Value Added Tax
In my December 2013 blog I was banging on about incorrect transposition of EU law and the transgressions of the First-tier Tax Tribunal in the Rapid Sequence case. Well blimey, here’s another one. Luckily this time Mr Justice Nugee rode into town to sit as a judge of the Upper Tribunal. He saved the day so the lily-livered amongst you can get out from behind the sofa.
The case was Mercedes-Benz Financial Services UK Ltd. One issue before Nugee J, on an appeal by MBFS from the First-tier Tribunal, was whether supplies made under a particular type of motor vehicle finance agreement were supplies of goods or services for VAT purposes.
Under the agreement, customers made monthly payments to repay the credit they had taken out on a vehicle. This gave them possession of the vehicle. The agreement also provided for an option to purchase on making an additional payment. MBFS retained ownership of the vehicle until the customer had exercised the option to purchase and made all required payments. If the customer did not opt to purchase, the vehicle had to be returned.
MBFS contended that the agreement gave rise to a supply of services. HMRC took the view that there was a supply of goods. If there was a supply of goods, even on deferred terms, VAT would be chargeable on the full price of the vehicle at the start of the agreement. However, if there was a supply of services, VAT would be chargeable only when payments were received during the duration of the contract. So MBFS appealed for cashflow reasons.
The relevant UK legislation is paragraph 1, Schedule 4, VATA 1994. It sets out that there is a supply of goods not only where there is the transfer of the ‘whole property’ in the goods but also where there is the transfer of possession of goods under agreements which ‘expressly contemplate that property in the goods will also pass at some time in the future (determined by, or ascertainable from, the agreements…)’. That time must be no later than the time when the goods are fully paid for. The transfer of possession of goods in other circumstances is a supply of services.
The equivalent provision in EC legislation is article 14(2)(b) of Directive 2006/112/EC which (in the English text) reads that there is a supply of goods where there is :
‘the actual handing over of goods, pursuant to a contract for the hire of goods for a certain period or for the sale of goods on deferred terms, which provides that in the normal course of events ownership shall pass at the latest upon payment of the final instalment.’
The French text of article 14(2)(b) differs slightly from the English version. In particular, the French wording uses ‘normalement’ (‘normally’) where the English has ‘in the normal course of events.’ Our hero referred to this in his judgement and went on:
‘Each version of the text is equally authoritative; neither counsel referred to any other language version of the Directive, from which I assume that none of the other versions of the text sheds any further light on the question of interpretation.’
Assume away, but here I have the advantage of you, Christopher old chap. My school friend who lives in Melbourne (the one I went to the Barossa with in October 2011 – you can read about the trip here) is a gifted (and meticulous) translator from French, German and Dutch into English. Article 14(2)(b was relevant to some advice I was giving on the VAT treatment of leases of postal franking machines last year so I had emailed her asking about any differences in the versions of article 14(2)(b) in those three languages. She replied:
‘You may be onto something here, Sherlock.
The Dutch follows the French, but in the German ‘normally’ appears earlier in the sentence, so the English (‘which provides that in the normal course of events ownership is to pass at the latest…’) becomes (in the German version) ‘which is ordinarily accompanied by a clause stipulating that title shall be acquired at the latest …’
The German word is ‘regelmäßig’, which literally means ‘regularly’ or ‘as a rule’, hence my suggestion of ‘ordinarily’. Other alternatives are ‘routinely’ or ‘habitually’, but ‘generally’ s a bit wide of the mark – the Germans use other words for that.
So either the French came first and the Germans changed the word order to make logical sense out of it, or the German came first and the French stuffed it up, then everyone else followed suit.
The English has made things vaguer still by skipping the reference to an ‘attached clause’ (the Dutch has done the same).
Is this a Euro version of Chinese whispers??’
If only I’d known that the MBFS case was being heard. I could have hopped down to the Rolls Building on 17 and 18 March and added my two pennorth.
