19372

Recovery of tax – claim involving output and input tax – claim purported to be made and partially met under s80 VATA – whether new or adjusted claim – date of claim – whether “capped” under Reg 29(1A) – whether legislation imposing cap unlawful – what transitional period would be appropriate if 29(1A) can be validly applied.  Value Added Tax Act 1994 s.80, Value Added Tax Regulations 1995 SI 1995/2518, Reg 29.

EDINBURGH TRIBUNAL CENTRE

	NATIONAL GALLERIES OF SCOTLAND	Appellants

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Member):	 James D Crerar, WS., NP

Sitting in Edinburgh on Monday 25 & Tuesday 26 July 2005 and Friday 30 September 2005

for the Appellants		Charles K Rumbles

for the Respondents	Sarah Wolffe, Advocate

© CROWN COPYRIGHT 2005.

DECISION

Introductory
In this, the second, matter between these parties to come before the Tribunal the issue was the right, if any, of the Appellants to recover a sum of £300,672.70 which was the part of a claim made for refund of VAT not due to the Commissioners which they have refused to repay.  The issue is not simple and, like many disputes of a similar nature, has been made more complicated, at least for the tax payer, as a result of the Respondents insistence upon a particular interpretation of the law in relation to input tax held ultimately by the Court of Appeal in 2004 to have been erroneous.  The entire history of these matters reflects a determination by the Commissioners to avoid making repayments of sums of which they get possession whether or not they involve accrued community rights.

In the present appeal the Tribunal heard evidence from the present director of finance of the Appellants, who had been in post since 1 October 2001 and also from 2 officers of the Respondents Mrs Halcro, who was involved in various correspondence discussions and decisions hereinafter referred to and Mr McCue, a highly experienced officer of the Respondents, who also participated in certain decisions, one of which the Commissioners seek to repudiate, although not claiming any repayment by the taxpayer as a result of that repudiation.  In addition a bundle of correspondence, because of the passage of time not entirely complete, was produced and spoken to.  In this case the chronology of events involving the pattern of statutory “capping” and the developing law is of importance and requires to be rehearsed.

The Appellant
The Appellant is a non-profit making body registered for VAT purposes since 1 April 1973 which had funding from Government for the majority of its activities by way of grant and aid but also had some trading income from exhibitions and retail activities.  There are on occasions admission fees levied to special collections and exhibitions and income from trusts and bequests.

In and prior to 1994 the Appellant only recovered input VAT which was directly related to business supplies.  It did not recover any VAT on general overhead expenditure which they were entitled to recover on an apportionment.

Throughout and prior to the involvement of Mr Rumbles the attitude in relation to this matter of recovery by the Galleries was artistic rather than business like.

History of Claim
In early 1994 as is apparent from the correspondence letters had passed and discussions had taken place between the Appellant and an officer of the Commissioners.  The first relevant letter available is dated 3 March 1994.  That letter states that it is the intention of the Appellant to carry out an exercise to determine an appropriate methodology for a business/non-business apportionment of general overhead input tax.  The letter stated “we would therefore like to advise you as a matter of record of our intention to carry out this exercise” and requested written confirmation that the Respondents would have no specific objections to the view that such input tax is properly recoverable.  A response was sent by the Respondent on 8 March agreeing that such tax may properly be recovered provided that an apportionment was made.  They intimated that Appendix J of the VAT guide (Notice 700) provided the model for a method of apportionment.  The letter of 8 March continued “if you propose to use a different formula it must produce a fair result and you must write to this office to obtain prior agreement to your method”.

The Appellant later appointed a new Head of Finance and IT.  He wrote on 20 December 1996 intimating that for a variety of reasons including a change of finance personnel and in the accounting system no apportionment had been carried out until that date.  The letter continued “it is now my intention to make a claim for input tax incurred on general overhead expenditure”.  That letter also sought to use a particular method of apportionment for which agreement was sought with the Commissioners retrospectively.  The response dated 15 January 1997 from Mrs Halcro stated categorically that the request to use a proposed method retrospectively “will not be possible” “any special method of apportionment she said can only be used from the date of direction issued by Customs and Excise”.

On 2 March 1998 the Appellant’s representative wrote to Mrs Halcro in response to her request for a review of the non-business use of each of the National Galleries for Scotland and also to follow up the said Respondent’s letter of 15 January 1997 regarding the recovery of VAT on general overheads.  The letter of 2 March was detailed, but in sum, sought agreement of a formula and intimated that whatever method was decided the Galleries wished to apply the method for the “past 3 years”.  That, in context, was from 1 January 1995. 

By letter dated 24 June 1998 the Respondents accepted the method of apportionment put forward by the Appellant but stated that it was their view that the Appellant had “no argument to apply a special method of apportionment retrospectively”.

