Value added tax - tax point - supply of goods over internet - payment by credit card - sale under distance contract - taxpayer obliged to account for output VAT on price of goods bought online - dispute as to tax point - tribunal deciding that tax point occurred when cancellation of contract no longer an option - Court of Session holding that tax point was date of payment - Customs' appeal allowed - Value Added Tax Act 1994, s. 4, 6.

The Court of Session (Inner House) held that the tax point at which a taxpayer company had to account for output VAT on the price of goods sold online was the date when the customer made the payment for the goods online.

Facts

The taxpayer company was a retailer of electrical goods. It sold some of its goods online. When a customer ordered goods online he paid for them by recording his credit or debit card details on the taxpayer's website. In the normal case the amount paid was the full price of the goods. When the goods were sent to the customer, the taxpayer prepared an invoice, either at the date of dispatch or at a later date; but in all cases within seven days from the date of delivery. The taxpayer recorded the tax point for VAT purposes as the date of the invoice or the date occurring seven days from the date of delivery, whichever was the earlier.

The taxpayer's terms and conditions for online transactions provided inter alia that credit/debit card payments were taken at point of order on all sales. By submitting an order the customer was offering to buy goods. All online orders were confirmed as received through sending an automatically generated e-mail. The taxpayer reserved the right to decline an order. A customer was entitled to return a product that was not faulty or misdescribed within seven days from the day after the product was received. Faulty products had to be notified within seven days from the delivery date and they would be collected by the taxpayer. Upon receipt of the goods and confirmation of the fault the customer would be offered either a replacement, a repair or full refund, providing the item was complete with all accessories and in its original box and packaging. If the product was not deemed faulty the goods would be returned to the customer.

The basic tax point for accounting for VAT was the time of removal of the goods (VATA 1994, s. 6(2)(a)). Section 6(2)(c) provided for tax points other than that on the basis that when goods were sent or taken on a transaction of one of the kinds there described, it could not be known whether a supply would take place. It therefore implied that the mere sending or taking of the goods under such a transaction did not constitute a taxable supply.

Section 6(4) provided, in effect, that if the supplier issued a VAT invoice before the tax point which would otherwise apply under s. 6(2), or if the supplier received payment before delivery, the tax point was the date of the issue of the invoice or the date of receipt of the payment. It also suggested that s. 6(2)(c) applied where the goods were not paid for when they were sent or taken. An online sale of this kind also constituted a'distance contract' governed by the Consumer Protection (Distance Selling) Regulations 2000 (SI 2000/2334). Regulation 10 entitled the customer to cancel the contract within the cancellation period without having to give a reason.

There was no dispute that the taxpayer had to account for output VAT on the price of the goods bought online. The question was when the tax point occurred. The tribunal considered that the issue was to be decided on the construction of VATA 1994, s. 6(2)(c) and its application to the facts of the case. If s. 6(2)(c) applied, then the payment before delivery did not have the effect of creating a deemed time of supply. No actual tax point would be created by virtue of the receipt of payment for goods yet to be delivered. On that view, the question then became whether a supply of goods with a statutory right of cancellation was a supply on similar terms to a supply on approval or on sale or return. The essential feature in such cases was that the person to whom the goods were supplied had the unqualified right to return the goods or to decline to proceed with or to cancel the transaction, usually without penalty. While the precise terms might vary in such cases, essentially there need be no defect in the goods and the supplier need not be in breach of contract. In the tribunal's view, the statutory right to cancel gave the supply of goods under a distance contract a character similar, but not identical, to the supply of goods under such contracts. In a distance contract it was only when the cancellation period expired that it became certain that a supply had taken place for the purposes of s. 6.

The tribunal ([2004] BVC 2,070) concluded that supply of goods under a distance contract was in effect a supply on seven working days' approval. Its similarity to sale on approval was sufficient to bring a distance contract of this kind within the phrase'similar terms' in s. 6(2)(c). The tribunal considered the decision of an English tribunal in Littlewoods Organisation plc v C & E Commrs [1997] BVC 2,479. In that case the supplier's terms of supply allowed 14 days' free approval, but required that payment or a first payment should be made before the 14 day period expired. The tribunal in that case held that a transaction concluded on those terms constituted a contract of sale with a condition subsequent entitling the purchaser to cancel the transaction within the 14 day period, the provisions for payment being incompatible with the theory that the goods were supplied on approval only. The tribunal in this case considered that the Littlewoods case was distinguishable on its facts and doubted whether it adopted the correct approach.

Issue

Whether the tax point was the date of payment or the date on which the customer ceased to be entitled under the 2000 Regulations to cancel the contract.

Decision

The Court of Session (Inner House) (Lord Justice Clerk Gill, Lord Johnston and Lord Hardie) (allowing the appeal) said that the tribunal had misdirected itself. It had overlooked the meaning and effect of the taxpayer's online terms and conditions. The tribunal appeared to have acceded to a proposition for the taxpayer to the effect that the 2000 Regulations conferred on the customer the absolute and unfettered right to disregard the contract, leaving the legal position as it was before the order was made; that the transaction was at most an agreement to sell (Sale of Goods Act 1979, s. 2(5)) and that no sale took place until the expiry of the cancellation period (s. 2(6)).

That approach seemed to imply that reg. 10 did not merely confer a right to cancel the contract but modified the nature of the contract itself by making all distance contracts in effect transactions of sale on approval. That view was based on a misunderstanding of reg. 10. Although the taxpayer's terms and conditions were subject to the statutory right of cancellation, they nonetheless determined the nature of the transaction under which the goods were supplied. The provisions relating to payment, ordering and returns all indicated that the nature of the online transaction was one of outright sale. Regulation 10 governed the transaction only to the extent of conferring on the purchaser an unqualified right of cancellation of the sale.

There was no concluded contract of sale if goods were supplied on approval or on sale or return. It followed that there was no taxable supply under VATA 1994, s. 4. The taxable supply occurred only'when it becomes certain that the supply has taken place' (s. 6(2)(c)), i.e. when the recipient bought them, or on the expiry of 12 months after the removal of the goods, if sooner.

The goods in this case could not be said to have been sent or taken'on similar terms' to transactions of these two kinds. The taxpayer's terms and conditions had the effect that there was a concluded sale, although it was subject to the purchaser's statutory right to annul it. The fact that payment had to be made when the order was placed indicated that s. 6(2)(c) could not apply to the transaction. The transaction in this case was therefore of a similar nature to that considered by the tribunal in Littlewoods, which was would be treated as taking place either at the time of the correctly decided.

Under a transaction of this nature, there was therefore a taxable supply (Staatssecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV (Case 320/88) [1991] BTC 5,130; [1990] ECR I-285. That supply would be treated as talking place either at tha time of the removal of the goods (s 6(2)(a)), which Customs accepted would be the date of delivery, or, as in this case, on the making of the online payment (s. 6(4)).

Court of Session (Inner House). Judgment delivered 11 November 2005.