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General Motors Acceptance Corporation (UK) plc v Revenue & Customs [2007] UKVAT V19989 (26 January 2007)

19989

REPAYMENT OF VAT – Capping – Claim in 2002 for repayment from 1973 – Absence of transitional relief – Whether Second Directive 8a had direct effect – Direct effect of Sixth Directive Art 11C.1 – Conditions for reliance on direct effect – Disapplication of VATA s.80(4) – Whether overpayments within section 80 when reg 38 of VAT Regs 1995 applies

LONDON TRIBUNAL CENTRE

GENERAL MOTORS ACCEPTANCE CORPORATION (UK) PLC Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

CYRIL SHAW FCA

Sitting in public in London on 27 and 28 February and 1-3 March 2006

Roderick Cordara QC and Jessica Wells, instructed by KPMG LLP, for the Appellant

Paul Lasok QC, instructed by the Acting Solicitor for the Respondents

© CROWN COPYRIGHT 2006

DECISION

This is an appeal against the refusal of a claim to recover VAT overpaid on HP sales between the introduction of VAT on 1 April 1973 and 31 December 1996. The claim was made on 10 July 2002 which was the day before the judgment of the Court of Justice in Marks and Spencer plc v Customs and Excise Commissioners [2002] STC 1036. The claim was refused by Customs on the grounds that it was capped under section 80 of the VAT Act 1994 and was not within Business Brief 22/2002.

There was no dispute as to the fact that the Appellant paid VAT which was not due going back to 1973, although the quantum is not agreed. Customs contended that the entire claim is barred by the 3 year time limit under section 80(4) of the VAT Act 1994 as substituted by the Finance Act 1997. Although there was no transitional period under the amendment by the 1997 Act, Customs contended that the claim was after the expiry of any reasonable transitional period and after the expiry of the retrospective transitional period under Business Briefs 22/02 and 27/02.

During the hearing Customs contended that if, contrary to their submissions, the 3 year time limit under section 80(4) as amended falls to be disapplied under EU law, then the six year time limit introduced by the Finance Act 1989 applied and the mistake was discoverable by the Appellant with reasonable diligence in 1973 under the old section 80(5). The appeal was adjourned after the initial five days for evidence as to this issue. The Appellant filed substantial evidence including witness statements by Michael Conlon QC and Mrs Penny Hamilton, two prominent practitioners in the field. By a letter of 18 September 2006 Customs conceded that the Appellant identified the error in or about 24 October 2001 and that it could not with reasonable diligence have discovered the error before that time; we consider this concession to be realistic.

The result of this concession on the facts is that if the Appellant succeeds in its contention that the failure to provide a transitional period under the Finance Act 1997 prevents Customs from relying on the 3 year time limit, the previous 6 year time limit does not bar the claim because section 80(5) as it then stood before the Finance Act 1997 was satisfied.

A separate issue arises in respect of the tax paid before 1 January 1978 in that Customs submitted that Article 8(a) of the Second Directive which applied before the Sixth Directive took effect did not have direct effect so that as regards the tax paid before 1978 the Appellant could not rely on any EU law right to repayment and section 80(4) as amended applied.

The Appellant's primary contention was that it was entitled to make adjustments under regulation 38 of the VAT Regulations 1995, the predecessor of which was introduced by regulation 7 of the VAT (Accounting and Records) Regulations 1989, and that regulation 38 adjustments are not covered by section 80 so that the time limit under section 80(4) has no application.

At the outset of the hearing Dr Lasok made an application for the Tribunal to refer to the Court of Justice questions as to EU law rights under the Second Directive in respect of the period before 1 January 1978 and as to the effect in EU law of the failure to prescribe a transitional period when shortening the time limit for repayment claims in the Finance Act 1997. The application was opposed by Mr Cordara.

We declined to make a reference in advance of hearing the evidence and the issues but stated that we would consider the possibility of a reference at a later stage.

The UK legislation

At the time when the claim was submitted in 2002 section 80 provided so far as relevant as follows,

"(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

…

(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.

…

(7) Except as provided by this section, the Commissioners shall be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not due to them."

Subsections (3), (3A), (3B), (3C), (4A), (4B), (4C) and (6) are not relevant.

Subsection (4) was substituted for subsections (4) and (5) by section 47(1) of the Finance Act 1997 with effect from 18 July 1996 subject to transitional provisions in section 47(3)-(5) which are not relevant to this appeal. Prior to that substitution section 80(4) and (5) provided as follows,

"(4) No amount may be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.

(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it."

Regulation 38 of the VAT Regulations 1995 provides, so far as relevant, as follows,

"(1) Subject to paragraph (1A) below, this regulation applies where –

(a) there is an increase in consideration for a supply, or

(b) there is a decrease in consideration for a supply,

which includes an amount of VAT and the increase or decrease occurs after the end or the prescribed accounting period in which the original supply took place.

(1A) Subject to paragraph (1B) below, this regulation does not apply to any increase or decrease in consideration which occurs more than 3 years after the end of the prescribed accounting period in which the original supply took place

…

(2) Where this regulation applies, the taxable person shall adjust his VAT account in accordance with the provisions of this regulation.

(3) The maker of the supply shall –

(a) in the case of an increase in consideration, make a positive entry, or

(b) in the case of a decrease in consideration, make a negative entry,

for the relevant amount of VAT in the VAT payable portion of his VAT account.

…

(5) Every entry required by this regulation shall, except where paragraph (6) below applies, be made in that part of the VAT account which relates to the prescribed accounting period in which the increase or decrease is given effect in the business accounts of the taxable person.

(6) Any entry required by this regulation to be made in the VAT account of an insolvent person shall be made in that part of the VAT account which relates to the prescribed accounting period in which the supply was made or received.

(7) …"

Paragraph (1A) was inserted by the VAT (Amendment) Regulations 1997 with effect from 1 May 1997 together with paragraph (1B) which is not relevant.

