First-tier Tribunal (Tax)

[2010] UKFTT 339 (TC)

 

 

 

 

 

                                                                                               

TC00621

 

 

Appeal number LON/2009/157

 

 

REPAYMENT CLAIM – VAT on HP contracts – Repossession – Whether “output tax which was not due” in VATA 1994 s.80(1)(a) took account of output tax not declared on sale of repossessed cars – Yes

CARS – Sale of cars repossessed under HP contracts – Desupply – Some work including valeting before resale – “Same condition” – VAT (Cars)Order 1992 Art 4.1(a) – Decision in principle – Adjourned to agree figures

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

                                            MASTERLEASE LTD                           Appellant

 

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

 

 

                                    TRIBUNAL:  JUDGE THEODORE WALLACE

                                                             MISS S C O’NEILL            

                                                                       

 

Sitting in public in London on 2-5 March 2010

 

Roderick Cordara QC and Jessica Wells, instructed by KPMG LLP, for the Appellant

 

Paul Lasok QC, Ian Hutton and Fiona Banks, instructed by the Solicitor, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.         This appeal concerns a repayment claim following a reduction under regulation 38 of the VAT Regulations 1995 in the VAT on supplies of cars under hire purchase agreements which were repossessed in the years 2000 to 2006 before all instalments were paid.  Customs offset against the repayment claimed the VAT which it contended should have been paid by the Appellant on the subsequent sale of the cars repossessed on the ground that the “same condition” requirement for de-supply under the Value Added Tax (Cars) Order 1992 (1992 S.I. No. 3122) was not satisfied.

 

2.         The reduction under regulation 38 was agreed to be £3,331,905.  This arose because the VAT on the hire purchase (“HP”) supplies was paid on the full consideration under Schedule 4, paragraph 1(2) of the Value Added Tax Act 1994 when the customers took possession of the cars, whereas, as a result of the early termination of the agreements the Appellant  only received part of the consideration.

 

3.         The dispute is solely concerned with the decision of Customs to offset the sum of £3,050,374 against the regulation 38 adjustments on the grounds that the Appellant had failed to account for that sum in respect of the sale of the repossessed cars in respect of which the requirements of article 4(1)(a) of the 1992 Order (“the Cars Order”) had not been satisfied because the cars were not sold in the same condition as when repossessed.  A separate assessment of £56,003 relating to road fund licences was not challenged by the Appellant.  Customs accepted that the balance of £225,528 was repayable.

 

4.         The dispute involves two entirely separate issues: (1) whether Customs were entitled to offset any underdeclaration in respect of the sale of the repossessed cars without making an assessment which was now out of time and (2) whether, on a proper interpretation of the Cars Order, the Appellant was liable to VAT on the sale of the repossessed cars.

 

5.         The parties agreed that the appeal should proceed on the question of principle with the quantification of any offset to be dealt with at a later stage.  This is therefore only a decision in principle.

 

6.         The Cars Order issue involves the interpretation of the “same condition” requirement.  There is a further subsidiary issue:  whether on a proper application of European Community law the Cars Order should be applied so as to limit the VAT on a car sold when not in the same condition to the VAT attributable to the value added by the change in condition between repossession and sale.

 

The Offset Issue

 

7.         We consider the offset issue first.  Unless Customs are entitled to offset any underdeclaration in respect of the sale of the repossessed cars against the regulation 38 adjustments, the Cars Order issue or issues do not arise.

 

8.         In the seven years covered by the Appellant’s claim, Masterlease Ltd and its predecessor, Interleasing UK Ltd, which we refer to together as “Masterlease”, did not account for VAT on the sale of cars repossessed under HP agreements.  It is not clear whether Masterlease accounted for VAT on sales of some cars repossessed under HP agreements.

 

9.         Customs accepted at paragraph 52 of their Statement of Case that no assessments were raised in respect of underdeclared VAT and that now they are precluded from making an assessment because of the relevant time limits.  The time limits are in sections 73(6) and 77(1) of the Value Added Tax Act 1994.

