S79 VATA 1994 – Repayment Supplement – S78 VATA 94 – Interest in cases of official error – S84(8) Interest awarded by Tribunal – Jurisdiction of Tribunal in Repayment Supplement matters – appeals allowed in part with costs – appeal dismissed in relation to part of interest claimed.
EDINBURGH TRIBUNAL CENTRE

                               NATIONAL GALLERIES OF SCOTLAND	Appellants                                                                                                                                                  

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:  GRETTA PRITCHARD, BL., MBA., WS(Chairman)
                                                  Mrs Helen Dunn, LLB.,
                                                  Mr I R Welch, CA., JP 

Sitting in Edinburgh on 2 and 3 October 2003.

for the Appellants		Mr Charles Rumbles

for the Respondents	Mr  R Macleod

© CROWN COPYRIGHT 2003.

DECISION

The National Galleries of Scotland, The Mound, Edinburgh is the Appellant.  The National Galleries of Scotland is a non-departmental public body, having charitable status, and is a body listed under Section 33(A) Value Added Tax Act 1994 (VATA 94). The Appellant made an appeal against a refusal of repayment supplement under Section 79 VATA 1994 in respect of repayments due to them for the quarters 03/02 and 06/02.    They also appealed against a refusal of interest under Section 78 VATA 1994.    They further requested this Tribunal to award interest under Section 84(8) VATA 1994.

	In addition three preliminary matters have been dealt with by this Tribunal.   The first was jurisdiction which although not contentious was an issue during the hearing.    Two preliminary matters were also brought to the Tribunal by the Commissioners of Customs and Excise (the Respondent).

	The Appellant was represented by Mr Charles Rumbles, Taxation Consultant.    The Respondent was represented by Mr Roddy Macleod, Solicitor.    The Appellant and Respondent lodged a joint bundle of documents tabbed 1-32, each document referred to throughout the Tribunal and in this Decision as TAB (NUMBER).     When any reference is made to any TAB (NUMBER) it will be treated as repeated here.

	Oral evidence was given for both parties.   Evidence by the Appellant’s employees Ms Lynn Banks and Mr Alan Davidson was factual only and credible.   All other oral evidence both for the Appellant and the Respondent was given by the Respondent’s Officers Mr A McCue, and Mr I Brown for the Appellants and Mr M McCoy for the Respondents.    That evidence was so far as in relation to fact credible.   The written statements by the Respondent’s Officers Mr M McCoy and Mr A McCue TABS 28 and 29 were adopted as part of their verbal evidence.   Witness Statements for the Respondent and of the Respondent’s Officers Mr Stephen Oakes, Joseph Baird and Thomas Caine were provided at TABS 30, 31 and 32 and were unchallenged though lodged out of time.   No formal objection was taken to these Statements and they are treated as part of the Respondent’s evidence.     

LAW USED IN THIS DECISION
1.	Section 25(2) VATA 1994 which provides the Appellant with entitlement to credit where appropriate for input tax allowable under S26 VATA 1994.
2.	Section 25(3) VATA 1994 which provides for the Appellant that where input tax exceeds the output tax on a return the credit shall be paid to the Appellant.   (This is  subject to SS4 and 5 neither of which is relevant)
3.	Section 26 VATA 1994 which defines input tax to be credited as input tax on taxable supplies (i.e. trading activities).
4.	Section 33(A) VATA 1994 which provides the entitlement to refunds of VAT to museums and galleries where the supply, acquisition or importation to the body is attributable to the provision by the body of free rights of admission to a relevant museum or gallery.    
5.	Value Added Tax (Refund of Tax to Museums and Galleries) Order 2001 SI 2001/2879 which lists the Appellant as a body having entitlement under Section 33 (A) from 01/04/01.
6.	Section 78 VATA 1994 which provides for interest in cases of official error where a person has suffered delay in receiving payment of an amount due to him from the Respondent in connection with VAT.
7.	Section 79(1) and (2) VATA 1994 which provide that a repayment supplement is payable in any case where a body which is registered and to which Section 33(A) applies is entitled to a refund under Section 33(A) where the conditions in sub-section 2 of Section 79 are satisfied, and (5) which is referred to for its form.
8.	Section 80 VATA 1994, was referred to but not found relevant.
9.	Section 81 VATA 1994 which provides that with regard to interest payable by the Commissioners that it is to be treated as an amount due by way of credit under Section 25(3), and   provides for set-off to be applied by the Commissioners subject to Section 81(1) of any VAT penalty or interest due by the taxpayer.
10.	Section 81(3) VATA 1994 which provides for statutory set off within the Commissioner’s hands.
11.	Section 83 VATA 1994 which at paragraph (c) gives jurisdiction to this Tribunal in respect of the amount of any input tax which may be credited to a person, at paragraph (s) gives jurisdiction to this Tribunal in respect of official error interest, and at paragraph (t) gives jurisdiction to this Tribunal in respect of a claim for the repayment of any amount under Section 80 but limits this to an appeal against an assessment under sub-section 4(a) of that Section or the amount of such assessment.

