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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Marks and Spencer Plc v Appellant [1998] EWHC 1143 (Admin) (21 December 1998) URL: http://www.bailii.org/ew/cases/EWHC/Admin/1998/1143.html Cite as: [1999] 1 CMLR 1152, [1999] BTC 5073, [1999] STC 205, [1999] Eu LR 450, [1999] BVC 107, [1998] EWHC 1143 (Admin)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(CROWN OFFICE LIST)

		Royal Courts of Justice The Strand
		21st December 1998

Introduction

There are before me two appeals and one judicial review application. The appeals are against:-

(1) The Tribunal's decision, released 30 January 1997, dismissing Marks and Spencer's appeal against a decision of the Commissioners that repayment of VAT overpaid in respect of teacakes would unjustly enrich Marks and Spencer ("the unjust enrichment decision");

(2)(A) An appeal against the decision of the Tribunal, released on 22 December 1997, in which the Tribunal declined jurisdiction save to the extent that Marks and Spencer asserted enforceable Community law rights ("the jurisdiction decision");

(2)(B) The decision of the Tribunal, released on 22 April 1998, that Marks and Spencer had no enforceable Community rights in relation to its claim to repayment save in respect of the period 1991 to 31 July 1992 but that during that period those rights had not been infringed ("the three year cap decision").

The proceedings seeking judicial review are designed to include those issues not dealt with in the appeals. The appeal in the unjust enrichment case concerns chocolate teacakes: a dome-shaped confection covered in chocolate with a cake-like substance underneath supporting a mound of marshmallow. From 1973 Marks and Spencer accounted to the Commissioners for VAT at the standard rate. In September 1994 the Commissioners acknowledged that the teacakes should have been zero-rated. On 10 March 1995 Marks and Spencer claimed repayment of all the VAT it had accounted for (some £3.5 million) pursuant to section 80 of the VAT Act 1994 which replaced section 24 of the Finance Act 1989. The Commissioners invoked the defence provided by section 80(3) of the 1994 Act namely that repayment would unjustly enrich Marks and Spencer save for 10% of the claim, which was accepted subject to the three year limit for retrospective refund claims.

On 18 July 1996 the Paymaster General announced the Government's intention to introduce a three year limit for retrospective refund claims to come into effect from that date, subject to Parliamentary approval. On 30 October 1996 Marks and Spencer made a claim for some £2.6 million. This claim related to gift vouchers. From 1991 Marks and Spencer had charged VAT on the full face value of gift vouchers rather than on the cash actually received in exchange for vouchers i.e. the subjective value of the vouchers. The European Court of Justice had decided on 24 October 1996 in Argos Distributors Ltd v. Customs and Excise Commissioners (Case C-288/94) [1996] ECR 1-5311 that Article 11A of the Sixth VAT Directive (Council Directive 77/388)required the subjective value to form the basis of the VAT charge. On 4 December 1996 Parliament made a resolution pursuant to the Provisional Collection of Taxes Act 1968 that the three year cap should be imposed with effect from 18 July 1996. Legislation imposing that cap was enacted in the Finance Act 1997 on 19 March 1997. Accordingly the Commissioners applied the cap to 10% of Marks and Spencer's claim in relation to teacakes and the whole of the gift vouchers claim. The appeal against the Tribunal's three year cap decision concerns both teacakes and gift vouchers.

In relation to the claim in respect of gift vouchers in the period 1991 to 31 July 1992, it is accepted that Marks and Spencer has enforceable rights under Community law; the only issue is to the extent to which they were infringed by the application of the three year cap. In relation to the claim for repayment in respect of VAT paid on teacakes and in relation to the remaining period of the claim in respect of gift vouchers the crucial question is whether Marks and Spencer has any rights under Community law which it can assert and the nature of those rights.

Has Marks and Spencer Enforceable Community law rights in Relation to Their Claim to Repayment?

Marks and Spencer contend that the Commissioners' rejection of its claim for repayment of Value Added Tax, save insofar as it related to tax paid within three years of the claim, infringes its enforceable Community rights in three ways:-

1. the three year cap violates the principle against retroactivity;

2. it breaches the principle of equivalence, and

3. it breaches the principle of effectiveness.

It is, thus, essential to Marks and Spencer's claim to repayment of VAT overpaid in respect of tea cakes and its claim to repayment of overpayments of VAT in respect of vouchers (save for the period between 1991 and 1 August 1992) that it can assert enforceable Community law rights. Marks and Spencer can only rely upon breaches of the Community law principles upon which it bases its case if it can identify the breach of an enforceable Community law right. The Commissioners contend and the Tribunal held that the right to recovery of overpayments of VAT is purely a matter of domestic law in which no Community law principles are engaged.

Community law does not expressly confer any right to recover overpayments of VAT. There are no provisions within Council Directive 77/388 as amended by Council Directive 92/77 of 19 October 1992 ("the Sixth Directive") for repayment of VAT (see BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v. Greek State case C-62/93 [1995] ECR 1-1883). However, if an amount of tax is charged by a Member State in breach of the rules of Community law there is a right to obtain a refund of the amounts charged.

That right was described by the European Court of Justice as:-

"the consequence and compliment of the rights conferred on individuals by the Community provisions as interpreted by the Court" (see paragraph 40 of BP Supergas).

Thus there are cases where Member States had imposed taxes in breach of Community law in which individuals were held to be entitled to invoke a Community law right to repayment which carried with it Community law principles (the imposition of health inspection charges in Amministrazione delle Finanze dello Stato v. Sp A San Giorgio Case C-199/82 [1983] ECR 1-3595, the imposition of taxation on various alcoholic products to protect domestic aquavit production in Hans Just v. Danish Ministry for Fiscal Affairs Case 68/79 [1980 ]ECR 1-501, the imposition of dock dues in Societe Comateb v. Directeur general des douanes et droits indirects Case C/192/95 [1997] ECR 1-165, the levy of parafiscal charges on sales of finished petroleum in Les Fils de Jules Bianco SA v. Directeur Général des douanes et droits indirects [1988] ECR 1-1099, and the application of VAT calculated on the basis of a price at the first marketing stage contrary to Article 11 of the Sixth Directive in BP Supergas itself). In all those cases the taxpayer was entitled to assert breaches of Community law principles (in particular of equivalence and effectiveness) for the very reason that the imposition of the tax in question was itself a breach of a right conferred on the tax payer by a Community provision.

Accordingly, Marks and Spencer seeks to identify the breach of a community law right conferred on it by Community provisions. In the claim in relation to tea cakes Marks and Spencer assert a right to pay no more than the correct rate of VAT. If it can establish that right as a Community law right then the overpayments were in breach of that right; it can rely upon a Community law right to repayment in accordance with Community law principles as a consequence of that breach.

Marks and Spencer seek to establish the right to pay no more than the correct rate as a right conferred by Community law in two ways:-

1. in reliance upon the direct effect of the Sixth Directive; and

2. by contending that, even if it cannot rely upon a directly effective right, Community law applies because the imposition of a zero rate is within the ambit of Community law.

A Directly Effective Right

It is, to use the argot of the European Court of Justice, settled law that an individual may assert an enforceable Community law right on the basis of a Directive only where:-

1. The Member State has failed to transpose or has failed properly to transpose the Directive into domestic legislation. In such circumstances, a Member State is estopped from pleading against individuals its own failure to perform its obligations (see Ursula Becker v. Finanzamt Münster-Innenstadt (Case 8/81) [1982] ECR 1-53 paragraph 24).

2. The provision of the Directive upon which reliance is placed must be unconditional and sufficiently precise (see Becker paragraph 25 page 71).

In relation to employers' obligations under the social policy Directive 91/533 in Helmut Kampelmann and Others v. Landschaftsverband Westfalen-Lippe and Others [1997] ECR 1-6907 the Court recently said:-

"Since the date on which it was transposed, individuals can no longer rely on those provisions unless the national implementing measures are incorrect or inadequate in the light of the Directive." (at paragraph 42)

Where, on the contrary, the Member State has properly transposed a Directive:-

"its effects extend to individuals through the medium of implementing measures adopted by the Member State concerned" (see Becker paragraph 19 page 70).

But where the Directive has been properly implemented, it may be used not as a source of rights but as a standard against which the domestic legislation must be tested so as to ensure that the domestic legislation is construed in accordance with the Directive which the domestic legislation was designed to implement. Thus in Felicitas Rickmers-Linie KG & Co v. Finanzampt fur Verkehrsteuern, Hamburg [1983] ECR 1-2771 once it was established that Germany had correctly implemented Article 5(2) of Directive 69/335 (concerning indirect taxes on the raising of capital) the construction of Article 5 remained relevant since German law had to be interpreted consistently with the Directive whose effects reached individuals through the domestic implementing measures. But the Directive was not itself the source of rights (see paragraphs 24 to 26 of the judgment and the final paragraph of Advocate General Sir Gordon Slynn's opinion at page 2792 cited by the Tribunal at page 175 G-H of its decision on the three year cap).

It is necessary, at this stage, to emphasise that in order to make good the first argument Marks and Spencer must establish that the Sixth Directive is the source of the right it asserts. This is because it cannot use the Sixth Directive as a guide to interpretation of the Value Added Tax Act 1994. Section 80 of the 1994 Act has no precursor in the Sixth Directive. There is no provision requiring repayment in that Directive. Thus, to establish this argument Marks and Spencer must identify a provision of the Sixth Directive which has direct effect as a source of the claimed right.

Does the Sixth Directive confer a Right to be Taxed at the Proper Rate?

Marks and Spencer's argument depends upon an analysis of Articles 12 and 28 of the Sixth Directive. Before turning to the details of the argument, I observe that the insuperable problem which Marks and Spencer faces is that the Sixth Directive has been implemented in domestic legislation. Marks and Spencer cannot point to any provision of the Sixth Directive relevant to the claim in relation to teacakes which the United Kingdom has failed properly or at all to implement. In those circumstances Marks and Spencer has failed to overcome the first condition provided in the settled law of the jurisprudence of the European Court of Justice in Becker and in the cases which I have already cited. In such circumstances it is not open to Marks and Spencer to assert any enforceable Community law right on the basis of the Sixth Directive. Once the Sixth Directive had been transposed into the legislation of the United Kingdom it is no longer possible for Marks and Spencer's to rely upon provisions of the Sixth Directive as a source of the right it asserts. In those circumstances, in my judgment Marks and Spencer's assertion of a right based upon a directly effective provision of the Sixth Directive fails. Although unnecessary for the purposes of this argument, I shall consider whether the relevant provisions are unconditional and sufficiently precise because the answer may cast light on the second issue.

Zero Rate under the Sixth Directive

Marks and Spencer's first argument relies, in part, upon the submission that the zero rate which the Commissioners failed to apply to teacakes is a rate of VAT subject to the Sixth Directive. This argument depends upon an analysis of Article 12 and Article 28. Article 12(1) of the Sixth Directive provides:-

"the rate applicable to taxable transactions shall be that in force at the time of the chargeable event."

Article 12(3)(a) provides:-

"the standard rate of VAT shall be fixed by each Member State as a percentage of the taxable amount and should be the same for the supply of goods and for the supply of services. From 1 January 1997 to 31 December 1998, this percentage may not be less than 15 ...

Member States may also apply either one or two reduced rates. These rates shall be fixed as a percentage of the taxable amount which may not be less than 5% and shall apply only to supplies of the categories of goods and services specified in annex H."

Member States are obliged to apply the rate in force at the time of the chargeable event. But in relation to standard rates and reduced rates the Directive does not provide a particular rate but rather sets a minimum. The power to provide a rate lower than 5% or a zero rate is contained in the provisions of Article 28. Article 28(2) provides:-

"notwithstanding Article 12(3) the following provisions shall apply during the transitional period referred to in Article 28L

(a) Exemptions with refund of the tax paid at the preceding stage and reduced rates lower than the minimum rate laid down in Article 12(3) in respect of the reduced rates, which were in force on 1 January 1991 and which are in accordance with Community law, and satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained."

Article 28L provides that the transitional arrangements should be replaced by a definitive system and required the Commission to report to the Council on the operation of the transitional arrangements and submit proposals for a definitive system. It was expected that the transitional arrangements would apply until 31 December 1996. But Article 28L provides:-

"the period of application of transitional arrangements shall be extended automatically until the date of entry into force of the definitive system and in any event until the Council has decided on the definitive system."

No definitive system has been devised or agreed upon. The system of that which have been described as "super reduced rates" and zero rates, which the Sixth Directive expected to be transitional, remains in force to this day.

Marks and Spencer points out that since standard rates and reduced rates for which minima are set within Article 12 fall within the scope of that provision, it must follow that the exercise of any transitional power to set a super-reduced rate or a zero rate must also fall within the scope of that provision. All rates, therefore, are Community law rates and the requirement to pay at the wrong rate breaches the right to be taxed at the appropriate rate.

In support of those submissions Marks and Spencer refers to the extent to which the Community retains control over the power to set a zero rate in addition to the transitional quality of the power. The power must be exercised in accordance with Community law and satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967. An example of the effect of these restrictions upon the power conferred by Article 28(2), is to be found in EC Commission v. UK [1988] ECR 1-3127 in which the Commission alleged that the United Kingdom's provision of a zero rate in relation to, inter alia, supplies of animal feeding stuffs infringed the last indent of Article 17 of the Second Directive because the provision was not made for clearly defined social reasons and did not benefit the final consumer. In the course of his opinion Advocate General Darmon drew a distinction between the system of zero rating and the exemption system provided for in Article 28.

"Only a retailer who sells an exempted property to a "final consumer" does not pass on the VAT which he has paid but obtains a refund from the tax authorities. The zero rating system takes a different approach. A list of goods and services designated by the national legislature is subject to purely notional taxation, under which no VAT is actually charged either on delivery or at earlier stages in the marketing stage. Naturally there is nothing to refund to the retailer." (See paragraph 4 of the opinion at page 3139).