 

10.       Masterlease made three claims to recover VAT: on 4 July 2003, on 18 March 2005 and on 19 December 2007.  The initial decision letter dated 31 January 2008, stated that the amount of VAT to be refunded would be after adjustment for sales where the Cars Order condition was not met.  The letter stated that a Notice of Assessment would be issued shortly confirming a net refund of £225,528.  It was accompanied by a document headed “combined assessment and voluntary disclosure”.

 

11.       The decision letter against which the appeal was lodged was dated 8 December 2008.  It confirmed the earlier ruling. It stated that the document issued on 31 January 2008 showing an amount due to Customs was not an assessment but was a reduction of the claim.

 

12.       Mr Cordara did not contend that the document issued in January 2008 either constituted or evidenced an assessment.  We observe that if there had been assessment in January 2008 it would have been in time for some of the later periods.

 

13.       Dr Lasok said that Masterlease’s grounds of appeal at paragraph 1 correctly referred to a claim under section 80 to recover overpaid VAT, because the regulation 38 adjustment had not been made in proper time, see General Motors Acceptance Corporation (UK) Ltd v Customs and Excise Commissioners (2007) Decision No. 19989 at [76].

 

14.       He said that when a claim is made under section 80 it is necessary to determine whether or not the claimant has brought into account as output tax an amount that was not due.  When considering a notional overdeclaration of output tax, in order to arrive at the correct amount it is necessary to consider whether it is cancelled out by another underdeclaration. He said that the Cars Order underdeclaration had to be considered as well as the adjustment for decrease in the VAT on the HP supplies so as to arrive at the “amount that was not output tax due” within section 80(1) for the 2007 claim, or the “VAT which was not due” for those claims which preceded the amendment of section 80(1) by the Finance (No.2) Act 2005.  The correct amount due did not depend on the reason why it was due or was not due.  The Cars Order issue was indistinguishable from the claim that output tax had been paid which was not due.

 

15.       Mr Cordara said that section 80(1) only applies when tax is paid which was not due.  Here there was no mistake at the time when the tax was paid; the law required Masterlease to pay the VAT at the beginning of the HP agreements.  Regulation 38 was designed to give effect to Article 11C1 which applied when there was a reduction in the taxable amount after the supply; section 80 had nothing to do with Article 11C1.  He submitted that Decision No.19989 was contrary to the decision of the Court of Appeal in University of Sussex v Customs and Excise Commissioners [2004] STC 1 at [147].

 

16.       Dr Lasok responded that University of Sussex was dealing with input tax in respect of which the Court of Appeal held that the taxable person had a discretion as to when to make the deduction claim; regulation 38 however was mandatory and required the output tax adjustment to relate to a particular period.

 

Conclusions on the Offset Issue

 

17.       The right by Customs to set the repossession sales against the decrease in the taxable amount on the HP supplies depends on whether section 80(1) applies.  This provides,

“(1)     Where a person - 

(a)       has accounted to the Commissioners for VAT

 for a prescribed accounting period (whenever ended), and

(b)       in doing so, has brought into account as output tax an amount that was not output tax due,

the Commissioners shall be liable to credit the person with that amount.”

 

18.       “That amount” clearly refers to the whole or any part of the total output tax entered on Box 1 of the VAT return.  It is not tied to the reason why it was not output tax due.

 

19.       Mr Cordara was of course right in asserting that Masterlease was correct to account for the full output tax at the inception of the HP contracts.

 

20.       Regulation 38 provides,

 

“(1)     … this regulation applies where –

(a)       …

(b)       there is a decrease in consideration for a supply,

which includes an amount of VAT and the … decrease occurs after the end of the prescribed accounting period in which the original supply took place.

…

(2)       Where this regulation applies, both the taxable person who makes the supply and a taxable person who receives a supply shall adjust their respective VAT accounts …

 

(3)       … the maker of the supply shall –

 

…

(b)       in the case of a decrease in consideration, make a negative entry for the relevant amount of VAT in the VAT payable portion of his VAT account.”

