|Judgment - Commissioners of Customs and Excise v. Thorn Materials Supply Limited and Thorn Resources Limited continued|
For the purpose of determining when a supply is deemed to have taken place, sections 4 and 5 of the Act set out what are called the "time of supply rules". Section 4(1) reads:
The relevant provisions are section 4(2) and (3) and section 5(1):
I should at this point mention, merely to get the matter out of the way, that these rules are based upon Article 10 of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.). There are differences in formulation: for example, the Directive uses the term "when the goods are delivered" instead of the references in section 4(2) to removal and making available. But, for present purposes at least, nothing turns on this distinction. The Directive also distinguishes between the "chargeable event", which is "the occurrence by virtue of which the legal conditions necessary for the tax to become chargeable are fulfilled" and the time when the tax becomes chargeable, which may or may not coincide with the chargeable event. The United Kingdom legislation, on the other hand, provides in general terms that tax "becomes due at the time of supply" (section 2(3)) and provides in sections 4 and 5 for the time when the supply is treated as having taken place. Again I think that nothing turns upon these differences in formulation. In Ufficio IVA di Trapani v. Italittica SpA (Case C-144/94)  S.T.C. 1059 the European Court of Justice considered Italian legislation framed in terms similar to that of the U.K. Act: availing itself of one of the permissible derogations in Article 10.2, it said "The supply of services is regarded as effected upon payment of the consideration" rather than "Tax upon the supply of services shall become chargeable on payment of the consideration." Advocate- General Jacobs said, at p. 1066 that it came to the same thing:
It follows that for present purposes, sections 4 and 5 can be taken as faithfully reflecting the terms of Article 10 of the Directive and one can therefore concentrate upon the U.K. provisions and leave Article 10 behind.
The important words in section 5(1) to which I wish to draw attention are "to the extent covered by the . . . payment." If there is an advance payment of less than the whole price, a supply which would ordinarily be regarded as a single taxable transaction is treated as having taken place in two or more stages. The time of supply rules therefore provide for what may loosely be called a partial supply, that is to say, a supply treated as having taken place to some extent on one date and to some extent on another. I say "loosely" because both supplies are of course of the same goods. There is not a supply of part of the goods, or an undivided share in the goods, on one date and the rest on another. The tax is not concerned to divide up the goods because it is levied not upon the goods themselves but upon their value. A partial supply therefore means that the supply is regarded as having taken place up to a certain value on one date and as to the remaining value on another date. Thus if 90 per cent. of the price is paid in advance and the rest when the buyer removes the goods, section 4(2)(a), which expressed to be subject to the provisions of section 5, must be read as treating a supply as taking place on removal to the extent of 10 per cent. So much is, I think, uncontroversial.
This brings me to the construction of section 29(1), which reads as follows:
In order to apply the "disregard" in paragraph (a), it is therefore first necessary to identify a "supply of goods" which took place between persons who were, at the time of the supply, members of the same group. An application of the time of supply rules shows that in the present case, a supply to the extent of 90 per cent. is treated as having taken place between Materials and Home while they were members of the Thorn Group. That must be disregarded for the purpose of tax. The application of the same time of supply rules shows that a supply to the extent of 10 per cent. took place after Materials left the group. That is not to be disregarded and is to that extent liable to tax.
My Lords, I must confess that with all respect to the contrary views held by the Court of Appeal and some of your Lordships, I see no answer to that simple reasoning. Various answers have been put forward, but none of them seem to me to capable of logical or consistent application.
The main argument for the Commissioners was described by their counsel, Mr. Pleming Q.C., as the black box theory. He says (and I agree) that section 29(1) must be construed in the light of article 4.4 of the Sixth Directive, to which it gives effect. The article reads as follows:
Mr. Pleming then says that if one reads the opening words of section 29(1)--". . . any business carried on by a member of the group shall be treated as carried on by the representative member"--in the light of Article 4.4, the effect is that members of a group are treated as a single legal person and no regard is paid to anything which happens between them. It is only when a member leaves the group that dealings between him and other members emerge from the black box into the light and attract tax consequences. In this case, the part payment took place within the box and must be ignored. What happened afterwards was a removal of the goods having a value of 100 per cent. and the fact that Home paid only 10 per cent. does not matter: section 10(2) provides that the value of the goods is "such amount as, with the addition of the tax chargeable, is equal to the consideration." The consideration remains the sum agreed in the contract for the sale of the goods.
