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Xansa Barclaycard Partnership Ltd v Customs and Excise [2004] UKVAT V18780 (01October 2004)

18780

Value added tax – registration of companies, groups and divisions – consideration of decision by the Commissioners to degroup a company under section 43C of the Value Added Tax Act 1994 – extent of appeal to the tribunal from a degrouping decision.

LONDON TRIBUNAL CENTRE

XANSA BARCLAYCARD PARTNERSHIP LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Dr David Williams (Chairman)

Mrs S Edmondson FCA

Mr C Shaw FCA

Sitting in public in London on 29, 30, 31 March and 1, 2, 5 April 2004

Hugh McKay and Stephen Morse CTA (instructed by the Solicitor to Barclays Bank Plc) for the Appellant

Keiron Beal (instructed by the Solicitor to Her Majesty's Customs and Excise)

for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appellant Xansa Barclaycard Partnership Ltd, trading as the Xansa Barclaycard Partnership (XBP) is appealing against a direction of the respondents (the Commissioners) made on 16 April 2003 to terminate the registration of the appellant as part of the VAT group registration of the Barclays Bank Plc Group of companies (Barclays) with effect from 1 July 2003 under section 43C of the Value Added Tax Act 1994 (the Act). It is understood that this is the first appeal against a degrouping notice.

The company that is now XBP was incorporated as a shelf company then named Barshelf (No 73) Ltd (73 Ltd). It was one of a number of shelf companies incorporated on 12 August 1994 at the application of Barclays. They were established as wholly owned subsidiaries of Barclays Plc or of other wholly owned subsidiaries of that company. The companies were together included in an application in September 1994, that was accepted by the Commissioners, to add them to the Barclays VAT group. Until the events that are stated by the respondents to form the basis for the actions of the Commissioners that led to this appeal, 73 Ltd undertook no commercial activities. 100 £1 shares in the company were authorised, and 2 issued to Barclays.

The direction under appeal

Formal notice of the direction was given on 16 April 2003 in the following terms:

NOTICE OF DIRECTION TO REMOVE XANSA BARCLAYCARD PARTNERSHIP LTD T/A XANSA BARCLAYCARD PARTNERSHIP FROM THE BARCLAYS BANK PLC VAT GROUP FOR THE PROTECTION OF THE REVENUE

Further to our enquiries into the VAT position of Xansa Barclaycard Partnership Ltd t/a Xansa Barclaycard Partnership, the Commissioners of Customs and Excise have concluded that is should be removed from the Barclays Bank plc VAT group (registration umber 2453 8522 62).

The reasons for this are that the Commissioners are satisfied that the inclusion of Xansa Barclaycard Partnership Ltd t/a Xansa Barclaycard Partnership in the VAT group results in supplies within the VAT group being disregarded for VAT purposes, where they are being made by a company run by and for the benefit of a third party (Xansa UK). This leads to a revenue loss which, in the opinion of the Commissioners, goes beyond the normal consequences of VAT grouping.

Therefore, under the provisions of sections 43C(1) and 43C(2) of the Value Added Tax Act 1994, the Commissioners hereby direct that Xansa Barclaycard Partnership Ltd t/a Xansa Barclaycard Partnership be removed from the above mentioned VAT group with effect from 1 July 2003.

If Xansa Barclaycard Partnership Ltd t/a Xansa Barclaycard Partnership is then liable to be registered for VAT, or is entitled to register and wishes to do so, the company should submit a Form VAT1 to the appropriate VAT Registration Uni.

You have 30 days from the date of this letter in which to appeal against this decision to the VAT and Duties Tribunal.

The notice is signed for Karen Pittis, National Business Manger of the respondents, the officer responsible for informing the appellant of the direction.

Section 43C was inserted into the Value Added Tax Act 1994 by Finance Act 1999, section 16 and Schedule 2, paragraph 2. There are no relevant amendments. It provides:

43C Groups: termination of membership

(1) The Commissioners may, by notice given to a body corporate, terminate its treatment as a member of a group from a date –

(a) which is specified in the notice, and

(b) which is, or falls after, the date on which the notice is given.

(2) The Commissioners may give a notice under subsection (1) above only if it appears to them to be necessary for the protection of the revenue.

(3) Where –

(a) a body is treated as a member of a group, and

(b) it appears to the Commissioners that the body is not, or is no longer, eligible under section 43A(1) to be treated as a member of the group,

the Commissioners shall, by notice given to the body, terminate its treatment as a member of the group from a date specified in the notice.

(4) The date specified in a notice under subsection (3) above may be earlier than the date on which the notice is given but shall not be earlier than –

(a) the first date on which, in the opinion of the Commissioners, the body was not eligible to be treated as a member of the group, or

(b) the date on which, in the opinion of the Commissioners, the body ceased to be eligible to be treated as a member of the group.

XBP

On 18 January 2002 at a meeting of the directors of 73 Ltd it was agreed to redesignate 49 of the existing 100 £1 ordinary shares as A ordinary shares, and to redesignate the other 51 as B ordinary shares. New articles of association of the company were also approved, as was the issue of the 98 unissued shares to Barclays.

On 25 January this was followed by an alteration of the objects clause of 73 Ltd and on the same day by the sale of the A shares in 73 Ltd to Xansa UK Ltd.

On 28 January 2002 Barclay entered a Services Agreement with 73 Ltd to which Xansa Plc joined as a guarantor. It was signed by the chief executive of Barclaycard, a director of 73 Ltd and a Managing Director of Xansa Plc. The agreement is very extensive, dealing in considerable detail with the provision of services and subject to bank protections and other safeguarding provisions. Schedule 5 sets out provisions dealing with minimum commitment for each contract year under the Agreement and the service fees to be paid. Linked to that are two similar appendices, Appendix A and Appendix B. Both start with a rate card of daily rates (exclusive of VAT) for individual suppliers of services. The rates in Appendix B are lower than the rate in Appendix A. Paragraph 13 of Schedule 5 provides:

If it is found that VAT is payable on the Services then the Rates in Appendix A shall, with effect from the date on which VAT is payable, cease to apply and shall be replaced by the rates set out in Appendix B, as amended in accordance with paragraph 6. In this event, references to the rates in Appendix A in this Schedule shall, where appropriate, be construed as references to the rates in Appendix B.

This was followed on that day by a shareholders' agreement between Barclays and Xansa UK Ltd relating to their shares in 73 Ltd. This provided for the constitution of the board of directors of 73 Ltd for a dividend policy that gave a preferred dividend to the A shares, for losses by 73 Ltd up to a stated level to be the responsibility of Xansa UK Ltd and for both put and call options in favour of Barclays. Barclays could at any time require Xansa to buy its shares, and could exercise the call option if the Services Agreement was terminated.

