United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19015

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Abercromby Motor Group Ltd & Anor v Customs and Excise [2005] UKVAT V19015 (12 April 2005)

19015

Value Added Tax – classification of supply – motor vehicles – bonus paid by manufacturer to dealer – discount given by manufacturer to dealer whether to be accounted for on input or output tax – relevance of practice adopted by manufacturer and dealers. Input tax – time limits – whether Reg 29(1A) VATA 1999 applicable to input or output tax.

EDINBURGH TRIBUNAL CENTRE

ABERCROMBY MOTOR GROUP LTD

AND

LINN MOTOR GROUP LTD Appellants

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: (Chairman): T Gordon Coutts, QC

(Members): Mr K Pritchard, OBE., BL., WS

Mrs Helen M Dunn, LL.B.

Sitting in Edinburgh on 24, 25 and 26 January 2005

for the Appellants Mr Heriot Currie, QC

for the Respondents Ms Valentina Sloane, Counsel

© CROWN COPYRIGHT 2005.


 


DECISION

Introductory

The Appellants who operated as retail motor vehicle distributors and dealers during the time under consideration in the present appeals had an extensive Scotland-wide business operating through various dealer companies, all of which finally ceased to trade in 2003. The issues affecting the Appellants were, however, the same and the decisions in principle which we make affect both. The second Appellant in 1996 was purchased outright by the first.

Subject Matter of Appeal

The Appellants, founding upon decisions of the ECJ commencing with Elida Gibbs Ltd v Customs & Excise Commissioners 1996 STC 1387; Commission v Italian Republic 1997 STC 1062; Marks & Spencer Plc v Customs & Excise Commissioners 2002 ECR 1-6325; Grundig Italiana SPA v Ministero delle Finanze 2002 ECR 18003 and University of Sussex v Customs and Excise Commissioners reported at 2001 STC 1495 and, on appeal, at 2004 STC1, formulated and presented various claims, by way of voluntary disclosure, for overpayment of Value Added Tax either as an over-declaration of output tax or an under-declaration of input tax. These cases are further referred to below.

The disclosure was, at first, rejected but later allowed in part. The Tribunal was asked to adjudicate upon aspects of the claim as matters of principle.

Evidence

The Tribunal had oral evidence from Mr Alaster Cunningham the Managing Director of Abercromby, for the Appellants. Mr Roy Docherty an officer of the Respondents engaged in their large business group was led for the Respondents. He had been particularly assigned to deal with and resolve the difficulties in claims of the nature presented to the Tribunal by the Appellants on a nationwide basis.

There was produced to the Tribunal a considerable volume of documents as evidence or by way of reference most of which, for the reasons hereafter noted, did not provide significant assistance in resolving the question put to the Tribunal

Findings in Fact

The Tribunal, principally from the evidence of Mr Cunningham, which they accepted, was informed of the Appellants' method of business. Mr Cunningham gave a history of the corporate progress of the Appellant group, of which he was and is Managing Director and sole shareholder, but no particular significance attached to that history other than as a guide to the documents produced. The number, variety and duration of dealerships operated by both Appellants could be seen in those documents. There was no general pattern.

The Appellants operated several retail dealerships under various franchise agreements with major manufacturers. These dealerships were not always separate legal entities but all were owned and operated by the Appellants. The Appellants carried on dealership operations by agreeing to act as retail dealers for the sale of vehicles and parts in the territory defined under the various franchise agreements. These agreements also set out the manner in which they were expected to carry out the dealership operations.

An integral part of the operation of a retail car dealership involved the purchase from manufacturers and the eventual onward sale to retail customers of "demonstrator vehicles".

The arrangements involved the dealer undertaking to register for road use, keep and maintain in good order, demonstrator vehicles according to an agreed annual objective. This would usually attempt to set out the numbers of vehicles to be kept in stock including specifications as to types and models. The objective would also attempt to stipulate the number of sales to be achieved. It would also provide, in respect of demonstrator vehicles, that the manufacturer might determine from time to time the number of such vehicles kept and the amounts of any bonuses, discounts or incentives to be granted to the dealer in relation to the sale of those vehicles to the customer.

The demonstrator vehicles were primarily used by the dealership as selling tools and as test drive vehicles. Employees would also be permitted to use some of the cars as if they were company cars. These would be, as a rule, senior staff and sales staff. It was normal to have more demonstrator vehicles than qualifying company car staff, and in order to establish a valuable relationship, with the manufacturers it had to be an aim continually to exceed the annual sales volumes imposed or sought to be imposed by the manufacturer.

