United Kingdom House of Lords Decisions

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Lex Service plc (Appellants)

v.

Her Majesty's Commissioners of Customs and Excise (Respondents)

ON

THURSDAY 4 DECEMBER 2003

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Steyn

Lord Hoffmann

Lord Millett

Lord Walker of Gestingthorpe

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Lex Service plc (Appellants) v. Her Majesty's Commissioners of Customs and Excise (Respondents)

[2003] UKHL 67

1.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would dismiss this appeal.

LORD STEYN

My Lords,

2.   I have read the opinion of Lord Walker of Gestingthorpe. I am in complete agreement with the reasons he has given. I too would dismiss the appeal.
LORD HOFFMANN

My Lords,

3.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would dismiss this appeal.
LORD MILLETT

My Lords,

4.   I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Walker of Gestingthorpe. I have found this case more difficult than your Lordships; in particular, I have found it difficult to accept that a sum of money which is not available to the seller of a second hand vehicle except by way of an allowance against the price of a new vehicle is an unequivocal attribution of value to the second hand vehicle. In so far as the sum exceeds that which would be paid for the second hand vehicle free from any obligation to apply it towards the purchase of the new, it seems to me to have all the characteristics of a hidden discount.
5.   But the question is one of fact, and your Lordships take a different view. In those circumstances, though with some misgiving, I too would dismiss the appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

6.   This appeal is concerned with the quantification of non-monetary consideration for the purposes of value added tax (VAT). Non-monetary consideration has often given rise to difficulties in the operation of the VAT system, since VAT is essentially a tax on consumption of goods and services measured by monetary consideration (that is, price). This appears from Article 2 of the First Directive (67/227/EEC):
"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

The common system of value added tax shall be applied up to and including the retail trade stage".

7.   The Court of Justice of the European Communities (ECJ) has on several occasions given guidance on how non-monetary consideration is to fit into this price-based system. It is to be quantified by finding the appropriate monetary equivalent. In giving guidance the ECJ has stated and applied some important general principles, including the principle of fiscal neutrality, the principle of legal certainty, and the need to quantify non-monetary consideration by reference to its "subjective value". Mr Prosser QC, appearing for the appellant Lex Service Plc ("Lex") has submitted that the Court of Appeal (both in this case and in earlier cases) has misunderstood these general principles and treated them as inflexible rules.
8.   Lex (which is the representative member of a group of companies, and is here used to include any relevant group company) carries on business as a car dealer. It trades through about 100 subsidiaries (mostly owning a single showroom and workshop). It holds franchises for the sale of new cars, including Rover and Volvo. It also sells used cars. Both new and used cars are often sold by way of part-exchange.
9.   The background facts as found by the VAT and Duties Tribunal (Mr Theodore Wallace, Chairman) were as follows:
"11. The retail car market was very competitive. In terms of the national market Lex was not a large player. Retailers offered a wide variety of incentives including straight price discounts, good terms on cars taken in part-exchange and schemes under which customers could cancel the sale within a specified time.

12. Lex sold around 90% of cars taken in part-exchange either to other garages or by auction. These were known as trade sales. Typically a Lex dealer would only retain for retail sale low mileage cars of the same make as that of the franchise held by the dealer. Sales to other group dealers were presumably treated as trade sales. The group's second-hand sales were usually fleet or leased cars.

13. At the top end of the market manufacturers frowned on visible price discounting while not objecting to high part-exchange prices. Many customers wished to trade in a car but considered its value to be higher than the price which Lex could obtain in a trade sale.

14. From the viewpoint of Lex it was immaterial whether a customer received a discount in the price of the car he bought or received a higher price on the car taken in part-exchange; the net effect was the same. Since most customers were primarily concerned with the car traded in, Lex responded by offering good trade-in prices in order to obtain the business. It was a marketing tool."

    The choice of method was not however wholly immaterial if it made a difference to the VAT treatment of the transaction; and as this litigation shows, the proper VAT treatment was open to argument.

