Local Authorities Mutual Investment Trust v Commissioners of Customs and Excise

JurisdictionEngland & Wales
JudgeMr Justice Lawrence Collins
Judgment Date21 November 2003
Neutral Citation[2003] EWHC 2766 (Ch)
CourtChancery Division
Docket NumberCH/2003/APP/0291
Date21 November 2003

[2003] EWHC 2766 (Ch)



Royal Courts of Justice


London WC2A 2LL


Mr Justicec Lawrence Collins


Local Authorities Mutual Investment Trust
The Commissioners Of Customs And Excise

Mr David Southern (instructed by Reynolds Porter Chamberlain) for the Appellant

Mr Paul Lasok QC and Mr Owain Thomas (instructed by the Solicitor for Customs and Excise)for the Respondents

Mr Justice Lawrence Collins

I Introduction


This is an appeal by the Local Authorities Mutual Investment Trust ("LAMIT") under section 11(1) of the Tribunals and Inquiries Act 1992 from the decision of the VAT and Duties Tribunal ("the Decision") released on February 18, 2003.


The Decision was on an appeal from the decision of the Commissioners contained in a letter of November 28, 2001, refusing LAMIT's claim to recover input tax of £144,308.33, on the grounds that the claim was time-barred, being made more than three years and one month after the end of the accounting period in which the expenditure giving rise to the input tax was incurred. The Tribunal dismissed the appeal.


The issue in this case is whether the restrictions on the right to recover input tax introduced by the Value Added Tax Regulations 1995, SI 1995 No. 2518 ("the 1995 Regulations"), Regulation 29(1), (1A), with effect from 1 May 1997 are in conformity with Community law, and with the Human Rights Act 1998.

II The facts


LAMIT acts as trustee for charities and public authority pension funds, including the Local Authorities' Property Fund ("LAPF"). The assets of LAPF comprise commercial properties. In the case of some of these properties LAMIT as landlord has opted to charge VAT on the rents. Accordingly, LAMIT accounts for VAT on the rents of the opted properties and recovers input VAT on the costs incurred in making the taxable supply of the land.


In June 2001, LAMIT changed its method of accounting for VAT. It had previously accounted for VAT on an invoice basis (that is, it issued an invoice for rent and service charges on its taxable properties that included VAT; and it accounted to the Commissioners for that VAT in the quarter in which the invoice was issued even though the invoice might be paid only later on). Under the new basis, LAMIT issued a VAT invoice only when it received payment of the rent and service charge.


As a result of the change, LAMIT had to reconcile previous payments of VAT so as to ensure that there was no double counting and were no omissions. In the course of that exercise, LAMIT discovered that it had failed to claim credit in its VAT returns for a number of items of input tax for the periods 02/98 to 5/01 (the calendar period running from December 1, 1997 to May 31, 2001).


The errors were discovered after June 2001. This necessitated an extensive accounting review which was only completed in November 2001.


The review resulted in calculations which showed (for the periods 02/98, 05/98, and 08/98) output tax of £8,750 and input tax of £153,058.33, with a net balance of £144,308.33. LAMIT submitted a voluntary declaration to correct the errors on November 20, 2001. The Commissioners allowed a claim for later periods but refused the claim for the 1998 periods.

III The legal framework


The obligation to account for output tax and the right to recover input tax derive from the Sixth VAT Directive (77/388/EEC), Article 17 of which provides:

"(1) The right to deduct shall arise at the time when the deductible tax becomes chargeable.

(2) In so far as the goods and services are used for the purpose of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;



Article 18 deals with the exercise of the right of deduction:

"(1) To exercise his right of deduction a taxable person must:

(a) in respect of deductions pursuant to Article 17(2)(a), hold an invoice drawn up in accordance with Article 22(3);

(2) The taxable person shall effect the deduction by subtracting from the total amount of tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

(3) Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.

(4) Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine.



By Article 22(4)(a): "Every taxable person shall submit a return by a deadline to be determined by Member States …"


By section 25(1) of the Value Added Tax Act 1994 ("the 1994 Act"):

"(1) A taxable person shall … account for and pay VAT by reference to such periods (in this Act referred to as 'prescribed accounting periods') at such time and in such manner as may be determined by or under Regulations …'

(2) Subject to the provisions of this section, he is entitled at the end of each preceding accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax which is due from him.

(3) If … the amount of the credit exceeds that of the output tax, then … the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due to him under this subsection is referred to in this Act as a 'VAT credit' ".


By section 26:

"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is on supplies, acquisitions and importations in the period) as is allowable by or under Regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable supplies …'


Regulation 25(1) of the 1995 Regulations provides that returns are to be made within one month of the end of each three month period.


Section 58 of the 1994 Act provides that Schedule 11 shall have effect with respect to the administration, collection and enforcement of VAT. The 1994 Act, Schedule 11, para 2(10)(b),(c), provides for the making of regulations to allow accounting and financial adjustments for earlier accounting periods, including adjustments for the correction of errors. The relevant Regulations include Regulation 35, which provides that where a taxable person has made an error in any return made by him, then, unless he corrects it in accordance with Regulation 34 (which applies only to claims under £2,000), he shall correct it in such manner and within such time as the Commissioners may require.


The means of making such adjustments are the extra-statutory mechanisms of voluntary disclosure and credit notes: Notice 700/45/02. A voluntary disclosure of errors on VAT returns is a claim to adjust made on Form VAT 652 or by letter, in cases where the adjustment exceeds £2,000.


Section 80 of the 1994 Act was amended by the insertion of (inter alia) section 80(4) by the Finance Act 1997, section 47(1), with effect from July 18, 1996. By section 80(1) of the 1994 Act: "Where a person has … paid an amount to the Commissioners by way of VAT which was not due to them, they shall be liable to repay the amount to them." By section 80(4): "The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim."


The relevant Regulations were also amended. With effect from May 1, 1997 (Value Added Tax (Amendment) Regulations, SI 1997 No. 1086) Regulation 29(1), (1A) read as follows:

"(1) Subject to paragraphs (1A) and (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

(1A) The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made."

IV The Decision


The Tribunal applied the ruling of the European Court in Case C-62/00 Marks and Spencer plc v Customs & Excise Commissioners [2002] ECR I-6325, [2002] STC 1036 in which it had been held that a three year period for recovery of output tax imposed by national authorities was reasonable and in conformity with European law. The Tribunal said:

"15. … While we accept that recovery of excessive output tax collected in breach of European law is different in principle from the claiming of input tax for the first time, where the taxpayer is claiming back his own money which has in effect been the subject of an interest-free loan to the tax authority, in Marks and Spencer the European Court has approved a three year time limit for the recovery of excessive output tax collected in breach of European law in the interests of legal certainty, protecting both the taxpayer and the administration. In this case, in the periods under appeal there is one overpayment of output tax, to which the court's reasoning applies, and six failures to reclaim input tax, to which it does not directly...

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