Teleos Plc & Ors, R (on the application of) v Customs and Excise

This is an appeal by Teleos Plc (“Teleos”) against the decision of Moses J of 29 July 2004 whereby he refused to grant interim relief in the form of a payment of money principally on the grounds that the application was for an interim payment and the conditions applicable to such an application prescribed by CPR 25.7 were not satisfied. The Commissioners of Customs and Excise (“the Commissioners”) cross-appeal against the judge’s order for costs in respect of the application. The judge himself gave Teleos permission to appeal since he considered that the appeal raised an issue of some importance.

The application was made in judicial review proceedings in which Teleos challenge the lawfulness of the decision by the Commissioners that mobile phones supplied by it did not meet the conditions for zero-rate VAT and ought therefore to be chargeable to VAT at the standard rate. The relevant assessment was made on 26 September 2002. The total amount assessed as being due to the Commissioners was £1,533,274. The phones had been supplied to a Spanish company in circumstances in which, the Commissioners contend, Teleos has not supplied evidence that the goods have left the United Kingdom so as to fulfil the conditions for zero-rating. The legal basis for these conditions ultimately derives from Directive 77/388/EEC (“the Sixth VAT Directive”). The Commissioners recouped part of the amount of the assessment by setting off £1,058,121.94 of VAT input credits due to Teleos pursuant to section 81(3) of the Value Added Taxes Act 1994 (“the 1994 Act”).

The judge decided that it was necessary to refer questions concerning the interpretation of Art. 28c(A) of the Sixth Directive to the European Court of Justice (“ECJ”) in order to determine the proper scope and interpretation of the conditions for zero-rating. It is unlikely that a decision on the reference will be made until before 2006 at the earliest. It is this delay that prompted the application for interim relief.

By an application notice dated 23 July 2004, therefore, Teleos applied to the court for interim relief in the sum of 50% of the total amount set off by the Commissioners (£529,275.31) plus provision for past and future legal costs. The application was made pursuant to CPR 25 and/or the court’s inherent jurisdiction.

In support of the application, Teleos relied on the witness statement of Robert Holland, its solicitor, who said that, unless interim relief were given, the company “is almost certain to be wound up. Teleos requires interim relief so as to pay its taxes and to resume trading”. Shortly before the hearing, the Commissioners served a statement by Ruth Farmer, a senior Operational Accountant. She analysed the financial information provided by Teleos and concluded that its financial position was much better than it had suggested, and that, in so far as it appeared to be financially vulnerable, this was because dividends of £1 million had been paid on 19 December 2002 in unexplained circumstances, and in the period after the assessment under challenge (a) interest free loans had been made to directors and (b) unusually high remuneration had been paid to directors. A number of other points were made by Ms Farmer which led her to say at para 28 of her statement:

“In those circumstances, the Commissioners reached the conclusion that Teleos did not satisfy the test for an interim payment at this stage.”

Before the judge, the argument advanced on behalf of Teleos centred on CPR 25. The argument based on the court’s inherent power to grant an injunction for an interim payment was not developed. Moreover, no argument was addressed to the judge that the Commissioners had failed properly to exercise their discretionary power to make an interim payment. The judge said that it was plain that this was a claim for interim payment and not a claim for interim relief, so that the principles stated in CPR 25.7 applied. Since it was common ground that the claim did not satisfy the requirements of CPR 25.7, the application was dismissed. That was the essential holding of the judge. He also seems to have considered whether the application should be allowed in the exercise of the court’s inherent jurisdiction, and referred to para [10] of the decision of Neuberger J in Capital One Developments Limited v Customs and Excise Commissioners [ 2002] EWHC 197 (Ch), [2002] STC 479 (a decision to which I shall return) which is in these terms:

“As to the second point, while it may be wrong to suggest that it is an absolute principle, it seems to me that it would require very special facts before a court would be prepared to use its powers to grant an interim injunction to order that a payment of a disputed sum from a defendant to the claimant on the basis that it will be repaid if the claimant lost.”

I say that the judge “seems to have considered”, because, although he said that in this case there was no basis for thinking that the sums would be repaid if Teleos lost, he went on to say:

“But I stress that this is a case to which the principles set out in Civil Procedure Rules 25, Rule 7 apply, and it is accepted that those rules do not apply in this case.”

