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Marshall Motor Group Ltd v Revenue & Customs [2006] UKVAT V19828 (10 October 2006)

19828

THREE-YEAR CAP – whether claim would have been made if legislation had introduced a transitional provision – yes – appeal allowed regardless of the outcome of Fleming and Condé Nast

LONDON TRIBUNAL CENTRE

MARSHALL MOTOR GROUP LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

CYRIL SHAW FCA

Sitting in public in London on 11 and 12 September 2006

Roger Thomas, counsel, instructed by Grant Thornton, for the Appellant

Owain Thomas, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Marshall Motor Group Limited appeals against the refusal of Customs to pay a claim made on 10 July 2002 for overpaid VAT on the ground that it is subject to the three-year cap. The Appellant was represented by Mr Roger Thomas and Customs by Mr Owain Thomas.

On the present state of the law, following the Court of Appeal decisions in Fleming T/A Bodycraft v HMRC [2006] STC 864 and Condé Nast Publications Ltd v HMRC [2006] STC 1721, the Appellant is bound to succeed in this appeal. However the Appellant wishes to contend that it would have made an Italian Republic claim within a transitional period if legislation had provided for one. If they succeed in showing this then Customs have agreed that that they will succeed on this appeal regardless of the outcome of Fleming and Condé Nast. If they do not succeed in showing this, then, although we shall be bound to find in favour of the Appellant, Customs will appeal. We saw no objection to hearing the appeal on this basis.

We heard evidence from Nigel Faben, finance director of the Appellant and James Bond, Higher Officer of Customs.

We set out a timetable concerning the background which shows what information was available and when:

(1) 18 July 1996: 3-year cap announced in Parliament applying to claims made from 18 July 1996.

(2) 4 December 1996: Provisional Collection of Taxes Act 1968 Resolution giving effect to the 3-year cap. Business Brief BB/22/02 issued on 5 August 2002 deals with the transitional arrangements for making reclaims of overpaid VAT before that date.

(3) 10 December 1996: Advocate General's Opinion in EC Commission v Italian Republic, Case C-45/95, [1997] STC 1062 to the effect that where input tax was not creditable on the purchase, the supply must be exempt.

(4) 19 March 1997: 3-year cap enacted in s 47 Finance Act 1997.

(5) 31 March 1997: original end date (later extended to 30 June 1997, see paragraph 4(14) below) by which time the taxpayer must have discovered the error in order to obtain the benefit of transitional arrangements introduced following Marks and Spencer Case C-62/00 [2002] STC 1036.

(6) 25 June 1997: the European Court of Justice decided in EC Commission v Italian Republic, Case C-45/95, [1997] STC 1062, following the Advocate General, that where input tax was not creditable on the purchase, the supply must be exempt.

(7) 21 July 1997: Business Brief 16A/97 issued dealing with payments made by car manufacturers to dealers, when the dealer agrees to adopt the car as a demonstrator vehicle following Elida Gibbs v Customs and Excise Commissioners Case C-317/94 [1996] STC 1387.

(8) 10 October 1997: Business Brief 23/97 issued following the Italian Republic case under which while Customs considered the full effect of the judgment businesses could either continue to use the margin scheme for cars whose input tax was blocked, or treat the sale of such cars as exempt. (The Appellant did the former.)

(9) 1 December 1999: legislation implementing the Italian Republic case comes into force so that input tax is creditable and output tax payable in the normal way on demonstrator cars.

(10) 24 January 2001: Tribunal decision in JDL Ltd v Customs and Excise Commissioners (2001) VAT decision 17050 that demonstrator cars are capital items and the exempt sale of them does not require any recalculation of partial exemption. This decision was upheld by the High Court on 25 October 2001 ([2002] STC 1).

(11) 29 March 2001: voluntary disclosure submitted by the Appellant including a claim relating to demonstrator cars for the period 1 January 1998 to 31 December 2000, an average of £59,600 per annum. The claim was agreed and paid.

(12) 10 July 2002: claim made by the Appellant in relation to overpayment of VAT on demonstrator cars for the period 1 April 1973 to 31 December 1996, which claim is the subject matter of this appeal.

