Anglia Regional Co-Operative Society Ltd v Customs and Excise [2004] UKVAT V18991 (24 March 2005)

18991
Value Added Tax – section 80 VATA 1994 – claim for repayment of overpaid tax – section 80(4) VATA 1994 – three year time limit on claims – transitional arrangements – supplies of demonstrator cars by car dealer – whether C & E Comrs entitled to require Appellant to show it would have made uncapped claim in retrospective transitional period – yes - Marks and Spencer plc v C & E Comrs applied – no curtailment of Appellant’s Community law rights  - appeal dismissed

LONDON TRIBUNAL CENTRE

	ANGLIA REGIONAL CO-OPERATIVE SOCIETY LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal:	EDWARD SADLER (Chairman)
					SHEILA EDMONDSON FCA

Sitting in public in London on 21 January 2005

Amanda Brown, solicitor, of KPMG chartered accountants for the Appellant

Rebecca Haynes of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The appeal and an outline of the facts and issues
1.	This is an appeal by Anglia Regional Co-operative Society Limited (“the Appellant”) against a decision of The Commissioners of Customs and Excise (“the Commissioners”) given in their letter of 16 October 2003 to KPMG, the Appellant’s representatives, to refuse to repay an amount of VAT which the Appellant claims it has overpaid, and which should be repaid to it under the provisions of section 80 of the Value Added Tax Act 1994 (“VATA”).
2.	The Appellant’s appeal originally related to voluntary disclosures to the Commissioners relating to the overpayment of VAT for the VAT periods 03/78 to 12/99, but the Appellant now accepts that it is precluded from claiming that it overpaid VAT in relation to the periods 12/96 to 12/99, so that this appeal now relates to the periods 03/78 to 09/96.  It is estimated that the amount of VAT which would be repaid to the Appellant were it successful in its appeal is in the order of £190,000, but the parties are requiring a decision in principle as to whether any repayment is due:  if it is, the exact quantum remains to be agreed.
3.	The case is one of some complexity involving, as it does, the effect of the three year “capping” provisions limiting the right for the taxpayer to reclaim overpaid VAT effective from 1996, the transitional period relating to the introduction of those “capping” provisions which the Commissioners were subsequently required to give effect to in 2002 in consequence of the decision of the European Court of Justice in the case of Marks and Spencer plc v Customs and Excise Commissioners (Case C-62/00 and reported at [2002] STC 1036) (“the Marks & Spencer case”), and the effect of two other cases decided after the “capping” provisions were introduced (but before the Marks & Spencer case and therefore before a transitional period had been introduced) and which materially changed the basis on which the Appellant was required to account for VAT, and which resulted in its claim that it had overpaid VAT in prior periods.  Those two cases are EC Commission v Italian Republic (Case C-45/95 and reported at [1997] STC 1062) (“the Italian Republic case”), and the decision of the High Court against the Commissioners in Customs and Excise Commissioners v JDL Ltd [2002] STC 1 (“the JDL case”).
4.	It may at the outset be helpful to give an overview of the facts, the sequence of events, and the principal issues in this appeal:-
(1)	Until the introduction of the “capping” provisions in 1996, a person who had made an overpayment of VAT in consequence of a mistake of law could make a claim to recover that overpayment without limit provided that the claim itself was made within six years of the discovery of the mistake.  The law was changed (originally with effect from 18 July 1996, the date on which “capping” was announced), so that overpaid VAT could be recovered only for the period of three years before the making of the claim.  Thus if the overpayment had been made before that date, or if the mistake giving rise to the overpayment had been discovered before that date, but in either case the claim itself for recovery of the overpaid tax had not been made before that date, the amount which could be recovered was limited to the three year period.  There was no period of grace or other transitional provision relating to overpayments made before 18 July 1996 but for which no claim had been made by that date.
(2)	The Appellant is registered for VAT and carried on at the relevant time the business of a motor-car dealership;
(3)	In the course of that business the Appellant acquired cars initially for use in the business as demonstrator models and then later sold those “demonstrator” cars.  Until the decision in the Italian Republic case (that is, until June 1997 – and thus until after the “capping” provisions had been introduced with effect from 18 July 1996) the VAT treatment of demonstrator cars as applied to the Appellant was such that the Appellant was not entitled to recover input tax on the purchase of the cars, and on their eventual sale the Appellant was required to account for VAT on the profit margin only, if any, on the sales.
(4)	The consequence of the decision in the Italian Republic case was that sales of demonstrator cars were to be treated as exempt supplies.
(5)	To give effect to the decision in the Italian Republic case the Commissioners gave the Appellant (and other car dealers in a similar position) a choice: either to treat sales of demonstrator cars as exempt supplies for prior periods and to do so for future periods, or to continue as before (until December 1999, when new mandatory provisions were introduced giving effect to the decision in the Italian Republic case), with “blocked” input tax and accounting for tax on sale on the profit margin.
(6)	If the dealer opted to treat the sales of demonstrator cars as exempt supplies it would be entitled to make a claim for overpaid tax for prior periods (i.e. the VAT charged on the sales on the profit margin).  But since the sales were to be treated as exempt supplies in these circumstances, there would be a consequence for the dealer in that these additional exempt supplies would affect his partial exemption calculation which determines the proportion of input tax in his business which is recoverable.  Therefore a dealer opting to treat sales of demonstrator cars in prior periods as exempt supplies was required to carry out a recalculation of the partial exempt fraction, and the consequent reduction in the amount of recoverable input tax, and the amount of overpaid tax claimed was to be adjusted (that is, reduced) accordingly.
(7)	Further, if the dealer opted to treat the sales of demonstrator cars in prior periods as exempt supplies, his right to recover overpaid tax was limited to a three year period (in this instance, the period 1994 – 1997) imposed by the “capping” provisions.
(8)	The Appellant decided not to opt to treat the sales of demonstrator cars in prior or subsequent periods as exempt supplies, and therefore not to make a claim to recover overpaid tax.  Instead, it decided to continue to account for VAT using the system of blocked input tax on the purchase of the demonstrator cars and charging VAT on the profit margin when eventually the cars were sold.  It is an issue between the parties as to the Appellant’s reasons for so deciding:  the Appellant contends that it is the fact that the claim for overpayment was limited to a three year period by the “capping” provisions which was the principal reason for its decision not to opt for exemption treatment with its consequent right to claim for overpayment; the Commissioners contend that the Appellant refrained from opting for exemption and from making a repayment claim because the expense and trouble of making the consequent partial exemption calculation outweighed the benefits of the repayment, and this was so regardless of whether the claim was to be made for the “capped” three year period or for an uncapped period – thus the existence of the “capping” provisions did not affect the Appellant’s decision as to whether or not to opt for exemption and the right to make an overpayment claim.
(9)	In October 2001 the High Court (upholding a tribunal decision) held in the JDL case that, since demonstrator cars are within the “capital goods” scheme, the sale of them by way of an exempt supply is not to be taken into account in the partial exemption calculation required to determine the proportion of input tax which is recoverable in the business.
