20092

Settlement of appeal: whether open to HMRC to canvas all issues of quantum claimed, they having agreed to pay the claim “subject to verification of the amount sought”.  Yes.

EDINBURGH TRIBUNAL CENTRE

	ABERCROMBY MOTOR GROUP LIMITED
	AND
	LINN MOTOR GROUP LIMITED	Appellant(s)

-	and –

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC

Sitting in Edinburgh on Monday 19 March 2007

for the Appellant(s)	Heriot Currie, QC

for the Respondents	Ms Valentina Sloan, of Counsel

© CROWN COPYRIGHT 2007.

DECISION

Introductory
In this, the latest episode in a long running dispute between the parties, the Tribunal is asked to adjudicate upon 2 decisions contained in letters dated 30 March and 4 April 2006 where HMRC refuse to make payment in full of an amended voluntary disclosure claim.  It was amended to increase the sum claimed on 24 February 2006.

The present dispute arose from differing interpretations of a letter from the Respondents dated 15 February 2006.  The critical paragraphs of that letter read as follows:-

“You will, I imagine, be aware that the Court of Appeal has now handed down its judgment in Michael Fleming.  This did not specifically deal with claims for output tax over declared pursuant to repayment returns (i.e. under regulation 35) but the findings in relation to regulation 29 appear to apply equally to regulations 34 and 35.

We are still considering the implications of the judgment with our legal advisors but, if it is accepted, and, in any event, it is precedent law for the time being, it seems to us that, on our view of the implications of the ECJ’s judgment in Elida Gibbs your client must succeed.  Rather than engage here in further litigation, we propose, subject to verification of the amount sought, to pay your client’s claim.

I trust that, in the light of this letter, your client will now withdraw his appeal to the VAT and Duties Tribunal.

I can confirm that following Mrs Green’s call to your offices yesterday that she received the documents sent electronically detailing the amounts you consider to be due to your clients.  Please note that we have not yet received any hard copy papers.  Mrs Green will review the details supplied along with all other relevant papers and will in due course, be in contact to arrange a meeting to review the quantum of the claim”.

The passage in bold formed part of the original document.

Parties were agreed that all outstanding issues are now encapsulated in this appeal, the others being no longer pursued.

The issue for the Tribunal 
The issue for the Tribunal was encapsulated in the following passages from the parties arguments.  For the Appellants the contention was:

“Viewed objectively in light of the surrounding circumstances known to both parties at the time it was written, the letter dated 17 February 2006 constituted an agreement that the outstanding claim would be paid in full.  The words “subject to verification of the amounts sought” are properly to be construed as making payment of the claim subject to an arithmetical reconciliation to ensure that the claim was correctly calculated and took account of repayments already received by the Appellant.  “Verification” is not a term which would reasonably be understood as meaning the resolution of issues of substance regarding the merits of the Appellant’s claim.  The invitation to withdraw the appeal, which was intended to resolve all outstanding issues between the parties following the decision of 12 April 2005, implied that there were no longer any issues of substance between the parties in relation to the claim”.

For the Respondents it was:
“The Respondents submit that it is plain that the quantification of the bonus claims has never been determined by the Tribunal precisely because the previous appeals have concerned the question whether the claims are even payable in principle.  By the letter of 17 February 2006, the Respondents accepted that the claims were payable in principle.  The quantification of those claims has yet to be determined.

Interpretation of Letter
The Tribunals first impression of the letter of 17 February was that as a matter of ordinary construction it constituted an admission of liability rather than a consent to decree.  Accordingly any argument in relation to the quantum of that liability still required to be resolved.  It would not be reasonable to interpret the letter as a promise by the Respondents to pay any part of claim, which would be spurious or ill-founded, if it had not been verified.  

Both parties however said to the Tribunal that the letter of 17 February 2006 was on its face susceptible to interpretation in either way and so the Tribunal required to construe it objectively in the light of the circumstances known to both parties at the time it was written.  The circumstances will thus be considered.

The background to the dispute
The background was, in part, conveniently set out in the Respondents Statement of Case between paragraphs 1-12 which narration was accepted by the Appellants.  Those paragraphs are set out below.

1.	Abercromby Motor Group Limited ("Abercromby") & Linn Motor Group Limited ("Linn") (collectively referred to as "The Appellants") both carry on business as car dealerships from premises at 5 Tower Place, Edinburgh EH6 7BZ.  

