Value Added Tax; supply of goods over the Internet; payment by credit card; European Council Directive 97/7/EC; The Consumer Protection (Distance Selling) Regulations 2000 SI 2000 No. 2334; Value Added Tax Act 1994 Sections 6(2)(4); time of supply; similarity with sale on approval and sale or return.

EDINBURGH TRIBUNAL CENTRE

	ROBERTSON’S ELECTRICAL LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:	 (Chairman):  J Gordon Reid, QC., F.C.I.Arb.,
					 (Members):   Mr K Pritchard, OBE., BL., WS
							  I R Welch, CA., JP

Sitting in Edinburgh on Monday 28 June 2004

for the Appellant		Mr Leslie Allen, Dorsey & Whitney

for the Respondents	Miss Gillian Carty, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2004.

DECISION

Introduction
This is an appeal against a Notice of Assessment dated 16/2/04 in the sum of £92,924 plus interest and broadly relates to the timing of accountability for VAT on sums  (£623,928.57) paid by credit card over the Internet for goods supplied which are subject to the Consumer Protection (Distance Selling) Regulations 2000 SI 2000/2334.  Mr Les. Allen, solicitor, Dorsey & Whitney appeared on behalf of the Appellant and Miss Gillian Carty, solicitor, Messrs Shepherd & Wedderburn W.S., Edinburgh, appeared on behalf of the Respondents (Customs).  Neither party led evidence.  A Statement of Agreed Facts was produced along with two joint bundles of documents.  There is no dispute on quantum.  The Hearing took place at Edinburgh on 28/6/04.  

Facts
The Statement of Agreed Facts is in the following terms:-

1.  The Appellants are Robertson's Electrical Limited, a company incorporated under the Companies Acts and having their registered office at East Fulton House, 18 Darluith Road, Linwood, Renfrewshire, PA3 3TP.

2.  The Appellants are registered for VAT purposes under VAT registration number 264 2287 56 and have been so registered with effect from 1 April 1973.  Item 1 of the Joint List of Documents is a true copy of the Form VAT 1 completed by the Appellants in order to register for VAT purposes and is equivalent to the original.

3.  The appeal is against the decision of the Commissioners to assess the Appellants to VAT in the sum of £92,924 (exclusive of interest) pursuant to section 73 of the VAT Act 1994.  The appeal lies to this tribunal in terms of section 83(p) of the VAT Act 1994.
4.  The assessment under appeal was notified to the Appellants on 16 February 2004.  Item 8 of the Joint List of Documents is a true copy of the assessment and is equivalent to the original.
5.  On 28 January 2004, an officer of HM Customs and Excise, Robert Kerr, conducted a visit to the Appellants.  The purpose of the visit was to review the circumstances surrounding the VAT claim submitted by the Appellants in respect of the period 11/03 in the sum of £64,565.13.  Item 2 of the Joint List of Documents is a true copy of the visit report prepared by Robert Kerr and is equivalent to the original.

