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Cite as: [2000] EWHC Admin 311
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HIGHER EDUCATION STATISTICS AGENCY LIMITED And COMMISSIONERS OF CUSTOM AND EXCISE RESPONDANT [2000] EWHC Admin 311 (28th March, 2000)
CASE NO: CO/1268/99
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
CROWN OFFICE LIST
ROYAL COURTS OF JUSTICE
STRAND, LONDON, WC2A 2LL
Tuesday 28 March 2000
THE HON MR JUSTICE MOSES
BETWEEN:
APPELLANT
THE COMMISSIONERS OF CUSTOM AND EXCISE
RESPONDANT
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
____________________
MR RUPERT BALDRY (instructed by messrs willans/ Gloucester GL50 1RH) appeared
on behalf of the Appellant.
MR PETER MANTLE and MR OWAIN THOMAS (instructed by H.M. Customs and Exvise
Solicitor) appeared on behalf of the Respondent.
Judgment
As Approved by the Court
Crown Copyright ©
Introduction
1. In this appeal from a decision of the VAT and Duties Tribunal the issue is whether the Appellant, Higher Education Statistics Agency Ltd ("HESA") is liable to pay VAT when it purchased freehold premises at a public auction. The property was an asset of the business of the vendor, Royal and Sun Alliance Insurance Plc ("RSA"). The sale was the transfer of part of RSA's business as a going concern; the property was rented to a number of tenants. The sale of that property, being the transfer of a business as a going concern, would have fallen outwith the scope of VAT provided that HESA made an election, known as an "option to tax" in relation to that property on or before "the relevant date". The Commissioners submitted and the Tribunal decided that "the relevant date" was the date when HESA paid a deposit to the auctioneers as agents for RSA; the deposit was paid on the date of the auction. HESA submit that, on the contrary, "the relevant date" is the date of completion. By that time HESA had made its election and notified it to the Commissioners.
Facts
2. On 11th December 1997 HESA contracted at a public auction to purchase freehold land at 16-17 Royal Crescent, Cheltenham from RSA for £492,500. RSA had opted to tax that property for VAT purposes. Thus VAT was chargeable on the sale unless RSA was transferring part of its business as a going concern. On the same day HESA paid a deposit of £49,250 to the auctioneers as agents for RSA. On 23rd December 1997 HESA itself made an election to waive exemption in respect of the property and notified the Commissioners. On 8th January 1998 there was completion of the sale and payment of the balance of the purchase price.
3. HESA is a charity, although that is irrelevant to the issue. If HESA failed to make an election by the relevant date it will be liable to VAT on the purchase of the property.
The Statutory Regime
4. By Article 2 of the Sixth Directive (77/388):-
"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."
By Article 5
5.1. "Supply of goods" shall mean the transfer right to dispose of tangible property as owner."
5.8 "In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax."
By Article 10
1 (a) ""Chargeable event" shall mean the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled
(b) The tax comes "chargeable" when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred.
2. The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed .............."
However, where a payment is to be made on account before the goods are delivered or services are performed, the tax shall become chargeable on receipt of the payment and the amount received".
It is important, submits HESA, to appreciate that in this case there was no chargeable event until completion.
In implementing these provisions into domestic legislation, Section 4 of the Value Added Tax 1994 ("the 1994 Act") provides-
"Section 4.
(1) VAT shall be charged on the supply of goods or services made in the UK, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
(2) A taxable supply is a supply of goods or services made in the UK other than an exempt supply."
Paragraph 4 of Schedule 4, pursuant to Section 5(1) treats as a supply of goods:-
"the grant, assignment or surrender of a major interest in land............"
Major interest includes the fee simple (see section 96(1))
5. The provisions of Section 6 (Time of Supply) are of importance in resolving the issue in this case. By Section 6(1):-
"the provisions of this section shall apply .................. for determining the time when a supply of goods or services is to be treated as taking place for the purpose of the charge to VAT.