2.	 Abercromby is currently registered for the purposes of VAT as the representative member of a VAT group under registration number 703 8287 34 and has been since 2 March 1998. Previously Abercromby had been registered for VAT under registration number 635 0152 72 in respect of the period from 1 October 1994 to 1 March 1998 and under VAT registration number 502 4348 80 in respect of the period from January 1989 until 30 September 1994.  Linn was acquired by Abercromby in around June 1996. Linn joined the VAT group registered under registration number 703 8287 34 with effect from 2 March 1998. Previously Linn had been registered under VAT registration number 476 9042 16 with effect from 1 June 1987. 

3.	On 1 May 2003, Ernst & Young, on behalf of Abercromby, submitted a voluntary disclosure claim in the total sum of £628,142.89 in respect of (1) VAT overpaid by Abercromby between 1987 and 1996 in relation to the sale of demonstrator cars ("the margin claim") and (2) VAT overpaid by Abercromby between 1987 and 1996 in relation to the payment by car manufacturers of demonstrator bonuses ("the bonus claim"). Said voluntary disclosure was submitted as a consequence of the decisions in the cases of Elida Gibbs v CEC C-317/94 and Commission v Italian Republic C-45/95 .

4.	On 30 June 2003, Ernst & Young, on behalf of Linn, submitted a voluntary disclosure claim in the total sum of £792,827.70 in respect of VAT overpaid by Linn between 1973 and 1996 in relation to (1) a margin claim and (2) a bonus claim. The value of the margin claim was £413,020.08 and the value of the bonus claim was £379,807.66.

5.	On 30 June 2003, Ernst & Young, on behalf of Abercromby, submitted a revised claim in the sum of £813,588.81. The value of the margin claim was £383,019.17 and the value of the bonus claim was £430,569.65.Between November 2003 and February 2004 there followed discussions between the Appellants' representative and the Respondents as a result of which the Respondents agreed to make repayment in respect of the Abercromby claim of a total sum of £228,579.99 (representing a payment in respect of the margin claim of £203,593.02 and a payment in respect of the bonus claim in the sum of £24,986.97) and repayment in respect of the Linn claim of a total sum of £135,472.52 (which related in its entirety to the margin claim). This decision was notified to the Appellants by letters both dated 18 March 2004 and upheld on review by a letter dated 21 June 2004.

6.	The Appellants appealed against the decisions contained in the letters of 18 March 2004 to this tribunal.  The parts of the decision which the Appellants appealed against were:

i)	The reduction of the number of demonstrator cars used as the basis for calculating the margin claim.

ii)	The disallowance of the bonus claim on the basis that it was time-barred by the three-year time limit under Regulation 29(1A) of the Value Added Tax Regulations 1995 (“the 1995 Regulations”).

iii)	The disallowance of the claim in respect of repayment periods, on the basis that it was time-barred by the three-year time limit under Regulations 34 and 35 of the 1995 Regulations and Public Notice 700/45.

7.	The appeal was heard under appeal reference number EDN/04/0041.  As the decision in the appeal states “The Tribunal was asked to adjudicate on aspects of the claim as matters of principle” (decision at page 3). The tribunal's decision in that appeal was released on 12 April 2005.

8.	On the first issue, relating to the margin claim, the tribunal heard evidence in relation to the turnover of demonstrator cars. The tribunal rejected the Appellants’ arguments and made a finding that on the basis of the evidence heard by the tribunal a figure of 3 was appropriate for the turnover of demonstrator cars to be used in the calculation of the Appellants' claims. 

9.	On the second and third issues, relating to the bonus claim, the underlying basis of the Appellants’ claim was as follows. 

10.	Dealer demonstrator bonuses are payments made, or credits allowed, by car manufacturers or sole concessionaires to dealers, when the dealer agrees to adopt the car as a demonstrator vehicle. The cars were sold by the manufacturer/concessionaire to the dealer via a finance house. Where the bonus was paid directly by the manufacturer/concessionaire to the dealer, the Respondents considered that the bonuses should be treated as the payment for a supply of services by dealers, so that output tax was due from the dealer on this supply. 

11.	On 24 October 1996, the ECJ judgment in Case C-317/94 Elida Gibbs Ltd v Commissioners of Customs and Excise [1996] STC 1387 established that discounts can be given by a supplier for his goods to someone other than his direct customer. On 21 July 1997, the Commissioner issued Business Brief BB/16/97 which stated that in the light of Elida Gibbs, the Commissioners accepted that these bonus payments should normally be treated as discounts by manufacturers and sole concessionaires which reduce the value of their supplies. If businesses believed that they had overpaid VAT in the past three years they should contact their local VAT business advice centre.

