Birmingham Hippodrome Theatre Trust Ltd v Revenue & Customs [2011] UKFTT 117 (TC)

“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse: … ( n ) certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the Member State concerned; …”

“GROUP 13 —CULTURAL SERVICES ETC Item No … 2 The supply by an eligible body of a right of admission to— ( a ) a museum, gallery, art exhibition or zoo; or ( b ) a theatrical, musical or choreographic performance of a cultural nature. NOTES … (2) For the purposes of item 2 “eligible body” means any body (other than a public body) which— ( a ) is precluded from distributing, and does not distribute, any profit it makes; ( b ) applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies; and ( c ) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities.”

“… the exemption came into force on 1 June 1996. However in some limited circumstances it may be possible to backdate the exemption to 1 January 1990 and claim a refund of VAT for the period 1 January 1990 to 31 May 1996. These arrangements are explained in section 7 and Annex C.”

“ Is it necessary to recalculate the input VAT for the period of claim based on the newly exempt admission charges? Yes. Any claim to repayment of output tax for quarterly periods must be reduced by the amounts of any related input VAT, which would not have been deductible, if exemption had been in force during those periods.”

“Making claims or adjustments Cultural bodies that think they now qualify as an eligible body and wish to make a claim for overpaid VAT in respect of past periods may do so using one of the following methods, subject to statutory time limits. 1 … 2 If the net value of adjustments is more than £2,000, a separate claim for payment must be submitted to their local VAT Office. … All adjustments or claims must take into account any over-claimed input tax and are limited to a three-year period as detailed in Notice 700/45. Such claims will be considered subject to the conditions set out below— – Bodies must be able to produce suitable evidence (eg constitution, minutes, annual accounts) that they satisfy all the conditions for eligible body status outlined above, and must be able to substantiate the amount of any claim made. – Bodies will need to look back at earlier attributions of input tax (any input tax incurred on goods and services—including capital items—used exclusively for supplying exempt admission rights to the specified services is now attributable to an exempt supply), substituting exempt values for taxable values in the partial exemption calculation and deducting the resulting “exempt input tax” from overpaid output tax in determining the amount of the claim. – The usual rules on unjust enrichment explained in Notice 700/45 Section 14. …”

'In the circumstances in which a member state has failed to implement properly in its domestic legislation the Sixth Directive, is it compatible with the principle of the effectiveness of the rights that a taxable person derives from art 11A, or with the principle of the protection of legitimate expectations, to enforce legislation which removes with retrospective effect a right under national law to reclaim sums paid, by way of VAT, more than three years before the claim is made?'

“Practical effects of the judgement Customs will now give effect, albeit retrospectively, to a transitional regime for when the three year time limit was introduced in 1996 to allow taxpayers to make the claims that they ought to have been able to make at the time. This transitional regime will apply from 4 December 1996 to 31 March 1997. … Taxpayers can now make claims under VATA 1994 s 80 for repayment of amounts overpaid, regardless of the cause of the overpayment, subject to the following criteria. Claims Customs are now inviting all taxpayers to submit claims to their local VAT offices where— ● they made claims before 31 March 1997, which were capped (either by Customs or by them in expectation that no more than three years would be paid); or ● they made claims before 31 March 1997, which were repaid in full and amounts more than three years old were then clawed back by Customs by means of a recovery assessment; or ● they made no claim but can demonstrate that they discovered the error before 31 March 1997; and ● in all cases, the overpayments of VAT were made before 4 December 1996. If you consider that you fall within the above parameters, you will have until 31 March 2003 to submit claims. Claims may be refused in whole or in part if Customs are satisfied that repayment would lead to the unjust enrichment of the claimant. … Form of claim … Claims should only be made for the net amount overpaid for any given prescribed accounting period. If you overpaid output tax during an accounting period on supplies which ought to have been exempted, and in the same accounting period you recovered more input tax than you ought, you should only submit a claim for that period for the amount of output tax over declared, less the amount of input tax over deducted i.e. the net overpayment. Assessments When the time limit for making claims for overpaid VAT was reduced from six years to three, with effect from 18 July 1996, Customs' power to make assessments was also reduced by the same amount with effect from the same date. This remains unchanged.”

