[2009] UKFTT 32 (TC)

TC00004

Value Added Tax  -  Whether the Appellant's late claim for input tax, initially deducted in its Return, but later recovered by HMRC under an assessment, is a claim for input tax under Regulation 29 (1) of the 1995 VAT Regulations or a claim under section 80(1B) of the VAT Act 1994 for the recovery of wrongly paid VAT -   whether the decision in Fleming (trading as Bodycraft) v. HMRC, that the imposition of a three-year time limit for the purpose of making claims under Regulation 29 could not be invoked against those with pre-existing claims, applied to inputs incurred and invoiced in April 1997 if the trader's VAT period ended after 1 May 1997 such that the inputs could not, at 1 May 1997, actually be claimed  - Appeal dismissed  

LONDON TRIBUNAL CENTRE

CABLE & WIRELESS PLC	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						ROY JENNINGS FCA, FTII

Sitting in public in London on 22 and 23 January 2009

David Scorey, counsel, for the Appellant

Alison Foster, QC and Adam Robb, counsel, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

1.     This case raises two legal points, both of them in areas that have involved much debate and VAT litigation in the past.  Both relate to late claims by the Appellant for very large amounts of input tax that had been incurred by it, and invoiced to it, in April 1997.

2.    The first point, the minor one, involves re-visiting the issue of whether late claims for input tax deductions are rightly made under Regulation 29(1) of the VAT Regulations 1995 or under section 80(1B) VAT Act 1994 for the repayment of wrongly-paid VAT. The more significant point is the whole issue of whether the claims were time-barred or not, in other words the issue that might be described as a Marks & Spencer, Fleming or Condé Nast issue, which depends on whether the Appellant did or did not have “pre-existing rights” on 1 May 1997, when the rule imposing the 3-year limit for late claims for input tax deductions was introduced.  
  
3.    The significance of the “Regulation 29/section 80” issue derives from the fact that the three-year cut-off limitation for making late claims for section 80 VAT repayments was introduced many months earlier (back in 1996) than the introduction of the similar rule introduced in relation to late claims for input tax deduction, which was introduced on 1 May 1997.  The Respondents contended that a small proportion of the total late claim in this case was properly to be regarded as a claim under section 80 and not as a late claim for an input deduction. If this was right, since the limitation period in relation to section 80 claims had been introduced in 1996, well before the relevant services had been rendered to the Appellant, and in excess of a year before the assessment was made in October 1997 to recover the tax lost as a result of the relevant small part of the input claim having been deducted by the Appellant in its return, the late claims would certainly have been time-barred. 

4.    Whilst the point is complex, and we have reached our decision on this minor point with some diffidence because our decision is the reverse of one reached in another case before the VAT Tribunal, we have decided that the Appellant is correct on this minor point and that the claim in relation even to the minor element of the total claim that the Respondents contended should be dealt with under section 80, actually falls properly to be tested under Regulation 29, and not under section 80.

5.     This conclusion does not necessarily mean that the Appeal is allowed even in relation to this small proportion of the total claim.   It simply means that this element of the claim has to be considered, along with the great majority of the claim, to ascertain whether the total input claims under Regulation 29 were “pre-existing rights of the Appellant”, so as to be unaffected by the 3-year limitation period introduced into Regulation 29(1) on 1 May 1997 without any transitional relief for such pre-existing claims. It was decided by the House of Lords in Fleming (trading as Bodycraft) v. HMRC and Condé Nast Publications Ltd v. HMRC [2008] 1 WLR 195 that the 3-year limitation could not be asserted against those with pre-existing rights, and the question for us is whether the Appellant had such rights.

6.     The Appellant’s three-month VAT periods ran to 31 March and to 30 June, and so on.  The claims for input tax in this case, all referable to services received and invoiced in April 1997, thus arose in a “straddling period”, in that Regulation 29A was introduced after one month of the Appellant’s period to 30 June had elapsed, but prior to the remaining two months of the period, and prior also to the date (namely 30 June) as from which the Appellant was able to make its return and able to claim input deductions for the relevant VAT period.  This Appeal thus raises the issue of whether the Appellant had “protected pre-existing rights” by virtue of the inputs having been received before the limitation period was introduced, or whether it did not have such protected rights because it was unable to claim the input deductions until the end of its return period, by which time the limitation period had been in force for two months. 

7.     There is understandably no guidance on this point in any of the reported cases, including the Fleming and Condé Nast decisions. The claims in Fleming had pre-dated 1 May 1997 by years not days, and the last claim in the Condé Nast case was for the company’s VAT period that conveniently terminated on 30 April 1997.  Not surprisingly therefore, their Lordships did not consider the point that we have to decide.   The question for us is essentially whether the notion, enshrined in Article 17 of the Sixth Directive, and in section 26 VAT Act 1994, that the entitlement to deduct input tax arises when goods or services are supplied to the claimant, prevails (and so undermines the limitation period introduced after the supply of the services), or whether the claimant needs to establish that it was in a position actually to make its return for the relevant period and actually then to claim the input deduction in that return under Article 18 and section 25 VAT Act before the introduction of the limitation period in order for that limitation period to be inoperative in relation to late claims for the input deduction.    

8.   Our decision is that the relevant point is the point at which the Appellant is entitled to make the claim for input tax.  Thus because the claim for input tax incurred and invoiced in the month of April 1997 could not actually be made in the first place until 30 June, and was not bound to be made for a further month after that, we decide that the cut-off rule of Regulation 29A introduced on 1 May 1997 is not to be disapplied in relation to any of the claims for input tax in the whole of the 3-month period than ended on 30 June 1997.
The facts

9.     There was no dispute about the facts, which were very simple.   Furthermore no-one was called to give any evidence.

