Abbey National Plc v Customs and Excise

I have before me an appeal by Abbey National plc against the decision of the London Tribunal Centre of the VAT and Duties Tribunal (Mr A.E. Sadler, Chairman, and Mr K.C. Manterfield, F.C.A.) in the matter Abbey National plc –v- The Commissioners of Customs & Excise (“the Commissioners”, now of H.M. Revenue & Customs). Abbey National plc, which appears by Mr David Milne Q.C. leading Mr James Henderson, has, as an indirect but wholly owned subsidiary and as a company in the VAT group of which Abbey National plc is the representative member, a company called Wagon Finance Ltd (“Wagon”). No need to distinguish between Abbey National and Wagon arises and it will generally be convenient to refer to either or both simply as “Wagon”.

Wagon provides finance for the purchase of vehicles, for the most part motor cars, by individuals on credit terms, usually in the form of conditional sale agreements. Under such agreements Wagon sells the car to the customer in return for a promise of instalment payments computed by reference to the aggregate of the cash price of the car, including the VAT thereon, and a charge for credit (the supply of which attracts no VAT). That aggregate is then divided into equal instalments to be paid, usually monthly, over the whole contractual period, typically of up to about three years. There is no express apportionment of each instalment due under the conditional sale agreements as between the part going towards the cash price and the part going towards the overall cost of credit. The customer’s contractual indebtedness is not such that, looking at his conditional sale agreements, he can, before the last instalment is paid, say that he has paid off so much interest or so much principal or that, in turn, he owes only so much interest or so much principal. His contractual indebtedness at all times is simply to pay the remaining composite and undivided instalments as they fall due.

It is common ground that Wagon generally has to account to the Commissioners for VAT on the supply of the goods when possession of them passes to the customer. It is common ground also that for VAT purposes in relation to such conditional sale agreements credit is to be regarded as supplied instalment by instalment as and when the instalments fall due. The system is therefore such (as is, again, common ground) that Wagon has to account for the full VAT on the supply of goods before it will have received the VAT in full from the customer. If the conditional sale agreement is duly performed over the full intended term Wagon will eventually receive the VAT for which it will have had to account in full but in a small percentage of agreements there is default by the customer such that Wagon suffers a bad debt as to the cash price (including VAT) which it then may write off. A question then arises as to bad debt relief (“BDR”) for VAT purposes. BDR is available only in respect of the bad debt arising out of the sale of the goods, not in respect of any shortfall in payment of the supply of credit which, as I have mentioned, would not have attracted VAT in the first place.

In the process of writing off a bad debt it is to Wagon’s advantage, so far as concerns VAT, to minimise that part of the instalment payments that were made before the default which should properly be taken to be payment for the goods (so as to increase the debt owing for BDR) and hence to maximise that part which is properly to be taken as payment for credit. Thus, in respect of a number of conditional sale agreements to which Wagon was a party over the period from the 1^st July 1995 to the 31^st July 1998 and which led to default, Wagon argues that the apportionment of such sums as were paid should reflect that the sale price or principal owing at the start of the instalments period is inevitably at its largest and that it reduces, instalment by instalment, until, when the last comes to be paid, very little principal, if the conditional sale agreement is to run its full term, is left owing. As the instalments all along are of the same amount and the rate of interest is unchanged from beginning to end, the proper consequence, says Wagon, is that a large part of any given instalment which is paid should be attributed to credit in the earlier period, when a larger part of the principal is still owing, with the interest element correspondingly reducing, instalment by instalment, as the amount of principal still owing reduces.

The most precise form of apportioning between payment for goods and payment for credit so as to reflect the gradual diminution of the unpaid price for goods, instalment after instalment, whilst the rate of interest remains constant, is spoken of as “the actuarial method” but in its accounts Wagon uses a more simple method, one which approximates to the actuarial method and is called “the rule of 78” or “the sum of the digits” method.

“The rule of 78” assumes that the cost of credit is spread in the ratio which the number of instalments remaining to be paid bears to the total number of instalments. Thus, on a twelve month contract, where payment is to be made by equal monthly instalments, 12/78ths of the overall charge for credit is to be treated as earned in the first month, 11/78ths in the second month, 10/78ths in the third month and so on. This method is known as “the rule of 78” because the sum of the numbers 1 to 12 is 78. The term “rule of 78” is applied to all cases where this method of spread is adopted whatever the length of contract, despite, of course, a figure of 78, strictly speaking, being applicable only to a twelve month contract. To that extent it would be more accurate to call this method “the sum of the digits” method, as it is sometimes called, but I will adopt the usual practice of calling it the rule of 78 to whatever duration or number of instalments it applies.