“As a result, the transitional period set out in Business Brief 22/02 is extended by three months and will now be deemed to have run from 4 December 1996 to 30 June 1997 and taxpayers are now invited to submit, or resubmit, claims where: ● they made claims before 30 June 1997, which were capped (either by Customs or by them in expectation that no more than three years would be paid); ● or they made claims before 30 June 1997, which were repaid in full and amounts more than three years old were then clawed back by Customs by means of a recovery assessment; ● or they made no claim but can demonstrate that they discovered the error before 30 June 1997; and in all cases, the overpayments of VAT were made before 4 December 1996. The deadline for making claims is also extended by three months to 30 June 2003.”

“Making a Claim Taxpayers who believe that they are entitled to benefit from the Court of Appeal's judgment in Fleming , and who wish to claim without waiting until the matter is finally determined in the House of Lords, should proceed as follows— Where a claim, relating to an event more than three years earlier, has already been made and remains “active”, either because no appealable decision has yet been given by HMRC or because the matter is subject to appeal, taxpayers should write to HMRC (see the address below) asking for their claim to be considered in accordance with this Business Brief. In all other cases, a fresh claim can be made where an amount— ● has been improperly paid as VAT before 4 December 1996; ● has been overdeclared as output tax in an accounting period ending before 4 December 1996; or ● became deductible as input tax on or before 30 April 1997 and has not yet been deducted. In all cases, the claimant must sign an undertaking to the effect that, if the ultimate determination of litigation removes his entitlement, any credit given, or money paid, to him, will be returned to HMRC with interest. A copy of the undertaking is provided at the Annexe. Claims falling within the scope of VATA 1994 s 80 will be paid only where HMRC are satisfied that to pay the claim will not result in the unjust enrichment of the claimant. Form of claim … Claims (whether made under VATA 1994 s 80 or under SI 1995/2518, reg 29 ) will only be paid or credited on a net basis. For example, if you overdeclared output tax during a given accounting period on supplies which ought to have been exempt, and in the same accounting period you recovered more input tax than you ought, the input tax wrongly recovered will be set off against the overdeclared output tax and only the balance will be paid or credited. Conversely, if, in a given accounting period you have understated your input tax entitlement but you have also understated your output tax liability, your claim should be for any net credit due.”

“We are still in the process of reviewing the Theatre’s position with regard to cultural exemption and at this stage we believe the Theatre is likely to be exempt in accordance with [Group 13]. In addition, we have reviewed the Theatre’s position in light of [the London Zoo case] and considered the details outlined in Business Brief 28/2003. We have considered the merits of the Theatre submitting a retrospective claim in respect of its box office income. However, as the Theatre was closed between 1 January 2000 and 1 November 2001 to undertake a significant capital project, it is necessary to consider the impact that a retrospective claim would have in terms of the Theatre’s input VAT recovery position. Taking into account the necessary input tax and output tax adjustments the Theatre has decided not to submit a retrospective claim.”

“… was for the competent national authorities to judge the facts with a view to preventing undue payment of refunds as a result of manipulation by the producers of the proportion of the ingredients of compound animal feeding-stuffs.” (3) In DEKA Getreideprodukte GmbH & Co KG iL v EEC ( Case 250/78) [1983] ECR 421 the ECJ labelled an assignment of a trader’s claims against the authorities as “abusive”, in circumstances where the assignor was insolvent and its director had obtained fraudulent export refunds which the Commission was seeking to recover. The assignment was invalid against the Community authorities. Having identified the abuse, the ECJ went on to say (para 20): “so far as the Applicant’s original claim is concerned, it is sufficient to make a finding that the claim for compensation is extinguished by way of set-off.” (4) In I/S Fini H v Skatteministeriet (Case C-32/03) [2005] STC 903 the ECJ confirmed that Community law cannot be relied on for abusive or fraudulent ends (see para 32, citing Kefalas v Greece (Case C-367/96) [1998] ECR I-2843 , and Diamantis v Greece (Case C-373/97) [2000] ECR I-1705 ), and went on (at para 32) to define that to be the case : “… for example, if Fini H, whilst relying on the right to deduct VAT in respect of the payment of rent and charges relating to the payment after the cessation of the restaurant business, continued to use the premises previously used as a restaurant for purely private purposes”. (5) Based on the general proposition that non-abuse is a principle of Community Law, the ECJ has developed the principle of “abuse of law” which finds its clearest expression in Halifax v CCE (Case C-255/02) [2006] STC 919 . To quote from Miss Whipple’s skeleton argument: “ [HMRC] do not suggest that [the Theatre] has structured its transactions in a way to “abuse the law” within the Halifax principle. [HMRC] invoke wider principles of abuse, which share common origins with Halifax but are not within that specific line of case law.”

