19362
Value Added Tax - Claim for input tax under-declared - Claim made on 30 January 2001 for input tax under-claimed 1989-1996 - Legislation introducing limitation period for making claims had no provision for transitional relief – Effect on claim - Whether reasonable period sufficient for making claim – Value Added Tax Regulations 1995, SI 1995/2518, Reg. 29 (1A) – Appeal dismissed
LONDON TRIBUNAL CENTRE
THE LONDON INSTITUTE Appellant
(NOW KNOWN AS THE UNIVERSITY OF THE ARTS, LONDON)
THE COMMISSIONERS FOR HER MAJESTY’'S REVENUE & CUSTOMS Respondents
Tribunal: DR KAMEEL KHAN (Chairman)
MR CYRIL SHAW FCA
Sitting in public in London on 12 and 13 September 2005
Mr D Scorey, instructed by KPMG LLP, for the Appellant
Miss V Sloane, instructed by HMRC Solicitors Office, for the Respondents
© CROWN COPYRIGHT 2005
DECISION
Appeal and Background Facts
- The Appellant appeals pursuant to Section 83(c) Value Added Tax Act 1994 (“"VATA”") against the decision of the Commissioners for Her Majesty’'s Revenue and Customs (“"the Commissioners”") refusing a voluntary disclosure claim. The claim is for an under-declaration of input tax made by letter dated 30 January 2001. It relates to input tax underclaimed in the prescribed accounting periods from 1 April 1989 to 30 April 1996. The total amount of VAT claimed, excluding interest, is approximately £1.5 million.
- The disputed decision is contained in a letter from the Commissioners dated 29 April 2003. The claim was rejected by the Commissioners, on the basis that it was time-barred pursuant to Regulation 29(1A) of the Value Added Tax Regulations 1995 (“"the 1995 Regulations”"). The 1995 Regulations provide that the Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction shall fall to be claimed more than three years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made. This three year cap was introduced with effect from 1 May 1997 by the VAT (Amendment) Regulations 1997.
- The Appellant had previously made a claim on 31 August 1999 for input tax underclaimed in prescribed accounting periods from 31 July 1996 to 31 July 1999. The claim for these periods fell within the three year time limit and the Commissioners paid the Appellant approximately £1 million in respect of this claim in 2000-2001.
- The group VAT registration of the Appellant comprises three entities:
(a) the London Institute which comprises 6 colleges and two halls of residence. Input tax incurred by the colleges is only recovered where the directly associated onward supply is taxable. The Institute may be eligible to reclaim a portion of overhead expenses but to date (1994) no method had been proposed. The two halls of residence have an agreed recovery of 13/52 being representative of the number of weeks open for taxable activities;
(b) Development at London Institute Limited (“"DALI Limited”") where all income is taxable except grants from the then Polytechnic and Colleges Funding Council (“"PCFC”") towards salaries. No directly related input tax is claimed; and
(c) the Cochrane Theatre was included in the VAT group from 1 November 1992. The current partial exemption method as agreed with the VAT City Office enabled full input tax recovery on bar takings, i.e. where it can be directly related to taxable activities, and the recovery of 64% of the unattributable tax. The remaining 36% being representative of income received from the London Institute for exempt educational activities. The percentages are reviewed annually.
- The Institute is based in central London and provides higher and further education principally in the fields of Art and Design. It offers courses to UK, EC and overseas students through its different colleges and locations throughout London. Some of the colleges are well known and include the London College of Fashion, Central St Martins College of Art and Design, London College of Printing, Chelsea College of Art and Design and Camberwell College of Art and Design.
- The Cochrane Theatre is modest. It is used by the various colleges for stage design courses, shows and events. It undertakes a mixture of exempt and taxable supplies as the Theatre is also hired out for use to outside organisations for which a standard rated fee is charged. Additional taxable theatre income is from admission charges and from its small bar. Input tax incurred on the bar stock is recovered in full and is not part of the claim for our purposes. DALI Limited runs short courses from the various college sites and has an office at each college. It is not an “"eligible body”" under the VATA, Schedule 9, Group 6 and its supplies of training courses are subject to VAT at the standard rate. It receives some grant income in respect of non-credit bearing courses. The VAT identified as wholly relating to taxable supplies has been recovered in full and is not part of the claim for our purposes.
- Pursuant to Section 124A(3)(B) and 125 of the Education Reform Act 1988 as amended, the London Institute changed its name to “"the University of the Arts, London”" This was confirmed by the Privy Council Office on 10 May 2004.
- The London Institute was the representative member for the group VAT registration.
- For the purposes of this appeal, we should record that two bundles of documents were presented to the Tribunal: Bundle A containing an agreed bundle of documents which comprehensively dealt with all correspondence and other relevant paperwork and Bundle B, containing legislation and authorities. There was one witness called, Mr David Martin James, Head of Finance at the Appellant. He provided a Witness Statement.
Appellant’'s Arguments
- The Appellant’'s main submission concerns the legality of Regulation 29(1A) of the 1995 Regulations (“"Regulation 29”"). It is their submission that the legislation is unlawful and contrary to the directly enforceable rights of the Appellant and must be disapplied by the Tribunal, which is bound to give effect to the Appellant’'s rights. The legislation took effect in May 1997. Before 1997, UK law allowed a taxpayer six years to make a claim for overpaid tax. This was stated in Section 80 VATA. There was no time limit for claiming input tax and VAT on taxable supplies was allowed once attributable to taxable transactions. The recovery of input tax was allowed by Article 17-20 of the Sixth Directive. These provisions had been implanted into domestic UK law by sections 20-26 VATA. These rights are directly enforceable in the hands of the taxpayer. ...See Marks and Spencer plc v Customs and Excise Commissioners [2002] STC 1036 (“"M&S 1”"); Marks and Spencer plc v Customs and Excise Commissioners and University of Sussex v Customs and Excise Commissioners [2004] STC 1(“"M&S 2”").)
