Not Retrospective This Time

The Court of Appeal overruled the High Court's decision in R v Commissioners of Customs and Excise, ex parte Building Societies Ombudsman Co Ltd, and decided in the taxpayer company's favour.

The appellant company claimed a repayment of VAT relating to subscriptions and certain other charges paid by participating members. Customs, having accepted that the charges were not subject to VAT, deferred payment of the claim pending the introduction of the three-year cap. They eventually made the repayment after a tribunal ruled that it should be made, but later raised a clawback assessment. The Court of Appeal said that the cap could not override judicial decisions, and allowed the taxpayer company's appeal.

Background

The Building Societies Ombudsman Co Ltd employed the independent ombudsman, and assisted in the regulation of building societies. It registered for VAT in 1987, and paid VAT on subscriptions and other charges paid by the participating building societies. In April 1995, the Building Societies Ombudsman Co wrote to Customs requesting them to determine whether or not subscriptions and charges were liable to VAT. After some correspondence, Customs in June 1996 confirmed that the subscriptions and charges were not taxable. So in August 1996, the Building Societies Ombudsman Co submitted its formal claim for the VAT which it had overpaid.

Meanwhile, however, in July 1996, the Government announced its intention to introduce the three year limit for retrospective refund claims to come into effect from 18 July 1996, subject to Parliamentary approval. Customs' policy in the light of that was to refund agreed claims made in writing prior to 18 July, but to defer payment of unagreed claims. Thus no refund was made to the Building Societies Ombudsman Co.

In November 1996, the Building Societies Ombudsman Co appealed on the ground that Customs had no right to defer refund payments pending the introduction of the three-year time limit. Later that month, Customs agreed that the taxpayer company's appeal should be allowed, following an earlier appeal in October where challenges to Customs' action in deferring refund payments had been successful. Thus, with effect from 16 December the Building Societies Ombudsman Co's appeal was allowed, and in January 1997, Customs issued the refund.

The inexorable process of the new legislation was continuing, however, with Parliament passing a resolution on 4 December 1996 that the three-year limitation should be imposed from 18 July 1996. Then on 19 March 1997, Finance Act 1997 inserted a new section 80(4) into VAT Act 1994 imposing the three-year limitation and deeming it to have come into force from 18 July 1996.

Customs next move was to raise an assessment on the Building Societies Ombudsman Co, made under section 80(4A) which states:

'Where –

Section 80(4B)(a) describes the 'repayment liability' as:

'in a case where any provision affecting the amount which they were liable to repay to that person at that time is subsequently deemed to have been in force at that time, the amount which the Commissioners are to be treated in accordance with that provision, as having been liable at that time to repay to that person;'

The Building Societies Ombudsman Co applied for a judicial review of Customs' action on the grounds that:

• the repayment did not exceed Customs' repayment liability at the time of the refund, because that liability had been conclusively determined in the tribunal's decision in December 1996;
• legislation was not intended to override retrospectively judicial decisions;
• as the three-year limit was in force when the repayment was made, Customs' repayment liability was the amount which they were liable to repay at the time of the repayment;
• Customs' decision to make a section 80(4A) assessment was unfair and inconsistent, because the previous correspondence showed that the claim had been agreed, there had been undue delay in reaching that agreement, other taxpayers in similar situations had been exempted, and a notice period had been allowed before the three-year cap relating to input tax claims had been introduced. The decision was also unfair because Building Societies Ombudsman Co was not a taxable person, and the decision therefore contravened the Sixth Directive;
• the making of the assessment breached European Community law principles of equivalence, effectiveness and proportionality, and infringed the company's human rights to retain the sums paid.

In the High Court, Mr Justice Moses held that the tribunal's decision had not determined Customs' repayment liability. Furthermore, even if it had, the decision was overridden by section 80(4A) and (4B)(a), which entitled them to make a clawback assessment. Customs had acted rationally in making that assessment, and European Community law had no relevance on domestic law once it had implemented the requirements of the Sixth Directive. The Building Societies Ombudsman Co therefore appealed to the Court of Appeal.

(Roderick Cordara QC and Perdita Cargill-Thompson for the taxpayer company; Paul Lasok QC and Peter Mantle for Customs.)

The Court of Appeal decision

Lord Justice Rix delivered the first judgment. He looked first at the tribunal's decision to see if this had determined the company's claim. The tribunal had decided in line with an earlier tribunal decision, viz., Royal College of Obstetricians and Gynaecologists (14558). Lord Justice Rix said although the decision was made in favour of the taxpayer company, there had been a reservation favouring Customs. This was that should there be a successful appeal in respect of the Royal College of Obstetricians and Gynaecologists case, then Customs would have a right to appeal in the instant case.

