Judgments - Marks and Spencer plc (Appellants) v. Her Majesty's Commissioners of Customs and Excise (Respondents)

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    34.  At this stage the two claims began to converge and flow in the same channel of litigation. On 10 March 1997 the Commissioners told M & S that its teacakes claim, already reduced to 10% by the passing-on defence, would also be subject to the three-year cap (reducing it from £350,000 to about £88,000) and reiterated that the vouchers claim would be capped. M & S appealed to the Tribunal against these decisions. The Tribunal heard a preliminary issue as to jurisdiction and determined it (largely in favour of M & S) on 22 December 1997 ([1997] V&DR 344).

    35.  M & S's appeals to the Tribunal against the capping decisions were heard together over three days in March 1998. On 22 April 1998 the Tribunal gave a written decision dismissing both appeals ([1998 V&DR 235).

    36.  M & S appealed to the High Court against the dismissal of these appeals. It had already appealed against the Tribunal's dismissal of its appeal against the upholding of the passing-on defence. These appeals, together with a judicial review application arising out of the preliminary issue as to jurisdiction, came before Moses J at a five-day hearing in October 1998. Moses J gave judgment on 21 December 1998 dismissing the appeals, the judicial review issue having for practical purposes fallen away ([1999] STC 205). As to the passing-on defence Moses J reviewed the law and the evidence and held that the Tribunal was entitled to reach the conclusions which it did reach. That aspect of the matter has ceased to be a live issue. As to the capping appeals Moses J decided as follows (although this brief summary does scant justice to his detailed reasoning):

    (1) (page 225):

    "In relation to the teacakes claim Community law principles do not apply. The imposition of a zero rate in respect of teacakes was a purely domestic matter. The right to recover overpayments under section 80 arose because of a breach of domestic law. It did not arise as a result of a breach of Community law and thus no Community right to repayment arises."

    (2)  As regards the early vouchers, the United Kingdom Government's failure to transpose the Sixth Directive correctly did potentially give M & S directly enforceable rights, but M&S had failed to establish any breach of the principle of effectiveness (p 231) or any other general principle of EC law (pp 231-236).

    (3)  As regards the later vouchers (p 227), "the Commissioners' misconstruction of section 10(3) is not a Community law right and, thus, does not engage Community law principles."

    So all three appeals failed, but (in the judge's view) for quite different reasons.

    37.  M & S appealed to the Court of Appeal. On 14 December 1999, in a judgment given by Schiemann LJ (with whom Stuart-Smith and Ward LJJ agreed) the first Court of Appeal disposed of the appeal as follows: ([2000] STC 16):

    (1)  The teacakes passing-on appeal failed because the Tribunal had been entitled to reach the conclusions which it did reach (pp 42-43). That was the end of the appeal process as regards the factual evaluation of the passing-on defence.

    (2)  The teacakes capping appeal failed (a) because (pp 26-31) it satisfied neither of the Becker conditions; and (b) because (pp 31-32) general principles of Community law could not be relied on in the absence of some directly enforceable right.

    (3)  The later vouchers capping appeal failed (a) because (pp 27-32) it did not satisfy the first Becker condition, the Commissioners' failure to interpret and apply national legislation which correctly transposed the Sixth Directive not being equivalent to incorrect transposition; and (b) because (pp 31-32) general principles of Community law could not be relied on in the absence of some directly enforceable right.

    (4)  As regards the early vouchers capping appeal the first Court of Appeal decided to make a reference to the ECJ. In a part of his judgment (pp 39-42) which referred only to the early vouchers (see at p 39e) Schiemann LJ concluded that there was no evidence of any unfair discrimination of which M & S could complain.

    38.  When the order of the first Court of Appeal was drawn up the question to be referred to the ECJ was formulated as follows:

    "In the circumstances in which a member State has failed to implement properly in its domestic legislation Article 11A of Council Directive 77/388, is it compatible with the principle of the effectiveness of the rights that a taxable person derives from Article 11A, or with the principle of the protection of legitimate expectations, to enforce legislation which removes with retrospective effect a right under national law to reclaim sums paid, by way of VAT, more than three years before the claim is made?"

The course of the litigation: the ECJ reference and subsequently

    39.  It is clear that the first Court of Appeal decided to make a reference to the ECJ only because of a perceived problem about the early vouchers. But both the Advocate-General and the ECJ ([2002] STC 1036) felt it necessary to extend the scope of the question so as to cover (in addition) the later vouchers and (debatably) the teacakes. It is for that reason necessary to look at the proceedings in Luxembourg in some detail, even though the vouchers (whether early or later) are no longer a live issue.

