- I have had the very great advantage of
reading in advance the opinions on these appeals of my noble and learned
friends, Lord Walker of Gestingthorpe and Lord Neugerger of Abbotsbury.
They have set out comprehensively the legislative and factual background
to the appeals and, leaving aside the critical issue as to what courts in
this jurisdiction can properly do to remedy a breach brought about by
national legislation, primary or secondary, of rights of individuals and
companies under European law, I find myself in complete and respectful
agreement with the conclusions they have expressed. On that critical
issue, where the conclusions of my noble and learned friends diverge, I
am, subject to one minor qualification, in agreement with Lord Neuberger.
I would, therefore, dismiss the appeals of the Commissioners both in the
Fleming appeal and in the Condé Nast appeal. In the circumstances I can
confine myself in this opinion simply to addressing that critical
issue.
- It was held by the Court of Appeal in
University of Sussex v Customs & Excise Commissioners [2004] STC 1, dismissing an appeal against the judgment of Neuberger J (as my
noble and learned friend then was), that claims for the repayment by the
Commissioners of input tax that could have, but had not, been claimed by
the taxpayer in a previous accounting period had to be made under
regulation 29(1) of the Value Added Tax Regulations 1995 ("the 1995
Regulations") rather than under section 80 of the Finance Act 1994. The
significance of this was that whereas claims under section 80 for the
recovery of value added tax paid but not due were subject to a six year
time limit (section 80(4)), claims under regulation 29(1) were not subject
to any time limit at all. They could be brought no matter how long ago the
input tax had been paid by the claimant. The Commissioners did not apply
to this House for leave to appeal against the Court of Appeal’s decision
and have not challenged it in these appeals.
- On 18 July 1996 the Government announced that
the time limit for claims under section 80 to recover overpaid VAT would
be reduced from six to three years. The amendment was made by section 47
of the Finance Act 1997 with effect from 18 July 1996. There was no
transitional provision. Similarly regulation 29 of the 1995 Regulations
was amended by the addition of paragraph (1A) which imposed a three year
time limit within which claims for the repayment of input tax had to be
made (see the VAT Regulations 1997 - SI 1997/1080). The three years would
run from the date by which the VAT return for the accounting period in
which the claim to deduct the input tax in question ought to have been
included had to be made. Regulation 29(1A) came into force on 1 May 1997
and here, too, there was no transitional provision. The effect of this
amendment was that, on 1 May 1997, input tax that had been paid earlier
than 1 May 1994, and in respect of which valid repayment claims could have
been made, became immediately irrecoverable and that in respect of claims
for the repayment of input tax that had been paid between 1 May 1994 and 1
May 1997 the period within which they could be brought would be, depending
on when the input tax had been paid, progressively less than three years
from 1 May 1997. There would, for example, be one month only after 1 May
1997 within which a claim for repayment of input tax paid on 1 June 1994
could be claimed.
- Challenges to the reduction of the time limit
for section 80 claims from six to three years and to the introduction of
the three year time limit for regulation 29 claims followed. The
challenges were not to the three year time limits as such but to the
absence of any transitional periods. The challenge regarding the reduction
of the section 80 time limit from six years to three years was considered
by the European Court of Justice in Marks & Spencer plc v
Commissioners of Customs & Excise [2002] ECR I-6325. The Court
held that the reduction of the time limit without an adequate transitional
provision was "incompatible with the principle of effectiveness and the
protection of legitimate expectations" (para 47). In para 38 the Court
said that transitional arrangements allowing an adequate period for
lodging claims for repayment which persons would have been entitled to
submit under the original legislation
"…are necessary where the immediate application to those
claims of a limitation period shorter than that which was previously in
force would have the effect of retroactively depriving some individuals of
their right to repayment, or of allowing them too short a period for
asserting that right."
And, in paragraph 39, the Court said that, in order to
serve the purpose of legal certainty, "limitation periods must be fixed in
advance".
- It is not in dispute that a consequence of
the ECJ decision in the Marks & Spencer case to which I have
referred was that in the absence of any transitional provisions neither
the reduced time limit applicable to section 80 claims nor the
introduction of the time limit for regulation 29 claims could be
retrospectively applied to claims for repayments that had accrued before
these changes had come into effect. It is common ground, also, that it is
for individual member states and not for the ECJ to prescribe the means by
which Directives are to be carried into effect in national law (see para
34 of the ECJ’s Marks & Spencer decision - cited by Lord Walker
at para 29 of his opinion). The ECJ can rule as to whether that has been
properly done and can provide guidance as to what is required, but it is
for member states to decide how to do it. Some guidance as to what might
be required to remedy the deficiencies in the amended section 80 and
regulation 29 that the ECJ’s Marks & Spencer decision had
disclosed is to be found in the ECJ’s judgment on 24 September 2002 in the
Grundig case [2002] ECR I-8003, referred to by Lord Walker in
paragraph 44 of his opinion. In paragraph 41 of the judgment (cited by
Lord Walker) the ECJ concluded that, for the purposes of Italian
legislation extending the scope of a five year limitation period, a
transitional period of six months would have been adequate.
- The Commissioners’ reaction to these ECJ
decisions was to publish two Business Briefs. The first, Business Brief
22/02, published on 5 August 2002, allowed an extra period of about four
months within which certain categories of section 80 claims could be made;
the second, Business Brief 27/02, published on 8 October 2002, added a
further three months for these claims to be brought. Neither of these
Business Briefs made any reference to regulation 29.
- The Commissioners’ contention on the appeals
now before the House, based on para 41 of the ECJ’s Grundig
judgment, is that "Community law requires only that the time limit be
disapplied to claims brought within a reasonable period from the
introduction of the time limit". They contend that if a claimant "does not
make a claim until several years after the imposition of the time limit,
then the time limit can be applied to the claim in the interests of
finality and certainty" (see para 20 of their written Case). These
contentions cannot, in my opinion, be accepted. Immediately prior to the
addition of para.(1A) to regulation 29 both Mr Fleming and Condé Nast had
rights to recover input tax from the Commissioners without any time limit
for the bringing of their claims. That was part of the VAT regime that UK
national law had put in place. The addition of paragraph (1A) purported to
invalidate those claims forthwith, with no prior notice or warning given.
At first sight there would seem to be no answer to the contention advanced
by Mr Fleming and Condé Nast that in relation to their respective claims
paragraph (1A) must therefore be disapplied. The Commissioners accept
that, in relation to input tax paid before 1 May 1997, paragraph (1A) must
be disapplied to some, but not all, regulation 29 claims. A distinction,
they contend, must be drawn between claims made within a reasonable time
after 1 May 1997 and claims not made within that reasonable time. Only in
relation to the former must paragraph (1A) be disapplied. Mr Vajda QC,
counsel for the Commissioners, has put before your Lordships two
alternatives for the purpose of determining what that reasonable time
would be. His first alternative was that the reasonable period should be
six months from 1 May 1997. This was based on the six months extra that
the two Business Briefs had allowed for certain section 80 claims. Mr
Vajda’s second alternative was that the period should be six months from
the date on which a taxpayer could be expected to have become aware of the
ECJ’s Marks & Spencer judgment.
- My Lords, I would, for my part, reject the
premise on which these two alternatives are based. The UK instituted a VAT
scheme for the repayment by the Commissioners of input tax that enabled
claims for repayment to be made without limit of time. That was a
surprising, and perhaps unintended, feature of the scheme but was a lawful
feature. There is no suggestion that the scheme failed properly to
implement the Sixth Directive. The scheme was then amended by the
introduction of a three year time limit that was to apply not only
prospectively but also retrospectively with no transitional period during
which those, like Mr Fleming and Condé Nast, who had been sitting on their
claims, would be able to take into account the change in the law and bring
their claims before they became time barred. Whether a reasonable
transitional period for claims to be brought that on 1 May 1997 were
already at least three years old should have six months, 12 months or some
other period from 1 May 1997 is open to argument but is not in point. The
important fact is that there was no transitional period. The VAT regime is
not judge-made and is not made by the Commissioners. It is a statutory
scheme consisting of primary legislation made by Parliament and secondary
legislation made by others under powers conferred by Parliament. The
Commissioners have management powers conferred by Parliament but these
powers do not extend to enabling the Commissioners to amend the statutory
scheme. The Business Briefs published by the Commissioners can properly be
regarded as published pursuant to the Commissioners’ management powers but
are not a means enabling the Commissioners to amend the VAT régime made by
primary and secondary legislation. The two Business Briefs, to which
reference has been made in this opinion, contained provisions purporting
to extend the period within which certain section 80 claims which had
accrued to the taxpayers before the amendment to section 80(4) came into
effect could be brought. These provisions have been described as
"concessions". They are, my Lords, nothing of the sort. If European law
does not recognise the validity of a UK statutory limitation period in
relation to a certain class of VAT claim it is not a "concession" for
those charged with the management of the scheme to purport to amend the
scheme by allowing some of those whose claims would be barred by the
invalid provision to have some additional period to bring their claims. In
EC Commission v United Kingdom [2005] STC 582, another VAT case,
the ECJ said in its judgment at para 25, that
"…it is settled case law that the incompatibility of national
legislation with Community provisions can be finally remedied only by
means of national provisions of a binding nature which have the same legal
force as those which must be amended. Mere administrative practices cannot
be regarded as constituting the proper fulfilment of obligations under
Community law".
The UK’s obligation is to put in place a legal scheme
for the bringing of claims for repayment of input tax. Regulation 29
constitutes the legal scheme. If, as is the case, paragraph (1A) cannot,
consistently with Community law, be applied against a certain class of
taxpayers, into which class both Mr Fleming and Condé Nast fall, the
defect cannot, in my opinion, be cured by "mere administrative practices".
The Business Briefs fall, in my opinion, under that heading.
- It is argued, alternatively, that the court
can and should fix the duration of an extra period, a transitional period,
that must be allowed to claimants whose pre 1 May 1997 claims would
otherwise be barred by paragraph (1A). It is, to me, a surprising
proposition that the court can, by judicial legislation, add a
transitional period in order to cure the invalidity of a statutory
provision that would not otherwise comply with European law and be
enforceable against certain claimants. There are, to my mind, several
objections to the proposition. First, it is not the function of judges to
legislate. Second, the principle that people must be expected to know the
law and conduct their affairs in accordance with the law can hardly apply
to a judicial amendment to primary or secondary legislation that, until it
is made known in the judge’s pronounced judgment, is held in pectore. The
objection to retrospective legislation would apply here too. Third, the
important principle of certainty can hardly be satisfied. The terms of the
judicial amendment might change as the case travelled up the appellate
chain. And the ability of this House to depart from previous decisions
would need to be kept in mind.
