Judgments - C R Smith Glaziers (Dunfermline) Limited (Appellants) v Commissioners of Customs and Excise (Respondents) (Scotland)

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    requires a statement of the actual amount or whether it is sufficient to indicate by a formula the method of calculating the amount. If the latter is enough the question arises in the present case and no doubt in others as to whether the formula adopted is clear enough to amount to a "statement setting out every amount" so that the customer can readily know what is the amount.

    32. I am also in agreement with Lord Hoffmann that in interpreting the contractual terms in the present case there are difficulties about the meaning of some of the phrases used—eg whether 10% is 10% of the total contract price (as like him I think it is), whether the total contract price is inclusive or exclusive of VAT (as like him in the end I think it is). I also have difficulties in the concept of calculating the charge for services (to be exempt from VAT) as a percentage of the price including VAT and I too think that the tribunal was generous to the taxpayer in being "satisfied that the amount could be ascertained from the written terms of the contract".

    33. To get the benefit of the exemption from VAT on services related to the provision of insurance it is clearly mandatory that a document should be prepared "containing the statement specified in Note 5" (see Notes 3 and 4 to Group 2 in Schedule 9 (and in particular Note 4 (a)) to the Value Added Tax 1994 as amended).

    34. Mr Paines laid much emphasis on the argument that the object and result of insisting on a precise figure is that it would prevent value shifting—ie putting more of the total contract price on the exempt items and thereby reducing the basic price of the goods which are not exempt. If this was the only argument I would not be satisfied that requiring a figure necessarily does, whereas stating a formula necessarily does not, prevent value shifting.

    35. But Mr Paines had another argument which in one way is linked to the value shifting argument. It is that the object of the legislation is to require the supplier to give clearly and transparently the amount of the charge. That has the effect that the customer who may enter into the contract with a salesman at the door has a statement immediately obvious as to what is the amount he is charged under the various headings and in particular for "anything that is to be, may be or has been done in pursuance of that transaction" (Note 5 (b) to Group 2). It would also enable him more readily to calculate the residual amount subject to VAT and the amount of the VAT itself. But it would also make it less easy for a supplier to make retrospective adjustments to the various items and in particular the basic price and the administration charge. It is clear that, as Lord Hoffmann points out, this could still be achieved "if the allocation [is] unequivocally stated in the document". In my opinion, however, the clearest way, subject to the argument on proportionality to which I return, is to give the words their ordinary meaning—"set out an amount" means "state a figure" rather than "indicate a formula" by which an amount can be calculated.

    36. It is to be noted that Note 5(a) requires that there must be "a statement setting out the amount of the premium". That seems to me plainly to mean that the amount in money of the premium must be stated rather than that a formula be given and the words "a statement setting out every amount . . ." in Note 5(b) in my opinion should be read in the same way. It is of some relevance (though of course by no means compelling) to note that in other sections of the legislation the reference to an amount seems to require a figure rather than a formula.

    37. Reference has been made to Insurance Notice 701/36 of 1997, Appendix B in relation to Note 5 where it is said that "[i]n 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". I cannot see that this assists the appellant. It is perhaps neutral but in my view is more naturally to be read as meaning that the intermediary must tell the customer in the document what in money is the fee charged over and above the premium.

    38. I consider more relevant the provision of Note 5 (b) that it is not just "the amount of the charge" which is to be set out but

    "every amount that the customer . . .is to be or has been required to pay … in connection with that transaction or anything that is to be, may be or has been done in pursuance of that transaction" (emphasis added).

    This again is obviously not conclusive but in the interests of simplicity, transparency and "a correct and straightforward" application of such exemption (article 13 B of the Sixth VAT Directive (77/388/EEC)), it seems to me to indicate that for every amount for anything to be done a figure is required rather than there should be set out separate formulae. I thus agree with the reasoning of the Court of Session that as a matter of construction, amount means a specific monetary figure.

    39. I reject the suggestion that by providing for an amount (a figure) to be set out rather than permitting any other means (formula or otherwise) of indicating to a customer the way in which he or his advisers can calculate the amount to be paid, the United Kingdom is in breach of its obligation under article 13 of the Sixth Directive that it shall:

    "exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse".

    40. The member states there are clearly given a degree of discretion as to the methods they adopt and subject to the argument on proportionality it seems to me that to require a figure is no more unreasonable than requiring a formula or permitting a choice between a figure and a formula.

    41. It is said, however, that the requirements must be read in accordance with the Community law principle of proportionality. That is clear; I agree. It is also said that to require a specific monetary figure is in breach of that principle. That I do not agree. Limiting the objective to achieving clarity and transparency it seems to me that to require a figure to be stated is a suitable (the most suitable) way and is not more burdensome or disproportionate to the objective to be achieved. It is said that to require someone to calculate 10% of another figure is very easy. That is so. But the figure might not have been, and elsewhere might not be, 10%. It might have been 17.5% or 24.33% . Moreover to say 10% or 17.5% of the total contract price opens up the question in the case like the present as to what figure the customer has to start with in order to calculate 10% or 17.5%. Is it £1,000, £1,016, £1,016 plus the VAT to be calculated, before 10% is calculated? How does he add on the administration charge, if that is part of the total contract price, in calculating the 10% or the 17.5%? These may all be obvious to the VAT expert but they are not necessarily obvious to the customer. The customer is entitled to be considered in deciding what is suitable or proportionate and unduly burdensome.

    42. Moreover it seems to be at least likely that the supplier will have to calculate these figures at some stage, either for his VAT purposes or for other accounting purposes. He needs to calculate the amount of 10% or 17.5% of the total contract price. It seems to me that he will have to do it sometime. He might as well do it at the beginning and inform the customer.

