura.

Decision on Rate of Interest

64. The Appellant supplied evidence that it negotiated an overdraft facility with RBS which carried an interest rate of base plus 2.5 per cent. Although Respondent's counsel queried whether the Appellant had paid the base plus 2.5 per cent rate because of the withdrawal of the facility in May 2003, he accepted that it was the best evidence available of a commercial rate. We are satisfied that base plus 2.5 per cent interest rate represented the typical rate of interest for commercial borrowing for the general attributes of a company trading as a global wholesaler of GSM handsets.
65. For the reasons outlined above we determine that the rate of interest under section 84(8) of the 1994 Act is base rate plus 2.5 per cent subject to any revision arising from our decision on simple or compound interest. We are satisfied that this rate reflected the typical rate of commercial borrowing for the Appellant company. We consider that the conventional commercial rate of base plus one per cent was too low for the general attributes of a company trading in GSM handsets. Further, we consider that the base rate plus 2.5 per cent (6 per cent as at 10 July 2003) was broadly in line with the interest rates of 6.5 per cent under section 74 and 3 per cent under section 78.

Simple Interest or Compound?

66. We decided that it was best to separate out our consideration of whether our award of interest should be simple or compound from the rate of interest to avoid confusion of the various arguments advanced at the hearing, in particular Respondents' submission on statutory interpretation based on coherence from his submission on the exercise of judicial discretion.
67. In essence the Respondents' arguments for their proposition that section 84(8) only conferred a power to award simple interest were as follows:

(1) The wording of section 84(8) which only permitted an award of interest on the principal sum, not an award of interest on interest.

(2) The construction of Section 84(8) should be interpreted in such a way as to ensure consistency with other legislative provisions dealing with interest and to maintain coherence of the 1994 Act.

(3) The statutory power to award compound interest must be clearly defined.

(4) This Appeal did not involve a breach of Community law and, therefore, the matters under consideration in this Appeal were distinguishable from Sempra.

(5) The payment of interest under section 84(8) was an ancillary matter to be determined under national law operating within the principle of national procedural autonomy, subject to principles of equivalence and effectiveness.

68. Appellant's counsel countered by advancing a series of cumulative propositions:

(1) The principle of primacy of substantive EC law was established by the European Communities Act 1972.

(2) As a substantive principle of EC law, courts and tribunals in the United Kingdom should construe and apply domestic law so as to be consistent with EC law.

(3) In particular, the VAT and Duties Tribunal should construe and apply the Value Added tax Act 1994 so as to give full effect as to the principle of fiscal neutrality.

(4) In so doing, domestic procedural rules must not render it practically impossible or excessively difficult to exercise substantive rights conferred by EC law.

(5) The right to deduct input VAT provided by Article 17ff of the EC 6^th VAT Directive (77/388/EEC) should operate to relieve the trader entirely of the burden of VAT.

(6) In order for a trader to be relieved entirely of a fiscal burden, a trader must have a right to full compensation which can only be achieved by an order for compound interest.

69. We consider that the key to resolving the dispute between the parties is deciding whether interest arising from the unjustifiable withholding of payment of input tax is an essential component of the right under Article 17 of the EC 6^th VAT directive or an ancillary matter to be determined under national law operating within the principles of national procedural autonomy.
70. In R (on the application of UK Tradecorp Ltd) v Customs and Excise Commissioners) [2004] EWHC 2515 (Admin) Lightman J concluded that the Court of Justice in Garage Molenheide BVBA v Belgium (Joined cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] STC 126 endorsed the view of the Advocate General about the payment of interest. At paragraph 37 Lightman J stated

"As I read the passage in the opinion, what the Advocate General is saying perfectly generally is that, where by reason of the taking of preventive retention action payment of accepted or established claims for repayment of input tax is delayed by retention action and the taxable person eventually succeeds in the retention action and establishes that there was no justification for withholding payment, interest should be paid from the date that under the deduction rules in the member states the sum would have been payable to the date of payment".

71. In our view UK Tradecorp is authority for the proposition that the payment of interest is an essential component of the right to credit for input tax where that right has been denied wrongly.
72. Lindsay J in Elite Mobile, whilst endorsing the interpretation of Lightman J goes on to state that

"Neither Molenheide nor Tradecorp was required to deal with rates of interest but the same broad requirement of justice to the taxpayer and proportionality that informs both the opinion of the Advocate General and the judgment of the ECJ in Molenheide suggests that if, but only if, the relevant domestic provisions either no rate of interest or an unfairly low rate will Community law step in and provide both an obligation and a rate. In practical terms, as it seems to me, there can only be a Community law obligation and rate if domestic provisions are so materially out of step with current commercial rates that they can only be characterised as unjust".