- The Commissioners were of the view that payment traders (i.e. those making a net payment of VAT to the Commissioners) could claim their VAT repayment under Section 80 VATA and repayment traders (those to whom the Commissioners made a net payment) made claims under Regulation 29. The Appellant had made a voluntary disclosure pursuant to Section 80 VATA. The Commissioners in their letter of 26 August 2003 correctly identify that all claims to recover input tax are to be made under Regulation 29 of the 1995 Regulations and cannot be made under Section 80. The Commissioners changed their view following a High Court decision of Neuberger J ([2001]STC 1495) which was upheld by the Court of Appeal (M&S 2).
- The Appellant accepts that the UK could impose a time limit on the recovery of input tax but say that time limit must comply with European law. The Appellant relies on the ECJ’'s comment in M&S 1 that national legislation limiting the period of a taxpayer’'s entitlement to recover tax:
“"…is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation”" (see paragraph 38).
- They argue that the Commissioners rejection of its claim is unlawful in European law, it being “"incompatible with the principle of effectiveness and the protection of legitimate expectation”" as set out by the ECJ in M&S 1 (para 37 to 38 and 45 to 46).
- Mr Scorey for the Appellant cogently argued that the rejection of the claim is unlawful in that the Appellant had directly effective rights under Article 18(3) of the Sixth Directive, which had accrued prior to 1 May 1997. Since the introduction of the time limit provided for in Regulation 29 was not preceded by the introduction of transitional arrangements which allowed an adequate period after the enactment of the legislation for the lodging of claims for repayment of input tax, there was in effect no valid bar to claims which had accrued prior to the date of the enactment of Regulation 29. Regulation 29 therefore can only be prospective which means that it would only apply to claims post-May 1997, and given the continued absence of transitional provisions, the legislation continues to breach accrued community rights.
- .1 The Appellant states that based on the case of Conde Nast Publications Limited v Customs and Excise Commissioners [2005] ALL ER (D) 77 (Jun) this Appeal should be allowed. In that case, the Court looked at the situation where sufficient or reasonable time has elapsed since the non-compliant legislation was introduced. Firstly, that once a reasonable time (a minimum of six months) has passed since the introduction of the legislation and regardless of whether the taxpayer knew he had or believed that he might have, a Community Law right which he could enforce notwithstanding the failure to provide for a proper transitional period, then a new time limit has been set. In this approach, the taxpayer is not allowed to sleep on his rights since, in the interest of finality and certainty, there has to be a cut off date for the making of claims. The Appellant does not rely on this approach, which is called the “"first approach”" in Conde Nast. They do rely however on the “"second approach”" which gives effect to the principle of effectiveness and allows the taxpayer to enforce his Community Law right until:
“"The time has been reached when he could first have been expected to assert that right; and he could not be expected to do so as long as that right had not been established and was subject to challenge in the ECJ by the Member State concerned. He should, therefore, have a reasonable time in which to assert his Community Law right once that right had been established or at least once a generality of taxpayers and their M&S advisers appreciated such a right might subsist”" (para 39).
- Under the second approach, it is important that a taxpayer is clear on his rights and is in a position to make a claim before the expiration of the time limit. The Appellant argues that they would not have known about their rights until July 2002 (1) and possibly not until October 2003 (M&S 2) when the issue was dealt with and finalised by the Courts and accepted by the Commissioners. The reasonable period must be counted from that date. The idea that the rights were in dispute means that the taxpayer would not have been clear about his rights. The Appellant argues that, at the earliest, only on 5 August 2002 when the Commissioners issued Business Brief 22/02 accepting the ECJ’'s decision in M&S 1 did the reasonable period begin to run.
- The Appellant accepts that a reduction of an existing time limit of 5 to 10 years must provide a minimum transitional period of six months in which claims can be made as decided in Grundig Italiana SpA v Mistero delle Finanze Hydgnebt (C-255/2000)(“"Grundig”").
- The Appellant says that the failure to include contemporary transitional provisions when Regulation 29 was introduced is a breach of the Appellant’'s directly effective rights and this is supported in the Conde Nast case when Warren J stated:
“"It is clear that the failure to include an appropriate transitional period when introducing Regulation 29 (1A), during which a trader could make a claim under Regulation 29 in relation to the periods prior to the new time limit – limited period, was a breach of Community Law giving the trader directly enforceable rights (see para 36).”"
Even if Regulation 29 survives its illegal genesis, they say that it can only be relied upon provided effective transitional relief is granted to enable taxpayers to make claims before the cap takes effect.
- The Appellant further asserts that it is not necessary for them to show that they would have made a claim during the transitional period if it had been provided. Reference was made to the judgment of Warren J in Conde Nast to support this assertion:
“"The fact that he did not have the opportunity to exercise it during the transitional period is entirely the fault of the Member State in failing to comply with its Community Law obligation. It would, against that background, make it excessively difficult, in my judgment, for him to exercise his Community Law right if it were the rule that a taxpayer had to prove something which might, in its nature, be very difficult to prove, namely that he would have exercised his right had a transition period been included.”"(para 62).
- In support of this position, Mr David Martin James, the Chief Financial Officer of the Appellant, gave oral evidence that they would have made a claim if proper notification had been given to them by the Commissioners, but this had not been done.
- The Appellant seeks its costs in this appeal together with interest on any sum finally determined to be payable by the Respondents to the Appellant in accordance with Section 84(8) VATA.