(10)	In July 2002 the decision in the Marks & Spencer case was released, holding that (in broad terms) where provisions, such as the “capping” provisions limiting the right to claim overpaid tax, are introduced which curtail rights under Community law, those provisions must be subject to transitional arrangements so that the rights in question which have arisen prior to the introduction of the proposed curtailment may be exercised before the curtailment has effect.  
(11)	In response to that decision the Commissioners, in a series of announcements as to their practice in Business Briefs (no amending legislation was enacted), set out the transitional arrangements they would apply retrospectively.  So far as is relevant to the circumstances of this appeal, taxpayers in the position of the Appellant had until 30 June 2003 to make a claim for overpaid tax in relation to overpayments of VAT made before 4 December 1996 in cases where no claim had been made, but the error giving rise to the right to claim the overpaid tax had been discovered prior to 30 June 1997.  
(12)	The Appellant made such a claim for overpayment on 30 June 2003.  It is the refusal of the Commissioners to accept that claim which is the subject of this appeal.
(13)	The Commissioners accept that the Appellant was aware by the relevant date (30 June 1997) of the error which gave rise to the overpayment claim.  The principal issue between the parties is this:  the Appellant contends that its claim satisfies the terms of the transitional arrangements for the “capping” provisions as those terms are set out in the relevant Business Briefs;  the Commissioners contend that the circumstances and conduct of the Appellant demonstrate that, had the transitional arrangements actually been in effect at the relevant time, the Appellant would not have availed itself of them to make a claim (because of the expense and effect of the partial exemption recalculation – which at that time, before the JDL case, was thought to be required) and so the Appellant cannot now – after the JDL case - take advantage of retrospective transitional arrangements to put itself in a better position than it would have been in had such arrangements been in place at the relevant time.
5.	The Appendix to this Decision comprises a detailed chronology of the legislative changes, the court decisions and the Commissioners’ Business Brief publications relevant to the circumstances of this appeal.
The evidence and the facts
6.	Subject to one key matter, the facts in this appeal are straightforward and are agreed between the parties.
7.	That key matter is central to the Commissioners’ case as they sought to argue it before us.  It is the question of whether, had the post-Marks & Spencer case retrospective transitional arrangements in fact been in place when the three year “cap” became applicable to the circumstances of the Appellant (so that at that time the Appellant could have made an “uncapped” claim for overpayments up to December 1996), the Appellant would, or would not, have made such an “uncapped” claim.  This is a matter which has to be inferred from the facts, and we deal with this in paras. 56 to 58 below.
8.	We heard evidence from Mr Ronald David Douglas, currently Deputy Chief Executive (Finance and Secretary) of the Appellant.  During the period principally relevant to this appeal (namely, the period following the decision in June 1997 in the Italian Republic case, when the Appellant was considering whether or not to make a claim for overpaid tax) Mr Douglas was a management accountant with responsibility for producing monthly management accounts.  According to Mr Douglas, responsibility for deciding whether or not to make a claim for overpaid tax rested with the then tax manager and the then finance director of the Appellant, and Mr Douglas’s involvement in such matters was limited.  He was not able to speak to the question of fact as to the reasons which those responsible for such matters had at the time for deciding why the Appellant should not pursue a claim for overpaid tax in the light of the Italian Republic case decision.
9.	We also heard evidence on the Appellant’s behalf from Mr Jonathan Douglas Ireland, a Director in the Tax Practice of the firm of KPMG, who had advised the Appellant throughout the period relevant to this appeal.  
10.	There were no witnesses for the Commissioners, but Miss Haynes, for the Commissioners, cross-examined the Appellant’s witnesses.  The only documentation before us (in addition to the Appellant’s Notice of Appeal, and the Commissioners’ Statement of Case) was the correspondence between the Appellant (acting through KPMG) and the Commissioners comprising the overpayment claim made on 30 June 2003 and the rejection of that claim by the Commissioners, and subsequent elaboration by both parties of their respective positions.
11.	We find the facts to be as follows:-
(1)	The Appellant began operating motor dealerships in 1977, gradually expanding its outlets until 2000.  By 2000 it owned and operated six garages and eleven dealerships covering a range of makes of motor car.  It began closing garages in 2000, and ceased to hold any dealerships by January 2002.  Throughout this period the Appellant has carried on other businesses.
(2)	During the period 1994 to 1997 the motor dealership business (in common with other such businesses) suffered as a result of UK retail customers purchasing and importing cars directly from other countries in Europe and the Far East at prices below those prevailing in the UK.  In 1994 the profits for the year of the motor group of the Appellant were £270,000, and by 1997 the motor group made a loss for the year of £335,000.
(3)	In the course of its business the Appellant purchased “demonstrator” cars from the car manufacturers whose vehicles the Appellant sold under its dealerships.  These were current models of the cars which it offered for sale, and were made available to potential customers for test drives.  When a new model was introduced a “demonstrator” car might be used in the business as a courtesy car, or for staff purposes, and when no longer required it would be sold as a used car.
(4)	Until 1997 the VAT treatment of demonstrator cars in the UK was that, on purchase of such a car, the input tax was “blocked” (that is, it could not be recovered against any output tax of the business, so that it was a cost to the business), but on the eventual sale of the car, the dealer calculated whether or not it made a profit on that sale, and if it did, VAT was chargeable on the profit margin only.
(5)	In 1997 it was decided in the Italian Republic case that the relevant Article in the Sixth Directive requires that where recovery of input tax is blocked on the acquisition of goods, the subsequent supply of those goods is exempted from tax.  In the circumstances of car dealers such as the Appellant, the consequence of the decision in the Italian Republic case was that since the recovery of input tax was blocked on the purchase of demonstrator cars, the onward sale of such cars was to be treated as an exempt supply, so that VAT was not chargeable on any profit on such sale.
(6)	The Appellant was advised by KPMG that, as a result of the decision in the Italian Republic case, the Appellant was entitled to make a claim for overpayment of VAT (that is, broadly, the VAT the Appellant had accounted for on the profit margin on sales of demonstrator cars in prior periods, since such sales should have been treated as exempt supplies).  The Appellant was also advised that, alternatively, and on an interim basis, it could opt to continue to use the input tax margin scheme.  The Appellant was further advised that a claim for overpaid tax, if made, would have to be made on the grounds that all sales of demonstrator cars were exempt supplies.  Such a claim would have required the Appellant to ascertain the terms of the purchase and the sale of each demonstrator car, in order to establish the profit margin (if any) on each sale, and may have required the Appellant to produce purchase and sale documentation for each car in support of the claim.  Additionally, such a claim would have required the Appellant to recalculate its partial exemption fraction for each period for which the claim was made so as to adjust (by way of reduction) the proportion (and hence the amount) of the input tax recoverable in its business for each such period.  Both those exercises would have required the expenditure of significant time and expense on the part of the Appellant and its advisers. 
