Fleming (t/a Bodycraft) and Condé Nast Publications Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)
21. It is argued, alternatively, that the court can and should fix the duration of an extra period, a transitional period, that must be allowed to claimants whose pre 1 May 1997 claims would otherwise be barred by paragraph (1A). It is, to me, a surprising proposition that the court can, by judicial legislation, add a transitional period in order to cure the invalidity of a statutory provision that would not otherwise comply with European law and be enforceable against certain claimants. There are, to my mind, several objections to the proposition. First, it is not the function of judges to legislate. Second, the principle that people must be expected to know the law and conduct their affairs in accordance with the law can hardly apply to a judicial amendment to primary or secondary legislation that, until it is made known in the judges pronounced judgment, is held in pectore. The objection to retrospective legislation would apply here too. Third, the important principle of certainty can hardly be satisfied. The terms of the judicial amendment might change as the case travelled up the appellate chain. And the ability of this House to depart from previous decisions would need to be kept in mind.
22. The notion that a court can add a transitional provision to regulation 29(1A), and thereby avoid the need to disapply the paragraph in relation to regulation 29 claims based on some pre 1 May 1997 input tax payments, appears to derive from language used by the ECJ in paragraphs 40 to 43, but particularly paragraph 41, of the judgment in the Grundig case  ECR I-6325. These paragraphs are set out in paragraph 44 of Lord Walkers opinion. In paragraph 41 the ECJ said that the fact that a national court had held a transitional period fixed by its national legislature to be insufficient did not necessarily mean that the new limitation period could not be applied retrospectively at all, and continued:
The principle of effectiveness merely requires that such retroactive application should not go beyond what is necessary in order to ensure observance of that principle. It must, therefore, be permissible to apply the new period for initiating proceedings to actions brought after expiry of an adequate transitional period, assessed at six months in a case such as the present, even where those actions concern the recovery of sums paid before the entry into force of the legislation laying down the new period.
My Lords, the ECJ in this passage was dealing with the principle of effectiveness. But that is not the only principle in play. The principle of certainty, too, must be taken into account. Taxpayers are entitled to know from the statutory scheme what input tax repayment claims they can bring under regulation 29. In the absence of any statutory transitional provision, how are they to know whether pre 1 May 1997 claims that are more than three years old can be brought or, as to claims based on input tax paid between 1 May 1994 and 1 May 1997, within what period they can be brought? It is no answer to the requirement of certainty to be told that the claims can be brought within an adequate transitional period. There is also the constitutional point, which may or may not apply to judges sitting in Italian courts. It is the function of judges sitting in UK courts to construe primary and secondary legislation. It is the function of judges sitting in UK courts to disapply UK legislation that is inconsistent with Community law. It is not the function of judges sitting in UK courts to amend UK legislation that is inconsistent with Community law. Moreover, the passage I have already cited from the ECJ judgment in EC Commission v United Kingdom seems to me pertinent here too: incompatibility of national legislation with Community provisions can be finally remedied only by means of national provisions of a binding nature which have the same legal force as those which must be amended. Mere administrative practices cannot do this. Nor can judges.
23. Accordingly, I would dismiss both appeals.
LORD WALKER OF GESTINGTHORPE
Disapplication of national legislation
24. It is a fundamental principle of the law of the European Union (EU), recognised in section 2(1) of the European Communities Act 1972, that if national legislation infringes directly enforceable Community rights, the national court is obliged to disapply the offending provision. The provision is not made void but it must be treated as being (as Lord Bridge of Harwich put it in R v Secretary of State for Transport, Ex p Factortame Ltd  2 AC 85, 140)
without prejudice to the directly enforceable Community rights of nationals of any member state of the EEC.
The principle has often been recognised your Lordships House, including (in the context of taxes) Imperial Chemical Industries plc v Colmer (No 2)  1 WLR 2035, 2041 (Lord Nolan) and recently Autologic Holdings plc v Inland Revenue Commissioners  1 AC 118, paras 16-17 (Lord Nicholls of Birkenhead).