10.     The relevant facts were that in April 1997, the Appellant was invoiced in very substantial amounts by its lawyers, accountants, public relations consultants and others for various services relating to a proposed merger. Prior to the end of its relevant 3-month VAT period on 30 June, the Appellant had discussed with HMRC the issue of whether the input tax in relation to these supplies was deductible, and HMRC had indicated that it was not. This view was consistent with the authorities at the time. Notwithstanding this view, the Appellant deducted some of the input tax, and thus accounted for the net sum of VAT owed on the basis that some of the input tax was deductible.  The vast majority of the relevant input tax was, however, neither claimed nor deducted, on account of the views advanced by HMRC.    

11.     A few months later, in October 1997, HMRC made assessments to assess the additional VAT that was due on account of its claim that none of the relevant inputs were deductible, and at the end of October the Appellant paid the additional VAT, effectively disallowing the few inputs that had been deducted in the return for the period 06/97. 

12.     The judgment of the European Court of Justice in the case of Kretztechnik AG v. Finanzamt Linz C-465/03 established in about August 2005 that the basis on which all of the input tax had been disallowed was wrong. It is presently irrelevant to consider the basis for the original view or for the change occasioned by the Kretztechnik decision.  It was accepted by both parties that the relevant decision had completely reversed the earlier ruling and that the whole of the input tax should have been deducted. 

13.    On 19 August 2005, the Appellant made claims for the deduction of the whole of the input tax that had either been disallowed as a result of the October 1997 assessments, or that had never been claimed at all. 

14.   The August 2005 claims were in fact slightly more complicated than now remains relevant because the claims were for substantially more input tax than remains in contention.  Much of it has been conceded to be deductible and has already been refunded. Furthermore some of the input tax had been suffered and invoiced in periods before April 1997, albeit only claimed in the period ending 30 June 1997.    And other amounts had been suffered and invoiced in April, but only claimed in the period ending September 1997. Of the amounts that remain in contention however, we were asked essentially to ignore detailed figures and questions regarding interest, and to reach decisions on the two fundamental points of principle that we have already indicated. It is sufficient in relation to these to work on the basis that £20,000 of input tax was the amount initially claimed and deducted in the period 06/97 which was shortly thereafter recovered by the assessments, and that the amount that had been incurred, and duly invoiced, on or before 30 April 1997, but that was never claimed in any of the periods in the 1990s, was £200,000.

15.   Whilst HMRC conceded that all of the input tax should rightly have been deducted, they claimed that various amounts were time-barred by virtue of the fact that the April 1997 invoices could only have been claimed in the VAT period 06/97, that that period ended two months after 1 May 1997 when the three-year cut-off period for Regulation 29(1) claims had been introduced, and that as the claims had only been made in August 2005, they were made well after the expiry of the three-year cut-off period and were thus time-barred.      

16.     Initially HMRC had dealt with all of the claims as if they were properly made and to be tested as Regulation 29 claims for input deductions, rather than claims for the recovery of wrongly-paid VAT under section 80. In due course we will explain why it is that the claim for the £200,000 element (i.e. the element that was never claimed or deducted in the 1990s) was indeed rightly claimed under Regulation 29.     Leaving this aside at present, it occurred to HMRC that they had wrongly treated the £20,000 element as a Regulation 29 claim. They contended that the initial claim for, and deduction of, the £20,000 element in the VAT return for the period 06/97 meant that that claim had thus been finalised.  We certainly agree with that.  Once HMRC had then levied an assessment to recover the £20,000, HMRC argued that any later claim for the input deduction, or to recover the tax paid in the assessment, switched from being a Regulation 29(1) claim, and became a claim under section 80(1B) VAT Act 1994 for the recovery from the Commissioners of “an amount by way of VAT that was not VAT due to them”.  The three-year cut-off rule had been inserted into section 80 many months before April 1997, so that that limitation period was not sensitive to Marks & Spencer style disapplication, so far as the £20,000 element of the input tax was concerned.

17.     The House of Lords decided in the Fleming and the Condé Nast cases in early 2008  that the time limits introduced by Regulation 29(1A) on 1 May 1997 could not be invoked against taxable persons who had “pre-existing” claims on 1 May. This thus raised the issue of whether the Appellant’s claim for the £200,000, and the £20,000 as well if the Respondents’ argument referred to in paragraph 16 above was wrong, were pre-existing claims by virtue of the services having been received and invoiced before 30 April 1997, or whether they were not pre-existing claims because none of the input tax for the period 06/97 could have been claimed until 30 June 1997.    

18.    A feature that the claims in this case have in common with those in the case brought by Marks & Spencer in relation to tea cakes and sales of vouchers at a discount, is that all the relevant claims involved a wrong application of the VAT law in the first place by HMRC, and then the imposition of a time period within which claims had to be made, without that new limitation period having any transitional period to “grandfather” pre-existing claims, such that the imposition of the time limit could not be invoked under European law against those with pre-existing claims.    There may be little technical relevance to this point, albeit that it means that HMRC and Parliament between them were responsible for “two wrongs”. The case was in other words not akin to the Fleming, Condé Nast cases and to several other cases where the reason for the late claims was either a deliberate earlier decision on the part of the trader not to claim the amounts, or sheer dilatoriness. 

