London School of Accountancy and Management Limited v The Commissioners for HMRC

Whilst the appeal has focused on the application of Art 90, the Upper Tribunal in Inventive has stated that Art 90 and Art 73 are to be read together and construed consistently with each other. Article 73 provides as follows:

For the avoidance of doubt, and on this appeal, we note the Supreme Court decision in K E Entertainments at [44] that ‘there is no difference in meaning between the term “price” in article 90 and the term “consideration” used in article 73’; (see also Boehringer at [45]).

There are two aspects to Art 73; the first deals with a situation where a supplier ‘obtains’ consideration, and the second deals with a situation where consideration is to be obtained in the future. The first scenario envisaged by Art 73 applies in the present case, by virtue of LSAM’s Fee Policy, which stipulates that ‘[e]nrolment for the course, together with the payment of deposit/full fee, creates a binding agreement’ (§34(1)).

The Fee Policy further provides that ‘FULL FEES will be payable whether the visa is refused, or you decide to go to another college’ (capital original, see §34(1)). In fact, fees were payable in full before LSAM would grant the Visa Letter to customers in support of their visa applications. The second scenario envisaged by Art 73 therefore does not apply in the instant case, because the consideration was obtained upfront, and no part of the consideration was to be obtained in the future as being contingent upon any condition, such as the grant of a VISA. Where a student was allowed to start a course with fees outstanding, that would be by way of special dispensation and did not alter the analysis that fees were contractually payable upfront.

In Lombard Ingalatlan Lizing Zrt (Case C-404/16) (‘Lombard’),the Court of Justice of the European Union (‘the CJEU’) has held at [26] that Art 90(1) ‘embodies one of the fundamental principles of the VAT Directive, according to which the taxable amount is the consideration actually received’. The corollary is that ‘the tax authorities may not collect an amount of VAT exceeding the tax which the taxable person received’.

The Upper Tribunal in Inventive accepts, as a general proposition, that the definition of ‘taxable amount’ in Art 73 is focusing on the ‘consideration actually received’ for the supply, having regard to the CJEU judgment of in International Bingo Technology SA v Tribunal Económico-Adminstrativo Regional de Cataluña (Case C-377/11) [2013] STC 661 (‘International Bingo’), wherein it is stated:

Furthermore, the CJEU in International Bingo stated at [29] of its judgment that where a supplier receives payment in cash, and that cash is freely at the supplier’s disposal, that can only be treated as having been ‘actually received’ for the purposes of defining ‘taxable amount’. This statement by the CJEU in International Bingo is subject to the qualification apposite to gambling transactions, where the sum received by the taxpayer could be clearly separated into a part which the taxpayer was entitled to retain, and a part which was not.

Outside the context of gambling transactions, the same approach as in International Bingo was followed by the CJEU in Finanzamt Bingen Alzey v Boehringer Ingelheim Pharma GmbH & Co KG (Case C-462/16) (‘Boehringer’). For the purposes of this appeal, Boehringer specifically addressed the interaction between Art 90 and Art 73 at [45] as follows:

It is for this reason that Art 90 is to be construed together with Art 73, since Art 90 sets out ‘an inverse position to that set out in Art 73’ as described by the Upper Tribunal in Inventive. By ‘inverse position’, it means Art 90 is there to provide for ‘a reduction in taxable amount’ in order to ‘undo’ the effect of an obtaining of consideration under Art 73.

The legal basis for an entitlement to output VAT repayment is derived from Art 90 of the PVD, which provides that ‘the taxable amount shall be reduced accordingly’ in the case of: (i) cancellation, (ii) refusal or (iii) total or partial non-payment, or (iv) where the price is reduced after the supply takes place.

The factual matrix in Freemans is instructive for present purposes. Freemans was a mail-order business, and it sent catalogues to its ‘agents’ who made purchases, either as agents for others, or for themselves (‘Agents’ Own Purchases’ or ‘AOP’). Agents’ own purchases are paid for in instalments, and each agent had a separate credit account. Each time an agent made a purchase for herself, an AOP discount equal to 10% of the purchase price was credited to that account. Each time an agent made a purchase on behalf of another, a 10% commission was credited to that account.

The CJEU in Freemans was required to consider whether Art 90 applied in relation to the contractual relations giving rise to the supply which had provided from the very beginning for the grant of a discount, as distinct from the so-called ‘normal case’ (as referred to by Freemans) where the contractual relations entered into directly between two contracting parties are modified subsequently. In drawing such a distinction, Freemans relied on Elida Gibbs Ltd v C&E Comrs (Case C-317/94) [1996] STC 1387 (‘Elida Gibbs’).

