Littlewoods Retail Ltd & Ors v HM Revenue & Customs [2014] EWHC 868 (Ch)

“In this case, that principle [the EU principle of effectiveness] requires that the national rules referring in particular to the calculation of interest which may be due should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT.”

“The permissions given in paragraphs 1 and 2 above do not prejudice the claimants’ entitlement to raise in their pleadings and at trial any argument relating to issue estoppel or abuse of process which was or might have been raised in opposition to the Commissioners’ application issued on 14 March 2013.”

“4. It seemed to me, as the argument was proceeding, that the far more desirable course was for me to say nothing in a judgment today about the issue estoppel (and, indeed, about the Henderson v Henderson estoppel/abuse of process claims) that are raised by Littlewoods, but to allow HMRC to re-amend its defence in the way that it seeks to do, give Littlewoods permission to amend its reply and, also, possibly, its Particulars of Claim, so that the trial can be a comprehensive trial of all the issues that arise between the parties, including the questions of issue estoppel and abuse of process. 5. This may be a slightly unusual course, but it seems to me that there may well be, if not certainly will be, issues of fact that will arise in relation to the issue estoppel or the extent of the issue estoppel claimed. I took the view, therefore, that it would be far more desirable for all factual and legal issues to be decided at one resumed trial in October 2013 and for any appeals to follow that trial … 6. I, therefore, express no view whatever on the merits of Littlewoods’ claims that HMRC should be regarded as issue estopped from raising the claim that the VAT in this case was, in fact, due and payable, notwithstanding their admissions and acceptances in the past that such VAT was not due and payable. I leave all that over to the judge at the trial in October 2013.”

“52. The underlying facts are not in dispute. Littlewoods, through its home shopping division, carries on a retail business selling catalogue goods by mail order through a network of agents. When an agent is recruited to the network he (or, more usually, she) is given an information pack. She is told how to place orders for goods in the catalogue. She is told that she will receive a statement every four weeks which will contain details of all her transactions and will show the minimum amount that she needs to pay. She is told that: “You will receive commission every time you make a payment. You can choose to use your commission in one of two ways – either 12.5% if taken in goods, or 10% if taken in cash”. 53. The agent may order goods from the catalogue either for herself or for a third party – usually a friend or colleague. In either case the catalogue price of goods is debited to the agent’s account and appears on the statement sent to her. Payments received by Littlewoods from the agent are credited to the agent’s account. Those payments may be made by the agent out of her own monies or out of monies which she has collected from the third party customer. An amount of “commission”, based on the payments received during the previous four weeks, is credited to a commission account. The accumulated commission is shown as a separate item on the statement. The item takes the form: “Commission available – if taken in goods £[X] or in cash £[Y].”

“Commission will be paid on every payment received at a rate of 12.5% if taken in goods, or 10% if taken in cash.” 54. The agent “takes” her “commission” by claiming it on one or other of two forms which have been provided to her by Littlewoods. On one of those forms, headed “Commission in Goods 12.5%”, she enters particulars of the catalogue goods she wishes to claim, and the total catalogue price. Provided that the total price of those goods (£x) does not exceed the amount (£X) of commission available “if taken in goods”, the goods claimed are supplied to her without any monetary payment. The price is debited against her accumulated commission. In such a case the amount of commission available “if taken in goods” is reduced by the total catalogue price of the goods claimed, leaving a balance of £(X-x); and the amount of commission available “if taken in cash” is reduced by a corresponding amount to £(Y-4/5x). If the total price of the goods claimed exceeds the amount of commission available “if taken with goods”, the difference, £(x-X), is debited to her account under “Other Items: Charge for Insufficient Commission at Time of Order” and forms part of the new balance owing to Littlewoods for goods supplied. So, in such a case, the goods are supplied to her for a consideration of which the monetary element is part only of the catalogue price. 55. The other form is headed “Commission in Cash 10%”

“30. In the case of the Littlewoods Group home shopping business, shortly after the inception of VAT in 1973 the group introduced systems which enabled it to identify, at the time orders were placed, which purchases were Agents’ Own Purchases and which were Third Party Purchases. In the case of telephone orders the agent was asked when the order was placed whether the goods were for the agent or a customer. When orders were made in writing, the order form used by the agent required them to provide similar information. In this way, the Littlewoods Group analysed each order on an “item-by-item” basis in order to arrive at an Agents’ Own Purchases Percentage which could then be applied to the commission earned, to arrive at figures in relation to AOP Commissions and TPP Commissions. In the mid 1990s, the Littlewoods Group adopted a slightly different system, which included returned goods in the analysis, but the principle remained the same.”

“The additional 2.5% is not a freely given discount, the agent has supplied her selling services in order to be entitled to the option of taking her 12.5% commission in this way. If the £2.50 is not considered to be money received in payment for the goods, then it must be non-monetary consideration. … Suppose the original supplies of £200 are made. Assuming that half of these are bought by customers and half by the agent herself, this would give an AOP percentage of 50%. Tax would have been accounted for on the consideration of £190. Commission in the commission account would be £20. If the agent chose to take the commission/discount earned as goods, the value of commission is increased to £25. The amount of discount earned would increase by 2.5%, hence tax would be due on £187.50 plus the goods purchased with commission, £25.00. The value upon which tax has been accounted for on GFC [goods for commission, or secondary goods] it too low as it fails to include the non-monetary element of the consideration received by the Company from the agent for the goods.”

“Stemming from the comments of the Court, and following further legal advice, we [now] believe that for VAT purposes no distinction should be drawn between commission earned on agents’ own purchases and that earned on third party purchases. Moreover, it is our view that, as there is no direct link between commission paid out and the service provided, all the commission paid out in cash or taken as further goods should be treated as a discount under article 11C(1).”

“Having considered this matter very carefully, in consultation with leading counsel, the Commissioners have decided to withdraw the disputed decision presently under appeal. May I apologise to you and your client for the time it has taken to reach this conclusion but I am sure you will appreciate the Commissioners are under a duty to take particular care and give detailed consideration to issues that have large revenue implications.”

“For background information, the revenue at stake in this issue across the four large mail order companies in the UK is [figure redacted]. Claims have been received from these companies covering the past three years (and back to 1973 in some cases) and of course this is tax that is at risk going forward.”

“Subject to the provisions of this section, where a person gives notice of appeal under section 83 and, before the appeal is determined by a tribunal, the Commissioners and the Appellant come to an agreement (whether in writing or otherwise) under the terms of which the decision under appeal is to be treated – (a) as upheld without variation, or (b) as varied in a particular manner, or (c) as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement (including any terms as to costs).”

“WHEREAS [HMRC] have rejected the Appellant’s claim, pursuant to section 80 of the VAT Act 1994, for the recovery of output tax overpaid in the sum of £4,443,162.12, contained in a letter dated 5 February 2002 (“the Claim”) NOW in consideration of the terms set out herein IT IS HEREBY AGREED between the parties as follows: 1. [HMRC] will repay the Appellant’s Claim, subject to the receipt of satisfactory evidence to support the quantum and method of calculation of the Claim. 2. … ”

“(i) there must be a direct link between the supply of goods or services and the consideration which is said to have been received for that supply; (ii) the consideration must be capable of being expressed in money or a monetary equivalent; and (iii) the basis of the assessment is the consideration actually received.”

“The “subjective” value must be ascertained by reference to the consideration actually received for the goods or services actually supplied. The enquiry excludes any valuation which is independent of the actual transaction; that is to say, any valuation based on criteria which are not those adopted by the parties themselves.”

“In the light of the later decisions it can be seen that, in cases where the consideration for the supply of goods does not consist (or does not wholly consist) of money, there are at least two factual situations in which it may be necessary to ascertain the monetary equivalent of the non-monetary element of that consideration. The first is where the parties have, as between themselves, put a value on the non-monetary element. In those cases – of which the Naturally Yours case is an example – the monetary equivalent is to be taken at the value adopted by the parties. The second factual situation is where the parties have not dealt with each other on the basis of consensus as to the monetary equivalent of the non-monetary element. In those cases – of which the Empire Stores case is an example – the monetary equivalent has to be ascertained in some other way … In such cases, the monetary equivalent of the services supplied is the amount that the recipient of the services is prepared to pay for the purpose of obtaining those services.”

“In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.”

“The basic principle of the VAT system is that it is intended to tax only the final consumer. Consequently the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him.”

“… in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.”

“The question referred to the Court of Justice for a preliminary ruling was whether the taxable amount in respect of goods supplied to the agent for the agent’s own use was (1) the full catalogue price of the goods supplied less the AOP discount on that price or (2) the full catalogue price with a reduction as and when the AOP discount was credited to the agent or (3) the full catalogue price with a reduction as and when the AOP discount was withdrawn or used by the agent. It should be noted that the question referred was restricted to the treatment of the AOP discount – that is to say, the court was not asked to consider, separately or at all, the proper treatment of commission in respect of purchases made for other customers.”

“The dispute is as to the treatment, for the purposes of VAT, of the supply of goods to the agent herself in those cases where the commission which she has earned is “taken in goods” – that is to say, where goods are supplied to her in response to a claim on a “Commission in Goods 12½%” form. In such cases the Commissioners have accepted that the taxable amount of those goods should be the catalogue price reduced by an amount equal to the commission claimed, but at the “taken in cash” rate of 10%. It seems that this treatment is thought appropriate on the basis that it would be wrong to refuse a reduction equal to that which would be allowed if the commission were in fact “taken in cash”

“63. Littlewoods appeals from the order made by Lightman J with the permission of this court (Mummery LJ) granted on 8 August 2000. The grounds of appeal … are that the judge – “… erred in deciding that when an Agent purchased further goods using some or all of the commission she had earned, the value attributed by Littlewoods to the non-monetary consideration provided by the Agent in the form of her services in earning that commission was enhanced from 10% to 12.5%”

“64. The issue on this appeal is how the taxable amount in respect of the supply of goods to the agent herself, in response to an order made on a “Commission in Goods - 12½% Form”, is to be ascertained. The relevant question is whether the difference between the catalogue price for the goods ordered and the monetary amount (if any) paid by the agent, or debited to her account as “Charge for Insufficient Commission at Time of Order”, is to be treated as a price discount allowed to the customer and accounted for at the time of the supply – within art 11A(3)(b) of the Sixth Directive – or is to be treated (wholly or in part) as attributable to a non-monetary element of the total consideration which has been obtained by the supplier for the supply – and so brought into the computation of the taxable amount under art 11A(1)(a) at an appropriate value. 65. When the question is identified and posed in that form it can be seen that it raises two sub-issues: (i) whether there is any reason to apportion the amount claimed as “commission in goods” so as to distinguish between so much of that amount (equal to 80% of the whole) as would represent commission at the “taken in cash” rate of 10% and the balance of that amount (equal to 20% of the whole) which reflects the additional 2.5% allowed because the commission is “taken in goods”; and (ii) whether there is any reason to distinguish between that part of the amount claimed as “commission in goods” which is attributable (or which can be attributed) to commission earned on payments made by the agent in respect of her own purchases and that part which is attributable (or which can be attributed) to commission earned on payments in respect of third party purchases.”

