[2010] UKFTT 182

								TC00486

Appeal numbers: LON/05/0022
							       LON/05/0740

Value Added Tax  -  de-supply whether the condition of repossessed goods had been changed between the moment of repossession and subsequent sale  -  whether categories of contentious minor changes could be added to the subject matter of the Appeal  -  Appeal allowed in part

FIRST-TIER TRIBUNAL
TAX CHAMBER

	BUY AS YOU VIEW LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	 JUDGE HOWARD M NOWLAN
						 SUSAN HEWETT

Sitting in public in Cardiff on 26 February 2010

Paul Key, counsel, for the Appellant 

David Manknell, counsel, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.     This was a somewhat bewildering case in which only two points were in dispute.   The overall dispute between the parties had in fact involved various other points of difference, during the five-year period in which the parties had been in dispute, but some matters had been settled, and we were told that we were not required to consider other points. 

2.     The Appellant’s trade was that of supplying on hire-purchase terms furniture and electrical goods.  Most of the items that occasioned the substantive point on which we were asked to give our decision were televisions, refrigerators and washing machines.   The Appellant generally supplied these goods to customers who could not obtain more usual finance to acquire the relevant goods.  Thus the basic method of collecting the hire-purchase instalments adopted by the Appellant was to affix coin meters to the items in question so that the customer/hirer would insert coins in order to use the relevant item.   In the case of televisions, therefore, the Appellant’s name, Buy as you View Limited, indicated how customers would insert coins into the meter in order to view the television, and in that way they would pay their hire-purchase instalments. 

3.     We were not shown the terms of any hire-purchase contract with the hirers, but we were told that customers regrettably sometimes fell behind with their payments and this entitled the Appellant to terminate the contract and repossess the goods. 

4.     When goods had been re-possessed, the Appellant took them into its warehouse, and checked whether they were in working order.  Thus washing machines would be put through a full wash cycle to check that they were not leaking.   Televisions would be switched on and the various channels all tested.  If the machines were in full working order they would then be re-sold as second-hand items.  

5.     It was commonly the case that some minor replacements were required before an item could be re-sold.    In the case of televisions, for instance, it was often found that the employees who had repossessed the televisions might have failed to find the remote control unit in their haste to leave the house, or because upset customers might have failed to locate it “down the back of the sofa”.   Television stands might also be left behind for much the same reason.   In the case of washing machines, the machines were often brought in without their water hoses because the water hoses might be trapped in fitted kitchens and difficult to remove.   Power cables would often be missing for similar reasons.    

6.     Repossessed goods were invariably cleaned before being put into the despatch department for re-sale, and in many cases other minor repair work would be undertaken.  At the trivial end of the scale, batteries might be replaced in a TV remote control unit, refrigerator light bulbs might be replaced, TV flaps and control knobs that were missing would be replaced, and blown fuses replaced. 
7.     The Appellant had a service department, designed to deal with more involved repairs, and if such repairs were required, a decision would obviously have to be taken as to whether it was economically viable for more complex repair work (such as the replacement of TV tubes, or outer casings) to be undertaken.  We were told, not surprisingly, that it was generally uneconomic to undertake any but fairly simple repair work. 

8.    The VAT dispute revolved around the correct application of the provision in Article 4 of the Value Added Tax (Special Provisions) Order 1995 (SI 195/1268) that deemed there to be no supply of goods or services for VAT purposes if goods repossessed under a finance agreement were sold as “second-hand” goods, and “the goods so disposed of [were] in the same condition at the time of disposal as they were when they were repossessed or taken into possession”. 

9.    The substantive question for us in this Appeal was whether various itemised works of repair or replacement breached the condition just quoted.  The second question for us, which has regrettably involved more of a dispute than the more substantive point, was which categories of repair or replacement work we should address.   It was common ground that we should consider whether:

•	replacing TV remote control units;
•	replacing missing TV stands;
•	replacing missing washing machine hoses; and
•	replacing washing machine filters

breached the “same condition” requirement.   There were, however, numerous other categories of minor repair, which the Appellant claimed we should consider, whilst the Respondents said that we should ignore all those items because on several occasions the Appellant had implicitly indicated that these items were no longer in contention. In addition to contending that we should address all such items, the Appellant claimed, in the alternative, that we should allow it to amend its pleadings and add back items that had plainly once been in contention, even if they had been withdrawn. 

