Treading uneven boards: VAT claims and setoff – Birmingham Hippodrome Theatre Trust Ltd v HMRC [2014] EWCA Civ 684
The Court of Appeal's decision in this case is likely to create a great deal of uncertainty for taxpayers seeking to recover unlawfully levied VAT from HMRC.
Background
From 1990 to 2004, the Birmingham Hippodrome Theatre Trust charged VAT on the price of tickets to see its productions. VAT was charged because the UK had failed correctly to transpose into English law the provisions found in Article 13(A)(1)(n) of the Sixth Directive which would have made those supplies exempt.
The scope of the "Cultural Exemption" was the subject of an intense legal wrangle which rattled on for many years, leading to the ruling of the ECJ in Case C-267/00 Customs and Excise Commissioners v Zoological Society of London[1], which finally put the matter to bed: HMRC had got it wrong.
Two factors initially inhibited the Trust's ability to recover the VAT it had overpaid. The first was legislation which had been introduced to cap claims for the recovery of overpaid VAT – the "3 year cap" (s.47 Finance Act 1997). The second was that the Trust had claimed a significant input tax deduction, for January 2000 to November 2001, during a period of renovation which would have been attributable to exempt supplies on which no input tax would have been recoverable had the UK got the law right.
The introduction of the 3 year cap was deemed contrary to EU law in Case C-62/00 Marks and Spencer[2] for its lack of adequate transitional provisions. The matter was further complicated by successive sticking-plaster efforts to deal with M&S during the period which followed. The woeful course of the capping provisions legislation, non-legislation and case-law is well documented elsewhere, suffice it to say, when the dust finally settled, the Trust found itself in a position where it could claim only for certain years from before (Fleming claims) and after (section 80 VATA claims) the introduction of the capping provisions. Interestingly for the Trust, it was during the intervening period – where no claim could be made – that the large input tax deduction had taken place. On its face, therefore, the temporal limitation designed to protect the Treasury had the effect of assisting the Trust since the periods it was permitted to claim resulted in a net gain.
As readers will be aware, claims for the recovery of overpaid VAT may be set-off by HMRC against any VAT, penalty, interest or surcharge owing by the taxpayer. The Trust argued, however, that the period in which the input tax deduction had been made could not be taken into account when calculating the Trust's claim since it was not a period during which a claim could be made under English law: it was excluded for taxpayers so it must therefore be excluded for HMRC, right? Wrong.
HMRC invoked section 81(3A) VATA as a defence to the claim. The provision states that where mistakes have been made in liability for VAT, these may be set-off against one another, disregarding (on HMRC's side only) any statutory temporal restrictions on the same. The important point note with regard to section 81(3A), is that it was only ever intended to deal with anomalies which arose in the same accounting period. Clearly, if HMRC could use this provision for any period there was the potential for all accounting periods going back to 1973 to be open to HMRC as periods of potential set off against claims made against them. Nevertheless, HMRC argued section 81(3A) applied in this case.
Decision
The Court of Appeal found in favour of HMRC. In its view, the objective was to put the accounting in the position it would have been in, had the UK correctly interpreted and applied the Sixth Directive in the first place. For that, the Court considered the Trust must take the "rough with the smooth" and suffer the reduction connected with the input tax deduction it should never have been able to make.
In order to achieve this outcome, the Court relied on the "highly muscular approach" to statutory interpretation derived from the decision of the ECJ in case C-106/89 Marleasing[3]. The purpose of this method is to view national legislation in such a way so as to bring it into conformity with the direct effective of Treaty obligations. In this way, the Court found that HMRC was entitled to off-set the taxpayer's claims against sums which would not have been recoverable by it in periods now out of time. Its justification for this approach was that section 81(3A) could only be used by HMRC in circumstances where the taxpayer sought to recover under section 80 – it could not be used by HMRC without a claim and could only be used to reduce claims against HMRC: only as a shield – not as a sword.
Comment
The provisions which were at odds with the direct effect of the Treaty provisions were those which failed to transpose Art 13(A)(1)(n) into national law. The right to the recovery of sums paid but not due is a consequence and compliment of the rights conferred by EU law (C-62/93 BP Supergas[4]) and national rules providing for the recovery of those sums must not render virtually impossible or excessively difficult the exercise of those rights (principle of effectiveness Case 33/76 Rewe[5] et al).
It is compatible with EU law for those rights to be limited by time (Rewe et al), provided any limitations are introduced with an adequate transitional period (C-62/00 M&S). Importantly, the basis on which EU law accepts limitations of this type is the principle of legal certainty: temporal limitations are supposed to protect both the taxpayer and the administration by providing certainty.
The use of Marleasing by the Court of Appeal must be viewed in this context. Within the particular facts of the case the Court found that it was required to provide the state with an interpretation to shield it from the inadequacies of its own limitation periods to correct the wider VAT position. In order to do this the Court found, somewhat extraordinarily, that the "principle of legal certainty is not an overriding one" and overrode it.
The Trust in this case may have been a little cute – had the UK got it right, it's overall position – when taking into account the input tax deduction – would probably have been neutral (if not to its favour). The provisions wrongly transcribed in UK law were only to apply from 1990 onwards, therefore it was relatively easy for the Court to look at the whole period and form a view on the correct position. But this may not be possible in other cases. Taken in the round, this decision may seem to have come to the correct outcome, but expediency does not often lead to good law and when placed in a wider context, the effect of this decision can only be greater uncertainty and confusion for taxpayers seeking to recover unlawfully levied VAT. Expect to see Birmingham Hippodrome Theatre cited soon, in a tribunal near you.
[1] [2002] STC 521.
[2] [2002] ECR I-06325
[3] [1990] ECR I-04135
[4] [1995] ECR I-01883
[5] [1976] ECR 01989