12.	Section 84(8)(b) VATA 1994 which provides that where it is found that the whole or part of any VAT credit due to the Appellant has not been paid  so much of that amount as is found not to have been paid shall be repaid with interest at such rate as the Tribunal may determine.
13.	Vat Regulations 1995 Regulation 198 which provides for the computation of the period of 30 days, under Section 79(2)(b).
Any reference in this judgment to any Section is a reference to a Section of the Value Added Tax Act 1994 (VATA 1994).

PRELIMINARY MATTERS REFERRED TO ABOVE
(a)	Jurisdiction.
14.	The issue of jurisdiction of this Tribunal was raised late in the second day and was not contentious between the parties but the Tribunal decided the matter required determination.   In relation to Section 79 VATA 1994 (the repayment supplement appeal) the parties had agreed this Tribunal had jurisdiction under Section 83 (c) VATA 1994.   The Tribunal is satisfied this is correct.    Our reasons for so finding are (1) that Section 79 VATA 1994 relates entirely to entitlement to repayment supplement in respect of certain delayed repayments or refunds;  (2) all such repayments or refunds are of input tax;  (3) repayment supplement if awarded increases the repayment or refund due;  (4) that the Respondent has made no other administrative arrangements for a taxpayer to claim a refund under Section 33(A) VATA 1994 except by way of adding the refund due to the quarterly return for the Appellant’s trading activities in its shops and restaurants where it makes taxable supplies creating a credit in the Appellant’s return;   therefore (5) the appeal can be treated as an appeal about the amount of input tax credited to any person as provided in Section 83(c) VATA 1994.

15.	Jurisdiction for an appeal of the Respondent’s decision under Section 78 VATA 1994 with regard to liability to or the amount of interest in certain cases of official error is found in Section 83(s) VATA 1994.    Jurisdiction in respect of interest which may be applied by the Tribunal itself on the whole or any amount of any VAT credit due to the Appellant not paid is found in Section 84(8) VATA 1994.     

(b)	Preliminary motion by the Respondent under the VAT Tribunals Rules 1986 (SI1986/590) Regulation 19(5).
16.	Mr Macleod for the Respondent moved that the provision of Regulation 19(5) namely to waive non observance of a Tribunal Direction dated 26 September 2003 be applied so that two productions could be lodged which were required to be lodged to satisfy that Direction in his view and that of his client the Respondent.   He advised the Tribunal that he had had no personal knowledge of these two forms until the day before this hearing but they were essential to a proper determination of the appeal.    

17.	Mr Rumbles for the Appellant produced to the Tribunal the correspondence TABS 35-43 which had predated his request for the Direction which had been necessitated due to the Respondent’s dilatory production of documents referred to but not seen by the Appellant.    He objected to the waiver being granted.   

18.	The Tribunal considered the matter but proceeded to waive the breach and allow the admission of the documents then numbered TAB 33 and 34 to assist in a proper determination of the appeal.          

(c)    Concession by the Respondent on interest under Section 78.
19.	 Mr Macleod advised the Tribunal that interest under Section 78 VATA 1994 was conceded.  

Procedural note re above concession.
20.	No copy of the Respondent’s Decision on interest was provided to the Tribunal, or the Appellant.   No time period for the running of the interest was given.  No calculation of the interest was provided to the Tribunal or the Appellant.   No conditions were attached to this Decision.  	No comment was made by the Appellant’s representative.  No comment was made by the Tribunal.

The hearing proceeded.

FINDINGS IN FACT.
21.	  The parties had agreed the following facts which were also found by the Tribunal without oral evidence as follows:-

1.	The Appellant is registered for the purposes of VAT under registration number 270 7183 60 with effect from 1 April 1973.

2.	The Appellant had lodged appeals (references EDN/01/211 and EDN/02/74)  against assessments for VAT in the sums of £383,000.66 (with interest) and £81,393.00.   The appeals were lodged on 21 December 2001 and 29 April 2002 respectively.   The appeal applications were made claiming hardship.   The Commissioners raised no objection to the hardship applications.

3.	The said appeals were disposed of on 17 September 2002 in the Appellant’s favour.   The said assessments were withdrawn on that date.   Until they were withdrawn, the said assessments remained inputted on the Respondents computer system.

4.	The Appellant submitted a VAT repayment return for the period 03/02 in the sum of £365,931.34.    The Respondent received this on 30 April 2002, which satisfied the condition of s.79(2)(a) VAT Act 1994.

5.	The 03/02 return was inputted on the Respondent’s computer system on 2 May 2002.

6.	On 14 May 2002 the repayment was authorised by completion of a VAT 171 form.   The authorisation was inputted on the Respondent’s computer system on 15 May 2002.

7.	On 15 May 2002 the Appellant’s ledger balance displayed a debit owed to the Commissioners in the sum of £799,471.51.   This amount included the said assessments referred to at point 2 above.

