England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR. JUSTICE FERRIS
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL Wednesday 17th October 2001

THE VICE-CHANCELLOR :

1. At all material times down to, but not including, 28th February 1995 Thamesbank Developments Ltd ("TDL") was a wholly owned subsidiary of Barclays Bank plc ("Barclays"). It was treated as a member of the Barclays' Group for VAT purposes. On 24th February 1995 Barclays contracted with TDL for the latter to fit out premises at Canary Wharf which it was intended should be occupied by BZW, a division of Barclays, and paid to TDL the sum of £149.6m due thereunder. On 28th February 1995 the shares in TDL held by or on behalf of Barclays were transferred to the trustees of a charitable trust called the Felix Trust. On the same day Barclays informed the Commissioners of Customs & Excise ("Customs") of that fact, claimed that TDL was no longer eligible to be treated as a member of the Barclays Group for VAT purposes and requested Customs to exclude TDL from the Barclays Bank VAT group from midnight on 28th February 1995.
2. Customs did not accept that the consequence of the change in control of TDL was that it automatically ceased to be a member of the Barclays VAT group. On 15th June 1995 Customs notified Barclays that TDL would be removed from the VAT group at the beginning of the accounting period to commence next after the expiration of 90 days from the first notification on 28th February 1995, that is on 1st July 1995.
3. Thus the issue is whether TDL ceased to be a member of the Barclays VAT group on 28th Febuary 1995, as Barclays contends, or on 1st July 1995, as maintained by Customs. The materiality of the issue derives from s.25 Finance Act 1995. It came into force on 1st March 1995 and affects the liability of Barclays for VAT. If TDL was a member of the Barclays VAT group on that date then the liability of Barclays for VAT is substantially greater than if it were not. Both the VAT and Duties Tribunal (Mr Stephen Oliver QC) and Ferris J, whose judgment is reported at [2000] STC 665, concluded that TDL had automatically ceased to be a member of the Barclays VAT group on the change of control occurring on 28th February 1995. This is the appeal of Customs brought with the permission of Aldous LJ.
4. There is no dispute as to the relevant facts. The issue depends on the true construction of s.43 VAT Act 1994 in the context of the Sixth VAT Directive (77/388/EEC).
5. The Sixth Directive constituted a further stage in the evolution of the common system of turnover tax for which provision was made in Art 99 EEC. It superseded the earlier directives on the basis of which VAT was introduced into the United Kingdom by Finance Act 1972. So far as relevant it provides:

"Article 4

1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services...

3....

4. The use of the word "independently" in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person, persons established in the territory of the country who, while legally independent are closely bound to one another by financial, economic and organisational links."

As is apparent from the terms of Article 4.4 employees cannot be independent of their employers; but in the case of persons legally independent but closely bound to one another by financial, economic or organisational ties Member States have a discretion whether or not to treat them as independent.

6. Effect was given to the Sixth Directive in the United Kingdom at the relevant time by s.43 VAT Act 1994. Where in accordance with the provisions of the section any bodies corporate are treated as members of a group then any business carried on by any of them is treated as carried on by the representative member thereof. To that end supplies by one member of the group to another are disregarded, supplies by or to any member of the group to or by someone outside the group are treated as being made by or to a representative member of the group and imports by any member of the group are treated as made by the representative member.
7. The provisions relating to its application are contained in subsections (3)-(8) in the following terms:

"(3) Two or more bodies corporate are eligible to be treated as members of a group if each is resident or has an established place of business in the United Kingdom and-

(a) one of them controls each of the others; or

(b) one person (whether a body corporate or an individual) controls all of them; or

(c) two or more individuals carrying on a business in partnership control all of them.

(4) Where an application to that effect is made to the Commissioners with respect to two or more bodies corporate eligible to be treated as members of a group, then, from the beginning of a prescribed accounting period they shall be so treated, and one of them shall be the representative member, unless the Commissioners refuse the application; but they shall not refuse it unless it appears to them necessary to do so for the protection of the revenue.

(5) Where any bodies corporate are treated as members of a group and an application to that effect is made to the Commissioners, then, from the beginning of a prescribed accounting period-

(a) a further body eligible to be so treated shall be included among the bodies so treated; or

(b) a body corporate shall be excluded from the bodies so treated; or

(c) another member of the group shall be substituted as the representative member; or

(d) the bodies corporate shall no longer be treated as members of a group,

unless the application is to the effect mentioned in paragraph (a) or paragraph (c) above and the Commissioners refuse the application; but they shall not refuse it unless it appears to them necessary to do so for the protection of the revenue.