The Commissioners’ case, as put by Mr Kenneth Parker Q.C. and Mr Timothy Ward, is that neither the actuarial method nor the rule of 78 method is available to Wagon. Instead, say the Commissioners, our domestic legislation is such that there has to be (strictly speaking) apportionment on the time basis required by our legislation and which provides that the payments go first to pay off the first supply, namely the price for the supply of the goods (which occurs, as I have mentioned, when the customer takes possession of the goods) and that only after that is discharged will there be payment available such as may be taken to go toward paying off the price of later-supplied credit.

The domestic legislation to which reference is thus made is, as for statute, section 36 of the VATA 1994 and, as for regulation, regulation 170 of the VAT Regulations 1995. They provide, so far as here material, as follows:-

“36.

(1) Subsection (2) below applies where-

(a)

a person has supplied goods or services [….] and has accounted for and paid VAT on the supply,

(b)

the whole or any part of the consideration for the supply has been written off in his accounts as a bad debt, and

(c)

a period of 6 months (beginning with the date of the supply) has elapsed.

(2)

Subject to the following provisions of this section and to regulations under it the person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of VAT chargeable by reference to the outstanding amount.

(3)

In subsection (2) above “the outstanding amount” means –

(a)

if at any time of the claim no part of the consideration written off in the claimant’s accounts as a bad debt has been received, an amount equal to the amount of the consideration so written off;

(b)

if at any time any part of the consideration so written off has been received, an amount by which that part is exceeded by the amount of the consideration written off;

and in this subsection “received” means received either by the claimant or by a person to whom has been assigned a right to receive the whole or any part of the consideration written off.”

During the period I am concerned with regulation 170 provided, as to supplies made on different days, as follows:-

“170 (1) Where –

(a)

the claimant made more than one supply (whether taxable or otherwise) to the purchase, and

(b)

the payment shall be attributed to each supply in accordance with the rules set out in paragraphs (2) and (3) below.

(2)

The payment shall be attributed to the supply which is the earliest in time and, if not wholly attributed to that supply, thereafter to supplies in the order of dates on which they were made, except that attribution under this paragraph shall not be made to any supply if the payment was allocated to that supply by the purchaser at the time of payment and the consideration for the supply was paid in full.”

That time basis, say the Commissioners, is the strict position but they are and have been willing to temper it by extra statutory concession by using, instead of that time basis, a “straight line basis”. Under the straight line basis the total of the cost of credit over the whole original intended instalment credit period is added to the sale price of the goods, including VAT, and the aggregate is then divided by the number of instalments payable over the whole intended period. That gives the size of each instalment. Each of the equal instalments intended is then divided in the same ratio as the total cost of credit over the whole period bears to that aggregate cost of credit and goods. The resultant figure is taken to be the part (therefore constant over the whole period) attributable out of each instalment to repayment of credit, the balance being attributed to repayment of the cost of the goods (including VAT thereon). This straight-line method reduces the amount owing in respect of the goods faster than does either the actuarial or the rule of 78 methods. In turn, in case of default, there is less owing for the goods if the straight-line method is used and hence Wagon’s bad debt in respect of goods is smaller than it would otherwise be and its BDR is also correspondingly smaller.

Although the Commissioners could, strictly speaking, have argued for the statutory time basis of apportionment, they had, in a Business Brief of 6^th December 2001, indicated that finance companies had said that the time basis was unfair and they had permitted a concession in the following terms:-

“With immediate effect, suppliers can allocate each payment received from defaulting customers to goods and to finance in the same ratio as the total cost of goods and the total cost of finance to the customer. Further guidance is available in Annex 1 to this business brief.

Suppliers can re-calculate previous Bad Debt Relief claims by applying this new policy and submitting a voluntary disclosure. All claims will be capped to 3 years starting 6 months from when the payment was due from the customer.”

After the expiry of the accounting periods with which I am concerned the straight-line basis was enacted by way of Value Added Tax Regulation 170A which provides as follows:-

“170A (1) Where –

(a)

the claimant made a supply of goods and, in connection with that supply, a supply of credit;

(b)

those supplies were made under a hire purchase, conditional sale or credit sale agreement; and

(c)

a payment is received in relation to those supplies (other than a payment of an amount upon which interest is not charged),

the payment shall be attributed to each supply in accordance with the rules set out in paragraph (2) below.

(2)

The payment shall be attributed –

(a)

as to the amount obtained by multiplying it by the fraction A/B to the supply of credit; and

(b)

as to the balance, to the supply of goods,

where –

A is the total of the interest on the credit provided under the agreement under which the supplies are made (determined as at the date of the making of the agreement); and

B is the total amount payable under the agreement, less any amount upon which interest is not charged.

(3)

Where an agreement provides for variation of the rate of interest after the date above, it shall be assumed that the rate is not varied.”

