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31 January 2001
What a Fuss over an Omelette!
Hugh Mainprice LLB, FTII, AIIT, FRGS, solicitor of Hutchinson Mainprice & Co and Clare Mainprice MA, AIIT, barrister discuss the implications of the Advocate General's opinion in Primback Ltd v Commissioners of Customs and Excise.
Hugh Mainprice LLB, FTII, AIIT, FRGS, solicitor of Hutchinson Mainprice & Co and Clare Mainprice MA, AIIT, barrister discuss the implications of the Advocate General's opinion in Primback Ltd v Commissioners of Customs and Excise.
What a Fuss over an Omelette!
Hugh Mainprice LLB, FTII, AIIT, FRGS, solicitor of Hutchinson Mainprice & Co and Clare Mainprice MA, AIIT, barrister discuss the implications of the Advocate General's opinion in Primback Ltd v Commissioners of Customs and Excise.
On 18 January 2001 the Advocate General gave his opinion on the answers which should be given to the questions referred to the European Court of Justice by the House of Lords in Customs' appeal against the decision of the Court of Appeal in the taxpayer's favour in Primback Ltd v Commissioners of Customs and Excise [1996] STC 757 (the House of Lords hearing was unreported).
In essence, the European Court was asked to rule on the provision of interest-free credit. Where a retailer offers, at a single price, goods and the option of a period of extended credit to pay that price, and the credit is provided by a person other than the retailer, at no additional cost to the customer, what is the taxable amount for which the retailer must account in respect of the goods supplied?
Background
The facts of the case are well known. Primback sold furniture and offered interest-free credit terms. In the sample transaction put before the VAT tribunal, furniture was sold to a customer for £709 on 24 months interest-free credit terms. Primback received payment from the finance house of the sum involved less the sum of £127.62 which was the interest charge made by the finance house.
Primback contended that it was only liable to account for VAT on the amount which it actually received, because there were two supplies: a taxable supply of furniture and an exempt supply of credit. Both of these supplies were made to the customer, who then paid the finance house, although the consideration for the exempt supply of credit was deducted by the finance house from the price paid by it to Primback. Not surprisingly, Customs took the view that VAT was to be calculated on the total amount paid by the customer.
The VAT tribunal dismissed Primback's appeal, holding that there were two separate transactions. On the one hand, Primback had agreed with the finance house providing the credit to grant the customer interest-free credit, the costs of which it would bear. On the other hand the company providing the credit agreed with the customer to provide the full price of the furniture to Primback.
The High Court, to which Primback appealed, found for Customs on a different ground. However, the Court of Appeal reversed these decisions, holding by a majority that Primback was correct in its contention that the supply of credit to the customer was exempt and so VAT should only be charged on the amount actually received by Primback from the finance house.
Advocate General's opinion
The Advocate General concluded that where a retail trader offered goods at a single price and offered interest- free credit for payment of the price, that credit being provided by a person other than the retail trader, and at no additional cost to the customer and thus where the true costs of the credit were not separately indicated, the taxable amount for the purpose of VAT was the full amount payable by the customer.
While this opinion is not necessarily final, it is usually followed by the European Court when its decision is handed down. If the European Court agrees with the Advocate General and the House of Lords allows Customs' appeal, then a large number of traders who have been refunded tax on interest-free credit transactions will have to repay large sums of money to the Government.
Or will they?
Following the Court of Appeal decision in the Primback case, the Government introduced the three-year cap. The original intention was to cap reclaims to three years, but allow Customs to assess over a six-year period. This was so obviously unjust, that the Government was forced to amend the proposed legislation and impose the cap equally on both sides.
It follows therefore that payments by Customs made in 1996-97 may well be irrecoverable if they were made following a voluntary disclosure by the taxpayer, and Customs did not stipulate when paying them that were they to be successful in their appeal to the House of Lords, the sums reclaimed by other taxpayers would have to be repaid to Customs.
In any event, assuming that the European Court of Justice adopts the reasoning of the Advocate General, it seems that a result similar to the one contended for by Primback in the United Kingdom courts will be arrived at as a result of the decision.
Basic principle
One of the basic principles of VAT law is that anything which is done for a consideration, and which is not a supply of goods, is a supply of services and is taxable at the standard rate unless it is zero rated or exempt.
During its argument before the European Court, the United Kingdom Government argued that the credit costs were in practical terms every bit as much commercial expenses of Primback as were advertising or costs of commercial premises which also could not be deducted from the basis of assessment for VAT. The Advocate General agreed.
However, VAT charged to a retailer on the rent of its commercial premises, or its advertising costs, is deductible input tax in the hands of the retailer. This can be set off, pound for pound, against the VAT output tax due on the goods sold by that retailer.
Nature of supply
So what did the finance house supply to Primback in return for £127.62 which Primback paid to it, albeit by way of deduction from the amount which the customer paid to the finance house for the furniture?
It may be argued that what was supplied to Primback was the service of the making of arrangements for the granting of credit. However, it must be remembered that, if the Advocate General is right, the customer gave no consideration for that supply, and the credit was not supplied to Primback. The United Kingdom and German and Irish Governments argued that the amount deducted by the finance house from the payment which it made to Primback was a part of the 'general overhead' of the totality of the Primback operation, in the same way as payments for advertising or business premises were a part of the general overhead.
If, in fact, the payment was for part of the general overhead suffered by Primback, it cannot have been a payment for 'the making of arrangements for the granting of credit' to third parties, i.e., some of Primback's customers. It follows that it was, unless the contrary is proved, a supply of services taxable at the standard rate. That being so, Primback would be entitled to treat the gross amount paid to the finance house (by way of its deduction) as VAT inclusive and deduct 7/47ths of that sum as input tax. The net result will be exactly the same as if Primback was correct in its original contention that the sum paid by its customer was, in part, a payment which was exempt under the credit rules.
Previous history
The Advocate General used, as the foundation stone of his opinion, two cases previously decided by the European Court. The first of these was Chaussures Bally SA v Belgian Ministry of Finance [1993] (Case C-18/92) ECR I-2871. The issue for determination in that case was whether, in the case of a purchase by credit card, VAT was chargeable on the full price or whether the commission payable to the credit card company could first of all be deducted. The Court ruled that the taxable amount had to be the full price.
The second case was Kuwait Petroleum [1999] EDR I-2323. In that case, the Court found as a fact that Kuwait Petroleum, which was handing out vouchers on its sales of fuel which were expressly stated to be given without consideration, could not use the vouchers to reduce its turnover subject to VAT. In both cases the party liable to account for VAT regularly carried out two types of transactions in which it charged the same price to its customers. The European Court stressed in the Kuwait Petroleum case that the price of the purchased fuel remained the same irrespective of whether or not the vouchers in question were accepted.
However, in Kuwait there is no doubt that the associated costs of producing the vouchers would have had a VAT element which would then have been deducted by the petrol company. In the Bally case, the payments were made because the retailer made arrangements with the credit card company under which the credit card company guaranteed payment to the retailer of a guaranteed proportion of the price of the goods sold by the retailer to those of the credit card company's cardholders who were the retailer's customers. By a separate agreement, the company arranged to grant credit to the customers on their credit cards.
Since Primback's customers were not granted VAT exempt credit as part of the overall price they paid – and this must be the implication of the Advocate General's opinion – the service supplied by the finance house to Primback must have been for assistance in the marketing of its products. Therefore the price paid for it (the deduction) is subject to VAT at the standard rate which is then deductible as Primback's input VAT.
Implications generally
The writers have little doubt that the European Court will follow the Advocate General's opinion. In Primback's case that will mean that the House of Lords will allow Customs' appeal. As far as Primback is concerned, the matter is academic since it has been in liquidation for some time. Nevertheless, as we have said above, those companies which, on the back of the Primback decision, reclaimed VAT on interest-free credit transactions may well be able to retain the payments they received, depending upon what was said at the time when those payments were made.
No going back
One thing that Customs should not do is to say now what they should have said at the time of making the repayments, viz. that they were made subject to the result of the Primback appeal. This is because of the well settled rule of commercial (among other) law, that conditions attached to a payment must be attached at the time when the payment is made. Extra conditions can only be attached subsequently if consideration is given and accepted for them.
Thus it is only if the payments were accompanied by a notice from Customs that they were made subject to the condition that, should Customs be successful in the House of Lords in the Primback appeal, recipients would have to make a repayment that we consider that the cap would not apply. If Customs try to make after the event conditions apply, for instance, by statutory instrument, then arguments as to the effect of the Human Rights Act 1998 and Woolwich Equitable Building Society v Commissioners of Inland Revenue [1992] STC 657 on retrospective (and confiscatory) tax legislation would be appropriate. These are outside the scope of this article, but should be well known to all regular readers of this magazine.
Thus, even if Customs did try to disapply the three-year cap as regards the repayments they made to retailers whose customers had been granted interest-free credit, then 7/47ths of the price of the supply of these services made by the finance houses to such retailers (and any other similarly placed companies) being something 'done for a consideration' and not being the granting of or making arrangements for VAT exempt credit, will be deductible input tax in their hands.
Whose victory?
So, one way or another, even if Customs win in the European Court, much of the money they have repaid to retailers, etc. offering interest-free credit terms to their customers will be irrecoverable.
The editor is reliably informed (by the authors!) that the title to this article is a quotation from Voltaire.
Hugh Mainprice LLB, FTII, AIIT, FRGS, solicitor of Hutchinson Mainprice & Co and Clare Mainprice MA, AIIT, barrister discuss the implications of the Advocate General's opinion in Primback Ltd v Commissioners of Customs and Excise.
On 18 January 2001 the Advocate General gave his opinion on the answers which should be given to the questions referred to the European Court of Justice by the House of Lords in Customs' appeal against the decision of the Court of Appeal in the taxpayer's favour in Primback Ltd v Commissioners of Customs and Excise [1996] STC 757 (the House of Lords hearing was unreported).
In essence, the European Court was asked to rule on the provision of interest-free credit. Where a retailer offers, at a single price, goods and the option of a period of extended credit to pay that price, and the credit is provided by a person other than the retailer, at no additional cost to the customer, what is the taxable amount for which the retailer must account in respect of the goods supplied?
Background
The facts of the case are well known. Primback sold furniture and offered interest-free credit terms. In the sample transaction put before the VAT tribunal, furniture was sold to a customer for £709 on 24 months interest-free credit terms. Primback received payment from the finance house of the sum involved less the sum of £127.62 which was the interest charge made by the finance house.
Primback contended that it was only liable to account for VAT on the amount which it actually received, because there were two supplies: a taxable supply of furniture and an exempt supply of credit. Both of these supplies were made to the customer, who then paid the finance house, although the consideration for the exempt supply of credit was deducted by the finance house from the price paid by it to Primback. Not surprisingly, Customs took the view that VAT was to be calculated on the total amount paid by the customer.
The VAT tribunal dismissed Primback's appeal, holding that there were two separate transactions. On the one hand, Primback had agreed with the finance house providing the credit to grant the customer interest-free credit, the costs of which it would bear. On the other hand the company providing the credit agreed with the customer to provide the full price of the furniture to Primback.
The High Court, to which Primback appealed, found for Customs on a different ground. However, the Court of Appeal reversed these decisions, holding by a majority that Primback was correct in its contention that the supply of credit to the customer was exempt and so VAT should only be charged on the amount actually received by Primback from the finance house.
Advocate General's opinion
The Advocate General concluded that where a retail trader offered goods at a single price and offered interest- free credit for payment of the price, that credit being provided by a person other than the retail trader, and at no additional cost to the customer and thus where the true costs of the credit were not separately indicated, the taxable amount for the purpose of VAT was the full amount payable by the customer.
While this opinion is not necessarily final, it is usually followed by the European Court when its decision is handed down. If the European Court agrees with the Advocate General and the House of Lords allows Customs' appeal, then a large number of traders who have been refunded tax on interest-free credit transactions will have to repay large sums of money to the Government.
Or will they?
Following the Court of Appeal decision in the Primback case, the Government introduced the three-year cap. The original intention was to cap reclaims to three years, but allow Customs to assess over a six-year period. This was so obviously unjust, that the Government was forced to amend the proposed legislation and impose the cap equally on both sides.
It follows therefore that payments by Customs made in 1996-97 may well be irrecoverable if they were made following a voluntary disclosure by the taxpayer, and Customs did not stipulate when paying them that were they to be successful in their appeal to the House of Lords, the sums reclaimed by other taxpayers would have to be repaid to Customs.
In any event, assuming that the European Court of Justice adopts the reasoning of the Advocate General, it seems that a result similar to the one contended for by Primback in the United Kingdom courts will be arrived at as a result of the decision.
Basic principle
One of the basic principles of VAT law is that anything which is done for a consideration, and which is not a supply of goods, is a supply of services and is taxable at the standard rate unless it is zero rated or exempt.
During its argument before the European Court, the United Kingdom Government argued that the credit costs were in practical terms every bit as much commercial expenses of Primback as were advertising or costs of commercial premises which also could not be deducted from the basis of assessment for VAT. The Advocate General agreed.
However, VAT charged to a retailer on the rent of its commercial premises, or its advertising costs, is deductible input tax in the hands of the retailer. This can be set off, pound for pound, against the VAT output tax due on the goods sold by that retailer.
Nature of supply
So what did the finance house supply to Primback in return for £127.62 which Primback paid to it, albeit by way of deduction from the amount which the customer paid to the finance house for the furniture?
