Commissioners of Customs & Excise v DFS Furniture Company Plc

The issue on this appeal from the decision of the VAT and Duties Tribunal (Mr Colin Bishopp) made on 26th September 2002 is the proper construction and application of the provision in s.78A(2) VAT Act 1994, as applied to claims for repayment made against DFS Furniture Company plc (“DFS”) by the Commissioners of Customs & Excise (“the Commissioners”) under s.80(4A), limiting the time within which the relevant assessment may be made to a period of “two years after the time when evidence of facts sufficient in the opinion of the Commissioners to justify the making of the assessment comes to the knowledge of the Commissioners”. The Tribunal concluded that the assessments made on DFS by the Commissioners on 24th September and 7th December 2001 in the light of certain preliminary rulings of the European Court of Justice given on 15th May 2001 in proceedings between the Commissioners and Primback Ltd (“Primback”) were made too late. The Commissioners contend that the Tribunal was wrong to conclude that the judgment of the European Court of Justice was not a fact nor evidence of facts for the purpose of s.78A(2).

The relevant circumstances may be shortly stated. DFS is a retailer of furniture and registered for the purposes of VAT. In the accounting periods falling between 1st April 1993 and 31st March 1996 it supplied furniture to its customers on interest free credit terms. The transaction by which such a sale was carried out involved the supply of the furniture by DFS to the customer on terms which required the customer to pay the price by instalments to the finance company introduced by DFS. The amount paid by the finance company to DFS in due course was less than the price paid by the customer to the finance company. In its accounts for those accounting periods DFS accounted for VAT on the price paid by the customer, not the lower amount it received from the finance company.

The question whether the supplier should account for VAT on the price paid by the customer or on the lower sum received from the finance company arose in proceedings between the Commissioners and Primback. The Commissioners established that Primback should account for VAT on the price paid by the customer, not the lower sum received from the finance company both before the VAT Tribunal and, on appeal, before May J. But on 25th April 1996 Primback’s appeal succeeded by a majority in the Court of Appeal. The Court of Appeal gave permission to the Commissioners to appeal to the House of Lords.

On 26th July and 20th August 1996 DFS, at the invitation of the Commissioners, made voluntary disclosures of excess payments of VAT on the difference between the price paid by the customer and the lower sums received by DFS from the finance company. VAT on that difference came to £13.1m and DFS sought its repayment with interest of £1.5m. These sums were paid by the Commissioners to DFS by three payments made between 30th August 1996 and 6th January 1997.

On 1st February 1999 the House of Lords referred three questions to the European Court of Justice for preliminary rulings in relation to the appeal of the Commissioners from the decision of the Court of Appeal in favour of Primback. Both the Advocate-General in his opinion delivered on 28th November 2000 and the European Court of Justice in its judgment given on 15th May 2001 held, in effect, that the Court of Appeal had arrived at the wrong conclusion. Effect to those preliminary rulings was given by the order of the House of Lords made on 11th October 2001 whereby, without further argument, the order of the Court of Appeal was set aside and that of May J upholding the assessment restored.

Meanwhile, on 24th September 2001 the Commissioners issued a recovery assessment on DFS under s.80(4A) in the sum of £13.1m. On 7th December 2001 Customs raised a further assessment under s.78A(1) in respect of the payment of interest in the sum of £1.5m. DFS appealed against both assessments. Following a two-day hearing in Manchester on 11th and 12th June 2002 the decision of the VAT and Duties Tribunal was given on 26th September 2002. The Tribunal concluded (para 91) that the critical feature, which prompted the assessments, was the decision of the European Court of Justice given on 15th May 2001 but that, though the existence of the judgment was a fact, its contents were matters of law (para 101). Accordingly, though the judgment of the European Court of Justice was given within the two-year period permitted by s.78A(2) it was neither a fact nor evidence of a fact for the purposes of that sub-section. As all other relevant matters, primarily the repayments made between 30th August 1996 and 6th January 1997, had occurred more than two years before the assessments raised on 24th September and 7th December 2001 the latter were outside the period permitted by s.78A(2).

Before referring to the submissions of counsel it is necessary to consider the statutory framework within which the relevant provision, S.78A(2), appears. The original liability of DFS for VAT arose under s.4 in respect of the supplies of furniture it made to its customers. Tax was payable in respect of the value of that supply determined in accordance with the provisions of s.19. DFS was liable to account for that tax in accordance with the provisions of s.25 by reference to accounting periods and after deducting input tax. Part IV, headed “Administration, Collection and Enforcement”, contains provisions relating to assessments (ss.73-77) and interest and other sums (repayment supplements etc) payable by the Commissioners (ss.78-81).