The Court did not need to comment upon that distinction in concluding that certain of the supplies failed to benefit final consumers but observed:-

"it should be pointed out first of all the Commission does not dispute the legality of the zero-rating system in general; it considers that system to be essentially equivalent to the exemptions provided for by Article 28 of the Sixth Directive ... (paragraph 10 page 3151)".

In its report on reduced rates pursuant to Article 12(4) dated 13.11.1997 the Commission states:-

"under the transitional arrangements of 28(2)(a) to 28(2)(f), some Member States are allowed to apply to a limited number of goods and services exemptions with refund of the tax paid at the proceeding stage (so called zero rates) or reduced rates lower than the minimum laid down in Article 12(3) (so called super-reduced rates)." (Page 3).

Thus, despite Advocate General Darmon's distinction, zero rates are not distinguished from exemption with refund. In my judgment it is unnecessary to resolve the question as to the appropriate classification of a zero rate. The power to provide for a zero rate derives from, Article 28(2)(a) of the Sixth Directive whatever the appropriate classification of a zero rate. The real question is whether it follows from the fact that the power is derived from the Sixth Directive and circumscribed by Community restrictions that the zero rate is a Community rate, to be applied as a matter of Community law.

It does not seem to me that the argument is advanced by Marks and Spencer's reference to decisions of the VAT Tribunal in relation to the principles of unjust enrichment, in which it applied principles of Community law in relation to the defence of unjust enrichment. (see Computeach International Ltd v. Commissioners of Customs & Excise [1994] VATTR 239 and National Provincial Building Society v. Commissioner of Customs & Excise [1996] V&DR 153). Both the Commissioners and Marks and Spencer agree that any decision as to the defence of unjust enrichment provided in Section 80 of the 1994 Act should be informed by the approach of the European Court of Justice. Nor can Marks and Spencer gain any assistance from the opinion of the Advocate General in Belgocodex v. Konigreich Belgien (Case C-381/97) Opinion of A-G 17 September 1997. That case concerned the power of a Member State pursuant to Article 13 part C of the Sixth Directive to grant to taxpayers the right to opt for taxation on leasing and letting of land which would otherwise, pursuant to Article 13B of the Sixth Directive, be exempt from tax. The plaintiff contended that the Belgian Government had exercised its power to grant the right to opt for taxation but had then retrospectively withdrawn it. The Advocate General concluded that whilst Belgium was entitled to reintroduce the tax exemption for which express provision was made in Article 13B of the Directive, it could not do so where that would have the effect of retroactively withdrawing the right to deduct input tax under Article 17 (see paragraphs 31 and 34 of the opinion). A taxpayer who had made it clear that he wished to use the option could not have his consequential right to deduct input tax under Article 17 retrospectively withdrawn (see paragraphs 31, 34, 38 and 39 of the opinion). Marks and Spencer contends that this case affords an example of the violation of the Community law rule against retrospectivity in relation to the right to deduct input tax. There is, it contends, no reason why that and similar principles should not apply equally to output tax.

In my judgment the case does not assist in establishing Marks and Spencer's contentions. The Advocate General's opinion makes specific reference to the principle that once a Member State subjects supplies and services to the general VAT regime it can no longer make any subsequent use of a facility under Article 28(3) or apply a zero or super-reduced rate (see Commission v. Spain (Case No. C-35/90) [1991] ECR 1-5073 cited by the Advocate General at paragraph 23). The Advocate General drew the distinction between the prohibition against further use of a facility once a Member State had already regulated or taxed a specific sector under the Sixth Directive and the situation in Belgocodex where Belgium wished to revoke its use of the facility under Article 13 part C and return to the basic rule of exemption under Article 13B. The Advocate General remarked:-

"as Belgium has however re-introduced tax exemption which was expressly provided for in the Directive... it is not apparent why a Member State should be prohibited from doing so. It must therefore still be maintained that a Member State that makes use of the facility under Article 13 part C can also repeal this once more." (Paragraph 31).

The only reason why the Advocate General took the view that the optional facility under Article 13C of the Sixth Directive could not be withdrawn retroactively was because of the effect it might have, if withdrawn retroactively, on a right to deduct input tax which a taxpayer had already made clear it wished to exercise. The case does not, in my judgment, afford any basis for a general proposition that Community law principles apply to all issues arising in relation to VAT.

On the contrary, Belgocodex seems to me to underline a particular difficulty with which Marks and Spencer is faced in seeking to derive any right on the basis of Article 12. The right which it asserts is based upon the combination of Article 12 and Article 28(2)(a). Article 28(2)(a) is permissive; a Member State may take advantage of the facility afforded by Article 28(2)(a) and a Member State may return to a non-exempt system (imposing either a standard or reduced rate under Article 12). Once it has done so it cannot return to a system of exemption. The right which Marks and Spencer asserts is contingent upon the United Kingdom's choice to rely upon the facility afforded by Article 28(2)(a). It cannot identify the content of any right by reference to Article 12 alone. For this reason, a claim based upon the direct effect of Article 12 must fail because Marks and Spencer could not overcome the second hurdle of settled law expressed in Becker, namely that the right be unconditional and sufficiently precise. The right upon which the plaintiff in Belgocodex could rely was the right under Article 17. There is no question in this case of any retrospective withdrawal of the provision of a zero rate. Thus, in relation to its first argument Marks and Spencer must fail because it cannot rely upon an unconditional and sufficiently precise provision of the Directive.

Are Community Law Principles engaged because all VAT is Community Based and within the Field of Community Law

In its alternative argument Marks and Spencer seeks to establish that Community law principles apply notwithstanding that the Directive has no direct effect. It is contended that Community law has "occupied the field" in the application of VAT. In exercising the power under Article 28(2)(a) to impose zero rating the United Kingdom is acting in accordance with a permission conferred on Member States by the Community but nevertheless acts within the scope of Community law. It is contended that an analogy may be drawn with the common agricultural policy in respect of which, it may be recalled, the Community retains sovereignty and Member States who act independently must do so as trustees of the Community interest. Thus, it is said, Community law principles apply.

In support of that submission Mr Vaughan QC, on behalf of Marks and Spencer, refers to R v. Ministry of Agriculture, Fisheries and Food, ex parte Bostock (Case C-2/92) [1994] ECR I-955 which concerned the power of a Member State to award compensation under the milk quota scheme. The European Court of Justice held that the power must be exercised in accordance with Community law principles. A tenant who had surrendered his tenancy and lost his milk quota, sought compensation. The Court ruled that, although Community law principles necessary to protect fundamental rights in the Community legal order applied, there was no principle which required a Member State to implement a scheme for compensation. It stated at paragraph 16:-

"the requirements flowing from the protection of fundamental rights in the Community legal order are also binding on Member States when they implement Community rules ... the Member States must therefore, as far as possible, apply those rules in accordance with those requirements."

That principle presupposes that the Member State is exercising a power within the scope of Community law. The Member State will only be so acting where there has been a total transfer of sovereignty or "competence" to the Community. The Community has total competence in respect of agriculture. But Bostock provides no guidance as to the logically prior question as to whether the same is true of VAT.

The Court's statement of principle in Bostock must not be confused with the principle that a Member State exercising powers in relation to which it has sole competence must not do so in circumstances which infringe a principle of the Treaty. Such a case was Phil Collins v. Intrat Handelsgesellschaft mbH (Case C-326/92) [1993] ECR 1-5145. Member States are entitled to provide their own detailed rules for the protection of literary and artistic property. But in so doing they are obliged to avoid any infringement of specific provisions of the Treaty such as Article 7 prohibiting discrimination on the grounds of nationality. In Phil Collins the Court held:-

"... the first paragraph of Article 7 of the Treaty must be interpreted as precluding legislation of a Member State from denying, in certain circumstances, to authors and performers from other Member States ... the right, accorded by that legislation [sic] the nationals of that State, to prohibit the marketing, in its national territory the phonogram manufactured without their consent, where the performance was given outside its national territory". (Paragraph 33 page 1-5182)

The essential distinction between Bostock and Phil Collins is between a permission afforded to a Member State to decide whether to act or not in an area where the Community is sovereign and on the other hand, the right of Member States to act independently in an area where the Community does not have competence. In an area where the Community has competence Member States must act in accordance with fundamental principles laid down by the European Court of Justice to protect fundamental rights. In an area where the Community does not have competence Member States may act freely so long as they do not infringe provisions of the Treaty, which is part of the law of those Member States. The distinction was explained by Laws J in R v. Ministry of Agriculture, Fisheries and Food, ex parte First City Trading Ltd and others [1997] EuLR 195:-

"Where action is taken, albeit under the domestic law, which falls within the scope of the Treaty's application, then of course the Court has the power and duty to require that the Treaty be adhered to. But no more; precisely because the fundamental principles elaborated by the ECJ are not vouchsafed by the Treaty, there is no legal space for their application to any measurable decision taken otherwise than in pursuance of Treaty rights or obligations."

He contrasted this position with a measure adopted pursuant to Community law:-

"The position is altogether different where a measure is adopted pursuant to Community law; ... then, the internal law of the ECJ applies. ... decisions of the Member States are likewise subject to the Community's internal law when and to the extent that they are taken so as to implement Community law, or must necessarily rely on it ... This must be so, since in all such instances the Member States' domestic law is no more than the vehicle for a measure whose validity falls to be tested according to the law of the Community. If the Member State were in such cases permitted to legislate or take other action purely according to its own rules, freed from the constraints and disciplines of the Community's internal law, the legal regime of the Community would plainly lack harmony and uniformity." (See page 211)

The dichotomy to which Laws J refers is between domestic measures in respect of which the fundamental principles of Community have no application save in so far as they are enshrined in specific provisions of the Treaty and measures adopted pursuant to Community law. In that category of measures governed by the principles of Community law Laws J included:-

"measures which Community law requires, such as, for example, law which is made to give effect to a Directive. It includes also an act or decision done or taken by a Member State in reliance on a derogation or permission granted by Community law; as where for instance, the restriction on imports or exports is sought to be justified by reference to Article 36 of the Treaty ... the measure is necessarily a creature of the law of Europe. Community law alone either demands it, or permits it." (210 D-E).

It is true, as Mr Vaughan QC contends, that the imposition of a zero rate is in accordance with a permission granted by Article 28. But that permission is to be distinguished from the permission or choice afforded to a Member State acting within a field in which the Community has sole competence.

At the heart of this dispute lies disagreement as to the extent to which Member States have yielded sovereignty in relation to VAT. In my judgment sole competence or sole sovereignty has not been surrendered to the Community. Article 99 of the Treaty makes it clear that in the field of indirect taxation sovereignty has not been totally surrendered. Article 99 provides:-

"The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market within the time-limit laid down in article 7A."

Thus the Treaty provides that harmonisation should take place only to the extent to which it is judged necessary for the functioning of the internal market. The very existence of the power to impose a zero rate for a transitional period within the constraints identified in the last indent of Article 17 of the Second Directive identifies the limits of harmonisation beyond which, at present, the Community does not think it necessary to go for the purposes of the internal market. Such a power is the antithesis of harmonisation. Provided the measures fall within the scope of Article 28(2)(a) and comply with its restrictions, Member States which choose to exercise the facility are not acting within the scope of Community law because they are not acting in an area in which the Community requires harmonisation. Member States retain sovereignty in that limited respect because, at least for a transitional period, the Community does not think it necessary to achieve harmonisation in that limited area for the purposes of the internal market.

In my judgment Belgocodex (q.v. supra) affords an example of an area in which harmonisation is not considered necessary and thus Member States retain sovereignty. Marks and Spencer draws an analogy between the exercise of the optional facility under Article 13 part C of the Sixth Directive and the option under Article 28(2)(a). The Advocate General's opinion was that the abrogation of the facility under Article 13 part C and the reintroduction of the exemption under Article 13B was not prohibited. He was of the opinion:-

"(The First and Sixth Directive) ... do not prohibit a Member State, which has made use of the facility provided for in Article 13 part C of the Sixth Directive and has granted the right to its tax payers of opting for taxation of specified leases of immovable property from repealing this right of option by subsequent legislation - even retroactive legislation - and so reintroducing the exemption without restriction." (Paragraph 39).

However, as I have already recalled, such retroactive legislation was only permitted where it did not interfere with vested rights under Article 17 of the Sixth Directive. The Advocate General continued:-

"This however only applies to the extent that rights to deduct input tax (within the meaning of Article 17 of the Sixth Directive) which have already arisen as a result of the tax payer making it clear that he wishes to use the option, are not infringed." (Paragraph 39).

The Belgian repeal of legislation which permitted a taxpayer to deduct input tax interfered with rights conferred by Article 17 to the extent that the taxpayer had already indicated that he wished to exercise such rights. Thus the Belgian legislation repealing the right to opt for taxation retroactively was a mis-implementation of Article 17 to the limited extent that taxpayers had already stated their intention to exercise the right under Article 17. There is, in my judgment, no analogy in this case. The power to impose zero rating pursuant to Article 28(2)(a) was not retrospectively repealed. There was, in respect of teacakes, no mis-implementation of Article 17. On the contrary, in my judgment, Belgocodex presents the mirror image of the instant case. Once the facility was exercised under Article 13 part C granting taxpayers the right to opt for taxation, both the Member State and taxpayers exercising their right fell within the taxing provisions of Sixth Directive. In contrast, where the option is exercised under Article 28(2)(a) and a zero rate is imposed, Member States and taxpayers fall out with the Sixth Directive. The power to afford exemption exists because of the limitations contained within Article 99 of the Treaty from which the Directive is derived. The exercise of the power under Article 28 is an exercise which flows from a retention of sovereignty; a retention of sovereignty which is permitted by Article 99. Article 99 of the Treaty is to be distinguished from other Articles of the Treaty such as Article 39 in which sovereignty is transferred solely to the Community, because it envisages a partial retention of sovereignty. The Community's decision as to the need for harmonisation, expressed in the Sixth Directive, provides the line of demarcation between the sovereignty of the Community and the sovereignty of Member States. Member States are free to choose provided they comply with the restrictions. Their power to act independently is inconsistent with the harmonisation imposed by Article 99 of the Treaty and the Sixth Directive.

