MR JUSTICE JACOB:
- The Commissioners of Customs and Excise appeal from a decision of the VAT and Duties Tribunal (Chairman Mr Lawson) of 30th December 2002. The Tribunal allowed an appeal by National Westminster Bank Plc ("Natwest") against the Commissioners' decision given by letter ("the Decision letter") dated 23rd August 2001. I shall call the respondents "Lombard" which was the name of the relevant Natwest trading entity involved. The case is about a claim for repayment to Lombard of overpaid VAT.
- The Tribunal sets out the undisputed facts in paragraphs 22-36 of its decision. I borrow, with gratitude and some modification, the summary contained in the Commissioners' skeleton argument by Mr Christopher Vajda QC and Miss Philippa Whipple, their counsel.
- Lombard purchased vehicles for onward leasing to customers and at the end of the lease (typically 3 years), Lombard sold these vehicles at car auctions.
- Lombard and the manufacturers agreed a price for the vehicles, a price paid by Lombard with VAT. But in addition Lombard received payments from the manufacturers. These payments were known as "Manufacturers' Bonuses". The payments were made on receipt by the vehicle manufacturer of a self-billed invoice generated by Lombard. The invoice consisted of a fee for a service (called a "fleet discount") "performed" by Lombard for the manufacturer plus the VAT on that fee. This was based on the bizarre notion that somehow Lombard, the buyer, was performing a service for the manufacturer because it was buying in bulk. (Mr Michael Conlon QC for Lombard valiantly tried to explain how this notion came about. Not even he could get me to understand and it does not matter.)
- Thus manufacturers' bonuses were originally treated as being consideration for a taxable supply made by Lombard to the relevant manufacturer. Lombard accounted for the tax to the Commissioners. The tax was an output tax (in the jargon of VAT). The ECJ gave a decision (Elida Gibbs v CCE [1996] STC 1387) which made it plain that all this was wrong. The Commissioners realised that the manufacturers' bonuses should have been treated all along as what they obviously were, just discounts against the nominal purchase price of the cars. The prices really paid for the cars were lower than the stated agreed prices. Since the VAT was on that price, Lombard had been overpaying VAT. Its input tax was inflated by reason of the unreal high price. The amount of that inflation was the rate of VAT applied to the amount of the "bonus". Likewise there never should have been any output tax paid by Lombard to the Commissioners for the "service".
- Following Elida Gibbs, the Commissioners issued a Business Brief 16/97 on 21st July 1997 which outlined a change of treatment. This said: "in many cases the net effect of this change will not alter the tax due. However, if businesses believe they have overpaid VAT in the past three years they should contact their local VAT Business Advice Centre".
- Lombard duly submitted claims for VAT overpaid on manufacturers' bonuses between 1st July 1994 and 30th September 1995. The aggregate amount of this claim, as subsequently adjusted, was ฃ776,197.44. The Commissioners did repay ฃ63,235 of the claims (it matters not why). This left a total outstanding, which was the subject matter of the appeal to the VAT and Duties Tribunal. The sum involved (after a further minor adjustment) is ฃ706,347.44.
- By letter dated 12th October 1988 the Commissioners informed Lombard that they were invoking "the unjust enrichment" defence (see below) in relation to its claim. The material parts of this letter read:
"Having determined that in your case the bonuses were paid by manufacturers solely for you buying a certain number of their vehicles, I accepted that they should be treated as discounts reducing the value of the supply of the car. However, as I explained in my letter of 18 March 1998, I must consider unjust enrichment before authorising any repaying of tax. My HQ's have reviewed the position again since I informed you that they were minded to invoke this defence. They have found nothing to alter their initial opinion and I am to confirm that the Commissioners are formally invoking the provisions of Section 80(3) of the VAT Act 1994 in respect of claims made by voluntary disclosures of 27 and 30 October 1997 for VAT periods ending 30/9/94, 31/12/94, 31/3/95 and 30/6/95.
In making this defence the Commissioners consider that, whatever leasing method was offered by leasing companies, the basic cost of the car was paramount. If input tax could not be recovered, as was the case up to 1 August 1995, then the price of the car included VAT and this cost affected the calculation of the rental charges. If, however, the value of the car had been less and, therefore, the sticking VAT was less, the lease would have been cheaper for the customer. This is because basic cost components, such as interest, would have been based on a lower value.
The effect of your failure to take into account the lower value of the cars was that you charged your customers more. Consequently, any refund of VAT would unjustly enrich you as you have already recovered the sticking VAT from your customers in the cost of the lease, and you have not undertaken to pass the benefit of the refund on to your customers.
We believe that further proof that you would be unjustly enriched is provided by the wide publicity in the car press about the August 1995 leasing charges. It is clear from this that leasing cars would be cheaper because of the absence of sticking VAT. The implication being that under the old rules any reduction in the value of sticking VAT would have been reflected in the leasing cost of the car the benefit of which would accrue to the customer.
I would point out that whilst my HQ's are convinced by the above argument they are always willing to consider any counter view you wish to put forward. They note that in all the correspondence on this matter you have not seriously sought to challenge the defence of unjust enrichment which may imply, they deduce, that you accept its validity. No doubt you will wish to comment in this respect.
