19010
VAT — motor dealer —application for recovery of output tax on demonstrator bonuses and on margin on sales of demonstration cars following ECJ decision in Marks & Spencer that retrospective introduction on three year cap on recovery claims contrary to effectiveness of EC Community rights and legitimate expectations — finding that appellant would not have made claim to recover tax overpaid on demonstrator bonuses and tax paid on sales of demonstration cars by 30 June 1997 — appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

 
 	
	  ROBERT SMITH & SONS LIMITED 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: 	David Demack	 (Chairman)
						Mrs Rayna Dean FCA

Sitting in public in Manchester on 7 March 2005

Mr P Bendel of Messrs Baker Tilly, chartered accountants of Liverpool, for the Appellant 

Mr James Puzey of counsel instructed by the Solicitors office of HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2005

DECISION
1.	On 30 June 2003, the appellant company, Robert Smith & Sons Limited (“Smith”), submitted a claim for repayment of overpaid tax covering the period between 1 January 1981 and 31 May 1998.  Part of the claim related to output tax wrongly accounted for on the receipt of demonstrator bonuses from manufacturers, and the remainder on the margin made on its sales of demonstration cars.  The claim was based on two judgments of the Court of  Justice of the European Communities (“the ECJ”), namely Elida Gibbs v CCE [1996] STC 1387, and EC Commission v The Italian Republic [1997] STC 1062.  In the former case, the effect of the ECJ decision was that bonus payments made by a motor car manufacturer, typically on the sale of a demonstration car on which input tax recovery had been blocked, were to be treated as a discount on the sale price of the car.  Consequently, in contrast to the position in UK law, a motor dealer was not required to declare output tax on such bonuses.  In the latter case, the ECJ held that where input tax on the purchase of a motor car could not be recovered by a motor dealer, its onward sale of the car would be exempt from VAT.  That contrasted with the UK legislative requirement that motor dealers declare output tax on the profit margin.  In each case, UK law was subsequently amended in accordance with the ECJ’s decision.
2.	On 3 December 1996, to deal with claims made by motor dealers following the decision in the Elida Gibbs case, pursuant to the Provisional Collection of Taxes Act 1968, the UK Parliament resolved that a three year time limit on the recovery of overpaid VAT should be imposed with effect from 18 July 1996. That resolution was later enacted, and the enactment now forms section 80(4) of the Value Added Tax Act 1994.  The retrospective effect of that legislation, which was of course equally applicable to claims made following both the two European cases, was tested in Marks & Spencer plc v CCE [2002] STC 1036, when the ECJ held that the retrospective introduction of the three year cap on recovery claims was contrary to the principles of the effectiveness of Community rights and legitimate expectations. Consequently, in Business Brief 22/2002, the Commissioners introduced a transitional period between 4 December 1996 and 31 March 1997 (later extended to 30 June 1997) in which existing capped claims might be extended and new claims might be made.  That enabled traders who had made capped claims before 30 June 1997 to re-submit their claims for the full period of any overpayment, and allowed traders who had chosen not to make a claim because of the capping provisions and who could demonstrate that they were aware of the overpayment  prior to 30 June 1997 to make new repayment claims, in each case by 30 June 2003.   
3.	Smith fell into the latter category, and submitted a new claim on 30 June 2003.  The Commissioners did not accept that, but for the three year cap introduced in December 1996, it would have made a claim before 30 June 1997. They therefore rejected the claim.  Smith’s appeal is effectively against that rejection.
4.	Smith claims that it was aware of the potential to make a claim by 30 June 1997 but decided not to do so, first, because it considered it not worth the expense and trouble of formulating a claim for the three year period allowed under the capping provisions introduced in 1996; and, secondly, because it wished to avoid the partial exemption implications of applying the Italian Republic decision to the law as it stood, i.e. it considered that it would recover less residual input tax by making a claim.
5.	We propose to deal with the two elements of Smith’s claim separately.  (The Elida Gibbs element is calculated at £120,270 and the Italian Republic element at £84,954).
6.	The first claim by Smith was made to recover output tax overpaid on the margin of demonstrator sales (i.e. under the Italian Republic case).  It was made on 27 June 2001 and covered the periods 06/98 to 03/00 inclusive, and was expressed to be subject to the decision of the High Court in Commissioners of Customs and Excise v JDL Limited.  The claim was met by the Commissioners in February 2003.  Smith maintains that it would have continued to apply the margin scheme to sales of demonstration vehicles, regardless of the Italian Republic decision (the effect of which was enacted in domestic law on 1 March 2000), but for the decision of the High Court in JDL.  Smith treated onward sales of demonstration vehicles as exempt supplies only with effect from the end of March 1999, following removal from its VAT group of a partially exempt subsidiary company.
7.	The Elida Gibbs decision was given in November 1996 and its effect was immediate.  The Commissioners issued a Business Brief, 16/97, which made clear that they accepted that VAT did not have to be accounted for on demonstrator bonuses, and invited repayment claims.  Smith continued to account for VAT on demonstrator bonuses after 1997.  
8.	In September 2002, Smith made a second claim for tax overpaid prior to 4 December 1996, and reserved the right to make a further claim for amounts overpaid after 4 December 1996.  That claim was refused.  In correspondence, Smith’s representatives indicated that time was required “in order to provide evidence that errors were discovered prior to 30 June 1997”.
9.	As both the 2002 and 2003 claims made by Smith were estimated, such work as was done on them was insufficient precisely to quantify them, or any part of them.
10.	It is part of Smith’s case that it is entitled to repayment of tax if it can show that it was aware that it had overpaid tax before 30 June 1997, and in fact submitted its claim by 30 June 2003.  Mr Puzey, counsel for the Commissioners, submitted that that was incorrect: before the Commissioners agreed to meet a claim, they had to have the opportunity of verifying it and part of the verification process included the necessity of satisfying themselves that if a transitional period for the three year cap had been introduced between December 1996 and June 1997, Smith would have taken advantage of it to make a claim.
11.	We have based the foregoing findings of fact on the contents of an agreed bundle of copy documents and the parol evidence of Mr Hodgkin, Smith’s group financial director.  We found Mr Hodgkin to be an honest witness, and have no hesitation in accepting what he told us as the truth.  He was clearly aware of the developments in the law which would have enabled Smith to make the necessary claim, but admitted that the company was in a period of rapid expansion in 1997 and did not then have the administrative capability of formulating a claim for overpaid tax.  Further, it was he who admitted that, as a subsidiary company in Smith’s VAT group was partially exempt, any claim made under the Italian Republic decision would have had financial disadvantages for certain of its minority shareholders, and therefore it was thought inadvisable to pursue the matter in 1997.
12.	Against the whole of the factual background, we can only agree with the submissions of Mr Puzey, as outlined in the penultimate paragraph, and find that Smith would not have made the necessary claims before 30 June 1997.  We therefore dismiss the appeal.

DAVID DEMACK
CHAIRMAN
Release Date: 6 April 2005

MAN/04/0249