FJ Chalke Ltd & Anor v Revenue & Customs

Introduction 76- 77

The position down to the judgment of the ECJ in Hoechst 78- 93

Developments in the law since Hoechst 94-108

Domestic authority 109-123

Conclusion 124-125

Introduction 126-133

The mistakes made by the claimants and section 32(1)(c) of the

The acknowledgment argument and section 29(5) of the Limitation

Does Community law have any effect on the limitation defence? 159-170

Change of position 171-178

Introduction 179-186

The breaches of Articles 11 and 13 of the Sixth Directive 187-198

The three year cap 199-235

The repayment of the principal sums with simple interest only 236

The enactment and maintenance in force of section 78(3) of

Conclusion 238-239

The basic issue in these test cases is whether motor vehicle dealers who have overpaid value added tax (“VAT”) over periods of many years, dating back in some cases to the introduction of VAT in the United Kingdom in 1973, are entitled to recover from the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) not only the tax which they overpaid together with simple interest thereon pursuant to section 78 of the Value Added Tax Act 1994 (“VATA 1994”), all of which has now been paid to them, but also compound interest (less, of course, the simple interest which they have already received). The entitlement to compound interest is said to arise both as a matter of European Community law (“Community law”) and, following the decision of the House of Lords in Sempra Metals Limited v IRC [2007] UKHL 34, [2008] 1 AC 561 (“Sempra”), as a matter of English domestic law.

I emphasise at this early stage that, although it is convenient to use the term “compound interest” as a shorthand description of the remedy claimed by the claimants, it should be understood as including, where appropriate, restitution-based claims for the time value of the overpaid tax while it was retained by HMRC or their predecessors the Commissioners of Customs and Excise (together “the Commissioners”).

The Commissioners’ front line of defence to the claims for compound interest relies on two core propositions. The first proposition is that, as a matter of English domestic law, the relevant provisions in VATA 1994 for the repayment of wrongly levied VAT and simple interest thereon were intended by Parliament to be both comprehensive and exhaustive, and therefore oust any further domestic remedies which might otherwise be available, including any restitutionary right to compound interest of the type recognised by the majority of the House of Lords in Sempra. The second proposition is that there is nothing in the principles of Community law relating to the repayment of wrongly levied tax, as expounded in a series of decisions by the Court of Justice of the European Communities (“the ECJ”), and including in particular the Community law principles of equivalence and effectiveness, which overrides the domestic regime for the repayment of wrongly levied VAT in such a way as to require an award of compound interest to be made.

If their first line of defence fails, the Commissioners then fall back on a number of detailed arguments that the claims, however they fall to be categorised under English domestic law, are in any event misconceived, and are also time-barred under the relevant provisions of the Limitation Act 1980. The limitation arguments start from the incontrovertible fact that all of the overpaid VAT was paid by the test claimants to the Commissioners more than six years before they began the present proceedings. In considering these arguments it will be necessary to analyse with some care the precise nature of the mistake or mistakes made by the claimants which led to the overpayments of VAT. Also relevant to this part of the case is the by now notorious three year cap on the recovery of overpaid VAT, which was introduced by the Finance Act 1997 with retrospective effect from its first announcement on 18 July 1996, was subsequently held by the ECJ to be in breach of Community law in the first of the two Marks & Spencer cases referred to it by the English courts, Case C-62/00 Marks & Spencer v Customs and ExciseCommissioners [2002] ECR I- 6325, [2003] QB 866 (“Marks & Spencer I”), and (in the form in which it applies to claims for the recovery of wrongly paid input tax) was disapplied by the House of Lords in relation to claims based on accrued rights in Fleming v Revenue and Customs Commissioners [2008] UKHL 2, [2008] 1 WLR 195 (“Fleming”). To avoid confusion, I should explain that the case which I have called Marks & Spencer I is referred to in Fleming as Marks & Spencer II.

A further group of issues concerns the claimants’ alternative claim for damages under the Factortame principle, whereby a member state is liable to compensate individuals for loss and damage caused to them as a result of breaches of Community law for which it is responsible if three conditions are met, including the condition that the breach must be sufficiently serious to render the member state liable in damages. A main question here is whether that condition is satisfied, but issues of causation and limitation also arise.

Finally, on the assumptions that the claimants are in principle entitled to recover compound interest, and that their claims are not time-barred, there is an issue whether such interest should be paid in respect of accounting periods prior to 1 January 1978 which was the latest date for implementation of the Sixth Council Directive of 17 May 1977 relating to turnover taxes (77/388/EEC) (“the Sixth Directive”). This issue turns on the question whether Article 2 of the First Council Directive of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (67/227/EEC) (“the First Directive”) conferred directly enforceable rights on individuals upon which they could rely before national courts.

A Group Litigation Order for the resolution of these claims was made by Chief Master Winegarten on 28 June 2007. The claims together constitute the VAT Interest Cars Group Litigation, known for short as the “VIC Group Litigation”. There are two test claimants, F J Chalke Limited (“Chalke”) and A C Barnes (Wokingham) Limited (“Barnes”). I understand that the total number of claimants enrolled in the VIC GLO is currently about 165, and that the maximum amount of a sub-group of 130 of the claims, if the claimants were to succeed on all points, has been calculated to be in the region of £136.4 million.

No order for a split trial has been made, but it was agreed between the parties at the start of the trial, with my approval, that all detailed questions of quantum should be deferred for resolution, if necessary, at a future date. However, the parties invited me to decide at this trial any issues of principle which would assist in determining the quantum of the claims. One such issue, which was added by an unopposed application by the Commissioners to amend their defences, is whether a defence of change of position is available to the Commissioners in respect of the restitution claims.

I have had the benefit of excellent written and oral arguments on both sides, for which I express my gratitude to all concerned.

With this brief introduction, I will now describe the relevant VAT background before moving on to the facts, the statements of case, and consideration of the issues.

The claimants are all motor vehicle dealers, or persons who carry on a motor vehicle business of a similar nature. The overpayments of VAT with which this litigation is concerned were occasioned by the Commissioners’ treatment of:

VAT was first introduced in the United Kingdom with effect from 1 April 1973 by the Finance Act 1972, in fulfilment of one of the conditions of the UK’s accession to the European Communities. In the most basic terms, VAT is charged on the supply of goods and services by reference to the value of the supply. The tax is underpinned by the principle of fiscal neutrality, the object of which is to ensure that the burden of the tax is borne only by the final consumer. At all earlier stages in the chain of supply, a trader is in principle entitled to deduct from the output tax which he charges on his turnover (i.e. the supplies which he makes to his customers) the input tax which he has incurred on the purchase of his raw materials and other goods and services for the purposes of his business. In this way the burden of the tax is passed on up the chain to the ultimate consumer, and the amount of output tax due at each stage increases in line with the value which has been added to the supply.

One problem which a tax of this nature has to address is how to deal with supplies of goods which have, or may have, a mixed business and private use. Company cars supplied to employees are an obvious example. Less obviously, demonstrator cars purchased by a dealer may also in many cases be used by authorised members of staff for private purposes when they are not in use for demonstration purposes. For example, the car may be used as a runabout for shopping, or for collecting children from school, or for travel to and from an employee’s home outside business hours.

In common with a number of other member states, the UK decided from the earliest days of VAT to tax the private use of business cars by the draconian expedient of blocking the deduction or recovery of input tax on the purchase of the car. In other words, as one of the Commissioners’ witnesses, Mr David Easton, explains in paragraph 6 of his witness statement:

“If the business is blocked from recovering input tax on its purchase of the car, the car will effectively be subject to VAT in the hands of the business, as if it were a final consumer. The private use of that car, whilst it is in the possession of the business will then be subject to tax, without the need for a complicated or burdensome system of accounting for the private use of the vehicle by employees.”

This solution had the effect of treating all demonstrator cars as if they had been purchased for exclusively private use, regardless of the extent (if at all) to which they were in fact so used. It is important to note, however, that the blocking of input tax in this way has at all times been permitted under Community law, and this remains the position today. Article 11(4) of the Second Council Directive of 11 April 1967 relating to turnover taxes (67/228/ECC) (“the Second Directive”) provided that:

“Certain goods and services may be excluded from the deduction system [i.e. the system of deduction of input tax], in particular those capable of being exclusively or partially used for the private needs of the taxable person or of his staff.”

Article 17(6) of the Sixth Directive then provided as follows:

“Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of Value Added Tax. Value Added Tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.”

The four year transitional period envisaged by Article 17(6) elapsed without any rules having been introduced by the Council, and the question therefore arose whether it was open to the UK to maintain the prohibition on the recovery of input tax on the purchase of motor cars which had been provided for in a succession of statutory instruments. If so, further questions arose whether the prohibition could be maintained if the cars were in fact used exclusively for business purposes, or in various circumstances of mixed business and private use. On a reference for a preliminary ruling from the Court of Appeal, the ECJ answered these questions in favour of the Commissioners, holding that the expiry of the transitional period did not preclude member states from maintaining an input tax block on the purchase of motor cars, and that they could do so even where the cars “were essential tools in the business of the taxable person concerned”: see Case C-305/97 Royscot Leasing Limited and others v Customs and Excise Commissioners [2000] 1 WLR 1151, [1999] STC 998, especially at paragraphs 26 and 28 to 32 of the judgment of the court.

Despite the block on input tax for demonstrator cars, the Commissioners took the view that when such a car was sold to a private purchaser output tax should still be charged, although only on the difference, or “margin”, between the purchase price and the sale price. This system was generally known as “the margin scheme”, and is described as follows by Mr Easton in paragraph 6 of his statement:

“However, in the case of a car dealer, selling a demonstrator, the car will normally be sold on relatively quickly in the course of business to a customer at (usually) a higher price than the dealer bought it for. Since the dealer has already borne VAT on the amount of the purchase price he had to pay, the Commissioners took the view that it would not be appropriate for the sale by the dealer to carry VAT on the full amount of the sale price. Rather, United Kingdom law required the dealer only to account for VAT on the “margin” between his purchase price and the sale price.”

Before the decision of the ECJ in the Italian Republic case (see below), the block on input tax recovery on cars and the operation of the margin scheme were both contained in the Value Added Tax (Input Tax) Order 1992, SI 1992/3222.

According to Mr Easton, the policy view held by the Input Tax Branch of the Commissioners was that the combination of the block on input tax and the margin scheme represented “a pragmatic way of implementing the principle that VAT is a tax on the final consumption of goods”, and was compatible with Article 13B of the Sixth Directive. Article 13 dealt with exemptions within the territory of a member state, and so far as material Article 13B provided as follows:

“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemption and of preventing any possible evasion, avoidance or abuse:

…

(c)

supplies … of goods on the acquisition or production of which, by virtue of Article 17(6), value added tax did not become deductible;”

This view was, however, shown to be untenable by the decision of the ECJ on 25 June 1997 in Case C-45/95 EC Commission v Italian Republic [1997] STC 1062 (“Italian Republic”). In that case the Commission brought infraction proceedings against Italy under Article 169 of the EC Treaty, alleging that Italy had failed to fulfil its obligations under Article 13B of the Sixth Directive. In upholding the Commission’s complaint, the ECJ held (para 16) that the final part of Article 13B(c) requires member states to exempt the supply of goods in respect of which, by virtue of Article 17(6), VAT did not become deductible when they were previously acquired or produced by the taxable person, and (para 19) that Article 13B(c) does not allow member states to treat a transaction which is to be exempted as one which falls wholly outside the scope of VAT. It clearly follows from this reasoning that the United Kingdom should at all material times have treated sales of demonstrator cars as exempt supplies in respect of which no output tax could be charged, and that the margin scheme was therefore unlawful. The implications of the decision were soon realised, and on 10 October 1997 the Commissioners published Business Brief 23/97 in which they explained that, while consideration was given to what changes to UK legislation might be necessary, businesses could choose either to continue to use the margin scheme or to rely upon the ECJ judgment and treat the sale of input tax blocked cars as being exempt. The business brief went on to say that the Commissioners would accept claims for refunds of tax that had been overpaid as a result of the UK applying a margin scheme as opposed to an exemption, but that such refunds would be subject to the three year cap which was by then in force.

Mr Easton goes on to explain how consideration was then given to the question of how best to tax the private use of demonstrator cars and (more generally) the private use of vehicles by employees. Following consultation with motor industry trade bodies, proposals for new legislation relating to the VAT treatment of cars were published in April 1999, and new regulations were then introduced with effect from 1 March 2000, by the Value Added Tax (Supplies of Goods where Input Tax cannot be recovered) Order 1999, SI 1999 No. 2833. The general effect of these regulations was to remove the input tax block and to require private use to be accounted for by means of a notional self-supply. The margin scheme was abolished with effect from the same date.

I now turn to the treatment of manufacturers’ bonuses. Before the judgment of the ECJ in the Elida Gibbs case (see below), the Commissioners took the view that, as a matter of law, bonuses paid by car manufacturers to dealers on demonstrator vehicles, or to dealers or other customers on bulk orders, were to be treated as payments for a supply of services by the dealer or customer to the manufacturer. The normal practice seems to have been that the dealer would invoice the manufacturer for a supply of services including VAT, or alternatively the manufacturer would raise a self-bill invoice for the supply of services including VAT. Either way, the manufacturer would be entitled to deduct input tax on the supposed supply of services, but the dealer would of course have to account to the Commissioners for the output tax. With the benefit of hindsight, it can be seen that there were at least two difficulties with this treatment. First, the nature of the supposed services supplied by the dealer to the manufacturer in return for the bonus was elusive, and in many cases appears to have been an artificial construct invented to account for the fact that money was passing between two persons in a business relationship. Secondly, if it was right to regard the bonus as a discount from the price of the supply by the manufacturer, the principle of fiscal neutrality would appear to require that the taxable consideration for the original supply should be reduced by the amount of the discount.

On a preliminary reference by the VAT and Duties Tribunal in London, the ECJ held in Case C-317/94 Elida Gibbs Limited v Customs and ExciseCommissioners [1997] QB 499, [1996] STC 1387 (“Elida Gibbs”), that retrospective discounts given by a manufacturer of toiletries under two coupon schemes (the first of which offered consumers a price reduction at the point of sale on the production of money-off coupons circulated in magazines or newspapers, and the second of which allowed the consumer to obtain a cash refund from the company by returning cash-back coupons which were printed on the label of the products) were indeed to be treated as reducing the taxable price at which the manufacturer had sold the goods in the first place. The reasoning of the ECJ appears sufficiently from the following paragraphs in the judgment:

“28.

In circumstances such as those in the main proceedings, the manufacturer, who has refunded the value of the money-off coupon to the retailer or the value of the cash-back coupon to the final consumer, receives, on completion of the transaction, a sum corresponding to the sale price paid by the wholesalers or retailers for his goods, less the value of those coupons. It would not therefore be in conformity with the [Sixth Directive] for the taxable amount used to calculate the VAT chargeable to the manufacturer, as a taxable person, to exceed the sum finally received by him. Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the manufacturer is one, would not be complied with.

29.

Consequently, the taxable amount attributable to the manufacturer as a taxable person must be the amount corresponding to the price at which he sold the goods to the wholesalers or retailers, less the value of those coupons.

30.

That interpretation is borne out by article 11C(1) of the Sixth Directive which, in order to ensure the neutrality of the taxable person’s position, provides that, in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount is to be reduced accordingly under conditions to be determined by the member states.”

The ECJ went on to hold that this principle applied even where there was no contractual relationship between the manufacturer and the final consumer, and despite the practical difficulties involved in retrospectively adjusting the taxable consideration for the supply. Considerations of that nature had weighed heavily with the Advocate General (Fennelly), who in his opinion delivered on 25 April 1996 had held that the cash-back coupons had no effect on the taxable amount of the manufacturer’s original supply to the retailer or wholesaler, and that the money-off coupons should be regarded as a sales promotion scheme financed by the company to promote its commercial reputation and turnover: see the summaries of his conclusions in paragraphs 29 and 39. The judgment of the ECJ is indeed a striking example of conceptual purity prevailing over practical convenience, and it doubtless came as a considerable surprise to the Commissioners after the strong support for their position in the Advocate General’s opinion.

The implications of Elida Gibbs in the context of bonuses given by car manufacturers understandably took some time to consider, but on 21 July 1997 the Commissioners issued business brief 16/97 accepting that such bonuses should normally be treated as discounts by the manufacturers which reduced the value of their supplies. Businesses which believed that they had as a result overpaid VAT in the past three years were invited to contact their local VAT business advice centre.

The result of the decisions of the ECJ in Italian Republic and Elida Gibbs was that dealerships with demonstrator cars were likely to have overpaid VAT both (a) in respect of manufacturers’ bonus payments which they had received, whether for the purchase of demonstrator cars or the achievement of specified sales volumes, and (b) in respect of the onward sale of demonstrator cars, when the margin scheme operated. It is not disputed by the Commissioners that the overpaid VAT was unlawfully levied, at any rate with effect from 1 January 1978, and that the claimants were entitled to have it repaid in full once the unlawfulness under Community law of the three year cap had been established in Marks & Spencer I.

In his opening submissions, Mr Conlon QC for the claimants sought to stigmatise the errors made by the Commissioners as involving double, or even in one case treble, taxation. In my judgment it is not helpful to characterise the position before the Italian Republic and ElidaGibbs decisions in these rather emotive terms, and all that matters for present purposes is the undoubted, and admitted, fact that in the light of those decisions it became clear that VAT had been overpaid in breach of directly effective provisions of Community law. I should also say that I was helpfully provided by counsel for the Commissioners with some worked examples which illustrate the effect of the two errors, both separately and combined. It is unnecessary for me to go through these examples, but they make the point that there was never any double taxation in the strict sense of that term (i.e. where the same person is taxed twice over in respect of the same receipt or transaction), and that repayment of the VAT wrongly paid in respect of the bonuses and the margin scheme will (subject to the question of interest) restore to the claimants all of the tax for which they wrongly accounted.

The basic facts are straightforward and undisputed. I heard evidence on behalf of Chalke from Mr Edward James Chalke, who is a director of his company, and on behalf of Barnes from Mr Martin Arthur John Barnes, who is also a director of his company. Both witnesses were cross-examined fairly briefly by Mr Swift, with the principal object of eliciting precisely when they or their companies became aware of the ECJ judgments in Elida Gibbs and ItalianRepublic and of their right to claim a refund of the tax which had been overpaid. I will deal with the evidence on those points, in so far as it is necessary to do so, when I come on to the limitation issues.

Chalke is a small family-run motor dealership business operating in Wiltshire and South West England. The business was first established in the late 1920s as a small country garage, and has been in the ownership of the same family ever since. The business was incorporated in May 1960, and since then Chalke has held dealership franchises with a number of different car manufacturers, including British Leyland, Austin Rover, Nissan, Seat, Subaru, Fiat and Isuzu. The business has expanded since its incorporation, and now has sites in Wincanton, Warminster and Yeovil as well as the original site at Mere in Wiltshire.

Barnes is also a family business, which was established by Mr Barnes’ grandfather in November 1919 and was later incorporated in March 1961. Mr Barnes joined the company in 1973, when it operated as a franchised motor dealership from a site in Wokingham holding franchises with Vauxhall and Rover. At its peak the company operated from two sites in Wokingham and one in Crowthorne, but for various reasons the business declined from around 1995, leading to the closure of one of the Wokingham sites in March 1997 and the Crowthorne site in June 2002. The business was subsequently wound up and the company no longer trades, although it remains on the register of companies at Companies House. Most of the company’s business records have by now been destroyed.

On 26 July 1999, Chalke submitted a claim to the Commissioners for its overpayment of VAT in relation to the sale of demonstrator vehicles during the period of three years from 1 May 1996 to 30 April 1999. The amount of the claim was £12,974.30. This was of course a “capped” claim, because the three year cap was still in force, and it was only on 14 December 1999 that the Court of Appeal referred Marks & Spencer I to the ECJ.

On 9 August 1999 the Commissioners paid Chalke’s capped claim relating to the demonstrator vehicles in full, and on 16 September 1999 they paid simple interest on that sum of £694.20.

On 27 September 1999 Chalke submitted a capped claim in respect of the same three year period relating to manufacturers’ bonus payments in the sum of £18,685.98. This claim was also paid in full on 12 October 1999, together with simple interest of £1,487.39 paid on 20 October 1999.

On 11 July 2002 the ECJ delivered judgment in Marks & Spencer I, and on 5 August 2002 the Commissioners issued business brief 22/02 introducing a retrospective transitional regime in response to the judgment. The Commissioners said they would accept claims from taxpayers who could demonstrate that they had discovered their error before 31 March 1997 (i.e. slightly under four months from 4 December 1996 when the three year cap first had statutory force by virtue of a resolution passed by the House of Commons on the previous day pursuant to the Provisional Collection of Taxes Act 1968), and provided further that the overpayments of VAT were made before 4 December 1996. The stated purpose of this retrospective transitional regime was to allow taxpayers to make the claims that they ought to have been able to make at the time. By a further business brief issued on 7 October 2002 (No. 27/02), the transitional period was extended by three months to 30 June 1997. This extension was intended to reflect the judgment of the ECJ in the second Grundig case, Case C-255/00 Grundig Italiana SpA v Ministero delle Finanze [2002] ECR I-8003, [2003] All ER (EC) 176 (“Grundig II”), which had been delivered on 24 September 2002.

In the light of the decision of the House of Lords in Fleming, it is now clear that this transitional regime was itself unlawful, and that the Commissioners should simply have disapplied the three year cap in relation to accrued claims. However, the transitional regime was in fact sufficiently generous to allow both Chalke and Barnes to submit uncapped claims in relation to manufacturers’ bonus payments and the sale of demonstrator cars going back to 1973. Chalke submitted such an uncapped claim on 13 June 2003, and Barnes submitted a similar claim on 28 June 2003.

On 12 May 2004 the Commissioners duly paid Barnes £101,866.03 in relation to its uncapped claim, and on 25 July 2004 they paid simple interest on that sum amounting to £121,691.38. The corresponding payments to Chalke followed a little later, the principal sum of £146,526 being paid on 16 August 2004 and interest thereon of £127,545.93 on 24 August 2004.

At this point, as is now common ground, both Chalke and Barnes had been repaid all of the tax which they had overpaid, going back to 1973, together with simple interest thereon pursuant to section 78 of VATA 1994.