10.     Our decisions are as follows. 

11.    Whilst we entirely accept that the Appellant has contributed to very considerable confusion in this case, we do consider that the Appellant should be permitted to pursue its case in relation to all disputed repair and replacement items. The Respondents have not, at this stage, had an opportunity to give full consideration to whether all of the extra items do or do not breach the “same condition” requirement.   The Respondents’ original decision to reject the Appellant’s Voluntary Disclosure claim for all items was on a wider ground that is not currently relevant.  In view of the fact, therefore, that it is indeed possible that the Respondents might actually concede that some of the “extra” items do not breach the “same condition” requirement, and that they have as yet not advanced any arguments in relation to these further items, it would be wrong for us to give a formal decision in relation to the further disputed items. 

12.    In an effort to be constructive we will, however, indicate the approach that presently seems correct to us in the hope that the parties may be able to settle the dispute as to these other items without further recourse to the Tribunal. 

13.     In relation to the four categories of replacement that are before us, our decision on all four items is in favour of the Appellant. 

14.    The short explanation of the approach that we are adopting in this case is as follows, this approach applying not only to the four items in relation to which we give formal decisions, but to the remainder where we give indications of the approach that we consider to be correct.  

15.    Where, at the point of repossession of TVs or washing machines, remote control units, TV stands or washing machine water hoses were not repossessed, and the machines themselves were re-sold after mere cleaning, without any other work, we consider that the “same condition” requirement had not been breached. The equipment actually repossessed has remained in identical condition, and something new has been sold alongside it.   We consider it too artificial to say that the eventual sale was, for instance, of a TV with a remote control unit, which is one single item in a different condition than it was in when it was repossessed.   We consider that the right approach is that VAT should be accounted for in relation to the sale of a new remote control unit, TV stand or washing machine hoses for an apportioned part of the total price, and that no VAT should be accounted for in relation to the second-hand item. 

16.     We consider it inappropriate to say that the condition of a repossessed item has been changed if new batteries are inserted into it.   Batteries are consumables, and the equivalent of fuel in a car.  Nobody would dream of advancing the ridiculous argument that a car needed repair if it had run out of petrol.   Nobody would dream of saying that a car itself was in a different condition if fuel had been added to a previously empty tank.     

17.     We also consider that the replacement of other “consumables” does not affect the condition of the machine in which they are used.  Thus the replacement of blown fuses in equipment that is otherwise in full working order does not mean that the condition of the equipment has been changed. We also treat removable washing machine filters and refrigerator light bulbs as consumables.  Their replacement should be ignored in considering whether the condition of the equipment itself has been changed.    

18.     We agree with the Respondents, without any hesitation, that the replacement of TV casings and TV tubes do change the condition of repossessed televisions. In considering the third principle on which we base our various decisions and indications, we accept, with the Respondents, that we must apply the “same condition” test strictly, but we consider that this does not extend to the point of having to reach conclusions that we would regard, and that we strongly suspect that the average reader would regard, as “well beyond the ridiculous”.  We assume, for instance, that the missing buttons and control flaps are minor plastic items  (of which the Appellant doubtless has a plentiful supply) which can either be pushed on to a steel spindle, or prized over small lugs in the case of the AV flap in a matter of seconds.  We also think it fair to say that any intelligent observer considering the condition of a television would not say that the replacement of a small plastic button would have changed the condition of a second-hand television. There must presumably be some purpose to the “same condition” requirement, and that we assume has something to do with a faintly material change, and not a technical change that takes a couple of seconds to effect, and that does not change the functioning of the equipment.  We consider the replacement of buttons and AV flaps to be of no more significance, and doubtless to be something very considerably easier to effect, than steam cleaning appliances.  Steam cleaning after all requires considerable equipment, and is more likely to be accepted by the sensible observer to improve the condition of equipment that the two second act of pushing on a little plastic button. 

The evidence

19.    Evidence was given before us by Mr. Bill Flaherty, who had retired from his former position as National Service Director of the Appellant, in which role he had been responsible both for selecting equipment that was suitable for the Appellant’s customers, and supervising the inspection and fate of repossessed equipment. 

20.  Mr. Flaherty’s evidence was largely uncontroversial.  He gave a detailed description of the different departments in the Appellant’s premises, namely the despatch department that dealt with the initial inspection, and trivial rectification, of repossessed goods, and the service department to which goods would be sent if they were defective in some more serious way. 

21.   Mr. Flaherty also described the very extensive sampling exercise that the Appellant undertook, but it will be clearer to mention the relevant aspects of that when describing the background to the dispute, and the various stages through which it has passed. 