“66. It is, we think, important to keep in mind the factual context in which those issues arise. That factual context includes the following elements: (i) there is no direct link between the placing of an order and the credit of commission to the agent’s commission account – commission is credited when payments are received, not when orders are placed; (ii) an agent earns commission on all payments made by her to Littlewoods – whether those payments are made by the agent out of her own monies in respect of purchases for her own use or out of monies which she has collected in respect of sales to third parties; (iii) as between Littlewoods and the agent there is no distinction between payments made in respect of purchases for her own use and purchases by third parties – the right to commission, the amount of the commission and the option to take the commission “in goods” or “in cash” is the same whether the payment is made in respect of her own purchase or in respect of a purchase by a third party; and (iv) unless and until the agent chooses to take the commission – whether “in goods” or “in cash” – the treatment for the purposes of VAT is the same whether the commission is attributable to a payment made in respect of her own purchase or in respect of a purchase by a third party; in either case the taxable amount on the goods supplied is the full catalogue price and no reduction is allowed at the time when the commission is credited to her account.”

“67. It is only when the agent chooses to take the commission that a difference in treatment can arise. If she takes the commission “in cash” then – at the least in so far as the commission is attributable to payments made in respect of her own purchases – a reduction is allowed under art 11C(1) of the Sixth Directive. That was decided by the Court of Justice in the Freemans case. The decision in the Freemans case is silent as to the position where the commission taken “in cash” is attributable to payments made in respect of purchases by third parties. But (without deciding the point) we find it difficult to see why art 11C(1) should not be engaged in such a case also. The principle of neutrality, upon which the court relied in reaching its decision in the Elida Gibbs case, points to that conclusion.”

“68. The basis of assessment for which the Commissioners have contended – and which was upheld by the judge – does involve an apportionment of the amount claimed as “commission in goods” so as to distinguish between the part (80%) equivalent to commission at the rate of 10% and the part (20%) equivalent to the additional 2.5% allowed because the commission is taken “in goods”

“71. The reason advanced in support of a distinction between that part of the amount claimed as “commission in goods” which is attributable to the agent’s own purchases and that part which is attributable to third party purchases is that, in the latter case (as the judge found), there is the necessary direct causative and contractual link between the agent’s services in relation to third party sales and the supply to her of secondary goods in return for a monetary payment which is less than the full catalogue price. It is said that, in such a case, the difference between the full catalogue price for the secondary goods and the monetary payment is attributable (in part at least) to a non-monetary element of consideration, provided by the agent in the form of services. As we have already pointed out, if that is the correct analysis, it applies as much to the whole of the amount claimed as “commission in goods” – so far as attributable to third party purchases – as it does to the “enhanced rate” element of that commission. There is no distinction to be drawn, in this context, between commission at the “in cash” rate of 10% and commission at the “in goods” rate of 12.5%. The only relevant commission is commission at the “in goods” rate. 72. In our view the judge was wrong to find that the necessary direct link between the service provided by the agent in respect of third party sales and the consideration received by Littlewoods in respect of the supply to her of secondary goods had been established. It may be true, as the judge observed, in the passage to which we have already referred (see [2002] STC 588 at 591, para 9), that: “The reason and only reason why the agent could and did enter into the sale contract at the price reflecting the special allowance [of an additional 2.5%] was the existence and exercise by the agent of the third option contained in the agency contract”

“3. Grattan is the representative member of a VAT group whose members carry on the business of retailing goods by mail order. In the course of that business companies that are now within the Grattan group used the services of persons described as “agents”

“The following shall be subject to the Value Added Tax: (a) The supply of goods and the provision of services within the territory of the country by a taxable person against payment; (b) …”

“The basis of assessment shall be: (a) in the case of supply of goods and of the provision of services, everything which makes up the consideration for the supply of the goods or the provision of services, including all expenses and taxes except the value added tax itself; …”

“Regarding Article 8(a) The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance, etc) that is to say not only the cash amounts charged, but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of compensation received. …”

“In relation to the period before 1 January 1978, does a taxable person [i.e. the mail order company] have a directly effective right under art 8(a) of the Second Directive and/or the principles of fiscal neutrality and of equal treatment, to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, the recipient of the supply [i.e. the agent] received a credit from the supplier which the recipient then elected either to take as a payment of money, or as a credit against amounts owed to the supplier in respect of supplies of goods to the recipient that had already taken place?”

“19. By its question, the referring tribunal asks, in essence, whether art 8(a) of the Second Directive must be interpreted as conferring upon a taxable person the right to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, an agent received a credit from the supplier which the agent elected to take either as a payment of money or as a credit against amounts owed to the supplier in respect of supplies of goods that had already taken place. [The Court then referred to the relevant provisions in article 8(a) and paragraph 13 of Annex A of the Second Directive] 22. The expression “consideration” is part of a provision of European Union law which does not refer to the law of the member states for the determining of its meaning and its scope. It follows that the interpretation, in general terms, of the expression may not be left to the discretion of each member state. Such consideration is a subjective value since the basis of assessment for the provision of services is the consideration actually received and not a value assessed according to objective criteria [the Court here referred to the “Dutch Potato” case at paragraphs 9 and 13]. 23. In order to determine whether art 8(a) of the Second Directive obliged the member states to permit the consideration to be altered and, therefore, the basis of assessment to be regularised after the chargeable event had taken place, the provisions of that directive concerning the calculation, declaration and payment of VAT should also be examined. Determination of the basis of assessment requires consideration and a chargeable event. 24. It is to be noted in this regard that art 5(5) of the Second Directive provided that “[t]he chargeable event shall occur at the moment when delivery is effected”

“28. As regards, next, the principle of fiscal neutrality, it is to be noted that this principle, which constitutes a fundamental principle of the common system of VAT, is the reflection in the field of VAT of the principle of equal treatment … One of the consequences of this principle is that taxable persons must not be treated differently in respect of similar supplies which are in competition with each other … 29. The principle of fiscal neutrality is not a rule of primary law which enables on its own the basis of assessment within the meaning of art 8(a) of the Second Directive to be determined (see, to this effect, Finanzamt Steglitz v Zimmermann (Case C-174/11) (15 November 2012, unreported), para 50 and the case law cited). Nor can it make up for the fact that the Second Directive does not include any provision comparable to art 11C(1) of the Sixth Directive. 30. Under the same principle in its other sense, the amount of VAT to be collected by the tax authority must correspond exactly to the amount of VAT declared on the invoice and paid by the final consumer to the taxable person (Fiscale eenheid Koninklijke Ahold NV v Staatssecretaris van Financiën (Case C-484/06), [2009] STC 45, [2008] ECR I-5097, para 36 and the case law cited). 31. It is clear from the documents submitted to the court that, in the main proceedings, sub-customers, as the final consumers of the goods, had to pay the catalogue price for the goods which they purchased and did not receive any commission from the company. The commission was in fact required to be paid back to the agent and not to the sub-customer. In those circumstances, and by virtue of the principles recalled in the preceding paragraph, it must be held that the consideration for the supply corresponded to the full unreduced catalogue price and that the basis of assessment was therefore that price.”

“37. Having regard to all the foregoing considerations, the answer to the question referred is that art 8(a) of the Second Directive must be interpreted as not conferring upon a taxable person the right to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, an agent received a credit from the supplier which the agent elected to take either as a payment of money or as a credit against amounts owed to the supplier in respect of supplies of goods that had already taken place.”

“According to the order for reference, the referring tribunal considers that it is only necessary to clarify whether under art 8(a) of the Second Directive a reduction of the basis of assessment is also possible after the time of the supply. However, the first condition for a reduction of the basis of assessment under that provision is that the described payments by the mail order companies are actually repayments of parts of the consideration, which reduce the basis of assessment. This question should therefore be considered first … before I explore whether the Second Directive requires a reduction of the basis of assessment after the supply takes place.”

“the legal and business relationships between the mail order companies, the agents and the third-party customers do not appear to be clarified sufficiently and are evidently disputed between the parties to the main proceedings.”

“29. Against this background, I consider it necessary to make a few remarks regarding the court’s case law to which regard must be had, in order to enable the referring tribunal to give a ruling in the main proceedings which is consistent with EU law on VAT. In so far as the case law cited below does not concern the Second Directive, I consider that it is also applicable to the Second Directive because of the comparability of the provisions of the Sixth Directive interpreted there.”

“1. Direct sale of goods by the mail order companies to third-party customers 31. If the mail order companies sold directly to third-party customers, as the United Kingdom government has submitted, it would be clear, first of all, that the “commissions” granted to agents for third-party purchases cannot constitute a repayment of the consideration in respect of the sales of goods by the mail order companies to the third-party customers. In that case it would be irrelevant that the mail order companies ultimately received only the catalogue price payable by the third-party customer minus the “commissions” paid to the agents. The court has stated on several occasions that in a situation where a third party is involved in the payment process and, by virtue of this, retains part of the purchase price paid by the purchaser, the full purchase price nevertheless forms the basis of assessment of the supply provided by the seller to the purchaser. The situation can be no different in the present case if the agent, whilst not immediately retaining part of the purchase price paid by the third-party customer, received it subsequently. 32. If the mail order companies sold directly to third-party customers, it is also uncertain whether part of the consideration for another transaction, namely an agent’s own purchase, was repaid through the “commissions” granted to the agent for third-party purchases. In principle, this would seem to require a provision to that effect in the legal relationship that defines the consideration for the agent’s own purchase. It is true that in Elida Gibbs the court found for the first time that a reduction of the basis of assessment is potentially to be accepted even where the contractually defined consideration is not modified at all. According to that case law, however, at least the payment by the taxable person is conditional on the acquisition of a certain supply by the recipient of the payment. In the main proceedings, it is doubtful whether that condition is satisfied with regard to the basis of assessment of the agent’s own purchases, as the credited amounts did not appear to be dependent on an agent’s specific own purchase because, in particular, an independent cheque payment was also possible. 33. If a repayment of the consideration for an agent’s own purchases were nevertheless to be established, the referring tribunal would then be required to examine whether a reduction of the basis of assessment is ruled out because the “commissions” constitute payment for a supply made by the agents to the mail order companies. If the repayment itself is consideration, there cannot in the final analysis be a reduction of the basis of assessment. For the purposes of determining the basis of assessment, the repaid part of the consideration is replaced by the value of the supply provided. The court has already ruled to this effect in Naturally Yours Cosmetics, in relation to a discount. 34. According to settled case law, a finding that the “commissions” were payment for a supply provided by the agents requires, first, that there was a legal relationship between the agent and the mail order companies pursuant to which there was reciprocal performance. Second, there must be a direct link between the supply and the consideration received. According to the court’s case law, that link must be construed as a reciprocal condition of supply and consideration in the context of the legal relationship. In the present case, an agreement should therefore have existed between the mail order companies and the agents, under which payment of “commissions” was made dependent on a supply by the agents. On the other hand, it is not possible to infer further conditions – for example an obligation on the agents to act – from the case law.”

