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TMI Blog1996 (2) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... s for sale together with the price and reference number for each item. The catalogues for Studio and Ace are aimed, typically, at housewives. Those for Webb Ivory and Miller Fund Raising are aimed at people interested in raising money for some cause such as a charity and who typically will sell the goods supplied by Express Gifts to others at a profit which can be paid to that cause. Express Gifts recruits individuals, whom it calls 'agents' in relation to its Studio and Ace catalogues and 'fundraisers' in relation to its Webb Ivory and Miller Fund Raising catalogues, and does so in astonishingly large numbers. In 1989 the total number of agents and fundraisers (I shall call them indifferently agents) was over 8,00,000 of whom about 4,78,000 were Studio agents, 2,45,000 were Ace agents, 78,000 were Webb Ivory agents and 25,000 were Miller Fund Raising agents. None of the agents is registered for value added tax (VAT). The catalogues are distributed free to agents who had ordered several items in the relevant catalogue in previous years. Express Gifts aims to obtain at least 30 worth of orders from each agent to whom a catalogue is sent. Such orders may be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercentage lower than 25 per cent. of the catalogue price. The Webb Ivory booklet contained an explanation of the agent's 'profit.' The agent was told the significance of a number of symbols placed against the items listed, the most important of which was a black circle which indicated that the item was subject to '25 per cent. Fundraisers Discount.' The agent was told that items against which there were no symbols were discounted at 10 per cent. The agent, having completed the order booklet, sends it to Express Gifts, from which in due course the agent will receive a parcel containing the ordered goods and an invoice. The sample invoice which we have seen and was addressed to an Ace agent gave details in respect of each item ordered, viz., the quantity, the catalogue price, the total price (where more than one of that item are ordered) and, under 'You Pay,' the discounted price. A letter which formed part of the invoice thanked the agent for her order, told her, 'You have earned 5.82 commission on this order' (that sum being the total of the differences between the catalogue prices of the items ordered and the discounted prices paid) and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts may buy goods for their own use and in internal memorandum dated 28 November 1988 of Express Gifts shows that from its own surveys more than half the actual sales (in monetary terms) to Ace and Studio agents were not for resale. However, those surveys suggest that only about 10 per cent. and 20 per cent. of sales to Webb Ivory and Miller Fund Raising agents respectively were for the agents' own use. The surveys also showed that on most occasions when agents ordered goods for resale, they charged the customer the full catalogue price. But on occasions which appear to be sufficiently numerous not to be classed as insignificant they sold the goods either at the agent's price or at a price between that and the catalogue price. The legislation relevant for the purpose of this appeal is contained the following provisions of the Value Added Tax Act 1983. Section 10: (1) For the purposes of this Act the value of any supply of goods or services shall be determined as follows. (2) If the supply is for a consideration in money its value shall be taken to be such amount as with the addition of the tax chargeable, is equal to the consideration. (3) If the supply is not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngdom, considering that the marketing structure employed by F.A.D., among others, involving as it did retail sales through persons not registered for VAT, resulted in widespread avoidance of the tax, applied to the Council for a derogation from the Directive in the form of paragraph 3 of Schedule 4. Initially, on 13 June 1985, the United Kingdom was authorised to introduce the desired derogation for a two-year period. The validity of that decision (85/369/E.E.C.) was challenged by certain traders, but its validity was upheld by the European Court of Justice on 12 July 1988: Direct Cosmetics Ltd. and Laughtons Photographs Ltd. v. Customs and Excise Commissioners [1988] E.C.R. 3937. Thereafter the Council granted an indefinite derogation (89/534/E.E.C.) in these terms: By way of derogation from article 11(A)(1)(a) of the Sixth Directive, the United Kingdom is hereby authorised to prescribe, in cases where a marketing structure based on the supply of goods through non-taxable persons results in non-taxation at the stage of final consumption, that the taxable amount for supplies to such persons is to be the open market value of the goods as determined at that stage. In the meantim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if so, the whole or part of the business of Express Gifts consists in such supply. As to the first point there is no doubt that Express Gifts does supply its agents with goods, that it is keen that the agents should sell as many of these goods as possible to others by retail, and that the agents do sell a substantial part of the goods to others by retail, though a no less substantial part of the goods to others by retail, though a no less substantial part of the goods is retained by agents for their own use or to give as presents. The documentation used by Express Gifts in its business makes it plain that it desires and intends that its agents should sell on goods supplied to them to those who are described in the