“in my view the plaintiff correctly limits its claim in that way. Under the Greek rules the plaintiff neither pays VAT to the tax authorities on its sales of petroleum products nor deducts VAT on the purchase of such products. ... While under the rules of the Sixth Directive it would be entitled to deduct VAT on the purchase of the products, the benefit of the deduction would be wholly cancelled out by the output tax which it would be obliged to pay on the sale of the products . Consequently, the plaintiff does not incur any additional VAT burden as a result of being unable to deduct VAT on the petroleum products themselves.”

“...in the case of a directive such as the Sixth Directive, which lays down a comprehensive scheme of taxation, it is in my view possible to determine whether a taxable person has overpaid tax under national rules only by considering the combined effect of all relevant provisions of the directive on the transactions in question and by comparing the resultant liability with that arising under the national rules. The provision determining the liability of a taxable person in respect of particular transactions must be regarded as an inseparable whole.” (4) In Swedish State v Stockholm Lindöpark (Case C-150/99) [2001] STC 103 the AG (Jacobs again) noted (at para 48) that the taxpayer had issued a claim for damages, and stated: “it should be pointed out in that connection that where a taxable person has wrongly been prevented from deducting VAT, the remedy may often be a retroactive adjustment of the tax situation” for which member states were required to make provision in their national laws. That adjustment, in the same way as an action for damages, follows from the member state’s breach of the taxpayer’s directly effective community law rights. The AG went on to agree with the taxpayer that it had a right to reclaim input tax on the basis that the right to deduct is enshrined in Community law and is a right enforceable by the individual against the state (para 56). However, when it came to the quantum of that claim, the AG noted that there was an apparent agreement between the parties which was the amount of VAT which the taxpayer was unable to deduct during the relevant period (para 79). The AG disagreed with a quantification on that basis because it failed to take account of the output tax liability the taxpayer would have faced if the supplies had, as they ought to have, been subject to tax (at para 80): “... it should be pointed out that in principle reparation for loss caused to individuals as a result of breaches of Community law must be commensurate with that loss...In the case of an unjustified exemption from VAT on outputs leading to an inability to deduct VAT on inputs, the loss sustained will in general be the difference between the amount of input tax which could have been deducted and the amount of output tax which would have had to be accounted for...”

“Where a subsidiary resident in one member state has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime which allowed them to avoid that obligation, art 52 of the EC Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state have benefited as a result of the advance payment of tax by the subsidiaries”

“... shall be deemed to have come into force on 18th July 1996 as a provision applying for determining the amount of any payment or repayment by the Commissioners on or after that date, including a payment or repayment in respect of a liability arising before that date.”

“(3) ... in any case where— ( a ) an amount is due from [HMRC] to any person under any provision of this Act, and ( b ) that person is liable to pay a sum by way of VAT, penalty, interest or surcharge, the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of [HMRC] and the person concerned shall be discharged. (3A) Where— ( a ) [HMRC] are liable to pay or repay any amount to any person under this Act, ( b ) that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person, and ( c ) by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied, any limitation on the time within which [HMRC] are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to be set against the amount mentioned in paragraph (a) above.”

