- and -


D. Milne QC and D. Waelbroeck of the Brussels Bar (instructed by Walker Martineau) for the Appellant
P. Lasok QC, J. Peacock, P. Mantle (instructed by Commissioners of Customs & Excise) for the Respondent

DATED: 14 December 1999


Lord Justice Schiemann


Marks & Spencer Plc ("M&S"), the well known high street trader, is a taxable person for Value Added Tax ("VAT") purposes. Every quarter it makes a return to the Commissioners of Customs & Excise ("The Commissioners") telling them how much VAT it has collected from its customers. Several years after making the payments with which this appeal is concerned it discovered that it had paid to the Commissioners far more VAT than was due in respect of two entirely separate types of transaction - one relating to teacakes and the other to discount vouchers. This was because in each case both the Commissioners and M&S had taken what has now been revealed to be a wrong view of the Law.


In relation to sales of tea-cakes, it is now accepted by the Commissioners that these were in a category of products which was zero rated for the purposes of VAT. Yet M&S for years accounted to the Commissioners for VAT in respect of the teacakes. The confusion arose because M&S had themselves been charged VAT on the teacakes by their suppliers who in return had relied on advice given by the Commissioners to the effect that teacakes of this kind were not included in the zero rated category. All turned on the proper construction of the zero rated category. The Commissioners eventually realised that their construction of the zero rated category was a misconstruction.


In relation to gift vouchers issued by them, for years M&S accounted to the Commissioners for VAT on the full face value of the vouchers rather than on the cash actually received by M&S in respect of the vouchers - which was a lesser amount. But thereafter the European Court of Justice ("the ECJ") decided in Argos Distributors Ltd. V. Customs and Excise Commissioners (Case C - 288/94 [1996] ECR 1-5311) that the relevant European Directive required that VAT should only have been charged on the latter basis. Domestic legislation - the Value Added Tax Act 1983 s.10(3) - did not for a period in 1991 and 1992 ("the first period") properly transpose the relevant part of the relevant Directive - Article 11A(1) of the Sixth Directive - into English law. During this first period, the Commissioners correctly construed the statute and advised that VAT should be charged on the face value of the vouchers. In the following years ("the second period") s.10(3) of the Act was amended in such a way as properly to transpose the Directive. Although the amendment was not made with the present problem in mind, the UK legislation as amended could, after the amendment, be interpreted in a manner which conformed to the Directive as that has now been construed in Argos. In principle the UK legislation should have been construed by all concerned in accordance with the Directive. But it was not. Not because anyone disputed the principle but because they all misconstrued the Directive. The Commissioners, not having at that stage the benefit of the ECJ's opinion in Argos, continued to advise that VAT should be charged on the face value of the vouchers. M&S and others in the trade continued to account for VAT on that basis until Argos won its famous victory. I shall hereafter refer to M&S' claim in respect of the first period as the Early Vouchers Claim and their claim in respect of the second period as the Later Vouchers Claim.


In principle, a taxable person has a right under the VAT legislation to repayment when he has overpaid. The relevant legislative provisions have changed over the years and something turns on those changes. The VAT Act 1994 as enacted provided in section 80 so far as presently relevant as follows:

(1) Where a person has (whether before or after the 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.


(4) No amount may be claimed under this section after the expiry of six years from the date on which it was paid, except where subsection (5) below applies.


(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.


(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.


(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.


The Finance Act 1997 was enacted on 19 March 1997. Section 47 provides:-

(1) For subsections (4) and (5) of section 80 of the Value Added Tax Act 1994 . There shall be substituted the following subsection:-


(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.


(2) Section 47(1) shall be deemed to have come into force on 18 July 1996 as a provision applying, for the purposes of the making of any repayment on or after that date, to all claims under section 80 of the Value Added Tax Act 1994, including claims made before that date and claims relating to payments made before that date.


The Commissioners relied on subsection (3) as a defence to the tea-cakes claim and on subsection (4) as amended as a defence to the older parts of both the tea-cakes claim and the vouchers claim. I shall refer to these defences respectively as the Unjust Enrichment Defence and the Capping Defence.


On appeals being made to the VAT Tribunal (Chairman His Honour Stephen Oliver Q.C.) the Tribunal


(1) Upheld the Capping Defence.


(2) Allowed the Unjust Enrichment Defence to the extent of 90%, thus holding that M&S were entitled to be reimbursed only as to 10% of the VAT which they needlessly paid to the Commissioners;


M&S appealed in relation to each of these decisions to the High Court on a point of law. However Moses J. dismissed their appeals. M&S now appeal to this Court. The Tribunal's judgment at [1998] Eu.L.R 163 and [1997] V & DR 85 and that of Moses J. at [1999] STC 205.



The Capping Defence

It is common ground that if one looks purely at the terms of the VAT Act and at domestic law then the Commissioners were entitled to act as they did and the decision of the Court below is unimpeachable. However M&S submit that to give effect to section 80 (4) in the circumstances of the present case is to deprive M&S of rights ("enforceable Community rights" (the expression comes from s.2(1) of the European Communities Act 1972)) which are theirs by virtue of this country's membership of the European Union. In relation to the teacakes claim and the later vouchers claim the Commissioners reply that, as Moses J. has held, although in principle an individual possessed of rights under Community Law can assert them and have them vindicated in the teeth of UK legislation, M&S have no relevant enforceable Community rights to assert and that in any event any such rights have not been infringed. In relation to the early vouchers claim the Commissioners concede that M&S had enforceable Community rights but submit that these have not been infringed.


It is now established law that an individual can acquire rights under Community Legislation which he can assert against a Member State. In the case of rights set out in one of the Treaties or in Regulations this has posed no problems relevant to the present case. There are many cases which show that an individual can rely against the State on such rights. In the case of Directives, however, the position was for a while uncertain. Typically Directives indicate the agreement of the Member States on broad principles and direct Member States to ensure that these broad principles are respected in their territories. Often those broad principles leave a considerable area of possible choices any one of which can be adopted by the Member States. Usually, ensuring that national law complies with a Directive is achieved by the enactment of appropriate legislation in the Member State, but this is not necessarily the case. The relevant principle may already be enacted as part of the law of a Member State, or the administrative practice of a Member State may in practice conform with the Directive even though it is not required to do so by domestic law. However, if a Member State fails to bring its practice into line with the Directive by the deadline set in the Directive, then the other Member States or the Commission can bring it before the ECJ who can then order it to bring its law into line. Further, it is now established that the failure of a State to bring its law into line with Community legislation may give an individual a right of damages against the state. Moreover, and it is this which is relevant in the present case, before the case law as to a right in damages against the State for non-implementation of Community Directives was settled, it was established by the ECJ that, in certain circumstances, an individual can on the basis purely of a Directive assert rights against a Member State.


The leading case in this field is the decision of the full ECJ in Ursula Becker v. Finanzamt Münster-Innenstadt (Case 8/81) [1982] ECR 1-53. It was a case concerned with the VAT Directives. The Court said this in relation to Directives :-

17. According to the third paragraph of Article 189 of the Treaty, "a directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods".


18. It is clear from that provision that States to which a directive is addressed are under an obligation to achieve a result, which must be fulfilled before the expiry of the period laid down by the directive itself.


