20308
INPUT TAX — time limits for claiming — three year cap — what constitutes a claim — reasonableness of the provisions — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

TRADEMARQUE TOOLS LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Lady Mitting (Chairman)
Mohammed Farooq

Sitting in public in Birmingham on Monday 23 July 2007

Mark Green, financial controller, for the Appellant 
 
Jonathan Cannan, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The decision against which the Appellant appeals is that of the Respondents dated 27 October 2005 to refuse a claim for repayment of input tax incurred between April 2001 and September 2002.  
2.	The facts were not in dispute and we heard no oral evidence.  
The Legislative Framework
3.	Regulation 29 VAT Regulations 1995 (SI 1995 2518) governs claims to input tax credit.  At the material time it provided as follows:
	“(1)	Subject to paragraphs (1A) and (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do son on a return made by him for the prescribed accounting period in which the VAT became chargeable.”
	(1A)	The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made.”
4.	Regulations 34 and 35 make provision for correcting errors in returns which overstate the liability to VAT.  For errors in excess of £2,000 in any return, which these were, the error is to be corrected “in such manner and within such time as the Commissioners may require”.
5.	The procedure set out in Notice 700/45/02 “How to correct VAT errors and make adjustments or claims” applies to a claim in excess of £2,000.  Termed a “voluntary disclosure” the Notice requires full details of the errors including:
•	How each error arose;
•	The VAT accounting period in which it occurred;
•	If it was an input tax or output tax error;
•	The VAT underdeclared or overdeclared in each VAT period;
•	How you calculated the VAT underdeclared or overdeclared;
•	Whether any of the errors resulted in payment of an amount that wasn’t due;
•	The total amount to be adjusted.

The Facts
6.	The belated claim to recovery of input tax arises in two ways:
(i)	There was a failure to reclaim input tax on purchase invoices in quarters 06/01 and 09/01 
Applying Regulation 29(1A) claims arising in these quarters would be barred on 31 July 2004 and 31 October 2004 respectively (three years from the due date for submission of the returns for 06/01 and 09/01.  
(ii)	Duty on import certificates had not been reclaimed between August 2001 and September 2002.
These claims were appropriate to the returns for:
			09/01 (barred under Regulation 29(1A) on 31 October 2004); 
			12/01 (barred 31 January 2005); 
			03/02 (barred 30 April 2005); 
			06/02 (barred 31 July 2005); and 
			09/02 (barred 31 October 2005).

