Pye Motors Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 December 2022 |
| Neutral Citation | [2022] UKFTT 471 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2022] UKFTT 471 (TC)
Tribunal Judge Jonathan Cannan
First-tier Tribunal
Value Added Tax – VATA 1994, s. 78 – Motor dealer – Overpayment of output tax on demonstrator bonuses in the period 1974 to 1986 – Overpayments repaid by HM Revenue & Customs – Whether appellant entitled to interest – Whether error on the part of HM Customs & Excise caused the overpayment or caused a delay in the appellant claiming repayment of the overpaid tax – Appeal dismissed
In Pye Motors Ltd [2023] TC 08668, the First-tier Tribunal dismissed the appellant’s claim that it had overpaid output tax as a result of an official error by HMRC and was therefore entitled to interest under VATA 1994 s. 78.
The appellant was a motor dealer and on 31 March 2009 it submitted a “Fleming claim” for VAT overpaid in the period 1974–1986. It had accounted for VAT on “demonstrator bonuses” paid by manufacturers. When the payments were received, the appellant accounted for output tax on the grounds that they were consideration for a supply of services by it. However, following the ECJ decision in Elida Gibbs Ltd v C & E Commrs it was determined that such payments were, in fact, retrospective discounts on the purchase of the demonstrator vehicles.
The appellant argued that it had overpaid output tax as a result of an error by HMRC and, therefore, it was entitled to interest under VATA 1994, s. 78.
The FTT divided the case presented by the appellant into three issues, success on any one of which would result in the appeal being allowed.
Issue 1 was that HMRC had made what the FTT termed the “Alleged Bonus Error”, i.e. the appellant had overpaid output tax because HMRC had wrongly represented that the demonstrator bonuses were subject to VAT. The appellant did not have a specific letter or instruction from HMRC regarding these payments. It argued that in guidance to the motor trade, generally HMRC had advised that they were subject to VAT. However, the FTT was not satisfied that HMRC had made firm instructions regarding the VAT treatment. It accepted that HMRC instructed dealers that it was the general rule that VAT was due, but noted that HMRC did not adopt an “inflexible position”. HMRC had at all times included a proviso with the general rule that the VAT treatment was fact sensitive and bonuses paid in the line of supply might not be VATable (para. 139 and 140). The FTT also noted that not all motor dealers issued VAT invoices in respect of these payments (para. 115).
The FTT dismissed this ground of appeal on the basis that HMRC had not given direct advice regarding the bonus payments, and at all times it had been open to dealers to question the general rule and consider whether nor not it was appropriate to adopt the proviso in their case.
In the period covered by the appeal, when a demonstrator vehicle was sold motor dealers accounted for VAT on the sale under the margin scheme. The demonstrator vehicles had private use and were therefore subject to the input tax block applicable to motor cars. The ECJ case of EC Commrs v Italy demonstrated that the sale of input tax blocked cars was exempt from VAT.
The appellant argued that, had HMRC not incorrectly treated such sales as taxable under the margin scheme, it would have sought clarification regarding the VAT treatment of the demonstrator bonuses and its overpayment of output tax would not have arisen. The FTT dismissed this ground of appeal; HMRC’s error regarding the application of the margin scheme (which was a matter of common ground) was too remote from the overpayment of VAT on demonstrator bonuses to be its real cause (para. 149).
The appellant’s third ground of appeal was that the botched introduction of the three-year cap (since extended to four years) resulted in a delay to its submission of a claim for VAT overpaid on demonstrator bonuses. The three-year cap was first introduced from 5 December 1996. Following complex legal challenges, it was established by the courts that although capping legislation was permitted under EU rules, it could not be introduced without giving taxpayers proper notice. The legal challenges included Fleming (t/a Bodycraft) v R & C Commrs, following which the Government announced that new capping legislation contained in Finance Act 2008 would take effect from 1 April 2009, which gave taxpayers who considered that they had a pre-1996 claim until 31 March 2009 to make it. The appellant’s claim for overpaid output tax was submitted on 31 March 2009.
