Reed Employment Ltd v HM Revenue and Customs

This appeal is about the compatibility of UK legislation for the recovery of overpaid VAT with the EU law principles of equal treatment, fiscal neutrality and effectiveness.

The appellant (“Reed”) seeks to recover from the respondent (“HMRC”) amounts of £63.8m and £75.8m which it paid to HMRC in the years 1973- 1990 and 1991-1995 respectively in excess of the amounts which it was due to pay on account of VAT. EU law confers on taxpayers the right to be claim repayment of overpaid VAT. However, the EU legislature has not harmonised national procedural laws and so the procedure for recovering overpaid VAT is a matter of domestic law. This procedure must, however, satisfy the general principles of EU law, such as the equal treatment principle. Domestic law can, therefore, on this basis prescribe the limitation periods for such claims. Those limitation periods can also be reduced, though it is established that, to comply with the principle of effectiveness, national law must allow a reasonable transitional period in which claims that could be made under the old limitation period can still be made after the reduction takes effect (Marks and Spencer plc v Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036 (“M&S 1”)).

In the present case, the difficulty standing in Reed’s way is that it did not file its two claims for repayment until 27 March 2009. By that date, Parliament had given HMRC a possible defence of unjust enrichment. That defence works in the following way. As stated, a trader who has accounted to HMRC for VAT in excess of the amounts due from him has in general the right under EU law to reclaim the amount of the excess from HMRC. Where, as here, the trader made the overpayment of VAT because he charged his customers VAT when they were not liable to pay it, the customers, when they find out that they were not bound to pay VAT, may seek a refund from the trader. However, many will not do so because they were themselves liable to pay VAT and set the VAT that they paid to the trader against their own liability for VAT in the relevant accounting period. As a result they may be “payment” traders, that is, traders liable in that period to account to HMRC for VAT or “repayment” traders, that is, traders who are entitled in that period to a credit for the VAT paid as the VAT they pay on their purchases (input tax) is more than the VAT received by them on sales (output tax). There may be little point in payment or repayment traders seeking a refund from Reed since they would simply have to account for it to HMRC. Other customers may be exempt from VAT altogether and thus be unable to reclaim VAT paid from HMRC. Reed wrongly accounted for payments of VAT received from both payment and repayment traders and from exempt customers, but its present claims are in respect of the VAT received only from payment and repayment traders (together known as the “recoverable sector”). In 1996 and 1997 Reed made two claims for repayment of VAT on supplies to exempt customers (known as the “irrecoverable sector”) in respect of periods starting on 1 February 1991. HMRC contends that these earlier claims show that its present claims are something of an afterthought.

In those circumstances it is possible that the trader will be unjustly enriched if HMRC makes a repayment to him. EU law recognises this. Member states have the option of treating the right to repayment as subject to a defence to that effect. EU law does not consider that it is sufficient for the member state to say that the trader included the VAT in his selling price: there has to be an economic analysis in which all relevant circumstances are taken into account before the unjust enrichment defence can be established. Reed accepts these elements of the unjust enrichment defence and stresses that it is not claiming a right to be unjustly enriched. Although we are not concerned with this point, Reed does, however, say that it was not unjustly enriched on the facts of this case. It contends that it suffered loss by charging its customers VAT when it did not need to do so.

The Finance (No 2) Act 2005, section 3 (“the 2005 amending provision”) sought to reflect this qualification on the trader’s right to repayment (that is, the unjust enrichment defence) by giving HMRC a new defence of unjust enrichment where the trader seeking repayment had suffered no loss as a result of his overpayment of VAT. The new defence is expressed to apply to claims made on and after 26 May 2005 (“the cut off date”). For this purpose it does not matter whether the event giving rise to the overpayment that gives rise to the repayment claim was made before or after the cut off date. Parliament initially restricted the defence to claims by payment traders, but in its 2008 decision in Marks & Spencer plc v HMRC (No 2) (“M&S 2”) (Case C-309/06) [2008] STC 1408 the Court of Justice of the European Union (“the CJEU”, which term I shall also use for the CJEU’s predecessor, the European Court of Justice) ruled that this involved unequal treatment in the sense that there was no difference between the two groups. Parliament had already amended the law by the 2005 amending provision to bring repayment traders within the scope of the unjust enrichment defence. In this judgment, I shall in general for simplicity refer to repayment traders only where nothing turns on the difference between the two groups.

So Reed seeks to find a way of challenging the application of the cut off date to its claims. Before the First-tier Tribunal and the Upper Tribunal it pursued the route of contending that its first claim was made by way of amendment to an earlier claim filed before the cut off date. It lost on this issue and there is no appeal on it.

On this appeal Reed seeks to pursue a second route, applying to both of its claims. It claims that the 2005 amending provision infringes EU law principles, namely equal treatment, alternatively the allied principle of fiscal neutrality.

Reed’s case is further that, if the 2005 amending provision infringed the EU principles of equal treatment and fiscal neutrality, it should not have applied to any repayment claim filed after the cut off date in respect of periods before the cut off date. It goes on to argue that the principle of effectiveness requires that Reed should be put in the same position as if it had made a claim for repayment prior to the cut off date, since it was unable to make a claim before that date due to the absence of the requisite transitional period at that time. That was belatedly introduced after the cut off date.

The principle of equal treatment requires that comparable situations be treated in the same way unless the difference is objectively justified (“M&S 2” at [52]). We do not have to consider objective justification because HMRC has not sought to rely on it. The principle of fiscal neutrality again precludes unequal treatment of similar claims where the difference in treatment leads to distortions in competition (M&S 2, [47] – [49]). It is not enough that the difference in treatment is capable of leading to such distortions: it must actually lead to competitors being placed in a better position.