19. It follows that wherever a directive is correctly implemented, its effects extend to individuals through the medium of the implementing measures adopted by the Member State concerned (judgment of 6 May 1980 in Case 102/79 Commission v. Belgium [1980] ECR 1473).


20. However, special problems arise where a Member State has failed to implement a directive correctly and, more particularly, where the provisions of the directive have not been implemented by the end of the period prescribed for that purpose.


21. It follows from well-established case-law of the Court, and, most recently, from the judgment of 5 April 1979 in Case 148/78 Pubblico Ministero v. Ratti [1979] ECR 1629, that whilst under Article 189 regulations are directly applicable and, consequently, by their nature capable of producing direct effects, that does not mean that other categories of measures covered by that article can never produce similar effects.


22. It would be incompatible with the binding effect which article 189 ascribes to directives to exclude in principle the possibility of the obligations imposed by them being relied on by persons concerned.


23. Particularly in cases in which the Community authorities have, by means of a directive, placed Member States under a duty to adopt a certain course of action, the effectiveness of such a measure would be diminished if persons were prevented from relying upon it in proceedings before a Court and national courts were prevented from taking it into consideration as an element of Community law.


24. Consequently, a Member State which has not adopted the implementing measures required by the directive within the prescribed period may not plead, as against individuals, its own failure to perform the obligations which the directive entails.


25. Thus, wherever the provisions of a directive appear, as far as their subject matter is concerned, to be unconditional and sufficiently precise, those provisions may, in the absence of implementing measures adopted within the prescribed period, be relied upon as against any national provision which is incompatible with the directive or in so far as the provisions define rights which individuals are able to assert against the State.

Moses J. held at page 217


It is, to use the argot of the European Court of Justice, settled law that an individual may assert an enforceable Community law right on the basis of a Directive only (my italics) where:-


1. The Member State has failed to transpose or has failed properly to transpose the Directive into domestic legislation. In such circumstances, a Member State is estopped from pleading against individuals its own failure to perform its obligations (see Becker paragraph 24)


2. the provision of the Directive upon which reliance is placed must be unconditional and sufficiently precise (see Becker paragraph 25 )


Those two conditions are commonly referred to as the first and second Becker conditions.


In the present case no right stemming from the Treaties or from Regulations was relied on. Moses J. held that M&S could not show that in relation to any of its claims each of the Becker conditions had been fulfilled and that in consequence M&S were not in a position to assert a claim relying on the Directive against the Commissioners. M&S submit that the fulfilment of the Becker conditions is not an invariable prerequisite for the existence of an enforceable Community right in respect of a Directive and moreover that Moses J erred in holding that the conditions had not been fulfilled in respect of a number of its claims.


The first Becker condition : Can the Sixth Directive be relied upon as a source of rights trumping national legislation notwithstanding that the Directive has been correctly transposed into national legislation?


Moses J. correctly summarised the effect of Becker although that case is not itself authority for the proposition that it is only when both Becker conditions are fulfilled that an individual can rely upon a Directive as creating rights. Becker is strictly only authority for the narrower proposition that when the conditions are fulfilled then an individual can rely on the Directive. M&S submit that it can assert rights springing from the Sixth Directive even when the Directive has been correctly transposed. M&S fairly point out that many cases which refer to the Becker formula do so in a context where there has not been correct transposition. The Commissioners nonetheless submit that the first of the Becker conditions is, like the second, a condition precedent and refer us to paragraph 15 in the judgement of the ECJ in Kolpinghuis Nijmegen BV Case 80/86 [1987] ECR 1661.

The question whether the provisions of a directive may be relied upon as such before a national court arises only if the Member State concerned has not implemented the directive in national law within the prescribed period or has implemented the directive incorrectly.

They also refer us to Kampelmann and others v. Landshaftsverband Westfalen - Lippe and others Joined Cases C-253/96 - C-258/96 [1997] ECR I-2771, where the Fifth Chamber of the ECJ said

40. The provisions in question here are unconditional and sufficiently precise to enable individuals to rely upon them directly before the national courts either where the Member State has failed to transpose the Directive into national law within the prescribed period or when it has not done so correctly.


41. In the present case, the Directive was transposed into German law by a Law of 20 July 1995. Between the date by which it should have been transposed and 20 July 1995, individuals were entitled to rely on the relevant provisions of the Directive directly before national courts in order to enforce, as a minimum level of guarantee, the rights which the Directive attaches to one or other of the categories of information to be notified to the employee by virtue of Article 2(2)(c).


42. Since the date on which it was transposed, individuals can no longer rely on those provisions unless the national implementing measures are incorrect or inadequate in the light of the Directive.


The Commissioners submit that paragraph 42 is directly in point and demonstrates the necessity of fulfilling the first Becker condition.


M&S seek to show that there is no such necessity and make a number of submissions in support of their stance.


(1) M&S point out, correctly, that it is established law that national legislation is to be construed so as to conform with any relevant Directive and that if the correct construction of the Directive is in doubt then a reference can be made to the ECJ. They submit, correctly, that the Commissioners could not, as against M&S, rely on the Commissioners' own failure to construe national law correctly. In my judgment, while it is possible to speak in such circumstances of M&S having an enforceable Community right to have the national legislation construed in conformity with the Directive, that particular "right" is not in question in the present case and is acknowledged by the English courts as part of our law. This part of M&S' submissions does not seem to me to advance the case. M&S could at all times have chosen to challenge the Commissioners' interpretation of the UK legislation in the courts of this country but they chose not to.


(2) M&S rely on the BP Supergas v. Greek State case C-62/93 [1995] ECR 1-1883. In that case the Greek Court sought a ruling on two matters : (1) whether the special arrangements in the Greek legislation for taxing supplies of petroleum products complied with provisions of the Sixth VAT Directive relating to the taxable amount and the right of deduction and, (2) if not, whether those provisions had direct effect and could be relied on by a taxable person to claim a retrospective refund of tax from the date when the relevant Greek law came into force. The ECJ held that the Greek legislation did not comply with the sixth VAT Directive. In those circumstances the second question asked by the Greek Court fell to be answered and the court answered it as follows:


"A taxable person may claim, with retroactive effect from the date on which the national legislation contrary to the Sixth Directive came into force, a refund of VAT paid without being due, by following the procedural rules laid down by the domestic legal system of the Member State concerned provided that those rules are not less favourable than those relating to similar domestic actions nor framed in such a way as to render virtually impossible the exercise of rights conferred by Community law.


Although M & S relied heavily on this answer to the second question in relation to retroactivity, the answer does not help them to establish a totally different proposition, namely, that in the present case the national legislation was contrary to the Sixth Directive. That is conceded by the Commissioners in relation to the vouchers during the first period but not in relation to the second period. So the answer in BP Supergas to the second question posed by the Greek Court does not advance M&S' case under this head.


(3) M&S submit that they can rely on the Directive as a source of rights not merely in circumstances where the Directive has been imperfectly transposed but also in circumstances where, although the Directive has been correctly transposed into national legislation, the national administrator has failed to implement the Directive's provisions correctly because, for instance, he has misconstrued the national legislation or the Directive.


They point in this context to the word "measures" in paragraph 24 of the Becker decision and paragraph 42 of the Kampelmann decision and submit that the word is broad enough to embrace administrative as well as legislative action. That has semantic force. However it is clear from Becker paragraph 25 that what the ECJ was concerned to avoid was a situation in which rights which the Directive meant an individual to enjoy could not be asserted before the national court. Where national legislation correctly transposes the Directive then this problem does not arise : the individual can assert before the national court the right which the Directive directed the Member State to afford to the individual.