 

Under regulation 38(5) the entry is to be made in that part of the VAT account which relates to the prescribed accounting period in which the decrease is given effect in the business accounts.

 

21.       Although no evidence was given as to when effect was given to the repossessions in the business accounts of Masterlease, this must at the very latest have been in the statutory accounts covering the successive periods when the repossessions occurred.  There was no suggestion by Mr Cordara that this was not the case.  Nor was there any suggestion that adjustments were made at those times in the VAT account.

 

22.       We consider that the conclusion in Decision No. 19899 that the failure to make adjustments at the correct time resulted in overpayments for the periods when the adjustments should have been made with the result that section 80 applied was correct.  The overpayments arose because the VAT payments made were greater than they would have been if the adjustments had been made at the times when they should have been made. We accept the submission of Dr Lasok that the decision of the Court of Appeal in University of Sussex is to be distinguished, because that case was decided on the basis that deductions for input tax which were not mandatory whereas the adjustments in this case under regulation 38 were mandatory.  It is also relevant that Article 11C1 of the Directive was mandatory.  We conclude that the claims by Masterlease were claims under section 80(1) for credit for “an amount which was not output tax due” and that in calculating such amount any liability to tax on repossessed cars sold is to be brought into account.

 

The Cars Order issue

 

23.       There was an agreed statement of facts.  Three witnesses gave evidence and were cross-examined: Stephen Shaw, refurbishment technician at Masterlease’s repair centre at Smethwick, Birmingham, between April 2002 and February 2006, after which he was Masterlease’s representative at auction sales; Gareth Shaw, a member of Masterlease’s financial department for 11 years until June 2008 since when he has been chief financial officer; and David Ward, who was responsible for Masterlease at the Large Business Service of Customs between March 2005 and February 2008 as part of the assurance team for General Motors.

 

24.       There was a common bundle of documents.

 

25.       We summarise the agreed facts as follows.  Masterlease, a subsidiary of GMAC (UK) Plc, carries on amongst other things a car leasing business.  A part of its business relates to selling cars on hire purchase.  This activity is the subject matter of this appeal.  Masterlease operated a repair facility during the relevant period.  Some remedial work was carried out on the cars returned to Masterlease prior to their being sold.  We observe that on the evidence the work on some cars was limited to valeting, see paragraph 32.

 

26.       We find the following additional facts.

 

27.       Masterlease was formerly a member of the Arriva Group and was acquired by GMAC (UK) Plc in 1999 or 2000.  The repair centre was formerly operated by Arriva.

 

28.       At the relevant times the repair centre was carrying out work on cars which had previously been leased by Masterlease and also on cars repossessed by Masterlease from HP customers.  After the work, cars were resold by Masterlease in one of three ways: sale to Auto Point which specialised in selling quality second-hand vehicles, sale by Masterlease’s trade centre or sale by auction. Auto Point took around 10 per cent of the repossessed cars up to 2004 when it closed.  Around 60 per cent of the cars were sold at the trade centre, an open air compound holding several hundred cars.  The remaining cars were sold by auction.

 

29.       Less than 5 per cent of the turnover of Masterlease was generated by HP agreements.

 

30.       Some 15-17,000 cars a year passed through the repair centre of which some 5 per cent were repossessed HP cars.  The average annual cost of the centre was £2¼ to £2½ million including fixed costs.  It does not appear that the centre costs included the cost of bringing the repossessed cars to Birmingham. There were 80 or 90 employees at the centre, of whom three were supervisors who signed off the work. 

 

31.       On collection of repossessed cars, a vehicle movement inspection report was filled in, recording scratches and dents, the condition of the tyres, lights, windows, mirrors, seats etc, but not the mechanical condition; the mileage was recorded.

 

32.       On arrival at the repair centre cars were assessed for their structural, mechanical and general condition.  As a rule, if more than five hours work was necessary to bring a car up to a reasonable standard, the car was sent to auction with no work done apart from cleaning and valeting.  If work was needed to make the car roadworthy prior to sale, as required by section 75 of the Road Traffic Act 1988, this was done.

