C00193
CUSTOMS DUTY – Warehousing – Conditions for approval for customs warehouse – Retail sale – Sales of warehoused goods to distributors retaining some for personal use – Whether retail sale – Conditions precluding to distributors while goods warehoused – Implementing Regulation (2454/94/EEC) Art 527.2 – Sixth Directive (77/388/EC) Art 16 – FA 1994 s.18(1) – Appeal dismissed

LONDON TRIBUNAL CENTRE

	STANLEY HOUSE LOGISTICS LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE   (Chairman)
						ROY JENNINGS FCA FTII
					 	TONY RING FTII

Sitting in public in London on 25-29 October 2004, 1 November 2004 and  10 and 11 January 2005     

Michael Conlon QC and Jeremy White, instructed by KPMG, for the Appellant Company 

Melanie Hall QC, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This appeal concerns a decision by Customs dated 30 September 2003 to impose conditions for approval for the operation by the Appellant of a Type A customs warehouse. 

2.	Although the decision concerns a customs warehouse, its real significance is its impact on the VAT payable by Betterware UK Ltd, another group company intending to deposit goods in the warehouse to sell them to distributors while subject to the warehouse procedure. When goods are imported from outside the European Union, supplies effected while the goods are subject to a customs warehousing regime are treated as taking place outside the EU, see section 18(1) of the VAT Act 1994.  Although import VAT is payable when the goods cease to be subject to the warehousing regime, that is distinct from the normal charge on a supply and the VAT is charged as a duty of customs on the consignee. 

3.	The conditions referred to in paragraph 1 were imposed in reliance on Articles 87 and 100.2 of the Community Customs Code (Reg 2913/92/EEC) and Article 527.2 of the Implementing Regulation (Reg 2454/93/EEC). The disputed conditions are as follows:-

“that no sales can be undertaken whilst goods are under the Customs Warehouse procedure and that the Depositor of goods in Warehouse (Betterware UK Ltd) must always be declared as the consignee when goods are removed from the procedure to Free Circulation.”

The appeal centred around the meaning of “retail sale” in the first sentence of Article 527.2 which provides,

“Authorisation shall not be granted if the premises of customs warehouses or the storage facilities are used for the purpose of retail sale.”

4.	The Appellant is part of the Betterware Investment Ltd (“BIL”) group and wishes to provide warehousing and logistics services from premises at Stanley House in Birmingham. Betterware UK Ltd (“BUK”), another subsidiary of BIL, sells household goods stored in the warehouse to distributors who either sell to customers at their homes using catalogues or keep the goods for themselves or their family and friends.  BUK sells to some 7,000 distributors at a 20 per cent discount to the prices in its catalogue. The distributors retain as profit the difference between the discounted price and the price which they obtain on sale to customers.

5.	Very few of the distributors are registered for VAT.  As a result of a notice of direction dated 2 February 1996, issued under Schedule 6, paragraph 2 of the VAT Act 1994, BUK is required to account for VAT on sales to unregistered distributors on the basis of the open market value for retail sales rather than the discounted price obtained by BUK on such sales.

6.	As matters stand, goods from outside the EU, which account for some 40 per cent of BUK’s total purchases, are entered for customs duty by BUK on removal to the UK and VAT becomes payable by BUK under section 1(4) of the VAT Act 1994 and section 43(1) of the Customs and Excise Management Act 1979 as if it were customs duty.  The VAT payable by BUK on importation is recoverable by it as input tax when its next VAT return is made, in effect cancelling out the tax paid on entry under section 1(4) albeit after a delay averaging seven weeks. When BUK sells to the distributors, it accounts in its VAT returns for VAT on the sales, taking account of the direction under Schedule 6, paragraph 2.  As a result of the direction, BUK’s VAT liability on sales to unregistered distributors is calculated on amounts which are substantially greater than those which it obtains from those distributors.

7.	BUK has made agreements with the Appellant and proposes to enter into agreements with the distributors under which sales by BUK to unregistered distributors will take place while the goods are in the warehouse, which is to be leased to the Appellant, and while they are subject to a warehousing regime and so before the duty point for customs duty.

8.	This of course depends on the Appellant receiving approval to operate a customs warehouse and on the conditions for approval.

9.	If the Appellant receives approval without the contested conditions, the sales by BUK to the unregistered distributors will be treated for VAT purposes as taking place outside the UK by reason of section 18(1) of the 1994 Act.  On removal from the warehouse the Appellant will make the necessary entries for customs duty and VAT on behalf of those distributors and the value will be determined in accordance with EU customs rules, being based on the price paid by BUK to the overseas exporters plus foreign taxes, customs duty and transportation and insurance costs.  The VAT payable by the distributors will be substantially less than that currently paid by BUK, not only because the direction would not bite on sales of goods sourced from outside the EU but also because the prices paid by BUK to exporters are only a fraction of the prices at which it sells to distributors.  We were informed that the average mark-up was around 550 per cent.

10.	The disputed conditions would prevent sales to distributors taking place while goods are under the warehouse procedure, so that section 18(1) would not apply, and would require BUK to be declared as consignee on entry as is the case at present so that all BUK’s sales to unregistered distributors would be within the UK for VAT purposes and the direction will apply.

11.	The Appellant contends that the warehouses are not and would not be “used for the purpose of retail sale” within Article 527.2 of the Implementing Regulation.  Customs assert that a substantial proportion of purchases by distributors are not resold by them but are retained for their personal or family use; that such sales to distributors are retail sales and that the warehouse premises are therefore used for the purpose of retail sale notwithstanding that the goods are not displayed in the warehouse and distributors do not have access to it.

12.	At a hearing on 12 July 2004 Customs applied to the chairman for the interpretation of “retail sale” to be referred to the Court of Justice on the basis of agreed facts without hearing evidence, citing Irish Creamery Milk Suppliers Association v Ireland (Cases C-36/80 and C-71/80) [1981] ECR 735.  The Appellant opposed the application contending that a reference was not necessary, that the facts were not agreed and that a reference before the facts were fully ascertained was premature.  The chairman dismissed the application for an immediate reference.