25. Disapplication is called for only if there is an inconsistency between national law and EU law. In an attempt to avoid an inconsistency the national court will, if at all possible, interpret the national legislation so as to make it conform to the superior order of EU law: Pickstone v Freemans plc  AC 66; Litster v Forth Dry Dock & Engineering Co Ltd (in receivership)  1 AC 546. Sometimes, however, a conforming construction is not possible, and disapplication cannot be avoided. Disapplication of national legislation is an essentially different process from its interpretation so as to conform with EU law. Only in the most formal sense (because of the terms of section 2(4) of the European Communities Act 1972) can disapplication be described as a process of construction. In these two appeals it is common ground, at least in your Lordships House, that the national court is concerned with disapplication, not with trying to find a conforming construction. This important distinction has been to some extent overlooked in the Court of Appeal.
26. The admitted infringement of directly enforceable Community rights occurred when, by a series of legislative steps taken between July 1996 and May 1997, Parliament and the Commissioners of Customs and Excise (now the Commissioners for Her Majestys Revenue and Customs"the Commissioners) took action to reduce severely the time within which taxpayers could make claims for repayment of value added tax (VAT). These steps (which I shall describe collectively as the 1996-7 amendments) are described in more detail below. For present purposes their most significant feature is that they applied to claims in respect of amounts of VAT already paid, as well as to future payments; and (with one trifling exception on which the Commissioners place no reliance) they contained no transitional provisions. So a taxpayer might, at the beginning of July 1996, have had until July 1998 to make a claim for repayment of VAT overpaid in July 1992; the changes appeared to deprive him of any possibility of recovering the tax since there was no transitional period, however brief, for putting in a last-minute claim. There was a further complication, which I shall have to come back to, as to whether the taxpayer should, if his claim was for repayment of input tax, have made his claim under section 80 of the Value Added Tax Act 1994 (VATA 1994) or under regulation 29 of the Value Added Tax Regulations 1995 SI 1995/2518 (the Regulations).
27. In order to explain why the 1996-7 amendments infringed EU law it is necessary to refer to the Sixth Council Directive 77/388/EEC (the Sixth Directive). The Sixth Directive has now been consolidated in the Principal VAT Directive 2006/112/EC but it is convenient to refer to its provisions in the same way as in the judgments below. VATA 1994 and the Regulations (and other regulations not material to these appeals) represent the transposition into national law of the Sixth Directive (and other EU legislation relating to VAT). Articles 17 and 18 of the Sixth Directive are in Title X1, dealing with deductions. These two articles provide the legislative foundation for one of the essential features of VAT, that is the passing on of input tax, to be credited against output tax, along a chain of traders (for instance a supplier of components, a manufacturer, a wholesale distributor and a retailer) until the final output tax is borne by the ultimate consumer. Generally a traders credit for input tax is obtained by deduction from his output tax, but some traders with a large turnover in zero-rated goods (such as most foodstuffs) may be repayment tradersthat is, they regularly or occasionally pay amounts of input tax which exceed their output tax, so as to entitle them to a repayment of input tax. By contrast payment traders will as a rule simply deduct input tax on making their regular quarterly returns under regulation 25 of the Regulations.
28. These points are discussed and explained in much more detail in the judgments of Neuberger J and Auld LJ in University of Sussex v Customs and Excise Commissioners  STC 1495, paras 11-72 and  STC 1, paras 108-152 respectively. For present purposes it is enough to set out the relevant parts of article 18 (as amended by Council Directive 91/680/EEC):
(1) To exercise his right of deduction, a taxable person must:
(a) in respect of deductions pursuant to Article 17(2)(a) [ordinary input tax], 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 value added 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.
It is common ground that article 18 gives taxpayers directly enforceable Community rights. The United Kingdom has opted (under article 18(4)) to permit refunds; and it has carried out its task, under article 18(3), of laying down the conditions and procedures for obtaining credit for input tax which is not dealt with by the normal, regular procedure in paragraphs (1) and (2) of article 18 (that is, by having a proper tax invoice as a voucher and by deducting the input tax from output tax payable in respect of the same quarterly accounting period).
29. In the United Kingdom the conditions and procedures authorised by article 18(3) included, before the 1996-7 amendments, time limits which did not offend EU law. EU law recognises that time limits for claims are permissible so long as they do not infringe the principles of equivalence and effectiveness, which are basic principles of EU law. The Court of Justice of the European Communities (ECJ) stated in Marks and Spencer plc v Commissioners of Customs and Excise Case C-62/00  ECR I-6325 paras 34-36 (Marks and Spencer II):
The principle of effectiveness
34 It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness) (see, inter alia, Aprile srl v Amministrazione delle Finanze dello Stato (No 2) Case C-228/96  ECR I 7141  1WLR 126 para 18, and the judgments cited above in Dilexport srl v Amministrazione delle Finanze dello Stato  ECR I-579, para 25, and Metallgesellschaft Ltd v Inland Revenue Commissioners joined Cases C -397/98 and C - 410/98 , ECR I - 1727,  Ch 620, para 85).