However, the only assessment that was in issue before the Tribunal was an assessment made on the straight-line basis by way of the extra-statutory concession. The Tribunal dismissed Wagon’s appeal against that assessment. Wagon now appeals. It adheres to its case that the straight-line method is not open to the Commissioners. It does not argue for apportionment on the time basis, which is more unfavourable to it than is the straight-line method. Wagon’s first arguments are based on the provisions of the conditional sale agreements, they, in the majority of cases, incorporating provisions of the Consumer Credit Act 1974 and of regulations made thereunder. Even where that Act did not apply, the agreements used adopted forms of words to substantially the same effect as the provisions of that Act.

As the argument below was understood it had become of “first importance” to establish whether Wagon’s Conditional Sale Agreements did or did not expressly or impliedly include provision allocating some (and if so what) part of each instalment paid to either the balance of principal then owing or to the balance of interest. The first sentence of the Tribunal’s paragraph 54 says:-

“54.

For both parties the issue of first importance is that of the terms of the conditional sale agreements, and in particular whether they include provision to allocate a portion of each instalment payment to the payment of the finance charge payable under the agreements with the balance of necessity allocated to repayment of the reducing credit balance.”

Why that was so important is not so clear; there does not seem to have been any concession that the Commissioners were bound by, or even had to take account of, whatever apportionment the contracts made between repayment of principal and reduction of interest. That could lead to the Commissioners being bound by the parties’ arrangements, however unreasonable or (in VAT terms) evasive or abusive they may have been. Nor was it the case of the Commissioners below that there was no current legislative apportionment and hence that, in its absence, the contracting parties, so long, at any rate, as not using their freedom abusively, were free to fill the void by whatever contractual provisions they might choose. On the contrary, as the Commissioners argued before me, Regulation 170 was in force and enforceable at all material times (although its enforcement was tempered by the extra statutory concession to which I have referred). Thus in his oral argument before me Mr Parker from the outset took the position that, firstly, so long as there was, as he said there was, a legislative domestic provision in force and enforceable and which purported to make a relevant apportionment irrespective of the parties’ agreements, that provision would override whatever the parties had expressly or impliedly agreed on the point and, indeed, he added, as I shall come on to later, would also override whatever might accord with the basis on which Wagon did or should draw up its accounts. Secondly, Mr Parker continued, any domestic legislative provision on its face in force would become unenforceable only if it was so irrational or otherwise impaired that no reasonable legislature could have enacted it. Such argument plainly reduces the importance of that which the Tribunal had regarded as of first importance. The argument on appeal having taken this turn, before I turn to examine the parties’ contractual arrangements to see what, if any, provision is therein made as to apportionment I need, firstly, to determine in what circumstances, if any, those arrangements may be or become relevant. If there is no circumstance in which they are relevant then it will not be necessary to determine what they may be.

As I see the case, the apportionment, if any, between principal and interest prescribed either by express provision in, or to be implied from the provisions of, the conditional sale agreements used by Wagon may determine the apportionment for VAT bad debt relief purposes in only the following circumstances, namely:-

I have not understood Mr Milne to argue that the case falls within (i). There are limited occasions where our domestic law does cede primacy to a party’s specific allocations – see Regulation 170 (2) supra – but none arises in this case and (iii) above is, in general, unarguable and unargued. I am not sure Mr Milne presses (ii) but he has not clearly abandoned it and he does press (iv) and (v). I thus need to deal with (ii), (iv) and (v)

As for whether Community law gives a primacy to the parties’ own arrangements, if any, as to apportionment such that legislative provisions of Member States can do no more than merely fill a void, if there is one, in the parties’ arrangements, I was not referred to any provision of the Sixth Directive that dealt with apportionment of the kind with which I am concerned. I do not feel assisted by the authorities drawn to my attention dealing with the respective values to be given to monetary and non-monetary consideration where both were given together for the same supply of goods; I am concerned, rather, with separate supplies – one of goods, several of credit – made at different times and both for wholly monetary consideration. It does not follow that the same broad rules applicable to one form of apportionment should apply to the other. I would perhaps have been more assisted by looking at cases of wholly monetary consideration given for one supply but of mixed goods or services where different parts of the one supply attracted different rates or were exempt or zero rated but none of that difficult range of cases was cited to me and in any event it is intrinsically unlikely that Community law should give carte blanche to the parties to settle upon whatever form of apportionment they please. That could readily lead to abuse. The only Community law guidance I am left with is thus to be found in Article 11 (C) (1) of the Sixth Directive 77/388/EEC which provides:-

“(1)

In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

However, in the case of total or partial non-payment, Member States may derogate from this rule.”

That Article does not say that the reduction is to be “subject to such provision as the parties themselves make in that behalf” or anything else of that kind but rather says only that “conditions” shall be determined by the Member States.