10.   Where a customer wished to dispose of his existing car by way of part-exchange Lex's practice, at the material time, was to obtain quotations from the trade. Lex's salesman would make a careful appraisal of the car and the sales manager would then obtain offers by telephone (usually from three trade sources). The customer would be told of the offers, and the highest would be proposed as the trade-in price. If the customer was content with it, matters proceeded on that basis. But if (as happened about three times out of four) the customer was looking for more, the sales manager would often authorise a higher price. Three specimen cases were considered in detail by the Tribunal. In the case which was most fully discussed before your Lordships, Mr King bought a used Volvo (with about 10,000 miles on the odometer) for £21,302 and traded in a Daihatsu (which had done about 70,000 miles) for a stated part-exchange price of £2,000, of which £600 was described as "additional allowance". This represented the difference between the highest trade offer and the figure which Mr King successfully bargained for. The part-exchange price less the allowance (in this example, £1,400) appeared on Lex's form (headed 'Part Exchange Details & Declaration') as 'True Value'. A regional finance controller employed by Lex summed it up as follows in his evidence to the Tribunal:
"We say to the customer your car is worth £x but we will give you more if you buy from us".

11.   Further details of the three specimen cases appear from the Tribunal's careful findings of fact. They explain two further matters which must be noted. First, at the material time, Lex had an advertised policy of permitting a customer to cancel a purchase within 30 days. If the customer exercised that right (which in practice seldom occurred) he was entitled to a refund of the purchase price, less certain deductions. But he was not entitled to the return of his part-exchange vehicle (which might have been sold already) and the refund in respect of it was limited to the "true value" shown on Lex's form.
12.   Secondly, the customer's purchase (whether of a new or used car) would often be by way of a conditional sale agreement entered into with a finance company, after the company had first purchased the car from Lex. The other two specimen cases (those of Mrs Cheeseman and Mr Petrovic) involved conditional sale agreements. It is not necessary to go into the details of these transactions beyond noting that in each case the finance company used the full part-exchange price in its documentation, and the Tribunal found that the finance companies were not informed of any difference between the stated purchase price of a car taken in part-exchange and its true value (as stated on Lex's form).
13.   The Tribunal also recorded that it was common ground that in no case did the part-exchange price exceed a proper value. There was no issue as to "bumping" (that is, the practice of artificially inflating the price of a car taken in part-exchange in order to meet a finance company's requirement as to the minimum deposit). Nor does anything turn in this case on the special VAT treatment of used cars under the Value Added Tax (Cars) Order 1992 (SI 1992 No. 3122), since the disputed issue comes back, by a rather different route, to the same basic statutory provisions.
14.   Although the price differential between the part-exchange price and the true value was often modest, it was sometimes more substantial (in the case of Mr Petrovic, who traded in a Ford Granada which had done 41,000 miles, it was nearly £2,000). The cumulative effect was considerable. In respect of the whole of Lex's operations between September 1994 and September 1997 it produced a disputed VAT liability of about £1.8 million—the sum for which Lex submitted a repayment claim in December 1997. This represented VAT which had been paid on the basis that the monetary equivalent of vehicles taken in part-exchange should be determined by the full part-exchange price, rather than (as Lex now contends) the 'true value' shown on Lex's printed form. It is common ground that (whether or not a finance company was involved) the basic transaction should be analysed as a barter transaction with payment of equality money, rather than as two separate sales with a set-off.
15.   On 26 May 1999 the Tribunal dismissed Lex's appeal against the Commissioners' rejection of the repayment claim ([1999] V & DR 156). On 20 July 2000 Arden J dismissed Lex's appeal to the Chancery Division of the High Court ([2000] STC 697). On 26 October 2001 the Court of Appeal (Aldous, Chadwick & Sedley LJJ) unanimously dismissed Lex's appeal to the Court of Appeal ([2001] STC 1568—the judgment covers four separate appeals of which the first listed is Customs & Excise Commissioners v Littlewoods Organisation Plc). Undeterred, Lex now appeals to your Lordships' House with leave granted by an Appeal Committee on 4 March 2002. All three judgments below contain a careful discussion of the legal principles and the parties' competing submissions. Before considering Mr Prosser's criticisms of those judgments (and especially the single judgment of the Court of Appeal, delivered by Chadwick LJ) it is necessary to cover some basic ground.
16.   VAT is imposed by the Value Added Tax Act 1994 and statutory instruments made (or treated as made) under that Act. But it is common ground that the United Kingdom legislation must be interpreted in accordance with that of the European Union, and in particular the Sixth Directive (77/388/EEC). Article 11A of the Sixth Directive provides in para 1 that
"The taxable amount shall be [subject to immaterial exceptions] … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies … "

    but that does not include (para 3(b)):

"Price discounts and rebates allowed to the customer and accounted for at the time of the supply".

    Section 19 (3) of the Value Added Tax Act 1994 provides as follows:

"If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such an amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration".

    This provision reflects, but does not by itself cast much light on, the European jurisprudence.

17.   The first important case in which non-monetary consideration was discussed by the ECJ was the Dutch Potato Case (a convenient shorthand for Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA [1981] ECR 445). The specific issue in that case was easily disposed of. A farmers' cooperative, which owned a refrigerated potato store, had during 1975 and 1976 found it unnecessary (because it was planning to sell the store) to levy the usual storage charges on its members. Dutch tax officials claimed that there was nevertheless consideration for their use of the store in the form of a reduction in the value of their shares in the cooperative. The ECJ rejected that notion (the opinion of Advocate General Warner, describing it as a "very simple case", must be one of the shortest ever given). But in doing so the ECJ stated (in paras 12 and 13 of its judgment) some principles which have been followed and applied in later cases. First, there must be a direct link between the service provided and the consideration received; secondly, the consideration must be capable of being expressed in money; and thirdly,
"that such consideration is a subjective value since the basis of assessment for the provision of services is the consideration actually received and not a value assessed according to objective criteria".

18.   The expression "subjective value", to be understood in the sense described above, has been repeated in many later cases before the ECJ, including Argos Distributors Limited v Customs & Excise Commissioners [1996] ECR I-5311, para 16, and the other cases cited in that paragraph. Nevertheless the expression continues to cause some difficulty, partly because it naturally suggests a value which is chosen as a matter of individual discretion, and might therefore be expected to be more vague, labile and difficult to ascertain than one determined by objective criteria. But any such impression would be mistaken and would overlook one of the basic strengths of the VAT system. It is a system which is intended to be self-policing in the sense of operating automatically on the economic activities of registered taxpayers and final consumers, with the least possible need for VAT authorities to undertake independent investigation of the facts. In a straightforward case the "subjective value" of non-monetary consideration means the value overtly agreed and adopted by the parties to the transaction in question, just as the price overtly agreed and adopted by the parties is (in most cases) conclusive as to the quantum of monetary consideration. So far from introducing an element of vagueness or obscurity, the concept of subjective value (correctly understood) achieves legal certainty and ease of administration of the VAT system (just as a subjective apportionment of the consideration for a package of taxable goods and exempt services may achieve those results: see C R Smith Glaziers (Dunfermline) Ltd v Customs & Excise Commissioners [2003] STC 419, especially the speech of my noble and learned friend Lord Hoffmann at p 426, para 21).
19.   Subjective value is therefore, in a straightforward case, the value which the parties to the contract have themselves recognised in the course of their dealings, and have in that way attributed to goods or services which amount to non-monetary consideration. A clear case is Naturally Yours Cosmetics Limited v Customs & Excise Commissioners [1988] ECR 6365, where a wholesaler of cosmetics offered to a beauty consultant (who was in the position of a retailer) a pot of rejuvenating cream at the special price of £1.50. The consultant was to give the cream to a chosen retail customer (referred to as a hostess) as a reward for the hostess arranging a sales party, and the special price was available only if the sales party was actually held. The issue was as to the quantification of the consideration received by the wholesaler from the consultant. The ECJ stated (para 17, with the relevant amounts inserted),
"In the present case, the parties to the contract have reduced the wholesale price of the pot of cream [£10.14] by a specific amount [£8.64] in exchange for the supply of a service by the beauty consultant which consists in procuring hostesses to arrange sales parties by offering them the pots of cream as gifts. In those circumstances, it is possible to ascertain the monetary value which the two parties to the contract attributed to that service; that value must be considered to be the difference [£8.64] between the price actually paid [£1.50] and the normal wholesale price [£10.14]."

