United Kingdom House of Lords Decisions

Commissioners of Customs and Excise v. Thorn Materials Supply Ltd and Thorn Resources Ltd [1998] UKHL 23; [1998] 3 All ER 342 (18th June, 1998)

LORD BROWNE-WILKINSON

My Lords,

      I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nolan. I agree with it and for the reasons which he gives I would dismiss the appeal.

LORD LLOYD OF BERWICK

My Lords,

      I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nolan. I agree with it and for the reasons which he gives I too would dismiss the appeal.

LORD NOLAN

My Lords,

      This appeal is concerned with the value added tax consequences of sale transactions carried out between the appellants, whom I shall refer to respectively as "Materials" and "Resources", as vendors on the one hand and Thorn E.M.I. Home Electronics (UK) Limited ("Home") as purchaser on the other. These three companies were at all material times wholly-owned subsidiaries of Thorn E.M.I. Plc.

      The common feature of all of the transactions is that the vendors and the purchasers were members of the same V.A.T. Group, (that is the Thorn E.M.I. Plc. group) under the provisions of section 29 Value Added Tax Act 1983, at the time when the sale contracts were made, but not when they were completed. In all cases, the purchase price was payable as to 90 per cent. on the signing of the contract and as to the remaining 10 per cent. when the contract was completed by the delivery of the goods. The appellants contend that value added tax is payable on only the 10 per cent. The respondents contend that value added tax is payable upon the whole of the value of the goods, that is to say upon the whole of the purchase price.

      Since all of the transactions followed the same pattern, the case has been argued throughout by reference to the details of a single representative transaction, which was one of those carried out between Materials and Home. By a written agreement dated 29 November 1993, Materials agreed to sell to Home the goods described in the schedule to the Agreement, which were components and office supplies of one sort or another. The price was to be 105 per cent. of the V.A.T.--exclusive cost to Materials of buying the goods from a third party supplier. Delivery was to take place during the period ending 31 March 1994, on a date or dates specified by the buyer. The price, as I have said, was to be paid as to 90 per cent. on the date of the contract and as to the remaining 10 per cent. on delivery of the goods.

      The advance payment of 90 per cent. was duly made on 29 November 1993. The total amount of the advance payments made by Home to Materials on that date in respect of this and similar agreements was £33,834,140. By a loan agreement of the same date Materials agreed to lend Home the sum of £33,760,330 (the slight difference between that figure and the total of the advance payments is unexplained) at an interest rate of 5.6875 per cent. The loan was expressed to be for an initial period of three years and a day, but Home was entitled to repay it at any time, or to set it off against its liabilities to Materials.

      On 6 December 1993 Materials ceased to be a member of the Thorn V.A.T. Group. After that date Materials bought and paid for the goods which it had contracted to sell to Home. Some of these goods, having a total value of £3,757,247, were already owned by Home at the date of the said agreement on 29 November 1993. Consequently, on 21 January 1994, these goods were supplied by Home to Materials in order that Materials could supply them back to Home under the sale contracts. I should add, for the sake of completeness, that although the specimen agreement which I have described was one for the sale of components, office supplies and the like, approximately half of the total of the advance payments made on 29 November 1993 by Home to Materials was attributable to cars sold by Materials to Home on virtually identical terms. Home had previously contracted to buy some of these cars from the General Motors Company on its own behalf. Accordingly the existing contracts between General Motors and Home were cancelled and replaced by fresh contracts between General Motors and Materials acting through the agency of Home.

      Your Lordships were told that all of the goods and the cars were purchased by Home for retention, and not for resale. If Home had resold them, then any benefit which it might have obtained from the price reduction resulting from the avoidance by Materials and Resources of 90 per cent. of the "output" value added tax payable on the sale would have been offset by the corresponding reduction in the "input" tax which Home could charge against its own output tax liability on the resale.

      The appellants have not suggested for a moment that these transactions were designed for any commercial purpose, or indeed for any purpose other than the avoidance of value added tax. Clause 4.1 of the Sale Agreement states in terms that:

 "It is intended and anticipated by the parties that payments made on the date hereof shall not be liable to value added tax further to the provisions of section 29 of the Value Added Tax Act 1983."

      The respondents do not however contend that the transactions were a sham. Their claim for tax on the full value of the goods supplied is based on what they submit to be the true construction of the statutory provisions relating to the time at which a supply is made for V.A.T. purposes and so chargeable to tax. If they fail in that then, given that the acknowledged purpose of the transactions was to avoid tax, they seek to rely on the so-called "Ramsay" principle, that is to say the principle applied by your Lordship's House in the capital gains tax case of W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] AC 300.