(7)	The Appellant was also advised by KPMG that such a claim would be restricted to the “capped” period of three years.
(8)	The advice of KPMG was consistent with the guidance given by the Commissioners to taxpayers following the decision in the Italian Republic case as set out in their Business Brief 23/97 issued on 10 October 1997.  
(9)	It was estimated by the Appellant that, if it were to treat the sales of demonstrator cars as exempt supplies and to make a section 80 VATA claim for overpaid tax, the value of a claim for the “capped” three year period (after taking into account the consequence of the adjustment to the partial exemption fraction) was in the order of £65,000.  KPMG carried out a cost/benefit analysis in order to assist the Appellant in its decision as to whether or not to treat the sales as exempt supplies and to make a claim for the three year period on the required basis.  KPMG noted that there would be difficulty in establishing the gross value of such a claim since not all records of purchases and sales of demonstrator cars were easily available (and those that were available had to be extracted, separately for each vehicle, from the used car stock book which contained the records relating to all used cars purchased and sold by the dealerships).  They also noted that there could be difficulty in establishing the amount of the adjustment to the partial exemption fraction in the light of the partial exemption method then used by the Appellant.  
(10)	The Appellant was aware on or before 30 June 1997 that it had the right to make a claim under section 80 VATA to recover overpaid tax, but that any such claim would be subject to the “capped” three year period.  However, in the light of the advice it received the Appellant concluded that the expense and management time involved in making a claim on this basis was such that it was not worth the Appellant’s while to take that course of action, and no claim for overpaid tax was made.
(11)	No exercise was carried out at that time to quantify the value of a claim which was “uncapped” (and therefore – potentially – relating back to the VAT period 03/78), nor the likely expense and management time involved in preparing such a claim.  If the Appellant had considered at that time making an “uncapped” claim, the following additional factors would have been relevant:  amounts claimed for earlier years were likely to be significantly smaller, but there would be a significant interest element;  detailed records of the purchase and sale of each demonstrator car may not have been available as far back as 1978 – if they had not been retained a claim would have to have been formulated on some basis of extrapolation from such more recent records as were available, which would have reduced the expense of preparing the claim for earlier years, but may have led to difficulty in substantiating the claim;  and, for a significant early part of the “uncapped” period different partial exemption rules had applied which in their effect were more favourable to the Appellant, and would have resulted in a reduced offset against the gross value of the claim for the earlier years.
(12)	At that time the Appellant did not consider as a possibility that demonstrator cars might be regarded as “capital goods” for VAT purposes, and that therefore the exempt supply on the sale of such cars might be disregarded in the calculation of the partial exemption fraction for the purposes of calculating the proportion of input tax which could be recovered.  Nor did KPMG advise in relation to such a possibility.
(13)	The Appellant chose to continue with the input tax margin scheme in relation to demonstrator cars until changes were introduced in December 1999 to the relevant UK legislation to implement the decision in the Italian Republic case.
(14)	In 2001 the VAT tribunal decided that demonstrator cars acquired by car dealers are capital goods for the purposes of VAT, and this decision was upheld by the High Court on appeal (the JDL case).  The consequence of this is that the sale of demonstrator cars is excluded for the purposes of making the partial exemption fraction calculations, which has a material effect on both the calculation of the net tax paid and the complexity of making that calculation.  For a taxpayer in the position of the Appellant seeking to recover overpaid VAT, it increases the net amount which can be claimed (because there is no adjustment (by way of increase) in the proportion and amount of irrecoverable input tax, since the input tax attributable to the exempt supply on the sale of the demonstrator cars is disregarded) and it eliminates the need to recalculate, period by period, the partial exemption fraction, thereby reducing the expense and time required to formulate the amount of the claim.
(15)	Following the decision in the Marks & Spencer case (released in July 2002) the Commissioners issued Business Brief 22/02, the terms of which are specified in more detail in para. 17 below.  This set out the terms on which the Commissioners, retrospectively, gave effect to a transitional regime for the introduction in 1996 of the three year “capped” period for overpayment claims.  Claims made before 31 March 1997 for overpayments made before 4 December 1996 which were “capped” were to be treated as not falling within the “capping” regime, and taxpayers who had made no claim, but could demonstrate that they had discovered the error which gave rise to the overpayment could make an “uncapped” claim for overpayments made before 4 December 1996.  Any such claims within this transitional regime had to be made on or before 31 March 2003.
(16)	Following the decision of the European Court of Justice in the case of Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) released on 24 September 2002 the Commissioners issued Business Brief 27/02 intended to give effect to that decision, by extending the transitional period for claims outside the scope of the “capping” provisions from three months to six months – from 31 March 1997 to 30 June 1997 as the cut-off date by which it must be shown that the error giving rise to the overpayment was discovered, and from 31 March 2003 to 30 June 2003 as the date on or before which claims within the transitional had to be made.
(17)	On 30 June 2003 the Appellant made the claim for repayment of overpaid tax which is the subject of this appeal.  The claim was made at the suggestion of KPMG, and took into account the consequences of the decisions in both the Italian Republic and the JDL cases.  The calculations of the overpaid tax were initially carried out by the Appellant, and then verified by KPMG.  Those calculations did not require any adjustment to the partial exemption fraction and thus to the proportion and amount of input tax recoverable for each VAT period over the total period covered by the claim.
The statutory provisions and the Business Briefs
12.	The “capping” provisions were introduced by section 47 of the Finance Act 1997.
13.	First, a new provision was introduced as subsection (4) of section 80 VATA in substitution for the previous subsections (4) and (5), as follows:-
(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.
14.	Section 47(2) Finance Act 1997 then provided as follows:-
(2)	Subject to subsections (3) and (4) below [not relevant to this appeal] subsection (1) above [i.e. the new subsection (4) of section 80 VATA] shall be deemed to have come into force on 18 July 1996 as a provision applying, for the purposes of the making of any repayment on or after that date, to all claims under section 80 of the Value Added Tax Act 1994, including claims made before that date and claims relating to payments made before that date. 
15.	Following the release of the decision in the Italian Republic case, the Commissioners issued on 10 October 1997 Business Brief 23/97 entitled “VAT changes on sales of input tax blocked goods”.  After summarising the basis of the case and the decision, and the operation of the block on input tax under the then current UK legislation in relation to the sale of business cars, the Business Brief continued as follows:-