With regard to the concerns you have raised about the treatment of your claim as compared to your competitors, I am unfortunately not able to report on the final outcome of enquiries currently being conducted by my HQ's office. I can however, reassure you that the issue is being actively pursued and once the exact position is known, hopefully in the next few weeks, I will advise you further. I can confirm at this stage that should a repayment have been made, in circumstances which are on all fours with your case, then the Commissioners would have to consider their powers to correct the situation.
As I have mentioned above, we would of course be prepared to consider any further comment which you may wish to make if you do indeed wish to challenge the defence of unjust enrichment. However, in the absence of any request for reconsideration, you would have 30 days from the date of this letter to appeal to the VAT Tribunal."
Thereafter there was further correspondence on the unjust enrichment point.
- Between November 1997 and June 2000 the Commissioners did repay some other claims from other car leasing businesses relating to the matters covered by Business Brief 16/97. However the Commissioners do not accept that the repayments to others were made in circumstances which were identical to those present in Lombard's case.
- In June 1999 Lombard complained to the Revenue Adjudicator, Dame Barbara Mills DBE QC, that the Commissioners had not treated Lombard fairly compared to other leasing companies. (The Revenue Adjudicator operates a non-statutory scheme on behalf of the Commissioners and the Inland Revenue to deal with complaints as to fairness, efficiency and the like. She has no remit or jurisdiction to deal with technical points of VAT law, which are matters for the statutory Tribunal.)
- In February 2001 the Revenue Adjudicator substantially upheld the complaint. She held that Lombard had been treated differently from all other car-leasing companies who had submitted claims under the Business Brief. She "strongly criticised" the Commissioners for this. She did not go so far as to recommend payment of the claim because the Commissioners were claiming (and at the lime Lombard were accepting) that would mean Lombard would be unjustly enriched.
- The Commissioners responded by the Decision Letter in which the claim was refused. I set out the material parts of the letter:
"I have fully considered the facts of this case and the process applied to your and similar claims. As found by the Adjudicator, the application of the unjust enrichment provisions to your claims was correct and your company was not singled out for special treatment. However, I do accept that there were other Elida Gibbs VAT claims from the car leasing sector which were repaid unconditionally when they should have been made subject to, and possibly rejected under, the unjust enrichment provisions. I am somewhat cautious on the rejection point because the unjust enrichment provisions can bite differently on what appear to be very similar cases. A lot hinges on the fine detail of contractual relationships and pricing policy. Nevertheless, whatever the outcome would have been, our failure to consider unjust enrichment in appropriate cases is regrettable. Consistency of treatment is an important aim for us and we are re-examining our procedures to identify improvements that can be made.
In the administration of a complicated tax, however, I fear it is inevitable that some instances will arise where different treatment is incorrectly applied to taxpayers in similar circumstances to one of the taxpayers' disadvantage. We seek to minimise these occurrences and are always prepared, as here, to investigate and reconsider individual cases when they arise. As the Adjudicator recently advised you, in this particular case I did not find that the failings by this Department were such as to justify concessionary treatment and hence concluded that the original decision to refuse these claims must stand."
- Lombard appealed. The Tribunal allowed the appeal, holding:
i) the Decision Letter was a decision falling within s. 83(t) of the Value Added Tax Act 1994 ("VATA") as it was the final rejection of Lombard's claim for repayment under s. 80 of VATA;
ii) the 1998 Decision Letter was a "prior decision" (although not expressly stated this must be a reference to s. 84(10) of VATA) on which the Decision Letter depended but was not itself an appealable Decision;
iii) the appeal against the Decision Letter was not out of time (a point no longer in issue);
iv) the Commissioners had breached the EU principles of effectiveness and equivalence;
v) insofar as the 1998 Decision Letter may be regarded as a "prior decision" within s. 84(10) it was set aside as being unreasonable and in breach of the principle of equality of treatment; and
vi) in any event the Commissioners did not establish the defence of unjust enrichment.
- By this appeal (which lies only on a point of law) the Commissioners seek reversal of the Tribunal's decision. There are two main issues, unjust enrichment and unfair treatment. Each main issue fragments into a number of sub-issues. Mr Vajda initially focussed on unjust enrichment, whilst Mr Conlon on unfair treatment. This probably reflects where they each saw their stronger point. I propose to consider unjust enrichment first, for if repayment would not involve unjust enrichment the second point falls away. It is only live if repayment should not have been made to Lombard's trade rivals.
- Relevant to both points are the material statutory provisions contained in s.80 VATA 1994 as amended:
"(1) Where a person has (whether before or after 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."
(2) The Commissioners shall only be liable to repay an amount under this section on a claim, being made for the purpose.
(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.
(3A) Subsection (3B) below applies for the purposes of subsection (3) above where-
(a) there is an amount paid by way of VAT which (apart from subsection (3) above) would fall to be repaid under this section to any person ('the taxpayer'), and
(b) the whole or a part of the cost of the payment of that amount to the Commissioners has, for practical purposes, been borne by a person other than the taxpayer.