The Regulation 29(1)/Section 80(1B) issue

19.    We will deal first with the Regulation 29(1)/Section 80(1B) issue, even though it is a minor point in this Appeal.  We will also regrettably deal with the point in some detail since it is complex. It also has a bearing on how we should decide the main point.

20.   A number of cases have depended on the somewhat bewildering issue of whether a taxable person, on making a late claim for an input deduction, is making a claim under Regulation 29(1), specifically as a claim for an input deduction, or whether alternatively the trader is making a claim under section 80 for the repayment of “an amount by way of VAT that was not VAT due to them”. The confusion arises because if input tax was not claimed in the initial trading period when it was incurred, or it was disallowed, or having been deducted in the return it was recovered by HMRC by making an assessment, then it follows, at least for the trader whose outputs generally exceed its inputs such that it actually pays VAT in cash (“the payment trader”), that the non-deduction of the input tax will indeed have resulted in more VAT being paid in the initial period than should have been, or than might have been, paid. Thus if a later claim is then made, there arises the confusion as to whether the claim falls under Regulation 29(1) or under Section 80. 

21.   This whole issue was considered in an extraordinarily helpful manner by Mr. Justice Neuberger in the High Court decision in University of Sussex v. HM C&E [2001] STC 1495.  In November 1996 the University made a late claim for numerous small amounts of input tax that it had deliberately not claimed ever since the introduction of VAT in 1973. At that time, the VAT legislation contained a three-year cut-off date within which section 80 claims had to be made, but it contained no limitation period whatsoever for the making of late claims for input tax.     Understandably therefore the University framed its claim as one for input tax, and not one to recover over-paid VAT, albeit that it had generally been a net payer of VAT such that its earlier decisions not to claim certain input deductions had resulted in more VAT having been paid than would have been paid, had it made those claims.

22.     In 1996 when the University made its claim, section 80(1) was significantly not in the form in which it had been re-cast by the time the Appellant made its claim in August 2005 in this case.  In 1996, the three relevant sub-sections of section 80 read as follows:

“(1)  Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(4)  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…    .

(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”.

Section 96(1) defined “VAT” for the purposes of the 1994 Act as “value added tax charged in accordance with this Act”.

Regulation 29(1) read as follows before the insertion in May 1997 of the cross-reference to the new three-year limitation period for claims:

“Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specifically, a person claiming deduction of input tax under section 25(2) shall do so on a return made by him for the prescribed accounting period in which the VAT becomes chargeable”.

23.    In the course of giving his judgment, Mr. Justice Neuberger made a number of observations on these provisions, most of which had occurred to us even before reading the brilliant survey of these unhappily drafted provisions. For instance, he thought it slightly odd that the provision for the repayment of over-paid VAT should appear in the Act, whilst that for making late claims for input tax only in the Regulations.  It was also odd that the liberty, subject to some sort of discretion on the part of HMRC, to make late claims for input tax (without any limit in 1996) should be based on a curious inference to be drawn from Regulation 29(1), rather than from any clear and specific provision.  Equally it was not clear whether the policy behind the different rules for the two different claims were directed to distinguishing between “payment traders”, who would generally with late input claims be seeking to recover VAT, whereas “repayment traders” would be seeking larger refunds but not obtaining repayment of anything that they had paid.   Or was the distinction geared to whether the earlier extra payment had resulted from paying excessive amounts of output tax, as distinct from not having deducted input tax from the rightly calculated amount of output tax?   Significantly he observed that, if a repayment trader had returned output tax of 40, rather than the correct 20, and correct input tax of 100, it was not at all clear how that trader would recover the additional 20, beyond the 60 recovered in the original claim, when a later claim could not be either for non-deducted input tax, or for any repayment of wrongly-paid VAT.   

24.   Leaving aside these distinct oddities in the drafting of these provisions, a number of telling but not “knock-out” arguments were advanced on behalf of the University to the effect that the claim should be under Regulation 29. A difficulty with these various arguments, however, was the realisation that even if one started with the assumption that the claims might be brought under either of the provisions when under-claimed input tax was being claimed by a “payment trader”, the “tie-breaker” clause appeared to be section 80(7), which precluded the claim under Regulation 29, if section 80 was in point.   The answer to this, however, and indeed the point that Mr. Justice Neuberger considered to be the “knock-out” blow in favour of the claim properly being made under Regulation 29, and a point of some significance in this present Appeal, was the observation that section 80 did not actually apply at all.   For if the trader simply chose not to claim input tax, then the resultant increased VAT that the trader ended up paying was properly paid.   It was, in terms of section 80(1), not “VAT that was not due to the Commissioners” at all, so that section 80 was wholly irrelevant and the claim fell to be made under Regulation 29.
  
25.    We mentioned in paragraph 16 above, that we would refer later to why the claim for the £200,000 input tax that had never been claimed in the 1990’s, was in this case indisputably a claim under Regulation 29, rather than under section 80, for wrongly paid VAT.  The explanation for this is the point underlying Mr. Justice Neuberger’s decision, mentioned at the end of the previous paragraph. That point apart, and leaving aside the now different wording of section 80 to which we will turn below, the Appellant in this case had paid excessive VAT as a result of being induced not to claim the £200,000 and was a payment trader. Thus the only explanation for the fact that HMRC accepted that the claim for the £200,000 input tax was made under Regulation 29, was the fact that ever since the Court of Appeal confirmation of Mr. Justice Neuberger’s decision, HMRC has accepted that the extra VAT that the trader pays when refraining (for any reason) from claiming a deduction for input tax, is VAT that is entirely properly payable, and it is not “VAT wrongly paid”.