The evidence

13.	Robert Anthony Way ACA, finance director of the BIL group and company secretary of the Appellant company, gave evidence and was cross-examined.

14.	Michael Garrett, who was engaged in Customs and International Trade Assurance in the Regional Business Services division of Customs at Birmingham and who gave the disputed decision, gave evidence and was cross-examined.  Jane Hyde, previously district manager responsible for the Customs group engaged in assurance of large businesses including BUK, Karen Pearson, who was responsible for assurance of BUK from June 2001 to May 2002, and Colin Davis, of the Customs and International Trade Policy Team, who participated as UK delegate at meetings in 2004 of the EU Customs Code Committee, also gave evidence and were cross-examined.  Mr Conlon objected to the evidence of Mr Davis; however the Tribunal admitted it “de bene esse”. Statements by two other Customs officers, Doris Humphrey and Ruth Pike, were read.

15.	There was a statement of agreed facts.

16.	The documentary evidence included the following:

(a)	Betterware catalogue issue 8/04,

(b)	a customer order form,

(c)	a distributor order form for catalogue 8/04 (Oct/Nov),

(d)	current standard form agreements between BUK and co-ordinators, 

(e)	current standard form agreements between BUK and distributors,

(f)	proposed standard form agreements between BUK and co-ordinators,

(g)	proposed standard form agreements between BUK and non-registered distributors, 

(h)	proposed standard form agreements between BUK and registered distributors,

(i)	draft contract between the Appellant and BUK for the sale of part of the business of BUK to the Appellant, 

(j)	draft contract between the Appellant and BUK for the provision of customs warehouse, delivery and collection services,	

(k)	draft lease to the Appellant of the warehouse and offices,

(l)	the Notice of Direction of 2 February 1996,

(m)	calculations for BUK’s effective VAT rate dated 2 January 2002,

(n)	a report by Robson Rhodes on 17 February 1992 calculating the open market value on sales by retail under an earlier direction,

(o)	the application dated 15 September 2003 to operate Type A customs warehouse,

(p)	the decision letter dated 30 September 2003.

17.	Mr Davis produced his own notes of EU Customs Code Committee meetings on 16 and 17 February 2004, an extract from the Commission minute of that meeting, copies of the notes of meetings on 4 May, 7-8 September and 4-5 October 2000, by the UK representatives at those meetings, extracts from Commission Revisions 5 to 8 of the draft Article 527, an extract from Public Notice 232 (March 2002 edition) in 2000 and an extract from Customs’ internal guidance on Customs Warehousing.  He said that the UK notes of the 2000 Meetings showed that it was initially proposed to allow e-commerce retail sales from customs warehouses provided customers did not enter the warehouses but that it was agreed that goods must be removed from the warehouse regime before any retail sale.

18.	The common bundle also included Commission Working Papers, XXI/1677/92 RED 58, XXI/688/93 RED 65 and XXI/1512/93 RED 70 and the other EU language versions of Article 527.2 of the Implementing Regulation.

19.	Commission Minutes or records of five meetings of sections of the Customs Code Committee in 1999 and five meetings in 2000, working papers, further UK notes of meetings, Customs’ briefs for meetings, an e-mail of 24 January 2003 from a Commission official and two schedules produced by Mr White and were put by Mr White to Mr Davis in cross-examination.

The facts

20.	We find the following facts based on the statement of agreed facts and on the evidence.  We do not repeat all the facts already set out.

21.	The Appellant was incorporated on 1 June 2003.  Its main objectives are to implement a customs warehouse and to provide logistical services to BUK and distributors including delivery of goods to distributors.  It has agreed to lease part of Stanley House from BUK and to buy or lease 23 delivery vehicles and employ approximately 36 staff.  The Appellant has purchased software to support customs freight simplified procedures and customs warehouse record keeping requirements from Grosvenor International Systems Ltd.

22.	Stanley House is a distribution facility currently operated by BUK comprising 15,000 square metres of storage space with racking for 8,650 pallets.  It receives and stores around ten 40 foot containers per week.  It is secured from the public by a fence and barrier.  There are no facilities at the premises to display products or solicit sales of any kind.

23.	The Appellant has agreed the terms of a contract with BUK to provide warehousing and logistical services, however due to the disputed decision the agreement has not been signed and implemented.

24.	The Appellant was formed to make better use of BUK’s warehousing and transport assets, to reduce BUK’s logistical costs, and to secure and support the various tax and other advantages that an authorised customs warehouse would bring to BUK’s shareholders and customers.

25.	BUK employs around 270 people.  The average stockholding is £3.5 million at cost. Stock is held for 2-3 months on average. Total annual sales are about £90 million. Around 40 per cent of its products are sourced from outside the EU.  Its 7,000 distributors are recruited, trained and managed by some 700 coordinators. The coordinators do not take title to the products which are sold by BUK to the distributors, who are free to resell to the public but are not required to do so.  There is a high rate of turnover of distributors with many dropping out after 3 to 4 weeks.  Around 2,000 distributors operate for a period of years.  Most distributors are individuals seeking to earn some extra cash.  Many are ladies under 35 with a young family.  Currently a considerable number are persons over 50 who are unemployed.

26.	BUK produces 24 million catalogues a year in three editions.  Distributors who cover 1,200 to 1,500 households leave 250 catalogues per week with order forms on doorsteps.  They call on customers a week later to retrieve the catalogues and collect the order forms.  They collate the orders and give a weekly order to their coordinator to pass on to BUK. The identity of the individual customers is not known either to the coordinators or to BUK.  The aggregate average value of each of the 6,000 to 7,000 orders received every week by BUK from distributors is £245.  

27.	The goods ordered are picked and packed by BUK and delivered to the co-ordinators who then deliver them to distributors. The distributors deliver the goods to the individual customers collecting the payment. The distributors pass the cash to BUK via the coordinators, who act as agents for BUK.  The distributors are reluctant to provide details of their customers.

