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Standing Committee A
Thursday 24 June 2004
[Sir John Butterfill in the Chair]
(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 2, 11, 12, 21 and 37 to 39)
Exclusion of extended limitation period in England, Wales and Northern Ireland
Mr. Howard Flight (Arundel and South Downs) (Con): I beg to move amendment No. 548, in
clause 303, page 247, line 14, leave out '8th September 2003' and insert
'the date six months after this Act shall have received Royal Assent.'.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 549, in
clause 303, page 247, line 15, leave out from beginning to end of line 7 on page 248.
No. 550, in
No. 551, in
clause 304, page 248, leave out lines 23 to 31.
Mr. Flight: I welcome you, Sir John, to chairing our deliberations on what will be the last day of the Committee.
Tax legislation has allowed claims for overpaid tax to be made for years that end within the previous six years. Similarly, the Revenue can normally go back six years to assess outstanding tax. A High Court decision in the Deutsche Morgan Grenfell case potentially changes the position. Deutsche Morgan Grenfell successfully argued in the High Court that the English common law remedy of restitution of payment made under a mistake of law applied to payments of tax. The result is that, where the view of the law changes as a result of a court decision, within six years of that decision, proceedings could be commenced in the courts for repayment of tax made under a mistake of law for all back yearsthat is, not time barred.
The clause covers England, Wales and Northern Ireland and the related clause 304 introduces a similar rule for Scotland. As I understand it, the Inland Revenue is appealing the Deutsche Morgan Grenfell decision, and the clauses set out provisions that apply to court actions brought on or after 8 November 2003. For those actions, the intention is to legislate that, for
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Inland Revenue taxation matters, the usual six-year limits apply to common law actions for relief from the consequences of a mistake of tax law.
It has been argued by many that these provisions are contrary to European Union law, as there is no allowance for a transitional period and, in particular, to the judgment of the European Court of Justice in Marks and Spencer v. Customs and Excise, in which the relevant facts were identical. In citing earlier judgments, the European Court of Justice held that the national legislation retroactively curtailing limitation periods was incompatible with the principle of effectiveness and the protection of legitimate expectation. The Institute of Chartered Accountants in England and Wales said:
''there will inevitably be litigation, with the costs of both sides likely to be met out of the public purse.''
Amendment No. 548 therefore proposes the introduction of some transitional arrangements for the provision. The easiest of these appears to be simply to delay it for six months after Royal Assent. That would give taxpayers time to work out whether they already have a cause of action that will become time barred under the new rules and to start proceedings within the transitional period, so that the right is not taken away from them without them having a chance to exercise it. It is only common justice that, if proceedings are taking place now, which I understand is the case, they should not suddenly be cut off in the middle without a transitional period that allows them to finish.
As I understand it, there is no disagreement in essence about what clauses 303 and 304 do, which is to put the position back to what it has always been thought to be. However, there is a powerful case for transitional arrangements, whether via the routes that we propose, or an alternative route to be suggested by the Government.
The Paymaster General (Dawn Primarolo): I will urge the Committee to reject the amendments, should they be put to the vote, as they would undermine the effectiveness of the measure, which has been introduced to protect direct tax revenues. There is nothing unusual about a Government moving in such cases. There are examples of that under this Government and the previous Government.
Clauses 303 and 304 preserve fair and effective time limits for claiming repayment of overpaid tax. For many, many years, there has been symmetry in the direct tax system. The Inland Revenue has the right to assess outstanding tax for six years and those who have overpaid tax have the right to make claims for repayment for the same period.
As the hon. Member for Arundel and South Downs (Mr. Flight) pointed out, the High Court judgment in the recent case of Deutsche Morgan Grenfell v. the Commissioners of the Inland Revenue has the potential to upset that balance. The High Court held that the English common law remedy of restitution for payment made under a mistake of law applied to payments of tax. The judgment has no binding effect in Scotland.
