- This
is my judgment on preliminary issues ordered to be determined by the consent order
of Burton J, as limited by agreement between the parties. I was told that this
is a test case, on which others depend. (Indeed, much of the correspondence before
me relates not to the Claimant Council, but to Renfrewshire Council.) In order
to understand the issues I have to determine, it is necessary to summarise the
facts and refer to the relevant legislative provisions.
The
legislation in outline
- The
EC Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of
the Member States relating to turnover taxes requires the economic activities
of producers, traders and persons applying services to be subject to value added
tax. Persons who independently carry on such activities are "taxable persons":
see Article 4.1. Public Authorities are not taxable persons in respect of their
activities as such. Article 4.5 of the Directive is as follows:
"States,
regional and local government authorities and other bodies governed by public
law shall not be considered taxable persons in respect of the activities or transactions
in which they engage as public authorities, even where they collect dues, fees,
contributions or payments in connection with those activities or transactions.
However,
when they engage in such activities or transactions, they shall be considered
taxable persons in respect of these activities or transactions where treatment
as non-taxable persons would lead to significant distortions of competition.
In
any case, these bodies shall be considered taxable persons in relation to the
activities listed in Annex D, provided they are not carried out in such a small
scale as to be negligible. ..."
None
of the activities referred to in Annex D to the Directive is relevant to this
case; nor is the final paragraph of Article 4.5.
- The
provisions of the Sixth Council Directive are, of course, reflected in our domestic
legislation. Section 4(1) of the Value Added Tax Act 1994 ("the Act") provides:
"VAT
shall be charged on any supply of goods or services made in the United Kingdom,
where it is a taxable supply made by a taxable person in the course or furtherance
of any business carried on by him."
"Business"
denotes activities of a private economic nature, and does not include those of
public authorities as such. Section 94 defines "business" as including "any trade,
profession or vocation". Furthermore, "supply" in general does not include anything
done otherwise than for a consideration. The activities of public authorities
acting as such are not, in general, the carrying on of "any trade, profession
or vocation". A "taxable person", an important concept in the VAT legislation,
for present purposes can be defined as a person whose taxable supplies made in
the course or furtherance of his business exceed or are reasonably expected to
exceed in value prescribed sums during prescribed periods: see Schedule 1 to the
Act. Taxable persons are required to register and to account to the Commissioners
in respect of their taxable supplies: see section 25, to which I shall have to
refer below. It can be seen that a public authority that carries on no business
activity does not make any taxable supplies and is not a taxable person.
- Public
authorities such as local authorities pay VAT on the goods and services they acquire
for the purposes of their public functions. The Act makes provision, in section
33, for them to be able to reclaim that tax, even though they may not be taxable
persons and therefore are not liable to register as such. So far as is relevant
section 33 provides as follows:
"(1)
Subject to the following provisions of this section, where –
(a)
VAT is chargeable on the supply of goods or services to a body to which this section
applies, on the acquisition of any goods by such a body from another member State
or on the importation of any goods by such a body from a place outside the member
States, and
(b)
the supply, acquisition or importation is not for the purpose of any business
carried on by the body,
the
Commissioners shall, on a claim made by the body at such time and in such form
and manner as the Commissioners may determine, refund to it the amount of the
VAT so chargeable.
(3)
The bodies to which this section applies are –
(a)
a local authority; ..."
In
the case of local authorities, the effect of section 33 is that VAT on supplies
for their governmental functions is not a burden on council taxpayers, and that
the VAT income of central government is correspondingly reduced.
- However,
the activities of many authorities to which section 33 applies are not restricted
to non-business activities. Local authorities, for example, may operate car parks
and cafés or cafeterias, which are, for the purposes of VAT, business activities.
(C.f. the position of "hybrid" public authorities under section 6(3)(b) and (5)
of the Human Rights Act 1998.) If the supplies of the local authority for the
purpose or in furtherance of its business activities exceed the prescribed value,
it will be a taxable person in respect of those supplies, and bound to account
for its output tax accordingly.
