Scottish Court of Session Decisions

This appeal is concerned with the question whether the appellant made an under-declaration of output tax in respect of the supply by it of cars which were the subject of hire purchase agreements.

According to the general principles as to the value of any supply of goods or services for the purposes of the Value Added Tax Act 1994, where the supply is for a consideration in money, its value is to be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration. If the supply is for a consideration not consisting or not wholly consisting of money, its value is to be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration (section 19(2) and (3)).

The legislation relating to VAT requires to be construed, so far as possible, in accordance with community law. The EEC Council Directive 77/388 (the Sixth Directive), which was issued on 17 May 1997, was aimed at "the harmonising of the laws of Member States relating to turnover taxes". Article 11A(1)(a) of the Directive provided that the taxable amount in respect of supplies of goods and services, apart from certain exceptions with which the present case is not concerned, was to be

Decisions of the Court of Justice of the European Communities have established that the concept of "consideration" in Article 11A, and consequently in section 19 of the 1994 Act, must be approached as a matter of community law and not as a matter of the domestic law of the individual Member States. It is a matter of settled case law in the decisions of the Court of Justice that the consideration is what is actually received for the supply of the goods and services, which is referred to as the "subjective value", and not a value estimated according to objective criteria (see, e.g. Argos Distributors Limited v. Customs & Excise Commissioners (Case No. 288/94) [1996] STC 1359 at page 1372). There must be a direct link between the supply of goods and services and the consideration received (see Naturally Yours Cosmetics Limited v. Customs & Excise Commissioners (Case No. 230/87) [1988] S.T.C. 879 at page 894).

When a dealer supplies a new car, output tax is payable on its price. Transfer of possession of the car under a hire purchase agreement involves its supply (para. 1(2) of Schedule 4 to the 1994 Act). Input tax payable by the finance company is balanced by an equivalent amount of output tax, and accordingly the position is tax-neutral so far as it is concerned. The supply of finance by a finance company is VAT-exempt. In the case of the supply of a used car, the effect of Article 8(1) of the Value Added Tax (Cars) Order 1992 is that tax is chargeable only on the excess of the consideration for which the car is supplied over the consideration for which it was obtained by the supplier. This is subject to the dealer keeping the required records and accounts, in accordance with para. (2)(d) of the Article. It may be noted that if a dealer sells a used car at a loss, i.e. for less than he acquired it for, he is not entitled to any relief in respect of that loss. Accordingly for him to acquire a car for a comparatively high value may operate to his disadvantage for the purposes of VAT.

Before the Tribunal parties were in agreement in regard to the facts, which are set out in considerable detail in its decision. For present purposes the salient facts can be put shortly as follows. The appellant has been registered for VAT since 10 April 1986. As from 1 March 1994 it has been the representative member of a VAT group registration. The appellant sells new and used cars to members of the public. The customer who is acquiring a new or used car, referred to as the "replacement car", expects to negotiate a discount on its showroom price, or to obtain a generous part exchange for his existing car, or to achieve both. About two thirds of the deals by which new cars were supplied by the appellant involved a part exchange. Customers frequently made use of arrangements for hire purchase. Consumer credit legislation no longer requires the customer to make a minimum deposit. However, finance companies continued to follow a practice of credit scoring The purpose of a system of credit scoring was to assess the degree of risk and ensure that the customer would be able to repay the amount which was lent and that a bad debt would not arise. Some companies required that the hire purchase documents should show a minimum deposit made up of cash or a part exchange allowance. Depending on the status of the customer, this could vary from 10% to 15%.

Parties were agreed that during the initial negotiations the appellant's sales executive who was dealing with the customer would introduce him to one of the finance managers to discuss the requirement of finance. The manager would seek to persuade the customer to take finance. He would prepare for this purpose a finance proposal form which showed the part exchange allowance, as part of the deposit, and the amount of the loan which was to be sought, which was referred to as the "balance to change". The manager would be aware of the criteria of the finance companies, including the minimum deposit which was required. If the substance of the deal which was being negotiated with the customer did not satisfy that, he would adjust the figures in the form until they did so. This might involve inflating the selling price of the replacement car and also further inflating the part exchange allowance (i.e. in addition to any inflation to attract the customer) by the same amount. This practice was known as "bumping". The amount of the finance which the customer required (i.e. the balance to change), remained the same. The proposal was then communicated to the finance company with a view to it approving the loan in principle.