The judge then considered whether the Commissioners’ decision to refuse an interim payment was “on conventional public law grounds, irrational.” He said:

“In my judgment, it cannot be said that it is. The Commissioners were entitled to take into account that there was very little prospect of any of these sums returning should the Commissioners be successful. Indeed, this case has not been argued on the basis that there is a legitimate public law challenge to the Commissioners’ refusal.”

There has been no challenge to this part of his judgment by Mr Andrew Young on this appeal.

CPR 25 provides for interim remedies. CPR 25.1(1) states that the court may grant “the following interim remedies”. There follows a list of remedies in paras (a) to (o). Para (k) reads:

“an order (referred to as an order for interim payment) under rule 25.6 for payment by a defendant on account of any damages, debt or other sum (except costs) which the court may hold the defendant liable to pay.”

CPR 25.1(3) is a provision on which Mr Young places much reliance:

“The fact that a particular kind of interim remedy is not listed in paragraph (1) does not affect any power that the court may have to grant that remedy.”

Rule 25.6 makes certain general procedural provisions for interim payments. Rule 25.7 defines the conditions that must be satisfied if an interim payment is to be made. It is unnecessary to set them all out in this judgment. They include that the defendant against whom the order is sought has admitted liability to pay damages or some other sum of money to the claimant, or that the claimant has obtained judgment against that defendant for damages to be assessed and that, with certain exceptions, the court is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial amount of money against the defendant from whom he is seeking an order for interim payment. As I have said, it is common ground that Teleos does not satisfy the rule 25.7 conditions.

The court’s power to order interim payment derives from section 32(5) of the Supreme Court Act 1981 which defines “interim payment” as:

“a payment on account of any damages, debt or other sum (excluding any costs) which that party may be held liable to pay to or for the benefit of another party to the proceedings if a final judgment or order of the court in the proceedings is given or made in favour of that other party.”

This statutory provision and the consequent rules were necessary because the court has no inherent power to order an interim payment: Moore v Assignment Courier Ltd [1977] 1 WLR 638. In that case, landlords brought proceedings against tenants claiming possession and mesne profits, and sought orders that, before the determination of their forfeiture actions, judgment be entered for them for mesne profits, since they were entitled to compensation in one form or another for the tenants’ occupation of the premises. The applications were dismissed on the grounds that the court had no inherent jurisdiction to make the orders sought.

It is a general principle of our system of civil justice that a defendant has the right not to be held liable to pay until liability has been established by final judgment. Rule 25.7 departs from that principle, but it is subject to strict conditions. In these circumstances, I would respectfully doubt the correctness of para [10] of the judgment of Neuberger J in the Capital One case. If the court had the jurisdiction to which he refers, then the court could have granted the plaintiff landlords in the Moore case the money they claimed by way of an injunction. Be that as it may, Teleos does not say that the judge should have granted a mandatory injunction requiring the Commissioners to pay the sum claimed.

Mr Young submits that the judge was wrong to hold that there was no jurisdiction to grant interim relief under CPR 25. He accepts that, if the claim for an interim payment were made in routine domestic litigation in which Teleos were claiming a sum of money, it would only succeed if the conditions specified in CPR 25.7 were satisfied. But he submits that the fact that the proceedings involve the application of EC law (as demonstrated by the fact that a reference has been made to the ECJ) means that certain principles of EC law relevant to claims for interim payment of VAT are applicable. These would be frustrated if CPR 25.7 were to be applied with full rigour. CPR 25.1(3) provides that the fact that a particular kind of interim remedy is not listed in para (1) does not affect any power that the court may have to grant that remedy.

Mr Young submits that, as a consequence of EC law, the court has the power to grant an interim remedy which is not mentioned in rule 25.1(1), namely the power to order an amount to be paid in circumstances where the court has referred a question to the ECJ even if the conditions specified in rule 25.7 are not satisfied. In support of his submission that EC law requires national courts to confer on their courts the power to grant interim relief by way of interim payment in such circumstances, Mr Young relies on the ECJ decisions in R v Secretary of State for Transport, ex p Factortame Ltd (No2) [1991] 1 AC 603 and Garage Molenheide BVBA, Schepens, Bureau Rik Decan-Business Research & Development NV (BRD) and Sanders BVBA v Belgium [1997] ECR 1-7281, [1998] STC 126. In my judgment, it is the Garage Molenheide decision which lies at the heart of the current appeal. But before I come to that case, I shall refer briefly to Factortame.

