Grattan plc v Revenue & Customs [2009] UKFTT 184 (TC)

FTT-Tax
Grattan plc v Revenue & Customs
[2009] UKFTT 184 (TC) · 2009-07-24
[1][2009] UKFTT 184 (TC) TC00139 Appeal number LON/2008/2002 (previously ref: MAN/2008/0388) PROCEDURE – Entertainment of appeal – Strike-out application – Whether appeal made out of time – Date of Decision – Whether to extend time for appealing – VAT Trib Rules 4, 6(1) and 19 FIRST-TIER TRIBUNAL TAX CHAMBER GRATTAN PLC Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS (VAT) Respondents TRIBUNAL: SIR STEPHEN OLIVER QC Sitting in public in London on 18, 23 and 24 June 2009 Dr P Lasok QC, instructed by KPMG accountants, for the Appellant Peter Mantle and Peter Wolff, counsel, instructed by the General Counsel and Solicitor for HM Revenue and Customs, for the Respondents © CROWN COPYRIGHT 2009 DECISION This concerns an application by HMRC "to strike out or dismiss" an appeal by Grattan Plc. Grattan's appeal, lodged on 14 March 2008, was described in its Notice of Appeal as against HMRC's rejection of claims "for interest calculated on a compound basis" on repayments by HMRC to Grattan pursuant to section 80 VAT Act 1994 of amounts overpaid by Grattan.[2]Grattan's Notice of Appeal states that the appeal is brought under section 83(s) and (t). Section 83 directs that an appeal shall lie to this Tribunal in respect of "matters" that include: (s) Any liability of the Commissioners to pay interest under section 78 or the amount of interest so payable: (t) A claim for the … repayment of an amount under section 80 …" HMRC seeks to strike out the appeal by notice of 26 March 2008[3]HMRC's first ground for striking out the appeal in pursuance of rule 6 of the VAT Tribunals Rules is that section 83, the sole relevant source of this Tribunal's authority, does not cover Grattan's claims. Grattan's claim is for compound interest pursuant to an alleged EC law right. HMRC deny that there is such a right; and if there were one, they say the refusal of the claim would not be an appealable matter within section 78. Resolution of the first ground has been postponed because, if HMRC's second ground is sustained and the Notice of Appeal is found to have been served out of time, the whole appeal fails.[4]The second ground is that "the only effective decision of HMRC in relation to the amount of interest payable to [Grattan] under section 78 was made no later than 4 April 2005" The appeal, commenced on 14 March 2008, was therefore outside the time limit prescribed by rule 4(1) of the Tribunal Rules. Grattan seeks leave to appeal out of time by application of 19 May 2009[5]Grattan's notice of 19 May 2009 applies for leave to have the appeal accepted out of time (assuming the Tribunal finds it to have been out of time in the first place).[6]Grattan's application points out that its claim relates to three claims:. Repayment Claim 1 for the periods 01/99 to 11/01 made on 27 January 2002 Repayment Claim 2 for the periods 04/73 to 11/98 on 17 July 2002 Repayment Claim 3 for the periods 02/02 to 08/04 on 21 October 2002. (I refer to those as Claim 1, Claim 2 and Claim 3.) The application states that Claims 1 and 3 had been paid on 7 January 2005 "with statutory interest being paid on 4 April 2005". (By "statutory interest" is meant interest calculated on a simple basis and at the rates prescribed under section 73(3)). "Part-payment of Claim 2 together with statutory interest" had (the application states) been made on 28 February 2008: the remaining part of Claim 2 is said to be the subject of the separate appeal MAN/06/0120 to the VAT and Duties Tribunals.[7]The appealable decision, asserts Grattan in the application, was given by HMRC in a letter of 12 February 2008. The appeal was therefore one day out of time. HMRC's Application of 30 April 2009[8]HMRC applied to have this appeal dealt with under the "Old" VAT Tribunal Rules and in particular rule 6. This application was not disputed. In the circumstances and having regard to the provisions of the Transfer of Tribunal Functions Order 2009 Schedule 3 paragraph 7, this seems to me to be correct.[9]Regarding Claim 2 HMRC applied to have the appeal struck out (so far as it related to Claim 2) on the basis that the 12 February 2008 letter contained no appealable decision within the scope of either section 83(s) or section 83(t). The issues in this appeal[10]Regarding Claims 1 and 3:(i) whether these appeals were commenced out of time, i.e. after the period fixed by rule 4(1) of the Tribunal Rules and(ii) if the appeal was commenced out of time should the Tribunal exercise its discretion under rule 19(1) to extend time to appeal until the date on which the Notice of Appeal was actually served. Regarding Claim 2, should the appeal be struck out on the grounds that there has been no appealable decision?