Judgments - Fleming (t/a Bodycraft) and Condé Nast Publications Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)

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39.  In defining the main stages of the litigation I have adopted the system of designation used in the printed case for the respondent Condé Nast Publications Ltd (“Condé Nast”), the respondent in the second appeal. This system passes over the linked appeals heard successively by the Tribunal [1997] V&DR 344 and Moses J [1999] STC 205 and designates the first hearing by the Court of Appeal (Stuart-Smith, Ward and Schiemann LJJ) [2000] STC 16 as “Marks and Spencer I“. In its judgment delivered on 14 December 1999 the Court of Appeal decided to make a reference to the ECJ on part only of one of the appeals, that is the so-called “early vouchers” claim. The ECJ gave judgment on this reference on 11 July 2002 (Marks & Spencer II [2002] ECR I-6325, [2002] STC 1036). Its judgment covered a wider field than the narrow question referred by the Court of Appeal, and the ECJ was rather critical of the narrowness of the reference. I have already referred to the second hearing before the Court of Appeal (Marks & Spencer III) and the further reference to the ECJ in Marks & Spencer IV. For present purposes the most material part of the judgment in Marks & Spencer II is the decision that the amendment of section 80 of VATA 1994 infringed the principle of effectiveness and was in breach of EU law. I have already quoted paras 34-36 of the judgment, which are central to the decision. The ECJ held that section 80 was also in breach of the principle of the protection of legitimate expectations (paras 43-46).

40.  The Commissioners responded to the judgment by granting an extension of time for making section 80 claims. The extension was however, as explained below, itself retrospective. It was announced by Business Brief 22/02 (“BB22/02”) published on 5 August 2002. This announcement did not have any specific statutory force, but it has not been suggested that it was not within the Commissioners’ general powers of care and management of VAT under section 58 of and Schedule 11 to VATA 1994.

41.  The “transitional regime” announced by the Commissioners was a period of nearly four months, from 4 December 1996 to 31 March 1997. It covered three categories of case:

(1)  where a claim had been made before 31 March 1997, but had   been capped by the amending legislation;

(2)  where a claim had been made and paid before 31 March 1997,   but had been clawed back by a recovery assessment (under   section 84A of VATA 1994); and

(3)  where a mistake had been discovered before 31 March 1997,   though no claim had been made.

In each case the overpayment of tax must have been made before 4 December 1996.

Grundig Italiana

42.  The Commissioners’ response to Marks & Spencer II was soon overtaken by further events in Luxembourg. On 24 September 2002 the ECJ gave judgment in Grundig Italiana SpA v Ministero delle Finanze Case-255/00 [2000] ECR I-8003 (“Grundig II“). This was the sequel to Grundig Italiana SpA v Ministero delle Finanze, Case C-68/96 [1998] ECR I-3755 (“Grundig I“) in which the ECJ (in a judgment delivered on 17 June 1998) held that an Italian consumption tax, introduced by a law of 30 December 1982, was contrary to EU law as infringing article 95 of the Treaty, since it differentiated between home-produced and imported audiovisual and photo-optical products.

43.  Grundig II was concerned with the legality under EU law of the Italian law no 428 of 29 December 1990. That law extended the scope of a statutory five-year limitation period (applicable to customs duties) so as to apply to all claims and actions for the refund of sums paid in connection with Customs operations, including the consumption tax considered in Grundig I. It further directed that that limitation period should be reduced to three years as from the 90th day following the coming into force of the law (27 January 1991). Grundig Italiana, which had from 1983 to 1992 made payments of the wrongly-charged consumption tax, brought a claim for repayment on 22 July 1993.

