20303

VAT – INTEREST – Repayment claim for input tax – Appeal Allowed by Agreement – claim for interest on input tax from date of repayment claim to date when input tax paid – Respondents deny interest claim on the ground that Appellant gave new evidence at the Appeal – not new evidence more a change in emphasis – Appellant’s conduct reasonable – interest awarded in respect of first amount from the date the Appellant repaid the sum  - start date of interest for subsequent claims 16 days from when the claim received – rate of interest  base plus 2.75 per cent – Appeal allowed – Appellant’s costs ordered

LONDON TRIBUNAL CENTRE

CONSTANTGREEN LIMITED	Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public in London on 14 June 2007
Additional written submissions by 12 July 2007

Heather Rae for the Appellant 

Catherine Addy counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The Appeal
1.	The dispute concerned the Appellant’s claim for interest on a sum of £10,647 which was repaid by the Respondents to the Appellant as input tax. The Appellant’s claim was made under section 84(8) VATA 1994. The Respondents disputed that they were liable to pay interest on the principal sum of £10,647.
The Dispute
2.	The Appellant claimed that it was entitled to simple interest at the rate of 2.75 per cent over base on the principal sum of £10,647. The Appellant proposed that the start dates for the interest depended upon when the claims were made for the various amounts of input tax which constituted the principal sum.  Thus the start date for the first claim of £5,581 input tax was the 9 September 2004 when that sum was repaid to the Respondents by the Appellant. The remaining balance of £5,068 was the subject of a voluntary disclosure after the Appeal hearing in November 2006 which showed that the entitlement to input tax was phased over several VAT quarters from September 2004 to September 2005. The start date for interest on the phased claims for input tax was 16 days from the date of the relevant return. The end dates for interest were 11 December 2006 for the initial claim of £5,581 and 26 February 2007 when the remaining balance of £5,068 was met by the Respondents. 
3.	The Respondents contested the claim for interest on three separate grounds. First they contended that no order for interest should be made on the ground that they did not become aware of the full details of the Appellant’s repayment claim until Mr Rae gave evidence on its behalf at the Appeal hearing on 2 November 2006. Had the Respondents been aware of Mr Rae’s evidence earlier they would not have challenged the repayment claim. In those circumstances the Respondents submitted that they should not be penalised with an award for interest because of the Appellant’s failure to provide the necessary information in support of its repayment claim. The Appellant disagreed with the Respondents’ interpretation of the sequence of the events. The Appellant maintained that the Respondents were in possession of all relevant evidence at the outset of the Appellant’s repayment claim. 
4.	If an award of interest was appropriate, the Respondents contended that the start date for the award should be different from that proposed by the Appellant. The Respondents preferred start date was the 2 December 2006, 30 days from when they conceded the Appellant’s claim at the Appeal hearing on 2 November 2006. Alternatively the start date should commence not earlier than 14 October 2005, the date they received Mr Rae’s first witness statement. Their final default position was that the commencement date should be 30 days from the date of the return instead of the 16 days suggested by the Appellant. There was no dispute about the end dates for an award of interest.
5.	Finally the Respondents disputed the rate of interest claimed by the Appellant. In their view it was incumbent upon the Appellant to demonstrate by evidence that it was in continuous overdraft in excess of the repayment claim over the relevant period.  If that was so the appropriate interest rate would be either the current account interest rate offered by its bank or the conventional commercial rate of base plus one per cent. The Tribunal should also have in mind the rate of interest payable under section 78 of VATA 1994. 
6.	The Appellant contested the Respondents’ assertion that it had to prove its bank account was overdrawn. The over-riding principle was that interest should be awarded not as compensation for the damage done but for being kept out of money which ought to have been paid to the Appellant.
7.	The questions for determination by the Tribunal were as follows:
(1)	Should the Tribunal exercise its discretion not to make an award of interest on the account of the Appellant’s conduct?
If an award of interest is appropriate:
(2)	What is the appropriate start date for the award of interest?
(3)	What is the appropriate rate of interest?
The Legal Position
8.	Section 84(8) of VATA 1994 gives the VAT and Duties Tribunal discretion to award interest to an Appellant following a successful appeal. Section 84(8) provides that
“Where on an appeal it is found –
(a)	that the whole or part of any amount paid or deposited in pursuance of subsection (3) is not due; or
(b)	that the whole or part of any VAT credit due to the Appellant has not been paid.
so much of that amount as is found not be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the Commissioners to be payable as VAT has not been paid or deposited and it is found on the appeal that that amount is due, the tribunal may, if thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction”.
