Midlands Co-Operative Society Ltd v HM Revenue & Customs

This is an appeal by HM Revenue and Customs (whom I will call “HMRC”) from the order dated 19 June 2007 of Blackburne J. By his order, Blackburne J allowed an appeal by Midlands Co-operative Society Limited (“Midlands”) against a decision released on 20 July 2005 of the VAT and Duties Tribunal (Mr Colin Bishopp). The sole question arising on this appeal is whether Midlands as transferee of the business of another industrial and provident society, Leicestershire Co-operative Society Limited (“Leicester”), has standing to make a claim for the repayment of VAT under section 80 of the Value Added Tax Act 1994 (“VATA”).

In my judgment, the judge was correct for the reasons he gave. As he held, the appellants have to show that there is some provision in the relevant statutory scheme which expressly or by implication precludes an assignment by operation of law of a claim for repayment under section 80 of VATA. Both he and this court have been referred to certain provisions of VATA and the Value Added Tax Regulations 1995 ("the regulations") made thereunder. There is no express legislative prohibition on assignment in the provisions to which we have been referred, and in my judgment none of them gives rise to the implication that the transfer of claims under section 80 was not permitted in the circumstances of this case.

Like the judge, I can take the facts from the agreed statement of facts, making only an alteration which the judge made to correct an obviously erroneous statutory reference in paragraph (9).

“(1)

Midlands is an industrial and provident society registered in accordance with the Industrial and Provident Societies Act 1965 (the Act).”

(2)

Midlands carries on business as a general retailer, selling food and non-food products through retail premises, providing funerals, acting as travel agents, and carrying on the business of a motor dealer.

(3)

Midlands has been registered for the purposes of VAT since 6 September 1997 although returns have been rendered with effect from the prescribed accounting period 02/92.

(4)

Leicestershire Co-operative Society Limited (Leicester) was an industrial and provident society registered in accordance with the Act carrying on a similar business to Midlands, including the business of a motor dealer. Leicester was registered for VAT.

(5)

At general meetings of Leicester held on 7 March and 23 March 1995 the following special resolution was passed in accordance with section 51 of the Act:

‘That this meeting of the members of [Leicester] hereby resolves to transfer the whole of the stock, property and other assets and all engagements of the Society to [Midlands] in consideration of [Midlands] issuing to each member of this Society paid up shares equal to the amount standing to the credit of each member in the share ledgers of this Society on the date when the transfer of engagements becomes effective. The transfer shall become effective immediately on the expiration of the Saturday following the date of the registration of this resolution’.

(6)

At a meeting of the Board of Midlands on 26 January 1995 it was resolved that a special members’ meeting be called to change the name of the society and:

‘That this meeting of the Central Board of Directors of [Midlands] hereby agrees in consideration of this Society receiving the whole stock, property and other assets of [Leicester] to issue paid up shares equal to the amount standing to the credit of each such member in the share ledgers of [Leicester] on the date when the transfer of engagements becomes effective.’

(7)

On 30 March 1995 the Registrar of Friendly Societies acknowledged … the registration that day of the Special Resolution of Leicester and the registration of the change of name of Midlands.

(8)

In consequence of the registration of the Special Resolution 'immediately upon the expiration of' Saturday 1 April 1995 the engagements of Leicester were transferred to Midlands pursuant to section 51(1) of the Act. At that moment Leicester had no spare members and no assets or liabilities whatsoever.

(9)

On 30 April 1997, pursuant to section 16(l)(a)(iii) of the Act, the Registrar of Friendly Societies stated in respect of Leicester that:

'The registration of the above mentioned society is hereby cancelled on the ground that the society has ceased to exist following its Transfer of Engagements to [Midlands]'.

(10)

On 30 June 2003 Midlands' representatives submitted two voluntary disclosure claims in respect of VAT claimed to have been over declared. The first voluntary disclosure for £63,054 relates to the period 1 April 1973 to 30 November 1999 in respect of output tax over declared under the margin scheme on the sale of demonstrator cars. The second voluntary disclosure for £38,493 relates to the period 1 April 1973 to October 1996 in respect of payments by car manufacturers of demonstrator discounts and bonuses. The two claims were made as a consequence of the decisions: in the cases of Commission v Italian Republic (Case C-46/95) [1997] STC 1062 and Elida Gibbs v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 respectively.

