19327

Value Added Tax – Recovery of tax overpaid – Section 80 VATA (as amended FA1997) – absence of transitional period for repayments in terms of amended provisions – terms of Business Briefs Nos 22/02 and 27/02 and related guidance issued by Respondents – Appeal allowed.

EDINBURGH TRIBUNAL CENTRE

	JOHN CLARK (HOLDINGS) LTD	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

		Tribunal:	 (Chairman):  Mr Kenneth Mure, QC
				 (Members):	  Mrs Charlotte Barbour, CA., ATII
						  Miss Karen Bruce Lockhart, Advocate

Sitting in Edinburgh on Monday 12 September and Monday 10 October 2005

for the Appellant		Mrs Amanda Brown, Solicitor, KPMG

for the Respondents	Andrew Young Esq, Advocate

© CROWN COPYRIGHT 2005.

DECISION

Introduction
The matter in dispute is a claim dated 25 June 2003 in respect of overpayments of VAT totalling about £286,428.00 relating to the period between the commencement of trading and 31 March 1996.  The preliminary issue arising for consideration is whether such a claim for a period in excess of 3 years can competently be made following on the amendments to Section 80 VATA by the Finance Act 1997, the matter of its exact calculation being reserved.

Until 18 July 1996 a taxpayer had 6 years to reclaim overpayments of VAT, the time-limit running from the date of payment or, if later, the date of discovery of the error in making payment.  Thereafter, as provided for in FA 1997, revised provisions substituted in Section 80 VATTA reduced the time-limit to 3 years (the “3 year cap”).  

The absence of a transitional period when the restriction to the “3 year cap” was introduced was criticised by the ECJ in Marks and Spencer v C&E [2002] STC 1036 as infringing the principle of “effectiveness” in European Community Law.  Thereafter, by 2 Business Briefs Nos 22/02 and 27/02 (Appellant’s Documents Nos 2 and 3) the Respondents introduced retrospectively a notional transitional period for claims running until 30 June 1997.  The deadline for making such claims was 30 June 2003.

A further Respondents’ publication relating to the motor trade is produced (Appellant’s Documents No 3A).  It relates to overpayments of VAT from altered treatment of demonstrator vehicles and relative compensatory payments by manufacturers.  Crucially it provided that only claims which “would” have been made during the transitional period would be entertained. 

Here, 4 claims in respect of overpayments by each company group member were made by the letter dated 25 June 2003.  The Respondents have rejected these on the basis that they consider on the available evidence that the Appellant would not have made a claim in respect of the alleged overpayments by the end of the retrospective transitional period, viz 30 June 1997.

The Law and Practice
Section 80 VATA 1994 provided originally in respect of overpaid VAT that – 

“(4) no amount may be claimed under this section after the expiry of 6 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 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.”

As amended by FA 1997 Section 80 provided that on or after 18 July 1996 – 

“(4) the Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than 3 years before the making of the claim”.

No transitional period for claims pre-dating 18 July 1996 was incorporated in the legislation.  Following on the absence of such a transitional period being criticised by the ECJ in Marks & Spencer the Commissioners indicated in certain Business Briefs and related publications that they would entertain such repayment claims if made notionally before 31 March 1997.  The retrospective transitional period was extended to 30 June 1997.  Further “detailed guidance” affecting the motor trade was published providing that a dealership would have to show that it “would” have put in a claim before 30 June 1997.  (Appellant’s Documents nos 2, 3 and 3A).  Parties referred us to the following case law viz –

Marks & Spencer v C&E [2002] STC 1036;
Anglia Regional Coop v C&E (LON/2004/0233);
Fleming t/a Bodycraft v C&E [2005] STC 707;
Abercromby Motor Group Ltd v C&E (EDN/04/41);
Condé Naste Publications Ltd v C&E (Case no CH/2005/APP/0053);
Wilsons (Lindale) Ltd v HMRC (MAN/2005/…..  )

