INPUT TAX – whether claim made in 2000 for input tax for 1989 and 1990 for which no tax invoice was issued was part of a claim made in 1993 – no – whether the 2000 claim was prevented by the 3 year cap introduced by regulation 29(1A) – no, because there was no transitional provision – however, refusal of claim 10 years after the input tax was incurred was reasonable – appeal dismissed

LONDON TRIBUNAL CENTRE

	MICHAEL FLEMING T/A BODYCRAFT	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					ANGELA WEST FCA

Sitting in public in London on 5 April 2004

David Southern, counsel, instructed by Hepburns, for the Appellant

Nicola Shaw, counsel, instructed by Shepherd & Wedderburn, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Michael Fleming appeals against a decision to refuse to pay input tad on three cars on the ground that the three-year cap applies.  The Appellant was represented by Mr David Southern, and the Commissioners by Miss Nicola Shaw.
2.	We heard evidence from the Appellant and find the following facts.
(1)	The Appellant deals in specialist cars which, unlike production cars, are manufactured to order with a substantial deposit payable in advance.  Pre-ordered cars can be sold before delivery and the price is volatile.  Normally the Appellant dealt in second-hand Aston Martins.
(2)	He was approached in 1989 by Mr Max Maciocia (MM) who had ordered 17 new Aston Martins for delivery in 1989-90, and also one second-hand Aston Martin, and in doing so had over-committed himself at a time the price had slumped.  Aston Martons have to be purchased through a franchised dealer.  MM had purchased the 17 cars through Mr Paul Jaconelli.  Nine of the cars had consecutive registration numbers and were a collection of one of each model produced by Aston Martin with identical livery.  The Appellant agreed to acquire 13 of the cars from MM.  The Appellant sold the nine with consecutive numbers (one of which was purchased directly from Mr Jaconelli and not through MM) as a collection to Jersey, plus one additional car.  Three further cars were repossessed by the finance company as the Appellant was in financial difficulties.  One further car was sold separately.
(3)	Mr Jaconelli was being investigated by the Commissioners for non-payment of output tax on car sales.  The Appellant helped the Commissioners in their investigation.  Mr Jaconelli did not provide a VAT invoice to the Appellant or to MM for the cars sold to them.
(4)	The Appellant engaged Price Waterhouse to assist him with the recovery of input tax on the purchases from Mr Jaconelli.  The problems were that the claim would have to be made by voluntary disclosure; that alternative evidence to a tax invoice would have to be provided; nine of the cars would have to be accepted as new even though registered; deposits paid by MM would have to be treated as paid by the Appellant; and the matter would have to be agreed as part of the investigation of Mr Jaconelli.  Price Waterhouse advised the Appellant to claim for the ten cars sold to Jersey first.  They provided him with a draft letter and a schedule of payments (including payments by MM) which he wrote to the Commissioners on 30 November 1993 enclosing the schedule and a letter from MM saying that he would not claim any input tax himself.  After investigation, the Commissioners paid that claim in April 1994.
(5)	The Appellant’s understanding was that Price Waterhouse wanted the claim for the first 10 cars to be made separately as they were more straightforward.  If successful, he would then claim for the remaining three cars which had the added complication that they were not sold on by the Appellant but repossessed by the finance company.  Relations with Price Waterhouse became strained because they also acted for him in relation to an investigation by the Inland Revenue about which he was unhappy, and there was a disagreement about fees.  He recollects meeting the VAT partner from Price Waterhouse in passing on one of his visits at which the partner said something to the effect that they must get on with the claim.  He was not aware that the further claim had not been made by them.  
(6)	The information and documents that could be provided by both parties was incomplete.  The Appellant had not been able to obtain documents from Price Waterhouse, and the Commissioners no longer had the papers relating to their investigation of Mr Jaconelli.
(7)	The Appellant made a claim for the remaining three cars on 23 October 2000 which was refused on the ground that the three-year cap applied.  This appeal is against that refusal.
3.	Mr Southern for the Appellant claims that the claim in 2000 formed part of the 1993 claim and was not a new and separate claim.  It arose out of the purchase of the 13 cars from MM all of which were part of the Commissioners’ investigation into Mr Jaconelli.  Alternatively even if the 2000 claim was a separate claim the three-year cap did not apply because the Appellant had a vested right to recover input tax before this was introduced (for input tax) on 1 May 1997.
4.	Miss Shaw for the Commissioners contends that the 2000 claim is a separate claim and that the Appellant had not right to input tax until it was claimed.  Although initially she contended that the cars were not new and that there was no sufficient documentary evidence in place of a VAT invoice she abandoned this during the hearing.