The black box theory seems to be wrong both as a matter of construction and by virtue of its extraordinary logical implications. First, section 29(1) does not say that everything which happens between group companies shall be disregarded. It could easily have said so. For example, section 29(2) provides:
But section 29(1) does not say that the members of the group shall be treated as one person. Instead, it contains certain specific deeming provisions and disregards. First, any business carried on by a member of the group shall be treated as carried on by the representative member. Mr. Pleming said that this in itself was enough to create his black box. If the other members were not carrying on any businesses, how could they own assets, enter into contracts or provide consideration? But this in my view takes the deeming provision to absurd lengths. The concept of carrying on a business is quite different from questions of ownership of assets or making contracts. One can be carrying on a business on behalf of someone else even though one is using one's own assets and making contracts on which one is personally liable. The purpose of the assumption is simply to enable any supplies made or deemed to be made by the representative member to be treated as made "in the course or furtherance of any business carried on by him" and therefore chargeable to tax under section 1. It is quite unnecessary to deduce from the assumption any consequences beyond those which it necessarily entails. Furthermore, treating the assumption as having the wide consequences for which the Commissioner contends would make paragraphs (a) and (b) redundant. Mr. Pleming accepted this to be the case and said that the word "and" before the subparagraphs should be read to mean "and therefore." But this is not what it says.
The second assumption is that any supply of goods or services by a member of a group to another member of a group shall be disregarded. It is therefore again necessary to identify those legal transactions between members of the group which constitute supplies for the purposes of the Act. They, and they only, are to be disregarded. Thirdly, any other supply by or to a member of the group shall be treated as a supply by or to the representative member.
None of this suggests that what goes on inside the group happens in the obscurity of a black box. On the contrary, the application of the specific deeming provisions require a close look into the box to establish what has to be treated as being done by the representative member and what has to be disregarded. Nor, in my view, is the argument assisted by the reference in Article 4.4 of the Directive to a "single taxable person." A single taxable person is not the same thing as a single person. Section 29 does produce a single taxable person, namely, the representative member. But it does so, not by the crude method of deeming all members to be a single person, which, as we shall see, would have startling side effects, but by the much more limited and specific assumptions which the subsection makes.
The difficulty faced by the black box theory is that in the case of companies which move in or out of groups during the course of a transaction, it is impossible to apply the legislation without looking into the box. In the present case, Mr. Pleming says that upon removal of the goods by Home after Materials left the group, there was a supply which is taxable upon its consideration. But how is the consideration to be established? Only by looking at the contract of sale between Home and Materials, which happened inside the box. On the black box theory, however, that was no contract at all: it was an agreement made by a single person with himself. All that happened outside was that Home received the goods and paid Materials a sum of money which, if one could look inside, one would know was 10 per cent. of the agreed price.
Take the case of a company which agrees to sell goods, receives the whole price in advance, but before the goods are delivered or the property has passed, joins the same group as the buyer. Under the time of supply rules, the whole supply is deemed to have taken place when the price was received and the seller is liable for tax. But the completion of the transaction takes place within the box. If it cannot be seen, there was no supply within the definition of a supply in schedule 2. Is the seller entitled to repayment of the tax? Mr. Pleming seemed cheerfully willing to accept that he was. But this too seems an extraordinary anomaly. On the other hand, a straightforward application of the time of supply rules leads to the conclusion that the entire supply took place before the seller joined the group and that nothing therefore happened within the group which requires to be disregarded. If the seller had received 90 per cent. of the price in advance, a supply as to only 10 per cent. would have to be disregarded. The Court of Appeal did not rely upon the black box theory but concentrated upon the "disregard" in paragraph (a). Schiemann L.J. said that it was "schizophrenic" to use the time of supply rules in order to discover what supply was required by section 29 to be disregarded and what was not. Mummery L.J. said, to similar effect, that section 5(1) could only apply if there was a "person making the supply" and therefore could not apply if the supply was required by paragraph (a) to be disregarded.
I respectfully think that this reasoning is fallacious. Paragraph (a) requires one to identify a supply which has occurred while the parties were members of the same group. There is in my view no way in which one identify such a supply except by application of the time of supply rules in sections 4 and 5. There is in the judgment of Beldam L.J. a suggestion that the time of supply rules presuppose that the supply is taxable and therefore cannot apply to a supply which must be disregarded. This in my view is logically impossible and the Commissioner did not support it. As I explained earlier, the question of whether a supply is taxable often depends upon the time at which it is treated as having taken place. Thus the question of taxability must be determined by applying the time of supply rules. The only alternative is to use some kind of meta-rules, derived from fairness, common sense and other such concepts lodged in the judicial bosom. This seems to have been the technique used by a majority of the Court of Appeal in B.J. Rice & Associates v. Customs and Excise Commissioners  S.T.C. 581. In that case the meta-rules led to the transaction being treated as having occurred at a time when it was not taxable. On the other hand, if the court had concluded that it happened at a time when it was taxable, they would presumably then have applied the time of supply rules, which may have treated it as having occurred at some other time. This cannot be right. The time of supply rules are in my view the only criteria for deciding whether the transaction is to be treated as having occurred at a time when it was taxable.