“As a matter of EU law were the VAT payments in question due in so far as they related to commission (a) taken by the agent by cheque or applied against the balance of her trading account and (b) applied by the agent against the purchase of secondary goods?”

“25. One issue which is fundamental to our VAT accounting is that it is impossible to reconcile a specific payment to a specific supply. When an agent orders goods the amount she owes is debited to her account. Typically an agent will pay by instalments, and she must make a payment to Littlewoods on a monthly basis to reduce the balance on her account. The amount she is liable to pay in each instalment is calculated by reference to the total amount outstanding. The only way in which we can determine the split between [AOP] and customer purchases is analysing the order forms, and deducting any returned goods to give the net dispatches. 26. Thus each payment could be for goods ordered on the agent’s own behalf or for her customers, or a combination of both. The payment, and therefore the commission, may relate to goods dispatched 2 weeks ago or goods dispatched years ago. This is the principle of rolling credit whereby a payment of a proportion of each order is required each month rather than requiring the agent to pay for one item and then another.”

“This much, at least, is clear as a consequence of the application of the principle of fiscal neutrality, in its second sense, to the wider factual background of the question referred by the national court.”

“31. Finally, it must be stated that Article 11C(1) of the Sixth Directive must be interpreted as meaning that, in a sales promotion scheme such as that at issue in the main proceedings, the taxable amount constituted by the full catalogue price must be reduced as soon as the agent withdraws or uses in another way the amount with which her separate account has been credited. 32. Freemans and the Commission submit that Article 11C(1) of the Sixth Directive covers the cases in which the reduction in consideration arises from an amendment to the contract after the time of the supply. That provision is therefore not applicable where, as in the present case, the contractual relations giving rise to the supply provide from the very beginning for the grant of a discount, even though that discount is not actually accounted for until later. In that context, they rely upon paragraph 31 of the judgment in Elida Gibbs, cited above, in which the Court held that that provision refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently. 33. In that regard, it suffices to state that the wording of Article 11C(1) of the Sixth Directive does not presuppose such a subsequent modification of the contractual relations in order for it to be applicable. In principle, it requires the Member States to reduce the taxable amount whenever, after a transaction has been concluded, part or all of the consideration has not been received by the taxable person (see Case C-330/95 Goldsmiths [1997] ECR I-3801, paragraphs 16, 17 and 18). Moreover, there is no indication that in its judgment in Elida Gibbs, cited above, the Court wished to restrict the scope of application of that provision. On the contrary, it is apparent from the facts of the Elida Gibbs case that there had been no modification of the contractual relations. Nevertheless, the Court held that Article 11C(1) of the Sixth Directive was applicable.”

“2B. If the VAT payments in question, or some of them, were due, are [HMRC] estopped from defending the claims, or some of them, on this basis? Is it otherwise an abuse of process for [HMRC] to do so?”

“Cause of action estoppel arises where the cause of action in the later proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved the same subject matter. In such a case the bar is absolute in relation to all points decided unless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be re-opened. … Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue.”

“… the principle that even where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties: Duchess of Kingston’s Case (1776) 20 State Tr 355.”

“But there is room for the view that the underlying principles upon which estoppel is based, public policy and justice, have greater force in cause of action estoppel, the subject matter of the two proceedings being identical, than they do in issue estoppel, where the subject matter is different. Once it is accepted that different considerations apply to issue estoppel, it is hard to perceive any logical distinction between a point which was previously raised and decided and one which might have been but was not. Given that the further material which would have put an entirely different complexion on the point was at the earlier stage unknown to the party and could not by reasonable diligence have been discovered by him, it is hard to see why there should be a different result according to whether he decided not to take the point, thinking it hopeless, or argue it faintly without any real hope of success. In my opinion your Lordships should affirm it to be the law that there may be an exception to issue estoppel in the special circumstance that there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings. One of the purposes of estoppel being to work justice between the parties, it is open to courts to recognise that in special circumstances inflexible application of it may have the opposite result, as was observed by Lord Upjohn in the passage which I have quoted above from his speech in the Carl Zeiss case [1967] 1 AC 853-957.”

“When seeking to justify a conclusion that, though it applies, res judicata does not preclude a point being taken, it can be dangerous to invoke the observation of Lord Keith of Kinkel in Arnold v National Westminster Bank Plc [1991] 2 AC 93, 109B, that estoppel is intended “to work justice between the parties”, because it is only too easy to fall back on it as an excuse for an unprincipled departure from, or an unprincipled exception to, the rule.”

“The whole point of an issue estoppel on a question of law is that the parties remain bound by an erroneous decision.”

“If a judge has made a mistake, perhaps a very egregious mistake, as is said of Walton J’s judgment here, and a later judgment of a higher court overrules his decision in another case, do considerations of justice require that the party who suffered from the mistake should be shut out, when the same issue arises in later proceedings with a different subject matter, from re-opening that issue?”

“Estoppel per rem judicatam, whether cause of action estoppel or issue estoppel, is essentially concerned with preventing abuse of process. In the present case I consider that abuse of process would be favoured rather than prevented by refusing the plaintiffs permission to re-open the disputed issue.”

“In Arnold at first instance the Vice-Chancellor said ([1989] Ch at page 70) that there was great danger in allowing allegations that the law had changed. I respectfully agree. In my judgment, even if I had thought that there was a change in the law, I would have held that issue estoppel should apply.”

“In their Lordships’ opinion the question of estoppel cannot be decided merely by enquiring to what extent the Board of Review exercises judicial functions. The critical test is not the bare issue whether or not such a board exercises judicial power … What is important here is that the Board of Review is a tribunal set up under the Income Tax Ordinance for the purpose of deciding income tax appeals at a certain stage of their prosecution, and that decisions given with regard to such appeals are effective only within the limited jurisdiction that the Ordinance creates for all tribunals that deal with the matter of an appeal. All such appeals remain in one sense a part of the process of assessment since all the tribunals, including the Supreme Court, have independent power to increase or reduce the assessment under appeal. While, therefore, it is unexceptionable to say that the Board of Review when exercising its powers under section 73 is acting in a sense judicially, that the dispute which it has to determine is at any rate somewhat analogous to a lis inter partes and that the assessor who made the assessment or some other representative of the Commissioner … resembles a party hostile to the appellant, these considerations are not those that are critical to the issue of estoppel. The critical thing is that the dispute which alone can be determined by any decision given in the course of these proceedings is limited to one subject only, the amount of the assessable income for the year in which the assessment is challenged. It is only the amount of that assessable income that is concluded by an assessment or by a decision on an appeal against it (see section 75). Although, of course, the process of arriving at the necessary decision is likely to involve the consideration of questions of law, turning upon the construction of the Ordinance or of other statutes or upon the general law, and the tribunal will have to form its view on those questions, all these questions have to be treated as collateral or incidental to what is the only issue that is truly submitted to determination …”

“It underlines the point that it is not the status of the tribunal itself, judicial or administrative, that forms the determining element for estoppel in cases of this kind but the limited nature of the question that is within the tribunal’s jurisdiction. The judgment of the High Court that had been given in the earlier year was explicitly directed to the construction of a particular section of the rating Act and to the correct measurement of the liability in the light of that construction. Precisely the same point arose in the later year and was ultimately decided by this Board in a sense contrary to that which had previously been adopted.”

“It may be that the principles applied in these cases form a somewhat anomalous branch of the general law of estoppel per rem judicatam and are not easily derived from or transferred to other branches of litigation in which such estoppels have to be considered; but in their Lordships’ opinion they are well established in their own field, and it is not by any means to be assumed that the result is one that should be regretted in the public interest.”

“89. I would apply that reasoning to the present case. The Ceylon Ordinance was closely modelled on the legislation that applies in the United Kingdom. The purpose of an appeal under section 31 of [TMA 1970] is to challenge the amount charged to tax by an assessment. The finality that attaches to the determination of the appeal by the general commissioners or by the special commissioners or to the settling of the appeal by agreement relates only to the amount chargeable under that assessment. The question as to the amount of any reliefs carried forward to subsequent periods remains open for examination as the assessment for each subsequent period is issued. This is because the Taxes Acts do not provide any means by which that amount may be determined conclusively, whether by appeal or by agreement, for any period other than that to which the assessment relates. 90. For these reasons I would hold that an agreement made under section 54 has no wider effect upon the position of either party than that which has been provided for by the statute. As Carnwath J … indicated, the issue turns simply and solely upon the machinery which the Taxes Acts provide for determining the amount in question between the commissioners and the taxpayer. That machinery is limited to determining conclusively the amount of tax chargeable for the year of assessment. It does not enable such determinations to be made, either on appeal or by agreement, as to the amounts of tax chargeable in future years.”

“It means that one could have a first finding that tax was due yet a subsequent finding that no interest or that any tax was due because tax had not been due after all. Or, as is claimed here, a finding of wilful default or neglect justifying out-of-year assessments but then a finding of no interest on those assessments because wilful default or neglect was not re-proved. Moreover the Revenue, or indeed the taxpayer, would find itself having to prove the same thing over and over again in relation to exactly the same facts for exactly the same periods.”

“27. But the opinion in Caffoor has been taken as representing the law in many cases by now. I have enormous sympathy with the view that once a matter is decided after a full and fair fight that is that. I can see no real reason for a different rule for tax cases. But I think I must, as a judge of first instance, bow to the weight of authority which does not distinguish between settled and fought appeals. Accordingly I hold that the 2000 commissioners were wrong to apply s46(2) [of TMA 1970, which says that the determination of the general or special commissioners in any proceedings under the Taxes Acts shall be “final and conclusive”] to the interest appeals. 28. There is one other point worth mentioning in relation to the effect of s46(2) which indirectly supports its non-binding effect. Suppose an original assessment upheld by commissioners. The taxpayer can only appeal to the court on a point of law. Then suppose a penalty determination based on those assessment again upheld by commissioners. From a penalty determination appeal lies to the court on fact and law. But if s46(2) (or the general law of issue estoppel) excluded any challenge to the earlier assessment and particularly to any point necessarily determined to uphold that earlier assessment (e.g. wilful default) then the right of appeal to the court on fact in respect of penalties would be nugatory or emasculated. Mr Woolf [counsel for Mr King] characterised this result as absurd.”

