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|Judgments - Commissioners of Customs and Excise v. Thorn Materials Supply Limited and Thorn Resources Limited
Lord Hoffmann Lord Clyde
THORN RESOURCES LIMITED
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nolan. I agree with it and for the reasons which he gives I would dismiss the appeal.
LORD LLOYD OF BERWICK
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nolan. I agree with it and for the reasons which he gives I too would dismiss the appeal.
This appeal is concerned with the value added tax consequences of sale transactions carried out between the appellants, whom I shall refer to respectively as "Materials" and "Resources", as vendors on the one hand and Thorn E.M.I. Home Electronics (UK) Limited ("Home") as purchaser on the other. These three companies were at all material times wholly-owned subsidiaries of Thorn E.M.I. Plc.
The common feature of all of the transactions is that the vendors and the purchasers were members of the same V.A.T. Group, (that is the Thorn E.M.I. Plc. group) under the provisions of section 29 Value Added Tax Act 1983, at the time when the sale contracts were made, but not when they were completed. In all cases, the purchase price was payable as to 90 per cent. on the signing of the contract and as to the remaining 10 per cent. when the contract was completed by the delivery of the goods. The appellants contend that value added tax is payable on only the 10 per cent. The respondents contend that value added tax is payable upon the whole of the value of the goods, that is to say upon the whole of the purchase price.
Since all of the transactions followed the same pattern, the case has been argued throughout by reference to the details of a single representative transaction, which was one of those carried out between Materials and Home. By a written agreement dated 29 November 1993, Materials agreed to sell to Home the goods described in the schedule to the Agreement, which were components and office supplies of one sort or another. The price was to be 105 per cent. of the V.A.T.--exclusive cost to Materials of buying the goods from a third party supplier. Delivery was to take place during the period ending 31 March 1994, on a date or dates specified by the buyer. The price, as I have said, was to be paid as to 90 per cent. on the date of the contract and as to the remaining 10 per cent. on delivery of the goods.
The advance payment of 90 per cent. was duly made on 29 November 1993. The total amount of the advance payments made by Home to Materials on that date in respect of this and similar agreements was £33,834,140. By a loan agreement of the same date Materials agreed to lend Home the sum of £33,760,330 (the slight difference between that figure and the total of the advance payments is unexplained) at an interest rate of 5.6875 per cent. The loan was expressed to be for an initial period of three years and a day, but Home was entitled to repay it at any time, or to set it off against its liabilities to Materials.
On 6 December 1993 Materials ceased to be a member of the Thorn V.A.T. Group. After that date Materials bought and paid for the goods which it had contracted to sell to Home. Some of these goods, having a total value of £3,757,247, were already owned by Home at the date of the said agreement on 29 November 1993. Consequently, on 21 January 1994, these goods were supplied by Home to Materials in order that Materials could supply them back to Home under the sale contracts. I should add, for the sake of completeness, that although the specimen agreement which I have described was one for the sale of components, office supplies and the like, approximately half of the total of the advance payments made on 29 November 1993 by Home to Materials was attributable to cars sold by Materials to Home on virtually identical terms. Home had previously contracted to buy some of these cars from the General Motors Company on its own behalf. Accordingly the existing contracts between General Motors and Home were cancelled and replaced by fresh contracts between General Motors and Materials acting through the agency of Home.
Your Lordships were told that all of the goods and the cars were purchased by Home for retention, and not for resale. If Home had resold them, then any benefit which it might have obtained from the price reduction resulting from the avoidance by Materials and Resources of 90 per cent. of the "output" value added tax payable on the sale would have been offset by the corresponding reduction in the "input" tax which Home could charge against its own output tax liability on the resale.
The appellants have not suggested for a moment that these transactions were designed for any commercial purpose, or indeed for any purpose other than the avoidance of value added tax. Clause 4.1 of the Sale Agreement states in terms that:
The respondents do not however contend that the transactions were a sham. Their claim for tax on the full value of the goods supplied is based on what they submit to be the true construction of the statutory provisions relating to the time at which a supply is made for V.A.T. purposes and so chargeable to tax. If they fail in that then, given that the acknowledged purpose of the transactions was to avoid tax, they seek to rely on the so-called "Ramsay" principle, that is to say the principle applied by your Lordship's House in the capital gains tax case of W.T. Ramsay Ltd. v. Inland Revenue Commissioners  A.C. 300.