Chalke issued its claim form in the Chancery Division of the High Court on 16 March 2007. On 28 June 2007 the VIC GLO was made by Chief Master Winegarten. On 18 July 2007 the House of Lords gave judgment in Sempra. On 8 February 2008 a case management conference took place before me, at which directions were given for the claims of Chalke and Barnes to proceed as test claims, for Chalke to serve amended particulars of claim, and for Barnes to commence its claim and serve particulars by 7 March 2008.

On 7 March 2008 Chalke duly served amended particulars of claim, and Barnes issued its claim form and particulars. The two sets of particulars of claim dated 7 March 2008 were settled by the team of counsel who have appeared for the test claimants at the hearing, Mr Michael Conlon QC, Ms Marie Demetriou and Mr David Scorey. They are in substantially similar terms, and it will be enough to refer to Chalke’s amended particulars.

After setting out the VAT background, the overpayments of VAT, and the repayments of the principal sums due in respect of the capped and uncapped claims, Chalke alleges (paragraph 19) that Community law requires the principal sums to be repaid “with interest on that sum paid at a commercial rate and on a compound basis”. This is said to be required by either or both of the Community law principles of effectiveness and equivalence. Slightly adapted, the pleaded case in respect of those two principles is as follows:

Chalke then says (paragraphs 20 and 21) that the statutory interest paid by the Commissioners on the principal sums was at a rate lower than a commercial rate, and calculated on a simple basis, with the result that in breach of Chalke’s directly effective Community law rights Chalke “has not received full compensation”.

Chalke’s claim is advanced under two heads: a claim in restitution (“the restitutionary claim”), and a claim in damages for breach of Community law (“the damages claim”). Particulars of the restitutionary claim are set out in paragraphs 23 to 30, and particulars of the damages claim in paragraphs 31 to 36.

The restitutionary claim proceeds by the following stages. First, by enacting and maintaining legislation which imposed VAT on manufacturers’ bonus payments and which did not exempt from VAT the onward sales of demonstrator cars on the purchase of which input tax recovery had been blocked, the UK acted in breach of the directly effective Community law rights of Chalke, as articulated by the ECJ in Elida Gibbs and Italian Republic.

Secondly, it is alleged that Chalke laboured under three mistaken beliefs:

Thirdly, as from the date of the overpayments Chalke has been deprived of the use of the principal sums, and the Commissioners have had the benefit and use of the principal sums, and have thereby been unjustly enriched.

Fourthly, the Commissioners have repaid the principal sums together with simple interest thereon, but they continue to be unjustly enriched to the extent that they have failed to account for the full benefits obtained by them from the use of the principal sums.

Restitution is then claimed of the benefits obtained by the Commissioners in the form of compound interest at a rate calculated by reference to the average cost of Government borrowing during the relevant periods going back to 1973, or alternatively to the introduction of the Sixth Directive in 1978. Calculations of the interest so claimed are set out in an annexe to the particulars, using a rate of 1% above the Bank of England’s base rate and compounding the interest with daily, or alternatively quarterly, rests. The maximum value of the claim down to the end of January 2008, with daily rests and after deducting the simple interest already paid, is £229,513.46. With quarterly rests, the amount claimed is some £9,000 less, namely £220,533.27. If interest is payable only from January 1978 onwards, the corresponding figures are £197,829.70 and £190,189.77.

Paragraph 30 then anticipates the Commissioners’ limitation defence by advancing two contentions. First, by virtue of section 32(1)(c) of the Limitation Act 1980, the six year limitation period began to run when Chalke discovered its simple interest mistake. This mistake could not have been discovered with reasonable diligence until the House of Lords had given judgment in Sempra. Secondly, in respect of the interest due on the uncapped claim, the payment of the principal amount of that claim on 16 August 2004 (or alternatively the issue of business brief 22/02 on 5 August 2002) is to be treated as an acknowledgment for the purposes of section 29(5) of the Limitation Act 1980, with the consequence that the six year limitation period began to run afresh on those dates.

The damages claim alleges the following breaches of Community law by the Commissioners:

It is then pleaded that the three Factortame conditions for liability in damages by a member state are satisfied, and that Chalke has thereby suffered loss and damage in the form of “the loss of the value of money over time” (paragraph 35). A computation of the compound interest claimed is set out in a second annexe, which is in materially identical terms to the first annexe save that the rate of interest claimed is now 3% above base rate, no doubt intended to reflect the commercial borrowing rates which would have been available to Chalke had it borrowed money to replace the overpaid amounts of VAT. The maximum amount of the claim on this basis, going back to 1973 and compounding with daily rests, is £483,898.57. With quarterly rests, the corresponding figure is £462,477.19.

Finally, the same limitation points are made as in respect of the restitution claim (paragraph 36).

On 23 May 2008 the Commissioners served their defence. Like the amended particulars of claim, the defence was settled by the same team of counsel as have appeared at the hearing, namely Mr Jonathan Swift, Mr Peter Mantle and Mr Philip Woolfe.

Paragraph 12 of the defence contains important admissions, in substantially the same terms as admissions which had already been appended as Schedule 3 to the VIC GLO made on 28 June 2007. The general effect of the admissions, which I need not reproduce, was that from 1 January 1978 until the publication of the relevant business briefs in 1997 the Commissioners’ treatment of manufacturers’ bonus payments was contrary to Article 11 of the Sixth Directive, as interpreted by the ECJ in Elida Gibbs; and that their treatment of demonstrator cars, in the manner which I have described, was contrary to Article 13B(c) of the Sixth Directive, as interpreted by the ECJ in Italian Republic. It is further admitted that the relevant provisions of Articles 11 and 13 conferred directly effective rights on Chalke.

The remainder of the defence contains detailed answers to Chalke’s claims, which I will not summarise at this stage but to which I will return when I come on to deal with the issues.

As I have already mentioned, I gave permission at the start of the hearing on 9 February 2009 for the defence to be amended by the addition of a change of position defence to the restitution claim. These amendments are contained in paragraphs 61A and 61B of the amended defence, as follows:

“61A. Further and/or alternatively, if and to the extent that the Commissioners were initially unjustly enriched, the Commissioners have in good faith, and assuming the Principal Sums to have been due by way of VAT, changed their position as a consequence of the payment by Chalke of the Principal Sums and the payment by the claimants in the VIC Group Litigation and/or by other persons of sums by way of VAT on the basis of the same, or equivalent alleged mistakes. In the premises it would now be inequitable and/or unconscionable to require the Commissioners to make restitution of the sums claimed in this claim.

61B.The sums in question formed part of the United Kingdom’s tax revenue for the relevant year in which they were paid, and were treated and dealt with accordingly. The receipt of all of the payments of the Principal Sums pre-dated the making of this claim by at least 10 years. Those sums have been irretrievably spent, in some cases decades ago.”

In due course Chalke served an apparently undated reply to the defence, which it is again unnecessary for me to summarise at this stage.

I now move on to consider the issues. I will begin by examining the two core propositions mentioned in paragraph 3 above, because to a significant extent their resolution will be determinative of the claim. I start with the question whether, as a matter of English domestic law, the relevant provisions in VATA 1994 for the repayment of wrongly levied VAT and the payment of simple interest thereon are to be construed as exhaustive and therefore as excluding any other remedy.

Section 80 of VATA 1994 was first enacted as section 24 of the Finance Act 1989 and brought into force by statutory instrument on 1 January 1990. From its consolidation in 1994 until the amendments made in 1997 which I mention below, it provided as follows:

“80.

Recovery of overpaid VAT

(1)

Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2)

The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

(3)

It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.

(4)

No amount may be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.

(5)

Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.

(6)

A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.

(7)

Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them.”

For present purposes, the two most material provisions of section 80 are subsections (1) and (7). Subsection (1) imposes an obligation on the Commissioners to repay any amounts paid to them “by way of VAT which was not VAT due to them”. The sole criterion for repayment is that the amount in question was not in fact due to the Commissioners as VAT. There is no requirement that the amount should have been paid by mistake, nor is there any exclusion for voluntary payments, or for payments made under a mistake of law. The only substantive defence afforded to the Commissioners by the section is the unjust enrichment defence in subsection (3), that is to say a defence that repayment of an amount would unjustly enrich the claimant (for example because the burden of the overpaid VAT has been passed on by the claimant to its customers, and the claimant is not out of pocket as a result). Subsection (7) then provides, in language which is clear, precise and unambiguous, that the Commissioners shall not be liable to repay an amount paid to them by way of VAT on the ground that it was not VAT due to them, “except as provided by this section”. In other words, the only basis upon which the Commissioners are to be liable to repay overpaid VAT is by means of a claim brought under subsection (1).

Further features to note, apart from the unjust enrichment defence in subsection (3), are the special procedural requirements in subsections (2) and (6), and the six year limitation period in subsection (4) which is extended in cases where the payment was made by reason of a mistake in terms analogous to those in section 32(1)(c) of the Limitation Act 1980.

Section 78 of VATA 1994 was originally enacted as section 38A of the Value Added Tax Act 1983, inserted by section 17 of the Finance Act 1991 which received the Royal Assent on 25 July 1991. It was then consolidated as section 78 of the 1994 Act, together with an amendment (immaterial for present purposes) which had been made in 1992. As so consolidated, the relevant provisions of the section were as follows:

“78.

Interest in certain cases of official error

(1)

Where, due to an error on the part of the Commissioners, a person has –

(a)

accounted to them for an amount by way of output tax which was not output tax due from him and which they are in consequence liable to repay to him, or

(b)

failed to claim credit under section 25 for an amount for which he was entitled so to claim credit and which they are in consequence liable to pay to him, or

(c)

(otherwise than in a case falling within paragraph (a) or (b) above) paid to them by way of VAT an amount that was not VAT due and which they are in consequence liable to repay to him, or

(d)

suffered delay in receiving payment of an amount due to him from them in connection with VAT,

then, if and to the extent that they would not be liable to do so apart from this section, they shall pay interest to him on that amount for the applicable period, but subject to the following provisions of this section.

(2)

Nothing in subsection (1) above requires the Commissioners to pay interest –

(a)

on any amount which falls to be increased by a supplement under section 79; or

(b)

…

(3)

Interest under this section shall be payable at such rates as may from time to time be prescribed by order made by the Treasury; and any such order –

(a)

may prescribe different rates for different purposes; and

(b)

shall apply to interest for periods beginning on or after the date in which the order is expressed to come into force, whether or not interest runs from before that date;

and the first such order may prescribe, for cases where interest runs from before the date on which that order is expressed to come into force, rates for periods ending before that date.

[Subsections (4) to (9) then set out detailed rules for determining the “applicable period” for cases falling within the different categories identified in subsection (1)]

(10)

The Commissioners shall only be liable to pay interest under this section on a claim made in writing for that purpose.

(11)

No claim shall be made under this section after the expiry of 6 years from the date on which the claimant discovered the error or could with reasonable diligence have discovered it.

(12)

… ”

Rates of interest were set by statutory instrument for the whole lifetime of VAT back to 1 April 1973, ranging from a low of 8% at the beginning to a high of 15% in the calendar year 1980 and during the period from 1 December 1981 to 28 February 1982.

Both section 80 and section 78 were amended by the Finance Act 1997 so as to replace the six year limitation periods, extendable in cases of mistake, set out above with the ill-fated three year cap. In section 80, a new subsection (4) was inserted in these terms:

“(4)

The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.”

In section 78, subsection (11) was replaced with the following:

“(11)

A claim under this section shall not be made more than three years after the end of the applicable period to which it relates.”

Various other relatively minor amendments were made to the two sections in 1996 and 1997, but for present purposes nothing turns on them.

In support of their submission that the right to repayment of wrongly paid VAT in section 80 was intended by Parliament to be both exhaustive and exclusive of other possible remedies, the Commissioners rely mainly on the express terms of section 80(7), but also on the principles recently restated by the Court of Appeal in Monro v Revenue and Customs Commissioners [2008] EWCA Civ 306, [2009] Ch 69 (“Monro”). The issue in Monro was whether section 33 of the Taxes Management Act 1970, which is in some respects a direct tax counterpart of section 80, implicitly ousts other remedies available to the taxpayer, including in particular a claim for restitution of tax paid under a mistake of law pursuant to the cause of action recognised by the House of Lords in Deutsche Morgan Grenfell v IRC [2006] UKHL 49, [2007] 1 AC 558 (“DMG”). The Court of Appeal, affirming the judgment of Sir Andrew Morritt C, held that Parliament had intended section 33, where it applied, to provide an exclusive regime, and that there was no room for other common law remedies to co-exist with it.

The leading judgment in Monro was delivered by Arden LJ, who expressly recognised in paragraph 23 that a right to a common law remedy can be excluded either by express words or by necessary implication. Earlier in her judgment, she pointed out that “one provision which is conspicuous by its absence in section 33 … is a provision which takes away common law rights” (paragraph 8). She drew an express contrast with the wording of section 80(7) of VATA 1994 (ibid). The Revenue therefore had to rely in Monro on exclusion by necessary implication. They succeeded in doing so because, as Arden LJ accepted in paragraph 23 of her judgment, Parliament had created a specific remedy for taxpayers who had overpaid income tax or capital gains tax under an assessment by reason of some error or mistake in a return, but had done so subject to a limitation which excluded from relief any payments made under the practice generally prevailing at the time when the return was made. Such a limitation was a special feature of the statutory regime, and would have no equivalent in a parallel common law claim. The limitation would therefore be defeated if it were open to the taxpayer to bring a claim at common law instead of under section 33. Parliament could not have intended the special regime in section 33 to be capable of circumvention in this way, so section 33 must be construed as implicitly excluding parallel claims.

The Court of Appeal went on to hold that such a construction did not involve any breach of the taxpayer’s human rights: see per Arden LJ at paragraphs 28 to 35 and Longmore LJ at paragraph 41.

The present case is a much stronger one than Monro, because of the express wording of section 80(7). As I have already said, that wording is clear and unambiguous, and in my judgment it leaves no room for the co-existence of other remedies for the recovery of overpaid VAT from the Commissioners. If further support were needed for that conclusion, it can be found in a number of features of the statutory regime in VATA 1994, including in particular the following:

The combined effect of all these provisions is in my judgment enough to make it crystal clear that the section 80 regime for the recovery of overpaid VAT was intended by Parliament to be both exclusive and exhaustive where the circumstances are such as to fall within the scope of the section. Nor is this conclusion disputed by the claimants, in so far as it relates to the recovery of the overpaid VAT itself. Thus paragraph 4(b) of Chalke’s reply says that “The statutory ouster in section 80 VATA 1994 is limited to the recovery from the Commissioners of the Principal Sum (namely the amount paid by way of VAT to the Commissioners which was not VAT due to them)”, thereby implicitly accepting that the section 80 regime is an exclusive one for recovery of the overpaid VAT itself. To similar effect, Mr Conlon QC accepted in the course of his opening submissions that a remedy to recover the VAT overpaid by the claimants by means of a common law action for restitution is “capable of ouster” by section 80(7), and that the reasoning of the Court of Appeal in Monro is “very cogent and compelling” (transcript, day 2, page 22).

The claimants do not accept, however, that their present claims for compound interest at common law are ousted by the statutory scheme. They argue that section 80 itself does not deal with the question of interest at all, and that section 78 provides only a limited framework for the payment of simple interest in certain circumstances. Furthermore, the right to interest provided by section 78 is in any event a residual one, because the Commissioners are only obliged to pay interest in the circumstances specified in subsection (1) “if and to the extent that they would not be liable to do so apart from this section”. Accordingly, so the argument runs, there is nothing in the statutory scheme which ousts the claimants’ common law restitutionary claim to compound interest, and such a claim is indeed accorded priority over the residual right to simple interest provided by section 78(1).

The argument is superficially attractive, but for a number of reasons I am unable to accept it. The starting point, in my judgment, is that the interest claimed in the present case, whether simple or compound, can only be interest in respect of the VAT which was overpaid and which has now been repaid, or in other words (to adopt the terminology of the particulars of claim and the reply) can only be interest on the principal sums. Without that original overpayment of VAT, there would have been no unjust enrichment of the Commissioners at the expense of the claimants, and the claimants would not have been deprived of money for the loss of use of which they can make a claim. However it is formulated, their claim for interest depends on, and stems from, the original overpayment.

The force of this point is not blunted, in my judgment, by the fact that the overpaid tax was repaid in full before the present actions were begun, with the result that the claims for compound interest have from their inception been independent claims. This accident of timing might have caused insuperable problems to the claimants before the House of Lords in Sempra swept away the old rules embodied in the earlier decisions of the House in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 and President of India v La Pintada Cia Navigacion SA [1985] AC104. It is now clear, following Sempra, that a claim for interest may be maintained even after the principal sum has been repaid, whether the interest is claimed as damages for late payment of the principal sum or by way of restitution for loss of use of the money. However, none of this alters the fact that all of the interest claimed in the present cases is interest in respect of the original overpayments of VAT.

The significance of this point, in my view, is that since section 80 (as I have held) provides an exclusive regime for recovery of the overpaid VAT, any right to recover interest on the repayment as a matter of domestic law must likewise be found within the confines of the statutory scheme, that is to say either in, or through, section 78. The section 78 interest regime is limited to cases where one of the four specified circumstances in paragraphs (a) to (d) of subsection (1) has occurred, and where the occurrence is “due to an error on the part of the Commissioners”. This limitation defines the scope of the section, and in itself strongly implies that no interest is to be payable save in one of the four specified cases of official error. Further indications that the section 78 regime is meant to be comprehensive are the specified rates of interest laid down for the whole period back to 1973, the detailed rules for ascertaining the period for which interest is payable, the special limitation period for making claims in subsection (11), and the provision in subsection (2) which relieves the Commissioners from any obligation to pay interest under subsection (1) where the claimant is entitled to repayment supplement under section 79. All of these features would be subverted if a general right to recover interest at common law, whether sounding in contract, tort or restitution, were to be permitted to co-exist with section 78.

The true analysis, in my judgment, is that section 78 provides a limited, and (subject to one point) exhaustive, right to interest in respect of payments due from the Commissioners to taxpayers. The one exception lies, of course, in the words “if and to the extent that they would not be liable to do so [i.e. to pay interest] apart from this section”. The question is what source or sources of liability to pay interest, apart from section 78, are contemplated by those words. Read in the context of the statutory scheme, I consider that the words must be construed as referring only to other liabilities to pay interest which are founded in statute, and not as extending to any liability to pay interest at common law which the taxpayer might otherwise be able to establish. In particular, there has always been a power for the VAT and Duties Tribunal to award interest, at such rate as it may determine, on amounts of overpaid VAT that it orders to be repaid, or on unpaid amounts due to the taxpayer in respect of input tax. This power was first enacted in section 40(4) of the Finance Act 1972, was re-enacted as section 40(4) of VATA 1983, and is now to be found in section 84(8) of VATA 1994. The effect of the relevant wording in section 78(1) is to give priority to any interest awarded by the Tribunal, and to prevent double recovery of interest by the taxpayer.

For these reasons I conclude that, as a matter of domestic law, the statutory scheme for the recovery of overpaid VAT in section 80 of VATA 1994 is an exhaustive one, and that interest may only be recovered on a repayment of overpaid VAT by the Commissioners if it is awarded by the Tribunal or pursuant to section 78. The exclusion in section 80(7) of any liability to repay overpaid VAT save as provided for by section 80 necessarily prevents the recovery of any interest on the overpaid VAT, except where section 78 or some other statutory provision provides an entitlement to such interest. In particular, there is no room for a common law right to recover compound interest by way of restitution to co-exist with the enclosed and carefully de-limited statutory scheme.

Before moving on, I should add that I was informed by counsel for the claimants that a Hansard search has been conducted but has revealed no Parliamentary material of any description which (assuming it to be admissible) could throw any light on the intended scope and effect of sections 80 and 78 in relation to interest.

Introduction

On behalf of the Commissioners, Mr Swift rightly accepted that the provisions of Community law could in principle override the domestic regime for the payment of interest on overpaid VAT, and that if they did so the domestic regime would have to be construed, interpreted or disapplied in such a manner as would accord the necessary priority to “the superior order of EU law” (as Lord Walker of Gestingthorpe aptly termed it in Fleming at paragraph 25). It is important to note in this connection that no issue of Community law arose in Monro, except indirectly as part of the taxpayer’s human rights argument based on Article 14 of the Convention: see the judgment of Arden LJ at paragraph 34. In the present case, by contrast, the claimants assert that the Community law principles of effectiveness and equivalence require the tax to be repaid with compound interest: see paragraph 39 above. It is therefore necessary to consider with some care whether those principles of Community law do indeed have the effect for which the claimants contend.

In considering this question it will be convenient to begin by examining the position down to and including the decision of the ECJ in the Hoechst case (joined cases C-397/98 and 410/98, Metallgesellschaft Limited v IRC, Hoechst AG v IRC, [2001] ECR I-1727, [2001] Ch 620). It will then be necessary to consider the position since Hoechst, including in particular the decisions of the ECJ in two more recent cases arising out of group litigation orders in the High Court, case C-446/04 Test Claimants in the FII Group Litigation v IRC, [2006] ECR I-11753, [2007] STC 326 (“FII”) and case C-524/04 Test Claimants in the Thin Cap Group Litigation v IRC, [2007] STC 906 (“Thin Cap”). In the domestic sphere, I will need to examine Sempra and a decision of the English High Court on a VAT appeal, Revenue and Customs Commissioners v RSPCA [2007] EWHC 422 (Ch), [2008] STC 885 (“RSPCA”). I will then draw the threads together and state my conclusions.

The position down to the decision of the ECJ in Hoechst

The Sixth Directive says nothing about the restitution of VAT that has been improperly levied, nor are such rules to be found anywhere else in Community legislation. Put shortly, remedies have not been harmonised at Community level in relation to either direct or indirect taxation, and a general theme which runs through the jurisprudence of the ECJ is that the provision of an appropriate remedy for breach of a directly effective Community law right is a matter for the domestic courts of the member state, subject only to the requirement that the remedy provided should satisfy the Community principles of effectiveness and equivalence.

The right to a refund of taxes and duties levied in breach of rules of Community law was first clearly enunciated in the San Giorgio case, case C-199/82 Amministrazione delle Finanze dello Stato v San Giorgio Spa [1983] ECR 3595. In paragraph 12 of its judgment in that case, the ECJ laid down the fundamental principle in the following terms:

“In that connection it must be pointed out in the first place that entitlement to the repayment of charges levied by a Member State contrary to the rules of Community law is a consequence of, and adjunct to, the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties or, as the case may be, the discriminatory application of internal taxes. Whilst it is true that repayment may be sought only within the framework of the conditions as to both substance and form, laid down by the various national laws applicable thereto, the fact nevertheless remains, as the Court has consistently held, that those conditions may not be less favourable than those relating to similar claims regarding national charges and they may not be so framed as to render virtually impossible the exercise of rights conferred by Community law.”