35 As regards the latter principle, the court has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community law to lay down reasonable time limits for bringing proceedings (see Aprile para 19, and the case law cited therein). Such time limits are not liable to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law. In that context, a national limitation period of three years which runs from the date of the contested payment appears to be reasonable (see, in particular, Aprile, para 19, and Dilexport, para 26).
36 Moreover, it is clear from the judgments in Aprile (para 28) and Dilexport (paras 41 and 42) that national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the court has held that legislation which is not in fact retrospective in scope complies with that condition.
30. In Marks and Spencer II the ECJ held that one part of the 1996-7 amendments (that is the amendment of section 80 VATA 1994) did infringe EU law. These appeals are concerned with the admitted infringement caused by the other part of the amendments, those affecting regulation 29 of the Regulations. It is unfortunately necessary to make a digression from the main course in order to address this complication.
Section 80 and regulation 29
31. Before the 1996-7 amendments section 80 of VATA 1994 provided as follows:
(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.
(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.
(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.
(4) No amount shall be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.
(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.
(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.
(7) Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them.
Thus there was a six-year period for claims, capable of extension where a mistake had been made. Section 80 was directed, it should be emphasised, to a payment which was not VAT due to [the Commissioners]".
32. Before the amendments regulation 29, so far as material, provided as follows:
Claims for input tax
(1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of [VATA 1994] shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of -
(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;...
There was no time limit other than the Commissioners discretion in cases outside section 25(2). Section 25(2) provided for the normal procedure by which a payment trader claimed credit for input tax by means of deduction on the making of his quarterly return. It was not therefore obvious (to say the least) that regulation 29 was providing for the less normal case of a payment trader claiming credit otherwise than under section 25(2), still less for a repayment trader claiming a refund of input tax. Indeed the Commissioners considered view was that regulation 29 did not apply to those cases. That was the point that was litigated as far as the Court of Appeal in the University of Sussex case. The Commissioners did not attempt to bring University of Sussex on appeal to this House but its determined stance as far as the Court of Appeal is a significant complication in these appeals.
33. In order to illustrate how the problem was perceived in 2001, and at the risk of excessive raking through ashes that are now cold, I set out the thoughts of Neuberger J in University of Sussex  STC 1495, paras 42-44:
42. The issue does not appear to me to be straightforward. There is obvious force in the commissioners simple point that, whether caused by too high a figure for output tax or too low a figure for input tax, a consequential payment by a taxpayer to the commissioners is an amount...by way of VAT which was not VAT due...'. In other words, where a payment trader pays a sum to the commissioners, that sum is arrived at by taking into account both his output tax and his input tax for the relevant period, and the net figure is the VAT he pays, and in so far as that figure is too high, he is entitled to reclaim it, pursuant to, and subject to the provisions of, section 80.
43. So far as repayment traders are concerned, it is common ground that they cannot fall within section 80; that is because by definition, they will not have paid the Commissioners...VAT'. The 1994 Act does not appear specifically to consider repayment traders who have under-claimed input tax. Sections 25(2) and 26(1) provide that a taxpayer is liable to take into account input tax in his return for the period during which the supplies were actually provided (see in particular the bracketed words in section 26(1). The 1994 Act contains no provision equivalent to section 80 so far as repayment traders are concerned. However, section 25(1)echoed in the opening words of section 25(2)indicates that it is contemplated that regulations will or may be introduced to deal with cases where inputs are not claimed for the relevant period in accordance with section 26(1).
44. When one turns to the 1995 regulations, it seems to me, indeed it appears to be common ground, that regulation 29 does enable a repayment trader, who has understated his input tax, to make a late claim for under-claimed input tax, albeit in terms which are pretty unspecific, particularly when contrasted with section 80. Regulation 29(1) appears to make it clear that the input tax should in principle be claimed in the return relating to the period in which the relevant goods or services were provided. However, the words save as the Commissioners may otherwise allow indicate that this does not represent an absolute requirement. That point appears to me to be supported by the provisions of section 25(1) and regulation 25(5), and indeed by article 18(3) of the Sixth Directive. Accordingly, at least until regulation 29(1A) was introduced, the commissioners enjoyed a relatively unfettered discretion as to whether, and if so how, to accommodate a repayment trader whose original return understated the input tax, and who subsequently claimed a credit or payment in respect of that input tax.