Mr Lasok Q.C., who appeared for the Commissioners, in pursuance of his duty to the court referred us to two decisions which had not so far been relied upon by M&S. However, in reply Mr Milne Q.C., who appeared for M&S, did rely upon them and so I should say something about them. The cases are Norbrook Laboratories Ltd v. Ministry of Agriculture, Fisheries and Food Case C-127/95 [1998]ECR I-1531, a decision of the ECJ, and Three Rivers District Council and others v. Bank of England [1999] Eu LR 211, a decision of this court. In the latter case there are dicta by the majority to the effect that Norbrook suggests


that there may be a category of Directives in relation to which a Member State's obligation of proper implementation is not limited to a once-for-all legislative process, but also requires a continuing administrative process" (p.286)


and that


if administrative non-implementation were of critical importance we would most probably think it right to refer that issue to the European Court under Article 177 of the Treaty. As regards Becker type liability we do not regard the point as acte clair, but as a matter of discretion this court decided not to make a reference under Article 177. (p.291)


So far as presently relevant, the issue in Norbrook was whether the national administrative authority was, on a proper construction of the relevant Directives, authorised to require certain information from an applicant for a marketing authorisation and if not whether it was liable in damages to the applicant. The relevant Directives prescribed in detail what information was to be asked for by the national authority and the Court held, in effect, that in those circumstances no more could be asked for by that authority and that the State was liable where the rule of Community law infringed was intended to confer rights on individuals. It seems to me that it is implicit in the judgment that the Court considered that there had been conferred on the applicant by the Directives in question a right not to be asked for the information in question . The Fifth Chamber of the ECJ made no reference to Kampelmann or Becker. Advocate General Léger in his opinion had stated in paragraphs 133 - 135 that


133 ... the provisions of Directives 81/851 and 81/852 are precise and sufficiently clear for it to be said that the discretion left to Member States when they transpose those directives is extremely reduced or even non-existent.


134. Therefore, where, in breach of the third paragraph of Article 189 of the Treaty, a Member State incorrectly transposes or misapplies sufficiently clear and precise provisions of the aforementioned directives, that Member State manifestly and gravely disregards the limits on the exercise of its powers.


135. Consequently, such a breach affords individuals a right to obtain reparation if the result prescribed by the directive entails conferment on them of rights whose content may be identified on the basis of the provisions of the directive .....


In substance, M&S' submission was that, just as the applicant in Norwood had a right not to be asked certain questions, so M&S had a right not to be asked for VAT on transactions which were zero rated for the purposes of VAT and a right not to be asked for VAT on the face value of the vouchers when the Directive properly construed, provided that they should only have been asked for VAT on a lesser value.


In relation to that submission the Commissioners reply that there can be no right to accurate legal advice from them and that VAT is a self-assessment procedure. The applicants had it within their power to proceed on a correct view of the law but, erring just as the Commissioners had erred, chose not to. The position was different in Norwood where the marketing authorisation of the applicant had been suspended because of its refusal to supply the information and this suspension had caused the applicant damage.


I would accept the Commissioner's stance on this. However, it is not enough to dispose of M&S' submission that Norwood shows that it is not an invariable precondition to suing in respect of a right under a Directive that the Directive should either not have been transposed into national legislation at all or should have been mistransposed.


As it seems to me however, whereas the relevant parts of the Directives in issue in Norwood were extremely detailed and left no discretion to Member States, the relevant parts of the Sixth VAT Directive leave a considerable amount to the discretion of Member States. There is no indication that the Fifth Chamber had changed its mind as to the general rule between its decision in Kampelmann and its decision in Norwood and it seems to me that Norwood is to be regarded as concerned with Directives which are so detailed as to be practically Regulations in another form.


The Commissioners submit that it is clear from the opinion of Advocate General Léger in Annalisa Carbonari v. Bologna University and others [199] ECR I-1103 (see in particular paragraphs 22-27 so far reported only in French) that he did not consider that the decision in, or his opinion in, Norwood had affected the consistent case law of the Court to the effect that once a Directive has been properly transposed into national legislation an individuals rights thereafter are founded on that legislation and not on the Directive. That submission seems to me well founded, although it is fair to say that Norwood does not appear to have been mentioned in Carbonari and the dispute between the parties concentrated on a time before the Italian Government correctly implemented the Directive.


For my part, I do not consider that either Norwood or Three Rivers should lead this court to hold that an individual can sue for a breach of his rights under the Sixth Directive once that Directive has, in all relevant respects, been accurately transposed into national law.


M&S point out that if the UK were, without leaving the European Union, to repeal its legislation giving effect to a Directive then in those circumstances an individual would be entitled to rely on rights conferred by the Directive : he would be in precisely the same position as individuals are in if a Member State does not transpose a Directive within the period prescribed by the Directive. I agree.


From this point M&S go on to submit that this shows that rights under a Directive exist in parallel with rights under national legislation correctly implementing a Directive. They submit that the wording of various decisions which seem to require a reference to national law rather than to Directives is explicable on the basis that whilst compliant national legislation is in force there is simply no point in referring to the Directive, save sometimes to help in interpretation of that legislation. If what this submission is intended to convey is that an individual can continue to assert rights in the national courts under the Directive during such time as the Directive has been properly transposed I would reject it. We were shown no authority to this effect and the concept introduces a needless complication into a field which is complicated enough to satisfy the most enthusiastic jurisconsult.


The development of the doctrine of direct effect of Directives was the result of the unwillingness of the ECJ to leave the individual without access to a national court in circumstances where the State failed properly to transpose a Directive. As the ECJ put it in its judgment in Faccini Dori v. Recreb [1994] ECR I-3325 paragraph 25, echoing its consistent case law,


It would be unacceptable if a State, when required by the Community legislature to adopt certain rules intended to govern the State's relations - or those of State entities - with individuals and to confer certain rights on individuals, were able to rely on its own failure to discharge obligations so as to deprive individuals of the benefit of those rights.


In the present case the misconstructions which led to M&S paying VAT in circumstances where they should not have paid it did not deprive M&S of any rights. M&S could have asserted their rights in the national court but failed to do so. The proper remedy for a misconstruction of this kind by administrators is an application to the national courts.


In my judgment therefore (1) each of the two Becker conditions must be fulfilled before a claim can be made on the basis of a right given by the VAT Directive and (2) the teacakes and later vouchers claims fail to fulfil the first Becker condition. It is conceded that the early vouchers claim fulfils this condition and also the second Becker condition.


The Commissioners submit that, if this be this court's conclusion, nothing further requires to be decided in relation to the Later Vouchers Claim and that so far as the Teacakes Claim is concerned all that requires to be decided is the unjust enrichment issue. However, M&S submit that, even if the court should hold that in principle enforceable Community rights can not be relied on where there has been correct transposition, this principle should not apply where the national administrator is acting in a field within the scope of Community Law and breaches the general principles of Community Law. I shall turn to those submissions in section IV of this judgment.



The second Becker condition : are the rights claimed unconditional and sufficiently precise to found a claim?


It is worth lengthening a long judgment to examine this question because it was submitted that the case law in relation to the necessity of fulfilling the first Becker condition did not warrant the conclusion that such a necessity was acte clair.