    40.  Advocate-General Geelhoed delivered his opinion on 24 January 2001. In successive sections of his opinion he covered the legal framework, the facts, and the question submitted to the ECJ. He then (paras 26-28) identified the three elements in the litigation in the national courts, and observed that the question submitted for a preliminary ruling concerned only overpaid tax in respect of the early vouchers and that the referring court was

    "making a distinction between the case where the directive is said not to have been transposed or not to have been correctly transposed and the other two cases in which the directive was correctly transposed into national law but incorrectly applied."

    This was, the Advocate-General stated (para 29), manifestly apparent in the case of the gift vouchers.

    41.  Then the Advocate-General stated, in a paragraph which has caused the House some perplexity (para 30):

    "The order for reference does not mention the claim for repayment of VAT erroneously paid in respect of teacakes. Nonetheless, a similar problem arises in the case of teacakes. In that connection, too, the question arises as to whether individuals have rights under Community law where a directive has in itself been correctly transposed into national law but that law is applied in a manner clearly inconsistent with the scope of the directive."

    42.  In the proceedings in Luxembourg both M & S and the European Commission had urged the ECJ to take a broader view. The Commission had stated in its written observations dated 30 May 2000 (para 1):

    "The parties also appear to be at one in their view that, as regards the teacakes and late vouchers claims, the relevant United Kingdom legislation, though in itself compatible with the Sixth VAT directive, was applied by Customs & Excise in a manner repugnant to that directive."

    Mr Lasok QC (for the Commissioners) says that that was a complete misunderstanding. The Commission pointed out the implications of the first Court of Appeal's view (para 5):

    "Indeed, if the view accepted by the Court of Appeal were correct, then a Member State could escape the consequences of a directive simply by implementing it correctly and then proceeding to misapply it."

    The Advocate-General, although well aware of the ECJ's disinclination to depart from the terms of the questions put to it, evidently recognised the force of this point (para 31) and expressed a view clearly contrary to that of the first Court of Appeal, concluding (para 44):

    "It is manifestly clear from the documents before the Court that, in regard to both teacakes and gift vouchers after August 1992, the Commissioners applied national tax legislation in a manner inconsistent with the directive. It is also clear that the referring court is not permitting M&S to rely on the directive against that incorrect administrative practice. It follows therefrom, in my view, that in that case both the tax authorities and the competent courts are acting in breach of Community law. Thus, the United Kingdom is failing correctly to implement the relevant part of the Sixth Directive."

    43.  The Advocate-General then addressed the questions as posed by the first Court of Appeal, discussing at length some well-known decisions of the ECJ on the principle of effectiveness. He concluded with the recommendation (para 78) that the question should be answered (by reference to the principle of effectiveness and the principle of legitimate expectations) in substantially the same terms as were adopted in the judgment of the ECJ.

    44.  In its judgment delivered on 11 July 2002 the ECJ emphatically endorsed the Advocate-General's views on the transposition of Directives (paras 27 and 28):

    "Consequently, the adoption of national measures correctly implementing a directive does not exhaust the effects of the directive. Member States remain bound actually to ensure full application of the directive even after the adoption of those measures. Individuals are therefore entitled to rely before national courts, against the State, on the provisions of a directive which appear, so far as their subject matter is concerned, to be unconditional and sufficiently precise whenever the full application of the directive is not in fact secured, that is to say, not only where the directive has not been implemented or has been implemented incorrectly, but also where the national measures correctly implementing the directive are not being applied in such a way as to achieve the result sought by it.

    As the Advocate-General noted in para 40 of his opinion, it would be inconsistent with the Community legal order for individuals to be able to rely on a directive where it has been implemented incorrectly but not to be able to do so where the national authorities apply the national measures implementing the directive in a manner incompatible with it."

    However the ECJ made no reference to teacakes, or to zero-rating, either in this context or elsewhere in the judgment. It expressed neither agreement nor disagreement with the Advocate-General's views on this point.

    45.  The judgment went on to consider the principle of effectiveness (paras 34-42) and the principle of legitimate expectations (paras 43-47) and concluded by answering the question referred by the first Court of Appeal as follows:

    "National legislation retroactively curtailing the period within which repayment may be sought of sums paid by way of VAT collected in breach of provisions with direct effect of the Sixth Directive, such as those in Article 11A (1), is incompatible with the principles of effectiveness and of the protection of legitimate expectations."