The conditions referred to at the end of that statement are, of course, the Community law principles of equivalence and effectiveness respectively.

As in my recent judgment in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2008] EWHC 2893 (Ch), [2009] STC …., (“FII Chancery”) I will refer to the principle enunciated by the ECJ in San Giorgio as the San Giorgio principle, and to claims within the scope of the principle as San Giorgio claims.

San Giorgio itself says nothing about the payment of interest on unlawful charges repaid by a member state, but an even earlier line of authority, often repeated in subsequent cases, lays down the general principle that it is for national law to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, the rate of interest and the date from which it must be calculated: see case 26/74 Société Roquette Frères v EC Commission [1976] ECR 677 at 686 (paragraphs 11 and 12 of the judgment of the ECJ), and case 130/79 Express Dairy Foods Limited v Intervention Board for Agricultural Produce [1980] ECR 1887 at 1901 (paragraphs 16 and 17 of the judgment of the Court).

In the case of BP Supergas v Greece (case C-62/93), [1995] STC 805, the ECJ held for the first time that the San Giorgio principle applies to overpayments of VAT (occasioned in that case by an unlawful refusal by the Greek authorities to allow full deduction of input tax in respect of sales of petroleum products). As the Court held in paragraph 42 of its judgment:

“… a taxable person may claim, with retroactive effect from the date on which the arrangements at issue came into force, a refund of VAT paid without being due, by following the procedural rules laid down by the domestic legal system of the member state concerned, provided that those rules are not less favourable than those relating to similar, domestic actions nor framed in a way such as to render virtually impossible the exercise of rights conferred by Community law.”

I now come to the decision of the ECJ in Hoechst, where (in very broad terms) it may be said that the two lines of authority which I have been considering were combined, but the instant case was distinguished on the ground that the “interest” claimed was not, on a true analysis, ancillary to the repayment of unlawfully levied tax, but was itself the principal sum claimed by way of reparation for the UK’s breach of Community law.

The facts of Hoechst are too well-known to need detailed rehearsal. It is enough to say that the failure of the UK legislation to allow a group income election to be made by a UK-resident company paying a dividend to its non-resident parent company in another member state, in circumstances where such an election could have been made upon payment of a dividend to a UK-resident parent, was held by the ECJ to impose an unwarranted restriction on the freedom of establishment of the non-resident parent and to be contrary to Article 52 EC. As a result of the inability to make a group income election, advance corporation tax (“ACT”) had to be accounted for soon after the dividend was paid, and the ACT so paid could not be set off against the mainstream corporation tax (“MCT”) for which the company paying the dividend was liable until the MCT was due, on a date which normally fell approximately 8 to 18 months later than the date of payment of the ACT, but could be later if the company’s liability to MCT was insufficient to absorb the ACT.

It is important to note that all of the test claims in the Hoechst group litigation were cases in which the prematurely paid ACT was, sooner or later, subsequently set off by the company against its liability to MCT, and that the ECJ regarded ACT as simply a payment of corporation tax in advance. It follows from this analysis that, in the eyes of the ECJ, there was nothing unlawful about the charge to ACT itself, but rather the case was one where an otherwise lawful tax was levied too early. Accordingly, what was required to remedy the premature payment, and to vindicate the claimants’ Community law rights, was not repayment of the ACT itself, but a remedy for the loss of use of the money represented by the ACT from the date of payment until the date of set off against MCT.

This distinction was of critical importance to the reasoning both of the ECJ and of the Advocate General (Fennelly), whose opinion the Court substantially followed, because it led to the conclusion that the claims for so-called interest were in reality nothing of the sort, but were rather claims for a principal sum measured by reference to loss of use of the prematurely paid tax. The claims therefore could not be defeated by the domestic rule of law (as it was then generally understood) which precluded the recovery of interest after the principal sum had been repaid (i.e. the rule in the London, Chatham and Dover Railway case, and in La Pintada). Furthermore, this analysis enabled the ECJ to distinguish earlier case law of the Court which said that questions of interest were ancillary matters for the national court to determine, and which on occasion had led to the result that no interest was in fact recovered by a claimant following repayment of a sum wrongly levied or withheld from him in breach of Community law.

The crucial passage in the decision of the ECJ is to be found at paragraphs 83 to 96. After summarising the arguments advanced by the UK government, the Court said at paragraph 83:

“83.

It is important to bear in mind in this regard that what is contrary to Community law, in the disputes in the main proceedings, is not the levying of a tax in the United Kingdom on the payment of dividends by a subsidiary to its parent company but the fact that subsidiaries, resident in the United Kingdom, of parent companies having their seat in another Member State were required to pay that tax in advance whereas resident subsidiaries of resident parent companies were able to avoid that requirement.”

The Court then referred to the San Giorgio principle, and continued:

“85.

In the absence of Community rules on the restitution of national charges that have been improperly levied, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, secondly, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness): [authority was then cited].

86.

It is likewise for national law to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, including the rate of interest and the date from which it must be calculated: [reference was made to Roquette Frères, paras 11 and 12 and to Express Dairy Foods, paras 16 and 17].

87.

In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of advance corporation tax is not ancillary, but is the very objective sought by the claimants’ actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the “reimbursement” of that which was improperly paid and would appear to be essential in restoring the equal treatment guaranteed by Article 52 of the Treaty.

88.

The national court has said that it is in dispute whether English law provides for restitution in respect of damages arising from loss of the use of sums of money where no principal sum is due. It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.

89.

Consequently, Article 52 of the Treaty enables a subsidiary resident in the United Kingdom and/or its parent company having its seat in another Member State to obtain interest accrued on the advance corporation tax paid by the subsidiary during the period between the payment of advance corporation tax and the date on which mainstream corporation tax became payable, and that sum may be claimed by way of restitution.”

The Court then turned to the alternative way in which the claimants sought to recover their loss, namely by a Factortame claim for damages. Here too the Court held that an award of interest “would … seem to be essential if the damage caused by the breach of Article 52 of the Treaty is to be repaired” (paragraph 95 of the judgment). The Court referred to its earlier decisions in R v Secretary of State for Social Security, ex parte Sutton (case C-66/95), [1997] ICR 961, and Marshall v Southampton and South West Hampshire Area Health Authority (Teaching) (No. 2) (case C-271/91), [1994] QB 126, in order to make the point that the nature of the remedy required by Community law depends on identifying the essential components of the Community law right which has been infringed. Ex parte Sutton was a claim for the payment of interest on an amount awarded by way of arrears of a social security benefit which had initially been denied to the claimant for reasons which infringed a Council Directive on sex discrimination. The Court held that the right provided by the Directive for victims of such discrimination was only the right to obtain the benefits to which they would have been entitled in the absence of discrimination, and that “the payment of interest on arrears of benefits could not be regarded as an essential component of the right as so defined” (paragraph 93 of the judgment). The Court continued:

“However, in the present cases, it is precisely the interest itself which represents what would have been available to the claimants, had it not been for the inequality of treatment, and which constitutes the essential component of the right conferred on them.”

By contrast, the Court commented as follows on Marshall (No. 2) in paragraph 94 of the judgment:

“In the latter case, which concerned the award of interest on amounts payable by way of reparation for loss and damage sustained as a result of discriminatory dismissal, the Court ruled that full compensation for the loss and damage sustained cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value, and that the award of interest is an essential component of compensation for the purposes of restoring real equality of treatment … The award of interest was held in that case to be an essential component of the compensation which Community law required to be paid in the event of discriminatory dismissal.”

If Hoechst were the last word of the ECJ on the subject, there would clearly be a strong argument for saying that the interest provisions in section 78 of VATA 1994 are compliant with Community law, at any rate in the context of the present claims. All that the San Giorgio principle positively requires is repayment of the overpaid VAT itself. Payment of interest is an ancillary matter for national law to determine, in accordance with the well-established principle derived from Roquette Frères and Express Dairy Foods and restated by the ECJ in Hoechst (paragraph 86). Although the statement of that principle by the ECJ does not say in terms that the choice between simple and compound interest is also a matter for the national court, it would be very odd (as Lord Nicholls pointed out in Sempra at paragraph 68) if, the rate of interest being a matter for national law, the same were not also true of the choice between simple and compound interest.

On the facts, the present claims are not ones (as in Hoechst) where the “interest” claimed is in itself the measure of the principal sum sought as a remedy for the breach of Community law. The interest claimed on the overpaid VAT is ancillary to the claim for the overpaid tax, and it does not lose that character merely because the tax was paid in full before the claim for interest was made: see paragraphs 70 to 71 above. The present claims therefore do not fall within the exception to the general principle identified by the ECJ in paragraph 87 of the judgment in Hoechst.

It is still necessary for the national law to satisfy the requirements of the twin principles of equivalence and effectiveness, but those principles do no more than lay down minimum standards which the relevant national law must satisfy. With regard to equivalence, the relevant comparison is with the rights conferred by national law for the recovery of overpaid VAT in a domestic context, as Moses J held in Marks & Spencer Plc v HMRC [1999] STC 250 at 232f-j. Those rights are to be found in the self-same provisions in sections 80 and 78 of the 1994 Act. There is no question of purely domestic claims for the recovery of overpaid VAT being treated any more favourably than claims based on a breach of Community law. In either case, only simple interest is recoverable. So far as effectiveness is concerned, there is nothing in the domestic provisions which renders either practically impossible or excessively difficult the exercise of the rights conferred by Community law. On the contrary, the regime in sections 80 and 78 provides a clear, simple and effective means of recovering overpaid VAT, and the claimants have already received everything to which they are entitled under those sections.

These, in summary, were the submissions persuasively advanced to me by counsel for the Commissioners. He argued that the relevant principles of Community law have not moved on since Hoechst, and that is the question to which I must now turn.

Developments in the law since Hoechst

On 12 December 2006 the Grand Chamber of the ECJ delivered its judgment in FII, six months after the Advocate General (Geelhoed) had delivered his opinion on 6 April 2006. The case raised a large number of complex issues in the FII Group Litigation which had been referred to the ECJ for preliminary rulings by the English High Court. A full account of the issues, and the UK tax legislation which gave rise to them, may be found in my judgment in FII Chancery. For present purposes, it is enough to note that the substantive issues referred to the ECJ included questions about the compatibility with Community law of:

The ECJ held that the charge to ACT at (ii) above infringed Articles 43 (freedom of establishment) and 56 (free movement of capital) of the EC Treaty, at least in certain limited circumstances. I have held that a further reference to the ECJ is needed in order to determine whether there was also an infringement in other circumstances which were in practice far more common: see my discussion of the “corporate tree” points at paragraphs 110 to 141 of FII Chancery. Whether or not I was right in so holding does not matter for present purposes. The important point is that in at least some circumstances the ECJ found the ACT regime to be unlawful, and in many of the cases where ACT was unlawfully levied, the company concerned would have been unable to set it off subsequently against MCT, because of the problem of surplus ACT. The ECJ therefore had to address the question of remedies in a context where the unlawful imposition of ACT did not merely result in ACT being paid prematurely (as in Hoechst), but often could and did result in the ACT remaining outstanding as unlawfully levied tax.

The ECJ also held that the FID regime breached Articles 43 and 56 in relation to dividends received from other member states, and here too (without going into detail) the result was that the successful claimants might have either or both of (a) Hoechst-type claims, where ACT had been wrongly levied but subsequently set off against MCT, and (b) claims to recover the ACT itself, where no such set off had been achieved.

The ECJ did not finally determine whether the Case V charge was contrary to Community law, but remitted a factual issue to the national court which I interpreted and resolved in the claimants’ favour: see FII Chancery at paragraphs 39 to 66. I accordingly concluded that the Case V charge has at all material times infringed Article 43 in relation to foreign dividends received from subsidiaries resident in other member states. As a result, claims to repayment of the unlawfully levied corporation tax arose, as well as related claims where (for example) other reliefs had been used or foregone within the group in order to reduce or extinguish the unlawfully levied tax, and reinstatement of those reliefs (or compensation for their loss) was sought.

To complete the picture, claims were also made in respect of the increased amounts which companies had distributed by way of enhancements to FIDs, in order to compensate recipient shareholders for the absence of a tax credit which was one of the special features of the FID regime. (For a brief summary of the FID regime, see FII Chancery at paragraphs 23 to 25; my findings of fact on the reasons why the enhancements were paid are at paragraphs 277 to 302).

Question 6 in the order for reference by the High Court in FII set out in nine numbered sub-paragraphs the various types of claim that would arise in the event that the alleged breaches of Community law were established. I need not set out these paragraphs, but they included all of the types of claim which I have outlined above. The ECJ was then asked, in respect of each such claim, whether it was to be regarded as:

I have set out this background at some length, because it is needed for a proper understanding of the passages in Advocate General Geelhoed’s opinion and the judgment of the ECJ which deal with remedies.

The Advocate General dealt with Questions 6 to 9 together in paragraphs 125 to 139 of his opinion. He began by referring to the San Giorgio principle, and to the well-established rule that it is for each member state to ensure that the Community law rights of individuals are safeguarded, subject to the principles of equivalence and effectiveness. The primary authority he cited for these propositions was Hoechst, paragraphs 84 and 85, although he also made copious reference to other case law of the Court. He then referred to the question of how the plaintiffs’ claims should be characterised, and said that on this point too the judgment of the Court in Hoechst was relevant. Having explained the nature of the issue in Hoechst, and having reaffirmed that it was for the national court to assign a legal classification under English law to the actions brought by the plaintiffs before the national court, he then continued as follows:

“130.

On this basis, the Court went on to consider issues arising on both of the hypotheses put forward by the national court: first, the hypothesis that the actions were to be treated as claims in restitution, and second, the hypothesis that they were to be treated as claims in damages. It concluded that, in any event, Article 43 EC required that the plaintiffs should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they had sustained and from which the authorities of the member state concerned had benefited as a result of the advance payment of tax. The mere fact that the sole object of such an action would be the payment of interest did not constitute a ground for dismissing such an action.

…

132.

In the present case, it seems to me that, with one exception, the claims described in the national court’s sixth question should be considered equivalent to claims for recovery of sums unduly paid, that is to say, claims for recovery of charges unlawfully levied within the meaning of the Court’s case law, which the UK is in principle obliged to repay. The underlying principle should be that the UK should not profit and companies (or groups of companies) which have been required to pay the unlawful charge must not suffer loss as a result of the imposition of the charge. As such, in order that the remedy provided to the test claimants should be effective in obtaining reimbursement for reparation of the financial loss which they had sustained and from which the authorities of the member state concerned had benefited, this relief should in my view extend to all direct consequences of the unlawful levying of tax. This includes to my mind: (1) repayment of unlawfully levied corporation tax …; (2) the restoration of any relief applied against such unlawfully levied corporation tax …; (3) the restoration of reliefs foregone in order to set off unlawfully levied corporation tax …; (4) loss of use of money in so far as corporation tax was, due to the breach of Community law, paid earlier than it would otherwise have been … . In each case, it would be for the national court to satisfy itself that the relief claimed was a direct consequence of the unlawful levy charged.”

The Advocate General went on to say, in paragraph 133, that he was not convinced that the claim relating to the enhancement of the FIDs “should qualify as equivalent to a claim for repayment of charges unlawfully levied”. In his view the direct consequence of the UK’s unlawful failure to grant a tax credit to shareholders in receipt of FIDs was simply the extra tax levied on those shareholders, which was a loss suffered by the shareholders and not by the distributing companies. The enhancement of the FIDs did not follow inevitably from the denial of the tax credit, nor was it possible to conclude without more “that the distribution of an increased dividend necessarily qualifies as a loss incurred for the distributing companies”.

The importance of this discussion, in my judgment, lies in the fact that the Advocate General identified the underlying principle as being “that the UK should not profit and companies (or groups of companies) which have been required to pay the unlawful charge must not suffer loss as a result of the imposition of the charge”. He found support for this underlying principle in paragraph 45 of the opinion of Advocate General Fennelly in Hoechst, and in paragraph 96 of the judgment of the ECJ in Hoechst where, in the course of giving their answer to the second question referred, the ECJ said that:

“article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries.”

Having thus identified the underlying general principle, the Advocate General went on to link it with the requirement of effectiveness by saying that in order to provide an effective remedy to the test claimants the relief should extend “to all direct consequences of the unlawful levying of tax”. In this way, the remedy which the ECJ had held to be necessary in Hoechst was brought under the umbrella of the general principle: it was the means of reversing a direct consequence of the unlawful levying of tax.

Like the Advocate General, the ECJ considered Questions 6 to 9 together. The relevant part of its judgment is contained in paragraphs 197 to 207 and 220. The Court began its discussion by referring to the rival contentions of the parties: the claimants argued that each of the types of claim referred to in Question 6 should be categorised as a claim for repayment, while the UK argued that each of the remedies sought by the claimants constituted a claim for damages subject to the conditions laid down in Brasserie du Pêcheur and Factortame (paragraphs 199 and 200). The Court then recited the basic principles established by existing case law, in terms which closely followed the Advocate General’s opinion (paragraphs 201 to 203), and then continued:

“204.

In addition, the Court held in para 96 of its judgment in [Hoechst], that, where a resident company or its parent have suffered a financial loss from which the authorities of a member state have benefited as the result of a payment of advance corporation tax, levied on the resident company in respect of dividends paid to its non-resident parent but which would not have been levied on a resident company which had paid dividends to a parent company which was also resident in that member state, the Treaty provisions on freedom of movement require that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the loss which they have sustained.

205.

It follows from that case law that, where a member state has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax. As the Court held in paras 87 and 88 of [Hoechst], that also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely.

206.

In so far as the rules of national law governing the availability of tax relief have prevented a tax, such as ACT, levied in breach of Community law, from being recovered by a taxpayer who has accounted for it, the latter is entitled to repayment of that tax.”

The Court went on to say that, contrary to the claimants’ submissions, neither the reliefs waived by a taxpayer nor the enhancement of the FIDs could form the basis of an action under Community law for the reimbursement of the tax unlawfully levied:

“Such waivers of relief or increases in the amount of dividends are the result of decisions taken by those companies and do not constitute, on their part, an inevitable consequence of the refusal by the United Kingdom to grant those shareholders the same treatment as that afforded to shareholders receiving a distribution which has its origin in nationally-sourced dividends.” (Paragraph 207)

In my judgment the reasoning of the ECJ in paragraphs 201 to 207 was in all essential respects the same as that of the Advocate General, and they differed from him only on the question whether a claim for reliefs which had been waived (whatever the precise significance of that rather enigmatic phrase may be) could be classified under Community law as a reimbursement claim. Subject to that relatively minor point of disagreement, it seems to me that the Court agreed with the Advocate General in identifying an underlying principle, first adumbrated in paragraph 96 of its judgment in Hoechst, and in linking it with the principle of effectiveness (see the reference to “an effective legal remedy” at the end of paragraph 204). The general principle, as stated in paragraph 205, is that individuals are entitled to reimbursement “not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax”. This may be compared with the Advocate General’s view (in paragraph 132 of his opinion) that an effective remedy should “extend to all direct consequences of the unlawful levying of tax”. The final sentence of paragraph 205 indicates that the Court, like the Advocate General, viewed the remedy fashioned by the Court in Hoechst as coming within the scope of the general principle thus identified.

Finally, in paragraph 220 the Court gave its answer to Questions 6 to 9:

“The answer to Questions 6 to 9 should therefore be that, in the absence of Community legislation, it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, including the classification of claims brought by injured parties before the national courts and tribunals. Those courts and tribunals are, however, obliged to ensure that individuals should have an effective legal remedy enabling them to obtain reimbursement of the tax unlawfully levied on them and the amounts paid to that member state or withheld by it directly against that tax. As regards other loss or damage which a person may have sustained by reason of a breach of Community law for which a member state is liable, the latter is obligated to make reparation for the loss or damage caused to individuals [in accordance with the conditions laid down in Brasserie du Pêcheur and Factortame], but that does not preclude the state from being liable under less restrictive conditions, where national law so provides.”

I have dealt at considerable length with FII, even at the risk of traversing again much ground which I have already covered in FII Chancery at paragraphs 220 to 235 and 240, because it does in my judgment represent a significant advance on Hoechst in the jurisprudence of the Court. The identification of an underlying general principle, the linking of it to the principle of effectiveness, and the subsuming within the general principle of the loss of use claim in Hoechst, are important new milestones (or perhaps I should say kilometre posts) on a journey that is still far from completed. They are sufficient, however, to make it clear, to my mind, that the San Giorgio principle must now be regarded as entitling a claimant who has paid tax levied in breach of Community law not only to repayment of the tax itself, but also to reimbursement of all directly related benefits retained by the member state as a consequence of the unlawful charge. It is only in this way that the claimant can obtain an effective remedy for its loss, and effect can be given to the underlying principle that the member state should not profit from the imposition of the unlawful charge.

Certain important consequences seem to me to follow from this analysis. In the first place, if an effective remedy requires that the member state should not profit from the unlawful charge, the claimant should in principle be entitled not only to repayment of the tax itself but also to interest. Otherwise the claimant would effectively be compelled to make an interest free loan to the member state for the period between the wrongful exaction of the tax and its repayment. Secondly, no sensible distinction can be drawn in relation to interest between cases where tax is levied prematurely (as in Hoechst) and cases where the tax itself has to be repaid. In each case, the claimant should receive by way of “interest” a sum which represents the loss of use of the money, or (perhaps more accurately) the benefit of the use of the money to the member state, over the relevant period. If anything, common sense suggests that this right should be stronger in cases where the tax itself has to be repaid than in cases where the tax was merely levied prematurely. Thirdly, the measure of such loss of use or benefit, in the context of a restitutionary claim brought in an English court, should normally be compound, not simple, interest, as the majority of the House of Lords (upholding Park J and the Court of Appeal) recognised and held in Sempra: it is only by an award of compound interest that the commercial value of the use of the money over the time when it was retained can be properly reflected. Fourthly, such an award of interest can no longer be regarded as merely ancillary to the repayment of the tax, within the principle of Roquette Frères and Express Dairy Foods (restated in Hoechst at paragraph 86 of the judgment of the Court), because it must now be seen as an integral part of the San Giorgio claim for the repayment of the tax and reimbursement of all directly related benefits retained by the member state.