 

33.       The valeting and cleaning work was done by a sub-contractor in a separate bay at the repair centre. This was not included in the records of time spent and it appears that the cost of this work per car was treated as £51.

 

34.       Before any work was done on a car an A4 sized job card was produced on computer with basic details.  No examples were available since these were not kept when the repair centre was vacated at the end of 2006.

 

35.       Mechanics were given a job card for each car.  These had a standardised check list.  The mechanic would note on the job card what work was done.  Each mechanic had a peel off check sheet on which he would enter the time spent on the car sticking it onto the job card.  A job card could thus have a number of stickers from different mechanics when work was finished.

 

36.       Gareth Shaw produced an exhibit (GS4) which consisted of a print-out from Masterlease’s computer of what remains on the system recording what was on the job cards.  He did not know who created the exhibit.  GS4 contained a small number of 2004 entries (including Jobs AV 4517 and 7761), and entries in 2005 and 2006, the last being on 15 November 2006 (Job AY 8495).  There were some 330 cars listed on 75 pages, with an average of 8 lines for each car.  The cars were listed in alphabetic order of registration number.  We note that 330 is well under 5 per cent of the annual throughput, see paragraph 29 above.

 

37.       The first page of GS4 listed the following work on vehicle registration number AEZ 2777: “mechanical assessment, chips service, mop + polish, valet, rep/prep/paint F bumper and rep/prep/paint NSF wing”; those six items had no parts cost or specifically allocated time and labour cost, but there was a total labour cost of £36 for 4.75 hours, which did not include cleaning and valeting.  The work was recorded as done on 30 January 2006.  It appears from another schedule (“GS6”) that the car was a 5-door 1.6 litre Vauxhall Astra Life for which the customer was Royal Liver Assurance Ltd and that the car was sold from the trade centre on 5 April 2006 to GMAC for £6,750.

 

38.       The next car listed on GS4 (AV 53 DFC) started with six entries for 12 October 2006 with no parts or itemised labour costs: “structural assessment, valet, mop N polish, blk wax N T/Up as required, remove phone kit if fitted, refurb to attached standard”; AC/6165 27.10.06 indicated further work at a later date with parts cost of £19.50.  The total labour cost for the car was £18.80 for 2.35 hours.  There were entries for dent service (£15) and FT Spoiler (£26.26).  The total cost including parts and labour was £79.56; again this excluded the sub-contracted valet service.

 

39.       AX 03 GVA, also on exhibit GS4, had six entries for 23 October 2006.  There were further entries for a tyre (£15), NSF inner tie rod (£13.10), dent service (£10), A/C/6192 03.11.06 (£19.50) and door check strap invoice (£8.09).  Total labour was £90 for 11.25 hours, making £155.69 including parts (£65.69), again excluding valet service.

 

40.       These are simply examples from the first page of exhibit GS4.  The accuracy of the records depended on the information which mechanics put on the job cards and on such information being correctly entered onto the database by one of four or five computer operatives.  There was no reason for mechanics to understate the time spent on a job since they were paid on piecework.

 

41.       There were team meetings about quarterly when costs were discussed, the aim being to keep costs per car under £130 on average so as to keep the repair centre viable.  Stephen Shaw, who attended some of the meetings, understood that the aim was to increase the potential channels for sale, where possible sending cars to the trade centre rather than to auction since that gave Masterlease more chance of recouping the residual value of the car; purchasers from the trade centre were more open to doing work themselves.  On occasion, when the vehicle warranted it, the work done at the repair centre was more than minor bodywork.

 

42.       Exhibit GS5 was a spreadsheet recording work done in 2005 and 2006 on repossessed cars sold.  It was produced at a time when the job cards still existed, listing car registration number, labour time and cost, parts cost and total cost.  It was based on GS4 and although generally reliable contained some errors.  It showed the total cost for 785 cars as being £61,412; this however excluded the sub-contracted valeting and also overheads.  The spreadsheet showed costs on 82 cars exceeding £150 per car and the costs on 377 cars as less than £50, again excluding valeting.  The average cost of parts for the 785 cars was £40.27 per car and that of labour was £37.85 at £8 per hour.