(3B) Where, in a case to which this subsection applies, loss or damage has been or may be incurred by the taxpayer as a result of mistaken assumptions made in his case about the operation of any VAT provisions, that loss or damage shall be disregarded, except to the extent of the quantified amount, in the making of any determination
(a) of whether or to what extent the repayment of an amount to the taxpayer would enrich him; or
(b) of whether or to what extent any enrichment of the taxpayer would be unjust.
(3C) In subsection (3B) above:
'the quantified amount' means the amount (if any) which is shown by the taxpayer to constitute the amount that would appropriately compensate him for loss or damage shown by him to have resulted, for any business carried on by him, from the making of the mistaken assumptions; and
'VAT provisions' means the provisions of
(a) any enactment, subordinate legislation or Community legislation (whether or not still in force) which relates to VAT or to any matter connected with VAT; or
(b) any notice published by the Commissioners under or for the purposes of any such enactment or subordinate legislation."
(7) Except as provided by this section the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them."
UNJUST ENRICHMENT
- The output tax on the vehicles was accounted for to the Commissioners by the manufacturers. Although it was passed on to Lombard in addition to the original purchase price, Lombard is not itself in a position to make any claim for overpaid output tax on the vehicles, because the tax paid by Lombard to the manufacturers on the purchase price of the vehicles was Lombard's input tax. Lombard was blocked from reclaiming any input tax on the purchase of new vehicles by operation of article 7 of VAT (Input Tax) Order 1992/3222 (the "Blocking Order").
- So Lombard's s.80 claim is brought on the following, agreed, basis:
(a) It paid an amount to the Commissioners which was not VAT due to them on the manufacturers' bonuses. This gives it a right to make a claim under section 80 for overpaid tax;
(b) However, that output tax cannot of itself simply be reclaimed from the Commissioners since it was in fact passed on to the manufacturers who reclaimed it as their own input tax, and any claim for the repayment of this tax would be defeated by the defence of unjust enrichment;
(c) But as a result of the mistaken assumptions about the operation of the VAT provisions in relation to manufacturers' bonuses, Lombard has incurred blocked input tax in an amount greater than it should have done. It is this "excessive blocked input tax" which is its "loss and damage" (so it argues) for the purposes of s.80(3B).
- The Commissioners say the Lombard itself did not suffer any loss or damage as a result. This is because in the transactions which occurred it passed on to its customers the cost of the VAT (which is what it was in accounting terms). The passing on was via the lease rentals and subsequent sales. Having passed this cost on, for Lombard to be repaid would amount to unjust enrichment.
- The fact that there can be cases of unjust enrichment has long been recognised in EU law. That law recognises two important rights, which go by the names of "the principle of equivalence" and the "principle of effectiveness".
- The two principles were expressed thus by the ECJ in Just, Case 68/79 [1980] ECR 501:
"[25] In the absence of Community rules concerning the refunding of national charges which have been unlawfully levied, it is for the domestic legal system of each Member State to designate the courts having jurisdiction and to determine the procedural conditions governing actions at law intended to ensure the protection of the rights which subjects derive from the direct effect of Community law, it being understood that such conditions cannot be less favourable than those relating to similar actions of a domestic nature and that under no circumstances may they be so adapted as to make it impossible in practice to exercise the rights which the national courts are bound to protect."
- In the same case the Court immediately went on to point out that the violation of these guaranteed rights resulting in overpayment of tax did not mean that a taxpayer was automatically entitled to repayment. On the contrary national laws could bar recovery if there would be unjust enrichment because the taxpayer had passed on the cost. It said:
"[26] It should be specified in this connexion that the protection of rights guaranteed in the matter by Community law does not require an order for the recovery of charges improperly made to be granted in conditions which would involve the unjust enrichment of those entitled. There is nothing therefore, from the point of view of Community law, to prevent national courts from taking account in accordance with their national law of the fact that it has been possible for charges unduly levied to be incorporated in the prices of the undertaking liable for the charge and to be passed on to the purchasers. It is equally compatible with the principles of Community law for courts before which claims for recovery of repayments are brought to take into consideration, in accordance with their national law, the damage which an importer may have suffered because the effect of the discriminatory or protective tax provisions was to restrict the volume of imports from other Member States."
- The last sentence of this passage recognises another factor which might come into play, namely that the wrongly levied charge or tax may have caused damage in another way for instance by forcing the taxpayer's prices up which in turn would affect his competitive position or his market volume. Later cases continue to recognise this sort of damage, see e.g. San Giorgio Case 199/82 [1983] ECR 3595 at para. 13 and Comatab Joined cases C-192/95 to C-218/95 [1997] STC 1006 at paras. 31-32).
ONUS OF PROOF
- I turn to consider the question of burden of proof. If one starts from first principles it seems obvious that if tax was overpaid, prima facie it should be returned. It follows that if unjust enrichment is to be used as reason for refusing return wholly or in part, it must be for the tax authorities to raise and establish the point. Section 83(3) exactly reflects that. It is for the Commissioners to establish the defence of unjust enrichment in this case passing on of the extra cost to customers.
- The Courts have considered the question of onus. The consideration really began in by the ECJ in San Giorgio. It spoke of "where [passing on] is established" (para. 13) and indicated that any presumption or rules of evidence which put the burden of proving non-passing on onto the taxpayer, would not do (para 14). Moving on in time, Moses J considered the problem in Marks v Spencer [1999] STC 205 at p. 239. He said at p.239 f-h:
"In my judgment the tribunal correctly stated the proper approach to the burden of proof ([1997] V&DR 85 at 91, para 10).
