Scouts Association Trust Corp & Ors v Secretary of State for the Environment

J U D G M E N T

1. LORD JUSTICE CARNWATH: This is a rather unusual case on the facts, which are set out in the very clear judgment of Judge Rich QC and I need not repeat them. The question concerns the way in which compensation is payable on the "equivalent reinstatement" basis and the accounting for VAT on that amount.

2. Originally the Scout Council, which operated the relevant premises, was advised to set up a separate company which would be registrable for VAT purposes, in the expectation that in that way it would be able to gain a tax advantage. Initially that was accepted by the VAT authorities, but later they changed their minds and said that that had been a mistake. However, they wrote in clear terms indicating that they were not going to try and recover VAT which had been wrongly repaid on the original basis.

3. One might have thought that in practical terms that would have been the end of the matter. Reference was made to the so-called "Sheldon doctrine", which is a well-established principle relating to the circumstances in which the authorities will seek to collect tax where a taxpayer has been misled by the Customs' own error. That of course is extra-statutory, but for practical purposes it would normally be relied on.

4. Mr Price QC says that there is always a risk that the Customs will go back on the assurance they have given. He points in particular to their letter of 3rd August 2004 which suggests that his clients have the certainty that they require, but then says:

"On the facts as currently known, Customs will not be re-examining any of the input tax claimed by Buckmore Park Services."

5. Mr Price suggests that there are circumstances in which it would be possible for Customs in good faith to argue that new facts had emerged which would entitle them to go back, at least in part, on the assurances they originally gave. He relies in particular on possible circumstances under the so-called Capital Goods Scheme. He asked me to see such circumstances against the law as set out by Roskill LJ in Stoke-on-Trent City v Wood Mitchell & Co [1980] 1 WLR 254, 259. He said:

"... if after examination of the relevant statutory provisions it is clear beyond peradventure that the sum in question would not be taxable in the hands of the claimants"

it would be appropriate to pay after deduction of tax, but in other circumstances it would be:

"... unjust that in a doubtful situation the acquiring authority can get the benefit of a reduced payment while leaving the claimants exposed to the risks we have mentioned."

6. That was in the context of direct taxes, not VAT. But Mr Price says that, notwithstanding the assurances that have been given, it cannot be said to be "clear beyond peradventure" in this case that there would not be a future demand. Of course the other side of the coin is that if, as one would expect, the Customs do stand by their assurances but in the meantime the authority have been required to pay the additional amount in respect of VAT (which I understand is something of the order of £1.5 million), there is at the present no apparent machinery for that to be repaid.

7. The answer may be that what the judge had to decide was not a complicated question of tax law but one of compensation law, namely: what was the reasonable cost of equivalent reinstatement? In doing that he needed to take a reasonable view of what the effect of taxation and of VAT would be on the amounts paid, and his decision on that is one of fact which was fully open to him on the evidence before him. If that is the right analysis, then there is nothing that this court (which is confined to questions of law) can do to alter the matter.

8. That would lead me to the view that there are here arguments, but not arguments which in themselves I would regard as realistic. However, I also bear in mind that this is an area of the law which has not been the subject of clear consideration in the authorities. Some consideration was given by the Law Commission in their consultation report on compensation to the question of taxation in relation to compensation (see LCCP No 165 para 8.51 ff). But the issue of VAT, particularly in the context of equivalent reinstatement, was not gone into (cf Final Report LC 286 para 10.26 note 44). Furthermore, the precise operation of the Sheldon doctrine in such circumstances is something which may justify further attention.

9. I have some doubts whether this is a wholly suitable case, given its rather unusual facts. However, on balance I am persuaded that permission should be granted. In doing so, however, I emphasise that I would regard the likely result as being that the appeal will fail. I am sure Mr Price will take that into account in any advice he gives to his clients.

10. However, subject to that, I grant permission to appeal.

ORDER: Application for permission to appeal granted; time estimate for the appeal of one day; appeal to be heard by three Lords Justices or two Lord Justices and a High Court judge; there should be at least one judge with Chancery or Tax expertise within the court.

(Order not part of approved judgment)

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