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Marks and Spencer plc (Appellants) v. Her Majesty's Commissioners of Customs and Excise (Respondents)
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Marks and Spencer plc (Appellants) v. Her Majesty's Commissioners of Customs and Excise (Respondents)
 UKHL 53LORD NICHOLLS OF BIRKENHEAD
1. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give I agree your Lordships' House should refer questions to the Court of Justice of the European Communities on the points mentioned by Lord Walker of Gestingthorpe. Given the tortuous history of this matter I reach this conclusion with reluctance, but in the circumstances this outcome is inescapable.
2. I have read the opinions of my noble and learned friends, Lord Hoffmann and Lord Walker of Gestingthorpe. I am in full agreement with their opinions. For the reasons which Lord Hoffmann and Lord Walker so carefully explained I too regard it as inevitable that the House should refer questions to the European Court of Justice on the points mentioned.
1. The supply of food is in general zero-rated for VAT: see section 30 and Schedule 8, Part II, Group 1, item 1 of the Value Added Tax Act 1994. But there are exceptions. One exception is confectionery: see item 2 of the Excepted Items. But there is an exception to that exception: cakes or biscuits are in general also zero-rated. There is however an exception to that exception to the exception, namely biscuits wholly or partly covered with chocolate. They are standard-rated.
2. For many years, starting with the introduction of VAT in 1973, the Commissioners of Customs and Excise took the view that Marks & Spencer teacakes, which are covered with chocolate, were biscuits and therefore standard-rated. Marks & Spencer accounted for VAT on that basis. But in September 1994 they admitted they had been wrong. They were actually cakes and should have been zero-rated. Marks & Spencer claimed repayment of all the VAT for which they had wrongly accounted over the years, totalling £3.5 million.
3. Section 80 of the 1994 Act gives a limited right to repayment:
4. The Commissioners invoked the defence under subsection (3). They said that Marks & Spencer had passed on 90% of the VAT to their customers. After hearing expert evidence about the market for teacakes, the VAT Tribunal accepted this submission and held that Marks & Spencer were entitled to only 10% of their claim. Marks & Spencer no longer dispute that as a matter of domestic law this finding was correct. Instead, they claim that they have a right to repayment not only under section 80 but also as a matter of community law and that it would be contrary to principles of community law for that right to be restricted by the defence of unjust enrichment.
5. The main question in this appeal is therefore whether Marks & Spencer have a right to repayment under Community law. There is no doubt that if a Member State charges VAT in breach of the rules of community law, a community right to repayment will be implied: see BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greece (Case C-62/93)  STC 805. Whether such a right would, in the circumstances of this case, be incompatible with the unjust enrichment defence is a matter in dispute. But what seems clear is that for such a right to arise in the first place, the charge to VAT must have been in breach of the rules of community law.
6. Does community law give Marks & Spencer a right to be zero-rated on the sale of teacakes? Article 12(3) of the Sixth Directive lays down the general rule that VAT must be charged at the standard rate. But, by way of exception, Article 28(2)(a) says that Member States "may" maintain "exemptions with refund of the tax paid at the preceding stage" (that is to say, zero-rating) which were in force in 1991. This continues an exception which has existed since VAT was first introduced.
7. The United Kingdom has chosen, as a matter of domestic law, to exercise this power. But does that mean that Marks & Spencer has a community right to be zero-rated? I should have thought not. Community law imposes no duty upon the United Kingdom to refrain from charging the standard rate of VAT on tea cakes. Marks & Spencer say that although there is no duty to legislate for a zero rate, article 12.1 of the Directive says that "the rate applicable to taxable transactions shall be that in force at the time of the chargeable event". If, therefore, the rate in force at the time the tea cakes were sold was zero, there was a community right to be charged that rate and no more.
8. I do not accept this submission. Article 12.1 is concerned with timing, not with the rate which may be charged. In any case, article 12.1 can have no application to transactions on which no tax is imposed, whether they are exempt in the narrower UK sense or zero-rated, that is to say, exempt with refund of tax previously paid.
9. This view appears to me to be supported by the reasoning of the Court of Justice in Idéal Tourisme SA v Belgian State (Case C-36/99)  STC 1386. Ideal Tourisme complained that the services they provided to coach passengers were charged VAT at 6% while competing air transport was exempt. They said that such discrimination was in breach of the community principle of equal treatment. The Belgian government said that they had a right to exempt air travel under article 28(3)(b) of the Directive but no such right in respect of coach travel. The Court said, in paragraph 38 of its judgment:
10. Similarly, as it seems to me, the United Kingdom, by zero-rating cakes, was not transposing the Sixth Directive and its failure to apply that "rate" to Marks & Spencer teacakes was therefore not a breach of the Directive or any other principle of community law.