'We start by reviewing the evidence adduced by the Commissioners to determine whether they have raised a prima facie case of unjust enrichment i.e. a case which, in the absence of any evidence to the contrary, would satisfy us that repayment would unjustly enrich Marks & Spencer. If the Commissioners have failed to satisfy us of that, we can dismiss the defence. But if the Commissioners have satisfied us that there is a prima facie case of unjust enrichment, we go on and examine the evidence presented by Marks & Spencer who will necessarily have the detailed facts and figures. With all the facts and figures placed before us we revisit the issue and once again ask whether "on the evidence as a whole" the Commissioners have satisfied us of the defence.'"
- Moses J's caveat in Marks & Spencer followed his review of the cases. It runs as follows at p241 f-g:
"I am concerned at the reference by the tribunal ([1997] V&DR 85 at 91, para 10) to 'Marks and Spencer who will necessarily have the detailed facts and figures [emphasis added].' I shall go on, when considering the decision in more detail, to see whether that led the tribunal into error in consideration of all the evidence. But I observe, at this stage, that the tribunal ought not to place reliance upon any failure to produce detailed facts and figures when that failure will normally be the fault of the taxing authority which levied a charge to which it was not entitled. A tribunal should only conclude that the defence of unjust enrichment is made out where the evidence satisfied it that a repayment will cause unjust enrichment."
- The latest and most convenient summary of the case law on burden of proof is that by Jacobs A-G in his recent Opinion of 20th March 2003 to the Court in Weber v Wine World Case C-147/01. He said (paras 58 to 60):
"[58] On the one hand there must be no obligation on the claimant to prove that he has not passed the burden of the tax on to a third party and no presumption that he has done so simply because his retail price was necessarily deemed to be inclusive of tax, regardless of any other circumstances.
[59] On the other hand it is clear that, where a self-assessed tax is concerned, the tax authorities cannot be expected to prove that the burden has been passed on without the taxable persons cooperation and access to such relevant records as he may have kept.
[60] In that context, it is in my view desirable to clarify the case-law by pointing out that, whilst Community law precludes any presumption of unjust enrichment to be refuted by the claimant, it does not preclude the possibility of drawing reasonable inferences from existing evidence. Without such a possibility, the balance might be tilted so far in favour of the claimant as to render the justified aim of preventing unjust enrichment in practice impossible to achieve. It must be possible for the deciding body to take all available relevant evidence into consideration and reach a fair decision taking full account of whatever likelihood there may be that the claimant bore any part of the burden of the tax or suffered any economic loss as a result of its imposition."
That summary is essentially the same as the view of Moses J.
- Given the source of that latest view of the law, I propose to apply it here. One starts with no presumption of unjust enrichment, assembles the available evidence and reaches a fair decision taking into account reasonable inferences from the known facts.
CAUSATION
- The Court in Giorgio uses the words "because the effect
". It is thereby indicating that the relevant damage must be caused by the wrongful tax. So far as I can see it has always been implicit and fundamental that commercial matters unrelated to the overcharged tax are irrelevant. That is reflected in the language of s.80 VATA s.80 (3B) refers to "loss or damage ... as a result of mistaken assumptions ... and s.80 (3C) refers to loss and damage to have resulted from ... the making of the mistaken assumptions". The only way other losses could be relevant is if it were shown that the taxpayer, although he tried to pass on the costs, failed to do so wholly. One might, then perhaps, look at all his costs and say that none of them was fully recovered, doing some sort of apportionment exercise.
WHAT AMOUNTS TO PASSING ON
- Mr Conlon suggested that passing on a mistaken tax could only be established if this was explicitly done. e.g. by including it as an item in an invoice. That cannot be so and is not so. As a matter of principle it cannot matter whether the taxpayer took that sort of step or not. The question is simply whether there would be unjust enrichment a question to be decided on all the facts as indicated by Moses J and Jacobs A-G.
THE FACTS OF THIS CASE
- In this case Lombard do not, and never have, suggested that the overpaid tax caused them to have a lesser market share or a lesser volume of customers or a lesser ultimate sales price. Their claim is based on the assumption that all their transactions with lessees and the auction sales would have gone ahead just as they did in fact, the only difference being that Lombard would not have incurred the cost of the extra VAT. The claim assumes that all prices and volumes would have been unaffected if there had not been this extra, unjustified charge. So the claim is for the total amount of overpaid tax.
- Lombard's evidence showed that one of the factors taken into account by Lombard in calculating their rental charges was the unjustified charge. It was included along with all other kinds of cost (price of car, apportioned overheads, estimated ultimate sales price) and so on. This is hardly surprising that is how a normal businessman would set about the task. He would know for certain some of his costs (e.g. purchase price), he would estimate others (e.g. ultimate sale price), and would form a reasonable view about others based on known costs (e.g. overheads). He would then add a margin for his profit. In short a middleman tries to pass on his costs and make a margin on top of that.
