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TMI Blog1998 (6) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 BREWICK. My Lords, 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. LORD NOLAN. My Lords, 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 (U.K.) Ltd. ( 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 VAT group, (that is the Thorn E.M.I. Plc. group), under the provisions of section 29 of the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponents, 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 Co. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 VAT 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: 4 (1) The provisions of this section and section 5 below shall apply for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to tax. (2) Subject to the provisions of section 5 below, a supply of goods shall be treated as taking place (a) if the goods are to be removed, at the time of removal; (b) if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied . . . 5 (1) If, before the time applicable under sub-section (2) . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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: The following shall be subject to value added tax: 1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such; 2. The importation of goods. Next I turn to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 of the Value Added Tax Act 1994 for repayment to occur where a person has paid an amount to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of this section and section 5 below shall apply for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to tax. The relevant provisions are section 4(2) and (3) and section 5(1): 4 (2) Subject to the provisions of section 5 below, a supply of goods shall be treated as taking place (a) if the goods are to be removed, at the time of the removal ; (b) if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied. . . (3) Subject to the provisions of section 5 below, a supply of services shall be treated as taking place at the time when the services are performed. 5 (1) If, before the time applicable under sub-section (2) or subsection (3) of section 4 above, the person making the supply issues a tax invoice in respect of it or if, before the time applicable under paragraph (a) or (b) of sub-section (2) or sub-section (3) of that section, he receives a payment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable event and the moment when the tax becomes chargeable. 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 plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , are closely bound to one another by financial, economic and organisational links. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ore 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 commissioners 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 [1996] 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 occu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ale 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) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Customs and Excise Commissioners [1996] 1 W.L.R. 201. The second argument was rejected by the VAT 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) [1995] 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 Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises 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 supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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