(13) 11 July 2002: Marks and Spencer case decided by the European Court of Justice that the absence of transitional provisions on enactment of the 3 year cap was in breach of Community law.

(14) 5 August 2002: Business Brief 22/02 issued setting out transitional arrangements following Marks and Spencer. This invited repayment claims by 31 March 2003 including cases where taxpayers "…made no claim [before 31 March 1997] but can demonstrate that they discovered the error before 31 March 1997." The references to 31 March in both years were extended to 30 June by Business Brief 27/02 of 8 October 2002 giving effect to the Grundig Italiana Case C-255/00 [2003] All ER (EC) 176 in which the European Court of Justice held that the minimum transitional period must be 6 months.

(15) March 2003: detailed guidance issued by Customs on claims by car dealers following the Italian Republic case including claims relating to demonstrator cars. This stated that claims going back to 1973 could be made by businesses which either made claims before 30 June 1997 that were capped or "can show that they would have put in a claim before 30 June 1997."

Mr Roger Thomas, for the Appellant, contends that the Appellant would have made a claim during the transitional period if legislation had provided for one for the following reasons:

(1) The Appellant did actually make a claim in 2002.

(2) Customs' reasons why a claim would not have been made relate to evidence of events after the end of the transitional period.

(3) The Appellant was waiting for legislation to clarify the position.

(4) Failure to make a capped claim lost only one quarter's claim; it was always possible to make a three-year claim.

(5) There were competing pressures on management time because of changes in the accounting system.

(6) A 23 year claim would have been presented to the board of directors and if additional resources were needed these would have been found or bought in.

(7) The partial exemption consequences were not as bad as Mr Faben feared. If he had done the figures he would have realised this.

(8) The fact of Italian Republic being pending before the European Court during the transitional period would have meant that advisers would have encouraged protective claims even if this required that the partial exemption consequences were considered later.

Mr Owain Thomas, for Customs, contends that the Appellant would not have made a claim in a transitional period for the following reasons:

(1) The Appellant made a claim in relation to Eida Gibbs for 1997 only, demonstrating that it had decided against making an Italian Republic claim.

(2) The Appellant did not have an outside VAT adviser and would not have appointed one. The first time one was appointed was in late 2000 after Grant Thornton had "done a good selling job."

(3) The claim was not made after the partial exemption problems went away for the future because of the legislation in 1999, but only after the Tribunal decision in JDL Limited that there was no partial exemption problem in the past.

It is common ground for the purposes of this appeal that the burden of proof is on Customs to show that the Appellant would not have made a claim within the transitional period.

If legislation had provided for a transitional period it is agreed that it would run from 4 December 1996 to 30 June 1997. During this period we find from Mr Faben's evidence that the Appellant's understanding was:

(1) Claims were capped for three years, so that a potential claim for one quarter was lost each quarter, but at any time a claim for three years could be made.

(2) Following the Advocate General's Opinion in Italian Republic, it was expected that since input tax on demonstrator cars was blocked their supply was exempt, instead of being taxable on the margin as previously thought. It was not in the Appellant's mind that the courts would later find that demonstrator cars were capital goods and their supply had no partial exemption implications for the past. It was also not in their mind that legislation would later make the input tax creditable and the supply taxable in the ordinary way.

(3) It was in the Appellant's mind that if it made a (capped) claim to recover tax paid on the margin on demonstrator cars, the claim would have partial exemption implications. The Appellant already made some exempt supplies in relation to leased cars and Mr Faben was keen not to add to the existing partial exemption complications.

(4) In addition to advice from their auditors, Ernst & Young, both Mr Faben and Mr Dastur, the group finance director, had received approaches from a number of accounting firms offering to help in making Elida Gibbs claims, none of which were taken up. These included Neville Russell (28 November 1996), Grant Thornton (21 October 1997), PricewaterhouseCoopers (16 February 1999), KPMG (9 February 2000).