On the same day Xansa Plc also entered into a separate Guarantee for the performance of the contract with Barclays. This was executed as a deed. New Articles of Association were adopted for 73 Ltd and the necessary consents given. The directors of 73 Ltd were appointed and met. They transferred the registered office of 73 Ltd to Campus 300 in Hemel Hempstead (a Xansa address) and instructed the secretary to transfer "the register of members and other books and records of the Company (other than VAT records)" to the same address. The accounting reference date of the company was moved from 31 December to 30 April.

On 1 February 2002 Barclays transferred 324 staff to 73 Ltd under the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 1999.

On 14 February 2002 73 Ltd changed its accounting reference date to 30 April. According to the Directors Report for the 12 months ending 30 April 2003 this was "in line with that of its ultimate parent company Xansa Plc."

On 15 April 2003 73 Ltd changed its name to Xansa Barclaycard Partnership Ltd.

The Green Sea Project

In June 2001 Barclays announced internally that it intended to reorganise how information technology was handled. The options canvassed included further productivity improvements, moving further work offshore, and strategic partnerships. The employees' union was informed. The project was known as the Green Sea Project. The project took shape in July and August 2001 as a joint venture proposal involving a New Co with transferred Barclays staff and seconded staff from an outside company (then unidentified, but now Xansa Plc). A risk assessment workshop was held in August 2001. Presentations suggested that New Co should be in the Barclays VAT Group but off balance sheet, while it should be in an employment group with Xansa. The presence of New Co in the Barclays VAT group is noted on a number of the slides used as presentations to the seminar. That the solution was "VAT efficient" was noted on another slide as one of the key assumptions of the solution adopted. It is clear that concerns of the employees who might be involved were also part of the key risk.

A detailed report on Barclays Green Sea was put up to Barclays Executive Committee on 31 August 2001. In the executive summary it recommended a joint venture with Xansa "whilst maintaining Barclaycard's current tax position". "It will be 51% owned by Barclays and 49% owned by Xansa, with the Venture maintained within the Barclays VAT group. Xansa will take all profit and loss from the venture up to the baseline commitment. They will have operational control to facilitate consolidation of the entity into its reported accounts…". At paragraph 2.2 (venture rationale) it is stated that the ownership profile of 51% for Barclays and 49% for Xansa "allows the Venture to sit within Barclays VAT grouping, whiles being within Xansa's employment group and consolidated into Xansa's accounts." This is emphasised also at paragraph 4.1. Elsewhere the report also reflects the concerns over the position of transferring staff and also over the right of New Co to use software required for the services to be provided. VAT is mentioned again three times in the financial summary (part 5). That states that "to ensure the supply of services remains within the Barclays VAT group a joint venture (JV) in which Barclays has a 51% shareholding is used to supply the services." Later in that part it is noted that; "Legislation changes may result in VAT degrouping in the future as a result the JV is assumed to be in the Barclays VAT group for one year. For every year that the JV remains in the Barclays VAT group an additional £3 million saving is achieved." The slides used to make the presentation accompanying the report stress three points: the maintenance of the Barclays VAT grouping, the transfer of staff to Xansa without redundancies and associated shifts of work offshore, and the shift of operational control to Xansa to provide for accounts consolidation with Xansa.

Internal approval to realising Green Sea was given, and the rollout programme was then agreed by Barclays and planned for the necessary announcements on 31 October 2001, seminars for staff starting on 1 November 2001, and for a rollout on 1 February 2002. As noted above, this was the date on which the staff were transferred.

The relationship of XBP to Barclays and Xansa

As the above suggests, we were shown fully documented details of the process of evolution of the Green Sea project into its maturity as XBP by Barclays. We also heard evidence at length from Jonathan Robert Elvin, a consultant to the Barclays group who played a central role in assisting the realisation of the Green Sea Project. We saw limited equivalent documentation of the evolving links between XBP and Xansa UK. But we did see documentation of the presentations made by Xansa to the staff being transferred to it, and its rollout plans and the joint Barclays/Xansa rollout plans from November 2001. At that stage a primary focus of all parties was clearly on the attitude of employees. Employees endorsed the plans after a ballot organised by their union with an overwhelming vote in favour of the changes, and 73 Ltd was made operational according to the timetable.

While we saw the extremely detailed agreement drawn up between Barclays and 73 Ltd, we saw no equivalent agreement between 73 Ltd on the one part and any part of the Xansa Plc company or group on the other. Nor were we given much information about the working of the Xansa group. There are clearly a number of companies acting together as "Xansa", including Xansa Plc, Xansa UK Ltd both of which are separately parties to various of the agreements we saw, and Xansa India.

We were shown evidence that, following the project launch, the venture moved ahead according to plan. A business plan was produced in March 2002. We note that this was issued as a Xansa document with a Xansa Plc copyright. It shows a business working essentially on Barclaycard and other Barclays group work while stressing the integration of the business into the overall Xansa international delivery unit model, involving 42% overseas (that is, overseas to the UK) delivery. We saw the 73 Ltd / XBP accounts for the period to 30 April 2002 and for the year to 30 April 2003. This saw turnover rising from zero at the project start to £41 million in the year to 30 April 2003.

We also heard evidence from Christopher Joseph O'Loughlin, the Chief Operating Officer of XBP and its commercial director from launch to December 2003. He explained to us that the practice of outsourcing information technology functions was a growing approach for large firms. The approach of XBP was to act as the outsourcer but not itself to outsource its own functions. For the work for Barclays, XBP used its own staff resource and also might use independent contractors, Xansa UK employees or Xansa India employees. He also explained how individual tasks were agreed between Barclays and XBP, in accordance with the agreement between XBP and Barclays. Once a "work package" was agreed operational control rested with XBP.

With regard to the relationship between XBP and Xansa more generally, Mr O'Loughlin gave evidence that he encouraged the use of Xansa UK when a staff resource outside XBP was needed. This was because of "the trading arrangements that are in place between XBP and Xansa UK, and Xansa UK and Xansa India". The trading relations involving Barclays are governed by the Service Agreement. Relations between Xansa UK and Xansa India were confidential and he was not party to the confidence, though he was aware that there was an agreed charging basis. Mr O'Loughlin agreed under a brief cross-examination that there were no figures in the 2003 accounts reflecting any external staff being paid as a separate item.

In addition to the documentary evidence from Barclays, we heard evidence from Mr Elvin about how Barclays had established XBP and its arrangements with Xansa. Mr Elvin told us that he was responsible for the implementation of the contract management controls and processes for 73 Ltd to ensure that contractual obligations were met. He was the financial consultant engaged to establish the business case for the project and for dealing with Xansa. He is a chartered accountant, but not a legal expert. He gave evidence of the development of the project and the use of 73 Ltd. He was not responsible for choosing it as the vehicle for the joint venture a company in the Barclays VAT grouping. Nor was he sure who did decide to do that. He was also not sure why Barclays had dormant non-trading companies in the Barclays VAT group. He did not know whether such a company would need a VAT registration if it were not in a group. The formal decision to use 73 Ltd was taken by the executives from Barclays that were on the project steering committee, and the relevant risks were for decision by the Finance Director. He did not know why none of them were present to give evidence.

