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C R Smith Glaziers (Dunfermline) Limited (Appellants) v Commissioners of Customs and Excise (Respondents) (Scotland)
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OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE C R Smith Glaziers (Dunfermline) Limited (Appellants) v. Commissioners of Customs and Excise (Respondents) (Scotland) ON THURSDAY 20 FEBRUARY 2003 The Appellate Committee comprised: Lord Hoffmann Lord Slynn of Hadley Lord Woolf Lord Hope of Craighead Lord Walker HOUSE OF LORDSOPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEC R Smith Glaziers (Dunfermline) Limited (Appellants) v. Commissioners of Customs and Excise (Respondents) (Scotland) [2003] UKHL 7LORD HOFFMANN My Lords, 1. The question in this appeal is whether a supplier of insurance and related services should be denied the exemption from VAT required by article 13B(a) of the EC Sixth Directive of 17 May 1977 on turnover taxes (77/388/EEC) on the ground that it failed to comply with a formal requirement prescribed by United Kingdom law. 2. CR Smith Glaziers (Dunfermline) Ltd ("the taxpayer") supplies double glazing. It gives a 10 year guarantee supported by an insurance policy (arranged by a broker with an established insurance company) to protect the customer against the risk of its insolvency. The charge to the customer consists of the price of the double glazing and additional charges for the insurance premium and services provided in arranging and administering the policy. There is no dispute that the supply of these additional services is prima facie exempt from VAT. 3. Section 38 of the Finance Act 1997, which came into force on 19 March 1997, prescribed new conditions for the exemption of UK suppliers of insurance and related services. It substituted the following provisions in Group 2 of Schedule 9 to the Value Added Tax Act 1994:
4. It is not disputed that the insurance-related services supplied by the taxpayer fell within Note (3). They were related to the supply of taxable double glazing. It was accordingly necessary to satisfy the relevant requirements as specified in Note (4). This means that a document containing the "statements" specified in Note (5) has been prepared and that the matters required to be stated have been "disclosed to the customer" at or before the time when the transaction was entered into. No relevant requirements as to the preparation and form of the document or manner of disclosure have been specified pursuant to the power in Note (4)(c). 5. The question in this appeal is whether the Note (4) requirements were satisfied by the taxpayer during the period from the date when they came into force, 19 March 1997 until 31 December 1997. I must describe the taxpayer's standard form of contract during the relevant period. On its face, it is headed by the word "Contract" in large letters. Most of the front page consists of boxes giving various options as to the size, form, materials, finishes and so forth of the windows. By reference to these boxes the salesman can look up the prices in his book and calculate the total due. At the bottom of the front page is a box for (among other things) the "Total Contract Price (ex VAT)", the VAT and the "Total Contract Price (inc VAT)". It must be assumed that these items were ordinarily filled in. Next to the box is a notice which says:
6. The front page contains no reference to insurance or the premium or any charge for insurance-related services. The back, however, contains a good deal of small print. There is a section headed "Practical Matters - what is included and what is not/who does what". This is followed by seven clauses (divided into sub-clauses) under the heading "Standard Conditions - sale/fitting of the products". Clause 3 is headed "Price/Payment terms" and clause 3.4 says:
7. Clause 6 is headed "Guarantee". Clause 6.3 says:
8. Clause 1 contains various definitions, including a definition of "contract price", which is said to mean: "The total contract price shown overleaf, or, where the context so requires, the contract price as amended in accordance with these conditions." In fact, when one looks at the box overleaf, it contains two figures for "total contract price"; one "(ex VAT)" and one "(inc VAT)". But a reading of the standard conditions shows that "contract price" or "total contract price" is consistently used to mean the figure inclusive of VAT, that is to say, the amount which the customer actually has to pay, see, for example, clause 6.1: "the…guarantee will be enforceable provided the contract price and any other sums due in terms of the contract have been paid." Likewise in clause 6.3 itself, the reference to issuing an insurance certificate "once the total contract price has been paid in full" must mean payment of whatever the customer has to pay. 9. The question then is whether the contractual document contains the "statements" required by Note (5). There is no dispute that it states the amount of the premium, which is specified in clause 3.4 as £16. But the Commissioners say that it does not contain a statement "setting out every amount that the customer is…required to pay otherwise than by way of such premium". The reference to "10%" in clause 6.3 is in their submission inadequate. 