- The notion that a court can add a
transitional provision to regulation 29(1A), and thereby avoid the need to
disapply the paragraph in relation to regulation 29 claims based on some
pre 1 May 1997 input tax payments, appears to derive from language used by
the ECJ in paragraphs 40 to 43, but particularly paragraph 41, of the
judgment in the Grundig case [2002] ECR I-6325. These paragraphs
are set out in paragraph 44 of Lord Walker’s opinion. In paragraph 41 the
ECJ said that the fact that a national court had held a transitional
period fixed by its national legislature to be insufficient did not
necessarily mean that the new limitation period could not be applied
retrospectively at all, and continued:
"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 actions brought after
expiry of an adequate transitional period, assessed at six months in a
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."
My Lords, the ECJ in this passage was dealing with the
principle of effectiveness. But that is not the only principle in play.
The principle of certainty, too, must be taken into account. Taxpayers are
entitled to know from the statutory scheme what input tax repayment claims
they can bring under regulation 29. In the absence of any statutory
transitional provision, how are they to know whether pre 1 May 1997 claims
that are more than three years old can be brought or, as to claims based
on input tax paid between 1 May 1994 and 1 May 1997, within what period
they can be brought? It is no answer to the requirement of certainty to be
told that the claims can be brought within "an adequate transitional
period." There is also the constitutional point, which may or may not
apply to judges sitting in Italian courts. It is the function of judges
sitting in UK courts to construe primary and secondary legislation. It is
the function of judges sitting in UK courts to disapply UK legislation
that is inconsistent with Community law. It is not the function of judges
sitting in UK courts to amend UK legislation that is inconsistent with
Community law. Moreover, the passage I have already cited from the ECJ
judgment in EC Commission v United Kingdom seems to me pertinent
here too: "…incompatibility of national legislation with Community
provisions can be finally remedied only by means of national provisions of
a binding nature which have the same legal force as those which must be
amended." "Mere administrative practices" cannot do this. Nor can
judges.
- Accordingly, I would dismiss both appeals.
Disapplication of national legislation
- It is a fundamental principle of the law of
the European Union ("EU"), recognised in section 2(1) of the European
Communities Act 1972, that if national legislation infringes directly
enforceable Community rights, the national court is obliged to disapply
the offending provision. The provision is not made void but it must be
treated as being (as Lord Bridge of Harwich put it in R v Secretary of
State for Transport, Ex p Factortame Ltd [1990] 2 AC 85, 140)
"without prejudice to the directly enforceable Community
rights of nationals of any member state of the EEC."
The principle has often been recognised your Lordships’
House, including (in the context of taxes) Imperial Chemical Industries
plc v Colmer (No 2) [1999] 1 WLR 2035, 2041 (Lord Nolan) and recently
Autologic Holdings plc v Inland Revenue Commissioners [2006] 1 AC 118, paras 16-17 (Lord Nicholls of Birkenhead).
- Disapplication is called for only if there is
an inconsistency between national law and EU law. In an attempt to avoid
an inconsistency the national court will, if at all possible, interpret
the national legislation so as to make it conform to the superior order of
EU law: Pickstone v Freemans plc [1989] AC 66; Litster v Forth
Dry Dock & Engineering Co Ltd (in receivership) [1990] 1 AC 546.
Sometimes, however, a conforming construction is not possible, and
disapplication cannot be avoided. Disapplication of national legislation
is an essentially different process from its interpretation so as to
conform with EU law. Only in the most formal sense (because of the terms
of section 2(4) of the European Communities Act 1972) can disapplication
be described as a process of construction. In these two appeals it is
common ground, at least in your Lordships’ House, that the national court
is concerned with disapplication, not with trying to find a conforming
construction. This important distinction has been to some extent
overlooked in the Court of Appeal.
- The admitted infringement of directly
enforceable Community rights occurred when, by a series of legislative
steps taken between July 1996 and May 1997, Parliament and the
Commissioners of Customs and Excise (now the Commissioners for Her
Majesty’s Revenue and Customs—"the Commissioners") took action to reduce
severely the time within which taxpayers could make claims for repayment
of value added tax ("VAT"). These steps (which I shall describe
collectively as "the 1996-7 amendments") are described in more detail
below. For present purposes their most significant feature is that they
applied to claims in respect of amounts of VAT already paid, as well as to
future payments; and (with one trifling exception on which the
Commissioners place no reliance) they contained no transitional
provisions. So a taxpayer might, at the beginning of July 1996, have had
until July 1998 to make a claim for repayment of VAT overpaid in July
1992; the changes appeared to deprive him of any possibility of recovering
the tax since there was no transitional period, however brief, for putting
in a last-minute claim. There was a further complication, which I shall
have to come back to, as to whether the taxpayer should, if his claim was
for repayment of input tax, have made his claim under section 80 of the
Value Added Tax Act 1994 ("VATA 1994") or under regulation 29 of the Value
Added Tax Regulations 1995 SI 1995/2518 ("the Regulations").
- In order to explain why the 1996-7 amendments
infringed EU law it is necessary to refer to the Sixth Council Directive
77/388/EEC ("the Sixth Directive"). The Sixth Directive has now been
consolidated in the Principal VAT Directive 2006/112/EC but it is
convenient to refer to its provisions in the same way as in the judgments
below. VATA 1994 and the Regulations (and other regulations not material
to these appeals) represent the transposition into national law of the
Sixth Directive (and other EU legislation relating to VAT). Articles 17
and 18 of the Sixth Directive are in Title X1, dealing with deductions.
These two articles provide the legislative foundation for one of the
essential features of VAT, that is the passing on of input tax, to be
credited against output tax, along a chain of traders (for instance a
supplier of components, a manufacturer, a wholesale distributor and a
retailer) until the final output tax is borne by the ultimate consumer.
Generally a trader’s credit for input tax is obtained by deduction from
his output tax, but some traders with a large turnover in zero-rated goods
(such as most foodstuffs) may be "repayment traders"—that is, they
regularly or occasionally pay amounts of input tax which exceed their
output tax, so as to entitle them to a repayment of input tax. By contrast
"payment traders" will as a rule simply deduct input tax on making their
regular quarterly returns under regulation 25 of the Regulations.
- These points are discussed and explained in
much more detail in the judgments of Neuberger J and Auld LJ in
University of Sussex v Customs and Excise Commissioners [2001] STC 1495, paras 11-72 and [2004] STC 1, paras 108-152 respectively. For
present purposes it is enough to set out the relevant parts of article 18
(as amended by Council Directive 91/680/EEC):
"(1) To exercise his right of deduction, a taxable person
must:
(a) in respect of
deductions pursuant to Article 17(2)(a) [ordinary input tax],
hold an invoice drawn up in accordance with Article 22(3);
(2) The taxable person shall effect the deduction by
subtracting from the total amount of value added tax due for a given tax
period the total amount of the tax in respect of which, during the same
period, the right to deduct has arisen and can be exercised under the
provisions of paragraph 1….
(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 paragraphs 1
and 2….
(4) Where for a given tax period the amount of authorised
deductions exceeds the amount of tax due, the Member States may either
make a refund or carry the excess forward to the following period
according to conditions which they shall determine."
It is common ground that article 18 gives taxpayers directly
enforceable Community rights. The United Kingdom has opted (under article
18(4)) to permit refunds; and it has carried out its task, under article
18(3), of laying down the "conditions and procedures" for obtaining credit
for input tax which is not dealt with by the normal, regular procedure in
paragraphs (1) and (2) of article 18 (that is, by having a proper tax
invoice as a voucher and by deducting the input tax from output tax
payable in respect of the same quarterly accounting period).
- In the United Kingdom the "conditions and
procedures" authorised by article 18(3) included, before the 1996-7
amendments, time limits which did not offend EU law. EU law recognises
that time limits for claims are permissible so long as they do not
infringe the principles of equivalence and effectiveness, which are basic
principles of EU law. The Court of Justice of the European Communities
("ECJ") stated in Marks and Spencer plc v Commissioners of Customs and
Excise Case C-62/00 [2002] ECR I-6325 paras 34-36 ("Marks and
Spencer II"):
"The principle of effectiveness
34 It should be recalled at the outset that in the absence of
Community rules on the repayment of national charges wrongly levied it is
for the domestic legal system of each member state to designate the courts
and tribunals having jurisdiction and to lay down the detailed procedural
rules governing actions for safeguarding rights which individuals derive
from Community law, provided, first, that such rules are not less
favourable than those governing similar domestic actions (the principle of
equivalence) and, second, that they do not render virtually impossible or
excessively difficult the exercise of rights conferred by Community law
(the principle of effectiveness) (see, inter alia, Aprile srl v
Amministrazione delle Finanze dello Stato (No 2) Case C-228/96 [1998] ECR I-7141 [2000] 1 WLR 126 para 18, and the judgments cited above in
Dilexport srl v Amministrazione delle Finanze dello Stato [1999] ECR I-579, para 25, and Metallgesellschaft Ltd v Inland Revenue
Commissioners joined Cases C -397/98 and C - 410/98 [2001], ECR I -
1727, [2001] Ch 620, para 85).
35 As regards the latter principle, the court has held that in
the interests of legal certainty, which protects both the taxpayer and the
administration, it is compatible with Community law to lay down reasonable
time limits for bringing proceedings (see Aprile para 19, and the
case law cited therein). Such time limits are not liable to render
virtually impossible or excessively difficult the exercise of the rights
conferred by Community law. In that context, a national limitation period
of three years which runs from the date of the contested payment appears
to be reasonable (see, in particular, Aprile, para 19, and
Dilexport, para 26).
36 Moreover, it is clear from the judgments in Aprile
(para 28) and Dilexport (paras 41 and 42) that national
legislation curtailing the period within which recovery may be sought of
sums charged in breach of Community law is, subject to certain conditions,
compatible with Community law. First, it must not be intended specifically
to limit the consequences of a judgment of the court to the effect that
national legislation concerning a specific tax is incompatible with
Community law. Secondly, the time set for its application must be
sufficient to ensure that the right to repayment is effective. In that
connection, the court has held that legislation which is not in fact
retrospective in scope complies with that condition."
- In Marks and Spencer II the ECJ held
that one part of the 1996-7 amendments (that is the amendment of section
80 VATA 1994) did infringe EU law. These appeals are concerned with the
admitted infringement caused by the other part of the amendments, those
affecting regulation 29 of the Regulations. It is unfortunately necessary
to make a digression from the main course in order to address this
complication.