(11)

Customs, by letter dated 18 May 2004, have refused to pay any part of the voluntary disclosure in so far as it relates to VAT paid originally by Leicester prior to its transfer of engagements to Midlands on 1 April 1995."

Section 80 of VATA was at the material time and so far as material as follows:

Section 51(1) of the Industrial and Provident Societies Act 1965 provides as follows:

"(1)

Any registered society may by special resolution transfer its engagements to any other society which may undertake to fulfil those engagements; and if that resolution approves the transfer of the whole or any part of the society's property to that other society, the whole or, as the case may be, that part of the society's property shall vest in that other society without any conveyance or assignment."

The reference in section 51(1) to a “registered” society is to any industrial and provident society (such as Leicester or Midlands) registered in accordance with the 1965 Act.

Section 51(1) of the 1965 Act was considered by this court in Co-operative group (CWS) Limited v Stansell Limited [2006] 1 WLR 1704. In that case, the industrial and provident society had entered into a contract for the construction of a distribution centre. It then passed a resolution under section 51(1) transferring its whole property and assets to another society and that resolution took effect under the 1965 Act. However, an issue arose as to whether section 51(1) was effective to transfer to the transferee the right to claim damages for breach of the construction contract notwithstanding the fact that it provided that neither the employer nor the contractor could assign the contract without the written consent of the other. This court held that section 51(1) vested the benefit of the contract in the transferee notwithstanding the prohibition on assignment.

Mr Craig Sephton QC, for HMRC, submits that section 51(1) cannot apply to non-assignable property. However this is precisely what Stansell decides. Indeed HMRC accept that the answer to the sole issue identified above is to be found in VATA. They do not rely on any particular quality of a claim to repayment under section 80 under the general law. It is not therefore a claim which is too personal to be the subject even of a statutory assignment.

The first question is what VATA must contain in order to exclude the transfer of a right to repayment. The judge approached the matter in essence by asking whether there was anything in VATA, express or implied, which prevented the assignment of such a claim (judgment paragraphs 35 and 36). Mr Sephton submits that the judge had simply to consider whether VATA allows the benefit of a claim under section 80 to be assigned. In my judgment, that is not the correct question. VATA and the regulations thereunder take effect subject to the general law unless the general law is excluded. Under the general law, the right to a repayment of monies overpaid to HMRC is a chose in action. Under the general law, choses in action are assignable under section 136 of the Law of Property Act 1925. That section provides, so far as material, as follows:-

“136 Legal assignments of things in action

(1)

Any absolute assignment by writing under the hand of the assignor (nor purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a)

the legal right to such debt or thing in action;

(b)

all legal and other remedies for the same; and

(c)

the power to give a good discharge for the same without the concurrence of the assignor:

Provided that, if the debtor, trustee or other person liable in respect of

such debt or thing in action has notice—

(a)

that the assignment is disputed by the assignor or any person claiming under him; or

(b)

of any other opposing or conflicting claims to such debt or thing in action;

he may, if he thinks fit either call upon the persons making claim thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the Trustee Act 1925.”

Section 51(1) of the 1965 Act makes it unnecessary for the parties to execute any document: see the concluding words “without any conveyance or assignment”.

Mr Sephton then goes to the wording of section 80 of VATA. He submits that it is clear from the inclusion of the words “to him” in subsection (1) that the only person who can make a claim for repayment is the person who paid the amount to the HMRC in the first place. In support of this submission, Mr Sephton relies on the decision of this court in HM Commissioners of Customs and Excise v Cresta Holidays [2001] STC 386. That case concerned a decision by the Commissioners regarding a claim for repayment of overpaid insurance premium tax. The Commissioners reviewed their decision in accordance with the procedure in s 59(1) of VATA, and their decision on review was the subject of appeals to the VAT tribunal, the High Court and this court. S 59(1)(l) applies to claims of for repayment under paragraph 8 of schedule 7 to VATA. That paragraph provides that:

“Where a person has paid an amount to the Commissioners by way of tax which was not tax due to them, they shall be liable to repay the amount to him.”