(2) Subject to sub sections (4) to (14) below, a supply of goods shall be treated as taking place -
.............
(b) if the goods are not to be removed, at the time when they are made available to the person under to whom they are supplied:
..........
(4) If, before the time applicable under sub section (2) or in (3) above, the person making the supply issues of a VAT invoice in respect of it or if , before the time applicable under sub section (2) (a) or (b) or (3) above, he receives a payment in respect of it, the supplier shall, to the extent covered by the invoice or payment be treated as taking place at the time the invoice is issued or the payment, is received."
The contrast between Section 6(2) and Section 6(4) illustrates the difference between a chargeable event and time when the tax may become chargeable on receipt of an advance payment. The effect of Section 6(2) is that the supply of a freehold interest in land is treated as taking place on completion, that is when the land is made available. But if a deposit is paid earlier then the supply is deemed to have taken place at that earlier date to the extent of the amount of the deposit.
6. Section 31 introduces the concept of exempt supplies as specified in Schedule 9. By Group 1 item 1 of Schedule 9:-
"the grant of any interest in land ..."
is an exempt supply.
However, the taxable person has a right to elect to waive exemption in relation to land. That election, known as "the option to tax" has the consequence that the taxable person must charge VAT on any subsequent sale or letting of the property. By Schedule 10 paragraph 2(1):-
"... where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when election has effect by the person who made the election .... would (apart from this sub paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group."
That procedure for making an election is more benign than the election procedures relevant in the instant case. An election takes effect from the date of the election or later date if specified (see paragraph 2 and paragraph 3(1) of Schedule 10). Notification must be given in writing:
"not later than the end of the period of 30 days beginning with the day on which the election is made, or not later than the end of any such longer period beginning with that day as the Commissioners may in any particular case allow" (paragraph 3 (6)(b)(i)) .
7. As I have said, the sale took place in the context of a transfer of part of RSA's business as a going concern. The Sixth Directive confers power on a Member State to take outwith the scope of VAT a transfer of the assets of a business. By Article 5.8:-
"In the event of a transfer, whether for consideration or not or as a contribution to a company of a totality of assets or part thereof, Member States, may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax."
The United Kingdom has exercised its power to exclude certain transfers of a going concern from the scope of VAT. Under Section 5 (3) of the 1994 Act the Treasury has power to order that specified transactions are to be treated "as neither a supply of goods nor a supply of services". In exercise of that power Article 5 of the Value Added Tax (Special Provisions) Order 1995 provides :
"(1) Subject to paragraph (2) below, there shall be treated as neither a supply of goods nor a supply or services the following supplies by a person of assets of his business-
(b) their supply to a person to whom he transfers part of his business as a going concern.... .
(2) A supply of assets shall not be treated as neither a supply of goods nor a supply of services by virtue of paragraph (1) above to the extent that it consists of-
(a) a grant which would, but for an election which the transferor has made, fall within item 1 of Group 1 of Schedule 9 to the Act: or
(b) a grant of a fee simple which falls within paragraph (a) of item 1 of Group 1 of Schedule 9 to the Act,
unless the transferee has made an election in relation to the land concerned which has effect on the relevant date and has given any written notification of the election required by paragraph 3(6) of Schedule 10 to the Act, no later than the relevant date.
(3) In paragraph (2) of this article-
"election" means an election having effect under paragraph 2 of Schedule 10 to the Act;
"relevant date" means the date upon which the grant would have been treated as having been made or, if there is more than one such date, the earliest of them.
Thus the sale by RSA of the land to HESA, as an asset of its business, part of which was transferred as a going concern, will be outwith the scope of VAT (i.e. neither a supply of goods nor a supply of services) provided that HESA made an election on or before the relevant date.
Is the relevant date the date of the actual grant?
