Topps Tiles Plc v Revenue & Customs [2006] UKVAT V19751 (15 August 2006) 

  19751

VALUE ADDED TAX – accounting of output tax – fractions of a penny where tax inclusive price charged – method for rounding. 

MANCHESTER TRIBUNAL CENTRE

TOPPS TILES PLC	Appellant

-	and –

HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

Tribunal:	 Richard Barlow (Chairman)
Peter Whitehead

Sitting in public in Manchester on 30 January 2006 and 20 June 2006

For the Appellant Andrew Hitchmough of counsel instructed by Messrs Ernst and Young.

For the Respondents Melanie Hall QC instructed by the solicitor and general counsel for the Revenue and Customs.

© CROWN COPYRIGHT 2006

DECISION

1.	The appellant, as the representative member of a VAT Group, appeals against assessments of Value Added Tax totalling £844,210 for the tax periods from 03/03 to 12/04 and two refusals by the respondents to repay to the appellant sums it had claimed as overpaid tax, in respect of the tax periods ending 09/04 and 12/04 being £199,004 and £190,914 respectively.

2.	The appellant sells tiles and related goods mostly by retail.  Its turnover is such that if it wished to operate a retail scheme as provided for by Schedule 11 of the VAT Act 1994 and the Regulations and Notices made and issued under that provision it would have to agree a scheme with the respondents.  No such scheme was in place at any material time.

3.	This case concerns an issue which is not specifically dealt with in the legislation and about which there appears to be no precedent authority, namely how a taxpayer is required to deal with fractions of a penny when accounting for VAT.

4.	The facts were not in dispute and we heard no oral evidence from witnesses though witness statements were produced and an agreed bundle of documents was referred to at the hearing.

5.	The appellant’s prices are advertised and quoted to customers as tax inclusive amounts.  Before January 2003, the appellant had accounted for VAT, via its sophisticated tills and other recording and calculating equipment, on the basis that the sale to each customer was treated as a single transaction and VAT was calculated on the total charged to the customer using the VAT fraction (7/47).  If that resulted in a fraction of a penny it was rounded up or down according to mathematical rounding.  Mathematical rounding means that fractions from .001 to .499 inclusive are rounded down and fractions from .5 to .999 inclusive are rounded up.  (Or similarly with more decimal places .0001 to .4999 etc).

6.	For the tax periods 03/03 and 06/03 an adjustment was made by which the appellant rounded down or up in respect of each “price unit” (e.g. individual tiles).  This was incorrectly calculated but if correctly calculated it would have led to a reduction in VAT payable in the order of £8,600 or thereabouts in each period.  

7.	Subsequently in periods 09/03 onwards adjustments were made, or claimed, on the basis of rounding at price unit level but on the contention that only rounding down was required.  This gave rise to reductions in VAT in the order of £200,000 for each period.  

8.	We were not asked to consider precise figures and no evidence was given about the precise calculations. 

9.	As we have said, “price unit” was the term used by the appellant to describe individual tiles or other items broken down into single units where the price was quoted tax inclusive per unit.  Tiles could be bought in any number and the price was quoted for a single tile so that although they could well be sold in a box containing 100 a person buying 100 would know that each one cost a certain amount.  On that basis the appellant claimed that it could treat each tile as a separate supply for VAT purposes and calculate the VAT on that supply rounding down only for each tile.  It applied the same logic to sales other than tiles.

10.	On the first day of the hearing Mr Hitchmough began by abandoning that argument and said that the appellant was now restricting its claim to having been entitled to account for tax on the basis that each “SKU line” was a separate supply.  SKU line is the term used to describe each separate item of merchandise in the appellant’s inventory so that for example each pattern, style and colour of tiles has its own unique SKU code, as do all other items sold.  Therefore someone buying, say, 100 blue tiles of a particular type and 20 white tiles of a particular type would receive goods proper to two SKU lines.  

11.	The appellants then claimed that they were entitled to round down each supply, identified by SKU lines, but that they were never required to round up.

12.	The appellant’s argument required two issues to be decided.  Firstly, what is the correct level at which elements in a complex transaction should be identified for the purpose of calculating the tax due on a tax inclusive sale.  Secondly, once the elements have been identified, and where the application of the VAT fraction would produce an amount of tax ending with a fraction of a penny, what method of rounding is to be applied to arrive at the amount of tax actually to be accounted for?

13.	So far as is relevant for present purposes section 1(1) of the VAT Act provides that VAT is charged on “the supply of goods” and section 4 provides that the scope of the tax is that it is charged on a supply of goods in the UK by a taxable person.  

14.	Mr Hitchmough contended that each separate SKU line entry in a transaction constitutes a separate supply.

15.	In many cases where a consumer buys several items of goods in a single transaction (e.g. a basket of goods from a shop) it will make little practical difference whether they are treated as one supply or several but at least, for example, where some of the goods are zero rated and some standard rated, as would be common in a grocery shop, the tax cannot be charged simply by reference to the total transaction value and it has to be sub-divided.  In such cases there is more than one supply in the same transaction.  Once Mr Hitchmough had withdrawn the contention that each tile was a separate supply Customs, through Mrs Hall, agreed that for the purposes of this case, they agreed that the individual SKU lines could be used to identify separate supplies.       

16.	We should note that Mrs Hall was careful not to say that that would necessarily be the case in other circumstances.  The Commissioners’ position is that it can be argued that strictly speaking each invoice represents a separate transaction and that where every element of a transaction is taxable at the same rate no separation of the items within that transaction is necessary so that it remains a single supply.  On the other hand as Mr Hitchmough pointed out that might not always answer all the relevant questions about the transaction if, for example, a trade purchaser bought goods for a customer but also for his own non-business use.   