The reasoning of the Court of Appeal in this case seems to me to display a different fallacy. It uses the time of supply rules to identify a supply which took place while Materials was in the group and which therefore has to be disregarded. It derives from section 5(1) the conclusion that the supply created by the prepayment falls, to the extent of that payment, within paragraph (a) and must therefore be disregarded. It might be thought that it logically follows from this conclusion that the supply to the remaining extent must not be disregarded. But the Court of Appeal avoids this result by going back to the time of supply rules and applying them again, this time on the assumption that the supply which has to be disregarded did not happen. In my view there can be no justification for revisiting the rules in this way. The rules serve the necessary function of identifying which "supply" falls within paragraph (a) and which does not. Once they have performed this service, they have no further function. Putting the matter in another way, one cannot import the hypothesis in paragraph (a) into the rules for determining whether or not paragraph (a) applies. I will not say that this is schizophrenic, but it is circular.
The effect of the construction given to section 29 by the Court of Appeal means that in a case in which a supply is treated by virtue of section 5(1) as having occurred while paragraph (a) applies but an event falling within section 4(2) occurs after it has ceased to apply, the tax consequences of the supply are postponed rather than disregarded. The effect can be seen even more clearly if one examined the similar language used in section 35(1):
This section gives effect to Article 16 of the Sixth Directive, which allows Member States to "take special measures designed to relieve from value added tax" certain transactions in imported goods, including supplies of goods and services carried out in places under customs warehousing arrangements. (Paragraph 1.C). The purpose is therefore to relieve from tax supplies which take place while imported dutiable goods are in a bonded warehouse. Thus if wine is imported and placed in a bonded warehouse, it attracts value added tax, by virtue of its importation, which is charged on the importation price "as if it were a duty of customs": section 2(4). But the sale of the wine by an importer to a customer (for example, at a higher price) while it is in the warehouse does not constitute a supply giving rise to a further charge to tax. It is disregarded. On the other hand, a supply by the importer which takes place after he has removed the wine from the bonded warehouse attracts tax in the normal way.
If the construction given to section 29(1)(a) by the Court of Appeal is applied to section 35, the consequences are startling. A wine merchant sells wine in a bonded warehouse to a customer, who pays the full price. This is a supply of the wine by virtue of section 5(1) which section 35 requires to be disregarded. It would logically follow that there cannot be any further supply of the same wine to the same customer. But the Court of Appeal requires one to go back to the time of supply rules and hold that when the customer removes the goods outside the warehouse, there is a supply to him under section 4(2) and that although that section expressly says that it operates subject to section 5, the latter cannot apply because the supply which it treats as having happened must be disregarded. The result is that the sale of the wine in the warehouse is not, as the directive suggests, relieved from tax. The liability to pay tax is merely postponed.
For these reasons, I think that reasoning on this point of Mr. Horsfield Q.C., the Chairman of the V.A.T. Tribunal, was right and should not have been reversed by the Court of Appeal. This makes it necessary for me to deal with the alternative argument for the Commissioners, which was that they were entitled to succeed under the principle in W.T. Ramsay Ltd. v. Inland Revenue Commissioners  A.C. 300.
The Ramsay principle is one of construction which enables a court, in deciding whether a transaction falls within the provisions of a taxing statute, to ignore steps inserted without commercial purpose except the avoidance of tax. The Commissioners put forward two ways in which that principle may apply. First, they say that the introduction of Materials into the chain of supply had no commercial purpose and that for the purposes of section 1, there was a "supply" by the outside supplier to Home. Alternatively, they say that the prepayment and loan back had no commercial purpose and should be ignored for the purposes of section 5(1), so that the supply took place when the goods were delivered to Home.
The first way of putting the matter is new. It was not raised before the V.A.T. Tribunal and Mr. Prosser Q.C. for the appellant objected to it being raised now. I think that in any case it must fail because it involves taking a "global view" of what are accepted to have been genuine contracts between the outside supplier and Materials and between Materials and Home. This is contrary to the principle laid down by the European Court of Justice in B.L.P. Group Plc. v. Customs and Excise Commissioners  1 W.L.R. 174, as applied by your Lordships in Robert Gordon's College v. Customs and Excise Commissioners  1 W.L.R. 201.