M&S submit that they had a right under the Directive in relation to teacakes not to be taxed at a higher rate than zero. The submission is based on Articles 12 and 28 of the Directive. Article 12(1) of the Sixth Directive provides:-


"the rate applicable to taxable transactions shall be that in force at the time of the chargeable event".


Article 12(3) provides:-


"the standard rate of Vat shall be fixed by each Member State as a percentage of the taxable amount and shall be the same for the supply of goods and for the supply of services. From 1 January 1997 to 31 December 1998, this percentage may not be less that 15...........


Member States may also apply either one or two reduced rates. These rates shall be fixed as a percentage of the taxable amount which may not be less than 5% and shall apply only to supplies of the categories of goods and services specified in annex H".


Article 28 (2) provides:-


"notwithstanding Article 12(3) the following provisions shall apply during the transitional period referred to in Article 28 L


(a) Exemptions with refund of the tax paid at the preceding stage and reduced rates lower than the minimum rate laid down in Article 12(3) in respect of the reduced rates, which were in force on 1 January 1991 and which are in accordance with Community law, and satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained"


The transitional period has not yet expired and the law of this country maintained at all material times and still maintains an "exemption with refund of tax paid at the preceding stage" in respect of teacakes. During the period in question that was the law, albeit that it was misapplied. M&S submit that whilst that exemption is maintained, the rate of tax applicable to the sale of teacakes was zero and that therefore it had a right under Article 12(1) not to be taxed at a rate higher than zero.


I would reject this argument for two reasons :-


(1) Where in respect of any particular transaction there is in force at the relevant time an exemption with refund of tax, there is no "rate applicable to a taxable transaction". The relevant transaction is not in the terms of the Sixth Directive, taxable.


(2) M&S cannot rely upon article 12(1) because that provision does not define the content of any right that M&S has under Community law. Article 12(1) defines no right to any particular rate of tax because the fixing of the rate is entirely within the discretion of the UK under Article 28(2)(a). In so far as it is legitimate to describe zero as being the rate applicable to the sale of teacakes that rate is not attributable to Community legislation but rather to UK legislation which is consistent with our obligations under the Treaty.


I therefore do not consider that the teacake claims satisfy the second Becker condition: the right upon which M&S rely as springing from the Directive is neither unconditional nor sufficiently precise.



Assuming that M&S do not satisfy the two Becker conditions do they nevertheless have enforceable Community rights?


This part of the argument is only of relevance to the teacakes claim and the later vouchers claim. The early vouchers claim has no need of it. By way of what Mr Milne Q.C. described as his fall-back position, M&S submit that whenever a Member State acts within the scope of Community law it must abide by the general principles of Community law. They submit that those general principles include the principles of non-retroactivity, of legal certainty, of non-discrimination, of the protection of legitimate expectations and the rights of property.


M&S rely in support of their argument under this head on Belgocodex v. Belgium Case C-381/97. The background to that case was Article 13C of the sixth VAT Directive which provided


Member States may allow taxpayers a right of option for taxation in cases of letting and leasing of immovable property .


There are circumstances where it benefits a taxpayer to be taxed; in particular he may be entitled to deduct input tax when otherwise he would not be. Belgium did allow its tax payers that right of option and Belgocodex had exercised that right. In those circumstances the exemption from tax on such transactions which is conferred by Article 13B did not bite. Thereafter Belgium withdrew the right of option with retrospective effect. Belgocodex complained saying that it had meanwhile ordered its affairs on the basis of having exercised the option and being entitled to deduct the input tax. The ECJ held that it was in principle open to a state which had made use of the Article 13C option thereafter to revert to the situation where it did not afford its taxpayers that option. The Court said in paragraph 26 of its judgment


the principle of protection of legitimate expectations and the principle of legal certainty form part of the Community legal order and must be observed by Member States when they exercise the powers conferred on them by Community Directives. However, in the specific circumstances of the present case, it is not for this court but for the national court to determine whether a breach of those principles has been committed by the retroactive repeal .


M&S rely on the passage which I have italicised. They submit that, just as Belgocodex had a right to deduct input tax which in principle was protected by the principle against retroactivity, so here they had a right not to pay tax on teacakes or on the full value of the Vouchers and this deserved equal protection. They submit that a right to deduct input tax is similar to a right not to account for output tax on teacake transactions which are not zero-rated and similar to a right not to pay output tax calculated on the face value of the vouchers rather than on the lower value. I would reject the comparison and this submission. In Belgocodex the company did have a right the right to deduct input tax - once Belgium had exercised its option under Article under the Directive and the company had exercised its option. The "right not to pay tax" by way of contrast is not a right at all. It is simply an absence of an obligation to pay tax. That absence of obligation does not arise by virtue of our membership of the Union. It pre-existed it and Community law does not interfere with it or compel interference by the United Kingdom. A right to deduct input tax is very different. That is a right and one prescribed by the Directive as one which must be granted by Member States and in respect of which all enterprises in the Union are subject to the same broad rules.


In my judgment while the general principles of Community law can be relied upon in protection of enforceable Community rights which exist independently of them, in general at least, they can not be relied upon to create an enforceable Community right , which did not exist prior to the infringement of the general principle upon which reliance is placed. So far as the teacakes and later vouchers claims are concerned, M&S, because they can not fulfil the Becker conditions and because they can not rely on any right given to them by the Treaty or regulations made thereunder, lack any basis upon which to found a complaint that there has been an infringement of the general principles of Community law.


I therefore conclude that, save as to the early vouchers claim, there is in the present case no right in play upon which the general principles of Community law could bite. So far as the teacakes claims and the later vouchers claim are concerned, I would dismiss the appeals. The early vouchers claim however needs to be examined further.



Does the enforcement of the retroactive amending legislation offend against M&S enforceable Community rights in respect of the early vouchers claim?

The undoubted effect of s.47 of the Finance Act 1997 was to deprive M&S of the opportunity of claiming a refund in respect of their early vouchers overpayments. The relevant dates are as follows:-

1991 and 1992

M&S make overpayments

27 June 1996

Opinion of A.G. Fennelly in Argos to the effect that the Commissioners' practice in relation to vouchers was compatible with Community Law

18 July 1996

Announcement in Parliament by a Government Minister of 3 year capping of repayment claims

24 October 1996

Decision of the ECJ in Argos disagreeing with the AG's opinion

31 October 1996

M&S submit claim for repayment in respect of vouchers

4 December 1996

Resolution under the Provisional Collection of Taxes Act 1968 purporting to introduce a 3 year cap with effect from 18 July 1996

11 December 1996

Commissioners reject the early vouchers claim on the basis of capping.

19 March 1997

Finance Act 1997 enacted.


It has not been suggested by M&S that the period between 31 October and 11 December 1996 was an unreasonable period for the Commissioners to take in determining the early vouchers claim. But M&S submit that the refusal by the Commissioners to repay the excess VAT admittedly paid in the first period by M&S in relation to vouchers is a breach of an enforceable Community right to have those sums repaid.


In this context the Opinion of Advocate General Jacobs in the BP Supergas case provides a useful introduction.


50. In the second part of Question 2 the national court asks whether a taxable person may claim a refund of the tax overpaid under the Greek Law retrospectively from 1 January 1987, the date when the Law came into force.