6.  During the course of the visit, Robert Kerr raised with Mr Conaghan of the Appellants the matter of accounting for deposits paid by the Appellants' customers and indicated that in the view of Mr Kerr the receipt of the deposit created the VAT point for tax purposes.  Mr Conaghan of the Appellants disagreed.
7.  It was established at the visit by Mr Kerr that in respect of the period 11/03 deposits totalling £623,928.57 were held in respect of goods paid for by customers who were still entitled to exercise their rights under the Consumer Protection (Distance Selling) Regulations 2000 to cancel the contract.  These sums had not been accounted for on the VAT return of the Appellants for that period.
8.  That with the exception of the matter of the tax treatment of the deposits held by the Appellants at the end of November 2003, Mr Kerr was satisfied that the return for the period 11/03 was in order.
9.  Following the visit, Mr Kerr confirmed with his colleagues that they were of the view that in the circumstances, the tax point for VAT purposes was created when the deposit was received and not at any later time.  Mr Kerr confirmed his view in his letter to the Appellants dated 30 January 2004.  Item 3 of the Joint List of Documents is a true copy of the letter of 30 January 2004 and is equivalent to the original.
10.  On 16 February 2004, Mr Kerr issued his assessment.  
11.  Following the issue of the assessment correspondence was exchanged between the parties.  Items 4,5,11,16,17 and 19 of the Joint List of Documents are true copies of letters issued by the Appellants to the Commissioners and are equivalent to the originals.
12.  Items 5,7,12,15 and 18 of the Joint List of Documents are true copies of letters issued by the Commissioners to the Appellants and are equivalent to the originals.
13.  Items 9,10,13 and 14 of the Joint List of Documents are true copies of e mails issued by the Appellants to the Commissioners and are equivalent to the originals.
14.  Item 1 of the Supplementary Joint List of Documents is a copy of the Appellants terms and conditions in respect of online sales made by the Appellants to their customers.
15.  The system for online sales operated by the Appellants, is that the Appellants' customer places an order online by use of the Appellants' website facility.  The customer makes payment of the full sum of the purchase price by credit or debit card using the Appellants' online payment facility.  An order note is prepared by the Appellants for the purposes of their internal administration.  This order note is not dispatched to the customer.  The goods are dispatched by the Appellants.  An invoice is prepared by the Appellants either at the point of dispatch of the goods or at a later date but in all cases within the period of 7 days from the date of the delivery of the goods to the customer.  The Appellants record the tax point for VAT purposes as the earlier of the date of the invoice or the date occurring 7 days from the date of delivery of the goods to the customer.
16.  The Appellants treat the payments made by customers purchasing online as refundable deposits and do not account for VAT at the point of receipt of the payments.  The Appellants treat the payments made by the customers in that way because of the protection afforded by the Consumer Protection (Distance Selling) Regulations 2000 to customers concluding contracts to purchase goods online.  In particular the Appellants have regard to the right to cancel provisions contained at Regulation 10 of the said Regulations and paragraph 9 of the Explanatory Notes issued by the DTI. 
17.  In the period following the dispatch of the goods to the customers from the Appellants and using the Appellants online sale service the goods are not covered by the Appellants' policy of insurance.
18.  There is no dispute as to the quantum of the assessment.  If the Appellants are correct in the way in which the payment made by customers are to be treated the appeal will succeed and the assessment will be withdrawn.  In that event, the Commissioners will concede expenses and agree to meet the costs of the Appellants calculated in accordance with Rule 29 of the VAT Tribunal Rules 1986.  In the event that the appeal does not succeed and the assessment issued by the Commissioners is upheld, the Commissioners will not insist in the recovery of any costs from the Appellants.

From the agreed documents and submissions, we found the following additional facts undisputed or established:-
(a)	When goods are ordered from the Appellant over the Internet, the price is normally paid in full.  References in the documents to deposits are generally to be taken as meaning payment of the full price of the goods.  Normally, an invoice is generated and sent out when the goods are despatched. 

(b)	The Appellant’s Terms and Conditions of use of their website include the following provisions:-

“The placement of an order either online or by telephone indicates your acceptance of these terms and conditions…..

All goods will remain the sole property of (the Appellant) until payment is received in full…..

By submitting your order you are offering to buy goods….

All online orders are confirmed as received through sending an auto-generated email.  We reserve the right to decline your order.

Returns 

If you wish to return a product that is not faulty or mis-described, you have 7 days from the day after the product is received (sic) to request that you wish to return the product……

(c)	When goods are so ordered, they may not be in stock.  Accordingly, the period between the Internet order and delivery of the goods may be several days or up to several weeks.  This period may straddle the Appellant’s VAT return periods.

(d)	The Appellant’s current practice of accounting for the VAT in dispute is administratively convenient and has cash flow benefits for them.  If Customs’ arguments are sound, carrying them into effect will be less convenient for the Appellant.

Statutory Framework
Section 6(2) of the 1994 Act sets out rules for determining the time of supply and thus the basic and actual tax points.  Where the goods are removed, the basic tax point is the time of removal (Section 6(2)(a)); if they are not removed the basic tax point is the time they are made available to the person to whom they are supplied (Section 6(2)(b)).  Section 6(2)(c) provides, in summary, that a supply of goods shall be treated as taking place if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time when it becomes certain that the supply has taken place or, if sooner, 12 months after the removal.  Section 6(2) thus identifies the basic tax point.  Section 6(4) provides, in effect, that if, before the basic tax point, the supplier issues a VAT invoice or if, before the time applicable under Section 6(2)(a) or (b) he receives payment, the actual tax point is the date of issue of the invoice or the date of receipt of the payment.  In relation to payment, Section 6(4) does not apply to goods sent or taken on approval or sale or return or similar terms.  Thus, in those circumstances, payment has no significance in relation to the identification of the time of supply.

