F J Chalke Ltd and Another v The Commisioners for HM Revenue and Customs

JurisdictionEngland & Wales
JudgeMr Justice Henderson
Judgment Date08 May 2009
Neutral Citation[2009] EWHC 952 (Ch)
Docket NumberCase Nos: HC08C00662 AND HC07C00681
CourtChancery Division
Date08 May 2009

[2009] EWHC 952 (Ch)




Before: The Honourable MR Justice Henderson

Case Nos: HC08C00662 AND HC07C00681

(1) F J Chalke Limited
(2) A C Barnes (Wokingham) Limited
The Commissioners for Her Majesty's Revenue & Customs

Mr Michael Conlon QC, Ms Marie Demetriou and Mr David Scorey (instructed by McGrigors LLP) for the Claimants

Mr Jonathan Swift, Mr Peter Mantle and Mr Philip Woolfe (instructed by the Solicitor for HMRC) for the Defendants

Hearing dates: 9, 10, 11, 12, 13 and 16 February 2009


I. Introduction

1- 10

II. The VAT background

11- 26

III. The facts

27- 36

IV. The statements of case

37- 56

V. Core question 1: is the statutory scheme in VATA 1994 for repayment of overpaid VAT and simple interest thereon exhaustive?

57- 75

VI. Core question 2: does Community law override sections 80 and 78 of VATA 1994 and require an award of compound interest to be made?


(1) Introduction

76- 77

(2) The position down to the judgment of the ECJ in Hoechst

78- 93

(3) Developments in the law since Hoechst


(4) Domestic authority


(5) Conclusion


VII. The Restitutionary Claims


(1) Introduction


(2) The mistakes made by the claimants and section 32(1)(c) of the Limitation Act 1980


(3) The acknowledgment argument and section 29(5) of the Limitation Act 1980


(4) Does Community law have any effect on the limitation defence?


(5) Change of position


VIII. The Damages Claims


(1) Introduction


(2) The breaches of Articles 11 and 13 of the Sixth Directive


(3) The three year cap


(4) The repayment of the principal sums with simple interest only


(5) The enactment and maintenance in force of section 78(3) of VATA 1994


(6) Conclusion


IX. The period before 1 January 1978


X. Summary of conclusions


Mr Justice Henderson

Mr Justice Henderson:

I. Introduction


The basic issue in these test cases is whether motor vehicle dealers who have overpaid value added tax (“VAT”) over periods of many years, dating back in some cases to the introduction of VAT in the United Kingdom in 1973, are entitled to recover from the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) not only the tax which they overpaid together with simple interest thereon pursuant to section 78 of the Value Added Tax Act 1994 (“ VATA 1994”), all of which has now been paid to them, but also compound interest (less, of course, the simple interest which they have already received). The entitlement to compound interest is said to arise both as a matter of European Community law (“Community law”) and, following the decision of the House of Lords in Sempra Metals Limited v IRC [2007] UKHL 34, [2008] 1 AC 561 (“ Sempra”), as a matter of English domestic law.


I emphasise at this early stage that, although it is convenient to use the term “compound interest” as a shorthand description of the remedy claimed by the claimants, it should be understood as including, where appropriate, restitution-based claims for the time value of the overpaid tax while it was retained by HMRC or their predecessors the Commissioners of Customs and Excise (together “the Commissioners”).


The Commissioners' front line of defence to the claims for compound interest relies on two core propositions. The first proposition is that, as a matter of English domestic law, the relevant provisions in VATA 1994 for the repayment of wrongly levied VAT and simple interest thereon were intended by Parliament to be both comprehensive and exhaustive, and therefore oust any further domestic remedies which might otherwise be available, including any restitutionary right to compound interest of the type recognised by the majority of the House of Lords in Sempra. The second proposition is that there is nothing in the principles of Community law relating to the repayment of wrongly levied tax, as expounded in a series of decisions by the Court of Justice of the European Communities (“the ECJ”), and including in particular the Community law principles of equivalence and effectiveness, which overrides the domestic regime for the repayment of wrongly levied VAT in such a way as to require an award of compound interest to be made.