Roth J, sitting in the Upper Tribunal, held that the introduction of the unjust enrichment defence did not breach the EU principles of equal treatment, fiscal neutrality and effectiveness.

In my judgment, for the following reasons (amplified below), the Upper Tribunal was correct:

Accordingly I would dismiss this appeal.

It is common ground that, at least following M&S 2, provisions of national law dealing with claims for the repayment of overpaid VAT must comply with the EU law principle of equal treatment.

The difference between the parties is as to whether the equal treatment principle was breached by the introduction of the unjust enrichment defence without a saving for claims relating to periods before the cut off date, whenever made. The argument revolves around (1) whether the CJEU decided this point in Weber’s Wine World; and (2) whether Reed’s claims and a claim for repayment in respect of the same period but made before the cut off date are relevantly similar (“the similar claim point”).

Effect of Weber's Wine World and M&S 2

I propose to take the decisions in ante-date order because of the central importance on this appeal of Weber’s Wine World.

The decision in Weber's Wine World arises out of an earlier decision of the CJEU in EKW and Wein & Co, Case-437/97 in which the CJEU held that Austria had infringed EU law by imposing a tax on certain alcoholic beverages. The effect of that decision was largely non-retroactive because the CJEU limited the effect of its decision, where the liability to pay the tax had been incurred before the date of its decision, to claims already filed or where the claimant raised an equivalent administrative claim. (In the interests of simplicity, I will refer below simply to the first group of excepted claimants, and treat them as including both groups). The decision of the CJEU was, therefore, an example of the exceptional technique which I have called “prospective overruling” (see my article, Prospective Overruling (2004) 120 LQR 7).

One week before the CJEU delivered this decision, the Viennese legislature passed a law with retroactive effect precluding any claims for repayment where the trader had passed the tax on to his customer (i.e. introducing an unjust enrichment defence against traders) unless the trader could establish a constitutional right to receive payment under the Austrian constitution. This is the Austrian law to which I refer below. The new law applied specifically to tax liabilities that arose before the new law was passed. The case before the CJEU was a test case: it appears that one of the claimants had filed claims for repayment before the new law was passed but had been met by the unjust enrichment defence raised under this law. The CJEU held that the new Viennese law had to satisfy the EU law principles of equivalence and effectiveness. Therefore, Viennese law could not, compatibly with the general principles of EU law:

The CJEU held that the second condition had been satisfied, and that it was for domestic law to determine whether the exception for constitutional proceedings complied with the first condition as this involved the interpretation of domestic law.

The CJEU also held that the courts had to interpret any restriction on a right conferred by EU law restrictively.

As already explained above, EU law conferred the right to repayment of tax which in terms of EU law was wrongly paid unless the unjust enrichment defence applied: see the following passage from the judgment of the CJEU:

“93.

The court has consistently held that individuals are entitled to obtain repayment of charges levied in a member state in breach of Community provisions. That right is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the court. The member state in question is therefore required, in principle, to repay charges levied in breach of Community law (see, in particular, the Comateb case (para 20), Metallgesellschaft Ltd v IRC, Hoechst AG v IRC Joined cases C-397/98 and C-410/98 [2001] All ER (EC) 496, [2001] ECR I-1727 (para 84) and the Marks & Spencer case (para 30)).

94.

According to the case law, there is only one exception to that obligation to make repayment. A member state may resist repayment to the trader of a charge levied though not due only where it is established by the national authorities that the charge has been borne in its entirety by someone other than the taxable person and that reimbursement of the charge would constitute unjust enrichment of the latter. It follows that, if the burden of the charge has been passed on only in part, the national authorities are required to repay the amount not passed on (see to that effect, in particular, the Comateb case (paras 27, 28)).”

Nothing was said about the equal treatment principle. The principles of EU law in issue in this case were the principles of equivalence and effectiveness. Under the equivalence principle, the procedural rules governing claims subject to EU law must be no less favourable than those governing claims subject to domestic law. Under the effectiveness principle, national law must not make it virtually impossible or excessively difficult for the taxpayer to recover tax wrongly paid in breach of EU law.

Both the Advocate General (Advocate General Jacobs) and the CJEU took the view that the unjust enrichment defence could be introduced with retroactive effect.

The Advocate General for his part considered that the introduction of an unjust enrichment defence with retroactive effect was compatible with EU law. In fact, in his opinion, the new rule applied only prospectively since there was no unjust enrichment until a claim was paid. He further held there could in any event be no legitimate expectation of repayment in such a situation because it would amount to seeking unjust enrichment:

“67.

Where such a rule applies to claims in respect of situations which arose before its enactment, that effect does not seem to me incompatible with Community law. On the one hand, in so far as it seeks to preclude unjust enrichment, it in fact precludes only enrichment which would have occurred after its enactment, provided that there is no provision for recovery of any amount already reimbursed. On the other hand, there can in any event be no legitimate expectation of any such enrichment, since the very concept of legitimacy cannot embrace what is unjust.”

In the opinion of the Advocate General, there was no requirement for a transitional provision because:

“ 69…since Community law does not require a right to reimbursement at all where unjust enrichment would ensue, the fact that, following a change to national law, a claim which might previously have succeeded can on that ground no longer succeed has no impact on the effectiveness of a right conferred by Community law.”

The CJEU also confirmed that the unjust enrichment defence could be introduced with retroactive effect, provided that the new defence was not introduced specifically to counter some decision of the CJEU. It held:

“92.

It must be concluded on this point, therefore, that the adoption by a member state of rules which retroactively restrict the right to repayment of a sum levied but not due, in order to forestall the possible effects of a judgment of the court holding that Community law precludes the maintenance of a national duty, is contrary to Community law and, more particularly, to art 10 EC only in so far as it is aimed specifically at that duty, a point which falls to be determined by the national court. Accordingly, the fact that such a measure has retroactive effect does not in itself amount to an infringement of Community law, where the measure is not aimed specifically at the duty which formed the subject matter of a judgment of the court.”