Elida Gibbs concerned coupon schemes operated by a manufacturer of toiletries under which consumers who presented a coupon (distributed by retailers or cut out from a newspaper or magazine) when buying a product in a shop received discount off the purchase price. The prices charged by the manufacturer to wholesalers, and by wholesalers to retailers were not affected by the coupon schemes, but retailers who accepted coupons from consumers could get the value of the coupons refunded to them directly by the manufacturer. Even though there was no direct contractual relationship between the manufacturer and the retailers to whom the sums of any coupon redemption were paid, the CJEU held that the manufacturer could deduct the sums which it refunded the retailers in calculating its taxable turnover for VAT purposes. The fact that the refunds were paid, not to the manufacturer’s own customer but to a party further down the supply chain, was held not to matter.

On the issue whether Art 90 is engaged by the grant of a discount at the very beginning of the contractual relations giving rise to the supply, the CJEU in Freemans concluded at [33]:

The CJEU in Freemans then considered the alternative argument whether Art 90 applied at the point at which the AOP discount was credited to the agent’s account, or at the alternative point when an agent actually used those sums. The conclusion reached by the CJEU is at [35]:

In Inventive the appellants all carried on tax consultancy businesses which involved the selling of tax avoidance schemes to customers, with a particular emphasis on stamp duty land tax (‘SDLT’) schemes. The ‘Letters of Instruction’ used to contract with scheme users all contained an undertaking by the appellants to refund fees to their customers if the underlying SDLT scheme was ‘unsuccessful’. It is common ground that the appellants were contractually obliged to make significant refunds. In terms of the relevance of Freemans to the facts in Inventive, the Upper Tribunal made the following observations at [50]:

As for the tribunals in Inventive, no CJEU authorities directly address the issues in front of us, but the principles derived from case law by the Upper Tribunal in Inventive provide a strong steer in the present case, as summarised below.

Applying case law principles in turn as summarised above to the facts in the present case, we find as follows:

The appellant’s appeal therefore fails. There is no legal basis for an entitlement to a VAT repayment under Art 90 because there was no reduction in price resulting in part or all of the consideration not having been received by the appellant. There was no provision for price reduction within the contractual agreements, nor any post-contract adjustments to alter the factual matrix that the actual consideration received by the appellant would be repaid to the students to result in a reduction in taxable amount for the related output VAT to be repayable.

The appellant’s submission does not address the reduction in taxable amount directly, and instead focuses on what is termed ‘a total failure of consideration’. By that, we understand that it is argued for the appellant that there had been a failure in course delivery due to LSAM going into liquidation, which gave rise to an entitlement to a refund being made (to the students presumably). This argument seems to be premised on the law of equity, in the sense that fairness directs that the students should be due a refund of their course fees. Whichever equity maxim or doctrine is being invoked in advancing this argument, it is irrelevant to the determination of this appeal for two simple reasons.

First, VAT is principally concerned with the economic and commercial reality of a transaction, and it is to the economic and commercial reality of a transaction alone the European jurisprudence is to be applied. What is required is a change in the consideration actually received by LSAM as the supplier for there to be a reduction in the taxable amount. In the present case, any refund of fees supposed to be due to the students remains a proposition, a vague indication, a remote possibility that is never going to materialise since LSAM does not have the funds in excess of £3.72 million to repay the course fees in tandem with the VAT attached thereto. The credit notes are purely theoretical, and do not represent a decrease in consideration in the real world. Where there is no decrease in consideration as an economic reality, there is no reduction in the taxable amount for Art 90 to be engaged.

Secondly, the entitlement under Art 90 is referable to LSAM (the taxpayer), not the students (as recipients of the supply). As Mr Ripley has submitted in reply, LSAM appears to assume that the mere fact of a service not being performed entitles a supplier to a refund of the VAT charged and received. That is not so. The prepayments received by LSAM were in respect of anticipated taxable supplies and they were within the scope of VAT. A tax point would have been triggered by the earlier of payment and the issue of a VAT invoice (per s 6 VATA). In its final analysis, the relevant fact that determines this appeal is whether LSAM had overpaid in output VAT on account of the historical consideration of supply it had actually received from its students: Lombard. We have no difficulty in making a finding of fact that there had been no change to the consideration actually received by LSAM for there to be a reduction in the taxable amount under Art 90.

In any event, the appellant’s submission that there had been a total failure of consideration is not borne out by the facts. The entries on the spreadsheets would suggest that many of the students would have completed their courses, or left years or months before LSAM went into liquidation. Furthermore, the deal with CLC would suggest that the students mid-way through their courses when LSAM went into liquidation were transferred to another college to receive the balance of the delivery of their courses, and for which LSAM received consideration of some £65,000 for making a ‘supply’ to CLC.

The appeal is accordingly dismissed. It is not necessary to consider the procedural and evidential bases of this appeal, but for completeness, we will address these two aspects in brief.

The CJEU in Lombard Ingalatlan Lizing at [37]-[38] confirms that Art 90 is ‘unconditional and sufficiently precise’, and therefore is capable of being relied upon by individuals where a member state has failed to implement the directive in domestic law. Whilst according to EU jurisprudence Art 90 is directly effective, the CJEU nevertheless observes that Art 90 ‘is not qualified by any condition’; hence, member states are accorded with a degree of discretion in determining the conditions under which the taxable amount is to be reduced.