44.  Grundig II was a sort of rerun of the earlier case of Aprile srl v Amministrazione delle Finanze dello Stato Case C-228/96 [1998] ECR I-7141 (“Aprile II“), mentioned in paras 34-36 of the ECJ’s judgment in Marks & Spencer II. The decision in Aprile II was inconclusive because it was based on a misunderstanding of the degree to which, under Italian law, law no 428 was retrospective. Grundig II seems not to have been entirely free from the same difficulties (see para 32 of the ECJ’s judgment) but paras 36 to 41 of the judgment set out the ECJ’s conclusions:

“36. Given that the detailed rules governing the recovery of national taxes levied though not due are a matter for the national legislature, the question whether such rules may apply retroactively is equally a question of national law, provided that any such retroactive application does not contravene the principle of effectiveness.

37. In that regard, 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 the effectiveness, this 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 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 (Case C-62/00 Marks & Spencer [2002] ECR I-6325, para 38).

38. Thus, the transitional period must be sufficient to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time. In any event, they must not be compelled to prepare their action with the haste imposed by an obligation to act in circumstances of urgency unrelated to the time-limit on which they could initially count.

39. A transitional period of 90 days prior to the retroactive application of a period of three years for initiating proceedings in place of a ten-year or five-year period is clearly insufficient. If an initial period of five years is taken as a reference, 90 days leaves taxpayers whose rights accrued approximately three years earlier in a position of having to act within three months when they had thought that almost another two years were still available.

40. Where a period of ten or five years for initiating proceedings is reduced to three years, the minimum transitional period required to ensure that rights conferred by Community law can be effectively exercised and that normally diligent taxpayers can familiarise themselves with the new regime and prepare and commence proceedings in circumstances which do not compromise their chances of success can be reasonably assessed at six months.

41. However, the fact that the national court has found that a transitional period fixed by its national legislature such as that in issue in the main proceedings is insufficient does not necessarily mean that the new period for initiating proceedings cannot be applied retroactively at all. 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 before the entry into force of the legislation laying down the new period.”

These paragraphs, and especially the last, have been the subject of closely-reasoned argument before your Lordships’ House.

45.  The Commissioners responded to Grundig II in a further Business Brief, 27/02 (“BB 27/02”), published on 8 October 2002. Its effect was to substitute 30 June 1997 for 31 March 1997 in the three categories of claim covered by BB 22/02. Claims were to be made by 30 June 2003 (that is, there was a similar three-month extension). BB 27/02 did not expressly refer to section 80 of VATA 1994 or to section 47(2) of the Finance Act 1997 (as BB 22/02 had done). But it was framed simply as an extension of the BB 22/02 and it contained no reference to paragraph 29 of the Regulations. At that time appeals to the Court of Appeal in Marks & Spencer III and University of Sussex were still pending. There had however been one reference, in Business Brief 4/02 published on 22 February 2002, to the possibility that the Court of Appeal would dismiss the appeal in University of Sussex.

The two appeals in outline

46.  The facts relevant to the two appeals are considered separately at the end of this opinion. For the moment it is enough to say that Mr Fleming, the respondent in the first appeal, made a claim on 23 October 2000 for repayment of input tax paid on the acquisition of three specialist sports cars some ten years before. Condé Nast made a claim on 27 June 2003 for input tax paid on staff entertainment during the preceding 30 years.

47.  The Tribunal dismissed Mr Fleming’s appeal on grounds which the Commissioners did not seek to support. Evans-Lombe J [2005] STC 707 dismissed Mr Fleming’s appeal on other grounds, that is (applying the principle in Grundig II) that Mr Fleming had failed to bring his claim within a reasonable time after the 1996-7 amendments. The Court of Appeal [2006] STC 864 allowed Mr Fleming’s appeal, the majority (Ward and Hallett LJJ) on the ground that no transitional period could be read into the legislation, and that it must be disapplied generally to all claims in respect of payments of VAT made before the legislation came into force. Arden LJ reached the same conclusion (contrary to the head note, she did not dissent) but by a different route. She correctly observed that the issue was disapplication of national law (although at one point in her judgment she seems to have confused this with conforming interpretation). She took the view that regulation 29(1A) must be disapplied in the case of anyone who made a claim within a reasonable time from the delivery of the ECJ judgment in Marks & Spencer II (11 July 2002).

