Investment Trust Companies ((in Liquidation)) v Revenue and Customs Comrs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson,MR JUSTICE HENDERSON |
| Judgment Date | 02 March 2012 |
| Neutral Citation | [2012] EWHC 458 (Ch) |
| Docket Number | Case No: HC09C03091 |
| Court | Chancery Division |
| Date | 02 March 2012 |
[2012] EWHC 458 (Ch)
Mr Justice Henderson
Case No: HC09C03091
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane,
London EC4A 1NL
Mr Laurence Rabinowitz QC, Mr Andrew Hitchmough and Mr Steven Elliott (instructed by PricewaterhouseCoopers Legal LLP) for the Claimants
Mr Jonathan Swift QC and Mr Andrew Macnab (instructed by the Solicitor for HMRC) for the Defendants
Hearing dates: 18, 19, 20, 23, 24 May 2011
Approved Judgment
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.
Contents
| Topic | Para |
| Introduction | 1–9 |
| The position of the claimants | 10–15 |
| The repayment claims by the Managers | 16–29 |
| The issues | 30–37 |
| A. The English Law Issues |
|
| (1) Introduction | 38–39 |
| (2) Were HMRC enriched? | 40–46 |
| (3) Was the enrichment at the expense of the claimants? | 47–73 |
| (4) Was the enrichment unjust? | 74–87 |
| (5) Section 80(7) of VATA 1994 | 88–110 |
| B. The EU Law Issues |
|
| (1) Introduction | 111 |
| (2) The threshold issue: could the claimants have any enforceable rights under EU law upon which they could rely? | 112–131 |
| (3) The nature of the remedy required by EU law | 132–148 |
| (4) Should the claimants be confined to a modified version of the Woolwich cause of action? | 149–171 |
| Summary of conclusions | 172 |
Introduction
Reduced to its simplest terms, the nature of the problem which arises in the present case may be described as follows. An end customer of goods or services has for many years been charged VAT at the standard rate by the supplier of those goods or services. The customer has paid the VAT, and the supplier has duly accounted for it as output tax to HMRC (a term which I will use to include their statutory predecessors, the Commissioners for HM Customs and Excise). It then transpires, as a result of a ruling by the Court of Justice of the European Union ("the ECJ"), that the supplies in question have at all material times been exempt, with the consequence that the VAT was unlawfully charged. To the maximum extent permitted by UK domestic law, the supplier then recovers from HMRC the VAT which it has overpaid, and passes on the benefit of that recovery to the customer. There are two reasons, however, why the supplier may be unable to recover from HMRC the full amount of the unlawful VAT paid by the customer. The first reason is the statutory three year limitation period applicable at the material time to claims by a taxable person to recover overpaid VAT from HMRC. The second reason is that the supplier will have paid to HMRC in the first place only a net amount representing the difference between the output tax on the supply to the customer and any associated input tax incurred by the supplier. The amount of the overpaid tax which the supplier can recover from HMRC, and thus pass on to the customer, is therefore confined to the net amount of tax which the supplier has actually paid to HMRC, as well as being subject to the three year limitation period.
In these circumstances, the question arises whether the end customer, who has borne the full economic burden of the unlawful VAT, can bring a direct claim against HMRC to recover the balance of the tax which it paid to the supplier. That is the fundamental issue in these lead claims, which were the subject of legal argument before me on questions relating to liability over four and a half days in May 2011.
In a little more detail, the customers (and therefore the claimants) in the cases before me are all closed-end investment funds constituted as limited companies, or "investment trusts" as they are generally known. The term "closed-end" denotes that the trust is established with a fixed number of shares in issue and a term date when it will be wound up and its assets will be distributed to the shareholders. The relevant services were investment management services provided to them by management companies ("the Managers"), under the terms of investment management agreements which typically provided for the Managers to be remunerated by the payment of fees plus VAT "if applicable" (or words to similar effect). Under the UK VAT legislation then in force, it was generally understood that these services did not qualify for exemption, although there was from 1990 an express exemption for investment management services supplied to authorised unit trust schemes, and in 1997 this exemption was extended to open-ended investment companies (i.e. investment trusts without a fixed termination date). Accordingly, despite the existence of these exemptions, the Managers continued from 1990 onwards to charge VAT at the standard rate on the management services which they rendered to the claimants, and the claimants paid the VAT on the assumption, and in the belief, that it was legally due.
