United Kingdom VAT & Duties Tribunals Decisions

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URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20664.html
Cite as: [2008] UKVAT V20664, [2008] BVC 2376, [2008] STI 1687

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University College London v Revenue & Customs [2008] UKVAT V20664 (01 May 2008)

20664

VAT – partial exemption special method – previous appeal determined by section 85 agreement – whether issue estoppel established – alternative contention of abuse of process – construction of section 85 agreement – direction that question precluded by issue estoppel

LONDON TRIBUNAL CENTRE

UNIVERSITY COLLEGE LONDON Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: JOHN CLARK (Chairman)

JOHN N BROWN CBE, FCA, CTA

Sitting in public in London on 11 March 2008

Andrew Hitchmough of Counsel, instructed by Deloitte, for the Appellant

Richard Smith of Counsel, instructed by the Solicitor for Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION: REASONS FOR DIRECTIONS

1. On 28 September 2007, the Appellant ("UCL") applied to have the validity of a particular decision made by the Respondents ("HMRC") dealt with at a preliminary hearing. The application was allowed by the President on 13 November 2007. The preliminary hearing took place before us on 11 March 2008. Following that hearing, we have issued Directions. The parties agreed that our decision on the matter should be published, and accordingly we have treated the hearing as having taken place in public.

The relevant legislation

2. Rule 19(3) of the Value Added Tax Tribunals Rules 1986 (SI 1986/590), to which we refer as "the Tribunals Rules", provides:

"(3) Without prejudice to the preceding provisions of this rule a tribunal may of its own motion or on the application of a party to an appeal or application or other person interested give or make any direction as to the conduct of or as to any matter or thing in connection with the appeal or application which it may think necessary or expedient to ensure the speedy and just determination of the appeal . . . ."

3. The corresponding legislation applying for direct tax purposes is regulation 9(3) of the Special Commissioners (Jurisdiction and Procedure) Rules 1994 (SI 1994/1811), which we refer to as "the Special Commissioners Rules":

"(3) On a preliminary hearing the Special Commissioner—

(a) shall give all such directions as appear necessary or desirable so as to enable the proceedings to be disposed of expeditiously, effectively and fairly;

(b) may, if the parties so agree, determine the proceedings without any further hearing."

4. Section 85(1) of the Value Added Tax Act 1994 ("VATA 1994") provides:

"85 Settling appeals by agreement

(1) Subject to the provisions of this section, where a person gives notice of appeal under section 83 and, before the appeal is determined by a tribunal, the Commissioners and the appellant come to an agreement (whether in writing or otherwise) under the terms of which the decision under appeal is to be treated—

(a) as upheld without variation, or

(b) as varied in a particular manner, or

(c) as discharged or cancelled,

the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement (including any terms as to costs)."

5. Section 54 of the Taxes Management Act 1970 ("TMA 1970") contains similar provisions for direct tax purposes:

"54 Settling of appeals by agreement

(1) Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the Commissioners, the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be."

The facts

6. UCL, through its Mullard Space Science Laboratory ("MSSL") makes zero-rated supplies of scientific equipment, for example, telescopes, spectrometers and x-ray equipment. This equipment is used for research into space (for example, the Beagle II mission to Mars project). Much of the equipment produced by MSSL is launched into space from sites outside the Member States. Under section 30(5) VATA 1994, MSSL is treated as making zero-rated supplies in the course or furtherance of a business carried on by it when it exports equipment to these launch sites.
7. In addition, MSSL donates equipment to other UK charities such as the Open University for export by them outside the Member States in order to be launched into space; these donations are treated as zero-rated under item 2(b) of Group 15 of Schedule 8 VATA 1994.
8. As the supplies made by UCL are zero-rated, it is common ground between the parties that UCL is entitled to recover input tax that is directly attributable to these supplies.
9. The issue arises whether UCL is also entitled to recover input tax on its overhead costs ("residual input tax"), to the extent that these overheads support the zero-rated supplies of scientific equipment that UCL makes.
10. The question was first raised by UCL in a letter to HMRC dated 23 February 2005. UCL indicated that as section 30(5) VATA 1994 requires a charity to treat the export of goods as a supply made in the course or furtherance of a business that it carries on, UCL was also required to include a value for these exports within its partial exemption calculations. UCL was therefore writing to agree with HMRC the value which should be attributed to such exports. On the basis of the adjusted figures resulting from the inclusion of the export values in the numerator of the partial exemption calculations, UCL stated that it was entitled to a repayment for the partial exemption years 2001-02 and 2002-03.
11. On 3 March 2005, HMRC responded. UCL's conclusion concerning the effect of the transactions on its input tax recovery through the partial exemption special method could not be agreed. There was no consideration received for a donation; the donation therefore had no value for partial exemption purposes. UCL's current partial exemption special method determined the numerator of the calculation based on outputs values. To determine the numerator in a different manner would constitute a change in partial exemption special method.
12. On 23 March 2005, UCL appealed against HMRC's decision in that letter. The appeal was assigned the reference number LON/2005/0238. (We refer to that appeal as "the First Appeal".) In their Amended Statement of Case dated 8 March 2006, they set out a summary of their argument:

"The numerator is calculated by grossing up the output tax declared and thereafter adding certain other specified values. The PESM [partial exemption special method] as originally agreed contained no provision for including any zero rated supplies in the numerator. . . . As such, the Commissioners cannot accept that there has been an error in excluding these zero rated exports from the calculation."

