[2011] UKPC 40
Privy Council Appeal No 0098 of 2010
JUDGMENT
Total Mauritius Limited (Appellant)
v
Mauritius Revenue Authority (Respondent)
From the Supreme Court of Mauritius
before
Lord Phillips
Lord Brown
Lord Mance
Lord Wilson
Sir Stephen Sedley
JUDGMENT DELIVERED BY
LORD PHILLIPS AND LORD MANCE ON
25 October 2011
Heard on 19 July 2011
Appellant
Sir
Hamid Moollan QC
Iqbal
Moollan
(Instructed
by Streathers Solicitors LLP)
Respondent
Philip
Baker QC
Rajesh
Ramloll
(Instructed by Royds Solicitors)
LORD PHILLIPS AND LORD MANCE:
1. The
appellants, are suppliers of liquefied petroleum gas to customers in Mauritius.
They have succeeded to the rights and liabilities of a company in the Elf group
with which they have merged. The Board will use the name Total to describe both the appellants and their predecessors.
Most of their domestic customers purchase their gas in portable 6 kg metal
bottles. When one bottle is empty the customer exchanges it for a full one, at
a retail outlet, paying for the gas. The bottles at all times remain the
property of Total. Commercial customers will typically keep on their premises a
larger gas container, equally owned by Total. Gas that these customers purchase
is delivered to them by a gas tanker. All customers are required to pay to
Total deposits in respect of the bottles
or containers in which their gas is stored. The issue raised by this appeal is
the impact that the receipt of these deposits has on Total’s liability to pay
value added tax (“VAT”) and income tax. Total contend that they give rise to no
liability at all. The respondent (“the Revenue”) contends that they give rise
to a liability to both types of tax.
The contracts
2. Total
sell their gas in Mauritius under two standard form contracts setting out their
General Conditions of Sale, which are in the French language. Form C is for
those who use the larger containers. Form D is for those who purchase their gas
in the smaller bottles. Sir Hamid Moollan QC, who appeared for Total, explained
to the Board that these forms were designed for the French market. The supplier
in the version of Form C that has been supplied to us is named as Elf Antargaz
and the supplier in Form D as Elf Gas (Maurice) Ltd. The Board was provided
with English translations of these forms.
3. The
relevant provisions of Form C, in translation, read as follows:
“CLAUSE 2. - Deposit – Delivery to a user of a
liquefied gas unit shall take place solely for and on behalf of elf antargaz
against payment of a guarantee deposit at the rate in force on the day of the
delivery.
Deposit slips are essentially personal and nominative
and non-assignable. Bottles delivered to
users shall always remain the property of elf antargaz. They shall not be given, or sold, or
exchanged, or lent by the holder of this slip, on pain of proceedings, or
seized by the latter’s creditors.
CLAUSE 5. – Duration of use - The user may ask at any time for the
equipment on deposit to be taken back from him/her/it.
At the time when it is put to the use of the elf
antargaz unit by either party, the equipment is returned by the user, while the
guarantee deposit is repaid to the latter according to the procedures laid down
in Clause 6.
CLAUSE 6. –Cancellation of supply agreement – The
amount of the guarantee deposit shall be returned to the user on the request
he/she/it shall make to any elf antargaz distributor subject to delivery to the
latter:
1 of the
equipment in deposit
2 of the
deposit slip
After
verification, the amount of the guarantee deposit shall be repaid directly by
our company (where appropriate by delegation of powers, through our network of
regional concessionaries or of distributors), after deduction:
1 - Of the accrued annual maintenance charges, as
they are authorised by the Public Authorities payable from the date of supply
of the elf antargaz unit until its return, any year that has been commenced
being due in full.
2 –
Where appropriate of the costs of making good the equipment that are provided
for in Clause 3.”
The reference to maintenance charges as authorised “by
the Public Authorities”, while meaningful in France, has no sensible
application in Mauritius.