A way was devised to achieve this without the dealer having to fund the carrying of extra registered vehicles entirely from the dealer's own resources. This was done by maximising the number of otherwise funded demonstrators at any time and to turn these over as often as possible.

Another reason for turning the vehicles over as often as possible was to ensure that mileage recorded on the vehicle did not get too high and so prove an impediment and give rise to difficulty in selling. Mr Cunningham said that his policy was to change each demonstrator 4 times a year if possible.

Mr Cunningham on 20 January 2004 at a meeting with the Respondents acknowledged that the view of Customs and Excise was that 3 demonstrator changes per annum was a reasonable annual average. He explained that he felt that the figure which was claimed of 4 times a year for his company was accurate, but that a figure of 3.5 could be considered as a compromise.

Mr Docherty explained the origin of the figure of 3. This was an average which he had derived after consultation with the Society of Motor Manufacturers and Traders and other dealers and after considering with them such documents as could be obtained from various dealers. He explained that the figure achieved by that method was slightly under 3. However 3 was adopted as one which would be accepted by the Respondents without further proof and would be a "fall back" level in the event of a deficiency of proof that any other figure was appropriate.

Mr Cunningham in cross-examination admitted that he had no in-depth knowledge of VAT or the treatment by the Company's Accounts Departments of demonstrator vehicles on a day to day basis. He therefore acknowledged that although he was confident that 3.5 would be correct he was unable to show that 4 or even 3.5 in fact appeared from the evidence available and before the Tribunal.

Ms Sloane put to Mr Cunningham various specific items in the productions; for example, while page 705 indicated that a particular Toyota vehicle was anticipated as being held as a demonstrator for between 1-4 months, page 704 proved that the vehicle had been registered on 1 August and sold on 16 January the following year. Page 585 also appeared to show an average of about 4 months between registration and sale for road vehicles kept in stock at the time and at the location specified on the document.

Another issue which had been raised in the correspondence between the parties was whether figures of vehicles involved deduced from an Inland Revenue declaration of car use by staff should prevail over various entries in management accounts.

However the Appellants at proof were unable to displace the use of the Inland Revenue Accounts as appropriate. The Tribunal had no evidence from any management accountant, salesman, garage manager or the like to supplement or make good the lack of written or documentary evidence or to support the accuracy of management accounts as against those given to the Revenue as being accurate at the time they were given. The Tribunal accept that the lack of documentary evidence in this case is a natural consequence of lapse of time and that no pejorative inference can be drawn from that absence.

In a history of the somewhat ill tempered discussion between the parties, evidenced in the correspondence produced, it seemed that Customs had at one time appeared to adopt a somewhat obstructive approach. That is further echoed in paragraphs 10.3 and 10.4 of their Statement of Case where there appears to be a paramount insistence on documentary evidence alone. It should be noted that while Regulation 37, which applies, of the VAT Regulations 1995 requires reference to documentary evidence that in no way precludes oral evidence being led and accepted by a Tribunal on any matter of fact at issue whether or not there is an extant document.

Decision on the appropriate number to be taken

Since such documents as could be produced were neither clearly explained nor obviously self evident, they could only be relied on at best to indicate a level of turnover which might support the suggestion of 4 or 3.5. Because Mr Cunningham admitted that he couldn't prove either figure, the matter must, in our opinion, rest upon the average accepted by Customs and Excise as applicable to the trade as spoken to by Mr Docherty. The figure of 4 was so far as the Appellants were concerned – "aspirational". A fortiori so far as the second Appellants were concerned, there was no direct evidence at all.

We accordingly find that on the balance of probabilities it is not established that any figure other than 3 for turnover of demonstrator cars is appropriate.

Bonus Payments

In relation to this matter the claim is for tax said to have been overpaid before 1996. The question put to the Tribunal, whether that overpaid tax was properly input tax or output tax has no effect upon the overall amount of tax secured by the Commissioners before 1996. The question now arises, because refunds of tax have been sought and different regimes have been adopted for payment to the trader of tax not properly due to Customs and Excise, depending upon whether the tax is classified as output tax or input tax. The importance of the classification (adopted post Elida Gibbs) is that it is an attempt to bar a trader obtaining a payment of tax of which he should not have been deprived, according to whether it is treated as input or output tax.

In the present case it was a matter of concession that before the decision in Elida Gibbs, Customs and Excise treated bonus payments given by a manufacturer to a dealer on sale of vehicles whether fleet vehicles or demonstrator vehicles, as output tax. This fact, that the tax when accounted for was treated as output tax was founded upon by the Appellants who argued that since what was in fact paid at the relevant time was output tax it is that output tax which should be repaid.

In response it was submitted in writing for the Respondents:-

"Prior to Elida Gibbs, the Commissioners considered that payment of bonuses by the manufacturers directly to dealers should be treated as consideration for supplies to services made by the dealers on which they should account for output tax. However, while some dealers did issue invoices and account for output tax, many manufacturers and dealers disregarded the Commissioners' view. Instead, the bonus was paid by way of credit note. The dealer deducted the amount of bonus from the purchase price of the vehicle and deducted the VAT on the credit note from his output tax credit, i.e. he reduced the amount of input tax he was claiming. On the basis of this widespread practice and in the absence of evidence that the dealer did in fact account for output tax instead, the Moderation Team has treated claims for bonuses paid by way of credit note as falling within Regulation 29.

The fact that the dealer and manufacturer should have treated the VAT as output tax on a supply of a service is irrelevant. It is what the parties did, as a matter of fact, which is relevant. Where the dealer received a credit note and adjusted his input tax, his claim is one for under-claimed input tax".

However the Tribunal is unable to find evidence before them which is conclusive of any standard practice on the matter and in particular whether in relation to the various dealerships operated by the Appellants the dealer's bonuses were paid after a tax invoice was submitted or accounted for and so paid by way of a credit note. It is clear that some payment involved invoices e.g. Rover vehicles, and that some may have been paid by way of credit note (Toyota). However at page 705 of the productions a mechanism is shown in one document relating to a Toyota vehicle. That document "requests" an amount of £500. It was not on its face a VAT invoice but the invoicing may not have been reached at that stage and the document itself bears the message that it was to be transmitted to Toyota Finance Department for payment i.e. not for the issue of a credit note.

In the opinion of the Tribunal applying first principles to the payment of the bonus in this case, it is correctly described as a payment for a service. The service of selling that manufacturer's vehicle as opposed to any other is performed for the consideration of the bonus and is therefore properly output tax. The Tribunal sees nothing in the Elida Gibbs decision to support Customs' revised interpretation of the transaction, at least with regard to demonstrator bonuses (whatever may be the situation on fleet discounts).

Elida Gibbs was concerned with a situation where a bonus was paid directly to the customer. The court considered that too much tax would be paid if the price was not reduced by the voucher price. It does not appear that any service was provided by the retailer in Elida Gibbs to the manufacturer or to the customer in relation to these vouchers other than accepting and accounting for the voucher as part payment. That sequence of transaction was of no financial benefit to the trader, other than possibly as a result of the benefit of some customers being attracted by the manufacturer's bonus and so a lower price, to purchase the article at all. The benefit of the manufacturer's bonus went directly to the customer. In the present context the bonus goes directly to the motor trader and not to the purchaser of the vehicle. Although it could be that the purchaser of the vehicle might benefit financially to some extent from the whole system of sale adopted by the trader, in no sense could the customer be regarded as having some bonus or a type of "money-off" coupon.

Accordingly the Tribunal determines that in relation to the refund of tax claimed, it was at the time considered by both parties to be output tax and was paid or accounted for as such. That situation was not changed by the decision in Elida Gibbs and on the facts in the present case the tax remains properly classified as output tax. The issue of a credit note in this context is in the opinion of the Tribunal no more than an accounting mechanism, tax definition neutral, whereby the manufacturer and dealer organised how they were to pay and be paid the bonus. The very use of the word "bonus" indicates that something is earned whereas a discount does not obviously connote earnings.

In any event a payment which was made to Customs of output tax as then determined by them, cannot, it appears to the Tribunal, appropriately be changed by them even if in some instances the way in which the matter was accounted for between the manufacturer and the dealer was by way of credit note.

Accordingly the distributor bonus before 1996 was and remained output tax and does not therefore fall within Regulation 29 of the VAT Regulations 1995.

Would a bonus claim be time barred under Regulation 29(1)(a)?

On the above view the question of time bar does not arise but, since the matter is of general importance, and may be further considered by a higher court it is appropriate that the Tribunal express a view upon whether the 3 year time limit imposed by that Sub-Section applies or indeed, is lawful.