      Let me turn first to the relevant statutory provisions. Section 1 of the Act provides for value added tax to be charged in accordance with the provisions of the Act on the supply of goods and services in the United Kingdom, and on the importation of goods into the United Kingdom. By section 2(1) the tax is to be charged on any such supply where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. Section 2(2) explains that a taxable supply is a supply other than an exempt supply; and that a taxable person is one who is or is required to be registered. The requirement of registration is imposed in by Shedule 1 of the Act on a person making taxable supplies in excess of a specified quarterly or annual value, the level of which has been constantly revised upwards. By virtue of section 2(3) the tax on any supply of goods or services is a liability of the person making the supply, and becomes due at the time of supply.

      Section 3(1) takes us to schedule 2 for the purpose of determining, inter alia, what is a supply of goods. The opening words of paragraph 1(1) of Schedule 2 state that:

 "Any transfer of the whole property in goods is a supply of goods;"

      Section 10(2) provides that if the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the tax chargeable as equal to the consideration. In summary, therefore, the effect of the provisions to which I have referred so far is that a sale of goods (including cars), involving as it does the transfer of the whole property in the goods, is a supply which attracts tax according to the value of the consideration if the supplier is or is required to be registered (as Materials and Resources were after they left the Thorn V.A.T. Group) and if the supply (as in the present case) was not exempt. The tax is a liability of the person making the supply and becomes due at the time of supply.

      I now turn to the provisions dealing with the time of supply, and with the effect of the grouping provisions, around which most of the argument has revolved. Section 4 reads as follows:

 "4(1) The provisions of this section and section 5 below shall apply . . . for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to tax.  (2) Subject to the provisions of section 5 below, a supply of goods shall be treated as taking place -   (a) if the goods are to be removed, at the time of removal;   (b) if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied . . .  5(1) If, before the time applicable under sub section (2) . . . of section 4 above, the person making the supply issues a tax invoice in respect of it or if, before the time applicable under paragraph (a) or (b) of sub section (2) . . . of that section, 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."  By section 29(1): "Where under the following provisions of this section, any bodies corporate are treated as members of a group any business carried on by a member of the group shall be treated as carried on by the representative member, and -   (a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and   (b) any other supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member . . . and all members of the group shall be liable jointly and severally for any tax due from the representative member.  (2) An order under section 3(5) or (6) above may make provision for securing that any goods or services which, if all the members of the group were one person, would fall to be treated under that section as supplied to and by that person, are treated as supplied to and by the representative member.  (3) Two or more bodies corporate [resident in the United Kingdom] are eligible to be treated as members of a group if . . .   (a) one of them controls each of the others . . . ."

      Section 3(5) and (6), to which reference is made in section 29(2), enable the Treasury to make orders treating the self-supply of goods and services as a taxable supply.

      The opposing arguments before your Lordships are essentially simple and straightforward. The appellants say that the advance payments in the present case fall squarely within the terms of section 5(1). Consequently, to the extent of the advance payment--that is to the extent of 90 per cent.--the supplies are to be treated as taking place at the time when the payment was received. At that time the two suppliers and Home fell to be treated as members of a group under section 29(1). It follows that the supply must be disregarded, to the extent of 90 per cent, under section 29(1)(a), and only the remaining 10 per cent. of the supply can be taxed.

      The respondent Commissioners say that the opposite is the case. Since the suppliers and the purchaser fell to be treated on the date of payment as members of a Group any supply between them must be disregarded under section 29(1)(a). Section 5(1) cannot therefore produce a relevant supply that is, a supply for the purposes of the charge to tax, on that date. It follows that the only relevant supply which took place for value added tax purposes was the transfer of the property in the goods when they were delivered, by which time the group relationship no longer existed. The value of this supply is to be taken under section 10(2) as the whole of the consideration paid for it, that is to say 100 per cent. of the price.

      Both parties sought assistance from the terms of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.), which our value added tax legislation is designed to implement. There are, I think, five provisions in the Directive to which reference can usefully be made. The first is Article 2, which provides that:

 "The following shall be subject to value added tax:  1. The supply of goods or services effected for consideration   within the territory of the country by a taxable person acting as such;  2. The importation of goods."

Next I turn to Article 4.4 which authorises, but does not require, each Member State to treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links. Mr. Prosser Q.C. for the appellants, submitted that while section 29(2) adopted the Article 4.4 approach in the cases to which the subsection applied, section 29(1) did not. If Parliament had wished to say in section 29(1) that all members of the group were to be treated as a single person it could simply have done so. Here it had adopted a different formulation. This, said Mr. Prosser, supported his argument that the appellants and Home retained their separate identities during the period in which section 29(1) applied. If the Act did not recognise their separate identities at the time when the sale agreement was made it could hardly support the respondents' claim for tax upon the supply to which the Agreement gave rise. It was true that in Customs and Excise Commissioners v. Kingfisher Plc. [1994] S.T.C. 63 Popplewell J. had held that the purpose of section 29(1) was to enable a Group to be treated as if it were a single taxable entity, taxable through its representative member, but the circumstances there were entirely different, and the view of section 29(1) expressed by Popplewell J. was unnecessary for the decision in the case. This is a point to which I shall return.

