No Storm in a Teacake

Substantial claims for overpaid VAT could follow, if the European Court of Justice echoes the Advocate General's opinion in Marks and Spencer plc, warns CHRIS TAILBY FTII.

THE EUROPEAN COURT of Justice usually follows the opinion of its Advocate General, but not always. In Marks and Spencer plc (Case C-62/00), Customs will be hoping that it will not follow his advice since, otherwise, Customs could be faced with some large claims for overpaid VAT.

In his opinion, Advocate General Geelhoed invites the Court to reply to the Court of Appeal that where a Member State has received an overpayment of tax as a result of the incorrect implementation of a provision in a directive, the retrospective shortening of the limitation period to three years for the recovery of the overpayment is incompatible with the principle of effectiveness and with the principle of legitimate expectations under Community law. Marks and Spencer could be in line for a repayment of the tax they had overpaid as a result of incorrect VAT accounting on teacakes and vouchers, following Argos Distributors v Commissioners of Customs and Excise (Case C-288/94) [1996] STC 1359. But, as we shall see, the case could have far wider implications for other taxpayers who had been wrong-footed by Customs' announcement on 18 July 1996.

Background

Starting with the facts, Marks and Spencer sold gift vouchers to companies at a price which was less than the face value of the voucher. The vouchers would be sold or given away to third parties who would exchange them for goods at Marks and Spencer. The value of the goods equated to the value shown on the face of the voucher, i.e., the true, not discounted, value. Customs were adamant that the value for VAT was the face value of the voucher and held to that opinion until the Court of Justice gave its judgment in Argos Distributors. That case established that when a supplier sold a voucher to a buyer at a discount and subsequently accepts that voucher at its face value in full or part payment of the price of the goods purchased by a customer who was not the buyer of the voucher, the consideration for the voucher is the amount received by the supplier from the purchaser of the voucher.

Following that decision, Marks and Spencer re-opened its debate with Customs and submitted a claim for repayment in the sum of £2,638,057 in respect of incorrect treatment of vouchers. The claim covered the period May 1991 to August 1996 with some amendments in November of that year. Customs' response was that they were prepared to repay that part of the claim unaffected by the three-year limitation period which had been announced on 18 July of that year. Accordingly, on 15 January 1997 Customs repaid £1,913,462.

However, Marks and Spencer's requests for repayments did not end with vouchers. From April 1973 until October 1994, it had accounted for VAT at the standard rate, instead of the zero rate, on sales of teacakes. On 8 February 1995, Marks and Spencer requested repayment of £3.5 million VAT wrongly paid. Customs accepted the claim, but argued that it should be reduced on account of the fact that Marks and Spencer had been unjustly enriched. They decided that a proper amount to repay was ten per cent of the claim. In addition, Customs informed Marks and Spencer that they intended to apply the new three-year limit to that claim. So instead of receiving ten per cent of £3.5 million, the company received £88,440.

Customs challenged

Marks and Spencer challenged the decisions in the VAT and Duties tribunal and then on appeal to the High Court and the Court of Appeal. The Appeal Court dismissed Marks and Spencer's appeal with regard to the period of the claims from August 1992 to August 1996 but, in respect of the period from May 1991 to July 1992, it concluded that Article 11A of the Sixth Directive had not been properly implemented by the VAT Act 1983. Community law had conferred on Marks and Spencer rights which it could rely on before the national courts. The question which left confusion in the minds of the judges was whether it was consistent with the principles of the effectiveness of rights conferred by Community law and the protection of legitimate expectations to amend a limitation period to deprive Marks and Spencer of the right under domestic law to reclaim VAT which should not have been paid in the first place.

So there were two issues:

(1) given that Customs had failed to implement the directive properly, could Customs act to render ineffective rights which Marks and Spencer had under the directive; and

(2) could Customs deprive Marks and Spencer of its legitimate expectation that it was entitled to make a claim for repayment?

The actions of Customs were, crucially, retrospective.

Application of directives

It is important to note that the Court of Appeal was referring a narrow point to the European Court of Justice. It was narrow in the sense that only the circumstances of the vouchers were in issue and then only to a limited period prior to the proper enactment of Article 11A by section 10, Finance (No 2) Act 1992. However, the Advocate General considered that a similar problem existed in the case of the teacakes. European Community Commission v Federal Republic of Germany Case (C-74/91) [1996] STC 843 was cited as authority for the proposition that not only must a directive be correctly enacted in national law, but it must be applied correctly and in accordance with the directive. Both the Commission and Marks and Spencer invited the European Court of Justice to consider that issue, notwithstanding that the Court of Appeal had not referred it. The Advocate General considered that although he was bound by the question as referred, he should comment on the principles involved.

The first point is the time when a directive can be said to be properly implemented, and the second point is whether individuals may continue to rely on rights conferred on them by the directive, after the directive has been implemented. This second point is the important one as it showed up the incorrect practice adopted by Customs in applying the directive. Application is all important, because a directive which is applied incorrectly will have unforeseen consequences which could result in inconsistencies between Member States. If it were left solely to the national authorities to ensure the directive was correctly applied, there would be a risk that individuals would lose the rights they had under the directive before it was enacted into national law.