26.    The version of section 80(1) that we quoted above appeared not to indicate whether the wrongly-paid VAT to which it was referring, resulted from the trader wrongly returning extra output tax, or alternatively wrongly paying VAT because HMRC disallowed input tax or HMRC assessed VAT to counteract a deduction for input tax that they claimed to be unjustified.  Neither of those circumstances would be ones where the trader had simply chosen not to claim input tax, and therefore on the original wording of section 80(1), there would have remained doubt as to whether section 80, or rather Regulation 29, should be invoked in making the late claim.     The revised wording of section 80, that certainly applies in relation to this Appellant’s claims made in August 2005, does however give attention to whether the wrong amount of VAT was paid because excessive output tax was accounted for, or to whether the wrong VAT was paid for some other reason, and we must now turn to that current wording of section 80. 

27.    Whilst section 80(4) and (7) remain identical, section 80(1) has now been re-cast as follows:-

“(1)  Where a person:-

(a)	has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and

(b)	in doing so, has brought into account as output tax an amount that was not output tax due,

the Commissioners shall be liable to credit the person with that amount.
(1A)  Where the Commissioners:-

(a)	have assessed a person to VAT for a prescribed accounting period (whenever ended) , and

(b)	in doing so, have brought into account as output tax an amount that was not output tax due,

they shall be liable to credit the person with that amount.

(1B)  Where a person has for a prescribed accounting period (whenever ended) paid to the Commissioners an amount by way of VAT that was not VAT due to them, otherwise than as a result of-

(a)	an amount that was not output tax due being brought into account as output tax, or

(b)	an amount of input tax allowable under section 26 not being brought into account,

the Commissioners shall be liable to repay to that person the amount so paid.”

28.     Sub-sections (1) and (1A) appear to have been drafted so as to apply to the situation of the overpaid VAT having been occasioned by excessive output tax being taken into account.  They also appear to have been cast in that form to remove the earlier doubt, whereunder the previous version of section 80(1) made no reference whatsoever to whether the excessive payment of VAT resulted from excessive output tax being taken into account, or from input tax wrongly being disallowed in a decision. 
 
29.    We must now address the critical issue in relation to “the Regulation 29/section 80(1B)” point, which is whether section 80(1B) brings section 80 into play in this case, where HMRC had wrongly assessed VAT back in October 1997 effectively to disallow and recover the deduction for input tax made by the Appellant in its Return for period 06/97.

The contentions of the parties

30.   The Appellant’s contentions were unfortunately not advanced in argument, but we were referred to a letter in the Documents file that had not been read during the hearing, which was said to advance the Appellant’s contentions very clearly as to why the claim should be under Regulation 29, rather than section 80(1B).

31.     The letter to which we were referred, which was that dated 21 May 2008 from Ernst & Young to HMRC, made three points in support of the proposition that the claims should remain input tax claims, and should not be treated as section 80 claims for wrongly-paid VAT. It said that it was contrary to principle for a claim that had always fundamentally been a claim for input tax to be switched (once HMRC had made its October 1997 assessment) into being a claim for wrongly-paid VAT. It was secondly said that it would be perverse for the Appellant to be worse placed in now seeking to recover input tax for the element of input tax that it had actually claimed and deducted in its Return, than it was, and than many others were, when it, and they, had made no claims at all for the contentious input tax related to share issues. Most significantly it contended that within the wording of section 80(1B)(b), the present claim was excluded from relief under section 80 because the wrongly-paid VAT was paid precisely because input tax allowable under section 26 was not brought into account.  Ernst & Young went on to point out that when section 80(1B) had been introduced, the HMRC explanatory notes had indicated that sub-section (1B)(b) was just a “mop-up” provision to cover such things as arithmetic errors and the case where the trader had mistakenly paid its VAT twice. Ernst & Young went on to point out that HMRC had contended that the provision was indeed just such a “mop-up” provision in their arguments in LA Leisure’s appeal [VTD 20648] and so defeated the then appellant’s contention that its claim could be brought under section 80(1B).

32.     It was contended on behalf of the Respondents that the Appellant’s claim could be, and thus had to be, brought under section 80(1B). Once the October 1997 assessment had been made, the claim had to be for the recovery of VAT wrongly paid.  This argument was substantially based on the wording of section 73(9) VAT Act 1994, which provided that:-

“(9)  Where an amount has been assessed and notified to any person under subsection (1)… etc above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.” 

Insofar as the Respondents were pressed to explain how it could be said that section 80(1B) was not ousted by virtue of the fact that the wrongly assessed VAT derived precisely from the point that “input tax deductible under section 26 was not brought into account” we understood the answer to be that the input tax had been brought into account in the original return, so that in that sense “it had been brought into account”.

33.    The Respondents also contended that section 80(7) precluded the repayment of wrongly-paid VAT under any provision other than section 80, in all circumstances.    Whilst this following summary was not as such advanced, the apparent result would be that section 80(7) would operate not just as the tie-breaker as between claims that could be advanced under section 80 and some other provision (such as Regulation 29(1)), but as precluding recovery of wrongly paid VAT under any other provision, even in a case where the wrongly paid VAT could not be recovered under section 80 at all. 