8. Mr. Baldry's first submission is that the relevant date within the meaning of Article 5(2) of the 1995 order is the date when the grant actually took place on 8th January 1998. It was on that date that a chargeable event occurred because it was only on that date that the property was made available to HESA. He contends that the legislation distinguishes grant from supply. In so contending he draws attention to a number of provisions (e.g. Schedule 10 paragraph 2 (3) (AAA) paragraph 3 (5A)) and paragraph 3 (5B)) where the legislation treats the date of grant as different from the actual date. The difficulty with that submission is that those paragraphs were inserted after the time when the 1995 order was made (10 May 1995). All were introduced by the Finance Act 1997 save for sub paragraph 2 (3AAA) which was introduced in 1999. The definition of relevant date must, in my judgment, be construed without reference to those subsequent provisions.
9. I reject the contention that there is a distinction to be made between the concept of a supply and the grant to which the definition in Article 5(3) refers. Article 5(2) refers to a:-
"a supply of assets..... to the extent that it consists of
a. a grant....." [my emphasis]
The reference to grant refers back to Schedule 9 Group 1 Item 1 which identifies a specific supply which is exempt.
10. Moreover to construe the relevant date as being the date upon which the actual grant was made fails to give sufficient effect to the hypothesis provided by the Order. Since the words must be construed without reference to subsequent insertions, the only statutory provisions which treat a specific date as the date on which the grant was made are the time of supply provisions contained within Section 6 of the 1994 Act. Section 6 is a deeming provision and the words of the definition in Article 5(3) of the 1995 Order, are, in my view, a clear reference to a deeming provision.
11. Mr. Baldry's second submission accepts the force of the hypothesis within the definition in Article 5(3). He contends that the words "date upon which the grant would have been treated as having been made" mean the date on which the supply of goods (consisting of the grant) would have taken place were it not to be disregarded pursuant of Article 5(1) of the 1995 Order. He submits that had the supply not been disregarded for VAT purposes pursuant to Article 5(1) it would have taken place on 8th January 1998. He argues that the supply of goods consisting of the grant would have taken place when the property was made available on that date.
12. This submission requires the words of the definition in Article 5(3) to be read without any reference to Section 6 of the 1994 Act. It rests, in part, upon the decision of the Court of Appeal in BJ Rice & Associates and Customs and Excise [1996] STC 581. In that case taxable supplies had been made by a tax consultancy business prior to registration. The Commissioners contended that the supplies were taxable because they should be treated as having been made on receipt of payment and not when earlier invoices were delivered. The court held that the provisions determining the time when a supply was deemed to have taken place did not themselves create a taxable supply. Those deeming provisions, at that time in Sections 4 and 5, and regulations made under 1983 Act did not create a charge to VAT. On the contrary whether there was a chargeable transaction depended upon whether there had been in fact a chargeable transaction at the material time.
"The argument for the Commissioners is that Sections 4 and 5 and the regulations determine conclusively and for all purposes when a supply is to be treated as having taken place. Mr. Rice (for the tax payer), on the other hand, maintains that one must first determine on the actual facts, and without deeming anything, whether a charge to tax has arisen under Section 2(1) If any of the four requirements is absent, no tax is payable and that is the end of it. Only if all four requirements are met does one proceed to inquire what was the actual or deemed time of supply for the remaining purposes of the 1983 Act." [585 c-d]
The Court of Appeal agreed with an earlier ruling of a VAT Tribunal that the wording of Sections 4 and 5 did not create any charge to VAT.
"Their role is to identify the time of supply, given there has been one which is in charge under Section 2(1). This conclusion is in line with the opening words of Section 4(1), which define the role of Sections 4 and 5 as applying "for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to tax"". [586 a-b]
13. Mr. Baldry contends that similarly there is no basis for regarding the definition in the Order as being a reference back to Section 6. Section 6 has no application where there has in fact been no taxable supply. Section 6 has no application to a hypothetical supply when none has in fact taken place.