- Generally,
taxable persons are entitled to deduct their allowable input tax from their output
tax when they account to the Commissioners for the latter. Section 25 provides,
so far as relevant:
"(2) Subject
to the provisions of this section, (a taxable person) is entitled at the end of
each prescribed accounting period to credit for so much of his input tax as is
allowable under section 26, and then to deduct that amount from any output tax
that is due from him.
(3) If
either no output tax is due at the end of the period, or the amount of the credit
exceeds that of the output tax, then, subject to subsections (4) and (5) below,
the amount of the credit or, as the case may be, the amount of the excess shall
be paid to the taxable person by the Commissioners, and an amount which is due
under this subsection is referred to in this Act as a 'VAT credit'."
Input
tax is VAT on "goods or services used or to be used for the purposes of any business
carried on or to be carried on by" a taxable person. Section 33 refunds are not
claims for input tax, because a claim under section 33 is by definition not for
goods or services used or to be used for the purposes of any business carried
on or to be carried on by a taxable person. Not all input tax may be the subject
of credit: hence the qualification in section 25 to input tax allowable under
section 26. That qualification is not relevant to these proceedings.
- Regulation
29 of the Value Added Tax Regulations 1995 ("the Regulations") in general requires
a person claiming deduction of input tax under section 25(2) to do so on a return
for the prescribed accounting period in which the VAT became chargeable. The return
is normally made in the familiar prescribed form VAT 100.
- Regulations
31 and 32 require a taxable person to keep and maintain his VAT account. For each
accounting period, the VAT account must comprise, among other things, the total
of output tax due from him for that period and the total of the input tax allowable
for that period under section 26 of the Act. The account must also include every
correction or adjustment to the VAT payable portion or to the VAT allowable proportion
of the VAT account which is required or allowed by regulations 34, 35 or 38.
- Regulation
35 is as follows:
"Where
a taxable person had made an error –
(a)
in accounting for VAT, or
(b)
in any return made by him,
then,
unless he corrects that error in accordance with regulation 34, he shall correct
it in such manner and within such time as the Commissioners may require."
Notice
700/45/93 imposes a 3-year time limit on such corrections.
- In
principle, a public authority to which section 33 applies and which carried on
sufficiently large business activities to be also a taxable person would have
the following accounting position in relation to the Commissioners:
- It
would be entitled to claim under section 33 the VAT it had incurred on goods and
services it acquired for non-business purposes.
- It
would be liable to account to the Commissioners under section 25 for its output
tax on its business supplies, and to pay that VAT to them, subject to (c).
- It
would be entitled to credit for its input tax (i.e. the tax incurred by it on
business supplies) when accounting for and paying its output tax.
- The
VAT legislation makes provision for taxable persons to reclaim tax in excess of
that which they were liable to account to or to pay to the Commissioners. So far
as is relevant, section 80 provides 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.
(4) 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.
(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 provisions 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."
- As
can be seen, section 80 is, by virtue of subsection (7), the exclusive remedy
of a taxable person for repayment of "an amount paid to them by way of VAT by
virtue of the fact that it was not VAT due to them". Prior to 18 July 1996, the
limitation period provided by section 80(4) was 6 years from the date the tax
was paid, with provision for an extension of that period on the ground of mistake.
With effect from 18 July 1996, the limitation period was reduced to
3 years by the retrospective operation of the Finance Act 1997. In Marks &
Spencer v Commissioners for Customs and Excise (Case C-62-00, judgment of
11 July 2002, [2002] STC 1036), the European Court of Justice held that the retrospective
operation of the legislation was contrary to European law. The parties indicated
that they would consider the potential impact of that case on their respective
rights and liabilities. It is common ground that I need not consider, for the
purposes of the preliminary issues, the effect (if any) of that decision on the
issues under domestic law which I have to determine.
