HM Revenue and Customs v RSPCA
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lawrence Collins |
| Judgment Date | 08 March 2007 |
| Neutral Citation | [2007] EWHC 422 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2006/APP/0237 & CH/2005/APP/0471 |
| Date | 08 March 2007 |
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Lord Justice Lawrence Collins
Case No: CH/2006/APP/0237 & CH/2005/APP/0471
Mr Rhodri Thompson QC and Mr Kieron Beal (instructed by the Solicitor for HM Revenue and Customs) for the Commissioners in the RSPCA Appeal
Mrs Philippa Whipple (instructed by Deloitte & Touche LLP) for the RSPCA
Mr Andrew Macnab (instructed by the Solicitor for HM Revenue and Customs) for the Commissioners in the ToTel Appeal
Mr Michael Patchett-Joyce (instructed by Hassan Khan & Co) for ToTel Limited
APPROVED JUDGMENT
Hearing: December 11 and 12, 2006
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic
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I Background
These appeals by the Commissioners raise the question of the way in which the VAT and Duties Tribunal should approach the exercise of the discretion to award interest under section 84(8) of the Value Added Tax Act 1994 in VAT appeals.
I shall set out the statutory provisions in full later, but for present purposes it is sufficient to say that under section 84(8) where on an appeal it is found that the whole or part of any amount paid by the trader is not due, or the whole or part of any VAT credit due to the trader has not been paid, then the amount found not to be due, or not to have been paid shall be repaid (or, as the case may be, paid) “with interest at such rate as the tribunal may determine.” Section 84 is in Part V of the Value Added Tax Act 1994, dealing with appeals.
Part IV deals with administration, collection and enforcement. Section 74 contains provision for the trader to pay interest on VAT recovered or recoverable by assessment. Section 78 contains provision for payment of interest by the Commissioners to the trader where, as a result of error by the Commissioners, the trader has failed to receive sums due.
Interest under sections 74 and 78 is computed by reference to section 197 of the Finance Act 1996 and the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No. 1461. The broad effect of some complex provisions is that for the purposes of section 74 and section 78 rates are fixed by a formula referable to the average base lending rates of six clearing banks, which is called the reference rate. The section 74 rate is the reference rate plus 2.5%, and the section 78 rate is the reference rate minus 1%. The consequence is that the trader who is owed money by the Commissioners receives less than the base rate, and the trader who owes money to the Commissioners may have to pay 2.5% above base rate.
Under section 79 the Commissioners are required to pay a “repayment supplement” where payments due to a trader are delayed. The payment is an uplift (the greater of 5% or £50) in the sum due to the trader. But no interest is payable under section 78 on any amount which falls to be increased by a supplement under section 79: see section 78(2).
The RSPCA Decision
The RSPCA appeal is brought by the Commissioners against a decision of the Tribunal (Mr. Wallace, Chairman) dated February 1, 2006 (“the RSPCA Decision”).
On April 23, 2001 the RSPCA entered into a purchase and development agreement with RSPCA Properties Ltd (“Properties”), a newly incorporated wholly owned subsidiary. Under the agreement the land and partly completed buildings would be transferred to Properties, which would complete the building and lease it back to the RSPCA. The RSPCA invoiced Properties for £11.8 million, and VAT of about £2 million.
In its VAT return for the period 03/01 the RSPCA claimed £2,317,425 input tax, the greater part of which related to the building, on the basis that it was fully recoverable as attributable to an intended taxable supply to Properties, in reliance on the principle in Case C-97/90 Lennartz v Finanzamt München [1995] ECR I-3795, [1995] STC 514 (“the Lennartz principle”) that the taxpayer has to pay output tax on the full cost of providing the asset for non-business use.
In August 2001 Properties raised an invoice to the RSPCA for £9.6 million, plus £1,680,962 VAT in respect of part payment for the building, and the RSPCA claimed input tax on the full amount of the invoice from Properties in its 09/01 return.
