ALUE ADDED TAX — output tax — tax point — goods sold by mail order — payment made when order for goods placed — customers allowed 14 days in which to return goods for refund or replacement if not satisfied — whether goods sold “on approval” and tax point determined by expiry of approval period — VATA 1994 s 6(2), (4) — Sale of Goods Act 1979, ss 2, 17, 18 — goods not sold “on approval” — tax point governed by date of receipt of payment — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

				GRATTAN PLC	Appellant

				- and -

THE COMMISSIONERS FOR HER MAJESTY’S
				REVENUE AND CUSTOMS	Respondents

			Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Manchester on 16 January 2006

Patricia Vann, tax manager, for the Appellant
Rebecca Haynes, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	The Appellant, Grattan plc, is the representative member of a VAT group whose members carry on the business of retailing goods by mail order. They sell items such as clothing and furniture to domestic customers. Typically, customers order goods which are described in catalogues issued by each of the trading companies, and they may do so by post, by telephone or via the internet. I understand that the various companies use similar, but not necessarily precisely identical, terms and conditions of trade. For the purposes of this appeal the terms and conditions printed in the catalogue issued by Kaleidoscope Limited in early 2005 have been used, and they are taken to be representative in all material respects of the terms and conditions used by all of the companies throughout the relevant period.
2.	All of the companies are, in principle, willing to sell either on credit terms or in exchange for immediate payment. Not all customers wish to take credit, and others do not satisfy the conditions on which credit is granted, and those customers must make immediate payment if they are to buy at all. Over the years, the manner in which Grattan has accounted for the VAT due on its sales has varied, partly because of the withdrawal in 1997 of a special scheme and partly because of its own changing perception of the proper method of accounting. There have been differences too in its treatment of credit and non-credit sales, but in this appeal I am concerned only with non-credit sales, that is those where customers pay for their goods by cheque, credit card or debit card when placing their order.
3.	Kaleidoscope’s terms and conditions allow customers (both those buying on credit and those making immediate payment) to return most goods within 14 days of receipt, and for any reason, for example because clothing does not fit or the customer has simply changed his or her mind. The right to return goods is offered in addition to the customer’s statutory rights and an overarching 12-month guarantee, but it does not apply to goods which have been specially ordered (for example because they are made to measure) and to some other categories. The excluded goods are not material to this appeal, which relates only to those which the customer may return within the 14-day period. Kaleidoscope’s catalogue mentions the customer’s right to return goods in several places and in different words, although the meaning of the words seems to me to be the same throughout. The most succinct description of it is in these terms:
“Buy with Confidence Guarantee You can try on your chosen styles in the privacy of your own home and be assured by our 14-days home approval. All items in this catalogue are covered by our 12 month guarantee, this is in addition to your statutory rights …
Convenient Courier Returns If for any reason you are unhappy with your order you can return it via your Personal Courier, who will collect most unwanted items … You will automatically be reimbursed for any returned goods via your original method of payment …”
4.	Grattan’s argument, as it was advanced by Pat Vann, its tax manager, is that the availability of the 14-day period for return of the goods is significant, for VAT purposes, when it is linked with section 6 of the Value Added Tax Act 1994. The material parts of that section read:
“(1)	The provisions of this section shall apply … for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to VAT. 
 (2)	Subject to subsections (4) to (14) below, a supply of goods shall be treated as taking place—
(a)	if the goods are to be removed, at the time of the removal;
(b)	if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied;
(c)	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 …
(4)	If, before the time applicable under subsection (2) … above, the person making the supply issues a VAT invoice in respect of it or if, before the time applicable under subsection (2)(a) or (b) … above, he receives a payment in respect of it, the supply shall, to the extent covered by the invoice or payment, be treated as taking place at the time the invoice is issued or the payment is received.”