Our decision in relation to the Regulation 29/section 80 issue

34.   We have reached our conclusion with some diffidence, first because this issue was not debated very clearly before us, and also because it appears that the Tribunal decided in the case of National Galleries of Scotland [VAT Decision 20253] that a claim in the situation of that made by the Appellant here as regards the claim for the £20,000 input tax, was properly to be brought under section 80(1B).  The basis of that decision was that, once the equivalent of the £20,000 had been assessed and paid, it was treated as being “an amount of VAT due from [the trader]”, so that the later claim became a claim for the recovery of wrongly-paid VAT. The decision did not specifically address the question of why the section 80 claim was not barred by the wording of section 80(1B)(b) which says that a claim for wrongly-paid VAT cannot be brought under section 80(1B) if the wrongly-paid VAT resulted from “an amount of input tax allowable under section 26 not being brought into account”.
 
35.   When the wording of section 80(1) was modified from that considered in the Sussex University case, the wording of the new subsections (1) and (1A), seemingly the core provisions, made it perfectly clear that they applied only to cases where either the trader or HMRC had occasioned excessive output tax to be taken into account.  Sub-section (1B) was then said to apply mainly to arithmetical errors and to the case where the trader’s VAT had mistakenly been paid twice. It seems odd therefore that it is now suggested that sub-section (1B) was designed to deal with cases where excessive VAT was paid because, for one reason or another, an input tax claim was denied, when the wording of the first two sub-sections was clearly framed precisely not to deal with denial of input tax claims, and sub-section (1B)(b) seems also to preclude the application of that sub-section when “an amount of input tax allowable under section 26 has not been brought into account”.

36.   At one point in argument it was suggested to us by the Respondents that the £20,000 element of input tax “had been taken into account”, because it was initially claimed and deducted in the Return. That was of course so, but at that point the excessive VAT had not been charged either. It was only when the assessment was made, in October 1997, that the excessive VAT was charged, and it is surely appropriate to say that the reason why that VAT was charged was precisely to exclude from account the claim for input tax that had been deducted in the Return.  So, by the point that the excessive VAT had been charged, the input tax that had once been taken into account had been excluded from account, and that was precisely the reason why the excessive VAT was charged. Had the Appellant actually appealed against the assessment, and had the Appellant’s sole argument in the appeal been that the inputs geared to the advisory fees in relation to its merger were rightly allowable, and had the appeal been determined against the Appellant prior to the ECJ ruling in Kretztechnik, how could it possibly have been disputed that the excessive VAT was not charged precisely because “input tax allowable under section 26 was not taken into account”?    It seems to us that that could not have been contended at all.  

37.   Standing back from the detail of the wording of these provisions, the construction that we prefer appears to make perfectly good overall sense. Claims for input tax are to be made under Regulation 29.  Recoveries of excessive VAT, through excess output tax being taken into account, and arithmetical errors occasioning excessive VAT payments, are covered by section 80. The description of the role of sub-section (1B) by HMRC on the introduction of the provision is consistent with this rationalisation. In contrast, if the Respondents’ argument is to prevail, then late claims for input tax would appear to be made under Regulation 29 only by “repayment” traders, and only in the Sussex University situation where failure to claim input tax for one reason or another, would mean that the extra VAT charged was rightly, and not wrongly, charged. Were that the intended construction, it would surely have been achieved very much more clearly by simply deleting paragraph (b) from sub-section (1B) altogether.   For then, whenever VAT had been wrongly charged, in other words in all but the case of the repayment traders and the “non-claim” Sussex situation, section 80 would clearly be in point. On the basis that paragraph (b) is contained in sub-section (1B), we are at a loss to understand which cases, on the Respondents’ construction, paragraph (b) aims to exclude from the operation of sub-section (1B) and which, while still involving disputes about input tax, it seeks to leave within that sub-section.

38.   Our decision is accordingly that sub-section (1B) is disapplied in this case because paragraph (b) is in point.  Accordingly the Appellant’s claim for the £20,000 was properly treated by the Appellant as a claim for input tax under Regulation 29(1).

39.     We should say that we reach this conclusion simply on a construction of section 80(1B)(b). We reach it with diffidence, not only because we reach a different conclusion from that reached by the Tribunal in the National Galleries of Scotland case, but also because, if there is a policy behind the rule as to whether the claims should be under one provision rather than the other, it might appear to make more sense to calculate the 3-year period from the moment of the wrong charge to tax, rather than from the end of the relevant VAT period of the Appellant.  Furthermore, whilst it suits the Appellant in this case for historic reasons to assert that the claim is properly under Regulation 29(1), from an on-going timing perspective it would appear that taxable persons would generally have a longer period in which to make their claims, had our decision been that section 80(1B) and not Regulation 29 was in point.   Thus we repeat that our decision is based simply on the apparent inevitable effect of the wording of section 80(1B)(b), and that in a sense the result appears to be unfortunate.  

40.     We need finally to address the question of whether section 80(7) operates only as a “tie-breaker”, and thus only applies when section 80 itself does apply, or does section 80(7) operate in the alternative to knock out the late claim for input tax under Regulation 29(1) even if we are right to say that section 80 cannot apply as regards the £20,000 element of claim?  Notwithstanding that the denial of the input tax claim resulted in the Appellant accepting, and not appealing against the October 1997 assessment, so that the denial of the input tax did occasion a “wrong payment of VAT”, we still consider that a successful late claim now for input tax under Regulation 29(1) would not as such result in a repayment of wrongly-paid VAT. It would result in a credit being available to the Appellant, but not strictly in a repayment of the wrongly charged VAT. Accordingly we conclude that section 80(7) does not preclude the allowance of a claim for input tax in this case under Regulation 29(1).

