Cardiff City Council, R (on the application of) v Customs & Excise

Before the court is an appeal, a notice of additional grounds for upholding the Judge’s order and a cross appeal from a judgment of Stanley Burnton J [2002] EWHC 2085 (Admin) in relation to Value Added Tax. He decided a series of preliminary issues in an application for judicial review of a decision by the Commissioners dated 10 July 2001 in which they refused to pay some £800,000 claimed by Cardiff City Council. He decided that the City Council, which is a taxable person for VAT purposes, was prevented by a specific statutory period of limitation from obtaining back from the Commissioners some VAT which it had paid to the Commissioners in error. The Council submit that he mis-characterised the position as between the Council and the Commissioners. They submit that the correct analysis of the agreed facts is that the Commissioners have wrongly refused to refund to the Council monies which it had paid to its suppliers by way of VAT. If that be the correct characterisation of what has happened then the period of limitation had no relevance. The Commissioners submit that the judge came to the right answer for the wrong reason.

There is a difference between the legislative provisions which govern ordinary taxpayers and those which govern local authorities and various other bodies. It is the interaction of these two legislative regimes which is at the heart of the present case. I propose first to look at the position governing the ordinary taxpayer and then to consider that of local authorities such as Cardiff.

The Value Added Tax Act 1994 (“VATA 1994”) provides as follows :-

s.24 (1) … “input tax” in relation to a taxable person means …VAT on the supply to him of any goods or services … being (in each case) goods or services used or to be used for the purpose of any business … carried on by him.

(2)

… “output tax”, in relation to a taxable person, means VAT on supplies which he makes …

s.25 (1) A taxable person shall-

(a)

in respect of supplies made by him, and

(b)

…

account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations …

(2)

Subject to the provisions of this section, he 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 … 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 section is referred to in this Act as a “VAT credit”

(6)

A deduction under subsection (2) above, and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations …”

s.26 (1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2)

The supplies within this subsection are the following supplies made … by the taxable person in the course or furtherance of his business

(a)

taxable supplies

…”

The legislator foresaw circumstances in which a taxpayer might make an overpayment of tax. The presently relevant statutory regime is contained in sections 80 and 81 of VATA 1994.

“s.80 (1) Where a person has … 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 that 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 …

(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.

s.81 (3) … 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 …

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.”

The VAT system is intended to operate by the taxpayer keeping correct accounts and making correct returns of his input and output taxes. The Value Added Tax Regulations 1995 (“the Regulations”) provide

25.

Every person who is registered … shall, in respect of every period … make to the Controller a return on the form [VAT 100] … showing the amount of VAT payable by or to him and … signed by him that the return is true and complete.

35.

Where a taxable person has made an error –

(a)

in accounting for VAT, or

(b)

in any return made by him,

then … he shall correct it in such manner and within such time as the Commissioners may require.

39 (1) Where a person is required by regulations made under the Act to make a return to the Controller, the amount to be entered on that return shall be determined in accordance with this regulation.

(2)

In [box 1] shall be entered the aggregate of all the entries in the VAT payable portion of that part of the VAT account which relates to the prescribed accounting period for which the return is made …

40 (1) Any person making a return shall … account in that return for (a) all his output tax …

The amounts to be entered on that return shall be determined in accordance with these Regulations.

(2)

Any person required to make a return shall pay to the Controller such amount of VAT as is payable by him in respect of the period to which the return relates not later than the last day on which he is required to make that return.

The ordinary taxpayer who is registered for VAT purposes is required to fill in a VAT return on the familiar form VAT 100. Such returns involve filling in various boxes. Box 1 sets out “VAT due in this period on sales and other outputs”; box 3 sets out “Total VAT due (the sum of boxes 1 and 2); box 4 sets out “VAT reclaimed during this period on purchases and other inputs” and box 5 the “net VAT to be paid by Customs or reclaimed by you (Difference between boxes 3 and 4)”. There are other boxes but they are of no present relevance.

A number of points can be noted at this stage:-

So much for the ordinary taxpayer. Local authorities who carry on businesses are obliged to fill in VAT returns in which they reveal the VAT due on supplies by them – the Output Tax. They are entitled, like every other tax payer to adopt the regime set out in s.25 and to take any VAT credit which is due to them under that regime.

Relevant to the present case is the fact that Councils are treated in a particularly favourable way in relation to VAT. Not only can they make use of the VAT credit system described above but they can also do something which the ordinary tax-payer cannot do. This is the consequence of section 33 which provides:

“33(1) … where

(a)

VAT is chargeable on the supply of goods or services to [a local authority] … and

(b)

the supply …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 manner as the Commissioners may determine refund to it the amount of VAT so chargeable.”

The Commissioners in their Notice 749 to local authorities stated the following:

“1.1

Public bodies and authorities generally undertake activities that are not considered to be business. It is not usually possible to recover VAT that is incurred other than by way of business. However, to alleviate the burden which this would place on taxpayers, provision has been made in VATA 1994 to enable those bodies mentioned in s.33(3) to claim a refund of VAT incurred in their non-business activities.