Mr Elvin explained the background to the decision by Barclays to set up the Green Sea project and partnership with Xansa. He detailed the business case for changing the way that Barclays dealt with its information technology needs. He emphasised the problems of ensuring that that the objective of introducing an element of outsourcing was balanced with the other demands of and on the Barclays group. There were a number of constraints on Barclays. There was a need to ensure business continuity and to meet the concerns of the Financial Services Authority. There was a need to ensure the retention of staff and to avoid both redundancies and the cost of redundancies. There was a need to ensure cost savings from the operation. There was also a need to control the transformation costs of changing the arrangements. There was a need to work within the existing information technology licences of the Barclays group as far as possible. And there was scope for VAT efficiencies, although these were assumed for one year only and were not an important factor in making the key decisions. It was, he emphasised, absolutely not the case that the Green Sea project had been arranged solely with the intention of generating some kind of VAT benefit. There were also needs to protect Barclays' reputation and to limit the scope of action of the XBP managers. There was also the question of consolidating XBP's figures into the group accounts of its parent.

During cross-examination by Mr Beal, Mr Elvin was taken in detail through the planning of the joint venture. He was asked about how the precise form of structure of the partnership was chosen. As we have the advantage of a full transcript of evidence, we record in particular the following passage concluding one period of evidence:

Q Can I just put some propositions to you shortly before lunch, then I will stop and see whether you agree. Firstly that the employees were wholly within Xansa's responsibility once they had been TUPE'd out of Barclays?

A Yes, to the extent that XBP was being included within the Xansa employment group, yes.

Q The operational control of XBP was effectively being run by Xansa?

A Yes, XBP, yes.

Q At the project proposal stage, you intended to put XBP into Xansa's consolidated accounts and that subsequently happened?

A That is correct.

Q Nonetheless you maintained XBP in Barclay's VAT group.

A Um, um.

Q Do you accept that such a structure is contrived?

A Contrived?

Q The presence in Barclay's VAT group does not reflect the underlying reality of the situation, does it?

A (pause)

Chairman: I must ask you to answer that question.

A Sorry, I was just thinking about the --- in terms of the operational --- what you are saying in terms of the operational control and everything, yes, it does not reflect the fact that operational control is not held by Barclays, yes.

Q It does not reflect anything, does it, other than it is in the VAT group?

A That is correct. It does not reflect anything other than the VAT group, yes.

The law

The general provision for recognising a group of companies as if it were a single taxable person for the purposes of VAT is in section 43 of the Value Added Tax Act 1994. Section 43A now deals with eligibility to be treated as members of a group. Section 43B deals with applications for two or more bodies corporate to be treated as members of a group. Section 43C deals with termination of membership of a group. No point was taken by either party about the operation of section 43B to allow a dormant shelf company to be included in the Barclays group in this case, or on the general provisions about grouping.

The only statutory provision in issue was section 43C, on which the decision of the Commissioners to give notice to XBP terminating its membership of the Barclays VAT group is based. The relevant text is at the head of this decision.

The parties also referred to the European law context of the grouping provisions and the powers in section 43C. Member states are given the power to establish grouping provisions under Article 4 of the Sixth VAT Directive (EC Council Directive 77/338 of 17 May 1977 as amended). Article 4 provides a definition of "taxable person" for the purposes of the Directive. In article 4 paragraph 4 it provides:

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 organisational links."

This is a permissive power which, when exercised, allows the group to be treated as a single taxable person. This was made clear by Lord Nolan in Commissioners of Customs and Excise v Thorn Ltd [1998] 1 WLR 1106, 1111. Were the power not present, that result would not be possible under the Directive. But we agree with Mr Beal that the permissive terms of the provision make its application to an individual case essentially a matter for the law of the member state. There is nothing express in Article 4 about the continuation of treatment of two or more persons as a single taxable person once granted. We were addressed at some length by both parties on the appellant's argument that European Community law principles were imported into the operation of section 43C by reason of its subsidiary status under Article 4 and, more generally, the Sixth Directive. In our view, this is one of the cases where the application of European Community law is stopped by the answer to the first of the questions posed by Laws J in his judgment in R v Ministry of Agriculture ex parte City Trading Ltd [1997] 1 CMLR 250: do the general principles of Community law apply at all? This, to echo Laws J's approach in that case (at paragraph 42) is a case "taken otherwise than in pursuance of Treaty rights or obligations". It is in this case for the United Kingdom government (and on appeal the United Kingdom's judicial authorities to the extent that the decisions are appealable) to decide the grouping question. It does not have to provide a grouping facility to taxable persons established in the United Kingdom under any Treaty or Directive provision. The Article 29 procedure referred to in Article 4 is that of an advisory committee with no decision making powers. Nor is there in our view any question that could be referred to the European Court of Justice. The United Kingdom has enabled VAT grouping subject only to criteria laid down in United Kingdom primary legislation. The decision whether the criteria are satisfied (or where there is a later revocation) is subject to appeal as in this case. We see no basis for an additional dimension to be added to that decision making and appeal process by reference to Community law. In any event, we are not persuaded that, even if we are wrong on this point, it would add any new aspect to the appellants' case additional to those we must consider by reason of the appeal before us. As we discuss below, we are required to consider the propriety of the decision because of the appeal before us taking into account not only required procedures and the common law but also the Human Rights Act 1998.

The Finance Act 1999, section 16, also amended section 83 (appeals) to add to the list of matters on which an appeal can lie:

(ka) the giving of a notice under section 43C(1) or (3).

Although this reads as a general right of appeal, it was agreed by the tribunal with both parties that the appeal tribunal does not have jurisdiction to reconsider the decision of the Commissioners to give the notice in full. The provision under appeal is a power given to the Commissioners for use only if it appears to them to be necessary to protect the revenue. This is very similar to the power considered by the Court of Appeal in John Dee Ltd v Commissioners of Customs and Excise [1995] STC 941. It was common ground that the approach in that case applies also to this case. After a full review of the authorities, including the opinion of Lord Lane in Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1981] AC 22, Niell LJ concluded:

It seems to me that the "statutory condition" )(as Mr Richards terms it) which the tribunal has to examine in an appeal under section 40(1)(n) is whether it appeared to the Commissioners requisite to require security. In examining whether that statutory condition is satisfied the tribunal will, to adopt the language of Lord Lane, consider whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The tribunal may also have to consider whether the Commissioners have erred on a point of law. I am quite satisfied, however, that the tribunal cannot exercise a fresh discretion on the lines indicated by Lord Diplock in Hadmor. The protection of the revenue is not a responsibility of the tribunal or of a court.