In R v. Customs & Excise ex parte Lunn Poly [1988] 2 CMLR 560 the taxpayer complained that the introduction of insurance premium tax at two rates was incompatible with Community law. Insurance premium tax was introduced pursuant to a power conferred by Article 33 of the Sixth Directive which provided inter alia:-

"This Directive shall not prevent a Member State from ... introducing taxes on insurance contracts."

It was contended that the power was exercisable within the scope of a Community enabling provision or authorisation. The Divisional Court concluded that the exercise of that power was merely an exercise of retained sovereignty and not action pursuant to an enabling provision or authorisation. It accepted the submission of the Commissioners that under Article 99 of the Treaty:-

"The Member States have yielded sovereignty only to the extent that harmonisation has been imposed but not otherwise and that Article 33 of the Sixth Directive is consistent with that proposition in that it implicitly recognises the continuing sovereignty and is not an enabling provision." (570)

The Court rejected the proposition that fundamental rights deriving from the jurisprudence of the Court apply where there is "a sufficient Community context". It concluded that if general principles apply whenever there is a sufficient Community context that would:-

"involve a wholly unwarranted encroachment on sovereign powers." (570)

That case is, in my judgment, authority for the proposition that unless the taxpayer can demonstrate that a Member State is acting in circumstances where uniformity has been imposed:-

1. the exercise of a power under an enabling provision, be it Article 33 or Article 28, is an exercise of continuing sovereignty,

2. there is no warrant for applying Community law or principle on the basis of a "sufficient Community context", and

3. the application of Community law principles in such circumstances would constitute an infringement of the sovereignty retained by Member States.

True it is that in ex parte Lunn Poly the United Kingdom introduced a tax which was not VAT but the distinction between the exercise of that power under Article 33 and the exercise of the power to impose a zero rate makes no difference. They are both examples of actions taken outwith the scope of harmonisation and thus in an area where Member States retain sovereignty.

For those reasons I conclude that in relation to the teacakes claim Community law principles do not apply. The imposition of a zero rate in respect of teacakes was a purely domestic matter. The right to recover overpayments under Section 80 arose because of a breach of domestic law. It did not arise as a result of a breach of Community law and thus no Community right to repayment arises. In those circumstances Community law principles do not apply to the right to repayment in respect of teacakes under Section 80 of the 1994 Act.

The Vouchers Claim

There is an important distinction between the voucher and the teacake claims. The overpayment in respect of vouchers arose because from 1991 Marks and Spencer had accounted for the VAT on the basis that the consideration represented by the face value of the voucher was the value of the supply for VAT purposes. In Argos Distributors Ltd v. Customs and Excise Commissioners (Case C-288/94) [1996] ECR 1-5311 the European Court of Justice concluded that Article 11A(1)(a) of the Sixth Directive meant that the consideration represented by the voucher is not its face value but the sum actually received by the supplier who had sold the voucher at a discount. As the Tribunal fully explained in its decision on the three year cap (paragraphs 22 to 26), when Marks and Spencer began to sell gift vouchers in 1991 Section 10(3) failed properly to implement Article 11A(1) as interpreted by the European Court of Justice. But on 1 August 1992 Section 10(3) was substituted by the Finance (No 2) Act 1992 which provided:-

"(3) If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the tax chargeable, is equivalent to the consideration."

Notwithstanding that change, the Commissioners failed to interpret that domestic provision in accordance with Article 11A(1) as interpreted by the European Court of Justice in Argos. It persisted in collecting VAT on the incorrect basis that the VAT was chargeable on the face value of the voucher. The Commissioners contend that the amendment of Section 10(3) is significant. Before 1 August 1992 the United Kingdom had failed properly to implement Article 11A(1). Thus, in accordance with the settled law in Becker Article 11A(1) was directly effective, a source of rights for Marks and Spencer carrying with it Community law principles. But, contend the Commissioners, once Section 10(3) was substituted by the Finance (No 2) Act 1992, Article 11A(1) was properly implemented and the only failure was the Commissioners' wrong construction. Marks and Spencer can no longer rely upon the Article as a direct source of rights, it is of significance only as a measure in accordance with which the domestic provisions must be interpreted. Marks and Spencer's rights after 1 August 1992 are derived from domestic provisions. The Commissioners continued imposition of a rate based upon the face value of the voucher was a breach of a domestic provision when properly interpreted in accordance with the Directive.

Marks and Spencer contend, on the other hand, that Community law principles apply because the Directive was not properly applied. Its position, so it asserts, should be no different before or after 1 August 1992 because the Commissioners, notwithstanding the substitution of Section 10(3) of the 1994 Act, persisted in their mis-application of Article 11A(1). It says that just as it and Argos are entitled to rely upon the principles of Community law at a time when the United Kingdom had failed properly to implement the Directive, so too it is entitled to rely upon those principles when the Commissioners failed to interpret the domestic measure in accordance with Article 11A(1). It asserts that Argos was repaid the overpaid VAT, although the Commissioners say that Argos' claim was capped in respect of its claim after the Finance Act 1997 came into operation.

There is no doubt that:-

"The requirements flowing from the protection of fundamental rights in the Community legal order are also binding on Member States when they implement a Community rule and that Member States must therefore, as far as possible, apply those rules in accordance with those requirements." (See R v. Ministry of Agriculture, Fisheries and Food, ex parte Bostock (Case C-2/92) [1994] ECR 1-955 at paragraph 16.

Thus the provisions of the 1994 Act which purport to implement Article 11A(1) must not, for example, violate the principles against discrimination or proportionality. The 1994 Act in the words of Laws J in ex parte First City Trading Ltd (211 E-F):-

"is no more than the vehicle for a measure whose validity falls to be tested according to the law of the Community".

That is not, however, to say that the Directive remains a source of rights upon which the taxpayer can rely. The United Kingdom provision must be interpreted in the same way as the Directive. But the effects of the Directive reaches taxpayers through the intermediary of the implementing measures, in the instant case through Section 10(3). A taxpayer, such as Marks and Spencer, cannot rely upon the Directive as a direct source of rights.

Felicitas (q.v. supra) demonstrates that approach. In that case the issue was whether, in the context of charging a limited partnership capital duty, the shares of that limited partnership should be deemed to have a nominal value within the meaning of Article 5(2) of Directive 69/335. That Directive had been transposed into German law. The German Court asked, in its second question, whether that Article had a direct effect. The Court concluded it was unnecessary to determine that question because:-

"The effects of the Directive can reach individuals through the intermediary of the implementing measures adopted by the Member State concerned." (Paragraph 26, 2787)

The Advocate General Sir Gordon Slynn took the view that the definition of the phrase "nominal amount" in Article 5(2) was a question of Community law:-

"The application of the definition, given by Community law, falls within the province of the national courts. This Court having identified the characteristics of a "nominal amount" in terms independent of national law, it is, as I see it, for the national court to decide whether national law attributes such characteristics to shares in companies or partnerships established under national law." (2790)

He concluded that the question whether Article 5 was of direct effect did not arise. He said:-

"The plaintiff can rely on the German law and does not need a Directive as such. Although the plaintiff argued here that Article 5(2) does have direct effect, it is really the defendant which is seeking to rely on the Directive or at any rate German law incorporating the terms of the Directive." (Page 2792)

In Argos the taxpayer sought a repayment of VAT paid between 1 April 1983 and 27 March 1993. The Court did not consider the question whether the provisions of Section 10 of the VAT Act 1983 as amended by the Finance (No 2) Act 1992 properly implemented the Sixth Directive. It was concerned solely with the proper interpretation of Article 11A. It disagreed with the opinion of the Advocate General. Its conclusion depended upon the Court's settled case law that the taxable amount for the supply of goods or services is represented by the consideration actually received for them, either the subjective value or the value actually received. That value was the amount of money received by the supplier of the voucher (in the instant case Marks and Spencer) from the buyer of the voucher, a third party, from whom Marks and Spencer's customer acquired that voucher. The Court, being solely concerned with the correct interpretation of Article 11A did not distinguish between the period before and after August 1992.

Marks and Spencer is relying upon a Community Law right to be taxed at a rate which is in compliance with Article 11A(1) both before and after the amendment to Section 10. But it has not challenged the Tribunal's conclusion that Section 10(3) as amended can be construed in a manner consistent with Article 11A(1), it merely asserts that that makes no difference.

The difficulty with Marks and Spencer's argument is that, just as in the case of teacakes, it depends upon establishing a right conferred on it by Community provisions. This is because there is, as I have already recalled, no right to obtain a refund in the Sixth Directive. The right to obtain a refund is the consequence and compliment of the right conferred on individuals by Community provisions as interpreted by the Court (See BP Supergas paragraph 40). Once Article 11A(1) had been properly implemented by Section 10(3), as amended, Marks and Spencer can no longer rely upon the direct effect of Article 11. Its effect reaches Marks and Spencer through Section 10(3). The failure of the Commissioners to calculate VAT in accordance with the subjective value of the vouchers was a failure properly to construe Section 10 in accordance with the Directive. It was not a breach of Community law but rather a breach of domestic law properly interpreted in accordance with Community law. In those circumstances Marks and Spencer's right to repayment does not flow from a charge in breach of a rule in Community law but from a charge in breach of domestic law. A right to a refund must, therefore, depend upon section 80.

For that reason I conclude that the right to repayment in respect of overpayments flowing from the Commissioners' misconstruction of Section 10(3) is not a Community law right and, thus, does not engage Community law principles.

Those principles are, however relevant, to the period between 1991 and 31 July 1992 because during that period the United Kingdom had failed properly to implement Article 11A(1)(a).

Violation of Community Law Principles

Introduction of the Three Year Limit

A statutory right to repayment was introduced from 1 January 1990. It has subsequently been consolidated in Section 80 of the 1994 Act. Section 80, prior to the introduction of the three year limit, provided:-

"(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.

(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 before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it."

On 18 July 1996 the Paymaster General announced the Government's intention to introduce a three year limit for retrospective refund claims to come into effect from that date, subject to Parliamentary approval. About a week after the decision of the European Court of Justice in Argos (q.v. supra), which was delivered on 24 October 1996, Marks and Spencer claimed repayment of overpayments arising from the VAT charge on the full face value of those vouchers. The claim covered the period May 1991 to August 1996. On 22 November 1996 Marks and Spencer made a further supplementary claim of £173,495. Before the claim was dealt with by the Commissioners, on 4 December 1996 a resolution was made by Parliament pursuant to the Provisional Collection of Taxes Act 1968. The Finance Act 1997 was enacted on 19 March 1997. Section 47(1) provides:-

"(1) For subsections (4) and (5) of section 80 of the Value Added Tax Act 1994 (time limit for making claim for a repayment of an overpayment) there shall be substituted the following subsection:-

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

Section 47(2) provided:-

"s.47(1) ... shall be deemed to have come into force on 18 July 1996 as a provision applying, for the purposes of the making of any repayment on or after that date, to all claims under section 80 of the Value Added Tax Act 1994, including claims made before that date and claims relating to payments made before that date."

I should recall that in its outline written argument Marks and Spencer challenged the effect of section 1 of the Provisional Collection of Taxes Act 1968 and contended that the Commissioners ought to have repaid the overpaid VAT on gift vouchers once the claims were made. It did so in reliance upon the decision of Keene J in R v. Commissioners of Customs & Excise ex parte Kay & Co Ltd [1996] STC 1500 in which he held that the Commissioners had no power to defer payments to which a taxpayer was entitled as sums which were admittedly overpaid. However, as Keene J foresaw (see page 1528b) the statutory provisions contained in Finance Act 1997 are now in force. The Commissioners' obligation to make repayment are governed by those provisions save insofar as they can be successfully overcome by an assertion of Community law rights.

Infringement of the Principle of Effectiveness

The principle of effectiveness was explained in BP Supergas (q.v. supra):-

"While it is true that such a refund may be sought only in the framework of the substantive and procedural conditions laid down by the various relevant national laws the Court has consistently held ... that those conditions and procedural conditions and the rules governing actions at law ... may not be ... framed in a way such as to render virtually impossible the exercise of rights conferred by Community law." (Paragraph 41 - 1-1919)

Marks and Spencer accept that a three year limitation period is ordinarily reasonable and does not breach the principle of effectiveness. That acceptance derives from decisions of the European Court of Justice (see e.g. Amministrazione delle Finanze dello Stato v. Denkavit (cite tab 17) and Fantask A/S and Others v. Industriministeriet (Case C-188/95) [1988] 1 CMLR 473. In Edilizia Industriale Siderurgica Srl v. Ministero delle Finanze (Case 231/96) Judgment dated 15 September 1998 (a case to which I will have to return in considering the principle of equivalence) the Court commented:-

"It is compatible with Community law to lay down reasonable limitation periods for bringing proceedings in the interests of legal certainty which protects both the payer and administration concerned." (Paragraph 20)

At paragraph 22 it continued:-

"Such time limits are not liable to render virtually impossible or excessively difficult the exercise of rights conferred by Community law. In that regard, a time limit of three years under national law, reckoned from the date of contested payments, appears reasonable."

The reference to legal certainty at paragraph 20 in Edilizia goes to the heart of Marks and Spencer's assertion that the three year limitation infringes the principle of effectiveness. The nub of its complaint is that the limitation period was fixed after Marks and Spencer's overpayments and after it had claimed repayment. It should, it asserts, have been fixed in advance in order to be lawful. The retrospective effect of the three year limitation violated the principle of legal certainty.

