Customs and Excise Comrs v Thorn Materials Supply Ltd

The time-of-supply rules must first be applied to identify the extent and time of a supply, including a supply between companies in a VAT group. Value Added Tax Act 1983, section 29 requires an intra-group supply to be disregarded for VAT purposes, but it does not confer a permanent exemption from tax.

Where goods are delivered after the supplier has left the group, the delivery is a taxable supply. Its taxable value is the whole consideration for the goods, including sums paid in advance while the companies were group members. The grouping provisions may defer the charge until an external supply occurs, but they do not prevent it.

Materials and Resources contracted to sell goods to Home, another wholly owned company in the same VAT group. Home paid 90 per cent of the price on signing. The vendors then left the group and delivered the goods to Home, which paid the remaining 10 per cent.

The Commissioners assessed VAT on the full price. The VAT Tribunal accepted the companies’ contention that only 10 per cent was taxable. The Court of Appeal reversed that decision. The House considered whether the 90 per cent advance payment was permanently disregarded under section 29 of the Value Added Tax Act 1983, or whether the later delivery was taxable on the whole consideration.

1. Appeal dismissed, by a majority of four to one. Lord Nolan delivered the leading majority speech, with which Lord Browne-Wilkinson and Lord Lloyd of Berwick agreed. Lord Clyde also concluded that the appeal should be dismissed. Lord Hoffmann dissented.

2. Per Lord Nolan, sections 4 and 5 of the Value Added Tax Act 1983 must be applied to establish whether, and when, a supply occurred between group members. Section 5(1) treated the advance payment as a supply to the extent of 90 per cent while the parties were in the group. Section 29(1)(a) therefore required that part to be disregarded for VAT purposes.

3. That disregard did not permanently remove the goods’ value from the charging provisions. Section 29 was an administrative grouping provision. It treated the representative member as the single taxable person for the group’s dealings, but did not grant exemption or relief. When the vendors left the group and transferred property in the goods by delivery, they made a taxable supply. Under section 10(2), its value was the whole consideration, including the earlier payment.

4. Lord Nolan approved the view that section 29 enables a group to be treated as a single taxable entity. It may defer a charge on added value until a supply outside the group, but does not prevent that charge. Lord Clyde reached the same result by emphasising that sections 4 and 5 regulate the time of one supply and do not create separate supplies; section 29 did not cover a supply completed after the supplier had left the group.

5. Lord Hoffmann would have allowed the appeal and restored the Tribunal’s decision. In his view, section 5 treated the single supply as occurring in value stages. The 90 per cent stage occurred within the group and was to be disregarded, leaving only 10 per cent taxable. The majority did not decide whether the Ramsay principle applies to VAT avoidance arrangements, considering that issue unnecessary to the outcome.

• House of Lords: dismissed the companies’ appeal and upheld the Commissioners’ entitlement to VAT on the full consideration.
• Court of Appeal: reversed the VAT Tribunal and accepted the Commissioners’ construction of the grouping provisions.
• VAT Tribunal: had accepted that only the unpaid 10 per cent of the consideration was taxable.