18906
RECOVERY of sums paid but not due – Appellant partnership provided private dancing lessons – VAT paid at standard rate since 1976 – Deemed entitled to exemption following Clarke (deceased) and Clarke (Decision 15201) – S.80 VATA 1994 consideration – Whether Appellant entitled to rely on Business Brief 22/2002 to claim back VAT from 1978 – Appeal allowed

LONDON TRIBUNAL CENTRE

	THE MARGUERITA HOARE SCHOOL OF DANCING 	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 MISS J C GORT (Chairman)
						 MR A J RING CTA (Fellow) ATT 

Sitting in public in London on 13 September 2004

Mr B Ollis, as husband of a partner in the business, for the Appellant 

Mr T Ward of counsel, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal against a decision of the Commissioners contained in a letter dated 22 September 1998 that the Appellants are not entitled to claim a refund from the period 01/01/78 to 30/04/95, such a claim being subject to section 80 of the VAT Act 1994 and therefore being capped as such claims are limited to a period of three years.  

The issue

2.	The initial argument raised by the Appellant in its notice of appeal was:

“As the moneys did not become ‘VAT paid to the Commissioners which was not VAT due to them’ until September 1998 the three-year deadline should not expire until September 2001.”

The appeal hearing was delayed for the outcome of the case of Marks & Spencer plc v Commissioners [2002] STC 1036 which was being heard in the European Court.

3.	At the hearing of the appeal it was accepted by Mr Ward that the issue before the Tribunal was whether the Appellant was entitled to extend its claim under the third bullet point of the Business Brief 22/2002 (see below).  

The facts

4.	The Appellant was established in 1939 by the late Marguerita Hoare, and has provided dance training to children ever since.  From 1974 the school has been run as a partnership by two of Marguerita Hoare’s daughters and her granddaughter.  They are the only teachers at the school and all are qualified with the Imperial Society of  Teachers of Dancing and the Royal Academy of Dancing.  

5.	In 1976 the Appellant exceeded the then VAT threshold and was therefore registered, it being the case that private education was deemed to be standard rated for VAT purposes.  In order to remain competitive, the school had to maintain its fees at a similar level to other schools in the area, none of whom needed to be registered for VAT purposes.  The Appellant therefore calculated the tax on the turnover and it was paid out of the partners’ profits, rather than being charged to the pupils.

6.	On 1 January 1978 the Sixth VAT Directive (Directive 77/388) granted exemption from VAT for “tuition given privately by teachers and covering school or university education”. [Article 13A.1.(j)] This was introduced into the United Kingdom legislation by Item 2 Group 6 Schedule 9 of the VAT Act 1994 which provided that: “The supply of private education, in a subject ordinarily taught in a school or university, given by an individual teacher acting independently of an employer” should be exempt.  The Appellant asked Customs and Excise in Harpenden for confirmation that they would qualify for this exemption, but were told, by telephone, that the regulations relating to education did not provide exemption for partnerships.  

7.	In October 1997 in the case of Clarke (deceased) and Clarke, (Decision 15201) the VAT Tribunal of Northern Ireland held that where the partners were the principals of the school, and were the only teachers, they were giving private education and were therefore exempt from VAT.  As a result of this case it was accepted by the Commissioners that the treatment of partnerships since 1978 was not lawful.  The Appellants were not informed of the outcome of the Clarke case, and no notice of it appeared in the quarterly VAT notes sent to taxpayers.  The Appellants were never contacted by the Commissioners to inform them that they were entitled to exemption from VAT.

8.	On 7 January 1998 Customs and Excise issued Business Brief 1/98 informing teachers in partnership with other teachers that they could now be declared exempt for VAT purposes.  This Business Brief was not sent out to VAT-registered schools, but was given to accountants and VAT advisers.  