9.	Lord Justice Collins in Revenue and Customs Commissioners v Royal Society for the Prevention of Cruelty to Animals and Totel Ltd [2006] EWCH 422 (Ch) considered how the Tribunal should exercise its discretion to award interest under section 84(8) of VATA 1994. At paragraphs 113 – 117 Collins LJ made the following observations:
“In my judgment it would be wrong for me to attempt to fetter the discretion by attempting to lay down guidelines as a gloss on the legislation. But I will say that it would not be easy to criticise a tribunal if it applied principles commonly applied in cases involving commercial entities, even if the relationship between the trader and the Commissioners is not a commercial one. In civil cases, the overriding principle is that interest should be awarded to the Claimant not as compensation for the damage done but for being kept out of money which ought to have been paid to him (para.113)”.
“Conventional practice in commercial cases (under section 35A of the Supreme Court Act 1981) is to award simple interest at base rate plus one per cent (para.114)”.
“I do not consider that there is any overriding reason of principle why a higher rate should not be adopted by the tribunal in the circumstances of a particular case, either because that rate is reasonably considered too low or because on the facts the taxpayer has to borrow at a higher rate. The former case would no doubt be rare. In the latter case there must be some evidence on which the tribunal can act (para.115)”.
“In commercial cases, although a rate higher than the conventional rate may be justified, any such claim is normally dependent on evidence that a Claimant has in fact borrowed funds at a higher rate (para.116)”.
“The rate will normally reflect the cost of borrowing rather than the return on lending (para.117)”.
10.	On the relevance of the rate  specified by section 78 VATA 1994 under which the Commissioners pay interest to the trader as a result of their error, Collins LJ stated at paragraph 132:
“In my judgment, the section 78 rate is simply a matter to which the tribunal may have regard or which it may take into account before assessing what is just in the circumstances. It is not the rate which must be applied, nor is it the rate which should be taken as the starting point. It is section 84(8) which governs, and not section 78.”
11.	At paragraph 188 Collins LJ examined the concept of mitigation in relation to an award of interest under section 84(8) VATA 1994:
“I agree with the tribunal in the RSPCA decision that the concept of mitigation has nothing to do with interest under section 84(8), since it is not compensation for damage, but I do accept that unreasonable behaviour on the part of the taxpayer which leads to a delay in payment may be a factor in the exercise of discretion under section 84(8). But it is also relevant that the Revenue has the benefit of the use of the money in the meantime”.
12.	At paragraph 198 Collins LJ considered the starting date for an award of interest under section 84(8):
“The Garage Molenheide case was a case on the proportionality of the Belgian legislation and not a case of general application, and does not lay down any general rule of law that interest must be paid from the date that the sums would normally have been paid. The starting date is a matter within the discretion of the tribunal, and I accept that it can take into account the policy in Notice 700/58. But it can also take account of a reasonable period for Customs to make enquiries”.
13.	In R (on the application of UK Tradecorp Limited) v The Commissioners of Customs and Excise [2004] EWCH 2525 (Admin) Mr Justice Lightman concluded that there was no prima facie duty on the part of the Commissioners to repay input tax until the claim has been agreed or upheld. On the question of interest Lightman J stated that
“I may add that the absolute obligation to pay interest from the date of claim to repayment advanced by the Claimant, as it seems to me, cannot arise from a doctrine of proportionality. Indeed it is scarcely consistent with it. The Claimant’s contention is advanced: (a) notwithstanding the clearly established principle the national VAT authorities are bound to investigate and defer payment of claims to refunds; and (b) irrespective of the reasons for any delay in the conclusion of the investigation and accordingly payment, even if the reason is the deliberate obstruction of investigations by the Commissioners. The principle of fiscal neutrality of VAT does not, as it seems to me require (if it extends to payment of interest at all) payment of interest in respect of the period prior to the acceptance or establishment of the right to deduct and repayment (para.41)”.
14.	The parties referred to the Tribunal decision in Purple International PLC v Her Majesty’s Revenue and Customs [2006] VAT Decision Number 19795. The parties’ submissions arising from this decision must be treated with caution as the decision is subject to Appeal to the High Court. The Appellant noted that the Tribunal had awarded a rate of interest of 2.5 per cent. The Respondents cited the range of factors particularised in paragraph 81 taken account by the Tribunal when exercising its discretion to fix the appropriate rate. 
