England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL

		Royal Courts of Justice Strand London WC2 Wednesday, 12th December 2001

1. LORD JUSTICE THORPE: Laws LJ will give the first judgment.
2. LORD JUSTICE LAWS: This is a taxpayer's appeal brought with permission to appeal granted by Chadwick LJ on 17th May 2001 against a decision of His Honour Judge Stephen Oliver QC, sitting as the Chairman of the Value Added Tax and Duties Tribunal, made on 4th April 2001. On that occasion the Chairman dismissed the appellants' appeal against the assessment of VAT made by Her Majesty's Commissioners for Customs & Excise. At the request of the parties, the Chairman decided the issue in the case without a hearing and gave a certificate pursuant to the VAT Tribunals Appeals Order 1986 allowing an appeal from his judgment to go direct to this court rather than a judge of the Administrative Court.
3. The background was that an earlier case on the same point, which I will describe in a moment, had been decided by His Honour Judge Oliver and two members of the Tribunal in favour of the Customs & Excise and appealed to the High Court, where Moses J had dismissed the taxpayer's appeal. Permission to appeal against Moses J's decision had been granted by Peter Gibson LJ on 31st July 2000, but the appeal had been abandoned, as I understand it, after the taxpayer company in that case went into receivership. That case is reported as Parker Hale Ltd v Commissioners of the Customs & Excise [2000] STC 388. It seems to be generally agreed that the issue needs to be resolved by this Court.
4. In the present case an agreed statement of facts was lodged with the Tribunal, and the Chairman expressed himself satisfied (paragraph 6) "that the relevant facts are in all material respects the same as those in the Parker Hale appeal". The agreed statement of facts was set out in a schedule to the Chairman's judgment, and I will set it out:

"1. The Appellants carry on the business of retaining guns (and a small amount of repair work) from their premises at 53 Chipstead Valley Road, Coulsdon, Surrey, CR5 2RB.

2. The Appellants were registered for the purposes of VAT with effect from 8 May 1992 under VAT registration no. 602398549.

3. Following the tragedy at Dunblane, the Firearms (Amendment) Act 1997 ('the 1997 Act') was enacted. Section 1 amended section 5 of the Firearms Act 1968 so as to make it an offence in general to have in one's possession, purchase, acquire, manufacture, sell or transfer most handguns.

4. Section 15 of the 1997 Act empowered the Secretary of State to make such arrangements as he thought fit to secure the orderly surrender at designated police stations of firearms or ammunition the possession of which would become or had become unlawful by virtue of section 1 or 9 of the 1997 Act.

5. Section 16 of the 1997 Act provided that the Secretary of State should, in accordance with any Scheme made by him, 'make payments in respect of firearms and ammunition surrendered at designated police stations in accordance with the arrangements made by him under section 15'.

6. Section 17 of the 1997 Act provided that the Secretary of State should also, in accordance with any Scheme which might be made by him, make payments in respect of ancillary equipment of any description specified in the Scheme. 'Ancillary equipment' was defined to mean equipment, other than 'prohibited ammunition', which is designed or adapted for use in connection with firearms which are prohibited by section 1 of the [1968] Act and has no practical use in connection with any firearm which is not a prohibited weapon. Section 18(1) refers to such a Scheme as 'a compensation scheme'.

7. The Secretary of State, in execution of his duty under the 1997 Act, made a Scheme (approved by the resolution of each House of Parliament) headed 'Firearms (Amendment) Act 1997 - Large Calibre Handgun Compensation Scheme ("the Scheme")'. It provides that the compensation will be paid for prohibited large calibre handguns (paragraph 2) and ancillary equipment (paragraph 3). Any property for which compensation is sought must be surrendered to the police in accordance with arrangements made by the Secretary of State paragraph 7. Under the Scheme, there are three options for claiming compensation: Option A, which is a flat rate payment for individual items, Option B, which is a payment for an individual item at the relevant price contained in the list of values annexed to the Scheme, and Option C, which is a payment based on an individual valuation of an item's full market value as at or immediately before 16 October 1996.

8. The Appellants were the owners of articles which it would become unlawful for them to possess as from the coming into force of the 1997 Act, as well as certain ancillary equipment, all of which qualified for compensation under the Scheme. The articles were surrendered by them to a designated police station on or before that date. The overwhelming majority of guns surrendered in accordance with the Scheme were destroyed. A small number may have been retained by the police for training purposes or, if a particular weapon was of interest, retained for public display in museums. Those surrendering the guns had no knowledge of which guns might be retained for training purposes or preserved for display. The Appellants claimed compensation under Options A, B and C, totaling £96,806.52. To the extent that the claim was accepted it has been paid in full.