Jurisdiction

We consider first the jurisdiction of the Tribunal to hear the appeal if the claims for repayment of VAT fell outside section 80 as involving adjustments under regulation 38.

Unless an appeal is in respect to one of the matters specified in section 83 no appeal lies to the Tribunal. Section 83(t) covers a claim for repayment of an amount under section 80. There is no dispute as to the VAT chargeable on the transactions in respect of which repayment is claimed. None of the paragraphs of section 83 refers to an adjustment under regulation 38. Unless the appeal comes within section 83(b) or concerns a repayment under section 80 the Tribunal has no jurisdiction.

Dr Lasok for Customs did not submit at any time that section 80 did not apply, indeed his submissions were all on the basis that it did apply.

When the jurisdiction problem was raised by the Tribunal, Mr Cordara submitted that the word "chargeable" in section 83(b) should be construed widely and encompasses the amount of VAT chargeable after the reduction under Article 11C.1. Dr Lasok submitted that a claim for adjustment under regulation 38 of the VAT Regulations 1995 is outside the jurisdiction of the Tribunal unless section 80 applies, but did not address section 83(b).

The 1994 Act contains no definition of the words "the VAT chargeable on a supply" which appear in section 83(b). Section 1(1) provides that VAT shall be charged on the supply of goods and services and section 2(1)(a) provides for VAT to be charged at 17.5 per cent by reference to the value of the supply. Under Section 4 an exempt supply is not a taxable supply. Section 29A and section 30 provide for VAT to be charged at a reduced rate and nil rate respectively on specified supplies.

Not one of the paragraphs of section 83 refers to the value of supplies, exempt supplies or reduced or zero-rated supplies. If those matters were not encompassed within the words "VAT chargeable on a supply" in section 83(b), there would be no right of appeal in respect of them without an assessment. Appeals are however frequently heard on rulings on the above matters without an assessment. We hold that section 83(b) does cover those matters. The reason why a decrease in the consideration for a supply gives rise to a negative entry in the VAT account under regulation 38 is because the value of the supply on which VAT is chargeable is to be reduced. We conclude that section 83(b) does cover an appeal with respect to an adjustment under regulation 38. We consider later whether Mr Cordara is correct in contending that section 80 does not apply in the present case.

The agreed facts

There was an agreed statement of facts which we summarise in the following paragraphs.

During the period covered by the appeal the Appellant which is a wholly owned subsidiary of General Motors Corporation, a United States quoted company, was registered for VAT.

The Appellant was engaged in the sale of vehicles to the public on deferred payment terms. Under the agreements title does not pass to the customer until all payments due under the agreements have been made; they are therefore hire purchase ("HP") agreements. The agreements are covered by the Consumer Credit Act 1974.

The decision in the High Court in Customs and Excise Commissioners v General Motors Acceptance Corporation (UK) plc [2004] STC 577 established the VAT treatment to be applied when HP agreements are terminated early. Following the decision Customs accept that VAT adjustments are allowed under regulation 38 of the VAT Regulations 1995 in the following situations:

(1) Where the customer exercises rights conferred under sections 99 to 101 of the Customer Credit Act 1974 entitling him to terminate the agreement and return the vehicle to the Appellant without further payment provided that he has made all payments then due and at least one-half of the total price specified in the agreement;

(2) Where the customer chooses to return the vehicle rather than pay the final "balloon" payment required to transfer title under a choices "1.2.3" agreement;

(3) Where the customer has defaulted under the terms of the agreement and the amount is reduced under the agreement by reference to the disposal proceeds on the repossessed vehicle.

In anticipation of the judgment of the Court of Justice in Marks and Spencer plc (Case C-62/00) [2002] STC 1036, the Appellant submitted to Customs a voluntary disclosure, based on the price adjustments allowable in the above situations, for £31,638,301.24 VAT overpaid on HP sales from 1 April 1973 to 31 December 1996. It is common ground that the Appellant has over accounted for VAT since 1973, however Customs have not verified the amounts claimed and do not admit that the amount or the basis of calculation is accurate.

On 15 August 2002 Customs rejected the voluntary disclosure on the basis that it was time-barred under the terms of Business Brief 22/2002.

The parties have agreed that the basis upon which the claim is quantified can be agreed if the Appellant is correct in contending that the claim is not time barred.

The facts and legislative history

There were three witnesses : Deri Williams, financial controller of the Appellant since January 2005, Theo Kortland, managing director of the Appellant and employed by the Appellant for 19 years, and Geoff Mason, VAT manager for the Appellant for the last 5 years and earlier in his career a Customs officer for 11 years. All of the witnesses confirmed written statements. The statement of Mr Williams was agreed; there was no substantial challenge to the evidence of Mr Kortland or Mr Mason.

We find the following facts with which we include a summary of the relevant changes in UK legislation.

The Appellant has been registered for VAT since VAT was introduced on 1 April 1973 trading as Vauxhall Finance. It purchased vehicles from Vauxhall Motors and sold them to dealers. If a customer chose to finance a purchase through the Appellant, the dealer sold it back to the Appellant which then sold on HP terms; this happened with around 20 per cent of retail sales.

Under what is now regulation 88 of the VAT Regulations 1995 when goods are sold on hire purchase the vendor is liable to account for the VAT on the full sale price at the outset. This is in accordance with Article 5(4)(b) of the Sixth Directive. From April 1973 the Appellant accounted for VAT in advance of receiving the related income from its customers.

In a variety of circumstances, although the Appellant paid VAT on the full sale price, it did not receive the full amount.

One scenario was where a vehicle was repossessed under sections 99 to 101 of the Consumer Credit Act 1974 the customer having paid one-half of the sums due.

Another scenario was where an agreement usually under a promotion gave the customer the option of paying a final "balloon" payment at the end, perhaps as much as £5,000, to buy the vehicle with the alternative of returning the vehicle without further liability. Falling residual values meant that vehicles sold on such agreements were often returned.

