C R Smith Glaziers (Dunfermline) Limited (Appellants) v. Commissioners of Customs and Excise (Respondents) (Scotland)

A domestic condition governing a mandatory VAT exemption must be construed, so far as possible, consistently with the applicable European directive and the principle of proportionality. A formal requirement that does not advance the permitted objectives of correct and straightforward application or the prevention of evasion, avoidance or abuse cannot justify denial of the exemption.

A requirement to set out an amount does not necessarily demand a self-contained monetary figure. Where no particular form has been prescribed, an unequivocal formula from which the amount can be ascertained may suffice. Requiring a specific figure, when the formula supplies the necessary information and there is no evasion, avoidance or abuse, imposes a disproportionate additional burden.

The taxpayer supplied double glazing together with insolvency insurance and services for arranging and administering that insurance. Those additional services were prima facie exempt from VAT. During the relevant period its standard contract stated the £16 premium and allocated 10% of the total contract price to the other insurance-related services.

The VAT tribunal accepted that the amount could be ascertained from the contract but held that the legislation required a specific monetary figure rather than a formula. The Extra Division of the Court of Session agreed: 2001 SC 646.

The taxpayer appealed to the House of Lords. The issue was whether the contractual formula satisfied Note 5(b) of Group 2 of Schedule 9 to the Value Added Tax Act 1994, construed compatibly with article 13B of the Sixth VAT Directive.

1. Appeal allowed by a majority of four to one. Lord Hoffmann delivered the leading speech. Lord Woolf, Lord Hope of Craighead and Lord Walker agreed with him. The taxpayer was entitled to exemption for the consideration attributable to its insurance-related services during the relevant period.
2. Per Lord Hoffmann, Note 5 identified the information that the contractual document had to disclose. It did not prescribe the form in which that information had to appear. Note 4(c) separately empowered the Commissioners to prescribe requirements concerning the preparation and form of the document, but no relevant formal requirements had been prescribed. An unequivocal allocation capable of being ascertained from the document therefore satisfied Note 5(b).
3. Per Lord Hoffmann, the Notes were apt to prevent surreptitious or retrospective value shifting by committing the supplier, when the contract was made, to an allocation of the consideration. Requiring the allocation to be expressed as a self-contained monetary figure did not materially advance that objective. Disclosure of the allocation, without insistence upon a particular form, was sufficient.
4. Per Lord Hoffmann, the mandatory exemption in article 13B(a) of the Sixth VAT Directive could be restricted only by conditions directed to its correct and straightforward application or to preventing evasion, avoidance or abuse. Such conditions had to satisfy proportionality: they had to be suitable, necessary and not disproportionate in the narrower sense. A requirement for a specific monetary figure served no additional legitimate purpose and imposed an additional burden capable of denying the exemption. It was therefore disproportionate.
5. Lord Hope agreed that domestic implementing legislation had to be read compatibly with Community law. Because the disclosed formula enabled the fee to be ascertained, and there was no suggestion of evasion, avoidance or abuse, denying the exemption was not strictly necessary. The contractual service fell within item 4 of Group 2.
6. Lord Slynn dissented. He considered that “set out an amount” ordinarily required a monetary figure. In his view that requirement promoted clarity and transparency, was within the member state's discretion, and was a suitable and proportionate condition for the exemption.

1. House of Lords: By a majority of four to one, allowed the taxpayer's appeal and declared that it was entitled to VAT exemption for the consideration attributable to insurance-related services during the relevant period: [2003] UKHL 7.
2. Extra Division of the Court of Session: Affirmed the tribunal's conclusion that Note 5(b) required a specific monetary figure and that a formula was insufficient: 2001 SC 646.
3. VAT tribunal: Accepted that the amount could be ascertained from the written contract but held that a statement setting out the amount required a specific sum rather than a formula.