Commissioners of Customs and Excise v Fine Art Developments Plc

JurisdictionUK Non-devolved
JudgeLord Keith of Kinkel,Lord Templeman,Lord Ackner,Lord Lowry,Lord Browne-Wilkinson,Lord Mustill,Lord Slynn of Hadley,Lord Lloyd of Berwick
Judgment Date22 February 1996
Judgment citation (vLex)[1989] UKHL J0202-1
Date22 February 1996
CourtHouse of Lords
Commissioners of Customs and Excise
Fine Art Developments plc

[1989] UKHL J0202-1

Lord Keith of Kinkel

Lord Templeman

Lord Ackner

Lord Lowry

House of Lords

Lord Keith of Kinkel

My Lords,


This appeal is concerned with the question whether, under the relevant statutory provisions relating to value added tax ("VAT") a taxpayer who by mistake has in a particular accounting period paid a greater amount of tax than was properly due is entitled to deduct the amount of the excess in computing his liability for a later period.


The appellants ("F.A.D.") carry on the business of manufacturing and distributing greetings cards, and have at all material times been registered for purposes of VAT. The statute which now governs that tax is the Value Added Tax Act 1983, a consolidating measure. Some of the events material to the present case took place before the consolidation, but, as the terms of the enactments in force at the earlier time have not been altered by the Act of 1983, it will be convenient to refer throughout to that Act. The supply of cards by F.A.D. to its customers in the United Kingdom was a taxable supply, so it was liable to charge its customers with VAT and to account for the tax so charged ("output tax") to the respondents ("C.C.E."). However, under section 14(2) of the Act of 1983 it was entitled to take credit for the tax on the supply to it of goods or services ("input tax"). Some of the customers of F.A.D. were not registered for VAT, so that they were not liable for output tax nor in a position to take credit for any input tax. The prices charged to these customers by F.A.D. for wholesale supplies of cards were lower than the prices charged by the customers on sale by retail. On 13 August 1981 C.C.E. served on F.A.D. pursuant to what is now paragraph 3 of Schedule 4 to the Act of 1983 a notice of direction requiring it to calculate output tax on the open market value of the cards on sale by retail, which was of course more than the prices actually charged by F.A.D. to the customers in question. F.A.D. duly complied. However, another taxpayer subject to a similar direction successfully challenged its validity under community law in proceedings before the Court of Justice of the European Communities: Direct Cosmetics Ltd v. Customs & Excise Commissioners ( Case 5/84) [1985] 2 C.M.L.R. 145. The invalidity flowed from the failure of the United Kingdom government to notify the Commission of the European Communities of the amendment by section 14(1) of the Finance Act 1981 of paragraph 3 of Schedule 3 to the Finance Act 1972. It is unnecessary to go into further detail. In the result, all notices of direction issued after the amendment took effect, on 27 July 1981, became null and void, including that issued to F.A.D. on 13 August 1981. So on 5 March 1985 C.C.E. informed F.A.D. that the notice was withdrawn with effect from 14 February 1985 (the day after the decision of the European Court), and that as from that date it should account for VAT on the basis of the prices actually charged by F.A.D. to its customers.


F.A.D. had accounted for VAT in accordance with the notice of direction from 13 August 1981 until 30 June 1983. Thereafter it had ceased to do so because of doubts about the validity of the notice. The excess of what had been paid by way of tax over what had been properly payable was £1,399,022. By letter dated 13 June 1985 C.C.E. intimated to F.A.D. that they were prepared to consider claims for repayment of VAT paid under invalid notices but would not do so in respect of payments made before 9 November 1983 unless the taxpayer in question had queried the validity of the relevant notice at an earlier date. The significance of 9 November 1983 was that it was the date upon which the London Value Added Tax Tribunal had referred the Direct Cosmetics case to the European Court. On 22 July 1985 F.A.D. requested C.C.E. to refund to it the sum of £1,399,022, but this was refused. Accordingly F.A.D. in its VAT return for the quarter ended 31 December 1985 deducted that sum from the net amount of VAT then otherwise due. By letter dated 3 March 1986 C.C.E. contended that the overpayment was irrecoverable as having been made under a mistake of law, and requested payment of the £1,399,022 within seven days, failing which they would take proceedings for recovery.