The assessment provisions contain three time limitations similar to that under consideration on this appeal. The first appears in s.73(6). Sub-section (1) of that section enables the Commissioners to assess to the best of their judgment the liability to VAT of those who have failed to submit accounts or keep documents or afford facilities for checking returns or whose returns are incomplete or incorrect. Sub-section (2) authorises the Commissioners to recover by assessment repayments, refunds or credits which ought not to have been paid or credited or would not have been so paid or credited

“had the facts been known or been as they later turned out to be”.

All such assessments must be made within the time limits laid down in s.73(6), namely 2 years from the end of the prescribed accounting period or 1 year

“after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge.”

There is a similar provision in s.75(2)(b). That section confers power on the Commissioners to raise VAT assessments in the case of acquisitions of certain goods by non-taxable persons but subject to certain time limits one of which is

“one year after evidence of the facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”.

A similar formula is contained in s.77(2A). This sub-section imposes a limit on the power of the Commissioners to assess liability to penalties by reference to the expiry of two years from

“the time when facts sufficient in the opinion of the Commissioners to indicate as the case may be [material inaccuracy or default] came to the knowledge of the Commissioners”.

As the heading indicates, ss.78 to 81 deal with the different topic of payments by the Commissioners. S.78 prescribes the circumstances in which interest is to be paid by the Commissioners in cases of official error. S.79 provides for repayment supplements in the case of certain delayed payments or refunds. S.80 deals with the recovery of overpaid VAT and s.81 with interest given by way of credit and set-off of credits.

On 18th July 1996 it was announced by or on behalf of the then Paymaster General that the periods for claiming repayments on either side were to be reduced from 6 years to 3. The relevant legislation was contained in the Finance Act 1997. For present purposes the relevant amendments were the insertion of ss.78A and s.80(4A).

S.78A enables the Commissioners to recover by assessment any amount paid to any person by way of interest under s.78 if and to the extent that the payee was not entitled to it. Sub-sections (2) to (8) contain ancillary provisions. The relevant time limit, contained in sub-section (2), provides that:

“An assessment made under subsection (1) above shall not be made more than two years after the time when evidence of facts sufficient in the opinion of the Commissioners to justify the making of the assessment comes to the knowledge of the Commissioners”

The assessment made by the Commissioners on 7th December 2001 in respect of £1.5m was made under this section because the payment of that sum to DFS on 6th January 1997 was in respect of interest on the VAT then thought to have been overpaid.

Subsections (1) to (4) of s.80 as amended impose on the Commissioners the obligation to repay to any person any amounts paid by him to the Commissioners by way of VAT which was not due to them. This section provided the authority for the Commissioners to repay to DFS the £13.1m it refunded in 1996 in the light of the majority decision of the Court of Appeal in the Primback case.

Subsections (4A) to (4C) of s.80 were added by Finance Act 1997 to give effect, in part, to the changes announced on 18th July 1996. They provide

“(4A) Where –

(a)

any amount has been paid, at any time on or after 18th July 1996, to any person by way of a repayment under this section, and

(b)

the amount paid exceeded the Commissioners’ repayment liability to that person at that time,

the Commissioners may, to the best of their judgement, assess the excess paid to that person and notify it to him.

(4B) For the purposes of subsection (4A) above the Commissioners’ repayment liability to that person at that time is –

(a)

in a case where any provision affecting the amount which they were liable to repay to that person at that time is subsequently deemed to have been in force at that time, the amount which the Commissioners are to be treated, in accordance with that provision, as having been liable at that time to repay to that person; and

(b)

in any other case, the amount which they were liable at that time to repay to that person.

(4C) Subsections (2) to (8) of section 78A apply in the case of an assessment under subsection (4A) above as they apply in the case of an assessment under section 78A(1).”

Thus the right of recovery afforded to the Commissioners by those subsections extends to the excess of the amounts paid, that is £13.1m, over the Commissioners’ repayment liability under s.80(1) at the time of the payment, that is in the period 30th August to 26th September 1996. If the assessments were made in time then DFS will seek to argue that the Commissioners were still obliged to repay £13.1m because of the nature of the arrangements with the finance house. But it is not suggested by DFS that in ascertaining the amount of the repayment liability of the Commissioners to DFS at that time the subsequent reference to the European Court of Justice, the preliminary rulings of that court or the order of the House of Lords setting aside the order of the Court of Appeal in the Primback litigation should be ignored. This must be right. It is plain from the provisions of subsection (4B)(a) that account must be taken of subsequent retrospective legislation; it would be odd if decisions of courts having similar effect were to be ignored.

As I have already indicated the Tribunal concluded that the preliminary ruling of the European Court of Justice was the critical feature which prompted the assessments. In paragraph 102 the Tribunal amplified that view in concluding that it was the content of that judgement or the explanation of the law set out in it, which led the Commissioners to issue the assessments. The Tribunal characterised that content as “evidence of law” not of fact.