Another scenario was if a customer defaulted on payments and the vehicle was repossessed under the HP agreement, in which event the sale proceeds net of expenses were deducted from the amounts remaining due.

Before the Finance Act 1978 there was no provision under UK law for bad debt relief. That Act introduced the relief but with certain conditions. Under section 12(1)(a) there was no relief for the part exchange element. Section 12(1)(b) limited the relief to circumstances where the debtor became formally insolvent : this did not normally happen when a private customer defaulted. Section 12(2)(c) provided that the relief did not apply unless title to the goods had passed.

The insolvency requirement was removed by the Finance Act 1990 under which relief was available if the whole or part of the consideration has been written off in the supplier's accounts as a bad debt and two years had elapsed from the date of the supply. These provisions were consolidated in section 38 of the VAT Act 1994 with the waiting period reduced to six months. The requirement that title in the goods must have passed to the customer remained until removed by the Finance Act 1997.

Following the 1997 change in bad debt relief conditions, KPMG were engaged to review the Appellant's HP contracts to see whether a claim was possible under the bad debt provisions. During that review it was concluded that the Appellant was potentially able to recover VAT under the reduction of consideration provisions.

The VAT (General) Regulations 1980 and 1985 required a trader who made an error in accounting for tax to correct it in such manner and in such time as Customs required. In Customs and Excise Commissioners v. Fine Art Developments plc [1989] STC 85, the House of Lords held that Regulation 58 of the 1985 Regulations and the VAT guide gave trader a legal right to correct errors.

That legislation did not however cover adjustments where there was no error. The first UK legislation providing for an adjustment for VAT purposes on a decrease in consideration was the VAT (Accounting and Records) Regulations 1989, which followed the decision of the House of Lords in Fine Art Developments. Those regulations came into force on 1 January 1990. The relevant provisions are substantially reproduced in regulations 24 and 38 of the VAT Regulation 1995, which however under regulation 38(1A), which was inserted with effect from 1 May 1997, contain a 3 year time limit from the date of the original supply.

Although UK legislation made no provision prior to 1989 for price adjustments, Customs and Excise issued a press release in 1982 following discussions with trade associations dealing with goods returned or repossessed under HP agreements. The arrangements changed with effect from 1 September 1984 and were contained in VAT Leaflet 700/5/85 published on 1 January 1985. One of the conditions was that resale of the goods had to be a taxable supply. In virtually all cases the Appellant could not meet this condition since the resale of returned and repossessed vehicles was not a taxable supply as confirmed by Field J in Customs and Excise Commissioners v GMAC (No.1) [2004] STC 577 upholding the decision of Stephen Oliver QC (as he then was) in 2003 Decision 17990 by reason of article 4(1)(a) of the Value Added Tax (Cars) Order 1992. Customs did not appeal against Sir Stephen's conclusion that regulation 38(1A) which contained a time limit from the date of the original supply was incompatible with the Appellant's community law rights under Article 11C.1.

During preparation for the litigation in GMAC (No.1) it was concluded that the Appellant had overpaid VAT on its HP transactions going back to the introduction of VAT. On 10 July 2002 the Appellant submitted the repayment claim which is the subject of this appeal. The letter set out the methodology used in calculating the claim which started with the net loss figures from HP sales for 1990 to 1996, being the difference between the full agreement price and the amount paid by the customer plus the proceeds realised on resale of repossessed vehicles, adjusting the average figure from 1990 to 1996 by fluctuations in the retail price index to produce estimated figures back to 1973. Adjustments were made for different standard rates of VAT since 1973 and for forced terminations. The claim which is summarised at pages 67 and 68 of Bundle 2 totalled £31,638,301.24, starting with £249,269.85 for period 06/73 and varying from a high of £782,776.13 for 06/91 to 12/91 to a low of £134,557.88 for the four periods in 1994.

The claim was refused in a letter dated 15 August 2002. The letter stated that following the ECJ decision in Marks and Spencer claims under section 80 would be considered regardless of the cause of the overpayment if certain criteria were satisfied. The first two criteria involved claims made before 31 March 1997. The third criterion was that "a claim was not made but the taxpayer can demonstrate that they discovered the error before 31 March 1997." In all cases the overpayments must have been before 6 December 1996. The claim was refused because it did not meet those criteria.

The issues

The first issue is whether section 80 is engaged at all in relation to the period from 1990 when the VAT (Accounting and Records) Regulations 1989 which preceded regulation 38 took effect. Mr Cordara submitted that as regards that period the appeal is solely concerned with adjustments under the 1989 Regulations and regulation 38 of the VAT Regulations 1995 and that the time limit under section 80(4) does not arise because the repayment claimed was not "VAT which was not due" within section 80(1) and did not become VAT which was not due by reason of the adjustments not having been made period by period.

The second issue is whether Article 8(a) of the Second Directive which applied before the Sixth Directive took effect on 1 January 1978 had direct effect. This is of particular relevance prior to the making of the 1989 Regulations. Dr Lasok accepted that Article 11C.1 does have direct effect.

The third issue is whether Customs are prevented from relying on the 3 year time limit under section 80(4) as substituted by the Finance Act 1997 against the Appellant because of the failure to provide for a transitional period. This issue involves consideration of the judgments of the Court of Justice in Marks and Spencer [2002] STC 1036 and Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00_ [2003] All ER (EC) 176 and of the Court of Appeal in Fleming (T/A Bodycraft) v Customs and Excise Commissioners [2006] STC 864 and Condé Nast Publications Ltd v Customs and Excise Commissioners [2006] STC 1721. This issue arises in respect of the period up to 1989 and to the entire period if the Appellant fails on the first issue.

If the Appellant succeeds in its contention that Customs cannot rely on the 3 year time limit, it is now accepted by Customs that the Appellant would have been able to claim repayment under section 80(5) as it was before the 1997 Act and that, subject to the Second Directive point, the claim could go back to 1973.