8.	On 15 May 2002 the 03/02 repayment return was set-off in full against the debit.

9.	On 17 May 2002 the Appellant paid the sum of £281,733.53.   This sum was inputted on the Appellant’s ledger account on 14 June 2002.

10.	The Appellant submitted a VAT repayment return for the period 06/02 in the sum of £332,055.40.   The Respondent received this on 30 July 2002, which satisfied the condition of s.79(2)(a) VAT Act 1994.

11.	The 06/02 return was inputted on the Respondent’s computer system on 5 August 2002.

12.	On 12 August 2002 the repayment was authorised by completion of a VAT 171 form.   The authorisation was inputted on the Respondent’s computer system on 12 August 2002.

13.	On 12 August 2002 the Appellant’s ledger balance displayed a debt owed to the Commissioners in the sum of £145,707.36.

14.	On 12 August 2002 the 06/02 repayment return was set-off against the debit on the Appellant’s ledger balance.   This generated a credit to the Appellant’s ledger balance.  On 12 August 2002 a Bank Giro repayment was authorised in the sum of £287,680.51.   The Appellant’s ledger balance was reduced by this amount.

15.	On 17 September 2002 the said appeals (referred to at point 2 above) were formally conceded by the Commissioners at Tribunal.   The said assessments were withdrawn.   This generated a credit to the Appellant’s ledger balance in the sum of £373,762.24.

16.	On 17 October 2002 a Bank Giro repayment was authorised in the sum of £373,762.24.   The Appellant’s ledger balance was reduced to nil.

FINDINGS OF THE TRIBUNAL AFTER EVIDENCE
22.	The Appellant is a body listed in Column 2 of the Schedule to the Value Added Tax (Refund of Tax to Museums and Galleries) Order 2001, SI 2001/2879 under Section 33(A) VATA 1994.  It has been entitled to VAT refunds on VAT chargeable on the supply of goods or services to the body since 01/04/01 by virtue of this Section, where such supplies are attributable to free admission.    The purpose of the scheme in Section 33(A) is as laid out in the extra statutory concession 3.34 which also provides the method for reclaiming input tax on capital items.    The Appellant had agreed the proportion to be applied to the input tax recovery, with the Respondent.  The period of negotiation for the adjustment had meant the Respondent had issued an assessment for disallowing input tax recovery amounting to £281.733.53 which was paid by the Appellant on 17.05.02 to the Bank of England by Bank Transfer though not credited by the Respondent to the Appellant’s ledger till 14.06.02.  This fell within the first repayment claim period.   This agreement was not in issue at the Tribunal but was not addressed or referred to in any of the consideration of the Appellant’s position as a VAT trader, by the Respondent.    The Section 33(A) refund relates to the non-business activity of allowing free admission to the body’s premises.   There can be no output tax attributable to the non-business activity in these special circumstances.   The Appellant has been and is still undergoing a large redevelopment project known as the “Playfair Project” with very large supplies.   Its funding and budgeting within the grant-in-aid scheme depended on receipt of the appropriate refunds to which it was entitled.

23.	This appeal under Section 79 related to a Decision by the Respondent’s Officer, Mark McCoy, in a letter dated 11 April 2003 TAB 1 refusing repayment supplement, on claims made by the Appellant for repayment of input tax for the quarters 03/02 and 06/02.   We find the Appellant claimed the refund under Section 33(A), along with the recoverable input tax on its trading activities within the repayment claim forms TAB 23 and 24 for respective 03/02 and 06/02 quarters.    The amounts claimed on the returns were not in contention at the Tribunal, as one adjustment which had been required had been made and the actual repayments made to the Appellant in full.   The contention was on the application of Section 79(2)(b).

