(back to preceding text)

61.  The second point is the general principle that if a Member State is in breach of a Council Directive, its breach must be remedied by proper legislation, and not merely by administrative action. The ECJ said in EC Commission v United Kingdom Case C-33/03 [2005] STC 582, para 25:

“it is settled case law that the 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 be regarded as constituting the proper fulfilment of obligations under Community law (EC Commission v France, Case C-197/96 [1997] ECR I-1489, para 14; EC Commission v Italy, Case C-358/98 [2000] ECR I-1255, para 17, and EC Commission v Italy, Case C-145/99 [2002] ECR I-2235, para 30).”

However that principle does not in my opinion apply here, for similar reasons to those mentioned in the last paragraph. The issue in this case is not the continuing non-transposition (or incorrect transposition) of a Council Directive; neither counsel put his case that way. Any action to be taken by the United Kingdom government to define a deferred transitional period for claims under regulation 29 (whether in the form of legislation, or the announcement of an official administrative policy) is relevant, not as a transposition of any part of the Sixth Directive, but as bearing on the duration of the “adequate transitional period” referred to in Grundig II.

62.  The third point, closely associated with the second, is whether the definition of an adequate transitional period is properly a matter for the national court (that is, in these appeals, for your Lordships’ House in its judicial capacity) and not for the legislature. My Lords, in my opinion that task is not merely within your Lordships’ power but is your Lordships’ plain duty under EU law. The disapplication of offending legislation is the duty of the national court, even if it involves action which would otherwise be alien to the strong judicial instinct not to intrude on the province of the legislature. Jurisprudence under section 3 of the Human Rights Act 1998 (such as Ghaidan v Godin-Mendoza [2004] 2 AC 557) is in this context irrelevant and misleading. The guiding principles are those set out in the seminal judgment of the ECJ in Amministrazione delle Finanze dello Stato v Simmenthal SpA, Case-C 106/77 [1978] ECR 629, paras 2024. The importance and binding nature of these principles has recently been explained by Peter Gibson LJ in Autologic Plc v Inland Revenue Commissioners [2005] 1 WLR 52, paras 22-25. The authority of those remarks is not diminished by the decision of this House [2006] 1 AC 118; see especially the observations of Lord Nicholls of Birkenhead in para 17, referring to formal statutory requirements being “disapplied or moulded” and later referring to “adapting” national provisions.

63.  My Lords, having set out the background to these appeals at (I fear) tedious length I can state my opinion fairly shortly (especially as I am, I understand, differing from the majority of your Lordships).

64.  I would unhesitatingly reject Analysis D, which Mr Vajda regarded as his last-ditch position. The essence of a limitation period is that it operates impartially (arbitrarily, even) in the interests of finality and certainty. (The fact that some national legal systems make special provision for cases of disability or mistake does not alter the general principle.) It would be contrary to legal certainty, and administratively unworkable, for the extent of disapplication to depend not only on the duration of the transitional period but also on an hypothetical question to be answered by reference to the circumstances and states of mind of particular tax payers. It would be unworkable regardless of whether the burden of proof lay on the Commissioners or on the taxpayer. The ECJ observed in Optigen Ltd v Customs and Excise Commissioners (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] Ch 218, 240, para 45:

“As the court held in BLP Group plc v Customs and Excise Comrs (Case C-4/94) [1996] 1 WLR 174, 199, para 24, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question.”

65.  The “would have” test might be thought to obtain some support from the decision of this House in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2007] 1 AC 558, which involved an enquiry as to the state of mind of in-house legal advisers in the taxpayer bank. But Deutsche Morgan Grenfell was a case in which the taxpayer was claiming a refund of unlawfully exacted corporation tax and was relying on a provision in national legislation - section 32(1)(c) of the Limitation Act 1980 - in support of a restitutionary claim for overpaid tax going back more than six years. There had been a mistake and there was an issue as to when the mistake was, or could with reasonable diligence, have been discovered. If that sort of issue is relevant to the appeals at all, it must be as part of the objective assessment of an adequate transitional period under Analysis B.