Let me turn first to the relevant statutory provisions. Section 1 of the Act provides for value added tax to be charged in accordance with the provisions of the Act on the supply of goods and services in the United Kingdom, and on the importation of goods into the United Kingdom. By section 2(1) the tax is to be charged on any such supply where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. Section 2(2) explains that a taxable supply is a supply other than an exempt supply; and that a taxable person is one who is or is required to be registered. The requirement of registration is imposed in by Shedule 1 of the Act on a person making taxable supplies in excess of a specified quarterly or annual value, the level of which has been constantly revised upwards. By virtue of section 2(3) the tax on any supply of goods or services is a liability of the person making the supply, and becomes due at the time of supply.
Section 3(1) takes us to schedule 2 for the purpose of determining, inter alia, what is a supply of goods. The opening words of paragraph 1(1) of Schedule 2 state that:
Section 10(2) provides that if the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the tax chargeable as equal to the consideration. In summary, therefore, the effect of the provisions to which I have referred so far is that a sale of goods (including cars), involving as it does the transfer of the whole property in the goods, is a supply which attracts tax according to the value of the consideration if the supplier is or is required to be registered (as Materials and Resources were after they left the Thorn V.A.T. Group) and if the supply (as in the present case) was not exempt. The tax is a liability of the person making the supply and becomes due at the time of supply.
I now turn to the provisions dealing with the time of supply, and with the effect of the grouping provisions, around which most of the argument has revolved. Section 4 reads as follows:
Section 3(5) and (6), to which reference is made in section 29(2), enable the Treasury to make orders treating the self-supply of goods and services as a taxable supply.
The opposing arguments before your Lordships are essentially simple and straightforward. The appellants say that the advance payments in the present case fall squarely within the terms of section 5(1). Consequently, to the extent of the advance payment--that is to the extent of 90 per cent.--the supplies are to be treated as taking place at the time when the payment was received. At that time the two suppliers and Home fell to be treated as members of a group under section 29(1). It follows that the supply must be disregarded, to the extent of 90 per cent, under section 29(1)(a), and only the remaining 10 per cent. of the supply can be taxed.
The respondent Commissioners say that the opposite is the case. Since the suppliers and the purchaser fell to be treated on the date of payment as members of a Group any supply between them must be disregarded under section 29(1)(a). Section 5(1) cannot therefore produce a relevant supply that is, a supply for the purposes of the charge to tax, on that date. It follows that the only relevant supply which took place for value added tax purposes was the transfer of the property in the goods when they were delivered, by which time the group relationship no longer existed. The value of this supply is to be taken under section 10(2) as the whole of the consideration paid for it, that is to say 100 per cent. of the price.
Both parties sought assistance from the terms of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.), which our value added tax legislation is designed to implement. There are, I think, five provisions in the Directive to which reference can usefully be made. The first is Article 2, which provides that:
Next I turn to Article 4.4 which authorises, but does not require, each Member State to treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links. Mr. Prosser Q.C. for the appellants, submitted that while section 29(2) adopted the Article 4.4 approach in the cases to which the subsection applied, section 29(1) did not. If Parliament had wished to say in section 29(1) that all members of the group were to be treated as a single person it could simply have done so. Here it had adopted a different formulation. This, said Mr. Prosser, supported his argument that the appellants and Home retained their separate identities during the period in which section 29(1) applied. If the Act did not recognise their separate identities at the time when the sale agreement was made it could hardly support the respondents' claim for tax upon the supply to which the Agreement gave rise. It was true that in Customs and Excise Commissioners v. Kingfisher Plc.  S.T.C. 63 Popplewell J. had held that the purpose of section 29(1) was to enable a Group to be treated as if it were a single taxable entity, taxable through its representative member, but the circumstances there were entirely different, and the view of section 29(1) expressed by Popplewell J. was unnecessary for the decision in the case. This is a point to which I shall return.
