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Andrew Hillas Ltd v Customs and Excise [2004] UKVAT V18671 (29 June 2004)

18671

VAT — output tax — motor dealer — whether monetary consideration includes or excludes fictitious deposits never paid —appeal dismissed

MANCHESTER TRIBUNAL CENTRE

ANDREW HILLAS LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr J D Demack (Chairman)

Sitting in public in Manchester on 17 May 2004

Mr Richard Barlow of counsel for the Appellant

Miss Lisa Linklater of Counsel instructed by the Solicitors office of HM Customs and Excise for the Respondents

DECISION

The question for decision in the instant case was put on behalf of the appellant company, Andrew Hillas Ltd ("Hillas), by its counsel Mr Barlow as: if a vendor of goods represents to the purchaser that a third party has paid an amount additional to that payable by the purchaser, is that sufficient to make the vendor liable to tax on the fictitious part of the consideration? Alternatively, or additionally, he asked whether in a hire purchase transaction involving a finance company the customer should be treated as the purchaser for the purpose of identifying the consideration

Those questions arise against the following agreed factual background. Hillas is a motor dealer and inter alia supplies vans. Some of its customers for vans require hire purchase finance. Hillas caters for them through a finance company, Capital Bank plc ("Capital"). Although consumer credit legislation no longer requires a customer to pay a minimum deposit, Capital insists that he pay one. But some of Hillas' customers are unable to fulfil that requirement. Consequently, to accommodate such a customer, Hillas artificially increases the sale price of the van he wishes to acquire, and restructures the transaction to enable him to obtain the whole of the sale price (or thereabouts) from Capital.

Hillas claims that the taxation consequences of the restructuring are that it is liable to VAT only on the basis of the original price, whereas the Commissioners maintain that VAT is payable on the basis of the restructured price. To recover tax allegedly due on the latter basis, on 15 May 2003 the Commissioners assessed Hillas to tax of £163,395. The assessment was later reduced to £151,265. £6,973 was not in dispute. The appeal proceeded against the balance assessed.

I was provided with the documents relating to a specimen transaction involving a Mr G. In December 2002 he agreed to acquire from Hillas a Mercedes Sprinter van for a VAT inclusive price of £7600, and required hire purchase finance. He was able to pay only a nominal deposit, so that Hillas reconstructed the transaction to enable him to proceed.

But first Hillas supplied Mr G. with an "invoice" in the following terms:

Price of Van £6500.00

VAT £1137.50

Total invoice price £7637.50

Mr G. paid a deposit of £37.50 so that the "total invoice price" was reduced to £7600 – the amount he needed from Capital. That "invoice" was a private document between Hillas and Mr G: it was not copied to Capital.

Contemporaneously, Hillas invoiced Capital in the total sum of £11,162.50. I shall call the invoice it issued to Capital "the tax invoice". The total sum was reflected in the hire purchase documents, i.e. the tax invoice and the hire purchase agreement itself, which showed:

Price of van £9500.00

VAT £1662.50

£11162.50

By cash/cheque £3562.50

By balance on HP £7600.00

On the tax invoice the words "deposit paid" were written alongside "by cash/cheque £3562.50". In relation to its supply of Mr G's vehicle to Capital, Hillas accounted for VAT of £1137.50, and not the £1662.50 shown in the tax invoice.

Against that factual background, Mr Barlow, counsel for Hillas, submitted that it had accounted for the correct amount of output tax since the amount received by it from Capital was the price it charged Mr G. In doing so, he placed reliance on the following legislation:

Article 2 of the First Council Directive:

"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.

Article 11 of the Sixth Council Directive, so far as relevant:

The taxable amount shall be:

(a) in respect of supplies of goods and services other than … 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 or such supplies including subsidies directly linked to the price of such supplies

…

The taxable amount shall not include:

(a) taxes, duties, levies and charges, excluding the value added tax itself;

(b) incidental expenses such as commission, packaging, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement maybe considered to be incidental expenses by the Member States.

The taxable amount shall include:

(a) price reductions by way of discount for early payment;

(b) price discounts and rebates allowed to the customer and accounted for at the time of supply;

(c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses . . .

Section 19 of the Value Added Tax Act 1994, so far as is relevant:

(1) For the purposes of this Act the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6, and for those purposes subsections (2) to (4) have effect subject to that Schedule.

(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration."

