The Court of Appeal held that Customs had no legitimate basis for refusing to pay the taxpayer company's late claim for input tax in respect of expenditure on staff entertainment which it had failed to claim between 1973 and 1997 since the three year cap in reg. 29(1A) of the Value Added Tax Regulations 1995 had to be disapplied as contrary to the Community principle of effectiveness since it did not include any transitional provisions, following Fleming (t/a Bodycraft) v C & E Commrs[2006] BTC 5,241 (CA).

Facts

The taxpayer, CNP, made a claim for repayment in respect of input tax on supplies made to CNP relating to staff entertainment. The claim was set out in a letter of voluntary disclosure dated 27 June 2003. There had been under-deduction of input tax in each of the prescribed accounting periods from 1 April 1973 to 31 March 2003. Customs rejected the claim in respect of periods before reg. 29(1A) took effect on 1 May 1997.

CNP appealed to VAT and Duties Tribunal from that decision. The tribunal dismissed that appeal ([2005] BVC 2,259, Decision No. 18,869). It accepted that CNP would have been entitled to repayment of any input tax incurred on relevant forms of staff entertainment expenditure during the period to 1999 if it had made a timely repayment claim. But it decided that CNP should not be entitled to make a repayment claim in 2003 because on the facts CNP would not have chosen to make the claim even if there had been a transitional period available under reg. 29(1A). It followed, in the view of the tribunal, that it was not open to CNP to revisit, in 2003, its earlier decisions not to claim in respect of the under-deduction of input tax.

CNP appealed to the High Court. The judge, applying Marks & Spencer plc v C & E Commrs (Case C-62/00) [2002] BTC 5,477; [2002] ECR I-6325 and Grundig Italiana SpA v Ministero delle Finanze (Case 255/00) [2002] ECR I-8003 held that the failure, when introducing reg. 29(1A), to include an appropriate transitional period during which a trader could make a claim under reg. 29 in relation to periods prior to the new time-limited period, was a breach of Community law (see [2005] BTC 5,447). He went on to hold that CNP's repayment claim failed because it had not been made within any reasonable transitional period which might have been introduced. If the reasonable transitional period ran from the time when the Community law requirement that there should be a transitional period was first recognised, CNP's claim, made in late June 2003, was still made after the expiry of a period which would have been reasonable.

CNP appealed to the Court of Appeal. After the judge's decision the Court of Appeal in Fleming (t/a Bodycraft) v C & E Commrs [2006] BTC 5,241 had held that reg. 29(1A) provided no legitimate basis for the refusal to repay under-deducted input tax on a claim arising before 1 May 1997. An appeal in that case was pending to the House of Lords. Customs submitted that the issue whether the principle of effectiveness precluded any reliance on the new time limit imposed by reg. 29(1A) should be referred to the European Court of Justice.

Issue

Whether the lack of any transitional provisions in reg. 29(1A) led to the conclusion that that regulation provided no legitimate basis on which Customs could refuse repayment of past under-deducted input tax.

Decision

Chadwick LJ (Arden and Smith L JJ agreeing) allowed.

It was inappropriate to make a reference to the ECJ.

Customs had not requested the Court of Appeal in Fleming to make a reference which they now said was necessary to reach a decision in the present appeal. Customs intended to ask the House of Lords in Fleming to make a reference. It would be wrong for the Court of Appeal to pre-empt consideration of that question by the House of Lords. It was not possible to refer only the issues which arose in this case and not the issues which also arose in Fleming.

The Court of Appeal was bound to follow Fleming on the question whether the principle of effectiveness precluded any reliance on the new time limit imposed by reg. 29(1A). There might be circumstances in which the obligation imposed on courts by s. 3(1) of the European Communities Act 1972 would require the Court of Appeal to refuse to follow its own earlier decision as to the meaning and effect of a Community instrument – including, in the present context, the effect of a judgment of the ECJ. However, one constitution in the Court of Appeal should not substitute its own view as to the effect of a judgment of the ECJ for the view which had been reached by an another constitution in an earlier case on consideration of the same judgment in circumstances in which there had been no opportunity for the ECJ to review that judgment. In those circumstances, if persuaded that there were strong grounds for thinking that the earlier decision was wrong (as a matter of Community law) the Court of Appeal might think it right to refer the point to the ECJ for a preliminary ruling. Or it might follow the earlier decision and give permission to appeal. But it should not refuse to follow the earlier decision merely because, on the same material and the same arguments, it was satisfied that a different conclusion should have been reached.

In the present case, therefore, the court was not free to refuse to follow the decision of the majority of the Court of Appeal in Fleming. The reasons why the view taken by the majority of the court in that case might be wrong were powerfully expressed in the judgment of Arden LJ. However, in the circumstances that the issue would be considered by the House of Lords in the pending appeal, no useful purpose would be served by adding to that debate in the present case. Accordingly, the taxpayer's appeal would be allowed on the ground that the court was not free to refuse to follow the decision in Fleming.

The Court of Appeal addressed two subsidiary issues although it was not necessary to decided them in light of the fact that the court was bound to follow Fleming: first the judge had been right to hold that CNP's failure to prove that it would have taken advantage of transitional provisions, had they been included in reg. 29(1A) when first introduced, was not fatal to its claim; second, the judge had erred in respect of the reasonable transitional period and should have held that the principle of the protection of legitimate expectations meant that any transitional provisions to be read into reg. 29(1A) would have had to extend to 30 June 2003, that being the end of the period allowed by non-statutory transitional provisions introduced to deal with the comparable problem which arose in relation to claims under s. 80 of VATA 1994 in respect of over-declaration of output tax. On that basis CNP's claim would succeed since it had been lodged on 27 June 2003.

Court of Appeal (Civil Division). Judgment delivered

11 July 2006.

Summary of Corporation Tax rates for 2005 across OECD countries

Country	Combined corporate income tax rate (%)
Australia	30
Austria	25
Belgium	33.99
Canada	36.1
Czech Republic	26
Denmark	28
Finland	26
France	34.95
Germany	38.9
Greece	32
Hungary	16
Iceland	18
Ireland	12.5
Italy	33
Japan	39.54
Korea	27.5
Luxembourg	30.38
Mexico	30
Netherlands	31.5
New Zealand	33
Norway	28
Poland	19
Portugal	27.5
Slovak Republic	19
Spain	35
Sweden	28
Switzerland	21.32
Turkey	30
United Kingdom	30
United States	39.2835
Source: Tax Database © OECD 2006. The “combined” rate cited shows the effect of federal taxes etc on the headline rate. Where a progressive rate structure operates, the top marginal rate is shown.