In order to succeed on this ground the appellant had to demonstrate to the FTT that, before it submitted the claim, it was aware of the overpayment but could not make a claim because of the capping legislation which applied at that time. The appellant’s evidence did not demonstrate to the FTT that it has suffered loss as a result of the unlawful capping legislation, the FTT found that it was unaware of the historic overpayments until 10 March 2005 and was not able to quantify its loss until 19 October 2007 (para. 162).
Pye Motors Ltd is a lead case for a set of motor dealers who overpaid VAT on demonstrator bonuses received before the Elida Gibbs Ltd v C & E Commrs decision established beyond doubt that they were, in fact, retrospective discounts. The interest claimed by Pye Motors Ltd is approximately £200,000. Given the amount of money at stake, an appeal to the Upper Tribunal is likely.
Comment by Sarah Kay, Lead VAT Writer, Croner-i Ltd.
[1] This appeal concerns the appellant's claim to interest pursuant to section 78 Value Added Tax Act 1994 (“VATA 1994”). It arises following repayment by HMRC of overpaid output tax in relation to the period 1 August 1974 to 31 March 1986 (“the Relevant Period”). The appellant is and was at all material times in business as a Ford motor dealership. It overpaid VAT on bonus payments from Ford to the appellant in relation to demonstrator vehicles and certain other types of vehicle supplied by Ford to the appellant. There is now no dispute that VAT was overpaid by the appellant. The matter for determination is whether the appellant is entitled to interest on the amount repaid.
[2] The appellant's case, in broad terms, is that the overpayment of VAT was caused by an error on the part of HM Customs & Excise (who for the sake of simplicity I shall refer to throughout as “HMRC”). Alternatively, that an error on the part of HMRC caused the appellant to delay making its claim for repayment. The circumstances in which VAT came to be overpaid are therefore highly relevant to the issues before me. I shall look at those circumstances in detail when I come to make my findings of fact. At this stage it is helpful to quote the summary of Henderson J as he then was in FJ Chalke Ltd v R & C Commrs [2009] BVC 486 which concerned the entitlement of a motor trader to compound interest on overpayments of tax. Henderson J identified at [11] the two types of payments in relation to which VAT had been overpaid in that case:
- so-called manufacturers' bonuses, typically paid by a car manufacturer to a dealer who purchased a demonstrator vehicle …, and
- onward sales of demonstrator vehicles, typically after their use by the dealer for demonstration purposes and the provision of test drives to customers for a period of between six months and one year.
[3] Henderson J went on to describe what is known as the “input tax block” on demonstrator vehicles purchased by a dealer, which meant that the dealer could not recover input tax paid to the manufacturer on the supply of such vehicles. This was imposed because there was an element of non-business use in relation to demonstrators which were available to employees of the dealership for non-business use. He continued:
[17] Despite the block on input tax for demonstrator cars, the Commissioners took the view that when such a car was sold 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 para 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.
[18] According to Mr Easton, the policy view held by the Input Tax Branch of the Commissioners was that the combination of the block on input tax and the margin scheme represented “a pragmatic way of implementing the principle that VAT is a tax on the final consumption of goods” …
[19] This view was, however, shown to be untenable by the decision of the ECJ on 25 June 1997 in EC Commission v Italian Republic (Case C-45/95) [1997] BVC 536 (“Italian Republic”). In that case the Commission brought infraction proceedings against Italy under art 169 of the EC Treaty, alleging that Italy had failed to fulfil its obligations under art 13(B) of the Sixth Directive. In upholding the Commission's complaint, the ECJ held (para 16) that the final part of art 13(B)(c) requires member states to exempt the supply of goods in respect of which, by virtue of art 17(6), VAT did not become deductible when they were previously acquired or produced...
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