Insurance premium tax had become repayable because tour operators who sold package holidays and travel insurance paid VAT to the insurers at a higher rate than they ought to have done. The tour operators wanted to make a claim for repayment themselves. At first instance, Lightman J held that only the tax payer could make a claim for repayment. He held at [19]:”

“Paragraph 8 limits the right in two ways. (a) The first limitation is imposed by the language of para 8(1) (reinforced by para 8(7)) on the person who can pursue the claim: it limits the claim to that made by the person who has paid an amount to the commissioners by way of tax which was not tax due to them. The limitation is to the taxpayer; it does not extend to persons who have put the taxpayer in funds to make this payment. The statutory provisions in the 1997 Act and the 1994 regulations make it quite clear that the legislature had very much in mind the distinction between the taxpayer who has made a payment in respect of a tax liability and a person who has in one form or another borne the burden of that payment. The taxpayer who made the payment alone can make a claim within the meaning of s 59(1)(l); the person who had borne the burden of the overpayment merely qualifies as the apt beneficiary of the reimbursement arrangement. In my view the language and scheme of the legislation precludes any construction of s 59(1)(l) which includes a claim by a party other than a taxpayer. (b) The second limitation is as to the right of repayment. The fact that the taxpayer can make a claim that he has paid an amount of IPT in excess of what is due gives rise, not to an absolute and immediate right to repayment (such as may exist under s 59(1)(b)) but to a right to claim repayment in accordance with the procedure laid down for such claims in para 8 of Sch 7 and in particular he may have to meet and overcome the defence of unjust enrichment.”

In this court the leading judgment was given by Simon Brown LJ and the other members of the court, Robert Walker and Keene LJJ, agreed with his judgment as well as giving short judgments of their own. Simon Brown LJ held:

“Although Mr Barling sought to challenge this conclusion, it seems to me plainly - indeed almost self-evidently - right for the reasons given by the judge in the first part of para 19 of his judgment. Both the language and the scheme of the legislation make it perfectly clear that any repayment is to be channelled through the taxpayer (see para 12 of the judgment) who must himself initiate the claim in the manner prescribed (see para 8(6) of Sch 7 and reg 14 of the Insurance Premium Tax Regulations 1994, SI 1994/1774). Nor is there any substance in Mr Barling’s contention that European Community law and/or the European Court of Human Rights precludes member states from requiring any restitutionary claim to be brought in this (or indeed some other) particular way. Such a claim, Dr Lasok rightly noted, is analytically different from a compensatory claim for damages and, of course, nothing can prevent those affected by a breach of Community law from bringing an action on that basis. On no view, however, would the tribunal be able to entertain an action of that kind.”

Mr Sephton fairly accepts that Cresta is not precisely in point. In my judgment, it does not assist because the issue was whether those who funded the payment of tax to HMRC could stand in the shoes of the taxpayer. It does not deal with the question whether a person who can as a matter of the general law stand in the shoes of the taxpayer can make a claim to which the taxpayer was entitled.

Returning to the words “to him” in section 80, I do not consider that these can bear the meaning which Mr Sephton places on them. HMRC accepts (as will appear below) that the statutory code allows for certain successors to make claims in particular situations. Accordingly the words “to him” have to include successors in those situations. Moreover, in my judgment, those words must also on general principle include payment to an agent of the taxpayer. “Where an enactment refers to a person it is usually taken as intended to include that person's agent authorised expressly or by implication.” (Bennion, Statutory Interpretation, 4th ed, page 984). Likewise, where a statute refers to a person who has paid VAT, and gives him a right of repayment, the statute must in my judgment be taken, in the absence of contrary indication, to have intended to include a person in whom he has vested that right. In my judgment, the contrary indication would have to be clearly stated because the right to a repayment is a right of property which should not be restricted without clear wording. It would follow that if a person has assigned a chose in action to another so as to invest in him the right to sue for it, and to give a good receipt, HMRC could not properly pay the assignor.

