Fleming (t/a Bodycraft) v HM Revenue and Customs; Conde Nast Publications Ltd v Same
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOPE OF CRAIGHEAD,LORD SCOTT OF FOSCOTE,LORD WALKER OF GESTINGTHORPE,LORD CARSWELL,LORD NEUBERGER OF ABBOTSBURY |
| Judgment Date | 23 January 2008 |
| Neutral Citation | [2008] UKHL 2 |
| Date | 23 January 2008 |
| Court | House of Lords |
[2008] UKHL 2
Appellate Committee
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Carswell
Lord Neuberger of Abbotsbury
HOUSE OF LORDS
Appellants:
(Fleming) Alison Foster QC
Adam Robb
(Condé Nast) Christopher Vajda QC
Valentina Sloane
(Instructed by Her Majesty's Revenue and Customs Solicitors Office)
Respondents:
(Fleming) David Southern
Denis Edwards
(Condé Nast) Jonathan Peacock QC
Jolyon Maugham
(Instructed by Hepburns (Fleming) and Forbes Hall (Condé Nast))
My Lords,
I am grateful to my noble and learned friend, Lord Walker of Gestingthorpe, for his comprehensive description of the legislative and factual background to these appeals and his analysis of the competing arguments, and to my noble and learned friend, Lord Neuberger of Abbotsbury, for his further examination of the issues that are before us in this case. I agree with both of them that the Commissioners' appeal should be dismissed in relation to Mr Fleming's claim. I agree with Lord Neuberger, for the reasons he gives, that the Commissioner's appeal in relation to Condé Nast's claim should also be dismissed.
As Lord Walker has explained, claims for overpayment of output tax and previously unclaimed deduction of input tax are provided for by section 80 of the Value Added Tax Act 1994 and regulation 29 of the Value Added Tax Regulations 1995 (SI 1995/2518). As originally enacted, section 80 provided that no amount paid by way of VAT which was not due to the Commissioners could be claimed after the expiry of six years from the date on which it was paid unless an amount had been paid by reason of a mistake, in which event a claim could be made at any time within six years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it: subsections (4) and (5). In the ordinary course input tax should be claimed as a deduction on the return for the accounting period to which it relates. As originally drafted, regulation 29 which permits claims for a deduction to be made later did not subject those claims to any time limit.
An amendment to section 80(4) of VATA 1994 was enacted by section 47 of the Finance Act 1997 with effect from 18 July 1996. It reduced the six year time limit for the recovery of overpaid tax to three years and removed the exception in relation to cases of mistake. No provision was made for a transitional period during which a claim could be made in cases where a right to recovery of overpaid tax already existed. A new regulation 29(1A) was inserted into regulation 29 by the Value Added Tax (Amendment) Regulations 1997 (SI 1997/1086) with effect from 1 May 1997. It provided that the Commissioners were not to allow a claim for deduction of input tax made more than three years after the date of the return for the relevant period. In the case of this amendment too there was no transitional period.
Following the decisions of the European Court of Justice in Marks and Spencer plc v Commissioners of Customs and Excise ( Case C-62/00) [2002] ECR I-6325 ("Marks and Spencer II") and Grundig Italiana SpA v Ministero delle Finanze ( Case C-255/00) [2002] ECR I-8033 steps were taken by the Commissioners, by means of announcements contained in Business Briefs, to introduce a transitional period for the making of claims for the recovery of overpaid tax under section 80. At first there was a transitional period of six months from 4 December 1996, when the amendment to section 80 was enacted to 31 March 1997, and taxpayers were given until 31 March 2003 to submit claims. Then, following the decision in the Grundig case, the transitional period was extended by three months to 30 June 1997 and the period within which claims could be made was extended to 30 June 2003. The period for the making of late claims under regulation 29 for deduction of input tax was not affected by these announcements. No similar transitional provisions have ever been introduced or announced with regard to those claims.