28.	Some coordinators are also distributors.

29.	Customers can place orders by BUK’s website, details of which are in the catalogue, or by telephone.  Many of those orders are placed when the distributor does not call back.  In such cases BUK ascertains the distributor from the postcode and passes the order on to the distributor who includes it in his or her order.  Under 1 per cent of sales are by internet or telesales.  If there is no distributor BUK fulfils the order directly, in which case the sale would not be while the goods are subject to the proposed warehouse procedure.  

30.	Under the proposed arrangements the Appellant will provide customs warehousing, handling and clearance services to BUK and also separately to the distributors.  The distributors will pay to the Appellant 2½ per cent of the catalogue price as a fair apportionment of the cost of logistical services provided to them.  To compensate for this new charge, the proposed discount given by BUK will be increased to 22.5 per cent.

31.	The proposed contract between BUK and unregistered distributors includes the following:-

“5.1	On purchasing products from [BUK] the amount payable by You will be the then current catalogue price less 22.5 per cent (the ‘Purchase Cost’).  Out of the Purchase Cost [BUK] will remit on Your behalf all customs duty and import VAT payable by you in respect of any Bonded Products to [the Appellant] … . For Free Circulation Products the Purchase Cost will include all VAT payable by [BUK].  The Purchase Cost does NOT include Clearance (where necessary) and Delivery charges payable by You to [the Appellant].  There is no minimum purchase requirement.
…
5.4	Title to and risk in Products will pass to You when they are picked within [BUK’s] warehouse and labelled for You.
5.5	The Purchase Cost for Products is to be paid by You to the Coordinator (who is authorised to accept such monies on behalf of [BUK]) within SEVEN DAYS from Your receipt of the products.  The Coordinator will issue You with a receipt upon receiving such monies.
…
5.8	You hereby request and [BUK] agrees to pass your details and information regarding Your purchase orders to [the Appellant] in order that it may make the necessary import declarations in Your name …”

32.	The proposed agreement between the Appellant and distributors provides by clause 2.1 and 2.2 for the Appellant to provide clearance services in respect of products brought into a customs warehouse from outside the EU, on which customs duty and VAT has not been paid, and to deliver all products.  Under clause 2.3 it provides for distributors to authorise the Appellant to do all acts required to effect clearance including the procurement of pseudo-trader unique reference number (“Pseudo-TURN”).  The distributors agree under clause 4 to pay 2.5 per cent of the catalogue price to the Appellant, to be paid to the coordinator in addition to the purchase cost.  

33.	Under the proposed agreements with coordinators, the coordinators will collect and bank sums due from distributors to BUK and the Appellant and will be paid commission by BUK and a delivery fee by the Appellant.  The Appellant will deliver to coordinators packages labelled for individual distributors which the coordinators will deliver to distributors from whom they will collect the payments due to BUK.  The proposed commission is 11.8 per cent of the catalogue price and the delivery fee proposed is 1 per cent.

34.	An initial application for warehouse approval was submitted by the Appellant in July 2003, and samples of proposed stock control records were provided in August.  On 5 September 2003 an application for Customs Freight Simplified procedures was submitted and a meeting took place between the Appellant and Mr Garbett of Customs. He was shown round the warehouse and the arrangements were explained.  Mr Garbett suggested certain amendments to the application including the type of warehouse. He asked for an understanding of KPMG’s interpretation of the legal provisions relating to sales in warehouse.

35.	On 10 September 2003 Customs provided the Appellant with a single Pseudo-TURN.  The letter said that use of this Pseudo-TURN was conditional upon the grant of authorisation for the sales to unregistered distributors to take place in warehouse and the provision of full details at audit of all transactions by individual consignees.

36.	On 11 September 2003 KPMG provided to Customs its interpretation of the legal provisions and on 15 September submitted an application for a Type A warehouse incorporating the amendments suggested by Mr Garbett.

37.	On 30 September 2003 Mr Garbett gave the disputed decision.  The letter included the following passages:

“1.	It is the Department’s view that sales made by Betterware, which are purchased by distributors [for] their own use, are retail sales …
2.	… retail sales may not take place in a Customs Warehouse … Article 527.2 does not restrict mail order or internet sales, provided the goods are removed from Warehouse prior to the sale.
3.	… Article 527.2 prohibits an authorisation if its sole purpose or one of several purposes is a retail sale … Policy consider the proportion of retail sales (estimated by you at 26%) satisfies them that one intended purpose of this facility would be for retail sale.
4.	In view of this, the department will only allow your application for a Customs Warehouse to be accepted for the purposes of storage, with conditions attached to exclude prohibited (retail) sales from the arrangements.
Although an estimated figure of ‘own use’ sales has been accepted for VAT purposes in determining your [liability under the] Notice of Direction, Customs Law makes no provision for estimation and this figure could not be used to exclude a proportion of sales from the Customs Warehousing arrangements.
As your business has no system that distinguishes ‘own use’ (retail) sales from other sales, all sales must be excluded from Customs Warehousing arrangements.  If at a future date you are able to implement systems that identify own use (retail sales) specifically, the Department will reconsider this position.” 

The letter then set out the conditions appearing at paragraph 2 of this decision.

38.	The Appellant required a statutory review under the Finance Act 1994 and provided further information in support of its request.  Customs failed to complete  the review within the 45 day period and the decision was therefore deemed to be confirmed under section 15.  The Appellant appealed against the deemed confirmation.

39.	The BIL group has incurred consulting, legal systems and set-up costs in planning the proposed arrangements; it has incurred printing and distribution costs on the new contracts and costs on the design and implementation of new commercial information systems.

40.	The information system in the warehouse is the Ricardo duty management system supplied by Grosvenor International Systems Ltd.  The package records the supplier of products and movement records.  It can identify the source of products and keeps a running record of stock with historic records.  The system does not record whether a distributor intends to resell goods: this information is not provided by distributors to BUK.  Equally the system does not record whether goods bought for resale are not in fact resold.  It cannot track goods after leaving the warehouse.

41	Distributors do not necessarily resell goods at the catalogue price.  They may offer discounts to customers and they may pass on goods at cost, perhaps to friends or family.  BUK is anxious to maximise sales and is not concerned with what happens to goods bought from it by distributors. We find as a fact that some distributors only join the scheme to buy goods for their own use. BUK does not sell to retail shops as such although some distributors are sub-post offices or corner shops.