[11]As I understand the position there was no issue as regards the application of section 83(t); the appeal turn entirely upon whether the Tribunal has authority under section 83(s). The claims for repayment pursuant to section 80[12]In October 2001 the Court of Justice in C&EC v Littlewoods Organisation plc [2001] STC 1561 decided that commission awarded to Littlewoods Organisation's agents was to be taken as a discount from the catalogue price of goods supplied to their agents; in accordance with Article 11A.3 of the Sixth VAT Directive therefore the commissions could not be included in the taxable amount in relation to the supplies. All the Claims were made by Grattan under section 80 in relation to the alleged overpayments. Claim 1 had covered the periods 01/99 to 11/01 in compliance with HMRC's interpretation of the "3-year cap". Claim 2 was made for the periods 04/73 following the ECJ decision in Marks & Spencer Plc v C&EC [2002] STC 1036 . Claim 3 was submitted in respect of the period 02/02 until 08/04.[13]An explanation of the circumstances of the alleged overpayment of tax, while not strictly relevant to this part of the appeal, is set out in the Appendix to this Decision. The facts relevant to all three claims[14]Grattan had been giving commissions to its agents in cash or in the form of goods since VAT was introduced at the start of 1973. Its claim to have accounted for too much tax extends back to that date, though the strength of the claim may have been enhanced by the coming into force of Article 11A of the Sixth VAT Directive in 1977.[15]In March 2001 the judgment of the ECJ in Metallgesellschaft (subsequently Sempra ) v IRC (C-397/98) [2001] STC 252 recognised that the UK companies that were parties to the group litigation and had overpaid tax to the Inland Revenue were entitled to compensation including restitutionary interest in respect of overpaid (direct) tax. C&EC v Littlewoods [2001] STC 1568 was decided by the Court of Appeal in October 2001 and decided that the commissions given to agents in the form of goods were to be treated as price discounts. They should not therefore be treated as "taxable amounts" for purposes of Article 11A.1(a).[16]On 23 January 2002 Grattan submitted a section 80 claim in respect of VAT accounting periods 01/99 until 11/01 (Claim 1). This was rejected by HMRC on 19 February 2002. Grattan served notice of appeal against the refusal on 28 March 2002.[17]The ECJ's judgment in Marks & Spencer v C&EC decided (on 11 July 2002) that the UK's "capping" legislation had been defective owing to our failure to have incorporated a transitional period. On 17 July 2002 Grattan submitted Claim 2 covering all periods prior to those covered by Claim 1. HMRC rejected Claim 2 on 1 November 2002 on the basis that it was time-barred.[18]Sempra Metals Ltd v IRC [2004] STC 1178 decided by Park J on 16 June 2004 awarded "compound" interest in respect of the overpaid direct tax.[19]On 21 October 2004 Grattan submitted Claim 3.[20]By letter of 22 December 2004 HMRC informed Grattan that Claims 1 and 3 were to be repaid with "statutory" interest and £12,759,687 was paid to Grattan on 7 January 2005 whereupon Grattan withdrew its appeal against the decision on Claim 1.[21]On 25 January 2005 Patricia Vann (who was responsible for VAT compliance for Grattan and who provided a witness statement) e-mailed David Bennett (senior officer of HMRC who also provided a witness statement) about the statutory interest on Grattan's claim and asked for confirmation that "no formal claim" was needed: Mr Bennett confirmed this by e-mail of 27 January 2005.[22]A letter from David Bennett to Patricia Vann of 17 March 2005 sets out the final calculation of statutory interest making a total amount of £1,538,133 due to Grattan. This covered all periods from 01/99 to 08/04. The explanatory part of the letter of 17 March 2005 reads:
"Please find attached my final calculations of statutory interest due to Grattan as a consequence of the Littlewoods case on agents' commission. The interest relates to the voluntary disclosure which was sent for processing on 22 December 2004."