In reaching that conclusion the Tribunal relied on the decision of the House of Lords in R v Governor of Brockhill Prison, ex parte Evans (No.2) [2001] 2 AC 19. In that case the Governor of Brockhill Prison calculated the release date of the applicant correctly in accordance with decisions of the court then prevailing. Three days before the applicant’s release the Divisional Court upheld her submission that the basis of the calculation was wrong and approved a different method of calculation which indicated that she should have been released already. She was released forthwith and sued the Governor for false imprisonment. Her claim was dismissed by the judge but succeeded, by a majority, in the Court of Appeal on the ground that the decision of the Divisional Court operated retrospectively.

The Governor’s appeal to the House of Lords was dismissed. It was held that the decision of the Divisional Court declared what the law had always been and it was no defence to the claim for false imprisonment, a tort of strict liability, that the Governor had calculated the applicant’s release date in accordance with the law as he and others considered it to be at the time he made the calculation. In dealing with an argument that the Governor’s reliance on the previous decision in calculating the release date meant that he was acting in accordance with an order of the court Lord Hobhouse of Woodborough (p.45) said:

“The highest that it can be put is that R v Governor of Blundeston Prison, Ex Parte Gaffney [1982] 1 WLR 696 gave a basis for a belief that 18 November might be the right answer. But any legal decision is no more than evidence of the law. In the Lincoln City Council case [1999] 2 AC 349, 377, Lord Goff of Chieveley quoted from Hale’s Common Law of England, 6^th ed (1820), p 90 and Blackstone’s Commentaries, 6^th ed (1774), pp 88-89:

“the decisions of the courts do not constitute the law properly so called, but are evidence of the law and as such ‘have a great weight and authority in expounding, declaring and publishing what the law of this Kingdom is’.”

They are a source of law but not a conclusive source. Judicial decisions are only conclusive as between the parties to them and their privies. The doctrine of precedent may give certain decisions a more authoritative status but this is relative as the present case shows: the Divisional Court was at liberty not to follow its own previous decision. A decision or judgment may on examination be shown to be inconsistent with other decisions. The value, force and effect of any decision is a matter to be considered and assessed. They are not statutes which (subject to European Union law) have an absolute and incontrovertible status.”

Counsel for the Commissioners submits that the Tribunal was wrong. He points out by reference to Ministero delle Finanze v IN.CO.GE [1998] ECR I 6307 that the effect of a preliminary ruling of the European Court of Justice is substantially the same as that of a superior court in England. At paragraph 23 the European Court of Justice said:

“It is settled case-law that the interpretation which, in the exercise of the jurisdiction conferred upon it by Article 177 of the Treaty, the Court gives to a rule of Community law clarifies and defines where necessary the meaning and scope of that rule as it must be or ought to have been understood and applied from the time of its entry into force. It follows that the rule as so interpreted may, and must, be applied by the courts to legal relationships arising and established before the judgment ruling on the request for interpretation, provided that in other aspects the conditions enabling an action relating to the application of that rule to be brought before the courts having jurisdiction are satisfied.”

He contends that the judgment of the European Court of Justice in the Primback litigation was a fact both as to its existence and its contents. He relies on s.3(2) European Communities Act 1972 which requires judicial notice to be taken of preliminary rulings of the European Court of Justice and R v Jagdev [2002] 1 WLR 3017 in which decisions of the Court of Appeal and the Privy Council were regarded as “information” for the purposes of s.3(1) Drug Trafficking Act 1994. Counsel for the Commissioners also referred me to Pegasus Birds v Commissioners for Customs & Excise [2000] STC 91, 97in which Aldous LJ described the similar provision in s.73(6)(b) as designed to protect the taxpayer from tardy assessments rather than to penalise the Commissioners for failing to spot some fact.

Counsel for DFS supports the reasoning and conclusion of the Tribunal. He does not dispute that the existence of the judgment of the European Court of Justice is a fact but, he contends, the contents are matters of law. He accepts that in one sense the reasons why the European Court of Justice took a different view to that of the Court of Appeal in Primback are matters of fact but insists that in the relevant sense they could only be matters of law. He points out that the Commissioners might have protected their position by a protective assessment or a refusal to pay without a contractual promise to repay if the appeal of Primback to the House of Lords succeeded.

Counsel for DFS referred me to the judgment of Woolf J (as he then was) in Parekh v Commissioners of Customs & Excise [1984] STC 284. That case concerned the time bar now contained in s.73(6)(b). The issue was whether making a nil return constituted evidence of facts warranting a new assessment. Woolf J concluded that on the facts of that case it was not. He approved the distinction drawn in argument by counsel for the appellants between facts relevant to the power to make the assessment and facts which would justify it. He concluded that the nil return did not amount to evidence of facts for the purposes of the time bar. He too pointed out that the object of the time bar was to protect the taxpayer from tardy assessments. Counsel for DFS contends that if the time bar, which is not intrinsically unreasonable in length, does not apply in cases such as this then the taxpayer will never be able to close his books and will be denied the protection to which both Woolf J and Aldous LJ considered that he is entitled.

