Flashback on ECJ Cases – C-309/06 (Marks & Spencer) – Business should be able to recover overpaid VAT regardless of unjust enrichment

On April 10, 2008, the ECJ issued its decision in the case C-309/06 (Marks & Spencer).

Context: Taxation – Sixth VAT Directive – Exemption with refund of tax paid at the preceding stage – Erroneous taxation at the standard rate – Right to zero rate – Entitlement to refund – Direct effect – General principles of Community law – Unjust enrichment

Article in the EU VAT Directive

Article 28(2) of the Sixth VAT Directive

The version of Article 28(2)(a) which stems from Directive 92/77 provides as follows:

‘…

(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.

Member States shall adopt the measures necessary to ensure the determination of own resources relating to these operations.

Facts

From the time of the introduction of VAT in the United Kingdom, in 1973, the Commissioners, who are responsible for collecting that tax, took the view that the chocolate-covered teacakes marketed by Marks & Spencer were biscuits and not cakes and that they accordingly had to be taxed at the standard rate of VAT rather than at the zero rate. Between April 1973 and October 1994, Marks & Spencer thus paid a tax which was not due.
By letter of 30 September 1994, the Commissioners acknowledged their error, the teacakes being in fact cakes and subject as such to VAT at the zero rate. On the basis of this error, Marks & Spencer submitted on 8 February 1995 a claim for repayment in the amount of GBP 3.5 million. That claim was accepted only to the extent of 10% of the amount (GBP 350 000), since the Commissioners took the view that the high street retailer had passed on 90% of the VAT paid by it to its customers. Consequently, the Commissioners invoked against Marks & Spencer the defence of unjust enrichment under section 80(3) of the VAT Act 1994. The authorities also applied rules of limitation (new and retroactive), by virtue of which they were not obliged to repay any sum which had been paid to them more than three years prior to the submission of the claim for repayment. The amount which was finally paid to Marks & Spencer on 4 April 1997 was therefore GBP 88 440.
After unsuccessful administrative proceedings, Marks & Spencer appealed to the VAT and Duties Tribunal, which, by decision of 22 April 1998, upheld the view taken by the Commissioners. Marks & Spencer appealed to the High Court of Justice of England and Wales, Queen’s Bench Division, which in turn dismissed the claim by decision of 21 December 1998. An appeal against that decision was made to the Court of Appeal of England and Wales (Civil Division), which, as regards the claim for repayment in relation to the teacakes, again dismissed Marks & Spencer’s claim. However, the Court of Appeal, by decision of 14 December 1999, referred a question which related to a separate aspect of the proceedings (the taxation of gift vouchers sold by Marks & Spencer) to the Court of Justice for a preliminary ruling on the compatibility of the retroactive limitation of three years (see paragraph 10 of the present judgment) with the principles of effectiveness of Community law and of the protection of legitimate expectations. That question concerned, inter alia, the issue whether an individual could derive rights directly from a directive after it had been correctly transposed into national law, where the Member State had failed to take proper account of the scope of the directive.
In Case C‑62/00 Marks & Spencer [2002] ECR I‑6325, the Court ruled that the principles of effectiveness and of the protection of legitimate expectations precluded national legislation such as the United Kingdom legislation in question.
In the light of the grounds of the Court’s decision that the legislation retroactively establishing a limitation period was incompatible with the abovementioned principles of Community law, the Commissioners, with a view to treating all claims made under section 80 of the VAT Act 1994 in the same way, on their own initiative, accepted that Marks and Spencer’s claim should not be time-barred and accordingly repaid the sum claimed, up to the limit of 10%, above which they maintained that there would be unjust enrichment.
Marks & Spencer maintained its claims before the Court of Appeal of England and Wales (Civil Division) as to the sums which, it was contended, represented unjust enrichment, relying directly on Community law. By decision of 21 October 2003, the Court of Appeal dismissed the claim put forward by Marks & Spencer, which thereupon appealed to the House of Lords.

Questions

Where, under Article 28(2)(a) of the Sixth VAT Directive¹ (both before and after its amendment in 1992 by Directive 92/77), a Member State has maintained in its domestic VAT legislation an exemption with refund of input tax in respect of certain specified supplies, does a trader making such supplies have a directly enforceable Community law right to be taxed at a zero rate?

If the answer to Question 1 is in the negative, where, under Article 28(2)(a) of the Sixth VAT Directive (both before and after its amendment in 1992 by Directive 92/77), a Member State has maintained in its domestic VAT legislation an exemption with refund of input tax in respect of certain specified supplies but has mistakenly interpreted its domestic legislation with the consequence that certain supplies benefiting from exemption with refund of input tax under its domestic legislation have been subject to tax at the standard rate, do the general principles of Community law, including fiscal neutrality, apply so as to give a trader who made such supplies a right to recover the sums mistakenly charged in respect of them?