Reasons for our decision
5.	We accept that all 13 cars were part of the same purchase from MM and Mr Jaconelli and that all 13 featured as part of the Commissioners’ investigation into Mr Jaconelli.  Price Waterhouse’s advice to separate the first 10 cars into a separate claim was a tactical one designed to speed up the acceptance of the first claim which would then be followed up with a further claim for the remaining three cars.  The Commissioners may have realised that it was likely that the original claim would be followed up by a further claim, or it may be that they did not know what had happened to the remaining three cars.  It seems to us that it is clear that there were two separate claims.  The 1993 claim claims for 10 specified cars and does not suggest that further claims would be made.  After payment of that claim nothing further seems to have happened.  The Commissioners, whatever they knew as a result of their investigations of Mr Jaconelli, did not follow up the other three cars, which would have happened if they thought that the Appellant had made a claim for input tax on all possible cars and had merely sent in the evidence relating to the ten cars first.  The Appellant did not know what Price Waterhouse had claimed and we do not know why they did not follow up their original intention to make the further claim when the first one was successful.  All we know that the Appellant made the claim for the remaining three cars in 2000.  Although it might be expected that the Appellant would have made a claim for any input tax he could obtain once the Commissioners had finished their investigation into Mr Jaconelli, in our view nothing points to the existence of an outline claim for all the cars, which was followed up by the details in two stages; and everything points the first claim being limited to the 10 cars for tactical reasons to be followed up, as it eventually was, by a further claim.  Accordingly, we find as a fact that the 200 claim was a separate claim.
6.	Regulation 29 of the VAT Regulations 195 provides:
“(1) Subject to paragraphs (1) and (2) below, and save as the Commissioners may otherwise allow of direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(1A) The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT becomes chargeable is required to be made.
(2) At the time of claiming dedcuction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of—
(a)	a supply from another taxable person, hold the document which is required to be provided under regulation 13 [i.e. a VAT invoice]…
provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a)…above, such other documentary evidence of the charge to VAT as the Commissioners may direct.”
7.	Mr Southern points to the decision of the European Court in Marks and Spencer (Case C-62/00) [2002] STC 1036 in which the court recognised the need for transitional arrangements where a limitation period shorter than that previously in force retroactively deprived individuals of their right to repayment.  He contends that the Appellant had a vested right to input tax which could not be taken away without adequate transitional arrangements.  Miss Shaw contends that Marks and Spencer is irrelevant as there was no question of reducing the right to repayment of overpaid VAT by virtue of a retrospective time limit.  It was purely a question of the conditions for claiming input tax.  She said that the issue was dealt with in University of Susses v Customs and Excise Commissioners [2004] STC 1.  In that case the claim for input tax was made in November 1996 after the section 80 cap relating to the recovery of overpaid VAT had taken effect on 18 July 1996, but before the paragraph 29 cap relating to input tax took effect on 1 May 1997.  The Court of Appeal made a distinction between overpayment of tax within section 80, which the Commissioners considered governed the case, and the late claiming of input tax.  Auld LJ, with whom Chadwick LJ and Newman J concurred said at [150]:
“If he pays more tax than he need because he has under-claimed inputs tax he has not overpaid tax for that period; the amount paid is simply the result of a mechanism which sets off against what is due from him what he claims is properly due to him.  If and when he seeks to remedy that under-claim in a subsequent accounting period, the 1994 Act and the 1995 Regulations, consistently with the discretion given by the Sixth Directive to member states in the matter, makes provision for him to exercise his right to that money by claiming to deduct it from his output tax due in future accounting periods.”
8.	In Local Authorities Mutual Investment Trust [2004] STC 246 Lawrence Collins J held at [63] that regulation 29(1A) was authorised by article 18(3) of the Sixth directive, and at [69] that a claim that the regulation was contrary to article 1 of the First Protocol to the Human Rights Convention must fail.  In that case the right to claim input tax had arisen after the cap had been introduced.
9.	This case differs from both of these two cases.  In University of Sussex the claim for deduction of input tax was made before the three-year period in regulation 29(1A) took effect in May 1997.  In Local Authorities Mutual Investment Trust the input tax was incurred and the claim made after regulation 29(1A) took effect.  In neither case was it necessary to decide the effect of the retroactive introduction of the three-year cap on input tax claims by regulation 29(1A) in relation to transactions entered into before, and claims made after, 1 May 1997.  In University of Sussex the Court of Appeal held that the university’s claim for previously unclaimed input tax was an accrued right under articles 17 to 20 of the Sixth Directive.  Auld LJ said at [173]:
“In my view, regardless of the basis of our domestic law (i.e. s.80 or reg.29) for the university’s claim in respect of its formerly unclaimed input tax, it had accrued rights under arts.17-20 of the Sixth Directive before the retrospective introduction of the three-year cap (for s.80 claims in July 1996 and for reg.29(1) claims in May 1997)….I consider that those provisions are unconditional and sufficiently precise to give rise to a directly effective Community law right.” 
10.	The existence of an element of discretion in a member state as to how such a right is to be exercised cannot deprive it of direct effect at [175]:
“The existence of an element of discretion in a member state as to how such a right is to be exercised cannot, in my view, sensibly deprive it of direct effect.  Thee is a clear distinction between the existence of a Community law right and the discretion given to a member state as to the manner of its exercise….”
11.	Furthermore if section 80 were to govern the claim (which it had held that it did not) then paragraphs 36, 44 and 45 of the European Court’s judgment in Marks and Spencer was of direct help as to the retrospectivity of the three-year time limit, see [180].  Those paragraphs are:
“36.  …national legislation curtaining the period within which recovery may be sought of sum charged in breach of Community law is, subject to certain conditions, compatible with Community law…the time set for its application must be sufficient to ensure that the right to repayment is effective….
44. …the court has consistently held that the principle of the protection of legitimate expectations forms part of the Community legal order and must be observed by the member states when they exercise the powers conferred on them by Community directives…
45.  The court had held, in particular, that a legislative amendment retroactively depriving a taxable person of a right to deduction he had derived from the Sixth Directive is incompatible with the principle of the protection of legitimate expectations….
12.	Had the claim in that case been made after 1 May 1997 the Court would have derived the same assistance from those paragraphs and would have decided that the introduction of the new three-year time limit introduced without any transitional provisions would have been unlawful under Community law.  Here the position is that before legislation was introduced taking effect on 1 May 1997 the Appellant had a legitimate expectation that it could have claimed input tax without any time limit, which the Commissioners had a discretion to allow.  On 1 May 1997 a claim was immediately out of time because the input tax had been incurred in 1989 and 1990, and there was no transitional arrangement apart from the time between the legislation and its taking effect.  We therefore agree with Mr Southern that on the Marks and Spencer principle the three-year cap cannot be relied upon by the Commissioners in this case.  The only reason why the Court did not come to the same conclusion in University of Sussex was that the claim in that case was made before the introduction of the three-year time limit by regulation 29.
13.	We are accordingly in the position that the Commissioners have discretion whether to refuse the claim which they have exercised for an invalid reason.  It seems to us that there is no point in sending the point back to them to make a new decision because Miss Shaw has argued that even if the 2000 claim was part of the original claim (which we have found it was not) it was still reasonable for the Commissioners to refuse the 2000 claim.  Their decision would obviously be the same where the claim is a separate one but paragraph 29(1A) cannot be relied on by them.  Just as the Court in University of Sussex did not send the point back to the Commissioners because they had indicated that they would exercise their discretion in the university’s favour (see [158]), the Commissioners have indicated by Miss Shaw’s argument that they would refuse the claim if we did send it back to them.  Accordingly we can consider whether it would be reasonable of them to have refused this claim for reasons other than it was made more than three years after the relevant accounting period.  Miss Shaw agreed that as this was an appeal relating to “the amount of input tax which may be credited to a person” (section 83(c) of the VAT Act 1994) we could decide the issue ourselves and not merely review the exercise of the Commissioners’ discretion.  Here the claim was made some ten years after the accounting period in which the input tax was incurred and seven years after the original claim to which it was closely related.  Even if a three-year transition had been given from 1 May 1997 the claim was made after the end of that time.  In the circumstances we consider that the Commissioners were reasonable in refusing the claim.  Legal certainty also requires that finality should be achieved after a reasonable period.  
14.	Accordingly we dismiss the appeal.

J F AVERY JONES

CHAIRMAN

LON/01/960