Revenue and Customs Commissioners v Mercedes-Benz Financial Services UK Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten |
| Judgment Date | 26 November 2015 |
| Neutral Citation | [2015] EWCA Civ 1211 |
| Docket Number | Case No: A3/2014/2814 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 November 2015 |
[2015] EWCA Civ 1211
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
NUGEE J — [2014] UKUT 200 (TCC)
ON APPEAL FROM THE FIRST-TIER TRIBUNAL (TAX CHAMBER)
JUDGE MICHAEL TILDESLEY OBE & RUTH WATTS DAVIES FCIPD MIH — [2013] UKFTT 381 (TC)
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Patten
and
Lord Justice Christopher Clarke
Case No: A3/2014/2814
Mr Owain Thomas and Mr Matthew Donmall (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Appellant
Mr Kevin Prosser QC (instructed by Mishcon de Reya LLP) for the Respondent
Hearing date: 21 October 2015
Judgment
Lord Justice PattenIntroduction
1. This is the judgment of the Court.
2. This is an appeal by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") against a decision of the Upper Tribunal (Tax and Chancery Chamber) (Nugee J) released on 2 May 2014. It concerns the proper tax treatment of so-called Agility hire purchase contracts entered into between Mercedes-Benz Financial Services UK Limited ("MBFS") and its customers in respect of the supply of Mercedes-Benz vehicles. The particular issue on which the appeal turns is whether for VAT purposes the Agility contract falls to be treated as a supply of services (which is MBFS's case) or, as HMRC contend, a supply of goods. The resolution of this issue turns on the correct interpretation and application of Article 14 of the Principal VAT Directive (2006/112/EEC) ("the Directive") which, so far as material, provides:
"1. 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner.
2. In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods:
(a) the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation;
(b) the actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment;
(c) the transfer of goods pursuant to a contract under which commission is payable on purchase or sale."
3. The facts are set out in paragraphs 4–16 of the Upper Tribunal Decision which, for convenience, I have reproduced as an Appendix to this judgment. But the following points are of particular relevance:
(1) the Agility contract is one of three financial products provided by MBFS to its customers in relation to Mercedes-Benz vehicles. The other two are "Hire Purchase" and "Leasing" contracts. Under a Leasing contract, the customer simply hires the vehicle for 36 months in return for a monthly rental payment. There is no option to purchase at the end of the term. Under the Hire Purchase ("HP") contract, the customer is given the option to purchase the vehicle at the end of the hire period usually on payment of a small option fee of £95. Some HP agreements provide for the balance of the price (after payment of a deposit) and the amount of the credit to be paid in 36 equal monthly instalments over the term of the agreement so that only the option fee remains payable by the customer who wishes to acquire the vehicle. But others provide for lower monthly payments and for a substantial "balloon" payment as the final monthly instalment together with the option fee. In both cases, the customer will have paid the price of the vehicle and the amount of credit by the end of the term so that a failure by him to exercise the option to purchase would be wholly uncommercial;
(2) the Agility agreement, like the HP agreement, provides for a term of 36 months with an option to purchase at the end of the term. Like the Leasing and the HP agreements, in most (if not all) cases, it is also regulated under the Consumer Credit Act 1974. But it differs from the HP agreement in that the monthly payments are calculated by reference to the difference between the purchase price of the vehicle and its anticipated residual value at the end of the term plus interest so that, even when the customer has made all the obligatory contractual payments, a substantial amount of the original purchase price will remain unpaid. If the customer decides at the end of the term that he does wish to exercise the option to purchase, his final monthly payment will therefore be a sum equal to the vehicle's estimated residual value in addition to the £95 option fee. The final monthly payment (described as an Optional Purchase Payment) amounted in the examples given to something in excess of 40% of the original purchase price;
(3) if the customer decides not to exercise the option to purchase, the vehicle is disposed of by MBFS to a sister company under a guaranteed buy-back agreement which means that it takes no risk "on the metal";
(4) where (as in most cases) the HP and Agility agreements are regulated agreements then the customer is given a statutory right of termination under the Consumer Credit Act. If exercised, the most that MBFS can recover from the customer is half the total amount that is payable under the agreement.
4. It is common ground that the Leasing agreement constitutes a supply of services for VAT purposes. There is no provision in the contract for the customer to acquire the property in the vehicle. But the parties are divided as to whether the Agility agreement with its substantial optional payment for the acquisition of the vehicle falls to be treated in the same way.
5. The first submission of HMRC is that, properly construed, Article 14(2)(b) identifies as a supply of goods any contract of hire under which title will normally pass no later than upon payment of the final instalment. In other words, that the reference in Article 14(2)(b) to the contract providing that "in the normal course of events ownership is to pass at the latest …" is concerned to specify when title is to pass rather than whether or not it will pass. If this construction is correct then there is no need to venture into issues of whether, economically or otherwise, the purpose of the contract was to secure the passing of title or the significance for VAT purposes of the optionality of the right to purchase the vehicle. Article 14(2)(b) would catch every hire contract under which the customer is able to acquire title to the goods by no later than the payment of the final instalment.
6. Mr Thomas for HMRC argued before the First-tier Tribunal that this construction of Article 14(2)(b) derived support from the French language version of the text of the Directive which does not refer as such to the normal course of events but states:
"la remise matérielle d'un bien en vertu d'un contrat qui prévoit la location d'un bien pendant une certaine période ou la vente à tempérament d'un bien, assorties de la clause que la propriété est normalement acquise au plus tard lors du paiement de la dernière échéance"
7. The First-tier Tribunal followed what seems to have become its normal practice of declining to enter into a consideration of any foreign language version of the Directive without the benefit of expert assistance: see e.g. Volkswagen Financial Services (UK) Ltd v Revenue and Customs Commissioners [2012] SFTD 190 at [60]. The First-tier Tribunal rejected this argument and it was not pursued on appeal to the Upper Tribunal. We have therefore heard no substantive argument on the point, although HMRC have reserved their right to take the point on any reference of this case to the CJEU.
8. The argument before the Upper Tribunal therefore concentrated on whether the First-tier Tribunal was right to hold that a contract of hire falls within Article 14(2)(b) if, under its terms, the passing of title in the goods is a normal rather than an abnormal event. The First-tier Tribunal had set out it reasons in [91]–[96] of its Decision: ( [2013] UKFTT 381 (TC)):
"91. The Tribunal prefers HMRC's alternative construction of in normal course of events namely that the possible passing of title was an essential feature of Agility rather than an eventuality which may only arise in limited and exceptional circumstances. HMRC's alternative construction did not stray away from the governing principle that the application of Article 14(2)(b) was determined by the terms of contract. The Tribunal's analysis of Agility's terms found that the option to purchase constituted the sole realistic option under the agreement. The transfer of ownership was, therefore, central to the Agility contract, not tangential.
92. The phrase normal course of events is directed at the legal realities of a contract for sale with an option to purchase. The phrase recognises that under the terms of such a contract ownership might not pass but that possibility did not prevent the contract from being a contract for sale under which ownership normally transferred. Thus the fact that ownership might not transfer under the Agility contract did not preclude it from being a contract for sale. The passing of title was central to Agility which meant that ownership would normally pass under its terms.
93. This Tribunal has arrived at the same conclusion as expressed in Rodney Hogarth:
"What usually happens under a hire purchase transaction is that the customer makes the payments and eventually becomes the owner of the goods, in both cases in accordance with the hire purchase agreement. In my judgment that course of events is one which is referred to in Article 5.4 as 'the normal course of events', and such an agreement is an example of an agreement which 'expressly contemplates' that the property 'will'...
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