73. Arguably the observations of Lindsay J are authority for the Respondents' submissions that issues of interest associated with the denial of the right to claim credit for input tax were ancillary matters to be determined in accordance with national law operating within the principle of national procedural autonomy.
74. In Metallgesellschaft Ltd v Inland Revenue Comrs (ECJ) [2001] STC 453 the Court of Justice decided that the payment of interest was not an ancillary matter if it was the very objective sought by the claimants' actions in the main proceedings. Respondents' counsel in this Appeal submitted that the Appellant's objective in this Appeal was the determination of the fact and the terms of its right to input tax deduction in accordance with VAT Act 1994. Appellant's counsel stated that the Respondents were raising a false point. It was common ground between the parties that the award of interest was mandatory, and if that was so it could not be described as ancillary.
75. The mandatory nature of the right under section 84(8) of the Act, in our view, meant that the claim for interest was an integral part of the right to input tax credit and not subservient to it. Since the claim for the input tax had been settled the sole objective of the Appellant in these proceedings was its claim for interest.
76. We conclude on balance that interest arising from the unjustifiable withholding of payment of input tax was an essential component of the right under Article 17 of the EC 6^th vAT directive and not an ancillary matter. In those circumstances this Appeal was not distinguishable from the decision in Sempra Metals. Thus Community law required the remedy to be a full one, which included an order for interest compounded at periodic intervals.
77. Colin Bishopp the Chairman in the VAT and Tribunals decision in Totel Limited v Revenue and Customs [2006] (decision number 19578) reached the same conclusion:

"Counsel for the Respondents 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 Respondents had withheld from the traders payments to which they were entitled to 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".

78. Thus as the right to interest is an essential component of the right under Article 17 section 84(8) should be construed so as to give effect to Community law. In which case Respondents' submissions about interpreting section 84 in line with other domestic legislation dealing with interest payments withers away. Counsel's contentions about the coherence of section 84 with other sections of the VAT Act were still pertinent. Counsel, however, conceded that section 84(8) was a self standing provision within the 1994 Act. In our view his concession undermined his argument that section 84(8) should be interpreted in line with sections 74 and 78 of the Act. Appellant's counsel put it more bluntly that he was attempting "to run with the fox and hunt with the hounds".
79. The plain wording of section 84(8) refers to "interest". The section does not expressly exclude the awarding of compound interest. Thus the ordinary and natural meaning of section 84(8) places no impediment to the effecting of the Community law remedy of compound interest.
80. Although we have the power to award compound interest, we are still required under section 84(8) to consider whether to exercise our discretion to award it.
81. In exercising our discretion we have taken account of the following factors:

(1) We are satisfied on the evidence of the RBS document "Advice of debit interest for the period 17 March 2003 to 15 June 2003" and its letter of 8 March 2006 that the commercial rate of borrowing for the Appellant was base plus 2.5 per cent compounded at quarterly rests.

(2) We are satisfied that the rate of base plus 2.5 per cent with quarterly rests was the commercial borrowing rate for the Appellant company having the general attributes of a company trading globally in GSM handsets.

(3) We place weight on the fact that the Appellant has been denied the use of the sums comprised in the input tax claims for periods ranging from two years and six months to in excess of three years.

(4) We consider that in all the circumstances that the conventional commercial rate of base plus one per cent was too low.

(5) We are satisfied that the rate of base plus 2.5 per cent with quarterly rests (6 per cent compounded at July 2003) was not out of line with the 6.5 per cent rate under section 74 of the Act, although we accept that it represented a significant difference with the 3 per cent rate under section 78. However we do not consider that the variance with the section 78 rate was materially out of step after taking into account the length of time that the Appellant was denied the use of the sum of monies wrongly withheld.

82. We, therefore, determine that the rate of interest payable under section 84(8) shall be compounded, namely base plus 2.5 per cent with quarterly rests.

Should the interest payment be abated by the Section 79 repayment supplement?