Section 80 and regulation 29
- Before the 1996-7 amendments section 80 of
VATA 1994 provided as follows:
"(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 shall 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 at any time before the expiry of 6 years from the date
on which the claimant discovered the mistake or could with reasonable
diligence have discovered it.
(6) A claim under this section shall be made in such form and
manner and shall be supported by such documentary evidence as the
Commissioners prescribe by regulations; and regulations under this
subsection may make different provision for different cases.
(7) Except as provided by this section, the Commissioners
shall not be liable to repay an amount paid to them by way of VAT by
virtue of the fact that it was not VAT due to them."
Thus there was a six-year period for claims, capable of
extension where a mistake had been made. Section 80 was directed, it
should be emphasised, to a payment "which was not VAT due to [the
Commissioners]".
- Before the amendments regulation 29, so far
as material, provided as follows:
"Claims for input tax
(1) Subject to paragraph (2) below, and save as the
Commissioners may otherwise allow or direct either generally or specially,
a person claiming deduction of input tax under section 25(2) of [VATA
1994] shall do so on a return made by him for the prescribed accounting
period in which the VAT became chargeable.
(2) At the time of claiming deduction of input tax in
accordance with paragraph (1) above, a person shall, if the claim is in
respect of -
(a) a supply from
another taxable person, hold the document which is required to
be provided under regulation 13;..."
There was no time limit other than the Commissioners’
discretion in cases outside section 25(2). Section 25(2) provided for the
normal procedure by which a "payment trader" claimed credit for input tax
by means of deduction on the making of his quarterly return. It was not
therefore obvious (to say the least) that regulation 29 was providing for
the less normal case of a payment trader claiming credit otherwise than
under section 25(2), still less for a "repayment trader" claiming a refund
of input tax. Indeed the Commissioners’ considered view was that
regulation 29 did not apply to those cases. That was the point that was
litigated as far as the Court of Appeal in the University of Sussex
case. The Commissioners did not attempt to bring University of
Sussex on appeal to this House but its determined stance as far as the
Court of Appeal is a significant complication in these appeals.
- In order to illustrate how the problem was
perceived in 2001, and at the risk of excessive raking through ashes that
are now cold, I set out the thoughts of Neuberger J in University of
Sussex [2001] STC 1495, paras 42-44:
"42. The issue does not appear to me to be straightforward.
There is obvious force in the commissioners’ simple point that, whether
caused by too high a figure for output tax or too low a figure for input
tax, a consequential payment by a taxpayer to the commissioners is ‘an
amount...by way of VAT which was not VAT due...'. In other words, where a
payment trader pays a sum to the commissioners, that sum is arrived at by
taking into account both his output tax and his input tax for the relevant
period, and the net figure is the VAT he pays, and in so far as that
figure is too high, he is entitled to reclaim it, pursuant to, and subject
to the provisions of, section 80.
43. So far as repayment traders are concerned, it is common
ground that they cannot fall within section 80; that is because by
definition, they will not have ‘paid the Commissioners...VAT'. The 1994
Act does not appear specifically to consider repayment traders who have
under-claimed input tax. Sections 25(2) and 26(1) provide that a taxpayer
is liable to take into account input tax in his return for the period
during which the supplies were actually provided (see in particular the
bracketed words in section 26(1). The 1994 Act contains no provision
equivalent to section 80 so far as repayment traders are concerned.
However, section 25(1)—echoed in the opening words of section
25(2)—indicates that it is contemplated that regulations will or may be
introduced to deal with cases where inputs are not claimed for the
relevant period in accordance with section 26(1).
44. When one turns to the 1995 regulations, it seems to me,
indeed it appears to be common ground, that regulation 29 does enable a
repayment trader, who has understated his input tax, to make a late claim
for under-claimed input tax, albeit in terms which are pretty unspecific,
particularly when contrasted with section 80. Regulation 29(1) appears to
make it clear that the input tax should in principle be claimed in the
return relating to the period in which the relevant goods or services were
provided. However, the words ‘save as the Commissioners may otherwise
allow’ indicate that this does not represent an absolute requirement. That
point appears to me to be supported by the provisions of section 25(1) and
regulation 25(5), and indeed by article 18(3) of the Sixth Directive.
Accordingly, at least until regulation 29(1A) was introduced, the
commissioners enjoyed a relatively unfettered discretion as to whether,
and if so how, to accommodate a repayment trader whose original return
understated the input tax, and who subsequently claimed a credit or
payment in respect of that input tax.
- Neuberger J went on to conclude, in his
judgment given on 10 October 2001, that section 80 did not cover a late
claim to deduct input tax, observing (para 63):
"although the taxpayer could have paid less VAT pursuant to
the earlier return if he had claimed all his input tax, that fact does not
render any of the VAT so paid ‘VAT [not] due to the Commissioners’".
The Court of Appeal (Auld and Chadwick LJJ and Newman J)
upheld that decision in a judgment given on 21 October 2003 [2004] STC 1,
paras 107 ff. It had been hoped that the appeal would be heard sooner but
it was listed with the second Court of Appeal hearing in Marks and
Spencer plc v Customs and Excise Commissioners ("Marks and Spencer
III") following the decision of the ECJ in Marks and Spencer
II. This delayed the disposal of the appeal in University of
Sussex.
- In the course of the part of his judgment
dealing with University of Sussex Auld LJ observed (para 134) that
the issue was essentially a matter of United Kingdom law; as a matter of
EU law, in transposing articles 17 and 18 of the Sixth Directive, section
80 could have been framed so as to fit either of the competing views. But
that does not mean that on the national legislation as actually enacted,
the unjustified refusal of a section 80 claim and the unjustified refusal
of a regulation 29 claim can be assumed to be equally serious breaches of
EU law. In some of the section 80 claims the breach consisted, not merely
of curtailing the taxpayer’s right to obtain a refund of VAT, but of
charging the VAT in the first place, as the result of official
misinterpretation or misapplication of the VAT legislation. The VAT which
was considered by the ECJ in Marks and Spencer II was unlawfully
exacted in the first place. It was always "VAT not due". So for Marks and
Spencer the 1996-7 amendments were an exacerbation of an existing breach.
In these appeals, by contrast, the amendments themselves were the only
breach.
The 1996-7 amendments
- During 1996, partly because of the Marks and
Spencer litigation described below and partly, perhaps, because of the
opinions given by Advocate General Fennelly on 27 June 1996 in Argos
Distributors Ltd v Customs and Excise Commissioners Case C-288/94 and
Elida Gibbs Ltd v Customs and Excise Commissioners Case C-317/94
[1997] QB 499, 515, 545 (both cases about vouchers), the Commissioners
expected to be faced with claims for repayment of large amounts of output
tax, some of it going back for many years. On 18 July 1996 the
Paymaster-General announced in the House of Commons that section 80 of
VATA 1994 would be amended from that date for past as well as future
overpayments of tax. This proposal became effective on 3 December 1996
under the Provisional Collection of Taxes 1968, and was enacted by section
47 of the Finance Act 1997, which received the Royal Assent on19 March
1997. Section 80(4) was amended so as to provide:
"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) of the Finance Act 1997 provided that this
amendment:
"shall be deemed to have come into force on 18 July 1996 as a
provision applying, for the purposes of making any repayment on or after
that date, to all claims under section 80 of [VATA 1994], including claims
made before that date and claims relating to payments made before that
date."
- Regulation 29 was amended by the Value Added
Tax (Amendment) Regulations 1997 SI 1997/1086. The amending regulations
were made on 25 March 1997, laid before Parliament (subject to negative
resolution) on the following day, and announced in a Business Brief
published by the Commissioners on the day after that. They came into force
on 1 May 1997. They inserted a new paragraph 29 (1A):
"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 the VAT became
chargeable is required to be made."
The Business Brief (No 9/97) reflected the restrictive view
which the Commissioners took, at that time, as to the scope of regulation
29.
The Marks and Spencer litigation
- The amendment made by section 47 of the
Finance Act 1997 was challenged by Marks and Spencer in very complex
litigation commenced by two separate notices of appeal against the refusal
of repayment claims, one (in respect of tea cakes) given on 17 August 1995
and the other (in respect of vouchers) given at the end of October 1996,
just after the ECJ judgment in Argos Distributors v Comrs of Customs
and Excise [1997] QB 499. That litigation is still going on, since in
July 2005 your Lordships’ House reluctantly made a second reference to the
ECJ (Marks and Spencer plc v Customs and Excise Commissioners
[2005] STC 1254 - "Marks and Spencer IV") in which a summary of the
whole litigation will be found at paras 27-50. A much shorter summary will
suffice for present purposes.
- In defining the main stages of the litigation
I have adopted the system of designation used in the printed case for the
respondent Condé Nast Publications Ltd ("Condé Nast"), the respondent in
the second appeal. This system passes over the linked appeals heard
successively by the Tribunal [1997] V&DR 344 and Moses J [1999] STC 205 and designates the first hearing by the Court of Appeal (Stuart-Smith,
Ward and Schiemann LJJ) [2000] STC 16 as "Marks and Spencer I". In
its judgment delivered on 14 December 1999 the Court of Appeal decided to
make a reference to the ECJ on part only of one of the appeals, that is
the so-called "early vouchers" claim. The ECJ gave judgment on this
reference on 11 July 2002 (Marks & Spencer II [2002] ECR I-6325, [2002] STC 1036). Its judgment covered a wider field than the
narrow question referred by the Court of Appeal, and the ECJ was rather
critical of the narrowness of the reference. I have already referred to
the second hearing before the Court of Appeal (Marks & Spencer
III) and the further reference to the ECJ in Marks & Spencer
IV. For present purposes the most material part of the judgment in
Marks & Spencer II is the decision that the amendment of
section 80 of VATA 1994 infringed the principle of effectiveness and was
in breach of EU law. I have already quoted paras 34-36 of the judgment,
which are central to the decision. The ECJ held that section 80 was also
in breach of the principle of the protection of legitimate expectations
(paras 43-46).
- The Commissioners responded to the judgment
by granting an extension of time for making section 80 claims. The
extension was however, as explained below, itself retrospective. It was
announced by Business Brief 22/02 ("BB22/02") published on 5 August 2002.
This announcement did not have any specific statutory force, but it has
not been suggested that it was not within the Commissioners’ general
powers of care and management of VAT under section 58 of and Schedule 11
to VATA 1994.