It is common ground that there has, as yet, been no derogation by the United Kingdom from Art. 11 (C) (1) so that I am not concerned with any especial liberty or flexibility that a derogation might have added. As for what margin is opened up by the reference to “conditions …. determined by the member States”, Mr Milne draws attention to EC Commission –v- Federal Republic of Germany (UK intervening) [2003] STC 301 ECJ which was concerned with supplies of goods from manufacturers, perhaps first to wholesalers and, if so, on to retailers and ultimately, one way or another, on to customers and where the manufacturer offered money-off coupons directly to the customer leaving the price as between the manufacturer and any wholesaler and between any wholesaler and retailer unaffected. The question arose whether a Member State could properly require that an allowance of reduction (to reflect the money-off coupon) in the manufacturer’s VAT liability could, by way of reliance on the reference to “conditions” in Art. 11 (C) (1), be made by the Member State to depend on whether the accounts of all others in the chain from manufacturer to ultimate consumer were also adjusted. In the opinion of Jacobs A-G that was to go too far; there was a right in the wholesaler to have his liability properly adjusted but to require all others in the chain to pass on the reduction went beyond the Member State protecting its rights and could not be justified as within the State’s ability to impose conditions. The learned Advocate-General at paragraph 74 said:-

“That is not to negate the effect of that provision by denying Member States any power to determine conditions for the adjustment to be made. I consider, however, that the type of condition envisaged relates to ensuring that no reduction is granted unless it is justified, and might include, for example, requirements relating to proper documentary evidence of payments made.”

The Advocate-General plainly did not limit what could be legitimate (as a step ensuring that a reduction was “justified”) to matters relating to proper documentation, which, he made plain, was merely an “example” of what conditions “might include”. Nor did the judgment of the ECJ in the case indicate the boundaries of what could be achieved by way of a condition in such a context. It is not clear to me, where the reduction requires an apportionment of payments as between capital and income over a period or periods, that “conditions” cannot be used to prescribe how that apportionment is to be made, so long, at any rate, as the condition is rational (in the Wednesbury sense), offends no general principle of VAT law and goes no “further than is necessary to obtain the objective of protecting the rights of the Tax Authorities” – Jacobs A-G at paragraph 73. But, even if “conditions” do not permit that, the word “accordingly” is, in my view, not so detailed and prescriptive as to preclude a Member State making provision for apportionment and to do so even where the parties themselves have purported to do so or, a fortiori, where they have not. On the contrary, the very broad brush used by the Community on the subject would seem to invite detailed work by the Member States. I conclude (which is so far only as I need go at this stage) that nothing in Community law requires that the parties’ own arrangements as to apportionment must oust domestic legislation, if there is any, on the same issue or have to be taken into account by that legislation. Thus far I have dealt with the possibility I raised in paragraph 15 (ii) above and, so far, therefore, there is no need to look at whatever the parties’ arrangements as to apportionment may have been. I next turn to look again at our domestic legislation as to apportionment to see whether it purports to override whatever, if anything, the parties may have agreed and whether it should be made void by reference to paramount domestic or Community law requirements.

Section 36 (1), (2) and (3) of the VAT Act 1994 provides, under the heading “Bad Debts”, as I have cited at paragraph 8 above.

At Section 36 (5) (f) the 1994 Act provides:-

“(5)

Regulations under this section may –

……..

……..

(f)

include such supplementary, incidental, consequential or transitional provisions as appear to the Commissioners to be necessary or expedient for the purposes of this section;

………”

Section 36 (6) provides:-

“(6)

The provisions which may be included in regulations by virtue of sub-section (5) (f) above may include rules for ascertaining –

(a)

whether, when and to what extent consideration is to be taken to have been written off in accounts as a bad debt;

(b)

whether anything received is to be taken as received by way of consideration for a particular supply;

…….”

Prior to the 31^st July 1998 section 36 (6) (b) had read as follows:-

“(b)

Whether a payment is to be taken as received by way of consideration for a particular supply.”

Given that I am only concerned with payments the difference between the original and amended form is of no significance.

Regulation 170 before its amendment, taking effect from the 1^st January 2003, provided as cited in paragraph 9 above.

Regulation 170 (3) provided for a form of “straight-line” attribution applicable where supplies were required to be treated as if all made on the same day, a situation which does not here arise because it is common ground, as I have mentioned, that the supply of goods occurs when the purchaser takes possession of the goods and the supply of credit occurs, instalment by instalment, as the instalments fall due.

I do not find it possible, particularly in the light of section 36 (6) (b) and of the breadth of section 36 (5) (f) to hold that regulation 170 was outside the Commissioners’ rule-making powers.

