England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
REVENUE LIST

		Royal Courts of Justice Strand, London, WC2A 2LL
		15 Th November 2001

Mr Justice Lightman:

INTRODUCTION

1. This is an appeal by an industrial and provident society, the Midlands Co-operative Society Limited ("the Midlands Society"), against the decision released on the 24th January 2001 of the Manchester Value Added Tax ("VAT") Tribunal (Mr Demack) dismissing its appeal against the VAT assessment by the Commissioners of Customs and Excise ("the CCE") in the sum of £759,150. The appeal concerns the VAT position of another industrial and provident society, the Leicestershire Co operative Society Limited ("the Leicestershire Society") which transferred its engagements to the Midlands Society. By reason of that transfer of engagements the VAT Tribunal directed that the appeal be brought in the name of the Midlands Society.
2. Until the 1st April 1995, the Leicestershire Society in the course of its retailing business sold a variety of goods some of which were standard-rated and some of which were zero-rated supplies. It adopted as the means of calculating its VAT liability the simplified method available to retailers known as "Retail Scheme B" ("the Scheme") to which I shall shortly refer. On the 1st April 1995 the Leicestershire Society executed a transfer of the whole of its stock, property and other assets and engagements ("the Transfer") to the Midlands Society under a transfer of engagements made pursuant to section 51 of the Industrial and Provident Societies Act 1965 ("the 1965 Act") and ceased to use the Scheme. It is common ground for the purpose of this appeal that the Transfer and the cesser of use of the Scheme simultaneously took effect at midnight on the 1st April 1995. It is likewise agreed that the Leicestershire Society's final accounting period ran to midnight on the 1st April 1995 ("the Period") and that the Transfer took place within the Period and that throughout the Period the Leicestershire Society used the Scheme. As the Transfer was a transfer of a business as a going concern, the Transfer (most particularly of the stock) was not a supply for VAT purposes: see VAT (Special Provisions) Order 1995 Article 5. The Leicestershire Society ceased to be registered for VAT purposes on the 2nd April 1995. The Transfer was made with a view to the Leicestershire Society being dissolved and its registration under the 1965 Act being cancelled. The Registrar cancelled its registration under section 16 of the 1965 Act on the ground that it ceased to exist following the Transfer and this cancellation took effect on the 30th April 1997.
3. The Leicestershire Society subsequently submitted a return for VAT for the Period (which included the date of the Transfer). The issue on this appeal is how the Scheme operated in respect of the Period and in particular whether there ought to be the adjustment in that return which gives rise to the assessment made.

LEGISLATION

4. Article 11A(1)(a) of the Sixth Council Directive of the 17th May 1977 (77/388/EEC) provides that the taxable amount of supplies of goods shall be everything which constitutes the consideration which has been obtained by the supplier from the purchaser, the customer or a third party for such supplies. Article 27.1 (Simplification Procedures) goes on to provide as follows:

"1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax .... Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage."

5. From the introduction of VAT in 1973 the CCE have provided special schemes for retailers which allow them to calculate their output tax in a simplified way. In particular, retailers making supplies of both standard-rated and zero-rated goods (such as of food) have been permitted to operate the Scheme, whereby as a general rule the value of standard-rated supplies made in a particular period can be calculated by taking the aggregate of daily gross takings in the period and by then deducting the expected selling price of zero-rated goods acquired in the period.
6. The UK statutory basis for the Scheme is the VAT Act 1994 Schedule 11 para 2(6), which authorises the CCE by regulation to make special provision for taxable supplies by retailers of any goods and in particular:

"(a) for permitting the value which is to be taken as the value of supplies in any prescribed accounting period or part thereof to be determined ... by such method or one of such methods as may have been described in any notice published by the Commissioners in pursuance of the regulations…"

7. Part IX of the VAT Regulations 1995 (1995 No 2518) contains the regulations giving effect to various special schemes for retailers, the purpose of which is to value retail supplies during any accounting period. Paragraph 67(1) provides:

"The Commissioners may permit the value which is to be taken as the value, in any prescribed accounting period or part thereof, of supplies by a retailer, ... to be determined ... by any method described in a notice published by the Commissioners for that purpose; and they may publish any notice accordingly."