When the customer indicated that he wished to proceed with the purchase of the replacement car, a sales executive would prepare a sales order form. The customer was invited to agree to the deal being restructured so as to show in that form not the inflated values which were shown in the finance proposal form but lower values. Where the customer agreed to this, the amount for the part exchange allowance usually became the figure shown on the original appraisal form as the written down value for the trade-in car. The remaining figures were "rolled back" to the selling price, which was discounted by an amount equal to the over-allowance. The "balance to change" was unaffected. If the customer did not agree to this, the sales order form would show the inflated part exchange allowance and the undiscounted price. The sales order form as agreed was ordinarily signed by the customer and the sales executive. Thereafter no amendment was made to it unless with the customer's agreement.

For new cars the finance company usually required a valid VAT invoice to enable it to deduct input tax. An invoice was usually issued by the appellant showing figures which corresponded to the figures in the finance proposal form, and not those contained in the sales order form. So far as concerned used cars, the finance company did not normally require an invoice, as it was not entitled to an input tax deduction in the case of such a transaction.

The appellant accounted for VAT on the basis of the discounted sale price shown in the sales order form and, where a car had been taken in part exchange, the appellant took as the acquisition cost for VAT purposes the part exchange allowance shown in that form.

Having carried out an examination of a sample of transactions during the period from May 1994 to January 1995 the Commissioners of Customs & Excise, who are the respondents in this appeal, claimed that there had been an under-declaration of output tax in respect of the difference between the values of cars as shown in the documents issued to the finance companies and those contained in the sale order forms relating to those cars. Their assessment of the under-declared tax was arrived at by reference to the difference. Where there was a corresponding over-declaration by the appellant arising from the sale of the part exchange car, an allowance was given by the respondents. On the other hand, where the consequence of the appellant seeking a higher value was such as to cause a loss on the sale of the part exchange car, no additional allowance was given.

The VAT Tribunal sustained the respondents' assessments. The reasons for the decision, put shortly, were that the hire purchase transaction involved in each case a supply by the appellant to the finance company, and that the sole evidence as to the value attributed by those parties to that supply was contained in the finance document; that it was neither necessary nor appropriate to have regard to the method by which those figures were arrived at, which were described as "wholly artificial, if not dishonest"; further, and in any event, what the appellant received included the important commission; and to ignore "bumping" was not in accordance with economic reality, since in order to secure a loan, all of the parties involved had agreed a value, which was therefore the subjective consideration.

For the appellant, Mr. Tyre did not dispute that for the purposes of VAT each of the cars was supplied by the appellant to the finance company. However, that did not mean, he said, that one should not look beyond the hire purchase agreement to the whole surrounding circumstances. Article 11A of the Sixth Directive did not stop with what was stated in the documents or even what was agreed between the persons between whom the supply took place. He emphasised that the taxable amount should not exceed the sum that was finally received by the taxable person. In support of that submission he referred to the decision of the Court of Justice in Elida Gibbs Limited v. Customs & Excise Commissioners (Case No. C-317/94) [1996] S.T.C. 137, which dealt with the VAT liability of a manufacturer who had refunded the value of money-off coupons to the retailer and the value of the cash-back coupons to the final consumer. It was held that the taxable amount corresponded to the price at which the manufacturer sold the goods to the wholesalers or retailers, less the value of the coupons.

Mr. Tyre said that in the present case the supply of a car to the finance house was in return for (i) the money lent by the finance company; (ii) the cash deposited by the customer; and (iii) the car which the customer traded in. The figure for the third element was subject to variation along with the price of the replacement car. The inflation of figures for the purpose of financing the transaction was merely a manipulation to assist the customer in obtaining the loan. It did not mean that, had it not been for that inflation, the transaction would not have gone through. There was nothing to suggest that the finance companies were not happy with the inflation of the figures. It was not unreasonable to infer that they knew what was going on. The inflation of figures did not affect the economic reality of the contract of sale between the appellant and the customer, which was the important matter. The figures were of no interest to the customer as they did not affect him. The customer was interested only in the difference between them, which was unaffected. It was significant that the customer was given the opportunity to agree, or not agree, with the re-structuring of the deal, and that he and the sales executive normally signed the sales order form. That was how the true subjective consideration was determined. Thereafter no amendment could be made without the agreement of the customer. Anything else was to do with the method for obtaining the loan, with which the customer was not concerned.

