Fleming (t/a Bodycraft) v Revenue and Customs

The House of Lords held that regulation 29(1A) of the Value Added Tax Regulations 1995 (as amended) is incompatible with EU law in so far as it introduced a retrospective three year time limit for claims to deduct input tax without providing adequate transitional arrangements. Because of that incompatibility the provision must be disapplied in respect of input tax claims which accrued before the introduction of the time limit until an adequate transitional period is prospectively laid down by Parliament or clearly announced by the Commissioners. The court emphasised the principles of effectiveness and protection of legitimate expectations deriving from the ECJ judgments in Marks & Spencer II and Grundig and rejected the proposition that the national courts should, as a general rule, devise ad hoc transitional periods for past-accrued claims.

Background and parties:

The appeals concerned challenges by Her Majesty's Revenue and Customs to decisions allowing repayment claims for input value added tax made by Mr Fleming (trading as Bodycraft) and by Cond Nast Publications Limited. The litigation arose after amendments in 1996-97 introduced a three year time limit for certain VAT repayment claims without any statutory transitional provision.

Nature of the claims and relief sought:

• Both claimants sought repayment of input tax that had accrued before the effective date of the three year limitation introduced by regulation 29(1A).
• The legal issue was whether the retrospective time limit could be enforced against those with accrued rights given EU law requirements, and if not, what remedial step the national court should take.

Procedural posture: The appeals came from the Court of Appeal ([2006] EWCA Civ 70). The House of Lords heard argument on the compatibility of the UK statutory and regulatory scheme with ECJ authority, principally Marks & Spencer II and Grundig II.

Issues framed:

• Whether regulation 29(1A) is incompatible with EU law because it imposes a retrospective time limit without adequate transitional arrangements.
• If incompatible, whether the national court may (a) disapply the provision and how broadly, or (b) itself fix a transitional period applicable to accrued claims.
• What remedial mechanism (legislative, administrative announcement, or judicially devised transitional period) is appropriate to cure the defect.

Court reasoning and disposition:

The House concluded that the absence of a transitional period made regulation 29(1A) incompatible with EU principles of effectiveness and protection of legitimate expectations. The court rejected the view that individual case-by-case judicial creation of transitional periods was appropriate generally. Several Lords held that the proper course is for Parliament or the Commissioners (by clear prospective announcement reaching taxpayers) to introduce an adequate transitional period; until that is done the three year limit must be disapplied in respect of claims that accrued before the amendment. Applying those principles, the appeals by the Commissioners were dismissed in respect of Mr Fleming and Cond Nast (subject to Lord Neuberger's analysis that Cond Nast's particular claim was made out of time on an objective test of diligence). The judgments canvassed whether the period of disapplication had begun and who should define it, but the common practical outcome was that regulation 29(1A) cannot be relied upon against accrued claims until an adequate transitional regime is put in place.

Appeals dismissed. The House held that regulation 29(1A) introducing a three year time limit for deduction of input tax without transitional arrangements was incompatible with EU law (principles of effectiveness and legitimate expectation) and must be disapplied in respect of claims that accrued before the introduction of the limit until Parliament or the Commissioners introduce and adequately communicate a prospective transitional period. The court declined to adopt a universal rule that national courts should themselves fix such transitional periods in these circumstances.

On appeal from the Court of Appeal ([2006] EWCA Civ 70). Earlier decisions in the domestic litigation included the Tribunal and High Court stages; related authority and interlocutory litigation included University of Sussex v Customs & Excise Commissioners [2004] STC 1 and the various Marks & Spencer proceedings reflected in ECJ references (see judgment).