4.7

(a) If you are registered for VAT you make your claim for refund by including the amount of VAT in the VAT DEDUCTIBLE side of your VAT account and in boxes 4 and 5 of the VAT return.”

For present purposes we can ignore that there are bodies other than local authorities which are subject to the section 33 regime.

It can be seen that section 33 makes provision for a refund by the Commissioners of VAT chargeable on the supply of goods and services to a local authority and paid by the authority to the supplier. Because the supply is not for the purposes of any business carried on by the authority it does not fall within the definition of “input tax” contained in s.24. VAT paid on that supply can therefore not be set against output tax or claimed as a VAT credit under s.25. The aim of the legislator in enacting section 33 was clearly to relieve Councils of the cost of the VAT charged to it by suppliers of goods or services which did not qualify for a VAT credit because it was not a supply for the purpose of a business carried on by the authority. In effect what the section provides is a subsidy by the state to Councils of VAT which is not recoverable under the VAT regime set up by the Act pursuant to our obligations as a member of the European Community. The provision for the subsidy could have been contained in separate legislation. Some of the difficulties in the present case arise from the fact that it was incorporated in VATA 1994.

The result of authorities being subject both to the ordinary taxpayer regime and the special local authorities regime is that the VAT paid by local authorities to their suppliers falls into two notionally separate categories depending upon whether the supply was for business purposes or not. The former is properly described as input tax and can be dealt with under the ordinary taxpayer regime. The latter I shall describe as “non-business VAT” and (for present purposes) is of relevance only in the special local authorities regime. In theory there could sometimes be much argument as to whether a particular supply to an authority is properly described as being for business purposes. In general such an argument would be wholly pointless because in either event the authority would not need to bear its cost.

The Commissioners have therefore prescribed for Local Authorities in the position of the appellant a regime which spares them the trouble of separating out Input Tax from non-business VAT. That is the regime set out in Notice 749 quoted at paragraph 10 above. A claim under s.33 by an authority for a refund by the Commissioners for non-business VAT paid by the authority to its suppliers is put in the same box as a claim under s.25(2) by an authority for a credit for allowable business VAT paid by the authority. The two claims are not differentiated.

So far as a claim for a credit under s.25(2) is concerned that can be made at the end of the appropriate accounting period in the form VAT 100, the ordinary VAT return. If however it is not made at that point there is nevertheless a 3 year period during which the return can be corrected : see s.80(4) and paragraph 29 and 35 of the Regulations. If that period is passed no more can be done.

There are now in force provisions which also impose time limits on refunds under s.33. These provisions are however not in play in the present case because they were not in force at the relevant time. In consequence there was a mismatch between the limitation regime applicable to claims under section 33 against the Commissioners for a refund of non-business VAT paid by authorities to their suppliers – in respect of which there was no limitation period - and the limitation regime applicable to claims against the Commissioners under section 80 for repayment of amounts paid by authorities to the Commissioners by way of VAT which was not VAT due to them – in respect of which there was a three year limitation period.

The factual background to the present appeal is not in dispute. The Council erroneously considered that amounts shown in internal accounting entries as credited by the Council to an arm of the Council known as the Grant Agency were liable to VAT and the Council therefore erroneously accounted to the Commissioners for that as part of their output tax. The judge said this:

“20.

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 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.”

I interpose to make two points at this stage:

I continue with the citation from the judgment.

“21.

Each of the returns therefore included the following errors:

(a)

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).

(b)

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. … (c) 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.

…

22.

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.

23.

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 [sc. have been], 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.

25.

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.”

The mistake which led to excess amounts of output tax being declared by the Council was understandable and was in due course spotted. In principle in such circumstances the Commissioners are obliged by s.80(1) to repay to the tax payer the excess amounts shown in box 1. However, by s.80 (4) there is imposed a 3 year time limit on back claims. The Commissioners have repaid the overpayments during the 3 year period but refuse to repay the overpayments made during the earlier period [“the Early Overpayments”].

The Council understandably seeks to sidestep the time limitation imposed by section 80(4). The Early Overpayments, argues the Council, can be refunded under section 33 which at the relevant time had no time limit.

The parties agreed preliminary issues to be decided by the judge. These, with the answers given by the judge, were as follows, namely

The judge said this in relation to issue (i):

“27.

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 …”

As to issue (ii)(a) the view taken by the judge was that the Council, by filling in its forms in the way it did, had made a correct claim under s.33 in Box 4, had by reducing its box 4 claim by the amount shown in box 3 “paid an amount to the Commissioners by way of VAT which was not due to them”, had thus brought themselves within s. 80 and were thus caught by the 3 year period in s.80(4).

As to issue (ii)(b) the judge held that Regulation 35 did not impose any period of limitation. There is no appeal against that holding.

Roderick Cordara Q.C., who appears with David Scorey for Cardiff, puts forward two possible analyses of the situation. The first of these runs as follows:-

The second possible analysis suggested by Mr Cordara is this:-

Mr Cordara submits that whichever analysis is adopted the position at the end of the day is that the section 33 claim is still outstanding.

