[2009] UKFTT 267 (TC)

			
TC00214
	
Appeal number LON/2008/2021

VAT – Second hand car margin scheme – Harsh effect of the scheme on some dealers – Whether scheme complies with EU Directive – Appeal dismissed

FIRST-TIER TRIBUNAL
TAX CHAMBER

	PETER BENJAMIN LYON	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: 	CHARLES HELLIER (Judge)

Sitting in public in Norwich on 8 September 2009

Mr A R Lyon for the Appellant

Mr Matthew Slater, counsel, instructed by the Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	Mr Lyon deals in second hand cars.  He is VAT registered. The Commissioners made an assessment on him on 30 June 2006 for the periods 06/05 to 03/06, that is to say for the periods ending on 30 June, 30 September and 31 December 2005, and 31 March 2006.
2.	The assessment was made on the basis of the margin scheme for second hand cars in the VAT (Cars) Order 1992, as amended.
3.	Mr Lyon appeals against that assessment.  His principle ground of appeal does not relate to the quantum of the assessment (although that issue is dealt with at the end of this decision) but with the propriety of the VAT (Cars) Order.  Put at its widest it is said that the scheme is unfair and causes unnecessary hardship: it is badly conceived legislation.
4.	Mr Slater says that HMRC recognise that the legislation may cause Mr Lyon hardship but that this tribunal is set up to consider the proper application of the legislation and is not to be concerned with the policy of the legislation.
5.	In outline the way the VAT (Cars) Order applies to Mr Lyon is this.  If Mr Lyon buys and then sells a car, and his selling price exceeds his purchase price (i.e. where he makes a gross profit) he is liable to VAT in respect of that margin.  If on the other hand his selling price is less than his purchase price (i.e. where he makes a gross loss) then no VAT is chargeable, but, importantly, no credit against profitable sales is available.  Thus VAT is chargeable in respect of his gross profits with no relief for his losses.  If Mr Lyon incurs input tax on other goods and services (e.g. polish for a car) he is entitled to a deduction or credit for that tax.
6.	Mr Lyon says that the scheme bears harshly upon him for the following reasons:-
(i)	Suppose Mr Lyon buys a car for £2,000, incurs £400 of expenses in preparing it for sale, and sells it for £2,500.  Suppose all the expenses bore input VAT. Prior to the effect of VAT he has made a net profit of £100.
But he has to pay VAT on his margin (at current rates) being 15/115 of £500 or £65.25, and gets relief for his input VAT of £400 or £52.20.  That leaves him with a net profit of 86.95, which is not a lot.  Generally he says that when account is taken of the fact that not all his expenses bear input VAT, the effect is that some 50% or so of his net margin is used up in paying VAT.  That is, he says, unfair and harsh;

(ii)	Mr Lyon buys cars from main dealers.  They often require him to take, not just one car, but a job lot or none at all.  Not all the cars in the lot can be sold profitably.  For example he might buy two: one for £2,000 which he might sell for £2,800, and one for £3,000 which he might sell for £2,500.  He makes a total gross profit of £300.  Suppose he incurs £200 of expenses.  Then his net margin is £100.  But he is required to pay VAT on the margin on his profitable sale and purchase.  That is VAT on £800 (= £2,800-£2,000).  Even though he gets credit for his input tax in his £200 of expenses, he is liable for about £80 of VAT.  Thus although he makes a trading profit, the effect of the VAT burden is to reduce the net cash profit from £100 to a meagre £20.  In less extreme examples the effect is still that VAT absorbs over 50% of his margin.

7.	Mr Lyon makes other points:-

(i)	he says that the operator of a margin scheme is required not to give a VAT invoice.  Thus the public do not know the cost of VAT in their purchases;

(ii)	the same disadvantage does not apply to Van dealers who operate in the usual way;

(iii)	the unfairness is particularly the case where a dealer buys a car in part exchange for another where generally he will give the customer an inflated price for his old car knowing that he will make a loss on its later sale;

(iv)	the effect of the scheme is to produce a distortion between registered and non-registered traders because registered traders effectively suffer VAT at 40 or 50% on their net profit;

(v)	VAT should be a consumer tax; this is a trader tax.

