United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20695

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Durwin Banks v Revenue & Customs [2008] UKVAT V20695 (30 May 2008)

20695

ZERO-RATING – Food – Linseed oil of high quality – VATA 1994 Sch 8, Grp 1, Item 1 – Appeal allowed

PRACTICE – Issue estoppel – Previous Tribunal decision – No material change in facts – Whether issue estoppel against Appellant – Applicability of issue estoppel in tax appeals - Conflict with EU principle of fiscal neutrality – No question of abuse – Appellant not estopped

LONDON TRIBUNAL CENTRE

DURWIN BANKS Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

MRS J NEILL ACA

Sitting in public in London on 17 March 2008

James Henderson, counsel, instructed by VAT Services Ltd, for the Appellant

Rebecca Haynes, counsel, instructed by the Solicitor for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This appeal concerns the VAT treatment of bottled unrefined linseed oil produced and sold by the Appellant. The Appellant claims that it qualifies for zero-rating as food within Group 1, item 1 of Schedule 8 to the VAT Act 1994. Customs ruled in a decision dated 27 June 2006 that it does not fall within item 1 and is standard-rated in accordance with the Tribunal Decision in Durwin Banks v Customs and Excise Commissioners (2005) Decision 18904, BAILII: [2005] UKVAT V18904

An application by Customs to strike out the present appeal under Rule 18(1)(b) on the ground that the matter was res judicata was dismissed after a hearing in November 2006.

The decision under appeal followed a correspondence in which the Appellant's representative wrote on 26 April 2006 that he was supplying "linseed oil in a form suitable for use as a salad dressing, and for use in cooking" and that "often, it is supplied in a corked glass bottle with a spout for pouring." He wrote that he provides purchasers with recipes and enclosed a sample copy. The decision letter, after referring to the earlier Tribunal decision, included the following,

"… it does not matter how the Linseed Oil is held out for sale, rather it is the product itself that is important. Linseed oil has been ruled as a dietary supplement rather than a food and that (sic) most people will take it for its perceived nutritional benefits rather than for any culinary purpose. We have no new evidence to suggest that there should be any change to that ruling.

Based on the above, I confirm that Mr Banks' product does not fall within … item 1 and is therefore standard-rated."

There has been no assessment because the Appellant has been accounting for VAT, nor has he made a repayment claim. We are satisfied however that the decision does concern real supplies and falls within section 83(b) of the 1994 Act.

Surprisingly no officer attended the hearing and it was unclear how much information Customs had when making the decision. No witness was called for Customs in the earlier hearing either. It would seem that the present Tribunal had considerably more evidence than the decision-maker in either appeal.

The only witness was the Appellant who gave evidence confirming and amplifying a witness statement, which he confirmed, and was cross-examined. Much of his evidence was of an expert nature in relation to linseed oil, however there was no substantial challenge.

We find the following facts.

The Appellant grows linseed on his farm near Horsham from which he produces and sells linseed oil in capsules, glass bottles and plastic bottles. In 2007 he planted 130 acres, compared with 60 acres when he started selling linseed oil six years earlier. He rotates crops of flax with wheat. It is an original variety high in Omega 3.

The Appellant's linseed oil is produced in exactly the same way as extra-virgin olive oil using a cold press. The seeds are pressed gently at under 40º centigrade with no artificial heat and the resultant oil is bottled by hand. This produces a high quality oil.

The oil is sold direct from the Appellant's website, at shows and exhibitions, including the Good Food Show and the Great Yorkshire Show and at farmers' markets. Customers taste samples on pieces of bread. The Appellant said that the majority of people tasting it like it. Customers often compare it with other oils. Customers had said that they love it on vegetables and use it on porridge or yoghurts. Linseed oil is now widely sold in food supermarkets with other oils such as olive oil.

Global sales of the Appellant's oil are around £10-15,000 a month of which about two-third is in capsules. This appeal does not concern capsules. The appeal concerns sales of ½ litre bottles which are rising faster than sale of capsules. The Appellant sells around 250 bottles a month mainly by mail order so as to ensure that the oil is fresh; he intends it to be eaten within 60 days. Plastic bottles, which have a screw top, are sold for £13 inclusive of VAT by mail order or for £10 at shows. Glass bottles with corks are sold at £16 plus postage. The glass bottles which are green are about 9 inches high and are narrow with a spout for pouring. The plastic bottles are about 5 inches high and are a conventional shape. The Appellant sells the residue of the oil for industrial use at £2 a litre.

Since Decision 18904 the labelling has been altered introducing the word "culinary" in the name of the product with a reference to food on the label and omitting references to doses. The label refers to the Omega 3 content. The Appellant produced a leaflet stating that the Omega 3 proportion of the fatty aid content of linseed oil is 60 per cent, compared with 9.6 per cent for rapeseed and 0.7 per cent for olive oil.

He told Miss Haynes that, although he had produced a customer survey at the earlier appeal, he had not considered conducting another survey since it had not been much use last time. It is difficult to question people in the street.

The Appellant produced an article by Rose Prince on Healthy eating in the weekend Daily Telegraph dated 29 September 2007 stating that he had "diversified into growing linseed, cold-pressing the seeds for extra healthy, Omega 3 rich oil to add to salads or drizzle over pasta".

He produced a leaflet which is sent with mail order products headed "High Barn Oils Linseed Oil Omega 3 Recipes and Ideas." This stated that the oil should not be used for frying or roasting and to protect it from damage by heat is best added at the end of cooking. The leaflet contains seven recipes or uses.

The Tribunal tasted a sample on bread and used some on salad and pasta during the luncheon adjournment. We both found it palatable.

The appeal giving rise to Decision 16905 was heard on 12 November 2004. The Appellant was not represented. The Appellant stated certain facts which Customs accepted; he was not cross-examined. The appeal concerned capsules as well as 500 millilitre bottles of linseed oil. The Appellant produced a survey of customers in which 122 out of 166 who returned forms stated that they regarded linseed oil as a food rather than a food supplement.

In that case Customs submitted that it was not food but a food supplement, that there was no evidence as to its palatability, that no evidence had been produced of widespread culinary use, that there was no evidence as to its palatability, that no evidence had been produced of widespread culinary use and that there was no evidence that the ordinary person would consider it to be food.

At paragraph 11 the Tribunal said this,

"The first issue to consider here is … whether Linseed Oil is to be regarded as a food or a dietary supplement in the circumstances of the present case. Whilst we are sympathetic to the Appellant's business and desire to be zero-rated we have to apply the law to the facts as found today. It may be that, in the future, the factual background and public perception can be shown by evidence to be different from the position today. However, there is no clear objective evidence before us showing that the products are such that in Respondents' view is not within the range of reasonable decisions."

Pausing there we observe that the last sentence was not the correct legal test. Furthermore the Act contains no dichotomy between food and food supplements.

At paragraph 12 the Tribunal said,

"The test to be applied is whether an ordinary educated individual or, if one prefers, a broadminded VAT payer who has heard the evidence would regard it as food. In our view, because of the recommended dose and the lack of evidence as to palatability, and that the public at large would regard it as food, we find it hard to regard Linseed Oil as food … We regard this as akin to the Cod Liver Oil in the Marfleet case (1974) Decision 129. Accordingly, we find as a fact on the evidence before us that Linseed Oil is a supplement and not a food both in the form of capsules and when supplied in … bottles."

On 20 November 2006 the Tribunal dismissed an application by the Respondents that the present appeal should be struck out on the ground that the matter under appeal was the subject of the earlier decision. The Tribunal gave a direction; there was no request for reasons. It is not therefore apparent whether the Tribunal decided that the subject matter was not the same, that the principle of res judicata does not apply in a tax appeal of this type or that there was no jurisdiction under Rule 18 to strike-out the appeal on the grounds sought. The last appears the least likely in view of the wording of the direction.

On 8 December 2006 Customs served a Statement of Case which made no reference to res judicata. Since the author of the Statement of Case had appeared at the directions hearing this suggests that Customs at that stage considered that the res judicata issue had been determined.