20.   A similar question came before the Court of Appeal in Rosgill Group Limited v Customs & Excise Commissioners [1997] STC 811. There the party hostess had been allowed to buy for £20.76 a blouse with a catalogue price of £27.99 (she could alternatively have chosen a cash commission of £2.89). The Court of Appeal, following Naturally Yours Cosmetics and other ECJ jurisprudence, held that the monetary equivalent of the consideration for the hostess's services in arranging the party was £7.23. Hobhouse LJ said at page 819,
"The second question involved the value of the barter element in the supply of the blouse. The value is that which the parties put on it, attributed to it, in the actual transaction between them. It is not a valuation exercise but simply the giving of an answer to a factual question, which is normally a simple exercise. In the present case the answer is provided by the parties' own documentation".

21.   Where the parties have not expressly or impliedly attributed any value to the non-monetary consideration, some other approach is needed. The leading case is the decision of the ECJ in Empire Stores Limited v Customs & Excise Commissioners [1994] ECR - I 2329. Empire Stores, a retail mail-order supplier, had run two promotions, the 'self-introduction' scheme and the 'introduce a friend' scheme. Under either scheme the introducer (once she or her friend had been approved, placed an order and paid for it) became entitled to receive, without payment, a household item (such as a toaster, a kettle or an iron) chosen from a list. These were not items in the Empire Stores catalogue and so they did not have a normal retail price. The ECJ treated that as an essential point of distinction from Naturally Yours Cosmetics (para 19):
"Where that value is not a sum of money agreed between the parties, it must, in order to be subjective, be the value which the recipient of the services constituting the consideration for the supply of goods attributes to the services which he is seeking to obtain and must correspond to the amount which he is prepared to spend for that purpose. Where, as here, the supply of goods is involved, that value can only be the price which the supplier has paid for the article which he is supplying without extra charge in consideration of the services in question".

    Mr Prosser relied strongly on this reference to how much the supplier (as recipient of the non-monetary consideration) is prepared to spend.

22.   The Court of Appeal considered these authorities in Customs & Excise Commissioners v Westmorland Motorway Services Limited [1998] STC 431. Westmorland ran motorway service stations. Its practice, known to coach drivers, was to provide, without payment, a packet of cigarettes and a self-service meal (chosen from its usual menu) to any coach driver who brought a coach with at least twenty passengers and stopped for at least thirty minutes. The issue was to quantify the non-monetary consideration for Westmorland's taxable supply of cigarettes, food and soft drink. The Court of Appeal, upholding Lightman J ([1997] STC 400), who had reversed the Tribunal ([1996] V & DR 185), held that the consideration was to be determined by reference to Westmorland's normal retail prices (and not the cost to Westmorland of the goods supplied). Hutchinson LJ summarised the principles which he derived from Naturally Yours Cosmetics and Empire Stores (and, it should be noted, those two cases alone):
"The principles derived from the two cases to which I have referred are as follows.

(1)  Where the consideration is not money, it must be capable of being expressed in monetary terms, and there must be a direct link between the relevant supply and that which is alleged to have been the consideration for it.

(2)  The value of the non-monetary element must be assessed on a subjective rather than an objective basis.

(3)  Where the parties have expressly or implicitly attributed a value to that element in money terms that determines its value.

(4)  Where, however, the parties have not done this, the value can only be the price which the supplier has paid for the articles which he is supplying free of charge in return for the services in question.