- There
are other provisions imposing 3-year time limits relevant to claims for sums overpaid
or accounted for by way of VAT: see Regulation 29(1A) (claims for input tax),
and Regulations 34 and 35 (corrections on VAT returns). Registration 34 is irrelevant:
it applies only to small claims, of sums less than £2,000 during a prescribed
accounting period. By the Commissioners' Notice 700/45/93, a 3-year time limit
was applied to corrections of VAT returns with effect from 1 May 1997.
- However,
until 1 April 2000, there was no similar limitation on claims under section 33
by authorities to which that section applied. Pursuant to section 33(1), the Commissioners'
Business Brief 26A/99 imposed a 3-year time limit on section 33 claims lodged
after 31 March 2000: more precisely, the Commissioners required claims to be made
within 3 years of the due date of the return for the prescribed accounting period
in which the VAT became chargeable. For claims lodged by a section 33 authority
on or before 31 March 2000 for VAT paid or accounted for more than 3 years previously,
therefore, it is crucial to determine whether the claim falls under section 80
or section 33, or some other and if so what provision, or was the subject of some
other, and if so what, time limit.
- Section
80 applies "Where a person has ... paid an amount to the Commissioners by way
of VAT which was not VAT due to them ...". One of the issues before me is whether
that reference to payment includes the satisfaction of a liability or perceived
liability by set off. Section 81 requires set off between amounts due from the
Commissioners to any person under any provision of the Act and that person's liability
to the Commissioners for, among other things, VAT. In so far as relevant, it provides:
"(3) Subject
to subsection (1) above, in any case where –
(a)
an amount is due from the Commissioners to any person under any provision of this
Act, and
(b)
that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,
the
amount referred to in paragraph (a) above shall be set against the sum referred
to in paragraph (b) above and, accordingly, to the extent of the set-off, the
obligations of the Commissioners and the person concerned shall be discharged.
(3A) Where
–
(a) the
Commissioners are liable to pay or repay any amount to any person under this Act,
(b) that
amount falls to be paid or repaid in consequence of a mistake previously made
about whether or to what extent amounts were payable under this Act to or by that
person; and
(c) by
reason of that mistake a liability of that person to pay a sum by way of VAT,
penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,
any
limitation on the time within which the Commissioners are entitled to take steps
for recovering that sum shall be disregarded in determining whether that sum is
required by subsection (3) above to be set against the amount mentioned in paragraph
(a) above."
The
facts
- The
Claimant is by definition an authority to which section 33 applies. Most of its
activities are not business activities for the purposes of the Act. However, like
many, if not most, local authorities, it also carries on business activities and
is a taxable person in relation to its taxable supplies.
- The
VAT legislation does not require a section 33 authority which is not also a taxable
person to submit VAT returns: such claims are paid by the Commissioners on receipt
of a completed claim in the prescribed form. However, since the Council was a
taxable person, and therefore was required as such to submit periodic VAT returns.
For convenience, by their Notice 749 the Commissioners directed the Claimant (and
similar authorities) to claim its section 33 refund in the same way and in the
same document as it accounted for its output tax and claimed credit for its input
tax, i.e., in the prescribed periodical VAT return known as form VAT 100, in boxes
4 and 5, in the manner in which the Council in fact did so as summarised below.
- Under
the Housing Grants, Construction and Regeneration Act 1996 and the Local Government
Housing Act 1989, the Claimant provided grants towards the cost of works for the
improvement and repair of homes. The grant was means-tested, and in practice government
funded the vast majority of the works. The recipient of a grant ("the grantee")
was free to appoint any suitable professional person or organisation to manage
the work on his behalf and to assist in the completion of the necessary documentation.