In support of the proposition that the limitation period should have been fixed in advance it relies upon the decision of the European Court of Justice in ACF Chemiefarma NA v. The Commission [1970] ECR 1-661. At paragraph 19 the Court said:-

"In order to fulfil their function and ensuring legal certainty limitation periods must be fixed in advance."

But that decision, as the Tribunal pointed out in paragraph 48 of its decision on the three year cap, does not identify the starting point. The proposition invites the question "in advance of what?". In that case Chemiefarma contended for a limitation period which would prohibit the Commission from taking proceedings against it in relation to a cartel to which Chemiefarma belonged. The Court's proposition was made in the context of provisions governing the Commission's power to impose fines for infringement of the rules on competition which did not lay down any period of limitation (see paragraph 18). But it provides no support for a contention that, absent violation of the principle of legal certainty, a limitation period may not have retrospective effect. Marks and Spencer's case, in this regard, must depend upon establishing such a violation.

To establish an infringement of the principle of legal certainty Marks and Spencer must show that it had a legitimate expectation that its claim, which covered the previous period of over four years, would not be capped. It is necessary, therefore, to examine the basis for such an expectation. Certainly, up to the Paymaster General's announcement it would have observed that no such limitation was contained in the statutory provisions for recovery of overpayments. But, in my judgment, a legitimate expectation cannot arise merely because VAT has been overpaid and a claim has been made. If those facts were sufficient to found a legitimate expectation no claim, however lengthy the period it covered, could be capped. No Member State could ever alter a limitation period from that laid down in the original provisions conferring a right to a refund. But Marks and Spencer has not contended that the original provisions in relation to limitation introduced in January 1990 could never be altered.

There are three other reasons why a legitimate expectation cannot rest merely on a claim. Firstly, despite having raised the question of the proper bases for accounting for VAT on discounted gift vouchers in 1989 and 1990 it chose not to challenge the Commissioners' instructions and waited to make a claim until after the decision of the Court in Argos. As the Tribunal explained in paragraph 49 of its decision no reasonable businessman could have expected that it would be permitted to build up a potentially unlimited claim without asserting its rights in the expectation that the 1989 statutory provisions would remain unchanged. Secondly the introduction of the cap did not prohibit the making of a claim, it precluded the right to recover payment as a result of that claim.

Thirdly, Marks and Spencer's claim was made in October 1996 after the Paymaster General's announcement in July. Thus, Marks and Spencer can have had no legitimate expectation when it made its claim that it would recover payment.

It must, therefore, rest its case upon establishing the existence of a pre-existing right. I shall consider later the distinction between a right to make a claim and a right to repayment in the context of Article 1 of the protocol to the European Convention on Human Rights. But for the purposes of the present issue it is sufficient to note that at the date of the introduction of the cap, Marks and Spencer had no right to repayment. Its claim had not yet been determined. I conclude, therefore, that Marks and Spencer has failed to establish any legitimate expectation that a limitation period would not be introduced before it had established any existing right. I conclude that no existing right was cancelled by the introduction of the three year limit. In those circumstances the principle of legal certainty was not infringed and the introduction of the three year limitation did not violate the principle of effectiveness.

Marks and Spencer also contends that the imposition of the temporal limitation frustrated the effect of the judgment of the European Court of Justice in Argos. The submission is based upon the principle enunciated by the European Court of Justice in Barra v. Belgian State and City of Liege (Case 309/85) [1988] ECR 1-355 that:-

"A Member State may not adopt a law restricting the effects ratione temporis of such a judgment where the Court did not make any such restriction in the said judgment." (Paragraph 9 page 374).

In February 1985 the European Court of Justice had ruled that the imposition of registration fees on the nationals of other Member States but not on nationals of the host Member State constituted discrimination contrary to Article 7 of the Treaty. In June 1985 the Belgian legislature prohibited re-payment of such fees save in the case of students who were nationals of a Member State who had brought proceedings before the decision of the European Court of Justice in February 1985. The Court had not limited the scope of its judgment in its decision in February. But it is open to the Court to restrict the operation of its judgment as Defrenne v. SA Belgerde Navigation Aerienne Sabena (Case 43/75) [1976] ECR 1-455 demonstrates. (See paragraph 74 page 481). In Deville v. Administration des impôts (Case 240/87 [1988] ECR 1-3513 France sought to limit the right of recovery of an annual tax on motor vehicles which had earlier been found by the European Court of Justice to infringe the Treaty. The Court held that it was not open to France:-

"subsequent to a judgment of the Court from which it follows that certain legislation is incompatible with the Treaty, to adopt a procedural rule which specifically reduces the possibilities of bringing proceedings for recovery of taxes which were wrongly levied under that legislation." (Paragraph 13, 3527)

The Court concluded:-

"It is for the national court to determine whether the procedural rule at issue reduced the possibility of bringing proceedings for recovery which would otherwise been available." (Paragraph 18, 3528)

In this case the provisions of section 47(1) of the Finance Act 1997 introducing the cap did not reduce the possibility of bringing claims on the basis of the decision in Argos. The announcement of the cap by the Paymaster General in July of 1996 was made before the Court's decision in Argos and, indeed, at a time when the Advocate General's opinion had been promulgated, an opinion which endorsed the Commissioners' approach and concluded that VAT should be charged on the basis of the face value of the vouchers. The legislation considered in Barra stifled the students' claims.

I agree with the Tribunal (see paragraph 53) that Marks and Spencer's right to make a claim was not stifled and that the imposition of a three year limit did not make it virtually impossible for an action to be brought by the taxpayer in reliance upon Community law. The legislation announced before the decision in Argos did not deprive the European Court of Justice's judgment of effect.

Equivalence

The principle of equivalence requires:-

"that the procedural rule at issue applies without distinction to actions alleging infringements of Community law and to those alleging infringements of national law, with respect to the same kind of charges or dues." (See paragraph 36 page 1-9 in Edilizia (q.v. supra)).

In emphasising that the principle only applies in respect of the same kind of charges or dues the Court in Edilizia continued:-

"That principle cannot, however, be interpreted as obliging a Member State to extend its most favourable rules governing recovery under national law to all actions for repayment of charges or dues levied in breach of Community law.

37. Thus, Community law does not preclude the legislation of a Member State from laying down, alongside a limitation period applicable under the ordinary law to actions between private individuals the recovery of sums paid but not due, special detailed rules, which are less favourable, governing claims and legal proceedings to challenge the imposition of charges and other levies. The position would be different only if those detailed rules applied solely to actions based on Community law for the repayment of such charges or levies."

The issue in relation to this ground of challenge turns on the appropriate comparator. Marks and Spencer points out that the limitation period in respect of other taxes such as income tax and capital gains tax is longer. The comparison, it asserts, cannot be confined to VAT but should cover all claims for repayment of taxes which were not properly levied. The principle depends upon there being an appropriate comparator and if it is confined merely to VAT that comparison cannot take place.

The argument focused upon the decision of the European Court of Justice in Rosalba Palmisani v. Instituto Nazionale della Previdenza Sociale (Case C-261/95) [1997] ECR 1-4025 upon which the Tribunal founded its decision at paragraphs 33-34 and upon which the Commissioners base their contention that the comparison is between claims for repayment of VAT charged in breach of Community law and claims for repayment of VAT charged in breach of domestic law.

It is plain that if the appropriate comparison is between the claim for repayment of VAT charged contrary to enforceable Community law rights and a claim for overpayment of VAT charged in breach of domestic law there is no breach of the principle of equivalence. Marks and Spencer's claim both before July 1992 and after is capped. All claims for repayment of overpaid VAT are now capped. The issue turns on whether claims for repayment of overpaid taxes other than the VAT represent appropriate comparators. Palmisani (q.v. supra) followed the decision of the European Court of Justice in Francovich and others v. Italy (1) case C-6/90 [1991] ECR 1-5357 which had required Italy to make good the losses of employees suffered because of Italy's failure to implement a Directive. The right to make a claim for reparation was limited to one year from the introduction of the law giving effect to the Directive. The claimant contrasted the one year limitation with the five year limitation in respect of actions relating to non-contractual liabilities. The Court stated that:-

"In order to establish the comparability of the two systems in question, the essential characteristics of the domestic system of reference must be examined." (Paragraph 38 page 1-4049).

It recorded that it was unable to undertake that task without further information and that it was for the national court to do so. It continued:-

"If the ordinary Italian system of non-contractual liability were to prove incapable of serving as a basis for an action against public authorities or unlawful conduct ... and the national court were unable to undertake any other relevant comparison between the time limit at issue then the conditions relating to similar claims of a domestic nature, the conclusion would have to be drawn ... that Community law does not preclude a Member State (from imposing the limitation period of one year)." (Paragraph 39).

The Court thus accepted that if no appropriate comparator exists it cannot be said that the measure infringed the principle of equivalence. Underlying the Court's decision is the necessity to compare like with like.

In my judgment no comparison can be made with other types of tax such as income tax payable in respect of an individual's profits or the tax on a document imposed by stamp duty. Other forms of indirect taxation, such as excise duty, are wholly different types of tax.

It seems to me that the jurisprudence of the European Court of Justice, exemplified in Edilizia, requires a comparison between the approach of a Member State to the recovery of tax charged in breach of Community rules and the recovery of the same tax in breach of domestic rules. Any wider enquiry will invite unnecessary argument as to whether there is a true comparison. There is no need to widen the range of enquiry if it is recalled that the need for making comparisons stems from the principle of equivalence which is designed to avoid infringements of Community law being dealt with in a less favourable way than infringements of domestic law. The need for the comparison was recently emphasised in IN. CO. GE. '90 Srl (Joined Cases C-10/97 to C-22/97) Judgment dated 22 October 1998:-

"Such repayment must be ensured in accordance with provisions of its national law, on condition that those provisions are not less favourable than those governing "similar domestic actions"..." (Paragraph 29 page 1-9).

The principle is designed to protect Community law rights; adequate protection is afforded by focusing upon the way a Member State deals with the same tax in a domestic as opposed to Community context.

Discrimination

Marks and Spencer under the head of effectiveness and other relevant Community principles alleges unequal and discriminatory treatment when it is compared to what it describes as "repayment traders" who, it asserts, included most of its major competitors in the food sector. It is important to record that Marks and Spencer's submission is put in two different ways. Firstly it alleges that it has been placed at a competitive disadvantage in comparison to repayment traders. That submission was not dealt with by the Tribunal because it says those considerations were outwith its jurisdiction. (See paragraph 42). However, because Marks and Spencer has sought judicial review of the Commissioner's decision on that ground it is necessary to consider the submission. No evidence has been advanced to establish a competitive disadvantage and in the absence of such evidence it is not possible for me to make any determination.

The second way in which Marks and Spencer seeks to establish discrimination does not require evidence but draws attention to the difference in treatment of repayment traders who, as a matter of law, are entitled to repayment without, at that time, any limitation being imposed.

In order to understand the submission it is necessary to explain what is meant by "repayment traders". In any accounting period a trader must enter in his VAT return the net amount he owes to the Commissioners by way of VAT. He enters the amount of tax payable on the supplies he has made during the period of the return (output tax) and the amount of tax he is entitled to claim on supplies he has purchased during that period (input tax). Where the output tax exceeds the input tax the difference is the amount he owes by way of VAT. Marks and Spencer describes that trader as a "payment" trader. In contrast, a trader whose input tax exceeds his output tax will show a net amount owed to him by the Commissioners.

The right to deduct VAT paid in respect of goods supplied to the trader is a right conferred by section 25 of the 1994 Act implementing Article 17 of the Sixth Directive. If the input tax exceeds the output tax the right to payment arises pursuant to section 25(3) of the 1994 Act implementing Article 17(3) of the Sixth Directive. The right to deduct input tax is part of the system for identifying that part of VAT which is to be paid out to the Commissioners in the chain of transactions leading to the ultimate liability of the consumer. The deduction of input tax is, therefore, an integral part of the operation of the system which is designed to identify the portion of VAT due for collection at each stage of the chain of supply. The distinction between a payment trader and a repayment trader is no more than a distinction between a trader whose input tax exceeds its output tax in an accounting period and one whose output tax exceeds its input tax.

Where a trader overpays VAT the nature of its right to recover that overpaid tax differs according to whether, in the period of overpayment, its input tax exceeds its output tax or vice versa. If it is a payment trader (i.e. its output tax exceeds its input tax) no provision is made within the Sixth Directive for recovery. The only statutory right to recovery is that which is contained in section 80 of the 1994 Act. However, where a "repayment trader" overstates its output tax that does not lead to any payment by that trader to the Commissioners. On the contrary, if the repayment trader overstates its output tax that will lead to a reduction in the amount of input tax which it can recover. Where repayment traders have overstated VAT on inputs, their claims are for under-recovery of tax credits which should have been paid to them earlier.

In cases where input tax exceeds output tax, provisions for refunds are set out within Article 18 of the Sixth Directive which entitles Member States to determine procedures for deduction. Such procedures fall to be determined pursuant to section 25(6). Repayment claims in respect of those who had deducted an excessive amount of output tax were not capped until a statutory instrument took effect on 1 May 1997. I should note that the Commissioners have no unjust enrichment defence in relation to such claims. That, of course, is not relevant in relation to the vouchers' claim which is the only claim relevant to these issues.

It seems to me, from this analysis of the legislation, that no comparison can properly be made between payment and repayment traders. An erroneous excessive calculation of the VAT chargeable affects the position of one whose output tax exceeds input tax in a different way. That trader must make a claim based upon section 80 of the 1994 Act. The repayment trader, on the other hand, will not have received that which is due to him from the Commissioners in an earlier period and his position is regulated within the legislative regime founded upon the Sixth Directive itself. Marks and Spencer happens to have been in the position of a payment trader because the majority of its sales are not of food but rather of clothing which, apart from young children's clothing, attracts VAT. Its major competitors have, hitherto, been far more widely concerned in the sale of food which does not attract VAT. (See paragraph 25 of the affidavit of Maureen Campion, a senior officer of Her Majesty's Customs and Excise). The position has already changed and many of Marks and Spencer's rivals now have to make payment returns due to the change in the nature of their business. Thus, although I accept, that both payment and repayment traders who have overpaid tax seek reimbursement and the economic effects of such reimbursement will be the same, in my judgment they are governed by different legislative procedures because their position is distinct within the VAT regime. For those reasons, which follow the reasoning of the Tribunal, I reject the assertion that the three year cap discriminates unfairly between payment and repayment traders.