42.	The Appellant estimates the net annual financial benefit to the group if the new arrangements take effect as £2.1 million before corporation tax.  The saving by BUK of VAT on supply to distributors would be partially offset by additional import VAT attributable to the cost of warehouse handling and distribution and by the VAT on the Appellant’s charge to distributors.

43.	If the conditions were accepted so that all goods from outside the EU would be entered by BUK as consignee, BUK would thereby obtain some deferment in the time of payment of VAT on those imports.  This benefit would be small compared with that flowing from the proposed arrangements.  It would be possible to adapt the systems to record sales of goods from outside the EU outside the warehousing regime; the Ricardo System covers EU goods at present.

44.	As matters stand, following the Notice of Direction, under an agreement of 28 November 2001 BUK accounts for VAT at 15.5 per cent of the catalogue price which equates to 20.2 per cent on the tax inclusive sums received from distributors.  Although expressed as a rate of VAT, it reflects an agreement that the full rate is to be applied on assumed retail sales which are less than the full catalogue values.

45.	Originally, following a Notice of Direction in 1985, BUK was required to account for VAT at the full rate on all its sales to unregistered distributors by reference to the catalogue price.

46.	In the light of a report by Robson Rhodes dated 17 February 1992, an effective VAT  rate of 15.23 per cent was negotiated.  The effective rate was agreed on the basis that for a variety of reasons a proportion of the goods bought by distributors were either not sold on by them or were resold at less than the catalogue price so that the catalogue price was not a correct indication of the open market value on a sale by retail within Schedule 6, paragraph 2.

47.	The report by Robson Rhodes identified a number of circumstances or factors in which goods were not sold by distributors at the catalogue price.  Those included distributors who obtained appointment with the sole purpose of buying goods for themselves at a discount making no attempt to resell, distributors who buy some goods for their own use reselling others, distributors who sell at a discount to catalogue prices to develop more business, distributors who sell to friends or family either at cost or at a discount and distributors who buy goods as gifts.  The report stated that BUK encourages distributors to use its products themselves to help them when marketing to customers. The figures put forward by Robson Rhodes were necessarily only estimates since there was no method of arriving at actual figures.  Furthermore all would clearly vary with changing circumstances and individuals.

48.	The calculations were renegotiated over a three year period culminating in a meeting on 21 November 2001 when the current effective rate of 15.5 per cent was agreed.  

49.	Mr Way accepted that the pattern of business is not materially different at present from that set out on the 1992 Report. The reference to a 26 per cent proportion of retail sales in Mr Garbett’s letter of 30 September 2003 (see paragraph 37 above) was derived from the estimated figures in the 2001 reworking in respect of sales to distributors buying for personal and family use or for gifts. Those figures were produced for the entirely different purpose of estimating the aggregate open market value of retail sales for applying the Notice of Direction and were the result of negotiations in which it was in the interest of BUK to maximise the proportion of goods not resold at catalogue prices by distributors. While we do not consider the figures to be clear evidence either of the proportion of sales within each category or that 26 per cent were not resold at catalogue prices, the report and outcome of the negotiations are clear evidence that a not inconsiderable proportion of purchases by distributors were not for resale under a commercial transaction.  Mr Way accepted in cross-examination that perhaps 10 per cent of purchases by distributors who were still active after 16 weeks were for personal and family use in the home.  Those coordinators who are also distributors get an additional payment, currently 12.8 per cent, (equivalent to the commission and delivery fee mentioned in paragraph 33) and therefore have a greater incentive to make purchases for their own use.

50.	Apart from the issue of retail sales, Customs are content with the physical controls and declarations systems proposed and with the use by the Appellant of the Ricardo recording system. Goods imported from outside the EU would be physically stored together with EU goods however their status would be recorded on the system with a separate code for each line of goods. An audit record would be a condition of approval and would require a specialist auditor.  Apart from the conditions in dispute, approval would be subject to some twenty or thirty standard conditions.  It would be open to the Appellant to seek a variation of the conditions including a variation to cover a different depositor.  The decision under appeal was of course in respect of the application actually made.

The legislation and its history

51.	Articles 84 to 90 of the Community Customs Code (“the Code”) cover provisions common to customs procedures with economic impact including customs warehouses. Article 85 makes the use of any such customs procedure conditional upon authorisation by the customs authorities. Article 86 lays down conditions regarding guarantees and supervision without prejudice to the additional special conditions governing the procedure in question.  Article 87.1 provides,

“The conditions under which the procedure in question is used shall be set out in the authorisation.”

Articles 98 to 113 cover customs warehouses.  Under Article 100.1 operation of a customs warehouse is subject to an authorisation.  Article 100.2 includes,

“The authorisation shall lay down the conditions for operating the customs warehouse.”

Article 98 refers to “the conditions laid down.”

52.	Article 527.2 of the Implementing Regulation (EEC) 2454/93 was substituted by Commission Regulation (EC) 993/2001 of May 2001 which replaced the previous Title III of Part II with a new Title III consisting of Articles 496 to 592.  The recital to 993/2001 stated that Title III should be simplified and rationalised.

53.	The substituted Article 527 reads,

“1.	Authorisations may be granted only if any intended usual forms of handling, inward processing or processing under customs control of the goods do not predominate over the storage of the goods.

2.	Authorisations shall not be granted if the premises of customs warehouses or the storage facilities are used for the purpose of retail sale.

An authorisation may, however, be granted, where goods are retailed with relief from import duties:

	(a)	to travellers in traffic to third countries;
	(b)	under diplomatic or consular arrangements;
	(c)	to members of international organisations or to NATO forces.

3.	For the purposes of the second indent of Article 86 of the Code, when examining whether the administrative costs of customs warehousing arrangements are disproportionate to the economic needs involved, customs authorities shall take account, inter alia, of the type of warehouse and procedure which may be applied therein.”

