Commissioners of Customs and Excise v. Thorn Materials Supply Ltd and Thorn Resources Ltd

This appeal concerned whether value added tax (V.A.T.) was chargeable on 90 per cent of a purchase price paid in advance between companies that, at the date of payment, were members of the same V.A.T. group under section 29 Value Added Tax Act 1983. The House held that the statutory "time of supply" rules in sections 4 and 5 must be applied to identify when, to what extent and between whom a supply was treated as taking place. Where a supply (or a staged element of it under section 5(1)) is treated as having occurred while the parties were members of the same V.A.T. group it is to be disregarded for V.A.T. purposes under section 29(1)(a). But where delivery and transfer of property occurred after the supplier had left the group the transfer constituted a taxable supply under Schedule 2 paragraph 1(1) and section 10(2) on the whole consideration. The House therefore dismissed the appellants' appeal and held that V.A.T. was payable on the whole price.

Background and facts.

Thorn Materials Supply Limited and Thorn Resources Limited ("Materials" and "Resources") were wholly owned subsidiaries of Thorn E.M.I. Plc. They contracted to sell goods (including cars and components) to Thorn E.M.I. Home Electronics (UK) Limited ("Home"). The contracts provided for 90 per cent of the price to be paid on signature and the balance on delivery. Advance payments were made on 29 November 1993. On 6 December 1993 Materials ceased to be a member of the Thorn V.A.T. group; the goods were acquired and delivered thereafter and the remaining 10 per cent. was paid on delivery.

Nature of the claim and procedural posture.

• The Commissioners claimed V.A.T. on the whole of the consideration (100 per cent.).
• The appellants contended V.A.T. was chargeable only on the 10 per cent payable on delivery because the 90 per cent prepayment fell within section 5(1) and, at that time, the supplier and purchaser were in the same V.A.T. group so the supply should be disregarded under section 29(1)(a).
• The matter reached the Appellate Committee of the House of Lords following earlier decisions including the V.A.T. Tribunal and the Court of Appeal (referenced in the judgment).

Issues for the court.

1. How are the "time of supply" rules (sections 4 and 5) to be applied to staged/advance payments where group membership changes between payment and delivery?
2. Does section 29(1) operate so as to "disregard" supplies within a group in a way that prevents any later charge to tax when the supplier subsequently leaves the group?
3. Was it necessary or appropriate to apply the Ramsay principle of construing away steps inserted solely for tax avoidance?

Court's reasoning and conclusions.

• The House emphasised that the statutory time of supply rules must be applied to identify, for tax purposes, when and to what extent a supply is treated as taking place; section 5(1) can treat a single supply as taking place to a stated extent at the date of payment and to the remainder at delivery.
• Where a supply (or part of it under section 5(1)) is treated as taking place while the parties are members of the same V.A.T. group that element is to be disregarded under section 29(1)(a). That disregard does not deny the reality of the transactions but excludes them from the charge to V.A.T. while the group relationship exists.
• However, when the supplier emerged from the group and the property in the goods was transferred, that transfer was a taxable supply under Schedule 2 paragraph 1(1) and section 10(2) and chargeable on the whole consideration. Section 29 does not operate to extinguish the charge but to prevent intra-group supplies being charged while the group exists; it does not create permanent exemption where delivery occurs after group membership ends.
• The House considered but declined to resolve broader questions about applying the Ramsay principle to V.A.T. construction as unnecessary in the present case.

Disposition. The appeal was dismissed by a majority: the whole value of the supplies was subject to V.A.T.

Appeal dismissed. The House held that the statutory time of supply rules in sections 4 and 5 must be applied to identify the extent to which a supply was treated as taking place while parties were members of a V.A.T. group; such intra-group elements are to be disregarded under section 29(1)(a). Where the transfer of property occurred after the supplier left the group the transfer constituted a taxable supply under Schedule 2 paragraph 1(1) and section 10(2) and the whole consideration was subject to V.A.T.; accordingly the appellants' contention that tax was payable only on the 10 per cent balance failed.

Appeal to the Appellate Committee of the House of Lords from lower tribunal decisions. The matter arose after decisions of the V.A.T. Tribunal and the Court of Appeal (both discussed in the judgment); the House heard and determined the appeal on the construction of the V.A.T. Act 1983.