As is well known, this litigation was concerned with the challenge by Spanish nationals to the Merchant Shipping Act 1894 and regulations made thereunder on the grounds that they contravened various provisions of EC law. The applicants applied to the national court for interim relief in the form of an order suspending the operation of the Act and regulations pending a decision by the ECJ on the question whether the legislation contravened EC law. The ECJ held that, in a case concerning EC law in which an application was made for interim relief, if the national court considered that the only obstacle which precluded it from granting such relief was a rule of national law, then that rule had to be set aside.

In Molenheide, the ECJ had to consider 4 cases where a taxpayer had claimed payment of a refund of VAT on the basis that the amount of input credits exceeded the amount of output tax payable. Relying on a provision of Belgian legislation, the Belgian authorities refused to pay on the grounds that they suspected that the taxpayers owed them a VAT debt which did not appear from their previous returns. The retention of the tax credits took effect as a “preventive attachment until the dispute has been definitively resolved, either in the administrative procedure or by a final court judgment”. The taxpayers contended that the Belgian legislation which permitted the authorities to do this was incompatible with the Sixth Directive.

There were two questions for the court. The first was whether Art 18(4) of the Sixth Directive in principle prohibited measures of this kind. Article 18 is headed “Rules governing the exercise of the right to deduct”. Article 18(4) provides that, where the amount of authorised deductions exceeds the amount of tax due, the Member State may “either make a refund or carry the excess forward to the following period according to conditions which they shall determine.” The answer given by the court to the first question was that it did not prohibit measures of this kind (para 44).

The court then considered whether the measures adopted and the manner in which they were applied by the Belgian authorities were proportionate, and concluded that it was for the national court to decide this question. The passage in which the issue of proportionality is discussed is of direct relevance to the issues that arise on this appeal. The court made the following general observations:

“45.

As regards, next, the effects which the principle of proportionality may have in this context, it must be emphasized that whilst the Member States may, in principle, adopt such measures, it is nevertheless the case that those measures are liable to have an impact on the national authorities’ obligation to make an immediate refund under Article 18(4) of the Sixth Directive.

46.

Thus, in accordance with the principle of proportionality, the Member States must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and the principles laid down by the relevant Community legislation.

47.

Accordingly, whilst it is legitimate for the measures adopted by the Member States to seek to preserve the rights of the Treasury as effectively as possible, they must not go further than is necessary for that purpose. They may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation.

48.

The answer to be given in that regard must therefore be that the principle of proportionality is applicable to national measures which, like those at issue in the main proceedings, are adopted by a Member State in the exercise of its powers relating to VAT, since, if those measures go further than necessary in order to attain their objective, they would undermine the principles of the common system of VAT and in particular the rules governing deductions which constitute an essential component of that system.”

They then addressed the various submissions made on behalf of the applicants to the effect that the system of preventive attachment infringed the principle of proportionality. The first point made was that the retention was “absolute” and effected “automatically” in all cases where a tax debt was disputed, and admitted of no exceptions. The court said at para 52:

“52.

It must therefore be held that an irrebuttable presumption, as opposed to an ordinary presumption, would go further than is necessary in order to ensure effective recovery and would be contrary to the principle of proportionality in that it would not enable the taxable person to adduce evidence in rebuttal for consideration by the judge hearing attachment proceedings.”

Next, the applicants made the point that, without the consent of the VAT authority and except where a formal requirement had been infringed, there was no power in the national court to lift in whole or part the retention of the refundable balance. As to this, the court said:

“55.

In that connection, it must be observed that, in considering whether the adverse effect on the right of deduction is proportionate, the availability of effective judicial review is necessary both in the proceedings on the substance of the case and in those before the judge hearing attachment proceedings.

56.

Consequently, provisions of laws or regulations which would prevent the judge hearing attachment proceedings from lifting in whole or in part the retention of the refundable VAT balance, even though there is evidence before him which would prima facie justify the conclusion that the findings of the official reports drawn up by the administrative authority were incorrect, should be regarded as going further than is necessary in order to ensure effective recovery and would adversely affect to a disproportionate extent the right of deduction.

57.

Similarly, provisions of laws or regulations which would make it impossible for the court adjudicating on the substance of the case to lift in whole or in part the retention of the refundable VAT balance before the decision on the substance of the case becomes definitive would be disproportionate.”

The next complaint was that it was impossible for the taxable person to request the court to adopt in place of the retention a different protective measure which was sufficient to protect the interests of the Treasury, but which was less onerous for the taxpayer. The court said (para 59) that such impossibility if proved “would also exceed the bounds of what is necessary to guarantee recovery of any sums due.”