48.  In reaching that conclusion Arden LJ considered at length the judgment of Warren J, who had heard Condé Nast’s appeal from the Tribunal before the Court of Appeal heard Mr Fleming’s appeal. The Tribunal had held that Condé Nast must be able to show that, had there been an adequate transitional period in the amending legislation, it would have made a claim within it (this has been referred to in argument before your Lordships as the “could have/would have” issue). Warren J [2005] STC 1327 rejected this argument but dismissed the appeal on other grounds, that is that Condé Nast had not made a claim within a reasonable time from (at latest) 5 August 2002, the date of BB 22/02 following the judgment of the ECJ in Marks & Spencer II (I must add that this bald summary does not do justice to Warren J’s clear and fully-reasoned judgment). The Court of Appeal (in a judgment of Chadwick LJ with which Arden and Smith LJJ agreed) was clearly troubled by the majority decision in Mr Fleming’s appeal, but considered that it was bound to follow the decision: [2006] STC 1721. It considered making a reference to the ECJ but decided not to, partly because the Court of Appeal had itself given Mr Fleming leave to appeal to this House.

Four possible analyses (with variants)

49.  The Commissioners have throughout this litigation accepted, in the light of Marks & Spencer II, that the 1996-7 amendments infringed EU law. They must be disapplied to the extent that they improperly deprived taxpayers of directly enforceable Community rights, but no further. The process of disapplication does not involve reading words into the national legislation (that would be, as already noted, to confuse it with conforming interpretation). It involves the identification of the class or classes of taxpayers who are so circumstanced that the offending provisions must not be invoked against them, either in particular cases or at all.

50.  Both sides agree that the amendment of section 80 of VATA 1994 must be disapplied in respect of taxpayers who made unsatisfied claims before 18 July 1996, or between that date and 4 December 1996. Mr Vajda QC (for the Commissioners) also concedes that the amendments of section 80 and regulation 29 must be disapplied to some taxpayers who made claims during a limited period after the dates of those respective enactments, provided that the claims related to payments of VAT made before those respective dates. But (according to Mr Vajda’s primary argument, which broadly corresponds to the policy underlying BB 22/02 and BB 27/02) the appropriate period for regulation 29 claims was six months (the period mentioned in Grundig II) from 1 May 1997.

51.  That is Mr Vajda’s Analysis A. His Analysis B is six months from the date on which an average taxpayer would or should have been aware that EU law required a reasonable transitional period. Mr Vajda suggested as candidates for that date (in descending order of preference from the Commissioners’ point of view):

  (1)  six months from the judgment of the ECJ Marks &   Spencer II (giving a final date of 11 January 2003);

  (2)  six months from the publication of BB 22/02 (giving a   final date of 5 February 2003); and

  (3)  the final date for claims under BB 27/02 (30 June 2003).

52.  Mr Vajda’s Analysis C (for which he showed no enthusiasm at all, but which he mentioned because it is the primary case for Condé Nast) was that the period is still running and will continue to run until there is either (1) primary or secondary legislation or (2) a formal official announcement of an adequate “claim period” for capped regulation 29 claims.

53.  Finally there is Analysis D. This differentiates between taxpayers not merely by reference to (i) when they paid the relevant VAT and (ii) when they actually made their repayment claim, but also (iii) whether, if the amending legislation had included an adequate transitional period from its inception, they would (on a subjective test) have made claims during that period. In other words the court is to ask (not as an alternative to the appropriate analysis on the first two points, but as an additional requirement) whether the particular taxpayer would have made a claim during whatever is the correct period.