This was also the approach taken by the tribunal in National Westminster Bank Plc v Commissioners of Customs and Excise [1999] V&DR 201 , a case on section 43B to which we must return. As the tribunal put it in that case, "it is an appellate jurisdiction but exercised on supervisory principles".

The power in section 43C

Mr McKay's first challenge to the Commissioners' exercise of their powers under the section was on the basis that the Commissioners had misinterpreted the powers. We therefore examine those arguments before turning to the way in which the Commissioners used the powers.

It was submitted that the clear wording of section 43C(2) emphasised that this was a last resort power to be used "only" if "necessary". "Only" was not to be found in the statutory wording applying to other revenue protection powers. This was because this power is a draconian power, excluding the person concerned from a status or privilege already granted. In particular, the wording was more restrictive than the wording in section 43 considered in the National Westminster Bank case.

The test of protection of the revenue was first considered by the VAT tribunal in Club Centre of Leeds Ltd (1980) V.A.T.T.R. 35. The power in question was the power of the Commissioners to direct the appellant to account for VAT on supplies to individuals who were not taxable persons. Having considered arguments about the scope of the wording "necessary for the protection of the revenue", the unanimous view of the tribunal was:

that a direction is only "necessary for the protection of the revenue" where the trader is carrying on his business in a manner designed to avoid accountability for tax. The words "for the protection of the revenue" appear in other provisions of the Act, and in [other Acts]. All such provisions seem to us clearly to be designed to secure the payment by a person so the tax or duty for which he is accountable … or to negate an attempt to avoid liability for tax… It is, therefore, to be assumed that the same words in paragraph 3(c) are to be similarly construed unless there is some indication that a wide construction is required. We cannot find any such indication in paragraph 3. The natural meaning of the words "necessary for the protection of the revenue" seems to us to accord with the foregoing, that is to say, to ensure that tax chargeable or charged shall be accounted for and paid, and that the avoidance of accountability shall be negated. … The words must mean something to import a requirement in addition to those set out in subparagraphs (a) and (b) of paragraph 3. Prima facie a trader who is a taxable person is only accountable for tax at the standard rate on the supplies he makes by reference to the consideration for those supplies, and a person who is not a taxable person is under no liability for tax on any supply which he may make. A trader could seek to avoid accountability for tax by arranging his business in such a way as to take advantage of such limitations. But in the present case the Appellant has not arranged its business in the way in which it now conducts it with a view to the avoidance of tax. It carried on business in the manner in which it presently does so long before the introduction of value added tax."

The next case cited to us on the test was Marshington (LON 97 701), decided in October 1997. In that case it was accepted for the taxable person without full argument that "necessary for the protection for the revenue" was not to be narrowly construed. But the decision takes the analysis little further forward than that.

The third of the cases cited, and the one nearest to this decision, is the National Westminster Bank case. This concerned a VAT group of banking companies similar to the group in this case in extent and in business activity (namely that some of the activity was exempt or partially exempt). The case concerned the application by National Westminster for a wholly owned subsidiary of a company already in the group to be added to the VAT group. The application was refused by the Commissioners under section 43(5A) of the Value Added Tax Act 1994 on the ground that the refusal was "necessary for the protection of the revenue". It is fair to say that counsel in that case argued somewhat extreme versions of what was, and was not, permissible under section 43(5). The tribunal steered a middle course. In fairness, neither counsel in this case sought to argue to support those extreme positions. Mr Beal argued that we should follow the decision. Mr McKay considered it too wide, while not adopting the taxpayer's approach in that case.

The tribunal rejected the argument by Mr Cordara QC for the taxpayer that the phrase is confined to schemes that abuse grouping and does not apply where a tax benefit flows from the normal operation of grouping. It distinguished the decision in Club Centre of Leeds and gave the phrase "protection of the revenue" a wide meaning.

The tribunal stated:

71 We do not accept the submission of Mr Cordara that the phrase "protection of the revenue" is confined to schemes that abuse grouping and does not apply where a tax benefit flows from the normal operation of grouping. Although the words considered in Club Centre of Leeds Ltd were the same, the context was different.

72 In our judgment the protection in question under section 343(5A) may be against any loss of revenue, which is not de minimis whether or not, it follows from the normal operation of grouping. It certainly covers an artificial scheme but it also covers a straightforward case that would not be characterised as avoidance or abuse, to use Mr. Cordara's adjective.

73 However we part company from Dr Lasok (for the Commissioners) when he says that the word "necessary" is merely causal so that whenever there would be a loss of revenue refusal is necessary to protect the revenue.

74 In our judgment the phrase "necessary for the protection of the revenue" must be considered as a totality and involves a balancing exercise in which the Commissioners must weigh the effect on the Appellant of refusal of grouping against the loss of revenue likely to result from grouping.

…

78 While the considerations in respect of grouping are not the same as those in respect of requirements for security, we consider that the principle is the same and that before exercising their powers Commissioners must in law consider more than whether there is a risk or likelihood of loss of revenue. Put another way, the prerequisite for refusal of the application is that the Commissioners must consider refusal to be "necessary" for the protection of the revenue and that on appeal the tribunal must consider whether in forming their view that refusal was necessary the Commissioners acted unreasonably, took into account some irrelevant matter or disregarded something to which they should have given weight, see John Dee at p 952g."

Mr McKay submitted that the Club Centre of Leeds and National Westminster Bank decisions are inconsistent with each other, and that we should follow the Club Centre of Leeds decision as the proper approach. It seemed to be the source of the reference to "only" in the statutory language relevant in this case. The Club Centre of Leeds approach was properly a narrower interpretation of the language, and was the better approach unless there is some indication in the statutory language that a wider approach is appropriate. There is no such indication here. Nor did the tribunal in National Westminster Bank give any clear reason of principle for adopting a different approach, merely noting "the context was different." The tribunal had, in paragraphs 71 and 72, gone too far in dealing with what it termed straightforward cases. In so doing it was endorsing a power that would interfere with the way in which a taxpayer chose to run its business. That offended the principle of VAT neutrality.

Further, even if National Westminster Bank was correct on section 43, its wide approach should not be transferred to section 43C, the wording of which was more exacting and with a direct financial effect on the company concerned. It was also open to question whether the same approach should be taken under section 43C for the separate reason that the Human Rights Act 1998 was now in force. Sections 43 and 43B stopped a company becoming part of a group. Nothing was taken away from the company by so doing. Section 43C involved depriving a company of an entitlement it already held. If the power given by section 43C were as wide as the Commissioners were arguing, then this would turn section 43C into a charging provision. It would be able not merely to stop a loss of revenue but actually to collect more revenue. That was not "protection".