13. The First Appeal was listed for hearing in early April 2006. However, shortly before the hearing, the parties settled the appeal by agreement. That agreement, which was dated 3 May 2006, included the following provisions:

"TAKE NOTICE that the Appellant and the Respondents HEREBY AGREE that the Commissioners' decision of 03 March 2005 shall be treated as discharged or cancelled pursuant to section 85(1)(c) of the Value Added Tax Act 1994 and the appeal determined on the following terms -:

1. The numerator and denominator of the fraction in the Appellant's partial exemption special method calculation shall include the value of the specific supplies of the goods to the extent that it is established that those supplies were properly zero-rated.

2. The Appellant shall provide evidence within 56 days to establish that the supplies of the goods were properly zero-rated. If the Appellant fails to do this then the extent to which those supplies shall be established to be properly zero-rated shall be nil.

3. The value for VAT purposes of the zero-rated goods shall be determined in accordance with Schedule 6, paragraph 6(2)(c) of the Value Added Tax Act 1994."

14. In a letter dated 26 February 2007 UCL made a further voluntary disclosure for the longer period to 31 July 2004. The first three paragraphs of that letter stated:

"Now that we have agreed our VAT claim for space exports in the financial years ended 2002 and 2003, we would like to bring the issue up to date.

As such, I should be grateful if you would treat this letter as a voluntary disclosure for £63,914.16, which relates to previously unrecovered residual input tax in the period ended 31 July 2004.

As you will see from the enclosed Appendices I and II, we have calculated this amount along exactly the same lines as the accepted claims for 2002 and 2003 and I can confirm that the directly attributable costs do not include any grant amounts paid in respect of indirect or overhead costs, which I understand was the final issue in respect of the previous claims."

15. On 27 June 2007, after certain additional information had been provided by UCL, HMRC responded to UCL's voluntary disclosure by rejecting it. The relevant paragraphs of HMRC's letter stated:

"A section 85 agreement is specific to a certain set of activities/supplies made within a specific period. Any supplies that take place outside the s85 agreement are considered on a new basis ie: as if the s85 agreement hadn't taken place. Looking at the s85 agreement lodged at the Tribunal Centre on 3 May 2006 for UCL, this is the case as it relates specifically to:

the Commissioners' decision of 3 March 2005 (concerning the voluntary disclosure for the longer periods adjustments ending 31 July 2002 and 2003); and

how specific supplies of goods were to be treated within the partial exemption special method.

It does not say that the s85 agreement has any wider implications.

The Commissioners have looked at the 2003/04 claim that you have provided on UCL's behalf and confirm:

it is outside the s85 agreement and so should be considered on its own merits;

the current de facto PESM obtains the numerator factor of the residual calculation by grossing up the output tax. Whilst there are adjustments for certain zero-rated supplies, this does not extend to exports. Therefore this part of the claim is not valid and will not be repaid."

16. UCL gave Notice of Appeal against this decision on 26 July 2007. (We refer to this appeal as "the Second Appeal".) In its Grounds of Appeal, UCL applied for "its costs incidental and consequent on this appeal on an indemnity basis".
17. On 28 September 2007, UCL gave Notice of Application for a Direction that the Second Appeal should be listed for a preliminary hearing as a matter of urgency. UCL considered that HMRC's actions amounted to an attempt to re-litigate an issue which had been pursued under an appeal which had ultimately been settled between the parties by way of a section 85 agreement. UCL had challenged the validity of HMRC's actions as part of its grounds of appeal, but now sought to have this issue dealt with by the Tribunal as a preliminary point. Consistently with its Notice of Appeal, UCL gave notice that it would seek the costs which it had incurred in respect of the application, and of any related preliminary hearing, on an indemnity basis in the event of success.
18. On 13 November 2007 the President, Sir Stephen Oliver QC, gave directions in relation to the Second Appeal. He indicated that the application went to the question of whether there had been an appealable decision. Consequently the application should be dealt with in pursuance of the Tribunal's powers in rule 18(1) of the Tribunals Rules. He directed that UCL's application to have the matter dealt with at a preliminary hearing was allowed.
19. On 31 January 2008, UCL submitted a further voluntary disclosure in respect of the longer period to 31 July 2005. On 14 February 2008, HMRC responded by rejecting the claim:

"Unfortunately I am unable to agree to payment of this claim for the same reasons as those outlined in Helen Ramsden's letter of 27 June 2007 to your advisor, Richard Dalton.

Her letter was a response to your claim for the financial year 2004 and I thought it would be helpful to reiterate the main points again to clarify the reasons for refusing this 2005 claim.

The current de-facto Partial Exemption Special Method (PESM) obtains the numerator of the residual calculation by grossing up output tax. Whilst there are adjustments for certain zero-rated supplies this does not extend to exports.

Therefore your claim for 2005 is not valid and will not be paid.

. . .

I am also aware that UCL and HMRC are close to approving a new PESM which should incorporate the supplies in question in future and that you wish this to be back-dated to 1 August 2006. However, until this has been agreed the current de-facto method is still valid and cannot include exports within the numerator of the residual calculation."

20. UCL gave Notice of Appeal on 10 March 2008 in respect of HMRC's decision dated 14 February 2008. This appeal carries the Tribunal reference LON/2008/0599. (We refer to that appeal as "the Third Appeal".) In its Notice of Appeal, UCL applied for the Third Appeal to be consolidated with the Second Appeal (reference LON/2007/1288).