The equivalent provisions were previously contained in Article 510.2 and 3 and Annex 69a.  Article 510.2 was the predecessor to Article 527.3.   No submissions were made regarding the wording of Article 510.2.  Article 510.3 previously read,

“3.	Without prejudice to the derogations provided for in Annex 69a, retail sales in the premises storage area or any other defined location of a customs warehouse shall not be allowed.  This prohibition shall also apply to goods placed under the customs warehousing procedure in a type E warehouse.”

Annex 69a provided,

“Retail sales in a customs warehouse of a type E warehouse under the customs warehouse procedure shall be allowed in the following cases:

1.	Sales with relief from import duties to travellers in international traffic.”

Items 2, 3 and 4 are replicated in paragraphs (b) and (c) of the second indent to Article 527.2.

54.	Article 510.3 and Annex 69a had been added by Commission Regulation (EC) 3254/94.  The preamble to Regulation 3254/94 stated

“Whereas the conditions governing the operation of a customs warehouse or use of a customs warehouse procedure in a type E warehouse should prevent the use of the procedure for the purpose of retailing, while allowing for certain derogations”.

Regulation 3254/94 was in accordance with the opinion of the Customs Code Committee, as was Regulation 993/2001. The procedure involving the Committee’s opinion is under Articles 247 to 249 of the Community Customs Code.

55.	The Customs Code Committee consists of representatives of each Member State.  The agenda is prepared by the Commission which provides the chairman.  The agenda is in French, German and English. There is a simultaneous translation of proceedings. The Commission prepares working papers for meetings with drafts of proposed legislation. Minutes of meetings are prepared by the chairman.  There is no official notetaker.  The Commission’s minutes are only a brief summary.

56.	Revision 5 dated 4 February 2000 for the first sentence of Article 527.2 was as follows,

“2.	Authorisations shall not be granted where there is retail sale of goods under the arrangements.”

The rest of Article 527.2 was substantially as the final version.  The Committee minutes record that the question of e-commerce from a customs warehouse was raised on 7 and 8 March 2000.  Revision 6 dated 24 March 2000 read as follows for the first sentence,

“2.	Authorisations shall not be granted if premises where goods under the arrangements are stored are used for delivery of goods sold by retail sale.”

The minutes of 4 May recorded that a member state sought to make the scope of Article 527.2 more precise “by excluding the retail sale with delivery to the purchaser/client in the premises.”

57.	Revision 7 substituted the words “are used for collection of goods sold by retail sale” for “are used for delivery … (etc)”.  This was discussed during a meeting on 7 and 8 September 2000, the official minute of which said that the drafted wording was insufficiently “waterproof to avoid the presence of customers in the warehouse premises.”

58.	Revision 8 substituted the words “are used for the purpose of retail sale.”  Those words were the same as those finally adopted in Article 527.2.  The only change in the final version was a minor change to the earlier part of the sentence.

59.	Article 16 of the Sixth Directive (77/388/EEC) providing for a common system of VAT reads (so far as relevant),

“Without prejudice to other Community tax provisions, Member States may, subject to the consultations provided for in Article 29, take special measures designed to exempt all or some of the following transactions, provided that they are not aimed at final use and/or consumption and that the amount of value added tax due on cessation of the arrangements on situations referred to at A to E corresponds to the amount of tax which would have been due had each of these transactions been taxed within the territory of the country:

	…
	B.	supplies of goods which are intended to be:
		…
	(c)	placed under customs warehousing arrangements or inward processing arrangements;
	…
	C.	supplies of services relating to the supplies of goods referred to 
		in B;
	D.	supplies of goods and of services carried out:
(a)	in the places listed in B(a), (b), ( c) and (d) and still subject to one of the situations specified therein;
		…”

60.	Article 16 provides the vires for section 18 of the VAT Act 1994.  Section 18(1) reads,

“(1)	Where –

(a)	any goods have been removed from a place outside the Member States and have entered the territory of the Community;
(b)	the material time for any acquisition of those goods from another Member State or for any supply of those goods is while they are subject to a warehousing regime and before the duty point; and
(c)	those goods are not mixed with any dutiable goods which were produced or manufactured in the United Kingdom or acquired from another Member States, 

then the acquisition or supply in paragraph (b) above shall be treated for the purposes of this Act as taking place outside the United Kingdom.”

Submissions for Appellant

61.	Mr Conlon said that the appeal concerns whether Customs have the power to impose the disputed conditions.  The purpose of customs warehouses under the Community Customs Code is to facilitate trade with non-member states.  Customs were generally content with the Appellant’s application but did not like the fact that its use would give BUK a favourable regime for VAT as well as for customs duty; that however is the purpose of the warehouse regime which in effect treats a customs warehouse in the same way as a ship on the high sea.  He said that the Customs had used the VAT code and the arrangements with BUK to interpret customs law : they were not entitled to do this. Their real reason is to frustrate the saving of VAT.  The added conditions are unlawful and otiose.

62.	He said that Article 16 of the Sixth Directive has been fully implemented in section 18 of the VAT Act 1994 which is clear and unambiguous and contains no limitations on the supply of goods while subject to a warehousing regime.  Customs seek to limit its application by imposing the disputed conditions on warehouse approval.  He said that Article 16 of the Sixth Directive is not relevant to the interpretation either of the Community Customs Code or of the Implementing Regulation.  There is no conflict between the Code and the Implementing Regulation.

63.	Mr Conlon said that the primary purpose of customs warehousing is to provide for the storage of goods while subject to duty suspension, see EC Commission v Netherlands (Case 49/82) [1983] ECR 1195 at page 1209.  Articles 85 to 90 of the Code lay down general conditions for all procedures with economic impact; these are limited to provision of adequate security, supervision, notification of changes and transfer. The provision in Article 90 for transfer of rights and obligations makes it clear that sales while under the warehouse procedure are covered.  Articles 98 to 113 are specific to customs warehousing with several special conditions some of which are mandatory and some discretionary. Here the proposed warehouse is a public warehouse, the Appellant would be the warehouse keeper and BUK would be the depositor. Article 100.2 provides that the authorisation shall lay down the conditions.  Article 247 provides the vires for the Implementing Regulation which was enacted following consultation with the Customs Code Committee.

64.	He said that a Type A public warehouse must consist of premises or any other defined location approved by the authorities, see Article 505.1 of the Implementing Regulation.

