Investment trust managers who following the JPMorgan Claverhouse decision can claim back from HMRC some VAT on their management fees should now be able to claim more of it back from HMRC for the period from 1 January 1990 to 4 December 1996, as a result of the decision of the House of Lords in the Conde Nast and Michael Fleming (trading as Bodycraft) cases.
Facts of the Cases
These cases concerned the retrospective imposition of a three year time limit for making claims in respect of underclaimed input tax where no transitional provisions were enacted.
Conde Nast made a claim on 27 June 2003 for deduction of amounts of input VAT paid on staff entertainment which it had failed to deduct when accounting for VAT in periods from 1973 to 1997.
Mr Fleming made a claim on 23 October 2000 for repayment of input VAT on three cars purchased by his business some ten years earlier in respect of which he did not receive VAT invoices at the time of purchase, which he needed in order to make a claim to recover input tax.
The claims were refused by HMRC, which relied on the three-year limitation period introduced in 1997 with effect from 1 May 1997 for claims for repayment of input VAT on supplies made to taxpayers under regulation 29 of the Value Added Tax Regulations 1995 (SI 1995/2518) (regulation 29). However, when the right to repayment of the input tax first arose there was no limitation period, and regulation 29 did not contain any transitional provisions.
Similarly, section 80 of the Value Added Tax Act 1994 (VATA) had been amended in 1997 but with effect from 4th December 1996 reducing the six year time limit for the recovery of overpaid tax on supplies made by taxpayers to three years and removing the exception in relation to mistake. No provision was made for a transitional period during which a claim could be made in cases where a right to recovery of overpaid tax already existed. However, subsequently steps were taken by HMRC to introduce a transitional period by means of a series of Business Briefs, culminating in one of 8 October 2002, which provided that claims made before 30 June 1997 or where a mistake had been discovered before 30 June 1997 but no claim made, would not be subject to the three year limitation period.
The Court of Appeal found in favour of Mr Fleming 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. The Court of Appeal in Conde Nast considered that it was bound to follow the decision in Fleming and found in favour of Conde Nast, albeit reluctantly.
HMRC accepted that transitional provisions ought to have been included in respect of accrued rights and that the three year limitation period ought to be disapplied to them by the courts. The issue was whether it was open to the court to read into the legislation a transitional period based on the various Business Briefs. If so, the issue to be determined was the proper characterisation and duration of the transitional period. A number of different possible dates were suggested as the start of the transitional period for the benefit of those with accrued rights as at 1 May 1997.
House of Lords Decision
All the Law Lords found in favour Mr Fleming, albeit with slightly different reasoning by some Lord Lords. The majority (Lord Walker dissenting) found in favour of Conde Nast.
Lord Neuberger gave the leading judgment. Lord Neuberger accepted that in principle, provided that an appropriate transitional period is properly accorded and communicated, the requirements of Community law would be satisfied. Legislation, whether primary or secondary, must be deemed to be sufficiently communicated by its enactment. If, however, a transitional period was accorded by concession by HMRC, it would, in Lord Neuberger's judgment, only be effective if it was properly communicated to those with accrued rights. Lord Neuberger rejected the argument that the transitional period should run from either of the Business Briefs published by HMRC announcing a transition period for a limited group of those with accrued rights at the date the new time limit. He doubted whether Business Briefs would have been sufficiently widely disseminated to make it right to conclude that all potential claimants should be treated as having had sufficient notice of the transitional period. To be properly communicated, he gave the example of a leaflet accompanying VAT form that would be sent out to each taxpayer. Accordingly, Lord Neuberger concluded that the transitional period has not yet arisen.
What does this mean for Investment Trust Managers?
As mentioned above, these cases concerned claims under regulation 29 for deduction of input tax on supplies received rather than claims for overpayment of output tax under section 80 as in the JPMorgan Claverhouse case on VAT on management supplies to investment trusts. Counsel for HMRC indicated that HMRC had hoped that the determination of these appeals would also settle the position in relation to claims under section 80. Lord Neuberger did say that whether an accrued claim fell under regulation 29 or section 80, it was, in each case, subject to a retrospectively imposed time limit without a transitional provision. Lord Neuberger's reasoning can equally be applied in respect of claims under section 80 and the conclusion drawn that the transitional period has not yet arisen in relation to claims under section 80.
The Business Brief 13/06 issued by HMRC on 25 August 2006 after the Court of Appeal decisions in Conde Nast and Fleming indicated that HMRC accepted for present purposes that any claim under regulation 29 or Section 80 arising before the retrospective capping measures, is effectively uncapped. HMRC indicated that a fresh claim could be made where an amount has been improperly paid as VAT before 4 December 1996 or has been overdeclared as output tax in an accounting period ending before 4 December 1996 or has become deductible as input tax on or before 30 April 1997 and has not yet been deducted. It did stipulate that claimants must sign an undertaking to the effect that, if the ultimate determination of litigation removes his entitlement, any credit given, or money paid, to him, will be returned to HMRC with interest.
If money has already been paid to investment trust managers on these grounds following the issue of BB 13/06, then we consider that the effect of the decision in Fleming and Conde Nast does not remove the investment trust manager's entitlement to the repayment and it would be entitled to resist any demand for repayment from HMRC. No doubt HMRC will issue another Business Brief on this issue shortly. We consider it unlikely that HMRC would have the appetite for yet another tussle in the courts on the subject matter of the retrospective changes to claims under section 80 given the decision in Fleming and Conde Nast and the comments made therein.
HMRC did say in BB 13/06 that claims falling within section 80 will only be paid where HMRC are satisfied that to pay the claim will not result in the unjust enrichment of the claimant. Since that date the Advocate General's opinion in yet another phase of the Marks & Spencer litigation has been published. The Advocate General stated that while EU law does permit member states to apply the principle of unjust enrichment in relation to refunds of VAT unduly charged, the principles of fiscal neutrality and equal treatment must be observed. In this context, the Advocate General noted that there is a distinction in the UK between 'repayment traders' and 'payment traders' as unjust enrichment is not applied to repayment traders. Therefore, the Advocate General ruled that 'the objection that Marks & Spencer has been enriched cannot be invoked as long as it offends the principle of equal treatment'. It remains to be seen whether the ECJ will follow the Advocate General's opinion although in the majority of cases it is followed.
All in all, the House of Lords' decision in Fleming and Conde Nast is good news for investment trust managers and opens the doors to recovery of output VAT charged in the period from 1 January 1990 to 4 December 1996.
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