Arguments for UCL

21. Mr Hitchmough indicated that UCL's application was one for a Direction under rule 19(3) of the Tribunals Rules that HMRC should not be allowed to advance an argument in the Second Appeal to the effect that zero rated supplies made by UCL were excluded from the numerator of the partial exemption method operated by UCL. As this argument related to the sole issue in the Second Appeal, the consequence of granting the Direction would be to allow that appeal. The substantive issue in the Second Appeal was whether zero rated donations and exports could be taken into the partial exemption special method.
22. The Tribunal's power under rule 19(3) to make the Direction sought by UCL, provided that the Tribunal was satisfied that the circumstances warranted such a direction, was clear. The rule gave a broad discretion, as indicated by Richards J in Customs and Excise Commissioners v GIL Insurance Ltd [2000] STC 204 at [37] and by the Chairman, Dr Brice, in Allan Bennett v Customs and Excise Commissioners (2000) VTD 16590 at paragraphs 64 and 65. In the latter case it had been recognised that a party might be estopped from raising an issue. Mr Hitchmough considered that another item to be added to the list in the Bennett case was a situation where the proceedings were an abuse of process.
23. Mr Hitchmough summarised his arguments for the making of the Direction:

(1) The same issue had arisen between the parties in the First Appeal and had been determined against HMRC following the section 85 agreement. The matter was accordingly covered by an "issue estoppel";

(2) In the alternative, to allow HMRC to advance the same argument on the same issue for a second time was an abuse of process.

24. After summarising the facts, Mr Hitchmough indicated that the reasons given by HMRC for rejecting the voluntary disclosure for 2003-04 were identical (his emphasis) to the reasons given by HMRC for rejecting the earlier voluntary disclosures for 2001-02 and 2002-03 which became the subject matter of the First Appeal.
25. He sought a direction that the Third Appeal should be consolidated with the Second Appeal, so that the Tribunal's directions would cover both appeals.

