Scottish Court of Session Decisions

[1] This is an appeal at the instance of C.R. Smith Glaziers (Dunfermline) Limited (hereinafter referred to as "the appellants") against a decision of the Edinburgh VAT and Duties Tribunal dated 22 October 1999. The appellants had appealed to the Tribunal against a Notice of Assessment issued by the Commissioners of Customs and Excise (hereinafter referred to as "the respondents") in the sum of £365,503 together with interest thereon of £24,442, the total assessment being £389,945.23. The appellants' business is the supply and installation of double glazing and related products such as conservatories and the appeal relates to the appellants' decision in 1996 to provide their customers with warranty insurance to guard against the appellants' insolvency. The question for determination is whether the part of the price for the appellants' services attributable to an arrangement fee for the insurance and the insurance premium itself fell to be treated as exempt supplies, as the appellants contend, or whether VAT at the standard rate is payable thereon.

[2] The facts of the case were not in dispute and the issue before us proved to be a question of statutory interpretation.

[3] The appellants' turnover is just under £30m a year. In their contracts with their customers they provided a warranty or guarantee in relation to workmanship and materials. In the latter part of 1996 they resolved to provide warranty insurance with the object of satisfying their customers that the product warranty would be honoured by the insurer in the event of the appellants becoming insolvent. The appellants accordingly entered into an arrangement through a broker with NIG Skandia, an established underwriter of commercial warranties, for the provision of an insurance policy which guaranteed the due performance, subject to certain qualifications and exceptions, of the appellants' obligations under each warranty. In the November 1996 Budget it was announced that legislation would be passed to require businesses such as the appellants' business to disclose to consumers details of their charges for insurance schemes, such as the appellants' scheme for warranty insurance. Since at least November 1996 the appellants have been anxious to ensure that the terms of their contracts with their customers complied with all the relevant legislation, including fiscal legislation such as the VAT legislation and the impending changes thereto. A great deal of correspondence passed between the appellants and the respondents and it was common ground that there had been no attempt by the appellants to evade VAT and that the dispute which has arisen resulted from a genuine difference of opinion in relation to an issue of statutory interpretation.

[4] On or about 30 November 1996 the appellants wrote to all their customers who as at that date had entered into contracts for the provision of services, but had not yet received those services, and stated that they had introduced "an insurance policy to provide our customers with additional peace of mind". The letter went on to state as follows:

It was stressed that this insurance product was being made available to the customer at no extra charge. Put broadly, the insurance provided that the insurer would secure, over a ten year period, the fulfilment of the appellants' contractual obligations in the event of the appellants ceasing to trade by reason of bankruptcy or liquidation and being unable to satisfy claims made under the guarantee. The insurance premium referred to in the letter to the appellants' customers was paid by the appellants to the insurer. Customers who entered into contracts after 30 November 1996 but before 1 January 1997 did not receive the offer contained in the letter nor did they receive the benefit of the warranty insurance. We were informed that the dispute in this case relates to the VAT payable in respect of contracts entered into during the period from 1 January to 31 December 1997.

[5] The contracts between the appellants and their customers were in writing in a standard form of contract. In the case of contracts entered into during 1997 there was

a box at the foot of the form which contained the following:

[6] Each contract contained what were referred to as Standard Conditions which were on the back of the form. Condition 1.1 provided inter alia as follows: "CONTRACT PRICE" means the Total Contract Price shown overleaf or, where the context so requires, the contract price as amended in accordance with these Conditions.

[7] Condition 3.4 provided as follows:

Conditions 6.1 and 6.3 were in the following terms:

[8] The appellants considered that the services in respect of the insurance premium and the arrangement fee of 10% of the total contract price were exempt supplies and accordingly not subject to VAT. In their returns in respect of the period in dispute they had not accounted for VAT on the insurance premiums of £16 or the arrangement fees. They effectively treated the total contract price exclusive of VAT as reduced by the amount of the insurance premium and the arrangement fee. From 1 January 1998 onwards, however, the appellants arranged for the actual amount of the arrangement fee to be entered in manuscript on the standard contract forms and in the case of contracts entered into from 1 July 1998 onwards they amended condition 6.3 to read as follows:

As stated above, in their VAT returns covering the period in dispute the appellants treated the total contract price, excluding VAT, for which VAT thereon had to be accounted for to the respondents, as reduced by the combined total of the insurance premium of £16 and the amount of the arrangement fee. However, the respondents took the view that the appellants' VAT returns were incorrect and in September 1998

they issued a Notice of Assessment for the total sum of £389,945.23. It was accepted that VAT was not payable on each insurance premium of £16 but the respondents contended that VAT was payable on the amount of each arrangement fee, those fees not being exempt supplies. The respondents' position was that the arrangement fee was not exempt, but was taxable at the standard rate of VAT, unless full disclosure of the amount of the fee was made to the individual purchaser. At the hearing before the Tribunal parties were agreed that the Tribunal had to decide whether there was full disclosure in the appellants' contracts with customers entered into during the relevant period. In this connection, the Tribunal had to decide whether the relevant requirements of Group 2 Notes (3), (4) and (5) had been fulfilled.