Article 10 provides that:
This Article, read with Article 5.1, is, I think helpful as emphasising that the subject of tax liability is the supply of the goods, in the sense of the transfer of ownership in them, which normally occurs (as in the present case) at the time of delivery. The Article authorises the tax to be charged, by virtue of Article 10.2 and section 5(1), in advance of the transfer of ownership where there has been a prior payment on account, but that does not displace the necessity for a transfer of ownership to follow in fact. Otherwise there is no chargeable event, and no justification for the imposition of the tax.
What happens, then, if there has been a payment on account, from which tax has duly been charged by virtue of Article 10.2 and section 5(1), but the goods are destroyed or for some other reason their supply does not occur? My Lords, tax legislation tends to be more explicit in its provisions for the collection of tax than for its repayment, but Mr. Prosser suggested, rightly to my mind, that the position would be covered by Article 11.1C1. which provides that in the case of cancellation, refusal, or total or partial non-payment, the taxable amount is to be reduced. Our own legislation has, at any rate since 1989, contained provisions which are now set out in section 80 Value Added Tax Act 1994 for repayment to occur where a person has paid an amount to the Commissioners by way of V.A.T. which was not V.A.T. due to them, and I understood Mr. Pleming Q.C. for the respondents to agree that this section would cover such a case. The corollary for present purposes, which again I understood Mr. Pleming to accept, was that if the sequence of events in the present case had been reversed, and if the sale agreement and advance payment had taken place before Materials and Home became members of the same group, but the agreement had been completed after that date, any tax charged on the advance payment would fall to be refunded. The transfer of ownership in the goods, and thus their supply, would duly have taken place, but this would have to be disregarded under section 29, and so, for the purposes of the charge to tax, the chargeable event anticipated by the charge of tax upon the advance payment would have failed to materialise.
The last of the provisions in the Directive to which I would refer is Article 11.A.1. (a) upon which Mr. Pleming placed some reliance. It defines that the taxable amount as "everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser . . ." Thus, he submitted, there was no difficulty in treating the whole of the purchase price as the consideration for the supply of the goods even though 90 per cent. of it had been paid in advance. The advance payment would, of course, be left out of the final reckoning if it had already been brought into charge by virtue of section 5(1) but that possibility was ruled out by section 29(1).
Developing his submissions more broadly, Mr. Prosser correctly submitted that a supply may be relevant and of practical importance for the purposes of the Act even if it is not a taxable supply, or not carried out by a taxable person. Thus the taxpayer is obliged to make a return both of his taxable supplies and of his exempt supplies, because he can only claim credit for the input tax which he has paid to the extent to which it is attributable to his taxable supplies. Further, the Act must also have regard to the non-taxable supplies made by a person who is building his business up towards the level at which he will be liable under schedule 1 to be registered for value added tax purposes and will thus become a taxable person. This latter point is of added significance because the time of supply rules, including section 5(1) must be applied to these supplies in order to determine whether their aggregate value is sufficient to bring them up to the specified level in the relevant period.
That leaves open the question of what is meant by the requirement in section 29(1) that a supply by one member of a group to another must be disregarded. I accept Mr. Prosser's submission that it does not mean that the separate existence of the appellants and Home is to be denied or that the sale agreement and the prepayment are to be treated as not having taken place. What it does mean is that the 90 per cent. supply to which these facts gave rise must be disregarded or, as Mummery L.J. put it, ignored, for tax purposes.
In saying this I also accept Mr. Prosser's further submissions that the time of supply rules, including section 5(1), must be applied to determine whether and if so when a supply between members of the same group took place. It is essential to apply the time of supply rules in order to determine whether the supply took place while the group relationship still existed. Unless a supply during the period of the relationship is identified as having taken place there is nothing upon which section 29(1) can bite. One can hardly disregard something which did not happen.
