Revenue and Customs v Royal Society for the Prevention of Cruelty To Animals [2007] EWHC 422 (Ch)

Case No CH/2006/APP/0237[2007] EWHC 422 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of JusticeDate Date: Thursday March 8, 2007
Strand
London WC2A 2LL
Before
LORD JUSTICE LAWRENCE COLLINS
Between
COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMSAppellantROYAL SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALSRespondentRSPCA (PROPERTIES) LIMITEDRespondentAnd BetweenAppellantCOMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMSAppellantTOTEL LIMITEDRespondent
Mr Rhodri Thompson QC and Mr Kieron Beal (instructed by the Solicitor for HM Revenue and Customs) for the Commissioners in the RSPCA AppealMrs Philippa Whipple (instructed by Deloitte & Touche LLP) for RSPCAMr Andrew Macnab (instructed by the Solicitor for HM Revenue and Customs) for the Commissioners in the ToTel AppealMr Michael Patchett-Joyce (instructed by Hassan Khan & Co) for ToTel LimitedHearing: December 11 and 12, 2006
JUDGMENT

I Background

[1]These appeals by the Commissioners raise the question of the way in which the VAT and Duties Tribunal should approach the exercise of the discretion to award interest under section 84(8) of the Value Added Tax Act 1994 in VAT appeals.[2]I shall set out the statutory provisions in full later, but for present purposes it is sufficient to say that under section 84(8) where on an appeal it is found that the whole or part of any amount paid by the trader is not due, or the whole or part of any VAT credit due to the trader has not been paid, then the amount found not to be due, or not to have been paid shall be repaid (or, as the case may be, paid) “with interest at such rate as the tribunal may determine.” Section 84 is in Part V of the Value Added Tax Act 1994, dealing with appeals.[3]Part IV deals with administration, collection and enforcement. Section 74 contains provision for the trader to pay interest on VAT recovered or recoverable by assessment. Section 78 contains provision for payment of interest by the Commissioners to the trader where, as a result of error by the Commissioners, the trader has failed to receive sums due.[4]Interest under sections 74 and 78 is computed by reference to section 197 of the Finance Act 1996 and the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No. 1461. The broad effect of some complex provisions is that for the purposes of section 74 and section 78 rates are fixed by a formula referable to the average base lending rates of six clearing banks, which is called the reference rate. The section 74 rate is the reference rate plus 2.5%, and the section 78 rate is the reference rate minus 1%. The consequence is that the trader who is owed money by the Commissioners receives less than the base rate, and the trader who owes money to the Commissioners may have to pay 2.5% above base rate.[5]Under section 79 the Commissioners are required to pay a “repayment supplement” where payments due to a trader are delayed. The payment is an uplift (the greater of 5% or £50) in the sum due to the trader. But no interest is payable under section 78 on any amount which falls to be increased by a supplement under section 79: see section 78(2). The RSPCA Decision[6]The RSPCA appeal is brought by the Commissioners against a decision of the Tribunal (Mr. Wallace, Chairman) dated February 1, 2006 (“the RSPCA Decision”).[7]On April 23, 2001 the RSPCA entered into a purchase and development agreement with RSPCA Properties Ltd (“Properties”), a newly incorporated wholly owned subsidiary. Under the agreement the land and partly completed buildings would be transferred to Properties, which would complete the building and lease it back to the RSPCA. The RSPCA invoiced Properties for £11.8 million, and VAT of about £2 million.[8]In its VAT return for the period 03/01 the RSPCA claimed £2,317,425 input tax, the greater part of which related to the building, on the basis that it was fully recoverable as attributable to an intended taxable supply to Properties, in reliance on the principle in Case C-97/90 Lennartz v Finanzamt München [1995] ECR I-3795,[1995] STC 514 (“the Lennartz principle”) that the taxpayer has to pay output tax on the full cost of providing the asset for non-business use.[9]In August 2001 Properties raised an invoice to the RSPCA for £9.6 million, plus £1,680,962 VAT in respect of part payment for the building, and the RSPCA claimed input tax on the full amount of the invoice from Properties in its 09/01 return.[10]After extensive correspondence, a decision was taken by the Commissioners to decline to meet the repayment claims made by the RSPCA under cover of a letter dated January 11, 2002 on the ground that the transactions between the RSPCA and Properties were not supplies made in the course of a business because the sole purpose was VAT avoidance, since the RSPCA would recover over 90% of the VAT on the construction works compared with its normal recovery rate of 32%. Alternatively the principle of abuse of rights applied to deny recovery on the basis that where the formal conditions for claiming an advantage are created artificially, and the advantage is not in accordance with the purpose of the legislation, then the advantage falls to be denied.[11]The RSPCA and Properties each appealed against that decision on February 8, 2002.[12]On January 17, 2003 the Commissioners’ review decision was issued, confirming the previous decision on the grounds that the transactions were artificial and had as their sole or predominant purpose the avoidance of VAT; the construction costs were incurred by Properties, and the sale of the land with completed building by Properties to the RSPCA, was not a supply, or was not a supply made in the course or furtherance of a business or economic activity; alternatively, there was a Community principle of abuse of right that required the arrangements to be taxed according to the underlying economic reality. The Lennartz principle could not be applied to purchases of construction services because Article 6(2)(a) of the Sixth Directive only concerned purchases of goods.[13]In Case C-269/00 Seeling v Finanzamt Starnberg [2003] ECR I-4101, [2003] STC 805, decided in May2003, the European Court decided that the Lennartz principle could apply to construction services. In November 2003, following the decision, Customs published a revised policy in Business Brief 22/03, and wrote to the RSPCA confirming the Commissioners’ acceptance of the Lennartz principle in relation to the construction services to create a building.[14]£4,333,328 was repaid to the RSPCA on October 20, 2004. Repayment supplement was made to the RSPCA in March 2005 in the sum of £216,964.[15]The RSPCA applied to the Tribunal for an award of costs and interest on July 13, 2005. The RSPCA in its notice of application (and subsequently in correspondence) maintained that it was entitled to compound interest at 8%; together with costs running from before the decision under appeal. The Commissioners filed a Notice of Objection to this application, but subsequently Deloitte & Touche on behalf of the RSPCA informed Customs that interest on a compound basis was no longer sought. The RSPCA then sought interest at a rate of 7.5% rather than the 8% initially claimed.[16]The Tribunal decided that:(1) Section 84(8) required the Tribunal to determine a rate of interest by reference to the facts of the particular case where this is possible.(2) No adjustment should be made by reason of the payment of supplement under section 79 when determining the rate of interest under section 84(8), because repayment supplement is a spur to efficiency: Bank Austria Trade Services v. Commissioners of Customs and Excise, Decision 16918, 2000; UK Tradecorp Ltd v Customs and Excise Commissioners [2004] V&DR 195; Olympia Technology Ltd v. Her Majesty’s Revenue and Customs, Decision 19145, August 24, 2005; Customs and Excise Commissioners v L Rowland and Co (Retail) Ltd [1992] STC 647.(3) It was not appropriate to treat the section 78 rate as the starting point when determining the rate under section 84(8), distinguishing R (Elite Mobile plc) v Commissioners of Customs and Excise [2004] EWHC 2923 (Admin), [2005] STC 275.(4) The High Court judgment rate of 8% was not an appropriate starting point, and a convenient starting point under section 84(8) in a case where there is no evidence specific to an appeal was the reference rate under the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, S.I. 1998 No.1461, calculated by averaging the base lending rate of clearing banks.(5) Where a substantial sum was due over an extended period, an adjustment was appropriate 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.(6) The concept of mitigation was not appropriate to interest under section 84(8) and did not in any event arise on the facts of the case.(7) Interest should run from June 21, 2001 for the RSPCA's first claim and thereafter from 10 days from the receipt of the claims.(8) Some reduction in the period for which interest was payable should be made because of the need for a partial exemption adjustment, but it must be proportionate.(9) The rate of interest was determined at 4.30%. The ToTel Decision[17]The ToTel appeal is brought by the Commissioners against the decision of the Tribunal (Mr. Colin Bishopp) released on May 19, 2006 (“the ToTel Decision”).[18]The original appeal to the Tribunal was against a refusal by the Commissioners to pay input tax credit in the sum of £217,525 claimed by ToTel in its 10/03 VAT return.[19]The claim for input tax credit arose out of the purchase and export of mobile phones by ToTel. The Commissioners had refused to pay the claim because they suspected a carousel fraud. Payment was refused on the basis that ToTel was not engaged in economic activity. It was not alleged that ToTel was aware of the fraud.[20]Following the judgment of the European Court in Joined Cases C-354/03 etc Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v Commissioners of Customs & Excise[2006] Ch 218, [2006] STC 419, the Commissioners withdrew the disputed decisions, repaid the disputed sums plus repayment supplement under section 79 and agreed to pay ToTel’s reasonable costs.[21]The matter came before the Tribunal on February 20, 2006. The only issue for the Tribunal was ToTel’s claim for interest under section 84(8).[22]ToTel sought interest at a rate of at least 10%, compounded monthly. Before the Tribunal, that claim was reduced to base rate plus 3%, compounded quarterly.[23]The evidence before the Tribunal was that ToTel had not borrowed money consequent upon the Commissioners’ decision.[24]The only other evidence before the Tribunal was a letter from Barclays Bank to ToTel dated February 16, 2006, which stated:
“Further to our conversation I would envisage a rate of 3% - 4% over Barclays Bank Base rate would be applicable if we were able to assist an unsecured lending to the company of £300,000. I would however emphasise that the underlying transaction would have an impact. I am also obliged to advise that as we have no details of the transaction this letter should not be taken as any form of offer.”