41.    Where there is a remedy under section 80, the result is clearly that the wrongly-paid VAT is refunded, and then section 80(7) precludes any recovery under any other provision.  In this case, however, just as we accept that the deduction of the £20,000 input tax closed and finalised the initial claim, so too the assessment by HMRC became a closed matter once the time-period for the Appellant to appeal against the assessment had expired and no appeal had been brought.   The August 2005 claim was a new claim, and not any perpetuation of either the original claim or any re-opening of the October 1997 assessment.  And if we are right to say that that claim is under Regulation 29(1), as the Appellant asserts, it does not as such result in the repayment of the VAT paid under that assessment.  Thus section 80(7) does not block the section 29 claim. 

Was the Appellant’s entitlement to an input deduction for the inputs received by, and invoiced to, it in April 1997 a pre-existing right or claim, such that the House of Lords’ decision in the Fleming and Condé Nast cases should apply so as to require the cut-off rule introduced on 1 May 1997 by Regulation 29(1A) not to be invoked against the Appellant?
42.     This is much the more important point in this Appeal.   Whether we are right or wrong in relation to the minor point above, the “pre-existing entitlement” point alone governs the chance of sustaining the input deduction for the £200,000 input tax that was not claimed at all until 2005, and if we are right in relation to the Regulation 29/section 80 point, it governs the outcome of the claim for the £20,000 as well.       Perversely however, the point is not so embedded in difficult points of interpretation under various sections but is more governed by one basic issue, and by the intuitive reaction to that issue. 

43.     The Appellant’s case is founded on the indisputable fact that Article 17 of the Sixth Directive gave the Appellant a directly-enforceable right to input tax when the supplier’s tax became chargeable.     Thus Article 17 provided that:

“Origin and scope of the right to deduct

1.	The right to deduct shall arise at the time when the deductible tax becomes chargeable.”

44.     Article 18 then provided the rules governing the exercise of the basic right to deduct.    The relevant extracts from Article 18 were as follows:-

“Rules governing the exercise of the right to deduct

1.	To exercise his right of deduction, a taxable person must:
(a) in respect of deductions pursuant to Article 17(2)(a), 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.”

45.     Correspondingly under UK domestic law, it is sections 24 and 26 of the VAT Act 1994 that provide for the basic deduction of input tax incurred by a taxable person insofar as they are attributable to his taxable supplies, and consistently input tax is available to a taxable person when the services are performed.  It is then section 25 that provides for how and when the taxable person makes his Return and claims to deduct his input tax from his output tax.    Section 25 provides as follows:-

“Payment by reference to accounting periods and credit for input tax against output tax

(1)	A taxable person shall-

a.	in respect of supplies made by him, and
b.	in respect of the acquisition by him from other member States of any goods,

account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2)  Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.”

46.      In the present case, two points were absolutely clear.  First, all the input tax in contention was incurred before 30 April 1997, and the Respondents conceded that all of it had been invoiced on or prior to that date. The second point is that the Appellant had 3-month VAT periods, and those ended on 31 March 1997 and 30 June 1997.    The Return for the period 06/97 could be made from the end of that period on 30 June, and had to be made before 1 August. Although we will refer to an argument advanced by the Appellant to contrary effect in this connection in due course, it seems to us that the Appellant could not in fact submit its return, or claim the input tax under Article 18 to which it was basically entitled under Article 17 until 30 June. 

The contentions of the Appellant

47.      The contentions of the Appellant in relation to the fundamental “pre-existing entitlement” question were that:-

•	Article 17 was the key provision and that conferred a right to an input deduction when the “deductible tax became chargeable”;

•	that point had occurred once the services had been performed and the supplier had delivered an appropriate invoice, which it was conceded by the Respondents had occurred by 30 April 1997 in relation to all the claimed input tax;

•	the rules in Article 18 and in section 25 were “mere mechanics”;
•	 a person in the position of the Appellant on 30 April 1997 could assert that he had an indefinite right to make claims for input tax that had already been suffered, so that if from 1 May onwards, his indefinite right had been changed into a limited 3-year right, he had thereby been deprived of a pre-existing right;

•	there was an automatic set-off, input by output, during a VAT period, with there only being a liability to pay VAT in respect of net outputs as the period progressed;

•	it would be offensive for different taxpayers, one with a period ending 30 April, and one with a three-month period ending 30 June, to be put in a different position as regards the ability to claim input tax incurred in the month of April, and

•	the immediate right to input tax under Article 17 was confirmed by the proposition that a taxable person with a three-month period due to end on 30 June could pack up trading on 30 April, and go on a three-month holiday and submit a VAT return on 1 May, revealing the figures of outputs and inputs just up to 30 April, even if this might mean deferring claims for input tax in relation to supplies that might be made to the taxable person whilst on holiday.

The contentions on behalf of the Respondents

48.     The contentions of the Respondents were that:

•	there is a fundamental VAT distinction between the result under Article 17 that a taxable person has a right to deduct input tax and the issue under 18 as to when and how that person has the right to claim input tax;

•	it is wrong to designate the machinery of Article 18 and section 25 etc as “mere mechanics”; they are a fundamental feature of the operation of the tax;

•	European law concedes that it is perfectly proper for member States to impose time limits within which claims can be made, in the interests of achieving finality;

•	it is even legitimate for those limits to be imposed in relation to existing claims, provided that adequate transitional provisions are granted and that those with existing rights are given adequate opportunity to exercise their rights;

•	in this case where the time limit on the making of claims was imposed two months before the first date on which the claim could be made, in circumstances where the Appellant not only had an adequate opportunity to claim its input tax for the period but where the Appellant did in fact claim an element of the disputed input tax related to services connected with share issues, it could hardly be asserted that the new limit rendered it even difficult for the Appellant to make its claims.