11. If that is correct, then the claim by Marks & Spencer to avoid the unjust enrichment defence must fail at the first hurdle. Speaking for myself, I think that it is correct. But we have been shown two contrary opinions which must be entitled to respect. The first is in the submissions of the Commission on a reference at an earlier stage of these proceedings which was concerned with the recovery of VAT on gift vouchers. There was no doubt that, in the light of the decision of the Court of Justice in Argos Distributors Ltd v Commissioners of Customs and Excise (Case C-288/94)  STC 1359, VAT on the vouchers had been charged on a basis inconsistent with Community law. The reference raised no question about whether the same could be said about teacakes. Nevertheless, the Commission, in its Written Observations, said:
12. Likewise, the Advocate General (Geelhoed) said at para 44:
13. There is no explanation of why the treatment of tea cakes was inconsistent with the directive. Nevertheless, in the light of these two observations, I find it impossible to say that the view which I would otherwise have formed is acte clair. I therefore agree with my noble and learned friend Lord Walker of Gestingthorpe that there should be a reference to the European Court and I concur in the order which he proposes.
LORD SCOTT OF FOSCOTE
14. Having had the advantage of reading in advance the opinion prepared by my noble and learned friend Lord Walker of Gestingthorpe I am in admiring agreement with his analysis of the issues raised by this appeal and agree with his conclusion that there should be the reference to the European Court of Justice on the points he has identified.LORD WALKER OF GESTINGTHORPE
15. The appellant Marks & Spencer Plc ("M & S") is a very well-known high-street retailer. Its turnover comes mostly from the sale of clothing, but it also sells a limited range of foodstuffs, including ready-made meals and other own-brand products. Its own-brand products have for many years included chocolate-covered marshmallow teacakes, manufactured by the McVities division of United Biscuits. No other retailer sells identical teacakes. Another manufacturer, Thomas Tunnock Ltd, did, in the 1990s, make comparable teacakes which were sold both under the Tunnock brand name and (as an own-brand line) by Tesco Plc ("Tesco").
16. Most foodstuffs are zero-rated for the purposes of value added tax ("VAT"): see section 30 of and, Part II, Group 1 of Schedule 8 to the Value Added Tax Act 1994 ("VATA 1994"). Clothing and footwear, by contrast, is zero-rated only if designed for young children (and not suitable for other persons) or if within limited categories of protective clothing and footwear: VATA 1994 Schedule 8 Part II, Group 16. Other sales of clothing attract VAT at the standard rate (currently 17.5%). A trader making supplies which are wholly or largely zero-rated is entitled to repayment of an amount equal to its surplus input tax as a VAT credit under VATA 1994 section 25(3). Such traders are sometimes referred to as "repayment traders". Tesco was during the period relevant to this appeal a repayment trader. M & S, by contrast, was (with the exception of a single quarter during 1993) a "payment trader", since the output tax on the bulk of its turnover (adults' clothing) exceeded the input tax attributable to all its trading activities.
17. Although most foodstuffs are zero-rated, there are exceptions, listed in several paragraphs of excepted items in Group 1. The list of exceptions (which can be traced back to the days of purchase tax, so that its retention no doubt eased the transition to VAT on 1 April 1973) includes (para 2),
So a cake covered in chocolate is zero-rated, but a biscuit covered in chocolate (or chocolate substitute) is within an exception to an exception to an exception, and attracts standard-rate VAT. The complex litigation leading to this appeal originated in the fact that in 1994 the Commissioners of Customs & Excise, now the respondents the Commissioners of Revenue and Customs & Excise ("the Commissioners") changed their view as to the correct classification of the teacakes sold by M & S. From 1973 to 1994 they regarded them as biscuits covered in chocolate, and so attracting standard-rate VAT. In 1994 they accepted that they were (and always had been) cakes covered in chocolate, and so entitled to zero-rating.
18. This is an appeal by M & S from an order of the Court of Appeal ("the second Court of Appeal") made on 21 October 2003 following a reference to the Court of Justice of the European Communities ("the ECJ") made on 14 December 1999 by a differently constituted Court of Appeal ("the first Court of Appeal "). The judgments of the first Court of Appeal are reported at  STC 16; the opinion of the Advocate-General and the judgment of the ECJ at  STC 1036; and the judgments of the second Court of Appeal at  STC 1. The judgment of Auld LJ in the second Court of Appeal gives (paras 17 to 32) a full and accurate account of the complex and protracted course of the litigation. But since the House is (as I understand it) minded to make a further reference to the ECJ it is appropriate to set out a self-contained summary of the litigation, including some issues which are no longer live issues. A full explanation of the background is needed in order to explain the difficulties leading to the need for a further reference.