[25]The Tribunal decided that:(1) Section 78(1) did not apply and was not to be applied by analogy: Olympia Technology Limited v. Her Majesty’s Revenue and Customs, ante; UK Tradecorp Ltd v Customs and Excise Commissioners, ante.(2) The starting date was in the Tribunal’s discretion, and the Commissioners were entitled to a period of time in which to satisfy themselves that a trader had no means of knowledge of fraud: R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs [2006] EWHC 311 (Admin), [2006] STC 1069.(3) Repayment supplement was not to be taken into account, because its purpose was to encourage prompt payment and it was not a substitute for interest: R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs, ante; UK Tradecorp Ltd v Customs and Excise Commissioners, ante; Olympia Technology Ltd v. Her Majesty’s Revenue and Customs, ante. But the Tribunal had misgivings: double recovery is generally to be avoided and sections 78 and 79 are together designed to provide a mechanism for compensating traders who have been kept out of their money; it would be wrong in principle for a trader who qualifies for repayment supplement to be entitled to interest in addition if he appeals, but can claim no interest if he does not appeal.(4) Compound interest was required: Sempra Metals Ltd v Inland Revenue Commissioners [2005] EWCA Civ 389, [2006] QB 37. The only evidence was the letter from Barclays Bank and the rate in that letter should be adopted. The rests should be at six-monthly intervals.(5) Consequently the Tribunal awarded interest pursuant to section 84(8) on the principal sum at 3% above Barclays Bank’s base rate from time to time, compounded at six-monthly intervals, and payable 30 days from receipt by the Commissioners of the 10/03 Return. II Summary of the parties’ positions[26]The Commissioners say that issues of general importance are involved, which have a potential impact on all cases of error on the part of the Commissioners in the application of the VAT regime in the United Kingdom. The effect of the Decisions, and of other recent decisions of the Tribunal, is to raise the possibility that section 78 will become increasingly redundant, as parties seek to displace or supplement the statutory rates of interest (or the repayment supplement under section 79) available on an administrative basis, with higher awards that are perceived to be routinely available on application to the Tribunal. This was not the intention of Parliament in enacting the scheme laid down by sections 78, 79 and 84. A RSPCA Decision[27]The Commissioners say that in respect of the exercise of the Tribunal’s power to award interest conferred by section 84(8):(1) In the absence of specific evidence supporting the award of a higher rate of interest, the rate of interest payable by the Commissioners under section 84(8) should be the rate prescribed by section 78.(2) The interest should be calculated as simple interest and without any adjustment by comparison with compound rates.(3) In determining the appropriate amount to be ordered pursuant to section 84(8), the Tribunal should deduct any payment of repayment supplement that has been made by the Commissioners pursuant to section 79 (in the present case the payment of £216,964 in March 2005).(4) A person seeking an order for interest against the Commissioners pursuant to section 84(8), as compensation for loss of the use of his money, is required to take reasonable steps to mitigate that loss.(5) The period for payment of interest pursuant to section 84(8) should commence 30 days after receipt by the Commissioners of a valid claim for repayment of VAT, together with such additional information or evidence as the Commissioners may reasonably require in support of such a claim.[28]The RSPCA says that section 84(8) confers a discretion on the Tribunal as to the award of interest it makes, that discretion must be exercised judicially and not arbitrarily, as the Tribunal itself recognised. The Tribunal has not infringed any rule or guidance on the award of interest. Its decision discloses no error of law. This Court should not interfere with the award. B ToTel[29]The Commissioners contend as follows:(1) The Tribunal has no jurisdiction under section 84(8) (or at all) to award compound interest.(2) Community law does not alter that position and does not confer any right or power, or impose any duty, on the Tribunal to award compound interest. The Tribunal’s reliance on Sempra Metals Ltd v Inland Revenue Commissioners, ante, was wrong in law.(3) The Tribunal erred in law in failing to take the applicable rate of interest under section 78(3) as the starting point in its determination of the rate of interest payable by the Commissioners under section 84(8).(4) ToTel did not establish any basis for departing from that rate. The Tribunal erred in law in disregarding the evidence before it and misunderstood the decision in Ahmed v Jaura [2002] EWCA Civ 210.(5) The Tribunal erred in law in failing to take into account the repayment supplement paid to ToTel under section 79(1), and should have reduced the rate of interest awarded under section 84(8) accordingly.(6) In all the circumstances, the Tribunal’s decision was Wednesbury unreasonable.[30]ToTel contends that:(1) The Tribunal ought to have found that the interest awarded to ToTel should be compounded quarterly, rather than semi-annually.(2) The Tribunal ought to have found that the interest should run from 10 working days after ToTel had submitted its 10/03 Return, and erred in finding that interest should run from 30 days from receipt by the Commissioners of the 10/03 Return.(3) The Tribunal’s decision should be upheld in all other respects. III The legislative provisions and interest rates[31]These appeals raise the issue of the proper exercise of the discretion of the Tribunal to determine interest under section 84(8), and in particular whether it may or must take account of interest payable under section 78 where there is no appeal, and whether it may or must take account of repayment supplement paid in the event of late payment by the Commissioners under section 79. This section will set out those provisions together with related legislation which is or may be relevant to the determination of the principal provisions. A Value Added Tax Act 1994 (“VATA”) Section 84(8)[32]Section 84(8) (which originated as section 40(4) of the Finance Act 1972) gives the Tribunal discretion to award interest on an appeal (which will include any settled appeal, by operation of section 85), whether the award is against the Commissioners, or against a taxpayer.[33]Section 84(8) provides:
“Where on an appeal it is found – (a) that the whole or part of any amount paid or deposited in pursuance of subsection (3) above is not due; or (b) that the whole or part of any VAT credit due to the Appellant has not been paid, so much of that amount as is found not to be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the Commissioners to be payable as VAT has not been paid or deposited and it is found on the appeal that that amount is due, the Tribunal may, if it thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction.”
[34]In practice section 84(8) is only significant as regards awards against the Commissioners because the usual rule under section 84(2) is that the Tribunal cannot entertain any appeal unless the taxpayer has paid all tax due. The Tribunal can waive this requirement if the taxpayer demonstrates he would suffer hardship: section 84(3). Section 78[35]Section 78 provides for interest to be paid by the Commissioners in cases of official error, where interest would not otherwise be payable apart from that section. The section 78 rate is fixed by reference to the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No 1461, set out below, and is pegged at 1% below the average of the base lending rates of the six largest clearing banks.[36]Section 78 (which originated as section 17(1) of the Finance Act 1991) provides: “(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, as a result, they are liable under section 80(2A) to pay (or repay) an amount 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) where an amount is increased under that section, on so much of the increased amount as represents the supplement. (3) Interest under this section shall be payable at the rate applicable under section 197 of the Finance Act 1996. (4) The “applicable period” in a case falling within subsection (1)(a) or (b) above is the period— (a) beginning with the appropriate commencement date, and (b) ending with the date on which the Commissioners authorise payment of the amount on which the interest is payable. (5) In subsection (4) above, the “appropriate commencement date”— (a) in a case where an amount would have been due from the person by way of VAT in connection with the relevant return, had his input tax and output tax been as stated in that return, means the date on which the Commissioners received payment of that amount; and (b) in a case where no such payment would have been due from him in connection with that return, means the date on which the Commissioners would, apart from the error, have authorised payment of the amount on which the interest is payable; and in this subsection “the relevant return” means the return in which the person accounted for, or (as the case may be) ought to have claimed credit for, the amount on which the interest is payable. (6) The “applicable period” in a case falling within subsection (1)(c) above is the period— (a) beginning with the date on which the payment is received by the Commissioners, and (b) ending with the date on which they authorise payment of the amount on which the interest is payable. (7) The “applicable period” in a case falling within subsection (1)(d) above is the period— (a) beginning with the date on which, apart from the error, the Commissioners might reasonably have been expected to authorise payment of the amount on which the interest is payable, and (b) ending with the date on which they in fact authorise payment of that amount. (8) In determining in accordance with subsections (4), (6) or (7) above the applicable period for the purposes of subsection (1) above, there shall be left out of account any period by which the Commissioners’ authorisation of the payment of interest is delayed by the conduct of the person who claims the interest. (8A) The reference in subsection (8) above to a period by which the Commissioners’ authorisation of the payment of interest is delayed by the conduct of the person who claims it includes, in particular, any period which is referable to— (a) any unreasonable delay in the making of the claim for interest or in the making of any claim for the payment or repayment of the amount on which interest is claimed; (b) any failure by that person or a person acting on his behalf or under his influence to provide the Commissioners— (i) at or before the time of making of a claim, or (ii) subsequently in response to a request for information by the Commissioners, with all the information required by them to enable the existence and amount of the claimant’s entitlement to a payment or repayment, and to interest on that payment or repayment, to be determined; and (c) the making, as part of or in association with either— (i) the claim for interest, or (ii) any claim for the payment or repayment of the amount on which interest is claimed, of a claim to anything to which the claimant was not entitled. (9) In determining for the purposes of subsection (8A) above whether any period of delay is referable to a failure by any person to provide information in response to a request by the Commissioners, there shall be taken to be so referable, except so far as may be prescribed, any period which— (a) begins with the date on which the Commissioners require that person to provide information which they reasonably consider relevant to the matter to be determined; and (b) ends with the earliest date on which it would be reasonable for the Commissioners to conclude— (i) that they have received a complete answer to their request for information; (ii) that they have received all that they need in answer to that request; or (iii) that it is unnecessary for them to be provided with any information in answer to that request. (10) The Commissioners shall only be liable to pay interest under this section on a claim made in writing for that purpose. ….” (a) accounted to them for an amount by way of output tax which was not output tax due from him and, as a result, they are liable under section 80(2A) to pay (or repay) an amount 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. (a) on any amount which falls to be increased by a supplement under section 79; or (b) where an amount is increased under that section, on so much of the increased amount as represents the supplement. (a) beginning with the appropriate commencement date, and (b) ending with the date on which the Commissioners authorise payment of the amount on which the interest is payable. (a) in a case where an amount would have been due from the person by way of VAT in connection with the relevant return, had his input tax and output tax been as stated in that return, means the date on which the Commissioners received payment of that amount; and (b) in a case where no such payment would have been due from him in connection with that return, means the date on which the Commissioners would, apart from the error, have authorised payment of the amount on which the interest is payable; and in this subsection “the relevant return” means the return in which the person accounted for, or (as the case may be) ought to have claimed credit for, the amount on which the interest is payable. (a) beginning with the date on which the payment is received by the Commissioners, and (b) ending with the date on which they authorise payment of the amount on which the interest is payable. (a) beginning with the date on which, apart from the error, the Commissioners might reasonably have been expected to authorise payment of the amount on which the interest is payable, and (b) ending with the date on which they in fact authorise payment of that amount. (a) any unreasonable delay in the making of the claim for interest or in the making of any claim for the payment or repayment of the amount on which interest is claimed; (b) any failure by that person or a person acting on his behalf