19060

3-YEAR CAP – demonstrator cars – whether Appellant aware of the right to claim and would have claimed by 30 April 1997 – no – appeal dismissed

LONDON TRIBUNAL CENTRE

	RYE MILL GARAGE LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					E  RACHEL ADAMS FCA CTA

Sitting in public in London on 25 April 2005

D R Gregory, retired director of the Appellant, for the Appellant

Nicola Shaw instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal by Rye Mill Garage Limited against a refusal to make two repayment claims made on 25 June 2003 and 31 August 2003.  The Appellant was represented by Mr D R Gregory, and Customs by Miss Nicola Shaw.
2.	The Appellant is a car dealer and the case concerns the treatment of demonstrator cars.  Their treatment has been the subject of an extremely confused history which is set out in detail in the Tribunal decision of Anglia Regional Co-Operative Society Limited v Customs and Excise Comrs (2005) VAT decision 18991 which Miss Shaw accepted set out the law correctly and Mr Gregory did not argue against.  Accordingly we gratefully adopt the reasoning in that case.  The following is a summary of the changes set out in that case (to which we have added a further item concerning Elida Gibbs which features in this appeal):
(1)	18 July 1996: 3-year cap announced in Parliament applying to claims made from 18 July 1996.
(2)	4 December 1996: Provisional Collection of Taxes Act 1968 Resolution giving effect to the 3-year cap.  Business Brief BB/22/02 issued on 5 August 2002 deals with the transitional arrangements for making reclaims of overpaid VAT before that date.
(3)	19 March 1997: 3-year cap enacted in s 47 Finance Act 1997.
(4)	31 March 1997: original end date (later extended to 30 June 1997, see paragraph 2(11) below) by which time the taxpayer must have discovered the error in order to obtain the benefit of transitional arrangements introduced following Marks and Spencer Case C-62/00 [2002] STC 1036.
(5)	25 June 1997: the European Court of Justice in EC Commission v Italian Republic, Case C-45/95, [1997] STC 1062 decided that where input tax was not creditable on the purchase, the supply must be exempt.
(6)	21 July 1997: Business Brief 16A/97 issued dealing with payments made by car manufacturers to dealers, when the dealer agrees to adopt the car as a demonstrator vehicle following Elida Gibbs v Customs and Excise Commissioners Case C-317/94 [1996] STC 1387.
(7)	10 October 1997: Business Brief 23/97 issued following the Italian Republic case under which while Customs considered the full effect of the judgment businesses could either continue to use the margin scheme for cars whose input tax was blocked, or treat the sale of such cars as exempt.  (The Appellant did the former.)
(8)	1 December 1999: legislation implementing the Italian Republic case comes into force so that input tax is creditable and output tax payable in the normal way on demonstrator cars.
(9)	24 January 2001: Tribunal decision in JDL Ltd v Customs and Excise Commissioners (2001) VAT decision 17050 that demonstrator cars are capital items and the exempt sale of them does not require recalculation of partial exemption.  This decision was upheld by the High Court on 25 October 2001 ([2002] STC 1).
(10)	11 July 2002: Marks and Spencer case decided by the European Court of Justice that the absence of transitional provisions on enactment of the 3 year cap was in breach of Community law.
(11)	5 August 2002: Business Brief 22/02 issued setting out transitional arrangements following Marks and Spencer.  This invited repayment claims by 31 March 2003 including cases where taxpayers “…made no claim [before 31 March 1997] but can demonstrate that they discovered the error before 31 March 1997.”  The references to 31 March in both years were extended to 30 June by Business Brief 27/02 of 8 October 2002 giving effect to the Grundig Italiana Case C-255/00 [2003] All ER (EC) 176 in which the European Court of Justice held that the minimum transitional period must be 6 months.
(12)	March 2003: detailed guidance issued by Customs on claims by car dealers following the Italian Republic case including claims relating to demonstrator cars.  This stated that claims going back to 1973 could be made by businesses which either made claims before 30 June 1997 that were capped or “can show that they would have put in a claim before 30 June 1997.”  It seems to be implied in the latter that the claim would have been made but the person decided not to because it was uneconomic to do so because of the capping.  
3.	Looking at the position on 30 June 1997 without the benefit of hindsight a person in the Appellant’s position who heard about the Italian Republic case decided 5 days earlier on 25 June 1997 would know that it could treat the sale of demonstrator cars, the input tax on the purchase of which was blocked, as exempt and reclaim the tax paid on the margin scheme subject to the 3-year cap and subject to recalculating the partial exemption fraction accordingly.  Both provisos turned out to be wrong but he would not know until 5 August 2002 of the transitional period introduced by business Brief following the Marks and Spencer case; and he would not be aware that the partial exemption did not need recalculating until the Tribunal’s decision in JDL Limited on 24 January 2001.
4.	From the brief summary of the changes in the law the issue in this case is whether by 30 June 1997 (a) the Appellant had discovered the error, and (b) would have made a claim.  The logic is, as explained in the Anglia Regional Co-Operative Society case, paragraph 50 that “if the Appellant would not have exercised its accrued rights had there been Community law-compliant transitional arrangements, it cannot be said that the absence of those arrangements in the actual legislation enacted by section 47 Finance Act 1997 was in any way prejudicial to the Appellant.”
5.	Mr Gregory gave evidence as a result of which we find the following facts:
(1)	As already stated, the Appellant decided to continue to tax demonstrator cars on the margin after business Brief 23/97 of 10 October 1997.  The Appellant carried on applying the margin scheme to demonstrator cars even after the change in the law taking effect on 1 December 1999 until the error was pointed out by Customs in a visit in February 2000.
(2)	Mr Gregory took a cautious line in making the claims, waiting to see how the law developed.  He did not want to be in a position of obtaining a reclaim which was later clawed-back.  He was (not surprisingly) confused by all the changes.
(3)	He was not specifically aware of the Italian Republic case.  He handed in some correspondence dealing with the earlier blocking of input tax on cars.  
(4)	Following advice at a trade association meeting in early 2003 the Appellant made a claim for repayment of tax on demonstrator cars on 24 June 2003 in respect of the years 1973 to 1987 totalling £23,535.46 heading the letter “Elida Gibbs Ltd & Marks & Spencers (Cases).”  The reference to Elida Gibbs in the two claim letters in 2003 shows that he was still unaware of the legal basis of the claim, which had nothing to do with that case.  
(5)	The Appellant made a second claim on 31 August 2003 in respect of the years 1988 to 1996 totalling £35,422.54 heading the letter in the same way.  The delay was not caused by difficulty in quantifying the claim, which relates to the more recent years.
(6)	Both claims were refused by Customs.
(7)	In a letter of 15 September 2003 Mr Gregory stated that he was aware of the potential to make a claim having been informed by its trade association RMI but made a business decision not to make it.  “The claim at the time would have been 3 years old, small and not economic to do so.”  We did not see anything from the trade association that supported that statement.  They would have needed to react extremely fast to have informed the Appellant by 30 June 1997 of the effect of the Italian Republic decision on 25 June 1997.  The reference to the claim being 3 years old seems to be a misunderstanding of the 3-year cap.  He did not make any calculations of the amount of the claim at the time.
6.	We find that the Appellant was not aware of the right to make a reclaim by 30 June 1997 and would not have made the claim by that date.  The second claim made on 31 August 2003 was also out of time and we do not have any power to extend the time limit which was properly imposed as part of the transitional arrangements following Marks and Spencer.
7.	Accordingly we dismiss the appeal.  Customs did not ask for costs.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 5 May 2005

LON/04/1035