That amount of interest was paid to Grattan on 4 April 2005. (On 12 April 2005 the Court of Appeal upheld the award of compound interest in the Sempra Metals appeal.)[23]On 21 February 2006 Grattan served Notice of Appeal against HMRC's rejection of Claim 2: this became MAN/06/0120. This did not include a claim for interest. Action on this appeal was suspended pending the outcome of(1) Fleming(2) Condé Nast v HMRC [2008] STC 324 .[24]A meeting between Patricia Vann and David Bennett took place on 27 March 2007. At this a possible claim for compound interest was raised. A letter from Grattan to HMRC of 13 June 2007 recites that £1,538,133 of interest, calculated on a simple basis, had been paid to Grattan (on 4 April 2005). A claim is made in the letter for interest on a compound basis in respect of the repayment of £12,759,690 made in response to Claims 1 and 3. (This letter makes no mention of Claim 2 or to any amounts contained in that claim: nor does it mention whether interest is charged under section 78 or on some other basis.)[25]The opinions of the House of Lords in Sempra Metals were provided on 18 July 2007. The effect was to allow the common law restitutionary claims for loss of use of prematurely paid tax quantified by reference to compound interest.[26]HMRC's letter of 19 July 2007, referring to Grattan's letter of 13 June 2007 "claiming compound interest" states the view of HMRC as being that interest payable under section 78 can be paid only at the rate specified in section 197 of Finance Act 1996 and that "the Commissioners have no jurisdiction to pay at any other rate, including compound interest". This letter concludes – "I am unable to progress your claim". This letter, referring as it does to Grattan's 13 June letter, is directed only at Claims 1 and 3.[27]KPMG for Grattan then write to HMRC 27 July 2007 requesting an independent review of what they refer to as the "decision" in HMRC's letter of 19 July "confirming your rejection of our client's claim for interest calculated on a compound basis." The "preliminary view" of HMRC contained in a letter of 31 August 2007 was that the decision of the House of Lord in Sempra Metals had changed nothing as regards the "statutory interest provisions in UK law or about community law".[28]On 24 October 2007 Grattan commenced High Court proceedings against HMRC in relation to its claims.[29]The House of Lords delivered its opinions in(1) Fleming(2) Condé Nast v HMRC on 23 January 2008. This decision established that the statutory cap had to be disapplied for claims such as those made by Grattan.[30]On 25 January 2008 KPMG wrote to HMRC requesting repayment of the sums comprised in what is described as "The Retrospective Claim", i.e. that made by letter of 17 July 2002. So far as Grattan was concerned the Retrospective Claim covered the period 04/73 to 11/98. The letter refers exclusively to that Claim, which is Claim 2. It concludes with this paragraph:
"I anticipate that the Commissioners will make a payment of interest under the provision of section 78 VAT Act 1974, in addition to the £78,645,244 tax currently due as an interim repayment. You are aware that our client does not consider the statutory rate payable by HMRC as sufficient and is already undertaking action to achieve a rate that more accurately reflects commercial restitution. Therefore while we do not believe that statutory interest payable under the above provisions to be an appropriate amount we are prepared to accept, in the interim, the interest payable using these rates as a part payment towards the correct amount of interest."
[31]On 12 February 2008 HMRC made a further written response to KPMG's letter of 27 July 2007. This reads as follows:
"I refer to your letter of 27 July 2007 in respect of compound interest and my colleague David Bennett's preliminary reply of 31 August 2007. I am now in a position to provide a full response regarding HMRC's position in this matter. HMRC take the view that restitutionary claims for interest/compensation are excluded by section 78 and section 80 of the Value Added Tax Act 1994. Therefore, your client, Grattan Plc has no right to a payment of compound interest. It has received simple interest under section 78 at a rate calculated by a formula set down in statute vis the Air Passenger Duty and Other Indirect Taxes (Interest Rate) Regulations 1998 and no further interest is due."