- Annexed to the Tribunal's Decision is a worked example for a Rover. It does not show a calculation of this sort. It purports to show a "loss", the principal reason for which is that the originally estimated auction price was wildly overoptimistic (ฃ9,233 estimate as compared with ฃ6,200 in fact). There was an unforeseen slump in the second-hand car market which is not suggested was caused by the change in VAT treatment of car-leasing companies.
- So one cannot tell from the calculation whether Lombard in fact made a profit or loss. That is because it includes an item of ฃ6,939 called "other charges" which included not only costs, but also the anticipated profit margin. Mr Conlon produced variants of this calculation. These showed the transaction as planned, as it happened, and as it should have been if there had been no manufacturer's bonus and no VAT on it.
- All the variants assume that the customer would have paid the same amount. There is no calculation which attempts to show what Lombard's position would have been if their price had been forced down by competition. Yet it is common ground that the unjustified tax was levied uniformly on the car-leasing trade as a whole. And Lombard positively asserted that their prices closely matched that of the competition. One would expect that in a competitive market, where the costs of each competitor are reduced, that there would be corresponding falls in prices to customers brought about by competition. Things would be different, of course, if the wrongful charge had only been levied on Lombard and not its competitors.
- So, to my mind, none of the calculations proceeds on a rational basis. Even on the assumption that nothing else would have changed, the calculations do not show whether the extra VAT was wholly passed on or not (i.e. whether there was a profit or loss as a whole). More fundamentally the obvious effect of competition was wholly ignored.
- Accordingly on the basis of all the known facts, I think the Commissioners did establish that it was more probable than not that the tax was passed on. Indeed I think that is the only rational inference from the known primary facts. Lombard intended to pass the charge on one can reasonably presume they succeeded unless they show, from figures within their own knowledge, that they did not.
- The Tribunal held otherwise. It said (para. 113):
"in view of our decision [on unfair treatment] it is not necessary for us to consider unjust enrichment but, in case this appeal should go further, we state that unjust enrichment has not been established for the reasons given in paragraph 106 above."
Paragraph 106 therefore contains the Tribunal's only reasoning on the point. It reads:
"There is some common ground on the legal analysis of unjust enrichment. Where the submissions diverge appears by contrasting paragraphs 15 and 16 of the Respondents' Skeleton with paragraphs 23 and 24 of the Appellant's submissions. The Respondents' conclusions as to application of the defence are too narrow. The basic questions are whether a repayment would enrich the claimant and whether that would be unjust. Community law does not permit an irrebuttable presumption merely because the undue tax has been passed on. It is still necessary to consider the basic questions. This case is not the simple scenario as in M&SHC where VAT was wrongly charged on teacakes and passed on in full to the final consumer. It is more complex. The undue "VAT" on the Manufacturers' Bonuses was not borne by the manufacturers. They obtained a deduction. It was in practice borne by the Appellant since it was a cost component of purchasing the cars and deduction was blocked. The Respondents have not shown this VAT was expressly passed on: the onward supply was not of goods but of services. The undue "VAT" was only one factor in the lease pricing and some element of the VAT suffered on purchasing the cars, the Appellant would have to invoice for the VAT inclusive amount of the bonus, plus VAT: see Worked Example attached (Appendix 3). On the facts the Respondents have not discharged the burden of proof of showing unjust enrichment."
- This reasoning is flawed for a number of reasons:
(1) The Tribunal says the Commissioners "have not shown this VAT was expressly passed on". But express passing on is unnecessary.
(2) The Tribunal says "the onward supply was not of goods but of services". But that is a distinction without a difference. The calculation of the lease rental included a cost due to the unjustified tax.
(3) The Tribunal says "the undue 'VAT' was only one factor". That is irrelevant indeed it is not possible to imagine a transaction where an undue charge was the only factor being passed on. All costs are passed on.
(4) The Tribunal relied on the example which, for the reasons I have given, is unhelpful.
(5) The Tribunal did not address the key question what in the light of all the known facts would have been the financial position of Lombard if the undue tax had not been imposed?
- That reasoning is so flawed that it amounts to an error of law. No reasonable Tribunal, properly directing itself, could have reached the conclusion it did.
- I considered what I should do about this. In particular I wondered whether I should remit the matter for a fresh determination. In the end I do not think this would be right. Lombard had every opportunity to advance a case of real economic loss notwithstanding that it had passed on the extra cost, or that in fact it had not managed to pass on that cost because it actually made a true loss on the transactions. It went for neither of these. It knew it had taken the extra cost into account when calculating rentals. Although the legal burden of proof lay on the Commissioners Lombard knew there was enough evidence of passing on the cost to shift the evidential burden back to show it had failed to pass on the cost or had suffered economic damage. Remitting the matter would mean starting all over again in circumstances where Lombard have already had one fair crack of the whip.
- Accordingly I conclude that the only reasonable inference from the evidence placed before the tribunal is that those who bore the loss caused by the wrongful treatment of manufacturers' bonuses were Lombard's customers, not Lombard. For Lombard to be repaid the tax would be unjust enrichment.