9. On 14 January 1998, the Commissioners notified the Appellants that the surrender of firearms and ammunition under the Scheme constituted the making of a taxable supply by the Appellants for VAT purposes.

10. By letter dated 28 March 1998 the Appellants informed the Commissioners that they had received a payment by way of compensation under the Scheme but had not accounted for it in the partnership's VAT return for the period ended February 1998. Since the Appellants did not account for VAT on compensation received by them in that and the following period, the Commissioners issued an assessment to tax on 13 May 1998.

11. The Appellants submitted a Notice of Appeal against that assessments on 22 May 1998."

5. The schedule also includes an agreed statement of issues which the Chairman was satisfied were issues identical to those which arose in Parker Hale. The agreed statement of issues is in these terms:

"1. The issue arising in this appeal is whether the surrender of certain articles effected by Appellants pursuant to the Large Calibre Handguns Compensation Scheme ('the Scheme') made under the Firearms (Amendment) Act 1997, sections 15 to 18 constitutes a taxable 'supply of goods' within the meaning of the Value Added Tax Act 1994 and EC Council Directive 77/388 EEC and, if so, whether the value of that supply is such sum as together with the value added tax thereon is equal to the amount of compensation paid to the Appellants in connection with the surrender.

2. It is accepted by the Appellants that they were at the material time taxable persons and that if they did make a taxable supply, that supply was made in the course or furtherance of a business carried on by them."

6. For the very good reason that he was, in any event, bound by Moses J's decision in Parker Hale, in which it was accepted that the facts and issues were the same, the Chairman did not rehearse the arguments which he had himself addressed in Parker Hale but simply dismissed the appeal, following Moses J.
7. It is convenient first to set out the essentials of the statutory compensation scheme. Its backdrop was the Firearms (Amendment) Act 1997, which amended earlier firearms legislation in light of the tragic shootings which had taken place at Dunblane. Section 1, amending section 5 of the Firearms act 1968, made it an offence to have in one's possession, to purchase, acquire, manufacture, sell or transfer most handguns. Section 15 provided:

"(1) The Secretary of State may make such arrangements as he thinks fit to secure the orderly surrender at designated police stations of firearms or ammunitions the possession of which will become or has become unlawful by virtue of section 1 or 9 above."

8. It is unnecessary to refer to section 9.
9. Section 16(1) provided:

"The Secretary of State shall, in accordance with a scheme made by him, make payments in respect of firearms and ammunition surrendered at designated police stations in accordance with the arrangements made by him under section 15 above."

10. The Secretary of State duly made a scheme of compensation which came into force on 1st July 1997, that is to say three months before it would become an offence pursuant to section 1 of the 1997 Act to possess a handgun. The relevant provisions of the scheme were succinctly described by Moses J:

"By paragraph 7 of the Scheme of Compensation:

'Any property for which compensation is sought must be surrendered to the police in accordance with the arrangements made by the Secretary of State.' (The police will inform individuals and dealers where and when to surrender their property)."

11. Then:

"By paragraph 18 of the Scheme:

'Once surrendered, all guns and equipment will be stored securely by the police until such time as disposal instruction is issued.'"

12. Moses J continued:

"The claimants had a choice of claiming, under various heads, and payments of claims were to be acknowledged once claims had been made. Paragraph 32 of the scheme reads:

'All properties subject to a compensation claim will be retained by the police until such time as they receive a formal instruction from the Home Office Firearm's Compensation Section that the property in question may be disposed of. Once such an instruction has been received the property will be disposed of at the discretion of the Secretary of State.'"

13. Then:

"Paragraph 33 provides:

'For claims made...the FCS [that I understand to be the Firearms Compensation Section] will normally issue disposal instructions to the police as soon as the claims are received in initial examination. However, they will do so only where such claims appear to be fully in order and if there are no reasons to believe that early disposal might be appropriate.'"

14. Moses J observes:

"When surrendering a handgun, a claimant was required to make a declaration as follows:

'I hereby declare that by surrendering to the police on [such and such a date] the items described in Part "C" of this form I have relinquished any entitlement to the ownership or use of the said items.'"

15. It seems to me plain from the shape of the scheme that the relinquishment there referred to has the effect that the title to the goods is transferred away from the original owner to the Secretary of State.
16. In Parker Hale, and in the present case of course, the appellants had handed in their guns and received appropriate compensation under the scheme.
17. Now I should set out the relevant Value Added Tax legislation. First the European measures. The First Directive, 67/227/EEC, provides, in part by Article 2:

"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged."

18. I may break off there and go to the Sixth Directive, which is the principal European provision. Article 2:

"The following shall be subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such..."

