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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Fleming (t/a Bodycraft) v Revenue and Customs [2008] UKHL 2 (23 January 2008)
URL: http://www.bailii.org/uk/cases/UKHL/2008/2.html
Cite as: [2008] 1 WLR 195, [2008] UKHL 2, [2008] STC 324, [2008] STI 181, [2008] 1 CMLR 48, [2008] WLR 195, [2008] NPC 5, [2008] BVC 221, [2008] Eu LR 455, [2008] BTC 5096, [2008] 1 All ER 1061

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Judgments - Fleming (t/a Bodycraft) (Respondent) v Her Majesty's Revenue and Customs (Appellants) Conde Nast Publications Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 2

on appeal from: [2006] EWCA Civ 70

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Fleming (t/a Bodycraft) (Respondent) v Her Majesty’s Revenue and Customs (Appellants)

Condé Nast Publications Limited (Respondents) v Her Majesty’s Revenue and Customs (Appellants)

Appellate Committee

Lord Hope of Craighead

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Lord Carswell

Lord Neuberger of Abbotsbury

Counsel

Appellants:

(Fleming) Alison Foster QC

Adam Robb

(Condé Nast) Christopher Vajda QC

Valentina Sloane

(Instructed by Her Majesty’s Revenue and Customs Solicitors Office)

Respondents:

(Fleming) David Southern

Denis Edwards

(Condé Nast) Jonathan Peacock QC

Jolyon Maugham

(Instructed by Hepburns (Fleming) and Forbes Hall (Condé Nast))

Hearing date:

12, 13 & 14 NOVEMBER 2007

ON

WEDNESDAY 23 JANUARY 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Fleming (t/a Bodycraft) (Respondent) v Her Majesty’s Revenue and Customs (Appellants)

Condé Nast Publications Limited (Respondents) v Her Majesty’s Revenue and Customs (Appellants)