Our decision

49.   We will address three different issues in giving our decision. We will first examine the authorities, to see whether there is any indication in any of them as to what we should treat as a “pre-existing right or claim”, in the case of the entitlement to input tax deductions arising in the “straddling period” that we have to consider.     We will then address the general issue of the nature of the right held by the Appellant at 30 April and at 30 June 1997, in order to decide on general principles, at which point it is realistic to say that the Appellant had “a pre-existing right”. We will finally consider whether it can possibly be asserted that the introduction of the 3-year limit rendered it practically impossible, or indeed even mildly difficult, for the Appellant to exercise its right.

50.    The first issue for us is accordingly whether there is any indication in any of the judgments by their Lordships in the Fleming and Condé Nast cases, or indeed in any of the judgments concerning similar “effective disapplication” issues, that impinge on the “straddling period” facts that arise in this case. It seems to us, having read all the authorities in detail, that there is no single occasion where any judge at any level has actually considered this point. This is not surprising because the facts in the earlier cases happened never to raise this straddling period point. It is true that there are occasional references to “accrued rights” or to “existing rights to claim”, which can just be asserted to have a bearing on the straddling period point, but there are very few such examples and we consider without hesitation that the use of particular words was never intended to address the point that arises in this case.  We do however accept, with the Respondents, that the following passage from Lord Neuberger’s decision in Fleming comes as close to any to address the distinction between the basic right and the right to claim, and so mildly supports the Respondents:-

“79 (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 brought:  Marks & Spencer II.

(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,

(c)	Any such time limits must, however, be “fixed in advance” if they are to “serve their purpose of legal certainty”: Marks & Spencer II,

(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 and Grundig II”

 51.     Having concluded thus that the existing authorities do not inform us how we should decide this case, save that the passage just quoted somewhat supports the Respondents’ case, we now consider the issue more generally. 

52.      The Appellant’s case was very much argued by defining the right that it asserts that it had “on 30 April 1997” under Article 17 as “an indefinite right”, and as a right that was progressively accruing automatically by way of set-off continuously throughout the 3-month VAT period, and a right that could have been exercised at any point during that 3-month period.  We consider that all these asserted attributes were absent.    

53.     We find the headings to both Articles 17 and 18 very instructive in this case.   Article 17 is headed “Origin and scope of the right to deduct”, and we consider that that rightly emphasises that the origin of the right to deduct input tax is, of course, the charge imposed on the supply of goods or services to the person claiming the input deduction.    This establishes the fundamental feature of the tax as a “value added” tax, and a tax the cost of which is ultimately passed entirely to the end consumer.    Whilst Article 17 identifies the origin and the background to the right to deduct, it is nevertheless Article 18 that defines the circumstances as to when and how that right is to be claimed.  

54.     The features on which the Appellant relied in order to assert that the right had been perfected by 30 April 1997, were that the charge had arisen in respect of the supply of the services for which an input deduction was being claimed, and the invoices had all been supplied. The reference to the supply of the invoices immediately trespasses, however, into the domain of Article 18 and section 25, albeit that the Appellant then ignores the other key requirement of Article 18 and section 25, namely that at the end of the VAT period the taxable person should 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 paragraph 1”. It seems to us therefore that the right meaningfully exists, not immediately the invoices have been supplied, but at the point when, in addition, the taxable person is in a position to make a return for the relevant VAT period, and is in a position to offset the input tax against output tax.  The more realistic rationalisation is, accordingly, that Article 17 explains the fundamental basis and origin of the right, but that it is Article 18 and section 25 that identify when the right becomes an exercisable right.

55.     It is wrong to suggest that the Appellant had “an indefinite right” under Article 17.   The Appellant had a right, the ability to exercise which was governed by Article 18, and European law always permitted member States to limit the periods during which the right to deduct could be exercised.    By accepting moreover that the period during which rights could be exercised could be cut down retrospectively, provided that adequate transitional provisions were granted for those with pre-existing rights, it was always possible that the terms affecting the exercise of the basic right addressed by Article 17 might be changed, and changed with perfect validity.

56.   The Appellant is wrong to say that the right to deduct input tax arose automatically throughout the VAT period, being set-off continuously as inputs and outputs accrued throughout the period. Beyond the fact that Article 18 clearly states that the inputs must be deducted at the end of the VAT period, in the return to be made at the end of the period, one of the reasons why we dwelt at some length on the Sussex University case is that that case establishes that input tax most certainly does not get set-off automatically against output tax. If the taxable person refrains from claiming input tax in the Return at the end of the VAT period, then the augmented amount of output tax on which VAT is properly to be paid, is the greater amount of output tax, disregarding the unclaimed inputs. Thus there is, and can be, no concept of automatic set-off. 

57.     Equally we consider that the Appellant was wrong to make the further related suggestion that certain provisions of section 81 implied such an automatic set-off. If inputs are not claimed, then at that point inputs are simply not due.

