The High Court held that the VAT tribunal was entitled, but not bound, to take account of repayment supplement paid in the event of late payment by Customs under VATA 1994, s. 79 when exercising its discretion to determine interest under s. 84(8).

Facts

In the RSPCA case, the dispute related to the disallowance of VAT incurred by the taxpayers on the construction of new headquarters. Following enquiries by Customs, assessments relating to the taxpayers’ input tax claims were withdrawn and, in 2005, Customs paid a five per cent repayment supplement of £216,964 to the RSPCA. The taxpayers applied to the tribunal for interest in respect of the disallowed input tax, from the due date of the returns until the date of payment, at eight per cent compound interest plus costs. Customs objected to the application, contending that, although the RSPCA was entitled to interest under s. 84(8), in the absence of borrowing to support a higher rate than under s. 78 the interest had already been met by the repayment supplement. The tribunal held that the result of the withdrawal by Customs of the decision under appeal was that they conceded that the VAT credit due to the taxpayers had not been paid. The effect was that the payment of interest under s. 84(8) was mandatory and s. 78 did not apply. In determining the rate of interest payable under s. 84(8), no adjustment was to be made by reason of the payment of a supplement under s. 79. Where a substantial sum was due over an extended period, an adjustment was appropriate to take account of the fact that the base lending rates were lower, because they were to be compounded, than they would be for simple interest rates. The interest payable to the taxpayers was determined by the tribunal at the simple rate of 4.3 percent. Although that rate was lower than that sought by the taxpayers, it was substantially more than Customs had been prepared to pay. Therefore, the taxpayer was awarded 90 per cent of the costs of the application (Decision No. 19,440; [2006] BVC 4,059). In the ToTel case, the appeal was originally against Customs’ refusal to repay the taxpayer's input tax claim. That refusal was initially on the basis that the input tax was incurred on mobile telephones used in the perpetration of a carousel fraud. Following the European Court of Justice's decision in Optigen Ltd v C & E Commrs (Case C-354/03) [2006] BTC 5,050; [2006] ECR I-483, Customs released the withheld input tax together with a repayment supplement. The taxpayer maintained its appeal on the grounds that interest should be paid in addition to the repayment supplement.

The tribunal held that, without an appeal to the tribunal, a taxpayer who was due a repayment which was delayed was entitled to interest in ‘certain cases of official error’ (VATA 1994, s. 78) and repayment supplement if he received a ‘delayed payment or refund’ (s. 79). However, it was clear that where, as in this case, s. 84(8) applied, because the non-repayment of any amount was appealed, s. 78(1) did not apply and the fact that repayment supplement might be due had to be disregarded.

It had been held in R (on the application of Mobile Export 365 Ltd) v R & C Commrs [2006] EWHC 311(Admin) that repayment supplement was designed to encourage prompt payment and was not a substitute for interest. Having decided that interest was payable, the tribunal determined the date from which it was to run as 30 days after receipt by the commissioners of the relevant return. Since mobile phones had been extensively used to perpetrate fraud and Customs had a duty to investigate claims for input tax credit from traders dealing in such goods, a period of 30 calendar days in which to make enquiries was not excessive. Turning to the rate of interest payable, the tribunal considered that it was bound by the decision of the Court of Appeal in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v IR Commrs [2005] BTC 202 in which it was held that restitutionary awards of interest were not analogous to awards of interest on damages or debt, that the appropriate rate of interest was that at which commercial loans were offered to borrowers and that compound interest should be allowed. The rate of interest was determined at three per cent above base rate (Decision No. 19,578; [2006] BVC 4,087).

Customs appealed against both decisions. They said that the effect of the decisions, and of other recent decisions of the tribunal, was to raise the possibility that s. 78 would become increasingly redundant, as parties sought to displace or supplement the statutory rates of interest (or the repayment supplement under s. 79) available on an administrative basis, with higher awards than were perceived to be routinely available on application to the tribunal. Customs said that that was not the intention of Parliament in enacting the scheme laid down by VATA 1994, s. 78, 79 and 84. ToTel cross-appealed.

Issues

Whether the tribunal properly exercised its discretion to determine interest; whether account should be taken of the interest payable where there was no appeal; and whether account should be taken of the repayment supplement for late payment by Customs.

Decision

Lawrence Collins LJ (allowing Customs’ appeals and dismissing ToTel's cross-appeal) said that VATA 1994, s. 84(8) gave the tribunal a discretion, and contained no guidance as to how it was to be exercised or what factors were relevant in the exercise of the jurisdiction. Conventional practice in commercial cases was to award simple interest at base rate plus one per cent but there was no overriding reason of principle why a higher rate should not be adopted by the tribunal in a particular case, either because that rate was reasonably considered too low, or because on the facts the taxpayer had had to borrow at a higher rate. The former case would be rare and in the latter case there had to be some evidence on which the tribunal could act.