(6) Where a body corporate is treated as a member of a group as being controlled by any person and it appears to the Commissioners that it has ceased to be so controlled, they shall, by notice given to that person, terminate that treatment from such date as may be specified in the notice.

(7) An application under this section with respect to any bodies corporate must be made by one of those bodies or by the person controlling them and must be made not less than 90 days before the date from which it is to take effect, or at such later time as the Commissioners may allow.

(8) For the purposes of this section a body corporate shall be taken to control another body corporate if it is empowered by statute to control that body's activities or if it is that body's holding company within the meaning of section 736 of the Companies Act 1985; and an individual or individuals shall be taken to control a body corporate if he or they, were he or they a company, would be that body's holding company within the meaning of that Act."

8. There are a number of points to be noted. First eligibility for membership of a VAT group depends on both (a) residence or an established place of business in the United Kingdom and (b) the relevant control. S.43(3). Second, the question of corporate control is to be determined in accordance with the provisions of the Companies Act 1985. S.43(8). It has been held and is not in dispute that such test is exhaustive. British Airways Board v Commissioners of Customs & Excise [1979] Vat Dec 846. Third, where the two conditions of eligibility are satisfied membership of the group still depends on an application being made to the Customs for the purpose. Customs may only reject the application if it is necessary to do so for the protection of the revenue. S.43(4) and (5)(a). In each case membership starts at the beginning of a prescribed accounting period. Fourth, the express provisions dealing with the exclusion of a member of the group, s.43(5)(b) and (6), depend on a prior application to or notice from Customs and take effect from dates not referable to the cesser of eligibility.
9. Mr Oliver QC, the chairman of the VAT and Duties Tribunal, rejected the submissions of Customs that the provisions of s.43(6) were inconsistent with the contention that membership of a group automatically ended when the condition for control ceased to operate but did entitle Customs to specify the date on which membership should come to an end. In paragraph 12 of his decision he said:

"This argument is, I think, based on a misinterpretation of subsection (6). In the scheme of section 43, the function of subsection (6) is to empower the Commissioners of their own initiative to direct that one or more companies are to be degrouped with effect from a particular date. Subsection (6) stands independent of subsections (5) and (7) and the 90 day time delay has no bearing on the scope of the Commissioners' power. The power to direct degrouping is evidently needed to cope with situations where there might be two views as to who actually exercises control. Control is not expressed (in subsection (8)) solely as control in the Companies Act sense. The holdings of individuals, partnerships, trusts, unincorporated associations, syndicates etc may be relevant. De facto control may be in point. Where for example trustees and personal representatives hold voting rights over shares the question of who is in control of those rights may be susceptible to two or more valid answers. The power is available to the Commissioners where for reasons, good or bad, the companies in the VAT group are unwilling (or unable) to make applications under subsection (5). It is limited to specifying a date on which the elibility conditions ceased, or appear to have ceased, to be satisfied. What the subsection does not do is to give the Commissioners power to force a company to be a member of a VAT group contrary to the rules set out in subsections 7 and 8. To interpret it as conferring a power of that nature would, I think, go beyond the scope of Article 4.4."

He concluded that the Customs exceeded their statutory powers when they directed that TDL did not leave the Barclays VAT group until 1st July 1995 and allowed the appeal.

10. Ferris J, to whom Customs appealed, described the argument that unless Customs contentions were correct s.43(6) was redundant as "the strongest in favour of the Commissioners". But he did not share the view of Mr Oliver QC, to which I have referred in paragraph 9 above, on the grounds that whether and if so when control has been lost can be determined by the Court. He added, in paragraph 13:

"I can see that there would be utility in having machinery which might avoid the need to have the question of change of control determined by the court, but I have difficulty in accepting that subsection (6) was included just for that purpose. In any event it would be of no help where the member is unwilling to accept that grounds for termination exist."

He also rejected an alternative submission advanced by counsel for Barclays and concluded in paragraph 15:

"I therefore see no real escape from the proposition that if Barclays is correct subsection (6) has no work to do and operates only in a case where a member of a group accepts that there has been a change of control and does not seek to challenge the date specified by the Commissioners. Nevertheless the fact remains that unless Barclays is correct the United Kingdom 1egislation will have the effect of conferring group treatment on an entity which was formerly entitled to that treatment but has ceased to be eligible for it. I cannot reconcile such treatment with the second indent of Article 4.4 of the Directive and I find myself unab1e to interpret the legislation in this way. I consider that the argument advanced by Barc1ays is correct."