66.  I would also reject Analysis C as going beyond what the principle of effectiveness requires, and as being contrary to the guidance (general though it is) given by the ECJ in Grundig II. Claims under regulation 29 are not for tax unlawfully exacted, but for a refund of input VAT which the taxpayer has (for one reason or another) not claimed promptly. The only breach of EU law lies in the failure to provide transitional provisions as part of the 1996-7 amendments. The problem might have been resolved (and would have been better resolved) by further primary or secondary legislation, but Parliament and the Commissioners chose not to take that course. In these circumstances disapplication is, for the reasons stated in Simmenthal, a task which the national court has both the power and the obligation to undertake, and Grundig II shows that disapplication for an adequate transitional period is the appropriate response.

67.  It does not follow, however, that a period which would have been adequate, if clearly fixed in advance by transitional provisions, will be adequate for the purposes of Grundig II. If you know the time of the last bus or tube you are in a much better position to organise your evening than if you do not know when public transport stops. The 1996-7 amendments were the equivalent of abruptly telling some taxpayers that there was no more public transport for them that day. It would take most of them some time to realise that the authorities had no right to act in that way.

68.  In Grundig II the Italian amending law did provide a transitional period (90 days) but it was inadequate. The fact that there was some transitional period on the face of the legislation may have made it marginally more likely that the average payer of the Italian consumption tax would grasp the idea that EU law might require a longer transitional period. That would suggest the need for an even longer transitional period where the legislation does not give the taxpayer that clue. But that is only a minor reason for rejecting, as I would, Analysis A. Much the more important reason is that where no adequate transitional period has been fixed in advance, so giving legal certainty, the resulting uncertainty requires that taxpayers should be given longer to work out where they stand. To that limited extent, therefore, I would apply the principle that the Commissioners cannot benefit from their own breach of EU law.

69.  In my opinion the correct answer lies within the range covered by Analysis B. Well-informed taxpayers would have been aware, by the end of 1999 if not before, that Marks and Spencer was making a determined challenge to the lawfulness of the 1996-7 amendments, and that a reference was being made to the ECJ. But not all traders registered for VAT are large enterprises with ready access to expert advice. Moreover (especially for those wishing to make late claims for input tax) the University of Sussex litigation (if they were aware of it) provided a further complication. Mr Vajda rightly did not contend for an earlier date under Analysis B, than 11 January 2003 (six months after the judgment of the ECJ in Marks and Spencer II). In my opinion that date best fits the guidance given in Grundig II. BB 22/02 and BB 27/02 were, with hindsight, ill-advised, but I do not think that the claims period should be prolonged because of them.

70.  Mr Fleming claimed a refund of input tax of about £127,000. His claim was made 23 October 2000 in a letter by way of voluntary disclosure. He had not made a claim sooner, it seems, for a variety of reasons, including the fact that he did not have a proper tax invoice. For the reasons set out above, which are very different from the majority of the Court of Appeal, I would dismiss the Commissioners’ appeal in his case.

71.  Condé Nast claimed a refund of input tax of about £115,000 in respect of sums spent on staff entertainment. The claim was made on 27 June 2003 in a letter by way of voluntary disclosure. The input tax went back as far as the introduction of VAT in 1973. It had not been claimed by way of credit and deduction over 30 years or more of quarterly returns, apparently because the trouble and expense of identifying and vouching the items of expenditure. In my view the claim was made more than a reasonable time after a taxpayer of average diligence would have been aware that regulation 29 (1A) could be disapplied. I would therefore allow the Commissioners’ appeal and restore the decision of the Tribunal (though for very different reasons than those on which the Tribunal relied).

72.  Neither appeal is concerned with a claim under section 80 of VATA 1994. Mr Vajda told your Lordships that the Commissioners hoped that the determination of these appeals would also settle the position in relation to claims under section 80. I rather doubt whether the House should go that far, since some section 80 claims (unlike regulation 29 claims) involve a serious antecedent breach of EU law as well as the imposition of the 1996-7 amendments without adequate provisions. Arguably different considerations would apply in such cases. I express no view on that. But I consider that routine section 80 claims call for the same treatment as regulation 29 claims.