65.	Mr Conlon submitted that the purpose of Article 527.2 is to prevent the use of a customs warehouse as a retail shop; the restriction in the first sentence is limited to use involving sales which are both at the final stage of distribution and also in premises to which the public have access.  The modifications in the second indent are all examples of retail sales in the premises of warehouses.  He said that there is no warrant for the blanket conditions imposed here.  The words “for the purpose of retail sale” in Article 527.2 are normal everyday words with no autonomous meaning.  He said that there are characteristics in the present case which clearly indicate that the sales contemplated are not retail.

66.	He cited a series of UK cases involving rating and planning as to the meaning of “retail shop”, including The Industrial Rating Cases [1931] AC 451 at pages 474 and 487, Ritz Cleaners Ltd v W Middlesex Assessment Committee [1937] KB 642 and Dolton Bournes & Dolton Ld v Osmond (Valuation Officer) [1955] 1 WLR 621.  He said that a retail sale is what someone carrying on a retail business does.  In Meriden RDC v Standard Motor Co[1957] 1 WLR 958 Morris LJ said at page 971 that where there is a middleman between the seller and the public it is not retail.  In R v Thurrock BC, ex parte Tesco Stores Ltd [1993] 2 PLR 114 sales to members of a warehouse club were held not to contravene a restriction barring use of a premises for retail sale.

67.	Mr Conlon said that the decision was unreasonable because Customs focussed on the business of BUK and on the VAT effect rather than on the business of the Appellant.  He said that it is necessary for the Tribunal to make findings of fact as well as to interpret Article 527.2.

68.	Mr White, following for the Appellant, said Article 527.1 is clearly addressed to physical activities in the premises.  He said that Art 527.2 might be interpreted either narrowly, as the Appellant contends, as prohibiting the use of warehouse premises as retail shops or outlets, or widely, as Customs contends, as precluding any final stage sale when the goods are under the warehouse procedure. If  Customs’ interpretation is correct, the question still arises whether any final stage sales are proposed; the Appellant’s case is that the proposed sales are all wholesale.

69.	He said that Article 527.2 implements Article 86 and 247 of the Code.  The wider interpretation which Customs supported and which he called “ethereal” is not “necessary” as Article 247 requires.

70.	Mr White said that the prohibition on retail sales in the premises was first introduced in Regulation 3254/94 which inserted Article 510.3.  He said that there was nothing similar in the previous legislation.

71.	He submitted that Commission working papers for the Customs Code Committee and the minutes of the Committee prior to legislation are admissible as travaux preparatoires under R v Immigration Appeal Tribunal, ex parte Antonissen (Case C-292/89) [1991] ECR I-745 per the Advocate-General at paragraphs 23 to 27 but that the notes of committee members either before or after meetings are not admissible.

72.	A working paper dated 6 May 1993 (RED 65) had addressed requests for storage of goods under type E warehouses to be permitted at retail premises.  The need to exclude the retail sector from the warehousing regime was given as the burden on Customs of controlling a large number of authorisations and distortion of competition if payment of customs duty is deferred until the point of retail sale.  It was recorded that certain Member States granted authorisations for warehouses to be use for direct sale to end-users of motor vehicles, sales from duty-free shops and sales by mail order companies.  The draft proposed excluded retail sales “to end-users” with exceptions including mail-order companies.  The draft with RED 65 was modified in RED 70 dated 18 July 1994 which put forward the wording adopted in Article 510.3.  The introduction in that working paper said that there was a “need to establish the principle that customs warehouses may not be used as retail outlets.”  Mr White submitted that the reference to “retail outlets” meant retail shops and that Article 510.3 involved no change in purpose but was to deal with the administrative problem for Customs.  He said that Article 510.3 precluded retail sales “in the premises” rather than sales to end-users.  He said that “retail sales in the premises” did not cover mail order sales.  The concept of “in the premises” was physical : Article 510.3 also referred to “any other defined location.”

73.	Mr White submitted that Article 510.3 prevented a customs warehouse being used as a retail shop with access by the public and was a physical restriction.  He said that there was no change when Article 527.2 replaced Article 510.3 in 2001.  Article 527.2 had gone through a series of drafts.  Revision 7 provided that authorisation should not be granted where the premises where goods are stored are “used for collection of goods sold by retail sale.”  The Commission minutes of the meeting on 7 and 8 September 2000 said that the drafted wording was insufficient “to avoid the presence of customers in the warehouse premises.”  There was no mention of any change in the purpose of the restriction.

Submissions for Customs

74.	Mrs Hall submitted that the meaning of the words “used for the purpose of retail sale” in Article 527.2 is not clear and that the Tribunal should refer questions to the Court of Justice as to (a) whether sales in small quantities to final consumers and/or users of goods constitute retail sales, (b) whether premises are used “for the purpose of retail sale” if the purchaser does not physically enter the premises and the sale is before the goods are physically removed from the warehouse, (c) whether premises are used “for the purpose of retail sale” when an unknown proportion of sales from the premises can be so described and (d), if the answer to (c), is positive whether it follows that authorisation shall not be granted for the premises?

75.	She said that the evidence as to the conduct of the business and the legislative history of Article 527.2 had strengthened the case for a reference.  The facts showed that a substantial proportion of goods are for distributors themselves and that the proportion cannot be determined on the Appellant’s method of operating.  The intention of BUK is to sell mainly to unregistered distributors who have no obligation to sell to third parties.

76.	Mrs Hall said that formal approval had not been given because the conditions were in dispute.  Articles 87.1 and 100.2 of the Code require conditions. The conditions imposed are to ensure compliance with Article 527.2.  The Appellant as warehouse keeper is responsible for complying with the conditions; it is irrelevant that the Appellant is not directly involved in the sales by BUK.