    46.  The matter then came before the second Court of Appeal, where it was heard with another appeal (in which the Commissioners were appellants and the University of Sussex was the respondent). Judgment was given on 21 October 2003 by Auld LJ, with whom Chadwick LJ and Newman J agreed ([2004] STC 1). The second Court of Appeal was faced with an unusual situation, in that the ECJ had dealt with the first Court of Appeal's reference in broader terms than those in which the questions were formulated. The ECJ's answers showed that parts of the first Court of Appeal's judgment were based on misapprehensions as to EC law. The second Court of Appeal felt bound to reopen parts of the first Court of Appeal's judgment (relying so far as necessary on the principle in Taylor v Lawrence [2003] QB 528).

    47.  The situation was unusual in another respect also. As recorded in para 34 of Auld LJ's judgment, shortly before the opening of the resumed appeal, the Commissioners accepted that, in the light of the ECJ's judgment, the retrospective element of the three-year time limit (introduced by the amendment of section 80 of VATA 1994) could not be invoked against a directly enforceable provision of the Sixth Directive. Therefore they conceded both parts of the vouchers claim. They also conceded the capping point in relation to the teacakes claim, but described that as an extra-statutory concession. Auld LJ nevertheless considered the later vouchers claim at some length, in paras 36 to 50 of his judgment, concluding that the order of the first Court of Appeal should be varied and the appeal on the later vouchers claim allowed.

    48.  Auld LJ then considered the effect, if any, of the ECJ's judgment on the teacakes claim. In the first Court of Appeal, Schiemann LJ had considered and rejected the argument that M & S's claimed right for its teacakes not to be taxed otherwise than by zero-rating was not a directly enforceable right ([2000] STC16, 31):

    "[M&S] cannot rely upon Art.12(1) because that provision does not define the content of any right that [M&S] has under Community law. Art. 12(1) defines no right to any particular rate of tax because the fixing of the rate is entirely within the discretion of the United Kingdom under Art. 28(2)(a). Insofar as it is legitimate to describe zero as being the rate applicable to the sale of teacakes that rate is not attributable to Community legislation but rather to United Kingdom legislation which is consistent with our obligations under the EC Treaty."

    Having quoted this passage Auld LJ set out at length the passages from the written observations of the European Commission, and the opinion of the Advocate-General, which appeared to contradict this conclusion. But he also noted (para 58) that in its judgment the ECJ said nothing about teacakes, or (in the context of zero-rating) about the second Becker condition. He summarised (paras 63-65) the two sides' submissions about the decision of the ECJ in Idéal Tourisme SA v Belgium (Case C-36/99) [2000] ECR I-6049.

    49.  Auld LJ concluded (paras 68-70) that as regards the first Becker condition the ECJ's wide reformulation of the principle put the teacakes claim on the same footing as the later vouchers claim. But it did not engage the second Becker condition, and the reasoning of the first Court of Appeal held good (para 69):

    "As a matter of logic, and in the light of the Court of Justice's reasoning in Idéal Tourisme, a member state's breach of its own domestic law maintained consistently with, but not as a requirement of Community law, is not a breach of a Community law requirement to charge only a rate fixed by law within the meaning of Arts. 10(1)(a) and (b) and 12(1)."

    This conclusion was reinforced by the fact that zero-rating ("exemption with refund of the tax paid at the preceding stage") was not really a rate of tax, but its antonym. The ECJ had said nothing which bore on that conclusion.

    50.  In case he were wrong on his main conclusion Auld LJ went on to consider M & S's submissions on the passing on (or unjust enrichment) defence, and its reliance on discrimination as between payment traders and repayment traders. His conclusions were adverse to M & S on both points (paras 84 and 85 on the first point, and—rather more tentatively expressed—para 103 on the second point).


    51.  This appeal has therefore reached your Lordships' House by a long and winding road, almost ten years after M & S first gave notice of appeal in respect of its teacakes claim. Your Lordships have heard argument on three main issues:

    (1)  Did M & S, under article 28 of the Sixth Directive (both before and after its amendment in 1992) have a directly enforceable right not to be required to account for the tax on its teacakes otherwise than in accordance with the zero-rating provisions properly applicable under UK national law?

    (2)  Even if article 28 did not give M & S a directly enforceable right of that type, was the United Kingdom (in giving effect to its discretion under that article) required by the principle of fiscal neutrality to avoid discrimination between different types of traders, so as to give M & S a directly enforceable right to complain of the discrimination?