Customs said that the only issue before the tribunal in Building Societies Ombudsman Co was the policy of deferral, it had not concerned the merits of the claim itself. Lord Justice Rix disagreed, in accepting the tribunal decision, Customs were accepting that a monetary claim had been made against them, and that they would pay the claim.

The judge did not agree with Mr Justice Moses that the tribunal's decision was not a final determination of Customs' repayment liability. The Building Societies Ombudsman Co had had to appeal to the tribunal because liability had not been assumed or admitted. If it had, then the company would have been paid. However, Customs was following its policy of deferral and did not wish to repay the company except on the basis that the three year cap was in place. There was a dispute as to the amount being claimed, and the tribunal had jurisdiction to determine the liability and quantum.

Counsel for the appellant raised the question as to the extent to which the retrospective provisions of the amended legislation were intended to operate. Could the clawback provisions apply where a judicial decision preceded the clawback assessment? The appellant argued that very clear words were required for legislation to be able to do this.

Lord Justice Rix said that the whole of section 80 was expressed in terms of a claim for repayment. Moreover, section 47(2) which states that the three-year cap should be retrospective to 18 July 1996, expresses the retrospectivity as applying to 'all claims under section 80 … including claims made before that date'. Nothing, however, specifically related to claims which had resulted in a judicial decision. Such a judicial decision would be a judgment as to the extent of Customs' repayment liability rather than a claim to repayment.

The judge also commented on the fairness of the legislation. He said that 'the statute's intention to turn a six-year cap (or not cap at all where payment of VAT had been made by mistake) into a three-year cap, without any warning, is hardly fair'. He went to say that the 'unfairness cannot be ameliorated by warning the hapless taxpayer, at a time when the Commissioners pay what the law requires them to repay, that they are looking forward to the time when Parliament will enable them to recover that repayment … by a retrospective removal of a valid claim'. If Government wanted to impose such a policy then it had to ensure that it was done 'meticulously and clearly'.

In the instant case, it was not acceptable for Customs to go so far as to litigate the claim with the taxpayer, concede that it must make the repayment, but then say that their repayment liability was other than had been judicially determined. If Parliament had intended that judicial determinations could be so overthrown, then it could easily have decreed that in the legislation.

The fact that the tribunal decision took effect after 4 December, i.e., the date when the resolution relating to the cap was made in Parliament, was an 'oddity'. The judge said that Customs could have appealed the decision, but they did not. In the event, a judgment was made against them, and it was difficult to see then how Customs' judgment could override a judicial determination. Thus Customs could not make a clawback assessment after a tribunal had determined the repayment.

The next issue under consideration was whether or not the retrospective provisions in section 80(4B)(a) applied to the instant case. Lord Justice Rix thought that Customs were wrong to rely on section 47, Finance Act 1997 (which inserted the new section 80(4A) and (4B) into the VAT Act 1994). The three-year cap was already in force when Customs made the repayment in January, and nothing was changed by the Finance Act 1997 coming into effect in March 1997.

The amount which Customs had to repay the Building Societies Ombudsman Co was decided by the tribunal, this established Customs' liability, and the decision 'for good measure' came into effect after the new régime. What entitled Customs, asked the judge, 'who permitted that decision to be made against them by consent, to say that it could just be disregarded?'. The second issue too was found in the taxpayer company's favour.

Lord Justice Rix mentioned that he had not needed to consider the human rights aspects in reaching his decision, adopting rather 'a purely English law pre-Human Rights Act 1998 approach … to reach conclusions which … reflect both the legislative intent of Parliament and the fairness of the situation'.

Overall, the judge concluded that the three-year cap did not apply retrospectively or at all so as to invalidate the tribunal's decision.

Lord Justice Mummery agreed with Lord Justice Rix that, on those points alone, the appeal should succeed. However, he added that the right to a refund of VAT arose from domestic law enforcing European Community law, and that there was no right to a refund under the Sixth Directive. The refund provisions were embodied in section 80, VAT Act 1994, and thus claims to refunds were governed by those provisions rather than the Sixth Directive.

Finally, there was no need to refer to the European Court of Justice in order to decide the appeal.

Lord Justice Nourse agreed with both judgments.

Decision for the taxpayer company

(Reported at [2000] STC 892.)

Commentary by Allison Plager

The crucial point in their Lord Justices' decision was that Customs could not overrule a determination made by the tribunal, despite the decision having been made perhaps incorrectly after the three-year cap régime came into existence. Lord Justice Rix pointed out that Customs had the opportunity to appeal the tribunal's decision, but chose not to. If they were not satisfied with the outcome then they should have challenged it in the proper way.

It is also reassuring that Lord Justice Rix found no need to consider the new human rights legislation in reaching his conclusions, relying rather on the existing English law to ensure that justice was done.

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