20551

SUPPLY – goods sold on 60 days’ approval – whether “sent or taken on approval or sale or return” in s 6(2)(c) VAT Act 1994 – no – appeal dismissed

LONDON TRIBUNAL CENTRE

	COMPTON & WOODHOUSE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)

Sitting in public in London on 22 January 2008

Richard Vallat and Kate Urell, counsel, instructed by Ernst & Young LLP, for the Appellant

Sarah Moore, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Compton & Woodhouse Limited appeals against a decision in a letter dated 5 October 2005 relating to the period 09/04 relating to mail order supplies to the effect that VAT was due at the time the goods were supplied and not, as the Appellant contended, 60 days thereafter.  The Appellant was represented by Mr Richard Vallat and Miss Kate Urell, and the Respondent (“Customs”) by Miss Sarah Moore.
2.	The issue in this appeal is whether the contract the Appellant makes with its customers is a true sale or return contract, or a contract for sale with a condition enabling the customer to return the goods within 60 days.
3.	I heard evidence from Mr Paul Davies, Finance Director of the Appellant and had a bundle of documents.  I find the following facts:
(1)	The Appellant is the leading direct marketer of collectibles and other “gifts for me” products, specialising in figurines, plates, collectible bears, prints and jewellery, with jewellery now representing 70 per cent of its turnover.  It sells from its website, catalogues, and direct mailings.
(2)	Goods are normally sold (in this paragraph I use the word “sold” or “purchased” without intending any implication about the nature of the contract, to avoid the use of “supplied” which has VAT implications) on the basis of 10 monthly instalments without interest, the first being due when the Appellant estimates that the goods will arrive at which time the Appellant will take the instalment for the customer’s credit or debit card of which details were supplied with the order form, or from a cheque sent either the order, and the remainder becoming due at 28 days intervals thereafter.  In about 28 per cent of cases the customer will pay in full at the time of order (or will request the Appellant to take the payment in full from his card); this figure does not include cases where the customer returns the goods before making a payment.  In a very few cases, amounting to only two or three cases a year, the Appellant will require payment in full for high value goods ordered by a customer with a bad credit record.  
(3)	Goods are sold “on approval.”  The Appellant’s current terms and conditions provide:
“In accessing the ComptonandWoodhouse.com site and/or purchasing from the ComptonandWoodhouse.com site you agree to be bound by the following terms and conditions.
…
•	…All our goods are supplied on approval.  If for any reason you are not satisfied with the goods, they may be returned within 60 days for a full refund of any monies paid, provided the goods are unused and in the original packaging.  Faulty goods should be returned for refund or replacement.
•	…
•	We may decline (without giving any reason) to accept an offer to purchase any of our products.”
When ordering on the website the customer clicks on “buy” opposite either payment in full or payment by 10 instalments.
(4)	At the time of the supplies the subject of the decision letter the first bullet point quoted above read (with the difference shown in italics):
•	“…All our goods are supplied on approval.  If for any reason you are not satisfied with the goods, they may be returned within 60 days for a full refund of any monies paid, provided the goods are still in perfect condition.  Faulty goods should be returned for refund or replacement.”
(5)	A frequently asked question on the website states:
“We have no hesitation therefore in inviting you to admire your selections at home without obligation.  If you are unhappy with any product you may return them within 60 days and you will owe nothing.  Any monies already paid will be refunded in full.”
(6)	A sample order form contained the following under the heading “Compton & Woodhouse Guarantee:”
“If, for any reason, you are not delighted with your selection simply return it in the security packaging within 60 days and we will refund your money in full.  Please note, any free gift must also be returned.  In he interest of hygiene we regret that pierced earrings may not be returned, unless faulty.”
(7)	Another sample order form stated under the heading “Our guarantee of Excellence”:
“We have no hesitation in inviting your to admire your purchases at home without obligation.  Should you wish to return them to us for any reason, simply do so within 60 days, unused and in their original packaging.  Any monies that you have paid will be refunded in full.”
(8)	Notes attached to a payment slip state:
“Your purchase is covered by the Compton & Woodhouse guarantee.  If you are not completely satisfied, just return this item to us unused in its original condition and packaging within 60 days from the date of dispatch and any monies paid will be refunded to you.”
Reference is then made to returns made outside the 60 day period.
(9)	In about 25 per cent of orders by value the goods are returned.  For customers paying in full at the time of order (or delivery) the figure is about 9 per cent.  90 per cent of returns are made within the 60 day period.  After that period the Appellant uses its discretion about whether to accept them and will issue a credit note rather than repay any payments made.
(10)	If instalment payments are not made the Appellant writes 18 days later requesting payment, with a chasing letter after a further 14 days, another after a further 14 days, this time including a late payment charge of £10, and finally after a further 14 days, a letter threatening that the amount will be passed to their debt recovery department, whish is done a further 14 days later.