The course of the dispute and the facts in more detail

22.    On 24 June 2003 the Appellant wrote to the Commissioners of Customs & Excise, submitting a claim for repayment of overpaid output tax of £958,438.70 resulting from the fact that it had been paying output tax on sales of second-hand electrical equipment that it had repossessed under hire-purchase transactions, its contention being that no VAT should have been accounted for because Article 4 of the Order, quoted in paragraph 8 above, eliminated the liability for VAT, provided at least that the goods were sold in the same condition as they had been when repossessed.   The attachments to the Voluntary Disclosure indicated that all of the categories of replacement and repair work that are mentioned at any point in this Decision had been undertaken in relation to repossessed goods. 

23.     On 17 December 2004 the Commissioners rejected the voluntary disclosure on the grounds that:

•	since no records had been kept, it was impossible to know whether the goods had been re-sold “in the same condition”;
•	claims for repayments of overpaid output tax under Article 4 ought to be matched by reductions in the adjustments made under regulation 38 (where original output tax liabilities had been reduced because of the customer’s default); and 
•	a “capping” point was also raised. 

24.   On 11 January 2005, the Appellant appealed against the rejection of its Voluntary Disclosure, this appeal being numbered LON/2005/22.

25.     We should mention that the second and third points referred to in paragraph 23 above were either dropped by the Commissioners, or nothing in relation to them was in issue before us. 

26.    There had obviously been a meeting between the parties in February 2005 where there had been discussion about a sampling exercise that the Appellant might undertake to ascertain what percentage of repossessed equipment had been the subject of various categories of replacement and repair. The purpose of this exercise appeared to be two-fold.   Firstly it was intended to clarify for the future which replacement and repair operations could be ignored in relation to the “same condition” requirement, and secondly it was supposed that the percentage figures derived from the sampling period could be adjusted back to the level of repossessions in the earlier periods which were the subject of the Voluntary Disclosure claim. 

27.     PriceWaterhouseCoopers then wrote to the Commissioners on 4 March 2005.   This letter was unfortunately written in very conciliatory tones, it being clear that PWC thought that they were reasonably close to striking an acceptable settlement with the Commissioners.  The particular paragraphs that have led to considerable misunderstanding between the parties read as follows:

“I have set out in Appendix 1 a list of the common types of work undertaken on goods which, in our view, do not result in a change in the condition of the goods for the purposes of … Article 4(1).   I have additionally set out in Appendix 2 a list of common works undertaken by BAYV on repossessed goods [which]e we believe the Commissioners may argue fall outside the definition of “sold in the same condition”.
I thought it would be useful to summarise the rationale behind our interpretation of the differences between Appendix 1 and Appendix 2.   In Appendix 1 we have listed work that does not change the condition of the item itself, but merely ensures that it is safe and hygienic for resale.    On this basis we have therefore included dusting, steam cleaning, PAT testing and water testing.   We have additionally included in Appendix 1 replacement TV remote controls and replacement TV stands.   They do not alter the condition of the goods themselves and are provided free of charge by BAYV with all of their TV’s in the same way that instruction manuals are provided with each item.   It is our view that this can be distinguished from work such as a replacement AV cover or a replacement TV casing or tube, which does alter the condition of the goods themselves.”
28.     For the purposes of this decision, we will break down the items that PWC inserted into their Appendix 1, into two lists.   The reason for this will become clear, but we should emphasise that the items on both our List 1 and our List 2 were all simply on PWC’s Appendix 1.  

29.     Our lists 1 and 2 are as follows.  

List 1:

Dusting
Steam Cleaning
Portable Appliance Test (electrical safety test) 
Washing machine water test
Washing machine filter check
Removing back of tumble dryer to remove dust build up
Relacement Instruction Manual
Wrapping in bubble wrap.

List 2:

Replacement remote control
Replacement TV stand
Replacement coin meter
Replacement water hoses
Replacement filters

30.      PWC’s Appendix 2 (which we will periodically refer to as our List 3 items) listed the following operations:
Replacement TV casing
Replacement AV flap on TV
Replacement TV tube
Replacement TV buttons
Tumble dryer replacement belt
New handles for cookers
Replacement AV screen on camcorders
Replacement control knobs. 

31.     The Commissioners’ response to the PWC letter indicated that they agreed with PWC that all of the items in Appendix 2 resulted in some change of condition.   More materially they contended that those of the items in PWC’s Appendix 1 that we have included in List 2 did breach the “change of condition” requirement.   They agreed that those on List 1 did not breach it. 

32.    Before addressing the source of the confusion created by the PWC letter, it might be clearest to indicate two further complications about these “Lists” of operations. 