In commercial cases, although a rate higher than the conventional rate might be justified, any such claim was normally dependent on evidence that a claimant had in fact borrowed funds at a higher rate. The rate would normally reflect the cost of borrowing rather than the return on lending.

Customs’ argument was that, in the absence of specific evidence supporting the award of a higher rate of interest, the rate of interest payable by Customs under s. 84(8) should be the rate prescribed by s. 78. However, policy considerations invoked by Customs did not justify, in effect, reading s. 78 into s. 84(8). There was no inconsistency in logic or practice between having one rate where an official error was resolved prior to appeal, and another rate where there was an appeal. The effect of the decisions of Lindsay J in R (on the application of Elite Mobile plc) v C & E Commrs [2005] BTC 5,113 and of Collins J in R (Mobile Export 365 Ltd) v R & C Commrs [2006] EWHC 311 (Admin) was that, when exercising the discretion under s. 35A of the Supreme Court Act 1981, the court might take into account the s. 78 rate. That rate was simply a matter to which the tribunal might have regard or which it might take into account before assessing what was just in the circumstances. It was not the rate which had to be applied, nor was it the rate which should be taken as the starting point. It was s. 84(8) which governed, and not s. 78. As regards s. 79, repayment supplement was a statutory penalty levied against Customs for failing to deal with VAT returns expeditiously, and it did not produce an interest formula of the sort required for the application of s. 84(8). As a matter of principle, the s. 84(8) interest should not be adjusted to take account of s. 79 repayment supplement. Again, it was s. 84(8)which applied, and not s. 79. But that did not mean that there might not be circumstances in which the tribunal could take account of, or have regard to, the fact that repayment supplement had been made. It would not normally be a reason for departing from a conventional rate if the tribunal considered that a conventional rate was appropriate. But if on the basis of evidence the trader claimed that it was entitled to a rate higher than a conventional rate, it might be unrealistic and unjust not to have regard to the receipt of the repayment supplement. Therefore the tribunal might have regard to the fact that there had been a s. 79 repayment supplement, especially where the trader claimed on the basis of evidence that interest should be higher than a conventional rate. Section 84(8) should not be judicially interpreted to include the power to award compound interest. If the matter were entirely at large there would be no difficulty in construing the expression to include compound interest. But the section had to be construed against the background of other provisions of VATA 1994; other legislation; and the approach at common law and equity. Against that background, it would be neither possible or legitimate to construe the word ‘interest’ to include compound interest. Sections 74 and 78 provided that ‘interest’ was payable, without stating in terms whether that interest was ‘simple’ or ‘compound’, but it was clear that only simple interest was payable under those provisions. Secondly, a statutory power of a court or tribunal to award compound interest was exceptional. The statutory position was in keeping with the approach both at common law and in equity. There was no power at common law to award interest (simple or compound). The equitable jurisdiction to award compound interest was only available in circumstances limited to fraud, breach of trust and breach of fiduciary duty. If the tribunal had no power to award compound interest directly, it had been an error of principle in the RSPCA decision to adjust the rate to take account of compounding, although in practice a realistic rate of interest was bound to reflect some element of compounding.

The question, in relation to the ToTel decision, was whether Community law required the award of compound interest. 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 had 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. Community law did not require the award of compound interest in those circumstances. The concept of mitigation had nothing to do with the award of interest under s. 84(8), since it was not compensation for damage, but unreasonable behaviour on the part of the taxpayer leading to a delay in payment might be a factor in the exercise of discretion under s. 84(8). It was incumbent on the taxpayer to satisfy Customs of his entitlement to a deduction. Accordingly there was no prima facie duty on the part of Customs to repay input tax until the claim had been agreed or upheld.

The principle of fiscal neutrality did not require payment of interest in respect of the period prior to the acceptance or establishment of the right to deduction and repayment. It was an error of principle in the RSPCA decision to adjust the rate in order to take account of the fact that interest would normally be compounded. It had been an error of principle in the ToTel decision to award a rate of three per cent above base rate (rather than a conventional rate) when the evidence was that ToTel had not borrowed, and the only evidence relied on was a letter from the bank indicating the rates at which ToTel could borrow; and for the tribunal to have awarded compound interest. Each tribunal had held wrongly that it was bound not to take account of the s. 79 repayment supplement, although it was not likely to have made any practical difference in the present cases.

Chancery Division.
Judgment delivered 8 March 2007.