The Appellants contended that if Regulation 29(1)(a) applied it should not be given effect because the manner of its introduction contravened the principles articulated by the ECJ in Marks & Spencer v Commissioners of Customs & Excise, 2002 STC 1036.

Paragraph 38 of that Decision states:

"Whilst national legislation reducing the period within which repayment of sums collected in breach of community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new legislation period is reasonable but also that the new legislation includes transitional arrangements for allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation".

That principle was extended in Grundig Italiana SpA v Ministero delle Finanze, Case C-255/00 where the court held that a transitional period required to be adequate. In that case a suggestion was made by the Court about the adequacy of a particular period in the particular circumstances. The court however did not substitute their indicative period. They made a finding and the Italian Court required to implement it .

The manner in which Regulation 29(1)(a) eventually appeared in the form it did, is as undernoted. Upon those facts the Commissioners argued that the requirement for a transitional period had been implemented.

[29(1A) - The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made].

The Commissioners put it in this way in written submissions to the Tribunal,

"The Paymaster General announced on 18 July 1996 that, following a review of the refund provisions applying to VAT and other indirect taxes, a three-year time limit was to be introduced for retrospective refund claims. The announcement applied to claims generally and was not restricted to section 80 claims.

In fact, the 1995 Regulations – unlike section 80 VATA 1994 – could not be amended retrospectively and so the time limit had to operate prospectively.

On 25 March 1997, legislation was laid which introduced the three-year time limit for claims under regulations 29 and 34 but the change would not take effect until 1 May 1997.

On 27 March 1997, Business Brief 9/97 explained in detail the prospective change in the Regulations.

Traders were therefore put on notice from 18 July 1996 of the change which took place in May 1997. Moreover, the legislation was enacted on 25 March 1997 and specifically provided for a transitional period until 1 May 1997, when the time limit would come into force. Given the lengthy advance notice given of the introduction of a three-year time limit, that transitional period was reasonable and adequate".

The Appellants argument on that matter was short. There were no transitional arrangements specifically provided in the legislation and no period provided after its enactment for the lodging of claims.

The Commissioners contended that such transitional period was not immediate but was prospective, with the giving of advance notice. Further that even if that transitional period was inadequate, the claim would fall well outside any necessary transitional period. It was argued that Community Law did not render the national legislation unlawful merely because it may dis-apply it in certain circumstances.

Support was sought from a Tribunal Decision, Conde Nast Publications Ltd a decision of a London Tribunal released on 7 December 2004. The basis for the decision appeared to be that since there was no evidence that the amendments introduced to Regulation 29 stopped the Appellant making any claim they were minded that no disadvantage had been shown to that Appellant in the introduction of the time limit without a transitional period and the appeal was rejected. The decision is, it is understood, not surprisingly, under appeal.

Tribunals View on 29(1)(a)

It is the view of this Tribunal that Conde Nast was wrongly decided. It is clear that the introduction of a statutory provision curtailing or cutting out claims requires to have as a pre-condition, in the words of the ECJ, that an adequate transitional period is given. In the present circumstances this was not done. Whatever the Paymaster General may have said at whatever time to Parliament, the critical time for the taxpayer must be the date of the coming into force of the legislation. Viewed from that standpoint there was not only no transitional period in the legislation but such gap between the placing of the legislation before Parliament and its entering into force was on any view wholly inadequate.

It appears to the Tribunal that in the light of the instructions given by the ECJ that an adequate transitional period is an essential element in such legislation it must be determined by the legislators and appear in the legislation. It is not for a Tribunal, and perhaps not even for a court, to speculate about what an adequate transitional period would have been. If that were not so the results in varying cases arising from the same statutory provisions could be different. In the present case, the period allowed for the coming into force of the legislation provided too short a period. For a case to be determined on the applicability of the legislation to depend upon the lapse of time between the coming into force of the legislation and the bringing of the appeal would be absurd. Furthermore it would fly in the face of the requirement that legislation, particularly legislation affecting the rights of a citizen, requires to be certain.

This Tribunal would accordingly have held that the time limit purported to be imposed by Regulation 29(1)(a), since it does not comply with a pre-requisite for such type of legislation, cannot be enforced and is accordingly void.

May the Appellants recover output tax in a period where they were due a re-payment?