    The Court of Appeal regarded the case as falling within the third head of this statement of principle.

23.   Mr Prosser criticised this decision as showing an inflexible approach. He described the case as correctly decided, but for the wrong reasons. I would not accept these criticisms. Hutchinson LJ was not attempting a comprehensive statement of principle applicable to every case of non-monetary consideration, but was spelling out the essential distinction between Naturally Yours Cosmetics and Empire Stores (as Morritt LJ had, with the express approval of Hobhouse LJ, in Rosgill: [1997] STC 811, 819, 822). I would accept that Westmorland was, on its facts, a fairly marginal case, as is reflected in the differing views expressed at different stages of the litigation. But the notion of both parties to a contract making an attribution of value does not in my opinion require the attribution to be a term of the contract, as Lightman J seems to have thought; and so Evans LJ's reference in the Court of Appeal to the need to construct "a somewhat artificial contract" seems to me to have scored a hit on an irrelevant target. It was sufficient that the coach driver knew what the practice was, and knew that he was choosing a meal for which any ordinary customer would have had to pay the retail prices shown on the menu.
24.   However it is not necessary to go further into marginal cases on attribution of value since in the present case (in contrast to all the authorities so far referred to) there was formal documentation bearing directly on the issue of attribution. The difficulty is in a sense not the lack of documentary evidence but an embarrassment of it, in that Lex's printed form calls for two sums to be specified, the part-exchange price and the 'true value' (in Mr King's case, £2,000 and £1,400) and each is a possible candidate for the appropriate monetary equivalent. The short issue in the appeal is whether the Tribunal, the Chancery Division and the Court of Appeal were correct, or were all wrong, in treating the part-exchange price as the monetary equivalent.
25.   The Court of Appeal (largely following the reasoning of the Tribunal and Arden J) thought it right to take the part-exchange price for three main reasons ([2001] STC at 1602-3):
(1)  It rejected the submission, based on the principle of fiscal neutrality, that transactions which have the same economic effect must be treated in the same way for VAT purposes.

(2)  It agreed with Arden J that the part-exchange price was specifically agreed for commercial reasons (in the Tribunal's words, "as a marketing tool" and as a step not taken "unless this was necessary to ensure the sale") and that it could not be re-characterised as a discount from the price of the car which Lex was selling.

(3)  The 'true value' served a different and distinct purpose—that is, to limit the refund which Lex would have to make if the customer decided to return his car within 30 days.

26.   I would be content to say that the Court of Appeal was correct in its reasoning (to which I would add the uncontradicted evidence that when a finance company was concerned, it worked by reference to the part-exchange price and was not even informed of the 'true value'). But in deference to Mr Prosser's skilful and determined argument I would add some further comments of my own, especially in relation to the principle of fiscal neutrality. That principle, like many other general principles, seems to focus on a central point but to have other more peripheral applications. Its central core meaning (spelled out in Article 2 of the First Directive) is that whether goods purchased by the final consumer have been through the hands of a dozen different traders at successive stages of their manufacture, distribution and marketing or are the product of a single manufacturer who is also a retailer the VAT system should (through its mechanisms of input tax and output tax) produce the same end result (and similarly for services): see Rompelman v Minister van Financiën [1985] ECR-I 655, 663-4, para 19 and Elida Gibbs Limited v Customs & Excise Commissioners [1996] STC 1387, 1403-4, paras 28 and 31. The principle also extends to other aspects of what may be described by the over-worked metaphor of the level playing field for economic activities: for instance as between different forms of business entity (Gregg v Customs & Excise Commissioners [1999] STC 934) or even, in a qualified way, between economic activities which are lawful or unlawful under domestic law (Staatssecretaris van Financiën v Coffeeshop Siberië vof [1999] STC 742).
27.   The principle of neutrality must however co-exist with other general principles, such as the objective of legal certainty: BLP Group Plc v Customs & Excise Commissioners [1995] STC 424, 437-8, paras 24 to 26. Moreover the principle does not go so far as to require that transactions which have the same economic or business effect should for that reason be treated alike for VAT purposes. That was made clear by the ECJ in Customs & Excise Commissioners v Cantor Fitzgerald International [2001] STC 1453, 1474, paras 30 to 33. The ECJ stated in para 33:
"The principle of the neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other".