    43. The Crown argues that it is clear that exemptions are to be strictly construed in the VAT legislation. (Stichting Uitvoering Financiële Acties v Staatssecretaris van Financiën (Case 348/1987) [1989] ECR 1737). That submission is right but the rule does not it seems to me apply directly in the present case. On the other hand I cannot see that any principle of Community law requires that a national court needs to be zealous in condemning a requirement laid down by a national legislature which prima facie is within its powers under article 13 to prescribe the conditions for an exemption.

    44. We are here concerned not with the existence of the principle of proportionality but its application. I consider that in the present case the purpose was legitimate and the means proportionate. There is an advantage not only of transparency but of avoiding arguments as to whether other methods of giving an indication to the customer are clear enough—arguments which may themselves lead to distinctions between cases more likely (than the requirement that a figure be stated) to deprive suppliers of the exemption to which article 13 entitles them.

    45. I would therefore uphold the decision of the Court of Session and dismiss the appeal.


My Lords,

    46. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it and for the reasons which Lord Hoffmann gives I would allow this appeal.


My Lords,

    47. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it, and for the reasons which he has given I too would allow the appeal.

    48. We are concerned in this case with a question as to the meaning of words in domestic legislation which was enacted to implement article 13B(a) of EC Sixth Directive (77/388/EEC). Member states were required by that article to exempt insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents from VAT. But they were permitted to attach conditions to that exemption for the purpose of ensuring its correct and straightforward application and of preventing any possible evasion, avoidance and abuse. This problem appears to have been approached both before the Tribunal and in the Inner House on the assumption that the meaning which was to be given to the words "every amount" in Note 5(b) of the Notes to Group 2 in Schedule 9 to the Value Added Tax Act 1994 could be found by giving them their ordinary meaning according to the ordinary domestic rules of construction: 2001 SC 646. As a general rule however legislation which is designed to give effect to Community legislation under article 249 EC (formerly article 189) requires to be read compatibly with that legislation as explained by the decisions of the European Court of Justice. It will rarely, if ever, be satisfactory to ignore the principles which have been laid down by the European Court of Justice in the relevant case law. The parties are now agreed that the sole issue in the appeal to your Lordships is whether the terms of the taxpayer's standard form contract satisfied the requirements of Note 5(b) read compatibly with the opening words of article 13B and 13B(a) of the Sixth Directive.

    49. In Litster v Forth Dry Dock & Engineering Co Ltd 1989 SC (HL) 96, the point that was in issue was the meaning of the words "immediately before" in regulation 5(3) of the Transfer of Undertakings (Protection of Employment) Regulations 1981. Those regulations were designed to give effect to Council Directive (77/187/EEC). As Lord Keith of Kinkel said, at p 101, it was the duty of the court to give regulation 5 a construction which accorded with decisions of the European court upon the corresponding provisions of the Directive to which the regulation was intended by Parliament to give effect. In this case the question is whether the provision of a formula by which the amount of the fee for arranging insurance could be ascertained was sufficient to satisfy the requirement in Note 5(b) to set out the "amount" of the fee. If it was not, the relevant requirements for the purposes of Note 3 will not have been fulfilled and the taxpayer will be deprived of the exemption from VAT which article 13 of the Sixth Directive provides and which the domestic legislation was designed to implement. It is settled case law that any derogations from rules intended to guarantee the effectiveness of rights recognised by the EC Treaty must be interpreted strictly: see Richard Brent, Directives: Rights and Remedies in English and Community Law (2001), p 119, para 11.14. In 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, the court observed that, in order for a Community measure concerning the VAT system to be compatible with the principle of proportionality, the provisions which it embodies must be necessary for the attainment of the specific objective which it pursues and have the least possible effect on the objectives and principles of the Sixth Directive.

    50. In my opinion it is far from clear that the phrase "a statement setting out every amount" in Note 5(b), giving the words their ordinary meaning and reading them in context, are incapable of including a formula by which the figure which represented the fee for arranging the insurance could be ascertained. The Tribunal held that the monetary figure could be ascertained from the information in the contract, and in the Inner House it was appreciated that there was no practical difference between the monetary figure and 10% of the contract price: 2001 SC 646, 652C, para 13. There has been no suggestion of an intention on the taxpayer's part to evade, avoid or abuse the exemption. The requirement to achieve certainty as to the amount would appear to have been satisfied by disclosure of the formula, as the Note required, to the customer.

    51. The matter is put beyond doubt however by applying the approach indicated by the decisions of the European court to the words used in Note 5(b). Lord Hoffmann has reviewed these decisions and I adopt with gratitude all that he has said about them. The essence of the matter lies in the strict form which the principle of proportionality assumes where a measure derogates from an exemption in a directive designed to harmonise the laws of the member states. The words of the Note must be construed in a way that is least detrimental to the taxpayer. They should not be allowed to deprive him of the exemption unless this is strictly necessary for achieving the aim indicated by the opening words of article 13B. The test as to whether the words go further than was necessary in each case lies in the facts.

    52. On the undisputed facts of this case, the construction of Note 5(b) for which the Commissioners contend would have the effect of denying the exemption to the taxpayer although sufficient information to enable the relevant figure to be worked out was disclosed to the customer. There is no hint of a suggestion that there was any evasion, avoidance or abuse or that the exemption could not be applied correctly. I think that the taxpayers are entitled to a finding that the relevant requirements are satisfied and that the service to the customer which is described in clause 6.3 of their contract falls within item 4 of Group 2 in Schedule 9 to the 1994 Act.


My Lords,

    53. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it and for the reasons which Lord Hoffmann gives I would allow this appeal.

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