[32]By letter of 21 February 2008 HMRC responded to KPMG's letter of 25 January 2008 relating to Claim 2. This was followed by a letter of 26 February from HMRC stating that HMRC would make a repayment on Claim 2 of £71,078,814 together with interest under section 78 on that sum in the amount of £95,741,932.[33]I now turn to deal with the issues so far as they relate to the particular Claims. Claims 1 and 3 : Were the appeals commenced out of time?[34]The relevant VAT Tribunal Rules are as follows:
"4(1): Subject to paragraphs (2) and (3) of this rule, a notice of appeal shall be served at the appropriate tribunal centre before the expiration of 30 days after the date of the document containing the disputed decision of the commissioners." "
Disputed decision" is defined in rule 2 as follows:
"(2) … "disputed decision" means that decision of the commissioners against which an appellant or intending appellant appeals or desires to appeal to a tribunal; …"
Rule 19(1) states (insofar as is relevant):
"19(1) A tribunal may … on the application of any party to an appeal … extend the time within which a party to the appeal … is required or authorised by these rules … to do anything in relation to the appeal … (including the time for service for a notice of appeal … ) upon such terms as it may think fit."
[35]By way of comment rule 4(1) sets the basic time limit for in-time appeals. A person affected by a decision will not necessarily be prevented from challenging the decision before the Tribunal where his appeal is out of time. Rule 19 gives the Tribunal power to allow this if the Tribunal is satisfied that it is proper to extend time for serving the notice of appeal and for extending the time until the date on which the notice of appeal is actually served.[36]Those rules operate where there has been an appealable decision. Generally the term "appeal" in section 83 is based on the existence of a prior decision that is wholly or in part adverse to the Appellant. When claims are involved, the prior decision will have been HMRC's failure to accept, wholly or in part, a claim made by the Appellant. Section 83(s) is specifically directed at claims made under section 78, i.e. to be paid interest or as to the amount of interest so payable.[37]The facts set out above relating to Claims 1 and 3 show that the decision was taken in 2005 both as to HMRC's liability to pay interest under section 79 and as to the amount payable in accordance with the rules set out in section 79. Following the e-mail exchange in January 2005, HMRC's letter of 17 March 2005 set out and notified to Grattan the amount of interest HMRC had decided was payable to Grattan under section 78 on the principal sum of £12,759,687. It attached final calculations which set out the total amount of interest payable, shown as calculated on a simple basis. The amount was £1,528,113. The interest was paid on 4 April 2005. That, says Mr Mantle for HMRC, comprised the decision within section 83(s) and that decision alone is relevant for the purposes of rule 4(1), i.e. for determining whether the appeal was in time.[38]Grattan, through Dr P Lasok QC, contend that the only relevant decision was in the letter of 12 February 2008 (see para 31 above). That was the first occasion when HMRC expressed, in a document, a concluded decision on Grattan's claim for compound interest. The letter of 31 August 2007 had set out a preliminary view: this indicated that no apealable decision had yet been made. The 12 February 2008 letter concluded the matter. The Notice of Appeal lodged 31 days later had been given in an extension by Mr David Demack in previous proceedings. The appeal in relation to Claims 1 and 3 should not therefore be struck out under rule 6.[39]I am against Grattan on this. The letter of 17 March 2005 (coupled with payment on 4 April 2005) comprises of decision of HMRC that covers both its acceptance of liability under section 78 and the amount payable under section 78. There is no issue about HMRC's liability. It is not in dispute that Grattan had wrongly accounted for VAT due to an error on the part of HMRC. HMRC's letter of 17 March 2005 accepted the liability to Grattan under section 78 in respect of interest on the principal sum of £12,759,687 and determined the amount of interest as £1,538,113. HMRC have never sought to resile from either its liability under section 78 or the amount of that liability. When Grattan, through KPMG, corresponded with HMRC the nature of Grattan's claim had changed. Grattan's claim was directed at the "appropriate compensation for the financial loss it had suffered in