After extensive correspondence, a decision was taken by the Commissioners to decline to meet the repayment claims made by the RSPCA under cover of a letter dated January 11, 2002 on the ground that the transactions between the RSPCA and Properties were not supplies made in the course of a business because the sole purpose was VAT avoidance, since the RSPCA would recover over 90% of the VAT on the construction works compared with its normal recovery rate of 32%. Alternatively the principle of abuse of rights applied to deny recovery on the basis that where the formal conditions for claiming an advantage are created artificially, and the advantage is not in accordance with the purpose of the legislation, then the advantage falls to be denied.
The RSPCA and Properties each appealed against that decision on February 8, 2002.
On January 17, 2003 the Commissioners' review decision was issued, confirming the previous decision on the grounds that the transactions were artificial and had as their sole or predominant purpose the avoidance of VAT; the construction costs were incurred by Properties, and the sale of the land with completed building by Properties to the RSPCA, was not a supply, or was not a supply made in the course or furtherance of a business or economic activity; alternatively, there was a Community principle of abuse of right that required the arrangements to be taxed according to the underlying economic reality. The Lennartz principle could not be applied to purchases of construction services because Article 6(2)(a) of the Sixth Directive only concerned purchases of goods.
In Case C-269/00 Seeling v Finanzamt Starnberg [2003] ECR I-4101, [2003] STC 805, decided in May 2003, the European Court decided that the Lennartz principle could apply to construction services. In November 2003, following the decision, Customs published a revised policy in Business Brief 22/03, and wrote to the RSPCA confirming the Commissioners' acceptance of the Lennartz principle in relation to the construction services to create a building.
£4,333,328 was repaid to the RSPCA on October 20, 2004. Repayment supplement was made to the RSPCA in March 2005 in the sum of £216,964.
The RSPCA applied to the Tribunal for an award of costs and interest on July 13, 2005. The RSPCA in its notice of application (and subsequently in correspondence) maintained that it was entitled to compound interest at 8%; together with costs running from before the decision under appeal. The Commissioners filed a Notice of Objection to this application, but subsequently Deloitte & Touche on behalf of the RSPCA informed Customs that interest on a compound basis was no longer sought. The RSPCA then sought interest at a rate of 7.5% rather than the 8% initially claimed.
The Tribunal decided that:
(1) Section 84(8) required the Tribunal to determine a rate of interest by reference to the facts of the particular case where this is possible.
(2) No adjustment should be made by reason of the payment of supplement under section 79 when determining the rate of interest under section 84(8), because repayment supplement is a spur to efficiency: Bank Austria Trade Services v. Commissioners of Customs and Excise, Decision 16918, 2000; UK Tradecorp Ltd v Customs and Excise Commissioners [2004] V&DR 195; Olympia Technology Ltd v. Her Majesty's Revenue and Customs, Decision 19145, August 24, 2005; Customs and Excise Commissioners v L Rowland and Co (Retail) Ltd [1992] STC 647.
(3) It was not appropriate to treat the section 78 rate as the starting point when determining the rate under section 84(8), distinguishing R (Elite Mobile plc) v Commissioners of Customs and Excise [2004] EWHC 2923 (Admin), [2005] STC 275.
(4) The High Court judgment rate of 8% was not an appropriate starting point, and a convenient starting point under section 84(8) in a case where there is no evidence specific to an appeal was the reference rate under the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, S.I. 1998 No.1461, calculated by averaging the base lending rate of clearing banks.
(5) Where a substantial sum was due over an extended period, an adjustment was appropriate to take account of the fact that base lending rates are lower because they are to be compounded than they would be for simple interest.
(6) The concept of mitigation was not appropriate to interest under section 84(8) and did not in any event arise on the facts of the case.
(7) Interest should run from June 21, 2001 for the RSPCA's first claim and thereafter from 10 days from the receipt of the claims.
(8) Some reduction in the period for which interest was payable should be made because of the need for a partial exemption adjustment, but it must be proportionate.
(9) The rate of interest was determined at 4.30%.
The ToTel Decision
The ToTel appeal is brought by the Commissioners against the decision of the Tribunal (Mr. Colin Bishopp) released on May 19,2006 (“the ToTel Decision”).
The original appeal to the Tribunal was against a refusal by the Commissioners to pay input tax...
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