 

43.       Exhibit GS6 showed the average sale proceeds of repossessed cars refurbished in 2006 as £6,186, of which 98 per cent had refurbishment costs of less than 5 per cent of average proceeds.

 

44.       The Birmingham centre was closed at the end of 2006 on economic grounds.

 

45.       Annex 1 to Business Brief 19/2001 dated 6 December 2001, which among other matters referred to article 4(1)(a) of the Cars Order, included this under the heading “Same Condition”,

 

“The condition of goods has been changed if any improvements, repairs and replacement parts or the generally making good of any damage has been carried out.  The cleaning of goods generally does not affect the condition nor does the inclusion of instruction manuals if they are otherwise missing.”

 

46.       The decision under appeal was made on the basis that Masterlease had not shown that the same condition requirement was satisfied in respect of any of the cars sold.

 

Submissions for Appellant

 

47.       Mr Cordara submitted that cars which were subject to cleaning and valeting and minor work to the body, such as removing scratches and dents, met the “same condition” requirement in article 4(1)(a) provided that not more than 5 hours work was involved; he submitted that “same condition” included servicing or repairing a vehicle so as to maintain it.  He said that there must be some de minimis concept and suggested 5 hours work or £150 costs as being reasonable. The purpose of the work done by Masterlease had not been to increase the underlying value of the cars but to prepare them for sale.  He said that “same condition” condition did not mean identical condition.

 

48.       He said that it was absurd and disproportionate if whenever the “same condition” requirement was not satisfied the entire sale consideration was taxed.  He submitted that article 4(1)(a) of the Cars Order should be construed purposively by reading in the words “in so far as” or “to the extent that” in place of “where”.  The purpose of article 4(1)(a) was that VAT, having been paid up front at the outset of the hire purchase, should not be levied again on a sale following repossession, see the Explanatory Note to the original order in 1973 (1973 S.I. No.336); Parliament did not intend to tax the whole vehicle twice.

 

49.       He said that a customer returning a car was contractually obliged to do so in the same condition fair wear and tear excepted.  It would be odd if, on a sale following voluntary repossession, article 4(1)(a) applied when the customer did all the remedial work but did not apply when Masterlease did any remedial work.

 

50.       Mr Cordara said that his fall back position was that the charge to VAT should be limited to the value added by remedial work.  This was in line with Finanzamt Burgdorf v Fischer (Cases C-322/99 and 323/99) [2001] STC 1356 at [25] to [28] and FörvaltningsAB Stenholmen v Riksskatteverket (Case C-320/02) [2004] STC 1041.  He said that the margin scheme for second-hand goods under Article 26aA(d) of the Sixth Directive permitted an element of repair; that was an analogous situation and the same principle should be applied when interpreting article 4(1)(a) of the Cars Order.

 

Submissions for Customs

 

51.       Dr Lasok said that Customs accepted that if no work was done on a car except cleaning or valeting the “same condition” requirement was satisfied.  If a difference was so minor as to be disregarded it was de minimis. However “same condition” means same condition and not a different condition.  He said that one should not be too “fine grained” in applying the test: with any object microscopic particles of paint may leave the surface.  It was necessary for the Tribunal to apply a common sense approach which is workable.

 

52.       He said that this appeal concerned changes of a different nature to cleaning, ranging from removing dents and repainting chips to replacing tyres or cracked windscreens and repairing brakes.  There was no reason to doubt that the work which was included in GS4 had been done although GS4 omitted things and was unreliable in that sense.  The burden was on Masterlease to show that the de-supply provision applied to the particular vehicles.

 

53.       Dr Lasok said that the repair centre was there for a reason.  He said that, if cars had gone direct to auction or to the sale compound, there would have been no provision for work on them.  The annual cost of the repair centre was substantial.  Having decided to put the cars through the repair centre, if Masterlease wished to opt for the de-supply, it had to avoid altering the condition of the cars.