However, in virtually all cases, the grantee appointed Cardiff County Council
Grant Agency, a division of the Council, to oversee the works. Whether the grantee
appointed the Grant Agency or a private firm of surveyors or the like, a grant
was available from the Claimant to meet the fees for supervising the works. Where
the Council's Grant Agency supervised the works, payment of the grant was made
by the Council directly to the building contractor, against his invoices to the
grantee. Where the Council was paying the whole of the cost of the works, the
Grant Agency did not issue any invoices to the grantee in respect of any supervision
fee in respect of its supervision of the works, because the grantee made no payment
to the Agency: if any payment were to have been made, the Council would have been
paying itself. In some cases, the means test resulted in some payment being made
by the grantee to the Council in respect of the Agency fee; normally, however,
this was a small proportion of the fee that might have been charged on an arm's
length basis. However, the Council's practice was to bring into existence internal
accounting entries showing an "agency fee" calculated at 13% of the total value
of the works undertaken, irrespective of whether any payment had been or was to
be made by the grantee. No invoice was issued by the Council for the notional
agency fee. However, the Council treated that "fee" as a taxable output, on which
VAT was payable, and it accounted for that VAT accordingly to the Commissioners,
and took credit for input tax attributable to its supervision of the works.
- During
the period in question in these proceedings, the Council accounted for VAT on
the notional agency fees for the provision of its supervisory services, rather
than on the payments it actually received from grantees. That VAT was declared
through the Council's VAT returns. It is accepted by the Commissioners, for the
purposes of this claim, that the practice of the Council to account for VAT on
the notional agency fees as if they were fees actually paid by grantees was incorrect,
and that no VAT was payable on those notional fees. It is similarly common ground
that the input tax accounted for in relation to the unpaid agency services should
not have been so accounted for.
- For
all accounting periods in question (apart from one, namely April 1996, which I
shall ignore for the purposes of the discussion of principle in order to avoid
unnecessary complication), the amounts to which the Council was entitled to be
paid by the Commissioners under section 33 exceeded its output tax on its business
activities. Because the Council did not claim section 33 refunds separately from
its VAT returns made by it in relation to its business activities, the sums entered
in Box 4 in Form 100 were an amalgamation of section 33 claims and claims for
credit for input tax, and the sum claimed by the Council by submitting its returns
consisted of the VAT which it considered to be due in the period in question on
sales and other outputs (box 1), less section 33 claims and input tax, undifferentiated
(box 4); and the difference between those two sums was entered in the return in
box 5 as "Net VAT ... reclaimed by (the Council)". Because the sums entered in
box 3 always exceeded the sums entered in box 4, the Council never paid money
to the Commissioners: the Commissioners would pay to the Council the sum entered
in Box 5.
- Each
of the returns therefore included the following errors:
- Box
1 (VAT due on sales and other outputs) included the amount of output tax that
the Council mistakenly recorded as due in respect of the notional fees of the
Grant Agency; so did box 3 (total VAT due).
- The
calculation that produced the amount entered in box 4 included the relatively
small sum claimed as a credit for input tax referable to the supervisory work
of the Grant Agency for which no fee was actually received. However, since, if
the Council had correctly treated the notional fee for Agency services as non-taxable,
that sum would in any event have been included in the section 33 claim which was
also included in box 4, the figure actually entered in box 4 was correct. (A worked
hypothetical example of this is set out in the Commissioners' letter of 26 March
2001.)
- The
amount entered in box 5 (i.e. the difference between the amount in box 3 and that
in box 4) was correspondingly too small.
There
were also, presumably, corresponding errors in Boxes 6 and 7, but these add nothing
relevant.
- In
consequence of these errors, the sums paid by the Commissioners to the Council
were smaller than they would otherwise have been. The Commissioners paid the sum
entered in box 5 in each return.
- Although
the returns made by the Council did not differentiate between its claims for section
33 refunds and its claims for credit for input tax, the amounts it believed to
have been entitled to by way of credit for input tax should, and I assume were,
recorded in its VAT account, as were the sums it considered to be the total of
output tax for which it was liable to account in each period. Correction of these
accounts would involve reducing the sum recorded as input tax in each accounting
period, and more significantly reducing the sum recorded as output tax.