The Hearing
15.	Mr Russell Anthony Rae, company director of the Appellant, gave evidence on oath concerning his dealings with Mrs Plumley, HM Revenue and Customs Officer, who carried out the audit of the Appellant’s VAT accounts. Further Mr Rae supplied details of the Appellant’s overdraft facilities. The Respondents supplied copies of their advocates’ notes of evidence taken at the 2 November 2006 hearing. Following the hearing the Tribunal issued directions requiring the Appellant to provide an analysis of its bank statements from 29 November 2004 to 28 February 2007. Contrary to the Tribunal letter dated 26 July 2007, the Respondents did reply by the required date which was considered by the Tribunal.
Background
16.	The Appellant carried on business as property developers and builders, and registered for VAT from April 2004. The Appellant was a family run firm which relied on sub-contractors to carry out the building works. On 25 July 2004 the Appellant submitted a repayment claim for the sum of £5,581 which represented the VAT incurred on the reconstruction of two cottages known as numbers 5 and 6 Moat Cottages, Penshurst, Kent. The Appellant considered that it was entitled to recover the VAT on the building works because they were directly related to a zero rated supply, namely, the first grant by a person substantially reconstructing a protected building  of a major interest in, or any part of the building or its site  (item 1, group 6, schedule 8, VATA 1994).  
17.	On 16 August 2004 Mrs Plumley of HM Revenue and Customs visited the Appellant and discussed the building works with Mr Rae. On 31 August 2004 Mrs Plumley refused the Appellant’s repayment claim on the ground that the sale of Moat Cottages was an exempt supply within group 1, schedule 9, VATA 1994. On 13 October 2004 the Respondents upheld Mrs Plumley’s decision on review.
18.	The Respondents accepted that Moat Cottages were protected buildings. The Respondents, however, disputed whether the works carried out amounted to a substantial reconstruction of the cottages within the meaning of group 6, schedule 8 VATA 1994.  In their view the Appellant failed to show that the buildings were reconstructed in common parlance, and that the reconstruction was substantial in accordance with note 4, group 6, schedule 8 VATA (the three-fifths test, namely three-fifths or more of the costs of the works spent on approved alterations).
19.	 On 10 November 2004 the Appellant appealed against the Respondents’ refusal to repay the VAT incurred on the building works for Moat Cottages. On 14 December 2004 the Appellant submitted its list of documents which included planning and building consents accompanied by plans, and all supporting invoices. Between 10 January 2005 and 2 June 2005 the Respondents were granted five separate extensions to the time limit in which to serve their statement of case. The statement of case was eventually served on 30 June 2005.  On the 9 September 2005 a direction hearing was held when the Respondents were given leave to amend their statement of case by 12 December 2005. On 1 June 2006 the Tribunal set the timetable for hearing the Appeal. On 27 September 2006 the Respondents accepted that the Appellant met the three-fifths threshold test. 
20.	On 2 November 2006 the Appeal hearing took place to deal with the sole disputed issue about whether as a question of fact Moat Cottages were reconstructed. At the end of Mr Rae’s evidence, the Appellant’s principal witness, the Respondents conceded the Appeal with the result that it was allowed by consent.
21.	On the 11 December 2006 the Respondents repaid the Appellant’s first repayment claim of £5,581.  However, during the currency of the dispute the Appellant undertook further work on Moat Cottages resulting in additional repayment claims  in the total sum of £5,068 which was met by the Respondents on 26 February 2007.  The Respondents accepted that the repayments were made more than 30 days from 2 November 2006 when they conceded the Appeal. As a result of the delay the Respondents paid interest in the sum of £4.45 under section 78 of VATA 1994.
Evidence
22.	Mr Rae confirmed that he discussed in detail the planned works to Moat Cottages with Mrs Plumley on her August 2004 visit.  Mr Rae accepted that at the time of her visit he was not in a position to tell Mrs Plumley about the precise magnitude of the works. Mr Rae, however, did point out to Mrs Plumley that there were some elements of the work which could not be identified until investigations of the building structure were completed.  He discussed with Mrs Plumley the condition of the listed building consent dated 29 October 2002 which dealt with the opening up of the timber frame. Further Mr Rae fully explained to her the drawings of the conversion of the cottages . In Mr Rae’s view a competent surveyor would have realised from the information provided the magnitude of the works involved with the two cottages. The fact that Mrs Plumley was not a competent surveyor and did not appreciate the magnitude of the reconstruction should not be held against the Appellant. Mr Rae was very surprised with Mrs Plumley’s denial of the Appellant’s repayment claim. At the end of his meeting with her, Mr Rae was left with the impression that Mrs Plumley accepted his explanation.