[2008] UKHL 2

LORD HOPE OF CRAIGHEAD

My Lords,

  1. I am grateful to my noble and learned friend, Lord Walker of Gestingthorpe, for his comprehensive description of the legislative and factual background to these appeals and his analysis of the competing arguments, and to my noble and learned friend, Lord Neuberger of Abbotsbury, for his further examination of the issues that are before us in this case. I agree with both of them that the Commissioners’ appeal should be dismissed in relation to Mr Fleming’s claim. I agree with Lord Neuberger, for the reasons he gives, that the Commissioner’s appeal in relation to Condé Nast’s claim should also be dismissed.
  2. As Lord Walker has explained, claims for overpayment of output tax and previously unclaimed deduction of input tax are provided for by section 80 of the Value Added Tax Act 1994 and regulation 29 of the Value Added Tax Regulations 1995 (SI 1995/2518). As originally enacted, section 80 provided that no amount paid by way of VAT which was not due to the Commissioners could be claimed after the expiry of six years from the date on which it was paid unless an amount had been paid by reason of a mistake, in which event a claim could be made at any time within six years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it: subsections (4) and (5). In the ordinary course input tax should be claimed as a deduction on the return for the accounting period to which it relates. As originally drafted, regulation 29 which permits claims for a deduction to be made later did not subject those claims to any time limit.
  3. An amendment to section 80(4) of VATA 1994 was enacted by section 47 of the Finance Act 1997 with effect from 18 July 1996. It reduced the six year time limit for the recovery of overpaid tax to three years and removed the exception in relation to cases of mistake. No provision was made for a transitional period during which a claim could be made in cases where a right to recovery of overpaid tax already existed. A new regulation 29(1A) was inserted into regulation 29 by the Value Added Tax (Amendment) Regulations 1997 (SI 1997/1086) with effect from 1 May 1997. It provided that the Commissioners were not to allow a claim for deduction of input tax made more than three years after the date of the return for the relevant period. In the case of this amendment too there was no transitional period.
  4. Following the decisions of the European Court of Justice in Marks and Spencer plc v Commissioners of Customs and Excise (Case C-62/00) [2002] ECR I-6325 ("Marks and Spencer II") and Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2002] ECR I-8003 steps were taken by the Commissioners, by means of announcements contained in Business Briefs, to introduce a transitional period for the making of claims for the recovery of overpaid tax under section 80. At first there was a transitional period of six months from 4 December 1996, when the amendment to section 80 was enacted to 31 March 1997, and taxpayers were given until 31 March 2003 to submit claims. Then, following the decision in the Grundig case, the transitional period was extended by three months to 30 June 1997 and the period within which claims could be made was extended to 30 June 2003. The period for the making of late claims under regulation 29 for deduction of input tax was not affected by these announcements. No similar transitional provisions have ever been introduced or announced with regard to those claims.
  5. There is no doubt that, if the time limit introduced by regulation 29(1A) was to be modified in the light of the decisions in Marks and Spencer II and Grundig by the introduction of a transitional period, the initiative lay with the Commissioners and that this initiative was not taken. As Lord Walker has explained, the breach of EU law lay in the provisions of regulation 29(1A) itself, not - as in the case of section 80 - in charging tax contrary to EU law in the first place. The situation was complicated by the view which was insisted upon by the Commissioners until a relatively late stage that claims for the deduction of input tax fell within section 80 because they were claims for amounts paid by way of VAT which were not VAT due. Whatever the reason may be, it is plain that the unmodified time limit in regulation 29(1A) is incompatible with EU law because it is retrospective and because it makes no provision for any transitional arrangements: Marks and Spencer II, [2002] ECR I-6325, para 38; Grundig, [2002] ECR I-8003, para 37. This much was common ground in these appeals.
  6. The question which your Lordships must resolve is how to apply the guidance that was given in Marks and Spencer II and Grundig in order to make good the lack of a transitional period for the application of regulation 29 to accrued claims resulting from a failure to deduct input tax. Legislation that is incompatible with EU law must be disapplied. But can the court go further and make good the defect which has led to its disapplication? The problem is far from easy, as the division of opinion in the courts below and in this House so clearly demonstrates. The possible choices were identified by Mr Vajda’s helpful analyses, which Lord Walker has set out in paras 50 to 53 of his speech. Underlying these possible choices is a more fundamental point, which I would express in this way. Where national legislation is defective because it lacks the transitional arrangements that are necessary under EU law, is it for the national court to make good the deficiency by devising such transitional arrangements as it may regard as appropriate? Or must this be left to the legislature or, following the example of what was done in regard to section 80 by means of announcements in Business Briefs, to the Commissioners?
  7. Two situations can, I think, be distinguished, although there is no difference in principle between them. One is where transitional arrangements have been included in a measure that reduces a pre-existing time limit for the making of claims but those arrangements are found to be inadequate because the period allowed is too short. The other, which is this case, is where there was originally no time limit for the making of claims at all and no transitional arrangements have been included in the measure that introduces one. In both cases the retrospective time limit is unenforceable as there is no adequate transitional period. But there is a difference in degree between them which affects the ability of the court to make good the defect.
  8. The decision in Grundig deals with the first situation. It tells us that the fact that the national court has found that a transitional period fixed by the legislature is insufficient does not necessarily mean that the reduced period for initiating claims cannot be applied at all: para 41. The national court cannot apply the inadequate transitional period to claims made with regard to rights accrued before the entry into force of the legislation which introduced the time limit. But it is open to the court, as the ECJ did in that case, to make its own assessment of what in accordance with EU law is an adequate transitional period during which the new time limit is not to be applied retrospectively. The reasoning in para 41 shows that the ECJ was satisfied that the making of a relatively modest adjustment to the prescribed period was not inconsistent with the principle of effectiveness.
  9. The other situation is that which applies in the case of these two appeals. Here too the guiding principle is that of effectiveness. Account must also be taken of the principle of protection of legitimate expectations: see Marks and Spencer II, para 47. The principle of legitimate expectations is infringed by the retrospective introduction of a time limit for the making of claims retrospectively. But this will not be in breach of EU law so long as transitional arrangements are included which allow an adequate period for the lodging of claims which persons were entitled to submit under the original legislation: Marks and Spencer II, para 38. Sufficient notice of these transitional arrangements must be given to ensure that the exercise of those accrued rights is not rendered virtually impossible or excessively difficult. Unless this is done there will be a breach of the principle of effectiveness.
  10. I would not rule out the possibility, in a suitable case, of the court reaching its own decision as to what would be a reasonable time for the making of claims and rejecting claims that were made after a period which it held to be reasonable. But I do not think that the situation disclosed by these appeals lends itself to that treatment. In my opinion this is a step too far for the court to take. The issue is not one of statutory interpretation, for which the court must accept responsibility. There is a gap in the legislation which is unfilled. The infringement of EU law in this respect cannot be said to have been comparatively minor or inadvertent, such as would enable greater weight to be attached to State’s need for legal certainty in matters of taxation: Fantask A/S v Industriministeriet (Erhvervministeriet) (Case 188/95) [1997] ECR I-6783, per Advocate General Jacobs, para 69. The primary responsibility for giving a clear indication to taxpayers as to where they stood with regard to the making of claims despite the retrospective introduction of the time limit lay with the legislature and the executive.
  11. To be compatible with EU law, taxpayers were entitled to be told in advance of any transitional arrangements that would enable them to submit late accrued claims for the deduction of input tax despite the introduction of the time limit. They were entitled to be given sufficient notice to familiarise themselves with the new regime, including the period of grace that was to be allowed for the submission of accrued claims during a transitional period: Grundig, para 40. This was necessary to give effect to the principle of effectiveness. Not all taxpayers affected by a system whose reach is as wide as VAT can be assumed to have been aware of the development of the relevant case law or, even if they were aware of the case law, to have understood the effect of it. Some may have appreciated that they could claim a period of disapplication, but some might not. Such indications as were available to them through the Business Briefs suggested that, in most cases, any such claims would be rejected by the Commissioners. I do not think that the gap in the legislation can be made good on a case by case basis. The nature of the defect is such that a single solution is required that can reasonably be applied to all taxpayers.
  12. For these reasons, and for those explained more fully by Lord Neuberger, I would hold that the period has not yet begun and that it is for Parliament or the Commissioners, if they choose to do so by means of an announcement disseminated to all taxpayers, to introduce prospectively an adequate transitional period. Until that is done the three year time limit must be disapplied in the case of all claims for the deduction of input tax that had accrued before the introduction of the time limit. I would apply that reasoning to Mr Fleming’s case as well as that of Condé Nast. I would dismiss both appeals.