In reply, Mr Beal submitted that sections 43B and 43C were part of the same set of provisions and were to be interpreted together. Looked at together, no particular significance should be given to the "only" in section 43C on which Mr McKay sought to put weight. Section 43C provided a power to end a grouping election in certain cases and a duty to do so in others, and was worded accordingly. He supported that argument by reference to the purpose of the grouping provisions. They are facilitative and simplifying measures and neither charging provisions nor exempting provisions. This was confirmed by Lord Nolan in the Thorn case at p 1111. This was followed by Buxton LJ in Commissioners of Customs and Excise v Barclays Bank Plc [2001] STC 1558 at paragraph 23, where Buxton LJ commented that "it is understandable, and indeed to be expected, that member states will be afforded latitude in the detailed collection arrangements that they make." It is consistent with that rationale that the facility or simplification could be withdrawn if it were found that the revenue loss was out of proportion to the administrative benefit.

Turning to the National Westminster Bank decision, Mr Beal drew attention to the change of approach of XBP to that case. The appellants had relied on it in the pre-appeal correspondence but were now arguing the reverse of that position. He drew attention to the fact that it was in that case, rather than this, that the tribunal was confronted with the disagreement between previous tribunals although he argued that on closer analysis there was less real difference between the cases than seemed at first sight. In the view of the Commissioners, the approach taken in the National Westminster Bank case is entirely consistent with the rationale behind section 43C and the grouping provisions. There was no mention in the legislation of any further test by reference to deliberate avoidance or contrived arrangements, and they should not be lightly introduced. Mr Beal sought support for that approach from the opinion of Lord Hoffmann in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 335 and, with reference to the use of the term "protection of the revenue", the judgment of Carnwath J in Svenska International Plc v Commissioners of Customs and Excise [1996] STC 1000, 1007. Further, the view taken of the test in the National Westminster Bank case best fitted the natural meaning of the language used. Parliament had used plain language here without elaboration, as compared with the language of the provisions of Schedule 9A to the 1994 Act (Anti-avoidance provisions: groups) which specifically refer to avoidance.

The parties also spent some time looking at the terms of various Business Briefs produced by the Commissioners to explain the operation of these provisions. The first of these is Business Brief 15/99 which refers expressly to paragraph 72 of the decision in the National Westminster Bank case and sets out the Commissioners' understanding of the changes intended to come into effect when the 1999 Finance Bill obtained royal assent. The second is Business Brief 01/2001 which was published as a follow up to the previous brief. The final publication is Business Brief 30/2002, head 2 which describes itself as an "article" providing business with further guidance about VAT grouping structures. All may be relevant in appropriate cases to the question whether the Commissioners of Customs and Excise are exercising their statutory powers properly, but – save in so far as they quote authority – they are no more than the views of one party to this case as to the interpretation of the extent of those powers, and we consider them no further in that context.

However, we accept Mr McKay's argument that the tribunal in the National Westminster Bank case does not substantiate the reasons why its own analysis is to be distinguished from that of the tribunal in the Club Centre of Leeds decision, and we do not find ourselves persuaded by Mr Beal's analysis of the absence of any real differences in the provisions. This is in part because we accept Mr Beal's argument that the words should bear, so far as they can, their natural meaning and we do not see that the "natural" meaning is so sharply different in the different contexts of those cases. We also accept his point that the language of section 43C avoids any specific reference to "avoidance" or similar terms that is to be found elsewhere in the related measures in Schedule 9A. Nor do we consider that the use of "only" in section 43C but not in section 43B adds much to the argument. We therefore feel constrained to consider again the weight to be put on the tests as defined in the two cases.

In so doing, we note that the tribunal in the National Westminster Bank case was adopting a middle ground between two polarised arguments, while the Club Centre of Leeds decision was towards one of those polar limits. Marshington does not assist that analysis, as the point was not fully argued. As already noted, neither party sought to support before us the full extent of the relevant side of those polar arguments in this case, and themselves have moved towards the middle ground. In so doing they accepted to some extent the approach of the tribunal in rejecting both Mr Cordara's submission and Dr Lasok's submission as summarised in paragraphs 71 to 74 quoted above.

Turning specifically to the application of the approach in the National Westminster Bank case to section 43C, we do not consider that the power in section 43C(1) and (2) is limited to "schemes that abuse grouping" although it clearly does encompass artificial avoidance schemes. But we feel that the phrase used by the tribunal in paragraph 72 that "it also covers a straightforward case which would not be characterised as avoidance or as abusive" if read without more and in isolation from its context in the decision, is open to interpretations that do not reflect fully the need for the proper balance of factors relevant to the section 43C power parallel to that stated by the tribunal in paragraph 74. Without seeking to lay down a general rule, we consider that the somewhat narrower approach adopted by the Commissioners, as explained by Mr Warr in evidence to us, expresses the width of the section as we see it. Mr Warr adopted the phrase that the revenue loss went "beyond the normal consequences of grouping". This is the wording used by the Commissioners in the formal direction issued on 16 April 2003 (set out at paragraph 3 above). We do not seek in this decision either to criticise the Commissioners' precise wording as if it were part of section 43C, or ourselves to adopt such wording. But there must, in our view, be something present other than a completely "straightforward" application of the rules before the Commissioners can act to protect the revenue under that section. In the specific context of degrouping under section 43C we would consider that a case that is entirely "straightforward" yet presents a perceived need to protect the revenue is one for legislative rather than executive intervention. For this reason, we do not consider that the wording used by the Commissioners in the formal direction on this point is either wrong in law or inappropriate.

Reliance is also placed by the Commissioners on paragraph 74, although not in the formal direction. That needs to be subject to further consideration before being applied here. The balancing exercise involved in depriving a company of a grouping election that the Commissioners have previously allowed is not the same balancing exercise as is needed to decide on allowing the company to join a group. It must involve consideration not only of the effects of a refusal of grouping for the future but also the additional effects involved in removing an existing grouping. It might also require account to be taken of how the original balance was struck in allowing the company to join the grouping in the past (in this case as a dormant company), the expectations that thereby arise and what, if anything, has changed since.

Subject to those comments, and to the need to recast the balancing exercise set out in paragraph 74 for this purpose, we follow the wider approach of the National Westminster Bank case rather than the narrower view of the Club Centre of Leeds decision.

The Commissioners' decision

With that approach in mind we now turn to consider how the Commissioners decided to issue the formal notice that underlies this appeal, and the terms of the direction itself. Full evidence of the decision and of the decision making process was given by John Stephen Gerard Warr, a policy manager with the Commissioners, supported by full documentation. He was the officer that took the decision that the formal notice be issued on behalf of the Commissioners. Karen Pittis, the officer who actually issued the direction, did so on his instruction.

Mr Warr first explained the significance of the Business Briefs. The first was issued in pursuance of an undertaking to Parliament during the passage of the 1999 Bill. The subsequent elaboration of that guidance followed requests from Ministers for further clarification. In Business Brief 15/99 the Commissioners had adopted the definition of "protection of the revenue" from paragraph 72 of the National Westminster Bank decision and had stated "we will not normally use our revenue protection powers when we consider that the revenue loss follows from the normal operation of grouping. It then added:

"When deciding in any particular case whether to refuse a VAT group application, or to expel a company from a VAT group, we will bear in mind the decision in National Westminster Bank."