- The "transitional regime" announced by the
Commissioners was a period of nearly four months, from 4 December 1996 to
31 March 1997. It covered three categories of case:
(1) where a claim had been made before 31 March
1997, but had been capped by the amending legislation;
(2) where a claim had been made and paid before
31 March 1997, but had been clawed back by a recovery
assessment (under section 84A of VATA 1994); and
(3) where a mistake had been discovered before 31
March 1997, though no claim had been made.
In each case the overpayment of tax must have been made
before 4 December 1996.
Grundig Italiana
- The Commissioners’ response to Marks &
Spencer II was soon overtaken by further events in Luxembourg. On 24
September 2002 the ECJ gave judgment in Grundig Italiana SpA v
Ministero delle Finanze Case-255/00 [2002] ECR I-8003 ("Grundig
II"). This was the sequel to Grundig Italiana SpA v Ministero delle
Finanze, Case C-68/96 [1998] ECR I-3755 ("Grundig I") in which
the ECJ (in a judgment delivered on 17 June 1998) held that an Italian
consumption tax, introduced by a law of 30 December 1982, was contrary to
EU law as infringing article 95 of the Treaty, since it differentiated
between home-produced and imported audiovisual and photo-optical
products.
- Grundig II was concerned with the
legality under EU law of the Italian law no 428 of 29 December 1990. That
law extended the scope of a statutory five-year limitation period
(applicable to customs duties) so as to apply to all claims and actions
for the refund of sums paid in connection with Customs operations,
including the consumption tax considered in Grundig I. It further
directed that that limitation period should be reduced to three years as
from the 90th day following the coming into force of the law (27 January
1991). Grundig Italiana, which had from 1983 to 1992 made payments of the
wrongly-charged consumption tax, brought a claim for repayment on 22 July
1993.
- Grundig II was a sort of rerun of the
earlier case of Aprile srl v Amministrazione delle Finanze dello Stato
Case C-228/96 [1998] ECR I-7141 ("Aprile II"), mentioned in
paras 34-36 of the ECJ’s judgment in Marks & Spencer II. The
decision in Aprile II was inconclusive because it was based on a
misunderstanding of the degree to which, under Italian law, law no 428 was
retrospective. Grundig II seems not to have been entirely free from
the same difficulties (see para 32 of the ECJ’s judgment) but paras 36 to
41 of the judgment set out the ECJ’s conclusions:
"36. Given that the detailed rules governing the recovery of
national taxes levied though not due are a matter for the national
legislature, the question whether such rules may apply retroactively is
equally a question of national law, provided that any such retroactive
application does not contravene the principle of effectiveness.
37. In that regard, whilst national legislation reducing the
period within which repayment of sums collected in breach of Community law
may be sought is not incompatible with the principle of the effectiveness,
this 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 claims for repayment which persons were entitled
to submit under the original legislation. Such transitional arrangements
are necessary where the immediate application to those claims of a
limitation period shorter than that which was previously in force would
have the effect of retroactively depriving some individuals of their right
to repayment, or of allowing them too short a period for asserting that
right (Case C-62/00 Marks & Spencer [2002] ECR I-6325, para
38).
38. Thus, the transitional period must be sufficient to allow
taxpayers who initially thought that the old period for bringing
proceedings was available to them a reasonable period of time to assert
their right of recovery in the event that, under the new rules, they would
already be out of time. In any event, they must not be compelled to
prepare their action with the haste imposed by an obligation to act in
circumstances of urgency unrelated to the time-limit on which they could
initially count.
39. A transitional period of 90 days prior to the retroactive
application of a period of three years for initiating proceedings in place
of a ten-year or five-year period is clearly insufficient. If an initial
period of five years is taken as a reference, 90 days leaves taxpayers
whose rights accrued approximately three years earlier in a position of
having to act within three months when they had thought that almost
another two years were still available.
40. Where a period of ten or five years for initiating
proceedings is reduced to three years, the minimum transitional period
required to ensure that rights conferred by Community law can be
effectively exercised and that normally diligent taxpayers can familiarise
themselves with the new regime and prepare and commence proceedings in
circumstances which do not compromise their chances of success can be
reasonably assessed at six months.
41. However, the fact that the national court has found that a
transitional period fixed by its national legislature such as that in
issue in the main proceedings is insufficient does not necessarily mean
that the new period for initiating proceedings cannot be applied
retroactively at all. 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 actions
brought after expiry of an adequate transitional period, assessed at six
months in a case such as the present, even where those actions concern the
recovery of sums before the entry into force of the legislation laying
down the new period."
These paragraphs, and especially the last, have been the
subject of closely-reasoned argument before your Lordships’ House.
- The Commissioners responded to Grundig
II in a further Business Brief, 27/02 ("BB 27/02"), published on 8
October 2002. Its effect was to substitute 30 June 1997 for 31 March 1997
in the three categories of claim covered by BB 22/02. Claims were to be
made by 30 June 2003 (that is, there was a similar three-month extension).
BB 27/02 did not expressly refer to section 80 of VATA 1994 or to section
47(2) of the Finance Act 1997 (as BB 22/02 had done). But it was framed
simply as an extension of the BB 22/02 and it contained no reference to
paragraph 29 of the Regulations. At that time appeals to the Court of
Appeal in Marks & Spencer III and University of Sussex
were still pending. There had however been one reference, in Business
Brief 4/02 published on 22 February 2002, to the possibility that the
Court of Appeal would dismiss the appeal in University of
Sussex.
The two appeals in outline
- The facts relevant to the two appeals are
considered separately at the end of this opinion. For the moment it is
enough to say that Mr Fleming, the respondent in the first appeal, made a
claim on 23 October 2000 for repayment of input tax paid on the
acquisition of three specialist sports cars some ten years before. Condé
Nast made a claim on 27 June 2003 for input tax paid on staff
entertainment during the preceding 30 years.
- The Tribunal dismissed Mr Fleming’s appeal on
grounds which the Commissioners did not seek to support. Evans-Lombe J
[2005] STC 707 dismissed Mr Fleming’s appeal on other grounds, that is
(applying the principle in Grundig II) that Mr Fleming had failed
to bring his claim within a reasonable time after the 1996-7 amendments.
The Court of Appeal [2006] STC 864 allowed Mr Fleming’s appeal, the
majority (Ward and Hallett LJJ) on the ground that no transitional period
could be read into the legislation, and that it must be disapplied
generally to all claims in respect of payments of VAT made before the
legislation came into force. Arden LJ reached the same conclusion
(contrary to the head note, she did not dissent) but by a different route.
She correctly observed that the issue was disapplication of national law
(although at one point in her judgment she seems to have confused this
with conforming interpretation). She took the view that regulation 29(1A)
must be disapplied in the case of anyone who made a claim within a
reasonable time from the delivery of the ECJ judgment in Marks &
Spencer II (11 July 2002).
- In reaching that conclusion Arden LJ
considered at length the judgment of Warren J, who had heard Condé Nast’s
appeal from the Tribunal before the Court of Appeal heard Mr Fleming’s
appeal. The Tribunal had held that Condé Nast must be able to show that,
had there been an adequate transitional period in the amending
legislation, it would have made a claim within it (this has been referred
to in argument before your Lordships as the "could have/would have"
issue). Warren J [2005] STC 1327 rejected this argument but dismissed the
appeal on other grounds, that is that Condé Nast had not made a claim
within a reasonable time from (at latest) 5 August 2002, the date of BB
22/02 following the judgment of the ECJ in Marks & Spencer II
(I must add that this bald summary does not do justice to Warren J’s clear
and fully-reasoned judgment). The Court of Appeal (in a judgment of
Chadwick LJ with which Arden and Smith LJJ agreed) was clearly troubled by
the majority decision in Mr Fleming’s appeal, but considered that it was
bound to follow the decision: [2006] STC 1721. It considered making a
reference to the ECJ but decided not to, partly because the Court of
Appeal had itself given Mr Fleming leave to appeal to this House.
Four possible analyses (with variants)
- The Commissioners have throughout this
litigation accepted, in the light of Marks & Spencer II, that
the 1996-7 amendments infringed EU law. They must be disapplied to the
extent that they improperly deprived taxpayers of directly enforceable
Community rights, but no further. The process of disapplication does not
involve reading words into the national legislation (that would be, as
already noted, to confuse it with conforming interpretation). It involves
the identification of the class or classes of taxpayers who are so
circumstanced that the offending provisions must not be invoked against
them, either in particular cases or at all.
- Both sides agree that the amendment of
section 80 of VATA 1994 must be disapplied in respect of taxpayers who
made unsatisfied claims before 18 July 1996, or between that date and 4
December 1996. Mr Vajda QC (for the Commissioners) also concedes that the
amendments of section 80 and regulation 29 must be disapplied to some
taxpayers who made claims during a limited period after the dates of those
respective enactments, provided that the claims related to payments of VAT
made before those respective dates. But (according to Mr Vajda’s primary
argument, which broadly corresponds to the policy underlying BB 22/02 and
BB 27/02) the appropriate period for regulation 29 claims was six months
(the period mentioned in Grundig II) from 1 May 1997.
- That is Mr Vajda’s Analysis A. His Analysis B
is six months from the date on which an average taxpayer would or should
have been aware that EU law required a reasonable transitional period. Mr
Vajda suggested as candidates for that date (in descending order of
preference from the Commissioners’ point of view):
(1) six months from the judgment of
the ECJ Marks & Spencer II (giving a final date of
11 January 2003);
(2) six months from the publication
of BB 22/02 (giving a final date of 5 February 2003); and
(3) the final date for claims under
BB 27/02 (30 June 2003).
- Mr Vajda’s Analysis C (for which he showed no
enthusiasm at all, but which he mentioned because it is the primary case
for Condé Nast) was that the period is still running and will continue to
run until there is either (1) primary or secondary legislation or (2) a
formal official announcement of an adequate "claim period" for capped
regulation 29 claims.
- Finally there is Analysis D. This
differentiates between taxpayers not merely by reference to (i) when they
paid the relevant VAT and (ii) when they actually made their repayment
claim, but also (iii) whether, if the amending legislation had included an
adequate transitional period from its inception, they would (on a
subjective test) have made claims during that period. In other words the
court is to ask (not as an alternative to the appropriate analysis on the
first two points, but as an additional requirement) whether the particular
taxpayer would have made a claim during whatever is the correct
period.