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

“(a) has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and (b) in doing so, has brought into account as output tax an amount that was not output tax due.”

“(b) the VAT chargeable on the supply of any goods or services; … (p) an assessment … or the amount of such an assessment; (q) the amount of any penalty, interest or surcharge specified in an assessment under section 76; … (s) any liability of the Commissioners to pay interest under section 78 or the amount of interest so payable; … (t) a claim for the crediting or repayment of an amount under section 80; …”

“Since we have concluded that another trader not fettered by res judicata would succeed on the material before us in establishing that similar bottled linseed oil is food, a decision against this Appellant based on res judicata would conflict with the principle of fiscal neutrality.”

“Findings made in judgments which have acquired the force of res judicata shall be binding in all respects on the parties, their lawful successors or assignees”

“17. Since the levying of VAT plays a central role in the accrual of the European Community’s own resources, the referring court is uncertain whether the case-law of the Court requires the binding authority of a judgment which has acquired the force of res judicata by reason of national law to be disregarded. In the main proceedings, the application of Article 2909 of the Italian Civil Code could prevent the full implementation of the principle of combating abuse of rights, a principle which the Court has developed in relation to VAT as a means of ensuring that the Community VAT system is fully implemented.”

“… in essence, whether Community law precludes the application, in circumstances such as those at issue in the main proceedings, of a provision of national law, such as Article 2909 of the Italian Civil Code, in a VAT dispute in relation to a tax year for which no final judicial decision has yet been delivered, where that provision would prevent the referring court from taking into consideration Community law rules concerning abusive practice in the field of VAT.”

“28. It is therefore necessary to determine, specifically, whether the above mentioned interpretation of Article 2909 of the Italian Civil Code may be justified with a view to protecting the principle of legal certainty, in the light of its implications for the application of Community law. 29. It should be noted that - as the national court itself points out – not only does the interpretation in question prevent a judicial decision that has acquired the force of res judicata from being called into question, even if that decision entails a breach of Community law; it also prevents any finding on a fundamental issue common to other cases, contained in a judicial decision which has acquired the force of res judicata, from being called into question in the context of judicial scrutiny of another decision taken by the relevant tax authority in respect of the same taxpayer or taxable person, but relating to a different tax year. 30. Accordingly, if the principle of res judicata were to be applied in that manner, the effect would be that, if ever the judicial decision that had become final were based on an interpretation of the Community rules concerning abusive practice in the field of VAT which was at odds with Community law, those rules would continue to be misapplied for each new tax year, without it being possible to rectify the interpretation. 31. In those circumstances, it must be held that such extensive obstacles to the effective application of the Community rules on VAT cannot reasonably be regarded as justified in the interests of legal certainty and must therefore be considered to be contrary to the principle of effectiveness.”

“[t]he importing house which has … obtained the favourable position permanently binding on the Government will be able to import the goods at a much better rate than that enjoyed by … its competitors. Such a result would lead to inequality in the administration of the customs law, to discrimination and to great injustice and confusion. In the same way if the first decision were against a large importing house, and its competitors … succeeded in securing a different conclusion, the first litigant, bound by the judgment against it … must permanently do business … at great and inequitable disadvantage with its competitors.”

“In relation to adjudications subject to a comprehensive self-contained statutory code, the presumption, in my opinion, must be that where the statute has created a specific jurisdiction for the determination of any issue which establishes the existence of a legal right, the principle of res judicata applies to give finality to that determination unless an intention to exclude that principle can properly be inferred as a matter of construction of the relevant statutory provisions.”

“There are many causes of action which can only be established by proving that two or more different conditions are fulfilled. Such causes of action involve as many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation upon such cause of action any of such separate issues as to whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either upon evidence or upon admission by a party to the litigation, neither party can, in subsequent litigation between one another upon any cause of action which depends upon the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was.”

“Second, it seems to me that the substratum of the doctrine is that a man ought not to be allowed to litigate a second time what has already been decided between himself and the other party to the litigation. This is in the interest both of the successful party and of the public. But I cannot see that this provides any basis for a successful defendant to say that the successful defence is a bar to the plaintiff suing some third party, or for that third party to say that the successful defence prevents the plaintiff from suing him, unless there is a sufficient degree of identity between the successful defendant and the third party. I do not say that one must be the alter ego of the other: but it does seem to me that, having due regard to the subject matter of the dispute, there must be a sufficient degree of identification between the two to make it just to hold that the decision to which one was party should be binding in proceedings to which the other is party. It is in that sense that I would regard the phrase “privity of interest”

“Any contention which leads to the conclusion that a person is liable to be condemned unheard is plainly open to the gravest of suspicions. A defendant ought to be able to put his own defence in his own way, and to call his own evidence. He ought not to be concluded by the failure of the defence and evidence adduced by another defendant in other proceedings unless his standing in those other proceedings justifies the conclusion that a decision against the defendant in them ought fairly and truly to be said to be in substance a decision against him.”

“32. Drawing this together, in my judgment a court which has the task of assessing whether there is privity of interest between a new party and the party to previous proceedings needs to examine (a) the extent to which the new party had an interest in the subject matter of the previous action; (b) the extent to which the new party can be said to be, in reality, the party to the original proceedings by reason of his relationship with that party, and (c) against this background to ask whether it is just that the new party should be bound by the outcome of the previous litigation.”

“If a corporate group such as L’Oréal chooses to arrange its affairs, no doubt for good reason, in such a way that matters such as trade mark oppositions, as well as applications and the holding of registered trade marks, are conducted by one company, for the benefit of others in the group, and others then use marks of which the first is the registered holder, or other marks, not yet registered, of which the first would be the holder if a registration was obtained, then it seems to us that it might well be consistent with what Sir Robert Megarry V-C said in [the Gleeson case] to regard any constraint on the first, whether by way of cause of action estoppel, issue estoppel or abuse of process, as applying also to the second as its privy.”

“Mr Potiwal was the sole director and 40% shareholder of a company connected with the fraudulent evasion of VAT in 2006. He was in sole charge of its commercial activities. In January 2009 in a challenge to the company’s VAT assessment by HMRC, the VAT Tribunal concluded on appeal that Mr Potiwal knew that the company was participating in the fraudulent evasion of VAT … Mr Potiwal was in charge of the conduct of the company’s appeal. He gave all relevant instructions to the company’s solicitors and counsel. He was its only witness of fact and was cross-examined during the proceedings. He had a strong financial interest as well as a reputational interest in the appeal coincident with that of the company. Following the proceedings with HMRC, the Secretary of State … applied to disqualify Mr Potiwal as a director under section 6 of the Company Directors Disqualification Act 1986. In the subsequent proceedings Mr Potiwal denied that he had the requisite knowledge and required the Secretary of State to re-litigate the issue.”

“WHEREAS (A) By letters dated 10 September 2007 and 11 October 2007 and subsequently a letter dated 27 June 2008, the Respondents have rejected the Appellants’ claims made pursuant to section 80 of the Value Added Tax Act 1994 for recovery of output tax said to have been overpaid (the “Decisions”), which claims were asserted by the Appellants in the letters dated 25 June 2002 and 23 June 2003 (and revised in letters dated 19 October 2006 and 31 October 2006) (“the Claims”). (B) The Appellants have appealed against those rejections by notices of appeal dated 4 October 2007 and 29 October 2007 (“the Appeals”) … (C) One of the issues raised by the Appeals and a subject of the Decisions is whether the Appellants are entitled to recover overpaid output tax in relation to the period 1 April 1973 to 31 December 1977 (inclusive) in respect of certain commissions paid by the Appellants in goods (or by way of a discount from the price of goods) to certain agents (“the GMAC Goods For Commission Issue”). (D) The Respondents have since reconsidered their position on the GMAC Goods For Commission Issue and now accept that the Appellants are entitled to repayment of the output tax that relates to those commissions. (E) The parties have agreed that the principal amount to be repaid on this basis is £4,528,957 (“the Repayment Amount”), which amount has now been repaid with simple interest in the amount of £12,773,444.96 (a total repayment of £17,302,401.96) … IT IS HEREBY AGREED between the parties that: 1. The Appellants are entitled to the Repayment Amount and simple interest that has been paid as set out above, and the Decisions shall be treated as varied to that extent. 2. The Appellants will advise the Manchester Tribunal Centre that the GMAC Goods For Commission Issue has been agreed between the parties and that the Appeals should be treated as allowed and the Claims accepted to the extent of that issue only but without prejudice to the other issues raised in the Appeals. 3. This Agreement is without prejudice to any right the Appellants may have (including any rights arising at law or in equity, under European law, or under any statutory provision) to claim further interest (on a compound basis and/or at a higher rate) in respect of the Repayment Amount. 4. … 5. This Agreement takes effect pursuant to section 85 of the Value Added Tax Act 1994.”

“The question which arises under s54(1) is whether the Revenue and the taxpayer have “come to an agreement” in relation to the assessment under appeal. If they have, then the subsection itself prescribes the consequences which are to follow from that agreement. Thus, the question whether a s54 agreement has been concluded has to be considered in a statutory, not in a common law, context.”

“1. The statutory scheme is clear. The taxpayer is given notice of the inspector’s assessment of the amount of tax due from him. Unless he appeals, the tax becomes payable when the time for appealing, 30 days, expires. This is a statutory debt and no question arises as to a contract or agreement to pay. If he does appeal, then the amount of tax is determined by the outcome of the appeal; but if the parties “come to an agreement” whilst the appeal is pending, then what they agree takes effect as the determination of the appeal (see s54(1)). No other outcome is provided for, and so the appeal remains pending and the Special Commissioners have jurisdiction unless and until an agreement is reached. 2. In this context, therefore, an agreement has statutory consequences. It does not make the taxpayer’s liability to pay contractual, but the agreement defines the amount of the statutory debt.”

“I see no reason why the ordinary law of contract should not apply to this agreement as to any other agreement. The effect of a concluded agreement under s54(2) is that it shall be final and conclusive but that does not mean that the court is not entitled to look and see whether all the ingredients necessary to the formation of a proper contract have been complied with. Thus capacity, fraud, mistake and such like matters seem to me to be available to a party who seeks to challenge the agreement on one or more grounds. In the sense that the agreement is res judicata of the issues which it determines it is clearly final and conclusive. But that does not mean, in my judgment, that the ordinary rules governing the formation of the contract are deemed to have been complied with.”

“… Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focussing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not … While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”

“An important purpose of the rule is to protect a defendant against the harassment necessarily involved in repeated actions concerning the same subject matter. A second action is not the less harassing because the defendant has been driven or thought it prudent to settle the first; often, indeed, that outcome would make a second action the more harassing.”

“Such situations are many and various, and it would be unwise to lay down any general rule. The principle is, no doubt, capable in theory of applying to a privy; but it is likely in practice to be easier for him to rebut the charge that his proceedings are oppressive or constitute an abuse of process than it would be for the original [claimant] to do so.”

“2. This case concerns the remedy given by national law where an undertaking has overpaid VAT. VAT was levied by [HMRC] contrary to the requirements of EU Directives on VAT when relevant provisions of EU law (and national implementing legislation) concerning the taxable amount of supplies were not properly applied to certain supplies made by Littlewoods who are the claimants in the proceedings from which this reference is made …. The taxable amount of those supplies was overstated and VAT was overpaid. This pattern repeated itself throughout the period 1973 to 2004.”

“Unless issue 2A is answered such that the VAT payments were all due and issue 2B is answered such that the Commissioners are entitled to defend all of the claims on that basis, does/did section 78 of VATA 1994 satisfy the requirements of the principle of effectiveness and, in particular, does/did that section deprive the claimants of an adequate indemnity for the loss occasioned through the undue payment of VAT? ”

“205. After referring to the San Giorgio principle, the Court in Littlewoods ECJ continued as follows: “25. The Court has also held that, where a Member State has levied charges in breach of the rules of Community law, individuals are entitled to reimbursement not only of the tax unduly levied but also of the amounts paid to that state or retained by it which relate directly to that tax. That also includes losses constituted by the unavailability of sums of money as a result of a tax being levied prematurely (Metallgesellschaft, paragraphs 87 to 89, and Test Claimants in the FII Group Litigation, paragraph 205). 26. It follows from that case law that the principle of the obligation of Member States to repay with interest amounts of tax levied in breach of EU law follows from that law. 27. In the absence of EU legislation, it is for the internal legal order of each Member State to lay down the conditions in which such interest must be paid, particularly the rate of that interest and its method of calculation (simple or “compound” interest). Those conditions must comply with the principles of equivalence and effectiveness; that is to say that they must not be less favourable than those concerning similar claims based on provisions of national law (or arranged in such a way as to make the exercise of rights conferred by the EU legal order practically impossible (see, to that effect, San Giorgio, paragraph 12; Weber’s Wine World, paragraph 103; and Case C-291/03 MyTravel [2005] ECR I-8477, paragraph 17). 28. Thus, according to consistent case law, the principle of effectiveness prohibits a Member State from rendering the exercise of rights conferred by the EU legal order impossible in practice or excessively difficult … 29. In this case, that principle requires that the national rules referring in particular to the calculation of interest which may be due should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT. 30. It is for the referring court to determine whether that is so in the case at issue in the main proceedings, having regard to all the circumstances of the case. In that regard it should be noted that it is apparent from the order for reference that, under the provisions of section 78 of the VATA 1994, the Commissioners paid Littlewoods interest on the VAT levied in breach of EU law. Pursuant to those provisions, Littlewoods received payment of simple interest, in accordance with the said provisions, in an amount of £268,159,135, corresponding to interest due over about 30 years, which amount exceeds by more than 23% that of the principal sum, which amounts to £204,774,763. 31. As for verifying whether the principle of equivalence has been complied with in the case at issue in the main proceedings, it should be noted that compliance with that principle requires that the national rule in question apply without distinction to actions based on infringement of EU law and those based on infringement of national law having a similar purpose and cause of action. However, the principle of equivalence cannot be interpreted as requiring a Member State to extend its most favourable rules to all actions brought in a certain area of law. In order to ensure compliance with that principle, it is for the national court, which alone has direct knowledge of the procedural rules governing restitution actions against the State, to determine whether the procedural rules intended to ensure that the rights derived by individuals from EU law are safeguarded under domestic law comply with that principle and to consider both the purpose and the essential characteristics of allegedly similar domestic actions. For that purpose, the national court must consider whether the actions concerned are similar as regards their purpose, cause of action and essential characteristics (see, to that effect, Case C-63/08 Pontin [2009] ECR I-10467, paragraph 45 and case-law cited). … 34. In the light of the foregoing, the answer to the questions referred is that EU law must be interpreted as requiring that a taxable person who has overpaid VAT which was collected by the Member State contrary to the requirements of EU VAT legislation has a right to reimbursement of the tax collected in breach of EU law and to the payment of interest on the amount of the latter. It is for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum must bear “simple interest”, “compound interest” or another type of interest.”

“29. This new line of case-law has been confirmed in Test Claimants in the FII Group Litigation and Test Claimants in the Thin Cap Group Litigation. Furthermore, both judgments give ample proof that the arguments developed in Metallgesellschaft and Others regarding advance payments of tax in breach of EU law can also be applied to cases where the levying of tax as a whole infringed EU law. This is also logical. As grounds for the interest claim under EU law as a result of advance payments of tax, the Court proceeds from the finding that because of the unavailability of sums of money as a result of a tax being levied prematurely, the taxpayer has suffered losses which are to be regarded as amounts retained by the Member State or paid to it in breach of EU law. Because the levying of taxes in infringement of EU law also gives rise to unavailability of sums paid until they are reimbursed, there is no evident reason to distinguish between the taxpayer’s interest claim under EU law in the context of advance payments made in breach of EU law and such a right in the context of payments made in breach of EU law per se. 30. In the light of these considerations, Member States which have levied charges in breach of EU law must in principle, according to the Court’s more recent case-law, both reimburse the charges levied in breach of EU law and pay interest in compensation for the unavailability of the sums paid. The taxable person therefore has a right to reimbursement of the charge and a right to payment of interest. Those rights enjoyed by the taxable person are based on the provisions of EU law prohibiting the taxes levied.”

“67. Thus, irrespective of the question whether the Member State may recover interest on the European Union’s own resources – which is a question which does not have to be resolved in the context of the present case – individuals entitled to reimbursement of sums paid unduly in respect of production levies in the sugar sector determined on the basis of an invalid regulation are also entitled to payment of the interest on such sums. 68. Therefore, it is not permissible for a national court to use its discretion to refuse payment of interest on the sums charged by a Member State on the basis of an invalid regulation on the ground that that Member State could not reclaim the corresponding interest on the European Union’s own resources.”

“… whether European Union law must be interpreted as precluding a national system … which limits the interest granted on repayment of a tax levied in breach of European Union law to that accruing from the day following the date of the claim for repayment of that tax.”

“26. As regards the principle of effectiveness, that principle requires, in a situation of repayment of a tax levied by a Member State in breach of European Union law, that the national rules referring in particular to the calculation of interest which may be due should not lead to depriving the taxpayer of adequate compensation for the loss sustained through the undue payment of the tax (see Littlewoods Retail and Others, paragraph 29). 27. In this case, it must be found that a system such as that at issue in the main proceedings, which limits interest to that accruing from the day following the date of the claim for repayment of the tax unduly levied, does not meet that requirement. 28. That loss depends, inter alia, on the duration of the unavailability of the sum unduly levied in breach of European Union law and thus occurs, in principle, during the period between the date of the undue payment of the tax at issue and the date of repayment thereof.”

“In addition, contrary to the arguments of the Kingdom of Spain and the Portuguese Republic set out in points 16 and 17 above, although the principle of procedural autonomy leaves it to the domestic legal system of each Member State to determine the procedural remedies for safeguarding rights which individuals derive from European Union law, that principle cannot have the consequence of restricting or undermining the substance of those rights.”

“29. In my opinion, the right to interest representing an adequate indemnity for the loss occasioned through the undue payment of tax contrary to European Union law ranks equally, in consequence of the Littlewoods Retail and Others judgment, with the right to repayment of the tax and is therefore a subjective right derived from the legal order of the European Union. In my opinion, that subjective right necessarily entails the payment of interest from the date of payment of the tax. It is obvious that it is from that date, and not from any other subsequent date, that the taxpayer suffers a loss arising from the unavailability of the sums in question.”

“… what must the remedy that EU law requires the Member State to provide include, in addition to reimbursement of the principal sums overpaid, in respect of the use value of the overpayment and/or interest?”

“… Littlewoods does not suggest that this Court needs to specify the rate of interest, or (if appropriate) the frequency of compounding, that will satisfy the principle of effectiveness. These are factual matters that will differ depending on the circumstances of particular cases. This Court can however rule on the principle that must be applied, viz that a remedy must be given in respect of use value that is commensurate with the benefit gained by the Member State. It is then for the national court to determine what that principle requires in particular cases. 95. Thus, the decision of the Court of Justice in Metallgesellschaft required that interest be paid, but it was not necessary for the Court to specify the rate or to rule on compounding. That was (properly) left for the national courts to determine.”

“12. In that connection it must be pointed out in the first place that entitlement to the repayment of charges levied by a Member State contrary to the rules of Community law is a consequence of, and an adjunct to, the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties or, as the case may be, the discriminatory application of internal taxes. Whilst it is true that repayment may be sought only within the framework of the conditions as to both substance and form, laid down by the various national laws applicable thereto, the fact nevertheless remains, as the Court has consistently held, that those conditions may … not be so framed as to render virtually impossible the exercise of rights conferred by Community law … … 14. On the other hand, any requirement of proof which has the effect of making it virtually impossible or excessively difficult to secure the repayment of the charges levied contrary to Community law would be incompatible with Community law … ”

“22. Article 6 of the Directive puts Member States under a duty to take the necessary measures to enable all persons who consider themselves wronged by discrimination to pursue their claims by judicial process. Such obligation implies that the measures in question should be sufficiently effective to achieve the objective of the Directive and should be capable of being effectively relied upon by the persons concerned before national courts. … 24. … the objective is to arrive at real equality of opportunity and cannot therefore be attained in the absence of measures appropriate to restore such equality when it has not been observed. As the Court stated in paragraph 23 of the judgment in Von Colson and Kamann, cited above, those measures must be such as to guarantee real and effective judicial protection and have a real deterrent effect on the employer. 25. Such requirements necessarily entail that the particular circumstances of each breach of the principle of equal treatment should be taken into account. In the event of discriminatory dismissal contrary to Article 5(1) of the Directive, a situation of equality could not be restored without either reinstating the victim of discrimination or, in the alternative, granting financial compensation for the loss and damage sustained. 26. Where financial compensation is the measure adopted in order to achieve the objective indicated above, 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.”