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The judgment means that, where the view of the law changes as a result of a court decision, proceedings can, within six years of that decision, be commenced in the courts in England, Wales and Northern Ireland for repayment of tax paid under a mistake of law and can be for all back years without limitation. In principle, that might mean that a taxpayer in England, Wales and Northern Ireland could take any court judgment that has overturned the previously accepted view of the law and, within six years of that decision, claim repayment for any past year.
The DMG case is about the payment of advanced corporation tax, which was introduced in 1973, so all years back to that year are potentially affected. However, the scope of the DMG decision is arguably much wider than that. If upheld, the decision would apply to most direct taxes. Although the Inland Revenue is appealing the judgment, the Government think that it would not be sensible to await the final outcome in the courts and, on 8 September 2003, announced the measure with operative effect from the date of announcement.
Clause 303 will ensure that, for Inland Revenue taxation matters, the same six-year time limit applies to common law actions for relief from the consequences of a mistake of law as applies to other actions to recover direct tax. That will protect the Exchequer from uncertainty and from a potentially large loss of tax revenues.
Clause 304 reflects the differences in Scottish law and brings about a result in Scotland that is in line with that to be brought about in England, Wales and Northern Ireland. Together, the clauses will ensure symmetry and preserve generous time limits in the United Kingdom direct tax system.
The amendments would unnecessarily undermine the effectiveness of the clauses. A transitional period prior to the commencement date of legislation would invite claims from any taxpayer who could have benefited from the DMG decision but did not commence proceedings before the Government announced their intention to legislate on 8 September 2003. In Scotland, such a period would encourage taxpayers to make such claims, even though the DMG decision does not directly apply there. That could leave the Exchequer vulnerable to a significant loss of tax revenue. In any event, our advice is that a transitional period is not necessary.
Amendment Nos. 548 and 550 would give six months from the date of Royal Assent for such claims to be made. Allowing any transitional period for the introduction of the measure by deferring the commencement date of the legislation, when we are advised that that is unnecessary, would leave the Exchequer vulnerable to a significant loss of tax revenues.
The loss of tax revenues cannot be quantified. It is impossible to know how many claims and in what amounts could be made. We are confident that large sums would be involved. We are well aware of the arguments that a transitional period is necessary for
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legislation to comply with European law. However, the firm legal advice received by the Inland Revenue is that a transitional period is not necessary in this instance. On that basis, the Government's view is clear that a transitional period should not be built into the legislation.
Amendments Nos. 549 and 541 would remove the provisions in the clauses dealing with court actions started between 8 September 2003 and Royal Assent. Amendment No. 549 also removes the provisions in clause 303 preventing amendments to court actions started before the clause becomes effective from seeking to introduce earlier periods of claim. Amendments Nos. 549 and 551 have presumably been tabled on the basis that the provision would not be necessary if a transitional period were allowed before the commencement date of the legislation. However, even if it were acceptable to defer the commencement date of the main change, it would still be necessary to build in provisions relating to amendments to court actions started before the commencement date for the main change. This would be further to protect the Exchequer in the event that the courts were to allow such amendments.
That is all hypothetical. For the reasons that I have explained, the amendments are unacceptable. I am sure that hon. Members would not wish the Exchequer to be exposed to the uncertainty and potential loss of tax revenues that would result from the amendments. I urge the Committee to reject all of them.
Mr. Flight: The ECJ judgment in the Marks and Spencer case said:
''Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.''
I am not arguing in terms of moral righteousness here. Indeed, I am not a huge supporter of the ECJ. It is about time that the Government did something to stop it interfering with our tax system the whole time. It clearly has a mandate to create common European taxation. However, contrary to the Minister's commentsI have had input from top, respected tax counselthose on the other side of the argument are quite convinced that the judgment applies. I understand that there is likely to be a judicial review on that point, which will resolve it one way or t'other.
The purely practical issue is that of legal advice. The Government have their legal advice one way, so they will not do anything with this Finance Bill. If there is a judicial review and the Government lose, they will have the cost and the problems related to that. However, that is the way they have chosen to resolve the issue of whether the Marks and Spencer case applies. I have raised the issue. The arguments on both
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sides are perfectly clear. These matters will be resolved by judicial review in due course, so there is little point in putting the amendment to a vote.