Domestic authority

I find some support for the conclusions which I have reached in the decisions at all three levels of the domestic hierarchy in Sempra, although I need to sound two notes of caution. The first is that the decisions of Park J and the Court of Appeal must now be read in the light of the detailed, far-ranging and instructive, but in many respects divergent, opinions of the House of Lords in Sempra, which provide a fertile source for academic debate and the future development of the law, but also pose considerable challenges to a lower court in search of a ratio decidendi on the restitutionary aspects of the case. The second is that the hearings before Park J and the Court of Appeal, and the first hearing in the House of Lords on 1 and 2 November 2006, all took place before the ECJ delivered judgment in FII on 12 December 2006. The resumed hearing on 16 May 2007 was not concerned with questions of Community law, and FII was neither cited in oral argument nor referred to by any of their Lordships in their opinions. At all three levels, therefore, the relevant principles of Community law were still those stated by the ECJ in Hoechst. Indeed, the purpose of the hearings was to decide how effect should be given in domestic law to the decision of the ECJ in Hoechst, and they were a continuation of the same proceedings in the ACT Group Litigation (Sempra Metals Limited being the same company, under a new name, as Metallgesellschaft Limited). I should also note that, at the first hearing, the House declined to make a further reference to the ECJ.

At first instance, Park J described his principal task as being to decide the question, left open by the ECJ in Hoechst, whether the interest which the claimants were entitled to recover over the premature tax payment period should be calculated on a simple or compound basis: see paragraph 17. He decided that the interest should be compound, because (put shortly) it was only in that way that the claimants would obtain full (rather than partial) restitution or compensation. In paragraphs 33 to 40 of his judgment, Park J considered and rejected an argument advanced by Mr Glick QC for the Revenue, which drew a contrast between cases (such as those in the Hoechst group litigation) where the company was able to set off against MCT all the ACT which it had paid, and other cases (like many of those in the FII group litigation) where the company had insufficient liabilities to MCT to set off some or all of the ACT. It was common ground that a company with unutilised ACT was entitled to have it repaid by the Revenue, in the light of the decision of the ECJ in Hoechst, but (so it was argued) the only interest which the company could recover on the repayment of tax would be simple interest pursuant to section 35A of the Supreme Court Act 1981. If that were the case, the court should not award interest on a more favourable basis merely because the company had been able to utilise the ACT.

Park J rejected this argument, on the basis that if the Revenue were right that the interest which is payable to a company which recovers unutilised ACT is simple interest, that was the result of a UK statutory provision which was out of line with the true merits of the situation: see paragraphs 34 to 36. He then went on (and this is the relevant point for present purposes) to cast doubt on the Revenue’s view that the only interest payable on a repayment of unutilised ACT would be simple interest pursuant to section 35A. He said (paragraph 37) that he could see “substantial arguments” that, in the case of unutilised ACT as well as utilised ACT, the entitlement to interest for the intervening period does not depend on section 35A, but rather on the principles of Community law expounded by the ECJ in Hoechst. He then continued:

“38.

Suppose that section 35A had never been enacted, and suppose also that the [ECJ] had dealt, not just with the two cases before it, but also with a third case in which the subsidiary had paid ACT, some or all of which it had not utilised. What would the [ECJ] have decided as respects that third case? I am sure that it would have decided that the unutilised ACT should be repaid, and I am equally confident that it would have directed that the Revenue must also pay interest (or an amount equal to interest) for the period between the payment of the ACT and the repayment of it. If interest (or an amount equal to it) had to be paid where the ACT had already been utilised, it follows as the night follows the day that interest (or an amount equal to it) also had to be paid where the ACT had not yet been utilised. The [ECJ] would have required that result regardless of whether United Kingdom law did or did not include a provision like section 35A of the 1981 Act.”

He said that he therefore had his doubts “even about the starting point for this argument which Mr Glick advanced” (paragraph 40).

In the Court of Appeal, the leading judgment was delivered by Chadwick LJ with whom Laws and Jonathan Parker LJJ agreed. The Court upheld the decision and reasoning of Park J, and also endorsed the provisional view which he had expressed in paragraph 37 of his judgment: see paragraph 53, and in particular the last sentence. Accordingly, both the Court of Appeal and Park J expressed the view, based on Hoechst alone, that Community law would require compound interest to be paid on a repayment of unutilised ACT, and that this requirement would prevail over a domestic UK statute which provided for the payment of simple interest only. These views were, of course, obiter, but in my judgment they were prophetic, and fully accord with the principles which the ECJ subsequently stated in FII.

I now turn to Sempra in the House of Lords. I must acknowledge at the outset that all of their Lordships proceeded on the basis, more or less firmly stated, that it is for the national legal system of a member state to lay down the detailed procedural rules governing remedies, and to deal with ancillary questions such as the payment of interest: see per Lord Hope (paragraph 11), Lord Nicholls (paragraphs 59 to 60), Lord Scott (paragraph 133), Lord Walker (paragraphs 160 to 161) and Lord Mance (paragraphs 195 to 198). Furthermore, as I have already pointed out, Lord Nicholls expressed the view (in paragraph 68) that the choice between simple and compound interest should likewise be a matter for national law. I do not read these statements, however, as doing more than reaffirming the oft-repeated jurisprudence of the ECJ, which had most recently been restated in Hoechst at paragraphs 81 and 85 to 86. Those principles make it clear that the national rules must yield, if there is a conflict, to the principle of effectiveness, which in turn requires an analysis of the claimant’s rights derived from Community law to which effect must be given. Thus, in Hoechst itself, the award of interest was not “ancillary”, but was essential to restore the equal treatment guaranteed by Article 52 of the Treaty (paragraph 87). The principle of effectiveness therefore required, as a minimum, that the English rule of law which precluded recovery of interest after the principal sum had been repaid should be disapplied (paragraphs 88 to 89).

If I am right in my analysis of FII, a similar line of reasoning must in my judgment lead to the conclusion that the principle of effectiveness requires interest to be paid on a San Giorgio claim for the repayment of unlawfully levied tax, and that such interest is not ancillary but an integral part of the right to repayment. This conclusion does not in my view conflict with anything in Sempra, but is simply an application in the context of the present case of the developing jurisprudence of the ECJ in this area.

The question whether the choice between simple and compound interest should also be regarded as answered by Community law is not an easy one. On the one hand, the House of Lords in Sempra appears to have proceeded on the footing that the question is at least primarily one for national law to decide, and considered that a further reference to the ECJ would serve no useful purpose: see per Lord Hope at paragraph 14, Lord Nicholls at paragraph 68, and Lord Walker at paragraphs 160 to 161, but see too his observations at paragraphs 181 to 182 emphasising the primacy in this context of the principle of effectiveness. On the other hand, if the guiding principle of Community law is that the member state should not profit from the imposition of the unlawful charge, compound interest would seem to be required as a matter of Community law, because it is only in that way that full effect can be given to the guiding principle. It was clearly the view of Park J and the Court of Appeal in Sempra that compound interest was a requirement of Community law, and some indirect support for that view may also be found in the observations of Mummery LJ in NEC Semi-Conductors v IRC [2006] EWCA Civ 25, [2006] STC 606, at paragraphs 172 to 175.

It is strictly unnecessary for me to resolve this question, because the House decided unanimously in Sempra that an English court has jurisdiction to award compound interest where a claimant seeks restitution of money paid under a mistake. The House further decided by a majority (Lord Hope, Lord Nicholls and Lord Walker) that the claimant’s claim for restitution in respect of utilised ACT ought to be measured by an award of compound interest at conventional rates calculated by reference to the rates of interest and other terms applicable to borrowing by the Government in the market during the relevant period: see per Lord Hope at paragraphs 48 to 50, Lord Nicholls at paragraphs 117 to 118 and 127 to 128, and Lord Walker at paragraph 188. Accordingly, whether the question is seen as one for Community law or national law to determine, the result is the same: compound interest should be paid. I will, however, state my own view, which is that the payment of compound interest is a requirement of Community law and should now be recognised as forming part of the SanGiorgio principle. The precise manner in which compound interest should be paid is, no doubt, a matter for the national court on any view, and the House has now dealt with this in Sempra.

I must finally mention two further cases, one in the ECJ (Thin Cap) and one in the English High Court (RSPCA).

Having dealt at length with FII, I can deal very briefly with Thin Cap. The case concerned the compatibility with Community law of the UK rules on thin capitalisation, and raised questions on remedies very similar to those raised in FII. The Grand Chamber of the ECJ gave its judgment on 13 March 2007, some three months after FII. The juge rapporteur (Lenaerts) and the Advocate General (Geelhoed) were the same as in FII. Both the Advocate General and the Court followed the same general approach as in FII, and I can find no indication that they sought either to modify or to develop that approach: see in particular the Advocate General’s opinion at paragraphs 103 to 107, and the judgment of the Court at paragraphs 109 to 113. The case therefore confirms, if confirmation were needed, that FII represents the current, and carefully considered, jurisprudence of the ECJ on these topics.

RSPCA was heard by Lawrence Collins J in the Chancery Division of the High Court on 11 and 12 December 2006, and he delivered his reserved judgment on 8 March 2007 (by when he had been promoted to the Court of Appeal). The case involved appeals by the Commissioners against two unrelated decisions of the VAT and Duties Tribunal, one released in February 2006 and the other in May 2006. The taxpayer in the former case was the RSPCA, and in the latter case a company called ToTel Limited. In each case the taxpayer’s claim for input tax credit in relation to certain transactions had initially been refused, on grounds of alleged tax avoidance (RSPCA) or suspected carousel fraud (ToTel), but the Commissioners had subsequently changed their policy in the light of various decisions of the ECJ and paid the claims in full together with repayment supplements under section 79 of VATA 1994.

The taxpayers then applied to the Tribunal for interest to be paid under section 84(8) of the 1994 Act, which empowers the Tribunal to award interest “at such rate as [it] may determine”. In the RSPCA case, the Tribunal awarded simple interest, but at an enhanced rate intended to take account of the fact that base lending rates are lower (because they are to be compounded) than they would be for simple interest. In the ToTel case, the Tribunal awarded interest at 3% above base rate, compounded at six monthly intervals. Neither Tribunal made any adjustment in respect of the repayment supplement under section 79, in the light of authority that its purpose was to encourage prompt payment and to act as a spur to efficiency.

The appeals raised a number of important and interesting questions about the nature and extent of the Tribunal’s power to award interest in section 84(8), the relationship of that power to the provisions in section 78 which require simple interest to be paid by the Commissioners in cases of official error, and the nature and relevance (if any) of the repayment supplement which had been paid. All these matters were fully discussed by Lawrence Collins LJ in his lucid and learned judgment. For present purposes, however, the most relevant part of his judgment is that in which he considered, and rejected, the submission by To Tel that Community law required the award of compound interest. The Tribunal had held that compound interest was required, relying on the decision of the Court of Appeal in Sempra. The discussion of this subject by the judge runs from paragraphs 147 to 163. He began his discussion by pointing out that the vindication of directly effective Community rights may sometimes require the payment of interest (as in Marshall (No.2)), but this is not always the case, as ex parte Sutton demonstrates: in the latter case, the ECJ ruled that the question whether the claimant was entitled to interest was a matter for national law to determine, because the payment of interest on arrears of the relevant social security benefit did not constitute “an essential component of the right so defined”. The judge then went on to discuss Hoechst, and pointed out in paragraph 156 that none of the three ECJ cases which he had reviewed “touched upon the question whether, and if so, in what circumstances, Community law required the payment of compound interest”.

In paragraph 157 the judge provided a helpful summary of the Court of Appeal’s decision in Sempra, and then said that an appeal in Sempra had been argued in the House of Lords, but judgment had not yet been given. He continued, in a passage which I should quote in full:

“158.

… The basis of Sempra is that the real vice of the tax regime was the discrimination in the effect on cash-flow, and full compensation for the effect of that discrimination could only be satisfied by an award of compound interest. The claim for payment of interest covering the cost of loss of the use of money paid pursuant to the unlawful domestic measure was not ancillary to some other claim but was the very essence of the claim itself.

159.

But Sempra is not authority for the proposition that every withholding of money due under Community law or loss caused by a breach of Community law requires the award of compound interest.

…

160.

It has long been established that the manner of protection of directly effective Community rights depends on national law, subject to the principles of equivalence and effectiveness. The principle of equivalence is that the same procedural treatment must be given to claims based on Community law as is given to claims based on national law. The principle of effectiveness is that national law should provide effective and adequate redress for violations of Community law, and national law may not render the exercise of rights conferred by Community law virtually impossible or excessively difficult.

…

161.

I accept the Commissioners’ argument that Sempra was a case where the breach of Community law arose not from the payment of the tax itself but from its being levied prematurely, and where the award of interest represented reimbursement of what had been improperly paid and what was essential in restoring the equal treatment guaranteed by Article 43 EC.

162.

Here the appeals concerned the determination of the existence and quantum of the taxpayers’ right to input tax deduction in accordance with [VATA 1994] and the Sixth Directive (matters which the Tribunal does have jurisdiction to determine). Payment of interest on the principal amounts was an “ancillary matter” to be determined under national law under the principle of national procedural autonomy, subject to the principles of equivalence and effectiveness.

163.

I am satisfied that Community law does not require the award of compound interest in these circumstances.”

The hearing before Lawrence Collins J concluded on the same day (12 December 2006) as the ECJ delivered its judgment in FII. There is no indication that it was drawn to his attention before he delivered his reserved judgment. He was also unable to take account of the decision of the House of Lords in Sempra, which was not delivered until 18 July 2007. He distinguished Hoechst, and Sempra in the Court of Appeal, on the footing that the interest there claimed was not ancillary to some other claim, but represented the very essence of the claim itself (paragraph 158). On the strength of FII, I have held that this distinction is not a sound one where interest is claimed on a repayment of tax levied in breach of Community law. I have also expressed the view that no sensible distinction can be drawn between cases where the breach of Community law arises not from the payment of the tax itself but from its being levied prematurely. It follows that I am, with the greatest respect, unable to agree with the views expressed by Lawrence Collins LJ in paragraphs 158 and 161 of his judgment. It is unnecessary for me to say whether I also disagree with his conclusion in paragraph 162, because, assuming my analysis of FII to be correct, it may still be possible to draw a valid distinction between cases (like the present ones) where unlawfully levied tax has to be repaid, and cases (like RSPCA) which concern the right to an input tax deduction, and where there is no dispute about the lawfulness of the VAT which was actually paid. I have heard no argument on this point, and it is not an issue which arises in the present cases, so I prefer to say nothing about it.

Conclusion

In the light of the foregoing discussion, it will be apparent that I would answer this second core question in favour of the claimants. In my judgment Community law does override the otherwise exhaustive and exclusive statutory scheme for the payment of interest on overpaid VAT, where the overpayment arose from breach of directly effective provisions of Community law. Subject to the Commissioners’ secondary defences, therefore, the claimants are entitled to an award of compound interest on the tax which they have overpaid, at any rate from 1 January 1978 when the Sixth Directive came into effect in the UK. It is only in this way that effect can be given to the underlying principle that the UK should not be permitted to profit from the overpaid tax. The requirement that compound interest should be paid is in my judgment a requirement of Community law, but the manner in which it should be worked out is a matter for national law. In Sempra the majority of the House of Lords held that the appropriate measure of interest was a conventional one, calculated by reference to the rates of interest and other terms applicable to government borrowing in the market during the relevant period. Sempra was a case concerned with direct taxation, but I cannot see any reason for applying a different approach to indirect taxation. Accordingly, the claimants would in my judgment be entitled to compound interest calculated along the same general lines as in Sempra.

In view of its importance, I have considered whether to refer this question to the ECJ for a further preliminary ruling, but have decided not to do so for three main reasons. First, the ECJ has re-stated the governing principles in FII, and repeated them in Thin Cap. In those circumstances, it is for national courts to do their best to apply those principles, and a further reference is unlikely to yield much in the way of further guidance. Secondly, although the ECJ has not dealt expressly with the question of interest on overpaid tax, it seems to me that the underlying principle identified in FII leaves little room for doubt about the correct answer to the question. Thirdly, it is open to the Commissioners to appeal against my decision, in which case the question of a further reference can more appropriately be considered by the Court of Appeal.

Introduction

If (as I have now held) the claimants are entitled under Community law to recover compound interest on the VAT which they overpaid, it is common ground that the English law of restitution is in principle capable of providing them with an effective domestic remedy, together with the alternative of a Factortame claim for damages for breach of statutory duty. In this part of my judgment I shall examine the claimants’ restitutionary claims and the secondary line of defences to them relied upon by the Commissioners, namely limitation and change of position.

As I pointed out in FII Chancery at paragraph 245, English law has not yet recognised a single unifying principle in the law of restitution for unjust enrichment, and a number of different causes of action exist, each with their own separate requirements: see in particular DMG at paragraph 21 (Lord Hoffmann). In the present context, two causes of action are potentially relevant: the Woolwich cause of action for the restitution of tax which has been unlawfully demanded, and the cause of action for restitution of tax wrongly paid under a mistake of law which was recognised by the House of Lords in DMG. However, the claimants rely on only the second of these causes of action: see paragraphs 37 to 46 above. No alternative Woolwich-based claim is pleaded, as the Commissioners pointed out in paragraph 67 of their amended defence. In the course of his oral submissions, Mr Conlon QC confirmed that this was a deliberate decision, and the reason for it was that any Woolwich claim would clearly be time-barred. The basic limitation period applicable to restitutionary claims is agreed to be (by analogy) the six year period under section 5 of the Limitation Act 1980 for actions founded on simple contract. The approximate date of the last overpayment of VAT made by Barnes was September 1996, and the approximate date of the last overpayment made by Chalke was April 1999. Chalke did not issue its High Court claim form until 16 March 2007, nearly 8 years after its last payment. Barnes issued its claim form on 7 March 2008, some 11 and a half years after its last payment.

The attraction of the DMG cause of action, from the claimants’ point of view, is that the making of a mistake (whether of fact or law) is an essential ingredient of the cause of action, and it is therefore open to them, on the orthodox interpretation of section 32(1)(c) of the 1980 Act, to take advantage of the extension of the normal limitation period provided by that section. The effect of section 32(1)(c) is that where the action is for “relief from the consequences of a mistake”, the period of limitation does not begin to run until the claimant has discovered the mistake “or could with reasonable diligence have discovered it”. The mistakes relied upon by the claimants for this purpose are the liability mistake, the time limit mistake and the simple interest mistake: see paragraph 43 above.

The first questions that I need to consider are what mistakes were in fact made by the claimants, when they were discovered (or could with reasonable diligence have been discovered), and how they relate to the claim for compound interest. It will then be possible to determine how far (if at all) the claimants are in fact able to rely on section 32(1)(c) as a matter of English domestic law.

Secondly, I will deal with the argument that the payment of the principal amount of the uncapped claims, or alternatively the issue of business brief 22/02, is to be treated as an acknowledgment for the purposes of section 29(5) of the Limitation Act 1980, with the consequence that the six year limitation period began to run afresh on those dates: see paragraph 47 above.

Thirdly, I will consider whether there are any principles of Community law which override or modify the domestic limitation provisions which would otherwise apply. The argument on this question revolved in particular around the principle of Community law which, in general terms, prevents a member state from taking advantage of its own wrong. I will need to examine that principle, and the extent (if at all) to which the claimants can rely on it to prevent time running against them under the 1980 Act.

Finally, I will deal relatively briefly with the defence of change of position. I can be brief because I have already covered this topic at considerable length in section VI of my judgment in FII Chancery (paragraphs 303 to 352).

I record that, as in FII Chancery, the claimants wish to reserve for a higher court any alternative arguments which seek to attack the orthodox view that the running of time for limitation purposes under section 32(1)(c) of the 1980 Act can be postponed only where the mistake relied upon is an essential ingredient of the cause of action: see FII Chancery at paragraph 244.

The mistakes made by the claimants and section 32(1)(c) of the Limitation Act 1980

I have no difficulty in concluding that both Chalke and Barnes made the liability mistake, and (subject to one point which I discuss in paragraphs 137 to 138 below) that the liability mistake caused them to make all of the overpayments of VAT in respect of which they now claim compound interest. Until the ECJ delivered its judgments in Elida Gibbs and Italian Republic, the claimants would naturally have assumed that the relevant provisions of UK VAT law were valid and binding on them, and that the Commissioners’ interpretation of those provisions was correct. They would have paid the resulting output tax both because they assumed it to be lawfully due, and because they would have been exposed to penalties or assessments had they failed to do so. In common with all the other companies enrolled in the VIC GLO, Chalke and Barnes are relatively small businesses, and it would in my view be unrealistic to expect them to have taken the initiative in examining and challenging the legality of either the margin scheme or the treatment of manufacturers’ bonuses.

That this was indeed the position is to a large extent confirmed by the evidence, both written and oral, of Mr Chalke and Mr Barnes. I will consider the position of each company in turn, beginning with the liability mistake and then moving on to the time limit mistake and the simple interest mistake.

Chalke

According to Mr Chalke, it is very unlikely that anybody at Chalke would have been aware of the overpayments before the two decisions of the ECJ in Elida Gibbs and Italian Republic. From a date before 1978 until 2000 the senior person dealing with financial matters at Chalke was a Mr Cox. His responsibilities included VAT and most of the group’s accountancy work. Mr Chalke accepted that Mr Cox would have been aware of each of the ECJ judgments soon after it was delivered, probably through reading the local motor trade press or through contacts with firms of accountants. Mr Chalke also agreed that each judgment had received considerable publicity, of which he himself was personally aware at the time. When Chalke submitted its uncapped claim in June 2003, the letter of claim written on its behalf by a professional tax adviser (Mr Ivan Atkins of Barnard Atkins Limited) said that the company was aware of the Italian Republic mistake relating to demonstrator cars “prior to 30 June 1997 … following industry information and speculation at that time”. The judgment in Italian Republic had in fact been delivered only a few days earlier, on 25 June 1997. The judgment in Elida Gibbs pre-dated it by some 8 months, having been delivered on 24 August 1996. Mr Chalke accepted in cross-examination that the company was aware of both the Italian Republic and the Elida Gibbs liability mistakes by 30 June 1997 at the latest, and he agreed that either he or his father (who had been working in the business throughout the relevant period) would have provided the necessary information to the company’s tax advisers. I therefore find that Chalke had in fact discovered both mistakes by the end of June 1997 at the latest.