Appellant's submissions

Mr Cordara submitted that the Appellant was entitled under regulation 38 to make adjustments in its VAT account to take account of the decrease in the consideration for its supplies under hire purchase contracts going all the way back to 1973. The VAT was due on the full amount of the sale price when originally paid under what is now regulation 88 of the VAT Regulations 1995 so that section 80(1) did not apply. The events giving rise to the adjustments occurred subsequently. He said that regulation 38(5) does not have the effect that the right to adjust the consideration is lost if it is not exercised in the VAT account for the period in which the change is effected in the business accounts; there is no "use it or lose it" requirement.

He said that the contention for Customs that, unless a regulation 38 claim is made in the period in which the decrease in consideration is effected in the business account, a trader has overpaid tax for such period and comes within section 80(1), reflected the argument under regulation 29(1) which was rejected by the Court of Appeal in Customs and Excise Commissioners v University of Sussex [2004] STC 1 per Auld LJ at [146]-[152].

Mr Cordara said that the first appeal by the Appellant GMAC No.1 involved an adjustment under regulations 38 covering 3 years but there was no suggestion by Customs that a block claim could not be made under regulation 38. The case had proceeded on that footing and the applicability of regulation 38 to block claims was therefore res judicata.

He said that although regulation 38, in providing for an adjustment to the VAT account, did not state how the Appellant would get the money, the regulation should be interpreted to implement Article 11C.1 fully. Regulation 38 has no application when the change in consideration is in the same period as the supply; in such a case a trader accesses his Article 11C.1 rights directly. Regulation 38(6) provides for adjustments to the VAT account for earlier periods. He said that, just as the failure to claim input tax in the correct period does not mean that tax has been overpaid, see University of Sussex at [146] so also the failure to operate regulation 38 does not have the effect that tax is overpaid. Regulation 38 is entirely concerned with Article 11C.1 evidence. He accepted that there was a duty to adjust the VAT account once the business accounts were altered, but said that failure to comply with paragraphs (2) to (6) does not mean that a trader loses the right to adjust. There is no time limit for a regulation 38 adjustment. The adjustment is an ongoing obligation. All that happened was that the Appellant did not make the changes to the VAT account for a considerable period. The question whether an amendment has been made to the VAT account does not affect the underlying rights under Article 11C.1.

Mr Cordara said that the argument by Customs that the failure to operate regulation 38 when the decreases in consideration were effected in the business accounts resulted in VAT being overpaid so bringing in section 80 is only relevant to the period from 1990 when the 1989 Regulations took effect. Before then there was no specific implementation by the United Kingdom of Article 11C.1 except in relation to bad debt relief unless the predecessor of section 19 of the VATA 1994 implemented it.

Mr Cordara submitted that between 1973 and 1 January 1990 when the 1989 regulations took effect the Appellant had an overarching right under European law to be taxed only on the price paid by the customer, see Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 at [26]-[35]. Article 11C.1 is simply an example of the underlying neutrality principle in Article 11A.1(a). In Decision 17990, the Tribunal applied Elida Gibbs and this was affirmed by Field J in GMAC (No.1). In Goldsmiths (Jewellers) Ltd v Customs and Excise Commissioners (Case C-330/95) [1996] STC 1073 the Court said at [15] that Article 11A.1(a) embodies the fundamental principle that the basis of assessment is the consideration actually received. He referred to Boots Co plc v Customs and Excise Commissioners (Case C-126/88) [1990] STC 387 at [18]-[20] and Freemans plc v Customs and Excise Commissioners (Case C-86/99) [2001] STC 960 at [27] and [31-36].

He said that Article 8(a) of the Second Directive also gave directly effective rights. The seventh and eighth recitals referred to neutrality. Although the word "obtained" was not in Article 8(a). Paragraph 13 of Annex A provided that "consideration" in Article 8(a) means "everything received in return for the supply." There was thus no difference in fundamental meaning between Article 8(a) and Article 11A.1(a) of the Sixth Directive. The principles in the above cases were of equal application prior to the Sixth Directive. There was a seamless period from 1973 during which directly effective rights vested progressively. Under the Marleasing principle section 10 of the Finance Act 1972 should be interpreted as meaning the consideration received under the Second Directive and section 19 of the 1994 Act should be interpreted as meaning the consideration obtained under the Sixth Directive. All that happened in the 1989 Regulations was that procedural requirements were introduced for amending the VAT Account. The Appellant was therefore able to access its directly effective rights without making a claim under section 80.

Mr Cordara submitted that the Appellant's vested rights accruing from year to year under Article 11C.1 could not be retrospectively abolished by the time limit in section 80, see Marks and Spencer [2002] STC 1036, ECJ and Fleming [2006] STC 864, CA. University of Sussex shows that it is possible to have an accrued and vested right which has not been exercised and this does not render any output tax overpaid.

He relied in particular on the judgment of Ward LJ in Fleming at [71] to [76] and [80] to [83]. He said that the Appellant had directly effective rights; there was no time limit before the section 24 of the 1989 Act; the Appellant had accrued vested rights when section 80 was amended by the 1997 Act; that Act imposed a 3 year time limit; the time limit of itself did not offend EU law; there was however no transitional period. Ward LJ quoted the ruling of the Court of Justice in Marks and Spencer in absolute terms that you cannot have a retroactive curtailment; the Court of Justice said that a Member State should enact legislation providing a prospective and legally certain limitation period. Ward LJ had rejected an implied transitional provision, distinguishing Grundig Italiana because the Italian legislation did provide a transitional period before the reduction in the limitation period took effect, although that period was too short.

He said that Hallett LJ agreeing with Ward LJ said that even if a purposive exercise was possible under Marleasing there was no basic transitional period to fasten onto : there was no transitional period to extend. Mr Cordara stressed that the Directive did not require a limitation period so that the UK was not applying EU law in enacting a limitation period.