77.	She said that there is no case law on the interpretation of Article 527.2 which must be interpreted purposively and consistently with the Code and Implementing Regulation and also having regard to the general Community law context of which the Sixth VAT Directive and in particular Article 16.1 form part. She cited Cremer v Bundesantstalt fur landwirtschaftliche Marktordung (Case C-125/76) [1977] ECR 1593, 1604 and Kvaerner plc v Staatsecretaris van Financien (Case C-191/99) ECR 4447 at paragraph 30 onwards.  She said that the words “provided that they are not aimed at final use and/or consumption” in Article 16.1 of the Sixth Directive are mandatory.  She submitted that there is no distinction between final use and retail sale.  She said that it would be impossible to supervise the prohibition on retail sales in the Appellant’s warehouse as proposed. The conditions were directed to the proposed use in the application.

78.	Mrs Hall said that Customs acknowledge that there are respectable arguments that the reference to “for the purpose of retail sale” in Article 527.2 is a reference to a physical space to which the public have access but she submitted that it is not clear and that such an interpretation is not consistent with the objectives of customs warehousing and of VAT.

79.	She submitted that the UK minute of the Code Committee Meeting on 20 October 2004, while not relevant to interpretation of Article 527.2, is relevant as showing that there is confusion as to its meaning.  She said that the Court of Justice is interested in the practice in Member States. Since it is part of the function of the Committee under Article 249 of the Code to interpret the legislation, its deliberations are highly relevant to the issue of whether there is uncertainty as to interpretation.

80.	Mrs Hall said that the answer to the question whether the proposed use of the warehouse is “for the purpose of retail sale” within Article 527.2 would be substantially determinative of the appeal and there is no previous case law, see Customs and Excise Commissioners v ApS Samex [1983] 1 All ER 1042, 1054.  She said that if the Tribunal has any real doubt it should make a reference, see CILFIT Srl v Ministry of Health (Case 283/81) [1982] ECR 3415, 3430 and R v International Stock Exchange [1993] QB 534, 545

81.	She said that a series of significant amendments were discussed before Article 527.2 was adopted in 2001.  The concept of authorisation was introduced and made mandatory, references to location were removed and the words “for the purpose of retail sale” were introduced.  She said that the UK minute of the code committee on 7 and 8 September 2000 showed that the UK opposed Revision 7 on the basis that any retail sale must be outside the warehouse regime.  She asked why the reference in Article 510.3 to a defined location had been omitted if it was considered to be so important.

82.	Mrs Hall said that the working paper of 6 May 1993 prior to the introduction of Article 510.3 indicated that the concepts of “final phase of their distribution”, “direct sale to end-users” and “retail sale” were all the same.

83.	She said that there is no lacuna in section 18 of the VAT Act 1994 which gives effect of Article 16 of the Sixth Directive. Before 1997 the simplified declaration procedure was not possible in the UK and the arrangements proposed by the Appellant would not have been viable commercially. Parliament cannot be assumed to have envisaged retail sales in a customs warehouse. Section 18 must be construed consistently with the Community law obligations of the UK, see Customs and Excise Commissioners v UK [1999] STC 758, per Lord Slynn.  The creation of a customs union and the harmonisation of turnover taxes are both objectives of the EC Treaty.  The objective of the VAT system is a general tax on consumption charged at the retail stage, see Article 2 of the First VAT Directive.  The warehousing regime referred to in section 18 does not contemplate sales to private consumers.

84.	Mrs Hall submitted that Article 527.2 is to prevent sales to end consumers under a suspensive regime. She said that the result which the Appellant seeks to achieve is directly contrary to the objectives of the Sixth Directive.  She said that the disputed conditions do not preclude customs duty advantages, deferment of duty being possible if goods are consigned to BUK.  The conditions do however take away the benefit of import VAT rather than supply VAT.

Appellant’s Reply

85.	Mr Conlon said that the core issue is very narrow – whether the intended use is “for the purpose of retail sale.”  It is not proposed to make sales at the retail stage.  It is not legitimate to focus on what BUK does; BUK’s activities are not the whole business. The application form for warehouse approval under Annex 67 of the Implementing Regulation does not address the identity of the proposed customer.

86.	He said that the thrust of Mr Way’s evidence was that sales to distributors are at the wholesale level. They collect orders from customers and place them with co-ordinators. The average order value for a distributor was £245 a week for the first 24 weeks of 2004. The coordinators’ commission structure and the distributors’ opportunity to make a margin on resale above the wholesale price depend on a high volume of sales.

87.	Mr Conlon said that the sales to distributors contain none of the hallmarks of retail sale.  The distributors are a restricted class of middlemen who buy in bulk at a discount.  The goods are not displayed in the warehouse and neither the distributors nor the public have access to the warehouse.  He submitted that, if the owner of a corner shop buys twenty items two of which are for himself, all of the purchases are wholesale.

88.	He said that Customs’ argument as to the coherent operation of the VAT system is misconceived.  There is no read across between Article 527.2 and Article 16 of the Sixth Directive which is permissive. Section 18 correctly implements Article 16 and is absolute in terms.  The proviso to Article 16.1 cannot override section 18.  He said that in any event a sale at wholesale level is not “aimed at final use and/or consumption” within the proviso to Article 16.1.  He said that if section 18 is deficient it is for Parliament to amend it.

89.	Mr Conlon said that the approach that distributors operate in a dual capacity selling on and also buying for their own use is erroneous.  The distributors are taxable persons within Article 4 and their purchases are part of their economic activity.  It is irrelevant that they are under the UK registration threshold.  The fact that they may use some goods themselves does not prevent them being taxable persons.  The Community VAT System has no concept of dual capacity.  The use of goods for their own use is covered by the adjustment rules, see Lennartz v Finanzamt München III (Case C-97/90) [1991] ECR 3795.  He referred also to Finanzamt Goslar v Breitsohl (Case C-400/98) [2001] STC 355 at paragraph 35; in that case the business never got off the ground but the taxpayer was still a taxable person.

90.	He cited the observations of Lord Nolan at page 733f and Lord Hoffman at page 738h-739b of Customs and Excise Commissioners v Thorn Materials Supply Ltd [1998] STC 725 where the VAT treatment of sales within a customs warehouse were considered.

Rejoinder by Customs

91.	Mrs Hall said that Thorn Materials is not an ECJ authority and does not address retail sales or their relationship with customs legislation.  She said that Breitsohl does not assist because here the distributors are not taxable persons acting as such when buying for themselves.