Despite the discovery of the mistakes, Mr Chalke says that Chalke continued to pay VAT on the old basis until May 1999 under the margin scheme, and until July 1999 in relation to manufacturers’ bonus payments. The final period for which Chalke has claimed repayment of VAT is the three month period to 30 April 1999. Mr Chalke did not explain why the company continued to pay VAT in this way for some two years after the mistakes had been discovered, and he was not cross-examined on this point. According to the June 2003 letter of claim, however, the company decided to continue its existing VAT accounting procedures until it received definitive instructions from the Commissioners or until legislative changes were introduced. Business briefs 16/97 and 23/97 did not provide definitive guidance, and business brief 23/97 expressly gave traders the option of continuing to use the margin scheme on an interim basis. It also warned that, if the exemption option was chosen, consideration should be given to the effect that this would have “upon their partial exemption position”: if the exemption option was chosen, it would have to apply to all disposals of input tax blocked cars, and not just those sold at a profit. Meanwhile, the existing legislation remained in place, and the position was only clarified for the future when new regulations were introduced with effect from 1 March 2000: see paragraph 20 above.

In these circumstances I accept that it was reasonable for Chalke to continue making payments of output tax on the old basis until at least April 1999, which is the approximate date of the last overpayment Chalke has sought to recover. Despite Chalke’s discovery of the liability mistake in June 1997, I find that the continued payments until April 1999 were still made as a consequence of that mistake, in the sense that but for the original mistake they would not have been made. There was still a sufficient causal connection, in my view, to satisfy the straightforward test of causation for the recovery of payments made under a mistake in the English law of restitution: see FII Chancery at paragraphs 247 to 252 and 264 to 265, and Barclays Bank Limited v W J Simms Limited [1980] QB 677 at 694E where Robert Goff J said, in a passage which has frequently been approved in subsequent cases:

“it is sufficient to ground recovery that the plaintiff’s mistake should have caused him to pay the money to the payee.”

Turning now to the time limit mistake, I see no reason to doubt that Chalke proceeded on the footing that the three year cap was valid and lawful at all material times until the decision of the ECJ in Marks & Spencer I was first drawn to their attention. Mr Chalke thought that he was probably not himself aware of the introduction of the three year cap in 1996, but it would obviously have been well known to the company’s financial advisers, and it was of course reflected in the capped claims which Chalke submitted in July and September 1999 under cover of letters from Mr Cox. In 2000 Mr Cox was succeeded as the Chalke group’s accountant by a Mr Fox, and around the same time Chalke engaged the services of a firm of chartered accountants, Trevor Jones & Co, who specialised in providing assistance on VAT matters to motor dealerships. The ECJ delivered its judgment in Marks & Spencer I on 12 July 2002. Trevor Jones & Co were not slow to realise the implications of the judgment, and on 15 July they issued a VAT alert headed “23 year VAT reclaims !!!”, pointing out that “[t]here now appears to be scope to recover VAT over-paid to Customs in the period from 1973 to 1996 and your business may therefore be entitled to a large repayment!”. This alert would no doubt have been received by Mr Fox, and it was followed in September 2002 by Issue 15 of another Trevor Jones & Co circular called “VAT facts”. This bears a date stamp showing that it was received by Chalke on 23 September 2002. It reported on the introduction by the Commissioners of the retrospective transitional arrangements, pursuant to which Chalke eventually made its uncapped claim on 13 June 2003. According to Mr Chalke, the directors of the company decided in around March or April 2003 that it would be worth submitting a claim, and at the beginning of April 2003 Chalke formally engaged Trevor Jones & Co to make the claim. In the light of this evidence, I find that Chalke was probably aware of the time limit mistake soon after 15 July 2002, and at the very latest by 23 September 2002.

The time limit mistake did not, however, cause Chalke to make any of the overpayments of VAT, all of which were caused solely by the liability mistake. The only relevant effect of the time limit mistake, in my judgment, was to delay the making of any uncapped claim to recover the overpaid VAT until after the ECJ had given judgment in Marks & Spencer I. The three year cap had already been announced in Parliament (although it did not yet have statutory force) when the ECJ gave its judgment in Elida Gibbs in October 1996; and the cap had been enacted in the Finance Act 1997, which received the Royal Assent on 19 March 1997, before the Court gave its judgment in Italian Republic on 25 June 1997. Accordingly, there was no practical likelihood of Chalke seeking repayment of VAT for a period exceeding three years until late July 2002 at the very earliest. In theory, it would have been possible for Chalke to emulate Marks & Spencer by challenging the legality of the cap at some earlier date, but in view of the relatively small amounts at stake, and the relatively small size of Chalke, nobody could seriously suggest that they should have embarked upon such an unequal struggle by themselves.

I come finally to the simple interest mistake. Mr Chalke says that when the uncapped claim was submitted in June 2003 he had no knowledge of any entitlement to claim interest at anything other than the statutory rate under section 78 of VATA 1994. I am sure that is the case, and I would be very surprised if Mr Fox thought any differently at the time. It was only after the judgment of the High Court in Sempra in June 2004, in my view, that the possibility of claiming compound interest might first have appeared seriously arguable; and only after the Court of Appeal had in April 2005 affirmed the judgment of Park J that one might reasonably expect a company like Chalke to have submitted a claim for compound interest. This is indeed what seems to have happened. A file note records that on 1 August 2005 one of the company’s professional advisers spoke to Mr Fox on the subject of compound interest, and on 28 October 2005 Barnard Atkins Limited submitted a formal claim for compound interest on Chalke’s behalf, relying on the recent decision of the Court of Appeal in Sempra.

As with the time limit mistake, it is obvious that the simple interest mistake cannot in itself have caused or contributed to any of the overpayments of VAT. Its only relevance is to explain why a claim for compound interest was not made at an earlier date. That explanation, however, cannot alter the simple fact that the claim for compound interest, when it was made, was a claim for interest (or, more accurately, restitution for the loss of use of money) in relation to the overpayments which had actually been made between 1973 and 1999. In the absence of the overpayments, there would have been no payments of money in respect of which restitution, whether of principal or of interest, could have been claimed.

The importance of this point is that Chalke’s claim in the present proceedings, which was begun by issue of the claim form on 16 March 2007, cannot in my judgment be regarded as a free-standing claim to recover interest under a cause of action which first accrued when the time limit mistake was discovered by Chalke (or, if different, when with reasonable diligence it could first have been discovered). On the contrary, the claim is simply for the one element which remains unsatisfied of Chalke’s restitutionary claim arising from the overpayments. The mistakes which found the cause of action are the liability mistakes which caused the overpayments to be made. Those mistakes had been discovered by Chalke by the end of June 1997 at the latest. Accordingly, as a matter of English domestic law, the extended limitation period under section 32(1)(c) of the 1980 Act for commencement of the restitutionary claim had expired by no later than the end of June 2003. Furthermore, the ordinary six year limitation period for recovery of the most recent overpayments had also expired by around April 2005, the last overpayment having been made approximately six years earlier. Neither the time limit mistake nor the simple interest mistake were mistakes which caused any of the overpayments, so on the orthodox construction of section 32(1)(c) they cannot postpone the running of time under the statute. It follows that, subject to the acknowledgment argument, and subject to the effect (if any) of Community law, Chalke’s claims in restitution are in my judgment time-barred.

Barnes

For essentially the same reasons, the position is in my judgment the same in relation to Barnes. Indeed, Barnes did not issue its claim form until 7 March 2008, and the approximate date of the last overpayments by Barnes was September 1996. It is unnecessary for me to review the evidence in any detail. Mr Barnes accepted in cross-examination that Barnes was aware of each of the liability mistakes by June 1997. Like Chalke, Barnes retained both Barnard Atkins Limited and Trevor Jones & Co. Through its professional advisers, Barnes discovered the implications of the decision of the ECJ in Marks & Spencer I at around the same time as Chalke. Unlike Chalke, Barnes decided not to make a capped claim while the three year cap was in force. The reason for this, as Mr Barnes explained in his oral evidence, is that the making of such a claim was thought to be more trouble than it was worth, and not cost-effective. In due course Barnes submitted its uncapped claim on 28 June 2003, some two weeks later than Chalke. A file note records that Trevor Jones & Co discussed the question of compound interest with Mr Barnes on 14 September 2005, but Barnes did not submit a formal letter of claim until 5 October 2007, after the decision of the House of Lords in Sempra.

As in the case of Chalke, the only mistakes which caused the overpayments of VAT were the liability mistakes. Due to the time limit mistake, no uncapped claim could reasonably have been made by Barnes before late July 2002 at the earliest. Due to the simple interest mistake, the earliest time when Barnes might plausibly have made a claim for compound interest is (say) July 2004, shortly after Park J had given judgment in Sempra. However, the position remained unclear while Sempra made its way to the Court of Appeal and the House of Lords, and it was entirely reasonable, in my view, for Barnes to delay making its formal request for compound interest until October 2007. None of this, though, has any bearing on the limitation position under the 1980 Act, because neither the time limit mistake nor the simple interest mistake caused any of the overpayments of VAT, and neither of them is an ingredient of Barnes’ cause of action in restitution.

The acknowledgment argument and section 29(5) of the Limitation Act 1980

So far as relevant, sections 29 and 30 of the Limitation Act 1980 provide as follows:

“29.

Fresh accrual of action on acknowledgment or part payment

…

(5)

Subject to subsection (6) below, where any right of action has accrued to recover –

(a)

any debt or other liquidated pecuniary claim; or

(b)

…

and the person liable or accountable for the claim acknowledges the claim or makes any payment in respect of it the right shall be treated as having accrued on and not before the date of the acknowledgment or payment.

(6)

A payment of a part of the rent or interest due at any time shall not extend the period for claiming the remainder then due, but any payment of interest shall be treated as a payment in respect of the principal debt.

(7)

Subject to subsection (6) above, a current period of limitation may be repeatedly extended under this section by further acknowledgments or payments, but a right of action, once barred by this Act, shall not be revived by any subsequent acknowledgement or payment.

30.

Formal provisions as to acknowledgments and part payments

(1)

To be effective for the purposes of section 29 of this Act, an acknowledgment must be in writing and signed by the person making it.

(2)

For the purposes of section 29, any acknowledgment or payment –

(a)

may be sent by the agent of the person by whom it is required to be made under that section; and

(b)

shall be made to the person, or to an agent of the person, whose title or claim is being acknowledged or, as the case may be, in respect of whose claim a payment is being made.”

I have already referred (see paragraph 47 above) to Chalke’s allegation that, by virtue of section 29(5) of the 1980 Act, the six year limitation period is to be treated as having accrued on and not before:

The Commissioners’ answer to this allegation, in paragraph 63 of the defence, is two-fold. First, they say that Chalke’s claim for restitution is not a claim for a debt or other liquidated pecuniary sum. If that is right, section 29(5) cannot apply. Secondly, although the Commissioners admit that they have acknowledged and paid Chalke’s statutory claims for the principal sums and interest thereon pursuant to sections 80 and 78 of VATA 1994, they deny that they have either acknowledged or paid any other claims by Chalke, including in particular Chalke’s mistake-based restitutionary claim or any other claim for compound interest.

I will begin with the Commissioners’ second point, because it is in my opinion plainly correct. The payment by the Commissioners of each uncapped claim was a payment in respect of the claimant’s right to repayment under section 80, no more and no less. It cannot be treated as a payment which was made in respect of, or which somehow recognised or acknowledged, the non-statutory common law restitutionary right to compound interest which the claimant now seeks to establish in the present action. All that the Commissioners can sensibly be supposed to have acknowledged by paying the uncapped claim is that the relevant conditions in section 80 for repayment of overpaid VAT had been satisfied. By contrast, the compound interest claims derive from the claimant’s rights under Community law, and have nothing to do with section 80. Furthermore, the compound interest claims were not even made in correspondence until well after the uncapped claims had been paid in full. As I have already said, Chalke made its first claim to compound interest in October 2005, and Barnes did not make its claim until October 2007.

If authority is needed to support this conclusion, it may be found in the decision of Kerr J in Surrendra Overseas Limited v Government of Sri Lanka [1977] 1 WLR 565. That case establishes two propositions in relation to the substantially identical predecessor provisions in section 23(4) of the Limitation Act 1939:

As Kerr J said at 575E, after reviewing the authorities:

“What I draw from these authorities, and from the ordinary meaning of “acknowledges the claim”, is that the debtor must acknowledge his indebtedness and legal liability to pay the claim in question. There is now no need to go further to seek for any implied promise to pay it. That artificiality has been swept away. But, taking the debtor’s statement as a whole, as it must be, he can only be held to have acknowledged the claim if he has in effect admitted his legal liability to pay that which the plaintiff seeks to recover. … In effect, “acknowledges the claim” means that the statement in question must be an admission of that indebtedness which the plaintiff seeks to recover notwithstanding the expiry of the period of limitation.”

Kerr J went on to apply the same reasoning to the making of payments in respect of a claim, and said at 576F:

“A part-payment, like an acknowledgment, can only revive the cause of action and start time running afresh if it provides evidence in the form of an admission by the debtor that the debt remains due despite the passage of time. This is consonant with the authorities.”

Application of these principles to the present case leaves no room for doubt about the answer. The payment of the uncapped claims did not involve any acknowledgment by the Commissioners that any further sum was due to Chalke or Barnes in respect of the overpaid VAT, and the only claim which the payment acknowledged was the statutory claim under section 80. In his oral submissions, Mr Conlon QC wisely did not press the alternative contention that business brief 22/02 could somehow be regarded as an acknowledgment, and I therefore say nothing about it.

This conclusion also makes it unnecessary for me to consider whether the claimants’ restitutionary cause of action is a right of action to recover a “debt or other liquidated pecuniary claim” within the meaning of section 29(5)(a). However, as the question was fully argued I will express my views on it.

In Amantilla Limited v Telefusion Plc [1987] 9 Con LR 139 (“Amantilla”), His Honour Judge John Davies QC, sitting as an Official Referee, held that a quantum meruit claim by a builder for payment of “a reasonable sum” in respect of extra building and shop fitting works carried out for the defendant was a liquidated pecuniary claim within section 29(5)(a), because it was a sufficiently certain contractual description for its amount to be ascertainable by the court. As the judge pointed out at 144 to 145, the court could determine what a reasonable sum would be if the parties were unable to agree, and he contrasted a claim for unliquidated damages where

“the function of the court is not one of interpreting the contract but of deciding, in accordance with legal principles, what compensation, if any, should be paid to redress any harm done by its breach.”

In Dwr Cymru (Welsh Water) v Carmarthenshire County Council [2004] EWHC 2991 (TCC), Jackson J decided that a claim for damages in tort falls outside the scope of section 29(5)(a). Having reviewed the legislative history of section 29 and the scanty case law, including Amantilla, he observed in paragraph 45 that in all of the cases the claim which was revived by acknowledgment “was either a claim made under a contract or else a claim of a similar nature”. In paragraph 49 he stated his conclusion that a claim for damages in tort falls outside the section and gave four reasons, of which I shall cite the second and third:

“2.

The phrase “liquidated claim” connotes a claim for a specific sum or, alternatively, for a sum which can be readily and precisely ascertained. None of the authorities reviewed in Part 3 of this judgment is inconsistent with this proposition. A claim for damages in tort is by definition not a liquidated claim. The assessment of damages in tort involves the application of a set of common law rules to the particular circumstances of the case. The application of those rules may be relatively straightforward in some instances, but that does not make the claim a liquidated one.

3.

The global phrase “any debt or other liquidated pecuniary claim” suggests a claim which is due to be paid pursuant to some contractual or similar obligation. The words on their natural meaning do not connote damages or compensation which the law requires to be paid by someone who has acted in breach of an obligation or duty.”

In the light of this guidance, I ask myself whether the restitutionary claims for compound interest in the present case fall within section 29(5)(a). With some hesitation, I consider that they do. It is true that the interest claimed is not a sum due pursuant to any contractual or quasi-contractual obligation, but rather represents the measure of a claim for loss of use of money mistakenly paid to the Commissioners in the form of unlawfully exacted VAT. However, I can see no good reason why the obligation on the Commissioners to repay the principal sums, whether under section 80 or pursuant to the San Giorgio principle, should not be regarded as giving rise to a debt, or at least to a liquidated pecuniary claim. The amounts involved are fixed and certain, and there is a legal liability to repay them. The only difference from a contractual claim is that the source of the obligation to repay is found, not in a contract, but in a statute or in the requirements of Community law. If that is right, it then seems to me that it would be artificial to regard the interest claims in a different light. They are wholly dependent on the right to recover the principal sums, and their quantification takes the principal sums as its starting point. The claims are restitutionary in nature, not compensatory, and following Sempra their quantum falls to be calculated on a conventional basis which the court can apply whether or not the parties agree. In short, the claims appear to me more closely akin to the quantum meruit claim in Amantilla than to a claim for damages in tort or contract.

For these reasons I think that the present claims are in principle capable of falling within section 29(5), but as I have already explained I do not see how the payment of the uncapped claims could possibly amount to an acknowledgment or part payment for the purposes of the subsection.

Does Community law have any effect on the limitation defence?

Mr Conlon’s next argument was founded on the principle of Community law which, at least for some purposes, prevents a member state from relying on its own wrong. He argued that the principle undoubtedly exists, whether it is properly to be regarded as a separate principle or merely as an aspect of the principle of effectiveness, and that the UK breached it by introducing the three year cap. The result of the breach, he said, is that the running of time under section 32(1)(c) of the 1980 Act was suspended from the date of the introduction of the cap at least until the ECJ gave its judgment in Marks & Spencer I on 11 July 2002, and time began to run afresh from the end of the period of suspension. It is unnecessary to say precisely when the period of suspension ended, because it could not have been earlier than the judgment in Marks & Spencer I, and both Chalke and Barnes began their actions within six years of that date.

Mr Conlon also relied on the government’s response to the decision of the House of Lords in Fleming. Section 121(1) of the Finance Act 2008, which by virtue of subsection (4) was treated as having come into force on 19 March 2008, provides as follows:

“(1)

The requirement in section 80(4) of VATA 1994 that a claim under that section be made within 3 years of the relevant date does not apply to a claim in respect of an amount brought into account, or paid, for a prescribed accounting period ending before 4 December 1996 if the claim is made before 1 April 2009.”

It would be strange, submitted Mr Conlon, if the claimants’ existing claims were time-barred, when Parliament has expressly provided a window of opportunity until 1 April 2009 for new claims to be brought under section 80(4) of VATA 1994 which are freed from the three year cap and may therefore claim recovery of overpaid VAT back to 1973. Mr Conlon further submitted, in the course of his reply, that the effect of the judgments of the majority of the House in Fleming was that the breach of Community law occasioned by the cap remained unremedied in domestic law until the enactment of section 121. Accordingly, it was not open to the UK to rely on domestic limitation defences to claims for VAT overpaid before 4 December 1996 while the breach remained unremedied. Both Chalke and Barnes issued their claims before section 121 came into force, so the Commissioners’ section 32(1)(c) defence, assuming it to be otherwise established, must be disapplied.

These submissions were attractively advanced by Mr Conlon, but I am unpersuaded by them. Let it be assumed that there is a principle which prevents a member state from taking advantage of its own wrong, and that the enactment of the three year cap breached that principle: what then? The unlawfulness of the cap under Community law was established in Marks & Spencer I, and in response to the judgment the UK introduced transitional arrangements which (as we now know, thanks to Fleming) did not go far enough, but were nevertheless sufficient to enable both Chalke and Barnes to make their uncapped claims dating back to 1973 which were paid in full. The claimants therefore do not need to take advantage of section 121 of the Finance Act 2008, and they have not been prejudiced in any way by the UK’s failure until 2008 to legislate to reverse the cap in its application to accrued claims.

The compound interest claims which the claimants are now advancing have nothing whatever to do with the cap, nor are they made under section 80 of VATA 1994. The claims seek rather to vindicate the claimants’ directly effective Community law right to restitution of the overpaid VAT pursuant to the San Giorgio principle, by means of the domestic cause of action for the recovery of tax wrongly paid by mistake. Such a claim could in theory have been started by the claimants at any time, whether or not the cap was in place. Furthermore, any such claim would have enjoyed the benefit of the very generous extended limitation period provided by section 32(1)(c), although to obtain that benefit the claimants would of course have had to overcome the argument (while the cap was in place) that section 80 provides an exhaustive and exclusive remedy for the recovery of overpaid VAT. What is more, the unlawfulness of the cap under Community law in relation to accrued claims was established by the judgment of the ECJ in Marks & Spencer I on 11 July 2002, which still left approximately one year of the extended limitation period within which the claimants could have started proceedings: it will be remembered that Italian Republic was not decided until 25 June 1997, and it was only on 21 July 1997 that the Commissioners issued business brief 16/97 dealing with the implications of Elida Gibbs for the VAT treatment of manufacturers’ bonuses.

The real problem, in my judgment, which confronts the claimants is nothing to do with the three year cap, but rather that the developments in Community law and domestic law which made the present claims seem worthwhile (including in particular the judgments of the ECJ in FII and the House of Lords in Sempra) came after the extended limitation periods had expired. The claimants seek to characterise this realisation as a mistake (the simple interest mistake), but it does not assist them to do so because, as I have explained, the simple interest mistake was not an operative mistake for the purpose of the present claims. The only operative mistakes were the liability mistakes, and they either had been discovered, or could with reasonable diligence have been discovered, by July 1997 at the latest. It is no part of the function of the law of limitation to provide that time should start to run afresh whenever a development in the law brings the possibility of making a new type of claim into the foreground.

It is apposite in this connection to have in mind the “very illuminating general discussion” (as Lord Walker termed it in Fleming at paragraph 58) by Advocate General Jacobs in Fantask A/S v Industriministeriet (Case C-188/95), [1997] ECR I-6783, (“Fantask”) where he emphasised at paragraph 71 of his opinion “the need for states and public bodies to plan their income and expenditure and to ensure that their budgets are not disrupted by huge unforeseen liabilities”, and in paragraph 72 “the need, recognised by all legal systems, for a degree of legal certainty for the state, particularly where infringements are comparatively minor or inadvertent”.

Advocate General Jacobs made these comments in the context of the question referred by the Danish national court which asked (as Lord Walker paraphrases it in paragraph 57) “whether, when a member state has failed to transpose a Council Directive correctly, EU law prevents that member state from relying on a national limitation period to resist an action for the recovery of charges levied in breach of the Directive, and continues to do so as long as the transposition has not been correctly effected”. In its earlier decision in Emmott v Minister for Social Welfare (Case C-208/90), [1993] ICR 8, (“Emmott”) the ECJ had given an answer to a similar question which, read without reference to the extreme facts of the case, appeared very wide and unqualified. In particular, the Court had said in paragraphs 21 to 23 of its judgment in Emmott:

“21.