The main issues of EC law
19. Before attempting a summary of the course of the litigation, however, and in the hope of providing some signposts on the way, I shall try to identify the main issues of EC law which have arisen (some but not all of which are directly relevant to this appeal as it comes before your Lordships' House). These are (1) directly enforceable rights under EC law (in the language of section 2(1) of the European Communities Act 1972, "enforceable Community right[s]"), especially in connection with the transposition into national law of EC directives; (2) transitional provisions of the Sixth Directive on VAT (77/388/EEC), especially as regards zero-rating; (3) repayment of overpaid tax and the passing-on defence; and (4) general principles of EC law and when and how they give rise to enforceable Community rights. These are briefly considered in the following paragraphs.
20. Enforceable Community rights: It is very well established that an individual may assert a directly enforceable right in his national court where (1) a member state has failed to transpose, or has failed to make a correct transposition of, a directive into national law; and (2) the relevant provision of the directive is unconditional and sufficiently precise. In such circumstances the member state is estopped from relying on its own failure to make a correct transposition. These two conditions are sometimes called the first and second Becker conditions (after the seminal case of Becker v Finanzamt Münster-Innenstadt (Case 8/81)  ECR 53, paras 24 and 25).
21. What if a member state's legislature correctly transposes a directive, but its executive branch of government (or another emanation of the state) systematically errs in its interpretation and application of the transposed measure? One view, based on some general observations by the ECJ in Kampelmann v Landschaftsverband Westfalen-Lippe (Joined Cases C-253/96 to C-258/96)  ECR I-6907, para 42, was that that did not give rise to a directly enforceable right, and that any right to redress which the individual had before his national court was a matter for national law. The other view, tentatively expressed in the Court of Appeal in Three Rivers District Council v Governors and Company of the Bank of England (No 3)  2 AC 1, 71, was that an administrative failure to interpret and apply the transposed measure correctly could give rise to a directly enforceable right. This issue has assumed great importance in the present litigation, and led to a drastic revision by the ECJ of the question of EC law referred to it by the first Court of Appeal.
22. Zero rating: The long-term aspiration of those who shape EC strategy is that VAT should become a fully harmonised tax. But the process of harmonisation is still far from complete. In the meantime member states have been given limited powers to maintain, for a transitional period which has turned out to be protracted, reduced rates of VAT, exemptions from VAT and other special provisions of their own tax systems. The provision most relevant to this appeal, in article 28(2) of the Sixth Directive in its original form, was as follows:
Article 28(2) has continued in force, subject to amendments made by Council Directive 92/77/EEC, operative as from 31 December 1992. Article 28(2) as amended, and so far as relevant, provides as follows:
So the express requirement that the measures should be in accordance with Community law was introduced by the amendment.
23. M & S's right to have sales of its teacakes zero-rated depends, therefore, on a choice made by the United Kingdom Parliament, but within the framework of powers conferred by the Sixth Directive. Your Lordships, like the courts below, have heard extended argument, deploying various metaphors, as to whether this right should be regarded as an enforceable Community right, or alternatively as one which fails to satisfy one or both of the Becker conditions.
24. Repayment of repaid tax and the passing-on defence: The Sixth Directive does not confer any express right to repayment of tax unlawfully exacted by a member state. But such a right is "the consequence and compl[e]ment" of a directly enforceable Community right. The taxpayer's right of recovery must be exercised in "the framework of the substantive and procedural conditions laid down by the various relevant national laws," but those conditions must comply with the general principles of equivalence and effectiveness: see BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greece  ECR I-1883, paras 40 and 41.
25. Passing-on is recognised (although not without some controversy: see for instance Burrows, The Law of Restitution, second edition (2002) pp591-596) as a possible defence to any restitutionary claim. It is in no sense peculiar to EC law (see for instance the decision of the High Court of Australia in Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516). But the ECJ has recognised that it is consistent with EC law for a national system of law to restrict the right of recovery of overpaid tax in circumstances where it is established that the burden of the tax has actually been passed on by the trader to others (normally his customers), so that reimbursement would amount to double recovery by, and unjust enrichment of, the trader. The ECJ first recognised this defence in Hans Just I/S v Danish Ministry for Fiscal Affairs (Case 68/79)  ECR 501, and the line of authority continues down to Weber's Wine World Handels-Gmbh v Abgabenberufungskommission Wien  ECR I-11365 (see the opinion of Advocate-General Jacobs at paras 45 ff, and the judgment of the ECJ at paras 93 ff). The defence is now very familiar to the ECJ, but it remains a matter for national law so long as there is no infringement of the principles of equivalence or effectiveness.