10. No one would claim that clause 6.3 was elegantly drafted. It refers to "10%" but does not say of what. However, the only candidate for being the principal sum is the "total contract price", so it must mean 10% of that. Then, as I have already commented, there is a potential ambiguity about whether this means inclusive or exclusive of VAT. Again, for the reasons I have given, resort to the last words of the clause, together with other references in the document, indicate that the price inclusive of VAT was intended. Even once these textual problems have been resolved, the calculation is, as the Tribunal said "not as straightforward as it looks." It did not expand upon this observation but I think it meant that as the sum allocated to the charge for insurance services would be exempt from VAT, there could be some circularity in trying to calculate it as a percentage of the price including VAT. The Tribunal stated, however, that they were "satisfied that the amount could be ascertained from the written terms of the contract". This may have been generous to the taxpayer but was not questioned by the Extra Division on appeal. 11. But that, in the opinion of the Tribunal, was not enough. A statement "setting out the amount" meant a specific sum such as "£500". What clause 6.3 provided was a "formula", which was not a statement of the amount but a means by which the amount could be ascertained or calculated. 12. The Extra Division of the Court of Session (Lord Kirkwood, Lord Cameron of Lochbroom and Lord Abernethy) agreed: 2001 SC 646. The court said, at p 652, that "amount" meant a "specific monetary figure":
13. It seems to me that the question is whether Note (5) means only that the document must successfully communicate to the reader what amount or amounts he has to pay for insurance-related services or whether the information must be communicated in a particular form. A document which says in clause 1: "Amount to be paid: £500" successfully communicates to me that I have to pay £500. So does a document which says in clause 1 that I have to pay half the principal sum specified in clause 2 and says in clause 2: "Principal sum: £1,000". But the form of communication is different. In the first case it is self-contained and uses only conventional numerical symbols. In the second it is referential and uses a simple arithmetical concept, namely division. 14. Looking at the matter as an ordinary question of construction, which requires one to consider the language against the background of the whole statutory scheme, I think that the arguments are finely balanced. The arguments on the one side are clearly stated in the views of the Tribunal and the Extra Division. They are not capable of great elaboration: that is what they thought the words meant. But there are arguments on the other side as well. Note (4)(c) gives the Commissioners a specific power to prescribe the form of the document by notice. It would have been open to them to say that the amount which has to be paid should appear in a box in a particular position on the front of the document in words or figures of a certain size. These are the kind of provisions one finds in consumer protection legislation. For example, the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553) prescribes the form and content of regulated consumer credit agreements. Article 2 and Schedule 1 require that such agreements contain specified information. Paragraph 13 of the Schedule says that they shall contain information as to the amount of each repayment—
15. Such provisions plainly address the form in which the information must be expressed and one might likewise have expected these matters to be prescribed by notice under Note (4)(c). This suggests that Note (5) is concerned to identify the information which the document must disclose rather than to specify any form of language or typography. 16. In fact, in the present case there are no other formal requirements whatever. There is no objection to the information being tucked away anywhere in the small print at the back of the form. If this is allowed, it would seem capriciously fastidious for Parliament to insist that the information must be communicated in self-contained form and without requiring the reader to have any knowledge of arithmetic. Despite the warning to the customer on the front that he should read the whole form (a warning which is not mandatory), I rather doubt whether insistence on a self-contained figure would in itself contribute much to the ensuring, as the Extra Division put it, at p 652, that "the customer knows exactly what amount he is paying in relation to the provision of insurance services". 