Business cars
The ECJ decision has implications for the United Kingdom’s treatment of the disposal of cars by a taxable person which have been subject to an input tax block by virtue of VATA 1994 s 25(7)…
Customs’ interpretation of the ECJ judgment is that the Sixth Directive requires the onward sale of input tax blocked goods be treated as exempt, regardless of whether a profit is made.  The Commissioners are still considering the full implications of the judgment and what changes to United Kingdom legislation may be necessary.
In the interim, businesses may choose either to continue to use the input tax margin schemes or rely upon the ECJ judgment and treat the sale of input tax blocked cars as being exempt.  Businesses choosing the exemption option should consider the effect that the making of exempt supplies may have upon their partial exemption position.  A business that chooses the exemption option must apply it to all of its disposals of input tax blocked cars, not just those it sells at a profit.  A VAT Group must apply its chosen option to all of the members of the Group.
Claims for refunds
The Commissioners will accept claims for refunds of tax that have been overpaid as a result of the United Kingdom applying a margin scheme as opposed to an exemption.  Refunds will be due to those businesses that have accounted for output tax on input tax blocked cars which they have sold at a profit.  Such refunds will be subject to the three year cap on VAT claims.
Traders wishing to recover overpayments should make a written claim to their local VAT office quoting this Business Brief.  The claim should give full details of the amount of VAT and its method of calculation.  Claimants should be prepared to be able to support the calculation in respect of each individual item by means of purchase and sales documentation.
Claims should also take into account the partial exemption implications of treating the sale of the cars as exempt.
16.	Following the release of the decision in the Marks & Spencer case, the Commissioners issued on 5 August 2002 Business Brief 22/02, entitled “Three year cap – Marks & Spencer – ECJ judgment”.  It is necessary to set this out at some length, since it is the published practice by which the Commissioners sought to give effect to the decision in the Marks & Spencer case by setting out a scheme for retrospective transitional arrangements in relation to the introduction of the three year “cap”.  The Commissioners chose to proceed in this way, rather than introducing legislation.  One of the Appellant’s contentions is that the Commissioners, in refusing the Appellant’s claim for overpayment, are not acting in accordance with the terms of their practice as set out in the Business Brief.  The Commissioners contend that the Business Brief is not to be regarded as the sole or exclusive expression of those transitional arrangements.
17.	The Business Brief 22/02 summarises the way in which the three year cap on claims for overpayment operates, and the circumstances in which it was introduced with effect from 18 July 1996 but by a change in legislation enacted on 4 December 1996, and after summarising the challenge by Marks and Spencer, it continues as follows:-
The judgment of the ECJ
The ECJ delivered its judgment on 11 July 2002 and held that the UK had acted contrary to the principles of Community law in that it had failed to implement properly provisions of Directive 77/388/EEC, which conferred directly effective rights on taxpayers, and had then retrospectively shortened the time limit within which taxpayers could exercise their rights to repayment.
The ECJ held that when the UK introduced the new time limit they ought to have introduced it with a transitional period, beginning on the date on which the change was enacted, i.e. 4 December 1996.  During this transitional period taxpayers who had directly effective rights under Directive 77/388/EEC, which had not been properly implemented in UK law, would have been able to exercise those rights before the new time limits were legitimately imposed.
The ECJ did not hold that it is contrary to Community law to impose time limits on the right to repayment of amounts paid by way of VAT contrary to directly effective provisions of Directive 77/388/EEC, but that it is contrary to Community law to impose those time limits with retrospective effect.
Practical effects of the judgment
Customs will now give effect, albeit retrospectively, to a transitional regime for when the three-year time limit was introduced in 1996 to allow taxpayers to make the claims that they ought to have been able to make at the time.  This transitional regime will apply from 4 December 1996 to 31 March 1997 [this latter date was changed to 30 June 1997 by the terms of Business Brief 27/02 issued by the Commissioners on 7 October 2002 to give effect to the decision in the Grundig Italiana SpA case]….
Claims
Customs are now inviting all taxpayers to submit claims to their local VAT offices where – 
-	they made claims before [30 June 1997] which were capped (either by Customs or by them in expectation that no more than three years would be paid); or
-	they made claims before [30 June 1997]  which were repaid in full and amounts more than three years old were then clawed back by Customs by means of a recovery assessment; or
-	they made no claim but can demonstrate that they discovered the error before  [30 June 1997]; and
-	in all cases, the overpayments of VAT were made before 4 December 1996.
If you consider that you fall within the above parameters, you will have until [30 June 2003] to submit claims.
Claims may be refused in whole or in part if Customs are satisfied that repayment would lead to the unjust enrichment of the claimant.
Claims made after [30 June 1997] will be subject to the three-year time limit…
Claims relating to overpayments made after 4 December 1996 will be subject to the three-year time limit.
18.	The Business Brief concluded by specifying that claims must be made in writing with a list of the matters and information which must be included in the claim.  It also specified that claims should only be made for the net amount overpaid for any given VAT accounting period (e.g. after any adjustments to the amount of recoverable input tax consequent upon changes which resulted in the overpayment claimed).
19.	Reference should also be made to the guidance notes issued by the Commissioners to all car dealers in relation to claims for overpayment (we were not told when these notes were first issued, but we were told that they were in existence in March 2003, and they are referred to in KPMG’s letter of 30 June 2003 making the Appellant’s claim).  They are entitled “Detailed guidance on claims to recover VAT paid on the profit margin on cars where dealerships were required to block the input tax when the car was new – Commission v Italian Republic case”.  The notes state that claims for overpaid tax can be made on the sales of cars where UK legislation required dealers to block the input tax on the purchase of cars, as in the case of demonstrator cars until the UK law changed on 1 December 1999 following the decision in the Italian Republic case, and they continue as follows:-
Claims can be made by businesses which:
•	Can demonstrate that they made a claim before 30 June 1997 that was capped; or
•	Can show that they would have put in a claim before 30 June 1997.
Where capped claims were made after 30 June 1997 (because they took time to quantify, for example) the reasons for the timing of the claim must be given, and Customs will decide, on a case by case basis, whether the claim can be seen to come with the scope of Business Briefs 22/02 and 27/02.
However, where no claim has been submitted until after the ECJ judgment in Marks & Spencer it is unlikely that claims will be seen as valid.
Where a taxpayer waited until after the High Court judgment in C&E Commrs v JDL Ltd (handed down on 25 October 2001) to make a claim, in the absence of other evidence, Customs may take the view that he didn’t make a claim in the wake of the “Italian case” because of the partial exemption implications and, on that basis, would not have done so had a transitional period been provided.  In these cases, it is especially important that you give comprehensive explanations to persuade Customs that the claim is valid.
The Appellant’s case
20.	The essence of the Appellant’s case, as it was put to us by Miss Brown in her submissions, was this:-
(1)	the Commissioners were required to give effect to the decision in the Marks & Spencer case by some scheme of transitional arrangements with retrospective effect permitting recovery of tax which had been overpaid prior to “capping” taking effect;  
(2)	they chose to do so by setting out such a scheme in the relevant Business Briefs;  
(3)	the Appellant’s circumstances fell within that scheme, in that it had made no claim for overpayment before “capping” was introduced, but it was aware that it had the right to make the claim prior to the end of the transitional period specified in the scheme (which is accepted by the Commissioners);
(4)	the Commissioners cannot now introduce a further requirement as a condition of the Appellant falling within the scheme of transitional arrangements, namely that the Appellant must show that, if the transitional arrangements had been in place, it would have made a claim prior to the end of the transitional period but for the effect of “capping” – such a requirement is in any event unreasonable, in breach of the principle of effectiveness, and therefore invalid; and
(5)	alternatively, if that further requirement is valid, the Appellant can satisfy it, since the evidence is such that the Appellant would have made a claim prior to the end of the transitional period if that claim could have been related back to the March 1978 VAT accounting period, when it commenced its dealerships.
21.	Miss Brown submitted that the decision in the Marks & Spencer case establishes that the principle of effectiveness requires that domestic legislation may not prevent a taxpayer from exercising rights conferred by Community law;  that a limitation period of three years for making claims to recover overpaid VAT does not in itself infringe Community law rights;  and that when provisions are introduced curtailing existing rights, those provisions must include transitional arrangements which allow an adequate period after enactment to permit, without curtailment, the exercise of such existing rights.
22.	The Appellant is prepared to accept that the transitional arrangements as set out in the two Business Briefs 22/02 and 27/02 are reasonable and consistent with the scope of the decision in the Marks & Spencer case.  In particular, the requirement that the Appellant must show that it had discovered, prior to the end of the transitional period, the error entitling it to make an overpayment claim is consistent with the principle of preserving pre-existing directly effective rights under Community law.