UCL's arguments on issue estoppel

26. Issue estoppel gave effect to two broad principles of public policy. The first was that there must be finality in litigation. The second was that the same party should not be harassed twice for the same cause. The rule established that, once an issue had been raised and determined between the parties in proceedings before a court of competent jurisdiction, neither party was allowed to challenge the outcome on that issue in subsequent proceedings. Mr Hitchmough referred to Diplock LJ's comments in Thoday v Thoday [1964] P 181 at p 198.
27. The only issue which had arisen in the First Appeal had been whether the value of zero rate exports and donations should be included in the numerator of the partial exemption special method operated by UCL. Thus this had been central to the First Appeal. This was also the only issue which arose in the Second Appeal. Moreover, the only argument advanced by HMRC in the First Appeal for excluding the value of these supplies had been that the numerator of the special method was calculated by grossing up output tax. This was the same and only argument raised by HMRC for excluding the value of these same supplies in the Second Appeal.
28. These matters had never actually been argued before the Tribunal, as at the eleventh hour, HMRC had abandoned the argument and the First Appeal had been disposed of by the section 85 agreement. Paragraph 1 of that agreement set out the principle; this depended on the factual question, which was reflected in paragraph 2. Thus the agreement dealt with the proper construction but left open the factual enquiry. The relevant evidence had been produced to HMRC and all matters concerning the First Appeal resolved.
29. It did not matter that the First Appeal had been determined by agreement under section 85 VATA 1994. Mr Hitchmough emphasised the words in section 85(1): " . . . the like consequences shall ensue for all purposes as would have ensued if . . . a tribunal had determined the appeal in accordance with the terms of the agreement." The effect of section 85(1) was to elevate the agreement to the status of a Tribunal decision. Here this was the equivalent of a decision in principle. The agreement had been made pursuant to section 85(1)(c). This meant that the partial exemption special method calculation had to be arrived at by including the zero rated donations and exports. The question of principle had therefore been determined. As this had been central to the First Appeal, and adverse to HMRC's contention, this was enough to create an issue estoppel. The only issue in the Second Appeal was the same; HMRC could not now have a "second bite of that cherry".
30. It had to be acknowledged that issue estoppel was not a rule of universal application. An important exception existed for tax cases as indicated for example by the Privy Council case of Caffoor v Commissioner of Income Tax, Colombo [1961] AC 584, and by MacNiven v Westmoreland Investments Ltd [2001] STC 237, in which a secondary issue relating to section 54 TMA 1970 (similar to section 85 VATA 1994) had been considered by the House of Lords. However, this exception did not apply to all tax cases, as had been acknowledged in the Special Commissioners case of Carter Lauren Construction Limited (2006) SpC 00603, [2007] STC (SCD) 482, in which HMRC had argued that issue estoppel applied in the context of a question concerning direct tax.
31. In Caffoor, the trustees of a trust appealed against an assessment to income tax on the income of the trust. They argued that the income was exempt from tax as the income was charitable. This argument had prevailed in an appeal by the trustees against an assessment for an earlier year. At p 598, Lord Radcliffe had referred to the recurring annual nature of the tax. Mr Hitchmough argued that the deciding factor in Caffoor was the limited nature of the tribunal's jurisdiction when considering an appeal against an assessment; the tribunal (like the assessment itself) had been concerned only with the amount of the income arising in the year. The decision on the secondary issue in Westmoreland, and similarly the decision in Caffoor, had been based on the jurisdiction of HMRC to assess and the jurisdiction of the General Commissioners or Special Commissioners to consider; the only question had been one of quantum. Mr Hitchmough accepted that if matters of quantum were under consideration, there was a limited restriction to issue estoppel. Those cases had only been considering quantum, and quantum for one year was unlikely to be the same for the next year.
32. Unlike Caffoor, UCL's appeal was not an appeal against an assessment. The scope for VAT appeals was wider, given the terms of section 83(c) and (e) VATA 1994. The appeal related to a claim for input tax, and in particular the manner in which UCL's residual input tax should be apportioned. Moreover, in an appeal relating to input tax, the jurisdiction of this Tribunal was not confined to "the amount of any input tax which may be credited to a person" (section 83(c) VATA 1994) but extended to "the proportion of input tax allowable" (section 83(e) VATA 1994).
33. Accordingly, the jurisdiction conferred on the Tribunal by section 83(e) VATA 1994 related not to quantum (as was the case with an appeal against an assessment) but to principle (here, the proper construction of UCL's special method). In addition, whereas an assessment was for a specific VAT period, questions of principle determined under section 83(e) (such as the proper construction of a special method) would apply indefinitely. The effect of the section 85 agreement in the present case had been to establish a principle; HMRC's reference in their argument to section 83(e) had been correct, the section 83(c) point having been left open because the amount had been left at large. This was a case where issue estoppel was capable of applying, and did apply; the section 85 agreement did have an enduring effect and created an issue estoppel. Caffoor and Westmoreland were only in point for matters of amount rather than principle; they did not apply to cases such as the present involving an agreement as to principle. In support of this view, Mr Hitchmough cited various paragraphs of the Special Commissioner's decision in Carter Lauren Construction, in particular paragraphs 54-60; the decision recognised the limited application of Caffoor and Westmoreland.
34. It followed that Caffoor did not establish a general rule that issue estoppel could never apply in tax cases. On close analysis it was clear that the exception recognised and applied by the Privy Council in Caffoor was both specific and limited. In the context of the present Application, if circumstances were to change so that UCL's special method no longer produced a fair and reasonable attribution of input tax, the method could be changed. The decision of the Tribunal on the proper construction of the method did not impose on UCL or on HMRC the unalterable privilege or disadvantage of a particular tax treatment.
35. For HMRC, Mr Smith had indicated that the argument in relation to section 83(e) VATA 1994 related to the question "how much?" However, the actual words used in that sub-section were "the proportion". Mr Smith had then proceeded to section 26 VATA 1994; on the basis that section 26(1) referred to "the amount", he had concluded that this raised the question "how much?", and this had formed the basis of the rest of his submissions. However, it was necessary to look at the rest of section 26. Section 26(3)(a) and (b) both referred to "a proportion", and provision was made for regulations governing a special method. Mr Hitchmough submitted in accordance with the vires contained in section 26(3) that the matters covered by section 83(e) were all matters of principle. Thus if an appeal related to quantum or amount, it would fall within section 83(c), but if it related to proportion, the relevant sub-section was 83(e). Under the latter the question was not "how much?" but "how?" The jurisdiction of the Tribunal was founded on section 83(e), not 83(c). These were not quantum cases; they fell within the category recognised in Carter Lauren where issue estoppel could have application. If cases raising the question "how much?" fell within section 83(e), the draftsman would have been "wasting ink" by including it as well as section 83(c). He argued that one should avoid construing section 83(e) as otiose.
36. Returning to Diplock LJ's definition of issue estoppel in Thoday v Thoday, Mr Hitchmough asked what issue was involved in the Second Appeal. The answer was, how did UCL work the special method? Looking as the section 85 agreement, this was the same issue as had been determined against HMRC in the First Appeal; the numerator of the fraction had to include the grossed up input tax.
37. The only reason why issue estoppel might not apply was if there was some technical objection to its application; he contended that there was no such objection. For HMRC, Mr Smith had accepted that in certain circumstances issue estoppel could apply to tax cases. Mr Hitchmough had established that the question did not concern quantum or amount. The same issue of principle or proportion had been the subject of the First Appeal as was now in question in the Second Appeal. He referred to paragraph 54 of Carter Lauren, referring to "the exact same issue". The issue in the present case was one of principle; it would be ridiculous if the same question could be decided in different ways by different parties.
38. HMRC had referred by way of precedent to the decision in Specsavers Optical Group (2002) VAT Decision 18025, in which the Chairman of the Tribunal had been the same as in the present case. On the basis of information provided by Deloitte, who had acted for the Appellant in Specsavers, Mr Hitchmough pointed out that the appeal to the High Court had been allowed by consent. Thus the decision had been overturned on appeal and was therefore unsafe and unsatisfactory to be relied upon; it was inappropriate to comment further on the case.
39. Mr Hitchmough referred to Société Internationale de Télécommunications Aéronautiques SC ("SITA") (2003) VAT Decision 17991, in which the Tribunal appeared to suggest, albeit in the context of an appeal against an assessment, that the exception for tax cases from the doctrine of issue estoppel was universal. Concern had been expressed in that decision relating to fixing an issue in perpetuity; the position in the present case differed, as alteration was possible. Mr Hitchmough acknowledged that the decision in SITA was probably correct on its facts, but in the light of the above arguments and in particular the Special Commissioner's detailed analysis and decision in Carter Lauren Construction, contended that any suggestion of a universal exception was, with respect, wrong.

UCL's construction of the section 85 agreement

40. HMRC contended that the agreement related to specific supplies. Mr Hitchmough referred to paragraph 1 of the agreement. What were the goods involved? There was not a long list; these were items of scientific equipment produced by MSSL. The approach taken by HMRC in their letter dated 3 March 2005, the subject matter of the First Appeal, had been to deal with generalities rather than specific items. He argued that paragraph 1 of the section 85 agreement was dealing with matters in principle, thus bringing the question within section 83(e) VATA 1994 rather than section 83(c).
41. It was also relevant that many projects were ongoing and took a long time to complete. It followed that the same supplies were in question in 2004 as in 2003 and 2003. For example, the "Double star" project and the "Solar-B" project had been mentioned to HMRC in UCL's letters of 23 February 2005 and 26 February 2007. The projects were of enduring application, so that for HMRC to say that a project could be included in one year but not in a later year would create practical difficulties; it would make it impossible for the scientists to budget correctly for the costs involved.
42. The section 85 agreement was not concerned with quantum or amount, but with principles or proportion. It was concerned with categories of supply; not short projects, but lasting over periods of years. It was for this reason that the parties had left open matters of quantum. It had been agreed that the values of exploration and scientific equipment should be brought in. The agreement had not been couched at the level of detail which Mr Smith had suggested on behalf of HMRC; the agreement had gone out of its way to leave the detail open.