“CLAUSE 48: NEW RULES TO ALLOW OVERCLAIMED AMOUNTS TO BE SET OFF AGAINST REFUNDS INTRODUCTION 1. This Clause allows Customs to set off any tax, penalty, interest or surcharge due to them against a payment or repayment due to a taxpayer and to repay only the net amount (if any) due to the taxpayer. It means that all the consequences of an earlier mistake are taken into account before any repayment is made. The change is deemed to have come into force on 18 July 1996. 2. The changes became law on 4 December 1996, retrospectively to 18 July 1996, by virtue of a resolution of the House of Commons having statutory effect under the Provisional Collection of Taxes Act 1968. DETAILS OF THE CLAUSE 3. Subsection (1) inserts a new subsection (3A) in Section 81. It covers circumstances where the Commissioners are liable to pay (or repay) an amount to a taxpayer because of a mistake previously made about the tax due. In these cases, the Commissioners may set off against their payment, any sum which is due from the taxpayer (including VAT, penalty, interest or surcharge) which arises because of that mistake. The normal time limits for enabling recovery of such sums of tax, penalty, interest or surcharge (for example, by means of an assessment) will not apply. 4. Subsection (2) deems new subsection (3A) to come into force on 18 July 1996 in determining the amount of any repayment to be made by the Commissioners on or after 18 July 1996. BACKGROUND 5. Previously, where a taxpayer has overpaid tax, but has as a consequence simultaneously overclaimed input tax, Customs cannot set off the overclaimed input tax against the refund due if they are out of time to issue an assessment for the overclaimed input tax. For example, if supplies have been charged with tax, and the supplies are subsequently ruled to be exempt, Customs can reduce the repayment to take account of input tax reclaimed originally as attributable to the supplies which is now no longer reclaimable. However, litigation can sometimes take a long time to settle and the time limits for making an assessment can sometimes expire. This means that Customs might not have been able to recover overclaimed input tax and as a result a business could gain a windfall benefit. 6. The changes mean that the taxpayer will be back in the position he would have been in, if the mistake had not occurred. It is not a general netting off provision. It will only apply to specific supplies where overclaims and overpayments have occurred as a result of the same mistake.”

“Section 81(3A) requires that we set off against amounts for which we are liable to a claimant any amounts which, although not assessed, would have been assessed had the mistake that led to the claim not been made. For example, Adana Ltd makes a claim on the 30th of June 2007 for output tax overdeclared on the sale of widgets. The claim covers all accounting periods between 1 April 2004 and 30 June 2007. Section 81(3) requires that we set off against the amount due under the claim all outstanding debts on file. However, section 81(3A) brings into the equation, for example, input tax that was attributable to the supplies in respect of which output tax is being claimed where it was deducted as a result of the same mistake that led to the overdeclaration of output tax. What's more, the set-off is not limited only to that input tax that was incurred in the accounting periods for which the claim was made. As a matter of policy, where a claim is not considered to be 'abusive', the section 81(3A) set-off should only be applied to liabilities in the accounting periods which are covered by the claim.”

“The term ‘abusive claim’ as used here means that the claimant has sought to use EU legislation or the case law of the ECJ (or UK legislation and case law intended to implement the EU provisions) in order to obtain a result which is contrary to the intentions of the EU legislator and contrary to the intention of the ECJ. That result is an unjustified tax advantage. A simple example of such a claim might be where, after a judgment that supplies of X are exempt rather than taxable, a trader makes a claim for the output tax that he overdeclared on his supplies of X but doesn’t declare the input tax that he deducted wrongly on the understanding that his supplies were taxable. The rationale behind the claim is that the claimant has a Community law right to recover the overdeclared output tax and that HMRC are not entitled to recover the input tax because they cannot rely on their failure to implement Community law properly. Such claims should be brought to the attention of the Anti-Avoidance Group.”