23.	The Appellant argues, however, that, having set out the terms of the transitional arrangements in the Business Briefs (the Commissioners having chosen to adopt this means, rather than legislation, to give effect to the decision in the Marks & Spencer case), the Commissioners must apply those terms, since otherwise the legitimate expectations of taxpayers (created by the terms of the Business Briefs) are not met.  In particular, it is not open to the Commissioners to make the further requirement that the Appellant, in order to bring itself within the transitional arrangements, must show that it would have made a claim for overpayment prior to the end of the transitional period had the transitional period in fact been in place – i.e. that the reason it did not in fact make a claim was because of the effect of the “capping”.
24.	It is further argued that it is unreasonable to require, as a condition of bringing itself within the transitional arrangements, that the Appellant must show that it would have made a claim had those transitional arrangements in fact been in place when “capping” had been introduced – it is unreasonable because of the burden it places on the Appellant to prove, some seven years after the relevant period, what its intentions and motives were.  To place such an unreasonable hurdle in the path of the Appellant is itself in breach of the principle of effectiveness and therefore this requirement is contrary to Community law and invalid.
25.	If the Appellant is wrong on this point in principle, so that the Commissioners can validly make it a requirement of claiming the benefit of the transitional arrangements that the Appellant must show that it would have made a claim but for the “capping” provisions, then the evidence shows that the existence of the cap was the predominant (although not the only) factor which led the Appellant to the decision not to make a repayment claim:  the other factors (the effect of the revised partial exemption fraction;  the time and expense of calculating the gross overpayment) did not in themselves determine the decision not to make the claim.
26.	The Appellant, when given the choice under Business Brief 23/97 (following the decision in the Italian Republic case) to treat future sales of demonstrator cars as exempt supplies, chose to continue with the input margin scheme, but that does not mean that the Appellant forfeited any right to claim for overpaid tax on an exemption basis for prior years – the Appellant was free to make separate choices for the prior years and for future years, and with declining car sales in 1997 the benefits of treating sales of demonstrator cars as exempt supplies would have correspondingly been reduced.  The Appellant’s choice for the future years therefore tells us nothing about its motives for refraining from making a claim on a different basis for the prior years.
The Commissioners’ case
27.	For the Commissioners, Miss Haynes put forward the following case:  in order to comply with the decision in the Marks & Spencer case the Commissioners were required, retrospectively, to put in place transitional arrangements to give effect to rights to repayment of overpaid tax where those rights had accrued when “capping” was introduced.  This it achieved by its policy of accepting a claim by any taxpayer who could show that it would have made a valid claim in the transitional period had that period in fact been provided for at the time the “capping” rules were introduced.  In the present case there were other factors which influenced the putative action of the Appellant, and as a result, and as a matter of fact, the Appellant could therefore not show that it would have made such a claim had there been a period up to 30 June 1997 when it could have made an “uncapped” claim for repayment of overpaid tax, and therefore its appeal fails.
28.	The Commissioners do not accept in principle that the terms of the relevant Business Briefs can in these particular circumstances give rise to expectations which must then be met.  In any event the subsequent detailed guidance issued by the Commissioners to taxpayers in the position of the Appellant, which was known to the Appellant before it made its claim (and which was referred to in the letter by which that claim was made) includes the requirement that the claimants must be able to show that they would have put in a claim before 30 June 1997, the end of the notional transitional period.  Therefore the wider terms of the Business Briefs did not in any way prejudice the Appellant or the claim it could make.
29.	The only question in law, the Commissioners contend, is whether the transitional arrangements as they have been applied to the Appellant comply with the decision in the Marks & Spencer case.  In order to be compliant with that decision the Commissioners are required to put the Appellant in the same position as it would have been in if an actual transitional period had been introduced as part of the “capping” legislation.  They can achieve this in the most expeditious way (that is, by practice rather than by legislation).  A claimant who may have had the right to make a claim but who would not in fact have exercised that right by making a claim in the actual transitional period is not prejudiced if transitional arrangements are not available to him.  It follows that retrospective transitional arrangements which exclude such a claimant are not thereby contrary to the decision in the Marks & Spencer case.  This was the approach adopted by the tribunal in Conde Nast Publications Ltd v Customs & Excise Commissioners (VTD 18869), where the taxpayer was claiming that it was entitled to corresponding transitional arrangements to apply the decision in the Marks & Spencer case to the deduction of input tax following discovery of an error under the provisions of regulation 29 of the Value Added Tax Regulations 1995 (where a similar “capping” provision had been introduced).
30.	In the present case, therefore, the only relevant question is whether the Appellant would have made a claim to recover the overpaid tax for the period March 1978 to December 1996 had there been an actual transitional period expiring on 30 June 1997.  It is the Commissioners’ contention that, on the evidence available, the Appellant would not have made such a claim.  It is clear that there were significant costs involved in preparing a claim (requiring each sale to be revisited), and the effect of revising the partial exemption calculation was also a deterrent factor.  It was estimated that a claim made for the three year “capped” period would have resulted in a repayment of approximately £65,000 (a little over a third of the eventual “uncapped” claim), but even so no claim was made because it was thought to be not worth the time and expense – that would no doubt have been the conclusion if a claim had been considered for the entire “uncapped” period, where the expense of retrieving and reviewing all the purchase and sales documentation for that period would have been proportionately greater.  Further, following the decision in the Italian Republic case the Appellant chose to continue with the input margin scheme, when given the choice to opt for exemption treatment, until the law was changed in December 1999 – this was because the Appellant did not wish to deal with the complexity of the partial exemption calculation.  This is a further indication that no “uncapped” claim would in fact have been made if the Appellant had had the benefit of a transitional period for making such a claim.
Ancillary procedural matters
31.	Before proceeding to give our decision on the principal issue between the parties it is necessary to refer to two ancillary matters of a procedural nature which were raised in the course of the hearing.
32.	The first matter concerned the question of whether in part the Appellant’s claim was to a recovery of input tax under regulation 29 of the Value Added Tax Regulations 1995 (or, possibly, regulation 35 of those Regulations), rather than a claim for the recovery of overpaid tax under section 80 VATA.  It appears that for some VAT accounting periods the Appellant was a so-called “repayment trader” (claiming more input tax than it could credit against its output tax), and that for such periods its claim would take effect as a further recovery of input tax.  In their Statement of Case the Commissioners indicated that in so far as the Appellant had to rely on a claim to recover input tax under regulation 29 (which has corresponding “capping” provisions to those in section 80 VATA), the Commissioners did not consider that the decision in the Marks & Spencer case was relevant, since that decision was not concerned with regulation 29, and that accordingly the Appellant had no entitlement to any transitional relief whatsoever.
33.	At the hearing of the appeal Miss Haynes was prepared to accept, for the purposes of this case but without conceding the point by way of wider application, that the same principles should be applied to the Appellant’s appeal whether its claim was, as a matter of technicality, under section 80 VATA or regulation 29.  She was prepared to make this concession because, as she saw it, even if the Commissioners were required to apply transitional arrangements for the purposes of claims under regulation 29 corresponding to those it applied to section 80 VATA, on the facts the Appellant could not avail itself of such arrangements.
34.	We have therefore reached our decision on that basis, and for convenience will refer to the Appellant’s claim as though it were solely a claim for repayment of overpaid VAT under section 80 VATA.
35.	The second matter concerned this tribunal’s jurisdiction in relation to the Appellant’s appeal (or, more precisely, its appeal in so far as it relied on certain lines of argument).  If the Appellant’s appeal is to lie to the tribunal it must be an appeal with respect to “a claim for the repayment of an amount under section 80 [VATA]”, as required by section 83(t) VATA.  At the hearing Miss Brown for the Appellant acknowledged that it might be said that the appeal against the decision of the Commissioners related in part to the means whereby the Commissioners sought to give effect to the decision in the Marks & Spencer case, and in particular whether the Commissioners had complied with their stated policy in this regard.  She argued that even if this were so, section 84(10) VATA gave the tribunal jurisdiction to hear the appeal on the basis that there was a prior decision of the Commissioners that the Appellant did not fall within the transitional arrangements and that the decision not to repay the overpaid tax claimed under section 80 VATA was a subsequent decision which depended on that prior decision.  The tribunal could therefore review both the prior decision and the dependent subsequent decision in relation to section 80 VATA.