23.	Mr Rae agreed that his letter of 19 August 2004 to Mrs Plumley following her visit made no mention about the plasterwork, the renovation of the timbers and the construction work in the roof which formed part of his evidence to the Tribunal on 2 November 2006. Mr Rae pointed out that his letter was not a detailed specification, nevertheless it highlighted shortcomings of the heading descriptions in the planning permissions, which were too brief. 
24.	Mr Rae stated that the Respondents must have been aware of the amount of restoration work undertaken to the fabric of the cottages from the information contained in the invoices made available for inspection by the Commissioners in December 2004 and his witness statement dated 10 October 2005 which revealed the disproportionate labour costs when compared with costs for materials.
25.	The Respondents’ instructing solicitors’ notes of 2 November 2006 hearing recorded Mr Rae giving evidence that he failed to give a blow by blow account of the work carried out to Mrs Plumley, it did not occur to him to do that.
26.	The Appellant’s letter dated 6 October 2004 requesting a review of Mrs Plumley’s decision drew the Respondents’ attention to the facts of the replacement of the entire roof and that the removal and repositioning of the outside wall for both properties. 
27.	Mr Rae gave evidence that in mid November 2004 the Appellant applied for and received an authorised overdraft up to a limit of £65,000 from Barclays Bank. The interest rate for the overdraft was 2.75 per cent above base rate, which did not alter during the period of the current dispute. The Appellant’s analysis of its bank account for each week from 29 November 2004 to 28 February 2007 showed that the Appellant utilised the overdraft facility for 69 weeks of the 118 weeks during the said period. 
28.	Mr Rae acknowledged that the overdraft facility was taken out for a number of reasons which included the refusal of the repayment claim but also on advice from the Appellant’s accountant because it gave the Appellant an improved cash flow and eased its tax burden.
29.	Mr Rae stated that the Respondents’ refusal of the Appellant’s repayment claim had an adverse affect on the Appellant’s working capital and limited its scope for further development work. According to Mr Rae the disputed £10,600 would have been geared up with its bank to produce a £70,000 loan which would have yielded a 20 per cent income return from applying the loan to other projects. At the time of the Respondents’ refusal of the Appellant’s repayment claim Mr Rae had earmarked three potential sites for development including a building plot at Offham.
30.	The Respondents did not challenge the accuracy of the Appellant’s analysis of its bank account for each week from 29 November 2004 to 28 February 2007. The Respondents, however, were of the opinion that the regular fluctuations in the account  between credit and overdrawn indicated that the overdraft facility was obtained and used by the Appellant for ordinary commercial business purposes. The overdraft facility had no substantive connection with the denial of the Appellant’s repayment claim.
Reasons for Decision
Should the Tribunal exercise its discretion not to make an award of interest on the account of the Appellant’s conduct?
31.	The Respondents contended that their refusal of the Appellant’s repayment claim was justified by the information supplied to them by the Appellant about the construction works prior to the hearing on 2 November 2006. They considered that the demolition of outbuildings, replacement of the roof, the construction of some internal walls and the replacement of external walls did not fall within the ordinary meaning of reconstruction. In their view the cottages were not reconstructed but altered by being extended and modernised.  On those facts the Respondents considered that the Tribunal would have agreed with their interpretation and dismissed the Appeal.  According to the Respondents Mr Rae’s evidence of the building works at the 2 November 2006 hearing was fundamentally different from the information previously supplied. The principal change was the magnitude of the works arising from the opening of the timber frame. As a result of Mr Rae’s evidence the Respondents reviewed its position and conceded the Appeal and the repayment claim. 
32.	The Respondents’ submitted that the Appellant’s correspondence and witness statements supplied prior to the hearing contained no reference to the magnitude of the construction work involved with Moat Cottages. Further they referred to Mr Rae’s statement at the hearing on 2 November 2006 that he failed to give a blow to blow account of the works undertaken. Thus there was ample evidence to substantiate their proposition that Mr Rae’s evidence constituted a marked shift in the Appellant’s position which could not have been anticipated by the Respondents. Had they known earlier about the magnitude of the construction work the Respondents would have met the repayment claim without the need for an Appeal hearing.
33.	The Respondents contended that the Appellant’s failure to disclose the magnitude of the work until the Appeal hearing was a relevant factor which the Tribunal should take into account when exercising its discretion to award interest under section 84(8) of VATA 1994. Further as the Respondents acted relatively promptly after the Appeal hearing to reimburse the Appellant with the VAT wrongly denied to it, they should not be penalised with an order for interest, or in the alternative interest should be awarded for a short period, the start of which would be determined by when the Respondents were aware of the full position. 