7.	On 6 October 2005, the Respondents received from a Mr Chris Russell, the Appellant’s then accountant, a letter dated 30 September 2005.  Mr Russell wrote “regarding VAT returns from April 2001 to March 2002”.  He outlined the history of the company and went on:
“Having reviewed these returns I suspect that the company has overpaid VAT due to under-claiming Input VAT.  In the quarter to June 2001 the VAT return showed sales of £335103 but only £101388 in purchases.  I have managed to print a summary for the first quarter and that reads purchases of £154196 not £101388 as declared.  Similar discrepancies follow in later returns.
There are also a number of monthly VAT certificates between August 2001 and September 2002 which appear not to have been claimed as input tax.
I do not know if there is a time limit for reclaiming VAT overpayments but I am fairly confident that we have overpaid.  I do not know how to prove to you that a claim can be made as there is little information to use.  
I would appreciate some guidance as to where to begin to formulate a claim.”
8.	The Respondents replied on 11 October 2005 enclosing a copy of the Public Notice 700/45 and advising Mr Russell that input tax could not be claimed if more than three years had passed since the due date of the return for the period in which it became chargeable.  Mr Russell responded on 19 October 2005.  In this letter he referred to having recently discovered that input tax had been underclaimed, commencing June 2001 through to March 2002.  He referred to the death of their previous accountant and a change of computer system causing problems.  Mr Russell also stated that he had been led to believe that the company had six years in which to reclaim input tax rather than three and he hoped that the three year period was a guideline only and that the company would be permitted to claim its overpayment as not to be allowed to do so would have had an extremely detrimental effect on a small business.  By letter dated 27 October 2005, the Respondents repeated the refusal to allow the claim, citing Regulation 29(1A).  Mr Russell responded as follows by letter dated 18 January 2006:
“I have been given your office as a reference point to appeal against a ruling of not being able to claim back input VAT over three years after the date of the return.
If I can tell you the circumstances perhaps it will clarify the reason for appeal.  The company began trading in April 2001 the first VAT quarter being June 2001.  The second quarter was September 2001 in this quarter the return showed £23655.40.  I have a schedule (copy attached) showing input tax of £47911.07 a shortfall of £24255.67.  There are also fifteen duty certificates from August 2001 to September 2002 which I cannot find evidence of being claimed, they amount to £23676.63.  My predecessor passed away in service in 2002 and there are very few records to work on.  This only came to light when I looked into the history of the company’s VAT records last September.  We wrote to our local office in September and they rejected our claims as it was over three years after the date of the effective return.  Due to the circumstances we wish to claim back the input tax.  I hope I have clarified the situation.”
9.	There, in effect, matters lay with the Respondents refusing to allow the claim.  It was somewhat unfortunate that the Appellant received no response to the letter of 18 January, nor to a whole series of reminders thereafter.  The Respondents maintained the letters were not received and one can only assume they were lost somewhere in the system.  This is clearly regrettable but does not alter the principal of what is before the tribunal.
10.	Mr Green put in a most useful skeleton argument which he expanded in oral submission.  The Appellant company had started trading in April 2001, the company evolving out of a previous company called Britool.  Various problems and difficulties arose on this evolution, not least of them the inheritance of archaic systems.  In May 2001, a Mr P Westgarth joined the company as company accountant.  He was clearly an exceptionally good young man who oversaw a transformation in the way in which the company operated.  Mr Westgarth also introduced a brand new computer system into which he began to input all the accounting records and information.  Most tragically, Mr Westgarth suddenly died in May 2002 leaving all the initiatives which he had begun unfinished and most importantly, the computer system not finalised.  Two problems arose out of this, one was that there was nobody else in the company who could access the information and secondly, Mr Westgarth had been in the habit of working a lot from home.  Documents therefore which he would have taken home were lost.  Mr Green vividly described the company as being in turmoil after Mr Westgarth’s death.  It took until August 2002 to find a suitable replacement accountant and throughout the period May to August, the company was in effect operating with no financial control.  Mr Dodd, the new accountant, was faced with an immense backlog and it took him six months to regain any sort of financial control and bring everything up to date.  In March 2003, Mr Dodd left and was replaced by a Mr C Davies who lasted only one month until Mr Russell joined the company in April 2003.  By this time there was an enormous amount of work to be done just to bring systems up to date.  In the course of this, the failure to reclaim input tax came to light and Mr Russell began his correspondence with the Respondents.  Mr Russell left and Mr Green joined the company in November 2006.  On the handover, Mr Russell brought Mr Green up to date on the position over the claim for input tax.  In the course of their conversations, Mr Russell told Mr Green that he had spoken to the Respondents over the telephone about reclaiming the input tax and had been told that there was a six year time limit for making claims.  It was Mr Green’s contention that Mr Russell genuinely believed, on good grounds, that the time limit was six years and not three.  We should state at this stage that Mr Cannan disputed that anyone within the Respondents would have advised of a six year time limit and believed that Mr Russell had been under a misapprehension.  There was no corroborative evidence of the call but that does not alter the point being made by Mr Green that the company had believed, for whatever reason, that there was a six year time limit.
Case Law
11.	We were referred by the parties to the following two cases:
Fleming (trading as Bodycraft) v Commissioners of Customs and Excise 2006 [EWCA Civ 70] 
Marks & Spencer Plc v Commissioners of Customs and Excise (Case C-62/00) [2002] STC 1036
Submissions
12.	Mr Green expressly did not dispute the applicability of Regulation 29(1A) but argued that it should be applied with an allowance for extenuating circumstances.  The Appellant had undergone a whole series of unfortunate events and the time limits had been missed due to circumstances quite outside its control.  Marks & Spencer was authority for the proposition that the imposition of the three year cap should be reasonable and, in the contention of Mr Green, the test of reasonableness should be applied to the individual circumstances of the trader.  A trader is entitled to recover its input tax; it is money which belongs to the trader, not to the Respondents and for the Respondents to withhold payment is unfair and arbitrary.  The Appellant had acted in good faith throughout and is now being penalised for circumstances over which it had no control.  The effect on the company of non-repayment would be serious and could lead to the loss of jobs.  Further, even if some of the periods are capped, the claim for recovery was made on 30 September 2005 which would still have been in time in relation to part of the claim.  
13.	Mr Cannan contended, first, that no claim was made in time in relation to either the invoices or the import certificates and all claims were capped by virtue of Regulation 29(1A).  There is no authority for the proposition that the application of Regulation 29(1A) could take into account individual circumstances.  Both Fleming and Marks and Spencer support the legitimacy of the cap.  The cap complies with Community law, being compatible with the principles of effectiveness and of legal certainty.  Mr Cannan recognised that there would always be hard cases at the edge but that was not grounds for varying the imposition of the bar according to circumstance.  A three year time limit relating to output tax and input tax applied to both Customs and traders and provided a balance for both.
Conclusions 
14.	The Appellant raises two issues for determination by the tribunal.  First, what is the relevant time limit within which a claim for recovery of input tax has to be brought and is there any discretion allowed to either the Respondents or the tribunal in applying the time limit and if not, is that reasonable.  Secondly, having determined the appropriate time limit, has a claim been brought within the time limit in relation to any of the quarters.  
15.	A simple reading of the Regulation shows that there is no element of discretion.  It reads “the Commissioners shall not allow or direct …”.  We are not concerned with the transitional provisions such as were in issue in Fleming and neither case law nor the Regulation itself gives the Commissioners or the tribunal any power or discretion to vary the imposition of the cap.  There is no power or provision for either to take into account the individual circumstances of a trader and vary the limitation period accordingly.  Arden LJ in Fleming analysed the decision of the Court of Justice on the legality of the cap.  The Court of Justice had held in Marks and Spencer that the imposition of a three year time limit running from the date of contested payment was reasonable and that such a time limit would not be incompatible with the principal of effectiveness.  Equally importantly, the Court of Justice held that the imposition of a time limit was compatible with Community law as it provided certainty, which protected both the taxpayer and the administration.  If the Appellant was correct in its argument, there could be no legal certainty as different traders would have different time limits applied to them to reflect their individual circumstances.  The time limit which we have to apply is that laid down in Regulation 29(1A) and it is in our view a time limit which is reasonable and in compliance with Community law.
16.	It remains, therefore, for us to determine whether or not any element of the Appellant’s claim was brought within the time period.  The first intimation of any claim to the Commissioners was Mr Russell’s letter of 30 September 2005.  In relation to the claim on the purchase invoices, the 30 September 2005 was quite considerably beyond the expiration of the three year limit and the claim on the invoices was clearly capped and the Respondents were entitled to refuse repayment.
17.	Slightly different considerations arise in relation to the VAT certificates because whilst the vast majority of them are time barred, the final ones did fall within tax period 09/02 and the Appellant would therefore have had until 31 October 2005 in which to bring a claim for repayment of input tax.  Within that period, the Appellant wrote two letters dated 30 September and 19 October 2005 respectively.  The question therefore arises as to whether or not either or both of these letters constituted a claim.  The Commissioners were empowered by Parliament under Regulation 35, to set out the manner in which they wished claims for input tax to be made.  They set out their procedure in Notice 700/45/02 and this makes clear, as we have quoted above, the information needed by the Commissioners before a claim can be entertained.  The letters of 30 September and 19 October do not provide anything like the necessary information.  The letter of 19 October sets out how the failure to claim at the correct time arose but goes no further.  The letter of 30 September, in our view, merely informs the Commissioners that there are some certificates on which input tax has not been claimed.  It notifies them of the possibility of a claim but does not make the claim.  Most importantly, it does not quantify any claim and in the absence of any quantification, it cannot be said that a valid claim has been made.  We find therefore, that the Appellant did not submit a claim for recovery of input tax on the certificates within the mandatory time limit and its claim must therefore be barred.  
18.	In summary, therefore, the Appellant’s claim for recovery of input tax on both the purchase invoices and the VAT certificates was out of time and regrettably it is not therefore entitled to recover any element of the input tax.  The appeal therefore has to fail and is dismissed.  The Respondents made no application for costs and no order is made.

LADY MITTING
CHAIRMAN
Release Date: 14 August 2007
MAN/06/0720