 

54.       He said that the concept of “same condition” was not concerned with the cost of the work or with its effect upon the value of a car.  There was no basis in article 4(1)(a) of the Cars Order for using those factors as substitutes or explanations of the concept of “same condition”.  He said that replacing tyres to make a vehicle roadworthy affected its condition, as did replacing a spark plug or a cracked windscreen.  Servicing might involve a change of condition depending on what was done.  All the work done by Masterlease was carried out for a commercial reason.  Gareth Shaw said that the repairs were “to get them into condition so we could sell them to traders”; Mr Shaw had used the word “condition” as a matter of ordinary language.

 

55.       Dr Lasok said that Mr Cordara’s submission that “where” in article 4(1)(a) of the Cars Order should be read as “in so far as” was impossible under domestic canons of interpretation and was an intrusive approach based on the principles behind the relevant EC legislation.  The alteration of a de-supply to a partially taxable transaction would be a complete reversal of article 4(1), going against its grain. 

 

56.       He said that Article 26a A(d) of the Sixth Directive, which was considered in Forvaltnings, provided for a margin scheme, however in this case there were no supplies of second-hand goods by defaulting customers to Masterlease and no consideration given by Masterlease; the cars never left the economic cycle.  The margin scheme would in any event not have assisted Masterlease because Masterlease would have had no purchase price to deduct.

 

57.       He said that Fischer concerned Article 5(6) of the Directive which applied when business goods were applied for private use: Masterlease did not buy the cars from private individuals, the cars continued to be used for its business and remained in the economic cycle up to their final sale after repossession.

 

58.       Dr Lasok said that the regulation 38 adjustment removed any double taxation.  He submitted that the observation by Field J at [31] in Customs and Excise Commissioners v General Motors Acceptance Corporation (“GMAC No. 1”) [2004] STC 577 was obiter and that the part of the final sentence in brackets was not correct.

 

59.       He said that there was no room to depart from the de-supply provisions in article 4(1)(a) unless Masterlease could identify a directly effective right under EC law. There was no such right either on the basis of Article 26a which covered second hand goods or on the basis of fiscal neutrality.  The basis of the VAT system was that VAT must be accounted for proportionately to the turnover achieved, see Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 at [19]-[20] and [24].

 

60.       Dr Lasok said that article 4(1)(a) did not implement any specific provision in the Directives; it was a broad brush simplification measure designed to ensure that VAT accounted for on HP supplies was proportionate to the consideration received.  When the underpinnings were held to be flawed in GMAC No. 1, the Cars Order was amended.

 

61.       He said that the fiscal neutrality argument arising in Revenue and Customs Commissioners v Rank Group plc [2009] STC 2304, where the legislation imposed differential treatment of similar supplies, did not arise here because Masterlease made a free decision as to whether to alter the condition of vehicles.  In Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2009] STC 1453 the Court said that the principle of fiscal neutrality did not mean that a taxable person could choose one transaction and avail himself of the effects of another.

 

Reply by Appellant

 

62.       Mr Cordara said that the contention that the cars never left the economic cycle conflicted with Article 5.4(b) of the Sixth Directive which aligned hire purchase contracts with sales, thus accelerating the liability to account for tax.  Handing over the cars was treated as a supply of goods within Article 5.1 of the Directive and therefore of the right to dispose of the goods as owner.  The cars left the economic cycle when the HP customer drove them away.

 

63.       He said that Elida Gibbs did not set a minimum amount that an asset must generate but did the reverse, setting a ceiling not a floor.  The Court took a global view of what Elida Gibbs truly received.

 

64.       He submitted that once goods have gone out of the economic cycle if they come back in they are never again taxed on the gross turnover.  This explained article 4(1)(a) of the Cars Order which assumes that the car has left the economic cycle and has borne VAT.  GMAC No.1 decided that in interpreting article 4(1)(a) it was irrelevant that not all the HP instalments were paid.  The Cars Order was first made nearly 40 years ago and it had never been suggested that it was contrary to EC law.

 

65.       Mr Cordara said that his middle position was that the VAT should be limited to the work done when the cars were repossessed coming back into the cycle.  He said that it was a working assumption that Masterlease had deducted input tax on paint, tyres parts and overheads; however if input tax should be blocked that was a different point.