Section 2 of the Sale of Goods Act 1979 defines a contract of sale of goods, which may be conditional.  Where the property in the goods is to be transferred at a future time or subject to some condition later to be fulfilled, the contract is an agreement to sell.  Sections 17 & 18 deal with the passing of property.  

The Consumer Protection (Distance Selling) 2000 Regulations SI 2000 No. 2334 implement, at least in part, the Directive 97/7/EC.  The Regulations define distance contracts (Regulation 3(1)); it was not disputed that the Regulations applied to the Internet transactions carried out by the Appellant and with which this appeal is concerned (See Regulation 3 and Schedule 1 para 11).  Regulation 10 entitles the consumer to give notice of cancellation within seven working days of receipt of the goods (see Regulation 10(1) and 11(2)); the period may be extended in certain circumstances.  The effect of such notice is that the contract is cancelled and is to be treated as if it had not been made.  Further provisions are made about the care of the goods during and after the cancellation period (Regulations 17), reimbursement of the price and the cost of returning the goods (Regulation 14).  Where payment is made by credit card the credit agreement is automatically cancelled (Regulations 15 & 16).  Contracting out is not permitted (Regulation 25).

Submissions
Mr Allen produced a written skeleton argument, which he amplified during the Hearing.  Essentially, his argument is that supplies of goods via the Internet fall within Section 6(2)(c) of the 1994 Act and, in particular, the phrase similar terms.  Until the statutory cooling off period under the Regulations expired, it was not known whether a supply would take place.  This is consistent with DTI Guidance which described the cooling off period as giving the consumer the same opportunity to examine the goods being offered as they would have when buying in a shop.  

He also submitted that under the Sale of Goods legislation the proper analysis of the internet transaction was an agreement to sell within Section 2(5) of the 1979 Act.  The transactions in question fell within Section 18 Rule 4.  The Appellant’s terms and conditions of sale were irrelevant because insofar as they differed from the Regulations, the Regulations prevailed and the tax point was much later (3 months and 7 days).

He also emphasised that this was not a case about VAT planning.  No windfall would accrue to the Appellant if successful and a decision in his favour would not open the floodgates.

Littlewoods Organisation plc v C&CE Comrs 1997 V&DR 408, relied on by Customs, was not binding on this Tribunal and was, in any event, distinguishable.  It was not concerned with the 2000 Regulations, but related to a condition subsequent which was not the position here.  It was a conditional contract to which Section 2 of the 1979 Act applied.  Too much should not be made of paragraph 17 of the Statement of Agreed Facts as it was difficult to insure goods not in one’s possession.  As the 2000 Regulations had their source in the EC Directive 97/7/EC, a purposive construction should be given to the Regulations.  UK contract law should not be rigidly applied.  The VAT statutory provisions were concerned with supply rather than contractual analysis.

He referred to Department of Transport’s publication entitled A Guide for Business to The Consumer Protection (Distance Selling) Regulations 2000, October 2000 (the “DTI Guidance”), which he acknowledged did not have the force of law.  However he adopted the logic of certain paragraphs (2.1, 2.2, 2.7-9, 2.13, and 9.1 which supported his submissions about the purpose of the Regulations.

Miss Carty, for Customs, submitted that the question was whether the internet sales are sales on approval etc within Section 6 of the of the 1994 Act as a result of the consumer protection provided by the Distance Selling Regulations.  She submitted  that, by virtue of Section 6 of the 1994 Act, the basic tax point where goods are removed is the time of removal; this is overridden if, before removal, an invoice is issued or payment made; the invoice or payment then creates the actual tax point.  Special rules apply where goods are sent on approval etc; then the basic tax point becomes the earlier of (i) when it becomes known that a supply will take place, and (ii) the expiry of twelve months.  The actual tax point will be earlier if an invoice is issued.