So long as a directive has not been properly transposed into national law, individuals are unable to ascertain the full extent of their rights. That state of uncertainty for individuals subsists even after the Court has delivered a judgment finding that the Member State in question has not fulfilled its obligations under the directive and even if the Court has held that a particular provision or provisions of the directive are sufficiently precise and unconditional to be relied upon before a national court.

22.

Only the proper transposition of the directive will bring that state of uncertainty to an end and it is only upon that transposition that the legal certainty which must exist if individuals are to be required to assert their rights is created.

23.

It follows that, until such time as a directive has been properly transposed, a defaulting Member State may not rely on an individual’s delay in initiating proceedings against it in order to protect rights conferred upon him by the provisions of the directive and that a period laid down by national law within which proceedings must be initiated cannot begin to run before that time.”

In Fantask Advocate General Jacobs subjected these apparently unqualified propositions to a sustained critique, and said in paragraphs 68 to 70 of his opinion:

“68.

The Governments’ arguments concerning the financial consequences of Emmott also raise an important point of principle. As they correctly observe, the Emmott ruling, if read literally, would expose Member States to the risk of claims dating back to the final date for implementing a Directive …

69.

Moreover, such liability would arise even in the event of a minor or inadvertent breach. Such a result wholly disregards the balance which must be struck in every legal system between the rights of the individual and the collective interest in providing a degree of legal certainty for the state. That applies particularly to matters of taxation and social security, where the public authorities have the special responsibility of routinely applying tax and social security legislation to vast numbers of cases.

70.

The scope for error in applying such legislation is considerable. Regrettably that is particularly so in the case of Community legislation, which is often rather loosely drafted … The recent Argos and Elida Gibbs cases provide a further example of how huge repayment claims can arise from a comparatively minor error in implementing a Community tax Directive. In those cases the court found that the fiscal treatment accorded by the United Kingdom to voucher transactions – used extensively in that Member State as a business promotion technique – was not in accordance with the Sixth VAT Directive. The resultant repayment claims are reported to be between £200 and £400 million.”

Advocate General Jacobs went on to say, in paragraphs 85 and following of his opinion, that the solution adopted by the Court in Emmott was justified by the particular circumstances of that case, and as an application of the principle of effectiveness. He said that similar rulings based on principles of equity and good faith could be found in the case-law of national courts, and cited as an example the decision of the English Court of Appeal in the Unilever case (R v IRC, ex parte Unilever Plc (1996) 68 TC 205, [1996] STC 681) where it was held that it would be an abuse of power for the Revenue to rely on a two-year time limit for claiming losses when they had not done so previously. He said in paragraph 88 that, so understood, the Emmott principle, although confined to “very exceptional circumstances”, continued to provide an important safeguard.

As Lord Walker noted in paragraph 58 of his opinion in Fleming, the ECJ in Fantask did not comment expressly on these parts of the Advocate General’s opinion, “but its judgment was not inconsistent with the Advocate General’s thinking”; furthermore, the importance of maintaining stability in public finances was acknowledged by the ECJ in Marks & Spencer I at paragraph 41. The ECJ did, however, hold in paragraph 51 of its judgment that its earlier decision in Emmott “was justified by the particular circumstances of that case, in which the time-bar had the result of depriving the applicant of any opportunity whatever to rely on her right to equal treatment under a Community Directive”, and in paragraph 52 the Court affirmed that the principles of equivalence and effectiveness were the governing criteria.

In the light of these principles, can it be said that the introduction by administrative announcement and subsequent enactment of the three year cap breached the principles of equivalence or effectiveness in such a way as to prevent the Commissioners from relying on the expiry of the extended limitation period in section 32(1)(c) as a defence to the present claims? In my judgment the answer to this question can only be in the negative. No question of breach of the principle of equivalence arises, because the cap applied alike to domestic claims for the recovery of overpaid VAT and to claims based on breaches of Community law. So far as the principle of effectiveness is concerned, for the reasons which I have already given the cap did not impinge at all on the present compound interest claims, and even if that is wrong, its unlawfulness under Community law had been established by July 2002, leaving a period of about 1 year before the expiry of the extended limitation period. In those circumstances it cannot sensibly be said that the exercise by the claimants of their Community law rights had been rendered either virtually impossible or excessively difficult. The only thing that was unlawful about the cap, as a matter of Community law, was the absence of any (let alone adequate) transitional arrangements for accrued claims; but on any view a period of approximately one year should have been more than adequate to remedy that deficiency. As Lord Neuberger said in Fleming at paragraph 84:

“On the basis of the limited argument and evidence we have received on the point, it appears to me that the duration of a transitional period required in the present case to satisfy Community law would have been between 6 and 12 months. Six months was the minimum period thought by the ECJ to be appropriate in Grundig II, where a time limit was retrospectively reduced from 5 or 10 years to 3 years. At the other extreme, albeit without the benefit of detailed argument, I find it hard to conceive of circumstances which would require a transitional period of more than a year, at least where a time limit is retrospectively created or reduced in relation to commercial tax claims.”

It is important to emphasise that I am here examining the principle of effectiveness not in relation to the lawfulness of the three year cap as such, nor in relation to the question for how long it has to be disapplied by the English courts, but merely in relation to the question whether it precludes the Commissioners in the present cases from relying on the expiry of the relevant limitation period under English law. In my judgment the principle of effectiveness does not have that result, with the consequence that the limitation defence succeeds and the claimants’ restitutionary claims are time-barred.

Change of position

It is only necessary to consider the defence of change of position if I am wrong in my conclusion that the restitutionary claims are time-barred. This section of my judgment therefore proceeds on the assumption that the restitutionary claims were started in time. I also take as my starting point the analysis of the second core question in section VI above (paragraphs 76 to 125) where I have concluded:

I have already set out in paragraph 54 above the way in which the defence is pleaded in paragraphs 61A and 61B of the Commissioners’ amended defence. The amendment to plead the defence was unopposed, and I gave permission for it to be made at the beginning of the trial. The lateness of the amendment is no doubt explained by the fact that I handed down my judgment in FII Chancery on 27 November 2008. In that judgment I dealt with the defence of change of position at considerable length: see paragraphs 303 to 352. In paragraph 445 I summarised my conclusion as being “that a defence of change of position is in principle available to the Revenue in respect of any mistake-based restitutionary claims which go beyond San Giorgio claims, although not in respect of Woolwich claims, and that where the defence is available it is likely to succeed on the facts”.

As I explained in FII Chancery at paragraph 304, the Revenue accepted for the purposes of that case that the defence was not open to the Revenue in respect of San Giorgio claims, because to allow such a defence would breach the Community law principle of effectiveness. The Revenue’s express acceptance of that proposition was confined to Woolwich claims, because they submitted that the Woolwich cause of action was the only restitutionary remedy needed in English law to give effect to San Giorgio claims. Since I rejected that submission, and held that the domestic cause of action in mistake-based restitution was also needed for that purpose, it seemed to me that the logic of the Revenue’s concession in relation to Woolwich claims must also extend to mistake-based restitution claims in so far as they are needed to give full effect to San Giorgio claims, but no further. It followed that the availability of the defence was only a live issue in relation to the restitutionary claims in FII Chancery which were not to be classified as San Giorgio claims.

In the present case, by contrast, the Commissioners do not accept (either expressly or implicitly) that change of position is unavailable as a defence to a San Giorgio claim for the recovery of overpaid VAT. Mr Swift pointed out that at least one defence to claims for repayment of VAT or customs levies has already been recognised by Community law, namely unjust enrichment of the taxable person where the charge in question has been passed on to customers: see FII Chancery at paragraph 306, and Weber’s Wine World v Abgabenberufungskommission Wien (Case C-147/01), ECR I-11365, at paragraph 94. Mr Swift submitted that the guiding principle in this area was effectiveness, and that a nuanced, context-specific, approach was needed, rather than a blanket denial of a change of position defence to all San Giorgio claims for the repayment of wrongly levied VAT.

I am unable to accept this submission. In Weber’s Wine World, the ECJ emphasised that the unjust enrichment defence is the only one which the case-law of the Court has recognised, and held that it must be interpreted restrictively. It is worth citing what the Court said at paragraphs 93 to 95:

“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 …

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 …

95.

As that exception is a restriction on a subjective right derived from the Community legal order, it must be interpreted restrictively, taking account in particular of the fact that passing on a charge to the consumer does not necessarily neutralise the economic effect of the tax on the taxable person.”

In my judgment that approach leaves no room for the possible availability of a change of position defence to San Giorgio claims on a case by case basis, and to allow the defence would not recognise, but would infringe, the principle of effectiveness. I find further support for this conclusion in Fantask, where the ECJ held that Denmark could not refuse to make a repayment of unlawfully levied indirect taxes (in the form of charges levied on the registration of companies and on increases in their capital) in reliance on a “settled law” defence available under Danish law. As the Court said in paragraph 40, which I quoted in FII Chancery at paragraph 308 but will for convenience repeat:

“40.

A general principle of national law under which the courts of a Member State should dismiss claims for the recovery of charges levied over a long period in breach of Community law without either the authorities of that State or the persons liable to pay the charges having been aware that they were unlawful, does not satisfy the above conditions [i.e. the principles of equivalence and effectiveness]. Application of such a principle in the circumstances described would make it excessively difficult to obtain recovery of charges which are contrary to Community law. It would, moreover, have the effect of encouraging infringements of Community law which have been committed over a long period.”

Since I have held that the claimants’ compound interest claims come within the scope of the San Giorgio principle, and since (in contrast to FII Chancery) no wider domestic restitutionary claims are advanced, it follows that the Commissioners are in my judgment unable to rely on a change of position defence to the present claims. In view of that conclusion, and because the factual ingredients of the defence (assuming it to be available) were the subject of only incomplete evidence and brief argument before me, I do not propose to go on to express any views on the merits of the defence in the context of the present claims. Any views which I did express would not only be doubly obiter, but could also be no more than provisional at this stage. The question can be revisited, with the benefit of fuller evidence and argument, if and when this litigation progresses to a hearing on quantum.

For now, I merely record that the Commissioners adduced evidence in support of the defence in the form of witness statements by Mr Peter Symons, who is head of the financing branch of the Debt and Reserves Management Team of the Macro Economic and Fiscal Policy Directorate in HM Treasury, and Mr Mark Neale, who is the Managing Director of the Budget, Tax and Welfare Directorate at the Treasury. Mr Neale was called to give evidence and verified his witness statement, but was not cross-examined by Mr Conlon. His evidence was to very similar effect to the evidence given by Mr Ramsden in FII Chancery (see paragraphs 349 to 352). It was agreed between the parties that Mr Symons need not attend the hearing, so the claimants have had no opportunity to test his evidence. I therefore say no more about it at this stage.

Introduction

I have already summarised how Chalke’s damages claim is pleaded, and referred to the four alleged breaches of Community law upon which reliance is placed: see paragraphs 48 and 49 above. The breaches are pleaded as follows in paragraph 31 of Chalke’s amended particulars of claim:

“31.

The Commissioners have committed the following breaches of EC law:

(a)

in breach of the claimant’s directly effective EC law rights under Articles 11 and 13 of the [Sixth Directive] (and, prior to the entry into force of the Sixth Directive, under Article 2 of the [First Directive]), the United Kingdom enacted and maintained, and the Commissioners enforced, legislation which imposed VAT on manufacturers’ bonus payments and which did not exempt from VAT onward sales of demonstrator cars on the purchase of which input tax recovery had been blocked; and/or

(b)

in breach of the Principle of Effectiveness in relation to the breach described at subparagraph (a) above, the United Kingdom enacted and maintained in section 80 of VATA 1994, and the Commissioners enforced, a three-year limitation period introduced retrospectively and with no transitional period in respect of rights which had accrued prior to 18 July 1996; and/or

(c)

the Commissioners repaid the Principal Sums with simple interest only, thereby failing to pay compound interest on that sum at a commercial rate and consequently acting in breach of the Principle of Effectiveness and/or the Principle of Equivalence; and/or

(d)

in so far as section 78(3) VATA 1994 constitutes a statutory bar to the payment of compound interest at a commercial rate, the Commissioners enacted and maintained in force that provision in breach of the Principle of Effectiveness and/or the Principle of Equivalence. But for any statutory bar contained in section 78(3), following the decision of the House of Lords in Sempra, the claimant would be entitled to compound interest.”

In a series of decisions since the Brasserie du Pêcheur and Factortame case, the ECJ has consistently stated that in order to render a member state liable in damages for a breach of Community law three conditions must be satisfied:

In FII Chancery I discussed the rather limited guidance given by the ECJ on the question of what constitutes a sufficiently serious breach, and reviewed the decision of the House of Lords in R v Secretary of State for Transport, ex parte Factortame Limited (No. 5) [2001] 1 AC 524 (“Factortame No. 5”), which is the leading domestic authority on the subject: see paragraphs 357 to 375. The claimants in the present case were content to adopt my analysis of the subject in FII Chancery (transcript, day 2, page 9), and I will not repeat it here. For convenience, however, I will set out the two key paragraphs from the judgment of the ECJ in FII:

“213.

In order to determine whether a breach of Community law is sufficiently serious, it is necessary to take account of all the factors which characterise the situation brought before the national court. Those factors include, in particular, the clarity and precision of the rule infringed, whether the infringement and the damage caused were intentional or involuntary, whether any error of law was excusable or inexcusable, and the fact that the position taken by a Community institution may have contributed towards the adoption or maintenance of national measures or practices contrary to Community law …

214.

On any view, a breach of Community law will clearly be sufficiently serious if it has persisted despite a judgment finding the infringement in question to be established, or a preliminary ruling or settled case-law of the court on the matter from which it is clear that the conduct in question constituted an infringement …”

I also derive assistance from the discussion of the subject by the Court of Appeal in Byrne, which was not reported until after I had handed down my judgment in FII Chancery. The only reasoned judgment was given by Carnwath LJ, with whom Keene and Waller LJJ agreed. In paragraph 35 Carnwath LJ cited Lord Slynn’s summary of the effect of the case-law in Factortame No.5, and in paragraph 36 he referred to the well-established principles by reference to which liability is to be decided. He then continued:

“37.

I agree, however, that the application of those principles varies within the context, as Lord Slynn’s summary illustrates. An important consideration is the degree of discretion left to the member state. In that respect the Brasserie du Pêcheur and Dillenkofer cases can be seen as opposite ends of a spectrum. In Dillenkofer [Dillenkofer v Federal Republic of Germany (Joined Cases C –178, 179, 188-190/94), [1997] QB 259] there was little doubt what the Directive required. The German Government had simply delayed implementation, with the result that direct loss was suffered by those who would have enjoyed its protection in the interim. In those circumstances, it was held that mere infringement was “sufficiently serious” to found liability. Although in theory this was an application of the Brasserie du Pêcheur principles, use of such apparently opprobrious terms as “manifest disregard” may distort the enquiry. Culpability may be relevant; but state liability does not necessarily depend on a successful witch-hunt.”

In paragraph 45 of his judgment, Carnwath LJ said that the “sufficiently serious” criterion laid down by the ECJ is not a hard-edged test, and it requires a value judgment by the national court, taking account of the various factors summarised by the ECJ.

I would emphasise, before going any further, that there is no pleaded allegation that any of the breaches relied upon by the claimants was intentional, or that the Commissioners acted at any relevant time in bad faith.

As to the third Factortame condition of liability, it was common ground that the existence of the necessary “direct causal link” between the breach and the loss or damage sustained by the claimant may be established by the application of a simple “but for” test of causation.

It was also common ground that a Factortame damages claim is to be classified under English domestic law as an action for breach of statutory duty: see the speech of Lord Diplock in Garden Cottage Foods Ltd v MilkMarketing Board [1984] AC 130 at 141C-F. In R v Secretary of State for Transport, ex parte Factortame Limited (No.7) [2001] 1 WLR 942, His Honour Judge John Toulmin QC, sitting in the Technology and Construction Court, held that such an action is “an action founded on tort” within the meaning and for the purposes of section 2 of the Limitation Act 1980: see his judgment at paragraphs 143 to 158. Both sides accepted the correctness of that decision. It follows that the limitation period applicable to the claimants’ damages claims is the normal period of six years applicable to tort claims, that is to say the period of “six years from the date on which the cause of action accrued”.

With this introduction, I will now consider in turn the four breaches relied upon by the claimants.

The breaches of Articles 11 and 13 of the Sixth Directive

These breaches are admitted by the Commissioners, who also admit that the relevant provisions of the Sixth Directive confer rights on individual taxpayers. They deny, however, that the breaches were, either separately or together, sufficiently serious. The Commissioners also accept that the breaches caused the claimants to be deprived of the use of the principal sums, i.e. the VAT which they overpaid from 1 January 1978 onwards. I will deal with the position before 1 January 1978, and the question whether Article 2 of the First Directive conferred directly effective rights on the claimants, in the final section of this judgment.

I agree that these breaches cannot be regarded as sufficiently serious, whether they are viewed separately or together. I need not spend long on this point, because Mr Conlon wisely did not seek to argue the contrary. He made it clear that he relied on these breaches only as setting the scene for, or as background to, the subsequent breach by the UK in enacting and maintaining the three year cap. I therefore confine myself to a few brief comments.

The breaches of Article 11

The problem here was that the UK misinterpreted the requirements of Article 11 and of the national legislation which had been introduced to implement it. The national legislation was, in all material respects, compatible with the Sixth Directive. It was only the decision of the ECJ in Elida Gibbs which established that the UK’s interpretation of the legislation was incorrect. However, the fact that Advocate General Fennelly had in his opinion strongly supported the UK’s position shows that the previous case-law of the Court was anything but clear. I have also referred to the opinion of Advocate General Jacobs in Fantask, where he used Elida Gibbs as an example of “how huge repayment claims can arise from a comparatively minor error in implementing a Community Tax Directive”: see paragraph 166 above.

The breach of Article 13B(c)

I have described the operation of the margin scheme earlier in this judgment. It was a pragmatic response by the Commissioners to the problems posed by possible non-business use of demonstrator cars, in circumstances where the imposition of an input tax block on the purchase of such cars was in itself unobjectionable, whether or not the cars were in fact used for non-business purposes: see the decision of the ECJ in the Royscot Leasing case and paragraphs 13 to 20 above. The margin scheme was operated without challenge for many years, and it was only the decision in Italian Republic which showed it to be conceptually flawed as a matter of Community law. The solution which was eventually adopted by the UK in response to the judgment, after consultation with the motor trade, in the new regulations introduced in 1999, produced a result which was in substance very similar to the margin scheme, but without the conceptual blemish. The input tax block was removed, with the result that a dealer who sells a demonstrator car is now liable to pay output tax on the full amount of the consideration. However, the dealer can now deduct input tax on the original purchase price of the vehicle, with the result that the dealer is again, in effect, accounting for VAT on the “margin”, that is to say the difference between the sale price and the original purchase price. Consistently with this, as Mr Easton says in paragraph 16 of his witness statement, the Commissioners’ view was that the effect of the change in the legislation would be broadly revenue neutral.

Because the relevant breaches were not sufficiently serious, it follows that the claim for damages under this head must fail. It is important to appreciate, however, that it was these breaches, and these breaches alone, which caused the claimants to make the overpayments of VAT in respect of which they now claim compound interest. It was the payments of VAT which caused the claimants loss, by depriving them of the use of money which they would otherwise not have been obliged to pay. Accordingly, the cause of action for breach of statutory duty accrued as and when each payment of VAT was made. The present claims for compound interest are part of the remedy which the claimants seek to obtain as compensation for the breaches, but they are wholly dependent on the same causes of action. There is no intermediate stage at which the claimants can say they sustained a fresh loss which for the first time gave them a right to claim compound interest. It follows, in my view, that any claims for compensation arising from the overpayments of VAT, including the present claims for compound interest, are prima facie time-barred by section 2 of the Limitation Act 1980, because all of the overpayments were made more than six years before the commencement of the present proceedings.

Mr Conlon tried to get round this difficulty by arguing that the Commissioners have been in continuing or repeated breach of statutory duty by failing to pay compound interest, but in my judgment such an analysis is unsustainable. It is wrong in principle, because it seeks to characterise an alleged failure to make full reparation for an admitted breach of duty as creating a new cause of action in respect of the further compensation which is claimed. If that were right, as counsel for the Commissioners pointed out, a defendant who seeks in good faith to compensate a claimant, but does not pay everything to which the claimant says he is entitled, would put himself in a worse position by doing so than by paying nothing. The true analysis is that the alleged underpayment may entitle the claimant to sue for further compensation pursuant to the original cause of action. What it cannot do is give the claimant the benefit of a fresh cause of action and a fresh limitation period.

The relevant distinction was clearly drawn by Colman J in a case involving alleged breaches of Articles 81 and 82 EC, Arkin v Borchard Lines Limited and others [2000] EuLR 232 at 242D, where he said this:

“In this connection it is important to recognise that there are different ways in which such a breach may cause damage. Thus, an isolated event amounting to such a breach may cause a chain of damage development commencing when the effects of the breach first affect the claimant, and those [effects] may continue for a long period of time. If that period commences prior to the cut-off date for the purposes of a period of limitation, the claim will prima facie be time-barred notwithstanding that the effects of the breach may continue beyond that date. The position is similar to a claim in tort for negligence.

By contrast, there may be a continuing or repeated breach of statutory duty, over an extended period, such as an unlawful emission of toxic fumes which continues to affect and injure those exposed to it over the whole period of that breach. In such a case, if the limitation cut-off date occurs during the period, the claimant’s cause of action for the damage suffered after the date in question will not be time-barred. He is then in the position where he can identify a continuing or repeated breach of duty within the limitation period: see Crumbie v Wallsend Local Board [1891] 1 QB 503 at 508, per Lord Esher MR, applying the principles for identifying a cause of action in a continuing breach situation articulated by the House of Lords in Darley Main Colliery Co v Mitchell (1886) 11 App Cas 127.”

In my judgment it is clear that each overpayment of VAT was an isolated event which caused loss to the claimant, and the claimant’s cause of action in respect of each such payment accrued immediately it had been made.