 

66.       In response to the submission by Dr Lasok that reading “in so far as” in place of “where” did violence to the wording of article 4(1)(a), he said that in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252, the Court of Appeal did considerable violence to the statute in applying general principles of EU law.  In Fischer the ECJ carried out the very kind of surgery for which Masterlease argued in this case.

 

67.       Mr Cordara contested the assertion by Dr Lasok that the passage at [31] in GMAC No 1 was obiter.  He said that the article 4(1)(a) issue was mainstream to the  conclusions at [32] and [33] and had been fully debated.  The argument advanced there by Customs was exactly the same as here but had been rejected by the High Court.

 

68.       He said that in Fischer the Court of Justice was concerned with the interpretation of Article 5.6 which contained no words of apportionment but implied into Article 5.6 a mechanism whereby VAT was only charged on the parts for which there had been a taxable deduction. He said that article 4.1 is the analogue of Article 5.6: both started with absolute tax treatment.

 

Conclusions on Cars Order issue

 

69.       Article 4(1)(a) of the Cars Order 1992 provides as follows,

 

“4(1)   Each of the following descriptions of transactions shall be treated as neither a supply of goods nor a supply of services –

 

(a)       the disposal of a used motor car by a person who repossessed it under the terms of a finance agreement, where the motor car is in the same condition as it was when repossessed; …”

 

70.       The wording of article 4(1)(a) is effectively the same as that in the Value Added Tax (Treatment of Transactions)(No. 4) Order 1973 and intervening statutory instruments.  The Explanatory Note to the 1973 Order read as follows,

 

“This Order removes from the scope of value added tax disposals by finance houses and insurance companies of certain used cars and certain works of art.  Any such disposals would otherwise be a supply of goods by virtue of section 5(2) of the Finance Act 1972 and would be chargeable with tax even though the goods had previously borne tax.”

 

Section 5(2) of the 1972 Act with Schedule 2, paragraph 1 had the same effect as section 5 with Schedule 4, paragraph 4 of the 1994 Act.

 

71.       In 1973 there was no provision in UK law for bad debt relief and no provision for repayment of VAT when the consideration was reduced after the time of supply.

 

72.       Neither the Sixth Directive, which took effect on 1 January 1978, nor the earlier directives provided for what would otherwise be a supply being treated as not being a supply.  Article 11C1 provided for circumstances when the consideration was reduced or not paid, but made no provision for a de-supply.  Article 26a, which was inserted by Council Directive 94/5/EEC, provided for margin schemes for second-hand goods; however this was not relevant to a repossession for which there was no consideration.

 

73.       Neither party contended that the Cars Order was incompatible with the Sixth Directive.

 

74.       We turn to consider the Cars Order on the basis of the intention of Parliament as expressed in the words used in the Order.

 

75.       We do not find the phrase “in the same condition” as having a clear and precise meaning.  The use of the adjective “same” involves comparison; it may involve a wide variety of comparators, including weight, size, colour, time, place or appearance.  Sometimes it will be exact : one-half is the same as 0.5. Usually “same” imports a substantial degree of similarity rather than absolute similarity.

 

76.       The word “condition” is imprecise in the context of its use in article 4(1)(a).  Usually when applied to a car, the word “condition” will be combined with an epithet such as mechanical, roadworthy, clean, dirty or rusty or will be allied with a phrase making it clear to what aspect of its condition is referred to for example “the bodywork is in good condition”.

 

77.       In article 4(1)(a) the concept of “same condition” involves a comparison between the condition of the car at the time of repossession with its condition at the time and place of sale. The time between repossession and sale could be considerable; in the example at paragraph 37, the sale was over two months after the work which followed repossession.

 

78.       It is clear that as a matter of physics and logic the phrase “the same condition” cannot mean “the identical condition”.  Any physical object changes at an atomic or molecular level.  Dr Lasok contrasted the same condition with a different condition.  That however involves identifying what differences are relevant.