      Article 10 provides that:

 "1. (a)  'Chargeable event' shall mean the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled.   (b) The tax becomes 'chargeable' when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred.  2. The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed . . .   However, where a payment is to be made on account before the   goods are delivered or the services are performed, the tax shall become chargeable on receipt of the payment and on the amount received."

      This Article, read with Article 5.1, is, I think helpful as emphasising that the subject of tax liability is the supply of the goods, in the sense of the transfer of ownership in them, which normally occurs (as in the present case) at the time of delivery. The Article authorises the tax to be charged, by virtue of Article 10.2 and section 5(1), in advance of the transfer of ownership where there has been a prior payment on account, but that does not displace the necessity for a transfer of ownership to follow in fact. Otherwise there is no chargeable event, and no justification for the imposition of the tax.

      What happens, then, if there has been a payment on account, from which tax has duly been charged by virtue of Article 10.2 and section 5(1), but the goods are destroyed or for some other reason their supply does not occur? My Lords, tax legislation tends to be more explicit in its provisions for the collection of tax than for its repayment, but Mr. Prosser suggested, rightly to my mind, that the position would be covered by Article 11.1C1. which provides that in the case of cancellation, refusal, or total or partial non-payment, the taxable amount is to be reduced. Our own legislation has, at any rate since 1989, contained provisions which are now set out in section 80 Value Added Tax Act 1994 for repayment to occur where a person has paid an amount to the Commissioners by way of V.A.T. which was not V.A.T. due to them, and I understood Mr. Pleming Q.C. for the respondents to agree that this section would cover such a case. The corollary for present purposes, which again I understood Mr. Pleming to accept, was that if the sequence of events in the present case had been reversed, and if the sale agreement and advance payment had taken place before Materials and Home became members of the same group, but the agreement had been completed after that date, any tax charged on the advance payment would fall to be refunded. The transfer of ownership in the goods, and thus their supply, would duly have taken place, but this would have to be disregarded under section 29, and so, for the purposes of the charge to tax, the chargeable event anticipated by the charge of tax upon the advance payment would have failed to materialise.

      The last of the provisions in the Directive to which I would refer is Article 11.A.1. (a) upon which Mr. Pleming placed some reliance. It defines that the taxable amount as "everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser . . ." Thus, he submitted, there was no difficulty in treating the whole of the purchase price as the consideration for the supply of the goods even though 90 per cent. of it had been paid in advance. The advance payment would, of course, be left out of the final reckoning if it had already been brought into charge by virtue of section 5(1) but that possibility was ruled out by section 29(1).

      Developing his submissions more broadly, Mr. Prosser correctly submitted that a supply may be relevant and of practical importance for the purposes of the Act even if it is not a taxable supply, or not carried out by a taxable person. Thus the taxpayer is obliged to make a return both of his taxable supplies and of his exempt supplies, because he can only claim credit for the input tax which he has paid to the extent to which it is attributable to his taxable supplies. Further, the Act must also have regard to the non-taxable supplies made by a person who is building his business up towards the level at which he will be liable under schedule 1 to be registered for value added tax purposes and will thus become a taxable person. This latter point is of added significance because the time of supply rules, including section 5(1) must be applied to these supplies in order to determine whether their aggregate value is sufficient to bring them up to the specified level in the relevant period.

      That leaves open the question of what is meant by the requirement in section 29(1) that a supply by one member of a group to another must be disregarded. I accept Mr. Prosser's submission that it does not mean that the separate existence of the appellants and Home is to be denied or that the sale agreement and the prepayment are to be treated as not having taken place. What it does mean is that the 90 per cent. supply to which these facts gave rise must be disregarded or, as Mummery L.J. put it, ignored, for tax purposes.

      In saying this I also accept Mr. Prosser's further submissions that the time of supply rules, including section 5(1), must be applied to determine whether and if so when a supply between members of the same group took place. It is essential to apply the time of supply rules in order to determine whether the supply took place while the group relationship still existed. Unless a supply during the period of the relationship is identified as having taken place there is nothing upon which section 29(1) can bite. One can hardly disregard something which did not happen.

      Does it, then, follow that the supply of the goods, to the extent of 90 per cent., is permanently excluded from the charge to V.A.T.? My Lords, I can find no warrant in the Act for any such consequence. I accept Mr. Pleming's submission that Article 4.4 and section 29(1) are not designed to confer exemption or relief from tax. They are designed to simplify and facilitate the collection of tax by treating the representative member as if it were carrying on all the businesses of the other members as well as its own, and dealing on behalf of them all with non members. It is entirely consistent with this approach that the 90 per cent. supplies effected by Materials and Resources to Home should be disregarded for the purposes of the Act, because Materials and Home were not to be treated as carrying on their own businesses at that time. Popplewell J. was in my judgment correct in holding, in the Kingfisher case [1994] S.T.C. 63, that the purpose of section 29(1) was to enable a group to be treated as if it were a single taxable entity, even though it is not expressed in those terms. The section may have the effect of deferring the charge to tax upon the added value of goods until they are the subject of a supply outside the group, but it does not prevent that charge.