Mr Jonathan Peacock QC, for Reed, submits that Weber’s Wine World is not authority for the proposition that retroactive treatment is lawful where there is a difference in treatment:

Furthermore, on Mr Peacock’s submission, the Upper Tribunal and the First-tier Tribunal wrongly held that because the retroactivity was lawful in Weber’s Wine World there was no breach of EU law in this case. The First-tier Tribunal mistakenly thought that retroactivity combined with the difference in treatment had occurred ([131]).

However, the decision in Weber’s Wine World did not depend on when the claim was paid. The Upper Tribunal on Mr Peacock’s submission misunderstood that the new defence was introduced before the decision in EKW, and that it was not a case where some people had been paid before the new defence had come into effect and some had not (cf [59],[66]). It is unlikely that any payments had been made before the defence was introduced. The law was changed immediately before the decision in EKW was handed down.

Miss Philippa Whipple QC, for HMRC, submits that it is implicit in Weber’s Wine World that the unjust enrichment defence can be introduced with retroactive effect in relation to claimants who have not yet filed claims in respect of the same period for which a claim could previously have been made without being subject to that defence. On her submission, it is untenable to suggest that Weber's Wine World would have been decided differently if the equal treatment principle had been an issue. The difference between pre- and post- 2005 claims is the result of the law having changed in the meantime. Once it is accepted that the measure can have retroactive effect in the sense of applying to claims for prescribed accounting periods prior to implementation, it follows that different taxpayers may be subject to different outcomes. The effect of Mr Peacock’s submission is that, once national law sets out the conditions for repayment, they are frozen and cannot be altered. That, on her submission, is inconsistent with Weber’s Wine World.

In my judgment, Miss Whipple’s submissions are to be preferred for the following reasons.

In Weber's Wine World, the Advocate General considered two further points. First, he concluded that domestic law could impose restrictions on repayment claims in addition to those restrictions which the CJEU had itself placed on such claims. Second, the Advocate General also contemplated that those additional restrictions might also be retroactive. Both these points are made in the following paragraph:

“65.

The limitation of the temporal effect of the ruling in the EKW judgment does not mean that whenever a person had raised a claim before the date of the judgment that claim must be free from any other restriction laid down by national law but rather that, in relation to the period specified, no other claims may be allowed to proceed. Nor is there is anything in the judgment which itself imposes or implies any general condition as to the date of enactment of any applicable national rules or which precludes any retroactive effect thereof. ”

So the claims on which additional restrictions could be imposed would include the pending claims for prior periods, such as that of the claimant. This was important because, had the Austrian law merely tracked the effect of its own decision, there would have been no issue for the CJEU. The national rules did not have to be retroactive, and that necessarily meant that they did not have to apply to all claims.

Likewise, the CJEU in [92] of its judgment clearly did not require the member state to make its own additional procedural rules retroactive. Moreover it contemplated that any retroactive rules which applied generally but which were specifically aimed at forestalling a ruling of the CJEU that a national duty was contrary to EU law would be invalidated in part.

So both the opinion of the Advocate General and the decision of the CJEU in Weber's Wine World necessarily recognised that there could be different groups of claims.

I can now state what I do and do not accept in Mr Peacock’s argument. I do not accept Mr Peacock’s submission that there was no question in Weber's Wine World of different conditions for claims for the same claim period. This submission rests on the proposition that it was not suggested in Weber’s Wine World that some claims had been paid before the new law was introduced. I shall go on to demonstrate below that this does not mean that there were no differences between claims for the same prior period.

However, I do accept Mr Peacock’s submission that there was no finding in Weber's Wine World about the amount of claims paid before the new law passed. It follows that, insofar as the Upper Tribunal relied on the fact that in EKW some claims had actually been paid, that was an error. Mr Peacock contends that it was unlikely that there were any such payments in the one week period between the introduction of the unjust enrichment defence and the delivery of the decision in EKW. However, the possibility of such a payment in practice or theory cannot be excluded.

The absence of any evidence of repayment of tax is perhaps unsurprising since the claims in issue in EKW at least arose out of recovery assessments where the tax had not been paid: that suggests that taxpayers were claiming an exemption or credit for the tax which they contended breached EU law. Some such claims might have been agreed since the introduction of the unjust enrichment defence in the regional legislature. Moreover the fact that claims might not have been paid does not mean that the new Austrian law did not result in there being differences between claimants, as I will now go on to demonstrate.

The point is that, leaving on one side the claims which had not been filed by the date of the CJEU’s judgment in EKW and for which there was no right of recovery, different conditions indeed attached to claims for the same prior periods as a result of the new Austrian law:

Moreover, there were substantial claims for the prior periods in the offing. As Advocate General Jacobs explained, Advocate General Saggio in EKW noted that the Austrian government had requested the CJEU to adopt the technique of prospective overruling if it found against Austria but considered that there were no exceptional circumstances justifying that course. Advocate General Jacobs, however, observed that there were substantial claims outstanding and, while he was not able to provide any figures for claims that had been paid, what he says does not exclude the possibility that claims had already been paid:

“20.

It appears that a large number of claims had in fact been raised, in one form or another, before the date of the judgment in the EKW case (when the court had been informed of a total which might have to be reimbursed if all claims were to succeed, but not of the number of claims estimated to have been brought already). In its observations in the present case, the Austrian government states that 16,000 such claims, representing some ATS 3,000m, are pending for Vienna alone, and suggests that their number is due at least in part to the fact that the Verwaltungsgerichtshof has decided that the concept of 'equivalent administrative claims', used by the court in the EKW judgment, must be given a broad interpretation.”

