19974

PRACTICE – Hardship – Whether hardship legislation engaged when input tax repayable for other periods set-off against output tax under appeal – Effect of set-off – Whether hardship legislation engaged when disputed output tax for period deducted from input tax for same period – Effect of deduction – Whether output tax assessed – Garage Molenheide  [1998] STC 126, ECJ applied – VATA 1994 s.25, s.73(1)(9), s.81(3), s.84(3)

LONDON TRIBUNAL CENTRE

	GUERNSEY LEASING CO	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	THEODORE WALLACE (Chairman)

Sitting in public in London on 14 September 2006

Valentina Sloane, counsel, instructed by Deloitte and Touche, for the Appellant 

Rebecca Haynes, counsel, instructed by the Acting Solicitor, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This decision concerns a hardship application in respect of appeals arising out of a decision dated 22 June 2006 that it has a fixed establishment in the UK and is liable to VAT on supplies of leasing equipment. It involves the issue of the jurisdiction of the Tribunal to consider hardship when the disputed output tax has been set-off against input tax otherwise repayable.  It was heard in public since it raised points of principle but has been anonymised.

2.	On 13 July 2006 the Appellant appealed against the liability decision, against separate assessments to output tax totalling £46,570 for the four monthly periods 04/03, 05/03, 06/03 and 02/06, against decisions that repayments of input tax due for periods 10/05 to 01/06 and 03/06 and 04/06 fell to be reduced by £178,123 by reason of a liability to output tax in those periods and against a decision withholding input tax of £75,822 for 05/06 by reason of output tax for other periods.

3.	On 18 August 2006 the Appellant appealed against assessments totalling £339,792 for the 33 monthly periods from 07/03 to 04/06.  Customs have consented to hardship in relation to the appeals

Introduction

4.	Before considering whether hardship can be considered and if so whether it is established it is necessary to consider which decisions are covered by section 84(3) of the VAT Act 1994.  That subsection provides that appeals against certain decisions shall not be entertained unless,

“(a)	the amount which the Commissioners have determined to be payable as VAT has been paid or deposited with them; or (b) …”

Paragraph (b) applies if the Commissioners agree that the Appellant would otherwise suffer hardship or the Tribunal so decides.

5.	The decisions to which section 84(3) applies include decisions as to the VAT chargeable on a supply and assessments under section 73(1) and (2) but do not include the liability decision under appeal, or a decision as to the amount of input tax to be credited.

6.	It is common ground that on any view section 84(3) applies to the appeals against the assessments for 04/03 and 06/03.  Customs have consented to the hardship application in respect of those periods.  Subject to the jurisdiction issue, Customs also consent to hardship in relation to 05/03 and 02/06.

7.	The issue before me is whether section 84(3) applies to the assessments for 05/03 and 02/06 and to the decision to reduce the repayments of input tax for six of the periods between 10/05 and 04/06 by reason of a disputed liability to output tax.

8.	Customs contend that, since sums repayable in respect of input tax were set off on 16 June 2006 against the tax assessed for 05/03 and 02/06 under section 81(3), the amount which they have determined to be payable as VAT has been paid with the result that section 84(3)(a) does not apply and no question as to hardship arises in respect of the assessments for those periods.

9.	The Appellant contends that Customs are not entitled to pre-empt the issue of hardship by prior set-off and that if the Tribunal accepts the hardship application the input tax against which Customs have purported to set-off the disputed output tax should be repaid forthwith without waiting for the substantial appeal to be decided.

10.	As regards the £178,123 reduction of VAT repayable for periods 10/05 to 04/06, the Appellant contends that in fact and law Customs have made assessments to output tax for those periods and cannot simply deduct that disputed output tax for the input tax repayments otherwise due.  Customs say that the decision to reduce the input credit repayable for a period by reference to output tax due for the same period does not involve an assessment and does not engage section 84(3).

Appellant’s submissions

11.	Miss Sloane submitted that the contention of Customs that they are entitled to set-off the disputed output tax against input tax otherwise repayable is contrary to the decision of the Court of Justice in Garage Molenheide BVBA and others v Belgium (Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] STC 126 in particular at [57].  Those cases also concerned the retention by the tax authorities of input tax which was not in dispute against disputed output tax.  Here the Tribunal is the court adjudicating on the substance of the case : on Customs’ interpretation it is impossible for the Tribunal to lift the retention even if hardship is established.  She said that the set-off under section 81(3) to pre-empt the hardship application is incompatible with Community law.  She said that Capital One Developments Ltd v Customs and Excise Commissioners [2002] STC 479 is distinguishable because in that case the input tax was in dispute.