33.    The first point is fortunately very simple.  This is that the Commissioners soon accepted that the item “Replacement coin meter” should be switched from List 2 back to List 1.   The coin meter remained the Appellant’s property at all times, and simply collected the Appellant’s gross revenue.  It was not part of the sale at all and therefore the Commissioners accepted that it had no relevance in relation to the “same condition” test as regards the goods re-sold. 

34.    The continuing relevance of Lists 2 and 3 is that the Respondents contend that both current appeals should relate only to the List 2 items, the Appellant allegedly having dropped any claim in relation to the List 2 items.  Obviously the Appellant contends the opposite (at least as regards the first numbered Appeal), and indeed there are further items that were in neither Appendix on which the Appellant wants us to rule as well.   These further items, which we will refer to as “List 4 items”, are:

Replacement batteries in a remote control
New power leads
Refrigerator drawers
Refrigerator light bulbs, and
Minor internal electrical and non-electrical parts/components for all products, such as fuses and circuit boards. 

35.    There is no doubt that the PWC letter of 4 March 2005 was confusing.   The Respondents claim now that it actually conceded on behalf of the Appellant that the Appendix 2 (or List 3) items were fatal to the “same condition” requirement.    It did not actually say this.   Indeed all that it expressly said was that Appendix 2 contained a list of items that PWC believed the Commissioners considered breached the “same condition” requirement.   The letter was, however, confusing in that it had said that the List 1 items were items which “in our view, do not result in a change in the condition of the goods for the purposes of Article 4(1)”, implicitly suggesting the reverse for the Appendix 2 items.  The following paragraph of the letter, addressing the rationale behind the two lists, appeared to be based on an assumption that also made it difficult to dispute that the Appendix 2 (List 3) items breached the “same condition” requirement.   Furthermore the whole conciliatory tone of the letter very much went on to suggest that if the Commissioners accepted that all the Appendix 1 items were unproblematic, then the case for the future, and the back claim under the Voluntary Disclosure, might be settled on this basis. 
36.    The Commissioners’ formal response to the PWC letter was contained in a letter of 14 June 2005.  This letter ostensibly just agreed with the PWC remarks about the Appendix 2 items.  More relevantly it decided formally that our List 2 items did breach the “same condition” requirement, and it was against this that the second Appeal, numbered LON/2005/740, was brought.  

37.     Whilst the Appellant appeared to concede at the hearing that the second appeal, number 2005/740, related only to the four List 2 items, it was contended that the first appeal had referred initially to every single operation on goods now on any of Lists 2, 3 and 4, and that at no time had the repayment claim made in the Voluntary Disclosure been narrowed down. 

38.     Without reciting every detail of the total confusion, we should mention four specific matters. 

39.      First in providing Further and Better Particulars of its case when requested to do so, the Appellant unquestionably increased the confusion by seemingly assuming that the only operations in dispute in relation to the “same condition” point were the four that remained on List 2.   The Further and Better Particulars, dated 29 June 2007, twice listed the four List 2 items in relation to the “same condition” requirement and made no mention of other operations. 

40.      To contrary effect, however, the Appellant undertook an enormous exercise, to the knowledge of the Commissioners, designed to ascertain what percentage of repossessed goods had been the subject of countless operations, and certainly not just the operations on List 2.   The Respondents said at the hearing that they had no idea why all this seemingly irrelevant material was being provided, but it would not have taken much imagination to realise that the Appellant wished to pursue its claim in relation to all the operations on its test list. 

41.     The third event to mention is that the Appellant was again asked to identify to the Tribunal the matters in dispute in 2009.  This PWC did in a letter of 5 May 2009.  With the benefit of hindsight it is possible to see that this letter just indicated that the Appellant considered that the “same condition” issue should involve consideration of everything on Lists 2, 3 and 4 but it was still far from clear.   In its favour, it started by reciting that the List 1 items had been accepted by the Commissioners to be irrelevant to the “same condition” test and that there was no longer any dispute about “capping” or any claim that discharge of the repayment claim would involve “unjust enrichment”.  It then indicated that the sampling exercise that had been done indicated what percentage of repossessed equipment had been the subject of four specific operations, two of them being List 2 items, and significantly 2 of them not being List 2 items.   It then defined the issue for the Tribunal in the following terms:

“The sole issue which remains in dispute, to be determined by the Tribunal, is whether the remedial work undertaken by the Appellant (other than the [List 1 work] on the repossessed goods, breaches the condition contained in Article 4(1) .. that they are “in the same condition at the time of disposal as they were when they were repossessed”. 
It is fair to say that that description of the issue appears wide enough to encompass all the various operations in fact undertaken by the Appellant (thus all the items on Lists 2, 3 and 4), but this sentence certainly did not openly and clearly remove all the doubt and confusion created by the 4 March 2005 letter and the 2007 Further and Better Particulars. 

