Chris Allen considers the Marks & Spencer case: Article published in the August 2002 issue of Tax Adviser. Chris Allen FCA is a chartered accountant and independent VAT consultant.
The European Court of Justice (ECJ) judgment in Marks & Spencer plc v C & E Commrs
(Case C-62/00) is clearly of interest to UK businesses with VAT repayment claims going back more than three years, including those which have previously made claims which have been capped. It is also of wider interest as an illustration of the ECJ's commitment to the supremacy of European Community (EC) law and to its role in enforcing this.
Marks & Spencer plc (M&S) made various repayment claims, which may be summarised as follows:
- early vouchers claim: this claim related to the treatment of certain vouchers accepted in return for goods up to July 1992, when it was admitted by Customs & Excise that the United Kingdom (UK) law was not in accordance with the EC legislation. Marks & Spencer made its claim for repayment after the July 1996 announcement of the three year capping provisions, but before legislation was enacted to introduce them;
- late vouchers claim: this claim related to the treatment of similar vouchers from July 1992, when the UK law had been brought into line with the EC provisions but Customs continued to apply the law in a manner found to be inconsistent with the EC provisions (and also with the new UK legislation). The claim was made at the same time as the early vouchers claim; and
- teacakes claim (the one which the press focus on, of course): this claim related to supplies of teacakes which should properly have been zero-rated as a matter of UK legislation, but which had been treated as standard-rated in accordance with a policy adopted by Customs and subsequently held to be incorrect. Marks & Spencer claimed repayment in 1995, but due to protracted negotiations the claim was not settled until 1997.
In each case Customs took the line that the three-year capping provisions applied, and restricted all three claims accordingly.
Marks & Spencer appealed on the basis that the retrospective introduction of three-year capping infringed its community rights.
The tribunal held that M&S's rights in respect of the teacakes and the late vouchers claim were derived from UK law, so that there was no question of any infringement of EC community rights in these cases. As regards the early vouchers claim the tribunal found that, while this derived from EC law, M&S's community rights were not infringed.
The High Court broadly agreed with the tribunal.
The Court of Appeal took the same line regarding the teacakes and the late vouchers claim, but had doubts about the correct treatment of the early vouchers claim. Accordingly, it referred the following question to the ECJ:
'In the circumstances in which a Member State has failed to implement properly in its domestic legislation Council Directive 77/388, is it compatible with the principle of the effectiveness of the rights that a taxable person derives from Article 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?’
EC proceedings — Advocate General's opinion
The Advocate General started by making preliminary observations which were not directed towards answering the question as put, pointing out that the chief characteristic of a directive is that it is not binding on the national authorities as to form and methods, but as to the result to be achieved. The state had an obligation both to transpose the directive into national legislation and to apply that transposed legislation so as to obtain the result required by the directive.
He continued with detailed observations as follows:
‘39. Put another way, the question is whether where Community law transposed into national law is incorrectly applied it is a matter solely for the Commission or whether national authorities, including the national courts, are obliged to ensure that the transposed directive is applied correctly, that is to say in conformity with the directive. In other words, does the directive, as drawn by the Community legislature, continue to serve as a guideline for interpreting the national law into which it was transposed?
40. In my view the reply to this question is unreservedly affirmative. If the referring court's view of the matter were followed, the result would be that Community nationals would, as a result of the directive's transposition into national law, lose rights under the directive, and thus under Community law, which they were able to assert before the directive was transposed. In its settled case-law the Court has acknowledged the rights of the individual to correct implementation in cases of incorrect transposition by national legislation. It would produce a result inconsistent with the Community legal order if an individual were able to rely on a directive in cases where the national legislature has acted incorrectly, that is to say inconsistently with the directive, but not in cases where the administrative authority of a State acts in a manner which is inconsistent with the directive in applying the transposed national legislation.
41. Nor can the Becker judgment be interpreted a contrario. That judgment concerned a case in which the Member State concerned had failed to implement a directive within the prescribed period and the question arising was whether in such a case individuals could rely on the directive. With that situation in mind the Court laid down the two conditions and the individual there had to rely on the directly effective obligation. It cannot be inferred therefrom, as the United Kingdom courts are plainly inferring, that if a Member State has adopted the requisite measures but then goes on to apply them in a manner inconsistent with the directive, an individual may no longer derive any rights from the directive. In that case as well the directive cannot be said to have been properly implemented.’
Later, he expressed the view that Customs' application of the UK legislation was inconsistent with the directive in connection with all three claims (i.e. including the teacakes).