12.	She submitted that if a hardship application under section 84(3)(b) is granted Customs would not be entitled to set-off the disputed amount under section 81(3) against repayments owed to the Appellant. Although section 81(3)(a) was satisfied, section 81(3)(b) did not apply because until hardship is determined the Appellant is not liable to pay a sum by way of VAT.  Section 73(9) which provides that an amount assessed is “deemed to be an amount of VAT due” is expressly subject to the appeal provisions, see Bennett v Customs and Excise Commissioners (No.2) [2001] STC 137 at [30].  She said that reading section 81(3) and section 84(3) together, the set-off ceases to operate when an appeal is made with a hardship application.  If hardship is allowed the payment is no longer required under section 84(3) and there is no liability within section 81(3)(b).  In Western General Trading Ltd v Customs and Excise Commissioners (1983) Decision No. 1551, Customs accepted that the tax set-off would be repaid if hardship was upheld.  This was in line with Customs’ manual at 6.7.1.

13.	Miss Sloane said that, if Customs are correct in contending that once set-off had occurred hardship could not arise, this would seriously undermine the hardship provisions.  In Coleman v Customs and Excise Commissioners [1999] V&DR 133, the Tribunal concluded that section 84(3) was not disproportionate because of the hardship exception.

14.	She said that there is no distinction in principle between the assessments to output tax and the decisions reducing repayments by reason of underdeclared output tax.  The right to input tax is directly effective.  Section 25(2) does not give Customs a right to deduct input tax and section 25(3) does not entitle Customs to deduct assessed output tax from input tax repayable but applies only to tax shown on a return.  If output tax is underdeclared the proper method of correction is by assessment under section 73.  She said that in law the letters reducing the repayments were assessments to output tax.

Respondents’ submissions

15.	Miss Haynes said that section 84(3) requires payment or deposit of tax assessed to enable an appeal to be entertained unless hardship is shown. Section 84(3) is only relevant to the issue whether an appeal can be entertained. Where the assessed VAT has been set-off or adjusted under section 25, no money remains due and the appeals can be entertained without considering hardship. It is irrelevant whether the tax has been paid voluntarily, set-off under section 83(1) or deducted under section 25. She said that set-off under section 81(3) takes effect even if no notification is given to the trader.  Following adjustment under section 25 there was no amount due to Customs and no amount to be assessed.

16.	She said that in Tricell UK Ltd v Customs and Excise Commissioners [2003] V&DR 333 the Appellant sought to use the hardship provisions to recoup the input tax there under appeal.  The arguments by the Appellant which were rejected at [47] were similar to those in this case.  She submitted that the Tribunal was correct in rejecting the assessment argument and correct in deciding at [52] that the Tribunal cannot assume a jurisdiction not given by statute.

17.	She said that the High Court has power to review the decision of Customs as to making an interim payment, see R (Teleos plc) v Customs and Excise Commissioners [2005] STC 1471 where the decision to refuse an interim payment was upheld by the Court of Appeal, Garage Molenheide having been considered, and R (UK Tradecorp Ltd) v Customs and Excise Commissioners [2005] STC 138 at [11]-[16].  The appropriate mechanism for the Appellant where moneys are withheld is to apply for judicial review.

18.	Miss Haynes said that the Tribunal has no jurisdiction per se to consider the lawfulness of set-off under section 81(3) or adjustment under section 25, neither being appealable matters under section 83.

19.	As to the submission that paragraph [57] of Garage Molenheide was inconsistent with judicial review being the only remedy, she said that there are no incompatible provision in the UK legislation which can be disapplied and no power to write in a jurisdiction which the Tribunal does not have.

20.	Miss Haynes said that at the time when the set-off was effected there had been no appeal.  Once the set-off had been effected it could not be undone.  There was nothing in Garage Molenheide to say that the retention when done was unlawful at the time when it was effected.

21.	She said that in Re Anglo German Breweries Ltd [2002] EWHC 2458 (Ch) Lawrence Collins J held that the lodging of an appeal does not suspend the obligation to pay the VAT.  At [87] he said that he did not consider that in Bennett Patten J intended to say that if an appeal was made the VAT would not be due.

22.	In reply, Miss Sloane said that this is a novel area not covered by precedent.  Teleos and UK Tradecorp were judicial review cases in the High Court and did not involve the hardship legislation. In Tricell the dispute concerned input tax and there was no question of an assessment, whereas here there was undeclared output tax said to be due.  She said that Garage Molenheide was the closest authority since it involved retention of input tax against disputed output tax.

23.	She said that the proposition that hardship could not arise where a set-off had already been made involved an arbitrary distinction. The principle in Garage Molenheide at [57] was plainly engaged and it was irrelevant for that paragraph when the appeal was made. The interpretation of the UK legislation for which the Appellant contended renders that legislation compatible with EU law.  If Customs are correct, they could always apply a set-off at the same time as making the assessment.  