In relation to the fourth complaint (about the effect of retention of interest, costs and penalties), the court said:

“61.

In that regard, it must be observed that the exercise of effective judicial review of the kind described above, in particular if both the court adjudicating on the substance of the case and the judge hearing attachment proceedings were able to grant the taxable person, at his request and at any stage of the procedure, a total or partial lifting of the retention, would suffice to eliminate any lack of proportionality in the calculation of the amounts retained, in particular as far as penalties are concerned.”

I accept that, if there were no mechanism whereby a taxpayer in a position such as that facing Teleos in the present case could ever obtain an interim payment of the VAT withheld by the Commissioners, then that would involve an infringement of the principle of proportionality as explained in Garage Molenheide. I did not understand Mr Young to dispute the fact that, as the judge said, in the exercise of their care and management powers (para 1 of Sch 11 to the 1994 Act), the Commissioners have a discretion to make interim payments in appropriate cases. The discretion must not be exercised unreasonably in the Wednesbury sense nor disproportionately. Thus, in refusing to make interim payments, the Commissioners must not go further than is necessary to attain the objective of maintaining the common principles of VAT and, in particular, the principle of effective recovery of VAT and the right in the taxpayer to make authorised deductions from the amount of tax due. There is no doubt that the exercise of this discretion is susceptible to judicial review.

If there are criteria by which the Commissioners exercise this discretion, they were not disclosed to us. Indeed, at para 14 of his witness statement, Mr Holland said that it was his understanding that it was the Commissioners’ policy not to make interim payments. It is clear from Ms Farmer’s statement that this understanding was not correct. But it is most unsatisfactory that taxpayers appear not to be aware of the true position. In my judgment, the Commissioners should make a clear statement of their policy and they should publish the criteria by which they exercise the discretion to make interim payments. This will enable taxpayers to know whether they may be entitled to an interim payment, and provide courts with a benchmark against which to assess refusals to make payment.

In her witness statement, Ms Farmer explained why she did not accept that Teleos was in the financially parlous state which it proclaimed and said that, to the extent that it was, this was as a result of unexplained and extraordinary decisions taken by the company which appeared not to have been ordinary business decisions. I repeat what she said at para 28 of her statement:

“In those circumstances, the Commissioners reached the conclusion that Teleos did not satisfy the test for an interim payment at this stage.”

As I have said, decisions of this kind may be challenged not only on traditional grounds of Wednesbury unreasonableness, but also on grounds that they are disproportionate in the sense that I have explained.

In Capital One, Neuberger J distinguished Garage Molenheide on the grounds that in the latter case the issue was whether the claimants were entitled to be paid a sum which they were admittedly entitled to claim, whereas in the former case, the issue was whether the claimants were entitled to maintain their claim at all. Nevertheless, he said (para 27) that he inclined to the view that:

“the question of proportionality identified in paras 46 and 48 and referred to in para 61, of the judgment of the Court of Justice, has some part to play in a case such as this, so that the courts can-indeed in an appropriate case should- be prepared to intervene, but not nearly as readily as in a case such as Molenheide”.

Whether the distinction drawn by Neuberger J is right or not, it is clear that in cases where the taxpayer claims VAT from the Commissioners, the refusal of the Commissioners to make an interim payment is challengeable on public law grounds, and proportionality has a role to play. This is not disputed by Mr Rupert Anderson QC.

Since there is no appeal from the decision by Moses J to reject a public law challenge against the decision not to make an interim payment, it is not necessary to say more about the circumstances in which such a challenge may successfully be made on public law grounds, and the role of proportionality. The critical point is that the courts of this country do provide a mechanism for ensuring that proportionate decisions are made by the Commissioners in relation to interim payments, and if they are not, the court can intervene. That is sufficient to meet the requirements of the ECJ as articulated in Garage Molenheide, and obviates any need to give a strained interpretation to rule 25.1 or 25.7. Our system is to be distinguished from the Belgian system where, as was made clear in Garage Molenheide, the national court had no power to interfere with a decision not to make an interim payment of VAT in any circumstances.

I do not consider that Factortame adds anything to Garage Molenheide. In Factortame, it was held that in a case concerning EC law a rule prohibiting the national court from ever granting the interim relief sought must be set aside. But for the reasons explained, there is no such applicable rule here.