ECJ jurisprudence

54.  The practicalities of disapplication of national legislation are matters for the national court, subject to guidance from the ECJ as to the principles to be applied. Some guidance can be obtained from the judgments of the ECJ and the opinions of the Advocates General in Marks & Spencer II, Grundig II and Fantask A/S v Industriministeriet (Erhvervministeriet) Case C-188/95 [1997] ECR I-6783, but the guidance is limited. Marks & Spencer II (paras 34-36 quoted above, and also paras 37-39) shows that limitation periods must be of reasonable duration, and fixed in advance. Any curtailment of existing limitation periods must have an adequate transitional period. Its adequacy must be judged by reference to its purpose, that is (as the ECJ said in Grundig II [2002] ECR I-8003, para 38):

“to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time. In any event, they must not be compelled to prepare their action with the haste imposed by an obligation to act in circumstances of urgency unrelated to the time-limit on which they could initially count”

and (at para 40):

“to ensure that rights conferred by Community law can be effectively exercised and that normally diligent taxpayers can familiarise themselves with the new regime and prepare and commence proceedings in circumstances which do not compromise their chances of success.”

The reference to “normally diligent taxpayers” suggests the need for a single objective test. The degree of curtailment of an existing limitation period is also material (paras 39 and 40).

55.  In Grundig II the ECJ went on to observe (in para 41, already quoted):

“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.”

But in paras 40 and 42 the period of six months was qualified as the minimum period. In my opinion the ECJ cannot have been intending to lay down a mandatory rule, or to do more, in these paragraphs, than offer guidance of the most general sort. Advocate General Colomer had in para 27 of his opinion stated:

“It is not possible to determine whether or not a 90-day transitional period, such as that in the present case, complies with the principle of effectiveness without having regard to all the factual and legal requirements, both procedural and substantive, which the domestic legal order imposes for the bringing of actions for recovery. Only with that overview, which the Italian courts alone have, is it possible to give a definitive answer.”

That is, with respect, obviously right and the ECJ cannot have intended to contradict it. Nothing is known, your Lordships were told, of the ultimate disposal of the Grundig Italia litigation.

56.  In these circumstances Grundig II cannot in my opinion be taken to establish much more than the general proposition that the principle of effectiveness requires that national legislation which curtails a limitation period, and does so in a way that infringes EU law, must be disapplied for an adequate period. It gives little, if any, reliable guidance as to the duration of the period. Neither Evans-Lombe J [2005] STC 707 nor Warren J [2005] STC 1327 understood it as laying down any rule about a six-month period: see the judgment of the former at paras 24 and 25 and the judgment of the latter at paras 38 (especially the last sentence) and 45 to 54.

57.  Fantask A/S v Industriministeriet Case C-188/95 [1997] ECR I-6783 was cited at length to your Lordships. For present purposes its main significance is, in my opinion, in showing what factors are not relevant to the national court’s task in disapplying national law. The case was concerned with whether official charges for the registration of Danish companies exceeded what was permitted by EU law (questions one to five referred to the ECJ) and with the consequences of the charges being excessive and unlawful (questions six to eight). The most material question was the seventh, that is whether, when a member state has failed to transpose a Council Directive correctly, EU law prevents that member state from relying on a national limitation period to resist an action for the recovery of charges levied in breach of the Directive, and continues to do so as long as the transposition has not been correctly effected. The ECJ rejected that argument, holding (at para 51) that its earlier decision in Emmott v Minister for Social Welfare Case C-208/90 [1991] ECR I-4269 had not laid down any general rule, but depended on its particular (and extreme) facts. The ECJ reaffirmed (in para 52) that the principle of effectiveness was the critical test.

58.  Fantask is also notable for a very illuminating general discussion in the opinion of Advocate General Jacobs. It steps back, as it were, and looks at the whole problem in context. The whole opinion merits attention but I restrict quotation to five paragraphs:

“68. The Governments’ arguments concerning the financial consequences of Emmott also raise an important point of principle. As they correctly observe, the Emmott ruling, if read literally, would expose Member States to the risk of claims dating back to the final date for implementing a Directive...