That decision was locally reconsidered and upheld by Mr McCue by letter dated 4 September 1998.  On 18 September 1998 the Appellant submitted its first VAT Tribunal appeal and on 25 September 1998 submitted 2 schedules showing over-declared VAT.  The claim was said to be made on the provisions of VATA 1994 Section 80(2).  By letter dated 7 October 1998 Mr McCue intimated that the voluntary disclosure which had been made was accepted and asked the Appellant to withdraw its appeal to the Tribunal.

The Appellant never withdrew that appeal.  There was therefore at that time a principal sum in dispute which was paid but neither interest nor expenses were dealt with, a matter recorded in a letter from Mr Rumbles of 19 February 1999.

On 18 November 2002 Mr Rumbles hoping to follow the Respondent’s invitation in their business brief 22/02 outlined the facts available which he claimed consisted with the criteria in the said business brief.  The letter concluded “I will therefore be obliged if you could write to confirm that it is competent for the National Galleries of Scotland to make such a claim to overpaid VAT pursuant to Section 80 of the VATA 1994”.

By letter dated 27 November 2002 Mr McCue agreed that the Appellant was entitled to submit a claim for the period 1 April 1973 to 30 June 1995 and invited the calculations be sent to the voluntary disclosure seat at York Place, Edinburgh.  This was done by Mr Rumbles by letter dated 16 June 2003 which provided a detailed calculation bringing out a claimed sum of £754,181.70 restricted to the period from 1/4/86 to 31/3/98.

Mrs Halcro wrote on 14 July 2003 claiming that the claim required to be treated as a new claim made subsequent to the timing restrictions as laid down following the Marks & Spencer case.  She said that the periods in issue were now out of time.

Following another review Mr McCue wrote on 3/9/03 thus:
“However, having read recent criteria set down by Policy, I can see no reason why your client cannot be repaid this voluntary disclosure, subject to one limitation, in that claims for repayment periods will not be paid.  Repayment returns fall outside the scope of Business Briefs 22/02 and 27/02 , as claims, or corrections of errors, which fall within regulations 29, 34 or 165A of the VAT Regulations, were not capped until 1 May 1997 and, in our view, potential claimants were given prior notice of the amendment”.

As a result of that letter the Respondents departed from the contention that the 2003 formulation was a new claim.

The Commissioners maintained that “repayment periods” would not attract repayment but on 2/12/03 Mr McCue authorised repayment for the other periods which amounted to £705,980.  He deducted therefrom the £252,471 which had already been paid following the Tribunal application of 1998 and processed a net repayment of £453,509.

That left 2 matters remaining; the “repayment claims” and statutory interest.  Statutory interest was paid, ultimately, following a letter of 11 June 2004.  The outstanding matter the “repayment claims” forms the subject of the present appeal to the Tribunal.

Statutory Background
In 1994 Section 80 VATA provided that where a person had paid an amount to the Commissioners by way of VAT which was not VAT due to them they should be liable to repay that amount.  By the then sub-section 4 they were not liable to make repayment of any amount paid to them more than 6 years before the making of a claim.  That period was reduced to 3 years by the Finance Act 1997 Section 47(1) with purported effect from 18 July 1996.  Because of the improper method of introduction of that cap, subsequent “transitional periods” were adopted, none in primary legislation.

The rules regarding claims for input tax were the subject of secondary legislation; Value Added Tax Regulations 1995, in particular paragraph 29.  No cap applied and until the purported amendment to the Regulations there was no artificial bar to taxpayers exercising their community right to reclaim input tax.  The amendment to the Regulations introducing a 3 year cap paragraph 29A was laid before Parliament on 26 March 1997.  That did not make it law or guarantee its enactment.  It did not come into force until 1 May 1997.  

No statutory amendment to that timetable which purported to cap all claims from 1 May 1997 for refund of input tax has been made.

Attempts to legitimise the said introduction of those capping provisions had been put to Tribunals and the High Court in the cases discussed below.

For present purposes the Appellant, if the legislation is valid, had an unlimited right to reclaim input tax until 1 May 1997.  That contrasted with s.80 output tax refund claims.

The Respondent has sought to run several arguments to seek to defeat repayment claims.  One of these was that all claims for refunds were Section 80 claims and, since unclaimed input tax credit did not involve payment to the Commissioners no sum was due.  Another argument was that if no sum was due to be repaid as an overpayment of VAT the input tax claim could be made but that if there had been any payment of output tax and the unclaimed input tax exceeded that amount repayment would only be made of the output tax portion.