The Right to Property

The fundamental rights protected by the European Convention on Human Rights form part of the general principles of Community law (see Vaughan, Law of the European Communities Service, Part 2). Marks and Spencer assert that its claim to repayment in the period 1991 to July 1992 was a possession of which it was deprived by the imposition of the three year limitation period contrary to Article 1 of the First Protocol to the Convention. This provides:-

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by general principles of International law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

I must, therefore, consider whether Marks and Spencer's claim constituted a possession.

In Stran Greek Refineries and Stratis Andreadis v. Greece [1994] 19 EHRR 293 the company had concluded a contract with the Greek Military Junta which was subsequently terminated once democracy had been restored. The Athens Court of First Instance accepted the principle that the State owed a debt to the applicants but ruled that whether in fact a debt was owed depended upon further evidence as to the extent of the alleged damage. The arbitration court made an award which recognised the State's liability. The European Court of Human Rights took the view that the Athens Court of First Instance decision was merely preliminary but that the arbitration award, being final and binding, conferred on the applicants a right to the sums awarded and constituted a possession (see paragraph 62). In National & Provincial Building Society and others v. United Kingdom (Case 117/1996/736/933-935) [1997] SCT 1466 the Societies contended that their claims to restitution of taxes paid pursuant to defective regulations were possessions which were unlawfully expropriated contrary to Article 1 of the First Protocol. The Woolwich Building Society had succeeded in establishing that the 1986 regulations were invalid in the House of Lords in Woolwich 1. Following in Woolwich's footsteps, the applicant Building Societies issued writs after Woolwich 1 and after the Government had announced that it would take steps to rectify with retrospective effect, the inadvertent defects in the 1986 regulations. Thereafter the Woolwich Building Society succeeded in establishing a common law right to repayment in Woolwich 2. The Commission had concluded that the applicant Building Societies' claims constituted possessions. The Court, however, took the view that they had not themselves secured an enforceable final judgment and consequently:-

"It may be questioned whether they could be considered in the circumstances to have an acquired right to the recovery of their monies at that time." (Paragraph 67)

The Court also doubted whether those building societies had any legitimate expectation that their claims would be determined on the basis of the ruling in Woolwich 1 particularly having regard to the Government's announcement. Nevertheless the Court decided not to express any concluded view as to whether the claims constituted possessions and was prepared to proceed on the working assumption that they did have possessions in the form of vested rights to restitution (see paragraph 70).

This case is, therefore, of no assistance in determining whether the claims in the instant case constituted a possession save that it is plain the Court took the view that in order to constitute a possession the claims would have to amount to "vested rights to restitution" (paragraph 70).

The debate between the parties has focused on Pressos Compania Naviera SA v. Belgium [1995] 21 EHRR 301. In that case the applicants were ship owners and others whose ships had been involved in collisions or accidents in Belgian or Netherlands' territorial waters before September 1988. Prior to September 1988 a ship owner required to make good damage caused by the negligence of a ship could allege that the pilot had been negligent and seek damages accordingly from the State. On 17 September 1988 legislation came into force with retrospective effect for a period of 30 years excluding the liability of the organiser of a pilot service (i.e. the State). The applicants alleged that that Act infringed Article 1.

The Commissioners say that this case is of no assistance because the applicant ship owners' right to recover from the State arose from the already established negligence of the pilots and their right to recover damages was only precluded by the operation of the Act of 17 September 1988. That is true in the cases of most of the 26 applicants. Prior to their bringing a claim against the State on the grounds of the negligence of a pilot, in most of the cases it had already been established or been agreed that the ship owner's vessel was at fault. That does not seem, however, to have been the case of the 20th, the 21st or the 23rd applicants. It is not clear to me that in their cases it had already been established that the ship was negligent. The decision of the Court, contrary to the opinion of the Commission, was that the claims did constitute possessions.

"The rules in question are rules of tort, under which claims for compensation come into existence as soon as the damage occurs.

A claim of this nature "constituted an asset" and therefore amounted to "a possession" within the meaning of the first sentence of Article 1. ... on the basis of the judgments of the court of cassation ... the applicants could argue that they had a "legitimate expectation" that their claims deriving from the accidents in question will be determined in accordance with the general law of tort ...

That was the position with regard to the accidents in issue, which all occurred before 17 September 1988, the date of the entry into force of the 1988 Act ... . (see paragraphs 31 and 32 of the judgment at page 21)

The legislation in that case which it was contended was contrary to Article 1 changed the rules of tort when the applicants had a legitimate expectation that the general rule of tort would be applied to their claims. Thus it appears that the Court based its view that the claims were possessions upon the concept of a legitimate expectation as to how those claims would be treated. I have already concluded, like the Tribunal, that Marks and Spencer had no legitimate expectation that the law would not be altered so as to restrict their claims. Marks and Spencer seems to me, accordingly, to have been in a different position from the ship owners in Pressos who would have had no reason to expect the rules of tort to be charged. For that reason I conclude that Pressos does not assist in establishing that the claims in this case, while they remained to be considered and the accuracy of their calculations to be verified, did not constitute vested rights to restitution. But I find it difficult to reconcile the approach of the Court in Pressos with the approach indicated in National and Provisional Building Society and the earlier approach of Stran Greek Refineries. It may well be that the Court, looking at the vast majority of the claims in Pressos regarded them as being bound to succeed but for the exclusion of liability of the State for the pilots' negligence. I should record that Mr Vaughan QC on behalf of Marks and Spencer referred to Zim Properties Ltd v. Procter (Inspector of Taxes) [1985] STC 90 in which a cause of action was regarded as an asset for the purposes of capital gains tax. That approach does not appear to have been adopted by the European Court of Human Rights.

But for the reasons I have given I do not need resolve that difficulty. I conclude that the introduction of the cap did not infringe Article 1 for two reasons:-

(a) it did not remove the possibility of a claim it merely imposed a limitation period.

(b) the claims did not constitute vested rights to restitution.

The Unjust Enrichment Appeal

Marks and Spencer appeals the decision of the Tribunal released on 30 January 1997. The Tribunal concluded that Marks and Spencer had passed on the burden of VAT erroneously accounted for on sales of tea cakes to their customers save as to 10%. It therefore concluded that to repay more than 10% of the overpayments of VAT would be to unjustly enrich Marks and Spencer. In short, the Commissioners had established the defence provided in section 80(3) of the 1994 Act. The Tribunal concluded:-

1. That Marks and Spencer had passed on the whole or substantially the whole of the VAT to their customers throughout the period from 1973 to 1994 because it treated VAT as one of the costs in arriving at its margin (paragraph 60), and

2. By passing on the VAT to its customers Marks and Spencer did not suffer damage because it would not have improved its sales and profits had tea cakes been zero rated (paragraph 65).

The decision is challenged both on the grounds that it discloses an error of law and on the basis that the true and only reasonable conclusion was contrary to the findings of the Tribunal.

Principles of Law

There is no definition of the concept of "unjust enrichment" within the 1994 Act. But it is accepted that jurisprudence of the European Court of Justice in relation to the concept of unjust enrichment should inform decisions relating to the defence in our domestic law. As Lord Hope remarked in Commissioners of Customs and Excise v. McMaster Stores (Scotland) [1995] STC 846 at 853E, the origins of the concept in respect of the repayment of overpaid indirect tax under Community law provide a basis for reference to the jurisprudence of the European Court of Justice. In those circumstances the following principles are agreed:-

1. Undue taxes must be reimbursed in accordance with national procedural rules (see Amministrazione delle Finanze dello Stato v. Sp A San Giorgio paragraph 12)

2. It is not prohibited for national courts, when adjudicating claims for repayment of unduly paid taxes to take into account the fact that the burden of the tax was passed onto other parties save to the extent that repayment would give rise to unjust enrichment (see Hans Just I/S v. Danish Ministry for Fiscal Affairs).

In relation to that second principle there is dispute as to whether the defence of unjust enrichment is all or nothing. Marks and Spencer assert that the issue is whether repayment "in full" would give rise to unjust enrichment. In my judgment it is not correct to say that the defence is all or nothing. Hans Just provides no support for that proposition. In Societe Comateb v. Directeur general des douanes et droits indirects [1997] ECR 1-165 the court, following Just and San Giorgio stated:-

"The protection of the rights so guaranteed by the Community legal order does not require repayment of taxes, charges and duties levied in breach of Community law where it is established that the person required to pay such charges has actually passed them on to other persons. (See paragraph 21)"

It continued:-

"...a Member State may resist repayment to the trader of a charge levied in breach of Community law only where it is established that the charge has been borne in its entirety by someone other than the trader and that reimbursement of the latter would constitute unjust enrichment.

It follows that if the burden of the charge has been passed on only in part, it is for the national authorities to repay the amount not passed on.

It should be borne in mind, however, that even where it is established that the burden of the charge has been passed on in whole or in part to the purchaser, repayment to the trader of the amount thus passed on does not necessarily entail his unjust enrichment. ...

In such circumstances, the trader may justly claim that although the charge has been passed on to the purchaser, the inclusion of that charge in the cost price has, by increasing the price of the goods and reducing sales, caused him damage which excludes, "in whole or in part", any unjust enrichment which would otherwise be cause by reimbursement. (paragraphs 27 to 29 and paragraph 32).

I conclude that the unjust enrichment defence may be established to the extent that the tax has been passed on.

3. Community law does not impose a requirement in domestic law to take into account the defence of unjust enrichment. (See e.g. Denkavit Italiana [1980] ECR 1-205).

4. The defence of unjust enrichment requires consideration not only of the question whether the taxpayer has passed on the overpaid tax to a customer but also whether by passing on the charge he has suffered damage, for example by reducing sales in consequence of the increase in price or maintaining sales by having to reduce the price, or losing profits which it would otherwise have received had the overcharged tax not been imposed (see e.g. passages cited above in Societe Comateb).

In relation to that principle there is a dispute as to the correct approach in law and in particular as to the burden of proof.

The burden of proving the passing on of tax

The Commissioners accept that the legal burden of proof lies on them to show that the taxpayer would be unjustly enriched by the repayment claimed. Thus it accepts:-

1. Whether the market is based on freedom of competition or regulated the State must show in fact that passing on occurred;

2. There is no presumption that passing on has occurred either:-

(a) where an indirect tax is involved i.e. a tax imposed on a transaction,

(b) where the tax was designed to be passed on or is, in the normal course of business, generally passed on, or

(c) there is a legal obligation to incorporate the charge in the price of the product sold.

(See Les Fils de Jules Bianco SA and J Girard Fils SA v. Directeur général des douanes et droits indirects [1988] ECR 1-1099 and Societe Comateb v. Directeur general des douanes et droits indirects [1997] ECR 1-165 (q.v. supra))

However cases such as Les Fils de Jules Bianco (unlawful duties on petroleum products) and Comateb (dock dues) were not concerned with VAT. In VAT as the Tribunal pointed out (paragraph 7) the tax is charged on the transaction which constitutes the supply. The burden of the VAT is designed to be borne by the trader's customer. Thus, while there is no presumption that VAT is passed on, it is unlikely that the Commissioners will have any difficulty in showing that the tax was "passed on"

The real dispute between the parties is as to the burden of proving that as a consequence of passing on the tax, the trader has suffered damage in one of the ways of which I have given examples above. Marks and Spencer contends that the burden of proving that no damage was suffered rests on the Commissioners throughout. It is contended that unless the Commissioners satisfy the Tribunal that no damage occurred it cannot establish the defence of unjust enrichment. If the evidence leads the tribunal of fact to be in a position where it cannot say one way or the other whether damage was suffered then, submit Marks and Spencer, it is entitled to succeed. The Commissioners submit that once they have established that the tax was passed on it is for Marks and Spencer to establish that in so doing it suffered damage. Thus, it contends, whilst the legal burden remains on the Commissioners, the evidential burden shifts. If the Commissioners successfully adduce evidence to show that the tax was passed on then they will succeed unless and until Marks and Spencer assert and adduce evidence to satisfy the Commissioners that it suffered damage in consequence of passing on the tax.

There is no decision of the European Court of Justice resolving this issue. In Les Fils de Jules Bianco (q.v. supra) the Court stated:-

"... a Member State is not entitled to adopt provisions which make the repayment of charges levied contrary to Community law conditional upon the production of proof that those charges have not been passed on to the purchasers of the products that were subject to the charges and to place the burden of adducing such negative proof entirely on the natural or legal persons claiming repayment." (Paragraph 13)

It continued:-

"The question whether an indirect tax has or has not been passed on in each case is a question of fact to be determined by the national court which may freely assess the evidence." (Paragraph 17)

In his opinion in that case the Advocate General Sir Gordon Slynn did, however, envisage the fiscal administration being able to produce sufficient evidence to call for rebuttal by the trader:-

"If the burden is not on the applicant to show that the charge has not been passed on, does it lie on the Administration to show that it has been passed on and that there has been unjust enrichment? It seems to me to follow that, if the burden is not initially on the applicant, it is for the Administration to raise this issue and if it can to prove it. It may, however, produce evidence which points to there being a passing-on or unjust enrichment sufficient to for rebuttal by the claimant. The evidentiary burden may thus, as is common place, shift during the case. The question at the end of the day is whether on the evidence as a whole the charge has been passed on so that, in the light of any profits it is alleged may have been lost, repayment in whole or in part would result in unjust enrichment." 1112 (His opinion was to like effect in EC Commission v. Italian Republic [1988] ECR 1-2925 page 1810 -1811).