LORD CARSWELL

My Lords,

73.  I have had the benefit of reading in draft the opinions prepared by my noble and learned friends Lord Hope of Craighead, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. Lord Walker has set out the facts, law and issues with such clarity that it would be altogether superfluous if I were to attempt to repeat any of those matters.

74.  In respect of the Commissioners’ appeal in the case of Mr Fleming (t/a Bodycraft) I entirely agree with Lord Walker’s reasons and conclusions and have nothing to add.

75.  In respect of the Commissioners’ appeal in the case of Condé Nast Publications Limited, I agree with Lord Hope and Lord Neuberger that the appeal should be dismissed. It seems to me that two issues arise out of this case. The first, which relates to the individual taxpayer (and others in like situations) is whether the Commissioners can be permitted in the circumstances of the case to refuse Condé Nast’s claim for repayment of input tax which had not been earlier deducted when they paid the output tax. The second, which is of more general import, is whether the Commissioners or the legislature have taken sufficient steps to specify a transitional period for submitting claims for the deduction of input tax despite the introduction of the time limit by the added regulation 29(A) of the Value Added Tax (Amendment) Regulations 1997 (S1 1997/1086).

76.  In order to comply with the principle of effectiveness, it was necessary for taxpayers to have sufficient information for them to know that they could submit claims for deduction of input after the introduction of the time limit. No transitional period was afforded by the legislature when regulation 29(1A) was passed into law. The Commissioners could not properly have refused to accept such claims if a reasonable transitional period had not elapsed after regulation 29(1A) came into operation on 1 May 1997. They had notified taxpayers in a series of Business Briefs that they would until 30 June 2003 accept claims under section 80 of the Value Added Tax Act 1994 for repayment of overpaid VAT. They maintained that late claims for refund of under-deducted input tax were governed by section 80 of the 1994 Act. Neuberger J ruled in a judgment given on 10 October 2001 in University of Sussex v Customs & Excise Comissioners [2001] STC 1495 that this contention was incorrect and that they were governed by regulation 29 of the 1997 Regulations. The Commissioners appealed, still contending that section 80 applied to such claims, but their appeal was eventually dismissed by the Court of Appeal on 21 October 2003 ([2003] EWCA Civ 1448, [2004] STC1). Until the last-mentioned date a taxpayer in the situation of Condé Nast was faced with the Commissioners’ insistence that his claim fell not within regulation 29 but within section 80, in respect of which claims were to be accepted up to 30 June 2003. No doubt with an eye to this date, Condé Nast’s advisers lodged their claim on 27 June 2003. In my opinion it would have been wholly unreasonable to expect a taxpayer to have to divine that the Commissioners’ appeal would be dismissed and that he should submit his claim on some earlier date than 30 June 2003, such as six months after 11 July 2002, the date on which the European Court of Justice gave its decision in Marks and Spencer Plc v Commissioners of Customs & Excise (Case C - 62/00) [2002] ECR I - 6325, or 24 September 2002, the date on which that court gave its decision in Grundig Italiana SpA v Ministero delle Finanze (Case C - 255/00) [2002] ECR I - 8003. If the case were to be decided on this issue, I should have been prepared to hold that a reasonable transitional period extended later than 27 June 2003.

