Clause 106

Finance Bill – in a Public Bill Committee at 1:15 pm on 7th June 2007.

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Limitation period in old actions for mistake of law relating to direct tax

Question proposed, That the clause stand part of the Bill.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I welcome you back to the Chair, Mr. Gale.

I have considerable sympathy with what the Government are seeking to do in the clause. I have made it clear on a number of occasions—sometimes in this very room—that I am concerned about the impact of the European Court of Justice’s judgments on our tax system and the revenues collected by the Exchequer. I am not asserting that there is necessarily any causal connection between the clause and recent decisions by the court, but there seems to be little doubt that the damage done to tax revenues as a result of ECJ decisions will be reduced if the clause is adopted.

I appreciate that a great deal of money is at stake, and I am happy to support effective and reasonable measures to protect that revenue. However, I am worried that the clause may simply land the Government back in the ECJ. Furthermore, it is important for the Committee to take a few minutes to consider the concerns about the retroactive removal of a right to reclaim taxes paid because they were not lawfully due. The Minister who is dealing with the matter will be well aware that various professional bodies believe that the clause is inconsistent with European law, and in particular that it would contravene the principle of effectiveness. That principle  provides that member states are not permitted to render rights conferred by community law that are impossible or excessively difficult to exercise.

The concerns of organisations such as the Chartered Institute of Taxation, the Law Society and the Institute of Chartered Accountants in England and Wales revolve around the ECJ judgment in Marks and Spencer v. Customs and Excise in 2002. The ECJ considered whether the curtailment of limitation periods could be compatible with the principle of effectiveness. It decided that such curtailments could be compatible with Community law as long as certain conditions were complied with. The first condition is set out in paragraph 36 of the judgment, which states that the relevant change to limitation periods

“must not be intended specifically to limit the consequences of a judgment of the Court to the effect that national legislation concerning a specific tax is incompatible with Community law.”

There is certainly a perceived link—I stress that it is perceived rather than definitely established—between clause 106 and the judgment in the Metallgesellschaft-Hoechst case and the follow-up litigation in Deutsche Morgan Grenfell v. Inland Revenue, although the direct claimants in that case will not, of course, be affected by the clause. Will the Minister give the firm assurance that the provision in Community law to which I referred does not cause a problem in relation to clause 106? It would be useful if he outlined the reasons for his view on that. In particular, to what extent do the Government’s references to the large sums at stake encompass taxes paid under a mistaken law that do not relate to the Hoechst case or other ECJ jurisprudence? If, for example, the clause had a range of situations rather than just the Hoechst case in mind, it might assist in satisfying the condition to which I referred, and in answering the concerns arising from that point of European law.

The second condition set out in the Marks and Spencer case is that

“the new limitation period is reasonable”.

The Government should be able to deploy some attractive arguments on that point, given that the six-year limitation period in the clause is in widespread use in our law. The explanatory notes on the Bill refer to the clause achieving symmetry with the period during which the Revenue can collect back taxes, which could be used to strengthen the argument that the period is “reasonable”. However, it is worth noting that in cases of negligent conduct, HMRC can go back 20 years to collect back taxes, which detracts from the strength of the symmetry argument.

The Government hopefully might find themselves on reasonably firm ground on the reasonableness condition, but there might be a problem with the third requirement laid down by the ECJ in the Marks and Spencer case. Paragraph 38 of the judgment required that legislation containing revised limitation periods must include

“transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where  the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.”

The Committee will see that there are no transitional arrangements in the clause, so it would seem that that aspect of the Marks and Spencer case poses a problem. The concern becomes more marked when one takes into account the way in which the Marks and Spencer case was interpreted and applied in subsequent cases such as Grundig Italiana v. Ministry of Finance. In that case, the ECJ concluded that

“the transitional period must be sufficient to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time.”

It would be useful if the Chief Secretary to the Treasury gave the Committee a clear assurance that clause 106 does not fall foul of the principle that a transitional period is required as is set out in the Marks and Spencer judgment. Is he able to distinguish the Marks and Spencer and Grundig Italiana cases and to explain why they do not apply in relation to clause 106? Alternatively, will he provide a justification that would override the application of the principle set out in those cases? Is there any scope for arguing that exceptional circumstances, within the meaning of Stichting “Goed Wonen” v. Staatssecretaris, apply in this case to justify the withdrawal of an entitlement to repayment?

It would also be useful if the Chief Secretary allayed the concerns raised by representative organisations about the principle of legitimate expectations as a part of Community law. In paragraph 46 of the Marks and Spencer judgment, the ECJ held, in the context of a breach of the sixth VAT directive, that the principle of legitimate expectations could apply

“so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes”.

It is useful to refer to the opinion provided to the Law Society by Mr. Philip Baker, QC, who is convinced that the principle of legitimate expectation applies to clause 106. He raised a particular concern about section 320 of the Finance Act 2004, which restricts claims for the repayment of taxes on the basis of mistake of law but explicitly excludes litigation that commenced before 8 September 2003. He argues:

“Any person having commenced an action before that date might reasonably have expected that they could continue their action until final judgment without further legislative intervention. Litigants will have continued to pursue claims (commenced prior to 8th September 2003) on the basis of that expectation and will have incurred costs in so doing. In a sense, the Finance Act 2004 legislation would have enhanced the legitimate expectations of those who had commenced their actions before 8th September 2003” that they would be able to continue them.

