England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ABERDAR COUNTY COURT
MR JUSTICE PETER SMITH
CH2007APP0319

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 February 2009

The Chancellor:

Introduction
1. Quartic Motor Group ("Quartic"), of which the appellant, Brunel Motor Company Ltd, is the representative member for VAT purposes, are authorised main Ford Car Dealers pursuant to a Dealership Agreement made with Ford Motor Company Ltd ("Ford") on 11th August 1999. By a further agreement made between them and dated 1st February 2001 provision was made for the sale of certain Ford models to Quartic on what was called the "dealer sold" basis. This involved Ford invoicing the dealer on 'gate release' for the full price, though the obligation to pay was deferred until the occurrence of the first of various specified events, but on the basis that Ford retained title to the car until payment of the price in full. A number of such models were sold and invoiced by Ford to Quartic before 2nd October 2002 to a total value of some £15.8m of which £2,359,853 was in respect of VAT. Such VAT, though not paid by Quartic to Ford, had, in previous quarters, been (£1,183,232) or was, in that quarter, due to be (£1,179,621) accounted for to HMRC by Ford as output tax and by Quartic as input tax.
2. On 3rd October 2002 Quartic went into administrative receivership. This had a number of consequences. First, the VAT quarter appropriate to Quartic, due to end on 31st October, came to an end the previous day and a new VAT quarter commenced on 3rd October 2002. Second, the price, including the VAT thereon, for the cars sold became immediately due and payable by Quartic to Ford. Third, the cars sold but not paid for were liable to be repossessed by Ford. Fourth, the agreement dated 1st February 2001 terminated but without prejudice to specified rights of each party.
3. On 28th/29th October 2002, the cars sold but not paid for having been repossessed by Ford, Ford issued (a) vehicle credit notes to Quartic in respect of each of those sales under the rubric "cancels previous billings" and (b) tax invoices in respect of the same cars for the same price to Quartic under a new customer code. These documents, if correctly reflecting equivalent underlying transactions, would have the effect of discharging the debt due by Quartic to Ford in respect of the sales effected before 2nd October 2002 and recognising the creation, by reason of the second sales, of equivalent debts due by Quartic to Ford on or after 29th October 2002. For the purposes of VAT it would be necessary to reduce both the output tax paid by Ford and the input tax for which Quartic sought relief in respect of the original sales and replace them with equivalent liabilities or rights as at the dates of the second sales.
4. HMRC considered that the credit notes had been properly issued and in order to give effect to them repaid to Ford the amount of VAT paid in respect of the first sales, namely £2,359,853, and in January 2003 assessed Quartic as liable in the like sum for input tax wrongly credited to its VAT accounts in respect of the first sales. Quartic, having paid the assessed amount, then sought its return on the basis of two voluntary disclosures made on 31st October 2005. It contended, in effect, that the credit notes had not been properly issued so that its original claim to set off input tax of £2,359,853 had been properly made. By a letter dated 19th December 2005 HMRC rejected the contention of Quartic on the footing that HMRC could "not ignore the consequences of the credit notes".
5. Quartic appealed to the VAT and Duties Tribunal on the ground, in effect, that the credit notes had not been properly issued and had no effect for the purposes of VAT. That appeal was dismissed by the Tribunal (Messrs Michael Johnson and John Lapthorne) on 3rd April 2003. Quartic then appealed to the High Court, as it was entitled to do on a point of law pursuant to Tribunal and Enquiries Act 1992 s.11, on the ground that the Tribunal was wrong to conclude that the credit notes were properly issued by Ford and had effect for VAT purposes. That appeal was dismissed by Peter Smith J on 24th January 2008. The appeal of Quartic to this court is brought with the permission of Lloyd LJ.
The facts as found by the Tribunal
6. The contractual relationship between Ford and Quartic was governed by the provisions of the two agreements to which I have referred. The relevant agreement for the purposes of this appeal is that dated 1st February 2001 ("the Supply Agreement"). As recited therein Ford had previously supplied vehicles to Quartic on a sale or return basis but wished to introduce an alternative basis, 'the dealer sold' basis, on the terms and conditions set out in the Supply Agreement. The Supply Agreement was then divided into three parts A, B and C. Part A dealt with the supply of vehicles on a sale or return basis, Part B on a dealer sold basis and Part C contained general provisions relating to both bases. The provisions contained in Part A are not relevant to any issue arising on this appeal.
7. The 'dealer sold' basis of supply only applied to vehicles for the time being designated by Ford as a 'Dealer Sold Model'. Vehicles supplied on that basis were delivered by Ford either to the dealer at its premises or into a vehicle holding compound to be held there as part of the dealer's stock. Paragraph 4 of Part B deals with "Invoicing and Dealer Payment". It provides:

"(a) Ford shall invoice the Dealer for each Vehicle supplied to the Dealer hereunder...at Gate Release for the full invoice price of the Vehicle (including....value added tax....). The Dealer shall pay all such invoices (as adjusted by any invoices or credit notes subsequently issued with respect to such Vehicle) in full on the first of the following events to occur:"

Such events include the registration of the vehicle, the expiry of certain periods of credit and a sale to another dealer. The relevant event for the purposes of this appeal was the appointment of administrative receivers on 3rd October 2002. Thus the full invoice price, including VAT, for cars previously supplied by Ford to Quartic in respect of which a relevant event had not occurred became due and payable on that date.

8. Paragraph 6 of Part B contains elaborate provisions for transfers between dealers of vehicles held as part of a dealer's stock in a vehicle holding compound. It has no relevance to this appeal though it may have provided the idea for the course adopted by Ford when the administrative receivers were appointed over the property of Quartic. There are a number of relevant provisions in Part C. I should refer to paragraphs 2, 8, 12 and 21. The Schedule to the Supply Agreement contains definitions of various terms used in the body of the Supply Agreement but nothing turns on their details.
9. Paragraph 2 of Part C deals with prices. It states that:

"Unless otherwise notified by Ford, the prices....to be paid by the Dealer for Vehicles shall be the latest advised to the dealer in respect of any particular vehicle prior to its Gate Release provided always...:"

The only proviso which relates to vehicles supplied on the Dealer Sold basis entitled Ford to change the price in the event of "a bona fide quotation or invoicing error in respect of the same." Paragraph 8 of Part C provides that title to each vehicle supplied to a dealer on either basis "shall be retained by Ford...until payment has been made in full by the Dealer of all moneys payable...in respect of the Vehicle..."

10. Paragraph 12 of Part C provides for the automatic termination of the Supply Agreement on a number of events of which the appointment of a receiver or administrative receiver over any property of the dealer is one. Sub-paragraph (d) provides that in the case of vehicles sold on the dealer sold basis if the price has not been paid by the due date then such vehicle "shall, if Ford...shall so elect by notice to the Dealer be returned to Ford and paragraph (c) of this clause 12 shall apply to such Vehicle". Thus the appointment of the administrative receivers had the effect of terminating the Supply Agreement, rendering the unpaid invoices immediately payable and the vehicles to which they applied liable to repossession by Ford on notice. The relevant part of sub-paragraph (c) provides:

"Vehicles returned pursuant to this paragraph (c) or the said paragraph (d) shall be in the same condition as when delivered to the Dealer, except and insofar as any modification, adaptation or addition shall have been carried out to them prior to termination (in which case the Dealer shall also become immediately liable to Ford or FCE (as the case may be) for the cost of reinstating the Vehicle to such condition. The termination of this Agreement (and the return of any Vehicle) shall be without prejudice to the respective rights, liabilities and obligations of Ford, FCE and the Dealer, with respect to Vehicles (including, without limitation, the Vehicle so returned) supplied to the Dealer under this Agreement prior to such termination (or return), and payments due or becoming due hereunder in respect of the same (including, without limitation, interest payable under clause 4(c) of Part A and clause 4(b) of Part B and any Violation Charge payable under clause 11 (b) of Part C)), and notwithstanding such termination the Dealer shall continue to be bound by clauses 5, 7, and 11 of this Part C."

Sub-paragraph (e) provides that the return of the vehicle is without prejudice to the other rights and remedies of Ford against the Dealer "including the recovery of the purchase price of the Vehicle if and to the extent that the same is due and payable but unpaid".

11. Paragraph 21 of Part C provides that the Supply Agreement and the preceding Dealership Agreement "contains the entire agreement and understanding of the parties hereto....and can only be amended in writing by duly authorised officers of each of the parties."
12. After referring to the Supply Agreement the Tribunal noted in paragraph 9 that they had received and considered documentary evidence submitted by the parties, witness statements of a representative of HMRC, Mr Duncan of Ford and Mr McKay an insolvency practitioner with Baker Tilly and oral evidence from Mr Duncan and Mr McKay. The facts, as found by the Tribunal, are set out in paragraphs 11 to 18 of their decision which, as far as now relevant, read as follows:

"11. Ford took care to acquaint Customs in advance with its proposals for the VAT treatment of the supplies dealt with in the Supply Agreement. Prior to January 2001, Ford sold vehicles to its dealers on sale or return, dealt with in Part A of the Supply Agreement. None of the supplies with which we are concerned were made on sale or return.