ATS 3,000m would be about €218m.

The CJEU, therefore, considered in EKW that there were circumstances that justified the exceptional step of adopting prospective overruling.

The CJEU’s decision in EKW further demonstrates that there can be differences between claimants resulting from temporal effects, that is, changes resulting from the interposition of specified dates. This happened when the CJEU imposed temporal limits on its decision, thereby creating unequal treatment between at least those who had filed claims for the prior periods and those who had not. If Reed’s argument were correct, it would mean that the CJEU’s own adoption of prospective overruling had in fact caused an independent breach of the equal treatment principle.

In summary, I consider that Weber's Wine World and EKW are authority for the proposition that a member state can without infringing the equal treatment principle introduce the unjust enrichment defence so that it applies to some only of the claimants for a prior period, namely those in respect of a prior period who have not filed their claims before the date when the new law comes into effect. That is the effect of the 2005 amending provision.

That is sufficient to determine the appeal on equal treatment unless Reed can show that M&S 2 has undermined the decision in Weber's Wine World or that it succeeds on the “similar claim” point.

M&S 2 is important in the argument regarding the equal treatment principle for two reasons. First, it is the leading authority on the application of the equal treatment principle to repayment claims. Second, it is important in this context because the 2005 amending provision was considered. As explained above, when the UK originally enacted the unjust enrichment defence, it applied only to payment traders. The CJEU held that as a result the UK provision breached the equal treatment principle. Parliament had, however, by then extended the 2005 amending provision so that HMRC could rely on the unjust enrichment defence against repayment traders. Since it was clearly relevant that Parliament had taken steps to put the two groups on the same footing, the Advocate General and the CJEU examined the 2005 amending provision. That leads HMRC on this appeal to argue that M&S 2 also decided that the equal treatment provision was not infringed by the introduction of the cut off date which caused unequal treatment between claims for prior periods, viz those filed before and those filed after the cut off date.

Mr Peacock submits that the Advocate General in M&S 2 cited the defence of unjust enrichment with apparent approval but did not refer to the legislation and that the CJEU simply noted the new defence.

Miss Whipple submits that both the Advocate General and the CJEU took the view that the 2005 amending provision cured the defect that they identified. Advocate General Kokott was highly critical of the original law, taking the view that any distinction between payment and repayment traders in this context was “unfathomable”. The remarkable effect of Reed’s submissions in this case would be that there is a new and fundamental breach of the law. However, Miss Whipple accepted that M&S 2 is confined to the particular defect which was identified and that it is not much help in the present case where the distinction is between pre and post 2005 claims.

In my judgment, Mr Peacock is clearly correct on this point. This court cannot treat as the ratio of a decision of the CJEU any more than that which a decision of the CJEU necessarily decides. The CJEU did not express approval of the cut off date for the new unjust enrichment defence in the 2005 amending provision. That issue was simply not before it.

That leads to the question whether Weber's Wine World would have been decided differently if the equal treatment principle had been argued in that case.

Mr Peacock submits that the CJEU would have reached the same conclusion in Weber's Wine World as they later did in M&S 2 if some of the claims subject to the new Austrian law had actually been paid before the date the law was passed as there would then have been a difference between the treatment of claims relating to the same period. But I have already demonstrated that the new Austrian law in Weber's Wine World had introduced differences between various claims for prior periods. Those differences were obvious on the face of the law itself, or from the Opinion of Advocate General Jacobs. It is unlikely that the CJEU was oblivious of them. Moreover, as I shall explain in the next section, it would have been inconsistent with the decision in Weber's Wine World to hold that these claims breached the equal treatment principle.

Are Reed’s claims and a claim for repayment in respect of the same period but made before the cut off date “relevantly similar”?

For claims to qualify for equal treatment, they must be “relevantly similar”. Counsel did not cite any authority showing what this entailed in the context of equal treatment. However, when comparing procedural rules applicable to EU law and domestic law claims for the purposes of the equivalence principle, the court has to have regard to “their purpose, cause of action and essential characteristics”: see Littlewoods Retail Ltd v HMRC [2012] STC 1714 at [31]. The parties have treated that statement as applying also for the purposes of the equal treatment principle, and I am content to proceed on that basis without deciding the point.

The issue between the parties is whether the period to which a claim relates is also an essential characteristic of the claim so that, when pre- and post- cut off date claims are for the same period prior to the cut off date, they are a single group that cannot be split apart without breaching the equal treatment principle. It is common ground that they are relevantly similar with regard to their purpose and the cause of action on which they are based.

Mr Peacock obviously argues for the proposition that the claim period is an essential characteristic and that the date on which a claim is made is not. He submits as follows:

Miss Whipple submits that the claim period is not an essential characteristic of a claim for repayment of VAT, or, if it is, that the date of the payment of the claim must also be an essential characteristic. She submits as follows:

There are elements in each party’s case that I would accept. I accept that in general the date of payment is in the hands of the executive and therefore cannot be treated as a defining feature of a taxpayer’s claim, but that that is only the case once the claim has been filed. So the date of payment cannot be relied upon in abstraction from the date of the claim. The taxpayer is normally free to make a claim at some date even though there may be a period when he was not free to make a claim. Reed could have made its current claims promptly as and when they arose and so avoided the restrictions later imposed on its right to repayment. It could not claim any expectation of making a claim for which it would be unjustly enriched.