4.	Section 6 of the VAT Act 1994 provides:
“6 Time of supply
(1) The provisions of this section shall apply, subject to sections 18, 18B and 18C, 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)    …;
(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.
(3) …
(4) If, before the time applicable under subsection (2) or (3) 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) or (3) 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.”
5.	Article 5 of the Sixth VAT Directive provides:
1. “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.
Article 14(1) of the Principal VAT Directive is the same.
6.	Mr Vallat and Miss Urell, for the Appellant, contend:
(1)	 The Sale of Goods Act 1979 (“SGA”) distinguishes between a sale and a contract for sale:
2(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.
…
(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.”
Accordingly, it is the transfer of property that concludes the sale.  The time of payment is not material.
(2)	The Appellant’s conditions are silent on the issue of when property passes.  Section 18 of the SGA provides:
“18. 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.” 
A sale or return transaction will be converted into a sale by (a) acceptance communicated to the seller, (b) adoption (ie doing something that interferes with the buyer’s ability to return the goods, such as giving them away), or (c) retention.  Parliament refers in rule 4 to the “buyer” and “seller” when strictly it is the prospective buyer or seller.  One should not therefore rely too much on the Appellant’s conditions doing the same.
(3)	For s 6(2)(c) of the VAT Act “the time when it becomes certain that the supply has taken place” should be determined objectively.
(4)	HMRC v Robertson’s Electrical Ltd [2007] STC 612 concerned the effect of the Consumer Protection (Distance Selling) Regulations 2000, which permits a buyer to give notice of cancellation of a distance sale within a particular period, on sales made online.  It was held by the Inner House of the Court of Session that the transaction was one of outright sale with payment in full when the order was placed, and not a sale or return.  Here the matter is governed by the Appellant’s conditions of sale.
(5)	The Court of Session in Robertson’s Electrical applied the tribunal’s decision in The Littlewoods Organisation plc v Customs and Excise Commissioners (1997) VAT Decision 14977 in which the conditions of sale were that “We guarantee to refund your money or, if you prefer, replace any item without quibble provided it is returned in new condition within 14 days of delivery.”  Payment had to be made within 7 days of delivery.  The Tribunal held that under a sale or return contract the customer need only give notice of non-acceptance, not return them, and the goods need not be in new condition because the risk had not passed to the customer.  Also payment within 7 days was inconsistent with sale or return.  This can be distinguished by the use of the word “guarantee,” that the guarantee did not apply to all goods, and the 60 day period in which 25 per cent of customers return goods.
(6)	In Grattan plc v HMRC (2006) VAT Decision 19515 sales were made on 14-days home approval with some sale being on credit and some with immediate payment.  The Tribunal found no distinction from Littlewoods or Robertson’s Electrical.  This was wrongly decided because the Tribunal did not rely on s 18 rule 4 of the SGA and did not analyse the contractual terms.
7.	Miss Moore, for Customs, contends:
(1)	The first issue for rule 4 is whether there is a delivery “on approval or on sale or return or similar terms” since on the proper construction of the contract property in the goods may have passed (SGA) or a supply may have been made (VAT Act).  While these concepts are similar they are not identical, as in Shipping and Forwarding Enterprise SAFE BV, Case C-320/88 concerning contracts under Dutch law under which A undertook to transfer to B the unconditional right of ownership of immovable property and to transfer the property to B on demand, and B entered into a contract selling the rights under the first contract to C, with A transferring legal ownership to C.  The court held that the contract between A and B was a supply of goods within art 5 of the Sixth Directive even though there was no transfer of legal ownership.
(2)	In a sale or return contract property in the goods and the risk remained with the seller so that if the goods were destroyed or damaged without default on the part of the buyer the buyer could still avoid paying for them or return them respectively.  It is necessary to determine whether the intention was that the property should pass immediately or on some other event not dealt with in rule 4, such as payment.
(3)	There is no basis for distinguishing the authorities mentioned or for saying that Grattan was wrongly decided.  They are all consistent and should be applied here.
(4)	If (contrary to the above) the Appellant were correct that the contract is one of sale or return the contract should be treated as being adopted (SGA) or its becoming certain that the supply has taken place (VAT Act) when the first instalment of the purchase price (or full payment) is made.