Under Art 90(1), Member States are permitted to set conditions for there to be a reduction of taxable amount. The UK had transposed Art 90 by setting conditions under Reg 38 in the VAT Regulations in relation to the procedural requirements for there to be ‘an increase or a decrease in consideration for a supply’, which includes an amount of VAT, and ‘the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place’. Apart from the procedural conditions under Reg 38, the evidential requirement is incorporated into the statutory definition under Reg 24, whereby ‘a decrease in consideration’ means a decrease ‘in the consideration due on a supply made by a taxable person which is evidenced by a credit or debit note or any other document having the same effect’.

The mechanism in UK national law for claiming VAT repayment under the terms of Art 90 is therefore by reference to Reg 38. As a matter of statutory construction, the key conditions for a negative entry in the VAT account pursuant to Reg 38 are as follows:

In the present case, the appellant is insolvent, and the specific provision under Reg 38(6) is directly relevant, whereby:

HMRC therefore submit that LSAM would have been required by Reg 38(6) to adjust its VAT account relating to the prescribed accounting period in which the supply was ‘made or received’. In other words, it is HMRC’s case that LSAM should not have simply made an adjustment in the VAT return for the 09/12 period.

It is unclear what the appellant’s position is as regards Reg 38. The appellant seems to have proceeded on the basis that Reg 38 is irrelevant to establishing its entitlement to the VAT refund. The appellant has relied on Barlin,and on the VAT Tribunal’s decision in GMAC as cited at [43] in Barlin:

The short point to be taken from GMAC is that the VAT Tribunal fully registered that conditions can be set in transposing Art 90 into domestic legislation, but these conditions need to be ‘objectively justifiable’. The VAT Tribunal in GMAC found the conditions set under Reg 38 as concerns procedure and evidence to be objectively justifiable, but that the time-limit condition under Reg 38(1A) to be unjustifiable because it rendered ineffective the taxpayer’s right to relief under Art 90. The limitation condition under Reg 38(1A) has been repealed, so there is no time limit for making an adjustment under Reg 38.

It is unclear therefore what reliance can be placed on GMAC by the appellant given that the offending condition under 38(1A) is no longer in force to debar the appellant from making a claim under Reg 38. However, and as a matter of fact, the mechanism adopted by LSAM to make its VAT repayment claim is simply to make one single negative entry in the VAT return for 09/12 period, which is contrary to the procedural requirement under Reg 38.

On one interpretation, the Reg 38 procedural requirement for making a VAT repayment claim is simply too onerous for LSAM to attempt, for it would have required meticulous co-ordination of the sums of consideration, and the purported decrease in consideration related thereto, to be matched up for each prescribed accounting period. Such procedural requirement as a condition is objectively justifiable because it places the onus on the taxpayer to establish from its accounting records the relevant sum in relation to a ‘decrease in consideration’ purported to have occurred after a prescribed accounting period in which the original supply took place. The fact that the appellant is in liquidation does not exempt it from meeting the procedural requirement in making a Reg 38 claim, as expressly provided under Reg 38(6).

Although Frost Group’s letter to HMRC dated 10 June 2016 (§21) stated its claim was pursuant to Reg 38(6), this is not borne out by the mechanism adopted by a negative entry on Form VAT 100. In the alternative, we consider the appellant’s grounds as stated in its Notice of Appeal, which refer to s 80 VATA as the basis for its claim. In that respect, the LSAM’s claim would be pursuant to s 80(1)(b), and staked on the fact that it ‘has brought into account as output tax an amount that was not output tax due’ for a prescribed accounting period; that is to say, LSAM had paid output VAT historically which should not have been paid.

Quite apart from the fact that no evidence obtains to substantiate that there had been historical output VAT overpayment, the appellant’s s 80 claim would be subject to the defence of unjust enrichment (s 80(3)), and the four-year limitation period (s 80(4)-(4Z)). When asked about unjust enrichment, Frost Group’s reply of 10 June 2016 was to switch to Reg 38(6) as the basis of its claim. As to time-bar issue, the VAT100 was received by HMRC on 25 June 2015 and purported to be relating to the period 09/12, while the spreadsheets show the receipt of the course fees to be predominantly prior to 1 July 2011, four years prior to the form being submitted to HMRC in June 2015.

It has been emphasised that HMRC remain expressly dissatisfied by the evidence produced by the appellant in support of its calculation of the allegedly overpaid output VAT. The unsound basis of the quantum of the claim is set out in some detail in our findings of fact at §§26-33; and its multiple defects, inconsistent formulae in application, and dubious interpretation of data mean that the quantum of the claim is wholly unsupportable on the face of the evidence, even if the repayment claim had not failed as without any legal basis.

Accordingly, the appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.