      When Materials and Resources left the Thorn E.M.I. Plc. Group they emerged into the value added tax world as separate taxable persons, each carrying on its own business for V.A.T purposes. The delivery of the goods by them to Home undoubtedly constituted a transfer of the whole property in the goods in the course of business. It constituted a supply of the goods within the meaning of paragraph 1(1) of schedule 2, taxable under section 10(2) upon the amount of the consideration whether already paid or still payable. The appellants' objection that this approach disregards the fact that, to the extent of 90 per cent., the supply was to be treated as having taken place when the advance payment was made must fail because this disregard is precisely what section 29(1) requires. It follows that, in my judgment, the whole value of the supplies in question falls fairly and squarely within the charging provisions of the Act according to the normal principles of construction which should be applied to a taxing statute.

      Upon this view of the matter there is no need to consider the questions whether the Ramsay principle, be it viewed as authorising a different approach to statutory construction or a different approach to the facts in tax avoidance cases, has any application to value added tax, or if so whether it should be applied in circumstances such as those of the present case. These questions raise novel issues of great importance and complexity, both in our national and in community law. In my judgment it would be undesirable to embark upon them until a case arises when it is necessary to do so.

      There is one final point arising out of the main argument to which I should refer. In the course of presenting the appellants' case to your Lordships, Mr. Prosser sought assistance from section 35 of the Act, which provides that in certain cases the supply of goods while warehoused is to be disregarded for the purposes of the Act. He rightly contended that confusion and uncertainty would arise unless the time of supply rules, including section 5(1), were applied to the supplies in question. I would accept that submission for reasons similar to those which I have advanced in relation to section 29(1) but I do not consider that it takes the matter further. If, as a result, goods are paid for under a sale agreement while still in the warehouse, the supply thus effected will be disregarded: but limit of disregard will be reached when the goods leave the warehouse, and the normal value added tax consequences will thereafter apply to any further supply of them.

      For these reasons, I would dismiss the appeal.

LORD HOFFMANN

My Lords,

      The tax avoidance scheme at issue in this appeal has been described in the speech of my noble and learned friend Lord Nolan. Whether it succeeds or not turns upon the meaning and effect of section 29 of the Value Added Tax Act 1983. But before examining the language of the section, I must say something about some basic concepts of value added tax.

      Tax is levied upon "the supply of goods and services" (section 1) "for a consideration" (section 3(2)(a)). The principal definition of a supply of goods is "any transfer of the whole property in goods" (schedule 2, para. 1(1)) but there are other transactions which are also brought within the definition. A supply of services is residually defined; it is "anything which is not a supply of goods but is done for a consideration" (section 3(2)(b)).

      Since the tax is levied upon specified transactions, it is in many contexts necessary to be able to say when the transaction took place. For example, when the tax was first introduced in 1973, it applied to any supply of goods which took place after 1 April in that year. Customs and Excise Commissioners v. Thorn Electrical Industries Ltd. [1975] S.T.C. 617 raised the question of whether the hiring of a television set pursuant to an agreement made before that date became taxable after the date had passed. If the rate of tax is changed, the time of the transaction will determine which rate is payable. If goods previously exempt are brought into tax, the date will determine whether the transaction is taxable. A small trader, exempt from tax because of his low turnover, becomes liable to be registered at the end of a quarter if during that quarter the value of his taxable supplies exceeds a certain maximum (in 1983, £6,000). One needs therefore to identify the transactions which took place within the quarter, even though they are not themselves taxable but merely trigger a potential liability on transactions in the next quarter.
 

      For the purpose of determining when a supply is deemed to have taken place, sections 4 and 5 of the Act set out what are called the "time of supply rules". Section 4(1) reads:

 "The provisions of this section and section 5 below shall apply for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to tax."

The relevant provisions are section 4(2) and (3) and section 5(1):

 "4(2) Subject to the provisions of section 5 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;   (b) if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied. . .    (3) Subject to the provisions of section 5 below, a supply of services shall be treated as taking place at the time when the services are performed.  5(1) If, before the time applicable under subsection (2) or subsection (3) of section 4 above, the person making the supply issues a tax invoice in respect of it or if, before the time applicable under paragraph (a) or (b) of subsection (2) or subsection (3) of that section, 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."