12. From January 2001 onwards, Ford began selling vehicles to its dealers at the factory gate, issuing VAT invoices at that point, but with provision for delayed payment for vehicles by incorporating an interest-free period applicable in respect of unregistered vehicles not yet sold to customers. Unpaid-for vehicles would typically be kept in a vehicle holding compound pending payment, before being "called down" by the dealer as required for onwards sale.

13. Prior to call-down, unpaid-for vehicles might be transferred between dealers so that a different dealer could supply a customer with a car to a particular specification. In such a case, Ford would issue the transferor dealer with a credit note in respect of the price of the vehicle and issue the transferee dealer with a fresh invoice. These provisions were contained in Part B of the Supply Agreement (clause 6.1). The tribunal is concerned to consider the contents of Part B and also Part C of the Supply Agreement in relation thereto. Part C contained general provisions applicable to supplies under Part A or Part B.

14. Occasionally a dealer would become insolvent. In that case, the issue of credit notes in respect of unpaid-for vehicles was standard practice by Ford. Part C of the Supply Agreement contained a retention of title clause (clause 8), and that part further provided for Ford to elect for unpaid-for vehicles to be returned to it (clause 12).

15. In October 2002 Mr Mackay and three of his partners in Baker Tilly were appointed as joint administrative receivers of the companies in the Quartic group by secured creditors of the group. We find that they are and were skilled and experienced insolvency practitioners. As receivers, Mr Mackay and his colleagues had the commercial objective of eliminating the group's "old debt" and putting the business into such shape that, following a clean break with the past, trading could proceed with a re-opened credit line and fresh supplies from Ford. On that basis, the receivers eventually achieved a sale of the business.

16. Initially it appeared to the receivers that the input tax attributable to the supplies covered by the credit notes would fall to be repaid to Customs. However the effect of so doing would be to change the VAT debtor/creditor position to a debtor (refund) position of £2,217,000 from a creditor position of £146,000. The receivers therefore took advice from Berwin Leighton Paisner, solicitors, as well as from Customs and Baker Tilly's own legal department. Mr Mackay told the tribunal, and we accept, that the receivers were advised that the retention of title clause was legally valid, and that they established that the return of vehicles to Ford and the issue of credit notes was a procedure approved by Customs as well as Ford. This was in December 2002/ January 2003.

17. In January 2004, the receivers were conscious of opposition to the VAT treatment on the part of one of the secured creditors. They took further advice from a Baker Tilly VAT specialist, Mrs Carolyn van Hecke, as to whether it could be demonstrated that there existed a legally correct alternative method of accounting for VAT beneficial to that secured creditor. She advised in the negative.

18. On 21 October 2005, two practitioners of Ernst & Young were appointed to be administrative receivers of the group jointly with Mr Mackay. They reviewed the VAT position, which led to the letter mentioned in paragraph 2 of this decision. At a meeting in Leeds on 29 November 2005, Mr Richard Smith of Customs rejected the proposed adjustment of the VAT accounting position. Consequently Mr Smith wrote the letter dated 19 December 2005 communicating Customs' decision to refuse repayment of the disputed amounts."

Credit notes and VAT
13. At this stage it is convenient to consider how credit notes have been treated for the purposes of VAT. As is well known, VAT is payable by a registered person in respect of the taxable supply of goods and services as at the point of delivery to the purchaser or the earlier rendering of a VAT invoice. It is accounted for to HMRC on a quarterly basis by the seller/supplier as output tax and by the purchaser as input tax. In the registered trader's VAT accounts and return input tax is set off against output tax. A balance of tax is paid by the registered person to HMRC if it is ouput tax and repaid to him by HMRC if it is input tax. Thus the shifting of a supply from one quarter to another will have consequences for both supplier, purchaser and HMRC.
14. Initially the VAT legislation, both primary and secondary, contained no provisions dealing with how to regard the issue of credit notes by a supplier. In British United Shoe Machinery Co Ltd v Commissioners of Customs and Excise (1977) VATTR 187 the VAT Tribunal had to consider the question for the first time. In that case a company in the group had been separately registered for VAT purposes without sufficient regard to the consequences for the recovery of output tax charged to another member of the group in respect of service charges. On discovering that the output tax was not fully recoverable the supplier issued credit notes to the recipient in an endeavour to reverse the taxable supply. The VAT Tribunal concluded that the credit notes did not have that effect. They said (p.192):