9.	In April 1998 the Commissioners issued notice 701/30 “Education and Vocational Training”.  At Appendix A this notice sets out item 2 of the VAT Act 1994 Group 6 Schedule 9 (as amended by the VAT [Education] [No.2] Order 1994).    In the body of the notice it sets out at section 3 the meaning of  “eligible body” and at paragraph 3.3 it states that partnerships are not eligible bodies.  

10.	At paragraph 4.1 it states: “However, your supply is NOT one of private tuition if you are either the employee of another person or yourself employ or engage others to carry out instruction, or if you are in partnership with others.  Under these circumstances, you are not providing the education as an individual teacher, and the supply is standard-rated unless you qualify as an eligible body.  (See section 3 of this Notice.)

11.	On 25 April 1998 the Appellant wrote to the Commissioners noting that it had been charging VAT on tuition fees since April 1976, and seeking a refund and exemption.  The letter continued:

“We have always argued that the school should be exempt from VAT … in view of the case of Clarke … we would be grateful if you would reconsider your views, grant the school exemption and refund the VAT we should not have been forced to pay over the last twenty-two years.”

12.	On 15 June 1998 the Commissioners confirmed that the Appellant’s case was identical in principle to that of Clarke and advised the Appellant to submit a detailed claim.  By letter dated 26 June 1998 the Commissioners stated:

“Any repayment will be capped at three years and no refund of tax will be entertained over three years before a detailed claim (i.e. showing tax due quarter by quarter) is made.  If you render this detailed claim by 31 July 1998 we will be willing to consider any refund back to 1 May 1995.”

On 7 July 1998 the Appellant submitted such a claim for periods 07/95 to 04/98.  

13.	On 18 August 1998 the Commissioners wrote providing a Notice of Voluntary Disclosure, and confirmation that £13,884 was due from the Commissioners in respect of the periods 07/95 to 04/98. On 2 September 1998 they confirmed that statutory interest was also payable.

14.	On 3 September 1998 the Appellant challenged whether the three-year cap was applicable to its case. On 13 September 1998 the Appellant made a further voluntary disclosure in the sum of £44,339 for the period 1 January 1978 to 30 April 1995.  On 22 September 1998 the Commissioners refused the claim stating:

“I would advise that your claim for a refund from 01.01.78 to 30.04.95 subject to section 80 of the VAT Act 1994 and is, therefore, capped as it is more than three years old.”

15.	In a letter dated 30 September 1998 the Appellant wrote to the Commissioners stating inter alia:

“Since April 1976 we have been compulsorily registered for VAT and so compelled by law to hand you the equivalent of output VAT on all our fees, less VAT on our purchases.  Now, by stumbling on information of a VAT tribunal decision last year, we are told by Customs and Excise that since 1 January 1978 they had no right to demand our money and we had no need to pay it …

Our first opportunity to even consider claiming a refund for the above period was in late August 1998 when we were told, by telephone, that we were to be deregistered with effect from 1 January 1978.”

16.	In a letter dated 13 August 2004 the Appellant wrote to the Commissioners stating that “between January 1978 and March 1997 we were aware of the error and tried to bring it to your attention on many occasions.”  There are no documents which record the Appellant approaching the Commissioners in this way.  

17.	Deloitte and Touche wrote to the Commissioners on behalf of the Appellant in June 2003 stating that the Appellant was “fully aware of the fact that Customs accepted interpretation was clearly misguided.  Thus, the partnership were aware, prior to 30 June 1997, that they should not be required to charge VAT on their supplies of private dancing tuition.”  In that same letter they set out that on 1 January 1978 when Item 2, Group 6, Schedule 9 of the VAT Act 1994 exemption was introduced the partnership accountant made enquiries at the local VAT office to establish if a partnership was still required to be registered.  He was told by Customs that the requirement to register remained and the partnership must continue to account for VAT on its fees.  The letter continues: “MHSD were aware prior to 30 June 1997 that the VAT paid on its private tuition fees was being charged in error and these supplies were properly VAT exempt.  This was based on their view that the accepted interpretation of the law, as it stood, was incorrect.  Following the case of Clarke, MHSD’s view was subsequently accepted.  The partnership accountant made enquiries in 1978 based on this belief, and was told by Customs that the partnership were still required to account for VAT on its supplies at the standard rate.  The partnership therefore complied, rather than face penalties and interest charges.”