8. The relevant notice in this case is Notice 727 ("the Notice") which, in relation to the Scheme, refers to the "How to work" VAT Leaflet 727/8/93 ("the Leaflet"). The method adopted by the Scheme is to set out (in paragraph 12) the basic exercise required to be undertaken and then (in paragraph 22 and a series of other paragraphs) the adjustments that should be made in various specified circumstances. The basic exercise requires the retailer first to calculate the "daily gross takings" for the period; then deduct the "expected selling price" of zero-rated goods which have been "received, made or grown for resale" in the period; and the resulting figure is the retailer's standard-rated sales for the period, and the output tax for the period is determined by applying the VAT fraction to that standard-rated sales figure.
9. The Notice, so far as material, provides as follows:

"The day to day working methods and requirements of the schemes are explained in detail in the How to work leaflets ... This paragraph sets out the general principles of each scheme ....

Paragraph 12 How do the Schemes work? ...

Scheme B. Record the expected selling prices of zero-rated goods you have received, made or grown for resale to get your zero-rated takings. Take this away from your daily gross takings to get your standard-rated takings. To work out your output tax you calculate the VAT that is due on these takings.

Paragraph 20. What are expected selling prices?

The idea of expected selling prices is that you apply your normal mark up to your purchases to reach a figure for expected sales. This figure is then adjusted to improve accuracy and applied in one of a variety of ways to calculate the tax due.

Paragraph 21. How do I work out the expected selling prices?

You can do this by using either:

the class of goods method (paragraph 22); or

• ...

Paragraph 22. The class of goods method.

You must use your actual or average mark up for each class of goods and not apply an overall average to everything.

Scheme B ... At the end of each tax period you must:

• make an adjustment to take account of any sales where you don't receive the expected selling price. This adjustment should include, for example, price changes, special offers, stock losses, wholesale sales and bad debts that have been written off during the period; ..."

10. The Leaflet, so far as material, provides as follows:

"3. How does Scheme B work?

Record the expected selling prices of zero-rated goods you have received, made or grown for resale to get your zero-rated takings. Take this away from your total daily gross takings to get your standard-rated takings. To work out your output tax you calculate the VAT that is due on these takings.

7. How do I work out my output tax?

Each tax period:

1. Add up your daily gross takings for this tax period.

To work out your zero-rated takings:

2. Add up the expected selling prices of zero-rated goods received, made or grown for resale in the tax period (Don't forget to adjust for special offers, stock losses, wastage, wholesale sales etc.) ...

To work out your standard-rated takings:

3. Total at 1 minus Total at 2

To work out how much of this is VAT, multiply by the `VAT fraction' [7/47] ...

Remember, when you work out your daily gross takings for this scheme ... add on the cost to you, including VAT, of any goods taken out of your business for private use.

10. Goods you have in stock when you start to use the scheme must not be treated as goods for resale, i.e. when you acquire a business as a transfer of a going concern. However, if there are any lines you intend to sell and not replenish, treat these as goods received for resale."

CONSTRUCTION OF THE LEGISLATION

11. The rationale and operation of the Scheme was the subject of detailed consideration by the Court of Appeal in United Norwest v. CCE [1999] STC 1065 ("Norwest"). In that case the question arose whether an adjustment under paragraph 22 should be made where a retailer transferred zero-rated stock at cost in a transfer of part of his business as a going concern and where the retailer continued to trade as a retailer and use the Scheme for the remainder of his business. The Court of Appeal held that it should be made. The Court did not have to decide whether the position was the same if there was (as there is in this case) simultaneously a sale of the entire undertaking and a cesser of use of the Scheme. The Court did however provide helpful authoritative guidance on the construction of the Scheme:

"Scheme B provides a simple but somewhat rough-and-ready method of calculating the output tax of a retailer who sells both standard-rated and zero-rated goods, and whose takings from sales of zero-rated goods do not account for more than 50% of his annual turnover. As the judge said ([1998] STC 1065 at 1070): `the purpose [of scheme B] is clear and the aim is to produce a figure which is as accurate as possible consistent with the simplicity of the method employed by the scheme.'

The basic assumption underlying scheme B-and it is, perhaps inevitably, a somewhat crude one is that while he continues to trade the retailer will sell his zero-rated stock by way of retail sale, and will replenish his stock with zero-rated goods to replace zero-rated goods which are sold. On that basis, over time the volume of zero-rated goods brought into stock in any period will approximate to the volume of zero-rated goods sold during that period. If it should happen that a retailer's closing stock on his ceasing to trade is less than his opening stock when he commenced trading (assuming for this purpose that he acquired the business as a going concern with existing stock) he will, if he is using scheme B, have understated his zero-rated sales over the period of trading (and in consequence have overstated his output tax liability) since the volume of zero rated goods sold will, ex hypothesi, have exceeded the volume of goods coming in by way of replenishment of stock. If on the other hand his closing stock is greater than his opening stock, the reverse will be the case. There is, therefore, an element of `swings and roundabouts' in the scheme B calculation. No doubt this is a factor of which the retailer will normally take account when deciding whether to use scheme B.

