18714

INTEREST – Appeal against refusal of tax credit – Decision withdrawn before hearing – Interest under VATA 1994 s.84(8) – Relevance of payment of supplement under s.79 – Determination of rate of interest by Tribunal

LONDON TRIBUNAL CENTRE

	UK TRADECORP LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE   (Chairman)

Sitting in public in London on 15 July 2004

Jolyon Maughan, counsel, instructed by Michael Welsh & Co, solicitors, for the Appellant 

Hugh McKay, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This hearing concerned a claim for interest by the Appellant under section 84(8) following the withdrawal by Customs on 9 March 2004 of a decision to refuse repayment of £45,290 input tax.  The Appellant had appealed against the refusal decision.  Customs agreed to pay costs and a repayment supplement of £2,264.50 under section 79.  The remaining dispute concerns the interaction of sections 78 and 79 with section 84(8).

2.	In its return for February 2003 served on 5 March 2003 the Appellant company declared nil output tax and £115,074.80 input tax so that the whole of the input tax was VAT credit repayable under section 25(3).

3.	By a letter dated 13 October 2003 Customs decided that the return should be amended by reducing the input tax to £69,784.80 which sum had been repaid.

4.	During the period from 3 July 2003 to date the Appellant borrowed sums substantially in excess of the repayment claimed at interest varying between 1 and 2 per cent per month.

5.	The Appellant’s List of Documents was served within the 30 day time limit under the Rules. Customs applied for an extension of time for its Statement of Case and List of Documents.  The Appellant objected.  On 12 February 2004 after a hearing the Tribunal directed that the Statement of Case be served within 28 days.  On 9 March 2004 Customs wrote a brief letter withdrawing the decision, referring to a meeting with counsel but giving no reasons.  On 25 May 2004 Customs wrote to the Appellant agreeing to pay £2,264.50 repayment supplement bur refusing a claim for further interest at 8 per cent based on Bank Austria Trade Services Gesellschaft MbH v Customs and Excise Commissioners (2000) Decision No.16918.

The statutory provisions

6.	Section 78, which provides for payment of interest to a trader in certain cases of official error, includes the following:

“(1)	Where, due to an error on the part of the Commissioners, a person has –

…
(a)	suffered delay in receiving payment of an amount due to him from them in connection with VAT, then, if and to the extent that they would not be liable to do so apart from this section, they shall pay interest to him on that amount for the applicable period …

(2)	Nothing in subsection (1) above requires the Commissioners to pay interest –

(a)	on any amount which falls to be increased by a supplement under section 79; …

(3)	Interest under this section shall be payable at the rate applicable under section 197 of the Finance Act 1996.”

The rate under section 197 which is calculated by a formula under regulation 5 of 1998 S.I. No.1461 was 3 per cent per annum to 5 September 2003, 2 per cent to 5 December 2004 and 3 per cent since then.  Under subsection (5)(b) the period for which section 78 interest runs starts on the date on which apart from the error Customs would have authorised the payment; however under subsection (8) interest does not run for any period referable to any reasonable enquiry by Customs.

7.	Section 79 provides for payment by Customs of a supplement equal to 5 per cent of the tax when a written instruction for a refund is not issued within 30 days of receipt of the return.  In determining the 30 day period, periods referable to raising reasonable enquiries are left out of account.

8.	Section 84(8) provides as follows:

“(8)	Where on an appeal it is found –

(a)	that the whole or part of any amount paid or deposited in pursuance of subsection (3) above is not due; or
(b)	that the whole or part of any VAT credit due to the appellant has not been paid, 

so much of that amount as is found not to be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the Commissioners to be payable as VAT has not been paid or deposited and it is found on the appeal that that amount is due the tribunal may, if it thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction.”

The reference in paragraph (a) to section 84(3) is to the tax which must be paid subject to hardship before an appeal is entertained.

9.	For the sake of completeness I refer also to section 74 which provides for interest on sums assessed from the reckonable rate under subsection (5) to the date of payment.  The rate of interest was 6.5 per cent to 5 September 2003, 5.5 per cent to 5 December 2003 and 6.5 per cent since then.

Submissions and Conclusions

10.	In their letter of 25 May 2004 (see paragraph 5 above) resisting the Appellant’s claim for interest Customs wrote that the Tribunal decision in Bank Austria is not binding and that section 78 interest cannot be paid when a repayment supplement under section 79 is due.

11.	This letter was plainly misconceived since the decision of Mr Gordon Coutts QC in Bank Austria was concerned with interest under section 84(8) and not with interest under section 78.  As Mr Coutts pointed out, “the repayment supplement is and cannot be a substitute for interest” and section 84 is mandatory overriding any perceived prohibition in section 78.  Section 78 is purely directed at interest in cases of official error.

12.	Initially Mr McKay submitted that section 84(8) has no application in the present case because the decision was withdrawn without any finding by the Tribunal so that the words, “Where on an appeal it is found” do not apply.

13.	While this argument might be tenable on a literal application of the words of the Statute, it would lead to the result that the Commissioners could avoid an award of interest by withdrawing a decision at any time up to the decision being released even after evidence and argument.  Such a result cannot in my judgment have been intended by Parliament.

14.	Mr Maughan countered Mr McKay’s submission by pointing to Rule 16(2) of the VAT Tribunals Rules which provides that the withdrawal of an appeal shall not prevent a party from applying under section 84(8) for a direction for interest.

15.	If the withdrawal of a decision or assessment or the withdrawal of an appeal precluded a finding for the purposes of section 84(8), then the reference to section 84(8) in Rule 16(2) would be pointless.  While an Act of Parliament is not normally interpreted by reference to delegated legislation, a purist approach is extremely difficult with VAT law where much of the basic legislation is contained in statutory instruments such as the VAT Regulations 1995.

