Appeal Numbers: LON/05/0022

[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 LIMITEDAppellant

- 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

1

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.