17. These considerations raise the question of what purpose Note (5) is intended to serve. If that can be identified, it may help one to choose the meaning best calculated to advance the statutory purpose. Mr Paines QC, who appeared for the Commissioners, said that it was intended to prevent what is known in VAT circles as "value shifting". VAT is ordinarily charged not upon the market value of the goods or services supplied but upon the consideration agreed by the parties. It is open to the parties to agree on whatever consideration they like and provided that truly reflects what is actually paid, it is not open to challenge by the Commissioners. But when a supply of taxable goods is combined with a supply of exempt services in a single package, particularly to a consumer, there is a temptation for both parties to agree on an inflated price for the exempt services and a correspondingly lower price for the taxable goods. This is called value shifting. It suits the supplier because he gains a competitive advantage from being able to reduce his total price. It naturally suits the consumer to pay less. The only losers are the Commissioners. 18. If, therefore, the construction put forward by the Commissioners was better calculated to prevent value shifting, that would be a powerful argument in its favour. But I have great difficulty in seeing how it does. In fact Mr Paines did not suggest that a provision requiring the contract to specify the amount charged for exempt services, even in the boldest type and most prominent position, could in itself do anything to prevent value shifting. The parties could still agree on whatever apportionment they liked. They would not be doing anything unlawful. There was no reason why they should be inhibited from value shifting by having to say what the apportionment was. 19. Mr Paines said however that, while the Notes could not prevent value shifting, they could help to discourage it. If the customer saw what appeared to be an excessive charge for insurance-related services plainly stated in the document, he might go and see whether he could get them more cheaply elsewhere. But there is more than one difficulty about this argument. The first is that the customer is not free to say that he will take the seller's double glazing but wishes to shop around for insurance. The taxpayer is not willing to contract on such terms. He is selling a single package which includes both double glazing and insurance. In practice this is inevitable because the insurance is against the taxpayer becoming insolvent and such insurance is unlikely to be obtainable without the taxpayer's co-operation. So the figure which will interest the customer is not the charge for insurance but the total contract price. 20. In response to this obvious difficulty, Mr Paines puts the argument in a weaker form, namely that an excessive charge for insurance will irritate the customer and make it more likely that he will try to find a lower overall price from another supplier. But this is also unlikely to discourage value shifting. On the contrary, if suppliers are competing on overall price, they will each want to do as much value shifting as possible, since it will enable them to charge lower overall prices inclusive of VAT. 21. It therefore seems to me that any effect which the Notes may have upon value shifting is speculative in the extreme. On the other hand, they are entirely suitable for achieving a more modest objective, which is to require the supplier to commit himself at the time of the contract to an allocation of the consideration, whatever it may be, by which he will afterwards be bound. That will prevent him from avoiding or evading VAT by subsequent retrospective adjustments. But for this purpose, all that its necessary is that the allocation should be unequivocally stated in the document. It need not be stated in any particular form. 22. It is interesting to note that the Commissioners in their Insurance Notice 701/36 of 1997, Appendix B summarise the effect of Note (5) by saying: "In order to treat a supply of arranging insurance as exempt, an intermediary is required to disclose the premium as well as any fee charged over and above that premium." This sounds like a requirement that information be disclosed without insistence on any particular form. 23. My Lords, for these reasons I think that even if one approaches the matter as a matter of construction of a domestic statute, the answer would not necessarily be that adopted by the Tribunal and the Extra Division. But what to my mind decisively tilts the balance against the Commissioners' construction is the European dimension. As I said at the beginning of this speech, the exemption of insurance-related services from VAT is a mandatory requirement of article 13B(a) of the EC Sixth Directive. A domestic rule which denies exemption to insurance-related services (as on the facts of this case Notes (3) to (5) admittedly do) is prima facie contrary to Community law. The only way in which, conformably with the Directive, the United Kingdom can justify rules which deprive such services of exemption is by reliance on the provision of article 13B that exemption shall be under conditions which member states shall lay down—
24. Mr Paines says that avoidance by value shifting is a form of avoidance or abuse which the United Kingdom is entitled to prevent. He has the support of some remarks of Advocate General Jacobs in Muys' en De Winter's Bouw-en Aannemingsbedrijf BV v Staatssecretaris van Financiën (Case C-281/91) [1997] STC 665, 676, para 12. The Advocate General said that conditions which required a credit transaction to be "clearly dissociable" from an associated supply of goods would be justifiable to "prevent evasion, avoidance or abuse":