Mr Sephton further relies on the presence of the unjust enrichment defence in section 80(3). He cites the decision of this court in Marks & Spencer plc v HMRC [2000] STC 16 at 42 to show the complexity of this defence. In that case, the taxpayer had charged VAT on teacakes and it was subsequently held that VAT was not chargeable. The tribunal decided that if more than ten per cent of the erroneously charged VAT were to be repaid to the taxpayer the taxpayer would be unjustly enriched. It found that 90 per cent of the VAT had been passed on to the customer. The tribunal did not accept that the taxpayer would, if it had reduced its prices, have improved its sales thus earning extra profit. Therefore the tribunal concluded that the taxpayer could not have made more profit from sales of teacakes had the correct VAT treatment been in operation. This court regarded that approach as permissible. Mr Sephton also relies on the decision of the Court of Justice of the European Communities in Commission of the European Communities v Italian Republic case C-104/86. In that case, Italian law obliged traders to prove a negative. In the face of mere allegations from the administrators, they had to prove that they had not passed on tariff duties which ought not to have been charged to other parties and they had to do this by means of documentary evidence only.

Accordingly, there are constraints on HMRC. HMRC cannot make it virtually impossible or excessively difficult for a taxpayer to require repayment of overpaid VAT.

The thrust of Mr Sephton’s argument is that because HMRC might find it difficult to establish the unjust enrichment defence if a claim for repayment had been transferred, the court should interpret section 80 of VATA as prohibiting such assignments. But a claim to repayment brought by assignees will not necessarily give rise to a defence under section 80(3). If it does, there are procedures in the tribunal for the summonsing of witnesses and disclosure of documents (see rule 22 of the VAT Tribunal Rules 1986). The presence of the unjust enrichment defence is therefore not enough to exclude by implication the right of a person entitled to a claim for repayment to transfer it to someone else.

In connection with a defence of unjust enrichment, Part VA of the regulations now provides a scheme of reimbursement arrangements. Where VAT has been charged to customers, received by the registered person and paid over to HMRC so as to give rise to a claim under section 80, the registered person can set up arrangements under regulations 43A to 43H in order to repay his customers who have been wrongly charged VAT and to pre-empt the unjust enrichment defence under section 80(3). Mr Sephton submits that it is clear from this provision that the person making the claim under section 80 must be the person who made the overpayment of VAT and will thus be the person entitled to repayment. Mr Kevin Prosser QC, for Midland, submits that there is nothing to prevent an assignee from setting up these arrangements but that even if he is wrong on this these regulations do not assist HMRC because, if a successor cannot implement the arrangements, the only result is that no reimbursement arrangements can be set up. The claim to repayment remains. I agree that these regulations do not assist on the issue before this court. These regulations cannot control the interpretation of section 80. In any event, there is nothing in these regulations which prevents a registered person from assigning his right to repayment. As I have said, it is to be presumed, unless otherwise stated, that a right which is created by statute is assignable under the general law in the same way as rights created by the general law, unless statute otherwise clearly provides.

Mr Sephton then relies on rule 37 of the regulations. This provides:

“Any claim under section 80 of the Act shall be made in writing to the Commissioners and shall, by reference to such documentary evidence as is in the possession of the claimant, state the amount of the claim and the method by which that amount was calculated.”

Mr Sephton’s argument is that this regulation is inconsistent with the assignment of claims under section 80. He contends that, in any case where assignment occurs for which express provision is not made in the regulations, the claims would not have to be in writing. For my own part, I find this argument difficult to follow since regulation 37 on its face applies to any application under section 80, not just one which is made under a specific regulation. Like the judge, I can give no weight to this argument.

Mr Sephton next relies on the specific provisions for succession in the regulations. In my judgment, this approach is fundamentally misconceived. If the primary legislation does not prohibit an assignment, it is difficult to see what assistance one can get from the regulations. We have not been referred to any power in VATA to make regulations which would include the power to make regulations preventing the assignment of a claim which is assignable under the general law.