In support of his argument that the breaches were properly to be characterised as continuing, Mr Conlon relied on the decision of Sir Andrew Morritt V.-C. in Phonographic Limited v Department of Trade and Industry [2004] EWHC 1795 (Ch), [2004] 1WLR 2893. In that action the claimant was a licensing body which owned the copyright in the sound recordings of record companies. On 10 March 2003 it instituted proceedings against the DTI on the ground that it was in breach of its Community law obligations arising under Article 8(2) of Council Directive 92/100/EEC, whereby if a phonogram was published for commercial purposes or was broadcast the performer and producer had a right to be paid a single equitable remuneration by the user. It was alleged that sections 67 and 72 of the Copyright, Designs and Patents Act 1988, which permitted the playing of sound recordings in circumstances which would otherwise constitute an infringement of copyright provided that certain conditions were satisfied, were an unlawful limitation on the right to a single equitable remuneration. The trial of certain preliminary issues was directed, including the question whether the claimant’s cause of action arose on 1 July 1994, that being the date by which the UK should have implemented the Directive, and was therefore statute-barred by section 2 of the Limitation Act 1980.

Sir Andrew Morritt V.-C. dealt with this question in paragraphs 11 to 28 of his judgment. As in the present case, it was common ground that the claim was one “founded on tort” within section 2 of the Limitation Act 1980. It was also common ground that a cause of action accrued on 2 July 1994. The issue between the parties was whether that was the only cause of action, or whether a fresh cause of action accrued on each occasion when PPL suffered consequential damage as a result of the Crown’s continuing failure to implement the Directive. On the basis that the latter analysis was correct, PPL claimed to be entitled to recover damage sustained within the six years immediately preceding the issue of proceedings on 10 March 2003.

The Vice-Chancellor referred to the passage in Arkin v Borchard Lines Limited which I have cited, and also to the decision of the House of Lords in Homburg Houtimport BV v Agrosin Private Limited [2003] UKHL 12, [2004] 1 AC 715, where it was held that the cause of action for damage from condensation caused by the negligent stowage of cargo was completed once and for all as soon as the negligent stowage had caused any significant damage. The Vice-Chancellor rejected the Crown’s submission that the case fell within the first Arkin category, holding that the obligation on the Crown to implement the Directive continued after 1 July 1994, and that a fresh cause of action accrued on each occasion when a sound recording was played in circumstances which, because of the Crown’s failure to do what Article 8(2) required, did not constitute an infringement. He pointed out that damage is an essential ingredient of the cause of action for Factortame damages, because of the requirement for a direct causal link between the breach of the obligation and the damage sustained by the claimant. Accordingly, PPL’s claims were not statute-barred, but the loss for which damages could be recovered was limited to that sustained within the six years before proceedings were begun.

In my judgment this case does not assist the claimants, because the Commissioners do not dispute that the breaches were continuing ones in the sense that a fresh cause of action accrued in respect of each overpayment of VAT on the date when it was made. Their point is, rather, that each such cause of action was complete when the tax was paid, and that there was no subsequent, or continuing, cause of action which generated the claimant’s right to claim compound interest on the overpayment. As I have explained, the Commissioners’ contention on that point seems to me clearly correct, with the consequence that all of the separate causes of action which accrued up to the date of the last overpayment of VAT in April 1999 were prima facie time-barred after six years had elapsed.

In their pleadings the claimants rely on the same arguments for saying that the limitation period has been extended in respect of their damages claim as they do in relation to their restitution claim, that is to say section 32(1)(c) of the Limitation Act 1980 and the making of an acknowledgment or part payment within section 29(5). In his oral submissions, however, Mr Conlon rightly accepted that neither of these arguments could avail the claimants, at any rate at first instance. So far as section 32(1)(c) is concerned, mistake is not an ingredient of the cause of action for damages for breach of statutory duty, so on the orthodox interpretation of that provision (which the claimants reserve the right to challenge in a higher court) it can have no application. As regards section 29(5), I have already referred to the decision of Jackson J in the Welsh Water case where he held that a claim for damages in tort falls outside the scope of section 29(5)(a): see paragraph 156 above. Mr Conlon did not seek to persuade me that this decision was wrong, so again the contention cannot succeed. It follows, in my judgment, that the damages claims under this first head are all time-barred, quite apart from the fact that the relevant breaches were not sufficiently serious to ground liability.

The three year cap

In the light of the judgment of the ECJ in Marks & Spencer I, the Commissioners naturally have to, and do, accept that the introduction of the three year cap in 1996 infringed the Community law principles of effectiveness and the protection of legitimate expectations. The most important passages in the judgment of the Court are paragraphs 34 to 42, dealing with the principle of effectiveness, and paragraphs 43 to 47, dealing with the protection of legitimate expectations.

In the light of the judgment of the House of Lords in Fleming, the Commissioners also have to, and do, accept that their initial attempts to remedy the breach of Community law by means of the transitional arrangements introduced by business briefs 22/02 and 27/02 were ineffective, and the cap had to be disapplied in relation to accrued claims to recover overpayments of tax made before 4 December 1996 until the breach was finally remedied by the enactment of section 121 of the Finance Act 2008.

The question whether the introduction and maintenance of the cap was a “sufficiently serious” breach is very much in issue between the parties, and I will come to it shortly. However, the Commissioners also take a short and simple point on causation, which I will mention first because it is in my judgment unanswerable. They submit that neither the introduction nor the maintenance of the cap caused any loss to the claimants. All the loss that the claimants have ever sought to recover flows from the original overpayments of VAT, and nothing else. What the cap did do was to place an unlawful, and temporary, restriction on the amount of their loss that the claimants could recover. However, the remedy for that infringement of Community law was disapplication of the offending time limit. The breach caused the claimants no separate or additional loss, because:

As I say, this submission is in my judgment plainly correct, and I accept it. The consequence is that this head of the damages claim, like the first, is doomed to failure, whether or not the breach was sufficiently serious. A further consequence is that the claim under this head faces exactly the same insuperable limitation problems as the claim under the first head, because all the relevant loss was suffered by the claimants, and their cause of action was completed, at the time when each overpayment of tax was made.

Against this background, the question whether the breach was sufficiently serious may seem academic. I will consider it, however, because the question is potentially one of some importance, it was fully argued, and Mr Conlon put the three year cap at the forefront of his oral submissions on the damages claim.

The argument before me focused on two main topics: first, the official background within the Commissioners and the Treasury to the introduction of the cap, and (to a lesser extent) the official reaction to the judgment of the ECJ in Marks & Spencer I; and secondly, whether the unlawfulness of the cap was so clear on the basis of earlier Community case law that it should be regarded as settled law, or at least as grave enough to make the UK’s persistence in introducing and defending the cap objectively inexcusable. I will deal with these two topics in turn, while reminding myself of:

Shortly before the hearing, the Commissioners disclosed a number of documents which were considered to be potentially relevant to the issue of sufficiently serious breach. The disclosure was not extensive, and it may be that fuller searches would have revealed more material. However, no application for further disclosure was made, either before or during the trial, and Mr Conlon was content to proceed on the basis of what had been disclosed, while inviting me to infer at various points that what was visible was only the tip of a much larger iceberg. I should add, in fairness to the Commissioners, that they have not been helped by the claimants’ refusal to give particulars of the matters they rely on in support of the plea of sufficiently serious breach. Having now had experience of three cases in which the issue arises, it seems to me that it will normally be of considerable assistance to the court and the defendants, and will help to focus what may be a wide-ranging and sensitive disclosure exercise, if the matters relied upon are particularised at an early stage, and are kept under regular review thereafter.

I should also record that, as they are fully entitled to under English law, the Commissioners have declined to waive privilege in respect of legal advice obtained by them and all other matters falling within the normal scope of legal professional or litigation privilege, and no adverse inferences can be drawn on that account. (Mr Conlon did not rely on the ambitious counter-argument on this point which was outlined to me by Mr Graham Aaronson QC in FII Chancery, and on which I found it unnecessary to rule: see FII Chancery at paragraphs 430 to 431).

The relevant documents were helpfully gathered together in a single bundle, bundle M, and I was taken through them by Mr Conlon in the course of his opening submissions. In reply, he produced a short schedule setting out the relevant themes which he said emerged, and giving the references to support them. Mr Swift then had an opportunity to deal with this document in the course of his rejoinder. As well as isolating these themes, Mr Conlon asked me to read through the bundle and look at it as a whole. I have done so, and I have also carefully considered his schedule. In the result, my conclusion is that this material does not amount to very much, whether the documents are viewed singly, by theme, or collectively.

The documents reveal that in February 1995 the Commissioners initiated a review of the unjust enrichment defence contained in section 80 of VATA 1994 and of statutory interest in the VAT area. The reason for this review, according to an internal policy memorandum dated 7 May 1996, was “the increasing amounts of tax and interest which were being refunded to businesses as a result of the VAT Tribunal or Courts overturning long-standing interpretations of UK VAT law”. It had become increasingly clear that the unjust enrichment defence was “a toothless tiger”, with the result that:

“If traders discover that they have overpaid tax by reason of a mistake, there is effectively no time limit to how far they can go back with a claim, e.g. in some VAT cases claims can go back to 1973.”

According to the same memorandum, the review was completed in late 1995, and one of its recommendations was to introduce a six year national retrospective time limit for refunds of VAT, and possibly also for other indirect taxes. The recommendations of the review had been accepted by the Paymaster General, but in view of the publicity recently given to potentially large repayments, e.g. in respect of blocked input tax on cars, the Chancellor of the Exchequer was minded to introduce a time limit of less than six years, namely three years or even two years. The memorandum continued:

“If necessary he is prepared to consider introducing it before the next budget. The UK could be vulnerable to challenge under Community law if the time limit went below six years, because for Inland Revenue taxes there is a 6 year reclaim period, and a shorter period for VAT might be regarded as discriminatory. However, we are seeking the advice of the Law Officers on time limits.”

The memorandum went on to say that the introduction of a three year time limit “would clearly be controversial”, and said that if it were introduced there would then be pressure for having the same reduced limit for other aspects of VAT administration, such as the making of assessments for underpaid tax and the keeping of records. The Paymaster General had therefore asked the Commissioners to assess the impact that this would have on business, revenue receipts and the operation of the Department before any final decision was taken.

I pause to make the following comments. First, it was obviously sensible for the Commissioners to review the length of the period for which overpaid VAT could be recovered, especially in cases of mistake where the claim could go back to 1973. Secondly, the concern about the proposed reduction of the retrospective time limit to three years centred on the comparison with the position relating to direct taxes, i.e. an issue of equivalence, and not on the length of the period as such. Thirdly, although one of the recent cases related to blocked input tax on cars, that case was nothing to do with the treatment of demonstrator cars or any of the issues in the present cases. The decision of the ECJ in Italian Republic still lay more than a year in the future. Fourthly, the Commissioners were seeking the advice of the Law Officers on time limits. Finally, an impact assessment was to be carried out before any final decision was taken.

On the same day, 7 May 1996, the Paymaster General sent a memorandum to the Chancellor to bring him up to date on these issues. One of his recommendations was that further advice should be sought from the Law Officers about the possibility of a three year retrospective time limit in relation to VAT overpayment claims. The discussion of this subject in the body of the paper shows that the focus of concern was again on the issue of equivalence under Community law. The Paymaster General referred to the further information which he had asked the Commissioners to obtain, and his request to them to consult the Law Officers. He then said:

“Subject to the outcome of all this research, I propose that we should announce the intention to have a 3 year limit and also say that if Parliament eventually agrees the legislation the time limit will apply to claims made on or after the date of the announcement. I propose that we should also publish draft Finance Bill legislation incorporating the time limit.”

A subsequent internal memorandum dated 28 May 1996 records, among other things, that the Inland Revenue had expressed concern at the introduction of a three year time limit for indirect taxes, because that might bring pressure on them to reduce the six year limit applicable to assessments and refunds of direct taxes. Under the heading “Changes to primary and secondary legislation”, the comment was made that the introduction of a three year rule for assessments would require changes to primary, and probably secondary, legislation, and “[t]ransitional provisions would need to be considered”.

On 14 June 1996 an internal memorandum referred to a meeting held on the previous day with representatives of the Law Officers, and reported their view that, if the time limits for making assessments were also reduced to three years, it was more likely that any challenge to the introduction of the time limit could be successfully fought off by the government in the ECJ and, more particularly, in the European Court of Human Rights. The note continued:

“The bigger the gap between the time periods for collecting underpaid tax and for repaying overpaid tax, e.g. 6 years for the former and 3 years for the latter, the more likely it was that the UK would run into difficulties. It is fair to say that they [i.e. the Law Officers’ representatives] were firm in their views.

3.

As the Chancellor appears to be minded to introduce a 3 year limit for refunds because 6 years still leaves him exposed to a very large bill if we were eventually to lose the cars cases, we will need to put forward some hard figures about the likely effects on the revenue, compliance, staffing, visiting programme etc, so that he can take an informed view about whether or not to reduce the 6 year assessment period to 3 years.”

I comment that the focus is still on the question of equivalence, and the possible human rights implications of introducing a three year limit.

On 20 June 1996 the director of VAT policy, Mr Martin Brown, sent a note to Mr Ian Walton of the VAT international division, referring to an earlier minute of 18 June (which is not in the bundle) “about the difficulty of claims made between the date of an announcement and the date of the budget”. He thought the problem arose because of something said by Parliamentary Counsel at a meeting earlier in the week which he had been unable to attend, and said his previous assumption had been that the new limit would be retrospective to the time of the announcement:

“Clearly no new rules can actually be in place when the Chancellor makes his announcement, but the idea would be that legislation eventually introduced in the Budget/Finance Bill would clearly have retrospective effect back to the date of the announcement, and we would (administratively?) refuse to pay up against valid claims lodged the day after the announcement.”

I comment that this is indeed what happened, and the Commissioners’ refusal to pay valid claims in the interval between the announcement of the cap on 18 July 1996 and its bringing into force on 4 December 1996 by a resolution under the Provisional Collections of Taxes Act 1968 was the subject of successful judicial review proceedings: see R v Customs and Excise Commissioners, ex parte Kay & Co [1996] STC 1500. However, this was a problem of legality under domestic law: it had nothing to do with Community law.

In the run up to the announcement by the Paymaster General of the introduction of the three year cap on 18 July 1996, a number of internal briefing papers were prepared to deal with press and other enquiries. As one would expect, the briefing anticipated various factual enquiries (e.g. when the changes would come into effect, and whether there were any transitional provisions), and suggested both positive and defensive replies to other questions that were likely to be asked. The defensive answers emphasised, among other things, that the cap was retrospective only to the date of the announcement, and did not reverse claims which had already been paid. The cap would not be unfair to people with claims in the pipeline, because those who had already made a valid claim or started legal proceedings would benefit from a three year retrospective refund from the date when they made the claim or started the proceedings. The cap would not be illegal under Community law, because national time limits are allowed for in Community law. Nor would there be any breach of the principle of equivalence, because it is legitimate to draw a distinction between indirect taxes (which should all be treated in the same way) and direct taxes.

With hindsight, it can be seen that this briefing was unduly optimistic in the view which it took of Community law, and while it rightly recognised that the principle of equivalence would not be infringed, it failed to recognise or foresee the problems caused by the failure to make any transitional arrangements for those with accrued rights under Community law who had not yet made a claim or commenced proceedings. That failure, however, as I shall explain, was in my judgment an excusable one in the light of Community law as it then stood and the generally prevalent view that once a Directive had been properly transposed into the domestic law of a member state it ceased to confer directly effective rights on nationals of that member state.

The introduction of the cap on 18 July 1996 took the form of an answer to a written Parliamentary question. The Paymaster General, the Right Hon. David Heathcoat-Amory MP, said:

“The Government has become concerned at the increasing amounts of revenue at risk in taxation boundary disputes, particularly VAT. Large sums, collected and paid in good faith, are being repaid to businesses, in some cases many years after the tax was collected and with no possibility that refunds will be passed on to final consumers. The Chancellor therefore asked Customs to undertake a review of the refund provisions applying to VAT and other indirect taxes. I am today announcing the outcome of that review.

I am proposing that with effect from today, a three year limit will be introduced for retrospective refund claims, applying to VAT and other indirect taxes, and to associated statutory interest. This will be subject to Parliamentary approval.

I also propose to recommend changes to the unsatisfactory law on unjust enrichment. Draft legislation effecting these changes will be published shortly and will subsequently be included in the 1997 Finance Bill. ”

A week later, on 25 July 1996, Mrs Maureen Campion of the Commissioners’ input tax branch prepared a background note for a forthcoming meeting between the Chancellor and representatives of Marks & Spencer on 29 July. For present purposes, it is not the content of this note which is of interest, but a manuscript note written upon it, almost certainly by one of the addressees, Mr Martin Brown. He said:

“I agree.

The 3-year cap on refunds is proving very unpopular with businesses with large claims in the pipeline that are now caught. Some are arguing that the new policy will fall foul of EC law. We will clearly take all views on board between now and Budget-time, but Ministers were advised that the policy was defensible in EC law, and acted to stop large unexpected bonuses to a few companies at the expense of taxpayers’ pockets in general. Hard cases such as M & S are outweighed by the public interest.”

The next important developments were the judgment of the ECJ in Elida Gibbs on 24 October 1996, the issue of business brief 25/96 on 6 December 1996, and on 10 December the delivery of the Advocate General’s opinion in Italian Republic. On 27 February 1997, an internal memorandum from Mr Peter Kirkham, head of the supply of goods branch, recommended that the claims of Elida Gibbs itself, and of the others who had agreed to stand over their cases pending the ECJ’s judgment and who had co-funded the litigation, should be paid in full, i.e. uncapped. The memorandum recorded that the Commissioners “were extremely surprised and disappointed that, contrary to practically all earlier VAT cases, the ECJ did not follow the Advocate General’s Opinion which had been conclusively and comprehensively in our favour”. It also recorded that one section of the European Commission, whose legal services department had supported the victorious manufacturers, were so uncomfortable with the decision that they had themselves tabled an item for discussion at the next meeting of the VAT Committee, and they had also received several representations from other member states who were unhappy with the ECJ’s decision. Mr Kirkham added:

“We will, I assume, be making our own presentation to the VAT Committee to demonstrate the problems the decision has caused already and will cause in the future.”

Mr Kirkham’s note went on to set out the history of the problem of manufacturers’ vouchers since he had taken over as head of the supply of goods branch in November 1991. He referred to two very lengthy meetings in Brussels, where they had failed to persuade the Commission’s legal services department of the correctness of the UK’s views, and he said that “eventually the UK found itself the recipient of an infraction warning letter issued under Article 169 of the Treaty”. He added that the letter “was technically flawed, and we were able to play for time by pointing this out to the Commission”. I comment that there is no indication in the evidence before me that the threatened infraction proceedings were taken any further, and in any event they related to the issues raised in Elida Gibbs which, as is common ground in the present case, do not cross the threshold of sufficiently serious breach.

In November 2000 the UK found itself in receipt of another pre-infraction letter, this time concerning the enactment of the three year cap in section 47(1) of the Finance Act 1997. The letter was dated 8 November 2000 and was sent by Mr Frits Bolkestein, a member of the Commission, to the then Foreign Secretary, the Right Hon. Robin Cook MP. The nub of the complaint was that the introduction of the cap, without adequate transitional arrangements, infringed the principle of effectiveness. It is enough to cite two paragraphs from the letter:

“The Commission objects to the new UK measures because, by their retroactive nature, they unfairly penalise taxable persons acting in good faith who were counting on a period of six years at the time they made their claims for repayment, and thus have acquired a right to repayment. The same applies as regards the retroactive repeal of section 80(5) of the 1994 Act. Such treatment cannot be justified by an overriding requirement such as legal certainty. In so far as it retroactively shortens limitation periods applying at the time when the cause of action arose, section 47 of the Finance Act 1997 thus falls foul of the principle of effectiveness (Case 309/85 Barra [1988] ECR 355 and Case 240/97 Deville [1998] ECR 3513).

The Commission therefore considers that the retroactive nature of the new UK measures contravenes this principle, in that repayment of the portion going back beyond the new time-limit becomes impossible even though there was full entitlement to it before the new measures came into force.”

The UK government was requested to submit its observations within two months, and warned that, if appropriate, the Commission might deliver a Reasoned Opinion pursuant to Article 226 EC after taking note of the observations.

On 3 February 2001 the UK provided its observations, in the form of a lengthy 12 page letter from the Commissioners. The author of the letter was Mr Mark Warwick, a senior departmental lawyer. The letter is too long to cite in full, but in my view it set out a reasoned and coherent response, and advanced a respectable argument that there had been no breach of the principles of legitimate expectation or effectiveness. Reliance was placed on the important observations of Advocate General Jacobs in Fantask, and the point was made that taxpayers can have no legitimate expectation that they will remain immune from any change in the law. An early decision of the ECJ (Case 84/78 Tomadini v Amministrazione delle Finanze dello Stato [1979] ECR 1801) was cited as authority for the proposition that a change in the law need not be subject to transitional periods where there is an overriding public interest. The relevant public interest was said to be that identified by Advocate General Jacobs in Fantask. The decisions of the ECJ in Barra and Deville were distinguished, and reliance was placed on the subsequent jurisprudence of the Court in the cases of Aprile and Dilexport. It was pointed out that, unlike the legislative provisions at issue in Barra and Deville, the cap did not prevent anybody from making a claim, but merely limited the amount that could be recovered. The case of Roquette Frères was cited as authority for the proposition that the operation of limitation periods does not infringe the principle of effectiveness, even when the consequence is to bring about the rejection of a claim, in whole or in part.

In his oral submissions Mr Conlon was very critical of this letter. He even went so far as to suggest in the course of his reply that “it was a tricky letter, an evasive letter, a letter full of hair splitting and obfuscation, in which the factual analysis of the Barra and Deville line of authorities is wholly unconvincing to anyone who has a smattering of European Community law knowledge” (transcript, Day 6, page 23). Such rhetoric is in my judgment misplaced, as well as being the product of hindsight. In any event, there is no indication that the threatened infraction proceedings were taken any further by the Commission.