Mr Barlow contended that art 2 of the First Directive clearly envisaged that tax would be charged only on the actual price charged, not on fictitious amounts. He further claimed that "everything which had been or is to be obtained" in art 11(1)(a) of the Sixth Directive could not sensibly be read as including purely fictitious amounts that were not going to be obtained; anything not actually received by the supplier was not part of the taxable amount. He also maintained that by providing detailed rules of what was and what was not included in the consideration in art 11, the legislature had further emphasised that it was the actual amount received that governed the taxable amount: the tax would not be "exactly proportional to the price" or "calculated on the price" if it were based on a fictitious price.

Mr Barlow further submitted that the Commissioners' arguments (1) that the cases established that the price attributed to goods by the parties determined the value of the supply; and (2) that since Capital and Hillas were the parties to the sale of the goods the price shown in the documents issued by Hillas to Capital were conclusive, were dangerous, e.g. a third party payment such as a deposit paid by a hirer where the supply was to a finance company would not be part of the taxable amount if the parties had not referred to it. He accepted that the authorities established that, where necessary, a subjective value placed on goods determined the value of the consideration, but maintained that that was in cases where the goods were the consideration, or part of it, and so the consideration was not purely monetary. Of course, he added, in such cases a value had to be established, and it could be established if the parties had agreed a value by their agreement. (He further added that in the instant case all but a handful of transactions did not involve any part-exchange vehicle and, where they did, the value agreed between Hillas and the customer had been correctly shown in the documents issued to Capital and formed part of the consideration). But, he continued, where as in the instant case what was in issue was the amount of purely monetary consideration, most of the cases to be cited by the Commissioners had no application, and those that had supported Hillas' case.

To support his claim that Hillas was liable to tax only on the money received from its customers, Mr Barlow relied on three decisions of the Court of Justice of the European Communities (the ECJ), those of Elida Gibbs Ltd v CEC [1996] STC 1387, EC Commissioners v Federal Republic of Germany [2003] STC 301 and Chaussures Bally v Belgian State [1997] STC 209. The first two of those decisions were concerned with the liability to tax on "money-off" coupons, and the last to the treatment of commissions paid by credit card companies to the taxpayer. From Elida Gibbs, Mr Barlow extracted the following sentence from para 28 of the judgment (p.561):

"It would not . . . be in conformity with [art 11A(1)(a) of the Sixth Directive] for the taxable amount used to calculate the VAT chargeable to the manufacturer as a taxable person, to exceed the sum finally received by him."

And from the German Republic case, to similar effect, he cited a short passage from the opinion of the Advocate General (Jacobs) para 110 p. 318 and paragraphs 58 and 59 (pp. 327-328) of the judgment. The former reads as follows:

". . . I take the view that, in the event of an otherwise irreconcilable difference, the requirement that the amount of VAT levied should be the correct proportion of the actual value finally received by the supplier (and, for the chain as a whole, of the final price) should be given greater weight than structural requirements. In other words, achievement of the end is more important than implementation of the means designed to achieve it."

Paragraphs 58 and 59 of the judgment in the German Republic case read thus:

"58. It follows that, in situations such as that in the present case, the subjective consideration within the meaning of art 11A(1)(a) of the Sixth Directive received by the retailer comprises the whole of the price of the goods, which is paid in part by the final consumer and in part by the manufacturer . . .

Consequently, it must be accepted that the retailer's taxable amount for the sale of the final consumer is the full retail price, namely the price paid by the final consumer plus the amount reimbursed to the retailer by the manufacturer."

Mr Barlow contended that the ECJ's approach in Chaussures Bally was to look first at what the final consumer had paid (see paras 14, 17 and 18 of the judgment at pp 223 and 224) and, allowing for the fact that the consideration might actually be paid to the supplier by a third party (the card companies), calculate the tax due on the amount paid by the consumer. He submitted that by analogy with that reasoning, the final customer in the instant case was the customer, not the finance company, and so, in principle, what he paid and, given that he did not pay the fictitious deposit or fictitious part of the deposit, it should not form part of the taxable amount. Alternatively, he claimed, even if the finance company were seen as the final consumer so that payments made by the customer (as third party) should form part of the taxable amount, as the deposits had not in fact been paid they did not form part of the taxable amount.