or under his influence to provide the Commissioners— (i) at or before the time of making of a claim, or (ii) subsequently in response to a request for information by the Commissioners, with all the information required by them to enable the existence and amount of the claimant’s entitlement to a payment or repayment, and to interest on that payment or repayment, to be determined; and (c) the making, as part of or in association with either— (i) the claim for interest, or (ii) any claim for the payment or repayment of the amount on which interest is claimed, of a claim to anything to which the claimant was not entitled. (a) begins with the date on which the Commissioners require that person to provide information which they reasonably consider relevant to the matter to be determined; and (b) ends with the earliest date on which it would be reasonable for the Commissioners to conclude— (i) that they have received a complete answer to their request for information; (ii) that they have received all that they need in answer to that request; or (iii) that it is unnecessary for them to be provided with any information in answer to that request. Section 79[37]Section 79 (which was introduced as section 20 of the Finance Act 1985) governs “repayment supplement” to be paid by the Commissioners in cases of delayed payments or refunds. This is an uplift (the greater of 5 % or £50) in the sum payable by the Commissioners where the statutory conditions are met: “(1) In any case where—(a) a person is entitled to a VAT credit, or(b) a body which is registered and to which section 33 applies is entitled to a refund under that section, or(c) a body which is registered and to which section 33A applies is entitled to a refund under that section, and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater. (2) The said conditions are— (a) that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and (b) that a written instruction directing the making of the payment or refund is not issued by the Commissioners within the relevant period, and (c) that the amount shown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250, whichever is the greater. (2A) The relevant period in relation to a return or claim is the period of 30 days beginning with the later of— (a) the day after the last day of the prescribed accounting period to which the return or claim relates, and (b) the date of the receipt by the Commissioners of the return or claim. (3) Regulations may provide that, in computing the period of 30 days referred to in subsection (2A) above, there shall be left out of account periods determined in accordance with the regulations and referable to— (a) the raising and answering of any reasonable inquiry relating to the requisite return or claim, (b) the correction by the Commissioners of any errors or omissions in that return or claim, and (c) in the case of a payment, the following matters, namely— (i) any such continuing failure to submit returns as is referred to in section 25(5), and (ii) compliance with any such condition as is referred to in paragraph 4(1) of Schedule 11. (4) In determining for the purposes of regulations under subsection (3) above whether any period is referable to the raising and answering of such an inquiry as is mentioned in that subsection, there shall be taken to be so referable any period which— (a) begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and (b) ends with the date on which the Commissioners— (i) satisfy themselves that they have received a complete answer to the inquiry, or (ii) determine not to make the inquiry or, if they have made it, not to pursue it further, but excluding so much of that period as may be prescribed; and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person. (5) Except for the purpose of determining the amount of the supplement— (a) a supplement paid to any person under subsection (1)(a) above shall be treated as an amount due to him by way of credit under section 25(3), and (b) a supplement paid to any body under subsection (1)(b) above shall be treated as an amount due to it by way of refund under section 33, and (c) a supplement paid to any body under subsection (1)(c) shall be treated as an amount due to it by way of refund under section 33A. (6) In this section “requisite return or claim” means— (a) in relation to a payment, the return for the prescribed accounting period concerned which is required to be furnished in accordance with regulations under this Act, and (b) in relation to a refund, the claim for that refund which is required to be made in accordance with the Commissioners’ determination under section 33 or (as the case may be) the Commissioners’ determination under, and the provisions of, section 33A. (7) If the Treasury by order so direct, any period specified in the order shall be disregarded for the purpose of calculating the period of 30 days referred to in subsection (2A) above.” (a) a person is entitled to a VAT credit, or (b) a body which is registered and to which section 33 applies is entitled to a refund under that section, or (c) a body which is registered and to which section 33A applies is entitled to a refund under that section, and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater. (a) that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and (b) that a written instruction directing the making of the payment or refund is not issued by the Commissioners within the relevant period, and (c) that the amount shown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250, whichever is the greater. (a) the day after the last day of the prescribed accounting period to which the return or claim relates, and (b) the date of the receipt by the Commissioners of the return or claim. (a) the raising and answering of any reasonable inquiry relating to the requisite return or claim, (b) the correction by the Commissioners of any errors or omissions in that return or claim, and (c) in the case of a payment, the following matters, namely— (i) any such continuing failure to submit returns as is referred to in section 25(5), and (ii) compliance with any such condition as is referred to in paragraph 4(1) of Schedule 11. (a) begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and (b) ends with the date on which the Commissioners— (i) satisfy themselves that they have received a complete answer to the inquiry, or (ii) determine not to make the inquiry or, if they have made it, not to pursue it further, but excluding so much of that period as may be prescribed; and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person. (a) a supplement paid to any person under subsection (1)(a) above shall be treated as an amount due to him by way of credit under section 25(3), and (b) a supplement paid to any body under subsection (1)(b) above shall be treated as an amount due to it by way of refund under section 33, and (c) a supplement paid to any body under subsection (1)(c) shall be treated as an amount due to it by way of refund under section 33A. (a) in relation to a payment, the return for the prescribed accounting period concerned which is required to be furnished in accordance with regulations under this Act, and (b) in relation to a refund, the claim for that refund which is required to be made in accordance with the Commissioners’ determination under section 33 or (as the case may be) the Commissioners’ determination under, and the provisions of, section 33A. Section 74[38]In relation to taxpayers, section 74 governs default interest payable on under-declared VAT (or over-claimed VAT credit). It provides that the last three years’ worth of sums due as shown on such an assessment shall carry interest from the reckonable date until payment at the rate applicable under section 197 of the Finance Act 1996. The rate is fixed by reference to the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No 1461, set out below, and is pegged at 2.5% above the average of the base lending rates of the six largest clearing banks. B Finance Act 1996, section 197 and The Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No 1461[39]Section 197 of the Finance Act 1996 provides the mechanism for establishing how the interest rates prescribed by section 78 (and section 74) are to be calculated: “(1) The rate of interest applicable for the purposes of an enactment to which this section applies shall be the rate which for the purposes of that enactment is provided for by regulations made by the Treasury under this section. (2) This section applies to— . . . (c) sections 74 and 78 of the Value Added Tax Act 1994 (interest on VAT recovered or recoverable by assessment and interest payable in cases of official error); . . . …” (c) sections 74 and 78 of the Value Added Tax Act 1994 (interest on VAT recovered or recoverable by assessment and interest payable in cases of official error); . . .[40]The Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998, SI 1998 No 1461, as amended (“the 1998 Regulations”), set out the formula to be used when calculating the interest due from and to taxpayers under sections 74 and 78. They entered into force on July 6, 1998. Regulation 2 contains the following definitions: “established rate” means—(a) on the coming into force of these Regulations, 6 per cent per annum; and(b) in relation to any day after the first reference day after the coming into force of these Regulations, the reference rate found on the immediately preceding reference day; “operative day” means the sixth day of each month; “reference day” means the twelfth working day before the next operative day.[41]Regulation 2(2) provides:
“(2) In these Regulations the reference rate found on a reference day is the percentage per annum found by averaging the base lending rates at close of business on that day of— (a) Bank of Scotland, (b) Barclays Bank plc, (c) Lloyds Bank plc, (d) HSBC Bank plc, (e) National Westminster Bank plc, and (f) The Royal Bank of Scotland plc, and, if the result is not a whole number, rounding the result to the nearest such number, with any result midway between two whole numbers rounded down.” (a) Bank of Scotland, (b) Barclays Bank plc, (c) Lloyds Bank plc, (d) HSBC Bank plc, (e) National Westminster Bank plc, and (f) The Royal Bank of Scotland plc, and, if the result is not a whole number, rounding the result to the nearest such number, with any result midway between two whole numbers rounded down.”
[42]Regulation 4(1)(c) provides that for the purposes of section 74, the rate applicable under section 197 shall, subject to paragraph (2), be 8.5 per cent per annum.[43]Sub-paragraphs (2) and (3) of regulation 4 provide:
“(2) Where, on any reference day after the coming into force of these Regulations, the reference rate found on that day differs from the established rate, the rate applicable under section 197 of the Finance Act 1996 for the purposes of the enactments referred to in paragraph (1) above shall, from the next operative day, be the percentage per annum determined in accordance with the formula specified in paragraph (3) below. (3) The formula specified in this paragraph is— RR + 2.5, where RR is the reference rate referred to in paragraph (2) above.”
RR + 2.5,[44]Regulation 5(1)(c) provides that, for the purposes of section 78, the rate applicable under section 197 of the Finance Act 1996 shall be 5 per cent per annum. Sub-paragraphs (2) and (3) then provide that:
“(2) Where, on a reference day after the coming into force of these Regulations, the reference rate found on that date differs from the established rate, the rate applicable under section 197 for the purposes of the enactments referred to in paragraph (1) above shall, from the next operative day, be the percentage per annum determined in accordance with the formula specified in paragraph (3) below. (3) The formula specified in this paragraph is— RR –1, where RR is the reference rate referred to in paragraph (2) above.”
RR –1,[45]Regulation 6 provides that:
“Where the rate applicable under section 197 for the purposes of any of the relevant enactments changes on an operative day by virtue of these Regulations, that change shall have effect for periods beginning on or after the operative day in relation to interest running from before that day as well as in relation to interest running from, or from after that day.”
[46]Regulation 7 provides:
“Where the rate applicable under section 197 for the purposes of any of the relevant enactments changes on an operative day by virtue of these Regulations, the rate in force immediately prior to any change shall continue to have effect for periods immediately prior to the change and so on in the case of any number of successive changes.”
