The House of Lords held that the failure of the legislature to provide for a transitional period when introducing a retrospective time-limit within which taxpayers could make a claim for overpaid input tax amounted to a breach of EC law. It was for the legislature and not the courts to introduce an adequate transitional period. Therefore, the time-limit had to be disapplied in respect of those taxpayers who had already accrued rights when the retrospective time-limit was introduced.

Facts

In the Fleming appeal, the taxpayer, who was the sole proprietor of a business engaged in the purchase and servicing of quality cars, agreed in 1989 to purchase 13 Aston Martin motor cars for the purpose of his business. He duly reclaimed the input tax on ten of the 13 cars and Customs paid his claim. However, he did not receive VAT invoices at the time of purchasing the remaining three cars and did not make a claim for repayment of VAT paid on those three cars until 2002. Customs refused his claim relying on the three-year time-limit for making repayment claims introduced by amendment to the Value Added Tax Regulations 1995 (SI 1995/2518), reg. 29 with effect from 1 May 1997. The Court of Appeal ([2006] BTC 5,241) allowed the taxpayer's appeal against a decision of Evans-Lombe J ([2005] BTC 5,215) that Customs were justified in refusing the taxpayer's repayment claim.

In the Conde Nast case, the taxpayer company had made supplies relating to staff entertainment. Warren J ([2005] BTC 5,447) upheld the decision of the VAT and Duties Tribunal ([2005] BVC 2,259) that the taxpayer's late claim for the repayment of input tax failed because it was made after the expiry of a period which would have been reasonable for making such claims after it had become clear that, as a matter of Community law, the three-year cap on such claims introduced by amendment in the Value Added Tax Regulations 1995 (SI 1995/2518), reg. 29(1A) should have been accompanied by adequate transitional provisions. The Court of Appeal allowed an appeal by the taxpayer ([2006] BTC 5,555).

Customs appealed to the House of Lords in both cases, which were heard together since they raised the same question of how to apply the guidance that was given in Marks and 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 C-255/00) [2002] ECR I-8003 in order to make good the lack of a transitional period for the application of reg. 29 to accrued claims resulting from a failure to deduct.

Issue

Whether the taxpayers were entitled to succeed in their respective claims to recover input tax when they had failed to make a timely claim under reg. 29.

Decision

The House of Lords dismissed the appeals (Lord Walker of Gestingthorpe dissenting in relation to the Conde Nast appeal).

Lord Hope of Craighead (Lords Scott of Foscote, Carswell and Neuberger concurring) said that following the decisions of the European Court of Justice in Marks and Spencer plc v C & E Commrs (Case C-62/00) [2002] BTC 5,477 and Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2002] ECR I-8003 steps were taken by Customs to introduce a transitional period for the making of claims for the recovery of overpaid tax under VATA 1994, s. 80. The period for the making of late claims under reg. 29 for deduction of input tax was not affected and no similar transitional provisions had been introduced or announced with regard to those claims.

There was no doubt that, if the time-limit introduced by reg. 29(1A) was to be modified in the light of the decisions in Marks and Spencer and Grundig by the introduction of a transitional period, the initiative lay with Customs and was not taken. The breach of EU law lay in the provisions of reg. 29(1A); not, as in the case of s. 80, in charging tax contrary to EU law in the first place. In any event, as was common ground in these appeal, the unmodified time-limit in reg. 29(1A) was incompatible with EU law because it was retrospective and made no provision for any transitional arrangements.

Legislation that was incompatible with EU law had to be disapplied, but the question was whether the court could go further and make good the defect which had led to its disapplication by devising such transitional arrangements as it might regard as appropriate.

In a suitable case, the possibility could not be ruled out of the court reaching its own decision as to what would be a reasonable time for the making of claims and rejecting claims that were made after a period which it held to be reasonable. However, the situation disclosed by the present appeals did not lend itself to that treatment. That was a step too far for the court to take. The issue was not one of statutory interpretation, for which the court must accept responsibility. There was a gap in the legislation which was unfilled. The infringement of EU law in this respect could not be said to have been comparatively minor or inadvertent, such as would enable greater weight to be attached to the state's need for legal certainty in matters of taxation (Fantask A/S v Industriministeriet (Erhvervministeriet) (Case 188/95) [1997] ECR I-6783, per Advocate General Jacobs, para. 69). The primary responsibility for giving a clear indication to taxpayers as to where they stood with regard to the making of claims despite the retrospective introduction of the time-limit lay with the legislature and the executive. To be compatible with EU law, taxpayers were entitled to be told in advance of any transitional arrangements that would enable them to submit late accrued claims for the deduction of input tax despite the introduction of the time-limit. They were entitled to be given sufficient notice to familiarise themselves with the new regime, including the period of grace that was to be allowed for the submission of accrued claims during a transitional period. That was necessary to give effect to the principle of effectiveness. Not all taxpayers affected by a system whose reach was as wide as VAT could be assumed to have been aware of the development of the relevant case law or, even if they were aware of the case law, to have understood the effect of it.

It was for Parliament or Revenue and Customs, if they choose to do so by means of an announcement disseminated to all taxpayers, to introduce prospectively an adequate transitional period. Until that was done, the three-year time-limit had to be disapplied in the case of all claims for the deduction of input tax that had accrued before the introduction of the time-limit.

Lord Walker (dissenting) said that the fact that the national court had found that a transitional period fixed by its national legislature was insufficient did not necessarily mean that the new period for initiating proceedings could be applied retroactively in any circumstances. The principle of effectiveness merely required that any retroactive application should not go beyond what was necessary to comply with that principle. Accordingly, a transitional period should be substituted by the court, which should be six months from the date on which an average taxpayer would or should have been aware that EU law required a reasonable transitional period. The appropriate date was 11 January 2003, which was six months from the date of the judgment in Marks and Spencer plc vC &E Commrs (Case C-62/00) [2002] BTC 5,477.

House of Lords.

Judgment delivered 23 January 2008.