consequence of being deprived of the £12,759,687", see KPMG's letter of 13 June 2007. Grattan were seeking an extra £1,352,297, being the amount that would have been produced had a compound interest calculation been used. The KPMG letters of 13 June 2007 and of 19 July 2007 refer to "compensation" and rely on Sempra Metals as recognising a common law right to restitution; moreover the calculation of interest claimed in the 13 June 2007 letter involves compounding using rates other than those specified in section 78(3) and for a period beyond the end of the dates of the applicable period under section 78. HMRC's responses (in letters of 19 July 2007 and 31 August 2007) in no way displaced their decision of 2005. The 31 August 2007 letter states in terms that the House of Lords in Sempra Metals "did not have anything relevant to say about statutory interest".[40]The 12 February 2008 letter from HMRC, relied upon by Grattan as the appealable decision letter, does no more than say that Grattan had been paid the correct amount of interest applying the simple interest rule in section 78; in consequence "no further interest is due". Properly understood the correspondence of 2007 and 2008 was addressed at something different, namely Grattan's assertion that it was entitled to a greater amount of compensatory interest than that allowed by the simple interest rules found in section 78. Dr Lasok stressed that the writing had been on the wall since long before 2005. In 1994 the House of Lords in Marshall v Southampton and South West Hampshire Area Health Authority ( Teaching ) ( No.2 ) [1994] AC 530 had considered the ruling of the ECJ in that matter (Case C-271/91) and had restored the decision of the Industrial Tribunal. The Industrial Tribunal had (Dr Lasok explained) made a compensatory award for sex discrimination that had well exceeded the statutory cap and had added an amount of interest that had exceeded that statutory authority of the Tribunal. This provided the basis for an argument that any statutory limitation on the VAT Tribunal's powers to award interest would have violated the EC entitlements of potential claimants such as Grattan. That may be so. It may provide an answer to Grattan's present problems but not, according to the position consistently taken by HMRC, through recourse to the authority of this Tribunal. HMRC's decision in 2005 that simple interest was the limit of Grattan's entitlement and the correspondence of 2007 and 2008 in no way altered that decision. Put another way, the response given by HMRC in its letter of 12 February 2008 stating its position on the outcome of the Sempra Metals litigation did not start time running again in respect of the original decision in the letter of 17 March 2005.[41]To conclude, Grattan were not just one day out of time in appealing: they were more like three years late. Should the Tribunal extend the time for appealing the decision on Claims 1 and 3 in pursuance of rule 19(1)?[42]Long after the 30 days had past since the Decision of 17 March 2005, Grattan realised that they had a chance of pursuing their claim for compound interest through the Tribunals. According to Patricia Vann, when they had been paid simple interest (on 4 April 2005) Grattan had not understood its right to interest on a compound basis: Grattan had not realised "that this was capable of challenge despite suffering the loss of funds". The view of HMRC has never changed. The thing that has changed since then has been the advice Grattan has received in relation to the recognition of the Courts of its EC, as distinct from statutory, rights. I cannot see that it will be just and equitable in the circumstances in effect to put the clock back and give Grattan a second chance. The strike out application in relation to Claim 2[43]Grattan's grounds of appeal in relation to all three claims identifies the decision appealed against as HMRC's refusal in the letter of 12 February 2008. HMRC seek to strike out the appeal on the grounds that, as at 12 February 2008, they had made no relevant decision in relation to Claim 2 as to either their liability to pay interest or as to the amount of the interest.[44]Claim 2 was made by letter of 17 July 2002 following the ECJ's ruling in Metallgesellschaft . Claim 2 related to the overpaid tax of some £85m and did not cover interest on that amount. HMRC rejected the claim on 1 November 2002 on grounds that it was time-barred. Grattan's appeal (MAN/06/0120) covers interest calculated at a higher rate from the statutory (section 78) rate.[45]The 2007 correspondence between KPMG and HMRC (i.e. letters of 13 June 2007, 27 July 2007 and HMRC's responses of 19 July 2007 and 31 August 2007 and their letter of 12 February 2008) made no reference to Claim 2.[46]On 25 January 2008 KPMG's letter expresses the claim as follows:
"Further to our meeting on Tuesday and the subsequent decision by the House of Lords in Fleming/Condé Nast , I can advise you that our client would now formally like you to make repayment of the sums claimed. The Retrospective Claim As you know, the Retrospective Claim totals £85,854,398 and was submitted on 17 July 2002. I have set out at Appendix 1 to this letter a copy of the claim schedules that Pat Vann provided to you on 17 July 2002. You are aware that the claim comprises the following elements: …"
[47]The letter of 12 February 2008 makes no reference to Claim 2. However a letter from HMRC to KPMG of 21 February 2008 notifies Grattan of HMRC's decision to pay statutory interest at the simple rate on the amount payable under section 80. By a letter dated 26 February 2008 HMRC notified KPMG that the "initial" amount to be paid on Claim 2 was £71,078,814. The letter notified HMRC's decision that the amount of interest payable under section 78 was £95,741,932.[48]Dr Lasok contends that the evidence as a whole shows that the letter of 12 February 2008 contains the decision encompassing Claim 2. I do not agree. The 12 February 2008 letter follows and refers back to correspondence that was directed explicitly to Claims 1 and 3. KPMG's letter of 25 January 2008 addresses Claim 2 as a new topic. Thus, even if the letter of 12 February 2008 could be construed as a decision, it did not cover Claim 2.[49]I am however satisfied that HMRC's letters of 21 and 26 February 2008 do amount to a single composite decision as to HMRC's liability to interest and as to the amount of such interest.[50]Grattan asked for leave to amend their grounds of appeal by changing the decision from the 12 February 2008 letter to the letters of 21 and 26 February 2008. The hearing of this application has called for a much closer attention to the details of the correspondence than appears to have been paid by the parties in the past. I think that a change is in the interest of justice and I direct accordingly.[51]On that basis the strike out application, so far as it relates to Claim 2, is dismissed. Directions[52]I shall give directions on the following lines. The grounds of appeal may be changed to make the decision in the letters of 21/26 February 2008 as the decision appealed against in respect of Claim 2. Although the MAN/2006/0120 appeal is not before me, I propose making an "own motion" direction that that appeal and the present appeal be listed before me to enable comprehensive directions to be made as the result of this decision. I have in mind the possibility that the two should be consolidated and that the scope of both appeals should be widened. The parties are at liberty to apply, within two months of the release of this Direction, to have the directions, as just proposed, formalised. If the parties wish to have a hearing, this can be arranged. SIR STEPHEN OLIVER QC CHAMBER PRESIDENT RELEASE DATE: 24 July 2009 APPENDIX The over-payment of VAT(i) a taxable person operating a mail order company used the services of an agent; and(ii) that agent earned commissions in relation to 3 rd party purchases and in respect of their own purchases (agent's own purchases or "AOP"); and(iii) that agent could take its commission either as a cash commission ("the cash commission") or as a payment towards goods which the agent purchased from the taxable person's mail order business ("commission in goods"); HMRC required that element of the commission that is referable to 3 rd party purchases to be treated for the purposes of accounting for VAT as consideration for a supply of services by the agent to the taxable person. The requirement was in breach of EC law. (i) the Grattan VAT Group comprised companies operating a mail order business and using the services of agents; (ii) the agents used by the members of the Group earned commissions in relation to 3 rd party purchases and could take that commission as a cash commission or commission in goods; (iii) in accordance with the requirements of HMRC, Grattan (as the representative member of the Grattan VAT Group) accounted for output VAT on that element of the commission received in respect of 3 rd party purchases; and(iv) in accounting for output VAT on commissions received in respect of 3 rd party purchases, Grattan believed itself bound to do so but was in fact overpaying VAT. The claims for repayment pursuant to section 80 VATA