“31. With regard to the second part of the second question relating to the award of interest, 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.”

“70. In the United Kingdom, simple interest is charged to taxpayers in respect of late payment of VAT. The use of simple interest is regarded as providing a means of compensating the tax collector for the passage of time. As already noted, simple interest is also used to compensate taxpayers seeking recovery of overpaid VAT for the passage of time. It cannot be said that the use of simple interest as opposed to compound interest makes it impossible or excessively difficult for taxpayers to recover overpaid VAT.”

“… a remedy which provides only for reimbursement of the principal sums overpaid and simple interest on those sums is compatible with EU law in so far as that remedy provides adequate restitution or compensation for the loss of the use of the money and in so far as no more generous remedy is available, as a matter of national law, in relation to other taxes.”

“34. It is settled case-law that the principle of effectiveness prohibits the Member States from rendering virtually impossible or excessively difficult the exercise of rights conferred by EU law. In the context of determining the detailed rules governing an interest claim stemming from EU law, a breach of the principle of effectiveness would therefore arise only if the interest were so low that it largely deprived the interest claim stemming from EU law of substance.”

“Satisfactory, but worthy of no stronger praise or recommendation; barely reaching an acceptable standard; just good enough”

“The rate at which the UK Government can borrow is, in virtually all conceivable circumstances, lower than the rate at which any commercial entity can borrow, and this has been true throughout the period of overpayments. This differential exists for two principal reasons: (i) lenders perceive lending to government as carrying the lowest risk associated with any borrower; and (ii) loans to the government are more liquid – i.e. easier to realise in a secondary market – than loans to other entities. … In my view, the cost of capital to the claimants would always have been higher – probably substantially higher – than the cost of government borrowing, and this was continuously true throughout the period from 1973 to 2012.”

“If issue 2 is answered in the affirmative, can sections 78 and 80 of VATA 1994 be construed so as to conform with EU law (and if so, how), or must they be disapplied so as to allow either (a) only the Woolwich claims, or (b) both the Woolwich claims and the mistake-based claims?”

“For present purposes, it is sufficient to highlight the constraints on the broad and far-reaching nature of the interpretative obligation, namely that the meaning should “go with the grain of the legislation” and be “compatible with the underlying thrust of the legislation being construed”, and should not be “inconsistent with a fundamental or cardinal feature of the legislation” since this would cross the boundary between interpretation and legislation.”

“75. Mr Rabinowitz raised a new argument in this case, somewhat ingeniously it might be said, bearing in mind the numerous occasions upon which these issues have been rehearsed. He submitted that s78(1) could easily be interpreted in a way that conformed to the putative EU right to the use value of money, by simply reading the exclusionary words in s78(1) [i.e. what I have called the saving words] as carving out restitutionary claims for interest as well as statutory ones. This interpretation did no violence to the words used and, so to speak, “ticked all the boxes” of the principles I have mentioned. 76. Ingenious though this approach is, it seems to me that it cannot work. For much the same reasons as I have given under issue 1, and as Warren J gave in John Wilkins, and as Arden LJ gave in Monro, the construction for which Mr Rabinowitz contends cuts straight across the grain of the legislation and is contrary to its fundamental or cardinal features. The legislation provided that taxpayers like Littlewoods should have only simple interest when they were repaid VAT upon an error being made by the Commissioners, and Mr Rabinowitz’s construction gives them something much more. That would not be construction but legislation. One may ask rhetorically, what on earth would have been the point of s78 if its exclusionary words were to be construed as allowing a quite different common law interest remedy in every case? I have little doubt that, if there is an EU right to the use value of the money, that right can only be given effect by the disapplication of s78 in cases where the right exists (which one may note will be substantially all cases to which it applies).”

“The question then arises as to how s78 should be disapplied.”

“As is apparent from consistent case-law, when faced with a rule of law that is incompatible with directly applicable EU law, the national court is required to disapply that national rule, it being understood that that obligation does not restrict the power of the competent national courts to apply, amongst the various procedures of the internal legal order, those which are appropriate to safeguard the individual rights conferred by EU law …”

“119. I have grave doubts as to whether that interpretation does not go against the grain of the legislation, since the “practice generally prevailing” condition is of long standing and has always been regarded as an important safeguard for the public revenue. I am inclined to think that Mr Aaronson was right … to call it a “cardinal feature” of the legislation. In my view the Marleasing principle can be applied in a simpler and more natural way by not construing section 33 as impliedly setting itself up as an exclusive provision (which it did not do expressly, unlike section 80 of the Value Added Tax Act 1994). The test claimants submit that the application of Marleasing cannot rework section 33 in a way that serves any relevant purpose. But to read it as non-exclusive does not go against its grain. It would merely exclude an implication which is itself no more than a process of statutory construction.”

“… [Section 33] confers a right subject to highly restrictive conditions to invoke what is essentially a discretionary power of the commissioners to grant a refund of overpaid tax. No one suggests on this appeal that such a limited remedy could possibly be enough in itself to satisfy the virtually unqualified obligation of the United Kingdom to provide an effective means of recovering tax overcharged contrary to EU law. This does not of course matter if it is an additional remedy as opposed to an exclusive one. There is certainly nothing in the provision which expressly excludes the availability of other causes of action at common law. If that is its effect, it must be by implication. In the ordinary way, such an exclusion might be implied, on the ground that where Parliament confers a restricted right of recovery, that must impliedly displace a corresponding right at common law which would be unrestricted. However, it is axiomatic that the courts cannot imply an exclusion of unrestricted rights of action at common law where that would be inconsistent with an overriding rule of EU law that an unrestricted right must be available. Section 33 cannot therefore be an exclusive right to recover tax overcharged contrary to EU law.”

“90. Taking all these factors together, it seems to me that the cause of action that most naturally and comprehensively gives effect to Littlewoods’ San Giorgio right to the use value of the repayments is the Woolwich claim, which is applicable, as we now know it to be, to all cases where the government has exacted tax, which was not lawfully due, whether or not a demand has been made. The mistake-based restitutionary claims would only vindicate the San Giorgio right to the use value of money in some circumstances – namely where an appropriate mistake had been made. Such a claim would, therefore, be of less general application than the Woolwich claims. The rules to be disapplied are the same in this case, so that factor is neutral, but one would generally want to lean in favour of the minimum possible disapplication of domestic law. 91. The Woolwich claims here will be subject to an (EU law compliant) six-year limitation period which will reduce Littlewoods’ claims for compound interest to a relatively small amount. On the other hand, if the mistake-based restitutionary claims were to be allowed, it is common ground that the limitation period must be extended under s32(1)(c) so as to allow the full extent of Littlewoods’ claims. It might be suggested, therefore, that the approach that I have adopted is driven by a desire to protect the Commissioners from the major part of the claims to compound interest in this case. I should make it clear that I have ignored that factor, which seems to me, as a matter of law, to be entirely irrelevant. 92. For the reasons I have given, therefore, and on the assumptions that I have adopted above, I would provisionally answer the two questions in issue 3 as follows: (i) ss78 and 80 of VATA 1994 cannot properly be construed so as to conform with EU law; and (ii) to give effect to Littlewoods’ putative San Giorgio right to the use value of the overpayment of tax, ss 78 and 80 of VATA 1994 must be disapplied so as to allow only the Woolwich claims.” (i) ss78 and 80 of VATA 1994 cannot properly be construed so as to conform with EU law; and (ii) to give effect to Littlewoods’ putative San Giorgio right to the use value of the overpayment of tax, ss 78 and 80 of VATA 1994 must be disapplied so as to allow only the Woolwich claims.”

“46. On that basis [i.e. on the assumption that the Woolwich cause of action was in principle available to the claimants], the next main question is whether Mr Swift is right in his submissions about the appropriate starting point, and the distinction which he draws between the position in the present case and the position in the FII litigation. In my judgment he is plainly right to draw attention to the fact that s80 of VATA 1994 is a statutory provision of long standing, which as a matter of national law provides an exclusive remedy for the recovery of overpaid VAT, and rules out any common law cause of action which might otherwise co-exist with it. In that respect, the position is clearly different from that which faced the FII test claimants. But does the distinction remain important once the exclusionary effect of s80 has been disapplied by EU law? My answer to that question is no. In my judgment, once the exclusionary rule in s80(7) has been over-ridden, the position is the same as it would be if common law causes of action had always been permitted to co-exist with s80, and in those circumstances no warrant can be found, in either English or EU law, for confining a claimant to only one such common law remedy, or for trying to identify the remedy which objectively provides the best fit for the claim. That was, in essence, what the Court of Appeal held should be done in FII (CA), but that approach has now been shown to be wrong by the majority in the Supreme Court. In short, once the exclusionary rule has been removed by force of EU law, I see no answer to the simple point that the normal principle of freedom of choice under English domestic law should be allowed to prevail. 47. In my view substantial support for this approach may be found in the judgments of the majority in FII (SC), including in particular the passages from the judgments of Lord Hope, Lord Walker and Lord Reed to which I have referred earlier in this judgment.”

“142. I reach this conclusion without any heavy reliance on principles of EU law, except perhaps in relation to the Pintada principle (which I regard as uncertain in relation to the law of unjust enrichment). But the European context confirms my conclusion. The domestic court must give DMG an equivalent and effective remedy, and that would not be achieved, in my opinion, if recovery were limited so as to exclude an alternative concurrent remedy which would be available in a dispute between private citizens.”

“49. In view of the foregoing considerations, the answer to the question referred is that in a situation in which, under national law, taxpayers have a choice between two possible causes of action as regards the recovery of tax levied in breach of EU law, one of which benefits from a longer limitation period, the principles of effectiveness, legal certainty and the protection of legitimate expectations preclude national legislation curtailing that limitation period without notice and retroactively.”

“… the guarantees attaching to the principle of effectiveness apply to every legal remedy which national law makes available to claimants for the reimbursement of taxes levied in breach of EU law (my emphasis).”

“Is a change of position defence available in English law to (a) a Woolwich claim, and/or (b) a mistake-based restitutionary claim?”

“A change of position defence is available in English law to a mistake-based restitutionary claim, but not to a Woolwich-based claim”. (2) Issue 4B: “Is an exhaustion of benefits defence available in English law to (a) a Woolwich claim, and/ or (b) a mistake-based restitutionary claim?”

“In so far as an exhaustion of benefits defence is a species of change of position, it is, as a matter of English law, available to a mistake-based restitutionary claim, but not to a Woolwich-based claim”. (3) Issue 4C: “Have the Commissioners made their change of position defence good on the facts to (a) the Woolwich claims, and/or (b) the mistake-based restitutionary claims?”