18.	Mr Ollis, who is an accountant and husband of one of the partners in the business, had been involved with the school since 1969 and had become its accountant in about 1975.  He gave evidence to the Tribunal which we accept.  He stated inter alia that in 1978 he had either seen a notice with the VAT return or he had become aware at the bank where he worked at the time of the wording of the Sixth Directive as it related to teachers in private education.  He believed that the school would be entitled to the exemption and therefore contacted the VAT office in Harpenden.  He believed the contact was made by telephone and he was told at the time that partnerships were not exempt.  He was provided with a document which become the forerunner of Notice 701/30. Whilst the school disputed the Commissioners’ interpretation of the ruling, nonetheless they were obliged to pay the VAT.  In order to remain competitive the Appellants had paid the VAT out of  their own share of the profits and had not charged VAT to their customers.  It was financially out of the question for the Appellant to challenge the Commissioners’ ruling in court.  

19.	Some time in 1996 Mr Ollis first became aware of the Clarke case when  people in the profession were talking about it.  Subsequently he obtained a copy of the ruling in the case and contacted the Luton VAT office asking how to obtain the exemption.  This contact was again made by telephone and he was told that the Appellants were not exempt and he was sent publication 701/30.  It was not until later that the Commissioners accepted that the Appellants were exempt.  

20.	Mr Ollis himself worked for a firm of civil engineers in Luton as their accountant.  He was not paid by the school.  The school profits were split three ways between the partners, one of whom was his wife.  Classes were held everyday after the end of school time and at week-ends.  There was an annual turnover of about £45,000 yielding a profit of about £14,000.  The ruling of the Commissioners had not been challenged because it was not thought to be within the capability of the school to challenge it.  The legal fees would have been prohibitive and it had been assumed that the error would be discovered and they would be able to recover their money.

21.	When asked why the claim had not been made in 1996, when the six-year cap would have applied and they would have been able to recover more money, Mr Ollis stated that he was not a professional accountant, that he had respect for the law, and that, according to the regulations, they were still liable.  He was no longer working for the bank at that time and did not feel able to challenge the Commissioners on their own definition. Whilst he was aware that the law said the teachers were exempt, the Commissioners’ regulations were operative. 

22.	Mr Ollis explained a phrase used in his letter of 30 September 1998 that they had “stumbled” on the information about Clarke following its decision by saying that, whilst in 1996 they had known that the Clarkes were challenging the law, in that letter he was trying to say that the Commissioners had not informed them about it.  

The Statutory framework

23.	Since 1 January 1978 the relevant provision of the Sixth Directive has been Article 13A.1.  This, so far as is material reads as follows:

“1.	Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and for preventing any possible evasion, avoidance or abuse;

…

(j)	tuition given privately by teachers and covering school or university education.”

24.	Schedule 6 Group 6 of the VAT Act 1983, “education”, was designed to cover those provisions of the Sixth Directive.  It read:

GROUP 6 – EDUCATION

Item No:

1.	The provision  of education or research by a school, eligible institution or university.

2.	The provision, otherwise than for profit, of 

(a)	education or research of a kind provided by a school or university; or
(b)	training or re-training for any trade, profession or employment.

3.	Private tuition, in subjects (except those of a recreational or sporting nature) which are normally taught in the course of education provided by a school or university, to an individual pupil by a teacher acting independently of any employer or organisation.

4.	The supply of any goods or services incidental to the provision of any education, training or re-training comprised in Items 1 and 2.