- In
December 1999, the Commissioners announced, in BB/26A/99, that VAT refund claims
made under section 33 and lodged after 31 March 2000 would be subject to a three
year time limit.
- By
letter dated 30 March 2000, Price Waterhouse Coopers ("PWC") on behalf of the
Claimant claimed from the Defendants over £800,000 by way of VAT that the Claimant
had mistakenly accounted for to the Defendants between 1 January 1991 and 29 February
2000. The Defendants accept, for the purposes of this claim, that the Claimant
did mistakenly account to them for sums in excess of their legal obligation. They
have paid to the Claimant the sums mistakenly accounted for between 1 April 1997
and 29 February 2000, but they have rejected their liability in respect of sums
over accounted for more than 3 years from the date of the claim on the ground
that their liability is limited to sums mistakenly accounted for within 3 years
of the date of the claim.
- In
these proceedings, the Claimant seeks judicial review of the decision of the Commissioners
to reject their claim for sums for which it over-accounted to them more than 3
years before the date of the claim contained in the letter of 30 March 2000. The
parties have agreed that the preliminary issues to be decided by me are the following:
(i) Was
the Claimant's claim for a payment within section 33 of the Value Added Tax Act
1994?
(ii) Was
the Claimant's claim time-barred by virtue of :
(a) Section
80 of the Act?
(b) Regulation
35 of the VAT Regulations 1995?
These
issues are narrower than those ordered to be determined by the Order of Burton
J of 6 March 2002, and that order will therefore be amended accordingly.
Discussion
- The
Council's claim is both a claim for output tax for which it over-accounted and
for the unpaid VAT refund to which it was entitled under section 33. The over-declaration
of output tax led to an insufficient claim for section 33 refund (although that
claim was not differentiated in the Council's returns from the credit it claimed
for input tax), and therefore an underpayment by the Commissioners of that refund.
Thus the answer to issue (i) is affirmative; but the dual nature of the claim
must not be overlooked. Nor must the fact that to a minor extent there was, albeit
not express, an excessive claim for input tax, i.e. the input tax thought by the
Council to be referable to the Agency fees. Although the claim for input tax was
not separately quantified in the return, the Council's perceived input tax should
have been shown in the VAT account maintained by the Council under Regulation
32.
- It
may be that in an orderly system, the classification of the underpayment, its
causes, and the statutory basis of the Council's claim to be put in the financial
position it would have been in if no mistake had been made by it, would be irrelevant;
unfortunately, because of differences in the timing of the introduction of the
3-year limitation period, the statutory basis of the claim may be decisive; and
the observation in the first sentence of the previous paragraph does not resolve
the issue.
- Before
addressing the preliminary issues, I mention two points that go to the merits
of the parties' cases. The Council, asserts that it is simply trying to be put
into the position in which it should have been if it had not made a mistake as
to the VAT treatment of its agency service. The Commissioners make the point that
if they had not for convenience required the Council's section 33 claims to be
amalgamated with its VAT returns, and the payment of the sums (a) under section
33, and (b) to or from the Council as a taxable person, amalgamated, the present
claims would unquestionably have been capped by section 80; and it is odd that
the form of return adopted for convenience should have a substantive affect on
the parties' rights and liabilities.
- It
is convenient first to address the issues raised in relation to section 80.