C Interest rates[47]Since May 2001 the interest rate payable by the trader under section 74 has varied between 5.5% and 7.5% and is now 7.5%. In the same period the section 78 rate has varied between 2% and 4% and is now 4%. See customs.hmrc.gov.uk/channelsPortalWebApp.[48]The rate conventionally applied by the Commercial Court is 1% above Bank of England base rate. From May 2001 to date the rate has varied between 5.75% and 3.5% and is now 5.25%.[49]The rate on judgments under the Judgments Act 1838 has since April 1, 1993 been 8%, but an order of the VAT and Duties Tribunal is not a judgment for the purposes of the 1838 Act: Dr R. Nader t/a Try Us v. Commissioners of Customs and Excise [1993] STC 806, 814 (CA). IV The arguments A Relevance of section 78 (1). The Commissioners’ argument In general[50]In the absence of specific evidence supporting the award of a higher rate of interest, the rate of interest payable by the Commissioners under section 84(8) should be the rate prescribed by section 78.[51]Parliament has clearly determined that interest should be applied at a specified statutory rate in cases of official error. An official error by the Commissioners may be resolved by the Commissioners before an appeal is brought; or it may be the subject of an appeal. If an appeal is brought and the Commissioners then realise their mistake, it would be curious and illogical if the rate of interest should automatically be payable on a different basis, and at a higher rate, than would have been payable if the error had been resolved before any appeal were brought.[52]There is no rational basis for disparity in treatment of taxpayers, depending on whether or not an appeal has been lodged. If the Tribunal is perceived to apply a consistently higher rate of interest than the rate prescribed by section 78, the effect will be to create a perverse incentive for taxpayers to ignore the possibility of an administrative resolution of their claims and to lodge appeals as early as possible (and prior to any review taking place) in order to benefit from a perceived ability to earn enhanced interest. This would be contrary to the scheme and purpose of these provisions, which are intended to facilitate administrative resolution of cases of this kind on a statutory basis, as the primary and automatic remedy for dissatisfied taxpayers. RSPCA decision[53]There was no evidence before the Tribunal that the RSPCA was a net borrower or that it had incurred any specific financial loss as a result of the delayed payment by the Commissioners. No evidence was adduced as to what commercial rates might have been payable by the RSPCA had it been a borrower, or payable to the RSPCA if it had invested the money.[54]The Tribunal erred in preferring the reference rate under the 1998 Regulations, as amended, as the starting point for determining the appropriate rate of interest to award. In the absence of any specific evidence as to the saving rates available to investors, or to the RSPCA in particular, there was no basis to think that the 1% discount on a commercial lending rate, provided for under section 78, was in any way inappropriate. ToTel Decision[55]In relation to the ToTel Decision, the Commissioners say that the Tribunal erred in law in failing to take account of the evidence before it, namely that ToTel had not borrowed money consequent upon the Commissioners’ refusal (whether at the rate or on the terms awarded by the Tribunal or at all). The fact that ToTel had not borrowed should have led the Tribunal to conclude:(a) that there was no rational basis for awarding ToTel interest at a higher rate than the appropriate rate under section 78; and(b) that there was no rational basis for awarding ToTel interest at the rate and on the terms set out in the Decision.[56]Conventional practice in commercial cases (under section 35A of the Supreme Court Act 1981) is to award (simple) interest at base rate plus 1%. Although a higher rate may be justified, any such claim is dependent on evidence and proof that a claimant has in fact borrowed funds at a higher rate: Ahmed v Jaura [2002] EWCA Civ 210. Given that the evidence was that ToTel had not in fact borrowed at all, there was no justification for awarding the rate awarded. (2). Respondents’ argument In general[57]Section 84(8) is a self-standing provision and the discretion to determine the rate of interest is not affected by section 78 (or section 79).[58]In commercial cases, the commercial rate of base rate plus 1% operates as the presumed rate which can be displaced by evidence.[59]As a matter of statutory construction, there is no statutory wording to import section 78 (or indeed section 79) into section 84(8). The provisions have different purposes. Section 78 fulfils the purpose of providing for interest to be paid by the Commissioners in cases which are resolved prior to litigation. In that context, the rate payable by the Commissioners is set at a rate which is less than commercial: the matter has been resolved prior to litigation (and in probability fairly swiftly), and the best interests of all parties have been served. By contrast, the markedly higher rate of default interest payable by taxpayers acts as a spur to taxpayers to comply with their statutory obligations.[60]It would be wrong for any discrimination in favour of the Commissioners to continue even once litigation had commenced, at least not without clear words to effect it (as such clear words exist in the pre-litigation regime). RSPCA Decision[61]For present purposes, the RSPCA is content to adopt the reference rate prescribed by the 1998 Regulations as the appropriate starting point for the award of interest in this case and to accept it as a “commercial rate” (although it is lower than “the” commercial rate), without prejudice to any argument it may seek to advance on further appeal. There is no evidence or authority to support the Commissioners’ contention that a commercial rate of interest would be the reference rate less 1%.[62]Lengthy and detailed examination of the particular facts of a case would be necessary if evidence were required to justify any claim for interest. That is unattractive for the court system as a whole and would mark a departure from standard practice. The Tribunal was correct to award interest without any examination of the RSPCA’s specific circumstances, by reference to a published standard rate.[63]The RSPCA says, in answer to the Commissioners’ challenge to the use of the reference rate, that lending rates are conventionally used to determine the appropriate rate of interest in commercial disputes. VAT arises on supplies in the course of business and any losses are therefore necessarily of a business or commercial type, so justifying a commercial rate of interest. ToTel Decision[64]In this case, the Tribunal had evidence before it as to the rate of interest that ToTel would have had to pay had it borrowed the amount withheld over the period that it was wrongly retained by the Commissioners. The Tribunal was correct to adopt the rate set out in evidence from ToTel’s bankers. B Relevance of repayment supplement under section 79 (1). The Commissioners’ argument[65]Section 84(8) in effect provides for a judicial backstop, whereby the Tribunal can remedy any perceived failure in the scheme of administrative protection, to ensure that a taxpayer who is entitled to a payment or repayment from the Commissioners obtains appropriate compensation for any loss of use of the money occasioned by lapse of time until the Tribunal’s decision.[66]For that purpose, there is no reason artificially to ignore any payment received by the taxpayer pursuant to section 79. There is no basis for the Tribunal to take no account of the fact that the taxpayer has already received a substantial sum from the Commissioners in determining what interest should be paid in addition to the principal sum. The court should not follow R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs, ante.[67]Section 78 interest paid by the Commissioners on a statutory basis is taken into account by the Tribunal in the exercise of its discretion under section 84(8). There is no reason to adopt a different approach to the avoidance of double recovery by the taxpayer under section 79. That construction is necessary in order to give effect to the principle that a claimant is not entitled to recover twice for the same loss.[68]The sole argument of principle in support of the submission that section 79 payments should not be taken into account is that to do so would undermine their role as a sanction for maladministration. But section 79 payments are made on an administrative basis whenever it is shown that the statutory conditions are satisfied, regardless of whether any appeal to the Tribunal is likely to be made. Their salutary effect is therefore not undermined by the possibility that the Tribunal may on occasion take account of the fact that a section 79 payment has been made in the exercise of its discretion under section 84(8).[69]Section 78(2) expressly provides that no interest is payable by the Commissioners for administrative delay where repayment supplement is due under section 79(1). It follows that repayment supplement should be taken into account, and an appropriate deduction made, when the Tribunal awards interest under section 84(8). Otherwise the taxpayer could recover significantly greater sums on appeal, which would create a strong incentive to appeal to the Tribunal under section 83. That would overburden the Tribunal and disrupt the scheme of the legislation, which cannot have been the intention of Parliament. (2). Respondents’ argument[70]Repayment supplement is not interest, i.e. not payment for the use of the money, but is a punitive measure intended as a “spur to efficiency on the part of the Commissioners” (Customs and Excise Commissioners v L Rowland and Co (Retail) Ltd [1992] STC 647 at 655) and to “encourage prompt payment by the Commissioners” (Mobile Export 365 at para 24). Repayment supplement is the quid pro quo for the taxpayer facing a surcharge for late payment of tax due. It is a penalty paid by the Commissioners to mark their unsatisfactorily slow handing of the taxpayer’s claim. It is not a windfall.[71]Section 84(8) contains no cross reference to section 79, as it could easily have done if the payment of section 84(8) interest was intended to be subject to the payment of any repayment supplement: contrast the cross referencing words in section 78(2).[72]The scheme and purpose of the two regimes is different. Section 84(8) is aimed at the award of interest by judicial act as part of the disposal of an appeal, whereas sections 78 and 79 stand together as provisions governing the making of supplement and interest payments as an administrative matter: Mobile Export 365, para 34.[73]Section 79 would be deprived of effect if repayment supplement stood to be offset against the payment of interest under section 84(8), because the amounts in fact received by any taxable person would be the same regardless of whether the conditions for section 79 repayment supplement had been met. Those conditions appear at section 79(2), and in essence go to delay on the part of the Commissioners for which there is no reasonable excuse.[74]Repayment supplement is a statutory penalty levied against the Commissioners for failing to deal with Form 100 VAT Returns expeditiously. It is separate and distinct from provisions regarding interest, and is intended to equiparate the position of the Commissioners with taxpayers who are slow in accounting for sums due to the Commissioners. It bears no connection with the taxable person’s loss.[75]The RSPCA adds that the periods in issue were 3/01, 9/01, 12/01, 03/02, 06/02, 12/02, 03/03 and 09/03. A repayment was made only on October 20, 2004, in the amount of £4,333,328. The Commissioners wrote on March 14, 2005 acknowledging that “on this occasion the processing of your VAT return has fallen short of our usual high standards”and offered an apology for any inconvenience experienced. The Commissioners retained very large amounts of the RSPCA’s money for a very considerable period, and accepted in correspondence that they had failed in their obligations to the taxpayer. The Commissioners should not now be allowed to go behind that admission of culpability. C Compound interest (1). The Commissioners’ argument In general[76]Section 84(8) does not include any reference either to “compound interest” or to “simple interest.” The correct construction is that it refers to simple interest only. Section 84(8) must be read in the context of VATA as a whole. The construction of section 84(8) as providing for simple interest only is consistent with other sections of VATA concerning payment of interest, namely sections 74 and 78. Those other provisions provide that “interest” is payable, without stating in terms whether that interest is “simple” or “compound”. It is clear that only simple interest is payable under those provisions. Construing section 84(8) as permitting the award of compound interest would put it out of step with section 78, introducing a major distinction for no obvious reason.[77]If compound interest were available under section 84(8) on appeal to the Tribunal, that would create a strong incentive for taxpayers to appeal to the Tribunal rather than resolve disputes by other means, since the sums recoverable would be likely to be significantly greater. That would overburden the Tribunal and disrupt the scheme of the legislation, which cannot have been the intention of Parliament.[78]A statutory entitlement to compound interest is the exception rather than the rule. Thus in the field of indirect taxation, and by way of contrast to sections 74 and 78, there are express references to “compound” interest in provisions requiring the payment of compound interest, juxtaposed with provisions requiring simple interest that do not expressly state that the obligation that they create is to pay “simple” interest. A statutory power on a court or tribunal to award compound interest is exceptional. Under section 35A of the Supreme Court Act 1981, and section 69 of the County Courts Act 1984, there is a power to award simple interest only. The exception to the general rule is the Arbitration Act 1996, section 49. The statutory position is in keeping with the approach both at common law and in equity. RSPCA Decision[79]The RSPCA had expressly refrained from seeking compound interest and it was inappropriate for the Tribunal to seek to achieve the same effect as an award of compound interest by increasing the rate of simple interest payable to reflect compound rates.[80]There was no evidence to support the conclusion that it was appropriate to increase the reference rate payable by a multiplier, to reflect the fact that the bank base rates on which the reference rate was calculated would have been based on compounded rates of interest rather than simple rates. Had evidence been called by the RSPCA as to the minimum lending rates available from high street banks, the Commissioners could have called evidence concerning the rates available for savings accounts from the same institutions. ToTel Decision[81]The Commissioners say that the conclusion by the Tribunal in the ToTel Decision that it was bound by Sempra Metals Ltd v Inland Revenue Commissioners [2005] EWCA Civ 389, [2006] QB 37 to award compound interest was wrong in law. Community law neither confers any right nor power nor imposes any duty on the Tribunal to award compound interest.[82]Sempra was concerned with a breach of Community law resulting from the premature levying of a domestic tax. The claim for payment of interest covering the cost of loss of the use of money paid by way of the unlawful domestic measure was not ancillary to some other claim but was the very essence of the claim itself. In those circumstances, where the breach of Community law arose not from the payment of the tax itself but from its being levied prematurely, the award of interest represented reimbursement of what had been improperly paid and was essential in restoring the equal treatment guaranteed by Article 43.