The brief then sets out paragraph 74 of that decision, and follows this with a discussion of the evidence it will seek.

Business Brief 01/2001 was published as a follow up to the first brief. That notice was issued on 10 January 2001. Mr Warr told us that the Commissioners had not used the section 43C powers following enactment, and they had issued the Brief as a reminder that the powers were there. It might also be viewed as a general indication before action under the section. The Brief starts:

We are aware that some businesses have adopted structures that enable them to include a supplier and a customer from different organisations in a single VAT group. Typically this is achieved by ensuring that the holding/subsidiary company relationship necessary for VAT grouping is in place between supplier and customer, even though the supplier is in reality run by and for the benefit of an independent third party and that third party provides almost all the investment to the supplier. By adopting these structures, partly exempt customers are able to obtain goods or services without incurring irrecoverable input tax.

The Brief goes on to give five reasons why "we consider that such contrived structures result in revenue loss that goes beyond the normal consequences of grouping." It then announces that the Commissioners will be writing to companies who appear to be involved in contrived structures.

This briefing was issued before the launch of the Green Sea Project and before the Commissioners became aware of its existence. It predates the correspondence between the parties and is obviously written without any knowledge of the circumstances that have led to this appeal. It was also on the public record before the Green Sea Project was finally launched. We note that the wording "by and for the benefit of a third party" in the paragraph from the Brief quoted above is used in the formal direction to XBP (paragraph 4 above). We also note that the phrase "contrived structure" is not so used.

The third Business Brief, 30/2002, was issued in November 2002 and is therefore directly contemporary to the ongoing discussions that led to this degrouping notice. This goes into greater detail about the Commissioners' understanding of the powers in section 43C. However, it was published some time after correspondence started between the parties in this appeal. The appellants raised points about the extent to which this Brief served to assist the Commissioners in this case. Our view is that the Brief did, as intended, expose some of the Commissioners' thinking on section 43C, and the Commissioners' view of the interpretation of the legislation. But the formal direction issued by the Commissioners under appeal in this case neither expressly referred to nor quoted anything in this Brief that was not in the earlier Briefs. Nor did Mr Warr seek to justify this decision in the express terms of the Brief. In our view the terms of the Brief do not and cannot either widen or narrow the terms of section 43C itself, and we do not therefore consider it of further assistance in deciding this appeal.

The Business Briefs do not replace formal determination of the meaning of the legislation by the tribunals and courts. Nor do we consider that they replaced the Commissioners' specific decision of this case. But they do suggest the respondent's starting point in the exercise of its powers. We note that Business Brief 15/99 does not seek to take as wide an interpretation of the National Westminster Bank decision as could be taken on the basis of paragraph 72 in isolation. Mr Warr confirmed this in his evidence. As we have commented above, we see no significant difference between that approach, as explained in his evidence, and our own. We also note that the Brief does not fully reflect in its reference to paragraph 74 the additional elements that we consider to be involved in a degrouping decision as against a grouping decision. Nonetheless it provides the taxpayer with guidance as to the evidence to be presented. We do not consider much significance attaches to the third Business Brief in this case for the reasons given above.

With reference to the XBP degrouping notice, Mr Warr explained that a decision of this sensitivity was taken at national level, although the decision was sent to the appellant by a local officer (in this case Karen Pittis). He took us through the decision making process. This had started very promptly after the launch of joint venture. A first letter, asking for "quite a lot of information" was sent to Barclays from the Commissioners' Large Business Office London on 20 February 2002 (the launch being on 1 February). It was acknowledged promptly and an extensive reply was sent within a month. There is then further correspondence following a meeting that July. This included an early indication of the thinking of the Commissioners:

At our meeting I understood you to agree that there was no other purposes to including the partnership within the VAT Group other than to avoid a charge of tax on the supply of IT services by the partnership to the Barclaycard divisions. Can you confirm this please? In principle we regard such a scheme as abusive and we are currently taking advice from our policy department." [Letter to Barclays, 26 July 2002].

Immediately following this, an officer reported to the Policy Group on these discussions with XBP and their background and asked a series of questions about both 73 Ltd (as it still was) and the other dormant companies in the Barclays VAT Group. An emailed reply offers guidance on the additional information to be sought from Barclays and the advice that "motive is not the issue", and further information was sought. A very extensive reply was sent by Barclays to the Commissioners on 6 September 2002. This not only provided the Commissioners with further information but also set out arguments why XBP should be allowed to remain within the Barclays VAT group. This expressly challenged the understanding noted in the letter quoted in the previous paragraph.

A formal request for agreement that XBP be excluded from the Barclays VAT Group was made within the Commissioners in a fully argued report dated 14 October 2002. It analyses and comments on the case set out in the letter of 6 September. It identifies the revenue cost of the grouping as £15 million over 5 years but notes no identification of precise costs to Barclays or XBP of degrouping. This led to a further recommendation by the Policy Group. The recommendation is that, subject to seeking further information and considering any representations made in response to a formal warning about exclusion:

Although XBP meet the "control" and "establishment" conditions for group treatment, I am satisfied that XBP does not have the close organisational, financial and economic links with Barclays intended by the Sixth Directive. This A-B share scheme is an example of an abusive grouping. This structure made revenue implications difficult to gauge when the original group application was approved. However, revenue loss has become unacceptable with the Commissioners losing around £3M per annum. Subject to the response to the representative-notice letter of direction … I recommend withdrawing XBP from the Barclays VAT Group, as it is clear that VAT has been the driving force for the set-up, and we need to ensure equity of treatment between all traders. Removal can be enforced from a current date, under section 43C(1), or we could consider using Schedule 9A to remove the SPV from the date it joined the group. I suggest we use section 43C(1) in line with Jack Warr's submission to the EST dated July 2002.

Comments were added by another officer dealing with profit, revenue loss, control and administrative costs. On 30 December 2002 Mr Warr endorsed his agreement on the correspondence. The pre-notice letter was sent. There was a prompt reply, a request for further information, also dealt with promptly, then further correspondence and a further meeting. Finally, on 16 April 2003 the formal notice was sent to XBP.

We have set out the exchanges that took place at some length because we are entirely satisfied that the Commissioners' approach to the issue of this notice was in procedural terms considered, deliberate and carried forward with full notice to the affected company and group. The company and group were given full notice of the views of the Commissioners about the degrouping and full opportunity to supply the Commissioners not only with all information considered relevant but also the opportunity to rehearse the legal and administrative reasons why they felt that the degrouping notice should not be issued. We also record, although it is not directly in issue, that the Commissioners did not seek to move under Schedule 9A, with retrospective effect, but under section 43C with only prospective effect from a future date on which the degrouping occurred. Further, the Commissioners declined to take any action against any other company within the Barclays VAT group although that had been considered with regard to other dormant shelf companies at an earlier stage in the process.