51. It may be noted that the Sixth Directive does not lay down rules concerning the time limits for claims for the refund of overpaid tax or the grounds on which such claims may be made.


52. The Court has held that "in the absence of Community rules on the subject, it is for the domestic legal system of each Member State to determine the procedural conditions governing actions at law intended to ensure the protection of the rights which individuals derive from the direct effect of Community law, provided that such conditions are not less favourable than those relating to similar actions of a domestic nature nor framed so as to render virtually impossible the exercise of rights conferred by Community law": see paragraph 16 of the judgment in Emmott, where the Court reaffirmed the principles laid down in Rewe and San Giorgio.


53. The Court has thus sought to achieve a balance between the need to ensure the effectiveness of Community law and the right of Member States, in the absence of relevant Community provisions, to lay down procedural rules governing administrative and judicial proceedings. Time-limits for appeals in tax matters must be regarded as an application of the principle of legal certainty protecting both the taxpayer and the administration; they are also consistent with the principle of sound administration.


[The same Advocate General in Fantask A/S v. Industriministeriet Case C-188/95 [1998] 1 C.M.L.R. 473 in paragraphs 68ff. of his opinion points out that the scope for error in the application of directives is considerable (and indeed cites Argos as an example of a case where huge repayment claims can arise from a comparatively minor error in implementing a Community tax directive) and continues " It might be objected that it is not unreasonable to require Member States to refund overpaid charges given that they were not entitled to collect them in the first place. However, that view disregards the need for States and public bodies to plan their income and expenditure and to ensure that their budgets are nor disrupted by huge unforeseen liabilities".]


54. The imposition by a Member State of a reasonable time-limit for appeals in respect of a tax year cannot be considered to make reliance on Community law virtually impossible or, to use the phrase employed elsewhere by the Court, excessively difficult. It appears that Greek law lays down a time-limit for appeals of three years from the end of the tax year concerned. Such a time-limit does not seem unreasonably short.




57. Consequently it appears that the plaintiff can succeed only if its application was made within the time-limit laid down by national law. That may be the case since it appears that the plaintiff submitted its application revoking its tax returns for 1987 on 31 December 1990, i.e. on the last day of the three-year period following the tax year in question.


58. The question then is whether the plaintiff can rely on the failure of Greece to implement the directive. In my view it follows from the principle that claims based on Community law must not be treated less favourably than claims based on national law that, whatever taxable persons are entitled to a refund of tax in respect of a particular tax year on grounds recognised by a national law, that possibility must extend to claims based on Community law; that is so regardless of the nature of the grounds recognised by national law. It is not, in my view, necessary to engage in the difficult and somewhat artificial exercise of seeking a comparable claim under national law. Indeed such an approach does not follow from the Court's case-law on this matter. That case-law is based on the principle that, subject to the requirement of ensuring the effectiveness of Community law, it is for the Member States, in the absence of harmonised rules, to decide upon the appropriate balance between the requirements of legal certainty and sound administration and the need to ensure the correct application of the tax in particular tax year. Where a Member State allows a tax year to be re-opened at the instance of the taxable person within a certain period on any ground, it accepts by implication that for the period for which the claim is permitted it is the need to ensure correct application of the tax which takes precedence. The Member state cannot therefore object that a claim based on Community law must be refused on grounds of legal certainty or sound administration.


59. That conclusion is particularly appropriate in the case of a Member State's failure to implement a directive, where the State itself is at fault and has led the taxable person to make the error in question. A taxpayer must be entitled to assume, when preparing his tax returns, that the national legislation has correctly implemented all relevant Community directives, and is therefore entitled to rely exclusively on the national legislation for that purpose. If subsequently he discovers that the national legislation is defective, then it must be open to him to seek revision of his assessment within the time-limit laid down by national law for revision on any other ground.


It will be recalled that the ECJ answered the second question posed by the Athens court as follows:-


"A taxable person may claim, with retroactive effect from the date on which the national legislation contrary to the Sixth Directive came into force, a refund of VAT paid without being due, by following the procedural rules laid down by the domestic legal system of the Member State concerned provided that (1) those rules are not less favourable than those relating to similar domestic actions nor(2) framed in such a way as to render virtually impossible the exercise of rights conferred by Community law. [My italics and numbering]


Mr Lasok QC did not, as I understood him, contend that so far as the early vouchers claims were concerned the only right conferred by Community law was a right to resist a demand for payment in the first place. He accepted that in principle a taxpayer who has paid VAT without this being due is entitled under Community law to a repayment but this is subject to national procedural rules as to, inter alia, limitation of actions. The freedom of Member States to set their own procedural rules is subject to the two conditions set out in the proviso which I have italicised. In the present case it is no longer contended by M&S that the principle of equivalence is infringed by our domestic rules. What remains is the principle of effectiveness. Did the imposition of the three year cap render virtually impossible the exercise of M&S' right to demand repayment of the excess amounts paid by them in respect of the vouchers?


It is settled law that the fact that national procedural law inhibits the enforcement of a right after a generous period of time is not to be regarded as rendering virtually impossible the exercise of rights conferred by Community law. Of course it renders such enforcement impossible at the time when it is sought to enforce them but there was plenty of time before then when those rights could have been enforced. Equally, it is settled law that a period of three years in itself is not so short as to breach the principle of effectiveness. All this is accepted by M&S.


They nevertheless contend that the principle of effectiveness has been breached by the UK. The substance of M&S' complaint is that the 3 year period was introduced at a time when, so far as presently relevant, the 3 years had elapsed. Under the old law they had 6 years in which to decide whether or not to litigate their right and now they find that, overnight as it were, they have lost that right. No evidence has been put before the court to suggest that because they relied on the continuance of the 6 year rule to enable them to make a claim later M&S refrained during 1991 and 1992 and thereafter from making a correct VAT return based on the correct value for the vouchers. Indeed the facts strongly suggest the contrary:- this was not an isolated transaction but a series of transactions throughout 1991-1996 involving very large sums. Had the point been perceived as having a significant prospect of success it would in all probability have been litigated. The sums involved were well worth it. Similarly no evidence has been adduced to suggest that a reason why for years M&S did not make a claim under s. 80 of the VAT Act 1994 was because they were relying on the 6 year rule to enable them to make claims later. While one suspects, without evidence, that they may well, at some stages, have been waiting for the decision in the Argos case, the claim for a refund in that case was not made until May 1993. We do not know when M&S heard about it. On the material before us I would draw the conclusion that M&S continued to account on the basis of the face value of the vouchers and failed to make a claim under s. 80 until after the Argos decision because they assumed that the Commissioners and in due course the Advocate General in Argos had correctly interpreted the law.


Apart from authority, I would have rejected M&S' contention that what has happened has rendered it virtually impossible to exercise the rights conferred by Community law. Those rights arose in 1991 and 1992. M&S were then in a position to do that which Argos did a few years later, namely, challenge the view of the Commissioners that the UK was entitled to exact VAT payments on the face value of the vouchers. M&S had, throughout the early 1990s an effective opportunity to assert their directly enforceable right but chose not to take it presumably either because they did not know that they had such a right or were not prepared to incur the potential liability in time and costs of asserting it. From that perspective M&S are in no different position from that which they would have occupied had there been no change in the law and had they failed to make a claim within 6 years of the date from which they could with reasonable diligence have discovered their mistake.