Mr Cordara submits that the taxpayer is only liable to pay as output tax that amount for which the legislation applied to the correct facts provides. Cardiff, as is now common ground, was never liable to pay tax on the notional fees to the Grant Agency.

He submits that what was due to Cardiff under section 33 was the amount in box 4. That amount was not paid. Although it is true that this is because the taxpayer overstated the amount in box 3 and thus underclaimed in box 5, in so far as it was not paid then it should be paid now and there is no limitation period which inhibits the making of such a payment.

Mr Cordara by way of “fall-back submission”, submitted that, where as here the amount shown in box 5 is paid by the Commissioners to the taxpayer the taxpayer has not “paid” anything to the Commissioners and thus section 80 is not available to him quite apart from any period of limitation. In this context he cites R v C&E Commissioners, ex parte Kay & Co [1996] STC 1500 (Keene J), Marks and Spencer v C & E Commissioners [2000] STC 16 C.A., R v C & E Commissioners, ex parte Building Societies Ombudsman Co Ltd [1999] STC 976 (Moses J), [2000] STC 892 C.A., University of Sussex v C & E Commissioners [2001] STC 1495 (Neuberger J) and Melham v Mrs J Burton (Collector of Taxes) [2003] EWCA Civ 173 C.A.

As I understood him, his argument was that since, on the assumption in the previous paragraph, section 80 was not available to the taxpayer, justice demanded that the taxpayer should be permitted to claim under section 33.

The Commissioners, who appear by Peter Mantle, submit that the judge’s analysis set out in paragraph 27 of his judgment, which is quoted in paragraph 23 above is flawed. They point out that the primary mistake made by Cardiff was contained in the over declaration in box 1 (and the consequential error in box 3). They say that the claim for a s.33 refund was contained in the figure given in box 4 and there has been no insufficiency or error – such as was referred to by the judge - in relation to that. They submit that box 5 had no error as such since it was merely the result of an arithmetical exercise which had been correctly carried out.

They draw attention by way of analogy to In re Harmony and Montague Tin and Copper Mining Company (1873) Ch. Ap Cas 407 [Spargo’s Case] in which Sir G. Mellish L.J. said

“… it is a general rule of law, that in every case where a transaction resolves itself into paying money by A. to B., and then handing it back again by B. to A., if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards. ”

They submit, alternatively, that, on the making of a return, the amount payable by the taxpayer for the purposes of Regulation 40(2) is the amount shown in box 3. That, until such time as any errors are corrected, is determined by the amount which the taxpayer is liable to pay “by way of VAT” for the purposes of s. 81(3). That, they submit, is implicit in the whole scheme of the VAT system which is essentially run by the taxpayer himself. It is he who knows the relevant facts and on whom the initial burden of applying the correct law to those facts falls.

They submit that where there are found to be errors in the return these can thereafter be corrected by use of the mechanism set out in Regulation 35 coupled with the making of a claim under section 80. They submit that this section is expressly designed for situations where there has been payment of an amount to the Commissioners “by way of VAT which was not VAT due to them”. They submit that this is in substance what has occurred here. That claim has been paid in relation to the previous 3 years but periods further back are caught by the time limitation in s.80(4).

Although the submissions have ranged far and wide, in my judgment these appeals admit of a relatively simple solution. It is common ground that if Cardiff has a valid claim in respect of the earlier period it must be a claim under section 33. Any claim under section 80 is by now time barred.

A claim under section 33 has nothing to do with rights given under Community Law. That too is common ground. That being so, the complex case law in relation to VAT and the rights given under Community Law is of limited assistance.

Every time Cardiff submitted a VAT return which contained in box 4 a claim for VAT which had been paid by Cardiff in respect of non-business supplies, Cardiff made a claim for refund pursuant to section 33 at such time and in such manner as the Commissioners had determined.

The root question which the judge had to answer was whether, in sending to Cardiff a cheque for the amount claimed in box 5 the Commissioners had refunded Cardiff the VAT to which it had correctly claimed it was entitled under section 33. In my judgment the answer to that question is in the affirmative. The creditor, Cardiff, had told the debtor, the Commissioners, how it wanted the debt paid. The debtor had paid it in the manner specified by the creditor by sending a cheque in precisely the amount asked for. That cheque was met. That obligation must be regarded as discharged.

As it seems to me the correct analysis of the situation is that at the time of the making of the VAT returns the Council were making claims under s.33. The Council could have sent a cheque for the amount in box 1 and the Commissioners could have sent a cheque for the amount in box 4. Instead the Council and the Commissioners proceeded as advised in Notice 749 and the net amount in box 5 was sent by the Commissioners. So the Council’s claims as set out in box 4 were met correctly by the Commissioners in the way which was apposite at the time. The true cause of dissatisfaction of the Council relates, not to what was done with their s.33 claims – the Commissioners did exactly what they asked them to do – but to the fact that they have not recovered the Early Overpayments of VAT. The Council’s dissatisfaction has nothing to do with a refusal by the Commissioners to make pursuant to section 33 a refund of VAT payments made to other traders but is in truth concerned with a refusal by the Commissioners to repay VAT payments made to the Commissioners. That is attributable to the presence of s.80(4).