19. Article 5(1):

"'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner."

20. Then 5(4):

"The following shall also be considered supplies within the meaning of paragraph 1:

(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..."

21. I should say that there was no order in this case, as appears from the shape of the scheme, so that Article 5(4) is not directly in play, but it perhaps demonstrates that in principle a state of affairs in which property is transferred to a public authority against payment of compensation is or may be within the scope of value added tax.
22. Article 6(1):

"'Supply of services' shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.

Such transactions may include inter alia:

- assignments of intangible property whether or not it is the subject of a document establishing title,

- obligations to refrain from an act or to tolerate an act or situation."

23. Then lastly 11A(1):

"The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies..."

24. Now I may go to the domestic legislation. That is to be found in the Value Added Tax Act of 1994, which, as I understand it, consolidated the earlier provisions that had commenced with legislation in 1972 introducing Value Added Tax into the United Kingdom.
25. Section 1(1):

"Value added tax shall be charged, in accordance with the provisions of this Act -

(a) on the supply of goods or services in the United Kingdom (including anything treated as such a supply)..."

26. Section 4(1):

"VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."

27. Section 5(1):

"Schedule 4 shall apply for determining what is, or is to be treated as, a supply of goods or a supply of services."

28. And 5(2):

"Subject to any provision made by that Schedule and to Treasury orders under subsections (3) to (6) below -

(a) 'supply' in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."

29. Then lastly Schedule 4 paragraph 1(1):

"Any transfer of the whole property in goods is a supply of goods; but, subject to sub-paragraph (2) below, the transfer -

(a) of any undivided share of the property, or

(b) of the possession of goods, is a supply of services."

30. I need not, I apprehend, trouble with paragraph 2.
31. In Parker Hale Moses J succinctly summarised, if I may say so, the argument presented by Mr Venables QC for the taxpayer. Paragraph 22 of his judgment:

"The essential argument advanced by Mr Venables, QC, on behalf of Parker Hale, is that VAT is a tax on consumption. It is not enough to show that the title to the handguns was transferred to the government; there must be consumption by the government before transfer of ownership gives rise to a charge to tax. That is made clear by Article 2 of the First Directive. VAT is not a tax on the transfer of title - like stamp duty - nor is it a tax on income.

23. In this case the government, he contends, was not a consumer. Under the Scheme, the government was, in reality, compensating those in the business of supplying handguns for the loss they have suffered as a result of the effects of the 1997 Act. The effect of that Act was to render the guns they held worthless. The Scheme was designed to reinforce the prohibition contained in Section 1 of the 1997 Act by providing an inducement to ensure that such guns were taken out of circulation. The guns were of no use to the government. The effect of the Scheme was just the same as if there had been no surrender, but retailers and manufacturers had been asked to bring the guns to appointed places for destruction, under supervision. The purpose of the surrender was merely to ensure that compensation was calculated correctly and paid only in appropriate cases; in other words, to ensure that the Scheme was properly administered. The government was not a consumer, because the guns were only received for the purpose - save in a few exceptions - of destruction. As it was summarised by Mr Venables in his outline written argument:

'The payments were compensation for the sterilisation of assets.'

24. That sterilisation had already occurred before any surrender was made. It was plain that Section 1 was going to come into force on 1st October 1997. Further, the payments were made by the State as part of a statutory scheme conceived as promoting a general public benefit and in satisfaction of a moral obligation of the State to compensation those injured, by the measures within the 1997 Act introduced for the general good."

32. These submissions thus summarised have been repeated before us. Mr Venables has presented the argument with great force. He relies on two decisions of the Court of Justice, which indeed were discussed by Moses J in Parker Hale. The first is Mohr v Finanzamt Bad Segeberg [1996] STC 328. There it was held that compensation paid in return for an undertaking given by farmers to discontinue milk production was not liable to value added tax because such an undertaking did not constitute a supply of services. Here is what the court said, at paragraphs 19 to 21 of its judgment:

"19. It should be recalled that, according to art 2(1) of EC Council Directive 67/227 of 11 April 1967...VAT is a general tax on the consumption of goods and services.

20. In a case such as the present one, there is no consumption as envisaged in the Community VAT system.

21. As the Advocate General notes at point 27 of his opinion, by compensating farmers who undertake to cease their milk production, the Community does not acquire goods or services for its own use but acts in the common interest of promoting the proper functioning of the Community milk market."

33. Then I may go to the Advocate General's opinion. Mr Venables took us to a number of passages, but for my purpose I apprehend it is only necessary to read the opening two sentences of paragraph 27:

"The scope of the tax is nevertheless limited by its character as a tax on consumption. A trader must supply goods or services for consumption by identifiable customers in return for a price paid by the customer or by a third party. In the present case that requirement is not met."