[83]By contrast, ToTel’s appeal did not concern a claim for restitution of a national tax levied in breach of Community law (or, indeed, restitution of anything, given that ToTel had paid nothing to the Commissioners) or compensation for damage resulting from a breach of Community law.[84]ToTel’s appeal concerned the question of statutory interest on a debt which was admitted, in connection with ToTel’s right to input tax deduction in accordance with VATA and the Sixth Directive. Payment of interest 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. (2). RSPCA’s argument[85]The RSPCA says that the Tribunal was asked to award simple interest, but it was entitled, in its search for a rate which would provide adequate compensation for the loss of the use of the money over the period, to take into account that the reference rate was itself a compoundrate and thus to adopt it without adjustment in the determination of simple interest would be, inevitably, to produce an undervalue, and to make the award on a false basis: Sempra,para 52.[86]The use of compounding reflects economic reality and is notprohibited by the statute (by contrast with section 35A claims). The fact that it was not sought in terms by the RSPCA does not prevent the court from arriving at a rate which will reflect fairly the economic reality of the fact that the RSPCA has been kept out of its money for a substantial period.[87]The effect of the Commissioners’ arguments is that, unless the Tribunal awards interest on a compound basis, it will be put in a position where it is forced to make the award on a false basis which produces an undervalue. (3). ToTel’s argument[88]Save that it must be exercised judicially, the power to award interest contained in section 84(8) is not fettered in any way.[89]If the legislature had intended for the power to be fettered, it would have specifically made provision for only simple interest to be awarded as it has done on other occasions: Law Reform (Miscellaneous Provisions) Act 1934; Supreme Court Act 1981 and County Courts Act 1984.[90]The Commissioners’ argument that if compound interest were available under section 84(8) it would create a strong incentive for taxpayers to appeal to the Tribunal, overburden the Tribunal and disrupt the scheme of the legislation, ignores the fact that the Commissioners must make a decision which falls within section 83 before any taxable person has standing to lodge an appeal to the Tribunal. If the Commissioners are of the view that the dispute can be resolved by means short of a decision that creates a right of appeal to the Tribunal, it is always open to them to invoke that alternative rather than making an appealable decision. Once an appealable decision is made, the options available to taxable persons are limited, and the only way to challenge such a decision is by way of formal appeal to the Tribunal. The provisions as to interest in VATA properly encourage the Commissioners to resolve issues without requiring the taxable person to resort to a formal appeal. If issues are resolved in the taxpayer’s favour short of a formal appeal, then only the interest provisions contained in section 78 Act can apply, whereas in the event of the taxpayer being required to appeal, and being successful on appeal, then the different provisions contained in section 84(8) will apply.[91]The Tribunal correctly concluded that Sempra was binding upon it and that there was no difference of substance or significance between actions based on an incorrect legislative implementation of European law (as in Sempra) and an error in its interpretation (as in this case). European law requires that full compensation be awarded to ToTel, which can only be achieved by an award of compound interest.[92]By cross-appeal ToTel challenges the Tribunal’s determination that the interest be compounded semi-annually. It argues that it is a notorious fact that High Street banks charge interest to borrowers on a compound basis with quarterly rests. That usual and ordinary practice should be applied to the present circumstances. Accordingly, the Tribunal erred in failing to take judicial notice of the frequency of rests to reflect the commercial reality of ToTel’s borrowing position. D Mitigation[93]This arises only in relation to the RSPCA Decision. (1). The Commissioners’ argument[94]A person seeking an order for interest against the Commissioners pursuant to section 84(8), as compensation for loss of the use of his money, is required to take reasonable steps to mitigate that loss.[95]The Tribunal erred in law in finding that the concept of a reasonable duty to mitigate one’s loss is not appropriate to questions of the assessment of interest under section 84(8). Interest is a sum payable to a claimant for being kept out of his money. It is not compensation for damages as such, but it does discharge a compensatory function in respect of loss of the use of money. It follows that if a claimant has failed reasonably to mitigate that loss, courts will award only what reasonably might be claimed. If a claimant, for example, has borrowing facilities available to him at 5% per annum, no court would award him 10% interest per annum as compensation for the loss of use of his money.[96]On the facts of this case, the Tribunal’s conclusion that the RSPCA did not fail reasonably to mitigate its loss was perverse. There was clear evidence before the Tribunal that the RSPCA was invited to make a claim for repayment of VAT due to it, subject only to the execution of a Deed guaranteeing recoupment by the Commissioners in the event that the balance of the claim was ultimately less than the sum paid to it. The sums involved were substantial. It would therefore have been able to recover large sums of money said to be due to it significantly earlier than it did. This would have improved the RSPCA’s cash flow and given it the use of the money which it claimed was due to it. The RSPCA unreasonably declined to enter into the Deed sought by the Commissioners ensuring that the sums repaid could be recouped (or more likely, set off) in the event that the RSPCA’s appeal succeeded.[97]The Commissioners were entitled to ask the RSPCA to enter into a Deed to protect the Revenue in the event that the appeal went against them. No evidence was called about the need for consent from the Charity Commissioners, or, if such consent were required, as to whether there was any likelihood of such consent being refused in the circumstances of this case. (2). RSPCA’s argument[98]There is no error of law in the Tribunal’s conclusion. The duty to mitigate arises in the context of damages claims. A litigant has no duty to mitigate an interest claim.[99]The Tribunal concluded on the facts that the RSPCA was entirely justified in not accepting the Commissioners’ suggestion that it should be repaid the money under a Deed following its voluntary disclosure. There was no perversity in that finding and the Tribunal’s view was the only sensible one that could be taken. The invitation to RSPCA to enter into the Deed was rejected by letter from the RSPCA’s advisers because the Commissioners had no power to enter into (or ask the RSPCA to enter into) this Deed: the Commissioners have powers within the legislation to issue “clawback” assessments (section 73(2)), but that power is subject to the three year time limit in section 77(1). The Commissioners were apparently seeking to circumvent the operation of the statutory limitation period by the use of the Deed. The RSPCA justifiably questioned whether the Commissioners had power to do this.[100]Further, the Commissioners were offering to repay under a Deed on the basis that the RSPCA would make a voluntary declaration that it had overdeclared its output tax but underdeclared its input tax: that was the Commissioners’ analysis with which the RSPCA has never agreed and which the Commissioners have now conceded to be wrong. The RSPCA was therefore being asked to make a voluntary declaration on a basis which it considered to be false.[101]As the Tribunal found, the proposal was not accompanied by any offer to pay the costs of seeking legal advice in connection with it; and the RSPCA would have required the consent of the Charity Commissioners (the Tribunal so found on the basis of an oral submission from the RSPCA’s counsel on taking specific instructions) in respect of which the Commissioners were not offering payment of legal or other expenses. The Deed would only have covered a small proportion of the overall tax.[102]The Tribunal’s finding that the RSPCA was justified in not accepting the Deed is unimpeachable as a finding of fact on the principles of Edwards v Bairstow [1956] AC 14. E Starting date RSPCA Decision[103]The Commissioners say that the Tribunal erroneously found that interest ran from June 21, 2001. The Commissioners were still awaiting documentation until August 2001. Thereafter, the Commissioners were indeed considering whether or not the arrangements put in place by the RSPCA amounted to an abusive practice. The Commissioners would not have authorised repayment until January 2002, and interest should have run from that date. The Commissioners were entitled to make reasonable enquiries to establish the credibility of the repayment claim. Documentation to support the repayment claim was not immediately forthcoming. Full documentation was not provided until the end of December 2001.[104]The RSPCA says the starting date was based on the Tribunal’s own lengthy examination of the correspondence which contained detailed arguments in the early stages about the Tribunal’s decision in Halifax [2001] V&DR 73 and in the latter stages about the European Court’s decision in Case C-97/90 Lennartz v Finanzamt München [1995] ECR I-3795,[1995] STC 514.[105]The conclusions that by June 21, 2001 the reason for the delay was the Commissioners’ wrong view of the law and that the RSPCA was not guilty of any substantial delay are findings of fact which cannot now be disturbed.[106]It is not material that the Commissioners’ investigations continued after June 21, 2001. Those investigations were focussed on the Commissioners’ erroneous view of the law and the RSPCA should not be penalised in interest for that period.[107]The later judgment in Mobile Export 365 endorses the Tribunal’s approach by allowing a longer period for the payment of the first claim to allow for investigation (in that case limiting it to 30 days rather than the 7 weeks or so allowed by the Tribunal in this case), and then indicating that “subsequent claims, when those investigations have already been made, will not attract the extended period”(para 40). The Commissioners’ own published targets are for payment within 10 days of claim: Notice 700/58. ToTel Decision[108]ToTel argues that the Tribunal was wrong to take a 30 day period. Notice 700/58 provides a benchmark of 10 days, and there is no reason to depart from that benchmark.[109]It would be contrary to the European Community principle of proportionality if the calculation of interest did not take as its starting point the date on which the VAT balance in question would have had to have been repaid in the normal course of events: Joined Cases C-286/94 etc Garage Molenheide BVBA and others v Belgium [1998] ECR I-7281,[1998] STC 126, para 64.[110]The Commissioners say that there is nothing in the Garage Molenheide case which affects the conclusion that the Tribunal was entitled to take a 30 day period on the facts of the case. VIII Conclusions The discretion[111]The starting point is that section 84(8) gives the Tribunal a discretion, and contains no guidance as to how it is to be exercised or what factors are relevant in the exercise of the jurisdiction.[112]As will appear, I have detected some errors of principle in the Decisions under appeal, in relation to the award of compound interest and in relation to the award of a higher than conventional rate of interest in the ToTel Decision.[113]In my judgment it would be wrong for me to attempt to fetter the discretion by attempting to lay down guidelines as a gloss on the legislation. But I will say that it would not be easy to criticise a Tribunal if it applied principles commonly applied in cases involving commercial entities, even if the relationship between the trader and the Commissioners is not a commercial one. In civil cases, the overriding principle is that interest should be awarded to the claimant not as compensation for the damage done but for being kept out of money which ought to have been paid to him: London, Chatham and Dover Ry. Co. v. South Eastern Ry. Co. [1893] A.C. 429 at 437; Deeny v. Gooda Walker (No. 3) [1996] LRLR 168.[114]Conventional practice in commercial cases (under section 35A of the Supreme Court Act 1981) is to award simple interest at base rate plus 1% (described by the Law Commission, Pre-Judgment Interest on Debts and Damages, Law Com No 287, 2004, para 3.41, as “relatively low”).[115]I do not consider that there is any overriding reason of principle why a higher rate should not be adopted by the Tribunal in the circumstances of a particular case, either because that rate is reasonably considered too low, or because on the facts the taxpayer has had to borrow at a higher rate. The former case would no doubt be rare. In the latter case there must be some evidence on which the Tribunal can act.[116]In commercial cases, although a rate higher than the conventional rate may be justified, any such claim is normally dependent on evidence that a claimant has in fact borrowed funds at a higher rate: Shearson Lehman Hutton Inc v Maclaine Watson and Co Ltd (No 2) [1990] 3 All ER 723; Ahmed v Jaura [2002] EWCA Civ 210 at paras [12], [20]; R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs [2006] EWHC 311 (Admin), [2006] STC 1069, at paras [35] to [38]. In Ahmed v Jaura[2002] EWCA Civ 210 at [26] (in which the rate which was applied was 3% above base rate) Rix LJ said:
“It is right that defendants who have kept small businessmen out of money to which a court ultimately judges them to have been entitled should pay a rate which properly reflects the real cost of borrowing incurred by such a class of businessmen. The law should be prepared to recognise, as I suspect evidence might well reveal, that the borrowing costs generally incurred by them are well removed from the conventional rate of 1% above base (and sometimes even less) available to first class borrowers.”