42.     The fourth matter to mention is that when, in the final run up to the hearing before us, the parties exchanged their Skeleton Arguments there was an immediate exchange of heated correspondence.  In the course of this the Appellant suggested that the best course was to defer the hearing in order to clarify the operations that remained in dispute.  The Respondents objected to this and insisted that the hearing should continue, which (without any intervention on the part of the Tribunal) it did. 

43.     We were accordingly presented with a preliminary issue which involved a consideration of papers that we had not seen, and which appeared actually to be slightly more complex (though of even less substance) than the substantive points that we were principally asked to address.  

The conduct of the hearing, and the subsequent representations by the counsel for each party on the preliminary issue
44.     In view of the fact that a witness was attending in order to give evidence in relation to the various operations that had been undertaken on repossessed equipment, we proceeded to hear limited argument on the procedural question, but more time was given to the actual application of the “same condition” test.  Needless to say, since the massive sampling exercise that had been undertaken extended to items that were not on List 2, we heard some evidence in relation to numerous operations.  We consider that it is irrelevant to summarise much of the evidence.   We were given detail as to which department of the Appellant dealt with the absolutely routine inspections and tests, and which undertook minor repair work.  However there is a limit to the amount of description that needs to be given to operations such as replacing remote control units, TV stands, and swapping blown fuses, and we consider that the outcome of this case should be governed by general principles that we will outline shortly.  These render the precise detail of the operations fairly irrelevant.   We should add that, as we requested, both counsel provided us with helpful written submissions on the confusing procedural issue after the hearing itself, both of which we have considered carefully. 

The contentions of the Appellant
45.      It was contended on behalf of the Appellant that:
•	nothing had limited the scope of the initial appeal against the Commissioners’ rejection of the Appellant’s Voluntary Disclosure;
•	that Voluntary Disclosure had  been accompanied by a 100-page document that had addressed every operation currently contained on Lists 2, 3 and 4;
•	even if we considered that the Appellant had limited its pleadings at some point, we had liberty to allow the Appellant to revert to its pleadings in the original appeal against the rejection of the whole Voluntary Disclosure and in the interests of justice should allow the Appellant to re-amend its pleadings;
•	the Respondents were wrongly applying a “scorched-earth” test in applying the Article 4 “same condition” test, and the test should be applied in a somewhat more flexible manner;
•	it made absolutely no sense to say that a television was sold in different condition if some ridiculously small operation (such as the replacement of batteries in a remote control unit) had been undertaken, and it was extraordinary that the VAT treatment of the entire supply should be affected by such a minor matter; 
•	the Appellant would be content with a finding that when an ancillary item (such as a remote control unit, a TV stand, water hoses or power cables) had been replaced because those items had not been collected when the goods were repossessed, the VAT treatment should be that VAT should have been accounted for on the element of the total price on re-sale attributable to the new replacement items, so long as the second-hand sale of the unchanged TV, washing machines or refrigerator continued to qualify for the treatment provided for by Article 4. 

The contention on behalf of the Respondents
46.     It was contended on behalf of the Respondents that:
•	we should confine our decision just to the four items remaining on List 2; 
•	all the confusion in relation to the scope of the Appeal had been caused by misleading letters or Further and Better Particulars emanating from the Appellant or its representative;
•	 it would be improper to allow the Appellant to extend the scope of the Appeal at the last minute when the Appellant had failed for a very long period to clarify its list of matters in dispute;
•	in the interests of the efficient conduct of litigation, we should be slow to permit last minute changes to pleadings;
•	on the substantive issue, we should construe the “same condition” test in Article 4 strictly, because all exemptions from VAT should be so construed;
•	the feature that the Commissioners accepted that cleaning and testing operations, and the replacement of an Instruction Manual, did not breach the “same condition” test was not inconsistent with the Respondents’ contention that every item on Lists 2, 3 and 4 altered the condition of goods, and thus breached the Article 4 test; and 
•	in considering a sale of a second-hand item (say a television) that had itself not been remotely changed, we should consider that a sale of that item plus a new replacement ancillary item (such as a remote control unit or a TV stand) was a sale of a composite item, and that that composite item was thus in a different condition than it had been when it had been repossessed, without some ancillary item. 

Our decision
47.     We certainly agree with the Respondents that the Appellant has been to blame for a considerable amount of confusion that has been created in this case, as to the scope of the appeal. 