36.	For the Commissioners Miss Haynes argued the point in principle.  She said that the Appellant, at least as to that part of its case which relied on an assertion that the relevant Business Briefs created a legitimate expectation on the part of the Appellant which required the Commissioners to implement the strict terms of those Business Briefs in order to meet that expectation, was seeking to challenge the policy of the Commissioners, which is a matter for judicial review proceedings.  Section 84(10) VATA does not assist the Appellant, since in reality there was only one decision of the Commissioners, not a two-stage decision process.  However, since the Commissioners’ case is that they have properly applied the law in terms of allowing transitional relief which complies with the decision in the Marks & Spencer case, and that the Appellant’s case fails on the facts to come within that relief, the Commissioners view the case as relating to a repayment claim under section 80 VATA and as such within the jurisdiction of the tribunal.
37.	The parties cannot, of course, by their agreement confer on the tribunal a jurisdiction which it does not have.  There are, however, difficulties where a case ranges over issues which touch on the proper application of policy or practice on the part of the Commissioners in the course of their dealings with rights or obligations which the taxpayer has and in relation to which the taxpayer has a right to appeal to the tribunal.  Section 84(10) VATA (which is not couched in the clearest of terms) may not always resolve the point.  In the present case we feel able to follow the approach adopted by Miss Haynes, since we reach our decision on grounds other than the compliance or otherwise of the Commissioners with their stated policy or practice.
The decision
38.	We dismiss the appeal.  We accept the Commissioners’ case as it was argued before us.  The Appellant’s claim for repayment of overpaid tax under section 80 VATA for periods back to March 1978 fails because the Appellant cannot show that, on the balance of probabilities, had UK law permitted it to make such a claim before 30 June 1997, it would have made such a claim.  The Appellant’s Community law rights have not therefore been infringed by reason of the “capping” provisions failing (whether in the original legislation or by subsequent practice on the part of the Commissioners) to include transitional arrangements which extended to the Appellant’s circumstances.
39.	The first issue is whether the terms of the transitional relief applied by the Commissioners to the Appellant were in accordance with the law as set out in the decision in the Marks & Spencer case.  As the case was argued by the Appellant, this turns on whether the Commissioners are entitled to require the Appellant to show not only that it was aware before the end of the transitional period that it had a right to claim overpaid tax for the “uncapped” period (and in this case it is common ground that the Appellant was so aware) but also that it would in fact have exercised that right and made such a claim before the end of that period had transitional provisions allowed it to do so.  If transitional relief in these terms is in accordance with the law, the second issue is one of fact, namely whether the Appellant can meet that requirement by showing that it would have exercised that right to make an “uncapped” claim if the law had then so allowed.
40.	The first issue and the second issue may together be expressed a little differently, and perhaps more accurately, in this way:  in relation to the Appellant, did the Commissioners apply the “capping” legislation in a way that was compatible with the Appellant’s Community law rights as those rights are identified in the decision in the Marks & Spencer case?
41.	As to this first issue (what one might regard as the point in principle), the decision in the Marks & Spencer case holds that national legislation which reduces the period within which overpaid tax may be claimed back by the taxpayer must comply with the principle of effectiveness (that is, must not “render virtually impossible or excessively difficult the exercise of rights conferred by Community law” – paragraph 34 of that decision) and the principle of the protection of legitimate expectations (that is, must not comprise an amendment “which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of provisions of the Sixth Directive with direct effect” – paragraph 46 of that decision).  The court said as follows at paragraph 38:-
Whilst national legislation reducing the period within which repayment of such sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which person were entitled to submit under the original legislation.  Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.  
42.	The “capping” legislation introduced by section 47 Finance Act 1997 was held to be incompatible with the principle of effectiveness and the principle of the protection of legitimate expectations in that it did not include transitional arrangements of the kind referred to by the court.  The decision in the Grundig Italiana case provided the further refinement that a period of six months following the date new legislation comes into effect is an adequate transitional relief period in these circumstances.
43.	Faced with the decision in the Marks & Spencer case and what one might regard as the time-lapse difficulties which it presented, the approach of the Commissioners was to seek to put taxpayers in a position whereby, retrospectively, the effect of the “capping” as introduced by section 47 Finance Act 1997 as it applied to them was not to be regarded as incompatible with Community law.  This was achieved by announcing and applying what was tantamount to transitional arrangements, and the principal method of implementing this was the relevant Business Briefs as described in paras. 17 and 18 above.  The legislation itself was not changed, but it was to be applied to individual taxpayers, so the Commissioners presumably intended, in a way which did not render it as contrary to the principles of effectiveness and of the protection of legitimate expectations.  By this means the taxpayer’s rights under Community law were to be safeguarded.
44.	As an approach, especially in the light of the difficulties of giving retroactive effect to a form of transitional relief, this seems to us to be reasonable and, in principle, capable of being effective.  The question is whether, as applied to the Appellant, it resulted in the Appellant’s rights being safeguarded.
45.	In the Appellant’s case, where the Commissioners accept that the Appellant knew of its right to make an “uncapped” claim to recover overpaid tax before the date fixed (retrospectively) as the notional cut-off point for making claims, the Commissioners are prepared to allow an “uncapped” claim only if the Appellant can show that it would, before 30 June 1997, in fact have made an “uncapped” claim for overpayments up to December 1996 had it had an unrestricted right to do so before that June date.  
46.	The Appellant argues that this further requirement goes beyond the terms of the relevant Business Briefs, and for that reason is unlawful – the argument was couched in terms of the Business Briefs giving rise to a legitimate expectation on the part of the Appellant.  We cannot accept that for two reasons.  First, as a practical matter, before the Appellant was required to make its claim the Commissioners had specified this further requirement in their detailed guidance to car dealers, so the Appellant knew before the relevant time the basis on which the “capping” legislation would be applied – or not applied – to it and was in no way prejudiced in its claim by this requirement being announced in the (presumably later) detailed guidance notes rather than in the Business Briefs.  Secondly, since as we have explained, the question is whether the “capping” provisions have been applied in a way which safeguard the Appellant’s rights under Community law, the narrower question of what one might call the mechanics of the way this is achieved is not relevant if in the end result those rights are safeguarded.
47.	More relevant in principle is the Appellant’s argument that its rights under Community law have not been safeguarded since the requirement that, to escape the “capping” provisions, it must show that it would have made an “uncapped” claim in the transitional period, is not consistent with transitional arrangements identified as being appropriate in the decision in the Marks & Spencer case.  The Appellant points to the words in paragraph 38 of the decision quoted above:  “…but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation” (emphasis added).  This, the Appellant says, is what the Business Briefs, unadorned, provided.  Nothing is mentioned by the court about persons having to show that they would have exercised that entitlement – the curlicue added at a later stage by the Commissioners.
48.	First, it seems to us that it is not surprising that the court in the decision in the Marks & Spencer case makes no mention of this further requirement.  The court is setting out the terms which must be included in new legislation curtailing a limitation period if that legislation is to be compatible with Community law.  Such legislation will need to provide no more than that accrued rights can be exercised.  Real life then determines whether or not they are in fact exercised.  Only where transitional arrangements have to be applied retrospectively do we enter the notional world where it becomes necessary to consider the question of how the taxpayer would or would not have acted in relation to accrued rights.  The court in the Marks & Spencer case did not peer into this notional world.
49.	Secondly, and in our view conclusively, the Commissioners are required to put the Appellant in the same position – no better and no worse - as it would have been in had the “capping” provisions complied with the terms (including in particular the terms as to transitional arrangements) specified in the decision in the Marks & Spencer case.  As Miss Haynes put it, why should the Appellant be given a right under retrospective transitional arrangements when, if it had had that right under Community law compliant provisions enacted at the time it would not have exercised that right?  This is a pertinent question where, as in the Appellant’s case, events subsequent to what would have been the transitional relief period (namely, the decision in the JDL case) have, or may have, an impact on the position of the taxpayer.  Viewed in this way, the further requirement that the Appellant must show that it would have exercised the rights it knew it had is not inconsistent with the decision in the Marks & Spencer case.