Cardiff had made a mistake both in its VAT accounts and in its Return as to the amount of output tax for which it was liable. The sending by the Commissioners of the cheque asked for in box 5 had no effect so far as that mistake was concerned. I am content to proceed on the basis that Community law in principle entitles the taxpayer to recover from the Commissioners the amount of Output tax which the taxpayer had mistakenly assumed was due from it to the Commissioners. That entitlement was not affected by the sending of the cheque for the amount claimed in box 5. The possibility of recovery may have been extinguished by the passage of time but that is irrelevant to the present problem.

So also, in my judgment, is Mr Cordara’s contention that section 80 does not permit this recovery in situations like the present, where the taxpayer is a repayment trader, namely, one who receives a cheque from the Commissioners at the end of each period rather than one who sends a cheque to the Commissioners. If that contention be right, then it may be that the statute is defective. The point does not arise in the present case since the Commissioners acknowledge their liability under section 80 and indeed have repaid all amounts during the period which is not caught by the limitation provisions.

For my part, like Scott Baker LJ, I am persuaded that the submissions of the Commissioners recorded in paragraph 35 above are correct. I note that default provisions in s.59 are structured on the basis that the taxpayer is in default if he does not pay “the amount of VAT shown on his return” whatever the position might have been if he had correctly kept his accounts and correctly transposed the correct figures onto his return. As it seems to me, in most ordinary cases, involving no section 33 claims, the provisions of section 25 (2) and (3) deal with the problems of cross claims.

If the submissions of the Commissioners be wrong, an alternative analysis leading to the same conclusion runs as follows. The full amount of the non business VAT claimed in box 4 was due from the Commissioners to the taxpayer under section 33 but, by virtue of the operation of the statutory set-off, the liability of the Commissioners was only discharged to the extent of the Correct Output Tax – namely, the figure which the Council would have inserted had they realised that the notional fee for non-agency services was not subject to tax. The remainder of the liability of the Commissioners was discharged, not by the operation of section 81(3), but by the Commissioners discharging it in the way accepted by the taxpayer, namely, by paying the amount stated in box 5. No suggestion was made for years that this liability under section 33 had not been discharged in that way.

I therefore consider that the issues agreed by the parties and recorded in paragraph 22 above do not require answers. The real issue between the parties is whether, on the agreed facts, a claim under section 33 is in principle now available to the taxpayer. I would answer that question in the negative.

I would therefore dismiss the appeal. I do not presently see any need to make any order on the Commissioners’ appeal.

I have had the advantage of reading in draft the judgments of Schiemann and Scott Baker LJJ. I gratefully adopt the account of the issues in this case in the judgment of Schiemann LJ. I use the same abbreviations and definitions. Unless otherwise stated, references to sections are to sections of VATA.

I agree with the judgment of Schiemann LJ other than paragraph 44 dealing with the effect of section 81(3). It follows that I also respectfully disagree with the judgment of Scott Baker LJ on this point, although I do not, of course, differ from him as regards the points he makes which are the same as those made by Schiemann LJ.

Section 81(3) 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.”

In effect, Schiemann and Scott Baker LJJ accept the submission of the Commissioners that section 81(3)(b) operates to set off sums due from the Commissioners against sums due from the taxpayer as shown by his VAT 100, whether the tax is ultimately found to be due from him or not.

In my judgment, the Commissioners’ interpretation necessitates the insertion into section 81(3)(b), after the word “liable”, of words such as “according to any VAT return submitted by him or assessment served on him by the Commissioners”. In my judgment, this is not a permissible approach on well-accepted canons of construction. Moreover, the word “liable” denotes the legal concept of liability. It cannot on its ordinary meaning include that which in law is not a liability. I do not consider that this meaning is altered by the addition of the words “by way of VAT” which is an ancillary phrase which takes its meaning from the word “liable”. The words “in a way” mean “incompletely” but the words “by way of” following “liable” mean “by reason of” or “by means of”.

Furthermore, the effect of section 81(3) is to effect a mutual discharge. If the Commissioners are right in their construction of section 83(1)(b), then logically a claim can never be made in respect of an overdeclaration of VAT on a VAT return which, pursuant to section 81(3), has been set against a perceived liability for VAT. This is because on the plain wording of section 81(3) the Commissioners’ liability has thereupon been discharged once and for all.

In addition, there are difficulties with the practical application of the Commissioners’ approach. Suppose that the taxpayer fails to complete a return. The Commissioners then raise an assessment. On the Commissioners’ interpretation, this fixes the amount for which a person is liable under section 81(3)(b) for all time. Yet that assessment may subsequently be withdrawn by the Commissioners under section 73(9). On the Commissioners’ interpretation, the set-off is fixed by reference to the amount shown in the assessment, although later withdrawn. This point could well give rise to anomalous results in other cases, which we cannot now foresee.