34.	The Respondents supported their contention with reference to the ruling of Lightman J in UK Tradecorp Ltd about the onus upon the taxpayer to satisfy the Commissioners of his entitlement and repayments should not be made to taxable persons who show no such entitlement.
35.	The Appellant disagreed with the Respondents’ submissions about the quality of the information supplied prior to the Appeal hearing. In the Appellant’s view it was obvious from the documentation provided and the conversations between Mr Rae and Mrs Plumley that Moat Cottages would be substantially reconstructed. The disputed issue of reconstruction had been identified by the Appellant from the outset. The Respondents were under no illusions about the case put forward by the Appellant.  The Appellant considered the Respondents’ tardiness in resolving the three-fifths test exemplified their approach in dealing with the dispute. In December 2004 the Appellant made available for inspection its list of documents including the invoice details which were fully explained in Mr Rae’s witness statement of October 2005. The Respondents waited until September 2006 before conceding that aspect of the Appeal.
36.	The Appellant submitted that section 84(8) of VATA 1994 required the Tribunal to order interest, it was only the rate of interest which was discretionary. Further the ruling of Lightman J should not be construed so as to penalise the Appellant for the Respondents’ failure to take the correct professional advice when all the evidence was before them. 
37.	The Tribunal’s power to award interest under section 84(8) of VATA 1994 is mandatory, however, it is open to the Tribunal to award interest at a nil rate. The Appellant was prima facie entitled to an award of interest under section 84(8) because the Tribunal found on appeal that the repayment claim due to it in respect of the construction of Moat Cottages had not been paid. The Appellant contended that the award of interest should be a substantive one commencing from a date close to the submission of the repayment claims. 
38.	Mr Justice Lightman ruled in UK Tradecorp Ltd  that it was incumbent upon a tax payer to satisfy the Commissioners of his entitlement to a VAT credit, and that the Commissioners were not under a duty to repay input tax until the claim had been agreed or upheld. Further the Commissioners were not obliged to pay interest on repayment claims from the date of the making of the claim. Mr Justice Lightman’s ruling, however, did not preclude an award of interest to a taxpayer from a date close to the repayment claim where the claim was eventually admitted, albeit some years later after the date of the claim. In this case the Respondents were relying on his ruling for their proposition that the Appellant’s conduct of not disclosing relevant information was the primary cause for the delay in making the repayment claim. Thus the Tribunal was entitled to take into account the Appellant’s conduct when exercising its discretion to award interest. Lord Justice Collins in RPPCA and Totel Ltd considered that unreasonable behaviour on the part of the taxpayer which leads to a delay in payment may be a factor in the exercise of discretion under section 84(8). Lord Justice Collins, however, stated that another relevant factor was the Revenue having the benefit of the use of the money in the meantime. 
39.	The critical issue in this case was whether the Appellant’s conduct was unreasonable which in turn contributed to the delay in making the repayment. There was no evidence or any suggestion from the Respondents that the Appellant obstructed the Respondents with their verification of the repayment claims or refused to answer the Respondents’ questions, which appeared to be the case in UK Tradecorp Ltd.  Further the Appellant did not delay the verification process by failing to provide the necessary documentary evidence as required by regulation 29 of the VAT Regulations 1995. The Respondents completed their verification process by September 2004. The subsequent delay in bringing the matter before the Tribunal appeared to rest with the Respondents, in particular the time taken to submit a statement of case.
40.	The Appellant was explicit from the outset that Moat Cottages had been reconstructed within the meaning of group 6, schedule 8 VATA 1994. The substance of the Appellant’s challenge to the Respondents’ refusal of its repayment claim did not change throughout the lengthy period prior to the tribunal hearing on 2 November 2006. The Respondents were not presented with new arguments at the hearing. The sole complaint about the Appellant’s conduct by the Respondents appeared to be that it did not articulate in sufficient detail the strength of its supporting evidence until Mr Rae gave his testimony on 2 November 2006.  The Appellant disagreed with the Respondents’ version regarding the change in the supporting evidence.
41.	I consider that Lord Justice Collin’s reference to unreasonable behaviour in RSPCA and Totel Ltd was directed at a trader who deliberately misleads the Respondents about his repayment claim or is otherwise uncooperative or obstructive with the Respondents’ enquiries. I find that the Appellant’s conduct in handling its repayment claim was that of a reasonable claimant. Throughout the dispute the Appellant maintained the same argument in support of its claim. The Appellant provided the Respondents with evidence of its claim and responded to their enquiries. The Respondents’ allegation that Mr Rae introduced new evidence at the 2 November 2006 was in my view more a change of emphasis rather than a deliberate withholding of evidence on the part of the Appellant. The Respondents’ assertion that the Tribunal would have agreed with their refusal on the basis of the information supplied to them prior to the hearing was conjecture. The Appellant had an arguable case which would turn on the facts. The Respondents’ suggestion that they should not be penalised with an award of interest overlooked the fact that they had the benefit of the use of the Appellant’s money during the currency of the dispute.