Under scheme B ... para 10 of the leaflet provides that a retailer who acquires an existing business (for example, by way of transfer as a going concern can only bring his opening stock into account to the extent that it represents a line which the retailer does not intend to continue: that is to say, to the extent that it consists of stock which the retailer does not intend to replace once it has been sold. It is consistent with the basic assumption of scheme B (ie that a retailer will replenish his zero-rated stock to replace zero-rated goods which are sold) that an adjustment should be made to the scheme B calculation in favour of the retailer where, in the event, zero-rated goods sold by way of retail sale are not replaced by replenishing the stock, just as it is consistent with that basic assumption that adjustments should be made in favour of the commissioners where, in the event, zero-rated goods sold otherwise than by way of retail sale are so replaced. Hence the provision in para 22 of the notice requiring an adjustment to take account of `any sale where you don't receive the expected selling price'. As I see it, both categories of adjustment are aimed at bringing the figure for zero-rated goods `received, made or grown for resale' closer to the actual takings from zero-rated sales during the relevant period. In that sense, they are adjustments ` to improve accuracy' (see para 20 of the notice).

That, in my judgment, is the general context in which para 22 of the notice has to be read." (see pp.698-9)

12. In submitting its return for the Period the Leicestershire Society deducted from its gross daily takings for the Period the total of the expected selling prices of all zero rated goods purchased in the period but, though by the Transfer it sold its zero-rated stock below the expected (retail) price, the Leicestershire Society did not make the adjustment referred to in paragraph 22. The Midlands Society contends that upon the true construction of the Notice and having due regard to the context, the scheme of the legislation and its purpose the first sentence should be read as saying:

"At the end of each tax period you must make an adjustment to take account of any sales where you don't receive the expected selling price but you continue to be a retailer."

It goes on to contend that the Leicestershire Society was not obliged to make that adjustment because the Transfer took effect simultaneously with the cesser of its retail trade and of its use of the Scheme and because accordingly the Leicestershire Society did not continue to be a retailer. In support of this construction Mr Prosser, Counsel for the Midlands Society, relies on three arguments, each of which I shall consider in turn.

13. The first is that the Notice makes specific provisions in relating to stopping use of a scheme. In particular paragraph 83 reads as follows:

"Is an adjustment required?

If you want to stop using [scheme B] for any reason [there is no requirement for] any adjustment."

The Midlands Society submit that, where the Transfer is simultaneous with a cesser of user of the Scheme, the provisions of paragraph 83 (and not of paragraph 22) are applicable. If the Scheme were intended to require an adjustment where there was a cesser of user of the Scheme for any reason, whether a transfer of engagements or otherwise, it would say so and make this plain to the reader.

14. The short answer to this submission is that, reading the Notice as a whole, the provision in paragraph 22 for an adjustment at the end of each tax period is an integral element of the Scheme which was brought into play whilst the Scheme remained in force by the transfer. The provisions of paragraph 83 merely provide that a cesser of use of the Scheme shall not of itself give rise to any requirement for an adjustment. If in this case the Midlands Society had merely ceased to use the Scheme and only later disposed of the zero-rated stock as it did, the cesser of use would not of itself have triggered any need for the adjustment. To trigger the provision for an adjustment there must be a sale otherwise than at the expected selling price. A cesser of user of the Scheme is not to be equated with a transfer of a business or any part of the business for this purpose: see Norwest at 699j. But there was not a mere cesser of use in this case. That is not what happened in this case. There was a simultaneous sale of the zero-rated supplies at a price below the expected prices and that sale triggered paragraph 22.
15. The second ground focuses on the basic assumption (or rationale) underlying the Scheme as expressed in the passage cited in Norwest:

"The basic assumption underlying scheme B ... is that while he continues to trade the retailer will replenish his stock with zero rated goods to replace zero-rated goods which are sold."