14. He draws further support from Customs & Excise Commissioners -v- Thorn Materials Supply Ltd and Thorn Resources Ltd [1998] STC 725. In that case Lord Nolan said of Article 10 of the Sixth Directive:-
"This Article, read with Article 5(1), is, I think, helpful as emphasising that the subject of tax liability is the supply of the goods, in the sense of the transfer of ownership in them, which normally occurs (as in the present case) at the time of delivery. The Article authorises that the tax be charged, by virtue of Article 10(2) of the Sixth Directive and Section 5(1) of the 1983 Act, in advance of the transfer of ownership where there has been a prior payment on account, but that does not displace the necessity for a transfer of ownership to follow in fact. Otherwise there is no chargeable event, and no justification for the imposition of the tax". [731 h-j]
15. The issue in that case was whether a supply had taken place between two companies whilst they were members of the same group. The House of Lords held that the time of supply provisions (which then included Section 5(1) of the 1983 Act) must be applied to determine whether and if so when a supply between members of the same group took place even though Section 29(1) required that the supply had to be disregarded where there was a supply between members of the same VAT group:-
"........Section 5(1) must be applied to determine whether and if so when a supply between members of the same group took place. It is essential to apply the time of supply rules in order to determine whether the supply took place while the group relationship still existed. Unless a supply during the period of the relationship is identified as having taken place there is nothing on which Section 29(1) can bite. One can hardly disregard something which did not happen." [732j - 733a]
I do not regard that case as assisting the tax payer. It merely affords an example of the application of the time of supply provisions notwithstanding the requirement that the supply be disregarded for tax purposes.
16. I do not think that these cases assist HESA. True it is that absent any chargeable event Section 6 has no application. There is no need to determine the time when a supply of goods is to be deemed as taken place unless there has been an actual supply of goods. But I do not think that that consideration assists in the proper construction of Article 5(3) of the Order. The hypothesis requires one to assume something which may not have taken place. That which should be assumed as having taken place is a taxable transaction namely a taxable supply consisting of a grant. The statutory hypothesis requires one to assume a non exempt grant (the grant having satisfied the condition under Article 5(2)(a) that the transferor has made an election). Once the assumption which the definition requires one to make has been made then the provisions of Section 6 come into play. It is no answer to say that in fact there has been no taxable supply when the definition in the Order requires one to assume such a supply.
17. Moreover HESA's argument demonstrates a degree of circularity. In order to establish that there has been no taxable supply in fact HESA relies on the provisions of Article 5(1) which provides:-
"Subject to paragraph (2) below, There shall be treated as neither a supply of goods nor a supply of services the following supplies by a person of assets of his businesses" - [my emphasis].
The argument proceeds on the basis that there was no taxable supply in fact and therefore the provisions of Section 6 have no application. But there was no taxable supply only if the provisions of Article 5 (2) apply. They do not apply where there has been no election on or before the relevant date.
18. Finally, it seems to me that the construction proposed by HESA fails to give proper force to the closing words of the definition of Article 5(3) namely:-
"or, if there is more than one such date, the earliest of them;"
19. Mr. Baldry argued that these words have no application in this case and only apply where, as will frequently happen, the supply of assets of an ongoing business consists of a number of grants of land. If there had been a number of grants then an election must be made on or before the earliest. I disagree. The important feature of the closing words of the definition is that it admits of the possibility that there is more than one date upon which a single grant could be treated as having been made. The only circumstance upon which a single grant could have been treated as having been made on more than one date is the circumstance set out within Section 6(4) namely when a VAT invoice is issued or the supplier receives a payment in respect of the supply. The supply to the extent covered by the payment is treated as having taken place at the time payment is received. Thus, when deposit is received by a transferor in respect of a supply, the supply will be treated as taken place on more than one date. The earliest date is the date on which the deposit is received. I accept that the supply is only treated for the purposes of Section 6(4) as having taken place to the extent covered by the invoice or payment. However, neither side contended that it made any sense to construe the definition as requiring an election to be made in respect of part of the total contract price.