That regulation 170 was within the rule-making power as a matter of construction of that power is not, of course, of itself sufficient to enable one to conclude that regulation 170 was not irrational. The Tribunal did not address this question as, in the light of the argument it received, it seemed sufficient for it to look only at the operation of regulation 170 as applied, namely as qualified by extra statutory concession. Looking, though, at regulation 170 as legislated, Mr Parker emphasises that regulation 170 has to deal not only with the financing of private cars (the major but not the only part of Wagon’s business) but of cars used in business and other goods such as vans and lorries and of yet other goods likely to be bought on conditional sale agreements similar to those used by Wagon but on the part not of private purchasers but by traders. Some of the conditional sale agreements put before the Tribunal as examples were deals with individuals carrying on business. All such traders would have to adjust their own accounts and their own VAT records, says Mr Parker, to reflect, on defaulting during the term of their conditional sale agreements with their finance companies, that they had not paid the full original price for the goods that they were contracting for, had not paid in full for interest and had not paid in full, either, for the VAT on the goods they had intended to acquire. They would, preferably, need to be able to do that without recourse to the finance company or, even more so, to a study of the finance company’s accounts. Whatever system was to be adopted, said Mr Parker, would thus need, as far as practical, to be straightforward, simple to understand and simple to apply. The system, moreover, says Mr Parker, would have to recognise and take account of the basic conflict between any such trader and his finance company; the finance company would wish as little as possible to be attributed to the goods in order to maximise its bad debt relief. The trader, on the contrary, would be likely to wish as much as possible to be attributed to the cash price of the goods (including VAT) in order to maximise his input tax already paid. The rationality of regulation 170, urges Mr Parker, has to be determined with such considerations in mind.

The Tribunal summed up the effect of regulation 170 at its paragraph 15.4 in the following terms:-

“The general attribution rule is that payments are attributed in time order, that is, first to the supply which is the earliest in time, and after that has been treated as paid for in full, the balance of the payments (if there is such a balance) is attributed to the next in time supply, and so on. This “first in time” attribution is displaced where the purchaser has allocated the payment to a particular supply and the consideration for that supply was paid in full.”

With the qualification that the attribution is displaced by an allocation by the purchaser only where the allocation is made by the purchaser “at the time of payment” (which is not said to have occurred) I would respectfully adopt the Tribunal’s summary of the provisions of regulation 170 (1) and (2). I need not consider the rationality of regulation 170 (3) as it dealt only with the situation in which the supplies were made on the same day.

The test of irrationality is a stern one. One does not prove irrationality by shewing only that other and better methods could have been prescribed or that difficulties or unfairness in some aspects of operation in a particular case amongst the whole range of cases required to be covered should have been, but seem not to have been, anticipated and provided for. Rather the test – a Wednesbury test - is whether the provision being tested is so irrational that no reasonable rule-making body in the position of the body that did make the rule could reasonably have made the rule that was made.

Looking, then, to the rationality or otherwise of regulation 170 (1) and (2), and recognising the need, to which I have referred, for simplicity and comprehensibility, I do not feel able to say that the time-basis used in regulation 170 (2), qualified, as it was, by the ability of the consumer to make a specific allocation as there provided, was irrational in Wednesbury or similar terms. It is not capricious or arbitrary. Indeed, such an attribution of payments to the first debt owing has been a rule-of-thumb form of accounting since Clayton’s case in 1816 and the ability of the consumer specifically to allocate reflected the sense of the common law position that, where he owes distinct debts, the debtor has the first right to appropriate.

Moreover, although the reasons why the time basis of apportionment was adopted are not disclosed, one could understand policy decisions such that, in relation to the basic possible conflict I have mentioned between a finance house and a trader or other customer already in default, it would be more clement and possibly even better in economic terms to assist the customer, if one or other had to be preferred, and, further, that there was no sufficient reason, nor would it be convenient, to distinguish between cases where the customer was a trader and where he was not. Certainly one cannot jump from the Commissioners mentioning, as they did in the Business Brief cited above, that finance companies had pointed out that the time-basis was unfair with respect to one particular type of financier to a conclusion that it was therefore irrational.

If, then, domestic legislation, without making itself subject in any way here material to whatever the parties may have agreed, provides for a form of apportionment that cannot be set aside for rationality, one has no need to study what the parties did provide on the subject. That deals with the possibility which I identified at paragraph 15 (iv) above.