Both parties served skeleton arguments before the hearing on 17 March 2008. No reference having been made to res judicata meanwhile, Mr Henderson's skeleton argument did not address that issue. In a skeleton served on the day of the hearing Miss Haynes contended that the matter was res judicata.

On 17 March 2008 we heard the evidence and submissions on the facts. We adjourned the appeal for submissions as to whether the 2005 decision was determinative of the matter now under appeal.

Submissions on the merits

Mr Henderson said that at the earlier hearing the Appellant had been under the impression from a letter from the National Advice Centre dated 8 March 2004 that he only had to show that linseed oil was edible. That letter had stated, "if and when an edible variety is produced commercially it will be eligible for zero-rate". That letter had informed his preparations for that hearing. Now there was new evidence and the facts had altered.

He submitted that the Tribunal should consider the product which the Appellant was marketing rather than linseed oil in general. He said that food in Group 1 should be given its ordinary meaning, see Brutus v Cozens [1973] AC 854. He said that the Appellant's product was quite different from the cod liver oil considered in Marfleet Refining Co v Customs and Excise Commissioners (1974) Decision 129. In Ayurveda Ltd v Customs and Excise Commissioners (1989) Decision 3860 the Tribunal reached different conclusions for tablets and bottled herbal fruit concentrate. He said that the concept of food supplement was neither helpful nor relevant. The Appellant's product which was tasty and nutritional and was carefully prepared to be used for culinary purposes was a food.

Miss Haynes accepted that there was fresh evidence but said that there were no different facts. A new shape of bottle and new labelling was not a new fact. Labelling as a culinary product did not make it food if it was not otherwise. It was not relevant that it was sold fresh. There was no direct objective evidence as to wider use as food. She accepted that palatability is relevant. It was necessary to consider what an ordinary educated person, other than the Tribunal, who had tasted the oil and was aware of the evidence before the Tribunal, would conclude.

Submissions as to Res Judicata

Miss Haynes submitted that the principle of issue estoppel set out by Dillon LJ in Arnold v National Westminster Bank plc [1990] Ch 573; [1989] 1 All ER 529 applied. The present appeal involved an issue determined in the earlier appeal and did not involve new facts which were not reasonably available in the earlier appeal. The principles of res judicata in Henderson v Henderson (1893) 3 Hare 100 had been applied by the High Court in Bennett v Customs and Excise Commissioners [2001] STC 137 which concerned VAT.

She said that the decision of the Privy Council in Caffoor v Commissioner of Income Tax [1961] AC 584, where it was held that a judicial decision as to charitable exemption for 1949-50 did not create an estoppel for the subsequent years, was very different from the present case which did not concern assessments. The decisions here did not relate to specific supplies although they did not relate to future supplies as in Odhams Leisure Group Ltd v Customs and Excise Commissioners [1992] STC 332. She said that the rulings were on the basis of the information provided by the Appellant. The decision in 2005 was a decision in principle which raised exactly the same issue and the present appeal. She said that if the appeal had been against an assessment rather than a ruling issue estoppel would still have applied. The position would have been the same if the earlier appeal had been against an assessment. The principle of issue estoppel could not be affected by the fact that the Appellant was unrepresented at the earlier hearing.

Miss Haynes said that the status of the Appellant's linseed oil was not set in stone. If the facts changed, estoppel did not apply. The facts were however essentially the same. The situation in SITA v Customs and Excise Commissioners [2003] V&DR 131 was very different, since the appeal was 30 years after the original decision and there were material changes in that case; this case was at the opposite end of the scale.

She accepted that there were competing public policy considerations between the need for finality at some point and the requirements of fiscal neutrality and the correct administration of the law. She accepted that the principle of issue estoppel is not easy in relation to tax, but said that it could not be correct that an Appellant could re-litigate a matter until he got the answer he sought.

Mr Henderson submitted that res judicata did not apply in principle and, alternatively, that matters had changed sufficiently. If a balancing exercise was required, the Appellant should succeed.

He said that decisions on tax and on rating constituted a well-established exception to the general rules on res judicata, see Caffoor [1961] AC 584 at pages 588-9 and 599 per Lord Radcliffe. He said that the same reasoning applies to successive VAT assessments as to income tax assessments. The same policy considerations should apply to rulings as to assessments. He accepted that successive appeals might constitute an abuse, but this was not such a case. He said that Carter Lauren Construction Ltd v Revenue and Customs Commissioners [2007] STC (SCD) 482 was a rare case where issue estoppel did apply in a tax appeal; it was clear there why for policy reasons it should apply.

He said that the correct approach was set out by Stephen Oliver QC in SITA [2003] V&DR 131 at [68] where he said that in tax cases the principle of finality litigation had been overridden by the need to ensure that tax operates uniformly in particular in the taxation of business transactions.

He submitted that in any event the marketing of the product had changed; this was held to be relevant in Customs and Excise Commissioners v Quaker Oats Ltd [1987] STC 683. Furthermore public perception had changed.

Conclusions

We are satisfied on the material before us that the linseed oil which is the subject of this appeal is "Food of a kind used for human consumption." There was no suggestion that it was not "of a kind used for human consumption." We tasted the linseed oil and found it palatable. The evidence that it is of high quality and is now sold in food supermarkets with other oils such as olive oil was not challenged. It was the subject of an article in the Daily Telegraph last year. The fact that it has a high Omega 3 content does not in any sense prevent it from being food. "Food" is defined in the New Shorter Oxford English Dictionary (1993) as "1. Substance(s) (to be) taken into the body to maintain life and growth, nourishment …"

In our judgment when deciding whether the word "food" as a matter of ordinary usage of the English language covers the Appellant's product, the matter must be approached from the viewpoint of an informed person who knows the product. Such person would take account of the marketing and presentation as in Quaker Oats citing Lord Reid in Customs and Excise Commissioners v Beech Foods Ltd [1972] 1 WLR 241 and 244. He would also take account of the relatively high price which customers pay and the uses for which it is marketed and presumably purchased.

We are satisfied that if a competitor selling the identical product appealed to the Tribunal, adducing the same evidence, he would succeed. It is difficult to see what contrary evidence Customs could adduce.

The real issue is whether the Tribunal is bound to decide against the Appellant because of the earlier decision.

The ambit of issue estoppel was considered by Lord Keith in the House of Lords in Arnold v National Westminster Bank plc [1991] 2 AC 93 in a speech with which all the House concurred. At page 105 he said this,

"Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue."

Clearly a decision giving rise to a right of appeal is analogous to a cause of action. A further decision gives rise to a further right of appeal. The issue is the classification of the Appellant's linseed oil.

At page 107 Lord Keith cited Lord Reid in Carl Zeiss Stiftung v Rayner & Keeler Ltd (No.2) [1967] 1 AC 853 where he stated at page 917,

"… there is room for a good deal more thought before we settle the limits of issue estoppel."

And from Lord Upjohn at page 947 where he said,

"All estoppels are not odious but must be applied so as to work justice and not injustice and I think the principle of issue estoppel must be applied to the circumstances of the subsequent case with this in mind."

At page 109 in Arnold Lord Keith said this,

"In my opinion your Lordships should affirm it to be the law that there may be an exception to issue estoppel in the special circumstance that there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings."

At page 110 Lord Keith said,

"Estoppel per rem judicatam, whether cause of action estoppel or issue estoppel, is essentially concerned with preventing abuse of process. In the present case I consider that abuse of process would be favoured rather than prevented by refusing the plaintiffs permission to re-open the disputed issue."

It has been long established that the general principles of res judicata do not apply to appeals in successive years against income tax or rating assessments. In Inland Revenue Commissioners v Sneath [1932] 2 KB 362 Lord Hanworth said at page 383 that it seemed,

"… difficult to attribute to an assessment [made for a particular year] … such a permanence as will provide an estoppel by res judicata in all future years by reason of a matter taken into account, or not taken into account, in a previous assessment for a year."

In Society of Medical Officers of Health v Hope [1960] AC 551, Lord Radcliffe having cited a number of authorities including Sneath said at page 563,

"it is more in the public interest that tax and rate assessments should not be artificially encumbered with estoppels."