If the answer to Question 1 or Question 2 is in the affirmative, do the Community law principles of equal treatment and fiscal neutrality in principle apply with the result that they would be infringed if the trader in question is not repaid the entire amount mistakenly charged on the supplies made by him in circumstances where:

– the trader would be unjustly enriched by repayment to him of the entire amount;

– domestic legislation provides that overpaid tax cannot be repaid to the extent that repayment would lead to unjust enrichment of the trader; but

– domestic legislation makes no provision similar to that referred to in (ii) in the case of claims by ‘repayment traders’? (A ‘repayment trader’ is a taxable person who, in a given prescribed accounting period, makes no payment of VAT to the competent national authorities but receives a payment from them because, in that period, the amount of VAT that he is entitled to deduct exceeds the amount of VAT due in respect of supplies made by him.)

Is the answer to Question 3 affected by whether or not there is evidence that the difference of treatment between traders making claims for the repayment of overpaid output tax and traders making claims for additional amounts by way of input tax deduction (resulting from the over declaration of output tax) has, or has not, caused any financial loss or disadvantage to the former and, if so, how?

If, in the situation described in Question 3, the Community law principles of equal treatment and fiscal neutrality apply and would otherwise be infringed, does Community law require or permit a court to remedy the difference of treatment by upholding a trader’s claim to a repayment of overpaid tax in such a way as to enrich him unjustly or require or permit a court to grant some other remedy (and, if so, which)?

AG Opinion

(1) Where, under Article 28(2)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (both before and after its amendment by Council Directive 92/77/EEC of 19 October 1992), a Member State has maintained in its domestic legislation a tax exemption with refund of input tax in respect of certain supplies, a trader is entitled under the Directive, in conjunction with the general principles of law to be applied in connection with its implementation, in particular the principles of equal treatment, neutrality, the lawfulness of administrative action and legal certainty, to insist on the correct application of that provision.

Where the tax authorities have mistakenly interpreted the domestic legislation in such circumstances, with the result that certain supplies benefiting from exemption with refund of input tax under its domestic legislation have been subject to tax at the standard rate, Community law in principle confers on the trader a right to obtain a refund of the VAT wrongly charged. When establishing the rules governing that right, the general principles of Community law, including the principles of equal treatment and fiscal neutrality, must be observed.

(2) The Directive does not in principle preclude a provision of domestic legislation which does not allow VAT charged in breach of Community law to be refunded in so far as that would result in unjust enrichment of the taxable person.

However, it is contrary to the principle of equal treatment, which must be applied when the Directive is being implemented, for the defence of enrichment to apply only in respect of taxable persons who have paid output VAT in a given assessment period and not in respect of taxable persons whose claim to input tax deduction exceeded the VAT payable in respect of their outputs (repayment traders).

The national courts, which have to apply Community law in cases within their jurisdiction, must guarantee the full effect of that law and protect the rights conferred upon individuals by Community law by disapplying a domestic provision that is contrary to the principle of equal treatment.

Decision

1. Where, under Article 28(2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, both before and after the insertion of the amendments made to that provision by Council Directive 92/77/EEC of 19 October 1992, a Member State has maintained in its national legislation an exemption with refund of input tax in respect of certain specified supplies, a trader making such supplies does not have any directly enforceable Community‑law right to have those supplies taxed at a zero rate of value added tax.

2. Where, under Article 28(2) of Sixth Directive 77/388, both before and after the insertion of the amendments made to that provision by Directive 92/77, a Member State has maintained in its national legislation an exemption with refund of input tax in respect of certain specified supplies but has mistakenly interpreted its national legislation, with the consequence that certain supplies benefiting from exemption with refund of input tax under its national legislation have been subject to tax at the standard rate, the general principles of Community law, including that of fiscal neutrality, apply so as to give a trader who has made such supplies a right to recover the sums mistakenly charged in respect of them.

3. Although the principles of equal treatment and fiscal neutrality apply in principle to the case in the main proceedings, an infringement of those principles is not constituted merely by the fact that a refusal to make repayment was based on the unjust enrichment of the taxable person concerned. By contrast, the principle of fiscal neutrality precludes the concept of unjust enrichment from being applied only to taxable persons such as ‘payment traders’ (taxable persons for whom, in a given prescribed accounting period, the output tax collected exceeds the input tax) and not to taxable persons such as ‘repayment traders’ (taxable persons whose position is the inverse of that of payment traders), in so far as those taxable persons have marketed similar goods. It will be for the national court to determine whether that is the position in the present case. Furthermore, the general principle of equal treatment, the infringement of which may be established, in matters relating to tax, by discrimination affecting traders who are not necessarily in competition with each other but are nevertheless in a similar situation in other respects, precludes discrimination between ‘payment traders’ and ‘repayment traders’, which is not objectively justified.

4. The answer to the third question is not affected where there is evidence that a trader who has been refused repayment of value added tax which was wrongly levied has not suffered any financial loss or disadvantage.

5. It is for the national court itself to draw any conclusions with respect to the past from the infringement of the principle of equal treatment referred to in point 3 of the operative part of this judgment, in accordance with the rules relating to the temporal effects of the national legislation applicable in the main proceedings, in compliance with Community law and, in particular, with the principle of equal treatment and the principle that it must ensure that the remedies which it grants are not contrary to Community law.

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