This Tribunal in Royal Bank of Scotland Group Plc v the Commissioners 1999 V&DR 122 heard such an argument.  In that case, because of its timing, if the Commissioners were correct in maintaining that repayment of input tax was subject to the Section 80 capping provisions the taxpayer would not have been able to claim the input tax for which they had not been credited.  If incorrect there was a gap between the purported introduction of capping provision as regards input and output tax, and the Banks claim was not capped at all.  The Commissioners sought to found upon a Tribunal Decision BICC 1998 V&DR 224 and to maintain that the only way in which tax paid may be reclaimed from the Commissioners is by way of a claim under Section 80.  This Tribunal in the Royal Bank case disagreed and found in terms that sections 24 and 25 had nothing to do with Section 80 which was intended to allow for the repayment of monies collected in error from the taxpayers customers and then passed on to the Commissioners.  The Commissioners however, despite having appealed Royal Bank to the Inner House and abandoning their appeal halfway through the Hearing, still insisted in founding upon BICC in their business briefs and persisted in putting it forward as sound law in University of Sussex v the Commissioners 2001 STC 1495.  There they had persuaded another Tribunal to follow BICC and hold that the claims were governed by Section 80.

That argument when presented in the University of Sussex case got short shrift not only from Neuberger J but also, subsequently from the Court of Appeal.  It was thought by Neuberger J that part of the reasoning in The Royal Bank was over-sophisticated, and on reflection this would now seem to be so.  Nonetheless this Tribunal did correctly identify as far back as 1999 that the two refund regimes were distinct and input tax did not fall to be recovered or credited having regard to Section 80 or its time limits.  In the University of Sussex case the timing was also such that the input tax claim was not barred at all even if the amendment to Regulation 29 of 1 May 1997 was valid.

The Court of Appeal did not, directly, opine upon the validity of the amendment to regulation 29 of the Regulations.  It seems clear, however, from the opinion of Auld LJ that he would have considered that the amendment to regulation 29 was subject to the same flaw as the purported amendment to Section 80 had been held to contain in the Marks & Spencer litigations and reference – University of Sussex para 180.

The situation that all this occasioned for individual taxpayers was one of unmitigated confusion.  Now, of course, the Commissioners, as they did before us, say that since these input tax under credits are all regulation 24 claims the transitional provisions which were introduced for the Section 80 cases were neither relevant nor appropriate and, since Section 80 did not apply, the contentions about repayment traders upon which they had previously been founding and indeed had been founding upon in this case were inappropriate.

Before us it was we consider conceded that the regulations were flawed, as expressed in paragraphs 15 and 16 of the written legal submissions presented to us on behalf of HMRC:

“15.	HMRC accept that Community law requires a transitional period to be applied before a curtailment of an accrued community right (including a curtailment having retrospective effect) can be applied.

16.	HMRC further accept that, in relation to the directly effective Community law rights of some taxable persons, there was no adequate statutory transitional period in relation to the introduction of Regulation 29(1A).

Questions for the Tribunal
The first question is at what date was there a claim made for repayment of incorrectly unclaimed input tax deductions?  The second was whether the matter presented to the Tribunal in the more elaborately calculated claim, partially met by the Commissioners, was a continuation of an existing claim or a new claim?  Third on the assumption that the capping legislation in paragraph 29(1A) of the Regulations is a valid imposition of a cap should the Tribunal consider what would have been an appropriate adequate transitional period and, consequently, whether in the circumstances of the present case an adequate transitional period would have cut down any of the claims made by the Appellant and in particular the detailed claim of 25 September 1998.  Fourth, whether in any event the entire purported imposition of the cap as it was done in paragraph 29(1A) was, in the words of Auld LJ at para 180 of the University of Sussex ‘unlawful under Community law’.

It is convenient, since it is purely a question of fact, to deal with the second question first.  The contentions of parties are adequately seen in the history above noted.  Before us it was asserted that the claim made on 16 June 2003 was a new claim distinct from that in September 1998.  The Commissioners presented this argument despite the above noted sequence of events.  Whether or not the 2003 claim was new or a continuation of a previous one is essentially a question of fact.  The Commissioners had considered the matter and on review came to the view that this was not a new claim.  Furthermore a substantial payment was made on that basis.  That payment was acted upon by the parties and indeed statutory interest was added to such portion of it as had been met.  Apart from the obvious difficulty of repudiation of that acceptance of a situation of fact by the Commissioners in the light of the events which followed, any error could only be one in interpretation of fact.  In the circumstances it would be for the Commissioners in order to present such a contention to demonstrate that the conclusion reached was one which no reasonable officer could have arrived at.  Apart altogether from the awkwardness of that stance the Tribunal does not consider that it was wrong to regard the claim as a continuation of an existing claim.  It was a decision which could reasonably be arrived at on the facts and in our view requires to be accepted.  In any event our view on the facts is that this is not a new claim.