UCL's arguments on abuse of process

43. UCL's alternative contention was that the application should be granted on the grounds that to allow HMRC to advance the same argument on the same issue for a second time represented an abuse of process. Mr Hitchmough referred to Carter Lauren Construction, in which the Special Commissioner, Mr Hellier, had also considered an argument based on abuse of process, raised in that case by HMRC. This was in the context of regulation 9(3) of the Special Commissioners Rules. Mr Hitchmough argued that the jurisdiction conferred on the Special Commissioners by regulation 9(3) was almost identical to that conferred on the Tribunal by rule 19(3) of the Tribunal Rules.
44. In Carter Lauren Mr Hellier had referred to the comment by Stuart Smith LJ in House of Spring Gardens Ltd v Waite [1990] 2 All ER 990 at p 100 that, although similar in outcome to the issue estoppel argument, abuse of process was a route "untrammelled by the technicalities of estoppel". Mr Hitchmough indicated that abuse of process involved a far less formal, and more flexible, approach than issue estoppel. The purpose of the concept was to do justice between the parties. This meant that questions arising in the context of issue estoppel, such as questions as to "amount", were not relevant. Technical objections did not matter. He referred to paragraphs 81 and 82 of Carter Lauren, in which Mr Hellier had summarised HMRC's contentions on abuse of process. Mr Hitchmough indicated that he was advancing the same set of submissions in relation to HMRC's attack on the section 85 agreement in the present case; it opened up the possibility of inconsistent treatment. Each and every case had involved exports and donations. All the differences concerned questions of principle. The importance of Carter Lauren was that the Special Commissioner had decided that he had jurisdiction in relation to abuse of process.
45. For HMRC, Mr Smith had challenged the contention that the Tribunal could dismiss an appeal for abuse of process. Mr Hitchmough pointed out that the Tribunals Rules corresponding to the Special Commissioners Rules under consideration in Carter Lauren were similarly worded. The rules gave a wide discretion. Mr Smith had accepted that the power might be exercised in certain circumstances. There was a body of case law establishing the breadth of the Tribunal's jurisdiction in this connection; Mr Hitchmough argued that the Tribunal did have this jurisdiction. There was a clear issue in 2005; it was the same issue in 2007. It would be odd to submit two years to anomalous treatment; there was no basis for making any distinction.
46. He argued that it would be an abuse of process to allow the appeal procedure to be used in a way which, although consistent with a literal application of the rules, would be manifestly unfair to a party to that litigation. Such manifest unfairness would exist where (as in the present case) a second set of proceedings had been commenced as a collateral attack on the outcome of previous proceedings. There should be an end to litigation. Mr Hellier had set out his conclusions at paragraph 88 of Carter Lauren; Mr Hitchmough submitted that this was the heart of the decision on that issue, and further submitted that the same logic applied for the purposes of VAT under rule 19(3) of the Tribunals Rules. He explained that the case of Deborah Smith (2005) Excise Decision E00896, to which Mr Hellier had referred in paragraph 87 of Carter Lauren, related to the language used in rules 6(1) and 18(1) of the Tribunals Rules and was not in point when considering rule 19(3).
47. UCL relied on, and would gratefully adopt, Mr Hellier's analysis in Carter Lauren, in particular the conclusion at paragraph 88, as well as the analysis set out in those cases to which Mr Hellier had referred in his Decision. Mr Hitchmough submitted that there would be abuse if the proceedings were no more than a collateral attack on a previous decision. The question to be posed was: would it be manifestly unfair if the proceedings were allowed to continue? To use an expression taken from the case cited at paragraph 81 of Carter Lauren, abuse of process would bring the whole administration of justice into disrepute. The powers of the Tribunal should be exercised in order to avoid this and instead to do justice.

Summary of UCL's contentions

48. UCL submitted that:

(1) The question of issue estoppel was clear: HMRC were estopped in the present proceedings from denying that the value of zero rated exports and donations of equipment produced by MSSL should be excluded from the numerator of the partial exemption special method operated by UCL; or

(2) in the alternative, if technicalities prevented acceptance of the issue estoppel argument, it would be an abuse of process for HMRC to argue in the present proceedings that such zero rated supplies should be so excluded.

49. Accordingly, UCL submitted that the Direction sought by it under rule 19(3) of the Tribunals Rules, limiting the scope of the present appeal, should be granted. UCL also requested that the Third Appeal should be consolidated with the Second Appeal, with the result that the Direction should determine the Third Appeal as well as the Second Appeal.

Arguments for HMRC

50. Mr Smith observed that UCL had made a claim in relation to its partial exemption special method by reference to supplies made in period 2003-04, ie not one of the periods to which the First Appeal had related. For the purposes of the hearing HMRC accepted that the supplies in question were similar to those which had been in dispute in the earlier appeal. HMRC had carefully considered the facts underlying the claim and had rejected it on the basis that the claim in fact proposed an amendment to the partial exemption special method which created an unfair distortion.
51. The effect of UCL's contentions as to res judicata, issue estoppel and abuse of process was essentially the same, namely that the section 85 agreement concluded in respect of the First Appeal prevented HMRC from refusing to accept UCL's claim to include in the partial exemption special method the value of the supplies made in 2003-04.