50.	 Put in a different way, if the Appellant would not have exercised its accrued rights had there been Community law compliant transitional arrangements, it cannot be said that the absence of those arrangements in the actual legislation enacted by section 47 Finance Act 1997 was in any way prejudicial to the Appellant.  This was the approach of the tribunal in the Conde Nast Publications Ltd case.  That case concerned a taxpayer who sought recovery of input tax in relation to entertainment expenditure under regulation 29 of the Value Added Tax Regulations 1995, and who was precluded by a “capping” provision similar in its terms to that now found in section 80 VATA.  The tribunal concluded that since, on the facts, the taxpayer in that case had chosen not to make an “uncapped” claim when it was open for it to do so, then even if the “capping” provision in regulation 29 were contrary to the Community law rights of that taxpayer because it had not included transitional arrangements, that taxpayer had not thereby been prejudiced, and therefore could not at a later date seek to have the effect of “capping” disapplied.
51.	One further strand in the Appellant’s argument is that it is unreasonable to require the taxpayer, some six or seven years after the event, to have to prove that it would have taken a certain course of action had circumstances been different – that is, that it would have made an “uncapped” claim under transitional arrangements had they been in place at the outset.  The court had this to say in the decision in the Marks & Spencer case (at paragraph 34):-
It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each member state to …lay down the detailed procedural rules governing actions for safeguarding rights which individual derive from Community law, provided…that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness)….
52.	As we see it, the test is not one of reasonableness as such, but whether it has been made “virtually impossible” or “excessively difficult” for the taxpayer to enjoy his rights under Community law.  In the present case we do not consider that this was so.  It should be noted that the context here (and this was true for the car dealership business community generally, not just the Appellant) was a situation where the decision whether or not to make a claim required detailed re-examination of a large number of individual transactions and also a re-working of the entire series of VAT calculations over the relevant period (because of the adjustment then seen as necessary to the partial exemption fraction), so that there could be good reasons why a taxpayer might be predisposed against making an “uncapped” claim for overpaid tax.  It is not therefore unreasonable in this context to require that the taxpayer shows that, despite these factors, he would have made a claim had he not been prevented from doing so by the effect of “capping”, and this is so notwithstanding the passage of time.  That requirement may place a burden of some difficulty on the taxpayer in the circumstances of the Appellant, but it is not making it “virtually impossible” nor “excessively difficult” in terms of the exercise of its rights conferred by Community law.
53.	As to the first issue (or the point in principle), therefore, we hold that the requirement imposed by the Commissioners as a term of allowing the Appellant to have the benefit, retrospectively, of the “capping” transitional arrangements (namely, the requirement that the Appellant must show that it would have made a claim before the relevant date were it not for the imposition of the “cap”) does not curtail or infringe the rights which the Appellant has under Community law.
54.	 We are therefore required to consider whether, on the facts as they appear from the evidence or as we infer them to be from the evidence, the Appellant is able to satisfy that requirement:  can it show that it would have made a claim before 30 June 1997 for overpaid tax dating back to March 1978 had it not been for the “capping” provisions, as enacted.
55.	The burden of proof would appear to be on the Appellant, so that it has to show on the balance of probabilities that it would have made such a claim.  We find that the Appellant does not discharge that burden.  The Appellant has produced no direct evidence on the point.  The Appellant considered making a “capped” claim, and although its estimate was that such a claim would have recovered in the region of £65,000 of overpaid tax (after adjustments for the changed partial exemption calculations), it concluded, having taken advice on the point, that the direct expense of professional fees and the indirect expense of management time involved in making such a claim were such as to make it not worthwhile making the claim.  The amount which could have been recovered by an “uncapped” claim (taking account of the partial exemption adjustments), and the amount of direct and indirect expense involved, were not considered (so far as we have evidence), presumably since, quite understandably, the Appellant was not minded to challenge the legality of the “capping” provisions.
56.	The “capped” claim estimated amount of £65,000 is a substantial proportion of the “uncapped” claim actually made, and the question arises whether, if the expenses of claiming £65,000 for the immediate past three years outweighed that sum, the expenses of formulating a claim back to 1978 would not equally, or more so, have outweighed the amount of the “uncapped” claim.  That those expenses were significant is clear:  they involved the re-examination of the detail of the purchase and sale of every demonstrator car and the adjustment of the VAT records to record the different VAT treatment of each such purchase and sale.  In turn, each such purchase and sale required an adjustment to the partial exemption fraction in each VAT accounting period which was then applied to the business as a whole.  The relevant factors in this exercise as we heard them in evidence are set out in para. 11(11) above.  Even though some of the expense may have been proportionately less (if the Appellant had been able to extrapolate from later information and records in order to establish acceptable estimates of earlier transactions) and even though the partial exemption factor may have been less significant, or not a factor at all, in the earlier years, it is nevertheless reasonable to conclude that what was the determining factor in the decision not to make an immediate past three year claim would equally have been the determining factor which would have led to a decision not to make an “uncapped” claim had that course been open to the Appellant.
57.	Quite distinct from the question of claiming for past overpaid tax, following the decision in the Italian Republic case – in effect, at the time the Appellant considered whether or not to make a “capped” claim - the Appellant was given another choice, namely, whether to continue for the time being (until, as it happened, December 1999) with the input margin scheme (as hitherto), or to treat the sale of demonstrator cars as exempt supplies.  The Appellant chose to continue with the input margin scheme.  If it had opted for the exempt supplies treatment it would have been required to take that into account in its calculation of recoverable input tax by reason of the application of the partial exemption fraction, but it would not have had the cost of examining its past records.  Thus, it is reasonable to conclude, the “cost” (in terms of additional irrecoverable input tax) of choosing the exempt supplies route was greater than the “cost” of continuing with the input margin scheme.  Whilst there may have been different factors relevant to this later period (including the decline in the Appellant’s car dealership business), the choice which the Appellant made as to how to proceed for the future sheds some light on the significance it placed generally on the “cost” or other consequences of making the partial exemption adjustment, especially when seen in the further context of the decision not to pursue the “capped” claim.
58.	Taking all these factors into account we infer that, had the Appellant had the opportunity to make an “uncapped” claim for overpaid tax on or before 30 June 1997, it is probable that it would not have done so, and therefore the Appellant is not able to show that it would have made a claim before 30 June 1997 for overpaid tax dating back to March 1978 had it not been for the “capping” provisions in section 80 VATA.
59.	For these reasons we dismiss the Appellant’s appeal.  It seems to us that the event which in reality prompted the Appellant to make its appeal was the decision in the JDL case which, as we understand it, removed at a stroke the requirement to recalculate the partial exemption fraction in relation to the sale of demonstrator cars.  Had the JDL case been decided before 30 June 1997 the Appellant’s decision as to making a “capped” claim might well have been quite different, and the inference as to the decision it would have made in relation to an “uncapped” claim might also in consequence have been different.  We can understand any sense of grievance which the Appellant might have, not least because in relation to three distinct matters, each critical to the Appellant, the stance taken by the Commissioners has been shown to be incorrect in law by, in turn, the decisions in each of the Italian Republic, the JDL, and the Marks & Spencer cases.  But any such sense of grievance does not necessarily give grounds for a remedy.  This case turns on the question of how the Appellant would have been placed and what action it would have taken if in fact there had been a transitional period during which it could have made an “uncapped” claim.  It is a hypothetical question, but it has to be asked by reference to circumstances as they were at the relevant time, including the circumstance of how the law was then interpreted and applied.  It was open to the Appellant to take the point which the taxpayer in the JDL case argued and on which it succeeded, and had it taken that point before 30 June 1997 there might have been a different outcome to this appeal.  But it did not do so, and it cannot now claim, with the advantage of having seen events as they have since unfolded, that its position as it was in 1997 should now be regarded in a way which reflects those later events or puts it in the position to take any benefit derived from them.
60.	We make no direction as to costs.