A number of points arising on the interpretation of section 81(3) appear to me to be relevant to this appeal:

I accept that, unlike insolvency set off under Insolvency Rule 4.90, set-off under section 81(3) is likely to occur in relation to successive accounting periods and thus (in relation to any one trader) on more than one occasion. Therefore it is not in this respect akin to statutory set off in insolvency. However, this is a numerical difference rather than one which affects the nature and effect of mandatory set-off. Thus, in respectful disagreement with Scott Baker LJ, I do not consider that this factual difference should be taken as an indication that section 81(3) applies in the case of the taxpayer to the declared amount inserted in box 5 of his VAT return even if he subsequently discovers that that figure was wrong. If the taxpayer finds that he has declared as the amount of VAT payable by him an amount which is excessive, and there is a means under VATA of rectifying that error, there is no reason for concluding that Parliament intended to treat the set-off as applying to the amount in box 5 rather than the true amount. On the contrary, to do so would introduce an unnecessary complexity into the statute for no apparent reason. It is to be noted that the liability of the taxpayer is not to pay the amount shown in box 5 but to pay “such amount of VAT as is payable” by him (regulation 40(2) of the VAT regulations). Likewise the amount of credit for input tax is not fixed by reference to the amount claimed (see sections 25 and 26, set out by Schiemann LJ). The amount of the surcharge payable in the event of a default resulting from the non-receipt by the Commissioners of either a VAT return or the amount shown in the return as the amount of VAT payable is (understandably) not linked to the amount of VAT declared by the trader but to the amount of the outstanding VAT for which he is liable (section 59(6)).

It is clear that the Commissioners’ liability to make a refund under section 33 of VATA constitutes a liability to pay a sum “under any provision of this Act” for the purposes of section 81(3). On the facts of this case, in all relevant periods the amounts due to the Council under section 33 exceeded the VAT payable by it (even if account is taken of the perceived liabilities). Moreover it is not disputed that if the claims now being made are correctly characterised as claims under that section they are not time-barred. However, because section 81(3) is mandatory and applies to section 33 claims, it is not in my judgment appropriate to compare the events which happened with the situation which would have arisen if the Council’s section 33 claim could have been made without mandatory set-off. The comparison between those situations is of no relevance: it could not arise. Thus it cannot, in my judgment, logically be deployed in support of the Commissioners’ construction.

The amount which the Council considered was the amount due to it from the Commissioners was brought into its calculations for the purposes of box 5. However so far as relevant, a part of that amount was set against what the Council wrongly perceived to be amounts due from it to the Commissioners. I agree with the judge that perceived liabilities are not within section 81(3). They cannot constitute a “sum which [the Council] is liable to pay by way of VAT”. (I have considered the meanings of “liable” and “by way of” above). Accordingly, whatever the parties thought had happened, the set off under section 81(3) of those liabilities could not in law give rise to the discharge of the Council’s claim under section 33 for a refund. Accordingly, with respect to the purported or perceived set-off of perceived liabilities, I respectfully differ from the judgments of Schiemann and Scott Baker LJJ.

This analysis does not, however, mean that the Council’s appeal must succeed. It still has to show that its claim under section 33 is extant. In agreement with Schiemann LJ, I do not consider that the Commissioners can be said to have made a “refund” for the purposes of section 33(1) of those sums which the Council set against non-existent liabilities to pay VAT to the Commissioners. This conclusion is not inconsistent with my interpretation of the word “liable” in section 81(3). As stated above, the latter refers to a legal concept. The word “refund” is so far as material a reference to the Commissioners’ factual response to a claim: did the Commissioners reimburse the Council for its section 33 claim? History cannot be rewritten. On the information available to the parties at the time, the Commissioners did factually “refund” the claim by setting it at the Council’s request against its liability as it then believed it to be. Because the enquiry is a factual one, it is not appropriate to examine the legal effect of its actions in the light of information that has only subsequently come to light.

Section 80 is only applicable if amounts have been “paid” by way of VAT. The question whether, where an obligation to pay a sum to the Commissioners is reduced by set off, that sum has to the extent of that reduction been “paid” for the purposes of an enactment depends on the true construction of the enactment in question (see generally, Mellham v Burton (2003) STC 441, distinguishing Spargo’s case). VATA draws a distinction between credit (section 25), payment (see, for example, section 80(1)) and set off (section 81). We have been shown authorities in which it has been held that, in order for section 80(1) to apply, there must have been an actual payment by way of VAT: see Keene J in R v Customs & Excise Commissioners ex parte Kay & Co Ltd [1996] STC 1500, 1522, Neuberger J in University of Sussex v Customs & Excise Commissioners [2000] STC 1495, 1508 and Moses J in R v Customs & Excise Commissioners ex parte Building Societies Ombudsman Co Ltd [1999] STC 974, 991 (reversed on other grounds [2000] STC 892). However, the point has not been fully argued on this appeal or in this court. The Commissioners accept that the Council’s claim would fall within section 80(1) but for the cap in section 80(4). If the Commissioners’ concession is wrong in law, that would not in my judgment have any bearing on the meaning of “refund” in section 33. Accordingly I agree with Schiemann LJ that the question of what “paid” means does not arise on this appeal. In my judgment, the question should be left open for a case in which it requires to be decided.

