Compound Interest Project v HM Revenue & Customs
Jurisdiction | UK Non-devolved |
Judge | The President, Mr Justice Warren |
Judgment Date | 11 June 2009 |
Neutral Citation | [2009] UKUT 175 (TCC) |
Respondent | REVENUE AND CUSTOMS |
Appellant | LOOKERS plc |
Court | Upper Tribunal (Tax and Chancery Chamber) |
Appeal Number | LON/06/0096, LON/08/1101 |
Neutral Citation Number: [2009] UKUT 175 (TCC)
Appeal numbers LON/06/0069
LON/06/0067, LON/06/0094
LON/06/0096, LON/08/1101
VALUE ADDED TAX — tax paid in accordance with domestic law provisions
later found to be incompatible with Sixth Directive — tax repaid to trader
with simple interest — VATA 1994 s 78, FA 1996 s 197, APD etc (Interest
Rate) Regs 1998 — whether sufficient remedy — whether tribunal able to
interpret statutory scheme so as to award compound interest — no
PRACTICE — whether appeal brought in time — nature of decision founding
jurisdiction — appeals out of time — whether time should be extended —
no
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
JOHN WILKINS (MOTOR ENGINEERS) LIMITED
JOHN PUDNEY LIMITED trading as Horsham Car Care
SQUIRE FURNEAUX GROUP
ROBMAR LIMITED trading as Worthing Kia
LOOKERS plc Appellants
- and –
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS Respondents
Tribunal: The President, Mr Justice Warren
Judge Colin Bishopp
Sitting in public in London on 8 to 11 June 2009
Michael Conlon QC and Nicola Shaw, counsel, instructed by McGrigors, for
the first to fourth appellants
Laurence Rabinowitz QC, James Henderson and David Yates, counsel,
instructed by Deloitte LLP, for the fifth appellant
Jonathan Swift, Peter Mantle and Philip Woolfe, counsel, instructed by the
General Counsel and Solicitor to HM Revenue and Customs for the
Respondents
© CROWN COPYRIGHT 2009
DECISION
Introduction
1. These are the joined appeals, all raising the same issues, of five unconnected
appellants. They were brought to the VAT and Duties Tribunal and joined, so that
they could proceed and be heard together, by direction of that tribunal. Several
appeals by other traders have been stood over, by direction, to await the outcome
of these appeals. On 1 April 2009 the VAT and Duties Tribunal ceased to exist,
and the appeals came within the jurisdiction of the Tax Chamber of the First-tier
Tribunal. They were then allocated to the complex category in accordance with r
23 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009,
following which a direction was made, pursuant to r 28 of those rules, that the
appeals be transferred to and determined by the Upper Tribunal. They became the
first appeals to be heard in the Finance and Tax Chamber (now re-named the Tax
and Chancery Chamber) of the Upper Tribunal.
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2. The five appellants all carry, or carried, on business as motor dealers. The
fifth appellant, Lookers plc, is the representative member of a VAT group which
includes many subsidiaries trading at locations throughout the United Kingdom; at
the other extreme are some of the remaining appellants, each with a single outlet.
There are other differences of detail between the appellants, but they have two
features in common: that they paid excess output tax on bonus payments made to
them by motor manufacturers, and that they paid further excess output tax on the
sales of demonstrator vehicles they had used for the purposes of their businesses.
3. The excess tax was exacted because, as is now accepted by the
Commissioners the United Kingdom failed to implement provisions of the Sixth
VAT Directive (77/388/EEC) correctly (at least, from 1 January 1978 when the
directive came into force). It wrongly treated bonus payments as the consideration
for a supply of services rather than, as arts 11A(1)(a) and 11C(1) of the Sixth
Directive required, as a discount from the price paid by the dealer to the
manufacturer. By the operation of the VAT (Input Tax) Order 1992, art 7 and its
predecessor equivalents, as they were then in force, input tax credit on the
purchase of demonstrator cars was blocked, but dealers were required to account
for output tax on the profit, if any, they made on the eventual sales of the vehicles.