42.	I, therefore, hold that the Appellant’s conduct in handling its repayment claim, and in particular Mr Rae’s evidence at the 2 November 2006 hearing did not constitute unreasonable behaviour. Consequently they were not relevant considerations for my determination of the Appellant’s interest claim under section 84(8) of VATA 1994. I am satisfied that the Appellant was entitled to an award of interest under section 84(8) at a rate higher than the nil rate.
Starting Date
43.	The Respondents’ submissions about the starting date for an award of interest depended essentially upon the success of their initial submission that Mr Rae’s evidence at the 2 November 2006 was a relevant consideration for the exercise of my discretion under section 84(8) of VATA 1994. I have decided that it is not a relevant consideration. I am, therefore, left with the Appellant’s submission that the starting date for interest on the sum of £5,581 should be the 9 September 2004, and 16 days after the relevant return for each period in which the balance of £5,068 was claimed. The Respondents’ default position was that it should be 30 days rather than the 16 days argued for by the Appellant.  
44.	Collins LJ said on the question of start date in RSPCA and Totel Ltd:
“The Garage Molenheide case was a case on the proportionality of the Belgian legislation and not a case of general application, and does not lay down any general rule of law that interest must be paid from the date that the sums would normally have been paid. The starting date is a matter within the discretion of the tribunal, and I accept that it can take into account the policy in Notice 700/58. But it can also take account of a reasonable period for Customs to make enquiries”.
45.	Paragraph 5.1 of Notice 700/58 Treatment of VAT Repayment Returns and VAT Repayment Supplement sets out the Respondents’ code of practice for meeting repayment claims. The code states that traders can expect the Respondents to authorise payment of at least 90 per cent of correct repayment returns within ten working days of their receipt in the VAT central unit. The 16 days referred to by the Appellant was the formula adopted by the Tribunal in RSPCA, Totel Ltd and Purple International to reflect the actual number of days represented by 10 working days.
46.	 In this case the Respondents completed their verification exercise when Mrs Plumley refused the Appellant’s repayment claim on 31 August 2004.  The Respondents have not explained why they would require more than the 10 working days for subsequent claims, which would concern the same project already subjected to detailed scrutiny by Mrs Plumley. Thus the Respondents’ have not made out their case for their default position of 30 days.  
47.	I, therefore, hold that the award of interest in respect of the principal sum of £5,581 should commence on the 9 September 2004 when the Appellant was required to repay that sum to the Respondents. Further the awards of interest in respect of the remaining balance of £5,068 should start  16 days from the date when the returns for the respective amounts of input tax which made up the £5,068 would have been received by the Respondents’ VAT central unit, had they not refused the initial claim of £5,581. The parties have agreed the respective end dates of the interest awards, which are 11 December 2006 for the sum of £5,581, and 26 February 2007 for the £5,068.
The Rate of Interest
48.	The Appellant contended for an interest rate of 2.75 per cent above base, which was the rate charged by its bank for the overdraft facility taken out in November 2004. The Respondents countered that the rate of base plus 2.75 per was not justified unless the Appellant could show that its bank account was overdrawn for the entirety of the period for which it was deprived of the input tax. The Appellant’s analysis of its bank statements showed that it was overdrawn for 69 weeks out of the 118 weeks for the relevant period. The Respondents considered that the Appellant’s pattern of fluctuating between credit and overdrawn demonstrated that the overdraft facility was obtained and used for ordinary commercial business purposes rather than as a result of the refusal of its VAT repayment claim. In the circumstances the Respondents suggested that the appropriate rate was either one per cent above base rate or the current account interest rate paid by Barclays. The Respondents also reminded the Tribunal of Lord Justice Collins’ observation in RSPCA and Totel Ltd that it should have in mind the rate of interest payable under section 78 of VATA 1994 when fixing the appropriate rate of interest.  
49.	 The Appellant considered that the Respondents’ insistence about the bank account being overdrawn for the entirety of the period was inconsistent with Lord Justice Collin’s ruling in RSPCA and Totel Ltd that the over-riding principle was that interest should be awarded to the claimant not as compensation for the damage done but for being kept out of money which ought to have been paid to him. In the Appellant’s view the evidence regarding the overdrawn bank account was only relevant if the interest award represented compensation for damage done.
