HM Revenue & Customs v Enron Europe Ltd

For supplies of gas and electricity, the relevant VAT tax point occurs when payment is received or a VAT invoice is issued, whichever is earlier. Under a close-out netting agreement, termination and a moratorium on further payments do not themselves discharge existing debts. The debts are discharged when the contractual calculation and set-off process is completed by provision of the binding calculation statement. A later payment of the net balance discharges only the replacement obligation and does not revive the earlier liability.

The Commissioners appealed against a decision of the VAT & Duties Tribunal allowing Enron’s appeal against a VAT assessment of £6,608,250. The assessment treated supplies of gas and electricity as paid on 6 August 2002, when Morgan Stanley paid the net balance under a close-out netting agreement. The central issue was whether the original debts were discharged on 1 December 2001, 21 February 2002, or 6 August 2002.

1. Appeal dismissed. The Tribunal’s conclusion that the agreement provided for novation netting was wrong. The agreement provided for close-out netting, involving termination of the outstanding transactions, calculation of gains and losses, contractual set-off, provision of a calculation statement, invoicing, and payment.
2. Termination of the transactions and the provision that no further payments should be made did not discharge the existing indebtedness. They imposed a moratorium pending completion of the netting process.
3. The contractual set-off became effective when the calculation statement was provided. At that point the accounting exercise was complete, the pre-existing liabilities were discharged, and only the calculated balance remained due. The calculation statement was binding when provided, without awaiting verification or agreement.
4. In this case, the original purchase-price debt was discharged on 21 February 2002, when the calculation statement was supplied. The balance of £655,858 became due and payable five working days after receipt of the invoice. Its payment on 6 August 2002 discharged the new balance obligation, not the previously discharged purchase-price debt.
5. Under Regulation 86(1) of the Value Added Tax Regulations 1995, the supplies were therefore treated as taking place when the original debt was discharged. The assessment for the later VAT accounting period was invalid.

• High Court (Chancery Division): On appeal from the VAT & Duties Tribunal, Lightman J dismissed the Commissioners’ appeal.
• VAT & Duties Tribunal: The Tribunal had allowed Enron’s appeal against the VAT assessment. Its characterisation of the netting arrangement as novation netting was rejected.