34. Reference was also made, as I said, as it was before Moses J, to a second case. That was Landboden-Agrardienste GmbH & Co KG v Finanzamt Calau [1998] STC 171. In that case a payment had been made by the German government to a farmer in return for an undertaking to reduce his potato harvest by at least 20 per cent. Again, it was held that value added tax was not chargeable because there was no supply of services. I go first to the court's judgment. Paragraph 19:

"As the Advocate General has pointed out in paras 21 to 29 of his opinion, the arguments put forward by the German government and the Finanzamt do not undermine the reasoning adopted by the court in Mohr."

35. Then 23:

"A transaction such as that at issue in the main proceedings, namely the undertaking given by a farmer to reduce production, does not fall within the scope of that principle [that is to say the principle stated in Article 2 of the First Directive] because it does not give rise to any consumption. As the Advocate General has pointed out in para 26 of his opinion, the farmer does not provide services to an identifiable consumer or any benefit capable of being regarded as a cost component of the activity of another person in the commercial chain.

24. Since the undertaking given by a farmer to reduce production does not entail either for the competent national authorities or for other identifiable persons any benefit which would enable them to be considered to be consumers of a service, it cannot be classified as a supply of services within the meaning of art 6(1) of the Sixth Directive."

36. Then in the opinion of the Advocate General (as in the case of Mohr, the Advocate General was Mr Francis Jacobs), this is said:

"It is argued [by the German government] that, by requiring that the public authority must receive a supply for its own use, the court [in the Mohr case] has added a condition not provided for in the Sixth Directive. The German government supports that conclusion with the - rather exotic - example of an individual who purchases a south seas island; the sale of the island would constitute a supply of goods within the meaning of the Sixth Directive regardless of whether the person actually used the island. The German government adds that a subsidy may constitute the consideration for a supply of services even though it is paid in the general interest.

20. The German government considers that the court's ruling in Mohr results in a distortion of competition. It gives the example of a farmer who grows certain produce for a cost of DM 100. However, market conditions are such that it would only be able to sell it for DM 1. To offset the losses he receives DM 99 from the Community. Under art 11A(1)(a) the taxable amount would be DM 100. If, on the other hand, the Community had bought the produce for DM 100 in order to stabilise the market, the German government considers that the subsidy would not be subject to VAT by virtue of the ruling in Mohr. It points out that the taxable person acts in the same way and receives the same income; yet in one case he makes a supply subject to VAT but in the other does not.

21. The German government's example is not wholly apposite because, as I shall explain, in the second example there would in my view be a supply of goods within the meaning of the Sixth Directive. There is, however, a more basic flaw in the German government's argument: it fails to recognise that VAT is not a tax on income but a tax on consumption. A taxable person's income is relevant for VAT purposes only if it constitutes the consideration for a supply of goods or services to a consumer. If there is no consumption then there should be no VAT.

22. In that regard it is necessary to distinguish between supplies of goods and supplies of services. As the German government illustrates with its south seas island example, a supply of goods by a taxable person always entails consumption regardless of the use, if any, to which the goods are put. Consumption in the context of VAT does not mean actual use but merely the acquisition of the right to dispose of the goods as owner. Where goods pass down the commercial chain they must be subject to VAT - it would be unworkable if tax authorities had to inquire whether there was actual enjoyment of the goods.

23. Thus, if a public authority acquires land with a view to the construction of a motorway but in the event does nothing with it, there is still a supply of goods. Moreover, the fact that the purchase is made in the public interest of a sound transport policy does not remove it from the scope of VAT...

24. The position regarding services is, however, more complex. Services are defined residually in art 6 of the Sixth Directive as 'any transaction which does not constitute a supply of goods'. The acquisition of a service is more difficult to verify than the acquisition of goods. Any payment, except perhaps a gift, will have conditions attached to it whose performance might, by creative use of language, be described as a service.

25. In order to determine whether a service has been provided within the meaning of the Sixth Directive, however, it is necessary to examine the transaction in the light of the aims and characteristics of the common VAT system..."

37. Moses J concluded as follows (paragraph 49):

"I conclude, in reliance upon the Advocate General's statement of principle [and he is referring to the passages I have just cited, including paragraph 22] - which seems me to have been endorsed by the European Court of Justice - that the fact that the government acquired the guns for destruction is irrelevant. The significant feature of the transaction was that Parker Hale Limited transferred title to the guns to the government. Thus, the supply of guns gave rise to consumption by the government. Consumption does not depend upon questions of whether there is any further use for the guns, or if they were destroyed, but upon the acquisition of title to the goods. The acquisition in the instant case was no different from the purchase of a portrait of a well-known politician for purposes of destruction by his wife.