28.   Mr Prosser submitted that the Court of Appeal had misunderstood his submission in relation to the principle of neutrality. He said that the two different ways in which the part-exchange transaction might have been structured (that is with a high part-exchange price for the traded-in car, or an explicitly acknowledged discount on the Lex car) were not merely the same in their economic effects, but were essentially the same transaction. He referred to the recent decision of the Court of Appeal in Hartwell Plc v Customs & Excise Commissioners [2003] STC 396, in which another car dealer achieved a saving of VAT by providing a "purchase plus discount" (evidenced by a voucher) to perform the function of the "additional allowance" in the present case. The Court of Appeal approved the analysis by Patten J [2002] STC 22, para 24,
"The Purchase Plus allowance is negotiated and agreed as a reduction by Hartwell in the amount which the customer will have to pay for the replacement car. No consideration is given for it. It is simply a concession made by the salesman as an inducement to the customer to purchase … the use of the Purchase Plus Discount Note effectively as part payment of the balance of the purchase price is no different from the use of the coupons or vouchers which were considered in the Boots and the Elida Gibbs cases".

29.   Mr Prosser submitted that it was absurd that there should be different VAT treatment of identical transactions. But in my opinion these are not identical transactions. Hartwell, no doubt learning from Lex's experience, decided to adopt a scheme which explicitly made a different attribution of value, possibly with different commercial repercussions (your Lordships do not know how up-market franchisers would take to the scheme) and certainly with different tax implications for the customer if he were registered for VAT (for instance, as proprietor of a number of hire cars or taxis). So whether or not the Court of Appeal correctly stated Mr Prosser's submission, I would not accept it.
30.   I would add two footnotes. Hartwell was a case involving a voucher and there was some discussion in the course of argument before your Lordships about "voucher cases". In fact there is no single species of "voucher cases": as Advocate General Fennelly said in Kuwait Petroleum (GB) Limited v Customs & Excise Commissioners [1999] STC 488, 502,
"I cannot pretend that it is easy to extract from the case law a completely coherent set of rules which it is possible to apply with total confidence to every promotion scheme devised by the ingenuity of commerce".

    But in the simple case of a voucher which the issuer himself redeems by allowing a discount on a purchase from himself, the voucher is not property but is simply evidence of an obligation to give a discount: see for instance Boots Co Plc v Customs & Excise Commissioners [1990] STC 387, 408, para 21. But I do not think it is necessary or helpful to go further into the complexities of some of the cases involving vouchers or coupons.

31.   Mr Prosser placed before your Lordships two very interesting articles which have recently appeared in the British Tax Review: one by Professor Geoffrey Morse at [2002] BTR 179 and the other by Rebecca Millar (a lecturer in taxation law at the University of Sydney) at [2003] BTR 153. Those articles are mainly (in Ms Millar's case, almost entirely) concerned with "free gift" cases rather than part-exchange cases. Both articles criticise Naturally Yours Cosmetics, Professor Morse on the ground that the decision was over-analytical and Ms Millar on the ground that it was insufficiently analytical. Your Lordships did not hear any submissions about these articles. It would be inappropriate to comment on them at any length, and brief comment would fail to do justice to them. I would however add that I would readily agree with Ms Millar that some of the "services" performed in what I have loosely called the "free gift" cases were almost illusory, and that the dividing line between such "services" and the giving of a discount is correspondingly obscure (just as the dividing line between a contract and a conditional gift may be obscure). But in the VAT system legal certainty is important, as well as fiscal neutrality, and if a supplier wishes to give a discount it is up to him to make his intention clear, especially in the context of a part-exchange transaction. Hartwell shows that it is possible, with appropriate documentation.
32.   For these reasons I would dismiss this appeal.