4. The
relevant provisions of Form D, in translation, read as follows:
“Clause 2 – PRICES OF THE GAS AND DEPOSITS ON THE
BOTTLES…
• Reservation
of title. ELF Gaz (Maurice) Ltd shall remain the owner of the LPGs contained in
the bottles until the date of payment in full for them. The delivery notes or deposit slips (signed
or not by the Customer) shall be good evidence between the parties of the
quantities delivered that are referred to by this clause. The Customer shall however be solely
responsible for the gas delivered whether it belongs to it or not and it shall
make its concern the insurance of the risks relating to such.
• Price
of the gas. The price of the gas
delivered, would conform to the price in force to the public, on the date of
delivery and determined according to the sale price scale and/or to the price
mentioned in the Special Conditions.
• Deposit
on the bottles. The bottles necessary to
ensure a sufficient autonomy of functioning shall have a deposit placed on them
at the rate in force on the day of supply and in accordance with the general
conditions of sale of ELF Gaz (Maurice) Ltd.
Clause 9 – OWNERSHIP OF THE CONTAINERS
All the containers made available to the user shall
remain the inalienable and non-seizable property of ELF Gaz (Maurice) Ltd. In the event of cessation of commercial
relations an inter partes inventory shall be carried out, before return of the
containers. Shortfalls that may be
established shall be billed in cash at the replacement value. In this case, ELF Gaz (Maurice) Ltd shall
take back the gas of which it has remained the owner pursuant to Clause 2. The deposit shall be repaid after deduction
of a charge for maintenance of the containers accounting to 5% of the rate of
deposit for each year of use. ”
The facts
5. This
summary of the relevant facts is taken from evidence given to the Mauritian tax
Assessment Review Committee (“ARC”), which forms part of the Record. Total
began supplying gas in Mauritius in 1986. The total of the deposits paid and
not yet reimbursed has grown steadily as Total’s business has expanded from Rs
53.55m at 31 December 1996 to over Rs 72.12 m at 31 December 2003. One would
not expect reimbursement to be claimed until the customer in question ceases to
rely on liquid petroleum gas. Evidence shows that some reimbursements have been
made but that claims for reimbursement are uncommon. Total have not been able to
provide a comprehensive picture of the reimbursements that have been made.
6. It
does not appear that Total have ever made deductions from refunds in respect of
the annual maintenance charge under clause 9 of Form D. Mr Jhumka, Total’s
Finance Director, who joined the company in 1993, had no recollection of a
deduction ever being made and stated “In fact we waived that clause”. This
evidence was not challenged in cross-examination.
7. For
many years Total paid no income tax or VAT on the deposits which they received
and then held or used in their business in one way or another. However in or
about June 2004 Total received the following assessments for tax, together with
penalties, on the basis that Total had been wrong in failing to pay income tax
and VAT: Rs 5,668, 560 for VAT for the period May 1999 to March 2004 and Rs
9,667, 812 for income tax for the tax years 2000-2001, 2001-2002, 2002-3 and
2003-4. This appeal arises out of Total’s challenge to those assessments.
Accounts
8. Total’s
annual accounts were prepared by KPMG, audited by Ernst & Young and
regularly submitted to the Registrar of Companies. In such audited accounts,
deposits received did not appear as profit in the profit and loss accounts;
instead, the total of all deposits held at the end of each year was included in
their balance sheets as “deposit on cylinders”, on the basis of Total’s
liability to refund them as and when their customers returned the bottles and
containers in question. Total also did not include deposits received as
consideration for supplies in their VAT returns. The Revenue’s assessments for
income tax and VAT were calculated by reference to the net increase in each
year of total deposits shown in Total’s accounts; the net increase consisted
necessarily of the total new deposits received, less the (unknown) total of any
deposits refunded.