He said that the conclusions of the Court of Appeal in Fleming which concerned regulation 29 of the VAT Regulations 1995 apply a fortiori to the time limit under section 80 since the amendment by the Finance Act 1997 took effect from the date of the Paymaster's announcement in July 1996.

Mr Cordara also referred to C R Smith Glaziers (Dunfermline) Ltd v Customs and Excise Commissioners [2003] 1 WLR 656; [2003] STC 419 in the House of Lords, where Lord Hoffman said that there must be some proportionality about measures of domestic law restricting access to directly effective rights, and to E C Commission v United Kingdom (Case C-33/03) [2005] STC 582 where the Court said that mere administrative practices cannot constitute proper fulfilment of obligations under Community law.

Submissions by Customs

Dr Lasok in asking the Tribunal to make a reference to the Court of Justice, in spite of the decision of the Court of Appeal in Fleming as to the interpretation of the decisions of the Court of Justice in Marks and Spencer and Grundig Italiana, said that in Rheinmühlen Düsseldorf v Einfuhr – und Vorratstelle für Getreide und Futtermittel (Case C-166/73) [1974] ECR 33 the Court of Justice decided that rules of domestic law whereby courts were bound on points of law by rulings of a superior court could not take away the power to make a reference under what is now Article 234. In Crehan v Inntrepreneur Pub Co (2004) the Court of Appeal said that the Court must apply ECJ decisions in priority to decisions of the Court of Appeal. He said that the Tribunal can refer questions as to the interpretation of decisions of the Court of Justice. He said that if a lower court or tribunal entertains doubts on a question of EU law it has power to make a reference and that power cannot be shut out by a domestic rule of precedent.

Dr Lasok said that the reduction of the taxable amount under Article 11C.1 is mandatory, rather than merely giving the taxable person a right. Regulation 38 of the VAT Regulations 1995 used similar obligatory language. It is implicit in Article 11C.1 that the reduction in the taxable amount is at the time when the price is reduced rather than at a time of choice. Since the Appellant did not make the adjustment at the time when the price was reduced, it overpaid VAT for the periods when the adjustments should have been made and section 80 applies. The reasoning in University of Sussex does not apply because of the difference in wording between Articles 17 and 18 with which that case was concerned and Article 11C.1.

Dr Lasok said that in order to succeed the Appellant must identify a directly effective right to the repayments claimed. From 1 January 1978, Article 11C.1 of the Sixth Directive generated that right. However Article 8 of the Second Directive was not sufficiently precise to meet the test in Becker v Finanzamt Münster-Innenstadt (Case 8/81) [1982] ECR 53. It was for that reason that Article 11C.1 was enacted. He referred to the opinion in 1974 of the Economic and Social Committee on the proposed Sixth Directive which showed that Article 11C.1 was tightened up to remove from member States the power to adopt varying approaches to the need to ensure that taxable amounts are identical. The inference was that before Article 11C.1 there was no harmonised rule. The Committee identified France as taxing unpaid transactions. If France was not complying with the Second Directive infringement proceedings would have been taken.

He said that a directly effective right only arises under Article 11C.1 if the Appellant can show some action on the part of the UK which prevented the Appellant from reducing the taxable amount at the time when the price was reduced; directly effective Community law rights arise where a wrong is committed by the Member State. He said that this follows from the judgment of the Court of Justice in Marks and Spencer. The evidence for the Appellant had been that adjustments were not made because there was no financial incentive. The UK had not prevented the adjustments. The Appellant's only claim is a section 80 claim. There is nothing disproportionate in this. Since there was no breach by the UK of the Appellant's EU law rights, the question of the compatibility of the absence of transitional relief does not arise. Marks and Spencer only applies to claimants who do have directly effective rights.

Dr Lasok said that until the end of 1989 there was no express statutory provision in the UK dealing with an adjustment to the taxable amount. It was however implicit in the UK legislation. This was recognised in the General Guide. Although the statute was silent, administrative implementation complied with the Directive. Directly effective rights are individual rights. There was no action by the UK barring persons from exercising the result intended by the Directive. From 1990 what is now regulation 38 of the VAT Regulations 1995 required contemporaneous adjustment and the failure to adjust resulted in an overpayment and a potential section 80 claim.

Dr Lasok said that in Ministero delle Finanze v IN.CO.GE. '90 SrL (Joined Cases C-10/97 to C-22/97) [1998] ECR I-6307 the Court of Justice rejected the proposition by the Commission that an incompatibility between Community law and national law meant that the rule of national law was non-existent or invalid. Disapplication is merely a remedy to protect individual rights. The legislation imposing the 3 year time limit is not therefore invalid; there is merely an obligation to disapply it to the extent necessary to protect individual rights under Community law. The disapplication principle goes back to Lück v Hauptzollamt Köhn-Rheinau (Case 34/67) [1968] ECR 245. The approach of the House of Lords in ICI v Colmer [1999] STC 1089 was to give effect to disapplication by an interpretation approach reading in a clause that the provision was without prejudice to directly effective rights of individuals.

Dr Lasok said that if, contrary to his submissions, the Appellant did have directly effective rights under EU law because of some wrong by the UK, it is necessary to consider the effect of Marks and Spencer and Grundig Italiana. Disapplication works by reference to a six month transitional period for persons who knew they had a claim.

Dr Lasok said that the Court of Appeal was mistaken in approaching Fleming as an exercise in interpretation since under the legislation there was no transitional provision to interpret. The real issue was one of disapplication. The Court of Appeal gave no guidance as to how to approach disapplication in a case such as the present appeal.