Respondent’'s Arguments
- The Respondents’' primary ground of appeal is that Regulation 29 can have retrospective application even though it was introduced without an adequate transitional period. It is accepted that the introduction by the UK of Regulation 29 without a transitional period was in breach of EC law. The fact only that the capping legislation was introduced without an adequate transitional period does not entitle the Appellant to payment of the sums it has claimed several years after the introduction of that cap. The basis of this contention is that once a reasonable time has passed since the coming into force of the relevant regulation, legal certainty and finality require that a time limit for the making of claims should apply. The Respondents state that the Appellant has slept on their right to deduct input tax since 1989 and the claim now falls squarely within the time limit imposed by Regulation 29. This position they say, is supported by two recent High Court decisions, which are binding on this Tribunal, in Fleming (t/a Bodycraft) v Customs and Excise Commissioners [2005] STC 707 (“"Fleming”") and Conde Nast.
- The imposition of a time limit for claims for input tax under Regulation 29 is authorised either under Article 18(3) of the Sixth Directive or igh under the general power of Member States to lay down procedural conditions for the application for European Law, provided that such conditions comply with the principle of equivalence and effectiveness (see Local Authorities Mutual Investment Trusts v Commissioners of Customs and Excise [2003] EWHC 2766 (CH) (“"LAMIT”").
- The Respondents say that the three year time limit imposed by Regulation 29 is compatible with EC law. Such a time limit is in the interest of legal certainty. The time limit is not disproportionate and does not prevent the effective exercise of directly effective rights.
- The Respondents assert that while the introduction of Regulation 29 breached Community Law, this would not prevent the time limit or “"cap”" for claims being applied retrospectively. The introduction of a three year cap without adequate transitional provisions does not, of itself, entitle the Appellant to payment of the form desired. A shorter limitation period can apply to claims arising before the introduction of the capping legislation providing the principle of effectiveness is observed. The transitional period must be sufficient to allow taxpayers, who initially thought that the period for bringing proceedings was available to them, a reasonable period of time to assert their right of recovery in the even that under the new rules they were out of time.
- The Respondents rely on the first approach in the judgment Warren J in Conde Nast where he said:
“"The first possible approach is that the new national time limit can be relied on by the Member State once a reasonable time has passed since its introduction; this is so regardless of whether the taxpayer knew that he had, or believed he might have, a Community Law right which he could enforce notwithstanding the failure to provide for a proper transitional period. On that approach, it may be that a longer period should be allowed for enforcement of directly enforceable right than the minimum period which could have been expressly provided. In the present case, and assuming that a 6 month transitional period for the purposes of Regulation 24 would have been appropriate, the time limit for making a claim would have expired 6 months after either 26 March or 1 May 1997, long before the claim was in fact made by CNP on 27 June 2003. Even allowing a longer period for enforcing Community Law rights, a reasonable period would have expired long before that date.”" (para 38)
The Respondents argue that on the basis of this approach, the Appellant has slept on their rights and did not make a claim until several years after the imposition of the time limit. Since the time limit is important in the interest of finality and certainty, there can be no successful claim. The time limit, not the knowledge of the taxpayer, is conclusive under this approach. This position is supported by Evans Lombe J in the decision of Fleming when he says that “"the principle of finality and legal certainty requires it to refuse to disapply the limitation provisions”" (para 24).
- The Respondents say that claiming input tax for the period 1 April 1989 to 30 April 1996 by letter on 30 January 2001 would fall well beyond any reasonable transitional period.
- The Respondents submit that the claim made in January 2001 was not an amendment to an earlier claim made in August 1999, which would effectively bring the later claim within the ambit of the earlier claim, but was a new claim, which was out of date. It was a new claim because it related to accounting periods which were not stated in the original claim made in August 1999. The Respondents say that the case of University of Liverpool v Commissioners of Customs & Excise Case Ref MAN/96/728. VAT and Duties Decision 16769 (“"University of Liverpool”") does not support the Appellant’'s contention that it was simply an adjustment to an existing claim.
- In addition to its submissions in response to the grounds of appeal, the Respondent puts forward a further or alternative submission that even if there had been a transitional period, the Appellant would not have made a claim so their Community Law rights have not been infringed by the manner in which the capping legislation was introduced. The Tribunal is requested to make a finding of fact in relation to this ground so submissions can be preserved, if necessary, on appeal. The Respondents say that the time limit may be disapplied where they show, on a balance of probabilities, that the Appellant would not have made a claim. The evidential burden is on the Respondents in such a case. This is different from the position where the Appellant had to prove that he would have made the claim had transitional provisions been put in place at the time. The Respondents say that if the Appellant would not have made a claim by 1997 then their Community Law rights would not have been infringed and the inclusion or absence of a transitional period is therefore irrelevant. This point is made to support the view that the Appellant should not be placed in a better position than if a transitional period had been included in the legislation in the first place. It is a view supported by Warren J in Conde Nast. (see para 55-63)
29 Relevant Dates
| 18 July 1996 |
3 year cap on section 80 claims announced in Parliament, with retrospective effect. |
| 18 July 1996 |
Section 80 claims capped at 3 years with retrospective effect from this date. |
| 4 December 1996 |
PCTA Resolution introducing three year cap with retrospective effect from 18 July 1996. |
| 4 December 1996 |