Conclusions

92.	Since this appeal is against an ancillary matter falling within Schedule 5, paragraph 1 of the Finance Act 1994, the powers of the Tribunal are specified in section 16(4). Under section 16(4) “where the tribunal are satisfied that the Commissioners or other person making the decision could not reasonably have arrived at it”, the Tribunal can direct the Commissioners to conduct a further review in accordance with the directions of the Tribunal.

93.	That awkwardly worded test has been generally accepted as involving the question whether in arriving at the decision the Commissioners in fact acted unreasonably. A decision is unreasonable if the Commissioners act outside their powers or if the Commissioners fail to consider matters which they should have considered or consider matters which they should not have considered.  A decision is unreasonable if founded on incorrect facts.

94.	The Appellant in the present case contends that the Commissioners have no power to prohibit sales while the goods are under the customs warehouse procedure or to direct that the depositor must always be declared as consignee and maintains that the proposed use of the warehouse is not “for the purpose of retail sale.”

95.	The disputed decision was contained in the letter of 30 September 2003, see paragraph 37 above.  It was made on the basis that sales by BUK which are purchased by distributors for their own use are retail sales and that one intended purpose of the customs warehouse facility for which the Appellant applied is for retail sale.  Since Article 527.2 prohibits authorisation if the premises of customs warehouses are used for the purpose of retail sale, the conditions were imposed to prevent retail sales while goods are subject to the customs warehousing procedure.

96.	Although Article 527.2 is expressed in the present tense since authorisation must precede use as a customs warehouse, the use must be the intended use.  In the present case the intended use is the existing use but with the proposed variations set out in paragraphs 30 to 33 above.

97.	Under the proposals the sales by BUK to distributors would take place when the good are appropriated to the distributor in question and this would occur at a time when the goods are physically in the customs warehouse and are still subject to the warehousing procedure.  The supply of goods which come from outside the EU would be treated as made outside the UK for VAT purposes and the subsequent VAT payable when the goods leave the warehousing procedure would be payable by the distributors and not by BUK. Goods from within the EU would of course not be affected since they would not come under the warehousing regime.

98.	The issue to be decided is whether the proposed arrangements involve the use of the premises of the warehouse “for the purpose of retail sale”.  If the proposed use does involve use for such purpose then authorisation is prohibited under Article 527.2 and the imposition of conditions precluding such use is clearly justified.  If the proposed use does not involve retail sale, the conditions were imposed on an incorrect legal basis and are therefore unreasonable.

99.	It is clear in our view that the use for the purpose of retail sale within Article 527.2 does not have to be sale by the Appellant. Although Mr Conlon said that Customs had focussed on the use by BUK rather than by the Appellant, we have no doubt that if sales to be made by BUK would be retail sales within Article 527.2 the premises would be used for the purpose of retail sales.  The retail sale does not have to be by the warehousekeeper.  Indeed the warehousekeeper will not normally be a party to the sale.

100.	It is clear on the evidence before us that a significant proportion of purchases by distributors are intended for themselves as end users.  It does not matter what the actual proportion is, indeed it will obviously vary with every order.  The decision by Customs was made on the basis that own use purchases by distributors cannot be identified. Since BUK’s method of operation is on the assumption that a significant proportion of distributors do make purchases for their own use, we are satisfied that the premises are and would be used for such a purpose.

101.	This brings us to the central issue : whether sales to distributors, who are for the most part middlemen selling on most of their purchases to end users but some of whom retain a significant proportion of purchases for their own use, are retail sales notwithstanding that goods are not displayed in the premises and that neither the distributors nor those buying from them have access to the premises.

102.	In our view a sale to a distributor who is known to be buying goods for his own personal use or for another non-commercial purpose is a retail sale.

103.	Does the fact that BUK and therefore the Appellant do not know that specified goods are for the personal use of the distributor make any difference?  We think not, since BUK knows that a significant proportion of the goods are for the personal use of distributors, whether because the distributors joined with this in view or because they are encouraged to buy goods for themselves to help their marketing.

104.	We do not find the rating cases which were concerned with the classification of hereditaments to be of any assistance.  In the world of today an increasing proportion of retail sales do not involve a retail shop.

105.	Clearly most retail sales are made to customers in person at shops where goods are on display.  However, the display of goods in premises to which customers have access, while a characteristic of most retail sales, is not a prerequisite.  Sales by telephone, e-mail or mail order direct to consumers are clearly retail sales.

106.	In our judgment the words “for the purpose of retail sale in Article 527.2” are directed at the same concept as the words “aimed at final use and/or consumption” in Article 16.1 of the Sixth Directive.

107.	Insofar as the distributors are end-users or final consumers sales to them are retail sales.  Since BUK knows and intends that a significant proportion of sales while the goods are in the warehouse would be to distributors who are end-users the premises would be used for the purpose of retail sale. The Appellant is not only aware of this but is an active party to the overall arrangements proposed.  In our judgment the proposed use involves the use of the premises for the purpose of retail sale.  It matters not that the retail sales are only a proportion of sales : the ban in Article 527.2 is absolute. There was no suggestion that the retail proportion would be de minimis; the facts would not support this.

108.	We considered the submissions of Customs that we should make a reference to the Court of Justice as to the interpretation of Article 527.2 and we considered the legislative history of that provision.

109.	The travaux preparatoires are a legitimate aid to interpretation particularly in view of the importance of the purpose when interpreting Community law.  However we do not consider that they should be invoked to create a doubt.  We do not consider that we should have regard to the unofficial UK notes of Customs Code Committee.  In the event however this material has not affected our conclusions.

110.	We do not have any real doubt as to the interpretation of Article 527.2 in the context of the appeal before us.  It follows that a reference is not necessary to enable us to give judgment.

111.	We conclude that the conditions imposed for approval of a warehouse by the Appellant were not imposed on an incorrect basis either of fact or of law.  It follows that the decision was one which the Commissioners could reasonably make.  The Appellant has not established that section 16(4) of the Finance Act 1994 applies.

112.	The appeal is dismissed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 25 April 2005

LON/03/7042