FJ Chalke Ltd & Anor v Revenue & Customs

The statutory scheme in the Value Added Tax Act 1994 for repayment of overpaid VAT and statutory interest is exhaustive as a matter of domestic law. However, the Community law principle of effectiveness overrides that scheme where VAT was overpaid through breach of directly effective Community law rights. The San Giorgio principle then requires reimbursement of directly related benefits retained by the state, ordinarily including compound interest. The appropriate measure may follow the approach in Sempra Metals Limited v IRC [2007] UKHL 34. Nevertheless, claims for such interest were time-barred. The alternative damages claims failed because the relevant breaches either caused no separate loss, were not sufficiently serious, or were also statute-barred.

These test claims arose in the VIC Group Litigation concerning motor dealers’ overpayment of VAT on manufacturers’ bonuses and on the onward sale of demonstrator vehicles. The overpayments resulted from the United Kingdom’s treatment of those transactions, later shown by the ECJ decisions in Elida Gibbs and Italian Republic to be contrary to directly effective provisions of the Sixth Directive.

HMRC had repaid the principal sums, together with simple interest under sections 80 and 78 of the Value Added Tax Act 1994. The claimants sought further compound interest in restitution and damages for breach of Community law. The central issues were whether domestic statutory remedies were exclusive, whether Community law required compound interest, and whether the claims were defeated by limitation, change of position, causation or insufficient seriousness.

1. Domestic statutory scheme. Sections 80 and 78 of the Value Added Tax Act 1994 formed an exhaustive scheme for recovery of overpaid VAT and interest. Section 80(7), read with the detailed provisions concerning unjust enrichment, limitation, procedure, statutory interest and tribunal appeals, excluded a co-existing common law restitutionary claim for interest.
2. Community law. The principle of effectiveness nevertheless required the domestic scheme to yield where the overpayment resulted from breach of directly effective Community law provisions. Following the reasoning in FII and Thin Cap, the San Giorgio principle required reimbursement not only of the tax but also of directly related benefits retained by the state. Compound interest was required to prevent the United Kingdom profiting from the unlawful charge. Its calculation should generally follow the government-borrowing approach approved by the majority in Sempra Metals Limited v IRC.
3. Restitution and limitation. The liability mistakes caused the VAT overpayments and had been discovered, or could reasonably have been discovered, by 1997. Later mistakes concerning the three-year cap and compound interest did not cause the payments and could not postpone limitation under section 32(1)(c) of the Limitation Act 1980. Payments of the principal sums acknowledged only the statutory section 80 claims, not the later interest claims. The restitutionary claims were therefore time-barred.
4. Change of position. If the claims had been in time, HMRC could not rely on change of position against these San Giorgio claims. The ECJ had recognised unjust enrichment as the relevant repayment exception and required that exception to be construed restrictively.
5. Damages. The breaches concerning the VAT treatment caused the original loss, but were not sufficiently serious. The three-year cap caused no separate loss because the principal sums and statutory interest had been repaid. The claims for further interest did not create fresh causes of action. The damages claims accordingly failed on causation, seriousness and limitation.
6. Pre-1978 period. The court left open whether Article 2 of the First Directive had direct effect in relation to the earlier period. The issue was unnecessary to decide because all claims were time-barred.
7. Order. The claims of both test claimants were dismissed.

First-instance decision in the VIC Group Litigation. The claims of both test claimants were dismissed.