On the above basis, I too would dismiss the appeal.

I have had the advantage of reading in draft the judgments of Schiemann and Arden LJJ. I gratefully adopt Schiemann LJ’s account of the facts, the background and the relevant legislation. I too use the same abbreviations and definitions. I agree that the Commissioners are under no obligation to satisfy the Council’s claim. This in my judgment is because there was a statutory set off under s.81(3) each time a return was submitted.

The Council’s error was in accounting to the Commissioners for output tax that it believed was due but in reality was not. Erroneous figures were included in box 1 of the form VAT 100 when the quarterly returns were submitted. This resulted in consequential errors in boxes 3, 4 and 5. It is the tax paid as a result of this mistake that the Council is seeking to recover. There was nothing wrong with the s.33 refund claims. As the judge pointed out, but for the fact the Commissioners had determined, obviously for reasons of convenience, that s.33 refund claims should be made in the VAT returns the present claims would undoubtedly have been capped by the 3 year time limit in s.80(4). It would be odd, on the face of it, if the procedural manner in which a s.33 claim is required to be made has the substantive effect of permitting the recovery of output tax paid in error where the repayment would otherwise have been time barred.

If the error as to the output tax had not been made, obviously the output tax declared would have been a lower figure. There would, we were told, also have been in consequence a slightly lower figure for input tax but anything that was not allowable as input tax would have been refundable under s.33. As Counsel put it there is no ‘gap’ between input tax and s.33. Thus, if the position were to reflect the true state of affairs without the impediment of the s.80(4) time limit, the Council would recover X as overpaid output tax but would have to give credit for Y input tax but at the same time would be entitled to a further refund of Y under s.33.

S.33 places local authorities (and certain other bodies) in a privileged position because it enables them to claim a refund of VAT chargeable on the supply of goods and services to them where that supply was not for business purposes. The problem in this case arises solely because of the manner in which claims for such refunds are required to be made. The Notice 749 is specific (see para 4.7(a)):

“If you are registered for VAT you make your claim for refund by including the amount of VAT in the VAT DEDUCTIBLE side of your VAT account and in boxes 4 and 5 of the VAT return.”

There is no other method open to the Council to claim s.33 refunds.

The Council duly made its claims for refunds in box 4 where they were merged with VAT reclaimed on purchases and other inputs, albeit the reclaims and the input tax were of a different character. Accordingly box 4 included a global figure whose two constituent elements would not be apparent to a recipient of the form. They would of course be apparent on inspection of the Council’s VAT records.

The present case poses a problem simply because legislation has imposed different time restrictions for rectifying errors in (1) overpayment of VAT and (2) claiming refunds under s.33.

It is necessary to consider the legal consequences when each quarterly VAT return was submitted and in particular whether there was a set off either at common law or under s.81(3) so that the Commissioners obligation to make a refund under s.33 was discharged by their payment to the Council of the amount entered in box 5.

S.25(2) provides a procedure for crediting input tax against output tax. The position is straightforward in cases where there is no s.33 element within box 4; the whole of the figure in box 4 is credited against the figure in box 3. But in the present case the quarterly figures in box 4 were comprised very largely of amounts due under s.33. The s.33 element plainly cannot be credited in the same way as input tax under s.25(2) because it is not ‘input tax allowable under s.26.’ What happens to the s.33 element? Every time the Council submitted a VAT return it contained a claim in box 4 for a refund of VAT that it had paid for non-business supplies. The Commissioners duly sent a cheque for the amount claimed in box 5 (which of course was the net amount due at the end of the accounting period i.e. the difference between the figures in boxes 3 and 4). This was for a lesser sum than was in truth due to the Council because the Council had returned a figure in box 3 (output tax) that exceeded what was due, albeit both it and the Commissioners were under the impression at the time that the figure was correct. There was, I emphasise, no other way in which the Council could have made its s.33 reclaim for this was the manner for making refunds as determined by the Commissioners pursuant to the section.

The Commissioners might have prescribed a different method for making s.33 claims. Suppose that instead of requiring a refund claim to be made through the quarterly VAT return they had required it to be made separately and had satisfied it with a cheque, leaving the Council to submit quarterly VAT returns in respect of its business activities in the ordinary way. In that event the Council, like other taxpayers, would at the end of each quarter have sent the Commissioners a cheque for the difference between the output tax and the input tax. On payment of the correct amount of the s.33 claim the Commissioners’ obligations under that section would have been discharged. Overpaid VAT could have been recovered under s.80 and regs 34 or 35. Can it really be said that because the s.33 claim was submitted with the VAT 100 return form and cross liabilities set against each other as required in the form that the s.33 claims nevertheless remained live? Such a conclusion seems to me to fly in the face of common sense and I am not attracted by either of Mr Cordara’s analyses justifying such a conclusion which have been summarised by Schiemann L.J, and which I need not repeat.