ECJ jurisprudence
- The practicalities of disapplication of
national legislation are matters for the national court, subject to
guidance from the ECJ as to the principles to be applied. Some guidance
can be obtained from the judgments of the ECJ and the opinions of the
Advocates General in Marks & Spencer II, Grundig II and
Fantask A/S v Industriministeriet (Erhvervministeriet) Case
C-188/95 [1997] ECR I-6783, but the guidance is limited. Marks &
Spencer II (paras 34-36 quoted above, and also paras 37-39) shows that
limitation periods must be of reasonable duration, and fixed in advance.
Any curtailment of existing limitation periods must have an adequate
transitional period. Its adequacy must be judged by reference to its
purpose, that is (as the ECJ said in Grundig II [2002] ECR I-8003,
para 38):
"to allow taxpayers who initially thought that the old period
for bringing proceedings was available to them a reasonable period of time
to assert their right of recovery in the event that, under the new rules,
they would already be out of time. In any event, they must not be
compelled to prepare their action with the haste imposed by an obligation
to act in circumstances of urgency unrelated to the time-limit on which
they could initially count"
and (at para 40):
"to ensure that rights conferred by Community law can be
effectively exercised and that normally diligent taxpayers can familiarise
themselves with the new regime and prepare and commence proceedings in
circumstances which do not compromise their chances of success."
The reference to "normally diligent taxpayers" suggests the
need for a single objective test. The degree of curtailment of an existing
limitation period is also material (paras 39 and 40).
- In Grundig II the ECJ went on to
observe (in para 41, already quoted):
"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 actions brought after
expiry of an adequate transitional period, assessed at six months in a
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."
But in paras 40 and 42 the period of six months was
qualified as the minimum period. In my opinion the ECJ cannot have been
intending to lay down a mandatory rule, or to do more, in these
paragraphs, than offer guidance of the most general sort. Advocate General
Colomer had in para 27 of his opinion stated:
"It is not possible to determine whether or not a 90-day
transitional period, such as that in the present case, complies with the
principle of effectiveness without having regard to all the factual and
legal requirements, both procedural and substantive, which the domestic
legal order imposes for the bringing of actions for recovery. Only with
that overview, which the Italian courts alone have, is it possible to give
a definitive answer."
That is, with respect, obviously right and the ECJ cannot
have intended to contradict it. Nothing is known, your Lordships were
told, of the ultimate disposal of the Grundig Italia litigation.
- In these circumstances Grundig II
cannot in my opinion be taken to establish much more than the general
proposition that the principle of effectiveness requires that national
legislation which curtails a limitation period, and does so in a way that
infringes EU law, must be disapplied for an adequate period. It gives
little, if any, reliable guidance as to the duration of the period.
Neither Evans-Lombe J [2005] STC 707 nor Warren J [2005] STC 1327
understood it as laying down any rule about a six-month period: see the
judgment of the former at paras 24 and 25 and the judgment of the latter
at paras 38 (especially the last sentence) and 45 to 54.
- Fantask A/S v Industriministeriet Case
C-188/95 [1997] ECR I-6783 was cited at length to your Lordships. For
present purposes its main significance is, in my opinion, in showing what
factors are not relevant to the national court’s task in disapplying
national law. The case was concerned with whether official charges for the
registration of Danish companies exceeded what was permitted by EU law
(questions one to five referred to the ECJ) and with the consequences of
the charges being excessive and unlawful (questions six to eight). The
most material question was the seventh, that is whether, when a member
state has failed to transpose a Council Directive correctly, EU law
prevents that member state from relying on a national limitation period to
resist an action for the recovery of charges levied in breach of the
Directive, and continues to do so as long as the transposition has not
been correctly effected. The ECJ rejected that argument, holding (at para
51) that its earlier decision in Emmott v Minister for Social Welfare
Case C-208/90 [1991] ECR I-4269 had not laid down any general rule,
but depended on its particular (and extreme) facts. The ECJ reaffirmed (in
para 52) that the principle of effectiveness was the critical
test.
- Fantask is also notable for a very
illuminating general discussion in the opinion of Advocate General Jacobs.
It steps back, as it were, and looks at the whole problem in context. The
whole opinion merits attention but I restrict quotation to five
paragraphs:
"68. The Governments’ arguments concerning the financial
consequences of Emmott also raise an important point of principle.
As they correctly observe, the Emmott ruling, if read literally,
would expose Member States to the risk of claims dating back to the final
date for implementing a Directive...
69. Moreover, such liability would arise even in the event of
a minor or inadvertent breach. Such a result wholly disregards the balance
which must be struck in every legal system between the rights of the
individual and the collective interest in providing a degree of legal
certainty for the State. That applies particularly to matters of taxation
and social security, where the public authorities have the special
responsibility of routinely applying tax and social security legislation
to vast numbers of cases.
70. The scope for error in applying such legislation is
considerable. Regrettably that is particularly so in the case of Community
legislation, which is often rather loosely drafted....The recent
Argos and Elida Gibbs cases provide a further example of how
huge repayment claims can arise from a comparatively minor error in
implementing a Community tax directive. In those cases the Court found
that the fiscal treatment accorded by the United Kingdom to voucher
transactions—used extensively in that Member State as a business promotion
technique—was not in accordance with the Sixth VAT Directive. The
resultant repayment claims are reported to be between £200m and £400m.
71. It might be objected that it is not unreasonable to
require Member States to refund over-paid charges given that they were not
entitled to collect them in the first place. However, that view disregards
the need for States and public bodies to plan their income and expenditure
and to ensure that their budgets are not disrupted by huge unforeseen
liabilities. That need was particularly clear in Denkavit, in which
repayment was sought of the annual levies imposed by the Netherlands
Chambers of Trade and Industry in order to finance their activities. As
was noted in my Opinion in that case, retrospective claims of up to 20
years would have had catastrophic effects on their finances.
72. In short, therefore, my main reservations about a broad
view of the Emmott ruling are that it disregards the need,
recognised by all legal systems, for a degree of legal certainty for the
State, particularly where infringements are comparatively minor or
inadvertent; it goes further than is necessary to give effective
protection to directives; and it places rights under directives in an
unduly privileged position by comparison with other Community rights.
Moreover a broad view cannot be reconciled with the Court’s subsequent
case-law on time-limits."
The Advocate General also noted (paras 73-75) that there are
different types of time limit in national legislation, and that they may
call for different treatment. The ECJ did not comment expressly on these
parts of the Advocate General’s opinion, but its judgment was not
inconsistent with the Advocate General’s thinking. The importance of
maintaining stability in public finances was acknowledged by the ECJ in
Marks & Spencer II, [2002] ECR I-6325 para 41.
- Three other points of EU jurisprudence were
raised and relied on by counsel for the respondents (Mr Southern for Mr
Fleming and Mr Peacock QC for Condé Nast). The first point is the general
principle that a Member State cannot rely on its own wrong. That principle
does in a sense underlie the whole doctrine of directly enforceable rights
(see Marshall v Southampton and South West Hospital Area Health
Authority (Teaching) (Case 152/84) [1986] QB 401, paras 46 and 47, and
also Advocate General Slynn in the fifth paragraph of his opinion, p 405).
But it has been relied on, in the particular context of unlawfully exacted
taxes, in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined
Cases C-397/98 and C-410/98) [2001] Ch 620, paras 105-106, and again
recently in Test Claimants in the Thin Cap Group Litigation v Inland
Revenue Commissioners Case C-524/04 [2007] STC 906, paras 124-126. In
each of those cases the United Kingdom was unable to rely on the fact that
the taxpayer had not made a particular claim (in one case, to a group
income election, and in the other case for clearance of a payment of
interest to another group company) in circumstances where, under national
law, the claim was certain to be refused.
- In my opinion that principle does not help
the respondents in these appeals. Metallgeselschaft and Thin
Cap were cases in which the United Kingdom was seeking to rely on a
technicality in order to avoid liability for a serious breach of EU law.
In this case, by contrast, there is no antecedent breach exacerbated by
the imposition of a new time limit with no transitional period. The only
breach is in the absence of the transitional period, and it is in its
nature transient. The correct principle is to be found in Grundig
II. To apply the "own wrong" principle in this case would be contrary
not only to Grundig II but also to the general tenor of
Fantask, which limits the effect of Emmott to extreme
cases.
- The second point is the general principle
that if a Member State is in breach of a Council Directive, its breach
must be remedied by proper legislation, and not merely by administrative
action. The ECJ said in EC Commission v United Kingdom Case C-33/03
[2005] STC 582, para 25:
"it is settled case law that the incompatibility of national
legislation with Community provisions can be finally remedied only by
means of national provisions of a binding nature which have the same legal
force as those which must be amended. Mere administrative practices cannot
be regarded as constituting the proper fulfilment of obligations under
Community law (EC Commission v France, Case C-197/96 [1997] ECR I-1489, para 14; EC Commission v Italy, Case C-358/98 [2000] ECR I-1255, para 17, and EC Commission v Italy, Case C-145/99 [2002] ECR I-2235, para 30)."
However that principle does not in my opinion apply here,
for similar reasons to those mentioned in the last paragraph. The issue in
this case is not the continuing non-transposition (or incorrect
transposition) of a Council Directive; neither counsel put his case that
way. Any action to be taken by the United Kingdom government to define a
deferred transitional period for claims under regulation 29 (whether in
the form of legislation, or the announcement of an official administrative
policy) is relevant, not as a transposition of any part of the Sixth
Directive, but as bearing on the duration of the "adequate transitional
period" referred to in Grundig II.
- The third point, closely associated with the
second, is whether the definition of an adequate transitional period is
properly a matter for the national court (that is, in these appeals, for
your Lordships’ House in its judicial capacity) and not for the
legislature. My Lords, in my opinion that task is not merely within your
Lordships’ power but is your Lordships’ plain duty under EU law. The
disapplication of offending legislation is the duty of the national court,
even if it involves action which would otherwise be alien to the strong
judicial instinct not to intrude on the province of the legislature.
Jurisprudence under section 3 of the Human Rights Act 1998 (such as
Ghaidan v Godin-Mendoza [2004] 2 AC 557) is in this context
irrelevant and misleading. The guiding principles are those set out in the
seminal judgment of the ECJ in Amministrazione delle Finanze dello
Stato v Simmenthal SpA, Case-C 106/77 [1978] ECR 629, paras 2024. The
importance and binding nature of these principles has recently been
explained by Peter Gibson LJ in Autologic Plc v Inland Revenue
Commissioners [2005] 1 WLR 52, paras 22-25. The authority of those
remarks is not diminished by the decision of this House [2006] 1 AC 118;
see especially the observations of Lord Nicholls of Birkenhead in para 17,
referring to formal statutory requirements being "disapplied or moulded"
and later referring to "adapting" national provisions.