50.	In arriving at the appropriate rate of interest, I place weight on the facts that the Appellant was deprived of its input tax for a period in excess of two years which it could have applied as working capital for its various projects. In those circumstances I consider it unjust to apply  the rate of interest as prescribed by section 78 of VATA 1994. The appropriate starting point is simple interest at base rate plus one per cent which is the conventional practice in commercial cases under section 35A of the Supreme Court Act 1981. 
51.	The issue, therefore, is whether I should depart from base plus one per cent and award the base plus 2.75 per cent as asked for by the Appellant. Lord Justice Collins in RSPCA and Totel stated that the Tribunal could depart form base plus one per cent if it was satisfied that the rate was reasonably considered too low or because on the facts the taxpayer has had to borrow at a higher rate.
52.	 I had no evidence that the rate of base plus one per cent was reasonably considered too low. I do have evidence that the Appellant borrowed at a rate base plus  2.75 per cent when it took out an overdraft facility of £65,000 in November 2004 which was close to  September 2004 when the first input tax claim was refused and repaid to the Respondents. The 2.75 per rate has remained constant throughout the disputed period.
53.	The Respondents submitted that the 2.75 per cent rate should be disregarded because the overdraft facility was taken out in effect to meet the normal demands of the business and not as a direct response to the refusal of the repayment claim. Mr Rae acknowledged in his evidence that the refusal of the repayment claim was not the sole reason for the overdraft facility. The Appellant, however, contended that the Respondents misconstrued the over-riding principle articulated by Lord Justice Collins in RSPCA and Totel Ltd  that interest should be awarded not as compensation for the damage done but for being kept out of the money. The Appellant considered that it was sufficient to produce evidence of actual borrowing to satisfy the over-riding principle, not that the borrowing was necessitated solely by the non-payment of the input VAT. The Appellant was of the view that the Respondents’ submission was tantamount to regarding interest as compensation for the damage done. Nevertheless Mr Rae explained the prejudice to the Appellant occasioned by the non-payment of the repayment claims in the form of geared loans producing income returns of 20 per cent.
54.	In RSPCA and Totel Ltd Lord Justice Collins  stated that a decision to award a rate higher than the conventional rate would normally depend on evidence that a claimant has in fact borrowed funds at a higher rate. Lord Justice Collins offered no guidance on whether the actual borrowing had to be necessitated by the non-payment of VAT. 
55.	The Court of Appeal in Ahmed v Jaura [2002] EWCA Civ 210 considered awards of interest under section 35A Supreme Court Act 1981 on damages awarded to small business persons. The Court of Appeal approved the dictum of Forbes J in Tate & Lyle Food and Distribution Ltd v. Greater London Council [1982] 1 WLR 149:
"... I think the principle now recognised is that it is all part of the attempt to achieve restitutio in integrum. One looks, therefore, not at the profit which the defendant wrongly made out of the money he withheld -- this would indeed involve a scrutiny of the defendant's financial position -- but at the cost to the plaintiff of being deprived of the money which he should have had. I feel satisfied that in commercial cases the interest is intended to reflect the rate at which the plaintiff would have had to borrow money to supply the place of that which was withheld. I am also satisfied that one should not look at any special position in which the plaintiff may have been; one should disregard, for instance, the fact that a particular plaintiff, because of his personal situation, could only borrow money at a very high rate or, on the other hand, was able to borrow at specially favourable rates. The correct thing to do is to take the rate at which plaintiffs in general could borrow money. This does not, however, to my mind, mean that you exclude entirely all attributes of the plaintiff other than that he is the plaintiff. There is evidence here that large public companies of the size and prestige of these plaintiffs could expect to borrow at 1 per cent over the minimum lending rate, while for smaller and less prestigious concerns the rate might be as high as 3 per cent over the minimum lending rate. I would think it would always be right to look at the rate at which plaintiffs with the general attributes of the actual plaintiff in the case (though not, of course, with any special or particular attribute) could borrow money as a guide to the appropriate interest rate."