9. Section
4(1) of the Income Tax Act requires tax to be paid on income derived during the
relevant year, and section 5(2)(a) deems income to be derived by a person when
(a) it has been earned or has accrued; or (b) it has been dealt with in his
interest or on his behalf, whether or not it has become due and receivable. It
is the (a) which is here relevant, since there is no suggestion that (b)
applies. More specifically, section 10 provides that gross income shall include
“(b) any gross income derived from any business”, which is defined to
include”any sum or benefit, in money or money’s worth, derived from the
carrying on or carrying out of any undertaking or scheme entered into or
devised for the purpose of making a profit …..”. The basic question remains,
whether the receipt is a trading receipt or profit, falling properly to be
entered in a company’s profit and loss account. The authorities relevant to
this appeal on this point relate to United Kingdom taxation. This does not
appear, however, to differ in principle from that imposed in Mauritius. There
is an abundance of authority that, when considering how income and expenditure
should be treated for tax purposes, the court should normally apply correct
principles of commercial accounting. It suffices to cite the following
statement from the judgment of Sir Thomas Bingham MR in Threlfall v Jones;
Gallagher v Jones [1994] Ch 107:
“Subject to any express or implied statutory rule, of
which there is none here, the ordinary way to ascertain the profits or 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 and accounting insights sharpen. But so long as such principles remain current
and generally accepted they provide the surest answer to the question which the
legislation requires to be answered.”
10. Section
214 of the Companies Act 2001 requires that the financial statements of a group
shall, in the case of public companies, be prepared with and comply with the
International Accounting Standards. It appears that auditors in Mauritius are
also expected to confirm that accounts comply with the auditing standards
adopted by the International Auditing and Assurance Standards Board – see the
Financial Reporting Act 2004: section 73. The Revenue’s case requires this
Board to find that the deposits have been inappropriately treated in Total’s
audited accounts. The onus must lie on the Revenue to show that this is indeed
the case.
The issues
11. Liability
to pay VAT is imposed by the Value Added Tax Act 1998. Under sections 9 and 10
in Part III of that Act Total were liable to pay to the Commissioner VAT on the
value of the supply of goods or services in Mauritius. Section 4(2)(b) of that
Act provides that
“anything which is not a supply of goods but is done
for a consideration (including, if so done, the granting, assignment or
surrender of any right) is a supply of services.”
The Third Schedule to the Act provides:
“11. The leasing of, or other grant of the right to
use, goods is a supply of services.”
12. Having
regard to these provisions, the Board concludes that the supply of gas bottles
or containers by Total is a service supplied by Total, albeit an ancillary
service of minor significance compared to the supply of the gas itself. The VAT issue relates to the value of that
service. It is the Revenue’s case that this is simply assessed. It is the
amount of the deposit. Section 12 (2) of the 1998 Act provides:
“If the supply is for a consideration in money, its
value shall be taken to be such amount as, with the addition of the VAT
chargeable, is equal to the consideration.”
The deposit is the consideration given by the customer
for the supply of that service. It is a charge made to cover the loan of the
bottles or containers and the cost of their maintenance. Total say that this
analysis is fallacious. The deposit is not exacted as consideration for the
supply of the bottles or containers. It
is a refundable sum deposited in an attempt to ensure that the customers return
the bottles or containers when they no longer use them – in effect when they
cease to look to Total for the supply of gas.
13. Total’s
liability to pay income tax is imposed by the Income Tax Act 1995. Income Tax
is payable on the net income of a company, which is its gross income less
deductions. Section 10(2)(a) of the 1995
Act in the Consolidated Version as at 20 August 2002, defined gross income as
including:
“any sum or benefit, in money or money’s worth,
derived from the carrying on or carrying out of any undertaking or scheme
entered into or devised for the purpose
of making a profit…”
It was common ground that this definition could
properly be summarised, by way of shorthand, as “trading receipts”.
The income tax
issue is whether or not the deposits were trading receipts. This issue is
closely linked with the VAT issue. If, as the Revenue contends, the deposits
were paid as consideration for the supply of the gas bottles and containers
provided by Total, then they plainly constituted trading receipts. Total argue,
however, that the benefit of the deposits was offset and extinguished by the
liability to reimburse them to the customers. They were in effect the property
of the customers, not the property of Total, albeit that they were not kept in
a separate account, or they were at all events not trading receipts or profit,
since they were refundable .