[9] The Group 2 Notes, which relate to the provision of insurance, are set out in Schedule 9 to the Value Added Tax Act 1994 and they provide that, in order to obtain the statutory exemption for the provision of insurance through an intermediary, certain matters require to be stated in a document delivered to the customer, that document being, in the present case, the appellants' standard contract form which was in use during 1997. In particular, in order to secure the exemption the contract had to contain the statements specified in Note (5) which provides as follows:

It was common ground that, in order to secure the exemption which they were seeking, the appellants' contract had to contain the statements specified in Note (5) and, as the Tribunal observed, the sharp question was whether the word "amount" in Note (5)(b) meant that an ascertained sum such as "£500" had to be stated or whether a formula from which the sum may be calculated, such as "10% of the contract price" would fulfil the requirement of the Note.

[10] The Tribunal was satisfied that in the present case a customer could ascertain the amount of the arrangement fee but reached the conclusion that in the context of Group 2 of Schedule 9 the word "amount" in Note (5)(b) meant a specific sum, such as "£500", and that a formula is not the statement of an amount but the means by which an amount may be ascertained or calculated. The purpose of the statutory provisions appeared to be "transparency". The customer has to be able to identify what he is paying for the warranty insurance and, while a stated sum tells him that, a formula does not. The Tribunal expressed the opinion that if a formula satisfied the provision in Note (5), then presumably a complex formula would suffice and further observed that a simple formula would not be sufficient. Even if the contract enabled the customer by a process of elimination to identify the amount, that would not be sufficient because that is not setting out the amount, as the legislation requires. The Tribunal found against the appellants and it is against that determination that the appellants have now appealed to this court.

[11] Counsel for the appellants submitted that the Tribunal had erred in holding that the word "amount" in Note (5) could only mean a specific sum. On a proper construction of the Note, the relevant requirement was fulfilled when the amount

which the customer was required to pay in connection with the arrangement of insurance was expressed as a percentage of the total contract price. Note (5)(b) related to the amount of the arrangement fee and the question was whether or not the appellants had complied with that provision. The amount had to be disclosed to the customer and such disclosure was seen as sufficient to discourage "value-shifting". The Tribunal had erred in law in taking too narrow an approach to the interpretation of Note (5). Counsel submitted that the requirements of Note (5)(b) had been fulfilled by the reference in the standard contract form to the arrangement fee being 10% of the total contract price and it was not necessary for the actual figure to be stated. It was accepted that the intention of the legislature had been "transparency", as the Tribunal had observed, but that had been achieved by the fact that the contract referred to 10% of a known figure. Nowadays people are used to receiving financial information in the form of percentages and the Tribunal had accepted that in the present case a customer would have no difficulty in working out the amount of the arrangement fee. If, for example, the total contract price was £5,000, there was no material difference between stating in the contract that the arrangement fee was £500 or that it was 10% of the total contract price. A reference to 10% of the total contract price was a reference to the amount of the arrangement fee, and the Tribunal had been wrong to say that such a statement did not tell the customer what he was paying for the arrangement fee for the warranty insurance. It was accepted that the use of a more complex formula may not comply with the requirements of Note (5)(b) but it would be a question of degree and the court could step in to say where the line had to be drawn. Counsel referred to Freight Transport Leasing Limited v. Commissioners of Customs & Excise, Manchester Tribunal, 21 January 1991, Decision No. 5578 and submitted that that case supported the contention which he was advancing. There was

no legislative policy which required a fixed sum to be stated in the contract as opposed to 10% of a known price. In this case the customer could very easily ascertain the amount of the arrangement fee. The appeal should be allowed and the case remitted back to the Tribunal to work out the arithmetic.