“The Commissioners’ change of position defence to the mistake-based restitutionary claims (if the claims were available in law) and to the Woolwich-based claims (if the defence was available in law) could not succeed on the facts, because the Commissioners have failed to prove that the government increased its spending on the basis of the expectation or the happening of the overpayments, even though they have shown that they either spent or used the overpayments to reduce governments borrowing”. (4) Issue 4D: “Have the Commissioners made their exhaustion of benefits defence good on the facts to (a) the Woolwich claims and/or (b) the mistake-based restitutionary claims?”

“Whilst the Commissioners have not made any change of position defence good on the facts, whether framed as an exhaustion of benefits defence or not, it is open to the Commissioners to argue on the assessment of quantum in answer to either or both of the Woolwich-based and the mistake-based claims (if such were available) that the government has not benefited from the money after the first fiscal year, so that no use value of the overpayments should be awarded to Littlewoods in respect of a subsequent period”. (5) Issue 4E: “Assuming a change of position defence is available and has been made good on the facts, can it be given effect as a matter of EU law in answer to San Giorgio claims for the use value of overpayments of tax?”

“Assuming a change of position defence is available in national law, and has been made good on the facts, my provisional view is that such a defence should be given effect as a matter of EU law in answer to San Giorgio claims for the use value of overpayments of tax”. (6) Issue 4F: “Assuming an exhaustion of benefits defence is available and has been made good on the facts, can it be given effect as a matter of EU law in answer to San Giorgio claims for the use value of overpayments of tax?”

“In principle, is the measure of recovery for the Woolwich claims and/or the mistake-based claims to be measured by reference to (a) a conventional rate of interest compounded, or (b) the actual benefit enjoyed by the Commissioners, or (c) a compound rate of interest reflecting the cost of national government borrowing, or (d) in some other way? And is the measure limited to the lower of the value of (a) the use of which the claimants have been deprived and (b) the value of the use which the Commissioners received?”

“(a) The measure of Littlewoods’ Woolwich claim and its mistake-based claim (if one were available) for the use value of the overpayments of VAT is a compound rate of interest reflecting the cost of national government borrowing, but it is open to the Commissioners to show at the quantum hearing that they have benefited to a lesser extent so that they should only be liable for the actual benefit enjoyed by them. (b) This measure of Littlewoods’ claims is not limited to the lower of the value of (a) the use of which they have been deprived and (b) the value of the use which the Commissioners received.”

“Simple interest is an artificial construct which has no relation to the way money is obtained or turned to account in the real world. It is an imperfect way of measuring the time value of what was received prematurely.”

“We live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms.”

“101. … Sempra’s claim is that under both causes of action restitution requires the Inland Revenue to pay Sempra the value of the benefit the Inland Revenue obtained by having use of the money Sempra paid as ACT. 102. In principle this claim is unanswerable. The benefits transferred by Sempra to the Inland Revenue comprised, in short, (1) the amounts of tax paid to the Inland Revenue and, consequentially, (2) the opportunity for the Inland Revenue, or the Government of which the Inland Revenue is a department, to use this money for the period of prematurity. The Inland Revenue was enriched by the latter head in addition to the former. The payment of ACT was the equivalent of a massive interest free loan. Restitution, if it is to be complete, must encompass both heads. Restitution by the revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity. 103. In the ordinary course the value of having the use of money, sometimes called the “use value” or “time value” of money, is best measured in this restitutionary context by the reasonable cost the defendant would have incurred in borrowing the amount in question for the relevant period. That is the market value of the benefit the defendant acquired by having the use of the money. This means the relevant measure in the present case is the cost the United Kingdom Government would have incurred in borrowing the ACT for the period of prematurity. Like all borrowings in the money market, interest charges calculated in this way would inevitably be calculated on a compound basis.”

“But section 35A says nothing about the principles to be applied by the courts at the anterior stage when assessing the amount of money required to achieve full restitution.”

“117. The time value of money, measured objectively in this way, is to be distinguished from the value of the benefits a defendant actually derived from the use of the money. The latter value is not in point in the present case. Sempra retained no proprietary interest in the money it paid to the Inland Revenue, and it has no interest in the “fruits” of that money. Sempra’s claim is a personal claim against the Inland Revenue in respect of the benefits it transferred to the revenue. The value of those benefits should be measured as described above. 118. In the present case there can be nothing unjust in requiring the Inland Revenue to pay compound interest, by way of restitution, on the huge interest free loan constituted by Sempra’s payment of ACT.”

“[Lord Goff’s] speech in the Kleinwort Benson case provides us with another vital building block. Recognition that the court has jurisdiction to award compound interest at common law is a short, but logical, step in the further development of the restitutionary remedy. It follows from the fact that the right to recover money paid under a mistake is available at common law. To treat the choice of remedy in unjust enrichment as discretionary would, in my opinion, be inconsistent with the common law right that gives rise to it.”

“But, as in cases of property other than money where the claim includes restitution for the value of the use of the asset that was transferred, subtraction of the enrichment from the defendant includes more than the return of the money that was transferred at its nominal or face value. That value, in this case, has already been accounted for. The subject matter of Sempra’s claim is the time value of the enrichment. This is the amount that has to be assessed. 33. In this case the enrichment consists, not of the payment of a sum of money as such, but of its payment prematurely. As Professor Birks pointed out, the availability of money to use is not unequivocally enriching in the same degree as the receipt of money: Unjust Enrichment, p 53. But money has a value, and in my opinion the measure of the right to subtraction of the enrichment that resulted from its receipt does not depend on proof by Sempra of what the revenue actually did with it. It was the opportunity to turn the money to account during the period of the enrichment that past from Sempra to the revenue. This is the benefit which the defendant is presumed to have derived from money in its hands, as Lord Walker puts it in para 180. The revenue accepts that the money it received prematurely had a value, but it says that the restitutionary award should take the form of simple interest. I do not think that such an award would be consistent with principle.”

“Restitution requires that the entirety of the time value of the money that was paid prematurely be transferred back to Sempra by the revenue. 34. All this points to the conclusion, subject to what I say later about onus (see paras 47, 48) that, for restitution to be given for the time value of the money which was paid prematurely, the principal sum to be awarded in this case should be calculated on the basis of compound interest.”

“The crucial insight in the speeches of Lord Nicholls and Lord Hope is, if I may respectfully say so, the recognition that what Lord Nicholls calls income benefits are more accurately characterised as an integral part of the overall benefit obtained by a defendant who is unjustly enriched. Full restitution requires the whole benefit to be recouped by the enriched party: otherwise “the unravelling would be partial only” … ”

“The judgment of the Court of Justice is in my opinion a powerful encouragement for this House to reconsider the basis on which a monetary award reversing unjust enrichment can and should take account of the time value of money. In modern economic conditions simple interest does not provide full compensation in a case where unjust enrichment has lasted for a significant period …”

“It seems to me that, in the type of case under consideration, Lord Walker saw either route as providing an acceptable route to a solution (compare the opening words of paragraph [188]), although his preference was for the equitable route. Had he intended to push his disagreement on this critical issue to the point of actual dissent, I think he would have said so explicitly, and would also have expressed his preferred solution in less tentative terms … To summarise, I regard Lord Walker’s observations in paragraphs [184] to [188] as being broadly supplemental in character, and not as intended to detract from his basic agreement with the reasoning and analysis of Lords Hope and Nicholls.”

“Further, although the issue involved can be said to be slightly different, namely payment under a mistake, the approach of Lord Hope and Lord Nicholls, in the House of Lords decision in [Sempra] … seems to me, as it did to Etherton LJ at [2010] EWCA Civ 1427 at [144], to indicate that market value is the prima facie basis of valuation in this area of law.”

“119. Here, as elsewhere, the law of restitution is sufficiently flexible to achieve a just result. To avoid what would otherwise be an unjust outcome the court can, in an appropriate case, depart from the market value approach when assessing the time value of money or, indeed, when assessing the value of any other benefit gained by a defendant. What is ultimately important in restitution is whether, and to what extent, the particular defendant has been benefited: see Burrows, The Law of Restitution, 2nd ed (2002), p 18. A benefit is not always worth its market value to a particular defendant. When it is not it may be unjust to treat the defendant as having received a benefit possessing the value it has to others. In Professor Birks’s language, a benefit received by a defendant may sometimes be subject to “subjective devaluation”: An Introduction to the Law of Restitution (1985), p 413.”

“Once the claimant has shown that prima facie he is entitled to a restitutionary remedy, direct knowledge of the extent of the benefit, if any, that has been received can be assumed to lie with the recipient. It is open to the recipient to demonstrate that there was no actual enrichment when the money fell into his hands notwithstanding the opportunity to turn it to account.”

“A defendant, in my view, is entitled to prove that he valued the relevant services (or goods) provided by the claimant at less than the market value. That principle is widely accepted by academic commentators and is based on the fundamental need to protect a defendant’s autonomy. It is important to note that subjective devaluation is not about the defendant’s intentions or expectations but is an ex post facto analysis of the subjective value of the services to the defendant at the relevant time.”

“The common law “places a premium on the right to choose how to spend one’s money” … and this right might be unfairly compromised if a defendant were forced to make restitution of the market value of a benefit which he would only have bought for himself at a lower price, or which he would not have bought at all. To avoid this, the court may therefore assess the value of the benefit by reference to the defendant’s personal value system rather than the market.”

“21. After the claimant has adduced evidence of the objective value of the benefit which the defendant received, the burden of proof falls upon the defendant to prove that he did not subjectively value the benefit at all, or that he valued it at less than the market price: Goff & Jones, para 4-08; Virgo, pp 64, 66-67. That principle was established by the majority of the House of Lords in Sempra Metals [2008] AC 561: see para 48, per Lord Hope of Craighead, para 116, per Lord Nicholls of Birkenhead and para 180, per Lord Walker of Gestingthorpe. The minority took a different view, namely that it was for the claimant to establish the actual benefit obtained by the defendant: see especially per Lord Mance, at paras 231-232, and Lord Scott of Foscote, at para 147. As I see it, the difference between them is really no more than a different approach to the burden of proof. In each case the question is what was the value to the defendant.”

“The defendant, as a public body, could purchase the benefit in question (the use of money) at a lower price than commercial enterprises. The benefit arising from the mistaken payment of tax before it was due was therefore valued on the basis of the public sector borrowing rate rather than ordinary market rates of interest.”