The failure of the UK legislation to provide an exemption for fund management services supplied to closed-end investment trusts was eventually challenged on the ground that it was incompatible with Article 13B(d)(6) of the Sixth VAT Directive, which provided that the "management of special investment funds as defined by Member States" should be exempt from VAT. One important issue was whether this wording gave Member States a wide discretion to decide which management services to exempt, or whether the area of choice was more narrowly confined, for example by the principle of fiscal neutrality which requires similar economic operations to be treated in the same way for VAT purposes. Another issue was whether closed-end investment trusts were "special investment funds" within the meaning of the exemption. A further issue was whether Article 13B(d)(6) had direct effect, so that it could be relied upon by a taxpayer in a national court.
The challenge was made by an investment trust like the claimants in the present action, J P Morgan Fleming Claverhouse Investment Trust, with the backing of the Association of Investment Trust Companies. On 28 June 2007, following a reference by the VAT and Duties Tribunal in London on 19 September 2005, the ECJ ruled in Case C-363/05, J P Morgan Fleming Claverhouse Investment Trust Plc and another v HMRC, [2007] ECR I-5517, [2008] STC 1180, (" Claverhouse") that:
a) the words "special investment funds" in Article 13B(d)(6) were capable of including closed-end investment trusts;
b) the discretion afforded to Member States in defining the funds in their territory to be exempted
"must respect the objective pursued by that provision, which is to facilitate investment in securities for investors through investment undertakings, while guaranteeing the principle of fiscal neutrality from the point of view of the levying of VAT on the management of special investment funds which are in competition with other special investment funds such as funds falling within the scope of the UCITS Directive"
(paragraph 54 of the judgment); and
c) Article 13B(d)(6) had direct effect, so that it could be relied on by a taxable person before a national court in order to challenge the application of national legislation alleged to be incompatible with its provisions.
At this stage, it is unnecessary to say more about the judgment in Claverhouse. Although the ECJ left it to the national court (see paragraph 49 of the judgment) to determine whether the exclusion of closed-end investment trusts from the exemption then contained in Items 9 and 10 of Group 5 of Schedule 9 to the Value Added Tax Act 1994 (" VATA 1994") was consistent with the objective of Article 13B(d)(6) and the principle of fiscal neutrality, the guidance given by the court left no real room for doubt about the answer (see in particular paragraphs 50 to 54). It can therefore have occasioned no surprise when on 7 November 2007 HMRC published Business Brief 65/07, in which they commented on Claverhouse and said:
"After careful consideration of the ECJ judgment, we now accept that fund management services supplied to [investment trust companies] are exempt [from VAT]."
With effect from 1 October 2008, VATA 1994 was amended (by the Value Added Tax (Finance) (No. 2) Order 2008, SI 2008/2547) to take account of Claverhouse and to comply with EU law. Thus Items 9 and 10 of Group 5 in Schedule 9 now exempt:
"9. The management of –
(a) an authorised open-ended investment company; or
(b) an authorised unit trust scheme;
10. The management of a closed-ended collective investment undertaking."
As a result of Claverhouse, it became clear that:
a) the supplies of investment management services by the Managers to the claimants should have been exempt from VAT under Article 13B(d)(6) from 1 January 1990 onwards;
b) Article 13B(d)(6) had direct effect at all material times;
c) between 1 January 1990 and 1 October 2008 the United Kingdom failed to transpose Article 13B(d)(6) correctly into its national legislation; and
d) the Managers were entitled to make claims to HMRC pursuant to section 80 of VATA 1994 for the crediting and repayment of sums accounted for and paid by them in error by way of VAT on investment management services.
Before describing the repayment claims, I will first say a little more about the position of the claimants.
The position of the claimants
The nine claimants are all investment trusts (a term which I will use hereafter to mean closed-end investment trusts, unless the contrary is stated). They are all in members' voluntary liquidation, not due to insolvency but because their term dates have arrived and this is the means by which their assets are realised and...
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