UNFAIRNESS/UNEQUAL TREATMENT
- Mr Vajda explained how the Commissioners deal with claims for overpaid VAT. At the time there were over 100 tax offices. Each dealt with overpayment claims broadly independently. Of course most overpayment claims are not complex and essentially involve nothing more than accounting errors and the like. There was not, at least so far as I was told, any system for calling in for central determination by a specialist team complex repayment claims of the type involved here.
- What happened in the case of Lombard, but not in the case of its rivals, was that the Commissioners decided to invoke unjust enrichment. The rivals' claims (submitted to different offices) for repayment were met without question. This was not part of some unfair plot to single out Lombard. It was simply that one office was more alert than the others. It is conceded that unjust enrichment should have been considered in the case of all claims for repayment following the Business Brief. It is not conceded that unjust enrichment would have been established in other cases.
- Although there is no concession to that effect, I have to say that I cannot see any likely basis upon which unjust enrichment could not have been established in the case of Lombard's trade rivals. There was evidence that prices closely matched. Indeed that is one of the points made by the Commissioners on the first point. In my judgment there was ample material upon which the Tribunal could conclude that Lombard were treated differently from their rivals. I intend to proceed on that basis.
JURISDICTION
- The first question is whether the unfair treatment point was one within the jurisdiction of the Tribunal. Jurisdiction is claimed to exist via one or other of two routes, s.83(t) and s.84(10). The Tribunal settled on the s.84(10) route. Although there is no Respondents' notice, I propose to consider s.83(t) too. So to do does not involve any unfairness to the Commissioners: it is a pure point of law and Mr Vajda was prepared to deal with it.
THE S.83(t) ROUTE
- Section 83 provides:
"Subject to s.84, an appeal shall lie to a tribunal with respect to any of the following matters -
(t) a claim for the repayment of an amount under s.80
"
Lombard argue that they have a claim for repayment of an amount under s.80, it has been refused and so the clear language of s.83(t) applies.
- The Commissioners riposte by arguing that this complaint of unfair treatment is essentially one about their conduct. It is not a point involving the facts of Lombard's individual case or the law applicable to those facts. The proper remedy for unfair treatment is judicial review, not an appeal to the Tribunal. The Tribunal is not a body entrusted with a supervisory, public law jurisdiction. Here there is a question of discretion involved.
- I think the Commissioners are right. The actual decision impugned is that to invoke unjust enrichment in the case of Lombard. It is not a decision to invoke unjust enrichment in the case of Lombard but not others. That is what happened in fact but there never was a decision to that effect.
- There is authority which supports the conclusion that general conduct towards taxpayers is outwith the Tribunal's jurisdiction. I turn first to Lord Lane (with whom Lords Scarman and Simon agreed) in CCE v Corbitt [1980] STC 231 at p.239h:
"Assume for the moment that the tribunal has the power to review the commissioners' discretion. It could only properly do so if it were shown the commissioners had acted in a way which no reasonable panel of commissioners could have acted; if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. If it had been intended to give a supervisory jurisdiction of that nature to the Tribunal one would have expected clear words to that effect in the 1972 Act. But there are no such words to be found. Section 40(1) sets out nine specific headings under which an appeal may be brought and seems by inference to negative the existence of any general supervisory jurisdiction."
(Section 83 is the successor to the s.40(1) of the 1972 Act referred to. There are now more specific headings but no general supervisory jurisdiction has been conferred.)
- The Tribunal in Marks & Spencer (Mr Stephen Oliver QC) was of the same view. It said:
"Does our jurisdiction in any way extend to controlling the manner in which the Commissioners have administered the law? Here again, I go back to sections 83 and 84. The VAT and Duties Tribunals have been created by statute and theft powers are conferred by it. We have no supervisory jurisdiction, so far as claims and refusals and refusals of claims under section 80 are concerned. Our jurisdiction is appellate. It is limited to determining whether decisions of the Commissioners to refuse claims are correct in law. ... However, no provision of the 1994 Act enables this tribunal to declare ineffective the manner in which the Commissioners have applied the provisions of section 80."
- On appeal Moses J agreed, saying (p.246):
"However in so far as the complaint is not focused upon the consequences of the statute but rather upon the conduct of the Commissioners then it is clear that it has no jurisdiction. Its jurisdiction is limited to decisions of the Commissioners and it has no jurisdiction in relation to supervision of their conduct."
Moses J specifically endorsed the Tribunal's refusal of jurisdiction in relation to complaint C, namely that "the Commissioners have treated other taxpayers differently and this further offends against the principle of equality".
- I can see no reason for differing from Moses J and judicial comity requires that I follow a decision of a court of co-ordinate jurisdiction unless I do. Here I go further. I agree with him.
- Mr Conlon conceded that if the matter were one purely for domestic law, the tribunal would have no jurisdiction. But, he submitted, this was a case where an EU right was involved. The right involved in this case is the right to equality of treatment. Two other general principles are relevant, namely effectiveness and equivalence; effectiveness is that domestic law should provide effective machinery for the enforcement of EU law rights; equivalence is that such remedies should be no less effective than the remedies for enforcing domestic law rights.
- In my view that concession is fatal. For it is well settled that the manner in which a Member State implements provisions of this sort is a matter for that Member State. EU law does not prescribe how these rights are to be implemented, it simply requires that they be. There is no EU requirement that there be VAT tribunals, or administrative law courts. The EU perspective is simply to ask whether the Member State has proper machinery for safeguard the rights. Here there is machinery, namely the Administrative Court which is not suggested to be inadequate or ineffective.