I should add for completeness that Mr Young withdrew his submissions (which appeared in his skeleton argument) to the effect that the Commissioners’ refusal to make an interim payment violated certain of Teleos’s rights under the European Convention for the Protection of Human Rights and Fundamental Freedoms.

He also drew attention to what he described as the “odd” fact that, if the Commissioners’ submissions were accepted, there was a lack of “equivalence” between the position which applies in VAT appeals and that which applies with regard to direct tax appeals. But he did not rely on this lack of equivalence as founding a discrete argument. Section 55(3) of the Taxes Management Act 1970 allows an appellant to postpone paying a demand for tax until his appeal has been heard if certain conditions are satisfied. There is no corresponding provision in the VAT legislation. But as Mr Anderson points out, it is a well established principle of Community law that it is for the domestic legal system of each Member State to determine the procedural conditions governing actions intended to ensure the protection of directly effective rights: see, eg LAMIT v Customs & Excise Commissioners [2003] EWHC 2766 (Ch), [2004] STC 246 at para [53]. There is no principle of Community law which requires the procedure of direct tax appeals to be the same as that of indirect tax appeals.

In my judgment, the appeal against the judge’s refusal to grant interim relief must be dismissed. Teleos was not entitled to an interim payment under CPR 25.7 because it did not satisfy the conditions specified in the rule. Moreover, there is no need to give a strained interpretation to rule 25.1(1) or 25.7 or to hold, as Neuberger J suggested in Capital One, that the court has the power to grant an interim injunction to order a defendant to make payment of disputed sums to a claimant. Similarly, there is no need for the court to hold that, as a consequence of EC Law, the court has the power to grant an interim remedy which is not mentioned in rule 25.1(1), namely the power to order an amount to be paid to a claimant where a question has been referred to the ECJ even if the rule 25.7 conditions are not satisfied. This is because the Commissioners have a discretion to make interim payments of disputed input VAT credits in certain circumstances and the exercise of that discretion is susceptible to challenge by judicial review. The judge expressed the view that a judicial review challenge could not succeed, and this part of his judgment has not been the subject of appeal.

The judge refused to award the Commissioners their costs even though they had defeated the application for interim relief. He made no order as to costs. He said:

“I think the Commissioners have a point that they, even on their reading of the law, had to look into it because they had to exercise their discretion whether to make an interim payment. But having said that, it all seems to have come terribly late and I think they could have tried to get this issue resolved at a more sensible time, within a more sensible time frame, and in those circumstances I think honour will be satisfied and I think the right order is no order as to costs.”

The general rule is that costs follow the event: CPR 44.3(2)(a). The reason given by the judge for departing from the general rule was that the Commissioners could have tried to resolve the matter earlier and (possibly) that they should have served their evidence earlier.

The relevant chronology is as follows. On 6 May 2004, the judge decided to refer questions to the ECJ for a ruling. Teleos first mooted the possibility of an application for interim relief on 14 June. On 25 June, the Commissioners replied saying that they were prepared to consider interim relief, but required clarification of the information that Teleos had provided as well as “some further and better particulars”. On 14 July, Teleos provided further information. On 20 July, the Commissioners wrote saying that they were not satisfied on the basis of the information provided that Teleos would suffer “serious and irreparable” harm if an interim payment were not made.

Late on Thursday 22 July, copies of the application for interim relief and supporting evidence were served on the Commissioners. Teleos obtained a very early hearing date (29 July). The parties exchanged skeleton arguments on 28 July and the Commissioners served their evidence on 27 or 28 July. I would accept the submission of Mr Anderson that the witness statement of Ms Farmer was essentially analysis of and comment on the information that had been provided by Teleos, most if not all of which could have been the subject of submission by counsel at the hearing.

In my judgment, the reasons given by the judge did not justify a departure from the general rule that costs should follow the event. It is difficult to see what the Commissioners could have done (but failed to do) which would have avoided the hearing of the application. Even if there were further avenues to be explored, it seems to me that the Commissioners were not dragging their feet. The hearing came on very quickly, perhaps too quickly for negotiations to be completed. But the pace was set by Teleos, and they cannot complain if there was insufficient time to explore all possible avenues. Nor do I consider that the Commissioners can reasonably be criticised for late service of their evidence. Teleos did not serve its application and evidence until late on 22 July. In any event, the timing of the service of the Commissioners’ evidence did not prejudice Teleos.

I would allow the cross-appeal. In my judgment, the decision as to costs should be set aside. The Commissioners are entitled to their costs of the application.

I agree.

I also agree.