56.	 In Shearson Lehman Huttin Inc. v Maclaine Watson and Co Ltd (No2) [1990] 3 All ER 723 the court examined the conventional  interest rate of base plus one per cent:
“Although the decision of Forbes J in the Tate & Lyle case was neither referred to in the judgment nor cited in the Polish Steam Ship Co case I do not conclude that the cases which refer to the practice in the Commercial and Admiralty Courts have the effect of precluding evidence as to the rate at which persons with the general attributes of the plaintiff could have borrowed the money. In the FMC (Meat) Ltd case and the Polish Steam Ship Co case no evidence had been adduced on this question. In the BP Exploration case no evidence had been adduced in relation to the sterling part of the award; but evidence was adduced, and admitted by Robert Goff J, on the dollar element. I conclude, therefore, that the practice of the Commercial Court amounts to no more than a presumption which can be displaced if its application would be substantially unfair to either one party or the other. I do not treat Donaldson J's short dictum 'If one can draw money at less … best of luck to them' as inconsistent with this conclusion.
But if the presumption is to be displaced the burden must clearly lie on the party who seeks to displace it”.
57.	I conclude from the authorities that the principal task is to determine the rate at which the plaintiff would have had to borrow money to supply the place of that which was withheld. Evidence of actual borrowing is directed more at displacing the conventional rate of base plus one per cent rather than demonstrating that the actual borrowing was necessitated by the loss suffered by the clamant.
58.	I make the following findings of fact on the rate of interest: 
(1)	The Appellant was a family run business comprising husband and wife which had only been established since the end of 2000. The business relied on sub-contractors to carry out the building work. 
(2)	The Appellant was deprived of its input tax for a period in excess of two years which it could have applied as working capital for various projects.
(3)	The rate of interest as prescribed by section 78 of VATA 1994 was unjust having regard to the length of time for which the Appellant did not have the benefit of the input tax.
(4)	The Respondents had the benefit of the Appellant’s money during the period in dispute.
(5)	The appropriate starting point is simple interest at base rate plus one per cent which is the conventional practice in commercial cases.
(6)	In November 2004 the Appellant took out an overdraft of £65,000 at the rate of  base plus 2.75 per cent.
(7)	The date of taking out of the overdraft facility in November 2004 was close to  the 9 September 2004 when the Appellant repaid the first amount of input tax to the Respondents. 
(8)	The taking out of the overdraft facility had some connection with the Respondents’ refusal of the repayment claims but not exclusively so.
(9)	The rate of base plus 2.75 per cent remained constant throughout the disputed period.
(10)	From 29 November 2004 to 28 February 2007 the Appellant was in and out of its overdraft. However, it was overdrawn for the majority of the weeks during the period. 
59.	On balance I am satisfied that the rate at which the Appellant would have had to borrow money to replace the input tax wrongly withheld was simple interest at base plus 2.75 per cent. The Appellant supplied evidence of actual borrowing at the rate of base plus 2.75 per cent which was in line with base plus 3 per cent for small businesses in Ahmed v Jaura.  The Respondents did not suggest that base plus 2.75 per cent rate was a rate which reflected the special attributes of the Appellant.  
60.	Although the overdraft was not exclusively taken out to meet the shortfall arising from the refusal of the Appellant’s repayment claims, there was some connection between the two in terms of timing and the reasons for the overdraft. However, the principal criterion for fixing the appropriate rate under section 84(8) is to determine the rate at which the tax payer would have had to borrow money to replace that which was withheld.  
61.	I am satisfied that the evidence of base plus 2.75 per cent adduced by the Appellant was sufficient to displace the conventional commercial rate of base plus one per cent.
Decision
62.	I  decide the following that
(1)	The Appellant’s conduct in handling its repayment claim, and in particular Mr Rae’s evidence at the 2 November 2006 hearing did not constitute unreasonable behaviour. Further they were not relevant considerations for my determination of the Appellant’s interest claim under section 84(8) of VATA 1994.
(2)	The Appellant is entitled to an award of simple interest on the sums of money wrongly withheld.
(3)	The award of interest in respect of the principal sum of £5,581 should commence on the 9 September 2004 when the Appellant was required to repay that sum to the Respondents. Further the awards of interest in respect of the remaining balance of £5,068 should start 16 days from the date when the returns for the respective amounts of input tax which made up the £5,068 would have been received by the Respondents’ VAT central unit.
(4)	The rate of interest is base plus 2.75 per cent.
63.	I, therefore, allow the Appeal. I order the Respondents to pay the reasonable costs of the Appellant. Mrs Rae conducted the litigation on behalf of the Appellant. Mrs Rae was a non-practising solicitor. She was entitled to be compensated for the time spent utilising her skills as a solicitor in conducting the Appeal. Mrs Rae undertook to restrict her rate to £100 per hour.
64.	I direct that the parties agree the necessary computation of interest arising from my decision. I give leave to either party to bring the matter back before a Tribunal Chairman sitting alone for determination if the quantum of costs and or interest cannot be agreed.  

                             

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 14 August 2007

LON/2004/1868