Construction of the section 85 agreement

52. Mr Smith submitted that it was clear from the wording of the section 85 agreement that it was not capable of meaning that HMRC were estopped from making a different decision in relation to subsequent periods. The agreement provided that the values of the particular disputed supplies were included in UCL's partial exemption special method fraction. This could not sensibly be taken to mean that the values of all disputed supplies in the future would be similarly included in the fraction.
53. He argued that the section 85 agreement related, and could only have related, to the amounts of tax in the First Appeal and could not bind HMRC to make any particular decision in relation to claims for subsequent periods. HMRC contended that, as a matter of law, the section 85 agreement was not capable of binding HMRC's conduct in relation to subsequent periods. In any event it was clear on the face of the agreement that it was not intended to have any continuing effect. The preliminary issue should be determined in HMRC's favour.
54. It was necessary to consider first the question of what had been agreed in the section 85 agreement, and after that to look at the legal consequences. Paragraph 1 of the agreement referred to "the specific supplies of the goods in dispute". By using those words, the agreement expressly confined itself to the issues in dispute in the First Appeal, ie whether the value of the "specific supplies of the goods in dispute" in that appeal could be used in the partial exemption special method fraction. This "anchored" those supplies in particular periods. Mr Smith argued that this had been entirely appropriate and had disposed of all issues extant in the First Appeal.
55. To have gone further than this and, as UCL argued, to have purported to bind HMRC to a particular analysis of factual questions arising in the future would have been inappropriate and an impermissible fetter on HMRC's duty to protect the revenue.
56. Having related those supplies to particular periods, the effect on the partial exemption special method was that the basic method would involve the numerator calculated by reference to output tax; the effect of the section 85 agreement was to add the values of the specific goods in dispute. It was not correct to say that HMRC had abandoned their argument on the principle; they had actually abandoned the contention that those specific supplies should not be included in the calculation. HMRC had maintained a consistent position, as in relation to the decision of 14 February 2008. It was hoped that agreement would be reached to have a new special method, but this was still in the future, as part of a wider agreement which had been under negotiation for some considerable time.
57. On the face of the section 85 agreement, it could not have the effect that UCL was contending; it did not speak as to the future, and was necessarily connected to the value of supplies when made. The Second Appeal concerned different supplies. It would be stretching the section 85 agreement beyond breaking point to say that it was covering supplies for the future. This simply could not be correct; it was simply not what had been agreed between the parties in the section 85 agreement. This was a straightforward point of contractual construction.

The legal foundation of the appeal

58. There was no higher court authority on whether and how a section 85 agreement could form an issue estoppel in circumstances such as those in the present case. However, the House of Lords had considered whether agreements made under section 54 TMA 1970, worded similarly to section 85 VATA 1994, were capable of having this effect. Mr Smith referred to the comments of Lord Hope in Westmoreland at [87] to [90], and submitted that the reasoning set out in those paragraphs applied equally to section 85 agreements. There was no means under the VAT legislation by which a taxable person's liability to VAT for future periods could be determined conclusively, by appeal or agreement.
59. The appeal had been made under section 83(e) VATA 1994, which made the proportion of input tax allowable under section 26 VATA 1994 an appealable matter. Mr Smith stressed the words "at the end of any period" in section 26(1). Therefore the issue in the First Appeal was the proportion of input tax which UCL was entitled to at the ends of the periods in question, ie periods in which the input tax was incurred. As a result of section 83(e) and section 26 the appealable matter could not be any wider than that and certainly could not relate to HMRC's future conduct.
60. The words used in section 83(e) were "the proportion of input tax allowable under section 26". Given the words "at the end of any period" in section 26(1), section 83(e) was concerned with the proportion allowable at the end of any period, and was therefore attached to particular periods. Thus the only issue that could be determined under section 83(e) was the input tax for the period in question, and not other periods.
61. The same would apply if a special method had been imposed; the Tribunal would have to establish whether this produced the correct amount of input tax at the end of the period.
62. Thus the Second Appeal was not concerned with a matter of overarching principle, but on a question of "how much?" Reference had been made to duplication, but section 83(e) was dealing with how much input tax was to be credited as a result of a special method. This was a question of amount; it should be considered as for any assessment. Therefore the matter should not be elevated; this was no more than a quantum appeal, albeit with some complex questions.
63. If the point at issue was the amount, he submitted that there was no difference between the parties' arguments; there was an exception to issue estoppel where the dispute was as to amount. He contended that a different question was being asked; how much input tax should be credited at the end of the period in question in this appeal? If the provisions did not operate in this way, there would not have been a reference back to section 26; the definitions would have been different. On this basis alone, the present case was distinguishable from Carter Lauren.
64. That case had involved an application for a certificate, and the review of certain conditions. This was very different from the present case, where the issue under review was clearly the amount of input tax to be credited at the end of any given period. Mr Hellier had ultimately found that issue estoppel was applicable. In paragraph 54, where this conclusion was set out, Mr Hellier had used the words "the exact same issue". In paragraph 55, he had acknowledged that the facts in a later appeal could be different. It was clear from the decision that the facts had to be virtually identical for issue estoppel to apply. In the present case the supplies were different supplies. In this context, Carter Lauren was not persuasive. Mr Hellier was making a very narrow point; if appeals on identical facts were brought twice, it should be considered whether to use powers to stop the later appeal. This was not the case in relation to UCL's appeals.
65. The point was the same in terms of abuse of process. Mr Smith disagreed with UCL's argument that this was open to the Tribunal. He contended that there was no need for it; the position should be compared with paragraph 89 of Carter Lauren.
66. The difference here was even more stark. The factual overlap was one of generality rather than specifics, as different supplies were involved. Mr Smith referred to the comments of Lord Reid in Caffoor at p 598 (cited by Lord Hope in Westmoreland at [88]):

"The critical thing is that the dispute which alone can be determined by any decision given in the course of these proceedings is limited to one subject only, the amount of the assessable income for the year in which the assessment is challenged."