“In any case where, for any prescribed accounting period, there has been paid or credited to any person— ( a ) as being a repayment or refund of VAT, or ( b ) as being due to him as a VAT credit, an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.” (2) HMRC accepted that they were out of time to assess under s 73(2) but s 81(3A) addresses (and cures) precisely the mischief which results when a taxpayer puts in a claim to its own benefit, in circumstances where HMRC are out of time to assess any countervailing benefits that the same taxpayer has enjoyed by virtue of the same mistake giving rise to the claim itself. It matters not whose mistake it was; nor what was the cause of the mistake. Rather, the provision rectifies the effects of the mistake so as to achieve a fair result. (3) The guidance cited at V1-33 (see paragraph 50 above) was internal and cannot be relied on by taxpayers. It was wrong. It had been corrected in August 2009 by the issue of the current guidance in VR8200 (see paragraph 51 above) which correctly stated the position: “…the set-off is not limited only to that input tax that was incurred in the accounting periods for which the claim was made” . (4) The Explanatory Notes to clause 48 of the Finance Bill 1997 (see paragraph 49 above) state in terms that s 81(3A) is intended to allow offset of “any sum” which is due from the taxpayer which arises because of that mistake; and further that “the changes mean that the taxpayer will be back in the position he would have been in, if the mistake had not occurred. It is not a general netting off provision. It will only apply to specific supplies where overclaims and overpayments have occurred as a result of the same mistake”

“ for the purposes of the cumulative provisions of [ s 81(3A)] a "mistake" resulted from the Appellant's deciding not to report their earlier under-declarations for the four periods referred to by way of Voluntary Disclosure but instead to deal with this liability by reducing incorrectly in Box 4 of their Return for 11/00 the amount of input tax. Thus liability to make a repayment by reference to the correct amount of input tax arose.”

“For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”

“According to well-established case law, the right to obtain a refund of charges levied in a member state in breach of rules of Community law is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the court ... . It follows from all those considerations that the fact that a member state has correctly implemented the provisions of art 11A(1) of the Sixth Directive in domestic law does not deprive individuals of the possibility of relying, before the courts of that state, on the rights which they derive from those provisions and, in particular, the right to recover amounts collected by a member state in breach of them.”

“ Current proceedings 6. Any current proceedings are to continue on and after the commencement date as proceedings before the tribunal. 7. —(1) This paragraph applies to current proceedings that are continued before the tribunal by virtue of paragraph 6. ... (3) The tribunal may give any direction to ensure that proceedings are dealt with fairly and justly and, in particular, may— (a) apply any provision in procedural rules which applied to the proceedings before the commencement date; or (b) disapply any provision of Tribunal Procedure Rules. (4) In sub-paragraph (3) “procedural rules” means any provision (whether called rules or not) regulating practice or procedure before an existing tribunal. ... (7) An order for costs may only be made if, and to the extent that, an order could have been made before the commencement date (on the assumption, in the case of costs actually incurred after that date, that they had been incurred before that date).”

“Where an appeal was made to the VAT and Duties Tribunal before 1 April 2009, and the new tribunal exercises its discretion to apply the existing costs rules, HMRC will continue to operate the Sheldon practice (under which HMRC do not seek costs from appellants in most cases).”

“These, however, are “current proceedings” within the meaning of that expression in paragraph 1(2) of Schedule 3 to the TTF Order. Because they are current proceedings, paragraph 7 of Schedule 3 to the TTF Order applies. Thus, if the Tribunal is satisfied that in the circumstances a costs award is a direction that ensures that the proceedings are dealt with fairly and justly, the Tribunal has the power (on the strength of paragraph 7(3)(a) and (7) of Schedule 3 to the TTF Order) to apply the 1986 Rules (and specifically rule 16(2), so far as it is material, and rule 29). In principle, and without at this stage examining the particular circumstances of the present proceedings, a costs award is a direction that may come within paragraph 7(3) as ensuring that proceedings are dealt with fairly and justly; it ensures, for example, that the successful party does not lose out financially by being involved in the litigation. Paragraph 7(7) of Schedule 3 to the TTF Order limits the Tribunal’s powers, wherever granted, in relation to costs orders. Any order for costs made in pursuance of the power in paragraph 7 of Schedule 3 of TTF Order may, therefore, only be made if and to the extent that an order could have been made before 1 April 2009. On that basis the Tribunal cannot make a costs award that goes beyond what could have been awarded under the 1986 Rules. ... There is, however, no question in the present case of the costs award exceeding the amount permitted by the 1986 Rules.”