      I should at this point mention, merely to get the matter out of the way, that these rules are based upon Article 10 of the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.). There are differences in formulation: for example, the Directive uses the term "when the goods are delivered" instead of the references in section 4(2) to removal and making available. But, for present purposes at least, nothing turns on this distinction. The Directive also distinguishes between the "chargeable event", which is "the occurrence by virtue of which the legal conditions necessary for the tax to become chargeable are fulfilled" and the time when the tax becomes chargeable, which may or may not coincide with the chargeable event. The United Kingdom legislation, on the other hand, provides in general terms that tax "becomes due at the time of supply" (section 2(3)) and provides in sections 4 and 5 for the time when the supply is treated as having taken place. Again I think that nothing turns upon these differences in formulation. In Ufficio IVA di Trapani v. Italittica SpA (Case C-144/94) [1995] S.T.C. 1059 the European Court of Justice considered Italian legislation framed in terms similar to that of the U.K. Act: availing itself of one of the permissible derogations in Article 10.2, it said "The supply of services is regarded as effected upon payment of the consideration" rather than "Tax upon the supply of services shall become chargeable on payment of the consideration." Advocate- General Jacobs said, at p. 1066 that it came to the same thing:

 "under the scheme of the Sixth Directive the moment at which tax is chargeable assumes sole significance. It determines the rate of tax applicable to a transaction (article 12(1)(a)) and the moment at which the customer's right of deduction arises (article 17(1)). It also determines the tax return on which the supplier and the customer are required to record the transaction (article 22(4)) and hence the date for payment of tax by the supplier (article 22(5)). Where a member state opts to make tax chargeable on all services at the moment of payment, it is therefore unnecessary for it to make an express distinction in its legislation between the chargeable event and the moment when the tax becomes chargeable."

      It follows that for present purposes, sections 4 and 5 can be taken as faithfully reflecting the terms of Article 10 of the Directive and one can therefore concentrate upon the U.K. provisions and leave Article 10 behind.

       The important words in section 5(1) to which I wish to draw attention are "to the extent covered by the . . . payment." If there is an advance payment of less than the whole price, a supply which would ordinarily be regarded as a single taxable transaction is treated as having taken place in two or more stages. The time of supply rules therefore provide for what may loosely be called a partial supply, that is to say, a supply treated as having taken place to some extent on one date and to some extent on another. I say "loosely" because both supplies are of course of the same goods. There is not a supply of part of the goods, or an undivided share in the goods, on one date and the rest on another. The tax is not concerned to divide up the goods because it is levied not upon the goods themselves but upon their value. A partial supply therefore means that the supply is regarded as having taken place up to a certain value on one date and as to the remaining value on another date. Thus if 90 per cent. of the price is paid in advance and the rest when the buyer removes the goods, section 4(2)(a), which expressed to be subject to the provisions of section 5, must be read as treating a supply as taking place on removal to the extent of 10 per cent. So much is, I think, uncontroversial.

      This brings me to the construction of section 29(1), which reads as follows:

 "Where, under the following provisions of this section, any bodies corporate are treated as members of a group any business carried on by a member of the group shall be treated as carried on by the representative member, and -  (a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and  (b)  any other supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member. . ."

      In order to apply the "disregard" in paragraph (a), it is therefore first necessary to identify a "supply of goods" which took place between persons who were, at the time of the supply, members of the same group. An application of the time of supply rules shows that in the present case, a supply to the extent of 90 per cent. is treated as having taken place between Materials and Home while they were members of the Thorn Group. That must be disregarded for the purpose of tax. The application of the same time of supply rules shows that a supply to the extent of 10 per cent. took place after Materials left the group. That is not to be disregarded and is to that extent liable to tax.

      My Lords, I must confess that with all respect to the contrary views held by the Court of Appeal and some of your Lordships, I see no answer to that simple reasoning. Various answers have been put forward, but none of them seem to me to capable of logical or consistent application.

      The main argument for the Commissioners was described by their counsel, Mr. Pleming Q.C., as the black box theory. He says (and I agree) that section 29(1) must be construed in the light of article 4.4 of the Sixth Directive, to which it gives effect. The article reads as follows:

 "Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organizational links."

Mr. Pleming then says that if one reads the opening words of section 29(1)--". . . any business carried on by a member of the group shall be treated as carried on by the representative member"--in the light of Article 4.4, the effect is that members of a group are treated as a single legal person and no regard is paid to anything which happens between them. It is only when a member leaves the group that dealings between him and other members emerge from the black box into the light and attract tax consequences. In this case, the part payment took place within the box and must be ignored. What happened afterwards was a removal of the goods having a value of 100 per cent. and the fact that Home paid only 10 per cent. does not matter: section 10(2) provides that the value of the goods is "such amount as, with the addition of the tax chargeable, is equal to the consideration." The consideration remains the sum agreed in the contract for the sale of the goods.

      The black box theory seems to be wrong both as a matter of construction and by virtue of its extraordinary logical implications. First, section 29(1) does not say that everything which happens between group companies shall be disregarded. It could easily have said so. For example, section 29(2) provides:

 "An order under section 3(5) or (6) above [which empower the Treasury to make orders by which certain transactions are deemed to be self-supplies attracting tax] may make provision for securing that any goods or services which, if all the members of the group were one person, would fall to be treated under that section as supplied to and by that person, are treated as supplied to and by the representative member."