"...it seems to us that the issue of a credit note is a common and usual commercial method of rectifying an overcharge or giving credit for damaged or returned goods. We can find nothing in the Finance Act 1972 or elsewhere which empowers the Commissioners to say whether or not a credit note should be issued at all – so to hold would bring commercial life to a standstill whilst permissions were being sought. In the judgment of this Tribunal the duty of the Commissioners and of the tribunal on appeal is to satisfy ourselves that a credit note has been issued bona fide in order to correct a genuine mistake or overcharge or to give proper credit. If this test be not satisfied then the credit note is for a false purpose and is void as being contrary to public policy, see Alexander v Rayson and Napier v National Business Agency Ltd."

That test was applied by VAT Tribunals in Peter Cripwell and Associates v Commissioners of Customs & Excise (1978) VAT Decision No:660; Temple Gothard and Co. v Commissioners of Customs & Excise (1978) VAT Decision No:702 and George Hamshaw (Golf Services) Ltd v Commissioners of Customs & Excise (1979) VATTR 51.

15. The first legislative intervention came with the Sixth Council Directive (77/388/EEC). Article 11 C 1 which is, so far as relevant, of direct effect and came into force in 1978. It provided that:

"In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

However, in the case of total or partial non-payment, the Member States may derogate from this rule."

16. In Mannesmann Demag Hamilton Ltd v Commissioners of Customs & Excise (1983) VATTR 156 the taxpayer relied on Article 11 C 1 as justifying his action in issuing a credit note to the purchaser of machinery on deferred payment terms and subject to his retention of title to the machinery until payment in full was made, which he had repossessed and sold to a third party. He contended that the repossession and resale amounted to a cancellation, refusal or partial non-payment under the Article. The VAT Tribunal rejected his claim. First the Tribunal applied the dictum in British United Shoe which I have quoted in paragraph 14 above and concluded that:

"..this credit note was issued bona fide but mistakenly for the purpose of recognising the rescission of the contract for the supply of the goods. For the reasons above indicated...there was a valid contract for the supply of the goods and..the credit note is not in reality a credit note. This so-called credit note taken with the invoice...attempted to alter the nature of a valid supply and...are of no effect."

17. Later, in dealing with the case for the taxpayer based on Article 11 C 1, the Tribunal considered that there was a partial non-payment but that the express power of derogation prevented that part of the Article from having direct effect. The Tribunal accepted that the UK had given sufficient effect to the part dealing with total or partial non-payment by its provision of bad debt relief. On the facts of that case no such relief was available. In relation to the contentions of the taxpayer that there had been either a cancellation or a price reduction the Tribunal held that:

"..although under the settlement between the parties the contract was terminated it was not cancelled and no cancellation took place within the meaning of Article 11 C 1. I also reject..[the] submission that the price was reduced after the supply had taken place. In my judgment the price was never reduced ..., although a settlement was reached on the basis that on the [supplier] retaking possession of the machine, no further payments were due under the contract which was treated as being at an end."

18. In Re Liverpool Commercial Vehicles Ltd [1984] BCLC 587 Vinelott J held that the repossession of goods pursuant to a retention of title clause did not nullify the original supply for VAT purposes. He said (p.591):

"A return or assessment may have to be adjusted if in the light of later events it transpires to have been incorrect and it may be that an adjustment falls to be made if it transpires that a supply was made under a contract which is later found to be void or which is rectified or rescinded. In practice these points are unlikely to arise unless there is an intervening change in the rate of tax or an insolvency, because adjustments can be made in a later period. But I can see no ground on which a delivery of goods pursuant to a contract which contains a retention of title clause and which constitutes a supply in respect of which VAT has become due within the clear terms of the legislation can later be said not to constitute a supply because the goods are repossessed by the vendor."