 

79.       Given the ambiguity or lack of clarity in article 4(1)(a) it is legitimate to consider the Explanatory Note as an aid to interpretation.  The context of the de-supply under the Cars Order is that the disposal follows repossession of a car under a finance agreement when VAT was payable on the full price when possession was transferred.  The original explanatory note referred to the goods having “previously borne tax”.

 

80.       Regardless of its condition, the de-supply involves the car which is disposed of being the car which was repossessed which in turn was the car originally subject to the finance agreement.

 

81.       It would be illogical for the de-supply not to be available simply because the condition has deteriorated perhaps through standing outside over the winter unsold.

 

82.       The logical reason for the “same condition” requirement is to exclude the de-supply relief when value has been added following repossession.  However the concept of “same condition” does not as a matter of language import the concept of value.

 

83.       Customs accept that cleaning and valeting do not affect the condition of a car.  This does not accord with normal English usage, however it is in our judgment clearly consistent with the intention of Parliament.  Just as “the same condition” cannot logically mean “the identical condition” so that the element of wear involved in driving the car to the repair centre in Birmingham cannot logically prevent the car being in the same condition, so also mere cleaning and polishing cannot be intended to exclude a de-supply.

 

84.       In our judgment the phrase “same condition” must be qualified by an epithet such as “substantially” or “materially”.  This is similar to a “de minimis” exception although conceptually different.  It is extremely difficult to lay down a test of general application.  This would essentially amount to judicial legislation.

 

85.       We have little doubt that, if in a debate on the Cars Order, the question had been raised whether touching up a scratch or replacing a sparking plug would exclude the de-supply, the Minister’s response would have been that the legislation would be applied reasonably and with common sense.

 

86.       In our judgment the beating out of a substantial dent would clearly affect the condition of a car.  However the touching up of a minor scratch without respraying would not materially affect its condition.

 

87.       It would be anomalous if minor work to make a car roadworthy and compliant with the construction and use legislation, such as replacing defective windscreen wipers or bulbs, excluded a de-supply and still more anomalous if inflating a tyre to correct the pressure did so..

 

88.       Mr Cordara suggested that five hours work and £150 costs could be treated as de minimis.

 

89.       In our judgment five hours work excluding valeting is not de minimis and would materially affect the condition of a car.  We would regard one or two hours in addition to valeting and £50 on parts as reasonable.  A finance company should be able to carry out a minor service to ensure that the car is roadworthy without the de-supply being excluded; however a full service or any substantial mechanical work would be excluded.

 

90.       Dr Lasok submitted that Masterlease must show that the de-supply provision applied to the cars individually.

 

91.       The Appellant’s treatment of the sales of repossessed cars appears to have continued without challenge over many years until the regulation 38 claim.  In those circumstances it is a matter of no surprise that the Appellant did not keep a detailed record of the work done or not done to each car.  It is however most unfortunate that the Appellant disposed of a quantity of records on closure of the repair centre at a time when the matter was a live issue.

 

92.       We will adjourn the appeal for the parties to try to agree figures on the basis of our de minimis approach in this decision.  If no agreement can be reached within three months or any extension agreed between the parties and notified to the Tribunal, the appeal will be relisted for further evidence and submissions.

 

93.       Thus far we have been considering the application of the Cars Order on its express terms.  We now turn to Mr Cordara’s fall back position that the VAT on sale of the repossessed cars be limited to that on the value of the remedial work.  Although that approach might have been adopted by the legislators, the fact is that it was not.  There is no provision in the Directive for such approach in relation to the circumstances such as those which arise in this case.  Förvaltnings and Fischer involved specific provisions in the Directive concerning different problems.  Even if repossessed cars could be treated as second-hand goods, no purchase price was paid by Masterlease.  Mr Cordara was not able to identify any principle in the Directive which he could invoke as having direct effect.  His submission as we understood it was rather that we should interpret the Cars Order purposively in the light of the principles in those cases.  In our judgment that is not legitimate.

 

 

 

 

THEODORE WALLACE

 

RELEASE DATE: 15 July 2010