If their first line of defence fails, the Commissioners then fall back on a number of detailed arguments that the claims, however they fall to be categorised under English domestic law, are in any event misconceived, and are also time-barred under the relevant provisions of the Limitation Act 1980. The limitation arguments start from the incontrovertible fact that all of the overpaid VAT was paid by the test claimants to the Commissioners more than six years before they began the present proceedings. In considering these arguments it will be necessary to analyse with some care the precise nature of the mistake or mistakes made by the claimants which led to the overpayments of VAT. Also relevant to this part of the case is the by now notorious three year cap on the recovery of overpaid VAT, which was introduced by the Finance Act 1997 with retrospective effect from its first announcement on 18 July 1996, was subsequently held by the ECJ to be in breach of Community law in the first of the two Marks & Spencer cases referred to it by the English courts, Case C-62/00 Marks & Spencer v Customs and Excise Commissioners [2002] ECR I- 6325, [2003] QB 866 (“ Marks & Spencer I”), and (in the form in which it applies to claims for the recovery of wrongly paid input tax) was disapplied by the House of Lords in relation to claims based on accrued rights in Fleming v Revenue and Customs Commissioners [2008] UKHL 2, [2008] 1 WLR 195 (“ Fleming”). To avoid confusion, I should explain that the case which I have called Marks & Spencer I is referred to in Fleming as Marks & Spencer II.


A further group of issues concerns the claimants' alternative claim for damages under the Factortame principle, whereby a member state is liable to compensate individuals for loss and damage caused to them as a result of breaches of Community law for which it is responsible if three conditions are met, including the condition that the breach must be sufficiently serious to render the member state liable in damages. A main question here is whether that condition is satisfied, but issues of causation and limitation also arise.


Finally, on the assumptions that the claimants are in principle entitled to recover compound interest, and that their claims are not time-barred, there is an issue whether such interest should be paid in respect of accounting periods prior to 1 January 1978 which was the latest date for implementation of the Sixth Council Directive of 17 May 1977 relating to turnover taxes (77/388/EEC) (“the Sixth Directive”). This issue turns on the question whether Article 2 of the First Council Directive of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (67/227/EEC) (“the First Directive”) conferred directly enforceable rights on individuals upon which they could rely before national courts.


A Group Litigation Order for the resolution of these claims was made by Chief Master Winegarten on 28 June 2007. The claims together constitute the VAT Interest Cars Group Litigation, known for short as the “VIC Group Litigation”. There are two test claimants, F J Chalke Limited (“Chalke”) and A C Barnes (Wokingham) Limited (“Barnes”). I understand that the total number of claimants enrolled in the VIC GLO is currently about 165, and that the maximum amount of a sub-group of 130 of the claims, if the claimants were to succeed on all points, has been calculated to be in the region of £136.4 million.


No order for a split trial has been made, but it was agreed between the parties at the start of the trial, with my approval, that all detailed questions of quantum should be deferred for resolution, if necessary, at a future date. However, the parties invited me to decide at this trial any issues of principle which would assist in determining the quantum of the claims. One such issue, which was added by an unopposed application by the Commissioners to amend their defences, is whether a defence of change of position is available to the Commissioners in respect of the restitution claims.


I have had the benefit of excellent written and oral arguments on both sides, for which I express my gratitude to all concerned.


With this brief introduction, I will now describe the relevant VAT background before moving on to the facts, the statements of case, and consideration of the issues.

II. The VAT background


The claimants are all motor vehicle dealers, or persons who carry on a motor vehicle business of a similar nature. The overpayments of VAT with which this litigation is concerned were occasioned by the Commissioners' treatment of:

(a) so-called manufacturers' bonuses, typically paid by a car manufacturer to a dealer who purchased a demonstrator vehicle, or paid to a dealer in the form of a rebate when certain volumes of sales were achieved; and

(b) onward sales of demonstrator vehicles, typically after their use by the dealer for demonstration purposes and the provision of test drives to customers for a period of between six months and one year.


VAT was first introduced in the United Kingdom with effect from 1 April 1973 by the Finance Act 1972, in fulfilment of one of the conditions of the UK's accession to the European Communities. In the most basic terms, VAT is charged on the supply of goods and services by reference to...

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