But section 29(1) does not say that the members of the group shall be treated as one person. Instead, it contains certain specific deeming provisions and disregards. First, any business carried on by a member of the group shall be treated as carried on by the representative member. Mr. Pleming said that this in itself was enough to create his black box. If the other members were not carrying on any businesses, how could they own assets, enter into contracts or provide consideration? But this in my view takes the deeming provision to absurd lengths. The concept of carrying on a business is quite different from questions of ownership of assets or making contracts. One can be carrying on a business on behalf of someone else even though one is using one's own assets and making contracts on which one is personally liable. The purpose of the assumption is simply to enable any supplies made or deemed to be made by the representative member to be treated as made "in the course or furtherance of any business carried on by him" and therefore chargeable to tax under section 1. It is quite unnecessary to deduce from the assumption any consequences beyond those which it necessarily entails. Furthermore, treating the assumption as having the wide consequences for which the Commissioner contends would make paragraphs (a) and (b) redundant. Mr. Pleming accepted this to be the case and said that the word "and" before the subparagraphs should be read to mean "and therefore." But this is not what it says.

      The second assumption is that any supply of goods or services by a member of a group to another member of a group shall be disregarded. It is therefore again necessary to identify those legal transactions between members of the group which constitute supplies for the purposes of the Act. They, and they only, are to be disregarded. Thirdly, any other supply by or to a member of the group shall be treated as a supply by or to the representative member.

      None of this suggests that what goes on inside the group happens in the obscurity of a black box. On the contrary, the application of the specific deeming provisions require a close look into the box to establish what has to be treated as being done by the representative member and what has to be disregarded. Nor, in my view, is the argument assisted by the reference in Article 4.4 of the Directive to a "single taxable person." A single taxable person is not the same thing as a single person. Section 29 does produce a single taxable person, namely, the representative member. But it does so, not by the crude method of deeming all members to be a single person, which, as we shall see, would have startling side effects, but by the much more limited and specific assumptions which the subsection makes.

      The difficulty faced by the black box theory is that in the case of companies which move in or out of groups during the course of a transaction, it is impossible to apply the legislation without looking into the box. In the present case, Mr. Pleming says that upon removal of the goods by Home after Materials left the group, there was a supply which is taxable upon its consideration. But how is the consideration to be established? Only by looking at the contract of sale between Home and Materials, which happened inside the box. On the black box theory, however, that was no contract at all: it was an agreement made by a single person with himself. All that happened outside was that Home received the goods and paid Materials a sum of money which, if one could look inside, one would know was 10 per cent. of the agreed price.

      Take the case of a company which agrees to sell goods, receives the whole price in advance, but before the goods are delivered or the property has passed, joins the same group as the buyer. Under the time of supply rules, the whole supply is deemed to have taken place when the price was received and the seller is liable for tax. But the completion of the transaction takes place within the box. If it cannot be seen, there was no supply within the definition of a supply in schedule 2. Is the seller entitled to repayment of the tax? Mr. Pleming seemed cheerfully willing to accept that he was. But this too seems an extraordinary anomaly. On the other hand, a straightforward application of the time of supply rules leads to the conclusion that the entire supply took place before the seller joined the group and that nothing therefore happened within the group which requires to be disregarded. If the seller had received 90 per cent. of the price in advance, a supply as to only 10 per cent. would have to be disregarded. The Court of Appeal did not rely upon the black box theory but concentrated upon the "disregard" in paragraph (a). Schiemann L.J. said that it was "schizophrenic" to use the time of supply rules in order to discover what supply was required by section 29 to be disregarded and what was not. Mummery L.J. said, to similar effect, that section 5(1) could only apply if there was a "person making the supply" and therefore could not apply if the supply was required by paragraph (a) to be disregarded.

      I respectfully think that this reasoning is fallacious. Paragraph (a) requires one to identify a supply which has occurred while the parties were members of the same group. There is in my view no way in which one identify such a supply except by application of the time of supply rules in sections 4 and 5. There is in the judgment of Beldam L.J. a suggestion that the time of supply rules presuppose that the supply is taxable and therefore cannot apply to a supply which must be disregarded. This in my view is logically impossible and the Commissioner did not support it. As I explained earlier, the question of whether a supply is taxable often depends upon the time at which it is treated as having taken place. Thus the question of taxability must be determined by applying the time of supply rules. The only alternative is to use some kind of meta-rules, derived from fairness, common sense and other such concepts lodged in the judicial bosom. This seems to have been the technique used by a majority of the Court of Appeal in B.J. Rice & Associates v. Customs and Excise Commissioners [1996] S.T.C. 581. In that case the meta-rules led to the transaction being treated as having occurred at a time when it was not taxable. On the other hand, if the court had concluded that it happened at a time when it was taxable, they would presumably then have applied the time of supply rules, which may have treated it as having occurred at some other time. This cannot be right. The time of supply rules are in my view the only criteria for deciding whether the transaction is to be treated as having occurred at a time when it was taxable.