8.	The issue in this appeal, more precisely stated, is whether the Appellant’s contract with its customer is (1) a contract for sale or return, that is that there is no contract of sale at the time of delivery of the goods but the Appellant retains ownership of the goods and customer is a bailee who has an option either to purchase them (or he may accept an irrevocable offer by the Appellant to sell them) or return them within 60 days, to which I shall refer as “sale or return,” or (2) a contract of sale with the property in the goods passing immediately subject to a condition subsequent that the customer may return them within 60 days, in which case the contract for sale is cancelled, to which I shall refer as “sale.”  If there is a contract of sale or return s 6(2)(c) fixes the tax point at the time when it becomes certain that the supply has taken place; if there is a contract of sale the supply takes place under s 6(2)(a) at the time of removal of the goods.  Essentially the difference between (1) and (2) is when property in the goods passes, which is when the parties intend it to pass.  The issue for VAT in s 6(2)(c) is whether the supply has taken place, and for s 18 of SGA rule 4 whether a contract for sale has been concluded, which as Miss Moore points out may be subtly different, but essentially they are dealing with the same two extremes of the difference between (1) and (2).  I also  appreciate that, as in SAFE, there can be differences between ownership and the right to dispose of tangible property as owner but I suspect that this is more likely where a state does not recognise equitable ownership, and do not consider that the difference is relevant here.
9.	The authorities cited are examples where the applicable conditions pointed towards alternative (2), but it is always a question of interpretation of the contract.  Both Littlewoods and Grattan are cases in which payment was made at the time of delivery of the goods which the Tribunal found was inconsistent with a contract of sale or return.  I see no reason why Grattan should be regarded as wrongly decided.
10.	Mr Vallat’s and Miss Urell’s contention that there is a contract of sale or return involves that (a) property in the goods has not passed immediately, (b) risk has passed to the customer immediately because the customer can return them only if they are “still in perfect condition” (conditions at the time of the decision letter) or “unused and in the original packaging” (current conditions), (c) by the end of the 60 day period three instalments of the purchase price are required to have been made, or the customer will have chosen to pay in full (although it is possible that the customer returns the goods immediately without making any payment), (d) the Appellant will not know when it is certain that the supply has taken place since there is no mechanism for the Appellant to be informed about the customer adopting the goods within the 60 days, such as by giving them away (although the circumstance is clearly contemplated for example in marketing literature: “We’ve worked hard to ensure there is something for everyone in this catalogue, making choosing Christmas gifts for your loved ones so easy”), and so the Appellant cannot make a proper VAT return except on the basis that the supply takes place after 60 days.  Mr Davies seemed to accept that it was possible for a donee to return the goods, in which case the gift would not be an adoption, but I do not read this into the contractual terms.  Miss Moore’s contention is that there is a sale with property and risk passing immediately but subject to a condition subsequent that the goods may be returned in perfect condition (or unused and in the original packaging) within 60 days.  
11.	I have no doubt that Miss Moore’s contention fits the facts much better and reflects the intention of the parties as determined from the documents and surrounding circumstances read with s 18 SGA (which applies “unless a different intention appears”).  While I accept that, if the SGA can use the term buyer when it means prospective buyer, one should not hold it against the Appellant to do the same, particularly when dealing with the public, this does not explain away the bullet point in the terms and conditions “We may decline (without giving any reason) to accept an offer to purchase any of our products.”  The terms and conditions look professionally drafted and whoever drafted them clearly thought that the customer was making an offer to purchase when he clicked on the “buy” button, rather than taking goods under an irrevocable offer to sell (or under an option to purchase) that might or might not be converted into a sale within 60 days.  In determining the intention of the parties when property in the goods passes, this term is an important factor.  While there is nothing legally impossible in Mr Vallat’s and Miss Urell’s contention that the terms of the contract provide for risk, but not property, passing and for there to be up to three instalments of the prospective purchase price due before it is known whether there is a sale and therefore whether any consideration is payable, it is an extremely unlikely intention to attribute to anyone, compared to the simple alternative of a sale with the property passing immediately subject to a condition subsequent entitling the customer to return the goods within 60 days.  
12.	Mr Vallat tried to rely on Hansard for the interpretation of s 6 of the VAT Act, to which Miss Moore objected on the ground that no ambiguity had been identified.  I agreed to look at it but I do not find any ambiguity in s 6 and do not rely on Hansard.
13.	It is not necessary to deal with Miss Moore’s alternative contention that if the Appellant was right about there being a contract of sale or return then payment of the price should be taken to indicate acceptance.
14.	I should like to add that it was most helpful to have the Appellant’s case presented by Mr Vallat from the tax point of view and Miss Urell from the consumer law point of view.
15.	Accordingly, I dismiss the appeal and direct the Appellant to pay Customs’ costs of, incidental and consequent upon, the appeal on the standard basis to be determined in default of agreement by a taxing master of the Supreme Court.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 28 January 2008

LON/05/1156