In the light of those findings, we expressly reject XBP's submission that the Commissioners did not allow themselves the opportunity to obtain full information from the appellants. We do not see, in particular, what purposes would have been served by the Commissioners meeting with the full board of either XBP or Barclays. But we also take the view that little or no weight attaches to the criticism by the Commissioners that XBP could have sought guidance from them about the nature of the Barclays VAT group. XBP did not fail at any stage to keep the Commissioners informed or to respond to the Commissioners' requests for information and views, and the Commissioners as we have noted conducted their consideration transparently. In particular, the appellants at no point failed to provide full information, and at no point were they required or invited to take some step that they did not take.

We further take the view that the Commissioners should not be criticised for views expressed by their officers during the process of decision making in the context of continuing correspondence and meetings. What matters is whether the final decision, and the reasons for that final decision, stands up to scrutiny. We therefore pay attention particularly to the actual reasons given in the formal direction and also the evidence given by Mr Warr in support of the direction.

Judged on that basis, did the Commissioners take into account aspects of the case that were irrelevant or left out of account aspects that were relevant? We have set out above our view that "relevance" is to be determined by reference to the balancing exercise that has to be performed by the Commissioners in deciding whether to use the section 43C power to exclude XBP from the VAT group to which it belonged. Following the view we took of the National Westminster Bank case, this involves not only the potential loss to the public revenue but also the effect of both removing an existing group membership and also leaving XBP outside that group in the future.

Besides the above, the appellants' main criticisms of the Commissioners' decision are that the Commissioners did not take fully into account the true position with regard to XBP, that they were unreasonably inflexible in the way the decision was taken, and/or that they were unreasonably disproportionate in their actions and/or took the decision in a context of unreasonably uncertainty.

Mr Warr gave evidence of the factors he took into account in making the formal decision degrouping XBP. He confirmed that Barclays had not sought any guidance about the joint venture before undertaking it. He also indicated that there was some official concern about lack of certainty in the operation of the existing legislation.

Mr Warr was subject to extended cross-examination on the decision under appeal and the factors taken into account by him in confirming that the degrouping pre-notice and notice be issued.

He was asked in particular about the document exhibited as JW1 (Record of decision making process and factors taken into account). He was asked why the commercial justification for the joint venture was not mentioned in that document. He replied:

"… I entirely accept the commercial rationale for Barclays setting up a joint venture. I mean I have read the various documents that support that and there is a wealth of it here, but what I am saying at the end of the day what this evidence establishes is the commercial rationale for Barclays to operate these arrangements through a joint venture.

Where the Commissioners take issue is that we say that effectively because this joint venture is run by and for the benefit of the third party we think that we are entitled to use our revenue protection powers to remove the company from the VAT group because it has the effect of having a supply, a third party supplier in substance and reality within the Barclays VAT group, within the customers VAT group. Therefore we take the view that that is a loss which goes beyond the normal operation of grouping that I –

Q: Can we just pin you down on a sort of one word answer? Commercial motives and structure, relevant or irrelevant to your decision?

A Not relevant to the decision to remove the company from the group in the sense that it is relevant to the setting up of the JV."

Later in the evidence Mr Warr was asked to comment on the statement by a subordinate officer referring to the present case that "this is an abusive VAT structure that ought to be unpicked". He was asked whether there was any tension between this view and the acceptance that there was a commercial reason why Barclays had a 51% shareholding in XBP. H replied:

"I did not think in those terms as of whether there was a tension because I made my decision not on the basis as to whether this was abusive, but I made my decision on the basis that there was a revenue loss that went beyond the normal operation of grouping. Whether you refer to that as abusive because it widens is, in many ways, in the eye of the beholder. One man's tax planning may be another man's tax avoidance.

Q: So you did not ask [the subordinate officer] why she had adopted this view?

I did not, in the sense that it was not relevant to my decision because, as I explained earlier, I accept there is clear commercial rationale behind the formation of the JV; the Commissioners' objection is the JV being in the VAT group.

I think to explain that better, in my mind the revenue protection powers can be invoked where a result leads to a loss of revenue that goes beyond the normal consequence of grouping. There does not have to be an avoidance intention here.

So, in other words, even if such a loss were derived from commercial arrangements, if in fact the Commissioners can reasonably, obviously reasonably, form the view that it is a loss which goes beyond the normal consequences of grouping, there does not have to be avoidance intention, sir.

So we are not saying in this case that this is avoidance. We are simply saying it is a loss that goes beyond the normal consequences of grouping.

Having read Mr Warr's extensive statement and evidence, and having heard him examined fully, we accept his evidence as an account of what he, as the key decision maker, took into account and did not take into account in authorising the degrouping notice. We accept that the revenue loss of which he was advised (£3 million a year for each of five years) was the best available estimate at that time of the reduction of VAT received from the group as a result of the grouping. This clearly constitutes a significant revenue loss of the kind that would give a reasonable Board of Commissioners cause to consider using powers to protect the revenue. We do not consider that this can be looked at as additional revenue rather than lost revenue. The test, properly applied by the Commissioners, is what revenue would have been received if the company were not within the group, as against the revenue received if it remained in the group. Although the appellant questioned whether this was revenue lost, neither party questioned the figure of £3 million a year. It is also clear that this figure derives directly from the supplies made in-group in a partly exempt group. Those supplies would, had the supplies been made to the group, have been subject to VAT of which the group, because of its partly exempt status, would have been able to recover only a little. So both quantum and basis for protecting the revenue are clearly present. The prior condition for activating section 43C was therefore present.

That being so, the other points to be considered by us in applying the John Dee test are "whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they have taken into account some irrelevant matter or had disregarded something to which they should have given weight."(See paragraph 27 above).

The tribunal unanimously takes the view that the appellants have not shown that Mr Warr's decision on behalf of the Commissioners was unreasonable in that sense.

We have already indicated that we did not accept the argument that the Commissioners did not fail either positively or negatively to take into account anything that the appellants wanted taken into account. In a case like this, where the Commissioners have acted transparently in their processes and where the appellants were represented at the highest professional level and where additionally the individuals acting for each side had a professional relationship each with the other, we think it fair to assume that the taxpayer would put forward any relevant argument and that the Commissioners would consider it. In this case we are satisfied that both these processes happened.