Start of retrospective transitional period for accrued section 80 claims introduced by BB 22/02 following M&S 1. Period initially ended on 31 March 1997 but extended to 30 June 1997 by BB 27/02 following Grundig Italiana. |
| 19 March 1997 |
Section 47 Finance Act 1997 receives Royal Assent and introduces retrospective 3 year cap to section 80 claims. |
| 25 March 1997 |
3 year cap on Regulation 29 claims announced in BB 9/97. |
| 31 March 1997 |
End of retrospective transitional period (1st version) for section 80 claims under BB 22/02 issued on 5 August 2002. |
| 1 May 1997 |
3 year cap on Regulation 29 claims brought into effect. |
| 30 June 1997 |
End of extended retrospective transitional period (2nd version) for section 80 claims (previously 31 March 1997), introduced by BB 27/02 issued on 8 October 2002. |
| 31 August 1999 |
Initial voluntary disclosure by Appellant for input tax credit for periods 7/96 – 7/99 in the sum of £1,216,275 (subsequently amended on 30 January 2001 to add periods 4/89 – 4/96). Claim made pursuant to section 80, as directed by the Commissioners. |
| 30 January 2001 |
Amendment by Appellant to voluntary disclosure of 31 August 1999, in respect of input tax for the periods 1 April 1989 to 30 April 1996 in the sum of £1,490,998. |
| 10 October 2001 |
High Court Judgment in University of Sussex v HMRC in which Neuberger J held that input tax credit claims should be made pursuant to Reg 29 and not section 80. |
| 22 February 2002 |
BB 2/02 in which the Commissioners maintain that late input tax claims are made under section 80, and not Reg 29. |
| 11 July 2002 |
ECJ Judgment in M&S 1. |
| 5 August 2002 |
Retrospective transitional period announced in BB 22/02 (1st version, i.e. from 4 December 1996 to 31 March 1997). Claims to be notified by 31 March 2000. |
| 24 September 2002 |
ECJ Judgment in Grundig Italiana. |
| 8 October 2002 |
In the light of Grundig Italiania, the Commissioners issue BB 27/02 which introduces transitional period (2nd version); period for section 80 claims from 31 March 1997 to 31 June 1997, i.e. 6 months. Claims to be notified by 30 June 2003. |
| 31 March 2003 |
Notification Date under transitional period (1st version). |
| 31 June 2003 |
Notification Date under transitional period (2nd version). |
| 29 April 2003 |
The Commissioners rejected voluntary disclosure of 30 June 2001 on the basis that Appellant failed to satisfy the conditions set out in BB 27/02 in respect of claims under section 80. |
| 26 August 2003 |
The Commissioners identified the basis of the Appellant’'s claim as Reg 29 and not section 80 VATA. |
| 22 October 2003 |
Court of Appeal Judgment in M&S 2. |
Relevant Legislative Background
- European community law:
Title XI of the Sixth Directive (77/388/EC) contains provisions governing VAT deductions. Article 17 governs the origin and scope of the right to deduct and provides:
“"(1) The right to deduct shall arise at the time when the deductible tax becomes chargeable”".
Article 18 governs the exercise of the right to deduct and provides:
“"(1) To exercise…….right of deduction a taxable person must:
(a)…..hold an invoice
(2) The taxable person shall effect the deduction…
(3) Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of Article (1) and (2).
- UK legislation:
On 18 July 1996 the government announced that the time limit for recovering overpaid output tax under section 80 VATA would be retrospectively reduced to three years from six years. The change was enacted in the Finance Act 1997 on 19 March 1997. No provision was made for a transitional period during which a taxpayer could make a claim in respect of their accrued rights.
Regulation 29 Value Added Tax Regulations 1995 provides for claims for input tax. As originally enacted, the 1995 Regulations did not subject claims made under it to any time limit. It provided:
“"…save as the Commissioners may otherwise allow or direct either generally or specifically, a person claiming deduction of input tax under section 25(2) VATA shall do so on a return made by him for the prescribed account periods in which the VAT becomes chargeable.”"
On 26 March 1997, the Commissioners laid down secondary legislation, which introduced a three year time limit for claims under Regulation 29(1). The time limit was introduced by the VATA (Amendment) Regulation 1997 (SI 1997/1080) with effect from 1 May 1997.
The new Regulation 29(1A) precluded the Commissioners from allowing a claim for deduction of input tax made more than three years after the due date for the return in relation to the relevant period. It provided:
“"The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which VAT became chargeable is required to be made.”"
The change was announced in Business Brief 9/97 on 27 March 1997.
The Commissioners treated claims for repayment by repayment traders as being made under section 80 VATA. However, it was decided (M&S 1) that input tax claimed would properly come under Regulation 29. The Business Brief of 27 February 2002 advised taxpayers to lodge repayment claims under Regulation 29 rather than Section 80.
- Following the M&S 1 decision, Business Brief Number 22/2002 dated 5 August 2002 introduced retrospective transitional relief provisions for section 80. The Business Brief stated that its purpose was “"to allow taxpayers to make claims that they ought to have been able to make at the time”".
The transitional regime was to apply from 4 December 1996 to 31 March 1997 which was approximately 90 days after the House of Commons agreed the proposal. The Commissioners considered this period adequate to give effect to the taxpayer’'s Community Law rights. The transitional relief would not apply if the overpayment of tax was not discovered before 31 March 1997. This reflected the position which would have been the case should the legislation have included the transitional period during which claims could have been made. Under the transitional regime claims had to be made by 31 March 2000.
On 24 September 2002, the case of Grundig was decided by the ECJ which said that six months was the minimum period required to ensure that Community Law rights could be effectively exercised. Following this decision, another Business Brief, on 8 October 2002, extended the transitional period by three months to 30 June 1997. The transitional period was therefore changed to run from 4 December 1996 to 30 June 1997 a period of six months. The deadline for making claims was 30 June 2003.
The decision in M&S 1 was upheld by the Court of Appeal. The Business Brief did not apply to Regulation 29 and there were no transitional provisions announced in relation to Regulation 29, which remains the case up to the present time.
Our reasons begin below.
- It is accepted by both parties that the introduction of Regulation 29 (1A) was in breach of Community Law in failing to include a transitional period when introduced.