On 20 October 1986 C.C.E. issued a writ in the High Court claiming payment by F.A.D. of the sum of £1,399,657.67 (later reduced by amendment to £1,399,022) as a debt due to the Crown. Later they applied for summary judgment under R.S.C. Ord. 14 r. 1, but the application was dismissed by Deputy Master Rose on 5 March 1987. C.C.E. appealed, and on 9 July 1987 Sir Neil Lawson sitting as a judge of the High Court, allowed the appeal and gave C.C.E. leave to enter judgment for the sum claimed with interest to be assessed if not agreed. Execution of the judgment was stayed on condition that F.A.D. issued by a specified date a writ against C.C.E. claiming restitution of the disputed sum. Sir Neil gave no reasons for his decision. F.A.D. appealed to the Court of Appeal but on 28 January 1988 that court (Glidewell and Taylor L.JJ.) dismissed the appeal, while giving leave to appeal to your Lordships' House, which F.A.D. now do.


F.A.D. is not entitled to deduct past overpayments of VAT from that currently due unless there is some provision of primary or subordinate legislation which authorises it to do so. It maintains that such authorisation is to be found in certain provisions of the Value Added Tax (General) Regulations 1985 ( S.I. 1985 No. 886) made by C.C.E. under various powers conferred upon them by the Act of 1983. The powers particularly relevant are those to be found in paragraphs 2(1) and (4) of Schedule 7 to the Act.


Paragraph 2(1), so far as material, provides:

"Regulations under this paragraph may require the keeping of accounts and the making of returns in such form and manner as may be specified in the regulations … ."

Paragraph 2(4), omitting irrelevant words, reads:

"Regulations under this paragraph may make provision -

  • (a) …

  • (b) …

  • (c) for the correction of errors."

Regulation 58(1) of the Regulations of 1985 provides:

"Save as the commissioners may otherwise allow, every person who is registered or was or is required to be registered shall, in respect of every period of a quarter or in the case of a person who is registered every period of 3 months ending on the dates notified either in the certificate of registration issued to him or otherwise, furnish the controller, no later than the last day of the month next following the end of the period to which it relates, with a return on the form numbered 4 in the Schedule to these regulations showing the amount of tax payable by or to him and containing full information in respect of the other matters specified in the form and a declaration that the return is true and complete … ."


There follow certain provisos not relevant for present purposes.


The form 4 referred to in the regulation, as at the time of the relevant return by F.A.D., set out the following table:


The form also contained the following section:


Please tick only ONE of these boxes


Regulation 64 provides:

"Correction of errors

If a person makes an error in accounting for tax or in any return furnished under these regulations he shall correct it in such manner and within such time as the commissioners may require."


C.C.E. have issued and revised from time to time a "VAT guide." The guide as revised on 1 January 1984 stated in paragraph 2 that section VIII of it contained requirements made by C.C.E. by virtue of their powers under Schedule 7 to the Act of 1983 and had legal force. Section VIII contained a paragraph 63 dealing with adjustment of errors. Sub-paragraph (b) provided:

"Other errors. Any other errors affecting tax due from you or repayable to you, which are discovered after you have sent in your return for the tax period in which they occurred, should be recorded separately as underdeclarations or overdeclarations of tax in previous periods. You should carry the totals to your VAT account for adjustment in your next return."


The VAT account was thus described in paragraph 64:

"For each tax period, you must keep a summary of the totals of your output tax and input tax. This is called your VAT account. You should keep it in a special book or ledger opening. You will find an example of a simple VAT account in Keeping records and accounts but any form of account containing the same information will be acceptable to Customs and Excise. If you are in doubt, ask your local VAT office for advice.

You make up your VAT account by adding up the VAT in your records at convenient intervals — for example, once a month, and putting the totals in your VAT account with separate headings for:

Add up separately the VAT PAYABLE and VAT DEDUCTIBLE, take the smaller amount from the larger and record the difference.

If the VAT payable is more than the VAT deductible, the difference is the amount that you must pay to Customs and Excise.

If the VAT deductible is more than the VAT payable, the difference is the amount that you should claim from Customs and Excise."


The argument for F.A.D. is that the terms of form 4 and the requirements of paragraphs 63(b) and 64 of the VAT guide, which have the force of law, incorporate arrangements for the correction of errors which C.C.E. are authorised to make by paragraph 2(4)( c) of Schedule 7 to the Act of 1983. Regulation 64 of the Reguiarions of 1985 obliges F.A.D. to correct errors, including those arising from previous overdeclarations, in accordance with those arrangements. That is what F.A.D. did in its return for the quarter ended 31 December 1985.


The argument for C.C.E. is primarily founded upon section 14 of the...

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