In Comateb (q.v. supra), in the passage at paragraph 32 I have already cited, the Court refers to a trader claiming that the charge having been passed on caused him damage.

It seems to me obvious that in cases where the Commissioners have established that a wrongly charged tax was passed on and that is all the evidence in the case then the Commissioners will succeed. But if the taxpayer asserts that it has suffered damage in passing on the excessive charge and produces material on which that assertion is based then the Tribunal will have to consider that material and decide whether, in the light of that material, the Commissioners have made good the defence of unjust enrichment. I am not sure it assists to speak of an evidential "burden of proof". It is no more than a, possibly, convenient shorthand designed to indicate that unless the trader asserts that it has been damaged and provides some material for the tribunal of fact to consider, the Commissioners will succeed merely by proving that the tax was passed on. There is, perhaps, a danger in referring to shifts in the burden of proof. A reference to that shift may obscure the proposition that it is for the Commissioners to prove unjust enrichment if it can and that burden never shifts. In raising the issue of damage in consequence of having passed on the burden of a wrongly charged tax and producing material to support that assertion, in my judgment, the trader does not take upon itself any burden of proving that it was not unjustly enriched. The reason such a trader must assert damage and provide some material on which to base the assertion is because, absent any such material, there would be no evidence to rebut the defence of unjust enrichment established, prima facie, by the evidence of the Commissioners that the tax was passed on.

In my judgment in paragraph 10 of its decision the Tribunal correctly stated the proper approach to the burden of proof.

"We start by reviewing the evidence adduced by the Commissioners to determine whether they have raised a prima facie case of unjust enrichment i.e., a case which in the absence of any evidence to the contrary, would satisfy us that repayment would unjustly enrich Marks and Spencer. If the Commissioners have failed to satisfy us of that we can dismiss the defence. But if the Commissioners have satisfied us that there is a prima facie case of unjust enrichment, we go on and examine the evidence presented by Marks and Spencer who will necessarily have the detailed facts and figures. With all the facts and figures placed before us we revisit the issue and once again ask whether "on the evidence as a whole" the Commissioners have satisfied us of their defence."

In endorsing, with respect, the Tribunal's approach to the burden of proof I should raise one caveat in the passage I have cited above which I can deal with more conveniently under the next issue raised between the parties as to the proper approach.

The Proper Approach to Damage Caused by Passing On Tax

Marks and Spencer contends that it is very difficult if not virtually impossible for the Commissioners to prove unjust enrichment once the issue as to whether damage was occasioned by passing on tax has been raised. In support of that proposition it relies upon a number of statements made by Advocates General. In San Giorgio (q.v. supra) Advocate General Mancini set out the plaintiff company's contention that:-

"In the great majority of cases it is impossible for either the person who paid the charge or the revenue authority to demonstrate the financial loss indisputably suffered in every case by the person paying the unduly levied charge is offset by the incorporation of that charge in the price of the goods in question. ... the price is subject to innumerable market forces which can be identified only in very approximate terms. It is never - or almost never - permissible to state that a given portion of the price is due solely to the payment of a charge of the same amount. In those circumstances, to impose upon the person who paid the charge the burden of proving that it has not been passed on and to make the repayment of unduly paid charges conditional upon such proof is tantamount to repudiating the right to repayment."

The Advocate General was of the opinion that that criticism was largely well founded. He cited with approval comments of the Commission that:-

"In order to be certain that charges were passed on, supply would have to be elastic and demand would have to be ... rigid, but I believe that the only product for which both those conditions are fulfilled is salt."

He said:-

"To put it more directly, to raise the passing on of charges to the status of a legal rule is possible but only if it is not forgotten that the rule is fragile and can be applied only within very clearly defined limits. ... it is usually impossible to isolate any portion of the price and link it causally to a particular cost. Moreover, in my opinion , that argument is irrefutable. And who indeed can say that, if the importer had been released from the burden of the unlawful charge, he would not have applied the same price and sold the same quantity of goods?" (Pages 3624 to 3625).

These comments were made in the context of the Italian Government's requirement that proof be furnished in documentary form that the charge had not been passed on. That provision breached the Community rule of effectiveness because it made it virtually impossible to recover repayments of improperly levied taxes.

The Court endorsed the view that the Italian Government's requirement of documentary proof had the effect of making it virtually impossible or excessively difficult to secure repayment. Its only comment on the opinion of the Advocate General was:-

"In a market economy based on freedom of competition, the question whether, and if so to what extent, a fiscal charge imposed on an importer has actually been passed on in subsequent transactions involves a degree of uncertainty for which the person obliged to pay a charge contrary to Community law cannot be systematically held responsible." (Paragraph 15)

I shall return to that paragraph shortly.

In Les Fils de Jules Bianco (q.v. supra) the Court stated that:-

"It must also be observed that it is quite probable, depending on the nature of the market, that the charge has been passed on. However, numerous factors which determine the commercial strategy vary from one case to another so that it is virtually impossible to determine how they effect the passing on of the charge." (Paragraph 20).

That passage was made in the context of an issue as to whether there is a distinction between a free market economy and a regulated economy. That passage is to be understood as saying no more than even in a regulated market economy there is no presumption that tax has been passed on or that, if it has, repayment would cause unjust enrichment.

In Comateb Advocate General Tesauro followed the opinion of Advocate General Mancini in a passage cited by the Tribunal (see page 7). The Court did not adopt that approach merely commenting that a question of passing on was a matter for the Court to assess on a claim of damage being raised by the trader (see the passages cited above).

In my judgment the European Court of Justice has never endorsed a rule that it is impossible to prove unjust enrichment. Were that so Section 80 would have misfired. However, I do think that importance should be attached to the observation of the Court in San Giorgio at paragraph 15 which I have cited above. A trader seeking repayment who accepts that it did pass on the charge, or is faced with evidence that that was so, must assert that passing on the tax caused damage and must provide material on which to base that assertion. But the Tribunal of fact must bear in mind that in making that assertion the trader may, at least until the three year cap was introduced, be forced into the position of providing material relevant to a time when it did not suspect and had no reason to suspect that it might be overpaying tax and, thus, have any need to prepare a claim for repayment. Any difficulty that a trader has in providing such material either because of lapse of time or because of the complexity of determining whether, in fact, the passing on of a charge affected profits or sales and caused damage should be viewed sympathetically. Lacunae in the evidence should not be considered to the detriment of the trader. It was, after all, the taxing authority which caused the problem in the first place. Thus, it seems to me, if, after considering all the evidence there is uncertainty or absence of detail that should not be held against the trader. It seems to me that it is those considerations which led to the comment made by the Court in San Giorgio.

For those reasons I am concerned at the reference by the Tribunal to:-

"Marks and Spencer who will necessarily have the detailed facts and figures." (my emphasis) (at page 6 line 32).

I shall go on, when considering the decision in more detail, to see whether that led the Tribunal into error in consideration of all the evidence. But I observe, at this stage, that the Tribunal ought not to place reliance upon any failure to produce detailed facts and figures when that failure will normally be the fault of the taxing authority which levied a charge to which it was not entitled. A Tribunal should only conclude that the defence of unjust enrichment is made out where the evidence satisfies it that a repayment will cause unjust enrichment.

With those observations in mind I shall consider whether, in fact, the Tribunal's comment at paragraph 10 page 6 did lead them to error.

Standard of Proof

Marks and Spencer criticised the Tribunal for failing to draw a distinction between proof to the satisfaction of the Tribunal and questions of possibilities or probabilities. The standard of proof is the normal standard of proof in any civil case. The distinction is false. It is true that if a fact is merely a possibility then the Commissioners would not have satisfied the Tribunal on the balance of probability. But where the Tribunal find that a fact is probable it is finding that that fact is established. There is no true dichotomy. Once a fact is established as probable it is a fact upon which the Tribunal may draw appropriate inferences.

The Tribunal's Findings of Fact as to Whether Marks and Spencer passed on the Burden of the Erroneously Charged VAT

The Tribunal concluded that Marks and Spencer did pass on the burden of VAT. That conclusion was based upon the crucial finding that:-

"Marks and Spencer do treat VAT as one of their costs in arriving at their margins, whether these be teacakes or other "taxable" products. This is so even if Marks and Spencer do not consciously go through the process of counting VAT as an addition to their selling prices." (Paragraph 57, see also paragraph 60).

Marks and Spencer attack that conclusion on the basis that the findings of fact upon which the conclusion is based disclose errors and assumptions which the Tribunal was not entitled to make.

The conclusion that throughout the period between 1973 and 1996 margins were fixed after taking into account costs including VAT was, in my judgment, fundamental. Marks and Spencer sought, on the Tribunal's findings to achieve the same margin whatever the costs including VAT. If that margin was not achieved then, with some few exceptions not including teacakes, the product would not be sold. If that finding cannot be successfully impugned it must follow that the VAT was passed on to customers. If on the other hand the Tribunal had not been satisfied that the margin was maintained then it could not be satisfied that VAT was passed on: in short, a reduction in the margin would indicate that VAT was wholly or in part being absorbed by Marks and Spencer.

The conclusion of the Tribunal as to the calculation of margin was based on findings recorded earlier in its decision. Marks and Spencer called Mr Lloyd, a merchandising manager since 1988. He gave evidence as to the policy, with which he was familiar, that each department would have a target profit margin to achieve. Where VAT is chargeable it was treated as an overhead to be brought into account in determining the departmental margin. (See paragraph 31). Mr Lloyd, supported by Professor Davies an expert in Marks and Spencer's retail business, said that items would not be stocked if it was thought they could not achieve an acceptable margin. A document detailing pricing and margins for goods in the biscuit division in September 1994 showed that the normal margin achieved was around 33%. The Tribunal recalled that there was no evidence as to the period for which that was the normal percentage. I do not think that matters. The question was whether Marks and Spencer's pricing policy sought to achieve a margin after taking into account costs which included VAT. The Tribunal went on to consider the position when purchase tax which was at the higher rate of 18% ceased and VAT was introduced in 1973 (see paragraph 42). It then considered the position when the VAT rate was reduced in July 1974 (paragraph 44) and then substantially increased in June of 1979 to 15% (paragraph 45). At that time Mr Lloyd agreed that the increase in VAT had been passed on to customers (paragraph 45). The Tribunal considered a further increase in April 1991 to 17½%. At that time prices were held, due to printing costs through the spring, and due to an increase in costs, margins on standard rated products were slightly reduced (see paragraph 47). These findings of fact are attacked by Marks and Spencer because it says that findings that VAT was taken into account in setting the margins do not support a conclusion that VAT was passed on. I do not agree. The main thrust of the findings by the Tribunal was that the pricing policy was to maintain margins after taking into account costs and VAT. Those were findings which the Tribunal was entitled to make and they cannot be impugned. Indeed, at an important period in June 1979 when VAT was increased to 15%, Marks and Spencer's own witness agreed that the increase had been passed on.

The Tribunal thought that its conclusion was reinforced by the evidence of Dr Robinson, an economic expert called by the Commissioners which supported the view that the essence of VAT is that the burden will be borne by the consumer and by the evidence of Marks and Spencer's own witnesses that as rational retailer Marks and Spencer would seek to maximise profits. The price of the product would be set by the market but the market would reflect the burden of VAT (see paragraph 61). I conclude that the Tribunal's finding of fact that VAT was passed on because Marks and Spencer adopted a policy of fixing a margin after VAT and other costs had been taken into account, cannot successfully be impugned.

The Impact of VAT on Prices and Sales

The Tribunal considered the effect on prices and sales of the introduction of VAT. It did so for the purpose of reaching a conclusion as to whether in fact there was any evidence that an increase in prices led to a diminution in sales and an erosion in the margin. When VAT was introduced at a lower rate than purchase tax, there was no evidence as to what in fact had happened. The Tribunal concluded that Marks and Spencer would have sought to maintain the sale of teacakes at the same level as before April 1973 but that competition would have caused the price to be reduced to what the Tribunal describes as the normal biscuit division margin. Thereafter, it concluded that inflation would have caused an increase in prices. (Paragraph 42). In the period to the substantial increase in June 1979 it concluded that the change from purchase tax to VAT had no substantial effect on customers. (Paragraph 43).. Marks and Spencer complain that there is no evidence as to whether purchase tax was passed on. In my judgment that was not relevant. The Tribunal did have evidence as to Marks and Spencer's pricing policy namely that Marks and Spencer would seek to maximise profits, keep their shelves full of products and act in a way described by Professor Davies as a rational retailer. Marks and Spencer suggest that the fact that prices were maintained notwithstanding the decrease in the rate of the tax burden suggests that tax was not passed on. In my judgment it was open to the Tribunal, in the light of its conclusions as to the way margin was calculated to conclude that tax was in fact passed on. The absence of evidence as to what happened on the change from purchase tax to VAT does not undermine the consequences of the finding that margins were fixed after taking into account VAT. Since the Tribunal concluded that the price was maintained after the introduction of VAT there could be no conclusion that sales decreased as a result of the introduction of VAT.

The increase of VAT to 15% in June 1979 had no effect on sales. The facts recorded in paragraph 46 provide an ample factual basis for that conclusion.

The increase in price in May 1991 had an effect on margins on zero rated products and caused a slight reduction in margins on standard rated products. The Tribunal drew no clear conclusion from those facts (paragraph 59). That was a view, in my judgment, which it was entitled to take.