[117]The rate will normally reflect the cost of borrowing rather than the return on lending: Sempra Metals v Inland Revenue Commissioners [2004] EWHC 2387 (Ch) (Park J), at para. 30, approved by the Court of Appeal: Sempra Metals Ltd v Inland Revenue Commissioners [2005] EWCA Civ 389, [2006] QB 37, at para 47.[118]I should add that the judgment debt rate (which has been 8% since April 1, 1993) is not of direct relevance even in relation to the enforcement of a judgment in a VAT appeal. An order of the Tribunal is not a “judgment” for the purposes of the 1838 Act: Dr R. Nader t/a Try Us v. Commissioners of Customs and Excise [1993] STC 806, 814 (CA).[119]The following questions then arise: May the Tribunal take into account the rate which would be payable under section 78? Must the Tribunal take into account the section 78 rate? May, or must, the Tribunal take into account any section 79 repayment supplement which has been paid, and, if so, how? Section 78[120]The Commissioners’ argument is that in the absence of specific evidence supporting the award of a higher rate of interest, the rate of interest payable by the Commissioners under section 84(8) should be the rate prescribed by section 78.[121]In response to a question from the court, the Commissioners have indicated that their position is that they are prepared to consider bona fide evidence of actual borrowing from a taxable person to support a rate of interest higher than that paid under section 78. The Commissioners would require the following criteria to be met:(1) the increased borrowing took place and the interest claimed was actually paid by the claimant;(2) the evidence is from a reputable financial institution from whom a business carrying out normal commercial activities would be expected to be able to borrow money;(3) the financial institution is entirely independent of the business making the claim for interest;(4) the claimant can show not only that it has borrowed at the interest rate claimed, but that the rate is typical for a fully secured loan entered into by a business of that size and turnover, carrying on a normal mainstream commercial activity;(5) in the event that a business maintains that the effect of the Commissioners’ action has been to cause it to enter into borrowing at a higher rate of interest, it will be required to show that the business was solvent before the Commissioners refused credit, i.e. that it was not borrowing on this basis before the Commissioners took action; and(6) there is clear evidence that the borrowing was used to finance the continuation of the claimant’s business activity and that it was in respect of the same business activity in respect of which the claim for a VAT credit had been refused by the Commissioners.[122]I do not accept that the policy considerations invoked by the Commissioners justify, in effect, reading section 78 into section 84(8). There is no inconsistency in logic or practice between having one rate where an official error is resolved prior to appeal, and another rate where there is an appeal.[123]The relevance of section 78 rates has been touched on in two High Court decisions. R (on the application of Elite Mobile plc) v Customs and Excise Commissioners [2004] EWHC 2923 (Admin), [2005] STC 275 and R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs [2006] EWHC 311 (Admin), [2006] STC 1069 were both decisions awarding section 35A interest in judicial review proceedings. They were not cases on section 84(8).[124]R (on the application of Elite Mobile plc) v. Commissioners of Customs and Excise was an application for judicial review of a refusal by the Commissioners to pay interest under section 35A and a repayment supplement under section 79 on the sum of £5.2 million claimed as input tax. The Commissioners repaid the claimant on the claimant’s withdrawal of its application for judicial review of the Commissioners’ decision not to repay that sum. The Commissioners offered interest under section 78, and the claimant sought interest at 8% under either or both of section 35A or Community law. The judgment indicates that the claimant was seeking judicial review of the refusal to pay interest at the rate which the claimant sought. This was not a case involving interest awarded on an appeal, and it is unclear on what basis the matter was properly before the court.[125]Lindsay J said that nothing which he said was intended to bind other judges, but that the rate which should be ordered over the period until the position under section 79 had been established was the rate applicable under section 78, and that rate was not so materially out of step with current commercial rates as to be characterised as unjust for the purposes of Community law. He said:
“34. There is nothing, in my judgment, that precludes a court, when fixing a rate of interest under the discretion conferred by s 35A(3), from having in mind that Parliament has in some instances – ie under s 78 - prescribed rates of interest as to repayment of VAT. One cannot jump from the proposition that Parliament has prescribed certain rates for cases falling within s 78 to the conclusion that those rates were outlawed for cases outside s 78. 35. No evidence was led by Elite as to the s 78 rules being unusually inappropriate or as to the judgment rate of 8% being especially appropriate on the facts of this case. The discretion to fix a rate of interest that is conferred on the Court by s 35A(3) is unfettered save only to the extent that the discretion is to be judicially exercised. Nothing I say here, therefore, can or is intended to bind other judges in other cases but assuming, for the reasons which I have given, that s 35A does apply on the facts before me … I see it as both convenient and just to fix the appropriate rate or rates as those which would have been from time to time applicable under s 78.”
[126]R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs [2006] EWHC 311 (Admin), [2006] STC 1069 was also a decision in judicial review proceedings. The Commissioners had not settled the taxpayer’s claim for repayment of input tax (in the amount of £10 million). The taxpayer had brought proceedings in August 2005 for repayment of the input tax for the periods May and June 2005. In February 2006 the Commissioners repaid the money “without prejudice”. The taxpayer sought interest at rates of between 11% and 12% on sums due to be repaid to it.[127]Collins J held that judicial review proceedings would not perhaps usually be regarded as appropriately described as proceedings “for the recovery of a debt” within the meaning of section 35A; but a claim for a mandatory order for payment of what was allegedly due and owing coupled with a claim for damages might properly be regarded as engaging section 35A. Collins J said that he was not inclined to dissent from the acceptance by Lindsay J in Elite Mobile that section 35A was engaged in circumstances such as arose in Mobile Export 365. The judgment rate was not an appropriate rate to look at as a starting point; and the commercial rate was the correct rate which should be applied under section 35A, and the standard for the commercial rate was base plus 1% in the absence of any specific evidence in a particular case to the contrary.[128]As regards the section 78 rate, Collins J said (at paras 33 and 37):
“It seems to be that it is also proper to have regard to s 78 of the Value Added Tax Act 1994, but I do not follow Lindsay J in Elite Mobile entirely. It does not seem to me that it should be regarded as the rate which must apply. However, it is a relevant consideration. It would, after all, have been the rate applicable if proceedings had not been instituted and it was simply a case of the Commissioners delaying payment because they believed they had the legal right to do so, and then discovering that they did not and making the payment in question. One does have to ask oneself the question why the issue of proceedings should make all the difference. But it is clear that it does to some extent, and certainly that is what has been decided by the Tribunal in relation to s 84(8), because one might say that similar considerations could apply in those cases as well. … However, although I do not go the whole way with Lindsay J, I do regard the s 78 rates as a material consideration.”
[129]As regards the rate, Collins J thought that the commercial rate of base rate plus 1% was somewhat too low. Having regard to the evidence (that the taxpayers were borrowing at 11%), coupled with the section 78 rates, he adopted a figure of base plus 2.5%, which produced 7% overall.[130]In Olympia Technology Ltd v Her Majesty’s Revenue and Customs, decision of Stephen Oliver QC, Chairman, May 23, 2005 decision number 19145, there had been an appeal, but the Commissioners withdrew the disputed decision. The President said that section 84(8) stood on its own and was unaffected by the operation of sections 78 and 79, agreeing with the conclusion of the Tribunal in UK Tradecorp vCustoms and Excise Commissioners [2004] V&DTR 195. In what was agreed to be a confusing paragraph (para 16) the tribunal said that the message from Elite Mobile was that in a VAT context the section 78 rate should be used unless it was so significantly out of line with current commercial rates that it could be characterised as unjust. Neither side produced any evidence as to current commercial rates, which left the Supreme Court rate of 8%, and comparing that with the 7.5% rate prescribed by SI 1998/1461 for the purposes of Section 197, the latter was not so far out of line and was therefore adopted. In the present case the Commissioners pointed out that what was in fact being applied in that Decision was the section 74 rate.[131]The effect of the decisions of Lindsay J in Elite Mobile and of Collins J in Mobile Export 365 is that, when exercising the discretion under section 35A, the court may take into account the section 78 rates. Despite what was said in Mobile Export 365, it seems that Lindsay J had not in fact suggested that the section 78 rate must apply. The Decision in Olympia Technology Ltd goes somewhat further.[132]In my judgment, the section 78 rate is simply a matter to which the Tribunal may have regard or which it may take into account before assessing what is just in the circumstances. It is not the rate which must be applied, nor is it the rate which should be taken as the starting point. It is section 84(8) which governs, and not section 78. Section 79 repayment supplement[133]Auld J in Customs and Excise Commissioners v L Rowland and Co (Retail) Ltd [1992] STC 647 at 655 described the repayment supplement “as a spur to efficiency on the part of the Commissioners”.[134]In Mobile Export 365 Ltd [2006] EWHC 311 (Admin), [2006] STC 1069 Collins J asked himself, in the exercise of discretion under the Supreme Court Act 1981, section 35A, whether there was any guidance to be found from other provisions (para 16), and said, “It is also relevant to look at s 79” (para 18), and went on (para 24) “… the purpose behind s 79 is to encourage prompt payment by the Commissioners, and prima facie the claimants are entitled to that 5% supplement. But because it was not intended as a substitute for interest, it would not generally be right to reduce the amount otherwise considered appropriate by way of the correct rate of interest because of s 79”.[135]Although the judgment refers to a letter in which repayment supplement was being considered, it is not said in terms in the judgment that repayment supplement had in fact been paid in that case. If repayment supplement was not paid, then any discussion of the point would plainly have been obiter. What he seems to have been considering was whether the rate he was to award on the sums claimed should be affected by the fact that the amount normally payable under section 79 is 5% of the sum due (irrespective of the period).[136]Repayment supplement is a statutory penalty levied against the Commissioners for failing to deal with VAT Returns expeditiously, and as was pointed out in Olympia Technology Ltd, para 10, it does not produce an interest formula of the sort required for the application of section 84(8). I do not consider that as a matter of principle the section 84(8) interest should be adjusted in order to take account of a section 79 repayment supplement. Again, it is section 84(8) which applies, and not section 79.[137]But that does not mean that there may not be circumstances in which the Tribunal can take account of, or have regard to, the fact that repayment supplement has 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 may be unrealistic and unjust not to have regard to the receipt of the repayment supplement. I therefore consider that the Tribunal may have regard to the fact that there has been a section 79 repayment supplement, especially where the trader claims on the basis of evidence that interest should be higher than a conventional rate. Compound interest[138]There is a very valuable discussion on compound interest in the Law Commission Report, Pre-Judgment Interest on Debts and Damages, Law Com No. 287 (2003). The recommendation is that there should be a specified rate set each year at 1% above Bank of England base rate, as a starting point, but the courts should have a discretion to depart from that rate where there is good reason to do so. The court should have power to award compound interest in appropriate circumstances, particularly in large cases, and in cases of awards of £15,000 or more there should be a rebuttable presumption in favour of compound interest.[139]I am satisfied that 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 must be construed against the background of(a) other provisions of VATA;(b) other legislation; and(c) the approach at common law and equity. Against that background I do not consider it would be possible or legitimate to construe the word “interest” to include compound interest.[140]First, sections 74 and 78 provide that “interest” is payable, without stating in terms whether that interest is “simple” or “compound”, but it is clear that only simple interest is payable under those provisions.[141]Second, a statutory power on a court or tribunal to award compound interest is exceptional:(1) under section 35A of the Supreme Court Act 1981, the High Court has power to award simple interest only;(2) under section 69 of the County Courts Act 1984, county courts have power to award simple interest only;(3) the Court of Appeal’s only powers under statute are to award simple interest: under CPR Rule 52.10(1) the Court of Appeal’s powers are defined by the power of the lower court; and(4) the House of Lords has no statutory power to order compound interest. The same was true under the Law Reform (Miscellaneous Provisions) Act 1934, section (now largely superseded).[142]The precursor to the Supreme Court Act 1981, section 35A, was the Law Commission’s Report on Interest (1978) Law Com No 88, which recommended that the powers available under the 1934 Act should be widened so as to provide interest in cases resolved after proceedings were issued but before trial, whether through settlement or default judgment. It recommended that interest should continue to be simple on the grounds that a system of compounding was bound to be either too crude to be fair in all cases or too intricate to be practicable. The 2003 Report concluded that since 1978 the technology for conducting such calculation has changed beyond recognition and this reason no longer holds the force that it did in 1978.[143]The exception to the general rule is the Arbitration Act 1996, section 49 of which makes express provision for an arbitral tribunal to award “simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case …”.[144]Third, outside the area of litigation, a statutory entitlement to compound interest is the exception rather than the rule. For examples in the field of indirect taxation, and by way of contrast to sections 74 and 78, there are express references to “compound” interest in provisions requiring the payment of compound interest, juxtaposed with provisions requiring simple interest that do not expressly state that the obligation that they create is to pay “simple” interest: Finance Act 2000, Schedule 6 (Climate Change Levy), paras 81 – 86; Finance Act 1996, Schedule 5 (Landfill tax), paras 26-27; Finance Act 2001, Schedule 5 (Aggregates Levy), paras 5-10; Schedule 8, para 6; Schedule 10, para 5.[145]Fourth, the statutory position is in keeping with the approach both at common law and in equity. There is no power at common law to award interest (simple or compound). The equitable jurisdiction to award compound interest is only available in limited circumstances, properly described as exceptional. The circumstances are limited to fraud, breach of trust and breach of fiduciary duty: Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] A.C. 669, 700-702, per Lord Browne-Wilkinson, 718-719, per Lord Slynn; Law Commission, Pre-Judgment Interest on Debts and Damages, paras 2.23 to 2.27.[146]If the Tribunal has no power to award compound interest directly, it seems to me to have been an error of principle in the RSPCA Decision to adjust the rate to take account of compounding, although I accept that in practice a realistic rate of interest is bound to reflect some element of compounding. European law[147]The next question, which arises in relation to the ToTel decision, is whether Community law requires the award of compound interest.[148]It is established under Community law that the vindication of directly effective Community rights may require the payment of interest. In Case C-271 91 Marshall v Southampton and South WestHampshire Area Health Authority (Teaching) (No 2) [1993] ECR I-4367, [1994] QB 126 Mrs Marshall was employed by a Health Authority and was dismissed at the age of 62. She claimed, ultimately successfully, that, since the retirement age for men was 65, she had been the victim of unlawful discrimination on the ground of her sex contrary to the Council Directive (76/207/EEC) on equal treatment. At the relevant time the United Kingdom legislation limited the maximum sum payable as compensation to £6,250 and did not provide for the payment of interest. The industrial tribunal held itself bound by Community law to award adequate compensation, and made an award which included £7,710 in respect of interest. The House of Lords referred to the European Court the question (inter alia) whether it was essential to the implementation of the equal treatment directive that compensation should include an award of interest.[149]The European Court ruled (para 26) that where financial compensation was the measure adopted in order to achieve the objective of equality it must be adequate, in that it must enable the loss and damage actually sustained as a result of the discriminatory dismissal to be made good in full in accordance with the applicable national rules; and (para 31) that compensation could not be limited by the fixing of an upper limit or by the exclusion of an award of interest to compensate for loss sustained as a result of the effluxion of time until the capital sum awarded was actually paid:
“... suffice it to say that full compensation for the loss and damage sustained as a result of discriminatory dismissal cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value. The award of interest, in accordance with the applicable national rules, must therefore be regarded as an essential component of compensation for the purposes of restoring real equality of treatment.”