None of the following subsections is of any relevance here; although it occurred to me that an argument based upon the first part of subsection (4) and subsection (15) might have assisted the Respondents, they did not advance their case in that way and I leave it out of account.
5.	Grattan’s argument is that the relevant sales fall within section 6(2)(c) and that the time of supply (determining the tax point at which it must account for output tax) is consequently fixed at the expiry of the 14-day period, if the customer has not by then returned the goods. The Respondents, represented at the hearing by Rebecca Haynes of counsel, contend that section 6(2)(c) is of no application and that the tax point is determined by section 6(4); it is therefore the time at which payment is received. In formal terms, the appeal is against the Respondents’ decision to that effect, set out in a letter of 28 June 2004 and confirmed after reconsideration in a letter of 8 February 2005. Grattan completed its VAT return for the period ended on 26 February 2005 in accordance with the Respondents’ decision as so notified to it, and now seeks to recover the sum of £225,048 for which it accounted as output tax in that return but which, it says, was not then due.
6.	I heard no evidence, although I had some formal statements, and there was no dispute about the facts as I have briefly described them. I should mention in particular that I had no evidence or other information about the number or proportion of customers who avail themselves of the right to return goods. The essence of the issue between the parties is the question of law, namely whether the Grattan companies supply “on approval”, so as to bring the relevant supplies within section 6(2)(c); Mrs Vann acknowledged that if the goods were not supplied “on approval”, section 6(4) necessarily applied.
7.	The 1994 Act does not seek to define what is meant by the phrase “on approval or sale or return or similar terms” and Mrs Vann relied therefore on various provisions of the Sale of Goods Act 1979. Those relevant here are to be found in sections 2, 17 and 18; the material parts are as follows:
“2	Contract of sale
(1)	A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.
(2)	…
(3)	A contract of sale may be absolute or conditional.
(4)	Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called a sale.
(5)	Where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition later to be fulfilled the contract is called an agreement to sell.
(6)	An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
17	Property passes when intended to pass
(1)	Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2)	For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.
18	Rules for ascertaining intention
Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.
…
Rule 4—
When goods are delivered to the buyer on approval or on sale or return or other similar terms the property in the goods passes to the buyer:—
(a)	when he signifies his approval or acceptance to the seller or does any other act adopting the transaction;
(b)	if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of that time, and, if no time has been fixed, on the expiration of a reasonable time.”
8.	Mrs Vann referred me also to the definition of “sale on approval” which is given by Merriam-Webster’s Dictionary of Law (1996), namely “a conditional sale whose completion depends on acceptance of the goods by the buyer (as a consumer) receiving them primarily for use with the option to return them if they do not meet his or her approval even though they conform to contract”. Although the dictionary is American, I accept the definition as one which is of assistance in interpreting English law. Mrs Vann also drew my attention to the Respondents’ own published guidance to traders, in the VAT Guidance Manual, volume V1-11, section 28, “Sale or return and goods on approval”:
“28.1	Introduction
Under a sale or return agreement, goods are supplied on terms that allow the customer to return the goods at any point up until the time they are adopted. In the meantime ownership of the goods remains with the supplier. In some cases the agreement will lay down a time limit within which the goods must either be returned or adopted. As the name implies, sale or return is a term generally applied to agreements between commercial entities where the goods are intended for resale. Retail supplies on these terms are generally referred to as being ‘on approval’.
The following rules apply only in cases where the customer has an unequivocal right to return the goods in question. They do not apply in circumstances where the customer does not have this option, even though title may remain with the supplier until the goods are paid for, as in a Romalpa type agreement.
28.2   Basic tax point 
Section 6(2)(c) of the Act provides an alternative (delayed) basic tax point in these circumstances. This occurs either on adoption or 12 months after removal of the goods where this is earlier.