The evidence
We heard evidence from Mr John Chesser CA, the Financial Director of the Appellant, and Mr John Clark, the Managing Director of the Appellant and its principal shareholder (effectively its owner).  They referred to and adopted their Written Statements (Appellant’s Documents nos 12 & 13).  Mr Young led evidence from Mr Gilmartin, an officer of the Respondents.  The controversial factual aspects of the evidence for the purposes of this hearing related to whether or not the Appellant would have lodged a claim along the lines of the letter of 25 June 2003 in the transitional period.  It is accepted by the Respondents for the purposes of their practice that the Appellant knew of the overpayment error prior to the end of June 1997 ie the end of the transitional period.  Clearly reconstructing the likely scenario is far from satisfactory given the lapse of time since 1997.  However, we found Mr Chesser and Mr Clark both credible and reliable witnesses who gave a well reasoned account of what aspects were under consideration during the retrospective transitional period and which would have swayed the Appellant’s decision.  We accept their evidence that the decision would have been made on an economic basis and that the decision was ultimately one for Mr Clark as Director and controlling shareholder.  “Cost and benefit” considerations would have prevailed.  Rough calculations were made.  Costs of professional accountancy advice had to be taken into account.  While a 3 year repayment claim under the revised Section 80 Rules might not have been profitable, we accept the evidence of Mr Chesser and Mr Clark that an “uncapped” repayment claim would have been well worthwhile and would have been made.  We observe that the value of a 3 year claim was estimated at about £42,000 whereas the claim dated 25 June 2003 extends to a much higher figure!  We note paragraph 14 of Mr Chesser’s witness statement and paragraphs 6, 8 and 9 of Mr Clark’s.  That and their evidence satisfies us that the absence of the “3 year cap” would in itself have been the determining factor for the Appellant’s making the claim.  Indeed in cross-examination Mr Clark was emphatic on this point.

Mr Chesser and Mr Gilmartin spoke to a routine visit in June 1998 when such a claim was discussed.  It appears that having to take account of partial exemption requirements was a possibly discouraging factor (this had caused difficulties before) but we prefer Mr Chesser’s account that he intended the remark as jocular.  In fairness Mr Gilmartin’s recollection was admittedly uncertain.  In any event Mr Chesser’s view would have been subordinate to Mr Clark’s, who would have taken the ultimate decision and that, as he indicated and we accept, would be on a “cost benefit” basis.  Mr Chesser in cross-examination indicated that the putative claim would have extended to sums recoverable by reference to the decisions in both Elida Gibbs v CEC [1996] STC 1387 and CEC v Italian Republic [1997] STC 1062.  We note that the decision in the Italian Republic case was released on 25 June 1997, days before the end of the retrospective transitional period.  However, the matter had been a “live” issue.  The Advocate General had issued his Opinion in December 1996 and this in fact was approved by the Court.  The Appellant had the specialist advice of KPMG and the motor trade had an interest in this topic too.  We accept Mr Chesser’s answer as credible in that context.

Parties’ Submissions
Both Mrs Brown and Mr Young lodged written summaries of their arguments to which we refer.  Given their detailed terms it seems appropriate only to summarise their respective stances.  

They both invited us to consider, firstly, whether as a matter of fact the Appellant would have made a claim during the retrospective transitional period.  This, of course, is the wording used in the “detailed guidance” published by the Respondents to supplement the Business Briefs.

Mr Young suggested that this question was properly an inference from the evidence of fact.  He argued that the mere oral evidence of Messrs Chesser and Clark was insufficient.  Where, he enquired, were the documents and calculations which surely would have been prepared and should be available?  Further, the oral evidence led for the Appellant was based on a false premise.  Factors and circumstances prevailing in 2003 should not be imputed to the notional decision making process in the retrospective transitional period.  In particular the tables which introduced simplifications for the calculations were not available in 1997.  The awareness of other motor traders’ having made successfully substantial claims should be disregarded too.  The complications of partial exemption had to be borne in mind also.  The implications of the decision in JDL Ltd [2002] STC1 issued in 2001 should not be taken into account as post-dating the transitional period.  (The last factor was not objected to by Mrs Brown).

Mrs Brown in reply submitted that it had been shown that the decision to make the claim would have been determined on commercial considerations.  She relied not only on the benefit of the 6 year term but also the value of the ability to “discover” overpayments made even earlier.  Also, it was appropriate to introduce into the notional decision-making process the benefit of the simplified procedures as these were “part and parcel” of the allowance of the transitional period.

The wording purporting to regulate entitlement to claim ie “Claims can be made by businesses which … can show that they would have put in a claim before 30 June 1997” is not, of course, set out in legislation.  Rather, it is introduced into the declared practice of the Respondents to meet the criticisms of the ECJ in Marks & Spencer.

In the event of us not accepting her primary argument Mrs Brown presented a reserve argument that this requirement infringed the doctrine of “effectiveness” in European Community Law.  The prescribed test is that it should not be “virtually impossible or excessively difficult” for the Appellant to exercise its right.  Not only did FA 1997 reduce the repayment period from 6 to 3 years but also it deprived a tax payer of the ability to discover earlier overpayments.  She laid great stress on the decision of Warren J in Condé Naste Publications Ltd in support of her argument.  She submitted that this decision, which reversed that of the Tribunal, overruled also the Tribunal in Anglia Regional Coop.  While the sections in Warren J’s judgment on which she relied particularly were obiter they were highly persuasive and apt in the present case.  Accordingly the condition that a tax payer has to establish that they would have submitted a claim should not be enforceable.