17.	As both parties agreed that the SKU lines would be an appropriate way to identify supplies for the purposes of this case we need not attempt to resolve any issue about what the precise rules for separating elements in a transaction into one or more supplies may be in all, or any other, circumstances.

18.	The second issue concerning rounding must still be addressed.

19.	Mr Hitchmough argued that as the legislation does not provide for rounding up and, as it would be wrong in principle to charge more than 17.5% on any supply because that is the rate provided for by statute, then the consequence is that rounding down is allowed even if that means that the overall amount of tax accounted for will be less than 7/47ths of the total turnover.

20.	On the other hand Mrs Hall argued that although there is no specific rule about rounding in the legislation, the Directives and the UK legislation make it clear that the imposition of the tax (scope and chargeability) and accounting for it are separate concepts so that what has to be accounted for and how it has to be accounted for may not be determined by reference to the charging provisions in isolation without regard to the provisions dealing with accounting for the tax.  She pointed out that article 22 of the Sixth Directive allows for a summary invoice incorporating several supplies and that the invoicing requirements and accounting requirements allow for relatively limited details to be included in the invoice including, for example, a single amount for the tax accounted for.  That amount could well be made up of an addition of the tax on several items which, viewed in isolation, would each have ended in a fraction of the smallest unit of currency in the Member State where the transaction had occurred.  In such a case it could be argued that only one rounding could occur and that would be when the total of the invoice was calculated.  However the commissioners are not contending that is the only possible method, as their agreement that SKU lines can be used to identify supplies shows.

21.	Mrs Hall particularly relied upon article 2 of the First VAT Directive which refers to the tax involving “the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services” but that provision could be applied either to each supply or to the overall supplies by a trader and it is not conclusive of the argument in this case.  She also cited the recitals to the Directive which speak of simplicity and neutrality.

22.	The UK legislation transposing the Directives includes section 25 which requires the taxpayer to account “in respect of supplies made by him” by reference to prescribed accounting periods and in our view that strongly supports a contention that the tax payable is not calculated exclusively by reference to individual supplies but by reference to all supplies in an accounting period.  That does not necessarily mean that the only rounding that can occur is when the taxpayer makes his return but it does appear to support the Commissioners’ contention that the tax cannot be worked out by isolating each supply at whatever level of detail the taxpayer is able to achieve.  It points to the need for a system that achieves a fair result and taken together with the more general points referred to in the preceding paragraph that fair result appears to require a rounding exercise that produces the final result that the amount of tax payable (subject to input tax deduction) is 17.5% of the taxable supplies made by the business in the relevant period.         

23.	That result will be achieved as nearly accurately as possible if mathematical rounding is required.  Rounding only down will guarantee a wrong result in all cases whereas rounding both up and down will achieve as close to a perfect result as is possible. 

24.	Any minor mismatch between the appellant’s output tax and the inputs deductible by the appellant’s trade customers if they buy only part of the goods on an invoice for deductible purposes is so marginal as to fall well within the de minimis principle.  We also consider that the effect of rounding both up and down is likely to achieve a much more accurate result overall than the retail schemes which can and do sometimes lead to minor variations between the tax actually paid and the amount a precise application of 17.5% to all sales would lead to.  The retail schemes have not so far as we know been thought to be a breach of the Directives despite the slight and inherent inaccuracy they can lead to.  In other words the practicalities of accounting do play a legitimate part in the calculation of the tax.  

25.	It is true that the mathematical method of rounding is in theory marginally to the Commissioners’ advantage because, taking a calculation to three decimal places as the example, there are 499 fractions from .001 to .499 (which lead to rounding down) and 500 fractions from .500 to .999 (which lead to rounding up). That too is de minimis and in any event it appears from the calculations made in periods 03/03 and 06/03 that rounding both up and down would in fact lead to a reduction in the tax due, at least at unit price level.

26.	Our decision is therefore that the correct method of calculation of the tax due is that the tax should have been accounted for by calculating at the SKU line level but with mathematical rounding both up and down. 

27.	One further point remains.  The assessments were made on the basis that the appellant’s invoices to its customers only showed the tax calculation on the whole transaction (i.e. the basket) and on that basis no rounding at SKU line level was permitted in the past though it would be in future provided that rounding is both up and down.

28.	The best judgment of the assessments is not in issue but on appeal the tribunal must arrive at a figure that is actually due that is to say the correct amount of tax actually payable and we hold that the assessments should be re-calculated on the basis we have held to be the correct basis.  Transactions at SKU level rounded both up and down may well cancel each other out but if there has been an overpayment when the tax is accounted for on that basis the assessments should be reduced to take that into account.  We therefore leave it open to the parties to return to the tribunal if they cannot agree the adjustment to the assessments, if any is required.  As far as the claims for repayment are concerned the same will apply but in that case it would also be open to the Commissioners to argue that unjust enrichment precludes a repayment.

29.	In light of the preceding paragraph this is a part Decision but only to the extent described there.

30.	The respondents sought their costs if they were successful and we agree that in principle this case is akin to a High Court case because of the amount of tax involved and so their application is not in breach of their policy stated in Parliament.  As the case is not technically concluded by this Decision it would be premature to make an award at this stage and we direct that if the respondents wish to make an application for costs once the remaining issues have been resolved, either by agreement or by further hearing, then we direct that that application should be made to a chairman sitting alone.  If the appellant has any application to make in respect of its costs, which could arise if for example a further hearing were to be required and that led to a reduction in the assessments, then the appellant is directed to make such application to a chairman sitting alone.     

CHAIRMAN

RELEASED: 15 August 2006

MAN/05/0323