Adoption is not defined and can take various forms. In practice it normally occurs when the holder of the goods does something to indicate that the option to return the goods is not going to be exercised. For example:
•	the goods become the subject of an offer for resale by the holder;
•	the holder allocates the goods to a customer;
•	the goods are hired out by the holder to a customer;
•	the holder uses the goods otherwise than for display purposes; or
•	the goods are permanently modified or adapted by the holder or to the order of the holder. 
This is by no means an exhaustive list and is included for illustrative purposes only. The point at which it can be said that the supply has taken place in a particular case, will inevitably depend on the facts. Suppliers must ensure that their customers notify them promptly when they have adopted goods supplied on these terms.”
9.	The relevant goods were, she said, plainly supplied on approval as that term is so defined and as it must be construed in the light of the Sale of Goods Act: customers were allowed to return goods at any time before they were adopted, though within a 14-day time limit; and the right to return was unequivocal. Thus all the conditions of section 6(2)(c) were satisfied. Although section 6(4) provides that payment of the price overrides the timing points determined in accordance with section 6(2)(a) and (b), it does not similarly override section 6(2)(c), and the fact that the customer paid for the goods when they were ordered was therefore immaterial: the tax point must coincide with the end of the period in which the customer could return the goods.
10.	Miss Haynes’ principal argument was that the mere fact that customers were afforded the opportunity of returning goods did not carry with it the implication that those goods were “sent or taken on approval or sale or return or similar terms” so as to come within section 6(2)(c) of the 1994 Act and Rule 4 of section 18 of the 1979 Act, which use identical words. As a matter of fact, the customer paid for and took delivery of the goods; his or her doing so was consistent only with the existence of a concluded sale. She referred me to paragraph 5-041 of Benjamin on Sale of Goods, in which appears the proposition: “Goods will be considered to have been delivered on approval where it is agreed by the parties that they shall be retained and purchased by the buyer at the notified price if he approves them, but not if they are disapproved”. That, she continued, was not the case here; the purchase was not concluded if the purchaser approved the goods, rather, he or she had the opportunity of rescinding a purchase which had already taken place.
11.	That conclusion was consistent with the judgment of the Inner House of the Court of Session in Customs and Excise Commissioners v Robertson’s Electrical Limited [2005] CSIH 75, in which it had to consider the effect of regulation 10 of the Consumer Protection (Distance Selling) Regulations 2000 (SI 2000/2334) and its grant to the purchaser of goods pursuant to a “distance contract” of a seven-day period in which the goods might be rejected, a provision which was separately reflected in the trader’s own terms and conditions of sale; its sales were made over the internet. It too accounted for output tax upon the basis that the tax point was the date of expiry of the seven-day period. The Commissioners took the view that the tax point was the date of payment. The tribunal agreed with the trader, but the Lord Justice Clerk (Gill), giving the judgment of the court, said:
“[12]	In our opinion, the Tribunal has misdirected itself. It has overlooked the meaning and effect of the respondent’s online terms and conditions.
[13]	The Tribunal appears to have acceded to a proposition for the respondent [trader] to the effect that the 2000 Regulations conferred on the customer the absolute and unfettered right to disregard the contract, leaving the legal position as it was before the order was made; that the transaction was at most an agreement to sell (Sale of Goods Act 1979, s 2(5)) and that no sale took place until the expiry of the cancellation period (1979 Act, s 2(6)).
[14]	That approach seems to imply that regulation 10 does not merely confer a right to cancel the contract but modifies the nature of the contract itself by making all distance contracts in effect transactions of sale on approval.
[15]	We consider that that view is based on a misunderstanding of regulation 10. Although the respondent’s terms and conditions are subject to the statutory right of cancellation, they nonetheless determine the nature of the transaction under which the goods are supplied. In our opinion, the provisions relating to payment, ordering and returns (supra) all indicate that the nature of the online transaction is one of outright sale. Regulation 10 governs the transaction only to the extent of conferring on the purchaser an unqualified right of cancellation of the sale.