Miss Linklater, counsel for the Commissioners, maintained that the cases relied upon by Mr Barlow were of little assistance in deciding the instant case for they related to completely different subject matter. She observed that Hillas and Capital agreed the price of a van as reflected in the tax invoice and the hire purchase agreement with the customer, and that that price never varied. She submitted that the tax invoice indicated the relevant "value" of the supply to Capital and the VAT element of the supply for which Hillas was liable to account to the Commissioners. She added that Hillas, as a taxable person, was obliged to charge VAT on supplies of vehicles to finance companies, which supplies were "taxable supplies" as made for a consideration.

Miss Linklater observed that it was quite clear on the face of s. 19 of the Value Added Tax Act 1994, that the value of supplies was to be determined by reference to "consideration" as distinct from "payment": that was in line with the liability to VAT being referable to the time of supply as distinct from the time of payment. She further submitted that, in ascertaining the amount of "consideration", resort must be had to the contract between the parties. She maintained that where, as in the instant case, that was expressed as a price, that price less VAT was equal to the consideration: the fact that such price might not ultimately be paid was irrelevant to the question of "consideration". By way of observation, she added that in the ordinary law of contract the fact that a party might not receive the entirety of the agreed "consideration" did not alter that consideration, but merely gave a right to damages.

The cases Miss Linklater relied on were those of Lex Services plc v CEC [2004] STC 73 and North Anderson Cars Ltd v CECI [1999] STC 902, both of which concerned vehicle sales and involved part-exchanges. (The question for decision in Lex Services was the value to be attributed to cars taken in part-exchange by Lex where the part-exchange allowance agreed between it and its customers exceeded the trade value of the part-exchange cars. The House of Lords held that the part-exchange price was specifically agreed for commercial reasons, could not be re-characterised as discounted from the price of the car Lex was selling, and that the "true value" served a different and distinct purpose (in the case of Lex to limit its exposure to repayment of refunds). The House of Lords also rejected Lex's claim that the "additional allowance" i.e. the difference between the true part-exchange value of the car and its agreed exchange allowance, and in accordance with the principle of fiscal neutrality, had the same economic effect as a discount on the purchase price and was to be treated, for VAT purposes, in the same way as a discount. Miss Linklater observed that, in Lex Services, Lord Walker equated "consideration" with "price" (see para 6 of his speech at p. 76). She placed particular reliance on his consideration of "subjective value" at paras 18 and 19 (p. 79) when he said:

"18. The expression "subjective value" . . . 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 . . .

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."

Miss Linklater explained the Commissioners' case as an application of Lord Walker's analysis to the facts of the instant one and as indicating that the relevant "value" was that set out in the tax invoice.

Mr Barlow contended that the Lex Services case had no relevance to the instant one: being concerned only with non-monetary consideration. Lord Walker was merely referring to the cases of monetary consideration to emphasise that what he was saying about non-monetary consideration was not very far removed from the situation in most monetary cases, i.e. that the subjective value was no more difficult to identify in non-monetary cases than the money was in monetary cases. He submitted that that said nothing about monetary cases except that it was not difficult to identify what had been paid. He added that the fact that the documents in the instant case raised a question about how much had been paid did not make it necessary to identify what had been paid by any artificial means, and the remarks of Lord Walker as to subjective value could not be stretched to suggest otherwise; and the point made by Miss Linklater also ignored the words "in most cases" in the passage cited.

The Commissioners' argument was, in Miss Linklater's submission, re-inforced by the decision of the Inner House of the Court of Session in North Anderson Cars. She contended that the facts of that case were particularly close to those of the instant one. (In North Anderson a motor dealer was artificially inflating (or "bumping") the price of part-exchange vehicles to a finance company but seeking to use a lower value in sales agreements with its customers for VAT purposes. The Court rejected North Anderson's submission based on Elida Gibbs that one should look beyond the hire-purchase agreement to the whole of the surrounding circumstances, for the supply of cars by the appellant to the finance companies fell to be ascertained by reference to the finance documents and not by reference to the sales agreements between the appellant and the customers). She submitted that the Court's analysis in North Anderson applied equally to the instant case and indicated that the relevant "value" was that set out in the tax invoice.

In Mr Barlow's submission, the Inner House of the Court of Session had decided the North Anderson case on the basis that the parties (i.e. the taxpayer and the finance company) had agreed the price to be attributed to part-exchanged cars as part of the price, and that that was the subjective consideration (see p. 908). He maintained that the situation had no relevance in the instant case, particularly relying on the sentence (at p. 908d): "There was no question of the appellant not obtaining any part of what was referred to in the finance documents". Mr Barlow added that North Anderson did obtain the part-exchanged car, and what was in issue was its value; but the parties had attributed a value to it. In contrast, he contended that in the instant case Hillas had not obtained payment of deposits.