In UCL's case, the question in the First Appeal had been limited to one subject only, namely the amount of input tax for the period in dispute. This was tied to the proportion of input tax allowed under section 26 VATA 1994, which had to be related to a particular period.

67. Thus if the question was one of amount, there seemed to be no difference between the parties; issue estoppel did not arise.
68. Mr Smith referred to paragraphs 40 and 41 of the decision in Specsavers Optical Group. Mr Smith endorsed the comments made in those paragraphs.
69. In relation to SITA, Mr Smith disagreed with the suggestion that the decision was wrong. He submitted that the question of issue estoppel was not applicable here; he did not contend that it could never apply.
70. In relation to abuse of process, Mr Smith advanced the same arguments as for issue estoppel; if the later proceedings did not relate to the same circumstances, there could not be an abuse of process. Perhaps the position would be different if a change of method had been involved. Given the limited scope of the section 85 agreement, it was impossible to see how HMRC could be debarred from making similar decisions.
71. He questioned whether such a concept was proper to the Tribunal's process. There was no statutory basis for strike out for abuse of process. At best, there was some uncertainty. There was no authority. He contended that the lack of express power should mean that the Tribunal had no power to strike out for abuse of process. In relation to the facts, these pointed away from any abuse of process; he repeated the submissions made in the context of issue estoppel.
72. In summary, the application should be dismissed and the appeal permitted to continue. Subject to confirmation that the Third Appeal had been processed by the Tribunal administration, HMRC had no objection to the consolidation of the Second and Third Appeals.

Discussion and conclusions

73. As the parties' submissions raise questions as to the Tribunal's jurisdiction to make directions under rule 19(3) of the Tribunals Rules in relation to issue estoppel or abuse of process, we first consider those questions, before reviewing the effect of the section 85 agreement.

Issue estoppel

74. Although Carter Lauren was a direct tax case, we have found it of considerable assistance in relation to this question. We accept the distinction made in Carter Lauren between those tax cases which are an exception to the issue estoppel principle because they relate to a particular amount and/or a particular period, and those where the jurisdiction is not of an "annual" or "passing" nature.
75. UCL's appeal is not against an assessment, but against the decision of HMRC to exclude particular elements from UCL's partial exemption special method calculation. Did the appeal relate to quantum or amount? We think not. The question was one of the principles to be applied in operating the special method.
76. We agree with both parties that the appeal falls within section 83(e) VATA 1994. Mr Smith argued that the reference in section 83(e) to section 26 tied the appeal to "the amount of input tax for which a taxable person [ie UCL] is entitled to credit at the end of any period", ie to a particular period. We agree with Mr Hitchmough that the reference in section 83(e) to section 26 is to the whole of that section and not merely to those words in section 26(1). If that were not the case, why would the draftsman have found it necessary to include section 83(e) as well as section 83(c), which relates to "the amount of any input tax which may be credited to a person"? In addition, the use of the word "proportion" rather than "amount" in section 83(e) appears to us to be a matter of arriving at the appropriate principles in order to operate the special method, which would imply that the reference to section 26 was also intended to relate to matters of principle as covered by the whole of that section, rather than being limited as a result of the introductory words in section 26(1).
77. As an appeal made under section 83(e) is on a matter of principle, we do not think that it is necessarily tied to a particular period. The appeal may be brought in the context of a decision which covers a specific period, but the principle may well be relevant to the continuing basis for the calculation of the taxable person's allowable input tax. We have the same concern at the prospect of matters of principle being re-litigated as that expressed in argument at paragraph 52 of Carter Lauren and accepted by the Special Commissioner, Mr Hellier, at paragraph 54.
78. Thus in our view the question resolved in the First Appeal was a matter of principle, and not excluded from the concept of issue estoppel as tied to an amount or period. However, this conclusion is subject to the question of the construction of the section 85 agreement, which we consider below. Mr Smith argued that the facts of a subsequent appeal had to be identical for issue estoppel to apply. However, where the question is one of principle, issue estoppel is unlikely to be precluded except where, as Mr Hellier indicated at paragraph 55 of Carter Lauren, the facts are "startlingly different".
79. Mr Hitchmough indicated that in SITA, the Tribunal had appeared to suggest that there was a universal exception for tax cases from the application of issue estoppel. We are not sure whether to interpret the comments in paragraphs 68 to 70 of that decision as going that far, at least in the VAT context. The later analysis in Carter Lauren demonstrates that there are certain categories of tax case which do not fall within the general exception from issue estoppel for tax and rating cases. In relation to a question involving a taxable person's partial exemption special method, the principles to be applied appear to us to fall within Mr Hellier's comment at paragraph 60 of Carter Lauren: ". . . it seems to me to be in the public interest that neither HMRC nor the taxpayer should be able to re-litigate the same issue again and again."
80. An important distinction between the question under review in SITA and that in the present case is that the application of a partial exemption special method is not "unalterable", and so its continuation does not raise questions of inequity between one trader and others making similar supplies as mentioned in SITA at paragraph 68.
81. Before considering the actual effects of the section 85 agreement, it is necessary to establish the extent to which such an agreement can found an issue estoppel. The cases under review in Carter Lauren involved previous decisions by courts or tribunals. The difference in UCL's case is that the First Appeal was resolved by the section 85 agreement, so that there was no decision made by a tribunal. Mr Hitchmough referred to the words in section 85(1):