58.     We consider that the Appellant was also wrong to suggest that a taxable person could make its claim for input tax at any intermediate point during its VAT period.     The example was offered that a sole trader could go on holiday after one month of a 3-month VAT period, and immediately send in the Return for the period.   We accept that if a taxable person did as suggested, and in all likelihood accounted for excessive net VAT (since in his absence there would be no outputs, but supplies might be made and invoiced to him in his absence), there would be no default if “a Return” was submitted at the end of the first month, and the resultant or excessive amount of VAT accounted for.  In technical terms, however, the Return is required to be a Return for the trading in the 3-month period (or whatever the length of the period), and that can be submitted only when the period has expired. In any event, in this case, the example is irrelevant, because a major PLC was plainly going to be trading for the balance of the period 06/97 and a proper VAT Return for that period would have to include all the relevant information for the period, and not just that for the first month. Thus in logic, and in terms of Article 18 and section 25, the Return could only be submitted, and the input tax claimed, at the end of the period.

59.    We consider that there is very little in the point that there is in this case an unacceptable difference between the position of two taxable persons, each with substantial April 1997 inputs, one with a 3-month period ending 04/97, and one with a 3-month period ending 06/97. The point was advanced almost as suggesting that the latter was instantly prejudiced by the distinction, whereas of course both would have rights to claim the relevant input deductions in their relevant Returns, and both would be able to claim for many months thereafter.  There will be many occasions when two different taxpayers, each incurring inputs on the same date, will nevertheless know that the end date for the making of claims for those input deductions could well differ.   Take the case of two taxable persons, incurring input deductions in January 2009, one of them on monthly Returns, and the second with a six-month Return period to end on 30 June 2009.  There, with no change in the rules, there is a marked, albeit not terribly important, distinction between the two taxable persons in that the latter would be able to make a late claim for the January inputs for a period that will expire five months after the expiry of the period for the former. And that will be a feature that will arise regularly. 

60.   We have said, in paragraph 59 above, that we attach little weight to the Appellant’s point concerning the difference in treatment between the two taxable persons that the Appellant postulated with their different dates for Return periods.    The following point is of little significance, but we nevertheless consider that the Appellant is calling for an even greater anomaly, than the one dismissed in paragraph 59, in asking us to decide that the 3-year period for its Return 06/97 expires on one date in the future as regards two months of the trading, and on a different date (or never!) as regards the first month of trading.  We accept that when a change is made such as the change in the rate of VAT from 17.5% to 15% on 1 December 2008, that change must affect all taxable persons on the same date, and since the VAT account tallies both supplies and tax in both directions, the change in rate plainly impacts on 1 December for every taxable person.  When the change merely relates to the end date for making late claims for a period for which claims could not be made until a date after the imposition of the limitation period, it seems manifestly sensible that the whole claim period should be dealt with as a whole, and not be sub-divided.

61.    On considering the nature of the Appellant’s right, both on 30 April and on 30 June 1997, we consider that it was only on 30 June that the Appellant had a meaningful and exercisable right. Before that, the basic explanation had arisen as to why inputs would, in due course, be deductible, but the Appellant had no right then to claim inputs, and no right that could then be exercised.  And when the detailed terms governing the end date beyond which the right would no longer be exercisable was changed two months before the right could even be claimed, off-set or exercised in any way, we consider that in the required sense, the Appellant did not have “a pre-existing right” on 30 April 1997. 

62.     We must finally consider whether the introduction of the Regulation 29 limit on 1 May 1997 deprived the Appellant of its reasonable opportunity to exercise its rights (such as they were) for that period.  We consider that that cannot possibly be asserted.   Indeed to assert as much would be the equivalent of endeavouring to challenge the 3-year cut-off period as a general matter in all subsequent periods, since this Appellant was in no different position as regards its period 06/97, than it was to be for every period thereafter.  In other words, at the end of each period, at the point when it would first make its Return, it knew that there was a 3-year period during which late claims could be made, and this was so for its periods 06/97, 09/97 and every subsequent period. 

63.    We have made no reference in this decision to one point made by the Appellant, namely that the drafting of Regulation 34(1B) of the VAT Regulations 1995 does appear to lend some support to the Appellant’s argument.  In this context we note, however, that the far more significant indication from Parliamentary drafting, is that the very relevant terms of Section 121 Finance Act 2008 indicates that the draftsman of that provision considered that we should treat existing rights on 1 May 1997 simply as those rights to make immediate claims under Article 18 and section 25, and not such rights as the Appellant had in this case. Were we indeed to have allowed this Appeal on the fundamental point, that decision would appear to have suggested that the Parliamentary draftsman had “got it wrong, yet again”, and we do not reach that conclusion. We consider that the mild support to the Appellant’s case derived from the drafting of Regulation 34(1B) does not sway our decision. 

64.     We accordingly dismiss this Appeal.

Costs

65.    Both parties requested an order for costs in their favour in the event that they succeeded in the Appeal.  The presently relevant question is whether we should grant the Respondents their costs, which they claimed on the basis that this case was difficult, and that it involved a significant sum. Most significantly, it was suggested that the Appellant’s claim was a weak one, which should virtually not have been brought.  It was suggested that the Appellant’s claim was analogous to “throwing an egg at a tank”.

66.   We confirm that we have found this case difficult, particularly indeed the less important point. We do however confirm, in the Appellant’s favour, that we consider that the case was an entirely serious and proper case for it to bring.  In other words we consider the “egg” to have been a very large and solid egg, and we accordingly dismiss the Respondents’ claim for costs. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 27 March 2009

LON 2005/1268