At page 568 in the same case Lord Keith pointed out that the valuation officer owed a duty to hold the scales fairly between ratepayers. He said,

"a public officer in the position of the respondent cannot be estoppel from carrying out his duties under the statute."

In Caffoor v Income Tax Commissioners [1961] AC 584 Lord Radcliffe having referred to Sneath and Society of Medical Officers of Health said this at page 599,

"It may be that the principles applied in these cases form a somewhat anomalous breach of the general law of estoppel per rem judicatam and are not easily derived from or transferred to other branches of litigation in which such estoppels have to be considered: but in their Lordships' opinion they are well established in their own field, and it is not by any means to be assumed that the result is one that should be regretted in the public interest."

Although Miss Haynes submitted in her skeleton that the assumption that the principles of res judicata were applicable were applied in Bennett v Customs and Excise Commissioners (No.2) [2001] STC 137, a VAT case, it is to be observed that none of the authorities as to the applicability of res judicata to tax and rating appeals was cited. Further it is to be noted that at paragraph 39 that,

"the question whether raising of an issue in subsequent proceedings amounts to an abuse of process is one to be decided in a broad, merits based way in the light of all the circumstances."

A further important consideration arises in a VAT appeal namely the principle in Community Law of fiscal neutrality. In J P Morgan Fleming Claverhouse Investment Trust plc and another v Revenue and Customs Commissioners (Case C-363/05) (2007) not yet reported (the AITC case), the Court of Justice said this at paragraph 46,

"The principle of fiscal neutrality … precludes economic operators carrying out the same transactions from being treated differently in relation to VAT."

Since we have concluded that another trader not fettered by res judicata would succeed on the material before us in establishing that similar bottled linseed oil is food, a decision against this Appellant based on res judicata would conflict with the principle of fiscal neutrality. While the origin of that principle in Community Law is the Sixth Directive, it has much in common with the observation of Lord Keith in Society of Medical Officers of Health at paragraph 44 above as to the duty to hold the scales fairly.

Another strand of Community Law jurisprudence recognises the need for certainty for example in relation to time limits for appeals. Finality of litigation between parties is an aspect of this. We recognise the force of submission by Miss Haynes that a trader should not be permitted to re-litigate the same issue repeatedly. However in our judgment that consideration is achieved by the principle of abuse of process. In Arnold Lord Keith pointed out that estoppel is essentially concerned with preventing abuse of process, see paragraph 42 above. In our judgment repeated attempts to re-litigate the same issue without good reason would be an abuse of process. Abuse of process is a much less inflexible method of preventing or limiting re-litigation of matters previously decided.

In the present case we do not consider re-opening the classification of the Appellant's linseed oil to be in any sense an abuse. Indeed to use Lord Keith's words in Arnold we consider,

"that abuse of process would be favoured rather than prevented by refusing … permission to re-open the disputed issue."

The Appellant was unrepresented at the first appeal. He did not adduce relevant evidence having been misled by the letter of 8 March 2004. Customs appear to have made no effort to ascertain the facts by a visit and called no evidence.

If the principle of res judicata applied in the present case the Appellant would have been in considerable difficulty, since there was no real evidence of any change in the material facts. Apart from the decision itself, it is not possible to tell what material was before the Tribunal in particular with respect to public perception. It may well be that public perception has changed; however we cannot tell. There appears to have been some change in presentation; however we do not know what the position was at the original hearing. No doubt the reason why this was not addressed in evidence was because having failed in the application to strike out the appeal in November, Customs gave no warning that the issue was to be raised again until the day of the hearing. It may well be that the renewed reliance on res judicata was because of the weakness of Customs' case on the merits.

We agree with the Tribunal in SITA [2003] V&DR 131 at [70] that "issue estoppel has no place in a VAT litigation of this nature", the reference to "this nature" being the tax chargeable on the supply of any goods or services.

We allow the appeal. Any application for costs should be served on the Tribunal within 3 months specifying the sum claimed.

THEODORE WALLACE

CHAIRMAN

RELEASED: 29 May 2008

LON 2006/0791