It is unnecessary for me to refer to any of the few remaining documents in bundle M, because I have already mentioned those which are the most favourable from the claimants’ point of view. In my judgment the general picture which emerges is of a government department doing its conscientious best to limit the damage to the wider public interest which would be caused by a proliferation of uncapped claims. It is easy to see, with hindsight, that the solution adopted was deficient, but about the wider public interest involved there can in my view be no reasonable doubt. The relevant considerations were clearly stated by Advocate General Jacobs in Fantask, and the UK can hardly be blamed for seeking to build upon them. I am unable to accept Mr Conlon’s submission that the cap was, in any objectionable sense, targeted at specific ECJ decisions, or that the UK was deliberately running a risk of illegality or, as he put it, “skating on thin ice”. The surviving documents show that the Commissioners were at pains to take legal advice, and I can find no indication that they acted in disregard of it. Nor could it be said (and in fairness to Mr Conlon he did not submit) that the introduction of the cap was intended as a sort of pre-emptive strike before the ECJ gave judgment in Elida Gibbs. On the contrary, the Advocate General’s favourable opinion (from the UK’s perspective) had been given less than a month earlier, on 27 June 1996, and as Mr Kirkham said the Commissioners were “extremely surprised and disappointed” by the subsequent decision of the ECJ.

I was taken by both sides through a series of cases in the ECJ dealing with the introduction or curtailment of time limits for the recovery of unlawfully levied taxes and charges, beginning with Barra and Deville. The subsequent cases were: Aprile Srl v Amministrazione delle Finanze dello Stato (Case C-228/96), [1998] ECR I-07141, (“Aprile II”); Ministero delle Finanze v IN.CO.GE ’90 Srl and others (joined cases C-10/97 to C-22/97), [1998] ECR I-6307 (“IN.CO.GE”); and Dilexport Srl v Amminstrazione delle Finanze dello Stato (Case C-343/96), [1999] ECR I-579 (“Dilexport”).

I do not propose to review these cases in detail, but would make the following brief observations.

First, Barra and Deville were both cases in which the member state had introduced a time limit (in Barra with retrospective effect) for the recovery of specific taxes or charges which the ECJ had already held to be unlawful. Moreover, in Deville the French Government appears to have been guilty of something approaching sharp practice in its conduct of the case, because it was only in answer to a question put by the Court in the course of the oral procedure that it emerged that the new time limit was in fact less favourable in a material respect than the one which would otherwise have applied to recovery of the tax in question: see paragraph 16 of the judgment of the Court. The proposition for which these cases are authority is that a member state may not, after the ECJ has ruled that a particular tax is incompatible with Community law, adopt a procedural rule which specifically reduces the possibilities of bringing proceedings for recovery of the wrongly levied tax: see Deville at paragraph 13. The cap, however, did nothing of the sort. It was not targeted at specific charges to VAT which the ECJ had already held to be unlawful, but applied across the board to all claims for recovery of VAT under section 80 of VATA 1994, and whatever the nature of the circumstances which led to the claim for repayment.

Secondly, I make the obvious point that the decisions in Aprile II, IN.CO.GE and Dilexport all postdate the introduction of the cap. The ECJ gave its judgment in Aprile II on 17 November 1998, in IN.CO.GE on 22 October 1998, and in Dilexport on 9 February 1999. These cases established that the ruling principle in this area is the principle of effectiveness, that a limitation period of three years is in itself unlikely to be objectionable, and that national legislation may validly curtail the period for recovery of sums charged in breach of Community law so long as certain conditions are satisfied: see Marks & Spencer I at paragraphs 34 to 36. Furthermore, in both Aprile II and Dilexport the ECJ confirmed that the mischief countered by Barra and Deville was the adoption of provisions making repayment of a tax which the ECJ had held to be unlawful “subject to conditions relating specifically to that tax which are less favourable than those which would otherwise be applied to repayment of the tax in question”: see Dilexport at paragraph 39 and Aprile II at paragraph 26.

Thirdly, it was only in Marks & Spencer I that the ECJ dealt explicitly with the question whether the curtailment of a limitation period without transitional arrangements was compatible with the Community principles of effectiveness, certainty and protection of legitimate expectations. The Court considered that the answer was “plain” in relation to the principle of effectiveness (paragraph 37), but it is worth noting (as counsel for the Commissioners pointed out) that no authority was cited by the Court in its discussion of the subject in paragraphs 37 and 38. This is where the now familiar statement of the need for adequate transitional arrangements was first clearly articulated by the Court. The closest precursor of that statement which can be found in the authorities to which I was referred is in Dilexport at paragraph 36, which contains the following sentence:

“In particular, it is necessary to make sure that reduction of the limitation period does not have the effect of suddenly rendering inadmissible actions for repayment which could properly have been brought under the old legislation or, in any event, that taxpayers have had a reasonable period in which to safeguard their rights.”

However, that paragraph begins by recording the submission of the French government, and the sentence which I have quoted is naturally read in its context as forming part of the French government’s submission, rather than as part of the reasoning of the Court.

Nevertheless, I do not think that the Court would have taken the trouble to record this submission, without any adverse comment, unless it broadly endorsed it; and as a matter of Community law I would be inclined to accept that the need for adequate transitional arrangements was fairly clear from at least the date of the judgment in Dilexport (9 February 1999) onwards, although it cannot be said to have been acte clair until the ECJ gave its judgment in Marks & Spencer I.

It is important at this stage to remember that before Marks & Spencer I the UK had a second string to its bow in cases of the present type, in the form of the argument that, once a directive had been properly transposed into national law, an individual could no longer assert enforceable Community law rights derived from the directive. The effect of the transposition was that the direct effect of the directive was spent, and the individual’s rights would thenceforth be derived from the relevant national law alone. If this argument was right, the result in the present cases would be that none of the claimants could assert Community law rights based on the Sixth Directive, because it has never been suggested that any of the relevant provisions were not properly transposed into UK national law. Furthermore, as a matter of English domestic law, it was at the very lowest strongly arguable that the claimants would have no remedy, because their only legitimate expectation was to be taxed in accordance with the law as it stood from time to time. They had not been deprived of a pre-existing right to bring a claim, and the effect of the cap was merely to limit the period in respect of which a claim could be brought under section 80 of VATA 1994. Accordingly, if the premise (i.e. the argument based on transposition of directives) was correct, the UK had strong grounds for arguing that the introduction of the cap infringed no principles of either Community or domestic law.

In the domestic litigation which led to the reference to the ECJ by the Court of Appeal in Marks & Spencer I, the correctness of the premise was accepted by the Tribunal, by Moses J (Marks & Spencer Limited v Customs and Excise Commissioners [1999] STC 205 at 217-8), and by the Court of Appeal itself (Marks & Spencer Limited v Customs & Excise Commissioners [2000] STC 16 at 26-30 per Schiemann LJ, with whom Ward and Stuart-Smith LJJ agreed). As the judgments of Moses J and the Court of Appeal make clear, there was no shortage of Community case law which could reasonably be read as establishing the premise. There was, however, one comparatively minor part of Marks & Spencer’s claim (the “early vouchers claim”) which related to a period in 1991 to 1992 when the relevant part of the Sixth Directive had not been properly transposed (see [2000] STC at 23c), so in respect of this claim alone it was necessary for Moses J and the Court of Appeal to go on to consider whether the cap infringed directly effective provisions of Community law. The Court of Appeal considered the authorities on time limits, including Dilexport, at some length, and concluded that Community law was not clear “on the question whether it is permissible to amend with immediate effect a limitation period so as to deprive those possessed under domestic law of a right to reclaim payment which should not have been made of that right” (see [2000] STC at 38h; the discussion of the question begins at 33a and ends at 39c). The question was therefore referred to the ECJ, but in terms which expressly limited its scope to cases where a member state had not properly implemented Article 11A of the Sixth Directive.

The Advocate General (Geelhoed) and the ECJ disagreed with the premise, however, and took the unusual step of answering the question referred as if the limitation put on its scope by the national court were removed. The Court took the opportunity of laying down what is now the orthodox rule, namely that individuals are entitled to continue to rely on the provisions of a directive before national courts even after it has been correctly transposed into national law: see paragraphs 26 to 44 of the Advocate General’s opinion, and paragraphs 22 to 33 of the judgment of the Court.

Taking all these factors into account, it appears to me that there was considerable uncertainty about the legality of the cap under Community law, not only when it was proposed and introduced in 1996, but continuing until the position was finally clarified by the ECJ in Marks & Spencer I. Viewed objectively, the error of law involved in enacting the cap and maintaining it in force until 2002 was an excusable one, and the breach was not “sufficiently serious” to found liability in damages, whether viewed in isolation or in conjunction with all the other circumstances of the case.

The repayment of the principal sums with simple interest only

In my judgment this cannot possibly be characterised as a breach which caused the claimants any loss, and Mr Conlon rightly did not pursue it in his oral submissions. For the reasons which I have already given, the claimants’ right to be paid compound interest stems exclusively from the original overpayments of VAT. The fact that the statutory remedy of simple interest was insufficient explains why the claimants still have a claim to pursue, but it did not cause any of the loss which they now seek to recover. I therefore say no more about it.

The enactment and maintenance in force of section 78(3) of VATA 1994

I would make the same comments in relation to this head of the damages claim.

Conclusion

It follows that the damages claim fails in its entirety. The only breaches which caused the claimants any loss were the breaches which led to the overpayments of VAT, but those breaches were admittedly not “sufficiently serious” in themselves, and the claims founded upon them are in any event time-barred. The UK’s further breach of Community law in introducing and maintaining the three year cap did not cause the claimants any of the loss which they now seek to recover, and for that reason alone cannot ground a claim for damages. Even if that is wrong, the breach was again in my opinion not “sufficiently serious”, whether it is viewed in isolation or in conjunction with the earlier breaches and all the other circumstances of the case. Furthermore, any claim based on the breach would again be time-barred. The remaining breaches pleaded by the claimants are fundamentally misconceived, because they had no relevant causative effect at all.

In the light of these conclusions, I do not propose to go on to consider any of the issues of quantification which would arise if liability were established. They were not argued at any length, and can be revisited if and when my conclusions on liability are overruled and the case proceeds to a hearing on quantum.

I come finally to the question whether the claimants can maintain any claim in relation to the period before the Sixth Directive came into force on 1 January 1978. In order to succeed in this part of their claim the claimants need to rely on directly effective provisions to be found in either the First or the Second Directives, the latest date for implementation of which by the UK was 1 July 1973. They were in fact implemented by the Finance Act 1972, the relevant provisions of which came into force with effect from 1 April 1973. The only article relied upon by the claimants is Article 2 of the First Directive, as Chalke confirmed in a reply to a request for further information concerning paragraph 6(b) of the amended particulars of claim.

The First Directive contains a recital upon which the claimants also place some reliance, in the following terms:

“Whereas a system of value added tax achieves the highest degree of simplicity and of neutrality when the tax is levied in as general a manner as possible and when its scope covers all stages of production and distribution and the provision of services; whereas it is therefore in the interest of the Common Market and of Member States to adopt a common system which shall also apply to the retail trade;”

Articles 1 and 2 then provide, so far as material, as follows:

“Article 1

Member States shall replace their present system of turnover taxes by the common system of value added tax defined in Article 2.

…

Article 2

The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

The common system of value added tax shall be applied up to and including the retail trade stage.

However, until the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States, Member States may, subject to the consultation provided for in Article 5, apply this system only up to and including the wholesale trade stage, and may apply, as appropriate, a separate complementary tax at the retail trade stage or at the preceding stage.”

The leading case on the question whether the provisions of a directive have direct effect is the decision of the full Court of Justice in Becker v Finanzamt Münster-Innenstadt (Case 8/81), [1982] ECR 53, (“Becker”). In paragraph 25 of its judgment, the ECJ said this:

“25.

Thus, wherever the provisions of a directive appear, as far as their subject-matter is concerned, to be unconditional and sufficiently precise, those provisions may, in the absence of implementing measures adopted within the prescribed period, be relied upon as against any national provision which is incompatible with the directive or in so far as the provisions define rights which individuals are able to assert against the State.”

Accordingly, if a provision of a directive is to have direct effect and to be capable of being relied upon by an individual in a national court, it must be “unconditional and sufficiently precise”. In so far as paragraph 25 of the judgment may be thought to imply that such reliance can no longer be placed on a directly effective provision of a directive once the directive has been properly transposed into national law, it must of course now be read in the light of the contrary view affirmed by the ECJ in Marks & Spencer I.

Mr Conlon submitted, and I would agree, that Article 2 provided for the introduction of the common system of VAT in clear and simple language. In particular, it requires that:

It is also relevant to bear in mind, however, that the First Directive is of the nature of a founding document, which sets out the basic principles of the new tax at a high level of generality and without descending into detail. There are only six articles, and the entire directive occupies only two pages of the Official Journal of the European Communities. Article 3 expressly stated that the Council would issue a second directive “concerning the structure of, and the procedure for applying, the common system of value added tax”, and the Second Directive was in fact issued on the same day as the First Directive, that is to say 11 April 1967. The Second Directive fleshed out the bare bones of the First Directive, but nowhere near as fully as the Sixth Directive which in due course superseded it. By contrast, Article 2 of the First Directive remained in force as a statement of governing principle.

Relevantly to the present case, Article 8 of the Second Directive provided that the basis of assessment should be:

“(a)

in the case of supply of goods and of the provision of services, everything which makes up the consideration for the supply of the goods or the provision of services, including all expenses and taxes except the value added tax itself”,

while Article 11(4) provided that:

“Certain goods and services may be excluded from the deduction system, in particular those capable of being exclusively or partially used for the private needs of the taxable person or of his staff.”

There was no equivalent of the much fuller provisions to be found in Article 11 of the Sixth Directive dealing with ascertainment of the taxable amount, including in particular the key provision in Article 11(C)(1) which says that “where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States”. Nor was there any equivalent of the much fuller provisions relating to exemptions contained in Article 13(B) of the Sixth Directive, including in particular Article 13(B)(c) which in turn interacts with Article 17(6).

In support of his argument that Article 2 of the First Directive gave rise to directly effective rights to repayment in the present case, Mr Conlon cited a number of decisions of the ECJ which, he submitted, show the fundamental role of that Article in the architecture of VAT, and its continuing primacy even after the Sixth Directive had superseded the Second Directive. Those cases included the Hong Kong Trade case (Staatssecretaris van Financien v Hong Kong Trade Development Council (Case 89/810, [1982] ECR 1277), where the Court relied on Article 2 of the First Directive and various provisions of the Second Directive in order to hold that the provision of free services was not subject to VAT (see paragraphs 6 to 19); the Gaston Schul case (Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen, Roosendaal (Case 15/81, [1982] ECR 1049), where the Court reviewed the common system of VAT in paragraphs 8 to 15 of its judgment; and BLP Group Plc v Customs and Excise Commissioners (Case C-4/94, [1996] 1 WLR 174) where the Court interpreted Article 2 of the First Directive and Article 17 of the Sixth Directive as meaning that, except in cases expressly provided for by those directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction (see paragraphs 18 to 28).

Mr Conlon also referred to the Dutch Potato case (Staatssecretaris van Financien v Cooperatieve Aardappelenbewaarplaats GA (Case 154/80, [1981] ECR 445), where the Court interpreted the provisions of the Second Directive as a whole in order to establish the fundamental point that there must be a direct link between the service provided and the consideration received, and the consideration must be capable of being expressed in money, and must have the subjective value agreed between the parties, if it is to be taxable (see paragraphs 8 to 15 of the judgment). It is noteworthy that the Court dealt with this question exclusively by reference to the provisions of the Second Directive, and not by reference to the Dutch Law on Turnover Tax, even though there was no suggestion that the Directive had not been properly transposed into Dutch national law. The Court also stressed, in paragraph 9, that the relevant provisions of the Second Directive had an autonomous meaning under Community law, and their interpretation could not be left to the discretion of each member state. Mr Conlon submitted that this case was, in some ways, the converse of the manufacturers’ bonus payments in issue in the present case, and a similar line of reasoning would have led to the conclusion that the bonus payments could not be taxable because there was no supply of services with which they could be linked.

Mr Conlon also pointed out, correctly, that the First and Second Directives together established a fully-fledged and functional VAT system, which had already been in place for some six years before the tax was introduced in the UK. He said that the development of the VAT system in the Community can be seen as a continuum, in which the degree of harmonisation between member states has increased over time, but the First Directive has always been at its heart and led seamlessly to what followed.

In general terms, these submissions appear to me to be well-founded, and I did not understand Mr Swift to disagree with them in any major respects, although he placed more emphasis on what he termed the progressive nature of the Sixth Directive, and the extent to which it broke new ground. He focused his submissions instead on the particular rights in the Sixth Directive which the ECJ held were infringed in Elida Gibbs and Italian Republic, and submitted that there is no permissible process of implication or interpretation by which those rights can be implied into, or derived from, Article 2 of the First Directive, that being the only pre-1978 provision upon which the claimants rely.

Beginning with Italian Republic, Mr Swift pointed out that the relevant provisions of the Sixth Directive, upon which the decision turned, were Article 13(B)(c) and Article 17(6). He submitted that Article 13(B) had no precursor in the Second Directive, and although he recognised that the claimants mainly rely on the principle of neutrality, as given expression in Article 2 of the First Directive, he said it was necessary to remember that the blocking of input tax is itself an exception to the neutrality principle. Further, he said that margin schemes are not necessarily incompatible with the Sixth Directive, because Article 26 preserves a special scheme for travel agents which is, in effect, a margin scheme. More generally, he argued that if the right upon which the claimants rely has to be implied into Article 2 of the First Directive, that is in itself enough to show that the Becker condition of sufficient precision is not satisfied: how can one say, Mr Swift asked rhetorically, that a right you need to imply is sufficiently certain?

In Elida Gibbs, the provisions of the Sixth Directive on which the decision of the ECJ turned were Article 11(A)(1)(a) and Article 11(C)(1). The Court made no reference to provisions of the Second Directive, and its conclusions were firmly rooted in the provisions of the Sixth Directive. In particular, said Mr Swift, Article 11(C)(1) expressly recognises that events after the original transaction can have an impact upon the value of the taxable amount, but there is no equivalent of this key provision in the First or Second Directives. Furthermore, the definition of the taxable amount in Article 11(A)(1) is considerably more sophisticated than Article 8(a) of the Second Directive.

Mr Swift also referred me to a decision of the VAT & Duties Tribunal, chaired by Mr Theodore Wallace, in 2006, General Motors Acceptance Corporation (UK) Plc v HMRC, VAT Decision No. 19989, (“GMAC”), in which one of the issues arising on a claim to recover VAT overpaid on hire purchase sales dating back to 1973 was whether Article 8(a) of the Second Directive had direct effect, with the result that the appellant could rely on a Community law right to repayment of the tax which it had paid before 1 January 1978. At the outset of the hearing before the Tribunal, counsel for the Commissioners, Dr Paul Lasok QC, applied for this question (together with another question relating to the three year cap) to be referred to the ECJ for a preliminary ruling. The Tribunal declined to make a reference before hearing the evidence and the arguments, but said they would consider the possibility of a reference at a later stage (see paragraphs 7 and 8). They then dealt with the matter as follows in paragraphs 96 and 97:

“96.

It is clear that the general principle in the Sixth Directive that the taxable amount is consideration actually received and cannot exceed the consideration actually paid by the consumer was derived originally from the Second Directive. What is much less clear is whether the Second Directive can be regarded by implication as requiring the taxable amount to be reduced when the actual amount received is less than the amount which at the time of supply was to be received. The neutrality principle derived from the First Directive suggests that a reduction should be made. Almost certainly a provision in domestic law precluding such adjustment would have been contrary to the Second Directive. That does not necessarily mean that Article 8(a) and Annex A [to the Second Directive] were sufficiently precise to have direct effect. [Reference was made to the Becker test]. It seems to us that if a term or a provision has to be implied it would not be normal to describe it as “precise”. We are not aware of any case in which the Court of Justice has held that a provision which is to be implied in the Sixth Directive has been held to have direct effect. Certainly Mr Cordara [counsel for the appellant, Mr Roderick Cordara QC] did not cite any case to that effect.

97.

We conclude that the Appellant’s directly effective rights do not extend back beyond 1 January 1978 when the Sixth Directive took effect. While we have formed this view, we cannot be wholly confident that it is correct. If we were referring a question to the Court of Justice on the effect of the absence of transitional relief, we would have included a question as to the Second Directive.”

They went on to say that, if a reference was to be made, it should be by a higher court, and should be made in the light of the conclusions of the House of Lords in Fleming.

Mr Swift naturally relied on GMAC as providing persuasive support for his submissions, in a context where the breach of Community law had some generic similarity to the unlawful treatment of manufacturers’ bonuses in the present case, because it involved the impact of subsequent events (in GMAC the failure of a hire purchase transaction, in the present case the payment of a bonus) on the original taxable amount. Mr Swift submitted that the lack of sufficient certainty in Article 2 of the First Directive, read with the relevant provisions of the Second Directive, was clear enough for me to decide the present question in the Commissioners’ favour without the need for a reference to the ECJ. In other words, he submitted that the question was acte clair. However, his fall-back position, like Mr Conlon’s, was that I should refer the question to the ECJ if I felt any doubt about the answer.

Having given the competing submissions my best consideration, I have to say that I do not find the answer at all clear. On the one hand, the terms of Article 2 are in themselves as clear and precise as one could wish, and I have little doubt that the basic propositions which the Article lays down satisfy the Becker test, including the fundamental principle that the tax is to be exactly proportional to the price of the goods or services supplied. On the other hand, it is far from obvious to me that one can clearly extract from this basic principle, together with the underlying principle of neutrality and the rule providing for the deduction of directly related input tax, either that the margin scheme was unlawful or that manufacturers’ bonuses should be treated as reducing the amount of the original taxable supply. In the former case, there is the complication that the input tax block on the purchase of demonstrator cars was in itself permitted, even where the cars were used exclusively for business purposes. Why, then, was it wrong to treat the purchaser as an end user when the car was sold on? In the latter case, there is the complication that a third party would nearly always be involved in the chain of transactions (because the manufacturer would first sell the care to an associated finance company), and the bonus was anyway not in any obvious sense a reduction in the original sale price. It seems to me that there is much to be said on both sides of these questions, and if it were necessary to my decision to do so, I would refer this issue to the ECJ, following the now classic guidance given by Sir Thomas Bingham MR in R v Stock Exchange, ex parte Else Ltd [1993] QB 534 at 545D-G. However, the point is not one that I need to resolve, because I have already decided that the claimants’ pre-1978 claims, in common with their later claims, are time-barred. I will therefore not direct a reference at this stage, and since I do not need to resolve the question, I prefer to leave it open.

The main conclusions which I have reached may be summarised as follows:

The end result, in my judgment, is that the claims of Chalke and Barnes must be dismissed.