I have already held that Regulation 170 is not irrational in the material sense but is it so greatly in conflict with some other requirement of Community law that it ought to be denied force? As to that, the Community authorities to which I was taken were, firstly, as I have mentioned, on the different subject of attribution between monetary and non-monetary consideration; the principles that emerged therefrom do not necessarily apply to the facts with which I am concerned. Moreover, whilst those authorities illustrate broad principles applicable across the board in VAT cases, I have failed to discern any principle such that the time apportionment prescribed by Regulation 170 was properly to be regarded, in the circumstances dealt within the regulation, as so offensive as to be intolerable. In particular, by its apportionment to the cash price (including VAT) of more than either the rule of 78 or a straight line basis would do, it would serve to reduce any prospect of a finance house being required, in breach of general principle, to account for more VAT than was paid by the ultimate customer. Mr Milne also sought to derive from the cases as to monetary and non-monetary consideration a principle as to ascertainment of “subjective values”. I shall return to the point later; at this juncture I say only that I cannot see there to be any principle of such a kind capable of rendering ineffective a rational and otherwise inoffensive provision of domestic legislation. That deals with the possibility that I identified in paragraph 15 (v) above.

If I am right so far the contractual arrangements between the parties as to apportionment of the kind with which I am concerned, if there are any, cannot stand in the way of an apportionment on the statutory time basis. They are, if they exist at all, overridden by the time apportionment prescribed by Regulation 170 (2) which makes no provision for them to have effect save in the specific case, not here arising, described in regulation 170 (2) after the words “except that”. The very fact that primacy is expressly given to a party’s stipulation in one case suggests that it is not intended in any other. On this basis, I need not inquire into what the contractual arrangements were; they are immaterial.

Thus far, though, I have looked at the rationality or otherwise of Regulation 170 (2). If, as I hold, Regulation 170 (2) is not irrational then Wagon has no interest to argue that the straight-line basis offered by concession, a basis more favourable to it than the time basis, is irrational. Even so I ought to deal with this question. As with the time basis, the Commissioners were entitled to pay regard to a need for simplicity and to recognise also that they were to some extent intervening or could be intervening in conflicts between finance houses on the one hand and small traders on the other. If I am right in thinking, for the reasons I have given, that the time-basis is not irrational then it is, if anything, even more difficult to attack a straight-line basis, a form of apportionment commonly used in accounts as one of 3 familiar accounting alternatives, as being irrational. I shall not set out the reasons all over again save to say that the Tribunal dealt with this issue in its paragraphs 64 and 65 and concluded that the straight-line method (as offered by concession and as now to be found in Regulation 170A) represented a rational, even if simple, approach to the question. I agree. Like the time basis, it was a mechanism that fell, in my judgment, within the discretion which the Commissioners are afforded.

However, Mr Milne at a late point claimed that the Commissioners had abandoned regulation 170 (2) in such a way that for a time during the period covered by the assessments in issue there were no applicable rules at all as to apportionment (the hoped-for consequence being that there was a void which the parties’ contractual terms could therefore fill). I cannot accept that; regulation 170 was not repealed; if I am right as to its rationality, it stood, throughout, as effective legislation in the field. The fact that the Commissioners permitted straight-line apportionment did not make it obligatory and a party better suited by the time basis could have insisted on it. The parties’ own contractual provisions remained, in my view, as immaterial after the concession as they were before. However, lest that be wrong, I shall look at whether anything relevant as to apportionment is to be derived from the terms of the agreements made between Wagon and its customers.

Let it be assumed, then, that where the parties do agree a mechanism for apportionment (expressly or by implication) or where they must, by way of the incorporation into their arrangements of the Consumer Credit legislation, be taken expressly or impliedly to have agreed such a mechanism, that such mechanism, at least where not abusive in VAT terms, ousts the domestic legislation on the issue. The question would then arise, did the parties’ arrangements here include agreement on some form of apportionment? Mr Milne concedes that there is nothing express on the subject in the contracts but says that something adequate can be extracted from the parties’ arrangements by way of implication. He argues as follows. On the consumer’s default, whilst, strictly speaking, the whole balance becomes payable under the contract, there is, inescapably, a statutory rebate under the provisions of the Consumer Credit Act which has to be allowed by way of deduction to the consumer and that statutory rebate is to be calculated on a rule of 78 basis. A rebate is thus calculated to reflect that the consumer is not, after all, borrowing as much for as long as he had originally agreed and had been paying in order to do. If one is thus obliged by way of a statutory rebate calculated on a rule of 78 basis to reflect the consumer’s failure to pay in the future, then it must follow, says Mr Milne, that the instalments received in the past should also be apportioned on the same rule of 78 basis. Thus, he says, the parties must be taken to have agreed throughout that, should apportionment be required, it should be apportionment on the rule of 78 basis.