The Upper Tribunal founded its reasoning on equal treatment in part on the point that the relevant point in time was when claimants were paid, relying on paragraph [67] of the Opinion of Advocate General Jacobs in Weber's Wine World that it was that payment and not the making of a claim which causes unjust enrichment, and that this point in time was different for each group of claimant. But that was said in the context of whether the retroactivity was compatible with EU law. Some retroactive provisions are not consistent with legal certainty, as noted above (paragraph 38(iii)). But the Advocate General did not make his statement in the context of the equal treatment principle.

The Upper Tribunal also drew an analogy between the introduction of a rule making a change in the provisions relating to repayment claims and the introduction of a time bar (see the judgment of Roth J at [67]). It was compatible with EU law to have a limitation period and a time bar which meant that claims would be treated differently according to the date on which they were filed. Thus the former could also be compatible. However, I do not consider that this analogy can determine whether the date of the claim is an essential characteristic of a claim for equal treatment purposes. As the Upper Tribunal acknowledged, a limitation period had to be properly introduced. That means that it must also comply with the EU principles such as effectiveness, equivalence and so on: see M&S 1, summarised in paragraph 2, above.

However, the main point seems to me to be that the focus on essential characteristics in the abstract is erroneous. Formalism is not the right approach here. First principles are. The first principle here is that the CJEU recognised in Weber's Wine World that a member state may introduce an unjust enrichment defence which applies to claims in respect of periods prior to its introduction. Any debate as to what constitutes an essential characteristic of a claim for equal treatment purposes has to be conducted against that background. It is then inescapable that account has to be taken of the date of the claim because it is inherent in Weber's Wine World that different rules will apply to claims made before and after a change in the law. They are not similar situations for the purposes of the principle of equal treatment and that principle will accordingly not apply (see M&S2 at [51]).

The CJEU acknowledged in Weber's Wine World that the procedural rules for VAT repayment claims fell within the member state’s competence ([37]). Accordingly, the situation in this case is quite unlike the case where the court is required to interpret domestic legislation so far as it can so that it complies with EU law. Domestic legislation may then be subjected to a strained interpretation. While restrictions on EU claims imposed by domestic procedural law are to be narrowly construed, they do not have to be subjected to a strained interpretation. When Lord Denning MR famously said that Community law was “…like an incoming tide. It flows into the estuaries and up the rivers. It cannot be held back.” (Bulmer v Bollinger [1974] Ch 401, 418), he was not in my judgment suggesting that national courts had to apply EU law beyond its proper limits.

I agree with Miss Whipple that either a purely prospective or fully retroactive unjust enrichment defence would create differences between post- 2005 claims for pre-2005 periods and post-2005 claims for other periods. It is irrelevant, as it seems to me, that no claims in any particular category are actually made: the possibility that such claims exist is sufficient because compatibility with EU law has to be determined as soon as the cut off date is established and the actual position may then not be known. Counsel did not put forward any means of introducing an unjust enrichment defence with retroactive effect that did not create differences between different groups of potential claimants in respect of the same period.

Moreover, if Reed were right about equal treatment, there could never be a retroactive unjust enrichment defence. Furthermore, if the unjust enrichment defence could not be introduced retroactively, it would seem to follow that any change in the procedural rules governing claims for the repayment of overpaid VAT could only ever be prospective and this would be a serious restriction on the member state’s competence to set the procedural rules for repayment claims.

Contrary to Mr Peacock’s submission, the fact that section 47 of the Finance Act 1997 dealing with VAT repayment claims may have been differently framed does not mean that Parliament had to use the same approach in the 2005 amending provision.

Reed accepts that, if it does not succeed on the equal treatment principle it cannot succeed on fiscal neutrality. It chose to raise it because a breach of the fiscal neutrality principle, unlike a breach of the equal treatment principle, cannot be objectively justified but HMRC does not seek to say that it is justified. Thus fiscal neutrality does not in my judgment need to be determined on this appeal.

Other points were raised as to the scope of the issues before the tribunals below, and as to whether exceptionally Reed bears any evidential burden in showing that there were competitors who were advantaged by the present rules. These points likewise do not have to be determined on this appeal.

The Upper Tribunal dealt with all these points. It is sufficient for me to say that, had these points arisen, I would have been minded to agree with the judge’s treatment of them for the reasons he gave.

Reed relies on the doctrine of effectiveness as a self-standing argument, and therefore we must consider that doctrine on the basis that the above conclusions are correct and that there is no breach of the equal treatment and fiscal neutrality principles. The argument on this basis is that, even absent a breach of those principles, the doctrine of effectiveness means that its claims are to be treated as not subject to any time limit or unjust enrichment defence simply because it could, if the UK had not been in breach of EU law (see M&S 1 and M&S2) have made claims at a time when there was no unjust enrichment defence. It has the right under EU law on its argument to make those claims as if those breaches had not occurred. It is clear that the UK law does not allow it to make claims on that basis. In my judgment there is no substance in this argument. Reed did not then have any “accrued” right to repayment, as it suggests. It only had a right to claim repayment when it made its claims. By then, those breaches of EU law had been duly rectified and the UK had duly introduced an unjust enrichment defence. Its claims were necessarily subject to the applicable law at that date. In addition, the UK could have introduced the unjust enrichment defence at any time with retroactive effect.

Mr Peacock submits that this court should refer questions to CJEU. He submits in particular that there is no decision of the CJEU that considers the ruling in Weber's Wine World in the light of the equal treatment principle that formed the basis of the CJEU’s later decision in M&S 2. In my judgment, despite the meticulous arguments put forward orally and in writing on behalf of Reed, the applicable EU law is clear. Accordingly this is not an appropriate case for this court to make a preliminary reference to the CJEU.

In my judgment this court should dismiss this appeal.