24.	In order for the repayment supplement to be paid the terms of Section 79 must be able to be applied.   Mr McCoy, the Respondent’s Officer, was the person responsible for determining whether the Respondent had met its responsibilities in terms of Section 79 (2)(b).   He was clear and we find if its terms were met, the Respondent would have  failed in its statutory obligations and repayment supplement was payable.     If not, repayment supplement was not payable.  We find however from his evidence that although he believed he dealt with Section 79 in its entirety he did not take the whole of Section 79 into consideration, and even where he took parts of that Section into consideration his responsibility stopped well short of ensuring that Section 79 had been properly met.   He has no responsibility to look at Sub-Section 1, ever.   He was entirely unaware of what a body which is registered and to which Section 33(A) applies actually was.    Section 33(A) provides “that the Commissioners shall on a claim made by the body in such form and manner as the Commissioners may determine refund to the body the amount of VAT so chargeable.”    Section 33(A) also provides the claim must be made before the end of the claim period.    It also provides that the claim period may be a period of three years beginning with the day on which the supply is made or the acquisition or importation takes place on which the input tax is to be recovered.  This is very different from the time periods of Section 25 which relates to the standard traders VAT  accounting periods.   No account is apparently taken in his section of the fact that refunds to bodies listed under Section 33(A) ought to be categorised as Section 33(A) refunds so as to show how the repayment arises.   This function may be carried out at an earlier stage but it is evidenced from TABS 33 and 34 that this Appellant does not come entirely within the terms of these forms which are prepared by those considering and determining the entitlement to repayment, whose conduct is what Mr McCoy was required to consider.  He had not noted that fundamental omission, that the form refers to claims under Section 25(3) and refunds under Section 33 but does not refer to refunds under Section 33(A).     It is also evidenced from the statements of the Officers at TABS 31 and 32 and from the ledger at TAB 27 line 4 that the Appellant was treated as a payment trader with exceptionally large repayment claims triggering credibility checks.    This is because at an earlier stage of the repayment claim processing, traders are distinguished as payment traders or repayment traders.    When a claim came in from the Appellant which was categorised as a payment trader the repayment claim of 03.02 triggered a credibility check since it was apparently the second repayment claim made by what was considered to be a payment trader within a twelve month period.  The previous repayment claim of 12/01 had gone through perfectly, and without delay.  The Appellant was treated by the Repayment Section as if it were a business trader despite the fact that in terms of Section 33(A) a relief had had to be built in to the position of museums and galleries when the Government decided that free admission would be given to the public.   This took the Appellant out of the definition of carrying on a business and out of entitlement to input tax credit in terms of Section 25 so far as its activities related to free admission.  It remained a payment trader in respect only of its trading activities.

25.	The Appellant being a museum and art gallery in terms of Section 33(A) VATA 1994, is a special class of trader.  Mr McCoy was not required to take account of that, by his superiors.  He did not look at Section 79(1)(c) or Section 79 (2)(a).

26.	When it came to consideration of Section 79(2)(b) the Tribunal found Mr McCoy had actually to look at its terms very closely and carefully, working through how the claim for repayment had been dealt with in the first instance.   The conditions imposed on the Respondents required to have been fulfilled.    The obligation is time limited to 30 days and onerous.  Failure to deal with the actual repayment claim properly and timeously would bring entitlement to repayment supplement.    He therefore has a check list to ensure that the Respondent has not failed in its duty.  Section 79 (2)(b) provides “that a written instruction directing the making of the payment or refund is not issued by the Commissioners in the relevant period.”    The relevant period is 30 days but can be fluid in that queries raised by the Respondent can delay the period under Regulation 198 VAT Regulations 1994.  Although there were internal queries raised they were quickly answered and did not in this case go outwith or extend the 30 day time limit.   The reasonableness of the queries was not in contention in this appeal.

27.	With regard to the quarter 03/02 he found and we find the return was lodged with the Respondents timeously.  The 30 day period was to 30.05.02.     No enquiry was raised with the Appellant who remained unaware of the credibility check.  We also found the Appellant became concerned through Lynn Banks, Alan Davidson, and J Welch, all of the Finance Department of the Appellant, about non-payment of the refund of £365.931.34 due to be paid to them, they believed, by return.  It affected their cash flow that the monies had not been received towards the end of May 2002.  They raised at least 5 telephone enquiries with the Respondent from 29.05.02 to 03.06.02 on which day they were advised on the telephone the claim had been authorised but had not been paid as it had been set off.  No explanation was offered verbally.  They were advised to write in which they did by fax on 05.06.02 TAB 20 and by letter on 12.07.02 TAB 16. Internal meetings and discussions took place in an atmosphere causing increasing anxiety. No payment and no satisfactory response or explanation was received in writing by the Appellant before the 30 day period determined by the legislation expired on 30.05.02.   

28.	However in the Repayment Section Mr McCoy found and we find that what happened was that a prepayment credibility check was carried out in the circumstances of the      repayment claim referred to above.  The repayment was authorised internally with a VAT 171 TAB 26 on 14.05.02.     Mr McCoy in his review of the activity in the Repayment Section was satisfied the VOPS 240 was done on 15.05.02. 

29.	With regard to the quarter 06/02 the return was lodged with the Respondent timeously.  The 30 day period was to 30.08.02.  A credibility check was again carried out and a VAT 171 TAB 27 and VOPS 240 TAB 34 completed within the 30 day time limit which applied.

30.	However we found that for Mr McCoy the Reviewing Officer that was not an end of the matter.  More was needed to ensure the terms of Section 79(2)(b) were not met.  The VOPS 240s TABS 33 and 34 had also to be seen to have been done.

31.	We found the VOPS 240 TAB 33, one of the two  productions lodged on the first morning of the hearing, bears its own date 15 May 02.   It purports to be an instruction to make VAT repayments.  It is to a shift leader at Shoebury Computer Complex from the Principal, VAT Operations Credibility Section in Liverpool.   It does not mention Section 33(A).   It does not mention the Appellant.  It does not give the VAT number, the reference number from the VAT 171 or any other identification.   It goes to a computer operator for processing.  It was not intimated to the Appellant.  TAB 34 was similar in its terms and was also not intimated to the Appellant.    