However, Mr Sephton relies in the first instance on the provisions dealing with death, bankruptcy and incapacity of a registered person. We were not taken to the enabling power for this regulation or regulation 9, but provisionally I consider it to be section 46(4), which provides as follows:

“(4)

The Commissioners may by regulations make provision for persons who carry on a business of a taxable person who has died or become bankrupt or has had his estate sequestrated or has become incapacitated to be treated for a limited time as taxable persons, and for securing continuity in the application of this Act in cases where persons are so treated.”

Regulation 30 gives HMRC power to compel compliance with Part V of the regulations by the person having control of his assets. It provides:

“Persons acting in a representative capacity

30.

Where any person subject to any requirement under this Part dies or becomes incapacitated and control of his assets passes to another person, being a personal representative, trustee in bankruptcy, receiver, liquidator or person otherwise acting in a representative capacity, that other person shall, if the Commissioners so require and so long as he has such control, comply with these requirements, provided that any requirement to pay VAT shall only apply to that other person to the extent of the assets of the deceased or incapacitated person over which he has control; and save to the extent aforesaid this Part shall apply to such a person, so acting, in the same way as it would have applied to the deceased or incapacitated person had that person not been deceased or incapacitated”.

This regulation does not, on its face at least, provide for the benefit of any claim under section 80 to be transferred. Moreover, this regulation applies only where “any person subject to any requirements under this Part” dies, becomes bankrupt or incapacitated. However, as Mr Prosser points out, a person may deregister prior to that event. He would then not be subject to any requirements under Part V. The only requirement to which Mr Sephton can point is the requirement to make a claim in writing under regulation 37. However, that requirement only arises if there is a claim capable of being made. That cannot be written in the opening words of regulation 37 since it would be circular if that requirement was also a test for the application of regulation 30. Mr Sephton alternatively relied on the accounting requirements of Part V of the regulations. However, these only apply to taxable persons (that is, persons who are, or are required to be, registered for VAT purposes: see section 3 of VATA).

Mr Sephton then relies on regulation 9, which enables HMRC to treat the person actually carrying on the business of a person who has died or become bankrupt or incapacitated as the taxable person in place of that person. Thus regulation 9 provides, so far as material, as follows:

“Death, bankruptcy or incapacity of taxable person

9(1) If a taxable person dies or becomes bankrupt or incapacitated, the Commissioners may, from the date on which he died or became bankrupt or incapacitated treat as a taxable person any person carrying on that business until some other person is registered in respect of the taxable supplies made or intended to be made by that taxable person in the course of furtherance of his business or the incapacity ceases, as the case may be; and the provisions of the Act and of any Regulations made thereunder shall apply to any person so treated as though he were a registered person.”

This is a very specific regulation. Some provision had to be made for the continuity of a registration where the taxable person becomes (say) bankrupt but the business continues. However, regulation 9 does not carry with it any necessary implication that claims are not assignable in other circumstances. (Indeed, it says nothing about the transfer of any claims). Accordingly regulation 9 in my judgment affords no support for the arguments of HMRC.

Mr Sephton next relied on section 49 of VATA. So far as material this provides:

“49 Transfers of going concerns

(1)

Where a business carried on by a taxable person is transferred to another person as a going concern, then—

(a)

for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly; and

(b)

Any records relating to the business which, under paragraph 6 of Schedule 11, are required to be preserved for any period after the transfer shall be preserved by the transferee instead of by the transferor, unless the Commissioners, at the request of the transferor, otherwise direct.

(2)

Without prejudice to subsection (1) above, the Commissioners may by regulations make provision for securing continuity in the application of this Act in cases where a business carried on by a taxable person is transferred to another person as a going concern and the transferee is registered under this Act in substitution for the transferor.

(3)

Regulations under subsection (2) above may, in particular, provide—

(a)

for liabilities and duties under this Act (excluding sections 59 to 70) of the transferor to become, to such extent as may be provided by the regulations, liabilities and duties of the transferee; and

(b)

for any right of either of them to repayment or credit in respect of VAT to be satisfied by making a repayment or allowing a credit to the other; but no such provision as is mentioned in paragraph (1) or (b) of this subsection shall have effect in relation to any transferor and transferee unless an application in that behalf has been made by them under the regulations.”