11. Ferris J considered, in paragraph 16, that his conclusion was supported by the fact that s.43(6) deals only with change in control; neither it nor any other subsection deals with a change in residence or loss of an established place of business in the United Kingdom. He thought that it was unlikely to have been intended that a company which had ceased to comply with that condition but refrained from applying for exclusion under s.43(5)(b) should continue to be a member of a VAT group. He held that membership must automatically cease with a change in residence or loss of a place of business in the United Kingdom. If membership ceased with eligibility then it must do so for both conditions for eligibility not only that dealing with residence or place or residence.
12. Customs contend that both Mr Oliver QC and Ferris J were wrong. They point out that Art 4.4 confers a power or option on a Member State to treat two or more persons closely bound to one another by links of the appropriate description as one person without prescribing in any way the mechanism by which that may be done. They point to the contrast with Art 22 which deals in some detail with the obligations of Member States with respect to the mechanics of their own internal systems. They submit that Ferris J was wrong to conclude (paragraph 15) that their argument was irreconcileable with Art 4.4. Their argument is that on its proper construction s.43 provides a sensible and workable scheme whereunder both entry to and exit from a group is regulated by subsections (4) to (6); in particular, that exit from a group is not automatic but dependent on an application by the company under subsection (5)(b) or a notice from the Customs under subsection (6).
13. Barclays submits that Ferris J was right for the reasons he gave. It is contended on their behalf that membership of a group ceases automatically when the conditions for eligibility cease. They rely on the point which appealed to Ferris J that there is no provision which deals with the position if the condition as to establishment prescribed by Art 4.4 implemented by the requirement of residence or an established place of business in s.43(3) is no longer satisfied. In that event membership of a group may be continued long after eligibility has ceased. If ceasing to be eligible because of a change in residence gives rise to the automatic exclusion from the group then, it is submitted, so must ceasing to be eligible because of a change of control.
14. I prefer the submissions for Customs. First, the fact that s.43 is silent as to the consequences of a change in residence does not mean that the consequences of a change in control, for which specific provision is made, must be the same. We are concerned with a change in control for which subsection 5(b) allows and subsection (6) makes specific provision. The question is whether that provision is consistent with Art 4.4.
15. Second, it is necessary to appreciate that there was and is an obligation on at least the registered group representative to notify Customs of any change in the constitution or ownership of his business or of any other event which might necessitate the variation of the register. VAT (General) Regulations SI 1985/886 reg.4 and Value Added Tax Regulations 1995 SI 1995/2518 reg. 5(2). These obligations are enforcible pursuant to s.69(1)(c) and Sch.11 para 7 VAT Act 1994. By virtue of s.43(6) if it appears to Customs from such notification or otherwise that the relevant control has ceased then Customs is required to give a notice terminating the treatment of that company as a member of the group from such date as it may specify. It is true, as observed by Ferris J in paragraph 15 of his judgment, that the operation of subsection (6) is such as to confer on a company the benefit of group relief for the period from the change of control to the date specified in the notice. But the benefit is not unlimited. Nor in my view is there anything in Art.4.4 to exclude that limited benefit in the interests of providing for a scheme which is practically operable as a whole.
16. Third, the express terms of S.43(4) are mandatory. Thus where two or more bodies corporate are eligible for group treatment and an application to that end has been made then, with one exception not relevant in this case, "from the beginning of a prescribed accounting period they shall be so treated..". The express provisions for the termination of that treatment are contained in subsections 5(b) and (6). Barclays seeks to imply a third from the requirement of eligibility. I see no sufficient reason for doing so. The commencement of group treatment does not begin with the onset of eligibility but with the beginning of a prescribed accounting period. The express provisions for the termination of such treatment do not provide that it should be coterminous with the cesser of eligibility either. Given the notification provisions to which I have referred and the other sources of information available to Customs the implication is not necessary to make the provisions work nor to provide consistency with Art.4.4.
17. Fourth, as Ferris J correctly observed in paragraph 15 of his judgment, if the argument for Barclays is accepted it will deprive subsection (6) of any real effect. It follows that the implication for which Barclays contends is not only unnecessary but inconsistent with the express terms of s.43(6).
18. It was suggested by Customs that if we do not accept the argument for Customs then we should refer to the European Court of Justice the question whether under Art 4.4 a Member State is permitted in the interests of orderly and efficient administration of VAT to continue to treat a company as a member of the group for a reasonable period of time after the relevant links have been severed. In my view the issue is one of the proper interpretation of s.43 and it is clear that there is nothing in Art.4.4 to preclude the interpretation I consider should be adopted. It follows that I see no scope, let alone need, to make any reference on what is permitted by Art 4.4.
19. For all these reasons I would allow the appeal, set aside the orders of both Ferris J and the Tribunal thereby restoring the decision of the Commissioners of Customs and Excise contained in their letter to Barclays dated 15th June 1995 to which I have referred in paragraph 2 above.