The findings of the Assessment Review Committee
14. The ARC
found that the provision of cylinders did not constitute a supply of services
and that the deposits paid in relation to the cylinders were not charges for
their supply; thus no VAT was payable. The reasoning of the ARC was as
follows:
“The question that arises at this stage is whether
when the Applicant sells the LPG contained in the cylinders, it is making a supply
of service as well as a supply of goods.
The Committee is of the view that when the Applicant is selling gas
contained in cylinders to customers, it is not performing a service for a
consideration, inasmuch as the customer would not be using the cylinder but
only the gas. The cylinders cannot be
dissociated from the supply of the LPG, but they would have no use on their
own, that is, without the gas inside.
The Committee is of the view that the money paid by a customer to the
Applicant is not a charge but a refundable security deposit.”
15. The ARC
further found that the deposits were not trading receipts and thus that they
were not liable to income tax. In so finding they were influenced by the fact
that the cylinders in respect of which the deposits were paid appeared as fixed
assets in Total’s accounts and were treated as such for the purpose of capital
allowances. ARC also interpreted Total’s accounts as evidencing substantial
refunds of deposits. This was a misreading of the accounts – as already stated
refunds of deposits were uncommon. What they thought were refunds appear to
have been no more than the replacement of one (empty) container by another
(full) container.
The findings of the Supreme Court
16. The
Supreme Court allowed an appeal by the Revenue, holding that the deposits were
chargeable for VAT and constituted trading receipts on which income tax fell to
be paid. Their reasoning in respect of VAT appears in the following passage of
the judgment of Matadeen SPJ:
“We agree that the issue whether the deposits for the
cylinders are subject to VAT is largely to be determined by the terms and
conditions of the agreement. True it is
that according to the agreement, the company remains the owner of the cylinders
and is responsible for their maintenance especially as regards ensuring safety
norms. It is also a fact that refunds of
deposits are made to customers who return the cylinders. However, the deposits
are not taken as security only i.e. to ensure the safe return of the cylinders. They include charges for the maintenance of
the cylinders. In fact, article 9 even
provides for the charges up to 5% of deposit per year of use, which means that
the whole or the greater part of a deposit, depending on the number of years of
use, may not be refunded to a customer.
We take the view that the deposits are in actual fact charges for the
supply of services viz the hire, loan and maintenance of the cylinders and are
subject to VAT under section 9(1) of the Act.”
17. So far
as concerns liability to income tax, the Supreme Court was influenced by the
fact that the deposits were mixed with Total’s other funds and used as working
capital, concluding from this that they fell to be treated as trading receipts
and thus taxable income.
Discussion: VAT
18. The
Supreme Court was particularly influenced by the contractual provisions in
contracts subject to Form D for deducting 5% per annum from the deposit to
cover maintenance of the cylinders. Had effect been given to those provisions
they would undoubtedly have been material to Total’s liability to VAT, albeit
that it does not follow that they would have rendered the entirety of the
deposits chargeable as representing the value of the supply of services. The
evidence was, however, that the provisions in respect of charges for
maintenance were never enforced in Mauritius but were “waived”. In the light of this evidence, and of the
fact that maintenance payments did not feature either in Total’s accounts, or
in past tax assessments, the ARC held that “the question of 5% is no more in
issue”. Was this approach correct?
