Pre-payments consisting of lump sums paid for unspecified goods to be delivered in the future did not fall within art. 10(2) of Directive 77/388 (‘the sixth directive’) as a chargeable event for VAT purposes.

Facts

The taxpayer, BUPA Hospitals Ltd (BHL), was part of the BUPA group of companies and carried on the business of, among other things, the running of private hospitals. It had been involved in a long-running dispute with Customs over the VAT treatment of supplies of drugs and prostheses to private patients. BHL had taken the view that the supplies were zero-rated and that attributable input tax was duly deductible, whereas the commissioners had claimed that the supplies were exempt and that input tax incurred on attributable expenditure could not be reclaimed. The issue was settled by the Court of Appeal in favour of BHL ([1997] BTC 5,140) and following a decision by the House of Lords to refuse leave to appeal, the government declared its intention to amend the legislation to reverse the court's decision.

The imminent change in law prompted the taxpayer to make pre-payment arrangements whereby it would contract with a supplier to purchase goods to the value of £100m in anticipation of the change in law to make the onward supply by the appellant exempt. VAT charged by the supplier would be deducted in the VAT period in which payment was made so that when the goods were eventually delivered, no non-deductible VAT would be charged to the appellant. A BUPA group company renamed BUPA Medical Supplies Ltd BMSL) was selected as the vehicle which would make the supplies. In order to avoid paying output tax of £17.5m to the commissioners and waiting for BMSL to reclaim the corresponding amount as input tax, a separate counter-party pre-payment arrangement was entered into involving another BUPA group company, Goldsborough Developments Ltd (GDL), the second party to the appeal. On 1 January 1998, the Value Added Tax (Drugs, Medicines and Aids for the Handicapped) Order 1997 (SI 1997/2744) took effect applying exemption from VAT to supplies by private health providers.

The taxpayers’ case was based on two propositions: that they had received taxable supplies and that the attributable input tax was recoverable on the basis that the goods were to be used to make taxable supplies. Customs contended, in response to the first proposition, that the supplying companies did not carry on any business for VAT purposes and were not taxable persons, and that the making of the contracts and the issuing of the invoices did not create taxable supplies. In response to the taxpayers’ second proposition, the commissioners contended that the appellants had received no taxable supplies but even if they had, those supplies were to be used for making exempt and not taxable supplies. Further, or alternatively, the commissioners contended that any right of deduction was precluded because such a right had been abused. A further argument for GDL was that the commissioners’ assessment should properly have been made not on it but on the representative member of its VAT group. As a separate matter, the commissioners argued that the pre-payment agreement between GDL and its supplier was a sham and should be ignored.

The VAT and Duties Tribunal dismissed the appeal on the ground that the associated companies did not carry on any economic activity and made no supplies for VAT purposes. It held that every step in the pre-purchase arrangements was taken solely for the purposes of avoiding VAT. Neither of the companies had any role in those arrangements other than to facilitate that objective ([2002] BVC 2,155; Decision No. 17,588).

On an appeal to the High Court, the judge decided to stay the proceedings and make a reference to the ECJ for a preliminary ruling.

Issue

Whether transactions of the kind at issue in the main proceedings, designed to obtain a tax advantage, constituted supplies of goods and an economic activity within the meaning of art. 2(1), 4(1) and (2), and 5(1) of the sixth directive.

Decision

The European Court of Justice (ECJ) (Grand Chamber) (ruling accordingly) said that the second subparagraph of art. 10(2), according to which, where payments were made on account before the goods were delivered or the services performed, VAT became chargeable on receipt of payment and on the amount received, constituted a derogation from the rule laid down in the first subparagraph and had to be interpreted strictly. Article 10(1)(a) defined the ‘chargeable event’ for VAT as the occurrence by virtue of which the legal conditions necessary for tax to become chargeable were fulfilled. It followed that the tax might become chargeable at the same time as or after the occurrence of the chargeable event but, subject to any provision to the contrary, not before it. Thus, the third subparagraph of art. 10(2) authorised the member states to provide that the tax was to become chargeable on a later date than that of the chargeable event, specifying three possibilities: no later than the issue of the invoice; or no later than receipt of the price; or, where an invoice was not issued or was issued late, within a specified period from the date of the chargeable event.

The second subparagraph of art. 10(2) departed from that chronological order by providing that, where a payment was to be made on account, the VAT became chargeable without the supply having yet taken place. In order for the tax to become chargeable in such a situation, all the relevant information concerning the chargeable event, namely the future delivery or future performance, must already be known and therefore, in particular, when the payment on account was made the goods or services had to be precisely identified. It was the supplies of goods or services which were subject to VAT, rather than payments made by way of consideration for such supplies. A fortiori, payments on account of supplies of goods or services that had not yet been clearly identified could not be subject to VAT.

Accordingly, pre-payments of the kind at issue in the main proceedings whereby lump sums were paid for goods referred to in general terms in a list which might be altered at any time by agreement between the buyer and the seller and from which the buyer might possibly select articles, on the basis of an agreement which he might unilaterally resile from at any time, thereupon recovering the unused balance of the pre-payments, did not fall within the scope of the second subparagraph of art. 10(2).

European Court of Justice (Grand Chamber). Judgment delivered 21 February 2006.