The MBFS agreement did not transfer the whole property in goods, but, as there was a transfer of possession, the question was whether the MBFS agreement provided that, in the normal course of events, property in the goods would pass at some time in the future, being no later than the time when the goods were fully paid for.
The First-tier Tribunal decided that ‘in the normal course of events’ was to be construed as a question of whether the passing of ownership was normal under the terms of the contract, rather than abnormal. The fact that ownership might not transfer under the MBFS agreement did not preclude it from being a contract for sale. The passing of title was central which meant that ownership would normally pass under its terms. The supply was therefore a supply of goods.
This was not what I was wanting to hear. I was well cross.
Luckily for my blood pressure, Nugee J took the opposite view:
‘It is not sufficient for a contract to come within Art 14(2)(b) for it to contain a provision under which the hirer has an option to acquire the ownership of the vehicle at the end of the hire period, and that such acquisition is a normal outcome. In order for a contract to come within Art 14(2)(b) it must be the normal outcome of the contract…’
The supply was a supply of services.
All is now calm in the Humphrey House.
*** UPDATE – October 2017 ***
HMRC (being bad losers) appealed against Nugee J’s decision and the Court of Appeal referred the matter to the European Court:
’26. The Upper Tribunal declined to refer the interpretation of Article 14(2)(b) to the CJEU. In our view, it was wrong not to do so. In the absence of any direct guidance about the interpretation of Article 14(2)(b), we have reached the conclusion that the issue is not acte clair. Having heard the arguments of Mr Thomas [for HMRC] and of Mr Prosser QC for MBFS, we therefore indicated to them that we proposed to make a reference. It seems to us that although Article 14(2)(b) is directed in terms to what the relevant contract of hire provides, there is much less certainty as to whether the qualifying phrase “in the normal course of events” requires a tax authority to do no more than to identify the existence of an option which is not exercisable later than upon payment of the final instalment or to go further and determine the economic purpose of the contract in accordance with the test outlined by Advocate General Tizzano in his opinion in the Mirror Group case.
27. We therefore require guidance from the CJEU as to whether that is the appropriate test to adopt and, if not, what is the correct interpretation and application of Article 14(2)(b). We envisage that as part of the reference the Court will consider HMRC’s argument about timing on which we have not heard full argument but which seems to us to have some obvious attraction in terms of legal certainty.’
On 4 October 2017 the European Court gave its answers (in a manner of speaking).
The European Court’s Answers
The classification of a contract as a ‘finance lease’ is not, in itself, sufficient for the actual handing over of goods pursuant to that contract to be categorised as a transaction subject to VAT. In order for such a contract to be considered a ‘supply of goods’ within the meaning of the VAT Directive, it is also necessary to determine whether the contract is a contract for ‘hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment’, within the meaning of Article 14(2)(b) of the VAT Directive.
For that to be the case two conditions have to be satisfied.:
- The agreement pursuant to which the goods are handed over must contain a clause expressly relating to the transfer of ownership of those goods from the lessor to the lessee. As the Advocate General noted in point 50 of his Opinion, an agreement may be considered to contain an express ownership transfer clause where it contains an option to purchase the leased asset.
- It must be clear from the terms of the contract, ‘objectively assessed’ at the time when it is signed, that ownership of the goods is intended to be acquired automatically by the lessee if performance of the contract proceeds normally, over the full term of the contract.
The only inference to be drawn from the words ‘in the normal course of events ownership is to pass at the latest upon payment of the final instalment’ is that the final payment of sums to be paid by the lessee under the terms of the contract must result in the transfer to that lessee of ownership of the goods to which the agreement relates.
As regards the fact that the agreement includes a clause which, as in the case of the standard agreement at issue, provides for the lessee to be able to exercise an option to purchase, the phrase ‘in the normal course of events’ must be regarded as referring simply to the foreseeable performance of an agreement over its full term by the parties thereto, acting in good faith, in accordance with the principle that agreements must be kept.
So MBFS (and Kev) won, I think.
Tax lawyer specialising in business tax, SDLT and VAT