The sales should instead have been treated as wholly exempt.
4. The Commissioners accepted, following the judgments of the Court of
Justice (“ECJ”) in Elida Gibbs v Customs and Excise Commissioners (Case C-
317/94) [1996] STC 1387 (“Elida Gibbs”) and EC Commission v Italian Republic
(Case C-45/95) [1997] STC 1062 (“Italian Republic”), that the UK’s tax treatment
of bonuses and demonstrator car sales respectively had been wrong and that the
appellants had paid excess tax from as early as 1973, when VAT was introduced
in the UK. Eventually, though not until litigation about the introduction of the
three-year cap for the making of repayment claims had run its course, they repaid
the excess tax to the appellants. The amounts so paid are not disputed. The
Commissioners also paid simple interest on the capital sums.
5. The appellants argue, however, that simple interest is not sufficient
recompense and that the Commissioners should instead pay, in addition to the tax
itself, a sum which, whether as a matter of principle or of practical convenience,
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is calculated as compound interest. They rely particularly on what was said by the
ECJ in Test Claimants in the FII Group Litigation v Inland Revenue
Commissioners (Case C-446/04) [2007] STC 326 (“FII”), by the House of Lords
in Sempra Metals Ltd v Revenue and Customs Commissioners [2008] 1 AC 561,
(2007) STC 1559 (“Sempra Metals”) and by Henderson J in F J Chalke Ltd and
another v Revenue and Customs Commissioners (also known as Test Claimants in
the VIC Group Litigation) [2009] EWHC 952 (Ch) (“Chalke”), cases to which we
shall make many further references. The last of those cases was an attempt by
several motor dealers, including some of the present appellants, to recover
compound interest by means of a restitutionary claim; the attempt failed as the
claims were found to be defeated by a limitation defence.
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6. It is common ground that the only legislative provisions relating to the
payment of interest by the Commissioners to a trader are now to be found in ss 78
and 85A of the Value Added Tax Act 1994 (the "1994 Act"). Section 84(8), a
provision which allowed the tribunal to award interest in some circumstances, was
repealed with effect from 1 April 2009 but would not have been of any application
in these cases. Section 85A, added by the Transfer of Tribunal Functions and
Revenue and Customs Appeals Order 2009, Sch 1 para 223, is also of no
application. Section 78 has been amended in consequence of the three-year cap
litigation, though the amendment is not material here. Subsection (1) provides that
“Where, due to an error on the part of the Commissioners, a person has—
(a) accounted to them for an amount by way of output tax which was not
output tax due from him …
then, if and to the extent that they would not be liable to do so apart from
this section, they shall pay interest to him on that amount for the applicable
period …”.
7. There is no dispute that the UK’s failure to implement the Sixth Directive
correctly is to be treated as “an error on the part of the Commissioners” for the
purposes of that subsection. The “applicable period” is defined by sub-ss (4) and
(5) as the period from the date of payment of the excess output tax to the date on
which repayment of it is authorised. Section 78(3) states that “Interest under this
section shall be payable at the rate applicable under section 197 of the Finance
Act 1996” which in turn, by sub-s (1), provides that
“The rate of interest applicable for the purposes of an enactment to which
this section applies shall be the rate which for the purposes of that enactment
is provided for by regulations made by the Treasury under this section.”
8. Section 78 of the 1994 Act is among the enactments to which the section
applies: see s 197(2)(c). The regulations referred to in sub-s (1) are the Air
Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998 (the
"1998 Regulations"). The 1998 Regulations, as their name indicates, apply to
several different types of tax and duty, and prescribe the rates of interest payable
both to and by the Commissioners. They include tables setting out the applicable
rates of interest for periods falling between specified dates; table 7 sets out the
rates of interest which are payable for the purposes of s 78, for periods beginning
with the introduction of VAT on 1 April 1973 and ending on 6 July 1998, after
which date a different formula was adopted. The percentage rates so prescribed
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