Disapplication of regulation 29(1A)
- My Lords, having set out the background to
these appeals at (I fear) tedious length I can state my opinion fairly
shortly (especially as I am, I understand, differing from the majority of
your Lordships).
- I would unhesitatingly reject Analysis D,
which Mr Vajda regarded as his last-ditch position. The essence of a
limitation period is that it operates impartially (arbitrarily, even) in
the interests of finality and certainty. (The fact that some national
legal systems make special provision for cases of disability or mistake
does not alter the general principle.) It would be contrary to legal
certainty, and administratively unworkable, for the extent of
disapplication to depend not only on the duration of the transitional
period but also on an hypothetical question to be answered by reference to
the circumstances and states of mind of particular tax payers. It would be
unworkable regardless of whether the burden of proof lay on the
Commissioners or on the taxpayer. The ECJ observed in Optigen Ltd v
Customs and Excise Commissioners (Joined Cases C-354/03, C-355/03 and
C-484/03) [2006] Ch 218, 240, para 45:
"As the court held in BLP Group plc v Customs and Excise
Comrs (Case C-4/94) [1996] 1 WLR 174, 199, para 24, an obligation on
the tax authorities to carry out inquiries to determine the intention of
the taxable person would be contrary to the objectives of the common
system of VAT of ensuring legal certainty and facilitating application of
VAT by having regard, save in exceptional cases, to the objective
character of the transaction in question."
- The "would have" test might be thought to
obtain some support from the decision of this House in Deutsche Morgan
Grenfell Group plc v Inland Revenue Commissioners [2007] 1 AC 558,
which involved an enquiry as to the state of mind of in-house legal
advisers in the taxpayer bank. But Deutsche Morgan Grenfell was a
case in which the taxpayer was claiming a refund of unlawfully exacted
corporation tax and was relying on a provision in national legislation -
section 32(1)(c) of the Limitation Act 1980 - in support of a
restitutionary claim for overpaid tax going back more than six years.
There had been a mistake and there was an issue as to when the mistake
was, or could with reasonable diligence, have been discovered. If that
sort of issue is relevant to the appeals at all, it must be as part of the
objective assessment of an adequate transitional period under Analysis
B.
- I would also reject Analysis C as going
beyond what the principle of effectiveness requires, and as being contrary
to the guidance (general though it is) given by the ECJ in Grundig
II. Claims under regulation 29 are not for tax unlawfully exacted, but
for a refund of input VAT which the taxpayer has (for one reason or
another) not claimed promptly. The only breach of EU law lies in the
failure to provide transitional provisions as part of the 1996-7
amendments. The problem might have been resolved (and would have been
better resolved) by further primary or secondary legislation, but
Parliament and the Commissioners chose not to take that course. In these
circumstances disapplication is, for the reasons stated in
Simmenthal, a task which the national court has both the power and
the obligation to undertake, and Grundig II shows that
disapplication for an adequate transitional period is the appropriate
response.
- It does not follow, however, that a period
which would have been adequate, if clearly fixed in advance by
transitional provisions, will be adequate for the purposes of Grundig
II. If you know the time of the last bus or tube you are in a much
better position to organise your evening than if you do not know when
public transport stops. The 1996-7 amendments were the equivalent of
abruptly telling some taxpayers that there was no more public transport
for them that day. It would take most of them some time to realise that
the authorities had no right to act in that way.
- In Grundig II the Italian amending law
did provide a transitional period (90 days) but it was inadequate. The
fact that there was some transitional period on the face of the
legislation may have made it marginally more likely that the average payer
of the Italian consumption tax would grasp the idea that EU law might
require a longer transitional period. That would suggest the need for an
even longer transitional period where the legislation does not give the
taxpayer that clue. But that is only a minor reason for rejecting, as I
would, Analysis A. Much the more important reason is that where no
adequate transitional period has been fixed in advance, so giving legal
certainty, the resulting uncertainty requires that taxpayers should be
given longer to work out where they stand. To that limited extent,
therefore, I would apply the principle that the Commissioners cannot
benefit from their own breach of EU law.
- In my opinion the correct answer lies within
the range covered by Analysis B. Well-informed taxpayers would have been
aware, by the end of 1999 if not before, that Marks and Spencer was making
a determined challenge to the lawfulness of the 1996-7 amendments, and
that a reference was being made to the ECJ. But not all traders registered
for VAT are large enterprises with ready access to expert advice. Moreover
(especially for those wishing to make late claims for input tax) the
University of Sussex litigation (if they were aware of it) provided
a further complication. Mr Vajda rightly did not contend for an earlier
date under Analysis B, than 11 January 2003 (six months after the judgment
of the ECJ in Marks and Spencer II). In my opinion that date
best fits the guidance given in Grundig II. BB 22/02 and BB 27/02
were, with hindsight, ill-advised, but I do not think that the claims
period should be prolonged because of them.
Mr Fleming’s claim
- Mr Fleming claimed a refund of input tax of
about £127,000. His claim was made 23 October 2000 in a letter by way of
voluntary disclosure. He had not made a claim sooner, it seems, for a
variety of reasons, including the fact that he did not have a proper tax
invoice. For the reasons set out above, which are very different from the
majority of the Court of Appeal, I would dismiss the Commissioners’ appeal
in his case.
Condé Nast’s claim
- Condé Nast claimed a refund of input tax of
about £115,000 in respect of sums spent on staff entertainment. The claim
was made on 27 June 2003 in a letter by way of voluntary disclosure. The
input tax went back as far as the introduction of VAT in 1973. It had not
been claimed by way of credit and deduction over 30 years or more of
quarterly returns, apparently because the trouble and expense of
identifying and vouching the items of expenditure. In my view the claim
was made more than a reasonable time after a taxpayer of average diligence
would have been aware that regulation 29 (1A) could be disapplied. I would
therefore allow the Commissioners’ appeal and restore the decision of the
Tribunal (though for very different reasons than those on which the
Tribunal relied).
Disapplication of section 80
- Neither appeal is concerned with a claim
under section 80 of VATA 1994. Mr Vajda told your Lordships that the
Commissioners hoped that the determination of these appeals would also
settle the position in relation to claims under section 80. I rather doubt
whether the House should go that far, since some section 80 claims (unlike
regulation 29 claims) involve a serious antecedent breach of EU law as
well as the imposition of the 1996-7 amendments without adequate
provisions. Arguably different considerations would apply in such cases. I
express no view on that. But I consider that routine section 80 claims
call for the same treatment as regulation 29 claims.
- I have had the privilege of reading in draft
the opinions of my noble and learned friends, Lord Hope of Craighead and
Lord Walker of Gestingthorpe. Lord Walker has set out and explained with
admirable clarity the relevant facts, statutory and Community law
provisions, case law, and arguments, and accordingly they need no
repetition from me. While I agree with him that the Commissioners’ appeal
should be dismissed in relation to Mr Fleming’s claim, I would also
dismiss their appeal in relation to Conde Nast’s claim.
- It appears to me that the following relevant
propositions can be derived from well-established principles of Community
law and, more specifically, from the reasoning of the European Court of
Justice ("the ECJ") in Marks & Spencer Plc v Commissioners of
Customs and Excise (Case C-62/00) [2002] ECR I-6325 (known as Marks
& Spencer II") and Grundig Italiana SpA v Ministero delle
Finanze (Case C-255/00) [2002] ECR I-8003 (known as "Grundig
II"):
a) It is open to the legislature of a Member
State to impose a time limit within which a claim for input tax must be
bought: Marks & Spencer II para 35;
b) It is further open to the legislature to
introduce a new time limit, or to shorten an existing time limit, within
which such a claim must be brought, even where the right to claim has
already arisen (an "accrued right")when the new time limit (a
"retrospective time limit") is introduced: Marks & Spencer II
paras 37 and 38;
c) Any such time limits must, however, be
"fixed in advance" if they are to "serve their purpose of legal
certainty": Marks & Spencer II para 39;
d) Where a retrospective time limit is
introduced, the legislation must include transitional provisions to accord
those with accrued rights a reasonable time within which to make their
claims before the new retrospective time limit applies: Marks &
Spencer II para 38 and Grundig II para 38;
e) In so far as the legislature introduces a
retrospective time limit without a reasonable transitional provision (as
in Grundig II) or without any transitional provision (as in
Marks & Spencer II), the national courts cannot enforce the
retrospective time limit in relation to accrued right, at least for a
reasonable period; otherwise, there would be a breach of Community law:
see Autologic plc v Inland Revenue Commissioners [2006] 1 AC 118
paras 16 to 17;
f) The adequacy of the period accorded by the
transitional provision ("the transitional period") is to be determined by
reference, inter alia, to the principles of effectiveness and
legitimate expectation: Marks & Spencer II paras 34 and 46, and
Grundig II para 40; in particular, it must not be so short as to
render it "practically impossible or excessively difficult" for a person
with an accrued right to make a claim: Marks & Spencer II para
34, and Grundig II para 33;
g) It is primarily a matter for the national
courts to decide whether the length of any transitional period is
adequate, although the ECJ will give a view if the transitional period is
"clearly" so short as to be inconsistent with Community law: Grundig
II paras 39 and 40;
h) The absence of a transitional period of
adequate length is not, however, automatically fatal to the enforcement of
the retrospective time limit: Grundig II para 41;
i) Where there is no adequate transitional
period, it is for the national court to fashion the remedy necessary to
avoid an infringement of Community law: Marks & Spencer II para
34, Grundig II paras 33, 36, 40, and 41, Autologic paras 16
and 17, and the ECJ’s decision in Metallgesellschaft Ltd and ors v
Commissioners of Inland Revenue (Joined Cases C-397/98 and C-410/98)
[2001] ECR I-1727, at para 85;
j) That remedy would, at least normally, be
to disapply (perhaps only for a period) the operation of, the
retrospective application of the new time limit to claims based on accrued
rights: Marks & Spencer II paras 34 to 41, and
Grundig II paras 38 to 40 and especially (with regard to temporary
disapplication) para 41.