19. Whether consequential on that decision or not, there was until 1997 an extra statutory concession No:8 which provided that where goods had been supplied under retention of title terms and were subsequently repossessed the supplier might reduce the value of the original supply by crediting his customer with the unpaid instalments.
20. In the case of total or partial non-payment effect was given to the Sixth Directive by the provision of bad debt relief. Legislative effect was not given in cases of cancellation or reduction of the price after the supply had taken place until VAT (Accounting and Records) Regulations 1989 SI 1989/2248 came into force. Regulation 7 applied where there had been "an increase in consideration" or "a decrease in consideration" "after the end of the prescribed accounting period in which the original supply took place". In such a case both the maker and the recipient of the supply were required to make the appropriate entries, positive or negative, in his VAT account for the period in which the increase or decrease was given effect in the business accounts of the taxable person; but if the entry was required to be made in the VAT accounts of an insolvent person then it was to be made in the VAT accounts for the period in which the supply was made.
21. The provisions of Regulation 7 of VAT (Accounting and Records) Regulations 1989 SI 1989/2248 were reproduced in VAT Regulations 1995 SI 1995/2518 regulation 38. But in this case definitions were added by Regulation 24 to provide that:

""increase in consideration" means an increase in the consideration due on a supply made by a taxable person which is evidenced by a credit or debit note or any other document having the same effect and "decrease in consideration" is to be interpreted accordingly;"

The conclusion of the Tribunal
22. Having set out the facts found by them in the passages I have quoted in paragraph 12 above the Tribunal summarised the arguments of counsel. They admitted to finding the case not to be straightforward but they agreed with counsel for Ford that:

"...the circumstances in which a credit might properly be due are not circumscribed to the extent urged by [counsel for Brunel]"

They then considered the common use in the commercial world of retention of title clauses and continued:

"36. In accordance with ordinary principles of contract, the contracting parties would appreciate, on entering into the Supply Agreement, that where Ford suffered no loss on resale of the vehicles returned, it would not be in a position to sue in respect of the vehicles, save to recover nominal damages. Although not expressly stated in the Supply Agreement, it falls in our view to be implied that, in the circumstances just mentioned, the dealer would be unlikely to face a claim from Ford.

37. However, what if there were to be a loss on resale, or what if a particular vehicle, returned to Ford under the provisions, could not be resold? The administrative receivers would have to reckon with the possibility of claims by Ford against the group. An indication from Ford that it was content not to pursue the group would accordingly be most helpful. As we see it, it is this that lay behind the provision of the credit notes that we are considering.

38. We think that the parties to the Supply Agreement would all along appreciate that the dealer would probably not have to pay Ford anything in respect of vehicles returned under clause 12 of Part C. All that the credit notes achieved was to confirm that. The credit notes did not provide credit where it was not due; on the contrary, they served to confirm a cap upon the contractual liability of the group, a cap which, we think, must have been anticipated by the contracting parties as likely to result if the Supply Agreement were to be operated according to its terms.

39. By the same token, it would not have been open to Ford to have claimed bad debt relief, given that the effect of having operated the Supply Agreement according to its terms was that Ford had received consideration for the debt. The position immediately before the issue of the credit notes was that Ford was constrained to recognize that, having had returned to it the vehicles affected by clause 12 of Part C of the Supply Agreement, nothing further was due.

40. Thus it seems to us that the position was analogous to that in AEG (UK) Ltd v The Commissioners of Customs and Excise (VAT Decision No 11428), a tribunal decision of Mr Paul Heim, CMG. In that case he decided that preference shares received under a voluntary arrangement entered into by the debtor company amounted to consideration for the prior debt. The Chairman stated:

"The issue of the shares under the voluntary agreement operated to replace the debt due to the Appellant Company by the shares, as it did those of other creditors so that there was not, upon receipt of the share certificate, any 'amount outstanding' which could be the subject of bad debt relief."

41. Clearly it would be wrong if Ford were enabled to make a claim for bad debt relief without giving full credit for having realized its security under clause 12. As well as providing Brunel with the evidence required for treating the group as discharged, the issue of the credit notes constituted an acceptance by Ford that it would not be correct to assert an entitlement to bad debt relief in this case.

42. We are satisfied that the facts of the case that we are considering are distinct from those of the authorities cited by [counsel for Brunel]. We are of the view that the position that we are considering is one where, in accordance with article 11(C)(1) of the Sixth EC Directive, Ford has properly treated itself as unable, to the extent of the credit notes, to pursue payment for the clause 12 vehicles. The credit notes have been volunteered by Ford; but that is no more than one might objectively have expected, from a perusal of the Supply Agreement."