Does it, then, follow that the supply of the goods, to the extent of 90 per cent., is permanently excluded from the charge to V.A.T.? My Lords, I can find no warrant in the Act for any such consequence. I accept Mr. Pleming's submission that Article 4.4 and section 29(1) are not designed to confer exemption or relief from tax. They are designed to simplify and facilitate the collection of tax by treating the representative member as if it were carrying on all the businesses of the other members as well as its own, and dealing on behalf of them all with non members. It is entirely consistent with this approach that the 90 per cent. supplies effected by Materials and Resources to Home should be disregarded for the purposes of the Act, because Materials and Home were not to be treated as carrying on their own businesses at that time. Popplewell J. was in my judgment correct in holding, in the Kingfisher case  S.T.C. 63, that the purpose of section 29(1) was to enable a group to be treated as if it were a single taxable entity, even though it is not expressed in those terms. The section may have the effect of deferring the charge to tax upon the added value of goods until they are the subject of a supply outside the group, but it does not prevent that charge.
When Materials and Resources left the Thorn E.M.I. Plc. Group they emerged into the value added tax world as separate taxable persons, each carrying on its own business for V.A.T purposes. The delivery of the goods by them to Home undoubtedly constituted a transfer of the whole property in the goods in the course of business. It constituted a supply of the goods within the meaning of paragraph 1(1) of schedule 2, taxable under section 10(2) upon the amount of the consideration whether already paid or still payable. The appellants' objection that this approach disregards the fact that, to the extent of 90 per cent., the supply was to be treated as having taken place when the advance payment was made must fail because this disregard is precisely what section 29(1) requires. It follows that, in my judgment, the whole value of the supplies in question falls fairly and squarely within the charging provisions of the Act according to the normal principles of construction which should be applied to a taxing statute.
Upon this view of the matter there is no need to consider the questions whether the Ramsay principle, be it viewed as authorising a different approach to statutory construction or a different approach to the facts in tax avoidance cases, has any application to value added tax, or if so whether it should be applied in circumstances such as those of the present case. These questions raise novel issues of great importance and complexity, both in our national and in community law. In my judgment it would be undesirable to embark upon them until a case arises when it is necessary to do so.
There is one final point arising out of the main argument to which I should refer. In the course of presenting the appellants' case to your Lordships, Mr. Prosser sought assistance from section 35 of the Act, which provides that in certain cases the supply of goods while warehoused is to be disregarded for the purposes of the Act. He rightly contended that confusion and uncertainty would arise unless the time of supply rules, including section 5(1), were applied to the supplies in question. I would accept that submission for reasons similar to those which I have advanced in relation to section 29(1) but I do not consider that it takes the matter further. If, as a result, goods are paid for under a sale agreement while still in the warehouse, the supply thus effected will be disregarded: but limit of disregard will be reached when the goods leave the warehouse, and the normal value added tax consequences will thereafter apply to any further supply of them.
For these reasons, I would dismiss the appeal.
The tax avoidance scheme at issue in this appeal has been described in the speech of my noble and learned friend Lord Nolan. Whether it succeeds or not turns upon the meaning and effect of section 29 of the Value Added Tax Act 1983. But before examining the language of the section, I must say something about some basic concepts of value added tax.
Tax is levied upon "the supply of goods and services" (section 1) "for a consideration" (section 3(2)(a)). The principal definition of a supply of goods is "any transfer of the whole property in goods" (schedule 2, para. 1(1)) but there are other transactions which are also brought within the definition. A supply of services is residually defined; it is "anything which is not a supply of goods but is done for a consideration" (section 3(2)(b)).
Since the tax is levied upon specified transactions, it is in many contexts necessary to be able to say when the transaction took place. For example, when the tax was first introduced in 1973, it applied to any supply of goods which took place after 1 April in that year. Customs and Excise Commissioners v. Thorn Electrical Industries Ltd.  S.T.C. 617 raised the question of whether the hiring of a television set pursuant to an agreement made before that date became taxable after the date had passed. If the rate of tax is changed, the time of the transaction will determine which rate is payable. If goods previously exempt are brought into tax, the date will determine whether the transaction is taxable. A small trader, exempt from tax because of his low turnover, becomes liable to be registered at the end of a quarter if during that quarter the value of his taxable supplies exceeds a certain maximum (in 1983, £6,000). One needs therefore to identify the transactions which took place within the quarter, even though they are not themselves taxable but merely trigger a potential liability on transactions in the next quarter.