The second argument was rejected by the V.A.T. Tribunal on the ground that it involved the Commissioners in accepting parts of the transaction between Materials and Home and rejecting others. The contract of sale and the agreed consideration was accepted for the purpose of constituting a "supply of goods", but the prepayment was rejected for the purpose of fixing when that supply took place. I think that the Tribunal was right. Once the Commissioners accept the sale transaction between Materials and Home as not merely genuine but as the basis upon which they propose to levy tax, it seems to me that they cannot say that the payment of the price under the contract is something which has no commercial purpose. There was a genuine obligation which had to be discharged. The fact that Home chose to pay at a time which was advantageous for the purposes of tax is not to the point: see Advocate-General Jacobs in Ufficio IVA di Trapani v. Italittica SpA (Case C-144/94)  S.T.C. 1059, 1066. It was entitled to do so. Nor does the loan back make the payment any less a payment with a commercial purpose: see Customs and Excise Commissioners v. Faith Construction Ltd.  S.T.C. 539. I would therefore allow the appeal and restore the judgment of the V.A.T. Tribunal.
The essential facts which are agreed for the resolution of this case are in short compass. Thorn Materials Supply Limited ("Materials") and Thorn EMI Home Electronics (UK) Limited ("Home") were wholly-owned subsidiaries of Thorn EMI Plc. ("Thorn"). For purposes of VAT they were both members of the group of which Thorn was the representative member within the provisions of section 29 of the VAT Act. By a written contract dated 29 November 1993 Materials agreed to sell certain goods to Home. Ninety per cent of the price was payable immediately and was paid. On 6 December 1993 Materials ceased to be a member of the Thorn EMI Plc. VAT group. Thereafter Materials acquired the goods in question, delivered them to Home and Home paid Materials the ten per cent balance of the purchase price. It is common ground that on the event of the delivery a chargeable event occurred. The problem is whether for the purposes of Materials' output tax the supply was of ten percent or of one hundred per cent of the goods.
The question in the case requires consideration of the provisions of sections 4, 5 and 29 of the Value Added Tax Act 1983. The relevant provisions have already been quoted by my noble and learned friend Lord Nolan. Two observations fall to be made about section 5. First, it is clear from section 5(1) that a supply may be treated as taking place at more than one time, but nevertheless it remains a single supply. It is "the" supply which is to be so treated. The Act does not deem the creation of two or more supplies. Accordingly it would not seem to me correct to talk of a supply taking place at the time of the prepayment and another supply taking place at the time of the removal of the goods. Secondly, it was common ground between the parties before us that the provisions in sections 4 and 5 are of general application for establishing the time of a supply whether or not there is a charge. The expression used in section 4 "for the purposes of the charge to tax" indicate that it is for all the purposes of the tax that the time provisions are to apply. Thus the supply in question may or may not be chargeable and indeed the time provisions may determine whether or not a charge arises upon the supply which is under consideration. Nor are the sections limited to supplies by a taxable person.
Section 29 finds its origins in the provisions of the Sixth Council Directive which seek to clarify the definition of taxable persons. The section does not destroy the identity and existence of the members nor embrace them all in some unified single taxable person. The single taxable person for which provision is made in Article 4.4 of the Directive is the representative member. The section is not presented as an exempting or relieving provision. But it has the incidental effect of excluding from a charge to VAT supplies made between members within the group.
The scope of the section extends to the regulation of the accounting for and paying of tax in the situation of a group, but in my view it goes no further. It recognises that supplies can be made between members and it regulates how the tax is to be operated. One member stands in the place of each and all of them. For the purposes of the tax in such a group situation supplies between the members necessarily have to be ignored. But the actual existence of such supplies is recognised, even although those supplies may have no VAT consequences. Indeed provision may be made in accordance with section 29(2)to cover such supplies by treating them as self-supplies. Where section 29(1)(a) speaks of the supplies between members being disregarded, that must in my view mean that they are to be disregarded for the purposes of VAT while they are members of the group and the single taxable person is the representative member. If the payment had been made in contemplation of and followed by a sale and delivery of the goods to Home while both companies were still within the group the supply could be treated as occurring at the date of the payment to the extent of the payment, although that would all be academic because the supply would be disregarded for purposes of VAT.
When one turns to the present case there was clearly a supply of the whole of the goods by Materials to Home on their removal. In terms of VAT this was a supply to Thorn as the representative member. But I find no justification for creating two supplies. Section 5 does not seem to me to create one supply at the time of the prepayment and another supply at removal so as to allow any separate treatment of the former. Section 29 concerns "any supply. . . by a member of the group to another member of the group." The single supply in the present case does not seem to me to qualify as such a supply because it was to an extent made by one who was not a member of the group. Section 29, dealing as it does with the definition of the taxable person, cannot have been intended to cover within the scope of a supply the kind of deemed part-supply which has been achieved in the present case, whereby in tax terms the first part of the supply was made to Home and the second to Thorn as the representative of the group. The section covers supplies completely carried out between the members of the group. The single supply in the present case was the supply by Home to Thorn when the former was no longer a member of the group and the provisions of section 29 do not in my view enable what could be deemed under section 5(1) to be part of the supply to escape the charge to tax.
In my view the appeal should be refused.
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