LORD JUSTICE BUXTON:

20. I gratefully adopt the account of the facts and issues set out by my Lord. Like him, I would allow this appeal.
21. The argument of both parties started from the Sixth Directive. In my view, however, we should start from the English statute. Section 43 of the 1994 Act exercises the freedom given to Member States by article 4(4) of the Directive to treat certain persons who are legally independent of each other as a single taxable person. The section creates an intelligible scheme so to deal with companies who are, in terms of English law as described in section 43(3), members of the same group; to provide a fixed starting point, controlled by the Commissioners, for such treatment in any given case (section 43(4)); to provide for a body corporate to withdraw from the group treatment, whether or not it has ceased to be in law a member of the group (section 43(5)(b)); and for the Commissioners to take action, again at a time determined by them, to remove a body corporate from group treatment if it ceases to be in law a member of the group (section 43(6)).
22. Section 43(6) therefore provides clear statutory authority for the course that the Commissioners have adopted in this case. Barclays argue, and so persuaded Ferris J, that the sub-section must simply be ignored, because it is inconsistent with the requirement of Article 4(4) that group treatment shall only be extended to persons "eligible" for it, as being closely bound to each other by financial, economic and organisational links. The 1994 Act having chosen to express the latter concept in terms of membership of a group of companies in English law terms, once such membership ceases group treatment automatically disappears, and it is not open to the Commissioners to extend that treatment to a point in time after the company leaves the group, as section 43(6) purports to permit. Sections 43(4) and 43(5) were said not to fall under the same condemnation, because they deal, or mainly deal, with the commencement of group treatment. The Commissioners can postpone that to a time after companies have become members of the same group because, under the Directive, the Member State has a discretion whether to extend group treatment at all, and section 43(4) can be seen as the exercise of that discretion to withold treatment in a particular case and for a particular period of time.
23. Like my Lord, I am not persuaded by these arguments. I mention first the view of high authority expressed by Lord Nolan in Customs and Excise Commissioners v Thorn Materials Supply Limited [1988] STC 725 at p 733 a-c, that article 4(4) is intended to simplify and facilitate the collection of the tax, rather than introducing any fundamental change in liability to the tax itself. In that context, therefore, it is understandable, and indeed to be expected, that Member States will be afforded latitude in the detailed collection arrangements that they make. Those arrangements must, however, conform with both the letter and the spirit of the arrangements for enforcing the obligation to tax that the Directive does impose. Those are to be found, in considerable detail, in article 22 of the Directive. They place weight, as does the scheme of section 43, upon accounting in relation to tax periods. If Barclays' contention were correct, members states would lose the power to operate group treatment in relation to tax periods, but would have to recognise changes in eligibility arising in the course of a period. I do not say that such a regime would be impossible to operate, but in my view it would be a regime much less clearly in line with the overall spirit and approach of the Directive than is the system adopted by section 43.
24. I should add that I also have some difficulty with the explanation of section 43(4) advanced by Barclays. Article 4(4) would seem to envisage that a Member State may introduce a scheme for the general treatment of taxable persons, treating every relevant case alike; and that impression is reinforced by the steps taken by the Member State being subject to consultation under article 29, something plainly not appropriate for ad hoc decisions. I doubt, therefore, whether section 43(4) can be adequately justified in terms of ad hoc exercises of the Member State's discretion. If Barclays were right, therefore, it would seem that article 4(4) would require section 43 to stop at the end of section 43(3), the Commissioners' management of the the group treatment scheme being then limited to adjusting or accepting the adjustment of accounts from the date when companies entered or passed out of group control.
25. I see nothing in the Directive to require that approach; indeed, the overall spirit and provisions of the Directive point in the contrary direction. Like my Lord, therefore, I see nothing in the Directive to offset the normal meaning of section 43, and no reason to refer any issue in that regard to the Court of Justice.

