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Cite as: [2005] CSIH 75, 2006 SCLR 493, [2005] ScotCS CSIH_75

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Customs And Excise v. Robertsons Electrical Ltd [2005] ScotCS CSIH_75 (11 November 2005)

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

Lord Justice Clerk

Lord Johnston

Lord Hardie

[2005CSIH75]

XA134/04

OPINION OF THE COURT

delivered by THE LORD JUSTICE CLERK

APPEAL

THE COMMISSIONERS OF CUSTOMS & EXCISE

Appellants;

against

ROBERTSON'S ELECTRICAL LIMITED

Respondent:

from a decision of the Edinburgh VAT and Duties Tribunal dated 28 June 2004

_______

For the appellants: Mrs S L Wolffe; Shepherd & Wedderburn WS

For the respondent: No appearance

11 November 2005

Introduction
[1] This is an appeal against a decision of the VAT and Duties Tribunal dated 28 June 2004 by which the Tribunal upheld the appeal of the respondent against a Notice of Assessment dated 16 February 2004.

[2] The respondent is a retailer of electrical goods. It sells some of its goods online. When a customer orders goods online he pays for them by recording his credit or debit card details on the respondent's website. In the normal case the amount paid is the full price of the goods. When the goods are sent to the customer, the respondent prepares an invoice, either at the date of dispatch or at a later date; but in all cases within 7 days from the date of delivery. The respondent records the tax point for VAT purposes as the date of the invoice or the date occurring 7 days from the date of delivery, whichever is the earlier.

[3] The respondent's Terms and Conditions for online transactions provide inter alia as follows:

"Payment Methods

... Credit/debit card payments are taken at point of order on all sales ...

Placing an Order

... By submitting your order you are offering to buy goods ... All online orders are confirmed as received through sending an auto-generated email. We reserve the right to decline your order ... By purchasing any product or item you are thereby agreeing to these terms and conditions.

Returns

No fault

If you wish to return a product that is not faulty or misdescribed, you have 7 days from the day after the product is received to request that you wish to return the product ...

Faulty Returns

Products delivered which are 'dead on arrival' should be notified within 7 days from the delivery date. We will arrange the uplift of the goods. Upon receipt of the goods and confirmation of the fault you will be offered either a replacement, a repair or full refund, providing the item is complete with all accessories and in its original box and packaging. If the product is not deemed faulty the goods will be returned to you ... "

The statutory framework

Value Added Tax Act 1994
[4] Sections 4 and 6 of VATA 1994, so far as material, provide as follows.

"4 Scope of VAT on taxable supplies

VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

Time of supply

... (2) Subject to subsections (4) to (14) below, a supply of goods shall be treated as taking place-

(a) if the goods are to be removed, at the time of the removal; ...

(c) if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time when it becomes certain that the supply has taken place or, if sooner, 12 months after the removal ...

(4) If, before the time applicable under subsection (2) or (3) above, the person making the supply issues a VAT invoice in respect of it or if, before the time applicable under subsection (2)(a) or (b) or (3) above, he receives a payment in respect of it, the supply 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 basic tax point is the time of removal of the goods (s 6(2)(a)). Section 6(2)(c) provides for tax points other than that on the basis that when goods are sent or taken on a transaction of one of the kinds there described, it cannot be known whether a supply will take place. It therefore implies that the mere sending or taking of the goods under such a transaction does not constitute a taxable supply.

[5] Section 6(4) provides, in effect, that if the supplier issues a VAT invoice before the tax point that would otherwise apply under section 6(2), or if the supplier receives payment before delivery, the tax point is the date of the issue of the invoice or the date of receipt of the payment. It also suggests, in our view, that section 6(2)(c) applies where the goods are not paid for when they are sent or taken.

The Consumer Protection (Distance Selling) Regulations 2000 (SI No 2334)
[6] An online sale of this kind constitutes a "distance contract" governed by these Regulations ("the 2000 Regulations", reg 3 and Sched 1, para 11). Regulation 10 provides inter alia as follows:

"Right to cancel

10.-(1) Subject to regulation 13, if within the cancellation period set out in regulations 11 and 12, the consumer gives a notice of cancellation to the supplier, or any other person previously notified by the supplier to the consumer as a person to whom notice of cancellation may be given, the notice of cancellation shall operate to cancel the contract.

(2) Except as otherwise provided by these Regulations, the effect of a notice of cancellation is that the contract shall be treated as if it had not been made ...

Regulation 10 entitles the consumer to cancel the contract within the cancellation period without having to give a reason. It is agreed that the cancellation period in this case is 7 working days after receipt of the goods (regs 10(1), 11(2)). Contracting out of the Regulations is forbidden (reg 25).