LORD SCOTT OF FOSCOTE

My Lords,

  1. 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.
  2. 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.
  3. 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.
  4. 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
  5. "…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".

  6. 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.
  7. 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.
  8. 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.
  9. 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
  10. "…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.

  11. 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.
  12. 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:
  13. "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.

  14. Accordingly, I would dismiss both appeals.

LORD WALKER OF GESTINGTHORPE

My Lords,

    Disapplication of national legislation

  1. 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)
  2. "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).

  3. 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.
  4. 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").
  5. 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.
  6. 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):
  7. "(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).

  8. 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"):
  9. "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."
  10. 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.
  11. Section 80 and regulation 29

  12. Before the 1996-7 amendments section 80 of VATA 1994 provided as follows:
  13. "(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]".

  14. Before the amendments regulation 29, so far as material, provided as follows:
  15. "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.

  16. 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:
  17. "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.
  18. 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):
  19. "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.

  20. 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.
  21. The 1996-7 amendments

  22. 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:
  23. "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."
  24. 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):
  25. "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

  26. 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.
  27. 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).
  28. 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.
  29. 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:
  30. (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

  31. 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.
  32. 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.
  33. 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:
  34. "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.

  35. 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.
  36. The two appeals in outline

  37. 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.
  38. 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).
  39. 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.
  40. Four possible analyses (with variants)

  41. 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.
  42. 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.
  43. 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):
  44.   (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).

  45. 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.
  46. 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.
  47. ECJ jurisprudence

  48. 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):
  49. "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).

  50. In Grundig II the ECJ went on to observe (in para 41, already quoted):
  51. "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.

  52. 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.
  53. 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.
  54. 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:
  55. "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.

  56. 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.
  57. 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.
  58. 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:
  59. "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.

  60. 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.
  61. Disapplication of regulation 29(1A)

  62. 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).
  63. 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:
  64. "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."
  65. 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.
  66. 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.
  67. 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.
  68. 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.
  69. 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.
  70. Mr Fleming’s claim

  71. 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.
  72. Condé Nast’s claim

  73. 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).
  74. Disapplication of section 80

  75. 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.