For those reasons I conclude that the relevant date is the date when the deposit was paid.
20. Mr. Baldry sought to avoid that conclusion by contending that it produces an absurd result. It is absurd to expect those bidding at an auction to make an election before they know whether their bid is going to be successful. Moreover, if the auctioneer merely took a deposit as stake-holder the problem would not arise. The taxability of the grant of property should not depend upon such happenstance outside the control of the bidder. Mr. Mantle seeks to counter that argument by referring to the uncertainty induced if election is postponed until completion. Whether the supplier, the transferor, is liable to account may depend upon the time when completion is agreed to take place which could be some time in the future. There are inevitably other uncertainties, as Mr. Baldry countered, even where an election is made at the time of deposit. It will frequently only be possible to tell whether there has been a transfer of the business as a going concern after the deposit has been paid and completion has taken place. Thus whether or not the supply is outwith the scope of VAT may often only be determined retrospectively.
21. I doubt whether the draftsman ever envisaged these provisions applying in the circumstances of an auction where the auctioneer acts as agent for the vendor. But I am driven to the conclusion, which I have reached, on the construction of the words of the Order. I do not think that considerations of unfairness or uncertainty can displace the wording of the provision.
22. The Commissioner's view of the proper construction of the provisions was publicised in Notice 700/9/96 at paragraph 2.3. The contrast between the benign position in relation to the election under Schedule 10 paragraph 2 made for the purposes of waiving the exemption under Group 1 of Schedule 9 (which allows notification to take place 30 days from the date of election with the possibility of an extension) and the rigorous regime where the election is made for the purposes of Article 5 of the 1995 Order can be readily explained. The election for the purposes of paragraph 2 of Schedule 10 is only relevant where the transferor is about to sell land. By way of contrast the election for the purposes of Article 5 of the 1995 order has a direct effect on the position of the transferor who, if the supply is not outwith the scope of VAT must account for the tax.
23. HESA's final argument relies upon the provisions in Article 5(8) of the Sixth Directive. It contends that the requirement, at an auction, for a bidder to make an election on or before the date of the auction where a deposit is made on that date is not a necessary measure to prevent distortion of competition indeed it promotes such a distortion. It makes it more difficult, for the sale of assets at auction, to qualify as transfers of assets of a going concern; it leads to arbitrary results.
24. In my judgment the 1995 Order is not relevant to the measures to which the closing words of Article 5(8) refer. Pursuant to the first sentence of Article 5(8) the United Kingdom has exercised its power to take supply of goods in the course of a transfer of a business as a going concern outwith the scope of VAT. The 1995 Order and the conditions for making an election were enacted in pursuance of the power conferred in the opening sentence of Article 5(8) of the Sixth Directive. They have no have relevance to the second sentence. The second sentence deals with the case of one who is not wholly liable to tax. HESA's argument elides the power conferred in the first sentence with measures which may be taken to prevent distortion of competition where the recipient is not wholly liable to tax. The measures which are under challenge in this case were not measures taken to prevent distortion of competition at all. They were measures adopted as a result of the power conferred in the first sentence. If a Member State chooses to exercise the power conferred in Article 5(8), the second sentence confers no rights upon a taxpayer who is required to satisfy domestic conditions, made in the exercise of the Article 5(3) power conferred by the first sentence of Article 5(8).
25. I conclude that Article 5(3):-
(I) requires an assumption that a taxable supply consisting of a grant of property has taken place;
(2) requires the application of Section 6 of the 1994 Act for the purposes of determining the time of that hypothetical taxable supply and
(3) contemplates more than one deemed date of supply in respect of only one grant.
Accordingly, the relevant date was the date when HESA paid the deposit. Since HESA had not made an election on or before that date it is liable to pay VAT in respect of its purchase of the property 16-17 Royal Crescent, Cheltenham.
(Transcript of post handed-down Judgment is unnecessary)
(Order does not form part of the approved judgment)
© 2000 Crown Copyright