(5) Mr Faben was personally unaware of Italian Republic at the time and there is no evidence that any adviser or potential adviser brought it to his attention until after the transitional period had expired.

(6) The Appellant continued to charge tax on the margin on demonstrator cars. Later, on 10 October 1997, Customs encouraged this as one on the options in Business Brief 23/97. The reason for continuing to charge tax was that Mr Faben did not want to become involved with partial exemption. He considered that a claim could have partial exemption problems for the future as well. He was no doubt thinking in terms of the option given by Customs (see paragraph 4(8) above) either to exempt or to continue charging tax, and considered that if he made a claim for exemption for the past he would have to continue to do so for the future.

(7) Mr Faben was busy in this period with a new accounting system with phased implementation running from 1 January 1995 to 1 September 1999 which met with with serious complications and an entire mainframe change was required in April 1997. Because of the change-over of computer systems, figures for a claim in respect of demonstrator cars were not readily available for the whole period and would have required finding manually at a time when the accounting staff were busy. This was the reason for restricting the Elida Gibbs claim to 1997.

(8) The main reasons for not making the claim were (a) pressure of work with the accounting system, (b) the amount was relatively small and did not merit taking staff off the accounting system problems, and (c) any claim would have created partial exemption problems for the past and, Mr Faben considered, the future.

If Parliament had legislated a transitional provision and everything else had remained the same we would have agreed with Mr Owain Thomas's approach that Mr Faben would not have made a claim. However, we do not think that this is realistic. If Parliament had legislated a transitional provision after which no claims for the past could be made, people's behaviour would necessarily change. One may echo Dr Johnson's "Depend on it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully"; the same would be true of the approach of the end of a six months' transitional period. The accounting firms that later offered their services to Mr Faben and Mr Dastur, the group finance director, to help them make Elida Gibbs claims for demonstrator cars would have done the same in relation to Italian Republic claims during the transitional period in even greater number and with far greater emphasis. The motor trade press would, we are sure, have done the same. Mr Dastur would want to know what Mr Faben was doing about making claims and would want to know how much was involved. We consider that a presentation to the group board would have been required. Mr Faben would certainly have been made aware of the possibility of making a claim. Mr Faben may have had a terror (his word) of partial exemption that was preventing him from acting entirely logically, but it seems to us that that this would have been overcome by the pressure of explanations by their advisers. Since the Advocate General's Opinion came at the start of the transitional period, Italian Republic claims would have been a hot topic among advisers at the time. The European Court might or might not give a decision agreeing with the Advocate General before the end of the transitional period. Even if it did not, advisers would be emphasising the need to make protective claims or lose the possibility of doing so for ever. When the Court did give judgment a few days before the end of the transitional period the advisers would have had a field day urging claims to be made now or never. If Mr Faben's reason for not making a claim was the partial exemption consequences, the advisers would have been arguing then, as they did later, that these were not as serious as he thought, and Mr Faben would have been forced to address the figures and present them to the group board. The advisers would have been explained to him that there was no downside for the future in making a claim; sales of demonstrator cars were going to be exempt anyway in future. All that mattered were the figures for the past and these could be estimated. For these reasons, we consider that the circumstances would have been so different from what they actually were, and that Mr Faben's conduct in the actual circumstances would not be a reliable guide to what he would have done if a transitional period had been legislated.

Accordingly we allow the appeal in principle and find that if the correct legal test requires that the Appellant would have made a claim during the transitional period running to 30 June 1977, the Appellant would have done so. If the figures cannot be agreed the parties have liberty to restore the appeal for these to be determined by the tribunal

The parties included contentions about interest in their skeletons but the Tribunal decided to postpone hearing argument on this until after it had decided the issue. As the Appellant is in principle entitled to interest it may give notice to the Tribunal to restore the appeal for this to be argued within 30 days of the date of release of this decision.

We direct Customs to pay the costs of, incidental to, and consequent upon, the appeal to be determined on the standard basis by a Taxing Master of the Supreme Court.

JOHN F. AVERY JONES

CHAIRMAN

RELEASE DATE: 10 October 2006

LON/04/1811