LORD CARSWELL

My Lords,

  1. I have had the benefit of reading in draft the opinions prepared by my noble and learned friends Lord Hope of Craighead, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. Lord Walker has set out the facts, law and issues with such clarity that it would be altogether superfluous if I were to attempt to repeat any of those matters.
  2. In respect of the Commissioners’ appeal in the case of Mr Fleming (t/a Bodycraft) I entirely agree with Lord Walker’s reasons and conclusions and have nothing to add.
  3. In respect of the Commissioners’ appeal in the case of Condé Nast Publications Limited, I agree with Lord Hope and Lord Neuberger that the appeal should be dismissed. It seems to me that two issues arise out of this case. The first, which relates to the individual taxpayer (and others in like situations) is whether the Commissioners can be permitted in the circumstances of the case to refuse Condé Nast’s claim for repayment of input tax which had not been earlier deducted when they paid the output tax. The second, which is of more general import, is whether the Commissioners or the legislature have taken sufficient steps to specify a transitional period for submitting claims for the deduction of input tax despite the introduction of the time limit by the added regulation 29(A) of the Value Added Tax (Amendment) Regulations 1997 (S1 1997/1086).
  4. In order to comply with the principle of effectiveness, it was necessary for taxpayers to have sufficient information for them to know that they could submit claims for deduction of input after the introduction of the time limit. No transitional period was afforded by the legislature when regulation 29(1A) was passed into law. The Commissioners could not properly have refused to accept such claims if a reasonable transitional period had not elapsed after regulation 29(1A) came into operation on 1 May 1997. They had notified taxpayers in a series of Business Briefs that they would until 30 June 2003 accept claims under section 80 of the Value Added Tax Act 1994 for repayment of overpaid VAT. They maintained that late claims for refund of under-deducted input tax were governed by section 80 of the 1994 Act. Neuberger J ruled in a judgment given on 10 October 2001 in University of Sussex v Customs & Excise Comissioners [2001] STC 1495 that this contention was incorrect and that they were governed by regulation 29 of the 1997 Regulations. The Commissioners appealed, still contending that section 80 applied to such claims, but their appeal was eventually dismissed by the Court of Appeal on 21 October 2003 ([2003] EWCA Civ 1448, [2004] STC1). Until the last-mentioned date a taxpayer in the situation of Condé Nast was faced with the Commissioners’ insistence that his claim fell not within regulation 29 but within section 80, in respect of which claims were to be accepted up to 30 June 2003. No doubt with an eye to this date, Condé Nast’s advisers lodged their claim on 27 June 2003. In my opinion it would have been wholly unreasonable to expect a taxpayer to have to divine that the Commissioners’ appeal would be dismissed and that he should submit his claim on some earlier date than 30 June 2003, such as six months after 11 July 2002, the date on which the European Court of Justice gave its decision in Marks and Spencer Plc v Commissioners of Customs & Excise (Case C - 62/00) [2002] ECR I-6325, or 24 September 2002, the date on which that court gave its decision in Grundig Italiana SpA v Ministero delle Finanze (Case C - 255/00) [2002] ECR I-8003. If the case were to be decided on this issue, I should have been prepared to hold that a reasonable transitional period extended later than 27 June 2003.
  5. For the reasons given by Lord Hope and Lord Neuberger, I do not consider that this is the determinative issue. I agree with them that it is for Parliament or for the Commissioners - who must disseminate the information sufficiently to all value added taxpayers - to introduce prospectively an adequate transitional period which will apply to all claims for the deduction of input tax that had accrued before the introduction of the time limit. That was not done before 27 June 2003 and indeed has not yet been effected. When such a step is taken, the time limit applied by regulation 29(1A) of the 1997 Regulations must be disapplied. Like Lord Hope, I would apply that reasoning to Mr Fleming’s appeal as well as to that of Condé Nast. I would dismiss both appeals.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

  1. 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.
  2. 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"):
  3. 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.

  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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).
  16. 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.
  17. 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).
  18. 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.
  19. 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.
  20. 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.
  21. 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).
  22. 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.
  23. 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.
  24. 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.
  25. 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.
  26. 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..
  27. 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.
  28. 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.
  29. 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.
  30. 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.
  31. 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.
  32. 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).
  33. 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.


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