- The failure to provide adequate or indeed any transitional period in introducing Regulation 29 would operate to infringe the directly effective rights of the taxpayer. It would render the relevant legislation in breach of the obligation to properly implement those rights under the Sixth Directive. This position is supported by Warren J in Conde Nast where he says:
“"In my judgment, it is clear that the failure to include an appropriate transitional period, when introducing Regulation 29(1A) during which a trader could make a claim under Regulation 29 in relation to periods prior to the new time limit period, was a breach of Community Law giving the trader directly enforceable rights.”"(para 36)
There are other decisions which have supported this position (see M&S 1 at para 28 – 40, 47; M&S 2 at para 173 per Auld LJ).
- The failure to include transitional provisions in the legislation providing the new time limit does not make Regulation 29(1A) invalid in full, but requires it to be disapplied to the extent that it has failed to comply with EC law. The time limit remains subject to being overridden by Community Law where appropriate. This position is supported by the case of Local Authorities Mutual Investment Trust v Customs and Excise Commissioners [2004] STC 247] (“"LAMIT”"), where Lawrence Collins J, commenting on the validity of Regulation 29(1A), said:
“"The validity of Reg 29(1A) is not, in my judgment, affected by the criticism directed at Reg 29 to the effect that Reg 29 (1) does not properly implement Art 18(1) and (2). If any taxable person could challenge the application of Reg 29(1) on the basis of the direct effect of Art 18, the consequences would not be that Reg 29(1) was invalid, but that the United Kingdom could not, in those circumstances, rely on it. Even if (which is plainly not necessary to decide on this appeal) Reg 29(1) could be declared inapplicable in an appropriate case, it cannot affect the validity and application of Reg 29(1A) in the present case. A national rule which is incompatible with directly effective Community Law is not invalid, but the national Court must, where it might otherwise apply, disapply the rule.”"(para 67)
The question is the extent to which the rule should be disapplied in giving effect to the principle of effectiveness.
- Miss Sloane, in her original submissions, clearly explained that the introduction of the three year cap without an adequate transitional period does not of itself entitle the Appellant to payment of the sums claimed several years after the introduction of that cap. She accepts that a time limit on claims for input tax under Regulation 29 is authorised either under Art 18(3) of the Sixth Directive or under the general power of Member States to lay down procedural conditions providing such conditions comply with the principle of effectiveness and legitimate expectation of the taxpayer. The principle of effectiveness means that the exercise of rights confirmed by Community Law should not be rendered impossible or excessively difficult to enforce. Further, the taxpayer has a legitimate expectation that amended law would not retroactively deprive them of rights enjoyed prior to the amending legislation being introduced.
- In the Conde Nast case, Warren J looked at the question of how far rules should be disapplied in order to give effect to the principle of effectiveness. The Judge discusses the principle of effectiveness and it is in these discussions that we find the explanation of the two approaches to be taken when looking at infraction legislation. In brief, under the first approach the new rules should be applied so as to allow the taxpayer a reasonable transitional period for making a claim. To reiterate what was said earlier by the Judge.
“"The first possible approach is that the new national time limit can be relied upon by the Member State once a reasonable time has passed since its introduction; and this is so regardless of whether the taxpayer knew that he had, or believed that he might have, a Community Law right which he could enforce notwithstanding the failure to provide for a proper transitional period.”"(para 38)
Under this approach, and if we use six months as a reasonable period as established from the Grundig case, Regulation 29 (1A) would have become effective within six months from 1 May 1997.
- Under the second approach Warren J, as explained earlier, said that the taxpayer should be entitled to enforce their right:
“"Until the time had been reached when he could first have been expected to assert that right; and that he could not be expected to do so as long as that right had not been established and subject to challenge in the ECJ by the Member State concerned. He should, therefore, have a reasonable time, in which to assert his Community Law right. Once that right had been established or at least, once the generality of taxpayers and advisers appreciated that such a right ght subsist.”" (para 39)
- In the Conde Nast case the Appellant claimed, in June 2003, an input tax deduction for expenditure for staff entertainment for past periods going back as far as 1973. The Appellant argued, inter alia, that because Regulation 29(1A) had been introduced without transitional provisions to restrict their rights, it should be disapplied. Warren J, accepted that Regulation 29(1A) was in breach of EC law but held that a reasonable period had passed and the Appellant was out of time when submitting their claim in June 2003.
- The effect of the first approach taken by Warren J is that a taxpayer who would have been in a position to make a claim for input tax before the imposition of the new time limit must have a reasonable time in which to make such a claim. The need for legal certainty would limit the length of time for making such claim. We know from the Grundig case that a six month limitation period from the date when the new legislation took effect would be a reasonable period for making claims. We know that Evans–Lombe J in Fleming agreed with this approach and supported the need for legal certainty by limiting the time for making claims.
- The second approach taken by Warren J, which he said had “"a great deal of force”", observed that a taxpayer is not in a position to assert his rights once those rights or the law establishing those rights remain “"in flux”". He said:
“"…so long as the very Community right in issue is subject to challenge by the Member State concerned, recognising that a taxpayer who needs to assert a disputed Community right is in far worse position than a taxpayer who can rely on a clear domestic law right (which should have been included in the legislation) and that his rights have thereby been rendered, if not virtually impossible then excessively difficult to exercise.”" (para 52)
He went on to say that the party at fault was the Member State in failing to comply with their Community Law obligations.
In effect, under the second approach the taxpayer would have to be clear on their rights or be aware that their rights exist before the reasonable transitional period can start to be counted.
- The second Conde Nast approach is the basis for the Appellant’'s argument. Mr Scorey argues that it is important that the taxpayer is clear on his rights before the reasonable period can start. He said that the Appellant in this case would not have known about their rights or be clear on those rights until July 2002 (M&S 1) and possibly not until October 2003 (M&S 2) when the issue was finally dealt with by the Court. He then goes on to say that the reasonable period must be counted from that date since before that date the rights were in dispute or being denied by the Commissioners or the taxpayer would have been “"in doubt”". He says that when the Commissioners issued Business Brief 22/02 accepting the ECJ’'s judgment in M&S 1 and after Neuberger J in University of Sussex v Customs and Excise Commissioners [2005] STC 1415 they clarified their position with regard to claims under Regulation 29 (versus Section 80) so giving certainty and clarity to the law.