12.	The Respondents rejected the bonus claims on the basis that they were time-barred since they fell under Regulations 29 and 35 of the 1995 Regulations (tax under-claimed from the Respondents), rather than under section 80 VATA 1994 (tax over-paid to the Respondents).  As such, contended the Respondents, the claims were time-barred.   The significant background to this distinction was that the 3-year time limit under section 80 VATA 1994 had been held incompatible with European Community law in Marks and Spencer [2002] STC 1036. At the time of the hearing in EDN/04/0041, the courts had not yet found, and the Respondents did not yet accept, that parallel reasoning applied to the time limits under regulations 29 and 35 of the 1995 Regulations.

Further, the Tribunal records that at the Hearing before the Tribunal in January 2005 the parties agreed to 4 issues of principle being put before the Tribunal for decision.  These were:

1.	Frequency of turnover of demonstrators each year.
2.	Whether bonus payments should be treated as bearing input or output tax.
3.	Whether the bonus claim was time barred under Regulation 29(1)(a).
4.	Whether the Appellant could recover output tax in a period where they were due a repayment, i.e. the position of a “repayment trader”.  Parties appeared to be at one but once the Tribunal had decided those issues parties would be able to quantify the claim.

The Tribunal’s decision was issued on 12 April 2005.  Parties were unable to agree the implications of that decision and a further appeal to the Tribunal was submitted dated 12 July 2005 against the Respondents statement of their position following the Tribunal decision of 12 April 2005.

A Hearing took place on 5 October 2005 on an application by the Respondent to strike out the appeal dated 12 July 2005.  That application was refused and parties were allowed a Hearing on outstanding issues.  The Hearing on 5 October 2005 followed upon an amendment to the original grounds of appeal and that amendment broadened the dispute between the parties.  The second appeal was set down for a Hearing on 2 and 3 March 2006 and it was prior to that Hearing that the letter of 17 February 2006 was written.  The hearing did not proceed but the Appellants, perhaps recalling the line from Virgil, “Timeo Danaos et dona ferentis” refused to withdraw their appeal.

What remained in dispute after 17 February 2006
It is the Tribunals view that on no view can the letter of 17 February 2006 be construed as an agreement to pay whatever the Appellants asked.  In any event no detailed verification of the part of the Appellants claims which remained in issue had been undertaken.  The Respondents, as it turns out erroneously, had taken the view that the Appellants claim was time barred and accordingly that detailed consideration of it was not necessary.  They had, however, as was pointed out by their counsel set out their view (stated to be “from the current Elida table”) of various matters of substance including whether substantial parts of the claim were outside the scope of the tax.  They appeared to relate this to “Elida tables”.

The Tribunal does not intend and nor has it the material before it at this stage to form any view as to the substance or merits of the Respondents contention in relation to such matters.  It is sufficient to say that it has not been determined by the Tribunal and is not a matter of agreement between the parties what significant elements of the Appellants claims consist of or whether they are allowable.  For example it may be that whether transactions were outside the scope of the tax may not matter if tax has been paid and is due to be repaid as not being tax due, time bar being out of the question.

Decision
In the light of the background and the correspondence together with the reservations expressed in a letter of 17 February not only as to “verification” but also Mrs Green’s duty to review the quantum and further considering that the Appellants felt able to submit a revised quantification of their claim subsequent to 17 February, the Tribunal has come to the view that it cannot accede to the Appellants motion to find that the only matters left outstanding were arithmetical.

The Tribunal is of opinion that “verification” means more than checking sums.  It involves a demonstration of the truth or correctness of the claim by facts and circumstances (S.O.E.D)

The Tribunal adopts the final 2 sentences of the Skeleton Argument for the Commissioners which read “the only agreement is that the claim is allowable in principle; if the quantum of the claim is grossly inflated, the Commissioners are entitled to dispute it.  To claim that they have tied their hands in this regard is not a reasonable reading of the letter of 17 February 2006, either in the terms of the letter itself or in the context of the surrounding circumstances”.

It follows that if parties are unable to agree quantification they must come back to the Tribunal to have that adjudicated upon.

It was noted that if the matter did require to come back to the Tribunal all issues with regard to quantification are open including the legitimacy or otherwise in the particular case of the Respondents founding upon “Elida tables” and the position of items of tax they may appear to have obtained and retained erroneously because certain items are said by them to be ‘outwith the scope’.

This result is in many ways unfortunate but the Tribunal is quite clear that no binding agreement or adjudication was arrived at in relation to quantum of the Appellants original claims and the whole matter of quantification is open.  

Finally it should be noted that neither party applied for expenses.  If they had done so the Tribunal would have reserved all consideration of expenses so that the reasonableness of the position of the parties throughout can be ascertained in the light of the full facts and ultimate decision.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  30 MARCH 2007

EDN/06/34