". . . the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the agreement in accordance with the terms of the agreement . . . "

82. It is clear that this resolves matters in relation to the appeal covered by that agreement, ie to the First Appeal, but to what extent should matters covered by a section 85 agreement be permitted to be taken into account in a subsequent appeal? We accept that the decision in Specsavers cannot now be treated as an authority, given its reversal by consent following the High Court hearing, but as indicated at paragraph 41 of that decision, an attempt to rely on a section 85 agreement for the purposes of another appeal raises difficulties. It appears to us that the circumstances in which a section 85 agreement might be used for such purposes must be extremely limited. First, it cannot establish matters of fact in relation to the subsequent appeal. Secondly, given the conclusions which we have already reached on the question of issue estoppel, it can only be relevant to matters of principle. Subject to the question of fact arising from the construction of the section 85 agreement, the facts underlying the three appeals are not disputed. Again subject to the construction of the agreement, the appeals concern a question of principle. Our conclusion is that in the present case the stringent conditions for the section 85 agreement to be taken into account have been met, so that it is appropriate to construe it to establish whether it has the effects which UCL seeks to argue.
83. We consider that the broad powers under rule 19(3) of the Tribunals Rules are sufficient to enable us to make any appropriate direction relating to issue estoppel where a party has satisfied the Tribunal that issue estoppel has been established.
84. Although we have determined the questions of the extent to which issue estoppel can be taken into account by the Tribunal and the availability of the section 85 agreement to establish such estoppel, we consider the alternative contention of abuse of process, in case any technical objection or other reason is subsequently found to preclude the application of issue estoppel.

Abuse of process

85. In Carter Lauren at paragraph 82, HMRC argued that the Special Commissioners had the inherent jurisdiction in respect of abuse of process, that that doctrine imposed a duty rather than a discretion on the tribunal, that such duty arose because there was a collateral attack on the earlier tribunal decision, the second appeal opening up the possibility of an inconsistent verdict, and because there should be an end to litigation. Mr Hitchmough submitted that the same contentions were relevant here.
86. Mr Hellier's conclusions as to the application of the doctrine in matters before the Special Commissioners are set out at paragraphs 86 to 88 of Carter Lauren. He decided that rule 9(3) of the Special Commissioners Rules "may extend to a direction to stay an appeal as abuse of process". He also said: ". . . that power must be exercised sparingly and only in cases where there is a clear abuse."
87. Does a similar power exist in relation to appeals before the VAT and Duties Tribunals? The language of rule 19(3) of the Tribunals Rules is not precisely the same as that in rule 9(3) of the Special Commissioners Rules. However, the effect of the respective rules is in our view exactly the same. We therefore conclude that rule 19(3) does extend to a direction to stay an appeal as an abuse of process, but that this power must be exercised sparingly.
88. Mr Smith argued that the proceedings in the Second Appeal did not relate to the same circumstances as those in the First Appeal. For the reasons which we have set out above in relation to issue estoppel, we do not accept this submission; subject again to the construction of the section 85 agreement, the question of principle in relation to the special method was the same in both appeals.

Construction of the section 85 agreement

89. We read paragraph 1 of the agreement as referring to a question of principle, namely the types of supply to be brought into account in the numerator and denominator of UCL's partial exemption special method calculation. That paragraph refers to "the value of the specific supplies of the goods in dispute". Mr Smith argued that this tied the agreement to the particular disputed supplies. However, as Mr Hitchmough pointed out, the nature of the projects carried out by UCL through MSSL was long term, so that for example the "Double star" project and the "Solar-B" project were included in the claim for 2002-03 and in the later claim for 2003-04. Having accepted the claim for 2002-03 as a result of the section 85 agreement, it seems to us that HMRC would be applying different principles for the subsequent period if the supplies relating to those projects were not included in the same way in the special method calculation for 2003-04. Mr Hitchmough indicated the difficulties which the variation in treatment would cause for the budgeting in respect of such continuing projects.
90. On the basis that the section 85 agreement related to the question of that principle, we regard the agreement as falling within the narrow category of agreements which can found an application to stay proceedings on the ground of issue estoppel. If for some reason a technical objection to the application of such estoppel is established at some future stage, we consider that the section 85 agreement does form the basis for a direction to stay the Second Appeal as an abuse of process, again because the agreement relates to a matter of principle.

Conclusions on UCL's application

91. We therefore agree to grant the two directions applied for by UCL, namely that the Third Appeal is to be consolidated with the Second Appeal, and that HMRC are precluded from advancing in the Second Appeal or the Third Appeal the argument that zero rated supplies made by UCL are excluded from the numerator and denominator of the fraction used in UCL's partial exemption special method.
92. Mr Hitchmough applied for costs on behalf of UCL. In its Notice of Application dated 28 September 2007, UCL indicated that it would be seeking the costs of the application and any related preliminary hearing on an indemnity basis. As we have found that the questions raised by UCL's application involve finely balanced and detailed arguments, we do not think that an indemnity basis is appropriate. We agree that costs should be awarded to UCL on the standard basis, to be determined in default of agreement by a Tribunal Chairman.

JOHN CLARK

CHAIRMAN

RELEASE DATE: 1 May 2008

LON/2007/1288