Law Report: Delivery of goods was supply for VAT

Tuesday Law Report 23 June 1998: Commissioners of Customs and Excise v Thorn Materials Supply Ltd and another House of Lords (Lord Brown- Wilkinson, Lord Lloyd of Berwick, Lord Nolan, Lord Hoffman and Lord Clyde) 18 June 1998

WHERE A sale contract was made between two members of the same VAT group, with part of the consideration to be paid at the date of the agreement and the rest to be paid on delivery of the goods, and at the date of delivery of the goods the vendor company had left the group, VAT was chargeable on the whole of the consideration, since the delivery of the goods constituted the taxable supply.

The House of Lords dismissed the appeal of Thorn Materials Supply Ltd ("Materials") and Thorn Resources Ltd ("Resources") against the decision of the Court of Appeal that they were liable to pay value added tax in respect of sale transactions carried out between them as vendors and Thorn EMI Home Electronics (UK) Ltd ("Home") as purchaser.

Nigel Pleming QC and Christopher Vajda QC (Solicitor, Customs and Excise) for the Commissioners; Kevin Prosser QC and Elizabeth Wilson (Rowe & Maw) for the appellants.

Lord Nolan said that the three companies were at all material times wholly-owned subsidiaries of Thorn EMI plc. The case had been argued by reference to a single representantive transaction. By a written agreement dated 29 November 1993, Materials agreed to sell certain goods to Home. The price was to be 105 per cent of the VAT exclusive cost to Materials of buying the goods from a third party. Delivery was to take place during the period ended 31 March 1994.

The advance payment of 90 per cent, totalling pounds 33,834,140, was duly made on 29 November 1993. By a loan agreement of the same date, Materials agreed to lend Home a similar amount at an interest rate of 5.6875 per cent. The loan was expressed to be for an initial period of three years and a day, but Home was entitled to repay it any time, or to set it off against its liabilities to Materials.

On 6 December 1993 Materials ceased to be a member of the Thorn VAT group. After that date Materials bought and paid for the goods which it had contracted to sell to Home. Some of those goods were already owned by Home at the date of the agreement of 29 November 1993. Consequently, on 21 January 1994 the goods were supplied by Home to Materials in order that Materials could supply them back to Home under the sales contracts.

The appellants had not suggested for a moment that the transaction was designed for any purpose other than the avoidance of value added tax, but had argued that the advance payment fell squarely within the terms of section 5(1) of the 1983 Act, and the supply was to be treated as taking place at the time when the advance payment was received. At that time Materials and Home fell to be treated as members of a group under section 29(1) of the Act. It followed that the supply must be disregarded, to the extent of 90 per cent, under section 29(1)(a), and only the remaining 10 per cent of the supply could be taxed.

However, section 29(1) and Art 4.4 of the Sixth Council Directive (77/388/EEC) were designed not to confer exemption or relief from tax, but to simplify and facilitate the collection of tax by treating the representative member of a VAT group as if it were carrying on all the businesses of the other members as well as its own, and dealing on their behalf with all non-members.

When Materials and Resources left the Thorn group they became separate taxable persons. The delivery of the goods by them to Home undoubtedly constituted a transfer of the whole property in the goods in the course of business. It constituted a supply of the goods within the meaning of paragraph 1(1) of Schedule 2 to the Act, taxable under section 10(2) upon the amount of consideration whether already paid or still payable. It followed that the whole value of the supplies in question fell fairly and squarely within the charging provisions of the Act according to the normal principles of construction which should be applied to a taxing statute.

Kate O'Hanlon, Barrister