These special rules do not apply here because the goods were not sent on approval etc.  The Distance Selling Regulations did not prevent a contract coming into existence (see Regulation 10(1) which referred to cancellation which assumes something in existence capable of being cancelled).  She relied on the Littlewoods case; the circumstances were sufficiently similar for its reasoning to be adopted (paragraphs 10, 11, 14, 15 (although the first sentence of paragraph 15 was said to be unsound), and especially paragraph 16).  Under the Regulations, a contract of sale was concluded; risk and property passed, but the Regulations allowed the transaction to be unscrambled.  Payment was inconsistent with sale on approval as was paragraph 17 of the Statement of Agreed Facts.  This was in line with the Appellant’s Terms and Conditions (Joint Bundle page 44) which provided that the goods remained the property of the Appellant until payment was received in full.  It was unnecessary to resort to Section 18 of the Sale of Goods Act 1979 as the contractual intention was clear.  The DTI Guidance did not have the force of law.

If it is accepted that Section 6(2)(c) did not apply, then the time of supply will be the earlier of the time of removal of the goods, and the receipt of payment; here, it will be the receipt of payment, and if so, the Assessment must be upheld.  If the transaction falls within Section 6(2)(c), the time of supply is the earlier of the time when it becomes certain that the supply has taken place i.e. the expiry of the statutory seven working days from the date of receipt of the goods, and the issue of the VAT invoice.

Decision
The problem which gives rise to this appeal is the period of delay between the debiting of the customer’s credit card and the delivery of the goods ordered and the seven working days thereafter.  This period may straddle a return period.  The question is when is the Appellant obliged to account for output VAT on the price of goods ordered and paid for in one return period but not delivered until some point during the next return period when invoices for such goods are generated and rendered.  The current practice of the Appellant is to account for the VAT in the later period.  Customs say the Appellant should be accounting for the VAT in the earlier period.

In our view, the answer to the problem is to be found in the proper construction of Section 6(2)(c) of the 1994 Act and the application of that provision to the facts of this case.  If Section 6(2)(c) applies, then the payment (usually by credit card) before delivery does not have the effect of creating a deemed time of supply for the purposes of the charge to VAT.  No actual tax point will be created by virtue of the receipt of payment for goods yet to be delivered.

The question then becomes whether the supply of goods with a statutory right of cancellation, without assigning any reason for cancellation, is a supply on similar terms to goods sent on approval or sale or return.  What are the ingredients of a supply on approval and a supply on sale or return?  We consider that the essential ingredient is that the person to whom the goods are supplied has the unqualified right to return the goods or to decline to proceed with or cancel the transaction, usually without penalty.  The precise terms upon which supply on approval or sale or return are made may vary e.g. as to the time within which approval or non approval must be intimated or the goods returned or the condition of the goods at the time the right is exercised.  Essentially, however, there need be no defect in the goods and the supplier need not be in breach of contract.  Approval of the goods, expressly or by implication, or onward sale to a third party rather than return, signify acceptance of the supply of the goods in contracts of this type.  At that stage, it becomes certain for the purposes of Section 6(2)(c) of the 1994 Act that a supply has taken place.  The goods could, perhaps, subsequently be rejected under some other statutory or contractual provisions (e.g. where there is a latent defect), but approval and onward sale signify acceptance that the supply has taken place.  In our view, the statutory right of cancellation of a distance contract (as defined in the Regulations) gives the supply of goods under such a contract a character similar, but not identical, to a contract for the supply of goods to a customer on approval or sale or return.  In each type of supply the customer, in his sole discretion, is entitled to decline to accept the supply of the goods in question, without justifying his decision to do so.  The effect is that the transaction is cancelled.  In a distance contract, it is only when the seven working day period (or possibly a later statutory period – see Regulation 11(3)&(4)) expires that it becomes certain that a supply has taken place for the purposes of Section 6.  It is a matter of agreement that the supplies to which the disputed Assessment relates are subject to the Distance Selling Regulations and in particular to Regulation 10.  The unqualified right to cancel is, in practical terms, the same as the right to disapprove.  Until the time for cancelling or disapproving passes, the supplier does not know whether the goods will be retained and must accept them back if the consumer timeously declines to accept them by cancelling the transaction or intimating disapproval.  The supplier has no choice.  The same considerations apply where the transaction is sale or return.  These circumstances may be contrasted with the statutory right of rejection where the supplier is in breach.  Rejection of the goods may be disputed by the supplier, and as far as he is concerned he has made a supply.  The dispute may ultimately be resolved by an award of damages or the return of the goods, but in the meantime, so far as the supplier is concerned, a supply has been made. 