25.	Immediately following enactment of the VAT Act 1994 the relevant exempting item was Item 2 of Group 6 to Schedule 9 and this contains the same wording as was found in Item 3 in Group 6 of Schedule 6 to VAT Act 1983.  The Commissioners had published a Consultation Paper on the working of the then current VAT exemptions for education training. Under the heading “problems” is this paragraph:

3.5	Private Tuition

Item 3 of Group 6 provides that the mandatory exemption for private tuition in Article 13A.1(j).  The item is not used extensively since relatively few private tutors exceed the threshold for compulsory VAT registration.  Nevertheless, problems do arise and some of these centre on the fact that the item is possibly more restrictive and is required by EC law.”

The Consultation Paper proposed certain solutions.  Relevant to the present issue is this –

“5.5	As far as private tuition is concerned, we propose to remove the restriction in the existing Item 3 that the tuition must be given on a one-to-one basis.  We also propose that the exclusion for sporting and recreational activities be deleted.  This is consistent both with the new exemption for certain services linked to sport and with EC law.”

26.	The statutory wording of the VAT Act 1994 Schedule 9 Group 6 Item 2 was changed with effect from 1 August 1994 by the VAT (Education) Order 1994 (SI 1994/1188).  The new wording reads as follows:

“The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer.”

27.	Section 80 of the VAT Act 1994 provides where relevant:

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

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

…

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

…

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

28.	Prior to the introduction of the three-year cap, section 80 provided:

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

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

29.	On 5 August 2002 the Commissioners issued Business Brief 22/2002 following the judgment of the European Court of Justice in the case of Marks & Spencer plc v Commissioners of Customs and Excise.  Under the heading “practical effects of the judgment” it is stated:

“Customs will now give effect, albeit retrospectively, to a transitional regime for when the three-year time limit was introduced in 1996 to allow taxpayers to make claims that they ought to have been able to make at the time.  This transitional regime will apply from 4 December 1996 to 31 March 1997.  

The judgment of the ECJ only actually requires that Customs give effect to this transitional period for those taxpayers who overpaid amounts by way of VAT in breach of directly effective rights of the Sixth Directive as a result of the UK’s failure to give proper effect to the Directive and were prevented, by the manner in which the three year time limit was introduced, from recovering those amounts.

However, if Customs had provided for a transitional regime at the time when the three-year time limit was introduced, it would not have been applied in such a selective manner.  Customs will not, therefore, restrict payment of claims only to those who would benefit from a strict interpretation of the ECJ’s judgment in Marks and Spencer. 

Taxpayers can now make claims under section 80 of the VAT Act 1994 for repayment of amounts overpaid, regardless of the cause of the overpayment, subject to the following criteria.  

CLAIMS

Customs are now inviting all taxpayers to submit claims to their local VAT offices where:

•	they made claims before 31 March 1997, which were capped (either by Customs or by them in expectation that no more than three years will be paid);

or

•	they made claims before 31 March 1997, which were repaid in full an amounts more than three years old were then clawed back by Customs by means of  a recovery assessment; 

or

•	they made no claim but can demonstrate that they discovered the error before 31 March 1997 (subsequently amended to 30 June 1997);

and

•	in all cases the overpayments for VAT were made before 4 December 1996.

If you consider that you fall within the above parameters, you will have till 31 March 2003 to submit claims.

Claims may be refused in whole or in part if Customs were satisfied that repayment would lead to the unjust enrichment of the claimant.”

The Respondents’ case

30.	It was not accepted by the Commissioners that the Appellant was aware of any error prior to June 1997, and they relied on the fact that there was no documentary record of any approach by or on behalf of the Appellant between January 1978 and March 1997.   Furthermore in its letter of 30 September 1998 the Appellant had asserted that it had “stumbled” across the relevant information on Clarke and that late August 1998 was the first opportunity for them even to consider claiming a refund.