32	Mr McCoy believed the VOPS 240 in each case perfected the Respondent’s responsibility to “issue written instructions” as provided in Section 79(2)(b).   This was because when operated it would create a credit in the taxpayer’s ledger with the Commissioners.   If the taxpayers account was clear then payment would be generated automatically.

33.	We found he had no instructions to check if the repayment section’s decision to authorise payment of the appropriate refunds under Section 33(A), or repayment under Section 25(3) which applied to trading activity, if that was appropriate, was intimated to the taxpayer.

34.	We found he had a clear view that the internal authorisation fulfilled the Respondent’s obligation.  He did not have on his check list anywhere that the Respondent had to have informed the taxpayer of its written instructions or that the written instructions themselves required to depart the Respondent’s hands to fulfil the requirement of issuing as demanded by Section 79(2)(b).  He had no training or instruction from his superiors that the written instructions had to have been issued.  His instructions were that they needed to have been passed around inside the Respondent’s various departments, and if that had been done timeously that was all that was required of the Respondent in that regard.  Mr McCoy was not even certain what the written instructions might be as he could not be sure if the VAT 171 or the VOPS 240 or even both were the statutory instructions.  We found he could only speculate despite all the identification deficiencies of a VOPS 240 that it had been at least the completion of the processes needed to meet the requirement of Section 79(2)(b), with regard to written instructions.

35.	Mr McCoy believed that since the VOPS 240 was done and that the Appellant’s ledger in the Respondent’s control was credited appropriately, which he checked, the Commissioners had not failed to issue written instructions in terms of Section 79(2)(b).

36.	He did in interrogating the computer find that the VOPS 240 had duly credited the ledger and that payment was denied to the Appellant because of an erroneous set-off.   He found that when the VOPS 240 had been done that there was a debit on this ledger.   Had there been no debit the system would have credited the Appellant’s bank by bank giro thereby advising the Appellant.   By a fault on the Respondent’s part which they admitted an amount was debited to the Appellant’s ledger which ought not to have been so debited.  As a result the VOPS 240 did not generate the transmission of funds to the Appellant and set-off occurred instead of payment.  He was still satisfied the Respondents had met their responsibility and disallowed the claim for repayment supplement made by the Appellant.   No explanation was provided at or to the Tribunal by the Respondent for the erroneous nature of the set-off.   It appeared to the Tribunal that there was a debit on the Appellant’s ledger because the Respondent had raised an assessment disallowing input tax correctly in the first instance in relation to the sum of £281.733.53 which had never been disputed by the Appellant and which it had paid as previously found on 17.05.02.   Even if that had been correctly debited it would not have held up implementation of the VOPS 240 dated 15.05.02 once the assessment had been paid.  It appeared to the Tribunal that a further input tax assessment had been raised in the sum of £383.000.66p (with interest) in respect of which an appeal had been lodged on 25.12.01 and a further penalty assessment for £81.393 in respect of which an appeal had been lodged on 29.04.02.    These sums should however not have been shown so far as the Respondent and Appellant were concerned as debits.   When assessments only, they should not have been set off either under Section 25(3) or Section 81 VATA 1994 in any way whatsoever since they were not “sums due”, only sums under assessment and openly challenged.   In this case they had indeed been challenged confirming the uncertainty of the amount of these assessments which could even less be “sums due” in terms of the legislation.   In addition in any event hardship applications had been granted, putting even further out of doubt any entitlement to debit by the Respondents.

37.	In evidence Mr McCue and Mr McCoy both talked of such assessments under appeal as being “ring fenced”, by what is referred to as an “inhibit” so that that debit, showing as such in the ledger was held on different terms so as not to trigger automatic set off, by the computer, if a credit occurred.   Their view was that an error had occurred since they both separately in their investigations discovered and we find that although the inhibit had been on these assessed sums, it had been lifted for reasons neither understood or enquired about so that set off actually occurred at the time of the repayment claims being authorised.    Neither Officer understood the precise legal position of set off.    Mr Oakes did not address the issue on review.

38.	In his decision letter TAB 1 Mr McCoy quoted the case of Aston v Commissioners of Customs and Excise (MAN/90/499) 5955 (Aston) and distinguished it from this Appellant on the ground of it concerning an Appellant who had not received a payable order within the 30 day period.  On his own admission we find Mr McCoy had not read the whole of Aston.

39.	We also find from TAB 30 the statement of Stephen Oakes, the Officer who reviewed Mr McCoy’s decision to refuse the repayment supplement that he did not look at the provisions of Section 79(1) (c) either.  He did not state any facts which he purportedly reviewed.    He did not confirm what information was supplied to him being information from the Appellant to the Respondent when considering if that information had been correctly applied to the legislation.   He only advised the Appellant that the Commissioners had responded to all arguments and stood by the decision of Mr McCoy to decline entitlement.     He did not consider the status of the set off.  He did not address the issue of how anybody such as the Appellant could possibly have such sums as were claimed for refund set off by any debit when the sums claimed represented funds allocated in respect of free admission.   The appropriate calculation of the proportion to be refunded on taxable supplies to the Appellant had been agreed with the Respondent as found previously.  Mr Oakes did not in that letter explain how or why that set off was wrong.   We find that he did accept that the set off was wrong.