- The Respondents said that it is possible to have a new shorter limitation period to be applied retroactively based on the Grundig case provided that such transitional period satisfied the principle of effectiveness or shall at least not go beyond what is necessary in order to comply with the principle of effectiveness. They argue that if this is not accepted then we would have a situation warned by Warren J in Conde Nast when he said:
“"It seems to me that, taken to its logical conclusion, it leads to the result that, since no transitional provision has even to this day, been adopted (whether by statute or by practice) in relation to Regulation 29, it would still be open to a taxpayer who has not yet made a claim now to make one in relation to periods prior to 1 May 1997….recognising that such a result would be extreme.”" (para 24)
The Judge therefore favours an approach where a taxpayer has a reasonable time in which to assert his Community Law rights, which gives certainty to the legislation. If we accept that the introduction of Regulation 29 is contrary to Community Law, as the parties do, but that we can have a reasonable time in which to claim, the crucial question is – when does this period start to run?
- If we go back to the Warren J second approach, he says that a reasonable time should be given from the point at which the right there,
“"had been established, or at least, once a generality of taxpayers and advisers appreciated that such a right might subsist”".
This places some responsibility on the taxpayers and their advisers to be aware of the law, its changes and its implications and to take action. This means that taxpayers and their advisers, if they knew or should have known of the changes, should have submitted protective input tax claims at the earliest possible date in order to preserve their position. This would have been an entirely reasonable position for taxpayers and their advisers to take. According to this Warren J approach, we should establish what taxpayers and their advisers, or the generality of taxpayers and advisers and the general tax community involved in this area of work, should have known. The Judge seems to distinguish between the knowledge of the individual taxpayer and the wider community of taxpayers and in this sense one has to make an objective assessment of what was known. He then identifies the time from when the reasonable period should run, as the earlier of when their rights are “"established”" (i.e. definitive statement given by the Court) or when the community of taxpayers and advisers “"appreciated”" that rights “"might subsist”". This is not an easy distinction to make but given that the distinction has been made, it is possible that the wider tax community might be aware of their rights or when those rights might subsist at an earlier time than when definitive decisions have been given by the law courts. They would have known of the changes on 27 March 1997 (Business Brief 9/97 and Business Brief 9A/97), when announced and in May 1997 when effected.
The Business Brief (9A) says:-
“"Late Claims for Input Tax: if a business did not claim input tax on the proper return, it cannot claim input tax on a later return made more than three years after the date when the input tax should have been claimed”".
The taxpayer, at the very least, would have known or appreciated that their rights “"might subsist”" at that time.
- In order to satisfy the principle of effectiveness and certainty, it would not be required for national legislation to be as it were, “"frozen”" until there has been a complete resolution of all points of dispute between the national law and the Community Law. National time limits can run, in certain circumstances, even where a Member State was in breach of EC law (see Fantesk a/s and Others v Industriministeriet (Erhverministeriet) 1997 [ECR1/6783]. A taxpayer has a directly enforceable Community Law right and it would therefore be appropriate for a reasonable period to start running when the new time limits are introduced or, at the very least, when taxpayers and their advisers appreciated that a right “"might subsist”", regardless of whether all issues related to those rights have been settled by the Court. If this approach is not taken, we can have a situation which is “"extreme”" as warned by Warren J in Conde Nast where a taxpayer would be able to make a claim at any time after legislation had been introduced if introduced without transitional provisions and a situation where we do not have certainty in the law. While the principle of effectiveness allows the protection of Community Law rights and their enforcement in national courts, the taxpayer can only expect a reasonable, not an indefinite period, for so doing.
- A question has been raised as to which of the two Warren J approaches should be used in this case. I do not believe that we have to choose between the two approaches. The question to be determined is which of the two approaches gives effect to the principle of effectiveness and the taxpayers’' directly enforceable rights. If we took six months from 1 May 1997 then the Appellant’'s claim would be out of date. If we took a reasonable additional period which would allow normally diligent taxpayers to familiarise themselves with the new regime and understand their rights, then the Appellants claim will also fall outside of that period. Under either of the approaches, the Appellant’'s claim would fail. This would become apparent when we look below at the Appellant’'s situation.
- Let us look at what the Appellant knew of the changes in the law and what was generally known at the time by the community of taxpayers. Mr David Martin James is the Head of Finance at the Appellant. He identified his duties in paragraph 3 of the Witness Statement as being the following:
“"My responsibility at that time included day to day management of the Finance Department and maintenance of the purchase and nominal ledgers, liaison with IT personnel to ensure smooth running of accounting systems, liaison with the school administrations on budgets, commitments, payments, etc, assisting in the preparation of monthly cashflow forecasts, statutory accounts and statistics, preparation of monthly management reports and liaison with internal and external auditors.”"
- Under his control was the general ledger section and this section was responsible for the preparation and submission of VAT returns. Mr James was the Head of Finance with overall responsibility but the actual person dealing with the VAT returns was Mr Philip Grimmer, who was Supervisor of the relevant section. Previously the VAT returns were dealt with by a Mrs Bingham, who was the financial controller in 1994 when Customs and Excise first alerted the Appellant to their claim. The Appellant became aware of a claim for input tax in 1994 after being informed by a letter on 12 January 1994 from Julie Manley of the Commissioners. The letter advised the Institute, among other things, that they were eligible to reclaim a proportion of the general overall expenses if a partial exemption method was agreed for the group. Mr James said that it was his understanding that he had six years in which to make a claim and he knew of this deadline from his general accountancy training rather than being a tax specialist, which he was not. He further explained that during the 1990s and certainly in 1996 the Appellant was under quite serious “"financial strain”" and the priority during that period was to conduct the affairs of the Appellant to “"break even on an annual basis”". It was clear that there was much to do in the Department. Mr James went on to say in his Witness Statement, which was repeated in oral evidence given at the Tribunal, that “"between 12 January 1994 and the appointment of our VAT advisers, KPMG, in August 1999, I am not aware of receiving any notification from Customs which contradicted my understanding that the Institute had six years to propose a partial exemption method and lodge a claim”".