48.    The Respondents are however wrong to assert that PWC conceded that the Appendix 2 items occasioned fatal changes of condition.   The letter of 4 March 2005 merely recited that PWC believed that the Commissioners considered that these listed operations resulted in changes in condition.   The letter was however confusing in the way that we have already described. 

49.     We consider that this Appeal should nevertheless consider whether each of the items on all of Lists 2, 3 and 4 occasioned changes in condition.   We accept that, at the hearing before us, the Respondents had not addressed the effect of any of the operations other than those on List 2, and we also accept that, whilst the entire original claim had been rejected for slightly different reasons, the Commissioners had not given decisions on the “change of condition” issue as regards the List 3 and List 4 items.   In view of this we will confine our formal decision to the status of the items on List 2.   In the great hope, however, that no further hearing will be necessary, we will indicate our preliminary view in relation to the items on the later two Lists.  It seems to us that there is a limit to the amount of debate that can be given to such items as changing TV tubes, and (at the other end of the spectrum) changing batteries in a remote control unit, and we hope that the parties will accept the indications that we will give in relation to each item on all three lists. 

50.    The four reasons why we consider it appropriate to allow the Appellant to extend its appeal to the items on all four lists are that:

1.	The Respondents were wrong to assert categorically that PWC accepted in their letter of 4 March 2005 that the Appellant conceded that the Appendix 2 (List 3) items did involve fatal changes of condition.  This is not what the letter said.

2.	While it is the Appellant that has created the confusion in this case, we agree that the scope of the sampling exercise undertaken by the Appellant indicated that the Appellant wished to contest all matters involved in that exercise;  a careful reading of the letter of 5 May 2009 contained the same indication. 

3.	In the interests of justice, it seems to us to be right that the Appellant should be able to advance the arguments that it wishes to advance, albeit that it has complicated matters by occasioning confusion.

4.	Finally there is nothing remotely complex in extending our decision to the matters on Lists 3 and 4 once we have arrived at principles for deciding the appeal generally.  It is wrong to suggest that the Respondents might have to raise complex and unforeseen arguments in relation to the extra items.  The Respondents’ contentions in relation to most of the items are not only obvious to the Respondents, but they are obvious to us as well and we agree with at least some of them. It thus appears far more satisfactory for our decision to endeavour to deal with all disputed points, in the hope that the parties will accept the indications in relation to those matters where we give merely indications, rather than a formal decision. 

51.     Addressing the more substantive issue, we observe first that our decision is merely a decision in principle.  The Commissioners have already indicated that they are prepared to deal with the Voluntary Disclosure claim by looking at the results of a sampling exercise, and extrapolating that over the past periods.  The way in which that is done is not for us to indicate. 

52.      We certainly agree with one point in relation to the sampling exercise made on behalf of the Respondents.   This is that it is not sufficient for the Appellant to show that particular goods were the subject of some operation that did not change their condition.    It must also be demonstrated that the goods had not simultaneously been the subject of some other operation that did have that effect.  We agree with the Respondents that the way in which the sampling exercise was done may not have extracted this information, and we agree with the Respondents that the sampling exercise needs to show that no “fatal” operation has been conducted. 

53.      Our substantive decision in this case is based on three principles, which we consider to be sensible.   Two of them are directly relevant to items on List 2, and the third is relevant to many of the other items.   

54.      The first point of principle addresses the issue of whether “goods were in the same condition at the time of disposal as they were when they were repossessed” if a television or other main appliance has been repossessed without the Appellant repossessing ancillary items such as the remote control unit or washing machine water hoses; those missing items have then been replaced by new items, and the television or appliance itself has been the subject of no change of condition at all by the point of re-sale.      

55.      We consider that the right approach in this case is as follows. The first question is whether, in this situation, it is still appropriate to say that the goods sold are indeed second-hand goods, and goods that have been repossessed.  The answer to this seems very obvious, and a buyer being told that the goods were new goods would soon dispute that suggestion.   We believe that this was not disputed by the Respondents.    We then address the question of whether there has been any change in the condition of the goods that were repossessed between the condition they were in when repossessed, and when later re-sold.  On the reasoning that the television itself, to take that example, was a discrete item, that it was that television that was repossessed, that nothing else was repossessed, and that that item (i.e. the thing that was repossessed) remains in identical condition, we say that the “same condition” test has been satisfied.  