Will the Minister assure the Committee that he does not believe that clause 106 infringes the principle of legitimate expectations, and give us his reasons for holding that view? Will he address in particular the point about the sums that have been expended on litigation by affected parties, and the point that has been made by some representative bodies about the number of affected taxpayers who might have chosen to  join the Deutsche Morgan Grenfell litigation had they been aware that the law might be changed retroactively? I hope that he will reassure the Committee regarding the points and questions that I have raised.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley 1:30 pm, 7th June 2007

It is a pleasure to serve under your chairmanship, Mr. Gale, and to entertain the Economic Secretary, who obviously did not notice me on the previous occasions that I attended, because I have not spoken all that much.

The clause is rather weird. Without going into all the details of the constitutional legislation that it may infringe, such as the European Communities Act 1972 and the Human Rights Act 1998, as well as the traditional issues of judicial review and the grounds on which challenges can be brought, there is one particular weirdness in it that I want to highlight. Suppose that someone has sued the Government, because they made a mistake, and won the case. The idea of passing legislation that reverses the judgment and provides that that person has to pay back the money and all the costs on both sides, with interest, which is basically what subsection (4) says, is quite odd. It is a strange idea that when someone has won a legal case, the whole thing can then be reversed through statute.

There is a substantial argument for drawing a line after six years and moving on, in terms of dealing with tax—there has to be some sort of symmetry—but the idea of reversing judgments through statutes, without any consideration of costs, has to be a strange one. Someone has won a case and got their costs, and now we are saying, “You’ve lost the case and you’ve got to pay the money back, with interest,” although the rate is not specified. We are saying, “Obviously, if you’ve lost the case, you have to pay the costs.” That is absurd. Of course, we are not going to divide on this, but the Government should respond regarding the idea of reversing judgments.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

It is a pleasure to serve under your chairmanship again, Mr. Gale, and I, too, congratulate the hon. Member for South-West Hertfordshire on his promotion to the Front Bench.

I am pleased that the hon. Member for Chipping Barnet supports the Government’s intention in the clause and, in a moment, I shall provide some reassurance and clarification on the point raised by the hon. Member for Birmingham, Yardley.

Our purpose here is to ensure that the limitation period in which to make a claim for the recovery of direct tax paid by reason of mistaken law is six years from the date of payment. That follows a House of Lords judgment on 25 October last year in Deutsche Morgan Grenfell Group plc v. Her Majesty’s Revenue and Customs. The Lords held that in certain circumstances the limitation period for claims does not begin until the claimant has discovered the mistake, which means that restitution is due in some cases for payments made more than three decades ago. As we have discussed, interest might be due on those payments as well.

That judgment leaves the Government facing potential repayments of very large sums in other cases,  which means that the general populous might pay a price through higher taxes or reduced public spending for a disproportionate benefit to a small number of groups and companies. In 2004, legislation was introduced to protect the Exchequer from new claims arising on or after 8 September 2003. We are acting now on claims made before that date to protect the wider public interest.

The clause ensures that a six-year limitation period applies from the date of payment. In other words, the payment groups affected will still be entitled to six year’s worth of repayments. That strikes a fair balance, familiar to other parts of the legislation, as the hon. Lady rightly said, between the general interest of the community and the protection of the rights of claimants. It goes some way, as well, to restoring the general symmetry thought to exist between the rights of claimants to recover overpaid tax and those of HMRC to recover underpaid tax.

To clarify the point raised by the hon. Member for Birmingham, Yardley, the clause will not affect the claimant in the Deutsche Morgan Grenfell case, as the hon. Lady acknowledged, or other claimants for whom that claim was a test case. The clause affects other cases and will ensure that a fair and proportionate limitation period of six years applies from the date of payment.

There have been widespread discussions about a transitional provision, which was raised by the hon. Lady. However, that misses the point of the clause. I imagine that the purpose of a transitional provision is to allow for an extra period in which claims can be made under the previous system. However, the clause affects claims made before 8 September 2003 only. In other words, all of the claims affected by the clause have been made already. I do not think, therefore, that providing for a transitional period in the clause would have any meaning.

It is my clear view that the clause is compatible with the European convention on human rights and strikes the right balance between the interests of the general taxpayer and the claimant companies. We are absolutely confident that it is proper to legislate in this way and we would defend robustly any challenge to the legislation in the courts. It is important to affirm that limitation periods are a matter for national legislation. Claimant groups affected by the measure will still be entitled to six year’s worth of repayments.

The hon. Lady raised a question about people who might have acted differently in the past. I am not sure that there is any great value in speculating about what others might have done in the past. Given the amount of revenue at stake, as she acknowledged, it is very important that the Government take action. The House of Lords judgment in the Deutsche Morgan Grenfell case was made prior to the announcement of the measure before us. We are aiming simply to put things right by ensuring that those claimants bound by that judgment under the terms of the group litigation are unaffected by the legislation, as I have explained. I hope that the clause will find favour with the Committee.

Question put and agreed to.

Clause 106 ordered to stand part of the Bill.

Clauses 107 and 108 ordered to stand part of the Bill.