23. It is not clear to me what test the Tribunal applied. In its notice of appeal to the Tribunal Brunel asserted in terms that Ford contended, but wrongly, that the case fell within Regulation 38(1)(b) of VAT Regulations 1995 SI 1995/2518 so that the credit notes were properly issued. But those regulations were not mentioned by the Tribunal in either the summary of the arguments of counsel or in its decision. Paragraph 40 might suggest that the Tribunal was looking to see if the original supply had been rescinded or novated but the terms of paragraph 42 indicate that the Tribunal were considering whether the credit notes had been 'properly issued', the test originally formulated in British United Shoe Machinery Co Ltd v Commissioners of Customs and Excise (1977) VATTR 187 and the other decisions of the VAT Tribunals to which I have referred.
The appeal of Brunel to the High Court
24. In its appeal to the High Court Brunel described the order against which they appealed as the decision of the Tribunal that "the credit notes....were valid for VAT purposes" and "gave proper credit". Such an appeal lies "in point of law" only, see Tribunals and Inquiries Act 1992 s.11(1). Such a restriction limits the ability of the appellate court to interfere with the decision under appeal in accordance with the well-known principles established in Edwards v Bairstow [1956] AC 14, 36.
25. In his judgment given on 24th January 2008 Peter Smith J set out the relevant terms of the Supply Agreement at paragraphs [5] to [15]. In paragraphs [16] to [29] he described what he termed "The Event" and the "Actions upon Termination". In the latter section he noted that there was no general right of appeal against a finding of fact of the Tribunal unless it were so extreme that the Tribunal could not reasonably have arrived at it. As he recorded, no such submission was made by Brunel. Having noted that the Tribunal rejected the appeal of Brunel he recorded the submissions of the parties before him. For Brunel counsel submitted that the Supply Agreement had terminated on the appointment of the Administrative Receivers but the original obligation to pay the price remained, albeit accelerated, so that Brunel (see paragraph [31]):

"remained liable to pay the VAT as an input and was thus entitled to reclaim it or off set it against its output liability (whether it paid it or not)."

In the case of Ford counsel's submissions appear to have been (see paragraph [33]) that the parties had, in effect, operated the clause B6 procedure for the re-sale of a vehicle delivered into the vehicle holding compound by one dealer to another thereby:

"...enabl[ing] the debt to be extinguished....[so that Ford] properly issued a proper credit note because the Supply Agreement was terminated on the basis that the vehicles were returned and on the acceptance that there would be no further claim from Ford."

For HMRC counsel submitted that (see paragraph [34]):

"the credit notes were issued in respect of goods that had been returned and the issue of the credit notes resulted from a state of affairs that was not unilaterally adopted by Ford but was a matter of agreement with Administrative Receivers."

26. Peter Smith J quoted paragraphs 31 to 41 of the Tribunal's decision. He then recorded two concessions. Counsel for Brunel conceded that if the Supply Agreement had provided a procedure on termination for the repossession of the vehicles and the issue of the credit notes then the credit notes would have been validly issued because the rescission of the Supply Agreement would mean that there had been no taxable supply. By contrast counsel for Ford and HMRC conceded that if the actions of Ford and the Administrative Receivers had been done in accordance with the express provisions of clause 12 then there would have been no basis for the issue of a credit note.
27. The judge considered that the decision of the Tribunal was to the effect of what is set out in paragraph 39 of their decision. He continued at paragraph [43] to [47]:

"[Ford and the Administrative Receivers] plainly did not operate clause 12 but the parties did operate a procedure whereby the following occurred:-

(1) The vehicles were returned

(2) Ford issued the credit notes

(3) The Appellant acting by the Administrative Receivers no longer claimed the VAT on the invoices as input tax

(4) The Administrative Receivers paid the VAT to HMRC in full without any such deduction

(5) Ford sold the vehicles to the Administrative Receivers at the same price (including VAT)

(6) That enabled the Administrative Receivers to trade the company out for the benefit of the old creditors of the Appellant.

(7) Both the Appellant and Ford acted as if the Supply Agreement had been rescinded and there were no further obligations arising under it.

44. [Counsel for Brunel] objects that there is no evidence of an agreement expressly agreed between the Administrative Receivers and Ford so that the relationship falls to be covered entirely by the express terms of clause 12.