77.  For the reasons given by Lord Hope and Lord Neuberger, I do not consider that this is the determinative issue. I agree with them that it is for Parliament or for the Commissioners - who must disseminate the information sufficiently to all value added taxpayers - to introduce prospectively an adequate transitional period which will apply to all claims for the deduction of input tax that had accrued before the introduction of the time limit. That was not done before 27 June 2003 and indeed has not yet been effected. When such a step is taken, the time limit applied by regulation 29(1A) of the 1997 Regulations must be disapplied. Like Lord Hope, I would apply that reasoning to Mr Fleming’s appeal as well as to that of Condé Nast. I would dismiss both appeals.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

78.  I have had the privilege of reading in draft the opinions of my noble and learned friends, Lord Hope of Craighead and Lord Walker of Gestingthorpe. Lord Walker has set out and explained with admirable clarity the relevant facts, statutory and Community law provisions, case law, and arguments, and accordingly they need no repetition from me. While I agree with him that the Commissioners’ appeal should be dismissed in relation to Mr Fleming’s claim, I would also dismiss their appeal in relation to Conde Nast’s claim.

79.  It appears to me that the following relevant propositions can be derived from well-established principles of Community law and, more specifically, from the reasoning of the European Court of Justice (“the ECJ”) in Marks & Spencer Plc v Commissioners of Customs and Excise (Case C-62/00) [2002] ECR I-6325 (known as Marks & Spencer II“) and Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2002] ECR I-8003 (known as “Grundig II“):

a)  It is open to the legislature of a Member State to impose a time limit within which a claim for input tax must be bought: Marks & Spencer II para 35;

b)  It is further open to the legislature to introduce a new time limit, or to shorten an existing time limit, within which such a claim must be brought, even where the right to claim has already arisen (an “accrued right”)when the new time limit (a “retrospective time limit”) is introduced: Marks & Spencer II paras 37 and 38;

c)  Any such time limits must, however, be “fixed in advance” if they are to “serve their purpose of legal certainty": Marks & Spencer II para 39;

d)  Where a retrospective time limit is introduced, the legislation must include transitional provisions to accord those with accrued rights a reasonable time within which to make their claims before the new retrospective time limit applies: Marks & Spencer II para 38 and Grundig II para 38;

e)  In so far as the legislature introduces a retrospective time limit without a reasonable transitional provision (as in Grundig II) or without any transitional provision (as in Marks & Spencer II), the national courts cannot enforce the retrospective time limit in relation to accrued right, at least for a reasonable period; otherwise, there would be a breach of Community law: see Autologic plc v Inland Revenue Commissioners [2006] 1 AC 118 paras 16 to 17;

f)  The adequacy of the period accorded by the transitional provision (“the transitional period”) is to be determined by reference, inter alia, to the principles of effectiveness and legitimate expectation: Marks & Spencer II paras 34 and 46, and Grundig II para 40; in particular, it must not be so short as to render it “practically impossible or excessively difficult” for a person with an accrued right to make a claim: Marks & Spencer II para 34, and Grundig II para 33;

g)  It is primarily a matter for the national courts to decide whether the length of any transitional period is adequate, although the ECJ will give a view if the transitional period is “clearly” so short as to be inconsistent with Community law: Grundig II paras 39 and 40;

h)  The absence of a transitional period of adequate length is not, however, automatically fatal to the enforcement of the retrospective time limit: Grundig II para 41;

i)  Where there is no adequate transitional period, it is for the national court to fashion the remedy necessary to avoid an infringement of Community law: Marks & Spencer II para 34, Grundig II paras 33, 36, 40, and 41, Autologic paras 16 and 17, and the ECJ’s decision in Metallgesellschaft Ltd and ors v Commissioners of Inland Revenue (Joined Cases C-397/98 and C-410/98) [2001] ECR I-1727, at para 85;

j)  That remedy would, at least normally, be to disapply (perhaps only for a period) the operation of, the retrospective application of the new time limit to claims based on accrued rights: Marks & Spencer II paras 34 to 41, and Grundig II paras 38 to 40 and especially (with regard to temporary disapplication) para 41.