[150]The ruling was that reparation of the loss and damage may not be limited by excluding an award of interest to compensate for the loss sustained by the recipient of the compensation as a result of the effluxion of time until the capital sum awarded is actually paid.[151]The European Court was not asked to consider whether the amount of interest actually awarded in the Marshall case was sufficient for those purposes.[152]But it is also clear that not all directly effective Community rights require the payment of interest to vindicate them. Case C-66/95 R v Secretary of State for Social Security, ex p Sutton [1997] ECR I-2163, [1997] ICR 961 concerned a claim for the payment of interest on an amount awarded for arrears of a social security benefit which had initially not been paid for reasons which amounted to sex discrimination contrary to Council Directive 79/7/EEC on equal treatment. The European Court ruled that the question whether the claimant was entitled to interest was a matter for national law because the payment of interest on arrears did not constitute “an essential component of the right so defined.”[153]Joined Cases C-397/98 and C-410/98 Metallgesellschaft Ltd and others, Hoechst AG and Hoechst UK Ltd v IRC [2001] ECRI-1727, [2001] Ch 620, [2001] STC 453 concerned the compatibility of provisions of the United Kingdom direct corporation tax regime with (amongst other things) the rules governing freedom of establishment (Article 43 of the EC Treaty, formerly Article 52).On a reference from the High Court under Article 234 of the EC, the European Court held, at para 76 that:
“… it is contrary to article [43] of the Treaty for the tax legislation of a member state, such as that in issue in the main proceedings, to afford companies resident in that member state the possibility of benefiting from a taxation regime allowing them to pay dividends to their parent company without having to pay advance corporation tax where their parent company is also resident in that member state, but to deny them that possibility where their parent has its seat in another member state.”
[154]The European Court concluded that an award of interest represented “the ‘reimbursement’ of that which was improperly paid” and was “essential in restoring the equal treatment guaranteed” by Article 43 (para 87), and was essential “if the damage caused by the breach of article [43] of the Treaty is to be repaired” (para 95):
“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, second, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness) … 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 … 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 [43] of the Treaty.”
[155]The European Court said that the Marshall case was a case where the award of interest was an essential component of compensation for the purposes of restoring real equality of treatment, whereas in the Sutton case the Community Directive only conferred the right to obtain the benefit in question and payment of interest could not be regarded as an essential component of the right as so defined. What is now Article 43 required 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.” In particular, “the mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action.” In the absence of Community rules, it was for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, but those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.[156]None of these cases touched upon the question whether, and if so, in what circumstances, Community law required the payment of compound interest.[157]In Sempra Metals Ltd v Inland Revenue Commissioners [2005] EWCA Civ 389, [2006] QB 37 (“Sempra”)the Court of Appeal considered claims to recover interest resulting from the Metallgesellschaft ruling. The Court of Appeal decided:(1) the task of the national court was to give effect to the decision of the European Court by providing the remedy in respect of the loss suffered by the taxpayer by reason of the premature payment of advance corporation tax which Community law required;(2) that remedy was full compensation for the loss of the use of the money, and the measure of compensation was interest accrued on the money over the premature payment period;(3) rates at which commercial loans were offered (such as LIBOR or base rate) were set on the basis that interest would be paid periodically, and so if the rate chosen was set by reference to the rates at which commercial loans were offered on the market, a computation made on the basis of simple interest at that rate would be made on a false basis, and would ignore a critical feature which was inherent in the rate which had been chosen, and would produce an under value;(4) Community law required full compensation for the loss of the use of the money, and full compensation for the loss of the use of money required that interest be compounded, at least where the rate of interest chosen was a rate set by reference to the periodic payment of compounding of interest; and(5) the English domestic rules as to interest failed to provide the remedy which Community law required, and those rules must yield to the overriding requirement that the domestic court give full compensation.[158]An appeal in Sempra has been argued in the House of Lords, but judgment has not yet been given. 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. Nor do I consider that C-78/00 Commission v Italy [2001] ECR I-8195 assists. That case simply decided that Italy could not discharge its liability to repay VAT by issuing Government bonds to taxpayers, because they were not equivalent to cash: if the taxpayer needed working capital it would have to borrow at higher rates than the bonds yielded, or sell the bonds at a discount and subject to costs and commissions.[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. See Schermers and Waelbroeck, Judicial Protection in the European Union, 6th ed. 2002, paras 388 et seq. Most of the early cases on the principles concerned the conditions under which national law could impose time limits on the exercise of Community rights: see Collins, European Community Law in the United Kingdom, 4th ed. 1990, pp 62 et seq.[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 was essential in restoring the equal treatment guaranteed by Article 43.[162]Here the appeals concerned the determination of the existence and quantum of the taxpayers’ right to input tax deduction in accordance with VATA 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.[164]The question of whether interest should be compounded quarterly, as submitted by ToTel, does not arise. Mitigation and start date[165]In its VAT return for the period 03/01 the RSPCA claimed £2,317,425 input tax, the greater part of which related to the building, on the basis that it was fully recoverable as attributable to an intended taxable supply to Properties. The date of the return was April 30, 2001, and would have been received by Customs in early May 2001.[166]On May 21, 2001, Mrs. Halliday wrote to the RSPCA stating that the RSPCA’s VAT return for the period 03/01 had been referred to her. She asked for documentation previously requested, and said that she was unable at that stage to authorise the repayment.[167]On May 23, 2001, the RSPCA replied with information indicating that £1,396,532 of the claimed input tax related to the new building. On May 25, 2001, Mrs. Halliday asked for further information and documents.[168]On June 21, 2001, Mrs. Halliday wrote to the RSPCA setting out her understanding of the transactions and seeking extensive documents and information, including advice given to the RSPCA, so that she could come to a decision on the claim. By letter of June 25, 2001, Mr Bennett of Deloitte & Touche provided some of the documentation requested, but refused to supply copies of the advice given by Deloitte and Touche. On July 16, 2001 he provided further documents, including a copy of the tax invoice raised by the RSPCA on the sale of the building.[169]In a letter dated July 18, 2001, Mrs. Halliday pointed out to Mr. Bennett the copies of the documents which she still had to receive and made further requests for other documentation.[170]In August 2001 Properties raised an invoice to the RSPCA for £9.6 million, plus £1,680,962 VAT in respect of part payment for the building, and the RSPCA claimed input tax on the full amount of the invoice from Properties in its 09/01 return.[171]On August 23, 2001, Mr Bennett wrote to Mrs Halliday enclosing the remainder of the documents sought with the exception of written advice given to the RSPCA about the proposed arrangements, on the ground that the Commissioners had no power to demand copies of advice. They requested that a decision be taken on the repayment claims made to date.[172]On September 12, 2001, Mrs. Halliday pointed out that, contrary to the RSPCA’s assertion, not all of the documentation had been provided. She stated that the Commissioners did not agree that they had no power to require production of the Deloitte & Touche advice, although they accepted that they did not have power to require production of documents in relation to which legal professional privilege was claimed. She requested Deloitte & Touche to enumerate the documents for which privilege was claimed, together with the grounds therefor.[173]In his letter in reply of October 5, 2001, Mr. Bennett stated the RSPCA’s intention to consult Counsel with regard to the request for documentation that had been made. He requested an extension of the period within which to answer the request to December 21, 2001. He added:
“I appreciate that payment of the refunds due to the RSPCA and Properties is on hold pending the outcome of your consideration of all matters relevant to the circumstances. Accordingly, I accept that no repayments of VAT relating to the new headquarters transactions will be made during the extension requested. I can confirm that both the RSPCA and Properties are aware of the effect the request will have in this respect.”
[174]Further documents were supplied to Customs by Nabarro Nathanson on behalf of the RSPCA, and a decision was then taken by Customs to decline to meet the repayment claims made by the RSPCA under cover of a letter dated January 11, 2002.[175]Because the result of the Commissioners’ decision was that, on their analysis, Properties had overpaid VAT, it was invited to submit a repayment claim under the Value Added Tax Act 1994, section 80. Mrs. Halliday indicated in her letter that she would be happy to pay such a claim, “so long as the Commissioners’ position can be adequately protected, in particular against the risk that my decisions are not upheld, and I am obliged to release the balance of the repayment claimed for 03/01.”[176]The RSPCA and Properties each appealed against that decision on February 8, 2002.[177]On March 28, 2002, Mrs Halliday re-iterated that on her analysis the RSPCA could have claimed its normal recovery percentage, and said that it should contact her so that they could discuss the conditions under which any claim would be paid.[178]On May 24, 2002, Mrs Halliday indicated that one method of ensuring that the Commissioners could recoup sums so repaid in the event that an appeal went against them would be for the RSPCA and the Commissioners to enter into a Deed by which the sums repaid would be recoverable by the Commissioners in the event that they lost the appeal. On June 7, 2002, the offer to enter into a Deed was reiterated by Mrs Halliday, subject to approval by the Commissioners.[179]On July 19, 2002, Deloitte & Touche, on behalf of the RSPCA, declined to enter into the Deed sought by Customs, stating that the proposed Deed:
“...would extend the Commissioners’ powers beyond those given to them by Parliament. The Commissioners’ power to raise assessments within a given time frame and, if necessary, to raise protective assessments, should suffice. It seems totally unreasonable, given the Commissioners’ decision, that they should now agree to pay monies in line with their decision only if the taxpayer signs a deed which seeks to change the application of the law as envisaged by Parliament. Insistence that this deed be signed to ensure release of money should, in our view, be seen as an abuse of power.”