He said that in Marks and Spencer the Court of Justice focussed at [24] to [27] on the obligation of Member States to achieve the result intended by the Directive by all appropriate measures; this is not limited to legislation. In relation to past events where there has been a failure to comply with EU law the issue is the remedy, see B P Supergas v Greece (Case C-62/93) [1995] STC 805. Here Customs had issued a Business Brief to address the need for transitional relief. In Grundig Italiana the Court of Justice said that where a time limit is shortened, there must be a transitional period of 6 months. If the legislation gave a transitional period of only two months, the Tribunal should disapply that. If a Business Brief gave another month, a claimant could rely on Grundig Italiana. If the administrative remedy falls short of a claimant's legal entitlement, a claimant can go to the Court with jurisdiction over the claim : in section 80 cases this is the Tribunal.

Dr Lasok said that Aprile SrL v Amministrazione delle Finanze (No.2) (Case C-228/96) [2000] 1 WLR 126 established that Member States can adopt a different time limit for fiscal claims to that for normal claims. Marks and Spencer established that three years from the contested payment is reasonable. Grundig Italiana decided that the time limit for accrued claims can be shortened. In Marks and Spencer the claim was actually before the Tribunal when the law was changed. In December 1996 GMAC had an accrued right but was not aware of it. He said that Marks and Spencer shows that where a time limit is enacted before a claim is made, the claim is caught even if it concerns a right which accrued before. In Grundig Italiana the focus was on protecting those caught by the shorter limit because they were relying on the old time limit. In Marks and Spencer at [38] the Court referred to the entitlement under the original legislation : there was no immunity from the old time limit. The old time limit was not repealed; a new time limit was substituted. The reasoning in Marks and Spencer does not apply to persons who did not realise they had a claim : such persons do not have a legitimate expectation to make a claim.

He said that before the Finance Act 1989 any repayment claim based on mistake would have been a claim in the civil courts subject to the Limitation Act. This route was excluded in 1989 by the predecessor of section 80(7). B P Supergas shows that the remedy where tax is overpaid in breach of a directly effective right depends on the relevant domestic procedure which in this case is section 80. If section 24 of the Finance Act 1989 is disapplied because of the lack of transitional period, the effect is to revive the civil claim which is outside the Tribunal's jurisdiction. He accepted that overpayments from 10 July 1996 to 4 December 1996 were in time under the old section 80(4).

He said that in Grundig Italiana it was clearly stated that a directly enforceable right does not give complete immunity from a shortened time limit; at [41] the Court said that a new time limit could be applied after the expiry of an adequate transitional period assessed there at six months. He said that the Appellant is caught by [41], because its claim was brought after what would have been an adequate transitional period from December 1996.

Reply by Appellant

Mr Cordara said that a directly effective right under EU law can be exercised whether or not there has been an error by the Member State : it does not matter if the taxpayer has made an error. The Appellant's rights under Article 8 of the Second Directive and Article 11 of the Sixth Directive became vested at various times; those rights were sufficient to enable the Appellant to acquire the right to a transitional period when the time limit was shortened. There was no hint in Marks and Spencer that the taxpayer must have been aware of the rights; no other European authority had been produced for this knowledge-based approach.

He said that section 80(4) remains on the statute book. The Court of Justice in effect decided that the legislation could stand so long as it did not interfere with vested rights under EU law. It was no part of the Court's function to assist the UK in abolishing retrospectively directly effective rights which vested before December 1996. The UK could not have passed a law in 2002 inserting a deemed transitional period into section 47 of the Finance Act 1997; this could not be done by a Business Brief.

He said that the conclusion in University of Sussex at [185] that if section 80 was applicable the old time limit revived was obiter. The old time limit was repealed. Disapplication did not undo the repeal. The principle in IN.CO.GE did not rewrite any part of the statute.

Mr Cordara said that Customs had not argued that Article 8(a) of the Second Directive was without direct effect but merely that it had no direct effect as regards reduction in consideration. However when Article 8(a) with the note in the Annex are compared with Article 11A(a)(a) of the Sixth Directive, there was no material change. Article 11C.1 which is implicit in Article 11A(1)(a) is also implicit in the Second Directive.

He said that it was implicit in the UK legislation before the 1989 legislation that there was a right to reduce the consideration if the price was reduced. That could only be under the valuation provision in section 10 of the Finance Act 1972 and later legislation. There had been no change in the meaning of consideration which must have encompassed reduction from 1972. Elida Gibbs and Argos both involved claims going back to 1973. The true position is that there was a directly effective right from 1973.

He said that Article 11C.1 is mandatory but does not state when the adjustments shall take place. Nor does it state that the reduction shall be by the taxpayer. He said that regulation 38 of the VAT Regulations 1995 does not affect the directly effective rights but only the domestic mechanics; it is probative and procedural.

Conclusions

Whether there were overpayments within section 80

We consider first the submission by Mr Cordara that section 80 and the time limit were not engaged at all because the Appellant was entitled to make an adjustment under regulation 38 and that the failure to make adjustments in the periods when the reductions were effected in the business accounts did not result in an overpayment.

Regulation 38 of the VAT Regulations 1995 clearly implements Article 11C.1 in respect of a decrease and Article 11A.1(a) in respect of an increase in consideration obtained. Without regulation 38(1)(a) any increase would not be included in the taxable amount. Both the increase and decrease in the taxable amount are mandatory under the Directive. In our judgment regulation 38 is mandatory and does require adjustment to the VAT account in the period when the business accounts reflect the change. Although the regulation does not in terms state when the entry is to be made in the VAT account relating to the period it is implicit that it should be at the time. It would be irrational if a trader could delay indefinitely making an entry effecting an increase in consideration. We accept the submission of Dr Lasok that the failure to make timeous adjustments resulted in overpayments and section 80 therefore applies to the claims. The Appellant did not lose the right to adjust by doing it late; it merely had the consequence that section 80 applied.