    (3)  If so, does EC law require or permit the remedy granted by the national court to depend on proof of financial loss, and on the absence of unjust enrichment?

    52.  On the first of these issues, it is not in dispute that article 28 is a transitional provision which does not form part of the harmonised system of VAT. It confers on member states a discretion, exerciseable within the ambit of what is permitted by article 28 (including, after the amendment in 1992, the requirement for measures to be "in accordance with Community law"). If the member state exercises its discretion within the permitted limits, it is acting consistently with EC law, and within a framework provided by EC law, but the measures which it continues in force are essentially national measures.

    53.  The decision of the ECJ in Idéal Tourisme SA v Belgium [2000] ECR I-6049 provides guidance on this type of situation. The claimant company complained that its international passenger coach operations were subject to VAT at 6%, whereas international air transport was exempt (under Belgian legislation ante-dating the Sixth Directive). The claim failed. The ECJ observed (para 38):

    "The harmonisation envisaged has not yet been achieved, insofar as the Sixth Directive, by virtue of Art. 28(3)(b), unreservedly authorises the member states to retain certain provisions of their national legislation predating the Sixth Directive which would, without that authorisation, be incompatible with that directive. Consequently, insofar as a member state retains such provisions, it does not transpose the Sixth Directive and thus does not infringe either that directive or the general Community principles which member states must, according to Klensch [1986] ECR 3477, comply with when implementing Community legislation."

    There are some similar observations in the opinion of Advocate-General Cosmas at para 30 of his opinion.

    54.  It is true that in Idéal Tourisme the Belgian state had not misunderstood or misapplied its own domestic legislation. But that seems immaterial in the context of whether there is a breach of EC law. But for the observations of the European Commission and of Advocate-General Geelhoed on the reference in this case, I would have little or no hesitation in concluding, in common with all the United Kingdom tribunals and courts which have so far considered the matter, that M & S had no directly enforceable right under EC law.

    55.  Mr Lasok QC (for the Commissioners) has submitted that the observations of the European Commission were based on a misunderstanding, which the Advocate-General followed. There is, he submitted, no reasoning to explain the conclusions which the Advocate-General seems to have reached. Mr Lasok also emphasised that the ECJ did not comment on this aspect of the matter. It may be that the ECJ did not agree with the Advocate-General's observations, but refrained from making any comment on them because they were not strictly relevant to the reference. However, for my part I find it impossible to be sure about that. The reference from the first Court of Appeal had got into something of a muddle, which led the ECJ to take the unusual course of departing from the questions referred to it. The ECJ must have been anxious to obviate any further confusion. Auld LJ (at para 68 of his judgment, already noted) evidently thought that the general principle enunciated by the ECJ was relevant to the teacakes claim so far as concerned the first Becker question.

    56.  In a case which has already gone on for ten years I am naturally very reluctant (in common, no doubt, with all your Lordships) to see further delay and expense occasioned by a second reference to the ECJ. But the Advocate-General has in this case (in para 44 of his opinion) criticised the national courts for acting in breach of EC law. Having studied his opinion and the judgment of the ECJ I consider that there is still real doubt as to the relevant principles of EC law, and that this House, as the national court of last resort, really has no alternative but to make another reference.

    57.  If a reference is to be made I would also refer the questions of EC law underlying the second and third issues argued before your Lordships. On the second issue M & S have relied on Goldsmiths (Jewellers) Ltd v Commissioners of Customs & Excise (Case C-330/95) [1997] ECR I-3801 and the case about reimbursable medicinal products, EC Commission v France (Case C-481/98) [2001] ECR I-3369. These cases appear to give M & S some support, but the Commissioners have argued that they are distinguishable. On the third issue (which has been loosely described as levelling up or levelling down) M&S has relied on Cotter & McDermott v Minister for Social Welfare (Case C-377/89) [1991] ECR I-1155, but the Commissioners have countered with Italy v Council of the European Union (Case C-340/98) [2002] ECR I-2663. These issues are also open to doubt.

    58.  In the appellant's printed case (paras 35, 46 and 68) Mr Milne QC (for M & S) proposed three questions for a possible reference to the ECJ. These broadly correspond to the three issues which I have identified, but Mr Milne's questions were not agreed by the Commissioners, and he indicated that he would himself wish to make some revisions in the way in which the questions are formulated.

    59.  If your Lordships agree that a further reference to the ECJ is necessary, the parties should agree the draft questions to be referred in accordance with your Lordships' opinions.


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