      The reasoning of the Court of Appeal in this case seems to me to display a different fallacy. It uses the time of supply rules to identify a supply which took place while Materials was in the group and which therefore has to be disregarded. It derives from section 5(1) the conclusion that the supply created by the prepayment falls, to the extent of that payment, within paragraph (a) and must therefore be disregarded. It might be thought that it logically follows from this conclusion that the supply to the remaining extent must not be disregarded. But the Court of Appeal avoids this result by going back to the time of supply rules and applying them again, this time on the assumption that the supply which has to be disregarded did not happen. In my view there can be no justification for revisiting the rules in this way. The rules serve the necessary function of identifying which "supply" falls within paragraph (a) and which does not. Once they have performed this service, they have no further function. Putting the matter in another way, one cannot import the hypothesis in paragraph (a) into the rules for determining whether or not paragraph (a) applies. I will not say that this is schizophrenic, but it is circular.

      The effect of the construction given to section 29 by the Court of Appeal means that in a case in which a supply is treated by virtue of section 5(1) as having occurred while paragraph (a) applies but an event falling within section 4(2) occurs after it has ceased to apply, the tax consequences of the supply are postponed rather than disregarded. The effect can be seen even more clearly if one examined the similar language used in section 35(1):

 "Where imported goods subject to a duty of customs or excise or a duty of customs and a duty of excise are supplied while warehoused, the supply shall, except where the contrary intention appears, be disregarded for the purposes of this Act if the goods are supplied before payment of the duty to which they are subject or, where they are subject to a duty of customs and a duty of excise, of the duty of excise."

This section gives effect to Article 16 of the Sixth Directive, which allows Member States to "take special measures designed to relieve from value added tax" certain transactions in imported goods, including supplies of goods and services carried out in places under customs warehousing arrangements. (Paragraph 1.C). The purpose is therefore to relieve from tax supplies which take place while imported dutiable goods are in a bonded warehouse. Thus if wine is imported and placed in a bonded warehouse, it attracts value added tax, by virtue of its importation, which is charged on the importation price "as if it were a duty of customs": section 2(4). But the sale of the wine by an importer to a customer (for example, at a higher price) while it is in the warehouse does not constitute a supply giving rise to a further charge to tax. It is disregarded. On the other hand, a supply by the importer which takes place after he has removed the wine from the bonded warehouse attracts tax in the normal way.

      If the construction given to section 29(1)(a) by the Court of Appeal is applied to section 35, the consequences are startling. A wine merchant sells wine in a bonded warehouse to a customer, who pays the full price. This is a supply of the wine by virtue of section 5(1) which section 35 requires to be disregarded. It would logically follow that there cannot be any further supply of the same wine to the same customer. But the Court of Appeal requires one to go back to the time of supply rules and hold that when the customer removes the goods outside the warehouse, there is a supply to him under section 4(2) and that although that section expressly says that it operates subject to section 5, the latter cannot apply because the supply which it treats as having happened must be disregarded. The result is that the sale of the wine in the warehouse is not, as the directive suggests, relieved from tax. The liability to pay tax is merely postponed.

      For these reasons, I think that reasoning on this point of Mr. Horsfield Q.C., the Chairman of the V.A.T. Tribunal, was right and should not have been reversed by the Court of Appeal. This makes it necessary for me to deal with the alternative argument for the Commissioners, which was that they were entitled to succeed under the principle in W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] AC 300.

      The Ramsay principle is one of construction which enables a court, in deciding whether a transaction falls within the provisions of a taxing statute, to ignore steps inserted without commercial purpose except the avoidance of tax. The Commissioners put forward two ways in which that principle may apply. First, they say that the introduction of Materials into the chain of supply had no commercial purpose and that for the purposes of section 1, there was a "supply" by the outside supplier to Home. Alternatively, they say that the prepayment and loan back had no commercial purpose and should be ignored for the purposes of section 5(1), so that the supply took place when the goods were delivered to Home.

      The first way of putting the matter is new. It was not raised before the V.A.T. Tribunal and Mr. Prosser Q.C. for the appellant objected to it being raised now. I think that in any case it must fail because it involves taking a "global view" of what are accepted to have been genuine contracts between the outside supplier and Materials and between Materials and Home. This is contrary to the principle laid down by the European Court of Justice in B.L.P. Group Plc. v. Customs and Excise Commissioners [1996] 1 WLR 174, as applied by your Lordships in Robert Gordon's College v. Customs and Excise Commissioners [1996] 1 W.L.R. 201.