[180]Mrs Halliday stated on August 16, 2002 that the Commissioners were obliged to take steps to protect the Revenue where recovery of any sums repaid (in the event of a successful appeal by the RSPCA) might be in doubt. On October 28, 2002 Ms Joad of Customs, Solicitor’s Office, said that she had taken instructions, and the Commissioners would consider the use of a Deed to secure repayment pending appeal, but could not reach a decision as to whether such an arrangement would be appropriate until they had verified the RSPCA’s voluntary disclosure and had completed the formal reconsideration of the case. On November 20, 2002 Mrs Halliday stated that the Deeds (for the claims by the RSPCA and by Properties) would be without prejudice to the RSPCA’s contentions, and added:
“Nothing in this letter should be taken as implying any legal obligation on the part of either RSPCA, or Properties, to enter into deeds with the Commissioners. Both RSPCA and Properties are asked to enter into the deeds of their own free will, but if they do not wish to do so, they are perfectly entitled to rely solely on their statutory rights.”
[181]The RSPCA declined to enter into the Deed sought.[182]On January 17, 2003 the Commissioners’ review decision was issued, confirming the original decision.[183]On November 21, 2003, Customs wrote to the RSPCA confirming the Commissioners’ acceptance of the Lennartz principle in relation to construction services to create a building, and offering on a without prejudice basis to settle the matter, including payment to the RSPCA of £2,072,473.02 shown as output tax by the RSPCA in its 06/01 return, and the input tax for the period 03/01 in respect of the construction costs: the appeals would be withdrawn and each party would bear its own costs. Mr. Bennett replied on behalf of the RSPCA on December 9, 2003 inviting the Commissioners to concede the appeal made by the RSPCA against the Commissioners’ decision. He asked that the Commissioners confirm that statutory interest under the Value Added Tax Act 1994, section 78 should be paid, as there had been an official error.[184]On December 29, 2003, Mr. Chris Colford of Customs, Anti-avoidance Team, informed Mr. Bennett of Deloitte & Touche that the Commissioners would withdraw their contested decisions. His letter stated under the heading “Interest”:
“I expect that your clients will be entitled to some form of compensation for the Commissioners’ delay in making payments to them. Strictly this compensation may take the form of repayment supplement under section 79 of the Act rather than interest under section 78. However, where the delay in making a repayment is so great that interest under section 78 would exceed repayment supplement under section 79, the Commissioners will sometimes make a payment equal to the section 78 amount.”
[185]The RSPCA decision was:
“83. I do not accept the submission … that RSPCA should have mitigated its loss by accepting Mrs Halliday’s suggestion of a voluntary disclosure subject to a deed. It would only have covered a small proportion of the repayment claimed and there was no suggestion that the RSPCA would be compensated for the expense. In addition RSPCA would have had to obtain the consent of the Charity Commissioners. On the facts I consider that RSPCA was entirely justified in not accepting the suggestion. Furthermore in my judgment the concept of mitigation applies to damages and is inappropriate to interest to compensate for the loss of the use of money. … 86. The initial repayment claim by the RSPCA was dated 30 April 2001 and no doubt received by Customs at the beginning of May. In 90 per cent of cases Customs make repayments within 10 days. I accept that some inquiries were to be expected in view of the size of the claim. It is clear however that from 21 June 2001 at the latest the reason for the delay in payment of the claim was the belief that the transactions between RSPCA and Properties were not business activities in accordance with the Tribunal decision in Halifax [2001] V&DR 73. When the decision in the present case was withdrawn it was accepted that the transactions were supplies in the course of business. This was not a case where new facts had emerged. The clear inference is that the original decision and the inquiries which preceded it were based on an incorrect view of the law. I see no reason why the Appellants having succeeded in their appeals against the decisions should be deprived of interest for the period taken up by the inquiries. 87. I do not accept the proposition that the period to December 2001 should be left out of account on the analogy of section 78(8) because of delay by the Appellants. On the material before me I am not satisfied that there was any substantial delay. Furthermore all that was delayed was the decision by Customs formalising the error and giving rise to the right of appeal.”
[186]In the event it was decided that interest should run from June 21, 2001 for the RSPCA's first claim and thereafter from 10 days from the receipt of the claims.[187]The ToTel Decision was that the starting date was in the Tribunal’s discretion, and the Commissioners were entitled to a period of time in which to satisfy themselves that a trader had no means of knowledge of fraud: R (Mobile Export 365 Ltd and another) v. Commissioners of Her Majesty’s Revenue and Customs. It was decided that interest was payable 30 days from receipt by the Commissioners of the 10/03 Return.[188]I agree with the Tribunal in the RSPCA Decision that the concept of mitigation has nothing to do with the award of interest under section 84(8), since it is not compensation for damage, but I do accept that unreasonable behaviour on the part of the taxpayer which leads to a delay in payment may be a factor in the exercise of discretion under section 84(8). But it is also relevant that the Revenue has the benefit of the use of the money in the meantime.[189]The proposal for payment against a deed of indemnity was conditional and related only to part of the sum claimed. In the light of the facts set out above, I accept the RSPCA’s contention that the Tribunal’s finding that the RSPCA was justified in not accepting the Deed is unimpeachable as a finding of fact on the principles of Edwards v Bairstow [1956] AC 14.[190]I turn to the question of the starting date for the award of interest.[191]In Joined Cases C-286/94, etc Garage Molenheide BVBA and others v Belgium [1997] ECR I-7281, [1998] STC 126 the questions referred by the Belgian courts concerned the compatibility with the Sixth Directive of Belgian legislation which permitted the attachment of VAT refunds where tax evasion was suspected, and which permitted the withholding of a VAT refund against disputed sums due for a later period. The plaintiffs in the Belgian proceedings pointed out that under Belgian law interest was not payable unless the sums retained have not been returned by March 31 of the year following the year in which the balances became due, and subject to other conditions. Advocate General Fenneally said (para 55) that, in the event of the taxable person being ultimately successful in the main action concerning the retention, the VAT administration must pay interest on the sum retained from the moment when, in accordance with the normal deduction rules applied in that member state in the implementation of the Sixth Directive, the sum would have been paid to that taxable person.[192]The Court ruled (paras 63-64) that in order to attain the objective pursued by the legislation it was not necessary for interest to be calculated from a date other than the date on which the retained VAT balance would normally have been paid, and in the event of the retention being lifted “calculation of the interest payable by the treasury which did not take as its starting point the date on which the VAT balance in question would have had to be repaid in the normal course of events would be contrary to the principle of proportionality.”[193]In R (on the application of UK Tradecorp Limited) v Customs and Excise Commissioners [2005] STC 138 the claimant sought declarations that the right to deduct import tax arose on the date of submission of the claim to deduction and that the Commissioners were liable to pay interest on the sum claimed from that date to the date of payment. Lightman J held that the right to deduct input tax was a fundamental principle, but until the claim was accepted or established there was no right to payment, and there was no prima facie duty on the part of the Commissioners to repay input tax until the claim had been agreed or upheld. Community law did not oblige member states to pay interest on repayments of input tax from the date of the making of the claim to repayment.[194]As regards the period in which the claim should be verified, Lightman J said that a refusal by the taxable person to answer questions put by the Commissioners going to the entitlement to claim input tax did not obviate the obligation on the part of the Commissioners to seek expeditiously to verify the claim, although it might delay the conclusion of the investigation and might oblige the Commissioners to reject the claim. The Commissioners could not be criticised for affording time to the taxable person to consider carefully the implications of his refusal to answer (e.g. that adverse inferences might be drawn), the other consequences (e.g. the consequent need on the part of the Commissioners to pursue other enquiries) and the potential impact on the outcome. But the duty of the Commissioners throughout continued to process the claim expeditiously: para 24. The Commissioners’ investigations were the appropriate means to verify whether or not there existed a valid claim to deduction, and until the claim was accepted or established, there was no right to payment: para 30. It was incumbent on the taxpayer to satisfy the Commissioners of his entitlement to a deduction. Accordingly there was no prima facie duty on the part of the Commissioners to repay input tax until the claim had been agreed or upheld: paras 33-34.[195]The principle of fiscal neutrality did not require (if it extended to payment of interest at all) payment of interest in respect of the period prior to the acceptance or establishment of the right to deduction and repayment. Community law might require payment of interest if repayment was wrongly deferred from the date on which the claim had been accepted or established: para 42. Community law obliged member states to proceed with any investigation of claims to input tax expeditiously and proportionately and to pay claims which were admitted or established promptly, it was possible that breaches of those duties might give rise to a claim under Community law or English law for compensation for the period during which the taxable person was kept out of his money (in effect interest). Whether or not there was such a claim under Community law might require consideration of the question whether the taxable person had an adequate remedy under English law and in particular under the provisions of sections 78, 79 and 84(8). In Tradecorp it was sufficient to say that there was no allegation of breach of duty and no claim to damages.[196]In Mobile Export 365 Ltd [2006] EWHC 311 (Admin), [2006] STC 1069 the Commissioners had not settled the taxpayer’s claim for repayment of input tax (in the amount of £10 million). The taxpayer had brought proceedings in August 2005 for repayment of the input tax for the periods May and June 2005. In February 2006 the Commissioners repaid the money “without prejudice”. The taxpayer sought interest to award interest at rates of between 11% and 12% on sums due to be repaid to it. Collins J held that, with regard to the date when interest should commence, the rival contentions were in effect 30 days on behalf of the Commissioners and 16 days on behalf of the claimants, and Collins J applied a 30 day period because of the time needed for the Commissioners to investigate.[197]Paragraph 5.1 of Notice 700/58 Treatment of VAT repayment returns and VAT repayment supplement sets out a code of practice to which repayment traders can expect Customs to adhere when processing their Form 100 VAT Returns. It states that traders can expect Customs to “authorize payment of at least 90% of correct repayment returns within 10 working days of their receipt in the VAT Central Unit”. This Notice was accepted as the best basis for selecting a starting date in Olympia Technology Ltd, para 22.[198]The Garage Molenheide case was a case on the proportionality of the Belgian legislation and not a case of general application, and does not lay down any general rule of law that interest must be paid from the date that the sums would normally have been paid. The starting date is a matter within the discretion of the Tribunal, and I accept that it can take into account the policy in Notice 700/58. But it can also take account of a reasonable period for Customs to make enquiries. Overall effect[199]The overall effect of these conclusions on the two Decisions under appeal is as follows. 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. But the rate which was taken as the starting point was the reference rate under SI 1998 No 1461 without any addition, and consequently it is unlikely that at the end of the day the actual amount awarded was excessive. It was an error of principle in the ToTel Decision to award a rate of 3% 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 Barclays Bank indicating the rates at which ToTel could borrow; and for the Tribunal to have awarded compound interest. Each Tribunal held that it was bound not to take account of the section 79 repayment supplement, and I have held that the Tribunal may take repayment supplement into account, although it is not likely to have made any practical difference in the present cases. Although the two Tribunals came to different conclusions on the appropriate starting date, I have detected no error of principle in those conclusions.[200]It follows that the Commissioners’ appeals are allowed, and ToTel’s cross-appeal is dismissed.[201]If a form of order cannot be agreed I shall hear argument.

Cited in 8 later judgments