56.      We now have to consider whether the Article 4 exemption applies to the sale of some new ancillary item (the remote control unit or the water hoses) sold in conjunction with the second-hand main item.   In the interests of not over-extending the application of a VAT exemption, we conclude that the right answer to this question is that, even if it was realistic to treat the re-sale as a sale of just one item, we should nevertheless split it, and preclude the sale of the ancillary new item from attracting the VAT exemption not intended to apply to a sale of a new item.  We deal with the resultant allocation of price in paragraph 58 below.  We should add that the approach that we have adopted in paragraph 54 above was more based on a simple interpretation and application of the Article 4(1) test than on any application of the VAT principles concerning multiple and composite supplies.  We are well aware of those principles. Neither counsel suggested that those principles were directly relevant, though we would mention that had we thought them to be relevant (which we do not), we would be more inclined to have said that their effect would be to extend the exemption applicable to the dominant element of the supply to the ancillary item as well, rather than to eliminate the availability of the exemption altogether.      

57.      We accept that the approach adopted in paragraph 54 can only apply where the dominant item and the replaced item are altogether separate.  Thus this approach can apply to remote control units, TV stands, washing machine water hoses, and replacement power cables.  All of these items are clearly distinct and all can easily be purchased separately.  

58.      We consider that this principle cannot be applied to integral parts of the main equipment itself.   It would be absurd to sub-divide a television set, and to argue that the innards of the television set were sold in unchanged state even where the whole casing had been replaced.   In this situation there is the obvious point that a television with a damaged casing would have been repossessed, and it would be the very condition of the repossessed item that had been changed.   The same must apply to the replacement of dryer belts and other items integral to the equipment repossessed.      We deal below with the more borderline situation, where minor items, such as control knobs, were missing from a television, at the point of repossession.

59.      We consider that remarks in the PWC letter that we quoted in paragraph 27 above were not correct when it was suggested that these ancillary replacement items were provided “free” by the Appellant. As the Appellant’s counsel implicitly conceded, we consider that the right approach is to treat the provision of the replacement ancillary items as a sale of a new item for the appropriate apportioned element of the aggregate price, and to treat only the balance as the price paid on the re-sale of the second-hand equipment, sold itself in unchanged state.   

60.     The second principle that we consider to be sensible is to disregard changes to items that are regarded as fuel or as “consumables”. We gave the example in the Introduction that it would be inappropriate to say that the condition of a car had been changed if it had been filled with petrol, and we consider that the same applies to batteries in remote control units.  Insofar as these were on List 4, not List 2, we accept that we heard no argument in relation to the replacement of batteries, and the parties may wish the hearing to be re-convened to address this point.  Our hope, we repeat, is that in common sense terms it would be inappropriate to say that the condition of a TV remote control unit, let alone the television to which it was related, had been changed merely because new batteries were either inserted into the unit, or sold in a sealed packet along side it. 

61.     We apply the same approach in relation to “consumables” to two further items, beyond batteries, namely to replacing faulty bulbs in refrigerators (on List 4) and, with more hesitation, to replacing filters on washing machines (List 2).  To take a slightly more extreme example, that was not on any of the Lists, no one would contend that the condition of a vacuum cleaner had been changed if a dirty “throw-away” dust bag had been removed and replaced with a new one.   One would regard that as simply the replacement of a consumable, and certainly nothing material to the condition of the vacuum cleaner.   Light bulbs in refrigerators generally have a long life-span, and it is not that simple for the average householder to obtain a matching replacement, but we still consider it sensible to conclude that the replacement of such a bulb cannot realistically be said to impinge on the condition of a refrigerator.  The same applies, as we have said with slightly more hesitation, with replaceable filters in washing machines.   Such filters are not replaced in the way that vacuum cleaner bags are replaced, but they are still removable filters, designed to be removed and replaced with ease by the user, and we conclude that they should also be treated as consumables, whose replacement does not affect the condition of the washing machine. 

62.     There remain to consider, thus, all of the items on List 3, and the items on List 4, other than replacement batteries and new power leads.   The treatment of these items is governed, we believe, by our third principle, which is that in applying the Article 4(1) test strictly, but not to the point of being ridiculous, we should treat it as not complied with where any repair or replacement of some item is of any significance, but we should not treat the test as being breached where a change is utterly trivial. 

63.     With or without contentions from the parties, there can be no realistic doubt that the replacement of faulty TV tubes and the replacement of damaged TV casings must involve major changes in the condition of televisions.    Whilst the following are more marginal, we also consider that there are material changes in condition where dryer belts are replaced, where broken refrigerator drawers are replaced, and even where cooker handles are replaced.   In explaining those conclusions, we assume that the dryer belt is considerably more costly than a couple of buttons, it affects the functioning of the machine, and it is doubtless quite awkward to access it in order to replace it.  Refrigerator drawers presumably cost more than trivial items, and a refrigerator with broken drawers would be unhygienic and virtually unsaleable.     Cooker handles are more marginal still but they are of some significance, and in applying the test strictly, we conclude that replacing them does breach the “same condition” test.