Date of Claim
The Commissioners founded upon the detailed claim which was made in September 1998 as being the first claim and therefore, possibly, capped.  The Appellants argued that viewing the whole correspondence and in particular having regard to the letter of December 1996 that a claim, albeit unquantified and unquantified for good reason, had been made and made before May 1997.  There was, said the Appellants, a diversion of attention because of the attitude of the Respondents to utilising a method of apportionment retrospectively.  It was they said reasonable to attempt to agree the basis upon which calculations could be made prior to making any specific requests.  The Respondent’s argument, shortly, was that all this was mere preliminary skirmishing and that no proper claim was made until September 1998 when a voluntary disclosure with supporting schedules was presented.

The Tribunal, albeit with some hesitation, were persuaded that what happened prior to May 1997 was that an unquantified claim was made to obtain refund of either an agreed amount or an arguable amount of input tax.  The Tribunal are influenced by the fact that the Commissioners had agreed that input tax over some period was indeed due to be repaid by them.  The Tribunal accordingly regard the instant claim as having been made prior to the introduction of any capping provision.

If a contrary view were taken and if it were to be thought that the first claim which required to be met by the Commissioners was not presented until September 1998 that would be 16 months after 1 May 1997 when the legislation was said to come into force.  If the legislation was valid and can be applied, about which there can be much discussion, it has been conceded by the Commissioners that an adequate transitional period requires to be adopted, not however by legislation they said but by the Tribunal.  This Tribunal has already expressed views on the absurdity of a non-legislative body effectively amending legislation a view reinforced by the reasoning in EC Commission v UK 2005 STC 582 where it was said “It was settled case law that the incompatibility of national legislation with Community provisions could be remedied only by means of national provisions of a binding nature which had the same legal force as those which had to be amended; mere administrative practices could not be regarded as constituting the proper fulfilment of obligations under Community law”.  That case was not cited to the Tribunal but would appear to be a strong view that alteration of legislation in substance or effect is a matter for the legislature.  However if the view is taken that the Tribunal does have jurisdiction to “dis-apply” a capping provision in legislation if they consider that an adequate transitional period has not been given then we proceed to consider what transitional provision is appropriate in the present case.

The Commissioners argued that the period of 6 months has been recognised as the appropriate transitional time.  It was said that this followed from the ECJ Decision in Grundig Italiana SPA v Ministero della Finanze, 2002 ECR1-8003.  

The Tribunal holds firstly that there is no binding significance in relation to a particular claim in the period of 6 months which was suggested by the ECJ in Grundig as the minimum.  No maximum was suggested.  There is no justification for asserting that such a period must be utilised if there is to be a dis-application of the time bar provisions.  In matters such as this a decision, if appropriate for a Tribunal, must be case specific.  In the present case we would have held that a period of at least 18 months would have been a reasonable period within which this Appellant could take steps to assert its input tax claim in proper form.  This is again particularly so in light of the varying attitude of the Respondents about the appropriate method to use to secure repayment and their persistence in the s.80 argument until the University of Sussex Case.

The imposition of the cap is akin to the prescription of an obligation claim at common law (the principle of equivalence).  It is noteworthy that when the law relating to the prescription of obligations in the Law of Scotland was reduced from 20 years for some obligations to 5 years by the Prescription and Limitation (Scotland) Act 1973, the Act was not brought into force until July 1976.  A period of 3 years was thus allowed as a transitional period.  In the law relating to limitation, which does not affect the subsistence of rights or obligations but merely renders them unenforceable, the same time gap was allowed.

It follows that there would be no violence done to, at least Scottish, general legal principles by a transitional period in an appropriate case of 18 months.

If that be correct no decision requires to be taken in this case in relation to the lawfulness or otherwise of the introduction of Regulation 21A capping.

The final question is whether in default of a statutory transitional period the legislation is unlawful under Community Law.  In Abercromby Motor Group Ltd v the Commissioners 12 April 2005 this Tribunal expressed the view that the legislation was void.  That case said the Commissioners to us was wrongly decided.  In the Tribunal’s view the only error in Abercromby was the use of the word “void” when unlawful would have been more appropriate.

Although the argument for the Appellant that the Commissioners had a duty to put in place provisions in relation to Regulation 29 claims which were the same as those in relation to Section 80 claims is overstated it is thought that the relevance of that argument in relation to the Marks & Spencer decision is that since it had to be acknowledged that in Marks the Section 80 limitations were unlawful, the matter is so similar as to be indistinguishable.  Accordingly unless and until the legislation is amended or modified by the only appropriate body to do so the capping provision in Regulation 29(1A) cannot be relied on.  We would have held that the appeal succeeded on that ground also.

Decision
The appeal succeeds and the Appellant is entitled to payment of the sum in issue.  Because the Appellants have been successful they are entitled to their expenses which failing agreement will be remitted to the Auditor of the Court of Session for taxation in terms of the rules.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  25 NOVEMBER 2005

EDN/04/115
££National Galleries of Scotland v Revenue and Customs [2005] UKVAT V19372 (25 November 2005)