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

JurisdictionEngland & Wales
Judgment Date25 March 2010
Neutral Citation[2010] EWCA Civ 313
Docket NumberCase No: A3/2009/1281
CourtCourt of Appeal (Civil Division)
Date25 March 2010

[2010] EWCA Civ 313





The Honourable Mr Justice Henderson

Before: Lord Justice Mummery

Lord Justice Etherton


Lord Justice Patten

Case No: A3/2009/1281

LOWER COURT NO: HC07C00681/HC08C00662

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

Mr Michael Conlon Q.C. and Mr David Scorey (instructed by McGrigors LLP) for the Appellant

Mr Jonathan Swift and Mr Peter Mantle and Mr Philip Woolfe (instructed by HMRC Solicitor's Office) for the Respondents

Hearing dates: 13, 14, 15 January 2010

Lord Justice Etherton

Lord Justice Etherton:



This is an appeal from the judgment of Henderson J handed down on 8 May 2009. It is one of a steadily growing number of cases in which the courts of this jurisdiction are working out the legal and practical consequences of decisions of the Court of Justice of the European Communities (“the ECJ”) in which it has been found that domestic tax legislation has infringed or the United Kingdom has failed properly to implement Community law. The present case concerns payments of value added tax (“VAT”) exacted in breach of Community law from motor vehicle dealers. The Commissioners for HM Revenue and Customs or their predecessors, the Commissioners of Customs and Excise (together “the Commissioners”), have repaid the principal amount of the overpayments and simple interest. What is in issue in these proceedings is whether the claimants are entitled to compound interest, rather than just simple interest, on the overpayments, as a matter of principle and in the light of the lapse of time and the expenditure by the Commissioners of the overpaid amounts.


The claimants, FJ Chalke Limited (“Chalke”) and A.C. Barnes (Wokingham) Limited (“Barnes”), carried on business as motor vehicle dealers at the time of the relevant VAT overpayments. Those overpayments arose in respect of the Commissioners’ treatment of two matters. The first was 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 sale were achieved. The second was onward sales of demonstrator vehicles, typically after their use by the dealer for between six months and a year for demonstration purposes and the provision to customers of test drives.


The proceedings are conducted under a Group Litigation Order (“GLO”) made in respect of what is called the VAT Interest Cars Group Litigation, known for short as the “VIC Group Litigation”. There are approximately 165 claimants subject to the VIC GLO. 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 £136.5 million.


The background is set out comprehensively in the judgment of Henderson J which, like other judgments he has delivered in the line of cases to which I referred at the outset of this judgment, is marked by outstanding care and clarity of analysis and expression. In view of the fact that several of his findings are not challenged on this appeal, it is possible to state relatively briefly the factual and legal background to this appeal.

The VAT history


Henderson J summarised the relevant VAT history as follows.

“12. 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 the value of the supply. The tax is underpinned by the principle of fiscal neutrality, the object of which is to ensure that the burden of the tax is borne only by the final consumer. At all earlier stages in the chain of supply, a trader is in principle entitled to deduct from the output tax which he charges on his turnover (i.e. the supplies which he makes to his customers) the input tax which he has incurred on the purchase of his raw materials and other goods and services for the purposes of his business. In this way the burden of the tax is passed on up the chain to the ultimate consumer, and the amount of output tax due at each stage increases in line with the value which has been added to the supply.

13. One problem which a tax of this nature has to address is how to deal with supplies of goods which have, or may have, a mixed business and private use. Company cars supplied to employees are an obvious example. Less obviously, demonstrator cars purchased by a dealer may also in many cases be used by authorised members of staff for private purposes when they are not in use for demonstration purposes. For example, the car may be used as a runabout for shopping, or for collecting children from school, or for travel to and from an employee's home outside business hours.

14. In common with a number of other member states, the UK decided from the earliest days of VAT to tax the private use of business cars by the draconian expedient of blocking the deduction or recovery of input tax on the purchase of the car. In other words, as one of the Commissioners’ witnesses, Mr David Easton, explains in paragraph 6 of his witness statement:

“If the business is blocked from recovering input tax on its purchase of the car, the car will effectively be subject to VAT in the hands of the business, as if it were a final consumer. The private use of that car, whilst it is in the possession of the business will then be subject to tax, without the need for a complicated or burdensome system of accounting for the private use of the vehicle by employees.”

15. This solution had the effect of treating all demonstrator cars as if they had been purchased for exclusively private use, regardless of the extent (if at all) to which they were in fact so used. It is important to note, however, that the blocking of input tax in this way has at all times been permitted under Community law, and this remains the position today. Article 11(4) of the Second Council Directive of 11 April 1967 relating to turnover taxes (67/228/ECC) (“the Second Directive”) provided that:

“Certain goods and services may be excluded from the deduction system [i.e. the system of deduction of input tax], in particular those capable of being exclusively or partially used for the private needs of the taxable person or of his staff.”

16. Article 17(6) of the Sixth Directive then provided as follows:

“Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of Value Added Tax. Value Added Tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.”

The four year transitional period envisaged by Article 17(6) elapsed without any rules having been introduced by the Council, and the question therefore arose whether it was open to the UK to maintain the prohibition on the recovery of input tax on the purchase of motor cars which had been provided for in a succession of statutory instruments. If so, further questions arose whether the prohibition could be maintained if the cars were in fact used exclusively for business purposes, or in various circumstances of mixed business and private use. On a reference for a preliminary ruling from the Court of Appeal, the ECJ answered these questions in favour of the Commissioners, holding that the expiry of the transitional period did not preclude member states from maintaining an input tax block on the purchase of motor cars, and that they could do so even where the cars “were essential tools in the business of the taxable person concerned”: see Case C-305/97 Royscot Leasing Limited and others v Customs and Excise Commissioners [2000] 1 WLR 1151, [1999] STC 998, especially at paragraphs 26 and 28 to 32 of the judgment of the court.


Despite the block on input tax for demonstrator cars, to a private purchaser output tax should still be charged, although only on the difference, or “margin”, between the purchase price and the sale price. This system was generally known as “the margin scheme”, and is described as follows by Mr Easton in paragraph 6 of his statement:

“However, in the case of a car dealer, selling a demonstrator, the car will normally be sold on relatively quickly in the course of business to a customer at (usually) a higher price than the dealer bought it for. Since the dealer has already borne VAT on the amount of the purchase price he had to pay, the Commissioners took the view that it would not be appropriate for the sale by the dealer to carry VAT on the full amount of the sale price. Rather, United Kingdom law required the dealer only to account for VAT on the “margin” between his purchase price and the sale price.”

Before the decision of the ECJ in the Italian Republic case (see below), the block on input tax recovery on cars and the operation of the margin scheme were both contained in the Value Added Tax (Input Tax) Order 1992, SI 1992/3222.


According to Mr Easton, the policy view held by the Input Tax Branch of the...

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