The issue
[7] There is no dispute that the respondent must account for output VAT on the price of the goods bought online. The question is when the tax point occurs. The appellants contend that the tax point is the date of payment. The respondent contends that the tax point is the date on which the customer ceases to be entitled under the 2000 Regulations to cancel the contract. This date may fall into a later VAT return period than the date of payment. So the case is about cash flow.

The reasoning of the Tribunal

[8] The Tribunal considered that the issue was to be decided on the construction of section 6(2)(c) of VATA 1994 and its application to the facts of the case. If section 6(2)(c) applied, then the payment before delivery did not have the effect of creating a deemed time of supply. No actual tax point would be created by virtue of the receipt of payment for goods yet to be delivered. On this view, the question then became whether a supply of goods with a statutory right of cancellation was a supply on similar terms to a supply on approval or on sale or return. The essential feature in such cases was that the person to whom the goods were supplied had the unqualified right to return the goods or to decline to proceed with or to cancel the transaction, usually without penalty. While the precise terms might vary in such cases, essentially there need be no defect in the goods and the supplier need not be in breach of contract. In the Tribunal's view, the statutory right to cancel gave the supply of goods under a distance contract a character similar, but not identical, to the supply of goods under such contracts. In a distance contract it was only when the cancellation period expired that it became certain that a supply had taken place for the purposes of section 6 (Decision, pp 13-14).

[9] The Tribunal concluded that supply of goods under a distance contract was in effect a supply on 7 working days approval. Its similarity to sale on approval was sufficient to bring a distance contract of this kind within the phrase "similar terms" in section 6(2)(c) (pp 15-16). Questions as to passing of property or risk, or as to whether there was a contract subject to a suspensive or resolutive condition, were therefore not helpful in the determination of the question (p 16).

[10] The Tribunal considered the decision of an English Tribunal in Littlewoods Organisation plc v CCE ([1997] V & DR 408). In that case the supplier's terms of supply allowed 14 days free approval, but required that payment or a first payment should be made before the 14 days period expired. The Tribunal in that case held that a transaction concluded on those terms constituted a contract of sale with a condition subsequent entitling the purchaser to cancel the transaction within the 14 days period, the provisions for payment being incompatible with the theory that the goods were supplied on approval only.

[11] The Tribunal in this case considered that the Littlewoods case was distinguishable on its facts and doubted whether it adopted the correct approach (pp 17-18).

Conclusions
[12] In our opinion, the Tribunal has misdirected itself. It has overlooked the meaning and effect of the respondent's online terms and conditions.

[13] The Tribunal appears to have acceded to a proposition for the respondent to the effect that the 2000 Regulations conferred on the customer the absolute and unfettered right to disregard the contract, leaving the legal position as it was before the order was made; that the transaction was at most an agreement to sell (Sale of Goods Act 1979, s 2(5)) and that no sale took place until the expiry of the cancellation period (1979 Act, s 2(6)).

[14] That approach seems to imply that regulation 10 does not merely confer a right to cancel the contract but modifies the nature of the contract itself by making all distance contracts in effect transactions of sale on approval (Decision, p 15).

[15] We consider that that view is based on a misunderstanding of regulation 10. Although the respondent's terms and conditions are subject to the statutory right of cancellation, they nonetheless determine the nature of the transaction under which the goods are supplied. In our opinion, the provisions relating to payment, ordering and returns (supra) all indicate that the nature of the online transaction is one of outright sale. Regulation 10 governs the transaction only to the extent of conferring on the purchaser an unqualified right of cancellation of the sale.

[16] There is no concluded contract of sale if goods are supplied on approval (Bryce v Ehrmann, (1904) 7 F 5, Lord Trayner at p 13) or on sale or return (Macdonald v Westren (1888) 15 R. 988, Lord Young at p 989). It follows that there is no taxable supply under section 4 of VATA 1994. The taxable supply occurs only "when it becomes certain that the supply has taken place" (s 6(2)(c)), that is to say when the recipient buys them, or on the expiry of 12 months after the removal of the goods, if sooner (ibid).

[17] The goods in this case cannot be said to have been sent or taken "on similar terms" to transactions of these two kinds. For the reasons that we have given, the respondent's terms and conditions have the effect that there is a concluded sale, although it is subject to the purchaser's statutory right to annul it. The fact that payment must be made when the order is placed indicates, in our view, that section 6(2)(c) cannot apply to the transaction. The transaction in this case is therefore of a similar nature to that considered by the Tribunal in Littlewoods Organisation plc v CCE (supra), which in our view was correctly decided.

[18] Under a transaction of this nature, there is therefore a taxable supply (Staatssecretaris Van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88, [1991] STC 627). That supply will be treated as taking place either at the time of the removal of the goods (s 6(2)(a)), which counsel for the appellants accepts will be the date of delivery, or, as in this case, on the making of the online payment (s 6(4)).

Decision

[19] We shall allow the appeal. All consequential matters have been agreed by the parties.