Mr Cordara further contended that there was no overpayment in respect of reduction in price taking effect before 1 January 1990 the date on which regulation 7 of The Value Added Tax (Accounting and Records) Regulations 1989, the predecessor of regulation 38, took effect. It was common ground that the original returns based on the contractual VAT price were correct and before 1990 there was no statutory mechanism in domestic law for adjustment. The failure of the UK to implement the mandatory requirement in Article 11C.1 before 1990 had the effect that the Appellant could rely on the direct effect of Article 11C.1 from 1 January 1978 when the Sixth Directive took effect whereas Customs could not. Consequently the Appellant did not overpay VAT as a result of not making adjustments before 1990 and section 80 does not apply to those adjustments.

Reliance on direct effect

We consider next the submission of Dr Lasok that the Appellant can only rely on the direct effect of Article 11C.1 if some wrong by the UK is identified. We do not find the foundation for this proposition to be clear. If the Directive has been fully implemented an Appellant will in all normal circumstances have no need to rely on direct effect.

The Court stated in terms at [27] in Marks and Spencer that the adoption of national measures correctly implementing a directive does not exhaust the effects of the directive whenever its full application is not in fact secured. In our judgment it is a major step in reasoning to say that, for the purpose of determining whether in a case such as this the Appellant is entitled to transitional relief, that person must show a breach of its rights under the directive as a result of some wrong by the Member State. The fact that for other purposes the Appellant does not need to rely on its directly effective rights does not mean that they did not exist. In Marks and Spencer there was a clear breach of directly effective rights so it is hardly surprising that the judgment referred to such breach and to the collection of tax in breach of rights.

At paragraph 40 of his opinion the Advocate General pointed out the illogicality if a trader could not rely on direct effect when the legislation has been correctly implemented but the administrative authority acts inconsistently with the directive in applying the transposed national legislation. It seems to us that it would be equally illogical if the Appellant was deprived of the right to an adequate transitional period if the directive had been correctly implemented but was not so deprived if it was not correctly implemented. We consider that such a result would erode the principles of effectiveness and the protection of legitimate expectations on which the decision in Marks and Spencer was based. In a case such as the present it would involve detailed analysis of the stance of Customs on the issue over a long period of time. In such event it would have been necessary to hear much of the evidence referred to at paragraph 3 above which led Customs to concede the section 80(5) issue.

We also observe that, if the Appellant could not assert its entitlement to adequate transitional relief when the time limit was shortened unless it could identify a directly effective right arising from some wrong on the part of the Member State in implementing the Directive, this would have been an answer to the repayment claim in Fleming since the late input tax claim in that case was not due to any wrong by Customs or any failure to implement the Directive. This argument was however never even referred to in Fleming and we can only assume that it was never advanced.

We reject Dr Lasok's submission on this issue.

The effect of the failure of section 80(4) to provide for a transitional period

The proposition that the three year time limit for input tax claims introduced in 1997 without any provision for transitional relief should only be disapplied during a reasonable transitional period assessed at 6 months in Grundig Italiana was rejected by the Court of Appeal in Fleming v Customs and Excise Commissioners [2006] STC 864, a decision which was followed by the Court of Appeal in Condé Nast Publications Ltd v Customs and Excise Commissioners [2006] STC 1721, which was decided on 6 July 2006 several months after the oral hearing in the present appeal.

We can see no difference in principle between reducing the time limit under section 80(4) without transitional relief and introducing the time limit in regulation 29(1A) of the VAT Regulations 1995 with which Fleming was concerned.

We accept the submission of Dr Lasok that the Tribunal cannot under Community Law be prevented from making a reference to the Court of Justice by the prior decisions of the Court of Appeal. However the power to refer is discretionary and the decisions of the Court of Appeal are highly relevant to the exercise of the discretion. This is all the more so when the Court of Appeal has already considered in Condé Nast whether a reference should be made given that the appeal in Fleming is going to the House of Lords. It is important to note that there has been no later decision of the Court of Justice which may call into question the decision in Fleming.

We heard extensive submissions as to Fleming, Marks and Spencer and Grundig Italiana, earlier in the year prior to Condé Nast when Dr Lasok was seeking to persuade us that a reference should be made in spite of Fleming. We accept his submission that the real issue is whether the time limit should be disapplied in the particular case rather than one of statutory construction, however apart from that we respectfully conclude that the decisions in Fleming and Condé Nast were correct. In our judgment in the absence of a reference to the Court of Justice those decisions are binding on the Tribunal and the principles apply in the present case.

Whether Article 8(a) of the Second Directive had direct effect

It is a basic principle of EU law that whenever the provisions of a directive appear to be unconditional and sufficiently precise, they may be relied on before the national courts by individuals against the state where the latter has failed to implement the directive in domestic law, see Marks and Spencer [2002] STC 1036 at [25] citing Becker [1982] ECR 53. It is clear from Grad v Finanzamt Traunstein (9/70) [1970] ECR 825 that provisions in the Second Directive were capable of having direct effect although less precise than those in the Sixth Directive. In Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen (Case 148/78) [1977] ECR 113 it was held that the first paragraph of Article 11(1) of the Second Directive did have direct effect subject to the issue whether the Dutch implementing legislation was within the margin of discretion left to Member States.

Article 8 of the Second Council Directive of 11 April 1967 provided as follows:

"The basis of assessment shall be:

(a) in the case of supply of goods and of the provision of services, everything which makes up the consideration for the supply of the goods or the provision of services, including all expenses and taxes except the value added tax itself;

…"

Article 20 provided that the Annexes were an integral part of the Directive. Paragraph 13 of Annex A included the following:

"Regarding Article 8(a)

The expression 'consideration' means everything received in return for the supply of goods or the provision of services, including incidental expenses (parking, transport, insurance, etc) that is to say not only the case amounts charged, but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received."

It is clear that the terms of Article 8(a) were unconditional. The question is whether it was sufficiently precise in relation to the effect on which the Appellant seeks to rely, namely that the taxable amount must be reduced when the price is reduced after the supply of the goods or when the full price is never received. It is to be noted that Article 5 provided expressly for the actual handing over of goods on hire purchase to be a supply and for the chargeable event to be on delivery.