Absent s.81(3), there is no statutory machinery available to set off VAT liabilities to the Commissioners against s.33 claims. The judge did not think s.81(3) applied because it was concerned with real as opposed to perceived liabilities and, as events have shown, the figures returned as output tax later turned out to be erroneous. In this I differ from the judge. In my view s.81(3) did apply each time a return was submitted. However the judge nevertheless concluded that the Council paid its perceived liability to the Commissioners just as effectively as if it had received cash for its s.33 claim and paid its perceived liability as a taxable person separately. There was, he pointed out, a practice of setting off sums between the Council and the Commissioners. I can see the force of the judge’s analysis but it could only apply in the event that there was no statutory set off under s.81(3). In my judgment s.81(3) did apply and it was by that route that the Council’s s.33 claims were met.

I turn to the structure of s.81(3). In order for its operation to be triggered two conditions have to be met; (a) there must be an amount due from the Commissioners to the Council under some provision of the VATA 1994 and (b) the Council must be liable to pay a sum by way of VAT, penalty, interest or surcharge. Once these two conditions are met the operation of the subsection is mandatory. The amount in (a) is automatically set against the sum in (b) and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the Council are discharged. There can be no doubt that condition (a) was satisfied; there has never been any question but that the refunds were due as claimed. Turning to condition (b) the question is whether the Council was ‘liable to pay a sum by way of VAT’. In my judgment on any ordinary meaning of this expression the Council was liable to pay to the Commissioners at the end of each quarter the amount of its output tax declared in box 3 less any input tax stated in box 4. I see the force of and accept the Commissioners’ argument that the sum a taxable person is liable to pay by way of VAT is determined by the output tax (less any input tax) that he accounts for in his return. In my judgment the words liable to pay by way of VAT, have been carefully chosen by the draughtsmen. They emphasise that the sum that is paid may not in truth be due as VAT, that it may only be the perceived as opposed to the real liability. This is, after all a self-assessing tax. In most cases the true amount will be declared and paid by way of VAT when the return is submitted. But this is not necessarily so and there are procedures for the correction of errors.

It was argued on behalf of the Council that the obligation in reg 40(2) requires the taxpayer to pay the true, as opposed to the perceived, amount that is due. However I do not read the regulation in this way. I accept Mr Mantle’s argument that there is synergy between s.25(1) and reg 40(2). The obligation is to account for and pay the amount accounted for. There are other provisions that deal with subsequent steps that can be taken when either the Commissioners or the taxpayer concludes that any figure in the return is wrong. In short, it is the amount in the return that is payable; the figures in the return stand until questioned. The presumption is that the taxpayer will return the correct amount and it is so treated unless or until corrected under the error procedure or by assessment under s.73 (see generally s.25). That this is so is apparent from the fact that the obligation to pay under reg 40 arises not later than the last day on which the taxpayer is required to make the return. Also, where the Commissioners exercise their power of assessment under s.73 the amount assessed is declared to be the amount due from the taxpayer. That is the amount he is liable to pay. The council was in my view ‘liable to pay a sum by way of VAT’ on the last day on which it was required to make the return for the quarter in question and the amount of that sum was the amount declared in box 3 of the return less any inputs in box 4. The two conditions were met for the mandatory set off in s.81(3) to operate each time a return was submitted.

S.81(3)(a) refers to an amount due from the Commissioners whereas s.81(3)(b) refers to a person that is liable to pay a sum by way of VAT etc. s.80(1) likewise refers to payment by way of VAT and envisages recovery where it was not VAT due to the Commissioners. These two sections plainly in my view envisage circumstances where a taxpayer sends in his VAT 100 accompanied by a cheque for the amount of VAT that he believes to be due. What he makes is “a payment by way of VAT” even though due to circumstances unbeknown to him it was not VAT that he was, on a true analysis, liable to pay. It was, in the words of s.80, an amount paid by way of VAT which was not VAT due to the Commissioners.

This in my judgment entirely reflects the scheme of the VAT legislation. S.25(1) places on a taxable person liability to account and pay VAT by reference to prescribed accounting periods. It is, as Mr Mantle for the Commissioners pointed out, a self-assessing tax. The taxpayer is obliged to make a return that he believes to be correct and to submit the return together with the tax by the due date. If, for example, the taxpayer fails to claim any input tax to which he is entitled he is liable for the whole of his declared output tax. Drawing a distinction between true and perceived liabilities is liable to lead to confusion. What is the taxpayer’s true liability? When is it ascertained? If it is the amount in absolute terms that the taxpayer should pay to the Commissioners it may be a figure that is forever unknown, where for example an error never comes to light.