documentation as customers. It is true that when Express Gifts sends a parcel of goods to an agent it does not known which goods the agent intends to sell on and which the agent intends to keep. However, at that stage the customer has already ordered from the agent the goods which he wishes to have, so that certain of the goods supplied to the agent are then already earmarked for onward sale. It accords with the ordinary use of language to describe such goods as goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted to that end. In the circumstances it would be quite unrealistic to hold that no part of the business of Express Gifts consists in supplying goods to others for sale by retail. The purpose of including the word part in paragraph 3 of Schedule 4 must be to cover precisely this kind of case, when not all the goods supplied are to be sold by retail, and there are no sound grounds for importing a limitation that the two types of business must be carried on by separate branches or departments. If that were done the effect would be to defeat largely the legislation purpose of avoiding large scale avoidance of VAT. It is to be noticed that paragraph 26 of the judgment of the Court of Justice of the European Communities in the Direct Cosmetics case [1988] E.C.R. 3937, 3979 is in these terms: Thus, if the business of an undertaking consists primarily or to a large extent in selling to non-taxable resellers, failure to apply the derogating measures adopted in order to prevent certain types of tax avoidance would lead to the substantial and continuing losses of tax revenue and to a distortion of competition. However, the position would be different in the case of an undertaking whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n itself. It does not follow, however, that the application of paragraph 3 through the medium of a particular direction may not contravene Community law, and that is what F.A.D. contends for as regards the direction issued to it in the present case. The relevant passages in the judgment are, at pp. 3984-3985: 50. Finally, the appellants in the main proceedings maintain that the authorisation granted to the United Kingdom does not provide a clear definition of what the taxable base is under the system established by the derogating measure. In their view, the concept of open market value, which has been adopted as the taxable base under the system, is so vague as to be incapable of constituting a precise base and is therefore capable of being applied in an arbitrary manner. 51. It should be pointed out in that respect that the concept of open market value, which has been adopted as the taxable base under the system established by the derogating measure authorised by the Council, must be interpreted in the context of the provisions of article 27 of the Sixth Directive, on the basis of which that measure was authorised. 52. In that regard, it is of decisive significance that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ultimate purchasers of each of the 30 per cent. of the goods in question are unknown, and it would not be reasonably practicable to ascertain them. In that connection the Advocate General said in the Direct Cosmetics case [1988] E.C.R. 3937, 3967-3968: 153. As regards the term 'open market value' used in the United Kingdom legislation, both in Schedule 3 of Annex 4 to the Value Added Tax Act 1983 and in section 10(5) thereof, which it is not appropriate to interpret here, it must be said that, whatever meaning it was intended to have in that Act, its use is compatible with the objectives of the derogating measure and with the principles laid down by the Sixth Directive only in so far as it does not purport to impose tax on an amount exceeding the value added along the entire length of the distribution chain as far as the final consumer. 154. That means, in my view, that, if such a measure is not to be seen as excessive or disproportionate, the choice of a taxable amount different from the consideration actually paid to the taxable person by the 'retailer' to whom the goods are supplied must not be based on anything other than the real price at which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he position where the price paid by the final consumer is unknown and if is impossible or excessively difficult to ascertain it. For these reasons and those contained in the speech to be delivered by my noble and learned friend, Lord Slynn of Hadley, I would answer the third issue in the negative. My Lords, I would accordingly allow the appeal. Lord Browne-Wilkson. My Lords, for the reasons given in the speeches of my noble and learned friends, Lord Keith of Kinkel and Lord Slynn of Hadley, I, too, would allow the appeal. Lord Mustill. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friends, Lord Keith of Kinkel and Lord Slynn of Hadley. For the reasons which they give I would allow the appeal. Lord Slynn of Hadley. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend, Lord Keith of Kinkel. I agree that for the reasons he gives the appeal should be allowed. The Community law issue appears to have occupied a more important place in the argument before your Lordships than it did before the Court of Appeal or earlier and I deal only with that aspect of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their marketing structure is that tax on the value added by the dealer to the final consumer is avoided. Other companies selling similar products in direct competition and selling through normal registered retail outlets are therefore at a competitive disadvantage because the price of their products to the final consumer bears additional VAT. The United Kingdom confirmed that the use of the special measure would be confined to companies in a substantial way of business operating in the manner described, that is only those who sell their products solely to retail dealers who are not required to be registered for VAT. Having recited the earlier legislation and the judgment of the European Court of Justice to the effect that the amendments which had been made by section 14(1) of the Finance Act 1981 required notification to the Commission under article 27(2) of the Sixth VAT Directive (Direct Cosmetics Ltd. v. Customs and Excise Commissioners (Case 5/84) [1985] E.C.R. 617), the United Kingdom set out the provisions which were at that stage contained in paragraph 3 of Schedule 4 to the Value Added Tax Act 1983. That paragraph provided: Where (a) the whole or part of a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the agents from their customers since the agents are not registered for VAT. Moreover, clearly without the derogation article 11 could be relied on directly in proceedings in British courts. By notice pursuant to paragraph 3 of Schedule 4 of the Value Added Tax Act 1983, dated 26 June 1985 the commissioners decided that: the value by reference to which value added tax is charged on any taxable supply of goods: (a) by you to persons who are not taxable persons within the meaning of section 2 of the Value Added Tax Act 1983, (b) to be sold, whether by persons mentioned in (a) above or others, by retail, shall be taken to be its open market value on a sale by retail. F.A.D. do not contend that a direction can never be given in these terms in exercise of the appellants' statutory power consistent with the derogation authorised by the Council. Their case is that on the basis of the European Court's decision in Direct Cosmetics Ltd. and Laughtons Photographs Ltd. v. Customs and Excise Commissioners [1988] E.C.R. 3937 such a direction cannot as a matter of European Community law be given or applied in this case. They refer both to the judgment of the court and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these terms, at pp. 39673969: 153. As regards the term 'open market value' used in the United Kingdom legislation, both in Schedule 3 of Annex 4 to the Value Added Tax Act 1983 and in section 10(5) thereof, which it is not appropriate to interpret here, it must be said that, whatever meaning it was intended to have in that Act, its use is compatible with the objectives of the derogating measure and with the principles laid down by the Sixth Directive only in so far as it does not purport to impose tax on an amount exceeding the value added along the entire length of the distribution chain as far as the final consumer. 154. That means, in my view, that, if such a measure is not to be seen as excessive or disproportionate, the choice of a taxable amount different from the consideration actually paid to the taxable person by the 'retailer' to whom the goods are supplied must not be based on anything other than the real price at which the goods are sold to the final consumer, or their open market value if, and only if, it is impossible or excessively difficult to ascertain that price. 155. In the latter case, however, it must be the 'open market' or 'cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Customs and Excise Commissioners [1988] E.C.R. 3937. Moreover it is not possible to have a different open market value for the same goods sold on the same day, and to require the respondents to prove the actual price at which the goods were sold on by the agent, whether at the price at which they were sold to him or at a price of up to 30 per cent. below the catalogue price, is putting an impossible or extremely difficult burden on the respondents. They also contend that the European Court did not agree with the Advocate General when he said, at paragraph 154 of his opinion, that the taxable amount of goods could be based on their open market value if, and only if, it is impossible or excessively difficult to ascertain that price sc. the real price at which the goods are sold to the final consumer. My Lords, the European Court in Direct Cosmetics Ltd. and Laughtons Photograhps Ltd. v. Customs and Excise Commissioners, recognised, as was clearly intended, that the basis of tax provided for in a derogation could produce a different basis for charging VAT from that laid down in article 11 but, they said that this was only to be to the extent strictly necessary for preventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l court as to how open market value is to be assessed should it, therefore, in the present case be the catalogue price or should it be based on an analysis of all the transactions of that kind by the companies who are involved? In my opinion when the objective of the derogation is kept in mind (i.e., to deal with situations where market structures lead to the avoidance or evasion of tax) it was open to the commissioners to take the catalogue price as being the true open market value except in those cases where the respondents could show what was the actual price, as the appellants accept that the respondents are entitled to do and as, if they were so minded, they could do by changing their procedures. As the commissioners point out VAT is a tax which the seller assesses for himself and in the absence of the actual figures it is open to the commissioners to take the catalogue price as being the commercial value of a sale by retail. This is the price which something like 70 per cent. of the final purchasers pay and is the best guide as to the open market value or the price which the market will bear. The fact that special arrangements may be made for special customers, or for the ..... 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