26. General principles of EC law: EC law recognises several general principles of law, including the principles of equivalence and effectiveness to which I have just referred. Other general principles include its disinclination to countenance discrimination, retrospectivity or expropriation of property. In this litigation the main area of controversy has been, not as to the general principles themselves, but as to whether and how far they can be invoked in the absence of a directly enforceable Community right.The course of the litigation: up to the ECJ reference
27. With that brief introduction to the legal issues I turn to the course of the litigation. M & S sold teacakes long before the introduction of VAT. When VAT was introduced in 1973, M & S accounted for VAT at the standard rate (initially 10%, then 15% and latterly 17.5%) on its sales of teacakes, in accordance with guidance published by the Commissioners. But by a letter to McVities dated 30 September 1994 the Commissioners acknowledged that the teacakes should have been designated as cakes, and should have been zero-rated. M & S had therefore overpaid VAT from 1973 until 1994.
28. Section 80 of VATA 1994 provides as follows:
In March 1995 M & S made a claim for repayment of £3.5m in respect of the overpaid tax. In July 1995 the Commissioners refused the claim, relying on the passing-on defence in section 80(3). On 17 August 1995 M & S gave notice of appeal to the VAT and Duties Tribunal ("the Tribunal"). The Commissioners' considered position on the appeal was that 90% of the overpaid tax had been passed on, and so was not recoverable.
29. While the appeal to the Tribunal was pending the Paymaster-General made a statement in the House of Commons on 18 July 1996, announcing the Government's intention to ask Parliament to amend section 80, with retrospective effect to the date of the announcement, so as to impose a 3-year time limit on claims under section 80. This was effected by section 47 of the Finance Act 1997, enacted on 19 March 1997, which substituted a new section 80(4):
This provision was deemed to have come into force on 18 July 1996, even in relation to claims made before that date (subject to limited exceptions provided for in section 47(3) and (4) of the 1997 Act).
30. M & S's appeal was heard by the Tribunal during October 1996. The hearing occupied seven days, with a good deal of oral evidence (from M & S's merchandising manager on its behalf, and from a professor of retailing at Manchester Business School on behalf of the Commissioners) on the passing-on issue. By a written decision dated 30 January 1997 (reported at  V&DR 85) the Tribunal dismissed M & S's appeal and confirmed that the amount repayable was £350,000.
31. In the meantime M & S had put forward another, separate repayment claim. It is not directly relevant to this appeal but it needs to be explained because it played an important part in the proceedings before the ECJ. This claim related to gift vouchers. From May 1991 M & S had sold gift vouchers in different denominations. Many were sold in bulk to employers, at a discount from their face value, with a view to the employers distributing them as incentives to their employees. Until the end of October 1996 M & S (in compliance with guidance from the Commissioners) charged VAT on the full face value of a discounted voucher (for instance a £10 voucher might be sold for £9 but the VAT accounted for was £1.75).
32. Throughout this period from May 1991 to October 1996 the Sixth Directive required that price discounts of this sort should not be included in the taxable amount (Article 11 (A (1) (3)). This requirement had however been incorrectly transposed into national law (by section 10(3) of the Value Added Tax Act 1983). This provision was amended so as to accord with the Sixth Directive by the Finance (No. 2) Act 1992 with effect from 1 August 1992. Vouchers sold during the pre-amendment period (ending on 31 July 1992) have been referred to in the litigation as the early vouchers, and the vouchers sold during the second period (1 August 1992 to the end of October 1996) have been referred to as the later vouchers.
33. Despite the amendment of section 10(3) of the Value Added Tax Act 1983 the Commissioners continued to apply the national legislation in a manner contrary to the Sixth Directive. This continued until 24 October 1996, when the ECJ gave judgment in an important voucher case which had been referred to it by the Tribunal, Argos Distributors Ltd v Customs and Excise Commissioners (Case C-288/94)  QB 499. M & S had no doubt been waiting for the ECJ's decision in Argos, since within a very few days M & S made a repayment claim for about £2.8m VAT overpaid on both the early vouchers and the later vouchers. In December 1996 the Commissioners agreed to repay about £1.9m, disallowing the rest of the claim because of the impending retrospective three-year cap.