31.	It was further submitted that, if the Appellant had been aware of the error, there was nothing at all to stop it challenging the Commissioners’ ruling at any point, as the Appellant had done in the case of Clarke, or writing to the Commissioners to explain why it considered them to be wrong about the issue.  

32.	The Commissioners relied on the case of Marks & Spencer plc v Commissioners [2002] STC 1036 in which the ECJ had held that a three-year cap for refund claims “appears to be reasonable”, but that the reduction of the six-year cap for three years without any transitional period was incompatible with the principle of effectiveness: para 40.  It was following that case that the Commissioners had issued the Business Brief 22/02 which retrospectively introduced a transitional period of three months with the introduction of a cap, with effect from 4 December 1996.  

33.	In case C-255-00 Grundig Italiana SpA v Ministero Della Finanze [2002] ECR 1-8003, the ECJ had considered that the transitional period of 90 days was insufficient, where a three-year cap had been introduced in place of a previous cap of five or ten years: para 39.  It ruled that a transitional period of six months was required.  As a result the Commissioners issued Business Brief 27/02 which extended the retrospective transitional period to six months.  It was made clear by the ECJ in that case that the State was entitled to introduce a retrospective transitional period, even where it had failed to introduce such a period at the time when the cap was reduced to three years: para 41.

34.	It was submitted by Mr Ward that it was relevant that the Appellant had not chosen to make a claim at the time, and if the school had known there was an error in the sense that the law was wrong it had every incentive to make the claim or to raise the issue with the Commissioners, if not to the Tribunal.  In the present case the sum represented a large proportion of the Appellant’s profit.  It was accepted that in the early stages a claim was perhaps not economical, but later there was a substantial sum involved.  It was submitted that being doubtful as to the validity of the law was not the same as knowing there was an error of law.  In this case the error of law was not apparent to the Appellant until after the release of the decision in the Clarke case.  

The Appellant’s case

35.	The Appellant relied on the Clarke case for the fact that the money paid to Customs between January 1978 and April 1998 as VAT was demanded under VAT rules that were not themselves lawful.  That money should not have been demanded or collected by Customs, but, having been paid, the amounts paid by the school to Customs after they were registered were not amounts of VAT due to the Commissioners. However the earliest time at which those amounts became recognized as “not VAT due to them” was October 1997 when the decision in Clarke was issued.  Prior to that time the amounts in question were VAT, which had been correctly calculated and paid as demanded by Customs in accordance with their VAT regulations.  It was submitted that Customs had made false representations concerning the liability of the supplies, and the Commissioners could not rely upon their own false representations as a means of denying restitution to the school and should repay those amounts, either as alleged tax overpaid, or by way of compensation.  

36.	Despite the fact that the Business Brief 1/98 was published in January 1998, in April 1998 the Commissioners were still handing out Notice 701/30 (dated October 1997) and stating that the exemption given to individual teachers was not available to partnerships.  This Notice was not corrected and reprinted until June 2000.

37.	As late as June 1998 the school was still regarded as liable to taxable supplies and VAT was still being demanded by way of VAT returns being issued.  It was not until September 1998 that the Commissioners finally agreed that the school fees should have been exempt from VAT since January 1978.  Therefore the Appellant’s claim in September 1998 for a refund of all payments made since January 1978 was submitted well within the three years of the earliest possible date that the money paid to Customs could be said to be “not VAT due to them” and could be reclaimed by the school in accordance with section 80.

38.	The Appellant also relied on the arguments submitted by Deloitte and Touche on their behalf in their letter of 20 January 2004 that, following the Court of Appeal’s decision in the Marks and Spencer case, there was no requirement for the school to prove that it was aware of the error as it was entitled to rely on EU law the exclusion of the domestic provisions.  

39.	The Appellant relied on legitimate expectation in that any time limit for reclaiming moneys that were legally demanded by Customs over a number of years, to which they now accepted they were never entitled, could not start running until the moneys were legally reclaimable.  It had been accepted by the Commissioners as a matter of law, that, in the light of the European Court’s ruling on the Marks and Spencer case, the retrospective aspect of the three-year time limit did not apply to claims based on a directly enforceable provision of the Sixth Directive.  This should include restrictive misinterpretations of exemption articles.