M&S however point to several cases where problems similar to the present have been considered by the ECJ. This type of problem has occurred before in the context of the ECJ giving a judgment which alerts claimants to a right to repayment of which they were unaware. Barra v. Belgium Case 309/85 [1988] ECR 371 was a case where students from other Member States had paid fees to attend a course in Belgium. It was held on 13.2.1985 in another case called Gravier that the exaction of those fees discriminated on grounds of nationality in breach of Article 7 of the Treaty. The Barra students thereafter on 7.3.1985 brought an action trying to recover those fees. They were met by a Belgian Law, published in July 1985 which decreed that in principle those who had paid the fees before 31.12.1984 should not have them reimbursed. The only exception was for those who already had started judicial proceedings at the date of the Gravier decision. The full court held


Community law precludes the application to students from other Member States who have unduly paid a supplementary enrolment of a national law which deprives them of the right to repayment if they did not bring legal proceedings before the delivery of the judgement of 13 February 1985.


The Court's reasoning appears from 19 of the judgement :


Since a legislative provision such as that at issue .. , which restricts repayment solely to plaintiffs who brought an action for repayment before the delivery of the judgement of 13 February 1985 , actually deprives individuals who do not satisfy that condition of the right to obtain repayment of the amounts unduly paid, such a provision renders the exercise of the rights conferred by article 7 of the Treaty impossible.


Therefore the National Court, which is obliged to apply Community law in its entirety and to protect the rights conferred by Community law on individuals must not apply such a provision of national law.


In my respectful opinion this approach is open to the comment that it appears not to take account of the fact that the claimants could, like the claimants in Gravier, have sought repayment before the Gravier judgment. It may be however that the ECJ was influenced by the fact that, in the words of the Advocate General Sir Gordon Slynn


The course of the proceedings was interrupted by the adoption of the 1985 Law . [page 366]

Certainly in Barra the refund claim was made and proceedings in that case were commenced before the Belgian law was adopted. There is no indication in the report that its imminent adoption had been announced before the students commenced their action.


M&S also rely in this context on the Dilexport case from which I have already quoted. They rely both on the opinion of Advocate General Colomer and the judgment of the ECJ. The facts of that case are complex but can be summarised for present purposes as follows. In 1987 the ECJ had in two judgments declared that a particular Italian tax was contrary to Article 95 of the Treaty. In March 1988 Dilexport paid to the Italian authorities amounts by way of the very tax which had been declared as being contrary to Article 95. At the time of payment the limitation period under Italian law for restitutionary claims was 5 years. By an Act of 1990 which came into force on 27 April 1991 the period was reduced to 3 years. That, when construed as the Italian courts had construed it, did not have the effect of barring the restitutionary claim made in March 1988. [See paragraph 32(a) of the Advocate General's opinion.] It only had the effect of barring claims brought more than 3 years after the coming into force of the amending law. It was submitted that even so, since the amending law had been enacted after the 1987 ECJ judgments, it infringed Community Law. This was rejected by the Court. M&S accept the rejection of that broad point but put their argument more narrowly.


They understandably rely on the following remarks by the Advocate General in his opinion :-


27. If the future application of Article 29 of Act no. 428 does not appear to me to be contrary to Community law, as I have explained above, its application to holders of the right to the refund of taxes unlawfully paid previously does raise doubts, inasmuch as it may mean that less favourable conditions are thereby imposed for exercising such rights than those which they had enjoyed until then.


28. The incompatibility with Community law would be clear as far as applications for refund are concerned which were filed before the entry into force of the new periods: the principle of legal certainty does not allow such claims to be affected by a later rule which was not in existence at the time when they were filed and which worsens the legal situation of claimants. The Italian judicial authorities themselves have understood this to be the situation and have discounted the retroactive application of the Article in question.


29. But the problem arises not only with claims already filed before 27 April 1991, but also with claims filed after this date, where they relate to taxes paid before the new Act came into effect. This is precisely the case of Dilexport: the customs duties had been (unlawfully) paid in 1988, before the publication of Act no. 428, therefore a possible claim for them was, at that time, legally admissible for the ten years following (the standard ten-year prescription period). However the actual claim was not made until 1991.




36. In my opinion, that must not imply the obligation to maintain the preceding legal regime absolutely "frozen", to the point of making it unalterable for the legislator. On the contrary, I believe that the amendment of the said legal regime would be admissible as regards a general legislative measure provided that, it did not additionally deprive those affected of the exercise of their right to make a claim, granting them for such purpose a long enough period, having regard for the principle of effectiveness of judicial protection.


M&S rely on the following paragraphs of the Court's judgment :-


42. Moreover, .. , the provision at issue sets a time-limit which is sufficient to guarantee the effectiveness of the right to reimbursement. It is clear from the written observations and oral argument presented to the Court that the Italian courts, including the Corte Suprema di Cassazione itself, have interpreted that provision as allowing proceedings to be instituted within the three years following its entry into force. In those circumstances, that provision cannot be regarded as having retroactive effect.


43. The answer to the third question must therefore be that Community law does not preclude the adoption by a Member State, following judgments of the Court declaring duties or charges to be contrary to Community law, of provisions which render the conditions for repayment applicable to those duties and charges less favourable than those which would otherwise have been applied, provided that the duties and charges in question are not specifically targeted by that amendment and the new provisions do not make it impossible or excessively difficult to exercise the right to repayment.


M&S submit that these remarks at least show that there is an argument to the effect that where legislation with immediate effect deprives those who have paid inexigible sums of the right to reclaim them then that legislation is contrary to Community Law. They submit that this argument is stronger when the legislation does this, not with effect as from the passing of the legislation, but with effect from the date when the intended introduction of future legislation was announced in Parliament.


The Commissioners point out that on the facts of Dilexport, since even under the amending law it was possible during the next three years after its coming into force to make repayment claims, neither the Advocate General nor the Court needed to consider the effect of a law which inhibited all claims in respect of payments made prior to its passing into law. I think this correct. But the fact is that they did and the passages cited make it impossible to contend that the matter is acte clair in the Commissioners favour.


It seems to me that Community law on the question whether it is permissible to amend with immediate effect a limitation period so as to deprive those possessed under domestic law of a right to reclaim payments which should not have been made of that right is not clear. It is even less clear in relation to the position in the present case because the amendment made by legislation passed in March 1997 goes back to the date of the announcement in Parliament in July 1996.


We were referred in this context to a number of decisions of the European Court of Human Rights Stran Greek Refineries and Stratis Andreadis v. Greece (1994) 19 ECHR 293, National Provincial Building Society and others v. United Kingdom [1997] STC 1466 and Pressos Compania Naviera SA v. Belgium (1995) 21 EHRR 301. M&S submit that these provide guidance which this court should, and the ECJ would, take into account when considering the claim that the general principles of Community law have been infringed. I do not propose to lengthen this judgment by reciting the contentions on either side in relation to each of them. It suffices for present purposes to say that those decisions do not have the effect of rendering M&S contentions either manifestly right or unarguable. The position remains unclear.


The same can be said in relation to submissions relying on the principle of legitimate expectation.