19. The
Board has concluded that it was. As a matter of law, and having regard to the
perfunctory evidence that was given on this point, it is not easy to reach a
firm conclusion as to whether, and if so how, Total waived the right to make
the deductions from deposits for which their standard form contracts in Form D
made provision. If however, it was Total’s practice not to enforce the 5%
provision, this was something that was likely to be made known to their
customers in circumstances that could well amount to a waiver. But this is not
really the point. So far as VAT and income tax are concerned, the question is
whether the deposit was consideration for and evidenced the value of the supply
of services, viz the supply and maintenance of cylinders. Had Total been
resorting to the deposits to cover maintenance of the cylinders, this would
have pointed towards an affirmative answer to this question – the answer given
by the Supreme Court. In fact, however, Total paid no regard to the contractual
provisions in relation to maintenance; it neither made nor included in its
profit and loss account any income in respect of maintenance; and the Revenue
has never sought to identify those contracts in Form D under the literal terms
of which a charge for maintenance might have been made or to levy tax on a
charge to maintenance which was never in fact made. The ARC were justified in
disregarding the 5% provision.
20. Requiring
payment of a deposit to secure some aspect of contractual performance is
commonplace and it is no surprise that there are decided cases dealing with the
tax implications of this practice. The Board was referred to a number of these,
together with some further relevant authorities. Most of these authorities are
concerned with liability for income or corporation tax, rather than VAT. They
are however relevant to both issues before the Board, because in each case
there was focus on the question whether the payment in question constituted
consideration for the supply of goods or services with which the contract was
concerned. The Board will review the
authorities that bear on both issues at this point, but will initially discuss
them in the context of liability to VAT .
21. Morley
v Tattersall [1938] 3 All ER 296 did not involve deposits made by customers,
but monies owned by customers that had not been claimed by them. Tattersalls
were auctioneers of horses. Having sold a horse they held the proceeds until
these were claimed by the customer. Sometimes they were not claimed and, ultimately,
were shared between the partners. The issue was whether these sums were, or
became, trading receipts for purposes of income tax. The Court of Appeal held
that they were not. They were and remained liabilities of the partnership. Sir
Wilfrid Greene MR held at p 306:
“This money – using a colloquial and business
expression rather than a legal expression – was never the money of Messrs
Tattersall. It was the customers’ money. It remains the customers’ money. The
customers can call for it at any moment.”
Sir Wilfrid Greene also roundly rejected submissions
(a) that an amount equal to the estimated value of proceeds received each year
that would not ultimately be called for should be treated from the outset as a
trading receipt, or (b) that at some later date an amount equal to the value of
the receipts which had not been called for could become and fall to be treated
as a trading receipt.
22. Precisely
the same is true as in Morley of the deposits held by Total. Their customers
have and retain the right to call for reimbursement of their deposits in full
on return of the cylinders to which they relate. Ultimately, customers who
return their cylinders without reclaiming reimbursement of their deposits will
lose the right to do so by reason of the relevant statute of limitation. That
fact cannot, however, convert the deposits into consideration for the supply of
the cylinders in question, let alone result in deposits being treated as such
consideration from the outset.
23. Jays
The Jewellers Ltd v Inland Revenue Commissioners [1947] 2 All ER 762 raised the
question of the tax treatment of surplus proceeds of sale of pledges realised
by pawnbrokers. Under the relevant provisions of the Pawnbrokers Act 1872,
where a pledged article has not been redeemed, the pawnbroker can sell it and
reimburse himself the loan plus interest due from the proceeds. He has to hold
the balance for three years, during which the pledgor can claim it. After that
it becomes his property. The Revenue claimed that these surpluses were trading
receipts, received at the time of the sale of the pledged articles and taxable
on that basis. Surpluses that were reimbursed were trading expenses. The
Special Commissioners held that the surpluses were not trading receipts when
they were created but only when they became the property of the pawnbroker. On
a case stated, Atkinson J upheld this treatment. He held at p. 766:
“The true accountancy view would, I think, demand that
these sums should be treated as paid into a suspense account, and should so
appear in the balance sheet. The
surpluses should not be brought into the annual trading account as a receipt at
the time they are received. Only time
will show what their ultimate fate and character will be. After three years that fate is such, as to
one class of surplus, that in so far as the suspense account has not been
reduced by payments to clients, that part of it which is remaining becomes by
operation of law a receipt of the company and ought to be transferred from the
suspense account and appear in the profit and loss account for that year as a
receipt and profit. That is what it in
fact is. In that year the taxpayers become the richer by the amount
which automatically becomes theirs, and that asset arises out of an ordinary
trade transaction. It seems to me to be
the commonsense way of dealing with these matters, and it is the way in which
the Special Commissioners have dealt with them.”