      The second argument was rejected by the V.A.T. Tribunal on the ground that it involved the Commissioners in accepting parts of the transaction between Materials and Home and rejecting others. The contract of sale and the agreed consideration was accepted for the purpose of constituting a "supply of goods", but the prepayment was rejected for the purpose of fixing when that supply took place. I think that the Tribunal was right. Once the Commissioners accept the sale transaction between Materials and Home as not merely genuine but as the basis upon which they propose to levy tax, it seems to me that they cannot say that the payment of the price under the contract is something which has no commercial purpose. There was a genuine obligation which had to be discharged. The fact that Home chose to pay at a time which was advantageous for the purposes of tax is not to the point: see Advocate-General Jacobs in Ufficio IVA di Trapani v. Italittica SpA (Case C-144/94) [1995] S.T.C. 1059, 1066. It was entitled to do so. Nor does the loan back make the payment any less a payment with a commercial purpose: see Customs and Excise Commissioners v. Faith Construction Ltd. [1989] S.T.C. 539.  I would therefore allow the appeal and restore the judgment of the V.A.T. Tribunal.

LORD CLYDE

My Lords,

      The essential facts which are agreed for the resolution of this case are in short compass. Thorn Materials Supply Limited ("Materials") and Thorn EMI Home Electronics (UK) Limited ("Home") were wholly-owned subsidiaries of Thorn EMI Plc. ("Thorn"). For purposes of VAT they were both members of the group of which Thorn was the representative member within the provisions of section 29 of the VAT Act. By a written contract dated 29 November 1993 Materials agreed to sell certain goods to Home. Ninety per cent of the price was payable immediately and was paid. On 6 December 1993 Materials ceased to be a member of the Thorn EMI Plc. VAT group. Thereafter Materials acquired the goods in question, delivered them to Home and Home paid Materials the ten per cent balance of the purchase price. It is common ground that on the event of the delivery a chargeable event occurred. The problem is whether for the purposes of Materials' output tax the supply was of ten percent or of one hundred per cent of the goods.

      The question in the case requires consideration of the provisions of sections 4, 5 and 29 of the Value Added Tax Act 1983. The relevant provisions have already been quoted by my noble and learned friend Lord Nolan. Two observations fall to be made about section 5. First, it is clear from section 5(1) that a supply may be treated as taking place at more than one time, but nevertheless it remains a single supply. It is "the" supply which is to be so treated. The Act does not deem the creation of two or more supplies. Accordingly it would not seem to me correct to talk of a supply taking place at the time of the prepayment and another supply taking place at the time of the removal of the goods. Secondly, it was common ground between the parties before us that the provisions in sections 4 and 5 are of general application for establishing the time of a supply whether or not there is a charge. The expression used in section 4 "for the purposes of the charge to tax" indicate that it is for all the purposes of the tax that the time provisions are to apply. Thus the supply in question may or may not be chargeable and indeed the time provisions may determine whether or not a charge arises upon the supply which is under consideration. Nor are the sections limited to supplies by a taxable person.

      Section 29 finds its origins in the provisions of the Sixth Council Directive which seek to clarify the definition of taxable persons. The section does not destroy the identity and existence of the members nor embrace them all in some unified single taxable person. The single taxable person for which provision is made in Article 4.4 of the Directive is the representative member. The section is not presented as an exempting or relieving provision. But it has the incidental effect of excluding from a charge to VAT supplies made between members within the group.

      The scope of the section extends to the regulation of the accounting for and paying of tax in the situation of a group, but in my view it goes no further. It recognises that supplies can be made between members and it regulates how the tax is to be operated. One member stands in the place of each and all of them. For the purposes of the tax in such a group situation supplies between the members necessarily have to be ignored. But the actual existence of such supplies is recognised, even although those supplies may have no VAT consequences. Indeed provision may be made in accordance with section 29(2)to cover such supplies by treating them as self-supplies. Where section 29(1)(a) speaks of the supplies between members being disregarded, that must in my view mean that they are to be disregarded for the purposes of VAT while they are members of the group and the single taxable person is the representative member. If the payment had been made in contemplation of and followed by a sale and delivery of the goods to Home while both companies were still within the group the supply could be treated as occurring at the date of the payment to the extent of the payment, although that would all be academic because the supply would be disregarded for purposes of VAT.

      When one turns to the present case there was clearly a supply of the whole of the goods by Materials to Home on their removal. In terms of VAT this was a supply to Thorn as the representative member. But I find no justification for creating two supplies. Section 5 does not seem to me to create one supply at the time of the prepayment and another supply at removal so as to allow any separate treatment of the former. Section 29 concerns "any supply. . . by a member of the group to another member of the group." The single supply in the present case does not seem to me to qualify as such a supply because it was to an extent made by one who was not a member of the group. Section 29, dealing as it does with the definition of the taxable person, cannot have been intended to cover within the scope of a supply the kind of deemed part-supply which has been achieved in the present case, whereby in tax terms the first part of the supply was made to Home and the second to Thorn as the representative of the group. The section covers supplies completely carried out between the members of the group. The single supply in the present case was the supply by Home to Thorn when the former was no longer a member of the group and the provisions of section 29 do not in my view enable what could be deemed under section 5(1) to be part of the supply to escape the charge to tax.

      In my view the appeal should be refused.