Once it was discovered that VAT was not chargeable in October 1994, the price was maintained and margins of 43% were achieved reducing when the price was lowered but reaching a percentage of 37.03% in September 1996. The reason for the reduction was increased costs due to an improved recipe and price rises allowed to McVities, (see paragraphs 49-50). The Tribunal concluded that Marks and Spencer in that period sought to maximise profits and apart from the short period when the price was reduced and then increased, it stayed at the same price as that which was applied when zero rating came into effect in October 1994. (Paragraph 49). In commenting on the period between September 1994 to September 1996, the Tribunal said:-

"It seems to us that a longer term analysis would be required to determine whether ultimately the margin on teacakes was reduced to its level before removal of the VAT and whether there was a consequent effect on their price." (Paragraph 59)

Marks and Spencer suggested the clear inference is that because a higher margin was achieved once teacakes were zero rated VAT must have been absorbed when teacakes were standard rated. Thus the tax was not passed on. I do not agree. The fact that Marks and Spencer did not pass on the benefit of zero rating to its customers could mean that it had not passed on the burden of VAT before or that it was taking the opportunity to maximise its profits in circumstances where customers were unaware of the change in the tax status of teacakes and not passing on the benefit of that change to its customers when prior to October 1994 it had done so. The evidence of what happened after October 1994 does not assist as to the conclusion whether the tax had been passed on in the past.

However, I should record at this stage that this 28 month period is relied upon by Marks and Spencer as evidence as to what would have happened had teacakes been zero rated from 1993. The achievement of higher margins on the introduction of zero rating provides a basis, asserts Marks and Spencer, for concluding that such higher margins would have been achieved in 1973. But it is important to recall that the conclusions stated in paragraph 59 were made in the context of considering whether tax was passed on and in not relation to the second question as to what would have happened had teacakes been zero rated throughout the period from 1973. It is to that question I now turn.

Loss of Profits

The resolution of this issue, unlike the issue as to whether the tax was passed on, required the Commissioners to hypothesise as to what would have happened had teacakes been zero rated, as they should have been, in 1973. This was accepted by Marks and Spencer. Marks and Spencer contended that by maintaining prices and selling the same number of teacakes as were actually sold it would have increased its profits by at least as much as its VAT. The Tribunal concluded that that hypothesis was not correct. That conclusion was based upon its view that customers would have known in 1973 that no VAT was chargeable on teacakes in stark contrast to the impact of purchase tax. The Tribunal concluded that in a competitive market, as a rational retailer, Marks and Spencer would have reduced the price in order to maintain or increase sales (see paragraph 63). Thus it concluded that after a delay of a year or two (reflected in the Commissioners' concession of 10%) prices would have dropped and the normal margin would have been achieved (see paragraph 65).

These conclusions are attacked because, it is said, they are based on assumptions. That is true, in a sense. Assumptions were inevitable bearing in mind that both sides were arguing as to an hypothesis. The hypothesis necessarily required assumption in the sense that there could be no factual evidence as to what "would" have happened.

Marks and Spencer also rely upon the findings, to which I have already referred as to what happened in 1994. But the Tribunal was entitled to conclude that the maintenance of prices after October 1994 was due to the increase in costs and was of no assistance in deciding whether prices would have been reduced back in 1973.

The conclusion of the Tribunal was also criticised because it failed to attach significance to the fact that sales increased after 1979 notwithstanding the increase of the rate in VAT. Marks and Spencer argue that the Tribunal ought to have concluded that the same prices would have been applied even if the teacakes were zero rated. If the same prices had been applied at that time it would have lead to a greater margin and thus greater profits. No doubt these contentions were made before the Tribunal. The Tribunal did and was entitled to reject them.

In my judgment the Tribunal was entitled to conclude that the hypothesis for which Marks and Spencer contended was incorrect. It was entitled to conclude that competitive forces would have compelled Marks and Spencer to reduce its prices and thus maintain rather than increase its margins if teacakes had been zero rated.

Profits from Sales of Other Products

The Tribunal concluded that even if the impact of VAT had been to cause a drop in demand Marks and Spencer was in a position to replace any losses consequent upon that drop in demand by sales of other equally profitable products. It is important to note that this ground was not a necessary part of its conclusion that Marks and Spencer did not lose profits as a result of the impact of the erroneously charged VAT.

The Tribunal concluded that Marks and Spencer's policy of filling shelf space would have led Marks and Spencer to move teacakes from its shelves and replace the teacakes with a another product with the same margin and higher sales or with a higher margin with the same level of sales (see paragraph 72). In my judgment Marks and Spencer's criticism of this conclusion is well-founded. Whilst there was evidence that products would be withdrawn if they failed to achieve the target margin it does not follow that other products likely to have achieved the target margin would have replaced those products. In my judgment, where the Tribunal is not satisfied that there was no impact on the profits from the sales of a particular product it is not appropriate to introduce a further hypothesis that those profits might have been covered in some other way. To carry that hypothesis further and make further assumptions as to what might have happened if the impact of VAT was to cause loss in respect of the sales of a particular product, creates an unfair burden on the trader. If that trader is a rational trader, such as Marks and Spencer, on the Tribunal's reasoning it would be very difficult, if not impossible, to show that it might not have been able to substitute its failing product by another more successful. The approach comes too perilously close to imposing a burden on the trader. If the trader has asserted that it has suffered losses in relation to a particular product and produces material to support that assertion it should not have the burden of dealing with the assumed prospect of success in relation to a different product. Such an approach requires excessive speculation. It requires, amongst other things, an assumption that the other product would be as successful as the product for which it was substituted and would not otherwise have been sold. In my judgment the Tribunal should not be invited to introduce such speculation into its considerations.

Had the issue of substitute sales been an integral part of the Tribunal's conclusion the Tribunal's approach would have infected that conclusion to the extent that I would have allowed the appeal and remitted the case. I am satisfied that the question of substitute sales was free standing and the Tribunal's conclusion that no loss was suffered as a result of the impact of VAT on teacakes was not dependant on its conclusion as to substitute sales. Its conclusion was reached before the Tribunal turned to that issue (see paragraph 65).

Expert Macro-economic Evidence

The Tribunal's willingness to accept expert evidence as to the issue of passing on the VAT and as to its likely impact has been challenged by Marks and Spencer. Marks and Spencer contends that economic evidence as to the effect of VAT should not be admitted because it is based upon general assumptions which do not condescend to sufficient particularity as to the product in question.

I agree that the resolution of the issue of unjust enrichment should not turn on evidence of this nature. In order successfully to establish the defence of unjust enrichment the Commissioners must rely upon facts and inferences drawn from those facts. In my judgment the Tribunal was careful to reach its conclusions independently of the expert evidence. (See paragraph 74). The Tribunal only used the evidence of Dr Robinson which it accepted in preference to Dr Sentance as support for the factual conclusion it had already reached (see paragraph 79). The Tribunal was entitled to prefer Dr Robinson's as to whether VAT was likely to have been passed on and as to its likely impact. But it was, in my judgment correctly, astute not to use that evidence as anything other than support for the conclusions it had already reached. That, in my judgment, was the correct approach. The expert evidence can be used as support but not to fill gaps in factual evidence. I do not think that the Tribunal, in this case, made that error.

Marks and Spencer complains that the need to adduce such evidence is excessively burdensome. I can see no basis for saying it was excessively burdensome in this case. But I share Marks and Spencer's anxiety as to the use of such evidence in other cases. Marks and Spencer has drawn attention to cases of other smaller traders (there may be as many as 99). Tribunals, in these cases, will, no doubt, be careful not to allow the use of such macro-economic evidence as an instrument of oppression. Such small traders cannot be expected to have the resources to deploy expert evidence to challenge experts called by the Commissioners. Indeed, the amounts at stake might not justify the expense. That was not the situation in this case and any conclusions I reached as to what was appropriate in other cases would necessarily be obiter. I refrain from further comment trusting in the Commissioners to bear in mind that if in such a case they called expert evidence it might well be regarded by a Tribunal as oppressive and thus imposing an excessively difficult burden upon a taxpayer contrary to the principle of effectiveness. Even if Community law rights cannot be asserted, that principle should inform the approach both of the Commissioners and the Tribunal.

I conclude, for the reasons I have given, that the Tribunal was entitled to find that VAT was passed on and that it caused no loss of profit. In those circumstances it was entitled to be satisfied that the Commissioners had made out their defence.

Jurisdiction

The issue which arose before the Tribunal in relation to jurisdiction has fallen away. Any matter not covered in the Appeals could have been dealt with in the Judicial Review proceedings launched by Marks and Spencer. In those circumstances the Commissioners argue that the appeal against the Tribunal's decision as to jurisdiction, limited as it was, is academic.

The jurisdiction appeal was mainly concerned with the Commissioners' challenge to the Tribunal's jurisdiction to decide issues raised by Marks and Spencer. The Tribunal ruled that it did have jurisdiction to entertain Marks and Spencer's assertions that it had enforceable Community rights. It considered those rights in relation to the three year period of limitation. The Tribunal ruled:-

"... In exercising such jurisdiction as the domestic law gives us, we have to give effect to such enforceable Community rights as the claimant successfully asserts. Here Marks and Spencer have identified potentially enforceable Community rights. ... The issue is whether, as a matter of law, section 80(4) bars Marks and Spencer's claim or whether their enforceable Community rights prevail over that subsection." ([1998] EuLR 162).

In so ruling the Tribunal said that it did not have jurisdiction to rule on points described in the grounds of appeal as:-

"(B) The decision at the material time was based upon a distinction between payment and repayment traders and is therefore discriminatory and offends against the principles of equality within the EC law.

(C) The respondents have treated other taxpayers differently (Business Brief 3/97) and this further offends against the principle of equality.

(D) If which was denied, the capping provisions are valid within domestic legislation, then the provisions cannot be relied upon to the extent that:

(iv) the respondents' conduct gave rise to legitimate expectations by which the Appellant within the legal doctrines both within the UK and the EC ..." (see page 157 I do not know how the last sentence finished).

I should say, although the point is academic now, I do not understand why the Tribunal declined jurisdiction in relation to (B). To the extent that Marks and Spencer was entitled to rely upon Community law principles and contend that the distinction between payment and repayment traders offended against the principle of equality or the suggested principle against discrimination I do not see why, consistent with its decision that it was entitled to rely upon Community law rights before the Tribunal it could not also rely upon the asserted right not to be discriminated against and to be afforded equal treatment with those whom it described as repayment traders. After all, the Tribunal itself did deal with the distinction considering the principle of equality in its decision on the three year cap.

If Marks and Spencer had mounted sufficient evidence to establish that the provisions in section 80(4) was discriminatory and thereby impeded competition then I would have thought it was within the jurisdiction of the Tribunal.

However insofar as the complaint is not focused upon the consequences of the statute but rather upon the conduct of the Commissioners then it is clear the Tribunal had no jurisdiction. Its jurisdiction is limited to decisions of the Commissioners and it has no jurisdiction in relation to supervision of their conduct. It is unnecessary to develop my reasoning any further. No submission was advanced before me in oral argument as to the Commissioners' conduct. No submission in writing was made in relation to the Commissioners' conduct giving rise to legitimate expectations over and above the arguments, in law, in relation to legal certainty. The only possibly outstanding matter is the short point raised in paragraph 7.20(1)(vi) in relation to opticians and mail order traders which is not made in relation to discounted gift vouchers. Since I ruled that, in relation to teacakes, Marks and Spencer had no Community law rights it is unnecessary to deal with the matter further.

Reference to the ECJ

Marks and Spencer did not develop any oral argument that any aspect of these appeals or the judicial review application should be referred to the European Court of Justice. Mr Vaughan QC on behalf of Marks and Spencer tentatively raised the question at the close of argument seeking, as I understand it, a provisional decision with an opportunity to argue the matter further. I expressed some doubt as to whether that was possible but, in any event, I understand the reluctance of Marks and Spencer since any request for a reference (on which, I appreciate, the question as to whether to refer does not depend) would be bound to be coloured by the result in the unjust enrichment appeal. If that appeal was unsuccessful it might well be that there was insufficient at stake to make a reference worthwhile.

In any event I decline to refer. The principles in relation to the unjust enrichment appeal are well settled. Their application is a matter for the national court. In relation to the retrospective imposition of the three year cap I accept that the matter is not "acte claire" but in my discretion I decline to refer that single issue. I am sufficiently clear in my own mind as to the correct result that I do not think that issue should be referred.

For the reasons I have given I give judgment in the appeals to the Commissioners and I dismiss the application for judicial review by the applicant.

MR LASOCK: The only other thing I mention -- this is something we noticed only this morning. If you look at page 67, it is the fourth line from the bottom:

"(there may be as many as 99)."

The context suggests that they are just enrichment cases, but we think that they are actually VAT capping cases. I am told that they are both.

MR JUSTICE MOSES: If it is only VAT capping cases the point I am making is a wasted point anyway.

MR LASOCK: My learned friend says that they are both.

MR JUSTICE MOSES: I have said it now and it is all in there.

So far as relief is concerned, is that right -- I suppose the appeals are dismissed and the judicial review dismissed, full stop. That is the order.

MR LASOCK: Yes. In relation to costs, the Commissioners did not ask for costs, or have not asked for costs so far before the Tribunal and therefore we would only ask for the costs before your Lordship in relation to the appeals from the Tribunal and the judicial review application, and that is all.

MR JUSTICE MOSES: You say "only", that is all the costs of the hearing before me.

MR LASOCK: It is not a situation in which we are asking for costs below.

MS STRATFORD: My Lord, in relation to costs, dealing first with the capping and jurisdiction appeal: the capping aspect of that appeal I cannot resist the respondent's application for costs. However, in relation to the jurisdiction part of your Lordship's decision, Marks and Spencers have succeeded, to some extent at least, in that your Lordship has held that in relation to the discrimination part of the Tribunal's decision the Tribunal was wrong in that there was jurisdiction.

MR JUSTICE MOSES: Yes.

MS STRATFORD: And that the decision -- if the decision is fettered against the Community Law principles and discrimination there was jurisdiction for the Tribunal to consider that. Those points, which were taken by the Commissioners on jurisdiction, led to a separate hearing before the Tribunal, a separate written decision of the Tribunal, and also led the appellant to have to issue the protective judicial review proceedings, which were also before your Lordship.