I do not accept this. Firstly, I am far from sure that the rebate is calculated on a rule of 78 basis; it would seem rather to be computed on the more accurate actuarial basis derived from the calculations of the relevant stated APR. Miss Roberts’ evidence given below on behalf of Wagon said only that the rates used on default were “derivations of the rule of 78” (her paragraph 43, with my emphasis). Secondly, whilst I see this could be convenient or even desirable, I do not see that it follows from the fact that rebate is calculated in a particular way after default that the payments made before default are necessarily to have been subject to the same form of apportionment. The necessity for an implication is an appropriate test by which to judge its propriety; I cannot determine what the parties have agreed by reference to what it would have been convenient or desirable for them to have agreed. Finding no necessity for the alleged implication I do not conclude that there has been any agreement between Wagon and its borrowers which prescribes any particular form of apportionment of the sums paid before default. Thus even if an agreement between the parties could oust our domestic legislation on the issue, there is here no such agreement. The Tribunal said, of a consumer entitled to a rebate, that:-

“….. he has a right to a rebate on statutory terms so that his total credit charge is adjusted to reflect the changed credit terms, but that adjustment, even though made by reference to the APR (or the rule of 78 approximation of it) does not perform the function of allocating prior instalments between finance charge and credit balance.”

I hold that to be a correct conclusion.

Should implication and any agreed contractual terms not come to his aid, Mr Milne argues that the accounts of Wagon, a company that borrows in order to lend, must, to escape qualification of its accounts and in order to give a true and fair picture of its finances, draw up its accounts to include reference to the cost of its borrowings in any period and the gains derived from its lending in that period in a matching manner which apportions its overall mixed receipts of principal and interest in the period between repayment of the principal advanced to it and payments of interest on a rule of 78 or on the similar actuarial basis. That, he says, is what the relevant accounting regulations require. Wagon draws up its accounts, he says, on such a basis, using the rule of 78. That basis, he says, is not only consistent with but is required by Community and domestic requirements as to company accounts. Were some of Wagon’s receipts, by reason of the VAT legislation, to be required to be computed on a different apportionment basis, namely a straight-line basis, that would not only be anomalous but would require Wagon’s accounts to be drawn up in a manner that would lead to qualification of them. That qualification would have not only Stock Exchange consequences for Abbey, a listed company, but would lead to the accounts falling foul of companies legislation.

I find it difficult to regard this as a substantial objection to the Commissioners’ argument. It is, of course, true that a company’s accounts must give a true and fair view of its assets, liabilities, financial position and profit and loss – see e.g. the Fourth Council Directive 78/660/EEC Article 2 (3), the Seventh Council Directive 823/349/EEC and Section 226 (2) of the Companies Act 1985. Minor departures, though, from strict, conventional or commonly used techniques, if explained in additional information, have always been permitted or, indeed, required in appropriate circumstances – see e.g. Article 2 (4), (5) and (6) and Section 226 (4) and (5). The Financial Reporting Standard 18 paragraph 15 as approved by the Accounting Standards Board permits departures. SSAP 21 (concerned, inter alia, with hire purchase contracts) provides, at its paragraph 35 that:-

“Rentals payable should be apportioned between the finance charge and a reduction of the outstanding obligation for future amounts payable. The total finance charge under a finance lease should be allocated to accounting periods during the lease term so as to produce a constant periodic rate of charge on the remaining balance of the obligation for each accounting period, or a reasonable approximation thereto. ”

A little later at paragraph 39 the SSAP continues:-

“The total gross earnings under a finance lease should normally be allocated to accounting periods to give a constant periodic rate of return to the lessor’s net cash investment in the lease in each period. In the case of a hire purchase contract which has characteristics similar to a finance lease, allocation of gross earnings so as to give a constant periodic rate of return on the finance company’s net investment will in most cases be a suitable approximation to allocation based on the net cash investment. In arriving at the constant periodic rate of return, a reasonable approximation may be made.”

Those references to what should “normally” be done and “in most cases” and to a “reasonable approximation” all suggest some measure of permitted flexibility. The guidance notes to SSAP 21 at paragraph 2 make it plain that it is not possible to lay down methods which will cover all situations and whilst paragraph 20 identifies three methods – the actuarial method, the rule of 78 method and the straight-line method – paragraph 32 indicates that the straight-line method may be the appropriate method to use in certain cases. It notes that it is the simplest of the methods. Nothing there prohibits the use of a straight-line method even though it will commonly not be found to be the method which most accurately draws a true and fair position. If, as I derive from these references, a straight-line method can, without impropriety, be used, especially if adequately explained, where there is no statutory or other requirement as to which should be used, then, a fortiori, the method can be used without impropriety where there is a legislative requirement that it should be used. For these reasons, as I have mentioned, a find it difficult to regard objection based on the form of Wagon’s (or Abbey’s) accounts as substantial.