In most cases the figures in the quarterly return determine the final liability of the taxpayer for the period in question. There are penalties for misdeclaration or neglect (see s.63). However, there is also power for the Commissioners to assess the amount of VAT due if they think the return is incomplete or incorrect (s.73) and there is a procedure open to the taxpayer for correction of errors (regs 34,35). There is also a procedure for estimating output tax (reg 28) where the correct amount for the period cannot be determined. In such circumstances the taxpayer’s liability is revised but that does not mean he was never liable to pay the amount for which he initially accounted. When the Council submitted the return it was liable to pay by way of VAT the output tax in box 3 less the input element in box 4. Reg 40(2) requires payment by the taxpayer of such amount of VAT as is payable by him in respect of the period to which the return relates, not later than the last day in which he is required to submit that return. What he actually makes is a payment by way of VAT which may or may not be the correct amount. If it is not, it is subject to later correction by the Commissioners or the taxpayer.

When s.81(3) refers to a mandatory set off of the obligations of the Commissioners and the taxpayer and the obligation of the parties being discharged, what it means in relation to this case is the discharge of the obligation at the time the return is submitted. In other words the Council is put in precisely the same position as if it had submitted the VAT that both parties at that stage believed was due, by way of a cheque. It is nothing to the point that the amount of the Council’s liability for output tax was subject to revision under various provisions of the Act. The use of the phrase ‘by way of VAT’ in s.81(3)(b) indicates in my view that s.81(3) does apply to the sums returned in the quarterly returns. This has been spoken of as a perceived liability, but this expression is liable to be misleading; for it is the amount by way of VAT that was payable by the taxpayer at that time. It was in that sense a real liability albeit the amount was subject to revision.

I turn therefore to the concluding words of the subsection. These provide that the obligations of the Commissioners and the Council shall be discharged. It was argued on behalf of the Council that these words point to the section applying only to the true or ultimate liability i.e. what is agreed in the final analysis after any corrections or assessments have been made. I do not, however, read them in this way. Again it seems to me s.81(3) has to be considered in the context of the legislation as a whole. It is obviously sensible to have a general set off provision for the discharge of cross liabilities between a taxpayer and the Commissioners. S.25(2) does no more than permit the credit of input tax against output tax.

S.81(3) seems to me to be a provision of broad application designed for reasons of practicality to simplify cross accounting between the Commissioners and a taxpayer. It is obviously sensible that such a provision should apply to a situation such as that in the present case where a s.33 refund claim is required to be added to any input tax in box 4 but where s.25(2) credit provision does not apply.

I differ from the judge in that in my view the s.81(3) set off procedure did apply in this case with the result that the s.33 claims have been met and what the Council was claiming was a repayment of output tax for which it had over accounted. Such a claim runs into the obstacle of the time bar in s.80(4).

It was argued by Mr Cordara Q.C that ‘paid’ in s.80 means ‘actually paid’ and that a s.81(3) set off is not payment within the meaning of s.80. Thus, runs the argument, a council cannot rely on s.80 to recover output tax erroneously discharged by set off under s.81(3). So the council would be left without a remedy. This is said to be the consequence of the repayment trader line of cases referred to in para 60 of the judgment of Arden L.J. I am unpersuaded that this is so. The issue, as was pointed out by Buxton L.J in a different but similar context, (see Mellham Limited v Burton [2003] EWCA Civ 173 para 7) is ultimately one of statutory construction. The repayment trader cases were dealing with a different kind of situation. What in my view they establish is that you cannot have a right to repayment of something you have never paid. A set off under s.81(3) creates a payment albeit by indirect means. As Mr Mantle observed, it is a matter of going back to Spargo’s case (1873) 8 Ch App 407 and looking at the reality of what has occurred. It is also to be noted that the repayment trader cases are first instance decisions and that this court has never considered the ambit of the word ‘paid’ in s.80. Like the judge I think the expression should be given a practical and commercial meaning rather than a narrow one.

If I am wrong in my conclusion that s.81(3) applies and it only bites on actual as apposed to perceived liabilities, as concluded by the judge, then I accept the analysis of Schiemann LJ that on common law principles a s.33 claim is no longer available.

My conclusion is as follows:

I would accordingly dismiss the Council’s appeal and if it is necessary to do so I would also allow the Commissioners’ appeal on the first preliminary issue.

The Appellant’s appeal be dismissed and the Respondent’ cross appeal be allowed.

Paragraph 1 of the Order of Stanley Burnton J dated 15^th October 2002 be set aside, save as to preliminary issue (ii)(b), and the remaining preliminary issues be answered as follows: (i) no; (ii)(a) yes.

The Respondents’ costs of the trial of the preliminary issues and of the appeal and cross-appeal be paid by the Appellant to the Respondents, subject to detailed assessment, if not agreed.

[The Appellant does not have permission to appeal to the House of Lords]

By consent the stay imposed by the order of Mr Justice Burton dated 6^th day of March 2001 in respect of the remainder of the Claimant’s claim for Judicial Review remain in force until further order.

Liberty to apply to the Administrative Court in respect of paragraph 5 of this order.