40.	Whereas the Commissioners reserved the right to go back twenty years in cases of  fraud, and the school having been deceived into thinking that VAT had to be paid, and those payments deprived the partners of a large part of their profits, they should be offered the same rights of recovery as enjoyed by the Commissioners.  

Reasons for decision

41.	As accepted by the Commissioners, this case turns upon when the Appellants “discovered” that there was an error in the Commissioners’ interpretation of the EC law with regard to partnerships. The Appellant did mount various arguments, as set out above, in relation to a legitimate expectation and other arguments not raised either in the notice of appeal or raised in any other way prior to the hearing.  Initially the Tribunal considered adjourning the matter for the Respondents to have the opportunity to consider these issues and submit written arguments, however, having looked carefully at all the evidence it became apparent that we were able to decide the appeal on the single issue of whether or not the Appellants were entitled to rely on the business brief and therefore no further arguments were called for.

42.	Whilst it would be right to say that the fact that the money demanded since 1978 was demanded in error by the Commissioners was not established in law until the decision in Clarke, nonetheless it is relevant to consider whether or not the Appellant properly believed that the Commissioners were in error in their interpretation of the EC law.  In this case we accept Mr Ollis’ evidence that from the outset of the school’s registration for VAT he had believed that the Commissioners were incorrect in demanding VAT from them. We accept that, because of his work at the bank at that time he was aware of the provisions of the Sixth Directive and considered that the Commissioners were not properly interpreting it. The school’s turnover was very limited at the outset, and we accept Mr Ollis’ evidence that, despite his own view that the Commissioners were in error in demanding VAT, it was not worth the Appellant’s while to challenge that decision in the Tribunal because of the time and the money involved.  We also accept that the issue was not challenged by the Appellant because of respect for the law and the understandable view of the majority of law abiding taxpayers that demands made by the Commissioners were lawfully made, despite any reservations they might have.

43.	Therefore the issue for us is whether the Appellant’s view that the VAT was demanded in error could be encompassed by the phrase “discovered the error”.  This is the phrase used in the Commissioners’ Business Brief and we were not directed to any authority as to the meaning of such a phrase.  We therefore consider that the normal everyday meaning must be applied; we cannot accept Mr Ward’s argument that the error of law was not apparent to the Appellant until after the release of the decision in the Clarke case.  The Tribunal in the Clarke case held that Item 2 of Group 6 of Schedule 9 (as it read before 1 August 1994) could be construed in a manner which complied with Article 13A.1(j) and afforded exemption to the supplies of the (Clarkes) partnership.  It further held that post-1 August 1994 supplies of dance tuition by the Clarkes were exempt under the domestic provisions, it being implicit that the wording of Schedule 9 Group 6 Item 2 in its new form could be read compliantly with Article 13A.1(j).  The Appellant further concluded that, even if this were not the case, the Clarkes would be exempt were they driven to rely on their Community Law rights to the exclusion of the domestic provisions.  It was this last aspect which we accept was apparent to Mr Ollis as far as 1978 although he did not act upon his view at the time.  Despite the lack of any contemporaneous documentary evidence to the effect that the Appellant did approach the Commissioners querying the demand, nonetheless we accept the evidence that communication was made by telephone and that the Appellant was told that the tax had to be paid, and he did not have the resources or the will to take the matter further.

44.	In all the circumstances we find that the Appellant is entitled to rely on the wording of the Business Brief and to claim repayment of all the money paid to the Customs since January 1978.  The Appellant is also entitled to the costs of this appeal.

45.	This appeal is allowed.  

MISS J C GORT
CHAIRMAN

RELEASED: 17 January 2005

LON/98/1304