16.	In any event it seems to be that the withdrawal of the decision does not prevent the Tribunal from finding that part of the VAT credit due has not been paid within section 84(8)(b).  The decision was in fact withdrawn.  Customs letter of 25 May 2004 was directed at section 78 which only arises in the case of official error.  The clear inference is that the VAT credit was due and I so find.

17.	Mr McKay accepted that Rule 16(2) does preserve the Appellant’s right to apply under section 84(8) for interest when an appeal is withdrawn.  Here the appeal has not even been withdrawn.  

18.	Mr McKay did not suggest that the words “has not been paid” in section 84(8)(b) have the effect that once the tax credit has been paid no direction can be made.  In my judgment it cannot have been the intention of Parliament that payment at a late stage following an appeal would defeat an Appellant’s right to apply for interest under section 84(8).  In the Bank Austria case the tax had clearly been repaid after the appeal was lodged but before the Tribunal hearing.  There was no suggestion by Customs that section 84(8) did not apply because of this.  Mr Coutts specifically referred in his decision to the fact that the matter arose in a settled appeal and gave that as one of the reasons why section 84(8) overrides any perceived prohibition in section 78.  In my judgment Bank Austria was correctly decided and should be followed.

19.	Mr McKay said that section 84(8) rarely arises because if Customs lose an appeal it follows that the Tribunal has decided that it is in error and section 78 interest applies at the statutory rate.  He said that section 78 is not concerned with dilatoriness but with correctness and is not dependent on an appeal.  Section 79 supplement is at a flat rate of 5 per cent and depends on dilatoriness.  He said that since a section 79 supplement precludes section 78 interest and any section 78 interest paid should be offset against any section 79 supplement (see THI Leisure (2) Partnership v Customs and Excise Commissioners (2000) Decision No.16876), the Tribunal should deduct the section 79 supplement of 5 per cent from the rate of interest which it would otherwise direct under section 84(8).  If the Tribunal would otherwise direct 6 per cent interest, it would direct 1 per cent.  He said that this was a pragmatic approach, the Tribunal being a legal tribunal rather than actuaries.

20.	Alternatively Mr McKay said that either the statutory rate for section 78 or the base rate for clearing banks, which is 4.5 per cent at present although under 4 per cent until February, would be appropriate starting points for section 84(8). He said that the fact that the Appellant had borrowed at a high rate of interest is not a relevant factor.

21.	Mr McKay said that the interest should run from the end of the basic 30 day period from the return before section 79 applies. Since the statute requires the Tribunal to set the rate of interest, it is implicit that the Tribunal must also set the time for which it is payable.

22.	Mr Maughan said that the right to deduct under Article 17 of the Sixth Directive is immediate.  In the absence of any other provision the interest should run from the date of the receipt of the return by Customs.  He said that Customs state that 90 per cent of repayment claims are made within 10 days.

23.	He said that section 84(8) provides that the tax “shall” be paid or repaid with interest “at such rate as the tribunal may determine.”  Payment of interest is mandatory but the rate is a matter of discretion.  Section 78 only applies if Customs would not be liable to pay interest apart from that section.  Section 84(8) therefore takes priority.

24.	Mr Maughan said that sections 78 and 79 do completely different things.  Section 79 was introduced at the same time as the default regime in 1985 and is its counterpart in that it imposes a fixed penalty on Customs for delay.  Section 78 interest is quite different and depends on the time for which a taxpayer is wrongly kept out of his money due to official error.  THI Leisure dealt with the relationship between section 78 and section 79.  There is no relationship between section 84(8) and sections 78 and 79.

25.	He said that the best guide in determining a rate of interest is the High Court judgment rate, see Pinnock v Wilkins & Sons (1999) a decision of the Court of Appeal cited at paragraph 7.0.17 of the White Book (2004).  That rate has been 8 per cent since 1 April 1983.  He said that although the Appellant had borrowed money at 12 per cent, he was not asking for that rate.

26.	I accept the submission of Mr Maughan that the provision for interest is mandatory but that the rate is a matter of discretion.  This is in line with the decision of Lord Grantchester in Mahoney v The Commissioners [1976] VATTR 241. It is of course a judicial discretion. Interest under section 84(8) is not in any sense a penalty, or a spur to efficiency as section 79 was described in Customs and Excise Commissioners v L Rowland & Co (Retail) Ltd [1992] STC 647.  “It is a right to interest and not a sum by way of compensation or damages,” see St Luke Great Crosby PCC v Customs and Excise Commissioners (1988) Decision 1463.  

27.	The fact that the rate is not fixed in the statute but is to be determined by the Tribunal implies that consideration should be given to the particular case.  If the fact that the Appellant has received a supplement is a factor, it is difficult to see why the fact that it had to borrow the disputed input tax at a high rate of interest should not also be relevant.  In the present case these factors broadly offset each other.

28.	I do not accept that it would be proper to select an initial rate and deduct 5 per cent from that because of the supplement.  The rate of interest under section 84(8) must refer to an annual rate whereas the section 79 supplement is a fixed percentage and not a rate of interest.

29.	I conclude that a rate of 6.25 per cent is appropriate being in line with the interest which would have been payable by the Appellant to Customs if section 74 had applied.  No deduction should be made for the supplement payable under section 79.

30.	The final issue is the period for which interest should run.  I consider that it is proportionate that interest should run from the due date for the return, that being the date from which default interest would normally run.  It is also the date from which the Appellant would have had the benefit of the credit if it had not been a repayment trader.

31.	The Appellant is entitled to the costs of this issue.  I direct that if the amount of costs are not agreed, any application shall be made under Rule 29 within 3 months of the release of this decision accompanied by a schedule of the costs claimed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 29/07/2004

LON/03/1071