Discussion

8.	As Mr Slater says the jurisdiction of this tribunal is limited to overseeing the correct application of the VAT legislation.  The tribunal is created by statute to provide a check that the statute has been properly applied.  But that process legitimately includes considering what the statute actually requires.  That process can consist of considering what a particular term means and whether it has been properly applied (for example, whether Pringles are “potato crisps … or similar products made from the potato or potato flour”), but in the case of VAT it can also consist of considering the EU legislation which gave rise to Act which regulates VAT.

9.	As a result of the European Communities Act 1972 the UK is required to implement the provisions of EU Directives in UK law.  Various European Directives have set out the system of VAT which Member States such as the UK are required to implement.  The Directive which applied at times relevant to this appeal was the Sixth Council Directive 77/388/EC but its provisions (and those of Directives amending it) were consolidated in the 2006 Directive.  We referred to that at the hearing and it is convenient to continue to do so in this decision.  The provisions in the older directive were in the same or similar terms.

10.	The Directive starts by setting the scene for the VAT system in 67 recitals.   These explain – or summarise some of the things the Directive is intended to do.  

11.	There follow 410 articles each setting out a detail how the VAT system is required to work.  The UK is required to put these provisions into its national law.  If Parliament enacts an Act such as the VAT Act as part of putting those Directive Articles into national law it may sometimes do it in an ambiguous way.  If it does then this tribunal is required to consider what the EU Directive means and if possible to interpret and apply the UK legislation as if it had properly implemented the Directive.  Further if the Directive gives a taxpayer a VAT right and the domestic legislation does not then this tribunal is required to give effect to that right for the benefit of the taxpayer.

12.	For these reasons I start by considering the relevant provision of the Directive.  
These are the following:-

Recital (51) provides:-

“(51)	It is appropriate to adopt a Community taxation system to be applied to second-hand goods, works of art antiques and collectors’ items, with a view to preventing double taxation and the distortion of competition as between taxable persons.”

13.	Article 313 starts setting out the scheme.  It provides:

“1.	In respect of the supply of second-hand goods, works of art, collectors’ items or antiques carried out by taxable dealers, Member States shall apply a special scheme for taxing the profit margin made by the taxable dealer, in accordance with the provisions of this Subsection.
2.	Pending introduction of the definitive arrangements referred to in Article 402, the scheme referred to in paragraph 1 of this Article shall not apply to the supply of new means of transport, carried out in accordance with the conditions specified in Article 138(1) and (2)(a).”

Article 314

14.	The margin scheme shall apply to the supply by a taxation dealer of second-hand goods, works of art, collectors’ items or antiques where those goods have been supplied to him within the Community by one of the following persons:

(a)	a non-taxable person;
(b)	another taxable person, in so far as the supply of goods by that other taxable person is exempt pursuant to Article 136;
(c)	another taxable person, in so far as the supply of goods by that other taxable person is covered by the exemption for small enterprises provided for in Articles 282 to 292 and involves capital goods;
(d)	another taxable dealer, in so far as VAT has been applied to the supply of goods by that other taxable dealer in accordance with this margin scheme.

Article 315

15.	The taxable amount in respect of the supply of  goods as referred to in Article 314 shall be the profit margin made by the taxable dealer, less the amount of VAT relating to the profit margin.  The profit margin of the taxable dealer shall be equal to the difference between the selling price charged by the taxable dealer for the goods and the purchase price.

16.	Articles 316 to 318 deal with works of art etc.

Article 318

1.	In order to simplify the procedure for collecting the tax and after consulting the VAT Committee, Member States may provide that, for certain transactions or for certain categories of taxable dealers, the taxable amount in respect of supplies of goods subject to the margin scheme is to be determined for each tax period during which the taxable dealer must submit the VAT return referred to in Article 250.