SUBMISSIONS
SUBMISSION FOR THE RESPONDENT
40.	Mr Macleod repeated his earlier submission on the concession of statutory interest under Section 78. The Respondent conceded that was due.   Unlike his original concession on the first morning he developed the Respondent’s reasons and qualified the concession.  He advised the Tribunal that the sums assessed were not “ring fenced”, and ought to have been.  He accepted the Appeal “inhibit” referred to by Mr McCue ought to have been in place.   He further submitted that the terms of Section 78 VATA 1995 precluded payment of interest if the Appellant was successful under Section 79 VATA 1995 in receiving Repayment Supplement.  

41.	On the Appeal under Section 79 he submitted that set off was an acceptable method of extinguishing debt.  He submitted that the VAT 171 and VOPS 240 of the Respondent and their effect of crediting the Appellant’s ledger was sufficient to ensure the Respondent had not failed to issue instructions in terms of Section 79 (2)(b) which was the critical issue in the Respondent’s view for this Tribunal.  He said that he would make no submission on the word “issue” as it might relate to intimation to the taxpayer.  

42.	On the Section 84(8) interest he opined that in the absence of the word refund this Section could not apply to the original repayment sum.   If the Repayment Supplement itself was found to be a VAT credit then Section 84(8)(b) could apply but since all sums due had been paid so far as the Respondents were concerned, no claim under this heading should be granted.  

43.	He distinguished Aston as having related to a payable order.   

44.	He asked the Tribunal to consider that Repayment Supplement if payable excluded the possibility of statutory interest which had been introduced in 1990 after Aston, and which was the only entitlement the Respondent conceded.   

THE APPELLANT’S SUBMISSION
45.	Mr Rumbles for the Appellant submitted that the Appellant was a special national body separately and particularly legislated for under Section 33A, undergoing a major refurbishment programme giving rise from 01.09.01 (backdated he advised to 01.04.01) to substantial refund claims.  The VAT returns 03/02 and 06/02 were repayment claims which were sent to the Respondent timeously.   The terms of Section 79(1)(a) and (c) were not under dispute.   The Appellant had not however received any information on the 03/02 claim within the 30 day period specified by Section 79(2)(b) and therefore had entitlement to Repayment Supplement.  Nothing had been issued by the Respondent.   He submitted that the set off by the Respondent was an error but he also submitted that it was more than an error.  His view was that it was illegal.  It was more than just a mistake giving rise to an interest payment which had been conceded by the Respondent.   It had with great certainty prevented the Appellant from receiving payment, but it had also blocked the only method the Respondent adopted for informing the Appellant of their decision to accept the claim.  The Appellant had no method to recover these funds they desperately needed for their cash flow being a non-departmental public body with charitable status.   Whilst no written instructions were issued indicating payment, they did not know funds were due to them.   They had had further assessments served, for disallowance of input tax and for penalties.  Even if they had been sent the VAT 171 TAB 26 or the VOPS 240 TAB 33 it would not have been easy for the Appellant to comprehend.  The VOPS 240 was meaningless to a taxpayer.  He submitted that it was sad but true that the Respondent  had acted against the interest of the Appellant so forcibly by raising another assessment but much worse by lifting the inhibit on the debit so as to activate set off.  This was a deliberate act on the part of the Respondent for which they required to take responsibility.  They knew the impact.  They stopped the repayment actively.  In these circumstances the VAT 171 and VOPS 240 were in this case inoperable within the knowledge of the Respondent, who denied the Appellant information or payment.   The Appellant through its staff tried and tried to find out what had happened to their return.  It was little wonder by the time they were finally offered the last of the money due, they asked the Respondent to keep it as a deposit against the still outstanding appeals (with inhibits on the debits) since they were advised that the Respondent if successful would be due not only the sum assessed and the penalty already assessed but interest on these amounts.   The staff of the Appellant were genuinely afraid by then of the whole VAT system which was incomprehensible for them.  Mr McCoy’s assertion that the credit on the Appellant’s ledger was sufficient to avoid the responsibility of the word “issue” in Section 79(2)(b) was clearly wrong.  Mr McCoy knew of the set offs but having made enquiry discovered they were not genuine as no VAT was owed by the Appellant.  Mr McCoy knew the debit related to the assessments.   He made no enquiry as to who specifically put on inhibits or who took them off or why.  He believed the credit in the ledger was sufficient evidence of the Respondent issuing written instructions.  

46.	Mr Rumbles asked the Tribunal to follow Aston  as the procedure under Section 20(1) of the Finance Act 1985 was similar with the exception that it made no reference to refunds as found in Section 33(A) VATA 1994.  