In reply to this legal argument Mr Young submitted that this requirement was neither impossible nor excessively difficult.  Such an exercise had been achieved in Wilsons (Lindale) Ltd.  Mr Young argued that the concluding section of Warren J’s opinion, on which Mrs Brown laid stress, was merely obiter and that the Tribunal’s decision in Anglia Regional Coop was correct.

Decision
Following the manner in which we were addressed, we propose to deal firstly with the factual or quasi-factual question of whether the claim would have been made in the retrospective transitional period.

The context in which this notional decision falls to be made is problematical.  We heard argument that it may be appropriate to discount certain benefits of supervening events.  According to the evidence of Messrs Chesser and Clark the decision fell to be made on only economic considerations.  Did the value of the claim exceed the cost of calculation, having regard to the Appellant’s Directors’ and staff’s time and the professional fees likely to be incurred?  We are satisfied that the making of a claim was under active consideration during the transitional period.  The rough calculations showing a repayment of £42,000 for a 3 year period was considered somewhat uncertain and on the margin of profitability.  However, a larger repayment, in particular one of 6 years would increase the value of the claim.  It may be noted that the letter of claim dated 25 June 2003 (Joint Documents no 9) seeks a repayment of £286,428.00.  We accept the evidence of Messrs Chesser and Clark that a claim would have been made at the material time if it were for a 6 year period.  We find that irrespective of other considerations the availability of a 6 year claim period would have resolved the question.  Mrs Brown urged us to consider also the factors simplifying the calculation.  While these were not available during the transitional period since they were not published until about 2002, they were introduced by the Respondents in relation to their conceding retrospectively the transitional period.  We agree with Mrs Brown’s approach here, which seems to correspond with the Tribunal’s views in Wilson’s (Lindale) Ltd at para 28.  In any event even if we disregarded these simplifications and moreover the likelihood of the Appellant’s and their advisers making especial efforts to maximise such a claim, we still consider that a repayment claim would have been made – and that simply on the basis that the longer 6 year period (with possible earlier “discoveries”) would have been worthwhile.

We disregard the references in evidence to “complications” of partial exemption as an influencing factor as explained in our remarks on the Evidence, supra.

Finally, we accept for the reasons explained supra that the claim would extend to both the Elida Gibbs and Italian Republic categories of loss, i.e. demonstrator support payments and marginal scheme payments.  Both categories of claim would have been in the contemplation of the Appellant and its advisers. 

While our conclusion on the evidence is that a claim would have been made, we have to address Mrs Brown’s reserve argument that this additional requirement should be regarded as infringing the principle of “effectiveness”.  The judgment of Warren J in Condé Naste Publications Ltd, which considers the somewhat comparable provision of Regulation 29, is helpful.  Paragraph 55 et seq (while obiter dicta) lends support to this argument.

Following the judgment of the ECJ in Marks & Spencer it is clear that the doctrine of effectiveness should apply to support a tax payer in maintaining this right to claim repayment over an extended period.  The doctrine – which has been acknowledged judicially in various contexts – directs that such rights should not be rendered virtually impossible or excessively difficult to pursue.

The Respondents acknowledged the need for a transitional period for claims following on the reduction of the time-limit in terms of the Business Briefs 22/02 and 27/02.  Although such a measure should ordinarily be incorporated in statute we have to review as against the standards of “effectiveness” these pronouncements of the Respondents’ practice.  Reasonably they do not provide relief where a repayment claim could not be pursued or where at the material time (ie during the backdated transitional period) the tax payer was unaware of his right.  Thus far there is a logical process of causation.  The tax payer is not put into a more advantageous position than he would have been in otherwise.  These conditions are not problematical here.  The Respondents are content to attribute the necessary state of knowledge to the Appellant.  Rather, we have to consider the further publication, the “detailed guidance” for the motor trade (Appellant’s Documents no 3A) which introduced the requirement that the tax payer would have made the repayment claim before 30 June 1997.

In our view the production of documentary evidence as desiderated by Mr Young is too high a requirement.  The interval which had elapsed when the transitional period was introduced was substantial.  Witness recollection would be affected also.  Provided that any factor precluding the making of a claim is absent, this requirement should not in our view denote anything more than a likelihood that the claim would be made or a logical justification in its being made.

Accordingly the Appeal succeeds, primarily on the basis that the claims contained in the letter of 25 June 2003 would have been made before the expiry of the retrospective transitional period.  We agree with the terms of paragraph 60 of Mrs Brown’s Outline Argument that the proceedings should be stood over for 6 months to enable an agreement to be concluded on the matter of quantum.

Costs
We make an award of costs in favour of the Appellant as requested.  Failing agreement these will require to be taxed in terms of Rule 29(3).

Finally, we wish to record our thanks for the helpful manner in which both Mrs Brown and Mr Young presented their arguments.

MR KENNETH MURE QC

CHAIRMAN

RELEASE:  8 NOVEMBER 2005

EDN/005/25