- Under cross-examination by Miss Sloane for the Respondent, Mr James said he knew nothing of the Business Briefs issued by the Commissioners at that time or the press notices, publications or changes in the law made at that time. This included Business Brief of 27 March 1997 dealing with an extension of the capping to claims for refund other than for amounts overpaid as VAT and the Business Brief BA/9A/97 which dealt with the extension of capping to claims for refund other than amounts overpaid as VAT. In the latter, it is clearly stated that “"these changes take effect from 1 May 1997 and also affect claims or adjustments made on or after that date”".
- The Respondents argue that the Business Briefs, as well as the relevant legislation, was sufficient notice to the Appellant. Mr James confirmed that he only knew of the new capping limit of three years when they appointed KPMG as tax advisers in 1999. It was pointed out by the Respondents that various VAT Notes would have been included with the relevant VAT returns sent to the Appellant. They would have been addressed to the person to whom the VAT forms were sent and this would have included the relevant VAT officer as well as Mr James. The Notes explained the relevant changes (copies were given to the Tribunal).
- Mr Scorey for the Appellant said that the Business Briefs have no legal status and that it leaves the offending legislation on the statute books still without retrospective effect. He said that Business Briefs did not offer a remedy since they were “"purely administrative responses”", which can never constitute “"proper fulfilment of obligations under Community law”". He also said that incompatible domestic legislation can only be remedied by means of national measures of an equivalently binding nature. While this goes to the issue of the legality of Regulation 29, the Business Briefs are meant to be informative to taxpayers and to be read as part of an advisor’'s update on recent developments in the law. The lay member, Mr Shaw, a chartered accountant, asked Mr James whether he was aware or had read Accountancy Age, a professional magazine for accountants, which included various articles on the changes under discussion. Mr James confirmed that he had not read anything in this magazine on this point. Mr Shaw explained that to his knowledge there were several articles in the magazine (later verified as correct) relating to the changes which a Finance Director should have read to keep abreast of changes (there was one article on the 20 November 1996 dealing with finance directors and three year VAT capping legislation and there were several other articles on similar subjects).
- The generality of taxpayers and their advisers would have known of these changes at that time and they would also have known that they had certain directly enforceable Community Law rights which would be safeguarded by the making of a claim. The making of a claim in this period would have secured a taxpayer’'s position and provided a “"protective”" position for taxpayers who were unclear on the law. Taxpayers were therefore given several months advance notice of the change which would have enabled them to make claims even before the new capping time limits took effect. In the period between the 18 July 1996 when the Paymaster General announced that the time limit for claiming overpayments of VAT was to be reduced to three years and 1 May 1997 when the three year cap legislation took effect, the generality of taxpayers and their advisers should have known that they have Community rights which “"might subsist”". Mr James made it clear that he did not read Business Briefs and he did not read VAT Notes, which were included with the VAT Returns and which clearly stated that they should be read by the person preparing the VAT Returns. They carried the warning “"please ensure that everyone responsible for VAT in your business sees these Notes those ones from September 1996, December 1996 and June 1997 referring to the change in the legislation”" (confirmed by the Tribunal).
- Announcements of changes in the law of this type normally would be done by Business Briefs and these cannot be simply dismissed as administrative in nature. They are meant to be informative and the general tax community would read these notes and be aware of changes being made to the law. We do not think, however, that the Appellant in this case was aware of the changes and this is borne out in the cross examination and confirmed by him when he says he was not aware of the changes in the law until it was pointed out to him by his VAT advisers appointed in 1999. We suspect that if KPMG were their advisers in 1997 they would have pointed out the changes and advised that claims be made. This is what one would have expected to be done.
- It is evident that Mr James and his team were not aware of the changes which were introduced in 1996 and which took effect in 1997. It seems very unlikely that even if a transitional period had been properly introduced, the Appellant would have made a claim for the recovery of input tax. One should draw reference to the words of Warren J in Conde Nast when he says:
“"…if it is shown that the taxpayer could not have made a claim in the transitional period, then he should be allowed to make it later. If he could not have made it, his community law rights are not infringed by the absence of a transitional period. This would be so where, for instance, the taxpayer did not know of his pre-existing right under the original legislation and is reflected in the first condition in the first Business Brief applying the transitional provisions only where (in cases where no claim was made before 30 June 1997) the taxpayer can show that he had discovered the error before 30 June 1997”".
This is a different question from the one posed earlier by Warren J as to whether there is a requirement that the taxpayer needs to prove that he would have made a claim if proper transitional provisions had been included (para. 60). On a balance of probabilities, it is unlikely that the Appellant would have made a claim given their lack of knowledge at that time.
- It is not our job to say more than whether on a balance of probabilities a claim would have been made even if a transitional period had been in place. It is our view that it is unlikely that a claim would have been made. This may be a matter for the Appeal Court should there be an appeal and the question it poses is if the taxpayer had not made a claim should he also not be allowed to claim later?
