Commissioners of Customs and Excise v Thorn Materials Supply Ltd and Another

JurisdictionUK Non-devolved
JudgeLORD BROWNE-WILKINSON,LORD LLOYD OF BERWICK,LORD NOLAN,LORD HOFFMANN,LORD CLYDE
Judgment Date18 June 1998
Judgment citation (vLex)[1998] UKHL J0618-1
Date18 June 1998
CourtHouse of Lords

[1998] UKHL J0618-1

HOUSE OF LORDS

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Nolan

Lord Hoffmann

Lord Clyde

Commissioners of Customs and Excise
(Respondents)
and
Thorn Materials Supply Limited
And
Thorn Resources Limited
(Appellants)
LORD BROWNE-WILKINSON

My Lords,

1

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 BERWICK

My Lords,

2

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,

3

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 (UK) Limited ("Home") as purchaser on the other. These three companies were at all material times wholly-owned subsidiaries of Thorn E.M.I. Plc.

4

The common feature of all of the transactions is that the vendors and the purchasers were members of the same V.A.T. Group, (that is the Thorn E.M.I. Plc. group) under the provisions of section 29 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 the signing of the contract and as to the remaining 10 per cent. when the contract was completed by the delivery of the goods. The appellants contend that value added tax is payable on only the 10 per cent. The respondents contend that value added tax is payable upon the whole of the value of the goods, that is to say upon the whole of the purchase price.

5

Since all of the transactions followed the same pattern, the case has been argued throughout by reference to the details of a single representative transaction, which was one of those carried out between Materials and Home. By a written agreement dated 29 November 1993, Materials agreed to sell to Home the goods described in the schedule to the Agreement, which were components and office supplies of one sort or another. The price was to be 105 per cent. of the V.A.T.–exclusive cost to Materials of buying the goods from a third party supplier. Delivery was to take place during the period ending 31 March 1994, on a date or dates specified by the buyer. The price, as I have said, was to be paid as to 90 per cent. on the date of the contract and as to the remaining 10 per cent. on delivery of the goods.

6

The advance payment of 90 per cent. was duly made on 29 November 1993. The total amount of the advance payments made by Home to Materials on that date in respect of this and similar agreements was £33,834,140. By a loan agreement of the same date Materials agreed to lend Home the sum of £33,760,330 (the slight difference between that figure and the total of the advance payments is unexplained) at an interest rate of 5.6875 per cent. The loan was expressed to be for an initial period of three years and a day, but Home was entitled to repay it at any time, or to set it off against its liabilities to Materials.

7

On 6 December 1993 Materials ceased to be a member of the Thorn V.A.T. Group. After that date Materials bought and paid for the goods which it had contracted to sell to Home. Some of these goods, having a total value of £3,757,247, were already owned by Home at the date of the said agreement on 29 November 1993. Consequently, on 21 January 1994, these goods were supplied by Home to Materials in order that Materials could supply them back to Home under the sale contracts. I should add, for the sake of completeness, that although the specimen agreement which I have described was one for the sale of components, 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 Company 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.

8

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.

9

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 4.1 of the Sale Agreement states in terms that:

"It is intended and anticipated by the parties that payments made on the date hereof shall not be liable to value added tax further to the provisions of section 29 of the Value Added Tax Act 1983."

10

The respondents do not however contend that the transactions were a sham. Their claim for tax on the full value of the goods supplied is based on what they submit to be the true construction of the statutory provisions relating to the time at which a supply is made for V.A.T. purposes and so chargeable to tax. If they fail in that then, given that the acknowledged purpose of the transactions was to avoid tax, they seek to rely on the so-called "Ramsay" principle, that is to say the principle applied by your Lordship's House in the capital gains tax case of W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300.

11

Let me turn first to the relevant statutory provisions. Section 1 of the Act provides for value added tax to be charged in accordance with the provisions of the Act on the supply of goods and services in the United Kingdom, and on the importation of goods into the United Kingdom. By section 2(1) the tax is to be charged on any such supply where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. Section 2(2) explains that a taxable supply is a supply other than an exempt supply; and that a taxable person is one who is or is required to be registered. The requirement of registration is imposed in by Shedule 1 of the Act on a person making taxable supplies in excess of a specified quarterly or annual value, the level of which has been constantly revised upwards. By virtue of section 2(3) the tax on any supply of goods or services is a liability of the person making the supply, and becomes due at the time of supply.

12

Section 3(1) takes us to schedule 2 for the purpose of determining, inter alia, what is a supply of goods. The opening words of paragraph 1(1) of Schedule 2 state that:

"Any transfer of the whole property in goods is a supply of goods;"

13

Section 10(2) provides that 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 as equal to the consideration. In summary, therefore, the effect of the provisions to which I have referred so far is that 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 V.A.T. 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.

14

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) … 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) … of that section, he receives a payment in respect of it, the supply shall, to the extent covered by the invoice or payment, be treated as taking place at the time the invoice is issued or the payment is received." By section 29(1): "Where under the following provisions of this section, any bodies corporate are treated as members of a group any business carried on by a member of the group shall be treated as carried on by the representative member, and - (a)any supply of goods or services by a member of the group to another member of the group shall be disregarded; and (b)any other supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member … and all members of the group shall be liable jointly and severally for any tax due from the representative member. (2)An order under section 3( 5) or (6) above may make provision for securing that any goods or services which, if all the members of the group were one person, would fall to be treated under that section as supplied...

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