47.	With regard to Section 78 VATA 1994 Mr Rumbles believed the concession by the Respondent was correct.  He believed it should have been met and paid before now, which the Respondent had denied his clients until the previous morning.   He asked the Tribunal to follow the Decision in Bank Austria Trade Services v C & E.  He submitted that the provisions of Section 78 were simply permissive in relation to Section 79 Repayments and Repayment Supplements.   Section 78(1) was mandatory and was simply ameliorated by the terms of Section 78(2) so as to make the Commissioners’ decision discretionary.   Mr Rumbles was satisfied that the Respondent had exercised that discretion within their concession and there the matter ended.   

48.	On Section 84(8) the Appellant asked for interest on the repayment supplement not conceded by the Respondent as their concession could relate only to the amount of the repayment claim and not the amount of the supplement which they had denied was due.

49.	As well as that in respect of Section 84(8) Mr Rumbles submitted that he was looking for interest for the Appellant on the sums effectively deposited by the Appellant by not taking the payment offered by the Respondent as at 17.08.02 in final settlement of the 03/02 and 06/02 repayment claims when the Respondent reimposed the inhibit on the outstanding assessment and penalty appeals not withdrawn until the Tribunal on 17.09.02.

DECISION ONE
DECISION IN SECTION 79 REPAYMENT SUPPLEMENT
50.	The appeal is allowed as follows:-   We are satisfied that repayment supplement is due on the whole amount of the 03/02 quarter and on the whole amount of the 06/02 quarter.               No communication of the internal written instructions prepared by the Respondent and sent only to its computer operation was ever issued to the Appellant. The bank giro for the sum of £287,680.51 issued on 12.08.02 was the first payment received by the Appellant and must be deemed as part of the 03/02 repayment claim. 

51.	Internal written instructions VAT 171 and VOPS 240 not having accomplished the outcome of having anything issued to the Appellant means that Section 79(2)(b) applies to the extent that the Respondent in considering the repayment claims for 03/02 and 06/02 quarters has failed to the extent specified in their obligation that a “written instruction directing the making of the……refund is not issued by the Commissioners within the relevant period.”  So since it is agreed that Section 79(a) and (c) are also fulfilled and are not in contention repayment supplement is payable.  The definition of “written instruction issued” in Aston, followed.  The reasoning in Watford Timber Company Ltd v C & E 1475, (at para 27) distinguishing the internal and external documents followed.

REASON FOR DECISION ONE
52.	Under the VAT Regulations there is no specific provision with regard to how a refund under Section 33(A) VATA 1994 is to be claimed.    The Appellant had agreed the proportion of input tax to be allowed to be refunded in respect of supplies relating to free admissions.  This was done by way of a claim on its standard quarterly return by adding the sum claimed under the Section 33(A) refund to the sums of input tax claimed on its trading activities under 25(2).

53.	In the general law relating to set-off only similar liquid debts may be set-off.  Set off is used as a  convenient  term.   It is not a standard term of Scots Law as was found by Lord Keith in Laing v Lord Advocate 1973 SLT (Notes 81).   The correct provision in Scots Law is compensation which was first legislated for in Scotland under the Act of 1592 caput 143.  Therefore special statutory provision for set off is made in relation to VAT.   It is made firstly in Section 25(2) VATA 1994 allowing a trader statutory set off  in any return of his input tax against his output tax which are of course unrelated to each other but are in the nature of a “running account”.   Section 25(2) provides that the input tax which may be set off must be input tax allowable under Section 26 VATA 1994 which relates only to trading supplies.  Section 25(3) provides that if input tax exceeds output tax a VAT credit is generated.     This is the section referred to in 79(1)(a).   It is also the very section which deprived museums and galleries of the right to repayment of input tax when the Government determined free admission to the public to these institutions thereby rendering their activity as non-business.   They could not then come within the definition of “VAT trader” under Section 26.  Section 33(A) reintroduced the right to a refund of tax paid on supplies to the body irrespective of the non-business activity.   No computer ledger management system was shown to have been introduced by the Respondent to identify Section 33(A) bodies as listed in the Schedule to SI 2001/2879 referred to previously.   In the circumstances the Respondent completed its internal communication by crediting the VAT “trader’s ledger” TAB 27 with the sums due. 

54.	 We were also satisfied that since a written instruction directing the making of the refund was not issued by the Commissioners to the taxpayer within the relevant periods and since the conditions in Sub-section (a) and (c) of Section 79(2) had been met and since the Appellant is a body which is registered and to which Section 33 (A) applies and is entitled to a refund under that Section that crediting the taxpayer’s ledger is still insufficient to meet the demands of 79(2)(b).    We consider that a body registered for VAT and listed under Section 33(A) requires that the Respondents should advise that body when the refund claim is admitted and confirmed that it is to be paid or credited as the case may be.   There is no doubt that the Appellant was entitled to that refund and that it did not receive its entitlement or any information on the treatment of its claim within the 30 days time limit specified for the 03/02 quarter, or for the 06/02 quarter.  Although a payment was released by the computer on 12.08.02, that was the first payment received by the Appellant on these claims, leaving the 06/02 claim undealt with so far as the Appellant was concerned.  Here we disagree with the terms of Mr Oakes statement – TAB 30.