16. It is common ground that this is indeed basic assumption. It is the feature of the retailer's trade which makes the Scheme appropriate to his use, and where the assumption holds true this enables the basic calculations required by the Scheme to operate as effective means of valuing taxable retail supplies. But the Scheme recognises and reflects the fact that there are thought to be good reasons why an adjustment should be required where the non-retail sale occurs simultaneously with the taxpayer ceasing to be a retailer with the inevitable consequences that those goods cannot be replaced in the final accounting period. In the present case, an adjustment is thought appropriate because in default of such an adjustment the Leicestershire Society would be entitled to offset against gross daily takings the expected selling prices of a considerable amount of zero-rated stock which was not in fact sold at those prices, and this would mean that the value of zero-rated sales would be overstated and those of taxable standard-rated sales would be understated. The adjustment mechanism of paragraph 22 is called for in that situation to improve accuracy. As the Tribunal expressed it in The Burton Group Plc LON/96/1116, the Scheme "would be distorted if no adjustment were made for transfers of a going concern" (at p.27 line 25).
17. In reaching this view and rejecting the submission of Mr Prosser I have particularly in mind three considerations. The first is that the existence of the basic assumption does not mean that it overrides all other considerations (let alone the language used in the Notice). Secondly the language of paragraph 22 is not expressed to be conditional on accordance with the basic assumption. Thirdly paragraph 22 in its reference to "wholesale sales" contemplates (as an example of a sale other than at the expected price which triggers the requirement for an adjustment) such a sale on a cesser of trading and imposes a mandatory obligation to make the adjustment in that situation (see Norwest at p.699g). If there is any sale other than at the expected price, whether occasioned by a wholesale sale or transfer (or otherwise), regard does have to be made to the closing stock the subject of the transaction and the requirements of paragraph 22 must be complied with.
18. The third ground advanced by Mr Prosser is that paragraph 22 should be construed as inapplicable in a case such as the present where the transfer is simultaneous with the cesser of use of the Scheme because it is irrational, arbitrary and unfair to require an adjustment if the transfer is simultaneous with a cesser of user of the Scheme when there is no such requirement if the transfer is subsequent to the cesser of user of the Scheme. The short answer to this argument is that the legislation affords to a retailer an option whether or not to adopt the Scheme. It is designed to afford a rough-and- ready somewhat crude method of calculating the output tax. There are swings and roundabouts, advantages and disadvantages. The Scheme necessarily has "rough edges", but having regard to its design I can see nothing unfair, arbitrary or irrational. Any fair reading of the Notice made clear to the Leicestershire Society the need for the adjustment if it proceeded with the Transfer before or simultaneously with its cesser of user of the Scheme, and that it was open to the Society to avoid the need for such adjustment if it postponed the Transfer until after the cesser of user of the Scheme. Nonetheless the Leicestershire Society decided to proceed simultaneously with the Transfer and cesser. It may be that the alternative was not commercially practicable. But having made the choice there can be no legitimate ground for complaint.

FURTHER EVIDENCE

19. Mr Prosser submits that, if it is held that paragraph 22 applied if the cesser of use of 1 the Scheme was simultaneous with the Transfer, the case should be remitted to the Tribunal to consider whether on the evidence adduced before it the Leicestershire Society ceased to use the Scheme before the Transfer. This was not an issue of fact raised before the Tribunal. The Midlands Society was content to proceed with its appeal before the Tribunal on the basis that the cesser of user and Transfer were simultaneous. Having lost on that basis, I do not think that the Midlands Society should be given a second bite at the cherry. There is a strong public interest in tax as in other cases in finality in litigation.
20. Mr Prosser in this argument set out to compare the operation of the Scheme with that of scheme B 1 in the factual situation prevailing in this like. Like the Court of Appeal in Norwest, I do not think the comparison helpful in construing the Scheme nor do I think that it helps his case. In any event the language of the Scheme leads to only one conclusion namely that paragraph 22 is applicable.

CONCLUSION

21. In the circumstances of this case, where there is a simultaneous transfer and cesser of use of the Scheme and trade as a retailer, the language of paragraph 22 is mandatory in requiring the adjustment. I am comforted in reaching this conclusion by the decision in Norwest. Whilst the facts of Norwest are different from those in this case in so far as the transfer was of part only of the undertaking and the Court did not have to decide what the position would be if the transfer was of the whole undertaking and simultaneous wth the cesser of the use of the Scheme, support can be found for the conclusion which I have reached in the language used and of the reasoning in that case. For all these reasons I dismiss the appeal.