The Advocate General considered that if the view of the national courts was followed in this case, then Community nationals would, as a result of the transposition of the directive into national law, lose rights they had prior to the implementation of the directive. Notwithstanding that Article 11A was correctly transposed into national law, the provisions were applied in such a way as to produce a result inconsistent with the directive. Furthermore, the referring court was preventing Marks and Spencer from relying on the directive against the incorrect administrative practice of United Kingdom Customs. Thus the Advocate General concluded that even after August 1992, the United Kingdom Government was in breach of community law. So, notwithstanding his earlier refusal to extend the question, the Advocate General in fact did precisely that by embarking on the analysis I have set out.

Effectiveness

Turning to the terms of the question referred, the Advocate General first examined the principle of effectiveness. He found that on the basis of a line of cases: Amministrazione delle Finanze dello Stato v San Giorgio SpA (Case C-199/82), Barra and others v Belgian State and City of Liège (Case C-309/85) and BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greece (Case C-62/93) [1995] STC 805, Marks and Spencer was entitled to repayment of VAT paid in breach of Community law. The United Kingdom Government argued that:

'since the directive contains no provisions applicable to requests for payments of VAT paid in breach of community law … the United Kingdom's obligation to repay can only stem from the applicable national legislation.'

Thus Customs would still be required to verify the amount claimed and check that it was within the permitted period. Only after these matters had been determined could repayment be made. Marks and Spencer merely had a procedural right to a repayment since no formal claim had been made. There was thus no substantive right to repayment of the amounts claimed. That argument did not impress the Advocate General who described it as 'untenable'.

In the view of the Advocate General, the question of the Court of Appeal went to the procedure to be adopted in giving effect to the claim for repayment by Marks and Spencer. It was clear from the case law that the extent of the jurisdiction of a Member State is to set out the procedure to be followed to safeguard the rights of the nationals who seek repayment in the exercise of their Community law rights. What was clear law was the fact that Member States could not make it impossible in practice to exercise those rights because if they did, this was a breach of the principle of effectiveness. However, although there was precedent for shortening the limitation period for claims for repayment of taxes (Aprile Srl v Amministrazione delle Finanze dello Stato (Case C-228/96) and Dilexport Srl v Amministrazione delle Finanze dello Stato (Case C-343/96)), the important difference between those cases and the instant one was that here Customs had shortened the period retroactively. That was what the Belgians had done in the Barra case where the court held that such a provision entirely negated the right to repayments of tax wrongly paid and thus rendered it impossible for individuals to exercise their Community rights.

The chilling paragraph for Customs is the statement by the Advocate General that the principle of effectiveness not only precludes the retroactive limitation of persons who had made a claim for repayment, but also of claims which could still validly be made. In Barra, the court expressly left open the right for persons who had not made a claim to recover amounts of VAT incorrectly claimed and according to the Advocate General 'there is every reason for doing so on the same grounds'.

Similar reasoning should be applied to claims by individuals to repayment of VAT levied in breach of directly effective provisions of Community law where those provisions have been enacted into national law correctly, but are applied in a way which is inconsistent with the terms of the directive.

Legitimate expectation

Turning to the question of legitimate expectation, the Advocate General set out the United Kingdom's contention which was that the only expectation Marks and Spencer had was for its claim to be dealt with under United Kingdom law. As it was possible for Customs to introduce retrospective application, Marks and Spencer had no legitimate expectation. The argument was given short shrift. According to the case law of the Community, on the question of the protection of legitimate expectations, one of the principles is that individuals may legitimately expect that rights 'will not be retroactively abridged'. It is possible to have exceptions, but only if there is an overriding public interest.

Thus protection of legitimate expectations is not merely a national matter requiring that national procedures must be satisfied before a claim can be paid, but it is a Community right conferred on individuals.

The Advocate General had little difficulty dealing with the point made by the United Kingdom that the exchequer was at risk from so many claims for repayment of VAT. He considered that the United Kingdom Government was not entitled to be enriched as a result of its failure to comply with Community law and, in any event, that was no justification for retroactively shortening the period for claiming repayment of unduly paid VAT. The conclusion was that the retroactive imposition of the shortened limitation period was inconsistent with the principle of protection of legitimate expectations.

Human rights

There was a further facet to the case which centred on Article 6(1) of the European Convention on Human Rights. The submission from the Commission was that this provision in the convention precludes retroactive shortening of the limitation period since it impairs the right of access to the courts in respect of the part of the claim caught by the retroactive shortening. However, the Advocate General declined to rule on that submission, together with another submission under Article 1 of Protocol 1 to the Convention, holding that his opinion on the substantive question was determinative of the matter.

Burning question

So the question remains whether the Court will follow the opinion given by the Advocate General. Certainly he went further than the basic questions referred by the Court of Appeal. He explored the underlying issues which were concerned with the retroactive effect of the change. He has identified the Community rights which the English courts failed or refused to recognise. His statements of opinion appear to be supported by case law, particularly the Barra case.

Did the Advocate General, I wonder, pay insufficient attention to the unjust enrichment argument? Could the Court say that risk to the exchequer is an overriding interest which entitles a Member State to introduce retroactive legislation? Time will tell, but to get the Advocate General on its side must put Marks and Spencer in a good position, especially when it has the support of the Commission.

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