LORD JUSTICE ARDEN:

26. I agree that the appeal should be allowed. I gratefully adopt the Vice-Chancellor's resume of the issues and arguments in this case. References in this judgment to the Value Added Tax Act 1994 ("VATA 1994") are to that Act as it stood at the time material to this appeal, except as otherwise stated.
27. I start from the second paragraph of Article 4(4) of the Sixth VAT Directive taken in isolation. This confers on Member States an option to treat a number of persons who are eligible to be so treated as a single taxable person. The form of this provision makes it clear that it is open of a Member State to confer single taxable person status (or group status) on a case by case basis. It is inherent in this provision, taken on its own, that a Member State which chooses to exercise this option must have an opportunity (if it wishes) of examining whether a particular case justifies single taxable person status. It is therefore consistent with the directive for implementing legislation (in the United Kingdom, VATA 1994 section 43(4), replacing earlier legislation) to require an application from the proposed constituent persons and to confer single taxable person status as from a date of the Member State's choice, based on objectively justifiable criteria. In the United Kingdom, that date is the start of a prescribed accounting period (VATA 1994, section 43(4)).
28. Such a provision is also consistent with the general purpose and spirit of the Sixth VAT Directive. As Mr Pleming QC, for the Commissioners of Customs & Excise ("CCE") submits, VAT is a self-assessed tax, dependent on orderly mechanisms and systems operated by Member States. In addition, the Sixth VAT Directive itself recognises the importance of tax periods: see in particular article 22. In the United Kingdom, these are called "prescribed accounting periods".
29. In my judgment, it would be surprising in these circumstances if single taxable person status could be dissolved without formality. As Mr Pleming points out, where the constituent persons conduct numerous transactions in the erroneous belief that the conditions for single taxable persons are fulfilled, the automatic termination of the status without formality could lead to the difficult and time-consuming unravelling of prior accounts. Those earlier accounts would have to be unwound, whereas if section 43(6) is available, the CCE can determine a date appropriate to the circumstances of the case.
30. In my judgment, Article 4(4) the Sixth VAT Directive does not deal with cesser of group status at all and there is no reason to conclude that it is inconsistent with the Sixth VAT Directive for a Member State to require an application to be made to determine single taxable person status at the behest of its members any more than it is inconsistent with it to impose a requirement for an application to be made to cause the status to begin.
31. This may mean that single taxable person status is conferred for a short period on persons who are not so entitled. But in practice (as I understand the position) this will almost always be limited to a part of a prescribed accounting period and will be for the purpose of ensuring the efficient administration of VAT. In my judgment this exception to the requirement of eligibility is justified by the aim of ease of administration in accordance with the Sixth VAT Directive's methodology and does not, as the judge thought, justify the conclusion that section 43(5) – (7) is inconsistent with Article 4(4).
32. In my judgment, section 43, even in the form in issue on this appeal, constitutes a comprehensive scheme for bringing into being, and bringing to end, single taxable person status. Accordingly, the statutory machinery must be followed. As originally enacted, section 43 did not provide a means of determining single taxable person status where the residence condition was lost. The taxpayer relies on that lacuna to support its argument that the status is lost automatically if the conditions for eligibility are no longer met. The lacuna was filled by Parliament in 1999. The fact of that lacuna might lead to the conclusion that section 43, as originally enacted, may not have properly implemented the Sixth VAT Directive, but that is a separate point and does not prove that section 43(5)-(7) is inconsistent with it.
33. Once an application for single taxable person status takes effect, the constituent members are "treated" as members of a group (see: section 43(4)). The word "treated" is apt to cover a situation where an artificial state of affairs has arisen and thus is appropriate where the conditions of eligibility, which were originally met at the time of the application, cease to be met. This means that, contrary to the conclusion of the VAT Tribunal (Chairman, Mr Stephen Oliver QC), I consider that a group could make an application for the exclusion of a member under section 43(5) even though as a result of events occurring after the application took effect that member had already ceased to be eligible to be a member of the group.
34. I agree that the Court should not refer a question to the European Court of Justice. I consider that, while it can be said that there is here a potential issue on the Sixth VAT Directive, it is one which the court can, with the requisite complete confidence decide: (see R v International Stock Exchange of the United Kingdom and Republic of Ireland Ltd [1993] QB 534 at 545 D/E per Sir Thomas Bingham MR).
35. Accordingly I too would therefore allow this appeal.
Order: Appeal allowed, set aside the orders of both Ferris J and the Tribunal thereby restoring the decision of the Commissioners of Customs and Excise contained in their letter to Barclays dated 15th June 1995 to which I have referred in paragraph 2 above. Allowed with costs here and below; detailed assessment, permission to appeal to the House of Lords refused. (Order does not from part of the approved judgment)