- The question arises therefore as to whether the Appellant has slept on their rights. The Appellant had not claimed until 2001 for input tax relief relating to prescribed accounting periods dating back to 1989. They have said that their claim in January 2001 was simply an adjustment to the existing claim of 31 July 1996 to 31 July 1999 which was made in August 1999. However, there was no mention in that claim of the earlier accounting periods between 1989 to 1996. The first time the earlier accounting periods were mentioned was in January 2001. The Appellant placed reliance on the VAT Tribunal decision of the University of Liverpool. They say that a claim was “"on foot”" so capable of being amended, the basis of the claim was the same and the calculation and method employed in the 1999 claim was the same. They further say that the letter of 12 March 2001 from the Commissioners referred to the claim being made in 2001 as being a “"further adjustment“" to the voluntary disclosure of 31 August 1999 and as such extended the periods back We do not accept this position. Claims must state the prescribed accounting period for which they are made. Returns are normally completed for three month periods ending on dates notified in the Certificate of Registration. A taxable person must account for and pay VAT by reference to the VAT Returns and must make a return no later than the last day of the month following the end of the return period showing the amount of VAT payable and containing full information in respect of all matters specified in the VAT Return. The time limits run from the prescribed accounting period and the completed Return for each period is dated on the form. The VAT legislation does not deal with adjustments as such but there are various guidelines dealing with adjustments for VAT none of which deal with the situation we have before us today. The first time the earlier periods were mentioned was in January 2001. We cannot accept that the claim being made in 2001 was an adjustment or part of the claim which was made in August 1999.
- The principle of effectiveness deals with the protection and enforcement of rights. In our case there has been no obstruction of the taxpayer in the enforcement of rights but only a failure to implement properly the relevant legislation. The reasonable time should therefore run from the 1 May 1997, which would be the date of the introduction of the legislation. In Grundig, the European Court of Justice was considering a case referred to it by the Italian Court on whether the establishment of a transitional period of ninety days in which to bring actions for the recovery of tax paid, which, having been subject to a five years limitation period, had, owing to a change in the legislation introduced with retrospective effect, a three year limit and whether this infringed the principle of effectiveness. At paragraph 41 of the Judgment, the Court stated :
“"However, the fact that the National Court has found that a transitional period fixed by a national legislature such that in issue in the main proceedings is insufficient does not necessarily mean that the new period for initiating proceedings cannot be applied retroactively. The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must therefore be permissible to apply the new period for initiating proceedings to claims brought after expiry of an adequate transitional period, assessed at six months in the case such as the present, even where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period”".
- A reasonable period was given in this case as six months. The proper test would seem to be that this period i.e. the reasonable period should run from the time when an ordinary diligent taxpayer should have realised that their Community Law right “"might subsist”". I do not accept the Appellant’'s position that this was in July 2002 or even October 2003. There were appeals to the Court in progress but the Business Briefs and legislation, at least, would have alerted a taxpayer to their rights.
- We should be aware that what we are seeking to achieve under the principle of effectiveness is the protection and enforcement of rights in a reasonable manner. The reasonable time in our case should therefore run from 1 May 1997 which would be the date of the introduction of the legislation. In this case, if a transitional period had been included in the original legislation it would have expired long before the making of the claim by the Appellant in 2001. In the circumstances, a taxpayer can only expect a reasonable time within which to make a claim and the claim in 2001 is clearly out of time. Further, when looking at the reasonable period to be applied under the second approach in Conde Nast one has to look at the knowledge of the taxpayer and the generality of taxpayers and advisers at the time. A diligent taxpayer would have known of changes in the law or have in place a system which would have alerted them to those changes. The Commissioners had widely publicised the changes and acted reasonably in the circumstances. Taxpayers must place themselves under an obligation to do their utmost to seek to provide complete and accurate information and returns and they should be diligent in keeping up to date with the law and seek to comply with any new provisions in the legislation, changes in the law and new deadline dates. The question that must be asked is was the taxpayer provided with sufficiently comprehensive information in an accessible manner such that the generality of taxpayers and their advisers would know of the changes in the law and would wish to make protective claims. The answer is yes. Did the taxpayer in this case make a timely claim? The answer is no. They made a claim in 1999 for the periods 1996-1999 and were paid. They had not made a claim or a protective claim for the period 1989-1996 until 2001 and this is out of time if one applied either of the two Warren J approvals in Conde Nast. Mr James and his team knew they had a claim in 1994 and were informed of this by the Commissioners. They believed they had six years to make the claim. In the period after 1994 there were changes to the law. The Revenue made these changes known in the normal way including direct mailing to taxpayers of updates, including information with their VAT returns as well as Business Briefs. It is then up to the taxpayer to make their claims and if the law is not entirely clear then to make protective claims. They should have done something.
- We do not accept the main contention of the Appellant that the absence of a contemporaneous transitional period in the introduction of Regulation 29(1A) means that the relevant legislation is “"invalid and/or unenforceable”" and may not be relied upon by the Commissioners to deny the repayment. As explained earlier, the fact that there has been an inadequate transitional period does not mean that a new, shorter limitation period cannot be applied retroactively. This would apply to claims arising before the new limitation period. It is only necessary that such retroactive period satisfies the requirement of effectiveness. The principle required effective protection of Community rights and, more generally, the effective enforcement of Community rights in national courts. The basis of this doctrine is primacy and direct effect, which are characteristics of Community law. At its heart the principle of effectiveness provides an interpretative technique for the Courts. It requires the legislation to be interpreted in a manner where the result would not be extreme but reasonable. The taxpayer in this case should not be put in a position which would be better than if transitional provisions were included when the changes were instructed. In the circumstances, the time limit in Regulation 29 would be applied to the claim and accordingly the appeal would be dismissed. No award for costs is given as none has been requested by the Respondents.
- We are willing to hear oral arguments on presentation of short skeleton arguments for an Order under Section 30 A Value Added Tax Tribunal Rules 1986.
DR KAMEEL KHAN
CHAIRMAN
RELEASED: 6 December 2005
LON/03/0502
