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Judgments - Fleming (t/a Bodycraft) and Condé 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

[2006] EWCA Civ 976

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 As originally enacted, section 80 provided that no amount paid by way of VAT which was not due to the Commissioners could be claimed after the expiry of six years from the date on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-8033 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-8033, 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,

13.  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.

14.  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.

15.  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.

16.  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-1-6325. The Court held that the reduction of the time limit without an adequate transitional provision was “incompatible with the principle of effectiveness and the protection of legitimate expectations” (para 47). In para 38 the Court said that transitional arrangements allowing an adequate period for lodging claims for repayment which persons would have been entitled to submit under the original legislation

“…are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.”

And, in paragraph 39, the Court said that, in order to serve the purpose of legal certainty, “limitation periods must be fixed in advance".

17.  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 [2000] ECR-1-8003, 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.

18.  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.

19.  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.

20.  My Lords, I would, for my part, reject the premise on which these two alternatives are based. The UK instituted a VAT scheme for the repayment by the Commissioners of input tax that enabled claims for repayment to be made without limit of time. That was a surprising, and perhaps unintended, feature of the scheme but was a lawful feature. There is no suggestion that the scheme failed properly to implement the Sixth Directive. The scheme was then amended by the introduction of a three year time limit that was to apply not only prospectively but also retrospectively with no transitional period during which those, like Mr Fleming and Condé Nast, who had been sitting on their claims, would be able to take into account the change in the law and bring their claims before they became time barred. Whether a reasonable transitional period for claims to be brought that on 1 May 1997 were already at least three years old should have six months, 12 months or some other period from 1 May 1997 is open to argument but is not in point. The important fact is that there was no transitional period. The VAT regime is not judge-made and is not made by the Commissioners. It is a statutory scheme consisting of primary legislation made by Parliament and secondary legislation made by others under powers conferred by Parliament. The Commissioners have management powers conferred by Parliament but these powers do not extend to enabling the Commissioners to amend the statutory scheme. The Business Briefs published by the Commissioners can properly be regarded as published pursuant to the Commissioners’ management powers but are not a means enabling the Commissioners to amend the VAT régime made by primary and secondary legislation. The two Business Briefs, to which reference has been made in this opinion, contained provisions purporting to extend the period within which certain section 80 claims which had accrued to the taxpayers before the amendment to section 80(4) came into effect could be brought. These provisions have been described as “concessions". They are, my Lords, nothing of the sort. If European law does not recognise the validity of a UK statutory limitation period in relation to a certain class of VAT claim it is not a “concession” for those charged with the management of the scheme to purport to amend the scheme by allowing some of those whose claims would be barred by the invalid provision to have some additional period to bring their claims. In EC Commission v United Kingdom [2005] STC 582, another VAT case, the ECJ said in its judgment at para 25, that

“…it is settled case law that the incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. Mere administrative practices cannot be regarded as constituting the proper fulfilment of obligations under Community law".

The UK’s obligation is to put in place a legal scheme for the bringing of claims for repayment of input tax. Regulation 29 constitutes the legal scheme. If, as is the case, paragraph (1A) cannot, consistently with Community law, be applied against a certain class of taxpayers, into which class both Mr Fleming and Condé Nast fall, the defect cannot, in my opinion, be cured by “mere administrative practices". The Business Briefs fall, in my opinion, under that heading.

 
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