45. I accept that the Tribunal did not in so many words say that there was a particular agreement struck on a particular day but all of the above that I have referred to was done by all the parties. I do not see that that can be anything other than the parties, (which they have the ability to do), simply operating outwith the Supply Agreement a different regime for their own particular purposes. Ford wanted its vehicles back but wished to sell them. The Administrative Receivers wished to continue the business. It needed stock. All of this in my view is a genuine transaction (not an artificial one for the purpose of extinguishing a VAT liability). Furthermore of course as I have set out above it was done with the approval of HMRC. The parties have in effect agreed that the Supply Agreement should come to an end on the basis that it was rescinded, no vehicles were ever supplied and no VAT was therefore payable and the credit notes were properly issued.

46. That in my view is what the Tribunal found. It is a finding of fact based on the evidence. I therefore do not see any basis for suggesting that they acted upon the express wording of clause 12 alone.

47. It follows therefore in my view that the Tribunal decision which is based on their fact finding cannot be challenged by the appeal. Further in my view had the matter come to me afresh I would have come to the precisely the same conclusion."

The submissions of counsel and my conclusions
28. Counsel for Brunel submits that both the Tribunal and the judge were wrong because the repossession of the vehicles and the issue of the credit notes were the unilateral acts of Ford with no legal effect whether for the purposes of VAT or otherwise. He points out that, as decided by Vinelott J in Re Liverpool Commercial Vehicles Ltd [1984] BCLC 587, repossession of the vehicles pursuant to a retention of title clause does not nullify the original supply. He suggests that the remedy of Ford was to seek bad debt relief. By contrast he accepted that the parties might have agreed to the rescission of the original contract. He suggested that the Tribunal had been invited to conclude that there was such a contract but had declined to do so. He submitted that they had not found facts from which it was legitimate for the judge to conclude that as a matter of law there was such a contract. In summary he contended that the judge's conclusion was not open to him and the Tribunal's decision was wrong in law.
29. By contrast counsel for Ford (and counsel for HMRC, who adopted his submissions) submitted that the facts as found by the Tribunal justified the conclusion of a contract on the basis that the repossession of the vehicles and issue of the credit notes amounted to an offer by Ford accepted by the conduct of the Administrative Receivers to rescind the original supply and replace it by the later one. They contend that both parties had good commercial reasons to do so: the Administrative Receivers needed stock with which to continue the trade of Brunel so as to be able to sell it on and Ford's only likelihood of being paid depended on Brunel trading out of its difficulties and selling its business. They submitted that the judge's analysis was the only possible one on the basis of the facts as found by the Tribunal.
30. In my view the problems in this case have arisen from the fact that neither the Tribunal nor the judge clearly identified the issue that had to be determined. Given that the original sales under the terms of the Supply Agreement on the dealer sold basis constituted taxable supplies of goods by one registered person to another they necessarily gave rise to an output tax to be paid and an input tax to be brought into account. Those consequences could only be altered after the event under some statutory authority. The relevant authorities in this case are Article 11 C 1 of the Sixth Directive (77/388/EEC) and Regulation 38 VAT Regulations 1995 SI 1995/2518.
31. Article 11 C 1 is applicable to 'cancellation' or cases where 'the price is reduced after the supply takes place'. It seems to me to be axiomatic that such cancellation or reduction be pursuant to some legal entitlement whether arising from or conferred by the original contract of supply or subsequently; otherwise VAT would be a voluntary tax in every sense of the word. The legal entitlement might take the form of a remedy, such as rescission for mistake or misrepresentation, a right under the original contract to return the goods in certain specified events or a subsequent agreement discharging the original contract. To the like effect is the definition contained in Regulation 24. That requires that there shall be 'a decrease in the consideration due'. The word 'due' clearly connotes some legal entitlement to the decrease. Such entitlement may arise either from a term of the original contract of supply, see Commissioners of Customs & Excise v General Motors Acceptance Corporation (UK) plc [2004] STC 577, or under some subsequent rescission or novation. Regulation 24 makes it clear that the credit note is not of itself sufficient to justify a decrease, it is only evidence of an entitlement to the decrease.
32. So the task of the Tribunal and the judge was to ascertain whether Brunel had a legal right to the discharge of the original supply. It was not provided by Clause 12. There was no vitiating factor in the conclusion of the original contracts of supply. It could only have arisen under some other provision of the original contract or by reason of some subsequent agreement.