In the event that such provision is made in accordance with the first subparagraph, the taxable amount in respect of supplies of goods to which the same rate of VAT is applied shall be the total profit margin made by the taxable dealer less the amount of VAT relating to that margin.

2.	The total profit margin shall be equal to the difference between the following two amounts:

(a)	the total value of supplies of goods subject to the margin scheme and carried out by the taxable dealer during the tax period covered by the return, that is to say, the total of the selling prices;
(b)	the total value of purchases of goods, as referred to in Article 314, effected by the taxable dealer during the tax period covered by the return, that is to say, the total of the purchase prices.

3.	Member States shall take the measures necessary to ensure that the taxable dealers referred to in paragraph 1 do not enjoy unjustified advantage or sustain unjustified harm.

Article 319

17.	The taxable dealer may apply the normal VAT arrangements to any supply covered by the margin scheme.

18.	Articles 320 to 322 are not relevant in this appeal.

Article 323

19.	Taxable persons may not deduct from the VAT for which they are liable the VAT due or paid in respect of goods which have been or are to be, supplied to them by a taxable dealer, in so far as the supply of those goods by the taxable dealer is subject to the margin scheme.

Article 324

20.	Where the taxable dealer applies both the normal VAT arrangements and the margins scheme, he must show separately in his accounts the transactions falling under each of those arrangements, in accordance with the rules laid down by the Member States.

Article 325

21.	The taxable dealer may not enter separately on the invoices which he issues the VAT relating to supplies of goods to which he applies the margin scheme.”

22.	It will be seen that the Directive requires the UK to implement a margin scheme for second hand goods such as cars, and importantly that the core of the requirement is that the effect of the scheme must be to charge VAT on the trader’s profit margin.  Where the scheme applies invoices must not show the VAT borne, and a purchaser cannot get input tax credit for it.

23.	How does this avoid double taxation?  That is after all what it is supposed to do – see recital 51.  Mr Lyon says he can see no avoidance of double tax and because of the effect of losses he says there is double taxation.  That raises the question as to whether the Directive provisions should be read as meaning something a bit different from the black and white meaning of their words because the black and white meaning – which appears to be that it requires the dealer’s profit to be taxed – does  not avoid double tax.  If it had to be read differently then the UK legislation (and the rights of a UK taxpayer) would have to be made, if at all possible, to conform to that different meaning.

24.	But in my judgment neither Recital 51 nor any other recital requires a different meaning.  It seems to me that properly understood the second hand goods scheme does avoid double tax on the consumer, and provides for a tax which is eventually borne by the consumer on his consumption of goods, that is to say on the value he consumes.  That is in the following way.  Suppose:-

(i)	a chair is sold for £1,000 plus £150 VAT to an individual who uses it;
(ii)	later that individual sells it to a second hand shop for £400.  No VAT:  he is not registered;
(iii)	the second hand shop sells it to another individual for £575.  He keeps it until it is thrown away.

25.	The first consumer will have consumed £750 of value of the chair.  The second consumer will have consumed £575 of value: in total £1,325 will have been consumed.

26.	If the second hand goods scheme did not apply then the second hand shop would have been liable to pay VAT on its £575 sale of £75.  Altogether £150 + £75 = £225 VAT would have been paid on £1,325 of consumption.  But the VAT on that consumption should be only about £172.  There will have been £53 of double taxation.

27.	If the scheme applies the second hand dealer pays VAT on his profit of £175.  That VAT is about £23.  The total VAT is £150 + £23 = £173 which is about right.

28.	Thus the scheme appears to me to achieve its objective and I can see no special meaning which needs to be given to the words used.

29.	Before I leave the Directive there is one other issue to consider.  That is the option given to Member States by Article 318 to apply the scheme on an aggregation basis.  If the scheme had been enacted in the UK to apply to second hand cars on an aggregation basis some of the unfairness of which Mr Lyon complains would be avoided since losses would serve to reduce the assessable sum.  But I must also note that it is an option, and the Member State is given discretion in relation to the transactions or dealers to which the scheme will be applied – see the words after the first comma in Art 318.