Section
80
- Section
80 applies only to those who have "paid" to the Commissioners "an amount by way
of VAT that was not (in fact) VAT due to them": subsections (1) and (7). The word
"paid" and like expressions ("pay", "payment") are protean. They may be construed
as being restricted to the actual transfer of money as cash or funds at a bank;
or they may include other means of satisfying debts, including the satisfaction
of debts by means of set off or the settlement of accounts. Examples of the wider
interpretation of such expressions are Spargo's Case (1873) 8 Ch App 407,
in which the expression "payment in cash" was held to include payment to the company
of the nominal value of shares by an agreed set off of mutual debts; and White
v Elmdene Estates Ltd [1959] 3 WLR 185, in which the landlord's requirement
that the tenants sell their house to an associated property company at a price
that was £500 less than its market value was held to constitute "the payment of
(a) premium" prohibited by statute. Of course, context is everything. The object
of the requirement that shares should be paid in cash was that the company should
have received full value for its shares: and in Spargo's Case the company
had done so just as much as if it had paid to the shareholder the sum due to him
and he had paid to the company the sum due to it on the shares. In White v
Elmdene Estates Ltd the court was concerned with an arrangement that would
have circumvented legislation protective of residential tenants in times of a
shortage of accommodation: from that point of view, there was no difference between
requiring payment by a tenant and requiring him to transfer property at an undervalue.
- Since
section 80 imposes an express obligation on the Commissioners to repay sums, to
which they were not entitled, one might have thought that it would be widely construed;
but it has not been. Hitherto, "paid" has been construed as restricted to actual
payment, and not to include the satisfaction of a taxable person's right to input
tax by its deduction from his output tax pursuant to section 25. It appears curious
that the rights of taxable persons who overpay VAT should have been different
(by reason of the limitation period or "cap" in section 80(7)) from those of persons
who did not actually pay tax, but received an inadequate repayment from the Commissioners.
Be that as it may, the restriction of section 80 to those who made actual payments
led to a distinction being drawn between so-called payment traders, whose output
tax exceeded input tax, so that they made payments to the Commissioners by way
of VAT when they made their returns, and repayment traders, whose input tax exceeded
their output tax, and therefore received payment of their tax credits from the
Commissioners after submitting their returns. Claims by payment traders for refunds
of tax overpaid by them were regarded as capped by section 80; claims by repayment
traders, for additional tax credits, were not, because they had not made any payment
by way of VAT to the Commissioners.
- The
concepts of payment and repayment traders are not to be found in the legislation,
and are unhelpful. There is no dichotomy. While some traders are always the one
or the other, others will sometimes make payments with their returns and at other
times (because, for example, of a large purchase resulting in unusually large
amount of input tax) receive a tax credit. Whether there has been an actual overpayment
of (or insufficient credit for) tax must be determined by reference to the individual
VAT return that resulted in it. The position is further complicated because a
claim against the Commissioners may be partly for the refund of tax actually paid
and partly for an insufficient tax credit, as where a trader has mistakenly accounted
for £250 more of output tax than he in fact paid or incurred during his accounting
period, and his return showed an excess of output tax over input tax of £100,
which he had paid to the Commissioners. In such a case, if section 80 is construed
as restricted to money payments, the trader's claim is as to £150 under section
80 and as to £100 outside it.
- The
first case in which the narrow interpretation was applied was R v Customs and
Excise Commissioners, ex parte Kay & Co Ltd [1996] STC 1500, decided in
November 1996. The issue there was whether the Commissioners were entitled to
defer repayment of overpaid VAT in order to take advantage of the legislation
expected to be introduced to impose the retrospective 3-year limitation period
on claims. Not surprisingly, Keene J held that the Commissioners had no power
to defer payment without legislative authority. It seems to have been assumed
that those who received tax credits under section 25 had not "paid" a sum by way
of their output VAT. The payment-by-set-off argument does not appear to have been
raised. Rather it was argued for the Commissioners that payment had been made
by the taxpayer to the Commissioners by the payment of his input tax to his suppliers.
- Following
the decision in Kay, the Commissioners issued a DCL in January 1997, in
which they advised that claims by payment traders only were capped by section
80, and that repayment traders' claims arising out of their having made too small
claims for tax credits were not capped. In a series of FAQs, the DCL stated: