Law Report: Firm wins VAT appeal: Fine Art Developments plc v Commissioners of Customs and Excise: Court of Appeal (Lord Justice Neill, Lord Justice Steyn and Lord Justice Peter Gibson), 20 May 1994

The value added tax to be charged on the supply of goods by a mail order business to 'agents' who sold on some of the goods at a profit was to be calculated by reference to the value of the consideration received by the business from the agent and not by reference to the higher prices realisable on the agent's sales.

The Court of Appeal (Lord Justice Neill dissenting) allowed an appeal by the taxpayer, Fine Art Development plc, from decisions of the President of the VAT tribunals and Mr Justice Brooke upholding a direction issued by the commissioners pursuant to paragraph 3 of Schedule 4 to the Value Added Tax 1983.

Paragraph 3 of Schedule 4 provides: 'Where (a) the whole or part of a business carried on by a taxable person consists in supplying to a number of persons goods to be sold, . . . by retail and (b) those persons are not taxable persons, the commissioners may by notice in writing to the taxable person direct that the value of any such supply by him . . . shall be taken to be its open market value on a sale by retail'. The taxpayer is the parent company of a company carrying on a mail order business through catalogues distributed free to large numbers of 'agents'. The agent may order goods for himself or for his customers. The agent pays for all the goods at the agent's price which is between 10 per cent and 25 per cent lower than the prices in the catalogue. The order does not differentiate between items for himself and those for customers.

Between 10 and 50 per cent of goods bought are for the agents' own use. Most goods ordered for customers are sold by the agent at the full catalogue price, but a significant number are sold at the agent's price or at a price in between.

The taxpayer is liable for VAT on the supplies to the agents. The supply by the agent to the customer is a separate supply under which no VAT is chargeable because each agent's turnover is too small.

The commissioners exercised their power under paragraph 3 of Schedule 4 and issued a direction to the taxpayer that the value by reference to which VAT was charged on the supply of goods to non taxable agents to be sold should be the open market value on a sale by retail. The tax in dispute is about pounds 9.5m.

Andrew Park QC and Gerald Barling QC (Shakespeares, Birmingham) for the taxpayer; Nigel Pleming QC (Customs & Excise solicitor) for the commissioners.

LORD JUSTICE PETER GIBSON said the first question was whether part of the business consisted in supplying goods to be sold by retail. The commissioners' approach to consider whether some or all of the goods supplied to the agents were goods to be sold by retail could not be accepted. The words 'part of' in 'part of the business' was transfered from 'a business' to 'the goods'.

On an objective view the business was single business which consisted in supplying goods, only some of which were sold by retail. The commissioners' approach was the equivalent of treating the strong words 'consists in' as 'includes'.

The words 'to be sold' could not be satisfied by reference to the agents' intentions, but must refer to the purpose of the supplier at the time of the supply. It could not appropriately be said that the taxpayer supplied goods 'to be sold'.

As a matter of drafting it would not have been difficult to provide that the wording of paragraph 3 should both make 'part of' qualify 'goods' rather than 'business' and replace 'to be sold' with 'are sold' or 'are likely to be sold'.

This was a provision in a taxing statute so must be construed strictly. The direction was inapplicable to the taxpayer. If the direction was valid, the commissioners argued that it was possible to comply with its terms by adding an extra column on the order form, so that one was for goods for the agent's own use and the other for goods for the agent's customers.

It was both novel and surprising that a taxpayer, without statutory compulsion, was expected to change his long-established trading methods, which were not chosen to avoid VAT, and adopt an administratively inconvenient practice for the sole purpose of assisting the revenue authorities to establish that a condition of imposing tax on an artificial basis was satisfied.

LORD JUSTICE STEYN agreed.

LORD JUSTICE NEILL, dissenting, said that the taxpayer knew that a substantial proportion of the goods ordered by agents would be resold by agents who were given a incentive to sell goods by making a profit. It seemed plain that the taxpayer was supplying goods to be sold by retail. The purpose of the legislation was to prevent the large-scale avoidance of VAT on the consideration paid by the ultimate purchasers and the consequent distortion of competition.