As you have noted in your appeal, the part of the jurisdiction appeal pursued by Marks and Spencers before your Lordship, both in the outline argument section 8 and oral argument, related exclusively to this question of whether the Tribunal in fact had jurisdiction to deal with questions of discrimination, so in my submission Marks and Spencers in effect succeeded on that point.

MR JUSTICE MOSES: Are you saying that had it not been for the query about jurisdiction you would never had issued judicial review proceedings?

MS STRATFORD: That is my understanding. It is made clear on the face of the grounds for relief as I recall, that they were issued solely for protective reasons.

MR JUSTICE MOSES: There was all those sort of other traders who have been granted privileges that were --

MS STRATFORD: I am told that it was made plain at the Tribunal. Since that was the only aspect of the case which I was involved in at an early stage I am reasonably confident in saying that there is the point expressly made in the -- I do not know whether your Lordship still has the core bundle by any chance.

MR JUSTICE MOSES: I have been living with it, yes.

MS STRATFORD: The Form 86A is at the back, at tab 9 of the core bundle. At paragraph 9, for example, of the grounds for relief, the third sentence:

"Marks and Spencers is therefore lodging this application as a cautionary measure ..."

So it was protective. I fully accept, of course, that the judicial review application, as drafted, covered the full gamut of all of the arguments that Marks and Spencers was trying to run but, nonetheless, it was solely because of the points which the respondent took as to jurisdiction --

MR JUSTICE MOSES: It did not take up much time of the hearing. It is really the costs of drafting this document and serving it.

MS STRATFORD: There may not be many additional costs of the judicial review proceedings and I was going to come on to those in a moment, but I was merely making the point that they were solely occasioned by the jurisdiction points which were taken by the respondent, which in the event have not --

MR JUSTICE MOSES: What are you asking me to do?

MS STRATFORD: I would ask, insofar as there are additional costs, both before your Lordship and before the Tribunal, occasioned by the jurisdiction arguments which were run by the Commissioners, I would ask for the costs.

MR JUSTICE MOSES: Can I make orders of costs that cover the hearings before the Tribunal?

MS STRATFORD: That is sought in the notice of motion.

MR JUSTICE MOSES: It may be sought, but what power have I got to deal with orders for costs? Normally each side bear their own unless there is behaviour which suggests to the contrary.

MS STRATFORD: My understanding -- I am instructed there was costs in cause at the Tribunal and I assume that was after the capping hearing.

MR JUSTICE MOSES: Anyway, your submission is you want all the additional costs occasioned by, firstly, the appeal and then the judicial review proceedings?

MS STRATFORD: Indeed.

MR JUSTICE MOSES: By which you mean the written document, because it did not add anything to the argument?

MS STRATFORD: I think that must be right.

MR JUSTICE MOSES: I am not going to knock anything off the argument costs. Let me hear Mr Lasock.

MR LASOCK: So far as the Tribunal is concerned if my learned friend wants costs there the proper thing to do is to go to the Tribunal and ask for them, because this is a situation in which, as I understand it, the Tribunal has not actually made an order for costs and has let matters lie.

MR JUSTICE MOSES: It probably said, "Wait and see what happens in the 3 year capping" and then there was no order for costs in that.

MR LASOCK: If we come to the remaining part of my learned friend's application it appears to be based on this, that because Marks and Spencer contends that it was successful on the discrimination point, therefore it is entitled to all the costs relating to the jurisdiction and judicial review aspects of the case. That ignores the fact that the discrimination point is the only point on which they were successful. They lost everything else. It was not a discrimination point on jurisdiction that generated the application for judicial review; it was because they lost all the jurisdiction points. That is what generated -- no, they issued the judicial review application because they saw that they were at risk.

MR JUSTICE MOSES: If they lost all the jurisdiction points, then they would have had to bring judicial review proceedings. Then they won all save one of the jurisdiction points, but still persisted in the judicial review because they still had the discrimination point; is that not the way it works?

MR LASOCK: If that is what they are arguing, yes.

MR JUSTICE MOSES: Yes, it is.

MR LASOCK: However, our understanding is that, in fact, they lost the jurisdiction point. Your Lordship may recall that one of the oddities in this case is that both parties believe that they won the jurisdiction battle before the Tribunal. However, only one of the victorious parties is appealing the decision and that is Marks and Spencers. Your Lordship might believe that that gives a vague hint as to who did actually win the jurisdiction fight.

MR JUSTICE MOSES: "Lost" is perhaps an unnecessary pejorative word. I thought he had concluded that he could deal with everything that involved an assertion of Community Law rights, save for discrimination. That was certainly the way I dealt with it in my judgment.

MR LASOCK: Our contention before the Tribunal was that if Marks and Spencer could identify a European Community Law right, then the Tribunal had a jurisdiction.

MR JUSTICE MOSES: Yes.

MR LASOCK: Marks and Spencer disputed that, because they also were asserting other things, such as legitimate expectations, which we said did not fall within the jurisdiction of the Tribunal because that related to questioning the conduct of the Commissioners.

We were successful on our application to strike out in relation to the jurisdiction aspects. What your Lordship has done is to say that, as we understand it, we were right to have been successful, save with regard to discrimination. The end result is that there is only one part of the jurisdiction argy bargy in respect of which Marks and Spencer were successful. At the most that would entitle, we submit, Marks and Spencer to have some tranche or little bit out of the total costs relating to jurisdiction that related to the discrimination argument.

In our respectful submission, the exercise of identifying that part --

MR JUSTICE MOSES: It would be hopeless, yes.

MR LASOCK: -- is not worth it and it is much simpler to leave it as we have submitted it ought to be, bearing in mind of course that we are not ourselves pursuing any costs in relation to the proceedings before the Tribunal, so to some extent there is a fair balance between the parties.

MS STRATFORD: My Lord, this is a baffling dispute, but like yourself --

MR JUSTICE MOSES: You are telling me; I hope you are as baffled as I am.

MS STRATFORD: I genuinely understood and understand that in relation to the jurisdiction argument before the Tribunal Marks and Spencer succeeded in establishing that the Tribunal did have jurisdiction.

MR JUSTICE MOSES: It all depends on how you identify the argument, I am afraid.

MS STRATFORD: That as may be, but fortunately, perhaps, I agree with my learned friend that the proper way to deal with the costs of the jurisdiction hearing before the Tribunal may be to go back before the Tribunal. I understand that those instructing me attempted to have costs dealt with at an earlier stage and that was not successful.

MR JUSTICE MOSES: All you are arguing --

MS STRATFORD: To come on to the costs before your Lordship, both in relation to jurisdiction and judicial review, in my submission Marks and Spencer have succeeded to a degree. The judicial review proceedings would not have been issued and would not have been necessary. The exercises most certainly were not in their point of view and, in my submission, a rough and ready percentage approach could properly be taken by your Lordship.

I should add that it may be relevant that although in the event the outcome of the jurisdiction dispute has not affected the decision that you have reached, nonetheless Marks and Spencer's success on this issue, to some degree, we would say, before the Tribunal and now before your Lordship, does assist in clarifying the law helpfully of public interest and hopefully will avoid the need for unnecessary duplicative judicial review applications being lodged in the future.

JUSTICE MOSES: I would have thought so. Thank you very much. The Commissioners will have their costs.

There was an application before me by Marks and Spencer in relation to the judicial review proceedings which they say they issued as a result of their jurisdiction appeal in which they assert they succeeded. There is perhaps, somewhat surprisingly, a dispute between the parties as to who won before the Commissioners, irresistibly reminding one of Tweedle Dum and Tweedle Dee in the fog. Neither have understood who won and have certainly been unable to explain to me who won, but I do not think it matters. In the result, the judicial review proceedings were brought because it was feared by Marks and Spencer that they would lose the whole of the jurisdiction appeal.

There is no application for costs in relation to the Tribunal hearings and I think that honour is satisfied if I say no more, but just say that the Commissioners get their costs of these hearings. After all, the judicial review proceedings did not in the event lead to any greater success that the unfortunate Marks and Spencer achieved otherwise in this case.

MS STRATFORD: My Lord, that brings me to an application for leave to appeal.

MR JUSTICE MOSES: Yes.

MS STRATFORD: I seek leave to appeal for three principal reasons: firstly, these proceedings raise a number of significant complex legal questions, both Community Law --

MR JUSTICE MOSES: Can I just ask what Mr Lasock's attitude is? I am minded to give leave. Some of the points, I agree, are pretty well -- one must not say "stale runs" in relation to them, but others of them; perhaps not. If you had lost you would have wanted leave.

MR LASOCK: Let me put it this way: if we had lost on VAT capping we would have wanted leave and I fully understand my learned friend's position on that. When it comes to unjust enrichment, our submission is that, as your Lordship has pointed out on the last page of your Lordship's judgment, this is a case where it is really settled law. It is an application for VAT settled law to the circumstances of this case.

MR JUSTICE MOSES: So I give leave in relation to everything, but not the unjust enrichment appeal? It had not occurred to me I could split it up.

MR LASOCK: The other thing is jurisdiction because, again, in our submission, realistically the jurisdiction aspects are fairly well settled. I say "fairly well settled" because it is well settled, but the Tribunal does not have jurisdiction to look over the conduct of the Commissioners.

MR JUSTICE MOSES: Nobody will argue that is wrong.

MR LASOCK: No. The result is that, we submit, there is only one aspect of the case that really merits its going up to the Court of Appeal and that is VAT capping. We are not proposing to try to go in to the VAT capping issues and split them up and say which one is a good one and which one is not. For example, discrimination, your Lordship said there is no evidence; we are not taking that point.

MR JUSTICE MOSES: Let it go up there and if they want to deal with it --

MR LASOCK: VAT capping is the only thing that we submit is one that does merit leave being granted.

MR JUSTICE MOSES: Can I just say, when I was drafting the judgment on jurisdiction and I looked at it again, what slightly makes me nervous about not giving leave is that it looks as though, as it were, my views and the Tribunal's views are somehow at loggerheads. I do not understand how the Tribunal came to the view in relation to discrimination of a sort of legal discrimination as opposed to a factual discrimination. I just did not understand why they thought they did not have jurisdiction, so it may be that I have just completely misunderstood and they have entrenched in their views something that perhaps somebody else ought to sort out.

MR LASOCK: We would submit -- and I think this is a repetition of what I put in argument to your Lordship.

MR JUSTICE MOSES: It may be that I just forgot your argument.

MR LASOCK: We suggest that if you read the two Tribunal decisions together you see that one of the things that concerned them was that the Tribunal was being drawn into deciding whether or not the statute was lawful and opposed to simply ignoring the statute and enforcing an enforceable Community Law right.

MR JUSTICE MOSES: It does not matter whether the statute is lawful or not if one sidesteps it.

MR LASOCK: Save for the fact that you then get in to the problem as to whether or not a discrimination argument does get you there. Some discrimination arguments may, but this discrimination argument does not. At all events, we would simply say this, that the jurisdiction question is in addition something that really is not decisive of this case at the end of the day. As your Lordship pointed out, it is academic. There is not really much point in sending up to the Court of Appeal something that is academic.

That, we submit, indicates that VAT capping issues quite sensibly can go, but the rest of it we do not see much point.

MR JUSTICE MOSES: Yes. Sorry, I interrupted you.

MS STRATFORD: I think I understand now my learned friend's position. Dealing first with jurisdiction, it is of course part of the capping proceedings so, apart from anything else, from a procedural point of view that is one action and one order of your Lordship in that matter and, in my submission, it may well be --

MR JUSTICE MOSES: I follow that. What about unjust enrichment?

MS STRATFORD: In relation to unjust enrichment I appreciate that your Lordship has felt able to come to a more firmly expressed view at the very end of the judgment in relation to the capping part of your decision where you recognise that, at least insofar as retrospectivity is concerned, it may not be apt and fair.

MR JUSTICE MOSES: But unjust enrichment has nothing to do with apt and fair. Do the Court of Appeal really -- do you want another go to explain to them about moving demand curves?

MS STRATFORD: Possibly one might hope to spare them that particular delight, but there are certain points dealt with earlier in the unjust enrichment part of your decision.

MR JUSTICE MOSES: Like what?

MS STRATFORD: Such as the section around about page 50 of your judgment. At page 51, for example, my Lord, you recognise that there is no decision of the European Court of Justice resolving the issue of the burden of proving damage suffered in consequence of passing on tax. In my submission that remains a difficult issue and one which you recognise as not being addressed.

MR JUSTICE MOSES: I really agreed with your submissions though on that. I mean, you won on the burden of proof point really. I just I did not much like talking about shifting burdens and evidential burdens and I said the Tribunal got it right because they said look at all the evidence and decide whether the Commissioners have proved unjust enrichment, but I also added that if you just kept quiet you might lose, if you had not said anything bit. I do not really understand Mr Vaughan to say anything to the contrary.

MS STRATFORD: I certainly do not want to get into another argument about who has won what.

MR JUSTICE MOSES: You are quite right, that is a point of some significance.

MS STRATFORD: I would also refer to the opinions of the Advocate Generals in San Giorgio and Comateb.

MR JUSTICE MOSES: If you had been right about that, that would have been a knock-out blow.

MS STRATFORD: Indeed, and that obviously is something on which the Court of Justice does not give an express or definitive ruling. I fully accept that your Lordship has felt able to reach certain conclusions about what they would say if they had dealt with it fully, but nonetheless it does remain at large.

MR JUSTICE MOSES: Very well, you have persuaded me. I will give leave on all of them.

MS STRATFORD: I am very grateful.

MR JUSTICE MOSES: You will just have to be careful you do not get too enthusiastic about some of the details of unjust enrichment or otherwise you will just lose all the other points because the Court of Appeal will get fed up. Thank you very much.

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