Although not referred to by Miss Linklater, Mr Barlow also dealt with another very recent case involving part-exchanges, that of Hartwell plc v CEC [2003] STC 396. In that case a retailer selling a replacement car and taking its customer's existing car in part-exchange attributed the market value to the car at the date of the transaction and issued a discount voucher to him as part-payment of the deposit on the replacement car where a finance company was involved or as a credit against the purchase price where a finance company was not involved. It was held by the Court of Appeal that the value of the voucher formed part of the consideration for the supply of the replacement car: the purpose of the voucher scheme was to make it clear that there was no overvaluation of the part-exchange car. Mr Barlow submitted that Hartwell showed that the correct question to ask was what the supplier received as consideration as a matter of fact, and that it was not relevant to consider from whom that consideration was received; the specific question about what value should be attributed to the voucher in that case had no relevance to the instant one. Mr Barlow particularly relied on the judgment of Chadwick LJ at pp. 408e to 410d to contend that if no money were actually paid as a deposit by the customer, or less was paid than was represented to the finance company, what was in fact paid did not include the deposit or part of it.

Conclusion

There are a number of facts which lead to what I regard as the inevitable conclusion in this case. First, there is the "invoice" provided by Hillas to its customer, in the sample transaction, Mr G. Effectively, Mr Barlow invited me to treat that document as the equivalent of a discount voucher. I am not prepared to do so. That "invoice" evidences a purely private arrangement between Hillas and its customer. It is certainly not for public consumption. In particular, it is not intended to be seen and acted upon by Capital. If it were to be, the whole transaction between Hillas and a customer such as Mr G would be jeopardised. (There was no suggestion that Capital was prepared to collude in any arrangement whereby payment of its minimum deposit could be circumvented). I observe that in all the cases which Mr Barlow regards as "irrelevant", the arrangements entered into were disclosed openly and honestly. That is the fundamental difference I detect between those cases and the instant one. The Court of Session put the position in the instant case as clearly as anyone could when it observed in North Anderson Cars p. 908, "As far as the finance company was concerned there was no other value which could be attributed to the transaction."

Then there is the manuscript endorsement on the tax invoice alongside the deposit, "deposit paid". To use the words of the tribunal in North Anderson Cars, that addition is "wholly artificial, if not dishonest" (see p. 906 of the Court of Session judgment in that case). Third, there is the purely practical point, assuming I accept Mr Barlow's argument that the VAT charged on the tax invoice is incorrect, that a Customs officer inspecting a tax invoice raised by Hillas to Capital in relation to a transaction involving a customer such as Mr G. is unable to tell from the tax invoice and the hire purchase agreement whether he is dealing with a genuine transaction in which the figures quoted are the correct ones, or an "artificial" one in which the figures are incorrect. As Lord Walker pointed out at para 18 of his speech in Lex Services, it is a "basic strength of the VAT system" that it "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". If I were to accept the case advanced by Mr Barlow, it would be to make a mockery of that statement. And, to adopt some further words from para 19 of Lord Walker's speech, albeit taken from a context dealing with non-monetary consideration - a fact I regard as irrelevant – "in a straightforward case, the [subjective] value [is that] which the parties to the contract have themselves recognised in the course of their dealings" (my emphasis). The parties to the contract in the instant case are Hillas and the finance company: the supply is to the finance company, not to the customer. There is no authority to support Mr Barlow's submission that the consideration agreed between Hillas and its customer should be substituted for that in the tax invoice where the supply is to a finance company, and without it I am not prepared to make substitution.

Having already said that I am in no doubt that the 'invoice' provided by Hillas to a customer such as Mr G. is not the equivalent of a voucher or discount note of the type considered by the ECJ in the first two cases relied on by Mr Barlow, I regard those cases as being of no assistance to me in determining the outcome of the present one. In contrast, I believe the line of cases relied upon by Miss Linklater to be that which should be followed.

I hold that the consideration for the supplies of vans made by Hillas to Capital is that expressed as the price in the tax invoices issued to Capital. In other word, the customer is not to be treated as the purchaser for the purpose of identifying the consideration in a case where the supply is, and is invoiced, to a finance company.

I dismiss the appeal

DAVID DEMACK

CHAIRMAN

RELEASE DATE; 29/06/2004

MAN/03/435