But, in addition to such considerations, Mr Parker adds reference to authorities indicating that ordinary principles of commercial accountancy have, in any event, to yield to requirements of tax law where they may otherwise conflict. Thus in Gallagher –v- Jones Inspector of Taxes [1993] STC 537 at 544 it was common ground between the very experienced Counsel in the case that:-

“They agreed that in the ordinary the computation of a taxpayer’s trading profits and losses for tax purposes must be made accordingly to the ordinary principles of commercial accountancy. But they also agreed that the application of such principles is subject to any rule of tax law, statutory or otherwise, which precludes or limits such application.”

– page 544 j. In his judgment Sir Thomas Bingham M.R., with whom Nolan L.J. and Sir Christopher Slade agreed, adopting what had been common ground between Counsel, said (with my emphasis) that:-

“Subject to any express or implied statutory rule, of which there is none here, the ordinary way to ascertain the profits and losses of a business is to apply accepted principles of commercial accountancy. That is the very purpose for which such principles are formulated. As has often been pointed out, such principles are not static: they may be modified, refined and elaborated over time as circumstances change in and accounting insights sharpen.”

– page 555 g-h. The recent judgment of Lightman J. in Trevor Williams Small (HM Inspector of Taxes) –v- Mars UK Ltd, unreported, judgment delivered on 12^th April 2005, case number CH2004 App 0261, followed Gallagher supra, when, at paragraph 35, the Learned Judge said:-

“Subject to any express or implied statute to the contrary, the way to ascertain the profits of a trade for tax purposes is to apply accepted principles of commercial accountancy; Gallagher at 555 g-h per Sir Thomas Bingham M.R..”

Accordingly, even were there to be a conflict between accepted principles of commercial accountancy and the requirements of VAT law, it would be the statutory requirements of VAT law that would hold sway. Again, there is thus, in my judgment, good reason not to regard Wagon’s accounting argument as a serious impediment to the Commissioners’ submissions. At the conclusion of its paragraph 59 the Tribunal said:-

“….. We did not see from the case argued before us that there is a general principle of the VAT system which can be applied to permit a taxpayer to claim a particular relief on the basis on the accounting treatment of the underlying transactions – VAT is not a tax which necessarily follows accounting principles applied to the supplies on which the tax is charged.”

I respectfully agree.

Wagon argues for the relevance of its own accounts in a further way. It seeks to draw from the cases as to apportionment between monetary and non-monetary consideration a wide VAT principle that if an appropriate apportionment has not emerged by way of a study of the parties’ own contractual arrangements then one should seek to find a “subjective value” to establish what consideration was given for the credit element and what for the goods element within each conditional sales agreement. Wagon argues that to find that “subjective value” one looks at Wagon’s accounts which, it is said, consistently reflect an apportionment not on the time or straight-line basis but by reference to the rule of 78 method. I am unsure that any such broad principle applicable to situations outside those they were dealing with is to be derived from the cases as to monetary and non-monetary consideration, but, in any event, the “subjective value” argument fails, in my view, because, were it relevant, the “subjective value” that would be relevant would be that ascribed respectively to credit and to goods by the recipient of the goods and services – see Customs & Excise Commissioners -v- Littlewoods Organisation plc [2001] STC 1568 C.A. at paragraph 23, pages 1581-1582. It was the car buyers who received the supply of goods and the supply of credit. There is no evidence whatsoever as to how the car buyers apportioned as between credit and goods but nor, either, is there anything to suggest that the buyers, invariably or at all, would have the same interest as has Wagon in ascribing as much as possible to credit and as little as possible to goods. I do not see this “subjective value” argument as assisting Wagon.

Wagon asserts that the decision of Field J. in Customs & Excise Comms. –v- General Motors Acceptance Corporation (UK) Plc [2004] STC 577 (“GMAC”) at paragraphs 37-40 supports its case as to the correctness of deriving an apportionment between principal and interest from the finance company’s accounts. I do not read those paragraphs in that way. Field J. was considering Regulation 24 of the VAT Regulations 1995 and its requirement that a decrease in consideration had to be “evidenced by a credit note or any other document having the same effect ….”. The Commissioners argued in that case that the document had not merely to evidence the decrease but had to show how the decrease was split between capital and interest. Field J. held – paragraph 39 – that that was right but, in effect, that it mattered not that the document showing that split had not been printed out during the currency of the agreement which was there being considered, so long (as he was assured was the case) that the finance company’s computer records were such that one could be printed off. The Judge was not there concerned with what split would have been revealed, were the document disclosing it to be printed off, nor with how, in order to be acceptable for VAT purposes, the split would have had to have been computed, nor with any allegation that the split available on a print-out from the finance company’s records necessarily played any part in questions as to the acceptability for VAT BDR purposes of whatever split was revealed.

I believe I have dealt with at least the principal arguments raised by Wagon on this appeal. For the reasons I have given, none, in my judgment, succeeds. I therefore dismiss the appeal.