83. The Appellant has received the repayment supplement of 5 per cent of the sums owing under section 79 of the 1994 Act. Essentially section 79 provides for an automatic uplift of the VAT credit which has been denied for a period in excess of 30 days. Section 79 is directed at the mischief of the withholding of payments through inefficiency on the part of Revenue and Customs.
84. Respondents' counsel argued that in this Appeal payment had not been withheld through inefficiency but in reliance on an interpretation of the law which was subsequently proved wrong. In his view the repayment supplement should be taken into account in the award of interest because it would confer a windfall benefit on the tax payer, if ignored, and that there was no statutory basis for the Tribunal to disregard it when assessing the appropriate award of interest under section 84(8).
85. We have sympathy with the Respondents' position, particularly as in this case the Appellant has been awarded the full remedy under Community law of compound interest. However, we are bound by the decision of Mr Justice Collins in Mobile Export who stated at para.24:

"It is also to be noted that section 79 provides for a 5 per cent supplement. Of course that in itself can amount to a substantial sum of money. However, the purpose behind section 79 is to encourage prompt payment by the Commissioners, and prima facia the claimants are entitled to that 5 per cent supplement. But because it was not intended to be a substitute for interest, it would not generally be right to reduce the amount otherwise considered appropriate by way of the correct rate of interest because of section 79".

86. Colin Bishopp in Total Limited also considered himself bound by Mr Justice Collin's decision in Mobile Export. However, he expressed misgivings about the position and concluded

"that he saw 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".

87. We endorse Mr Bishopp's misgivings but we are obliged to follow the decision of Lord Justice Collins. We, therefore, hold that we shall not take account of the repayment supplement in the award of interest under section 84(8) of the 1994 Act.

The Period

88. The issue in dispute between the parties was the start date from when the interest should accrue. There was no dispute about the end date which was when the sums in dispute were repaid which were told was the 6 March 2006.
89. Essentially the Appellants argued for a start date of 16 calendar days from the date of the Appellant's VAT return. The figure of 16 days was derived from the Respondents' statement in Public Notice 700-58 that payment was authorised for 90 per cent of correct repayment returns within 10 working days.
90. The Respondents suggested a period of 30 days from the date on which the appellant submitted the returns. The 30 day period was based on the Respondents' duty to satisfy themselves that input tax was properly due and that in this case it would have been necessary to carry out thorough enquiries having regard to the Appellant's business involving the export of mobile phones which carried a high risk of missing trader fraud.
91. We intend to follow the formula adopted by Mr Justice Collins in Mobile Export which involved similar facts to this Appeal. Thus we consider that the extended period of 30 days was appropriate for the first two disputed returns of the Appellants for January and February 2003 which were considered together by the Respondents as reflected in the decision letter of 19 June 2003. Thereafter we would apply for the 16 day period for subsequent returns.
92. We have reached this decision because we consider it reasonable that the Respondents should have an extended period to investigate the first returns because of the potential risks associated with those returns. However, subsequent returns would not have demanded the same level of scrutiny, hence the shorter period.

Summary of Our Decision

93. We have decided that

(1) The interest rate should be compounded at base plus 2.5 per cent with quarterly rests.

(2) The interest payment should not be abated by the section 79 repayment supplement.

(3) The period should be 30 days for the first two returns and 16 days thereafter.

Ancillary Orders

94. The parties agreed to carry out the necessary computations arising from our determination of the rate of interest. We give permission for this matter to be restored to the list if the computations cannot be agreed.
95. Both parties applied for their costs arising from the proceedings. The Appellant has not been completely successful with its application, in particular the commercial rate of 18 per cent with monthly rests. At the initial hearing in March 2006 the Appellant was prepared to settle for an award of base plus 2.5 per cent with quarterly rests. However, the Respondents were not prepared to accept the Appellant's offer, which was then withdrawn. The Appellants, however, were awarded their costs for the March hearing. We consider on balance that the Respondents should pay 80 per cent of the Appellant's costs which is a fair reflection of the outcome of the various applications involved in these proceedings, particularly as a significant part of the hearing was devoted to the issue of compound interest. If the amount of costs cannot be agreed between parties we direct that they are to be subject to detailed assessment on the standard basis by a High Court costs judge.

MICHAEL TILDESLEY

CHAIRMAN

RELEASE DATE: 28 September 2006

LON/

Note 1   The VAT Tribunal decision in Totel Limited [2006] 19578 which was decided after Mobile Export did not examine Mr Justice Collin’s comments about section 78 in relation to the rate of interest under section 84(8).     [Back]