I agree that this appeal should be dismissed. I have read the draft judgments of Arden and Vos LJJ. Between them they have set out all the facts and legislative background relevant to the issues, so I need not therefore repeat them. They have both explained the issues that arise on this appeal on the one remaining preliminary point of two that were before the Upper Tribunal (“UT”). I will adopt the abbreviations that they have used.

EU law has long established that an entity that has overpaid VAT has a right to recover it. But EU law also recognises a defence to a claim for repayment, which is known as “unjust enrichment”. Reed made two claims on 27 March 2009, under section 80 of the Value Added Tax Act 1994 (“VATA”), for the repayment of overpaid VAT for the period 1 April 1973 to 2 July 1995. These two claims are now known as the 2009 Claims. The question is whether the 2009 Claims can, as a matter of EU law, be subject to a defence of “unjust enrichment”. This defence was given its final statutory form in the UK in section 80(3) of the VATA, as it was amended by the Finance (No 2) Act 2005 (“the 2005 Act”). Reed’s case is that HMRC cannot take advantage of this unjust enrichment defence because to do so would infringe one or more of three principles of European law known as “Equal Treatment”; “Fiscal Neutrality” and “Effectiveness”.

“Equal Treatment”, as a general principle of EU law, is simply the principle that “similar situations” must not be treated differently legally unless the differentiation is objectively justified. Reed argues that this principle would be offended here if HMRC can rely on the unjust enrichment defence to defeat the 2009 Claims because the effect of the change in the law in 2005 bringing in the current version of the unjust enrichment defence is that a claim made before the 2005 Act for a repayment of overpaid VAT in respect of a period before that Act could not be met with an unjust enrichment defence, whereas the same claim brought after that Act came into force will be. But, it is said, the two claims (i.e. the one made before the 2005 Act and the one after) are, in all material respects, in the same situation for EU law purposes. Therefore if HMRC could rely on the unjust enrichment defence there would be “Unequal Treatment” of the 2009 Claims by comparison with a trader in a similar line of business as Reed who made its claim to be repaid its overpaid VAT for the same period as Reed, but had done so prior to the 2005 Act.

“Fiscal Neutrality” is a sub-set of the principle of “Equal Treatment”. It precludes, for VAT purposes, similar supplies of goods and services (which are thus in competition with one another), from being treated differently for VAT purposes. Mr Peacock QC, for Reed, accepted in argument that this principle only became relevant if, in respect of the principle of “Equal Treatment”, the court had to consider issues of objective justification for unequal treatment of the 2009 Claims. HMRC did not advance any argument on objective justification.

The third EU law general principle, “Effectiveness”, is equally short to state. Domestic laws (or administrative practices) of Member States must not be such as to make impossible the exercise of rights conferred on individuals or entities by EU law or so as to make them excessively difficult to be exercised. Reed’s case is that the 2005 Act, creating the unjust enrichment defence, makes it excessively difficult or impossible now for Reed to exercise its EU law right to claim its overpaid VAT, whereas it could have done in an unfettered way prior to the 2005 Act being passed. (Attempts to introduce the defence by statute before then had fallen foul of EU law and had been ineffective). Therefore, it is said, the change offends the principle of “Effectiveness”.

Equal Treatment. On the first question, viz. whether the introduction of the unjust enrichment defence by the 2005 Act offends the principle of “Equal Treatment”, to my mind the key question is whether an action claiming the repayment of VAT for the same period (i.e. 1973 to 1995) that was made before the 2005 Act came into force has different “essential characteristics” from an action claiming the same repayment for the same period, but which is made after the 2005 Act came into force. Mr Peacock argued that the date the claim was made was not, for these purposes, one of the “essential characteristics” of the claim. Therefore, on his argument, as all other “essential characteristics” of a claim made before the 2005 Act and after it were the same, the introduction of the unjust enrichment defence by that Act meant that they were exposed to “Unequal Treatment” contrary to the EU law principle.

I agree with Vos LJ that the date of the claim for the repayment of the overpaid VAT is one of the “essential characteristics” of the claim, for the obvious reason that he states, namely that a claim for period A at point (1) in time may be subject to a legislative structure that is in place at that moment, whereas a claim in respect of the same period A but made at point (2) in time may be subject to a different legislative structure. That is precisely the case here.

I agree with Arden LJ that this issue cannot be examined in the abstract. Obviously, if EU law prohibited wholesale the introduction of a statutory defence of unjust enrichment in respect of periods for which the repayment was claimed which periods pre-dated the time when relevant statute came into force, then that would be the end of the matter. But it does not, for the reasons that Advocate General Jacobs made clear at paragraphs 67 and 69 of his opinion in the Weber’s Wine World case, which Arden LJ has quoted above at [23] and [24]. The CJEU endorsed this view, at least implicitly, in its judgment at paragraph 92, which Arden LJ has quoted at [25] above. In my judgment, agreeing with Arden LJ, there is no contrary indication in the CJEU’s judgment in M&S (2).

Therefore, in agreement with both Arden and Vos LJJ, I conclude that the introduction of the unjust enrichment defence in the 2005 Act, which applies to claims made in respect of periods before that Act came into force, does not offend the EU law principle of “Equal Treatment”. As Arden LJ points out at [61] above, if Mr Peacock’s argument were correct, it would never be possible to introduce an unjust enrichment defence that was intended to apply to periods pre-dating its introduction. Mr Peacock accepted this conclusion would logically follow from his argument, but there is nothing in the CJEU jurisprudence to support his submission that this is the effect of EU law. I would reject this ground of appeal.

For the reasons given by both Arden and Vos LJJ, there is no need to consider Reed’s argument on “Fiscal Neutrality”.