24.	Miss Sloane said that the decision to reduce the repayment claims for 10/05 and following periods arose from decisions as to output tax just as the assessments for other periods.  Here what happened was that Customs decided that output tax was due and set that against the input tax repayable under section 81(3). Where a return is made the trader self-assesses the VAT due. However if Customs seek to recover underdeclared output the only avenue open is to assess for it.  She said that if there is a distinction between an assessment for output tax and a reduction of an input tax credit by reference to output tax that raises a problem as to the obligation to make an immediate refund under Article 18(4) of the Directive, see Garage Molenheide at [45].

Conclusions

25.	I consider first the question whether the set-off by Customs of input tax repayments due for other periods against the output tax assessed for periods 05/03 and 02/06 has the effect that the tax has been paid or deposited within section 84(3)(a), with the result that the issue of hardship does not arise and the Tribunal has no jurisdiction to consider hardship in respect of those assessments.

26.	This depends on the interpretation of section 81(3) in the light of the judgment of the Court of Justice in Garage Molenheide [1998] STC 126.

27.	Section 81(3) provides (so far as relevant),

“(3)	… in any case where – 

(a)	an amount is due from the Commissioners to any person under any provision of this Act, and 
(b)	that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to at paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the person concerned shall be discharged.”

28.	Section 73(9) provides (so far as relevant),

“(9)	Where an amount has been assessed and notified to any person under subsection (1), (2) … above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.”

29.	The following initial observations fall to be made.  Section 81(3) is expressed in mandatory terms and applies when a person is liable to pay a sum by way of VAT.  Section 73(9) deems an amount assessed to be VAT due “subject to the provisions of this Act as to appeals”, which provisions include section 84(3).

30.	Garage Molenheide was one of four linked cases which included (Case C-47/96) where the Appellant was Sanders BVBA. In Sanders the Belgian tax authorities retained a VAT credit due to the trader by reason of a contested demand for tax with a fine and penalties. The Belgian court referred two questions to the Court of Justice the first of which asked whether Article 18(4) of the Sixth Directive,

“be interpreted as permitting a member state, instead of refunding to a taxable person a VAT credit for a given tax period, or carrying it forward to a subsequent period, to ‘withhold’ the same by way of protective attachment on the basis of an additional demand in respect of an earlier tax period, where the additional tax demand is contested in law …”

The question thus concerned similar facts in that the input credit was not in dispute but was retained against disputed output tax for another period; the Belgian law provided for protective retention only whereas the UK legislation provides for set-off.  At [48] the Court of Justice said that the principle of proportionality applies to such measures and said this at [57],

“… provisions of laws or regulations which would make it impossible for the court adjudicating on the substance of the case to lift in whole or in part the retention of the refundable VAT balance before the decision on the substance of the case becomes definitive would be disproportionate.”

Although Miss Haynes said that the Appellant could seek judicial review of the decision not to make an interim payment, the High Court is not the court adjudicating on the substance of the case.  The availability of judicial review does not therefore meet the requirement that the court adjudicating on the substance of the case should be able to lift the retention.

31.	The only provision in the VAT Act 1994 which states that an amount assessed by Customs is recoverable as tax is section 73(9) which provides that it is deemed to VAT be due subject to the appeal provisions.  The qualification of subsection (9) by reference to appeals must have some meaning.  

32.	If sections 73(9), 81(3) and 84(3) read together have the effect that any set-off under section 81(3) ceases to operate once a hardship application is made the incompatibility with Garage Molenheide at [57] disappears since the Tribunal does have the power to decide that the appeal be entertained without the tax being deposited.  It is to be noted that section 84(3)(a) refers to the tax “which the Commissioners have determined to be payable”, which is consistent with section 73(9) being subject to the appeal provisions.  

33.	Miss Haynes relied on the observation by Lawrence Collins J in Anglo-German Breweries at [87] that he did not consider that in Bennett at [30] Patten J was expressing the view that if an appeal was made the VAT would not be due and on the decision of Lawrence Collins J at [93] that the VAT is due and recoverable “unless and until the Tribunal decides that it is not due in whole or in part.”

34.	It is however important to note that there was no reference to Garage Molenheide in Anglo-German Breweries and Miss Haynes did not give any explanation as to how the result for which Customs contend can be reconciled with the judgment of the Court of Justice.

35.	She relied on the fact that the set-off preceded the appeal, however she did not and could not submit that the set-off was irrevocable and would continue to take effect if the appeal succeeded.  It is to be observed that section 81(3) makes no express provision for a situation where an assessment which has been set-off is withdrawn or reduced.  Once it is clear that a set-of cannot continue to take effect or must be varied if the amount which a trader is liable to pay is reduced or found to be nil, it follows that the set-off under section 81(3) is not irrevocable and there is no reason why it should preclude a hardship application.