[12] Counsel for the respondents submitted that the Tribunal had reached the correct conclusion and that the word "amount" in Note (5)(b) meant a specific monetary sum. Counsel began by referring to Article 13 of the EC Sixth Council Directive 77/388 which related to exemptions from VAT which member states were obliged to include in their legislation with a view to preventing any possible evasion, avoidance or abuse. The principal purpose of the United Kingdom statutory provisions was to deter "value-shifting". If a company supplied mixed services, one taxable and one exempt, there would be a temptation to load value onto the exempt services. "Value-shifting" became more difficult if the supplier had to disclose to the customer the figure being charged for the exempt services, and the exact sum had to be disclosed. The legislation requires the disclosure of a specific monetary amount. It was not sufficient to tell the customer that the arrangement fee was 10% of the total contract price, although it was accepted that that was an easy calculation for the customer to make. If the total contract price was £5,000, the contract had to state in writing that the arrangement fee was £500. If a simple formula was held to be sufficient compliance, it was possible that less scrupulous suppliers would include more complicated formulae in their contracts. Group 2 Notes (4) and (5) contained extensive and fairly specific disclosure requirements and it would be odd if a supplier could set out an "amount" by reference to a calculation rather than a fixed monetary figure. Note (5)(b) referred to "every amount that the customer is, is to be or has been required to pay" and the reference to payment rendered it more likely that "amount"

meant a specific monetary sum. Further, so far as the standard contract form was concerned, it referred to two total contract prices, one excluding VAT and one including VAT, so that there was scope for uncertainty, although counsel accepted that, construing the contract as a whole, the reference was to 10% of the total contract price including VAT. In support of the interpretation of the word "amount" in Note (5)(b) which he was advancing, counsel for the respondents referred to other sections of the 1994 Act, including sections 25(2) and (3), 33(1) and (2) and 73(1). It was submitted that in the Act "amount" meant a specific monetary sum unless the context demonstrated otherwise. Paragraph 115(1) and (2) of VAT Regulation 1995/2518 referred to "an amount calculated" in the manner therein described and that shows that an amount is the result of a calculation and that it is not sufficient to specify what calculation has to be made. Reference was also made to the definition of "amount" in the Shorter Oxford Dictionary. The case of Freight Transport Leasing Limited was not of assistance as it dealt with the meaning of "charge" and not "amount". The decision of the Tribunal was correct and the case should be remitted back to the Tribunal, who still had to work out the correct figures, to proceed as accords.

[13] We have considered the submissions made to us and we have reached the conclusion that the submissions made on behalf of the respondents are well-founded. The result of the appeal depends on an issue of statutory interpretation which, although it can be stated shortly, we have found to be attended with considerable difficulty. The issue for our determination is whether the word "amount" in Note (5)(b) falls to be construed as meaning a specific monetary sum, as the respondents contend, or whether the appellants are correct in submitting that the requirements of Note (5)(b) are complied with by reference to 10% of the total contract price, the Tribunal having been satisfied that the amount of the arrangement fee could be

ascertained by the customer from the written terms of the contract. The provisions of Group 2 contain a number of detailed requirements in relation to disclosure in order that each customer, and the respondents, can know what sum or sums relate to exempt supplies of services. Note (5)(b) requires a statement setting out "every amount" which the customer is being required to pay in connection with the transaction in question, and it is clearly desirable that there should be certainty about what is required in such a statement. As the Tribunal observed, the statutory regime is plainly designed to ensure that the customer knows exactly what amount he is paying in relation to the provision of insurance services. In our opinion, on a proper construction of Note (5)(b) the word "amount" in its context, namely "every amount", means the specific monetary figure which the customer is being required to pay for each item within the transaction, and the setting out of a calculation, even a simple calculation, by which the customer can ascertain the exact sum which he has to pay is not sufficient compliance with the provision in question, although we appreciate that in the particular circumstances of this case there is no practical difference between the monetary figure and 10% of the total contract price. It also seems to us that this interpretation of the word "amount" is generally consistent with the way in which that word is used in other sections of the Act. We did not find the decision in Freight Transport Leasing Limited to be of any assistance as it dealt with the interpretation of the word "charge". As we have said, the present dispute relates only to contracts concluded in 1997, as contracts entered into by the appellants from 1 January 1998 onwards specified the specific monetary figure payable in respect of the arrangement fee, first in manuscript and later in the amended form of Condition 6.3 which refers, in the case where the total contract price exceeds £1,000, to "a flat insurance arrangement fee of £500". For the foregoing reasons we consider that the Tribunal reached the correct decision and, as we were informed that certain figures

still required to be worked out by the Tribunal, we shall remit the case back to the Tribunal to proceed as accords.