In the past the Tribunal had found against dealers who had carried on the practice of "bumping". However, Mr. Tyre pointed out that those were cases in which the taxpayer had sought to maintain that the sale agreement price was not the true value. In the present case, however, there was no question of seeking to displace the figure in the sales agreement in favour of some objective value. It was a question of whether the correct figures were those contained in the sales agreement or those in the finance agreement. In support of the proposition that it was not essential that both parties to the supply should be aware of the exact value of the consideration Mr. Tyre referred to the decision in Argos Distributors Limited v. Customs & Excise Commissioners. In that case it was held that, for the purpose of ascertaining the subjective consideration actually received by Argos for the sale of its goods which consisted of or included its acceptance of vouchers presented by the ultimate customer, it was correct to have regard to the sum of money which Argos received for the sale of those vouchers to distributors, even though the customer was unaware that they had been sold to them at a discount. Likewise, in Naturally Yours Cosmetics Limited v. Customs and Excise Commissioners, it was held by the Court of Justice that, where a supplier supplied goods to a retailer for a monetary consideration which was less than that at which he supplied identical goods to the retailer for resale to the public, on an undertaking by the retailer to apply the goods in procuring another person to arrange, or rewarding another for arranging, a gathering at which further goods of the wholesaler could be sold by the retailer to the public for their mutual benefit, on the understanding that if no such gathering was held the goods had to be returned to the supplier or paid for at the wholesale price, the taxable amount was the sum of the monetary consideration and of the value of the service provided by the retailer which consisted in applying the goods as an inducement in procuring the services of another person or in rewarding that person for those services. In that case the value of the service was regarded as being equal to the difference between the price actually paid for that product and its normal wholesale price. Mr. Tyre said that he had to accept that the figures which the appellant had declared to finance companies were, on his argument, untrue figures. However, it was not right for the Tribunal to have formed an adverse view of the appellant's case on the basis that what they had done was, or was possibly, dishonest. He also pointed out that the Tribunal had been wrong in treating the commission as part of the consideration for the supply of the car. It was in fact in return for the procuring of finance through the particular finance company which paid the commission.

We do not have any difficulty with the latter two points which were made by Mr. Tyre. However, we are not satisfied that the Tribunal came to the wrong result. We put the matter in that way rather than saying merely that the Tribunal was entitled to reach the decision which it did, since it was not in dispute that, in regard to the critical issue in this case, this court is in as good a position to reach its own conclusion on the agreed facts.

The central question, the answer to which is determinative of the present appeal, is - what value did the parties to the supply treat as the consideration? (cf. Rossgill Group Limited v. Customs & Excise Commissioners 1997 S.T.C. 811 to which we were referred by Mr. Young for the respondents). As Mr. Young pointed out, the finance company saw only the finance documentation, which included the appellant's declarations. In the case of new cars the finance company received a VAT invoice which showed the higher figures. Thus, as far as the finance company was concerned, there was no other value which could be attributed to the transaction. Mr. Young submitted that on the findings made by the Tribunal in the light of the agreed facts a finance company would not have agreed to the particular transaction unless there had been higher figures, arrived at by means of "bumping". The appellant had represented a higher value for the replacement car than he would have wished. A trade-in car had no fixed value. What mattered was its value for the purposes of a particular transaction. Different values could be attributed to the trade-in car for different purposes. The views of the customer were irrelevant. For what it is worth, the customer indicated that he was prepared to proceed on the basis of the higher figures, but he had no interest in the re-structuring of the deal, since it had no effect on the amount of the loan which he wished to obtain. Mr. Young submitted that the decisions founded upon by Mr. Tyre dealt with questions which were different from the question in the present case, in which the parties had attributed a consideration to the cars which were the subject of supply by the appellant to the finance company. There was no question of the appellant not obtaining any part of what was referred to in the finance documents. What appeared in those documents was what was necessary to enable the particular transaction to proceed. If one was to ignore what had been treated in the finance documents as the consideration for the supply of the cars, this would depart from the subjective approach and bring in the objective assessment which the Court of Justice had rejected.

We are satisfied that the argument for the respondents is correct and that the true consideration for the supply of cars by the appellant to the finance companies falls to be ascertained by reference to the finance documents and not by reference to the sales agreements between the appellant and the customers.

The appeal is accordingly refused.