55.	As the Chairman opined in Watford Timber and with which this Tribunal concurs “the only external document would have been the Bank giro instruction”.

56.	We do believe that to have treated the set off as a simple error was wrong.  We accept the Appellant’s submission that lifting the inhibit was a deliberate act.   No explanation was offered by the Respondent for the conduct of its officers.   The effect was devastating for the Appellant.   The Respondent cannot absolve itself from its responsibility so simply.  If the inhibit had never been in place that would perhaps have been an oversight.  Lifting it achieved the effect of negating the VAT 171 and VOPS 240, and depriving the Appellant of a decision, which is what must happen, so that it received payment.

DECISIONS TWO AND THREE IN SECTION 78 AND SECTION 84(8) INTEREST APPEALS.
DECISION TWO SECTION 78 INTEREST APPEAL AND CONCESSION
57.	We find interest is payable on the repayment claims at the rate provided in Section 197 of the Finance Act 1996, from the date of the claims for the 03/02 and 06/02 quarters until paid.

REASON FOR DECISION
 SECTION 78 APPEAL
58.	 The Tribunal prefer the Appellant’s submissions.  The interest under this section was conceded at the outset by the Respondent.   The Appellant has no remedy with regard to interest on the repayment claims except by this Section in light of the Respondent’s concession.  It has been deprived of funds to which it was entitled.  It ran into cash flow problems in its own affairs through the Respondent’s fault.  We are satisfied the Respondent correctly exercised their discretion on Section 78 interest in this case.  We are also satisfied that the Repayment Supplement and interest are not mutually exclusive.  We find the Repayment Supplement is intended as a penalty regime running alongside the interest regime, equiparating it with the taxpayers position on accountability to the Respondent.

DECISION THREE
SECTION 84(8) INTEREST ON THE REPAYMENT SUPPLEMENT APPEAL.
59.	We allow the appeal with regard to interest on the Repayment Supplement itself awarded by this Tribunal under this Section.   Interest on the Repayment Supplement is therefore due and is payable from the date specified for eligibility to entitlement in Section 79 VATA 1994 on the sums outstanding until paid.
  
NOTE 1
60.	 Failing agreement on the date from which interest will run the matter can be referred back to this Tribunal.

NOTE 2
61.	No rate for the award of interest under Section 84(8) was requested by the Appellant’s representative and failing agreement between the Appellant and the Respondent on the rate of interest on the repayment supplement the matter can be referred back to this Tribunal.

REASONS FOR DECISION THREE
62.	With regard to the Repayment Supplement itself we find that Section 84(8)(b) applies to it as the Commissioners had refused Repayment Supplement so had not conceded interest on it in their concession.    Repayment Supplement having been determined as payable by this Tribunal this opens up entitlement to interest on the Repayment Supplement under this Section.   We are satisfied in all the circumstances of this unfortunate difficulty for the Appellant that interest should be paid.

DECISION FOUR
SECTION 84(8) DECISION ON INTEREST ON SUMS DEPOSITED
63.	This appeal is disallowed.  No interest is payable by the Respondent on sums effectively deposited by the Appellant on refusal of Bank Giro on 17.08.02.

REASON FOR DECISION FOUR 
64.	We find that this submission by the Appellant cannot be accepted.   Assessments were raised by the Respondent as found at FINDINGS IN FACT 2 and 3.    The Appellant decided to leave the balance of repayment due on 17.08.02 with the Respondent as they had been threatened that in the event of the appeals being unsuccessful the whole sums due under the said appeals would fall due to be paid with interest and penalties to the Respondent.  This was a very threatening claim made by the Respondent to the Appellant.  It is perfectly understandable that the Appellant asked for the repayment to be retained by the Respondent.  However an opportunity arose under Section 84(8)(a) at the time of the determination of these appeals lodged by the Appellant at that time, as these were under Section 83(p) and (q).  It appears the permission of the Tribunal was sought for the withdrawal of the appeals by the Respondent on 17.09.02.  When the Tribunal was advised that these appeals were withdrawn, the appeals were allowed with expenses.  No interest was sought by the Appellant at that time, from the Tribunal, which the Appellant was entitled to do.  Hardship applications had been granted in any event.

65.	It appeared to this Tribunal that we were unable to correct that situation by awarding interest on that sum from its retention in the Respondent’s hands to the date when the Bank Giro repayment brought the Appellant’s balance to nil on the Respondent’s ledger on the 17 October 2002, within the terms of this Appeal.

EXPENSES
66.	The Tribunal ordains the Respondent to pay to the Appellant the expenses of and occasioned by this appeal which failing agreement will be taxed by the Auditor of the Court of Session in terms of the Rules.

MRS GRETTA PRITCHARD, BL., MBA., WS
CHAIRMAN

RELEASE DATE:    27 NOVEMBER 2003.

EDN/03/47

 

EDN/