On the third issue, whether the introduction of the unjust enrichment defence by virtue of the 2005 Act thereby offends the EU principle of “Effectiveness” in respect of the 2009 Claims, I agree with the conclusions of Vos LJ at [81] to [110] below. The very short answer to Mr Peacock’s argument on this point is that if the defence of unjust enrichment is otherwise valid under EU law, then the 2009 Claims that Reed makes in respect of its EU law right to be repaid VAT are not improperly fettered in any way, because that EU law right is always capable of being subject to an EU law defence of unjust enrichment.

I agree that the EU law is clear so that this is not an appropriate case to make a reference to the CJEU.

I agree with Arden LJ that this appeal should be dismissed and that this is not an appropriate case for the court to make a reference to the CJEU. Since the points raised are accepted to be of some importance and novelty, I will set out as briefly as possible my own reasons for reaching those conclusions. I gratefully adopt the definitions used by Arden LJ in her judgment.

As Arden LJ has explained, Reed contended before us that the vice in the 2005 amending provision was that it treated claims made after the cut off date (26^th May 2005) differently from claims made before it. That disparity was said to give rise to breaches of the EU law principles of equal treatment, fiscal neutrality, and effectiveness. There is less authority on the principle of equal treatment, but it is acknowledged by the parties to be a higher level principle than either fiscal neutrality, which is a reflection in VAT matters of equal treatment (see paragraph 49 of M&S2), or equivalence.

Before dealing briefly in turn with each of these 3 EU principles, I think it is useful to set out very briefly the chronological background relied upon by the Upper Tribunal (“UT”) and by Reed in support of its appeal.

Reed provides recruitment services, and invoices its clients for the weekly wages and commission in respect of the temporary staff Reed finds for them.

In August 1993, the VAT and Duties Tribunal upheld Reed’s practice of only charging its clients VAT on the commission element of its charges for temporary employees. It had, however, charged VAT on the wages element of its invoices up to that time in relation to workers outside the health sector. In 1995, an appeal to the High Court was dismissed in Reed Personnel Services Ltd. v. Customs & Excise Commissioners [1995] STC 588. Accordingly, Reed had overpaid VAT on the wages element of its invoices in its other sectors.

On 4^th December 1996, the Government enacted a 3-year cap on claims for overpaid VAT with effect from 18^th July 1996 by an amendment to section 80 of the Value Added Tax Act 1994 (“VATA”). By this time, section 80(3) of VATA also provided HMRC with an unjust enrichment defence (with effect from 1^st January 1990) for overpaid VAT claims in respect of payment traders, but not repayment traders.

In 1996, Reed effectively made a repayment claim in respect of VAT overpaid between 1993 and 1996 (because of the 3-year cap). With HMRC’s agreement, Reed recovered these overpayments administratively.

On 15^th January 1997, Reed made a second repayment claim for the recovery of overpaid output tax paid in the period 1^st February 1991 to 27^th October 1993 (outside the 3-year cap).

On 11^th July 2002, the CJEU handed down its judgment in M&S1 holding that the 3-year cap was unlawful as retrospective legislation without any adequate transitional period, and thus incompatible with EU law principles of effectiveness and legitimate expectation. Following M&S1 on 27^th January 2003, HMRC accepted Reed’s second repayment claim on the basis of Reed’s confirmation that it would not be unjustly enriched.

On 17^th June 2003, Reed submitted a third repayment claim for the period from 1^st April 1973 to 31^st December 1990. That claim was not accepted, but the First-tier Tribunal (“FTT”) decided in Reed’s favour that it was only liable to account for output tax on the commission element of the charges for that period, and that decision was not appealed to the UT.

On 2^nd October 2003, the CJEU delivered its judgment in Weber’s Wine World holding that a Member State could lawfully introduce a retroactive unjust enrichment defence which could be raised in answer to a trader’s right to repayment of duty that had been paid but was not in fact due.

On 20^th July 2005, the 2005 amending provision (section 3 of the Finance (No. 2) Act 2005) was enacted, adding a new Section 80(1A) to VATA abrogating the differential treatment of payment and repayment traders in respect of the unjust enrichment defence for claims made after 26^th May 2005, without regard to the period in respect of which the claim was made.

On 23^rd January 2008, the House of Lords decided in Fleming (t/a Bodycraft) v. HMRC, Condé Nast Publications v HMRC [2008] STC 324 that, until an adequate transitional period had been introduced, the 3-year cap was unlawful.

On 10^th April 2008, the CJEU in M&S2 held that the original unjust enrichment defence was a breach of the principles of equal treatment and fiscal neutrality, because it applied only to claims by payment traders, but not to claims by repayment traders. As a result, no unjust enrichment defence was available to HMRC in respect of claims brought before the 2005 amending provision took effect on 26^th May 2005.

On 21^st July 2008, section 121 of the Finance Act 2008 was introduced, as a result of Fleming, providing that the 3-year cap did not apply to claims made before 1^st April 2009 and in respect of accounting periods ended before 4^th December 1996.

On 27^th March 2009, Reed submitted two claims for overpaid VAT, the first in respect of the years 1973-1990 for an additional £63.8m (plus interest), and the second in respect of 1991-1995 for an additional £75.8m (plus interest). It is these claims to which this appeal relates.

On 31^st March 2009, the extended transitional period relating to the 3-year cap under the Finance Act 2008 came to an end.

The UT’s main reasons for deciding that the principle of equal treatment was not infringed were: (i) it followed from Weber’s Wine World that those who claimed and were paid before the defence of unjust enrichment was introduced would be in a better position than those who only claimed afterwards, (ii) paragraph 52 of M&S2 made clear that a trader was only unjustly enriched when his repayment claim was paid, so that the fact that an earlier claimant is better off than a later one did not constitute unequal treatment, (iii) as with limitation periods, the fact that one competitor may be better off than another by claiming before expiry rather than after expiry did not contravene the principle of equal treatment. Mr Peacock contested each of these points.