The Advocate General then went on to consider the relevant principles of EC law regarding the introduction of the capping provisions, and concluded that the UK was in breach of these principles.
EC proceedings — ECJ judgment
Changing the question
Like the Advocate General, the court started by considering the question referred to it, and questioning the UK court's assumption that where EC provisions had been correctly transposed into UK law there were no longer any community rights to be protected, holding that the implementation of the EC provisions in national law does not deprive individuals of the rights derived from the EC provisions and the right to recover amounts collected by the state in breach of them.
It also pointed out that its own role is to provide the referring court with an answer which will be of use to it and enable it to determine the case before it and, to that end, it may be necessary for the ECJ to reformulate the question referred.
In this instance it reformulated the question as being concerned with the validity of retroactive legislation curtailing the period for repayment of sums collected in breach of directly effective EC provisions generally, not just those which had not been transposed into national law.
Principle of effectiveness
While it is for member states to set periods for repayment claims, they must not breach the principle of effectiveness by rendering it virtually impossible or excessively difficult to exercise rights conferred by community law. While the ECJ appeared to have no difficulty with the three-year capping as such, it was against its introduction without a transitional period in which existing claims could be made, commenting as follows:
'38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.'
Principle of protection of legitimate expectations
The court also considered that the separate principle of the protection of legitimate expectations precludes a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to the amendment to obtain repayment of tax collected in breach of directly effective EC provisions.
The court's answer to the question referred (suitably amending the question) was as follows:
'National legislation retroactively curtailing the period within which repayment may be sought of sums paid by way of VAT collected in breach of provisions with direct effect of Sixth Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment, such as those in Article 11A(1), is incompatible with the principles of effectiveness and of the protection of legitimate expectations.'
Implications and action
The precise implications of this judgment will take time to work out, and may require further litigation. Debate was well under way within hours of the release of the judgment.
As far as M&S is concerned, it is clear that the court considered that the three-year capping provisions were ineffective in preventing repayments to M&S both for the early vouchers claim and the late vouchers claim, both being based on art. 11A(1) of Directive 77/388, the sixth VAT directive which the court specified as having direct effect.
The treatment of the teacakes claim is less clear. The court did not deal with this in terms (and may not even have noticed it, since it is not mentioned in the rehearsal of the national proceedings). However, the Advocate General was clearly of the opinion that this claim was equally protected by the community law principles. The logic is presumably that, while the zero-rating concerned is derived from a national provision, it is permissible under EC law (art. 28(2)(a) and Annex 8 of the sixth VAT directive), and the principle that VAT is not charged on exempt (including exempt with input tax credit) supplies is derived directly from the EC legislation (art. 12 and Title X of the sixth directive).
The matters outstanding are:
- the scope of the subject matter covered by the judgment. It is clear from the judgment that it covers matters based on EC law, whether or not the EC law has been correctly transposed into national law. The remaining area of doubt concerns national provisions which are not based on directly effective (and compulsory) parts of the directive. My own opinion is that national provisions are also covered, provided that they are permissible under EC law, as they will always be underpinned by the basic EC provisions concerning the chargeability and recoverability of tax once permissible discretions on points of detail have been exercised. Furthermore, I would say that the national courts should be slow in sanctioning a discriminatory treatment in other cases where, for instance, the national law may implement provisions not sanctioned by the directive;
- the temporal scope of the judgment. The judgment was specifically concerned with matters where claims had been made either before the announcement of the capping provisions or between the announcement and the enactment of the relevant UK legislation. There remain questions concerning, for instance, cases where the potential for claims might have been recognised in advance of the legislation (with six years then remaining to make a claim, under the previous provisions), or claims not recognised until the legislation was already in force (where there would have been no possibility, therefore, of a claim under the old rules, and any legitimate expectation of repayment could arguably be said to have been extinguished in advance of recognition of the potential claim). Other permutations of circumstance are possible.
There are reasonable arguments for saying that the three-year capping provisions continue to apply to some claims, but not to those of the types considered by the ECJ. If these are correct, it will be some time before we know the true scope of the judgment, and there will be many detailed differences (particularly based on timing) between apparently similar cases.
In my opinion, the better view is that the three-year capping provisions are simply invalid in their entirety, as having been introduced without a reasonable transitional period, so that all claims must be based on the old rules. The remedy is for the UK to abolish the three-year capping rules then reintroduce them with a transitional period.
In the meantime, I suggest that anyone with a claim which might be capped (or who has already made one which has been capped) should not agonise about the details, but claim now for the potentially capped amount, unless the cost of formulating the claim itself is prohibitive.
020 7235 9381
August 2002 by