69. Moreover, such liability would arise even in the event of a minor or inadvertent breach. Such a result wholly disregards the balance which must be struck in every legal system between the rights of the individual and the collective interest in providing a degree of legal certainty for the State. That applies particularly to matters of taxation and social security, where the public authorities have the special responsibility of routinely applying tax and social security legislation to vast numbers of cases.

70. The scope for error in applying such legislation is considerable. Regrettably that is particularly so in the case of Community legislation, which is often rather loosely drafted....The recent Argos and Elida Gibbs cases provide a further example of how huge repayment claims can arise from a comparatively minor error in implementing a Community tax directive. In those cases the Court found that the fiscal treatment accorded by the United Kingdom to voucher transactions—used extensively in that Member State as a business promotion technique—was not in accordance with the Sixth VAT Directive. The resultant repayment claims are reported to be between £200m and £400m.

71. It might be objected that it is not unreasonable to require Member States to refund over-paid charges given that they were not entitled to collect them in the first place. However, that view disregards the need for States and public bodies to plan their income and expenditure and to ensure that their budgets are not disrupted by huge unforeseen liabilities. That need was particularly clear in Denkavit, in which repayment was sought of the annual levies imposed by the Netherlands Chambers of Trade and Industry in order to finance their activities. As was noted in my Opinion in that case, retrospective claims of up to 20 years would have had catastrophic effects on their finances.

72. In short, therefore, my main reservations about a broad view of the Emmott ruling are that it disregards the need, recognised by all legal systems, for a degree of legal certainty for the State, particularly where infringements are comparatively minor or inadvertent; it goes further than is necessary to give effective protection to directives; and it places rights under directives in an unduly privileged position by comparison with other Community rights. Moreover a broad view cannot be reconciled with the Court’s subsequent case-law on time-limits.”

The Advocate General also noted (paras 73-75) that there are different types of time limit in national legislation, and that they may call for different treatment. The ECJ did not comment expressly on these parts of the Advocate General’s opinion, but its judgment was not inconsistent with the Advocate General’s thinking. The importance of maintaining stability in public finances was acknowledged by the ECJ in Marks & Spencer II, [2002] ECR I-6325 para 41.

59.  Three other points of EU jurisprudence were raised and relied on by counsel for the respondents (Mr Southern for Mr Fleming and Mr Peacock QC for Condé Nast). The first point is the general principle that a Member State cannot rely on its own wrong. That principle does in a sense underlie the whole doctrine of directly enforceable rights (see Marshall v Southampton and South West Hospital Area Health Authority (Teaching) (Case 152/84) [1986] QB 401, paras 46 and 47, and also Advocate General Slynn in the fifth paragraph of his opinion, p 405). But it has been relied on, in the particular context of unlawfully exacted taxes, in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) [2001] Ch 620, paras 105-106, and again recently in Test Claimants in the Thin Cap Group Litigation v Inland Revenue Commissioners Case C-524/04 [2007] STC 906, paras 124-126. In each of those cases the United Kingdom was unable to rely on the fact that the taxpayer had not made a particular claim (in one case, to a group income election, and in the other case for clearance of a payment of interest to another group company) in circumstances where, under national law, the claim was certain to be refused.

60.  In my opinion that principle does not help the respondents in these appeals. Metallgeselschaft and Thin Cap were cases in which the United Kingdom was seeking to rely on a technicality in order to avoid liability for a serious breach of EU law. In this case, by contrast, there is no antecedent breach exacerbated by the imposition of a new time limit with no transitional period. The only breach is in the absence of the transitional period, and it is in its nature transient. The correct principle is to be found in Grundig II. To apply the “own wrong” principle in this case would be contrary not only to Grundig II but also to the general tenor of Fantask, which limits the effect of Emmott to extreme cases.

 
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