Section 49(1) applies to a wide range of transfers of businesses. Its effect is to ensure that (a) the transferee is treated as having carried on the business before as well as after the transfer and (b) the transferee has to preserve the transferor’s business records. Section 49(2) is a much narrower provision. It applies “Without prejudice to subsection (1) above”. It deals with the situation where the transferee is not a registered person but is to be registered in substitution for the transferor. In that situation the Commissioners are empowered to make regulations. Subsection (3) then goes on to provide that those regulations may in particular provide for a right to repayment of VAT to be satisfied by making every payment to the transferee. However, this does not occur automatically but only on the making of an application.

The relevant regulation is regulation 6. This provides in material part:

“6(1)  Where—

Mr Sephton argues that it would have been unnecessary to provide for the matters set out in regulation 6(3)(b), (c) and (d) if a right to repayment was assignable under the general law. However, none of the matters listed in regulation 6(3) include a right to repayment under section 80. Moreover, we are not dealing with a transfer to which this regulation applies because Midland was already registered for VAT. What Mr Sephton has to show is that by necessary implication regulation 6(3) excludes an interpretation of section 80 that claims are assignable in any event at law. In my judgment it cannot bear that implication since it does not apply to section 80. If the other claims to which it applies are assignable, then it would have to be asked why it was thought necessary to refer to them in regulation 6(3). They ought to have been assets of the business transferred to the transferee. However, in the case of regulation 6(3)(c), HMRC are given the right to make the payment either to the transferor or to the transferee. This they would not necessarily be permitted to do under the general law. It may be that the reason for the other provisions is that the transfer could have taken place by an equitable rather than a legal assignment, in which case HMRC would no doubt have preferred certainty and thus required a provision in terms of regulation 6(3). However, the short point is that regulation 6(3) does not deal with claims under section 80 and it therefore cannot resolve the question whether there is anything in VATA to prevent the argument of such a claim.

In those circumstances, I come to the same conclusion as the judge that there is nothing to exclude the ordinary law to the effect that a claim under section 80 may be assigned. In particular, it may form part of a statutory assignment of assets pursuant to section 51(1) of the Industrial and Provident Societies Act 1965.

In the course of his argument, Mr Sephton referred to some other tax regimes having characteristics similar to section 80. However, he fairly accepted that they did not assist on this appeal. Mr Prosser for his part also took us to different regimes to show that statute had specifically provided for the vesting of all the assets of companies, for example, on privatisation statute had in some cases provided for those assets to be vested even if they were non-assignable. Again, those provisions do not really assist on the general question of the meaning of section 80.

Mr Prosser relied in his written argument on an argument of Community law with which the judge did not deal (see paragraph 43 of the judge’s judgment). In the circumstances I do not consider it is necessary to deal with this argument.

Finally, Mr Sephton relies on Commissioners of Custom and Excise v Barclays Bank plc [2001] STC 1558 where this court held that in relation to a VAT group the fact that Parliament had specifically provided for the Commissioners to serve a notice for the removal of a company from a VAT group where it appeared to them that the company no longer complied with the conditions for membership of such a group meant that a member of a VAT group could not without such notification cease to be a member of the VAT group. This authority does not assist HMRC in this case. There is nothing in section 80 that provides conditions for assignment, for example for assignment at the direction of HMRC, from which it might be concluded that assignment generally at the instance of the taxpayer was impliedly prohibited. The fact that the regulations may give HMRC that power in a very limited situation is not enough of itself to give rise to this inference.

Finally, I would observe that if HMRC are correct, it would lead to a number of odd results which would in themselves have required consideration as militating against the construction of HMRC:

In those circumstances, I would dismiss this appeal.

I agree. Mr Sephton did his best to make bricks without straw. However, in my judgment, the judge was plainly right, and the appeal was unarguable for the reasons Arden LJ has given,  to which I cannot usefully add.

I also agree.