- Moreover there is another difficulty in Mr Conlon's way, or rather another way of expressing the view of Mr Oliver and Moses J. Section 83(t) only confers jurisdiction over "a claim for repayment of an amount under s.80." Section 80 applies where the taxpayer has paid VAT "which was not VAT due". The essence of the unfair treatment case is not that the VAT was not due, It is that even though it was due, it should be repaid because trade rivals were unjustifiably repaid. That, as a matter of construction, is outwith s.80 and hence outwith s.83(t).
- It is just worth examining this last point further. Suppose there are a number of trade rivals each claiming repayment from their respective local offices. And suppose in the first case to be dealt with the relevant office takes the unjust enrichment point and determines no repayment is due. And suppose all other offices subsequently do not take the point and make repayment. If Mr Conlon were right the VAT of the claimant first in time, although properly due, would somehow, by reason of subsequent events involving other parties, cease to be due. That is unworkable and cannot have been intended. "Due" must have an invariant meaning.
THE S.84(10) ROUTE
- This is the route taken by the Tribunal in deciding it did have jurisdiction. Section 84(1) provides:
"Where an appeal is against a decision of the Commissioners which depended upon a prior decision taken by them in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision."
- The provision was introduced (as s.40(6) of the VATA 1983) to reverse the effect of the decision in Corbitt. In that case the Commissioners had exercised a discretion to decide that the taxpayer's records and accounts were not adequate. That was not a matter upon which appeal lay under the predecessor to s.83. A subsequent assessment depended on that prior decision and it was that assessment which was subject to appeal. It was held that the tribunal had no jurisdiction to consider the earlier unappealable exercise of discretion.
- This explains the otherwise somewhat convoluted language of the subsection. When hearing an appeal over which it does have jurisdiction (because a head of s.83) the Tribunal can consider an earlier decision over which it has no jurisdiction (because not a head of s.83). But this can only be done if the decision under appeal depended on the prior decision. That appears to me to be the plain consequence of the language of the section. It deals with the mischief identified in Corbitt. If authority is needed to support that construction it is to be found in the decision of Hidden J in CCE v Arnold [1966] STC 1271. But to me the position is plain.
- The provision simply does not apply where there are two independent decisions. If the Commissioners by Decision A decide point A (as to which there is no appeal) and then make later Decision B on point B (as which there is appeal), s.84(10) does not mean that the Tribunal can consider point A when considering the appeal on point B.
- But that is just what the Tribunal has done here. There are two points, unjust enrichment and unfair treatment. There is no dependence of one upon the other in any relevant sense. The unjust enrichment point (over which the tribunal does have jurisdiction) in no way depends on any prior decision about unfair treatment.
- The Tribunal's reasoning for holding that it had jurisdiction is far from clear. It recited the arguments of the parties at length but reached its conclusions rather briefly. It appears to have regarded the letter of 12th October 1998 as being a "prior decision" within s.84(10) and "insofar as it may be necessary we set it aside as being unreasonable and in breach of the principle equality of treatment" (para 113(v)). I cannot understand this. The letter of 12th October 1998 did not even purport to decide the unfairness point. It merely said it was being investigated. What is apparent is that the Tribunal did not refer to the language of s.84(10) and appears to have ignored the key words "depended on" in that provision.
UNFAIR TREATMENT - SUBSTANCE
- Although I have held that there is no jurisdiction in the Tribunal to consider this and hence no jurisdiction in this court by way of appeal, I should, in view of the Tribunal's finding that there was unfair treatment, consider the matter briefly. The decision is based on the fact that although Lombard was not singled out for different treatment in fact Lombard's trade rivals received repayments whilst Lombard did not. As I have said, that was probably so, even though the Commissioners do not formally concede that the unjust enrichment rule would have applied to the cases of the trade rivals.
- The Tribunal thought that was enough for an order for repayment. But the problem is more sophisticated than that. Just because a tax gatherer makes a blunder which favours some taxpayers by way of a windfall does not mean that he should perpetuate the blunder in favour of others. A number of wrongs do not necessarily make a right. The interests of the general community are involved taxpayers collectively have an interest that tax properly due should be collected, and that there should not be repayments to people who are not entitled to them.
- The ordinary taxpayer might indeed think that where repayments have not been justified what should really happen is that the tax gatherer should try to recover them. Mr Vajda submitted (on the basis of some provisions, not on a change of circumstances) that there would be difficulties with that here difficulties which did I not understand and do not matter for present purposes.
- The general principle of equality or non-discrimination is, of course, one of the principles of EU law. It requires that "similar situations shall not be treated differently unless differentiation is objectively justified" (Klensch Joined Cases 201 and 202/85 [1986] ECR 3477, see also Cotter Case C377/99 [1991] ECR I-1155. It appears to me to be entirely within the ambit of objective justification to say that mistakes need not be perpetuated and to take into account the fact that what is involved here is both complex law and a necessarily large administrative system.