34. Neuberger J went on to conclude, in his judgment given on 10 October 2001, that section 80 did not cover a late claim to deduct input tax, observing (para 63):
although the taxpayer could have paid less VAT pursuant to the earlier return if he had claimed all his input tax, that fact does not render any of the VAT so paid VAT [not] due to the Commissioners".
The Court of Appeal (Auld and Chadwick LJJ and Newman J) upheld that decision in a judgment given on 21 October 2003  STC 1, paras 107 ff. It had been hoped that the appeal would be heard sooner but it was listed with the second Court of Appeal hearing in Marks and Spencer plc v Customs and Excise Commissioners (Marks and Spencer III) following the decision of the ECJ in Marks and Spencer II. This delayed the disposal of the appeal in University of Sussex.
35. In the course of the part of his judgment dealing with University of Sussex Auld LJ observed (para 134) that the issue was essentially a matter of United Kingdom law; as a matter of EU law, in transposing articles 17 and 18 of the Sixth Directive, section 80 could have been framed so as to fit either of the competing views. But that does not mean that on the national legislation as actually enacted, the unjustified refusal of a section 80 claim and the unjustified refusal of a regulation 29 claim can be assumed to be equally serious breaches of EU law. In some of the section 80 claims the breach consisted, not merely of curtailing the taxpayers right to obtain a refund of VAT, but of charging the VAT in the first place, as the result of official misinterpretation or misapplication of the VAT legislation. The VAT which was considered by the ECJ in Marks and Spencer II was unlawfully exacted in the first place. It was always VAT not due". So for Marks and Spencer the 1996-7 amendments were an exacerbation of an existing breach. In these appeals, by contrast, the amendments themselves were the only breach.
The 1996-7 amendments
36. During 1996, partly because of the Marks and Spencer litigation described below and partly, perhaps, because of the opinions given by Advocate General Fennelly on 27 June 1996 in Argos Distributors Ltd v Customs and Excise Commissioners Case C-288/94 and Elida Gibbs Ltd v Customs and Excise Commissioners Case C-317/94  QB 499, 515, 545 (both cases about vouchers), the Commissioners expected to be faced with claims for repayment of large amounts of output tax, some of it going back for many years. On 18 July 1996 the Paymaster-General announced in the House of Commons that section 80 of VATA 1994 would be amended from that date for past as well as future overpayments of tax. This proposal became effective on 3 December 1996 under the Provisional Collection of Taxes 1968, and was enacted by section 47 of the Finance Act 1997, which received the Royal Assent on19 March 1997. Section 80(4) was amended so as to provide:
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.
Section 47(2) of the Finance Act 1997 provided that this amendment:
shall be deemed to have come into force on 18 July 1996 as a provision applying, for the purposes of making any repayment on or after that date, to all claims under section 80 of [VATA 1994], including claims made before that date and claims relating to payments made before that date.
37. Regulation 29 was amended by the Value Added Tax (Amendment) Regulations 1997 SI 1997/1086. The amending regulations were made on 25 March 1997, laid before Parliament (subject to negative resolution) on the following day, and announced in a Business Brief published by the Commissioners on the day after that. They came into force on 1 May 1997. They inserted a new paragraph 29 (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.
The Business Brief (No 9/97) reflected the restrictive view which the Commissioners took, at that time, as to the scope of regulation 29.
The Marks and Spencer litigation
38. The amendment made by section 47 of the Finance Act 1997 was challenged by Marks and Spencer in very complex litigation commenced by two separate notices of appeal against the refusal of repayment claims, one (in respect of tea cakes) given on 17 August 1995 and the other (in respect of vouchers) given at the end of October 1996, just after the ECJ judgment in Argos Distributors v Comrs of Customs and Excise  QB 499. That litigation is still going on, since in July 2005 your Lordships House reluctantly made a second reference to the ECJ (Marks and Spencer plc v Customs and Excise Commissioners  STC 1254 - Marks and Spencer IV) in which a summary of the whole litigation will be found at paras 27-50. A much shorter summary will suffice for present purposes.