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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Recruitment Consultant / Account Manager - Surrey / SW London

£40000 per annum + realistic targets: Ashdown Group: A thriving recruitment co...

Ashdown Group: Part-time Payroll Officer - Yorkshire - Professional Services

£25000 per annum: Ashdown Group: A successful professional services firm is lo...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before