[16]	There is no concluded contract of sale if goods are supplied on approval (Bryce v Ehrmann, (1904) 7 F 5, Lord Trayner at p 13) or on sale or return (Macdonald v Westren (1888) 15 R. 988, Lord Young at p 989). It follows that there is no taxable supply under section 4 of VATA 1994. The taxable supply occurs only ‘when it becomes certain that the supply has taken place’ (s 6(2)(c)), that is to say when the recipient buys them, or on the expiry of 12 months after the removal of the goods, if sooner (ibid).
[17]	The goods in this case cannot be said to have been sent or taken ‘on similar terms’ to transactions of these two kinds. For the reasons that we have given, the respondent’s terms and conditions have the effect that there is a concluded sale, although it is subject to the purchaser’s statutory right to annul it. The fact that payment must be made when the order is placed indicates, in our view, that section 6(2)(c) cannot apply to the transaction. The transaction in this case is therefore of a similar nature to that considered by the Tribunal in Littlewoods Organisation plc v CCE, which in our view was correctly decided.”
12.	In the Littlewoods case to which the court referred ([1997] V & DR 408), the trader sold through the medium of agents rather than by direct order but, like the Grattan companies, offered a 14-day approval period during which the customer could return the goods, for any reason, provided they were in new condition. The tribunal concluded that what is now section 6(2)(c) is intended to apply only to those transactions in which there is no contract of sale until the buyer has adopted the goods, or is deemed to have done so by the effluxion of time, that a contract which could be rescinded by the buyer was a contract of sale subject to a condition subsequent, and that the trader’s contracts in that case fell within the latter category.
13.	It is true, as Mrs Vann pointed out, that the arguments advanced in Littlewoods differed from those before me because, in an effort to mitigate the effects of the increase in the rate of VAT from 15 per cent to 17.5 per cent, it was the trader which was arguing in favour of the earlier, and the Commissioners in favour of the later, tax point, but I cannot agree with her that the decision turns on its own facts, nor that its effects are of limited scope. On the contrary, it seems to me to establish a general principle and I agree with the Inner House that it was correctly decided.
14.	The conclusion I have reached is that there is no meaningful distinction to be drawn between this case and Littlewoods and Robertson’s Electrical. Mrs Vann suggested that Littlewoods’ conditions were more onerous from the customer’s point of view. I am not altogether persuaded that they were, but even if Mrs Vann is right, differences of that kind cannot determine the fundamental nature of the contract. This is not a case where there is a blurred dividing line between the two categories. Once the terms of the contract have been determined, it is clear whether the goods are sent on approval, a contract of sale and purchase to be concluded only if they are approved, on the one hand, or there is a concluded sale which may be rescinded at the buyer’s option, on the other. I find nothing in that distinction which is inconsistent with the dictionary definition to which Mrs Vann referred me, nor with the Respondents’ own guidance, but even if there is the distinction is plainly in accordance with the view of the Inner House whose judgment, even if it is not strictly binding on a tribunal sitting in England, is of great persuasive force.
15.	It seems to me quite clear that Grattan’s contracts fall within the latter category, that section 6(2)(c) is of no application and that the tax point is determined by section 6(4), that is by the date on which payment is received. I add for completeness that I also agree with Miss Haynes that Rule 4 of section 18 of the 1979 Act does not help Grattan. The test, for the purposes of determining whether a supply has been made for the purposes of VAT, is to be found in article 5(1) of the Sixth VAT Directive (77/388/EEC), which treats it as “the transfer of the right to dispose of tangible property as owner” (see also the judgment of the European Court of Justice in Staatsecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV [1991] STC 627). Transfer of title is not essential, and therefore Rule 4 has no bearing on the question whether or not a supply has taken place.
16.	The appeal must accordingly be dismissed. Miss Haynes sought a direction for costs in the Respondents’ favour, this being one of those exceptional cases in which such a direction is requested. Mrs Vann did not resist the application, and I direct that Grattan is to pay the Respondents’ costs, to be the subject of detailed assessment on the standard basis by a costs judge of the High Court if they cannot be agreed.

COLIN BISHOPP
CHAIRMAN
RELEASE DATE: 20 March 2006

MAN/05/0175