“When I first drafted this judgment I thought that Sempra was an example of subjective devaluation in practice. It was held that the claimant could not recover the market interest rate on the sums it had paid to the Revenue by way of unlawfully levied advance corporation tax because the Government was able to borrow money at lower rates than the market rate. The amount saved by the Government was thus less than that which would have been saved by a commercial entity borrowing the same sums of money: see Goff & Jones at para 4-07. However, having read Lord Reed JSC’s judgment I can now see that it may be an example of the objective value of the money to a person in the position of the defendant, namely the Government. This perhaps shows the narrowness of the difference between our two approaches.”

“If I received £1 in 1975, and spent the £1 on four pints of beer, the pleasure that I derive as a result of that expenditure occurs in 1975. I do not derive any benefit in 2005, or in any subsequent year, from that 1975 receipt and the consequential expenditure. However I derive considerable benefit from the fact that I received the £1 in 1975 rather than 2005. There are two reasons for this. The £1, which would have bought four pints of beer in 1975 would not have bought one pint of beer in 2005. And even if the price and availability of beer is unchanged, present consumption may be valued more highly than future consumption. That difference in the value of money received at materially different times (the time value of money) is the quantum of benefit which falls to be measured in the present case. The time value of money is the result of inflation (beer tends to cost more at a later date) and time preference (people prefer to drink beer sooner rather than later).”

“Q. You take no account at all of the time value of getting £50,000 in 2015 in that analysis. A. If I am asked in 2020, what is the benefit that I have received from the bridge, then, yes, that is correct.”

“17. Taking my approach of considering the actual use of the interest avoided, the question of whether the benefit to Government compounded over time hinges on whether the interest avoided was itself saved or whether it was spent. … 19. In order for the benefit to Government to have compounded in the way that the claimants assert, the Government would have had to have saved the interest avoided in each and every year, the interest on the interest, the interest on the interest on the interest and so forth. … 21. There is, in general, no reason why interest payments should automatically remain “in the account” rather than being spent and hence no automatic reason for compounding to occur: whether it does or not depends on choices about the use of the interest (or in this case interest avoided). 22. Compounding would require that the amount of Government borrowing was set lower in each year as a consequence of the interest avoided and indeed that this reduction in borrowing was by an increasing amount in each year. The Government would have to have had an in-built bias towards saving rather than spending. I set out in my first Report that this was not the case. 23. Moreover, at the time they were received, the overpayments were not distinguishable from a very large number of similar payments. The only distinguishing feature that has been put forward was the size of the payments, distinguishing them from larger payments. If the Government had had an in-built bias towards saving the interest avoided on these payments, it would presumably have taken the same approach to all other, indistinguishable, payments. As I set out in my first Report, this has the implication that the Government would today have several trillion pounds worth of financial assets, which it clearly does not. Nor is it feasible that debt would otherwise have been several trillion pounds higher than it is today. It is inconceivable that the UK could have borrowed sums of this magnitude. 24. From considering the actual use of the interest avoided, I conclude therefore that the benefit to Government did not compound. The interest avoided was spent in full, or at least in very large part, rather than saved.”

“Those sums are reconciled precisely in the plans. … We add them up. So as a matter of accounting, if the borrowing amount is unaffected by the interest avoided, then one or other of the other sums must change as a consequence. Either there is more spending on some item or there is less taxation.”

“I think the point that is missing from Professor Kay’s analysis is that the total of spending, the big number, if you like, is exactly equal to the sum of all the little numbers. It is the sum of all the pennies. It is not approximately equal. It is exactly equal, the system reconciles.”

“The Year 2 position is that you are setting out your plans. Because this is debt interest avoided, you know precisely what the sum is. It is in the debt interest forecast. You cannot do a kind of by and large debt interest forecast. You actually have to pay people precise sums on precise dates, otherwise the Government would default.”

“14. The effect of lower borrowing by the Government in any year is to reduce the interest payable on Government debt in all subsequent years … This is the principal benefit to the Government of the lower borrowing, since it routinely renews its maturing debt and has no plans to reduce or repay its overall indebtedness. Over the period since 1973, that indebtedness increased in all but two years. 15. The direct benefit of the Government having had the use of the money, therefore, is the reduced interest which the Government will have had to pay in subsequent years as a result of additional receipts or lower expenditures on interest. Specifically, just as the effect of the overpayments is to reduce Government borrowing in the year in which the overpayment is received, so the effect in subsequent years of the lower interest payments which are consequent on the overpayment (and the consequent reduction in the debt size and interest burden) is to increase the funds available to the Government in these subsequent years, and hence allow it to spend more or borrow less. 16. I have reviewed whether the consequential lower interest payments would have been material in relation to the overall revenue and expenditure of the British Government. I have answered this question using the same method, and the same principles I described above, i.e. I have considered whether the budgetary decisions of the UK Government would have been likely to be affected by the anticipated receipt or non-receipt of these amounts. I have concluded that these amounts would also not be material in this sense. I therefore consider in line with my earlier opinion and the judgment of Mr Justice Vos that the interest savings would also have led to further reductions in Government borrowing, rather than lower taxation or additional expenditure. 17. It is also the case that the further reduction in borrowing that is the result of lower interest payments also has the effect of reducing the interest bill in subsequent years. The Governments saves not only interest, but interest on interest, and thereafter interest on interest on interest. It follows that the benefit to Government from the overpayments compounds over time.”

“36. Taking overpayments and interest savings together, the maximum effect on annual Government finances would have amounted to 0.020% of Government expenditure in 2000/1. This compares with the maximum effect of overpayments alone of 0.010% of Government expenditure in 1980/1 (or 0.011% including overpayments still in dispute). The maximum effect of overpayments including those still disputed is 0.012% in 1981/2 and it was this figure which formed the basis of my earlier opinion. 37. In my view, which Mr Neale and Mr Justice Vos accepted, a figure for overpayments which never exceeded 0.012% of total Government expenditure was never material in relation to overall Government revenues and expenditure, in the sense that expenditure decisions would have been affected by anticipated receipt or non-receipt of these amounts. In my view this conclusion on materiality is not affected by the inclusion of compounded interest, i.e. I would have reached the same conclusion on materiality if the relevant figure had been 0.020% of total expenditure rather than 0.012%. 38. I have also considered the potential effect of accumulated liabilities on Government spending. I have estimated the accumulated liability of the Government to the claimants, including compound interest, on a year by year basis during the period. On the assumptions about the basis of compounding set out at paragraphs 44-50 below, the maximum percentage liability is found in 2001/2, and is 0.29% of Government debt. 39. This figure may be considered to approach the threshold of materiality. Although it remains well within the normal margins of error associated with the forecasting of future debt levels, the percentage is not so small that it would necessarily be eliminated by sensible rounding in the presentation of data. The central criterion of materiality which is relevant for the present purpose, however, is whether the figure is of a magnitude such that Government spending decisions would be likely to have been affected by the belief that the liability existed, or did not exist. 40. In the earlier proceedings Mr Neale and I described the fiscal framework which the Government adopted after 1998. For the present purpose, the key element of that framework was the prescription of a 40% limit on the acceptable ratio of the national debt to national income. At the time at which the accumulated liability was largest in relation to total outstanding debt, the ratio of debt to national income was 34.7% and would, if liability for repayment is included, have been 34.8%. In these circumstances, I think it is unlikely as a matter of fact that Government spending would have been higher in any year as a result of previous overpayments by the claimants. It follows that the benefit to the Government of the overpayments is appropriately measured by reference to their impact on funding costs and it is not necessary or appropriate to enquire further into Government expenditure decisions over the period.”

“Dr Richardson appears to envisage a rather different process in which Government continuously adjusts its expenditure in the light of its actual receipts of tax revenue to achieve a predetermined borrowing target. I do not believe this is a realistic account of the Government’s budgeting process.”

“In Year 1 the Government receives, and let us suppose it is unexpected, £10 million which it did not expect to receive from Littlewoods. In Year 2 there is an interest saving which will be less than £1 million in most years as a result of it having received that amount of money in Year 1. The question then becomes whether if Dr Richardson were to go to the Chancellor of the Exchequer and say, we have realised that revenue was going to be £800,000 more next year than we had previously thought it was going to be, the Chancellor would say in that case I shall reconsider my spending plans. My belief is that is not the case.”

“130. I have, however, now to consider whether this could be consistent with the findings I have made under issue 4C above. In other words, is it consistent to say, on the one hand, that there has been no change of position because the overpayments must be taken to have decreased Government borrowing in the fiscal year in question, and on the other hand that it is open to the Commissioners to prove that Government has not benefited in fact from the overpayments after the fiscal year in which they were paid. There is, I think, no inconsistency here. The difference is between a defence of change of position, properly so called, which requires it to be shown that a spending decision has been taken in reliance on the overpayment, and a quantum assessment which enables the recipient to show that it has, in fact, not benefited beyond the capital payment because, in this case, of the special government mechanisms for setting its budgets, its borrowing limits and its expenditure.”

“20. None the less, since such a refusal of reimbursement of a tax levied on the sale of goods [i.e. the established passing on exception] is a limitation of a subjective right derived from the legal order of the European Union, it must be interpreted narrowly. Accordingly, the direct passing on to the purchaser of the tax wrongly levied constitutes the sole exception to the right to reimbursement of tax levied in breach of European Union law. … 25. … It must be noted that the Court, in paragraph 20 of the present judgment, states that the direct passing on of the tax wrongly levied to the purchaser constitutes the sole exception to the right to reimbursement of tax levied in breach of European Union law.”

“… European Union law precludes a Member State from refusing reimbursement of a tax wrongfully levied on the ground that the amounts wrongly paid by the taxpayer have been set off by a saving made as a result of the concomitant abolition of other levies, since such a set-off cannot be regarded, from the point of view of European Union law, as an unjust enrichment [i.e. of the taxpayer] as regards that tax.”

“The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognises would make an order for restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention ) of the payment is not unjust.”

“(1) The defendant has a defence if it is impossible for there to be counter-restitution of reciprocal benefits conferred on the claimant by the defendant. (2) The defendant normally has a set-off defence for counter-restitution of reciprocal benefits conferred on the claimant by the defendant.”

“Say, for example, the claimant pays £1,000 to the defendant by mistake. As a result a third party does not pay the defendant the £1,000 that she would otherwise have paid him. Or say the claimant has discharged the defendant’s liability to a third party but a relative of the defendant was about to discharge it gratuitously. Or say the claimant has improved the defendant’s car, and the defendant has realised those improvements, but the defendant would otherwise have made the same improvements at a cost well below the market price of the services. In all these circumstances it would seem correct to say that the defendant has not been benefited at all, or has not been benefited at the market price, by the claimant’s payment or services because it would have been benefited in any event or would otherwise have been benefited at a lower price than the market price.”