It may be argued that what was supplied to Primback was the service of the making of arrangements for the granting of credit. However, it must be remembered that, if the Advocate General is right, the customer gave no consideration for that supply, and the credit was not supplied to Primback. The United Kingdom and German and Irish Governments argued that the amount deducted by the finance house from the payment which it made to Primback was a part of the 'general overhead' of the totality of the Primback operation, in the same way as payments for advertising or business premises were a part of the general overhead.
If, in fact, the payment was for part of the general overhead suffered by Primback, it cannot have been a payment for 'the making of arrangements for the granting of credit' to third parties, i.e., some of Primback's customers. It follows that it was, unless the contrary is proved, a supply of services taxable at the standard rate. That being so, Primback would be entitled to treat the gross amount paid to the finance house (by way of its deduction) as VAT inclusive and deduct 7/47ths of that sum as input tax. The net result will be exactly the same as if Primback was correct in its original contention that the sum paid by its customer was, in part, a payment which was exempt under the credit rules.
Previous history
The Advocate General used, as the foundation stone of his opinion, two cases previously decided by the European Court. The first of these was Chaussures Bally SA v Belgian Ministry of Finance [1993] (Case C-18/92) ECR I-2871. The issue for determination in that case was whether, in the case of a purchase by credit card, VAT was chargeable on the full price or whether the commission payable to the credit card company could first of all be deducted. The Court ruled that the taxable amount had to be the full price.
The second case was Kuwait Petroleum [1999] EDR I-2323. In that case, the Court found as a fact that Kuwait Petroleum, which was handing out vouchers on its sales of fuel which were expressly stated to be given without consideration, could not use the vouchers to reduce its turnover subject to VAT. In both cases the party liable to account for VAT regularly carried out two types of transactions in which it charged the same price to its customers. The European Court stressed in the Kuwait Petroleum case that the price of the purchased fuel remained the same irrespective of whether or not the vouchers in question were accepted.
However, in Kuwait there is no doubt that the associated costs of producing the vouchers would have had a VAT element which would then have been deducted by the petrol company. In the Bally case, the payments were made because the retailer made arrangements with the credit card company under which the credit card company guaranteed payment to the retailer of a guaranteed proportion of the price of the goods sold by the retailer to those of the credit card company's cardholders who were the retailer's customers. By a separate agreement, the company arranged to grant credit to the customers on their credit cards.
Since Primback's customers were not granted VAT exempt credit as part of the overall price they paid – and this must be the implication of the Advocate General's opinion – the service supplied by the finance house to Primback must have been for assistance in the marketing of its products. Therefore the price paid for it (the deduction) is subject to VAT at the standard rate which is then deductible as Primback's input VAT.
Implications generally
The writers have little doubt that the European Court will follow the Advocate General's opinion. In Primback's case that will mean that the House of Lords will allow Customs' appeal. As far as Primback is concerned, the matter is academic since it has been in liquidation for some time. Nevertheless, as we have said above, those companies which, on the back of the Primback decision, reclaimed VAT on interest-free credit transactions may well be able to retain the payments they received, depending upon what was said at the time when those payments were made.
No going back
One thing that Customs should not do is to say now what they should have said at the time of making the repayments, viz. that they were made subject to the result of the Primback appeal. This is because of the well settled rule of commercial (among other) law, that conditions attached to a payment must be attached at the time when the payment is made. Extra conditions can only be attached subsequently if consideration is given and accepted for them.
Thus it is only if the payments were accompanied by a notice from Customs that they were made subject to the condition that, should Customs be successful in the House of Lords in the Primback appeal, recipients would have to make a repayment that we consider that the cap would not apply. If Customs try to make after the event conditions apply, for instance, by statutory instrument, then arguments as to the effect of the Human Rights Act 1998 and Woolwich Equitable Building Society v Commissioners of Inland Revenue [1992] STC 657 on retrospective (and confiscatory) tax legislation would be appropriate. These are outside the scope of this article, but should be well known to all regular readers of this magazine.
Thus, even if Customs did try to disapply the three-year cap as regards the repayments they made to retailers whose customers had been granted interest-free credit, then 7/47ths of the price of the supply of these services made by the finance houses to such retailers (and any other similarly placed companies) being something 'done for a consideration' and not being the granting of or making arrangements for VAT exempt credit, will be deductible input tax in their hands.
Whose victory?
So, one way or another, even if Customs win in the European Court, much of the money they have repaid to retailers, etc. offering interest-free credit terms to their customers will be irrecoverable.
The editor is reliably informed (by the authors!) that the title to this article is a quotation from Voltaire.