The recitals to the Second Directive set out the aim of a common system of value added tax and the need to ensure neutrality in competition between Member States while accepting certain differences in procedure on a transitional basis.

It seems incontrovertible that a common basis of assessment was fundamental to a common system. There was no point in prescribing who were to be taxable persons and what was to constitute a supply of goods or services if the basis of assessment or the taxable amount were not prescribed.

In providing that in the case of the supply of goods or the provision of services the basis of assessment shall be "everything which makes up the consideration" and in defining consideration as "everything received in return for the supply" including a series of specific matters Article 8(a) and Annex A paragraph 13 went into some detail. Consideration which is an autonomous concept under the Sixth Directive was also an autonomous concept under the Second Directive albeit less developed. It is to be noted that in Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 879 the Court interpreted Article 11A(1)(a) of the Sixth Directive taking into account Staatssecretaris van Financiën v Cooperatieve Aardappelen Gewarplaat, GA (Case C154/80) [1981] ECR 445 (the Dutch Potato case) which was decided on Article 8(a) of the Second Directive. In the Dutch Potato case which concerned the provision of services the Court said that the basis of assessment was "the consideration actually received and not a value assessed according to objective criteria." In Apple and Pear Development Council v Customs and Excise Commissioners (Case C102/86) [1988] STC 221, the Advocate-General Sir Gordon Slynn said that Article 8 of the Second Directive and Article 11 of the Sixth Directive had the "precise function of defining how the taxable amount is to be assessed and what it is to include in particular cases."

The word "received" in paragraph 13 of Annex A must have encompassed not only everything which has been received but also everything to be received in return for the supply. If this was not the case either sums received after the chargeable event would have escaped tax or successive receipts would have given rise to successive chargeable events notwithstanding the provisions of Article 5.5.

In Boots [1990] STC 387 the Court of Justice at [19] referred to the rule laid down in Article 11A(1)(a) as interpreted in the Court's decisions that "the taxable amount is the consideration actually received." The Advocate General, Mr Van Gervan, at [6] cited Naturally Yours as deciding that Article 11A.1(a) may be interpreted by taking into account the corresponding provisions of the Second Directive.

In Elida Gibbs [1996] STC 1387 the Court of Justice said at [19] that the taxable amount "cannot exceed the consideration actually paid by the final consumer" and referred in the following paragraph to the neutrality principle laid down in the First Directive. At [31] the Court said that the provision in Article 11C.1 reducing the taxable amount where the price is not paid or is reduced after the supply "is an expression of the principle … that the position of taxable persons must be neutral." In Goldsmiths (Jewellers) Ltd v Customs and Excise Commissioners (Case C-330/95) [1997] STC 1073 the Court said at [15] that Article 11A.1(a) embodies a fundamental principle of the Sixth Directive that the bases of assessment is the consideration actually received.

It is clear that the general principle in the Sixth Directive that the taxable amount is consideration actually received and cannot exceed the consideration actually paid by the consumer was derived originally from the Second Directive. What is much less clear is whether the Second Directive can be regarded by implication as requiring the taxable amount to be reduced when the actual amount received is less than the amount which at the time of supply was to be received. The neutrality principle derived from the First Directive suggests that a reduction should be made. Almost certainly a provision in domestic law precluding such adjustment would have been contrary to the Second Directive. That does not necessarily mean that Article 8(a) and Annex A were sufficiently precise to have direct effect. In Becker the Advocate General, Sir Gordon Slynn, said at page 80 that if a directive is not implemented an individual "may rely on its terms, if these are unconditional and sufficiently precise." At [25] the Court said this,

"… wherever the provisions of a directive appear, so far as their subject-matter is concerned, to be unconditional and sufficiently precise, those provisions may, in the absence of implementing measures adopted within the prescribed period, be relied upon …"

It seems to us that if a term or a provision has to be implied it would not be normal to describe it as "precise". We are not aware of any case in which the Court of Justice has held that a provision which is to be implied in the Sixth Directive has been held to have direct effect. Certainly Mr Cordara did not cite any case to that effect.

We conclude that the Appellant's directly effective rights do not extend back beyond 1 January 1978 when the Sixth Directive took effect. While we have formed this view, we cannot be wholly confident that it is correct. If we were referring a question to the Court of Justice on the effect of the absence of transitional relief, we would have included a question as to the Second Directive. In our judgment however it would not be appropriate for this Tribunal to make a reference at this stage. We consider that if a reference is to be made it should be by a higher court and should be made in the light of the conclusions of the House of Lords in Fleming.

Our decisions on the above issues do not determine the appeal because they do not cover the amount of VAT repayable, which have not been verified by Customs. We direct that a supplementary Statement of Case be served within 3 months if the amounts are not agreed and that the matter be then listed for directions.

We summarise our conclusions as follows:

(1) There were overpayments to which section 80 applies from 1 January 1990 when regulation 7 of the Value Added Tax (Accounting and Records) Regulation 1989 took effect (paragraph 76);

(2) Section 80 does not however apply to reductions in price taking effect between 1 January 1978 and 31 December 1989 (paragraph 77);

(3) The Appellant has no claim before 1 January 1978 because the relevant provisions of the Second Directive did not have direct effect (paragraphs 96 and 97);

(4) In order to rely on the direct effect of the Sixth Directive it is not necessary to show that the United Kingdom prevented the Appellant from exercising its rights (paragraphs 78 to 82);

(5) The provisions of section 80(4) as amended fall to be disapplied in respect of the Appellant's claim from 1 January 1978 (paragraphs 83 to 86);

(6) It is not appropriate for this Tribunal to make a reference to the Court of Justice at this stage of the litigation (paragraph 97);

(7) If the amount repayable is not agreed within 3 months Customs shall serve a supplementary Statement of Case addressing that issue (paragraphs 24 and 98).

THEODORE WALLACE

CHAIRMAN

RELEASED: 26 January 2007

RERELEASED: 14 February 2007

LON/02/806