Procter & Gamble UK v HM Revenue and Customs

Hearing dates: 23/24 April 2009

Lord Justice Jacob (giving the first judgment at the invitation of Mummery LJ:

Introduction

Are Pringles “similar to potato crisps and made from the potato?” That is the question. Upon it hangs the question of whether rather a lot of money, as much as £100m of tax for the past and about £20m a year for the future according to Mr Christopher Vajda QC for the Commissioners for Her Majesty's Revenue and Customs (“HMRC”), the appellants in this appeal.

“Pringle” is the trade mark of a very successful product of the respondent, Procter and Gamble (“P&G”). It is a manufactured savoury snack product. We are concerned with the variety known as “Regular Pringles”. It is described in detail in the decision of the VAT and Duties Tribunal (Dr John Avery Jones CBE and Catherine Farquharson BSc ACA). The following is taken from some of the findings of fact of the Tribunal (the full findings of primary fact are set out by Warren J in an appendix to his judgment, [2008] EWHC 1558 (Ch)). It is not necessary to set them all out here).

(2) Regular Pringles are made from potato flour, corn flour, wheat starch and rice flour together with fat and emulsifier, salt and seasoning. The precise percentages of each ingredient of Regular Pringles have varied from time to time and are not identical in the range of flavours because, for example, the flavouring may affect the salt content. …

(4) Regular Pringles are manufactured by mixing the dry ingredients into dough with water and emulsifier, cutting shapes out of a dough sheet, frying it for a few seconds, adding oil and salt, cooling it and then adding flavours. A similar procedure applies to maize (in US parlance, corn) chips like tortillas. Mr Hogg considered that the unique feature of Regular Pringles was that the manufacturing process causes oil to go into the spaces throughout the texture of the product replacing the water content removed during the frying. This gives the “mouth-melt” feel when it is eaten. By contrast with potato crisps most of the fat stays on the surface.

(5) Regular Pringles have a regular shape in the form of a saddle, which aids stacking them enabling high production speeds. They are a uniform pale yellow colour, which is paler than a potato crisp. They have a crisp texture.

The recipe for Regular Pringles has varied somewhat. Of importance in this case is the amount of potato flour. In the final product this amount has hovered around 40% —sometimes a little more, sometimes a little less. Currently it is 42%.

Food products are generally zero-rated for VAT purposes; see Schedule 8, Group 1 of the VAT Act 199However there are some excepted items. Item 5 reads:

“5. Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch, and savoury products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in shell.”

The question I posed at the outset is based upon item 5. The language of the question has its meaning to be derived from that context.

There is really little else of context that is suggested to be relevant to construction. In particular it is common ground that Art. 28.2 of the Sixth Directive (Art. 110 of the Recast Directive) permits zero rating in this case, but does not require it or provide any aid to construction. The only other possible aid to construction, one relied upon by Mr Roderick Cordara QC for P&G, emerges from Item 2 of the excepted items (see below).

The Tribunal answered the question “yes”, so that Regular Pringles fell to be standard rated. On appeal, Warren J answered the question “no”, so that the product would be zero rated. Arden LJ granted permission for this second appeal on the papers.

The Approach on a Second Appeal

Although Mr Christopher Vajda QC for HMRC opened the appeal by attacking the judgment of Warren J rather than concentrating upon the decision of the Tribunal (which of course he contended was correct) in the end counsel were agreed that what really mattered was whether the decision of the Tribunal was wrong in law. For it is the Tribunal which is the primary fact finder. It is also the primary maker of a value judgment based on those primary facts. Unless it has made a legal error in that in so doing (e.g. reached a perverse finding or failed to make a relevant finding) or has misconstrued the statutory test it is not for an appeal court to interfere. This has been said in other contexts e.g Osmani v Camden LBC[2007] EWCA Civ 1281 at [34] (“…the main focus of attention on a second appeal such as this should be on the decision of the Council rather than that of the County Court Judge on appeal”per Auld LJ and Waltham Forest LBC v Maloba[2007] EWCA Civ 1281 at [19]per Toulson LJ). The same applies for the same reasons to appeals from this Tribunal.

The effect of this principle in this case is that although P&G is the respondent to this second appeal, in reality it is necessary for P&G to show that the Tribunal erred in law. The Judge held that it had. Of course his reasons why need to be examined, but in the end the focus is on the Tribunal decision.

The approach on appeal to value judgments of the primary decision maker

Often a statutory test will require a multi-factorial assessment based on a number of primary facts. Where that it so, an appeal court (whether first or second) should be slow to interfere with that overall assessment – what is commonly called a value-judgment.

I gathered together the authorities about this in Rockwater v Technip[2004] EWCA (Civ) 381:

[71] … In Biogen v Medeva[1997] RPC 1 at p. 45 Lord Hoffmann said when discussing the issue of obviousness:

“The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans la nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved. When the application of a legal standard such negligence or obviousness involves no question of principle but is simply a matter of degree, an appellate court should be very cautious in differing from the judge's evaluation.”

[72] Similar expressions have been used in relation to similar issues. The principle has been applied in Pro Sieben Media v Carlton [1999] 1 WLR 605 at pp. 613–614 (per Robert Walker LJ) in the context of a decision about “fair dealing” with a copyright work; by Hoffmann LJ in Re Grayan Building Services[1995] Ch 241 at p.254 in the context of unfitness to be a company director; in Designer Guild v Russell Williams [2000] 1 WLR 2416 in the context of a substantial reproduction of a copyright work and, most recently in Buchanan v Alba Diagnostics[2004] UKHL 5 in the context of whether a particular invention was an “improvement” over an earlier one. Doubtless there are other examples of the approach.

[73] It is important here to appreciate the kind of issue to which the principle applies. It was expressed this way by Lord Hoffmann in Designer Guild:

“Secondly, because the decision involves the application of a not altogether precise legal standard to a combination of features of varying importance, I think that this falls within the class of case in which an appellate court should not reverse a judge's decision unless he has erred in principle.”

It is also important to bear in mind that this case is concerned with an appeal from a specialist Tribunal. Particular deference is to be given to such Tribunals for Parliament has entrusted them, with all their specialist experience, to be the primary decision maker, see per Baroness Hale in SH (Sudan) at [30] cited by Toulson LJ.

In its full form the statutory question merely re-stated is whether Pringles are “similar [to potato crisps, potato sticks, potato puffs] and made from the potato, or from potato flour, or from potato starch.”

As Toulson LJ observed in oral argument, it is a composite question. So although it is convenient to ask separately whether Pringles are “similar” to potato crisps etc and whether they are “made from potato”, one must also take into account the composite nature of the question. Moreover it is, to my mind, precisely...