- In so saying I find myself in agreeing with Elias J in the British Sky Broadcasting [2001] STC 437. BskyB had, for a period, been treated differently for VAT purposes from the way its rivals, cable companies, were treated. It turned out this was wrong. So BskyB sought judicial review because of their inconsistent treatment. Elias J first went to the authorities starting with IRC v National Federation of Self employed and Small Businesses Ltd [1982] AC 617 where it was established that the Revenue owe a duty to the general body of taxpayers to treat taxpayers fairly. He noted that, before judicial review can succeed there must he what Simon Brown LJ described in e.p. Unilever [1966] STC 681 at 695 as "conspicuous unfairness". He then said:
"[10] But the passages to which I have made reference are a strong reminder that the threshold of unfairness amounting to an abuse of power is a high one, and that the court must be careful not to interfere simply because a decision can be justifiably subject to some criticism."
And when he came to consider the unequal treatment claim he said:
"Identical in law argument
[15] The basis of this argument is that the court can now see, with the benefit of the decision of the tribunal, that BSkyB and the two cable companies ought to have been treated similarly in 1998. Accordingly, it is said that the commissioners acted unfairly in treating them differently.
[16] In my judgment this way of putting the case is wrong in principle and is a recipe for chaos in practice. Judicial review is about testing the legality of administrative action; save in exceptional cases, such as if jurisdiction is in issue, that can only properly be judged in the light of the factors which were known or ought to have been known by the administrator when the decision was taken. Of course, it may be necessary for an administrator to reconsider the decision if new facts emerge, but the legality of his action is not to be judged by material of which he was not, and could not be expected to have been, aware. Mr Pannick's argument amounts to saying that a body will be at risk of acting unfairly if it makes a rational and defensible decision as to the effect of the law in a particular situation and a court subsequently holds that the legal analysis was wrong. In my view that cannot be right. The argument equates a lack of fairness with an erroneous analysis of the law, at least where that mistaken analysis has led to the different treatment of persons in a legally identical position. In my judgment that expands the concept of fairness well beyond its established or legitimate limit.
[17] Furthermore, if this argument were right, the practical consequences would be severe indeed. Whenever a VAT tribunal rules that a company is subject to VAT on something which was formerly zero-rated then other parties who have been paying VAT for years in respect of the same service could on Mr Pannick's argument claim a rebate on the grounds that in retrospect it could be seen that they had been treated less fairly than the other party. The commissioners would never know when they may be subject to an obligation to repay taxes which they had originally obtained perfectly lawfully. No doubt there would be an overwhelming temptation for the officers in any situation of uncertainty to levy a VAT charge in case by failing to do so they were creating the risk that they might subsequently be shown to be wrong with the consequences that others, currently paying the tax, would then be able to reclaim the tax paid on the grounds that they had been the subject of unequal. and therefore unfair treatment. No sensible system of tax administration could operate in such a state of uncertainty."
- All of that applies here. Mr Conlon asserts that things were different because in this case the repayments to Lombard's rivals would give them a competitive advantage. But that would have been so in BskyB too. And in any event there is no evidence that any competitive advantage was gained. For all anyone knows the money was used to pay dividends or pay the management a bonus.
- The Tribunal determined this point briefly too. It said (para. 113(iv)):
"The Respondents have breached the Community law principles of effectiveness and equality of treatment. This is quite clear from both letters written to the Appellant by Mike Eland. In the letter of 23 August 2001 he says '... I fear it is inevitable that some instances will arise where different treatment is incorrectly applied to tax payers in similar circumstances to one of the tax payer's disadvantage. We seek to minimize these occurrences and are always prepared, as here, to investigate and reconsider individual cases when they arise ... In this particular case I do not find that the failures by this Department were such as to justify concessionary treatment and hence concluded that the original decision to refuse these claims must stand.' If different treatment was [sic] incorrectly applied to tax payers in similar circumstances, we would have thought that the correct response might be to reverse the decision in cases where the treatment was incorrect rather than speak of 'concessionary treatment'. As Mr Conlon pointed out, the Appellant was in fact impoverished, rather than enriched, by the refusal of its claim because other identical claimants had been, and continued to be, repaid. In this case, the losses incurred greatly exceeded the amount of the claim, being put by Mr Waghorn at over ฃ5.8m. If, as Mr Conlon said, and as was likely, the Appellant's competitors also suffered losses, the repayments made to those competitors by the Respondents would have created a cushion against the full extent of their losses. As a result of the Respondents' decisions this is a cushion denied to the Appellant. This is a clear breach of the principle of equality of treatment."
- The first part of this seems to suggest that the Tribunal thought that any unequal treatment was enough even if explicable for sensible objective reasons. It accepted a submission (said by Mr Conlon before me to be intended as no more than a forensic "flourish") that paying the due tax had impoverished Lombard. In fact a repayment had unjustly enriched its rivals. The Tribunal thought there were losses in the businesses which were in fact never established. And in any event if there were losses they were probably due to the collapse of the second-hand car market. Most fundamentally the Tribunal failed to consider that what it was ordering was payment of a sum which would enrich Lombard at the expense of the general body of taxpayers.
- Accordingly I do not think a case of unfair treatment was made out. And there are objectively justifiable reasons why repayment should not be made.
- In the result I allow the appeal.