The proper construction of the time bar contained in s.78A(2) must be ascertained in the light of its context. The particular context is its application to claims made by the Commissioners under s.80(4A) for sums repaid in excess of the repayment liability of the Commissioners under s.80(1) at the time of repayment. Repayment liability is defined by s.80(4B) to include sums for which the Commissioners were not liable at the time of repayment because of legislation enacted thereafter. If such legislation, its contents and effect are not facts for the purposes of the time bar then in many, if not most, cases the effect of s.78A(2) would be to negate the evident purpose of s.80(4B)(a). It may be, but it is not necessary for me to decide, that the reference in s.80(4B)(a) to a ‘provision’ is wide enough to comprehend a subsequent decision of the court as to the true interpretation and application of a statute, directive or regulation. It is sufficient for present purposes to recognise that if, as I think, the reference in s.78A(2) to evidence of facts, when applied to s.80(4A), is wide enough to encompass retrospective legislation, its contents and effect then it would be capricious to adopt an interpretation which excluded a subsequent judgment and its contents and effect.

In this connection it is necessary to have in mind that the time bar applied to claims under s.80(4A) is in the same terms as applied to claims under s.78A(1) and in similar terms to the time bars contained in ss.73(6)(b), 75(2)(b) and 77(2A). Moreover whilst ss.78A(2) and 77(2A) were introduced by the Finance Act 1997 ss.73(6)(b) and 75(2)(b) were contained in the VAT Act 1994 as originally enacted. In none of these other contexts is there any provision comparable to s.80(4B)(a). Nevertheless I see nothing in those contexts to suggest that an interpretation of the relevant time bars so as to include as facts the existence, contents and effect of either subsequent legislation or decisions of the European Court of Justice or superior courts in England would be inconsistent with the purpose of those provisions. Indeed in the case of the time bar contained in s.73(6)(b) it would further the purpose of the assessments authorised by s.73(2) that there should be such an inclusion.

The context of s.80(4A) is relevant in another way. It was evidently intended to be all embracing and to introduce a statutory mechanism for the recovery of sums repaid by the Commissioners in excess of the amount for which they were legally liable, for whatever reason. If the time bar is interpreted in the manner for which DFS contends then it will not be comprehensive in its operation. It will not cover situations in which the Commissioners have a prima facie claim for restitution for sums paid under a mistake of law, as envisaged in Kleinwort Benson Ltd v Birmingham City Council [1999] 2 AC 349, where the mistake is discovered two years after the repayment, albeit within the limitation period appropriate to such claims generally.

In my view not only the context of s.80(4A) but also the wording of s.78A(2) support the contention of the Commissioners. There can be no doubt that the existence of a judgment is a fact. Likewise its contents are facts. In my view, unless it is an entirely hypothetical issue, in which case the court should not have given a judgment at all, its effect is a fact too. The existence and effect of a judgment may also relevant to the purpose of s.78A(2), namely the justification for the assessment. The contrary view appears to stem from an assumption that if a judgment is evidence of the law then its existence, contents and effect cannot be facts or evidence of facts as well.

Lord Hobhouse of Woodborough, in the passage in his speech in R v Governor of Brockhill Prison, ex parte Evans (No.2) [2001] 2 AC 19, 45 which I have quoted in paragraph 18 above, was dealing with the argument that at the time the Governor calculated the release date the existing decisions supported his calculations. It had been submitted that those decisions represented the law until overruled. He disagreed for the reasons apparent from the passage in his speech I have quoted. But the contrast he drew was not between a judgment as law and a judgment as fact but between a judgment as the law in the sense that a statute is and as evidence of the law. It was irrelevant to any issue in that case whether in addition to being evidence of the law the judgment, its contents or effect were also facts or evidence of facts.

In my view, the existence of a judgment, its contents and its effect are facts or evidence of facts for the purpose of the time bar contained in s.78A(2), notwithstanding that they may for other purposes be evidence of the law. This at least is demonstrated by the decision in R v Jagdev [2002] 1 WLR 3017. I do not accept the submission of counsel for DFS that so to hold is to deny to taxpayers the protection against tardy assessments to which Woolf J and Aldous LJ referred. The time bar operates in relation to the retrospective legislation or the subsequent decision of the court in the same way as it operates in the case of any other fact. Similarly the suggestion that taxpayers will never be able safely to close their books if the time bar is interpreted in this way contributes nothing to the argument because they are always vulnerable to the discovery of any other fact.

For these reasons I allow the appeal and set aside the order of the Tribunal.