33. I suggested to counsel that the terms of clause B4(a), see paragraph 7 above, might be read as conferring on Ford the unilateral right to vary the purchase price by the later issue of credit notes. This point was adopted by counsel for Ford who, with our permission, amended his notice of appeal accordingly. But, as counsel for Brunel pointed out, clause C2 enables Ford to change the price of a supply in the limited circumstances of a bona fide error. It would be inconsistent with that provision that the earlier terms of clause B4 which deals with invoicing and payment should confer an apparently unlimited power to alter the price both upwards by the issue of an invoice or downwards by the issue of a credit note.
34. It follows that the taxable consequences of the original supplies of vehicles by Ford to Brunel can only be discharged by some subsequent contractual rescission or novation which is evidenced by the credit notes. It does not appear to me that the Tribunal reached any such conclusion. They concluded at paragraph [14] that the issue of credit notes in respect of repossessed vehicles which have not been paid for was standard practice of Ford. They returned to this question later when they concluded at paragraph [38] that the credit notes served to confirm the cap upon the contractual liability of Brunel which would have been anticipated by the contracting parties as likely to result if the Supply Agreement was operated in accordance with its terms. Paragraphs [39] to [41] dealt with the absence of any bad debt relief being available to Ford. The conclusion in paragraph [42] repeated that the credit notes had been volunteered by Ford in recognition of its inability to obtain payment from Brunel of the price of the vehicles repossessed. In dismissing the appeal the Tribunal was accepting the original view of HMRC that it could not ignore the consequences of the credit notes. In my view they were wrong to have done so.
35. Peter Smith J accepted, in my view, correctly that the parties were not operating a contractual right conferred by clause 12, or any other clause, of the Supply Agreement. In paragraph 43 he summarised what he described thereafter as a 'procedure' the parties did operate. There is no doubt that, on the findings of the Tribunal, steps 1 to 5 occurred, though I think it would be more accurate in step 1 to describe the vehicles as having been repossessed by Ford rather than having been returned by Brunel. Step 6 was a consequence of Step 5. Step 7 is an observation of the judge rather than of the Tribunal but appears to me to be justified. The question appears to me to be whether the conclusion expressed in paragraph [45] that "the parties have, in effect, agreed that the Supply Agreement should come to an end on the basis that it was rescinded" is justified.
36. The first problem is that I am unclear exactly what it means. I do not understand it to be a conclusion that there was a contract between Ford and Brunel, acting by the Administrative Receivers, rescinding the earlier contract of supply. If that had been the judge's intention he would not have interposed the words "in effect". Further, if that had been the judge's conclusion I do not think it would have been open to him on the findings of the Tribunal. Just as the terms of a contract concluded in whole or part by conduct is a question of fact, see Carmichael v National Power plc [1999] 1 WLR 2042, at 2049/50, so must be the question of whether there is a contract at all so concluded. If the primary facts found by the Tribunal must lead any tribunal properly instructed as to the law to conclude that there was a contract then it is open to the judge to reach that conclusion as one of law. But in any other event the question of whether there was a contract, otherwise than wholly in writing, is a question of fact for the Tribunal not the judge.
37. I do not think that the Tribunal's findings of primary fact do justify such a conclusion as a matter of law. They are equally consistent with findings of unilateral conduct of Ford in repossessing the vehicles and issuing credit notes to which Brunel submitted because it had neither the power nor the commercial incentive to do anything else. That would not be enough to justify the dismissal of the appeal of Brunel.
38. In my view, therefore, the appeal should be allowed. But it does not follow, as counsel for Brunel accepted, that we should reach the converse conclusion to the effect that the credit notes did not evidence a right of Brunel to the contractual discharge of the original contract of supply and were ineffective for all legal purposes including VAT. It appears to me that the Tribunal never asked themselves the right question. They never considered the facts from the correct perspective. Had they done so they might, not would, have concluded that the original contracts of supply had been discharged by subsequent agreement of the parties, to be inferred at least in part from their conduct, of which the credit notes were evidence. In that event Regulation 38 of VAT Regulations 1995 would have applied. As Brunel was an insolvent person within paragraph (b)(iii) of the definition of that term contained in Regulation 24 the consequence would be that the amending entries would have to be made to the VAT account of Brunel for the prescribed accounting period within which the original supply fell, see r.38(6), not that which followed the appointment of the Administrative Receivers.
39. For these reasons, if the other members of the court agree with me, I would allow the appeal and remit the matter to the VAT and Duties Tribunal to be reheard and determined in accordance with the judgment of this court.

Lord Justice Richards

40. I agree.

Lady Justice Hallett

41. I too agree.