M&S have an alternative submission which I shall consider in the next part of this judgment to the effect that the retrospective legislation is unlawfully discriminatory. I am not for reasons which I shall shortly explain persuaded that M&S are entitled to judgment on that basis. It follows that a decision on whether it is compatible with Community Law to enforce legislation which removes with retrospective effect a right under national law to reclaim VAT, which right has existed unexercised for more than three years, is in my judgment necessary to enable this court to give judgment on the early vouchers claim. I would therefore be minded to refer this question to the ECJ.



Does the difference in treatment between payment and repayment traders in relation to the cap in itself amount to a breach of the general principles of Community law?

M&S repeat the submission which they made before Moses J. that the way in which the 3 year cap has been implemented amounts to unjustified discrimination against them contrary to the general principles of Community Law. Mr Milne accepted that this issue is only relevant in relation to circumstances where M&S can assert that they have enforceable Community rights. For reasons which I have already explained, M&S only have enforceable community rights in respect of the earlier vouchers claims which are therefore the only ones which need consideration under this head.


It is first necessary to remind oneself of the facts. M&S sold gift vouchers of various denominations. The vouchers can be exchanged for goods. The vouchers with which we are concerned were sold to corporate customers at a discount. Thus the corporate customer might buy ten £10 vouchers for, say, £80. No doubt those corporate customers gave such vouchers to their staff or other worthy recipients who in due course bought goods with them for which those members of staff would otherwise have had to pay £100. From 1991 onwards M&S had accounted to the Commissioners for VAT on the basis that the taxable amount was the face value of the vouchers rather than the amount for which they had in fact been purchased by the corporate customers. After the Argos decision M&S sought repayment of the VAT overpaid but were met, in relation to the early vouchers claim, with the defence that more than 3 years had elapsed.


Discrimination as a concept requires that two comparable sets of taxpayers are treated differently without legal justification. For the purposes of this part of their argument M&S divide taxpayers into two sets which they call payment traders and repayment traders respectively. Payment traders in any particular accounting period are those whose output tax exceeds their input tax; those whose input tax exceeds their output tax are described as repayment traders. For all of the first period and most of the rest M&S were payment traders and it appears to be common ground that most if not all of their competitors were repayment traders at that time. There is no clear evidence as to what the position of their rivals was when, after the Argos decision, M&S made their claim for repayment in respect of the early vouchers.


The difference in treatment to which M&S call attention relates to the capping and unjust enrichment defences. The unjust enrichment defence is not relied on by the Commissioners in relation to the early vouchers claims and has no application to them. I therefore need say no more as to whether the difference in application of the unjust enrichment defence involves a breach of Community law. The capping defence under the UK legislation is available to the Commissioners in respect of claims by payment traders made after 18th July 1996 whereas it is only available to the Commissioners in respect of claims by repayment traders made after 1st May 1997. That is the only discrimination on which reliance is placed.


The judgment under appeal at p.233 says this in relation to this submission:-


The right to deduct VAT paid in respect of goods supplied to the trader is a right conferred by section 25 of the 1994 Act implementing Article 17 of the Sixth Directive. If the input tax exceeds the output tax the right to payment arises pursuant to section 25 (3) of the 1994 Act implementing Article 17 (3) of the Sixth Directive. The right to deduct input tax is part of the system for identifying that part of VAT which is to be paid out to the Commissioners in the chain of transactions leading to the ultimate liability of the consumer. The deduction of input tax is, therefore, an integral part of the operation of the system which is designed to identify the portion of VAT due for collection at each stage of the chain of supply. The distinction between a payment trader and a repayment trader is no more than a distinction between a trader whose input tax exceeds its output tax in an accounting period and one whose output tax exceeds its input tax.


Where a trader overpays VAT the nature of its rights to recover that overpaid tax differs according to whether, in the period of overpayment, its input tax exceeds its output tax or vice versa. If it is a payment trader (i.e. its output tax exceeds its input tax) no provision is made within the Sixth Directive for recovery. The only statutory right to recovery is that which is contained in section 80 of the 1994 Act. However, where a "repayment trader" overstates its output tax that does not lead to any payment by that trader to the Commissioners. On the contrary, if the repayment trader overstates its output tax that will lead to a reduction in the amount of input tax which it can recover Where repayment traders have overstated VAT on inputs, their claims are for under-recovery of tax credits which should have been paid to them earlier.


In cases where input tax exceeds output tax, provisions for refunds are set out within Article 18 of the Sixth Directive which entitles Member States to determine procedures for deduction. Such procedures fall to be determined pursuant to section 25 (6). Repayment claims in respect of those who had deducted an excessive amount of output tax were not capped until a statutory instrument took effect on 1 May 1997. .


It seems to me, from this analysis of the legislation, that no comparison can properly be made between payment and repayment traders. An erroneous excessive calculation of the VAT chargeable affects the position of one whose output tax exceeds input tax in a different way. That trader must make a claim based upon section 80 of the 1994 Act. The repayment trader, on the hand, will not have received that which is due to him from the Commissioners in an earlier period and his position is regulated within the legislative regime founded upon the Sixth Directive itself. Marks and Spencer happens to have been in the position of a payment trader because the majority of its sales are not of food but rather of clothing which, apart from young children's clothing, attracts VAT. Its major competitors have, hitherto, been far more widely concerned in the sale of food which does not attract VAT. The position has already changed and many of Marks and Spencer's rivals now have to make payment returns due to the change in the nature of their business. Thus, although I accept, that both payment and repayment traders who have overpaid tax seek reimbursement and the economic effects of such reimbursement will be the same [my italics], in my judgment they are governed by different legislative procedures because their position is distinct within the VAT regime. For those reasons, which follow the reasoning of the Tribunal, I reject the assertion that the three year gap discriminates unfairly between payment and repayment traders.


M&S submit that in the words which I have italicised the judge rightly recognised realities. They submit that there is no real difference between payment and repayment which justifies differentiating between them. They give this example. If a tax payer has in any tax period an output tax of £25 million and input tax of £15 million then he must account to the Commissioners for £10 million. If the Commissioners wrongly charged output tax and the output tax should only have been £20 million then £5 million must be returned by the Commissioners. That is the position of the payment trader. By contrast the position of the repayment trader is the other way round. If input tax is £30 million and output tax is £25 million then the repayment trader can reclaim £5 million under Article 18 (4). However if the Commissioners were charging output tax at the wrong rate and at the correct rate output tax was only £20 million rather than £25 million then once more the taxpayer is owed £5 million. M&S submit that in these circumstances the taxpayer is not owed that money because he did not receive enough credit for his input tax under Article 17 because he has already claimed the whole of the £30 million input tax. M&S submit that the taxpayer is owed the other £5 million because he has overstated his output tax. They submit that there is no distinction at all in principle between the two types of situations.


The fact that there are separate legal regimes for payment traders and repayment traders is the result of the way the Sixth Directive is framed. It is not suggested that there is anything contrary to Community Law in that. However, M&S submit that, assuming for present purposes that the mere imposition of the cap does not infringe Community law, it is incompatible with Community law to impose different caps for the same period on refund of input tax which could have been claimed earlier and recovery of output tax which need not have been paid. The caps could have been the same but were not for reasons which have nothing to do with Community law.


M&S submit that to differentiate between payment and repayment traders is to infringe the principle of fiscal neutrality which underlies the VAT regime.


This principle, which is laid down in Article 2 of the First Directive and which is inherent in the common system of value added tax, requires, as the fourth and fifth recitals of the Sixth Directive State, that all economic activities should be treated in the same way.