36.	Although there were no submissions as to this aspect, it is to be noted that section 81(3)(b) entitles Customs also to set-off sums payable by way of penalty, interest or surcharge. In practice Customs do not set-off penalties, interest or surcharges which are under appeal.  No doubt that is because it is recognised that such set-off would almost certainly be incompatible with Community Law, just as the application of section 84(2) to default surcharges and evasion penalties was held incompatible in Coleman [1999] V&DR 133 at [48]-[51].

37.	I hold therefore that the set-off under section 81(3) was subject to the appeal and the hardship application and at least until the hardship application was determined the amount determined as payable had not been paid or deposited.

38.	Between the oral hearing and the release of this decision, Customs accepted that if section 84(3) did apply to the assessments for 05/03 and 02/06 they were satisfied as to hardship.  The result is that the appeals can be entertained.

39.	In the notice of application the Tribunal was asked to direct that the input tax be repaid. This is not within the powers of the Tribunal. However I have no doubt that, subject to any appeal against this decision, the tax set-off will be repaid as in Western General Trading Ltd and in line with Customs’ Manual.

40.	The Tribunal was also invited to direct Customs to repay the £75,822 input tax withheld for 05/06.  Again this is outside the powers of the tribunal.

41.	I now turn to the question whether section 84(3)(a) applies to the decision reducing the input tax repayable for periods 10/05 to 01/06 and 03/06 and 04/06 by reason of output tax said to be underdeclared. The input tax itself is again not in dispute but the output tax is in issue. This question differs from the first question addressed, because here the input tax has been reduced by output tax for the same periods. Customs do not assert that section 81(3) applies but say that the input tax credit has been adjusted under section 25(2).

42.	Article 17.2 of the Sixth Directive gives a trader the right to deduct input tax “from the tax which he is liable to pay.” Where output tax is due relief is by deduction.  Under Article 18.4 a refund arises where authorised deductions exceed the tax due. The obligation to make an immediate refund to which the Court referred at [45] in Garage Molenheide can only refer to the excess to which Article 18.4 refers.

43.	The UK legislation is not as clear as it might be. Miss Sloane correctly pointed out that the terms of section 25 provide for deduction by the trader and make no reference to deduction by Customs from input tax otherwise due of output tax which Customs claim. She submitted that what happened in fact was that Customs made assessments to output tax in exercise of their powers under section 73. If that is correct then section 84(3) comes into play by reason of appeals against the assessments.

44.	Miss Haynes responded that the power to assess under section 73(1) is “to assess the amount of VAT due from him” which is not apt to cover a decision as to an amount due to a trader.

45.	The essential issue is whether the output tax decisions necessarily constituted assessments. The 1994 Act contains no definition of an assessment although it is clear from section 73(1) that it is separate from notification. There is no statutory form for notification. Sometimes notification is by letter, more often it is on Form VAT 655 which was used for period 04/03. That form contains columns for sums due to Customs and sums due from Customs. Sometimes Form VAT 655 is used to notify a net sum due from Customs for a period.  It is not unusual for several figures to appear both for sums due to and sums due from Customs for the one period, however there is always a net figure.  I have no doubt that the net figure is the amount assessed as due.  I do not accept that the component figures in calculating the amount due are all separately assessed. Although section 73(1) makes no reference to accounting periods it is clear from subsections (4) and (6) that assessments are by reference to accounting periods. It seems to me that section 73 involves the ascertainment by the assessing officer of a single figure of tax due which figure should take account of any VAT credit properly allowable. This approach is in my view in line with what is contemplated in Article 18.4 of the Directive.

46.	I adopt the words of Mr Colin Bishopp in Tricell UK Ltd [2003] V&DR 333 where he said at [47],

“There is in my view a clear legislative contrast between those situations in which the taxpayer is said to owe money, which give rise to assessments, and those in which the taxpayer claims the Commissioners owe money; these do not lead to assessments, but to a right of appeal if the claim is not met.”

I share Mr Bishopp’s concern expressed at [51] between the difference in treatment of a payment trader who can keep the tax pending the appeal if hardship is established and the repayment trader who must await the appeal.

47.	Miss Sloane pointed out that in Tricell UK Ltd the input tax was in issue, this does not however detract from the reasoning of Mr Bishopp.  In spite of the lack of express legislative provision for reducing input tax credit by reference to output tax which Customs consider to be due, I am not persuaded that the decisions involved assessments to output tax or determinations by Customs within section 84(3)(a) as to amounts to be payable as VAT.

48.	Accordingly I hold that section 84(3) is not engaged in respect of periods 10/05 to 01/06 and 03/06 and 04/06.

THEODORE WALLACE
CHAIRMAN

RELEASED: 9 October 2006

LON/06/763