50. Nor do I think that it is relevant that the acquisition of the title was made in the context of a scheme of compensation. True it is that the machinery for the compensation scheme could have been different, and not involved any transfer of title at all. There would have been no supply of goods chargeable to VAT. But in the instant Scheme there was a surrender of the guns involving acquisition by the Government of the right to dispose of those guns, as owner. The acquisition of that right - or to put it more shortly, the acquisition of title - was at the very core of the transaction; that was sufficient to give rise to consumption on the part of the government."

38. I repeat for convenience Article 5(1) of the Sixth Directive and Schedule 4 paragraph 1(1) of the Value Added Tax Act:

"5(1) 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner."

39. Schedule 4 paragraph 1(1):

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

40. It seems to me with respect to the submissions made by Mr Venables to be inescapable that the surrender of the guns here pursuant to the scheme made under the 1997 Act was a transfer of the whole property in goods within Schedule 4 paragraph 1(1) of our municipal statute, and so constitutes a supply. In my view, this is consistent with the European jurisprudence. In my judgment, the passage in the Advocate General's opinion in Landboden, not least paragraph 22, shows that in the case of a supply of goods, consumption is to be effectively presumed; and motive is irrelevant.
41. The difficulties that can arise in the identification of a supply of services which might be read too widely if it was unnecessary to consider consumption distinctly simply do not arise. Mr Advocate General Jacobs' observations in paragraph 22 of his opinion in Landboden were, as it seems to me, endorsed by the Court of Justice. I do not accept that they constitute any departure from principle. Nor can I accept that the question whether there has been a taxable supply of goods can at all depend on the motive or intentions of the goods' recipient. That would be an impractical result, introducing all sorts of uncertainty into the administration of this tax. Furthermore, I cannot accept that the fact that the recipient is the State can make a difference.
42. Mr Venables has submitted with great force and clarity that in truth the transaction here was not about the transfer of property in goods at all. It was about compensating the owners for property they had which had become worthless. There is no doubt that that is the backdrop to what was done. But we are not concerned here with equities or discretions or motives, but with whether the transaction fell within the taxing words in the statute and the directive. For the reasons I have given, it seems to me plain that it did.
43. Mr Venables advanced a further argument. He says that there was no consideration for the supply here, if supply there had been. For this purpose he relies on Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509. There the Court of Justice held that a busker's receipts were not consideration for the music supplied by him. In paragraph 14, and following, of its judgment the Court of Justice said this:

"14. It follows that a supply of services is effected 'for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

15. ...

16. If a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them.

17. First, there is no agreement between the parties, since the passers-by voluntarily make a donation, whose amount they determine as they wish. Second, there is no necessary link between the musical service and the payments to which it gives rise. The passers-by do not request music to be played for them; moreover, they pay sums which depend not on the musical service but on subjective motives which may bring feelings of sympathy into play. Indeed some persons place money, sometimes a considerable sum, in the musician's collecting tin without lingering, whereas others listen to the music for some time without making any donation at all."

44. Mr Venables submits that in this present case, the payments were not made in return for the passing of title to the guns, but, as I said, to compensate the appellants for the loss occasioned to them by the primary provisions of the 1997 Act. But that is again an appeal to motive. It seems to me that Tolsma was a wholly different case. Mr Venables says that here too, as in Tolsma, the payments were voluntary because Parliament was not obliged to compensate the appellants. But as my Lord Morland J pointed out in the course of argument this morning, once the scheme was promulgated and acted on, its beneficiaries could clearly insist on its fulfilment by the government, through the courts if necessary. In my judgment, there was here the necessary mutuality or direct link, and plainly a legal relationship between supplier and recipient so that the payment of compensation constituted consideration for the supply of the handguns.
45. For these reasons, it seems to me that there was consideration for the supplies. The appellants' appeals were rightly dismissed, and Moses J arrived at the correct conclusion in Parker Hale. I would accordingly dismiss the appeal.
46. I should say that Mr Venables has submitted that we should consider referring the case to the Court of Justice under Article 234/X/177 of the Treaty of Rome. For my part, I would decline to do so as a matter of discretion. We are not or not necessarily the last court for the purposes of Article 234, but, in any event, I have to say that I consider the proper resolution of this case to be very plain indeed. Accordingly, I would dismiss the appeal.
47. LORD JUSTICE THORPE: I agree.
48. MR JUSTICE MORLAND: I also agree.
Order: Appeal dismissed with costs.