25. The Advocate General did not enlarge upon what kind of conditions might be regarded as appropriate for this purpose. But in general European law would require them to satisfy the principle of proportionality in its broad sense, which, following German law, is divided into three sub-principles: first, a measure must be suitable for the purpose for which the power has been conferred; secondly, it must be necessary in the sense that the purpose could not have been achieved by some other means less burdensome to the persons affected and thirdly, it must be proportionate in the narrower sense, that is, the burdens imposed by the exercise of the power must not be disproportionate to the object to be achieved. In the particular instance of conditions for allowing a VAT exemption, the Court of Justice has recently said that such conditions must be "necessary for the attainment of the specific objective which [the legislation] pursues and have the least possible effect on the objectives and principles of the Sixth Directive": Ampafrance SA v Directeur des Services Fiscaux de Maine-et-Loire (Joined cases C-177 and 181/99) [2000] ECR I-7013, 7074, para 60. 26. The Court of Justice has acknowledged that the purpose of preventing "evasion, avoidance or abuse" may entitle member states to impose requirements as to the information to be contained in contractual documents. For example, in Jorion v Belgium State (Joined cases 123/87 and 330/87 [1988] ECR 4517 it accepted that it was legitimate for Belgium to require, as a condition of a VAT deduction, that the invoice on the sale of a motor car should contain a good deal of information enabling the car to be identified and thereby to prevent substitution and fraud. But there was in that case no requirement that the information had to be provided in any particular form and the court noted, at p 4541, para 9, that: "As regards invoices which are irregular as to form, the deduction is allowed when the genuine nature of the transaction is not open to doubt." In these circumstances the court said that the conditions could be justified provided only (see p 4544, para 18) that they did not "by reason of their number or technical nature, render the exercise of the right of deduction practically impossible or excessively difficult." 27. In the present case, however, I have great difficulty, for the reasons I have already explained, in seeing how a provision insisting not merely that the documents disclose the apportionment of consideration but do so in a particular form can be said to be "suitable for the purpose" of preventing avoidance. The additional burden upon suppliers would in my opinion be disproportionate to any effect the measure would have in addressing the alleged problem. On the other hand, if the specific objective is to prevent surreptitious or retrospective value shifting, then it seems to me that all that is required is disclosure of the apportionment without insistence on any particular form. 28. Mr Paines said that proportionality was concerned with imposing disproportionate burdens and that there was nothing more burdensome in imposing a requirement that the amount be stated as a self-contained figure than in requiring it to be stated referentially. Either was perfectly easy to comply with. In my opinion this is disingenuous. Any additional formal requirement, non-compliance with which may result in denial of exemption, is an additional burden. If the Note had required invoices to be on A4 paper, it could equally have been said that A4 paper was just as easy to obtain as any other kind of paper. But the imposition of such a requirement, which did nothing to advance any legitimate objective, would be disproportionate. Likewise, a requirement that information be communicated in any particular form is more burdensome than a requirement that it may be communicated in any form. And where, as in this case, the addition of a requirement of form appears to serve no legitimate purpose, I think that it is also disproportionate. 29. It is the duty of a court in the United Kingdom to construe a statute, so far as possible, in conformity with European law: see Litster v Forth Dry Dock & Engineering Co Ltd 1989 SC (HL) 96. In my opinion the Commissioners' construction does not conform to the terms of the Sixth Directive and it is therefore necessary to adopt the alternative construction which does. I would therefore allow the appeal and declare that the taxpayer is entitled to exemption for the consideration attributable to insurance-related services during the relevant period. LORD SLYNN OF HADLEY My Lords, 30. The principal facts, the terms of the contract and the legislative provisions relevant to this appeal are set out in the opinion of my noble and learned friend Lord Hoffmann to which I gratefully refer without repeating. 31. I agree with Lord Hoffmann that as an ordinary matter of construction "the arguments are finely balanced" as to whether Note 5 to Group 2 in Schedule 9 to the Value Added Tax Act 1994 (as amended with effect from 19 March 1997 by section 38 of the Finance Act 1997) that:
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