1998 (6) TMI 562 - HC - VAT and Sales Tax

Issues Involved:
1. Whether VAT is payable on the entire purchase price or only on the 10% paid upon delivery.
2. Interpretation and application of section 29 of the Value Added Tax Act 1983.
3. The relevance of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.) in interpreting VAT provisions.
4. The application of the Ramsay principle to VAT avoidance schemes.

Detailed Analysis:

1. VAT Payable on Entire Purchase Price or Only on 10% Paid Upon Delivery:
The appellants argued that VAT should be payable only on the 10% paid upon delivery, as the 90% advance payment was made while both parties were within the same VAT group and thus should be disregarded under section 29(1)(a) of the Value Added Tax Act 1983. The respondents contended that VAT should be payable on the entire purchase price because the supply of goods was completed after the parties were no longer in the same VAT group.

2. Interpretation and Application of Section 29 of the Value Added Tax Act 1983:
Section 29(1) states that any supply of goods or services between members of the same VAT group should be disregarded for VAT purposes. The appellants argued that the advance payment (90%) falls under this provision and should be disregarded. The respondents argued that since the supply was completed after the parties were no longer in the same VAT group, the entire transaction should be subject to VAT.

3. Relevance of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.):
Both parties referenced the Sixth Council Directive to support their arguments. The appellants cited Article 10.2, which allows for VAT to become chargeable upon receipt of payment for goods or services. The respondents referenced Article 4.4, which allows member states to treat closely linked entities as a single taxable person. The court found that the Directive emphasizes that the subject of tax liability is the supply of goods, which normally occurs at the time of delivery, and that advance payments can be taxed in anticipation of the transfer of ownership.

4. Application of the Ramsay Principle to VAT Avoidance Schemes:
The respondents invoked the Ramsay principle, which allows courts to disregard steps in a transaction that have no commercial purpose other than tax avoidance. The court, however, found it unnecessary to apply the Ramsay principle in this case, as the statutory provisions of the VAT Act were sufficient to resolve the issue.

Judgment:
The court dismissed the appeal, holding that VAT is payable on the entire purchase price. The court reasoned that section 29(1) does not provide an exemption or relief from tax but rather simplifies tax collection by treating the representative member as carrying on the business of all group members. The court concluded that the entire value of the supplies falls within the charging provisions of the VAT Act, as the supply of goods was completed after the parties were no longer in the same VAT group.

The court also noted that the Ramsay principle was not necessary to apply in this case, as the statutory provisions were clear and sufficient. The court emphasized that the purpose of section 29(1) is to facilitate tax collection and not to provide tax relief or exemption.

Conclusion:
The appeal was dismissed, and VAT was held to be payable on the entire purchase price of the goods. The court's interpretation of section 29(1) and the relevant provisions of the VAT Act and the Sixth Council Directive supported the respondents' position that the entire transaction should be subject to VAT. The Ramsay principle was deemed unnecessary to apply in this case.

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