80.  On the basis of the arguments addressed to your Lordships’ House and the reasoning of the Courts below, I believe that the only controversial aspect of the above analysis centres on propositions (h) and (j). The issue is whether it is open to the court to disapply the retrospective limitation for a limited period (as opposed to permanently) in cases where the legislation imposing a retrospective time limit contains no transitional period (as in the present case and as in Marks & Spencer II). In the Court of Appeal in the Fleming case ([2006] STC 864), Ward and Hallett LJJ concluded that the relevant part of the reasoning (and in particular the last sentence) in paragraph 41 of Grundig II, quoted in Lord Walker’s opinion, only applies where there is an inadequate transitional period (see at paras 73 to 81 and paras 60 and 61). This view appears to have been based on (a) the fact that the ECJ’s judgment in Marks & Spencer II resulted in a declaration that the absence of any transitional period rendered the retrospective effect of the relevant legislation “incompatible” with Community law, (b) the fact that that judgment had no equivalent to para 41 of the judgment in Grundig II, and (c) the belief that there is a difference in principle between the two types of case.

81.  Despite the arguments on behalf of Mr Fleming in support of this view, I am unpersuaded by any of these three factors. The question for the ECJ in Marks & Spencer II was admittedly relatively widely expressed, and concerned the enforceability of a retrospective time limit introduced without any transitional provisions; the ECJ held that such a time limit was “incompatible with the principles of effectiveness and of the protection of legitimate expectations". However, nothing was said either way as to whether the unlawfulness of not providing for a transitional period was, as it were, permanently fatal to the efficacy of the retrospective time limit. That was a topic on which the ECJ did express a view, albeit that it did not strictly arise from the specific question referred, in Grundig II at para 41. As I understand it, the ECJ was there seeking to give guidance to tax authorities, courts, and taxpayers in Member States as to the practical consequences where retrospective time limits were imposed without adequate transitional provisions.

82.  At least for present purposes, I can see no difference in principle or in practice between a case where there is an inadequate transitional period and one where there is no transitional period. In each case, there is “no adequate transitional period” to use the ECJ’s words in para 42 of Grundig II. In each case, the failure goes to the enforceability of the retrospective time limit. In each case, a person with an accrued right would be equally likely to be unaware of the court’s obligation to disapply the new retrospective time limit, or for how long the period of disapplication might run. In each case, the legislature (or, indeed, in appropriate circumstances, the executive or the courts) could put the position right by effectively creating (or extending an unduly short transitional period into) a valid transitional period. Further, it would seem odd if there was a completely different rule in a case where there was a very short (say, three day) inadequate transitional period and one where there was no such period.

83.  In the light of these considerations, it follows from the retrospective effect of regulation 29 (1A) and the absence of any transitional provision, that the duty of the UK courts is to disapply the regulation in relation to claims based on accrued rights made during an appropriate period. Although the Commissioners did not accept that proposition for much of the period of this litigation, they now accept that regulation 29(1A) ought to have included a transitional provision in respect of claims based on accrued rights, and that the regulation ought to be disapplied to them by the courts. Accordingly, the issue to be determined is the proper characterisation and duration of the period of disapplication.

84.  It is the Commissioners’ primary case that the appropriate period of disapplication should be equivalent to the transitional period which the legislature ought to have accorded under Community law, but failed to do so. That seems to me to be a surprising proposition. On the basis of the limited argument and evidence we have received on the point, it appears to me that the duration of a transitional period required in the present case to satisfy Community law would have been between six and 12 months. Six months was the minimum period thought by the ECJ to be appropriate in Grundig II, where a time limit was retrospectively reduced from five or ten years to three years. At the other extreme, albeit without the benefit of detailed argument, I find it hard to conceive of circumstances which would require a transitional period of more than a year, at least where a time limit is retrospectively created or reduced in relation to commercial tax claims.

85.  On that basis, given that regulation 29(1A) came into force on 1 May 1997, people with accrued rights to claim input tax as at that date would have had to put in their claims by 1 May 1998 at the latest. So one reaches this position. The vice in the regulation is that it contains no transitional period to enable persons with accrued rights to make their claims, and the remedy, on the Commissioners’ case, is that there is to be a period of disapplication, whose existence would be unknown to any reasonably well-advised person with an accrued right until it had already expired. That would mean that the supposed remedy for the failure to accord a transitional provision would be little more then hypothetical.