The Commissioners submit that the principle of fiscal neutrality merely implies that similar transactions must be treated in similar ways and that in the present cases we are not dealing with similar transactions because the statutory framework in respect of traders and repayment traders is different. To this M&S riposte that this is an example of relying on the very discrimination of which complaint is made to justify the discrimination and that this reliance is impermissible. For my part, I do not regard the law as clear on whether the difference in treatment meted out to traders depending on whether they are payment or repayment traders is compatible with the principle of fiscal neutrality.


However, it is not necessary to resolve this question in the present case. There is no evidence to show that repayment traders in competition with M&S have in fact made any claims in respect of vouchers taxed on the basis of their face value. So, even assuming that the legislation permits the treatment of categories of traders differently in a manner which conflicts with Community Law, there is nothing to show that in fact any trader has, so far as discount vouchers in the early 1990s are concerned, in fact been treated differently from M&S. In consequence there is no unfair discrimination of which the appellants can complain.



The Unjust Enrichment Defence

This only concerns that part of the teacakes claim which is not defeated by the capping defence. It will be recalled that S.80(3) of the VAT Act 1994 provides that where a person has paid to the Commissioners an amount by way of VAT which was not due to them and reclaims that amount it shall be a defence that repayment of an amount would unjustly enrich the claimant. It has not been suggested that this provision is as such in conflict with Community law.


The Tribunal held that if more than 10% of the erroneously charged VAT were to be repaid to M&S then M&S would be unjustly enriched. There was an appeal to Moses J. against this holding. Such an appeal can only be made on the ground that the Tribunal erred in law. He held that it had not erred. There is now a further appeal to us on this point. The appeal can only succeed if M&S can show that the Tribunal applied the wrong legal principles or came to a finding of fact or inference from fact which was unsupported by any evidence or plainly wrong.


The Tribunal identified as the key issues as these.


Firstly, does the evidence satisfy us that M&S "passed on" the wrongly charged VAT to their customers? Second, did the fact that VAT was wrongly charged on sales of teacakes result in a loss of sales and consequently profit to M&S so far as teacakes were concerned?


They expressly held that there was no legal presumption that the erroneously charged VAT was passed on to the customers and also held that it was for the Commissioners to prove unjust enrichment. This inevitably involved an examination of what sales might have been had the true VAT position been appreciated and what total profits would have been on those sales. That is agreed to have been the correct legal approach. They put the matter thus in paragraph 11 of their decision:-


The question for us.... is whether the Commissioners have satisfied us from the evidence that at least 90% of the wrongly charged VAT was passed on to M&S' customers, such that the real burden of the VAT was not borne by M&S. We approach this by comparing M&S' financial position on the assumption that they are repaid the amount claimed with the financial position they would have been in had VAT never been imposed on the sales of tea-cakes from 1 April 1973 until September 1994. To the extent that repayment of the amount claimed puts them in a better position, they will have been unjustly enriched.


As to whether or no M&S had passed on the VAT to their customers the Tribunal concluded that they had.


60. On the evidence so far we are inclined to the view that M&S have, throughout the period from 1973 until 1994, treated VAT as one of their costs in arriving at their margin, whether on tea-cakes or other taxable goods. This has been the position even though M&S have not consciously gone through the process of counting in VAT as an addition to those selling prices. In that respect M&S can, we think, be said to have "passed on" the whole or substantially the whole of the Vat to their customers. We are therefore satisfied that the Commissioners have established a prime facie case that M&S would be unjustly enriched if repaid the amount claimed.


This approach is criticised as being conceptually flawed on the basis that if no VAT had been charged then M&S would have kept their prices steady and thus increased their margin over cost. Why should they have foregone extra profit? This submission merged with submissions made concerning the second key issue namely whether the passing on of VAT has resulted in loss to M&S.


The Tribunal accepted and the parties agreed that the resolution of these questions was not an easy one because there are so many possible variables customer demand at various different price levels and the possibility of other suppliers adjusting their price levels so as to compete with M&S' putative price levels. The Tribunal heard economic evidence led by each side and preferred that led by the Commissioners which accepted that there was a degree of loss of profits which could be compensated for by repaying 10% of the erroneously charged VAT. They said this:-


63. We now turn to the second main issue in this appeal. This is: What would have happened to prices and profits if the correct VAT treatment had been adopted in 1973?........ The more likely scenario in 1973 is that competition from other retailers would have driven the prices down; this is in line with Dr. Robinson's evidence on economic theory which suggests that M&S and the other retailers, being rational profit/making retailers, would have sought to maximise the profits by reducing prices in order to maintain or increase sales.


64. We do not, therefore, accept M&S' contention that by reducing prices it would have improved sales and profits thereby earning it, over the next 21 years, £3.5million in extra profit. Our view is that on the balance of probabilities the margin on tea-cakes on both M&S and its competitors would over a year or so have slipped back to what we see as the standard biscuit margin, which was around 33% in 1994.....


65. On this basis we conclude that M&S would not have made much more profit from sales of tea-cakes had the correct VAT treatment been in operation from April 1973 or at the times of the changes of the rates of VAT in 1974, 1979 or 1991. Allowing for the fact that it might have taken a year or two for profits to drop back to the then standard biscuit division margin in 1973, and perhaps a matter of months on the later occasions we accept that a proportion of the amount claimed by M&S can be regarded as proper compensation. That proportion represents the real burden of the wrongly charged VAT borne by them. In our opinion 10%, the amount proposed by the Commissioners is appropriate. We are satisfied that a greater amount would, on the balance of probabilities, unjustly enrich M&S.


For my part, like the judge, I regard that as a permissible approach for the Tribunal to adopt and I consider that the conclusions to which they came were ones which were open to them. I would therefore dismiss the unjust enrichment appeal.




The procedural position is a little complicated but it is desirable to conclude as much of this litigation as possible bearing in mind the reference to the ECJ which I propose.


The unjust enrichment appeal poses no problems. Its procedural background is a decision of the Tribunal dated 30th January 1997 against which there was an appeal to Moses J which he dismissed. I would dismiss the appeal against his decision.


The background to the other appeal is a decision of the Tribunal dated 22nd April 1998 in which it held that M&S had no enforceable Community rights save in respect of vouchers during the first period and that so far as vouchers were concerned those rights had not been infringed. Moses J dismissed an appeal against both those holdings. For my part I would agree with Moses J that M&S had no enforceable Community rights save in respect of vouchers during the first period. However I would refer to the ECJ a question in relation to the finding that the enforceable Community rights which exist in relation to the early vouchers have not been infringed.


We have not heard submissions as to how this situation should be approached procedurally. In particular as to whether we have the power to dispose of part of the appeal while referring to the ECJ one question, which only relates to the remaining part, and as to whether, assuming that we do have that power, it would be appropriate to exercise it. My present view is that we do have the power and should exercise it.


Nor have we heard submissions as to the precise form of any question to be referred to the ECJ. My present view is that a question on the lines of that posed at the end of section V of this judgment would be appropriate.


I would hear submissions on these two questions.




I agree.




I also agree.




Order: Appeal allowed in part. The court referred to the European Court of Justice the question whether it is compatible with Community Law to enforce legislation which removes with retrospective effect a right under national law to reclaim VAT, which right has existed unexercised for more than three years. Order does not form part of approved judgment.