We also reject the argument that Mr Warr formed his view on the basis of a misinterpretation of the test in section 43C. We set out our view of the test above. It is essentially a balancing act. The appellants both in their submissions and their questions sought to make the decision look like an anti-avoidance decision and then to argue that the actions of the Barclays group were not avoidance actions. We have accepted that the power is wider than that although not as wide as the wide interpretation given to the similar wording in the National Westminster Bank case. We also accept Mr Warr's evidence that – notwithstanding some of the phrases used by his subordinate officers – he did not view it in those terms. Having heard from Mr Warr, we accept that he took a view about these arrangements on their facts rather than on a general economic approach, notwithstanding that various Business Briefs might have carried a different view. And we also accept that he was not imposing any of the tests elaborated in Business Briefs – but not in the legislation - on this particular case, although his subordinates sought to do so. For that reason also, we reject the argument that the Commissioners decided the case inflexibly by reference to their published views in those Briefs. That being so, we see no reason to express any further view on the wording of those Business Briefs than we have done above.

Mr Warr formed the view that the loss of revenue of £3 million a year beyond the ordinary consequences of grouping in this case and that, notwithstanding that the arrangement that gave rise to this revenue loss was fully justified as a commercial arrangement, the loss to the public was not counterbalanced by any equivalent loss to the taxpayer or the group. That balance, as we have emphasised, was a balance to be struck by reference to the fact that the taxpayer was being removed from a group, not merely refused admittance to one. We accept Mr Warr's evidence on this also. It is clear from the exchanges between the parties that his officers were fully aware of this context.

The picture presented to us was one of elaborate preparation for the launch of XBP in what was clearly a carefully considered structure adopted to deal with a number of commercial and other risks or potential risks. During the course of this process 73 Ltd was changed from a dormant shelf company which had been accepted by the Commissioners as a member of the VAT group of the parent company that owned all its shares into a company with changed name, objects, articles, and share structure operating within the grouping of one major public limited company for some purposes and the grouping of another major public limited company for other purposes. In particular, the accounts were consolidated with, and organisation and control was exercised by, Xansa. While Barclays maintained a majority shareholding (and therefore kept the company within its grouping for company law purposes) and put and call options over the other shares, it was in the context of an elaborate detailed set of agreements and a shareholding arrangement that dealt with profits in a specific way. The staff issue clearly caused concern, but was not straightforward in that at the start 73 Ltd had no staff. They were employed elsewhere in the Barclays group of companies. Nor is it clear that it had any significant levels of staff until after the rollout when the staff, as XBP staff, were in the Xansa employment group. The steps were taken with considerable care in order to control and minimise risks. These included the need to be fully commercial, the need to comply with any regulatory requirements, the need to ensure that all risks were properly controlled, and the need to ensure staff loyalty. But none of those required XBP to be part of the Barclays VAT group, as its witness accepted save in so far as there was also a VAT risk.

We consider it significant that the project literature did identify a VAT risk, namely that of degrouping.

If this was an entirely straightforward transaction, why was that seen as a risk? But our findings on these issues are not the critical matter. What is important is the basis on which the Commissioners could and did consider the matter.

For XBP it was argued that the Commissioners were imposing an anti-avoidance rule in disguise. It may be that if the decision making process had stopped at an earlier stage, or had rested on some of the submissions made in the process that gave rise to the eventual degrouping notice, then the appellants argument about inflexibility or failure properly to consider the test would have been on stronger ground. There is some weight in the appellant's criticisms that some of the letters that formed part of the decision making process appear to rehearse one side of the argument more fully than the other. We also do not find the phrase "contrived structure" that surfaced during the correspondence of much assistance. For a start, it is ambiguous. In one sense, every structure is contrived, and the phrase is duplicative. In another sense it attaches an emotive overtone to the term "structure" without indicating why that overtone is used. That is also not of assistance.

The decision making process did not stop with those letters, and the phrase "contrived structure" was not used in the formal direction. The decision was taken at national level after further examination and discussion, and in particular after giving the appellants not one but two further chances to deal with the issues raised. As a result, also, the appellants had full notice of the Commissioners intentions and could not claim (and did not claim) that the decision was one that took anyone by surprise or created any additional disadvantage by short notice. It may also be that if the outturn of the Commissioners' decision involved or purported to involve a decision that was effectively retrospective - and so required the appellants to repay VAT that was not paid while the grouping was in effect – there would have been an additional element to be added to the balancing exercise. But that was not so here.

There was some discussion during the case of the adverse effect of the decision to degroup XBP as compared with action against similar, or possibly similar, arrangements within other similar VAT groupings. While both parties appeared to be aware of details of comparator cases, they could not and did not put them before us. And while the appellants were entitled to explore whether this was any part of the Commissioners decision, we are satisfied from Mr Warr's evidence that the Commissioners were seeking to apply a consistent view to section 43C. The application of the approach to the appellants and to their rivals was consistent if not identical in effect. There was also some discussion of the original decision of the Commissioners to admit a shelf company into a VAT group when it was not trading, but this matter was not pursued by either party and the tribunal therefore also takes that matter no further.

We turn finally to the argument rested by the appellants on the Human Rights Act 1998. We understand that argument to be based on the fact that the National Westminster Bank case was decided before the Human Rights Act 1998 came into effect. It was submitted for the appellants that had the tribunal in that case been presented with arguments reflecting the Human Rights Act 1998 it would have been required to take a different view to the view it took on the issue of proportionality between the revenue loss and the effect on the individual taxpayer.

This argument was not strongly pressed before us. Nonetheless the Commissioners accepted that the decision should be examined to see whether it complied with the principle of proportionality as required under the case law relating to Article 1 of Protocol 1 to the European Convention on Human Rights. Article 1 of Protocol 1 requires respect to be given to the peaceful enjoyment of possessions. That right is expressly subject to the right of a state to secure the payment of taxes. We heard no detailed argument about the extent of that right beyond the need to consider proportionality. We have already noted that section 43C requires a balancing act, and that this must take into account the full cost effect on the taxpayer. That is an issue of proportionality that arises in our view from the legislation itself. We see nothing added to that by reference to the Human Rights Act 1998. We have already indicated that we did not accept the appellants' arguments that the case involved applying European law principles. But if we had, we would nonetheless agree with the Commissioners' submissions that this required no more than was already required by the legislation. Counsel for the Commissioners referred under both issues to a margin of appreciation. But again, that is in our view what John Dee requires us to respect as a matter of United Kingdom law.

We conclude therefore that the interests protected by the fundamental rights in the European Convention on Human Rights and the Human Rights Act 1998 are already fully protected by domestic law, and that therefore these do not add to the appellant's case. We were rightly reminded that this degrouping exercise is a policy decision. The European legislation leaves the issue of grouping to the national states. Parliament has dealt with this particular problem arising from grouping by giving the Commissioners a number of conditional discretionary powers, including the power to degroup under section 43C. We must respect those forms of delegation. We are empowered to review that discretion in a limited way. We are asked only to decide if the Commissioners (or in this case Mr Warr acting for the Commissioners) carried out the exercise of the power reasonably and within the powers granted. We are entirely satisfied on the facts that he and they did. We dismiss the appeal.

DR DAVID WILLIAMS

CHAIRMAN

Released: 1 October 2004

LON/03/422