- On the basis of the arguments addressed to
your Lordships’ House and the reasoning of the Courts below, I believe
that the only controversial aspect of the above analysis centres on
propositions (h) and (j). The issue is whether it is open to the court to
disapply the retrospective limitation for a limited period (as opposed to
permanently) in cases where the legislation imposing a retrospective time
limit contains no transitional period (as in the present case and as in
Marks & Spencer II). In the Court of Appeal in the
Fleming case ([2006] STC 864), Ward and Hallett LJJ
concluded that the relevant part of the reasoning (and in particular
the last sentence) in paragraph 41 of Grundig II, quoted in Lord
Walker’s opinion, only applies where there is an inadequate
transitional period (see at paras 73 to 81 and paras 60 and 61). This view
appears to have been based on (a) the fact that the ECJ’s judgment in
Marks & Spencer II resulted in a declaration that the absence
of any transitional period rendered the retrospective effect of the
relevant legislation "incompatible" with Community law, (b) the fact that
that judgment had no equivalent to para 41 of the judgment in Grundig
II, and (c) the belief that there is a difference in principle between
the two types of case.
- Despite the arguments on behalf of Mr Fleming
in support of this view, I am unpersuaded by any of these three factors.
The question for the ECJ in Marks & Spencer II was admittedly
relatively widely expressed, and concerned the enforceability of a
retrospective time limit introduced without any transitional provisions;
the ECJ held that such a time limit was "incompatible with the principles
of effectiveness and of the protection of legitimate expectations".
However, nothing was said either way as to whether the unlawfulness of not
providing for a transitional period was, as it were, permanently fatal to
the efficacy of the retrospective time limit. That was a topic on which
the ECJ did express a view, albeit that it did not strictly arise from the
specific question referred, in Grundig II at para 41. As I
understand it, the ECJ was there seeking to give guidance to tax
authorities, courts, and taxpayers in Member States as to the practical
consequences where retrospective time limits were imposed without adequate
transitional provisions.
- At least for present purposes, I can see no
difference in principle or in practice between a case where there is an
inadequate transitional period and one where there is no transitional
period. In each case, there is "no adequate transitional period" to use
the ECJ’s words in para 42 of Grundig II. In each case, the failure
goes to the enforceability of the retrospective time limit. In each case,
a person with an accrued right would be equally likely to be unaware of
the court’s obligation to disapply the new retrospective time limit, or
for how long the period of disapplication might run. In each case, the
legislature (or, indeed, in appropriate circumstances, the executive or
the courts) could put the position right by effectively creating (or
extending an unduly short transitional period into) a valid transitional
period. Further, it would seem odd if there was a completely different
rule in a case where there was a very short (say, three day) inadequate
transitional period and one where there was no such period.
- In the light of these considerations, it
follows from the retrospective effect of regulation 29 (1A) and the
absence of any transitional provision, that the duty of the UK courts is
to disapply the regulation in relation to claims based on accrued rights
made during an appropriate period. Although the Commissioners did not
accept that proposition for much of the period of this litigation, they
now accept that regulation 29(1A) ought to have included a transitional
provision in respect of claims based on accrued rights, and that the
regulation ought to be disapplied to them by the courts. Accordingly, the
issue to be determined is the proper characterisation and duration of the
period of disapplication.
- It is the Commissioners’ primary case that
the appropriate period of disapplication should be equivalent to the
transitional period which the legislature ought to have accorded under
Community law, but failed to do so. That seems to me to be a surprising
proposition. On the basis of the limited argument and evidence we have
received on the point, it appears to me that the duration of a
transitional period required in the present case to satisfy Community law
would have been between six and 12 months. Six months was the minimum
period thought by the ECJ to be appropriate in Grundig II, where a
time limit was retrospectively reduced from five or ten years to three
years. At the other extreme, albeit without the benefit of detailed
argument, I find it hard to conceive of circumstances which would require
a transitional period of more than a year, at least where a time limit is
retrospectively created or reduced in relation to commercial tax claims.
- On that basis, given that regulation 29(1A)
came into force on 1 May 1997, people with accrued rights to claim input
tax as at that date would have had to put in their claims by 1 May 1998 at
the latest. So one reaches this position. The vice in the regulation is
that it contains no transitional period to enable persons with accrued
rights to make their claims, and the remedy, on the Commissioners’ case,
is that there is to be a period of disapplication, whose existence would
be unknown to any reasonably well-advised person with an accrued right
until it had already expired. That would mean that the supposed remedy for
the failure to accord a transitional provision would be little more then
hypothetical.
- In other words, from the perspective of
Community law, I consider that the Commissioners’ solution to the problem
fails on the very grounds that the problem exists, namely that it breaches
the principles of effectiveness and legitimate expectation. One year of
disapplication expiring in May 1998 would come to an end before, indeed
years before, it was established that (a) the absence of a transitional
provision meant that there had been a breach of Community law principles
(Marks & Spencer II, in July 2002), (b) there was nonetheless
at least the possibility of a period of disapplication (Grundig
II, in September 2002), and (c) contrary to the firmly
expressed opinion of the Commissioners, the claims fell within regulation
29 (University of Sussex v Customs and Excise Commissioners [2004] STC 1, in October 2003). While the third point may not be significant, the
first two points establish, at least to my satisfaction that accepting the
submission of the Commissioners would involve hardly more than paying lip
service to the important principles of effectiveness and legitimate
expectation.
- There is another point about the
Commissioners’ primary case. Even if the possibility of a period of
disapplication had occurred to someone with an accrued right to claim
input tax as at 1 May 1997, the length of that period would have been a
matter of speculation. Despite the Commissioners’ arguments to the
contrary, I do not accept that, even with wisdom of hindsight, and in
particular with the benefit of the reasoning in Grundig II, it
would have been possible, or is even now possible, to conclude that the
length of the disapplication period would be six months. Although that was
the period mentioned by the ECJ, it was, as I have indicated, (a)
expressly identified in para 40 as a "minimum"(although I acknowledge that
it was not so described, in specific terms, at the end of para 41), and
(b) related in para 39 to the reduction in a limitation period to three
years from five or ten years. The national court, even in Grundig II
itself, could have gone for a longer period than six months, and, in
this case, the reduction in the limitation period to three years was from
the time that VAT was introduced, and so was from a potential period of 24
years.
- This point seems to me to represent a second
reason for rejecting the Commissioners’ primary case. As I have mentioned,
a valid limitation period, must, in order to satisfy Community law, be
"fixed in advance" - see Marks & Spencer II at para 39. In my
judgment, the same principle must, as a matter of logic, apply to a
transitional period which has to be included when a new retrospective time
limit is introduced. After all, the transitional period serves the same
function as a limitation period. If that is right, then, as I see it, the
period of disapplication envisaged in the last sentence of para 41 of
Grundig II, must also comply with the principle. Again, it serves
precisely the same purpose as a limitation period, namely to enable people
with a certain type of claim (in this case a claim based on an accrued
right) to know within what period they have to bring their claims.
Otherwise, where no transitional period has been provided for, persons
with accrued claims will not know, or be able to find out, with any
confidence by when they have to make their claims. In other words, the
Community law requirement of legal certainty would not be met by the
Commissioners’ primary contention.
- I ought to deal with the Commissioners’
argument that my reasoning so far is inconsistent with passages in two
judgments of the ECJ. First, and most directly in point, it is said that,
in the last sentence of para 41 in Grundig II, the ECJ effectively
indicated that the period of disapplication, in a case where there was no
adequate transitional provision, should be co-extensive with (i.e. equal
in duration and commencement to) that of the requisite transitional
provision. It seems to me that this argument ignores the fact that it is
for the Member State, if necessary by reference to the national court, to
decide on the appropriate period of disapplication: at best from the
Commissioners’ point of view, the ECJ was saying that it might be
permissible for a national court to adopt such an approach.
- However, I cannot accept that the "adequate
transitional period" referred to in that sentence was intended to be one
identified on an ad hoc basis, to be applied retrospectively from
the date the new limitation period came into force, let alone to start,
and even end, in circumstances where the great majority of those who are
intended to benefit from it would reasonably be unaware of its existence.
Such an interpretation would be quite inconsistent with much of the thrust
of the reasoning on the ECJ on the issue actually before it. In my
opinion, in the last sentence of para 41 of its judgment in Grundig
II, the ECJ was saying that legislation containing a retrospective
limitation period without a transitional provision could be
retrospectively effective, provided that what amounted to an effective
transitional period (such as a period of disapplication) was accorded by
the Member State, but that it was that Member State to determine how and
when it accorded such a period, and what the period was, provided
Community law principles, especially those of effectiveness, legitimate
expectation, and certainty (as well as equivalence, which is not in issue
here), were satisfied.
- The Commissioners also relied on the
reasoning of the ECJ (and of the Advocate General) in Fantask A/S v
Industriministeriet (Erhvervministeriet) (Case C-188/95) [1997] ECR I-6783. In that case, the ECJ held, that a national five-year limitation
period could be relied on by the Danish Government to defeat a taxpayer’s
claim for repayment of money paid under a charge imposed on the basis of a
wrongly transposed a Directive, even though time began to run before the
Government corrected the error. This was justified, at least by the
Advocate General in paras 68 to 71 and 82 to 84 of his powerful Opinion)
on the basis of (a) the right of a Member State to organise its finances
without the risk of facing very late unexpected and large claims, and (b)
it being more appropriate to leave taxpayers in such cases with claims for
damages in appropriate cases. The ECJ’s reasons were of a more general
nature (in paras 47 to 52).
- I do not consider that the reasoning in
Fantask calls my conclusions so far into question. In the first
place, the nature of the issue was very different. Fantask was a
case where the limitation period, which did not offend Community law, had
been in force from the inception of the Danish legislation which was
intended, but failed fully, to transpose a Directive. The instant cases,
however, concern the introduction of a new limitation period, in relation
to a directly effective right, viz. to claim input tax, and the limitation
period is the very item which does offend Community law.
- Secondly, the charges in Fantask were,
according to the Danish national court, "levied in pursuance of rules
which had been in force for a long time and had been assumed by all
concerned to be lawful" (para 53 of the Advocate-General’s Opinion). By
contrast, regulation 29(1A) came into force in May 1997, and the possible
unlawfulness of not having a transitional provision would have been clear
to the Commissioners well before December 1999 (when the High Court made
the reference in Marks & Spencer II - see para 25 of the
Opinion in that case).
- Thirdly, the ECJ in Fantask, as in
Marks & Spencer II and Grundig II, emphasised that the
determination of appropriate limitation periods (and, I add, it must
follow, of appropriate periods of disapplication to ensure compliance with
Community law) is primarily a matter "for the domestic legal system of
each Member State" (para 47). In this case, unlike in Fantask, the
limitation period in question undoubtedly infringes Community law, and it
is therefore up to the UK courts, as the relevant arm of "the domestic
legal system", to decide on the appropriate means of compliance.