There is no doubt that, if the time limit introduced by regulation 29(1A) was to be modified in the light of the decisions in Marks and Spencer II and Grundig by the introduction of a transitional period, the initiative lay with the Commissioners and that this initiative was not taken. As Lord Walker has explained, the breach of EU law lay in the provisions of regulation 29(1A) itself, not – as in the case of section 80 - in charging tax contrary to EU law in the first place. The situation was complicated by the view which was insisted upon by the Commissioners until a relatively late stage that claims for the deduction of input tax fell within section 80 because they were claims for amounts paid by way of VAT which were not VAT due. Whatever the reason may be, it is plain that the unmodified time limit in regulation 29(1A) is incompatible with EU law because it is retrospective and because it makes no provision for any transitional arrangements: Marks and Spencer II, [2002] ECR I-6325, para 38; Grundig, [2002] ECR I-8033, para 37. This much was common ground in these appeals.
The question which your Lordships must resolve is how to apply the guidance that was given in Marks and Spencer II and Grundig in order to make good the lack of a transitional period for the application of regulation 29 to accrued claims resulting from a failure to deduct input tax. Legislation that is incompatible with EU law must be disapplied. But can the court go further and make good the defect which has led to its disapplication? The problem is far from easy, as the division of opinion in the courts below and in this House so clearly demonstrates. The possible choices were identified by Mr Vajda's helpful analyses, which Lord Walker has set out in paras 50 to 53 of his speech. Underlying these possible choices is a more fundamental point, which I would express in this way. Where national legislation is defective because it lacks the transitional arrangements that are necessary under EU law, is it for the national court to make good the deficiency by devising such transitional arrangements as it may regard as appropriate? Or must this be left to the legislature or, following the example of what was done in regard to section 80 by means of announcements in Business Briefs, to the Commissioners?
Two situations can, I think, be distinguished, although there is no difference in principle between them. One is where transitional arrangements have been included in a measure that reduces a pre-existing time limit for the making of claims but those arrangements are found to be inadequate because the period allowed is too short. The other, which is this case, is where there was originally no time limit for the making of claims at all and no transitional arrangements have been included in the measure that introduces one. In both cases the retrospective time limit is unenforceable as there is no adequate transitional period. But there is a difference in degree between them which affects the ability of the court to make good the defect.
The decision in Grundig deals with the first situation. It tells us that the fact that the national court has found that a transitional period fixed by the legislature is insufficient does not necessarily mean that the reduced period for initiating claims cannot be applied at all: para 41. The national court cannot apply the inadequate transitional period to claims made with regard to rights accrued before the entry into force of the legislation which introduced the time limit. But it is open to the court, as the ECJ did in that case, to make its own assessment of what in accordance with EU law is an adequate transitional period during which the new time limit is not to be applied retrospectively. The reasoning in para 41 shows that the ECJ was satisfied that the making of a relatively modest adjustment to the prescribed period was not inconsistent with the principle of effectiveness.
The other situation is that which applies in the case of these two appeals. Here too the guiding principle is that of effectiveness. Account must also be taken of the principle of protection of legitimate expectations: see Marks and Spencer II, para 47. The principle of legitimate expectations is infringed by the retrospective introduction of a time limit for the making of claims retrospectively. But this will not be in breach of EU law so long as transitional arrangements are included which allow an adequate period for the lodging of claims which persons were entitled to submit under the original legislation: Marks and Spencer II, para 38. Sufficient notice of these transitional arrangements must be given to ensure that the exercise of those accrued rights is not rendered virtually impossible or excessively difficult. Unless this is done there will be a breach of the principle of effectiveness.
I would not rule out the possibility, in a suitable case, of the court reaching its own decision as to what would be a reasonable time for the making of claims and rejecting claims that were made after a period which it held to be reasonable. But I do not think that the situation disclosed by these appeals lends itself to that treatment. In my opinion this is a step too far for the court to take. The issue is not one of statutory interpretation, for which the court must accept responsibility. There is a gap in the legislation which is unfilled. The infringement of EU law in this respect cannot be said to have been comparatively minor or inadvertent, such as would enable greater weight to...
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