In our view, it is the nature and terms of the supply which are important rather than the other terms of a contract for sale on approval or sale or return.  The precise contractual effect on the question of passing of risk or property in the goods is secondary to the determination of whether a supply of goods under a distance contract with the unqualified statutory right of cancellation is similar to the supply of goods on approval or sale or return.  It seems to us that the supplies under a distance contract are in effect supplies on seven (working) days approval.  In both, there is an unqualified right to refuse to accept the goods or to reject them within a specified period.  Such similarity in the terms of supply is sufficient to bring distance contracts of the type under consideration within the phrase similar terms in Section 6(2)(c) of the 1994 Act.  We thus approach matters by focussing on supply rather than on a contractual analysis of sale of goods.  Section 6 does not use the language of contract.  For that reason we do not consider that an analysis of questions such as the passing of property or risk or the question whether there is a contract subject to a suspensive or resolutive condition to be helpful in determining whether the supplies are governed by Section 6(2)(c).  For example a retention of title clause would not prevent the making of a supply for the purposes of VAT.  In our view, it is plain that while supplies under the Distance Selling Regulations are not identical to supplies on approval or sale or return they are, in commercial terms, similar and therefore fall foursquare within Section 6(2)(c).  This conclusion is sufficient for the disposal of the appeal.  We therefore comment briefly on certain other matters canvassed before us.

In Littlewoods, the issue was whether the time of supply of the goods was the date of their despatch, or 14 days after the date of delivery (para. 3).  This issue required consideration of what is now Section 6(2)(a) & (c) of the 1994 Act.  Aspects of the general law of sale of goods were considered.  The terms of supply included 14 days free approval (para 8).  It was observed by the Tribunal that with (a) “on approval” transactions, there was no contract of sale until the consumer adopted or was deemed to have adopted the transaction and thus bring the contract into existence; Section 6(2)(c) applied to these transactions, and (b) transactions where there is a contract of sale but the consumer has the right to rescind the contract and thus annul it, Section 6(2)(a) or (b) applied to these transactions (paragraphs 15 and 16) (Miss Carty took issue with this analysis).  Given our approach, we do not need to express a view on it.  The Tribunal then analysed certain provisions of the Sale of Goods Act 1979 and the terms of “approval” set out in the supplier’s terms and conditions (paragraphs 17-19), and concluded that the transactions fell within Section 6(2)(a) and not (c).  The Tribunal was confirmed in its view because of the contractual provisions for payment, which appeared to require payment or a first payment before the 14 day approval period had expired (paragraph 20), and which appeared to enable the Tribunal to distinguish the transaction from goods taken on approval or sale or return (paragraph 22)  The Tribunal also seemed to be influenced by the fact that certain goods were, according to the Tribunal, excepted from the “approval” provisions (paragraph 21). 

In our view, the decision in Littlewoods turned upon (a) an analysis of the particular terms and conditions of supply and (b) certain provisions of the Sale of Goods Act 1979; (a) makes the decision distinguishable on its facts; and (b) raises doubts in our mind as to whether the correct approach was adopted in that case to resolve the issues.  It is, in any event, not binding upon this Tribunal.

Finally, we record that we have not relied at all on the DTI Guidance referred to in the course of submissions.

Result
We allow the appeal.  In accordance with the parties’ agreement, we direct, in terms of Rule 29 of the Value Added Tax Tribunals Rules 1986 (as amended), that Customs shall pay to the Appellant the Appellant’s costs of, incidental to and consequent upon the appeal, as the same, failing agreement, shall be taxed, by the Auditor of the Court of Session.

J. GORDON REID Q.C. F.C.I.Arb.
CHAIRMAN
RELEASE:  7 SEPTEMBER 2004

EDN/04/18