64.     Turning finally to the very trivial items, such as the replacement of TV buttons and AV flaps, we first observe and accept that it impossible to apply the reasoning that we adopted in paragraph 54 above to items such as missing knobs and flaps.  In paragraph 57 we made the obvious point that the replacement of defective internal parts could not be covered by this principle, and that was all the more obvious because such parts would have been in the defective item when it was repossessed, such that their replacement would obviously have affected the condition of the equipment between the two points in time.    We accept that missing flaps and buttons would not themselves have been “repossessed”, but we still consider that when such items are an integral part of the piece of equipment in fact repossessed, it is impossible to apply the reasoning adopted in paragraph 54 which applies only when utterly distinct items were not repossessed. 

65.      Whilst we consider that we cannot apply the reasoning adopted in paragraph 54 to the missing buttons and flaps, we repeat the point made in the Introduction.   We simply cannot believe that reasonable observers would say that the condition of items had been changed if one small plastic button was replaced, or a missing AV flap replaced, any more than they would say that the condition of a washing machine had been changed by the act of commercial steam cleaning.   A suggestion by us that the replacement of a couple of buttons would breach the “same condition” requirement would, we believe, be regarded as ridiculous and embarrassing, and, assuming that there is some coherent purpose underlying the “same condition” requirement, that purpose cannot extend to our having to regard the replacement of a couple of tiny buttons, effected in a matter of seconds, to be of the faintest significance.   We apply this reasoning to the buttons and flaps on List 3, but only to the AV screens on camcorders if they are non-technical items, broadly analogous to the AV flap, covering the minor controls, on a television. 

66.     We were given no other information in relation to the last item on List 4, and thus consider the only two items specifically mentioned, namely the replacement of fuses and circuit boards.    We consider the replacement of fuses to be irrelevant.   It might be inappropriate to describe fuses as “consumables”, but it would be equally inappropriate to suggest that a television in perfect condition with a blown fuse had been “repaired”, or the television’s condition changed, if a blown fuse was replaced.    Such a description would be as ridiculous as the suggestion that a car had been repaired, or a part of the car replaced, if petrol was put into a car that had had run out of fuel. 

67.      We take a different approach in relation to circuit boards.   A technician might know that circuit boards are relatively cheap, and that the Appellant might have a store of both new circuit boards, and ones salvaged from television sets that were faulty in other areas.  They are however a complex internal part that cannot be changed, in the ordinary course, by the user, and their replacement does alter the condition of the repossessed television set. 

68.     We of course accept that the views that we have expressed in relation to the items on Lists 3 and 4 do not technically constitute formal decisions, and that the parties have not advanced arguments in relation to these items.  In common sense terms, there is limited scope for debate as to whether most of these items do or do not infringe the Article 4(1) test, and we hope that the parties will find the indications that we have given, in an effort to be constructive, helpful. 

Overall conclusions
69.     On the basis that our formal decision is confined to the four remaining items on List 2, we say that none of the relevant replacements affects the Article 4 test, three of them for the reason given in paragraph 54, and the replacement filters for the reason given in paragraphs 59 and 60. 

70.     The indications that we give to the parties, as regards the remaining items, are that all the items on List 3 appear to fail the Article 4 test except the replacement of trivial buttons and flaps, as do the replacement of refrigerator drawers and circuit boards on List 4.    The other items on List 4 appear to us not to infringe that test. 

Costs

71.     Both parties requested that we adopt the old VAT and Duties Tribunal rules as regards costs, and both parties applied for their costs.  

72.     Without regard to whether we exercise our discretion to apply the old cost rules, we consider it inappropriate to award costs to either party. The Appellant has succeeded in this case, at least on the subject matter of the Appeal for which the Respondents contended.   The Appellant has however not prevailed in the tentative views that we have expressed as regards other items that the Appellant contended should be part of the formal appeal.  We also agree with the Respondents that the Appellant was largely to blame for the very considerable misunderstandings that there have been between the parties in this case.  For these reasons, even if we were to apply the old rules, we would still consider it inappropriate to award the Appellant its costs. 

HOWARD M NOWLAN
TRIBUNAL JUDGE
RELEASE DATE: 23 April 2010