30.	The UK has enacted the Directive by the following domestic provisions:

First, and most specifically, in the Value Added Tax (Cars) under 1992/3122, where central provision, Article 8 provides:-

“(1)	subject to complying with such conditions (including the keeping of such records and accounts) as the Commissioners may direct in a notice to be published by them for the purposes of this Order or may otherwise direct, and subject to (3) below [which is not relevant to Mr Lyon], where a person supplies a used motor car which he took possession of in any of the circumstances set out in paragraph (2) below, he may opt [I highlight this word for later discussion] to account for the VAT chargeable on the supply on the profit margin on the supply rather than by reference to its value.”

The circumstances set out in paragraph (2) include those in which the supply of the motor car to the dealer was outside the scope of VAT and where the supply was by another dealer who operated the margin scheme in relation to his supply.

31.	Second, and more generally, the UK has implemented the Directive in the Value Added Tax (Special Provisions) Order 1995/1268.  Article 12 of this Order provides for a margin scheme for second hand goods (and a second hand car is to my mind within those words) in terms almost identical to Article 8 of the 1992 Order set out above.  Mr Slater did not identify any part of the 1995 Order which excluded from its operation the sale of second hand cars.

32.	But after Article 12 of the 1995 Order appears, under the heading “Global Accounting”, Article 13.  This provides that, subject to compliance with conditions:
“a person who has opted under Article 12(1) above may account for VAT on the total profit margin [which is defined in (3) as the aggregate sale prices less the aggregate purchase prices in a period] on goods supplied by him during a prescribed accounting period … instead of the profit margin on such supply.”

By this provision the UK takes advantage of the permission given by Article 318 of the directive to tax the aggregate margin.

33.	But paragraph (2) of Article 13 of the 1995 Order provides that:

“(2)	Paragraph (1) above does not apply to supplies of –

(a)	motor vehicles …”
						
34.	Thus it can be seen that the UK has chosen not to apply aggregation for second hand cars.

35.	There is thus one further question to be asked.  And that is whether in making this choice the UK has properly exercised a permitted discretion?  The European Court has held (see for example Selleveld v Staatsecretaris van Financien 2007 STC 71) that where a Directive confers a discretion it must be exercised in a manner properly permitted by the Directive, and that the purpose of the Directive, properly understood, may limit the discretion.

36.	In their further written submissions HMRC note that the express purpose of the procedure authorised by Article 318 is simplification of the procedure for collecting the tax.  Whilst one of the consequences of the aggregation is to provide loss offset, that is an incidental consequence and not the purpose of the provision.  The UK would not be permitted to use the provision for a purpose other than such simplification.

37.	I see nothing in the recitals or language of the Directive which otherwise circumscribes the discretion given to the UK by Article 218.  In other words there is nothing which prohibits the UK from excluding dealers in second hand cars from aggregation.  I agree with the submissions of HMRC on this issue.

38.	Mr Lyon contends that the legislation is discriminatory.  It is true that it differentiates the VAT treatment of those within the margin scheme from those outside it and in that sense may be called discriminatory.  But if such discrimination is permitted by the Directive and is not otherwise prohibited by more general law then it does not affect the legality of the scheme.  As I have found in the preceding paragraph the Directive requires the operation of the scheme and permits the selective application of aggregation.  There is no unlawful discrimination in this.  Different considerations might apply if the UK legislation had discriminated for example on the basis of sex or nationality.

39.	I therefore conclude that the UK’s legislation is permitted by the Directive.  And I see nothing in the UK provisions which would cause them not to apply to Mr Lyon.

40.	The UK provision however provides, not for the compulsory application of the margin scheme, but for an option to use it – an option which the taxpayer can take up.

