Retail Therapy

VAT retail schemes to make VAT easy can cause their own problems; Midlands Co-operative Society Ltd v Commissioners of Customs and Excise.

WHEN A BUSINESS operating the former VAT retail scheme B transfers its trade as a going concern, stock in hand must be treated for VAT purposes as having been sold for its expected selling price.

Background

When a VAT registered business makes a supply, the VAT depends upon whether the goods are chargeable at a standard or reduced rate, or exempt or zero rated. It sounds easy, but businesses making many individual sales to the public at different rates may have record-keeping difficulties. For them, the VAT retail schemes were introduced to simplify matters when determining the proportion of sales taxable at different rates.

Leicestershire Co-operative Society sold various goods, both standard rated and zero rated, and used Retail Scheme B. This scheme basically worked as follows.

(1)

Calculate total takings for the tax period.

(2)

Calculate expected selling prices of zero-rated goods 'received, made or grown for resale' in the period. (N.B. Adjustments had to be made for special offers, stock losses, etc. and goods in stock when the scheme was first used were not treated as 'for resale' unless they were lines that would be sold, but not replenished.)

(3)

Deduct (2) from (1) and multiply by 7/47ths.

At midnight on 1 April 1995, the Leicestershire Society transferred its stock, property and other assets to the Midlands Co-operative Society, stopped using Retail Scheme B and stopped trading. As this was a 'transfer of a business as a going concern', it was not a supply for VAT purposes (Article 5 of the VAT (Special Provisions) Order SI 1995 No 1268). However, as the stock was transferred for less than its expected retail price, Customs pointed out that an adjustment should have been made under paragraph 22a of the scheme rules, and issued a VAT assessment of £759,150. The tribunal dismissed Leicestershire's appeal against the assessment and ruled that the subsequent appeal should be brought by Midland Co-operative Society as the successor to the business.

Judgment in the High Court, Chancery Division

Midlands Co-operative Society appealed on the following grounds.

• Paragraph 83 of the rules of Retail Scheme B said that if a retailer wanted to stop using the scheme, there was no need for an adjustment.
• This view was supported by the basic presumption underlying the scheme that, while trading continued, a retailer would replace the zero-rated stock that he had sold with more zero-rated stock.
• On the basis that no adjustment was required where a trader ceased to use the scheme and subsequently ceased to trade, it was 'irrational, arbitrary and unfair' for there to be an adjustment if cessation of trade happened first.

The decision

Mr Justice Lightman carried out a resumé of Retail Scheme B and referred to the decision in United Norwest Co-operatives Ltd v Commissioners of Customs and Excise [1999] STC 686, which saw three main facets to Retail Scheme B.

(i)

The scheme 'provides a simple but somewhat rough-and-ready method of calculating the output tax of a retailer who sells both standard-rated and zero-rated goods, and whose takings from zero-rated goods do not account for more than 50 per cent of his turnover'.

(ii)

The purpose of the scheme was 'to produce a figure which is as accurate as possible, consistent with the simplicity of the method'.

(iii)

The basic assumption underlying Scheme B ('a somewhat crude one') was that 'while he continues to trade, the retailer will sell his zero-rated stock by way of retail sale and will replenish his stock with zero-rated goods to replace the zero-rated goods which are sold'.

The scheme was described as having 'an element of swings and roundabouts' and for this reason adjustments were provided for in certain circumstances to bring the zero-rated goods 'received, made or grown for resale' closer to the actual takings from their sale for the relevant period.

Reviewing Midlands' grounds for appeal, Mr Justice Lightman commented that Leicestershire had not simply stopped using the scheme (which he agreed would not have triggered an adjustment), in this case there was a simultaneous sale. The assumption underlying the scheme was correct, but there were good reasons for the adjustments. In this case, without an adjustment the expected selling price of zero-rated goods would be overstated, standard-rated supplies would therefore be understated and so, consequently would the amount of output VAT payable. The fact that such adjustments were provided for in the scheme would be a factor that retailers should have taken into account when deciding whether to use the scheme in the first place. The scheme had 'rough edges', but this did not make it 'irrational, arbitrary and unfair'.

Decision for Customs and Excise

(Reported at [2002] STC 198.)

Commentary by Richard Curtis

Not only did the taxpayer lose, Mr Justice Lightman declined to give Midlands 'a second bite at the cherry' by refusing its request that the case be remitted back to the tribunal to decide whether the Leicestershire Society had, in fact, ceased to use the scheme before the transfer. This argument seemed to be something of a desperate measure and Mr Justice Lightman pointed out that Midlands were content to proceed with the present appeal on the basis that cessation of use of the scheme and the transfer of trade were simultaneous.

The fact that Retail Scheme B no longer exists should not mean that the judgment is ignored. Direct Calculation Scheme 1, which in part replaced it, does not in fact provide for an adjustment on the transfer of a trade. However, that scheme is only available to businesses with turnovers of less than £1 million per annum. But Direct Calculation Scheme 2, available for turnovers of up to £100 million, does have an equivalent adjustment provision. So when a client next takes an adviser out for some retail therapy - perhaps shopping in a takeover situation - they should ensure that there are no unforeseen costs such that Customs are the only ones to receive a 'therapeutic' (i.e. monetary) benefit. Mr Justice Lightman's decision indicates that in these circumstances, there is no VAT equivalent of 'Customer Services' for taking back that dodgy pair of trousers ('but they were such a bargain!') to get a refund.