In relation to Weber’s Wine World, Arden LJ has already provided an exhaustive analysis in which she concludes in paragraph 43 that it is authority for the proposition that a Member State can, without infringing the equal treatment principle, introduce an unjust enrichment defence that applies only to those claimants for a prior period who make a claim after a prescribed date. I respectfully agree with that conclusion, but think it is nonetheless important to say how, in my judgment, the decision in M&S2 affects this case.

Paragraph 51 of the CJEU’s judgment in M&S2 explained that: “… the general principle of equal treatment requires that similar situations are not treated differently unless differentiation is objectively justified”. At paragraphs 58-63, the CJEU made clear that, if unequal treatment is established, EU law requires what was referred to in argument as “levelling up” by applying to the “members of the disadvantaged group the same arrangements as those enjoyed by the persons in the favoured category”.

Much time was devoted in oral argument to the two questions of whether (i) differentiating between claimants by reference to the date of claim meant that those claimants were or were not in “similar situations” within the formulation I have already cited from paragraph 51 of M&S2, and (ii) whether if claimants making claims at different dates were in similar situations, that differentiation could be objectively justified.

As to the first point, as Arden LJ has already explained at paragraph 51, when comparing procedural rules applicable to EU law claims and domestic claims for the purposes of the equivalence principle, the court “must consider whether the actions concerned are similar as regards their purpose, cause of action and essential characteristics” (Littlewoods v. HMRC supra at paragraph 31). Arden LJ went on to set out the competing arguments as to what were or were not essential characteristics of a claim, concluding that focusing on them in the abstract was erroneous, and that one should instead concentrate on first principles against the background of the holding in Weber’s Wine World to the effect that in such a case it was inherent that different rules would apply to different claims.

In my judgment, it is useful to consider what are or are not essential characteristics for the purposes of ascertaining whether a similar situation does or does not exist. I would not want to lay down any general principle, since a vast array of different situations will undoubtedly arise. But, in this case, it seems to me that, contrary to Mr Peacock’s submissions, the date of claim for repayment of overpaid VAT (in addition to the period in respect of which the claim is made) must be essential characteristics of the claim. It is true, of course, that the date of any actual repayment is in the hands of the Government. But there is a clear differentiation between repayment claims made at different times. Such claims will inevitably be subjected to a different legislative structure, arising from the passage of time. It would, in my judgment, be counter-intuitive to regard the date of a claim as a non-essential characteristic of a claim.

I agree with Arden LJ that the question cannot be considered without taking full account of the decision in Weber’s Wine World, but I have also formed the view that one cannot properly regard a claim made after the cut off date as being in a “similar situation” to a claim made before the cut off date in this case.

That conclusion means that there is no need to consider the second question posed above of whether there might be objective justification for the differentiation. I would say, however, in that regard that, had the question been relevant, or if I were wrong in thinking that the date of claim was an essential characteristic, I would have thought that there was objective justification in this case. In this regard, I would have placed great weight on the fact that, if Reed were right, it would not actually have been possible for the Government to introduce a lawful defence of unjust enrichment at all, because of the need always to “level up” by applying the “same arrangements as those enjoyed by the persons in the favoured category” (i.e. the absence of an unjust enrichment defence) to the “members of the disadvantaged group”.

I should not leave this issue without also mentioning that I am not persuaded that the UT was wrong to draw an analogy between the principles applicable to the imposition of a limitation period and the application of a cut off date for the application of an unjust enrichment defence. Plainly, as Arden LJ has said, the introduction of a new limitation period has to be undertaken in compliance with the principles of effectiveness and equivalence, and requires a transitional period. But that does not, in my judgment, mean that the fact that it may be done lawfully is not indicative, as the UT suggested, of the fact that the principle of equal treatment ought not to prevent the introduction of an unjust enrichment defence after an appropriate cut-off date.

Reed submitted that the importance of its relying on the principle of fiscal neutrality (as a sub-set of the principle of equal treatment) was that fiscal neutrality cannot be objectively justified. I agree with Arden LJ that it is not necessary to deal with the point, because it is accepted that Reed cannot succeed on it, having failed on equal treatment.

Reed’s submission under this head was that, when the unlawful 3-year cap was introduced on 4^th December 1996, Reed had an accrued EU and domestic law right to recover all the output tax it had overpaid in respect of the period between 1973 and 1995 (the period in issue in this case), free of any unjust enrichment defence. The Finance Act 2008 provided that the 3-year cap did not apply to claims made before 1^st April 2009 and in respect of accounting periods before 4^th December 1996, but did not provide, as Reed says it should have done, that HMRC could not rely on any unjust enrichment defence in respect of the period prior to the cut off date (26^th May 2005). Reed submits that, because of the chronology of unlawful enactments, it should be put back into the position it was in before the original enactment of the unlawful 3-year cap in 1996.

The principle of effectiveness has this effect, according to Reed, because the circumstances I have described have made it impossible or excessively difficult for Reed to pursue its claims to repayment, that are conferred by EU law, free of the unjust enrichment defence.

In my judgment, this argument cannot succeed because it assumes, wrongly, that the defence of unjust enrichment is a limit on the right to recover overpaid tax. It is not. It is a defence that may be raised to a claim for repayment of VAT, but there is no actual unjust enrichment until the repayment is made. Accordingly, the principle of effectiveness only requires Member States to produce effective means for the EU law right to recover overpaid VAT to be given effect. The defence of unjust enrichment does not affect the right to make the claim for repayment itself. In short, Reed has no right to recover its overpaid tax without having to face a claim for unjust enrichment. It has no EU or other right to be unjustly enriched. In my judgment, the UT was right on this point as well.