41.	The Commissioners have assessed Mr Lyon on the basis that the scheme has been opted for but no evidence that he had so opted was put before me.

42.	However, if Mr Lyon falls outside the scheme, because he does not opt, then he must pay VAT on the full value of his output.  That would be a greater bill, not a lesser one.

43.	Mr Lyon says that if he could get credit for input VAT in his costs he would be OK.   But those he buys from are opted traders within the margin scheme and so cannot provide VAT invoices (see para 12 above) and he can get no VAT credit.  That is necessary for the proper operation of the scheme and required by Articles 323 and 325 of the Directive.

The Question of the Assessment

44.	The assessment on Mr Lyon included estimated amounts for input tax.  No ground of Mr Lyon’s appeal related to the computation of that input tax.  I gave leave at the hearing for Mr Lyon, if he thought that estimate substantially wrong and if HMRC did not amend the assessment under appeal, for him to apply by 8 October 2009 for the proper figure to be determined.

45.	Mr Lyon applied for extra time to deal with this.  I extended the date to 15 October.  No application has been received.  The assessment stands.

Conclusion

46.	I appreciate that, given the prices Mr Lyon buys for and sell at, the effect of the margin scheme is that his net profit may be severely curtailed.  But there is more than one way of looking at his difficulty : it can equally be said that his problem lies in the margin which is available in the market and the way in which car dealers price the cars they buy as part of deals where they take a car in part exchange.  Whether these factors should be taken into account in the framing of the scheme is not a matter for this tribunal nor can I see any way in which it can be said that the UK’s implementation of the EU Directive is improper even though by denying aggregation to second hand car dealers it bears harshly on Mr Lyon and those like him.

47.	Mr Lyon wrote to the tribunal after the hearing.  There were to my mind some misconceptions in his description of what was said at the tribunal hearing.  I have set out the relevant parts of his letter in an Appendix to this decision with my comments in italics.
48.	I dismiss the appeal.

49.	The parties’ rights of appeal against this decision are set out in the notice which accompanies it, and which to that extent forms part of the decision.

CHARLES HELLIER

TRIBUNAL JUDGE
RELEASE DATE: 19 October 2009

APPENDIX

Extract from Mr A R Lyon’s letter of 22 September with comments in italics from the tribunal.

“For your information I confirm my understanding of what was agreed at the tribunal on 8 September 2009 as follows:

“The VAT margins scheme is stealth tax.  In the majority of cases the purchasers of second hand motor cars are not aware that there is a VAT content.

The question of whether or not the scheme was a stealth tax was not relevant to the tribunal’s consideration.  It made no finding on the issue.  The tribunal heard Mr Lyon’s contention that purchasers are not aware of the VAT content, but did not find it relevant to its decision.  Hence it made no finding on the issue.

“I alleged that the margin scheme is a tax on Peter Lyon’s income and is a tax that only selected traders have to pay.

“It was agreed that the tax on Peter Lyon’s net profit was about 40%.

The tribunal accepted evidence to that effect.

“I contended that the margin scheme was discriminatory and therefore illegal.

“It was agreed that the margin scheme is a discriminatory tax.  The question to be answered is whether or not the tax is an illegal discrimination.  If the tax is not a mandatory tax imposed by European legislation the tax is illegal.

This issue is dealt with in the body of the decision.

“The tribunal was of the opinion that in normal circumstances losses are allowed to be set against gross profit and could find nothing in the legislation stating otherwise for motor cars.

The tribunal questioned HMRC’s representative about the aggregation procedure in regulation 13 and the exclusion therefrom of motor cars.  The tribunal’s question related to whether that exclusion was a valid exercise of the discretion given to the UK by the Directive.  The tribunal did not intend to convey by its question that it had formed a view at that stage on the legislation.

“… The tribunal accepted that the margin scheme was responsible for many motor dealers ceasing to trade.”

The tribunal heard unchallenged evidence to this effect.  However it was not necessary for the purposes of the tribunal’s decision to make a formal finding that this was the case.