- Finally, the court in Fantask also
stated that such periods must "not render [it] virtually impossible or
excessively difficult" to make a claim in "exercise of rights conferred by
Community law" (para 52). In my opinion, if the period of disapplication
in the present case expired in May 1998, it would have been "virtually
impossible or excessively difficult" for persons with accrued rights, as a
class, to mount their claims in time. In the light of the wording of
regulation 29(1A), both common sense and expert legal advice (at least
before the High Court reference in Marks & Spencer II in
December 1999, at the very earliest) would have almost inevitably led to
the clear conclusion that it would simply have been a waste of time money
and effort to make the necessary investigations and compilations to mount
any claim for input tax after May 1997 based on accrued rights to reclaim.
- Having rejected the Commissioners’ primary
case (on the basis of much of the same reasoning as Lord Walker), it is
necessary to consider a number of different possible periods of
disapplication which have been identified. However, before considering the
appropriate characterisation of the disapplication period in the present
case, I must deal with another argument raised by the Commissioners. They
contend that only those people who could and would have made claims during
the transitional period which ought to have been, but was not, accorded in
May 1997, should be entitled to raise claims during the period of
disapplication, whatever it is determined to be. That appears to me to be
both wrong in principle and inconvenient in practice.
- The "could have" point goes to whether the
person concerned has an accrued right, and is therefore entitled to
complain of the absence of a sufficient transitional provision.
Accordingly, it appears to me to take matters no further. The "would have"
point is in my view simply wrong. A period, whether of transition or
disapplication, is intended to be for the benefit of anyone who could take
advantage of it. If the legislation fails to accord an effective
transitional period, then the Member State, through the legislature the
executive or the courts, must do so. Quite apart from this, arguments and
evidence as to the hypothetical question of whether a particular claim
would have been made during a notional transitional period would very
often be expensive and time-consuming and likely to lead to uncertainty.
While not decisive, such a consideration is not irrelevant. Accordingly,
again in agreement with Lord Walker, and also in agreement with the Court
of Appeal in the Conde Nast case ([2006] STC 1721, para 48), I
would reject the Commissioners’ contention that a person with an accrued
right can only take advantage of a period of disapplication if he or she
would have made a claim during the transitional period (if there had been
one).
- A number of different possible dates were
suggested as the start of the disapplication period (or, to be strictly
accurate, the start of the end of the disapplication period) for the
benefit of those with accrued rights as at 1 May 1997. It does not appear
to me that it would accord with the principles I have been considering if
the appropriate period ran from the publication of any of the decisions in
Marks & Spencer II, Grundig II, or, indeed,
University of Sussex, (assuming in the Commissioners’ favour that
it is possible for a court decision to operate as the beginning of a
period of disapplication). This is for two main reasons. The first is
essentially the same as that discussed in paragraphs [2](c), [10], and
[11] above. In each case, it would be impossible for taxpayers with
accrued claims to know the length of the period which the court would
think it appropriate to determine as being the period of disapplication.
As I have already mentioned, after Grundig II well-advised
taxpayers might be pretty confident that it would be at least six months,
but, crucially for present purposes, there was good reason to think that
the period of disapplication could well have been longer.
- Secondly, it seems to me unrealistic to
conclude that taxpayers should have appreciated that time was running
prospectively against them (in the form of a period of disapplication)
from any one of the decisions in Marks & Spencer II, Grundig
II, and University of Sussex. While many large businesses no
doubt had access to highly expert legal and accountancy advice, that would
not have been true of the great majority of those who may have had accrued
claims for input tax in 1997. To expect such people to appreciate the
effect of those decisions of the ECJ or the Court of Appeal on their
accrued rights to reclaim input tax is, in my opinion, unrealistic.
- This point is significantly reinforced by
the fact that the Commissioners (or their statutory predecessors) were
publicly announcing that they were only prepared to accord a concession to
a very limited number persons with accrued claims, namely those who could
and would have made claims during a specific period immediately after 1
May 1997. This was done through the publication of two Business Briefs, BB
22/02 issued some three weeks after Marks & Spencer II,
and BB27/02 issued about two weeks after Grundig II. Even at
the time of the decision of the Court of Appeal in University of Sussex
v Customs and Excise Comrs [2004] STC1, taxpayers were still being led
to believe that this was the view of the Commissioners, as indeed it was.
It seems to me clear that these two Briefs proceeded under the
misapprehension discussed earlier, namely that the disapplication period
could only be relied on by those who could and would have made claims
during a transitional period, if one had been included in the legislation.
I do not consider that people with accrued rights can fairly be said to
have enjoyed a reasonable period of transition or disapplication if,
during that period, they were being told by the Commissioners, the
relevant branch of the executive, that their claims would be rejected,
because only a very limited category of claims would be paid.
- Until the Court of Appeal’s decision in
University of Sussex, taxpayers with accrued claims for input tax
were being told in BB4/02 by the Commissioners that regulation 29 did not
apply to their claims as they fell within section 80 of the Value Added
Tax Act 1994. I was at one time attracted to the notion that that was
another reason for rejecting Marks & Spencer II or Grundig
II as starting the disapplication period. However, on reflection, I do
not think that that is a good point. Whether an accrued claim fell under
regulation 29 or section 80, it was, in each case, subject to a
retrospectively imposed time limit without a transitional provision.
- Accordingly, while I agree with the views of
Lord Walker, and with the conclusion of Arden LJ in the Fleming
case (at [2006] STC 864, paras 51-2), that the reasoning of the ECJ
requires the UK courts to impose a realistic period of disapplication in
these two cases, I disagree with them that such a period should run from
the ECJ’s decision in Marks & Spencer I, or indeed the
decisions in Grundig II or University of Sussex..
- I would also reject the notion that the
period of disapplication should run from the issue of either of the two
Business Briefs to which I have made reference. Although they each
identified a specific period, and therefore did not suffer from want of
certainty, and although, at least as presently advised, I consider that
the latter of the two Briefs very probably gave a sufficient period
(nearly nine months), they both limited the concession to a very narrow
group of those with accrued rights at the date the time limit in
regulation 29(1A) was introduced. As already indicated, it does not seem
to me to be reasonable to hold, that a person who had an accrued right has
fairly been given an opportunity of making a claim, when the
Commissioners, the relevant organ of the executive arm of government, was
officially announcing that, if such a claim were made, it would not be
allowed. In any event, at least on the evidence available, I rather doubt
whether the Business Briefs would have been sufficiently widely
disseminated to make it right to conclude that all potential claimants
should be treated as having had sufficient notice of the period of
disapplication.
- In my opinion, the period of disapplication
(or, to be strictly accurate, the beginning of the end of the period of
disapplication) has not yet arisen. Subject to one point, I would have
thought that it would be a matter for Parliament to legislate
prospectively for a specific transitional period, or for the Commissioners
to communicate in clear terms, a final period during which claims for
input tax arising before 1 May 1997 could be made. The possibility of
legislation speaks for itself. The possibility of the Commissioners giving
what amounts to an extra-statutory concession was said on behalf of the
respondents to be insufficient. I do not agree. Provided that the
Commissioners allow a sufficiently long period, which is effectively
communicated in sufficiently clear terms to those registered for VAT, that
would suffice.
- I do not see that this conclusion is
inconsistent with what the ECJ said in para 25 of its judgment in EC
Commission v United Kingdom (Case C-33/03) [2005] STC 582, about the
insufficiency of "tax authority guarantees" and the need for conforming
"national legislation". That was a case in which the Member State had not
given effect to a Directive. This is a case where the Member State has to
disapply otherwise conforming legislation so as to comply with Community
procedural law requirements. Indeed, as the Commissioners argue, my view
on this point is consistent with what the ECJ said in para 43 of
Stichtung Goed Wonen v Staatssecretaris von Financien (Case
C-376/02) [2006] STC 833, about taking into account "procedures for
dissemination of information normally used by the member state" in a case
involving legitimate expectation.
- The obligation to allow an appropriate
period of disapplication in a case such as this lies with the Member
State. In principle, provided that an appropriate period of disapplication
is properly accorded and communicated, the requirements of Community law
would be satisfied. Legislation, whether primary or secondary, must be
deemed to be sufficiently communicated by its enactment. There was some
discussion before your Lordships’ House as to the ambit of the doctrine
that citizens are to be assumed to know the law. In my judgment, that
principle would enable the Commissioners to contend that, if the
legislature had accorded (either at the time regulation 29(1A) became law
or thereafter) a specific and valid transitional or disapplication period,
it would not be open to anyone to contend that he or she was unaware of
it.
- If, however, a period of disapplication was
accorded by way of concession by the Commissioners, it would, in my
judgment, only be effective if it was properly communicated to those with
accrued rights. In this connection, it seems to me that, as already
mentioned, communication through the medium of Business Briefs alone may
well not be sufficient, as they may come to the attention of only a
limited number of taxpayers. However, that should not present problems for
the Commissioners. Each quarter, every person registered for VAT receives
a VAT form, which he or she is, of course, bound to complete and return;
normally included with the form is a pamphlet with information about
recent developments in the law and practice relating to VAT. It would, it
seems to me, be only too easy for such a pamphlet to include information
about any period of disapplication accorded by the Commissioners, and,
provided the period was of a proper duration, that, in my opinion, would
be quite sufficient. (I refer to Goed Wonen in this context). It
may also (or, even conceivably, alternatively) be appropriate for the
Commissioners to include this information on their website.
- There was no detailed argument as to
whether, and if so in what circumstances, a decision of a court in this
country could or should operate to commence a period of disapplication of
a retrospective time limit which is introduced without a sufficient
transitional period. I am prepared to accept that, in an appropriate case,
a decision of a United Kingdom court could have that effect. However, in
circumstances such as the present, because of the difficulty of ensuring
adequate communication (or to use the word in Goed Wonen,
dissemination) of a decision of the court to those who might be affected,
other than by the Commissioners, and the ease and speed with which the
Commissioners can grant and communicate a concession, I would have thought
it unnecessary and inappropriate for a court decision to start time
running. The speed with which the concessions contained in the two
Business Briefs were made and issued following Marks & Spencer II
and Grundig II speaks for itself (although, as I have said, I
rather doubt that the Business Briefs alone represent a sufficient
communication).
- In the event, therefore, for these reasons,
and for those given by Lord Hope, all of which are somewhat different from
those of the Court of Appeal, I would dismiss these two appeals.