If the payments above discussed are correctly classified as output tax then, in terms of Section 80(1) VATA 1994 apply. That provides that where a person has paid an amount to the Commissioners by way of VAT which was not VAT due to them they shall be liable to repay the amount to him. The question has arisen and been the subject of case law in connection with accounting periods in which the Commissioners were due to refund input tax as opposed to receive payment of output tax.

The statutory provision requires payment to the Commissioners and, if it was not due, refund. That is not the same thing as an enhancement of a refund. The person involved, Abercromby, has not paid any sum to the Commissioners. No doubt tax has been paid to the Commissioners and they have received and retained benefit of that but it has not been reclaimed as provided for by the legislation.

In numerous cases there has been discussion about the different regime involved for "payment" and "re-payment" traders. There exists such a different treatment but it is enshrined in statute.

The argument for the Commissioners in that regard was set out in their Business Brief 2/98:

This means that the three year time limit applying to s.80 claims and introduced with effect from 18 July 1996 applies only where money has been paid to Customs for an individual VAT accounting period i.e. where the net figure in Box 5 of a VAT return shows a payment to Customs which has actually been paid. However, where the figure in box 5 indicates that a credit is due from Customs, s.80 does not and cannot apply. In such situations, VATA 1994 s.25 requires Customs to make payments to those businesses which claim a credit on their VAT returns. A credit of any type can only be recovered by a business, after rendering its VAT return, by using the correction of error provisions, i.e. the VAT Regulations, SI 1995/2518, regs 34 and 35. However, from 1 May 1997 corrections of errors for periods more than three years old have also been capped.

The contention for the Appellants was that a claim for VAT overpaid in a tax period which was a repayment tax period was properly made under Section 80. The procedure by which output and input tax are set off against each other, they argued, was merely a tax accounting mechanism and did not affect the characterisation of the over-declaration of VAT as output tax or as a tax paid to the Respondents. The Appellants sought to rely on University of Sussex v Commissioners of Customs and Excise 2001 STC 1495 and the decision of the Court of Appeal thereon at 2004 STC 1. Reference was made to paragraph 150 of the Court of Appeal judgment, which reads:

"..If he pays more tax than he need because he has under-claimed input tax, he has not overpaid tax for that period; the amount paid is simply the result of a mechanism which sets off against what is due from him what he claims is properly due to him..".

The Tribunal is unable to follow the Appellants argument insofar as it based upon the statutory provisions and the cases thereafter.

The Respondents, correctly, directed the Tribunal's attention to an argument that the distinction between a payment and a repayment trader is potentially discriminatory. They contended that that had been considered and rejected by Moses J in Marks and Spencer (1999) STC 205234. However although that passage was cited in the Court of Appeal judgment in Marks and Spencer 204 STC1 at 91-94 and 103-104 it is plain that the Court of Appeal did not decide the point expressly, because it did not arise in the appeal.

The argument that the different treatment between repayment and payment traders in the UK Legislation is discriminatory, has some attraction. If, as was stated in Elida Gibbs, there is a principle which involves the Commissioners not either receiving (or presumably retaining) tax which they plainly should not have, then it might seem that non-recovery discriminates against a trader who, perhaps by chance, has in a given accounting period been unable to obtain the tax credit to which that trader is entitled in terms of the Directive. Another anomaly can, and perhaps does arise if fortuitously a trader has paid some output tax but is entitled to a refund of a more substantial sum of input tax which he has not been able to claim because of the existing state of the interpretation of the law, that person would, presumably, only be entitled to payment of that portion of the tax which did not amount to as much as the input tax, whereas, had he paid more by way of output tax he would get whole sum as credit.

It appears to be arguable that such treatment is distortive, it can lead to some traders obtaining more credit than others on similar transactions and accordingly discriminatory.

That issue was not directly raised by the Appellants before this Tribunal and neither party sought a reference to the ECJ on this specific matter. It may arise only in a limited number of cases. In the present case if the Tribunal is wrong about the classification of the bonus payments as output tax then the question does not arise as a factual issue. It may be thought in an appropriate case before a higher court to make a reference if they agree with the proposition that the distinction between payment and repayment traders is discriminatory and distortive.

Conclusion

The Tribunal was asked to determine the above issues as matters of principle. This they have attempted to do. They were not asked to deal with expenses and, if either party seeks to claim expenses and that matter cannot be agreed that party may apply to the Tribunal for a decision.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE: 12 APRIL 2005

EDN/04/41