EDWARD SADLER

CHAIRMAN
RELEASE DATE:24 March 2005

LON/2004/0233

APPENDIX

Chronology of legislative changes, court decisions and Business Briefs issued by the Commissioners 

18 July 1996	Paymaster General announces 3 year “cap” on claims under section 80 VATA.  The 3 year limit applied to all claims made on or after 18 July 1996.
	
4 December 1996	Provisional Collection of Taxes Act resolution giving statutory force to amend section 80 VATA to provide for the 3 year “cap”.
	
4 December 1996	Overpayments of VAT made prior to this date could be claimed under, and subject to, the terms of the retrospective transitional arrangements introduced following the decision in the Marks & Spencer  case – this specified in Business Brief BB/22/02 issued 5 August 2002.
	
19 March 1997	Section 47 Finance Act 1997 enacted amending section 80 VATA to provide for the 3 year “cap”.
	
31 March 1997	Original end date specified in retrospective transitional arrangements (i.e. date by which claimant must be able to show that error discovered) – this specified in Business Brief BB/22/02.  Subsequently extended to 30 June 1997 – see below.
	
25 June 1997	European Court of Justice rules in the case of EC Commission v Italian Republic.	

30 June 1997	
Extended end date specified in retrospective transitional arrangements (i.e. date by which claimant must be able to show error discovered) – this specified in Business Brief BB/27/02 following Grundig Italiana case – see below.	

10 October 1997	
Commissioners issue Business Brief 23/97 referring to the decision in the Italian Republic case and informing motor traders that they may choose either to continue to use the input tax margin scheme or rely on the judgment and treat sales of input tax blocked cars as exempt.	

1 December 1999	
Legislation implementing the decision in the Italian Republic case comes into effect, abolishing the input tax margin scheme for cars and removing the block on input tax recovery on demonstrator cars.	

14 December 1999	
Court of Appeal determines to refer questions to ECJ concerning the legitimacy of introducing a retrospective curtailment of directly effective rights in respect of recovery of overpaid tax in Customs and Excise Commissioners v Marks and Spencer plc	

24 January 2001	
Tribunal decision in JDL Ltd v Customs and Excise Commissioners in which it is held that demonstrator cars are capital items and therefore the sale of them is excluded for the purposes of calculating the partial exemption fraction.	

25 October 2001	
High Court confirms the tribunal’s decision in the JDL case	

11 July 2002	
European Court of Justice rules in the Marks & Spencer case that the introduction of the three year “cap” in section 80 VATA without an adequate transitional period is invalid, being in breach of Community law rights.	

5 August 2002	
Commissioners issue Business Brief 22/02 setting out retrospective three month transitional period for section 80 VATA claims – requiring that the taxpayer must have been aware of the right to make claims before 31 March 1997, and that claims in respect of such rights must be made on or before 31 March 2003.	

24 September 2002	
European Court of Justice rules in the Grundig Italiana case that the minimum transitional period should be six months, rather than three months.	

8 October 2002	
Commissioners issue Business Brief 27/02 extending transitional period dates from three to six months in accordance with the decision in the Grundig Italiana case – i.e. permitting claims where the taxpayer had been aware of the right to make the claim before 30 June 1997 and extending to 30 June 2003 the date by which the taxpayer must make his claim.	

March 2003	
Commissioners publish detailed guidance notes for car dealerships setting out the requirements for making retrospective claims for recovery of overpaid tax in the case of claims based on the decision in the Italian Republic case.	

30 June 2003	
End of period under Business Brief 27/02 for retrospective claims under section 80 VATA.	

30 June 2003	
Appellant submits claim to recover overpaid tax.