24. This
decision is more relevant to the income tax issue than the VAT issue. However,
if one treats the making of loans as if this was the supply of services, it is
plain that the surpluses could not properly be considered as part of the
consideration for the making of the loans. The difference between Morley and
Jays in approach to the possibility that an item which was not originally a
trading receipt might at some subsequent date become a trading receipt was
explained by Atkinson J in Jays and by the Special Commissioner in Anise Ltd v
Hammond (Inspector of Taxes) [2003] STC (SCD) 258, on the basis of the
existence of the Pawnbrokers Act 1872 in
Jays, which was capable of creating out of the previous receipt a new asset in
the form of a trading receipt. The same might be said of the Limitation Act.
25. Elson v
Prices Tailors Ltd [1963] 1 WLR 287 raised the question of the proper tax
treatment of “deposits” that were demanded from customers of a bespoke tailor
when ordering a garment. Where the garment was ultimately accepted by the
customer, the deposit was treated as part payment of the price. Where the
garment was rejected, or never collected, the tailor would, if reimbursement of
the deposit was requested, accede to the request. Often, however, the customer
never reclaimed the deposit. Ungoed-Thomas J held that, although the deposits
were, in practice, repaid on demand, the tailor was not legally obliged to
repay them. They would be understood by the customer to be non-returnable. In
these circumstances they were trading receipts, to be treated as such as at the
date of receipt. The income tax position would have been different if they had
been given merely as part payment for suits not yet completed or delivered;
they would then only have been earned as and when the suits were finished and
accepted by the customer: see also Coopers & Lybrand Manual of Auditing
(1998) (Accountancy Books) para 3.46 (payments in advance) and (2011) (CCH)
para 9.57 et seq, (sale of goods, discussing the principles in IAS 18 on
recognition of income to which standard Sir Hamid also referred).
26. On the
facts of Elson, the deposits naturally fell to be treated as part of the
consideration for the supply of the garments. The case is, however, clearly
distinguishable from the present one, inasmuch as in the present case the terms
of the contract unquestionably confer on customers the right to recover the
deposits on return of the cylinders to which they relate.
27. Calor
Gas Ltd v The Commissioners [1973] VATTR 205 is more relevant inasmuch as the
issue in that case was the tax treatment of payments made to a gas supplier in
respect of cylinders that contained liquid gas. The cylinders remained the
property of the supplier. The customer, on buying his first cylinder of gas,
paid £1 for the gas and £4, described as a Refill Authority Charge. The terms
of his contract entitled the customer, “in consideration of the Refill
Authority Charge”, thereafter to obtain a filled cylinder in exchange for an
empty cylinder on payment merely of the price of the gas. If the customer
terminated the agreement within 7 years he was entitled to reimbursement of a
proportion of the deposit. The amount of this depended upon how long the
agreement had run. The maximum return was 45%, where the agreement was
terminated within a year. The minimum was 20%, where the agreement had run for
4 years or more. After 7 years there was no refund. The issue was whether the
deposit was consideration for the supply of the cylinders, which would be zero
rated, or for the supply of services, which would be chargeable to VAT. The
Commissioners, and the London Tribunal on appeal, held that it was the latter.
The charge was paid for the right, as an authorised customer, to exchange empty
cylinders for full ones, paying only for the gas. As such, it was a charge made
for the supply of services, and subject to VAT.
28. This
case also is distinguishable from the present one. The difference is that the
charge was never refundable in full, there was never a right to a refund of
more than 45% of the deposit, and this eroded rapidly over time. On analysis
the charge could be identified as specific consideration for the use of the
supplier’s cylinders. Significantly the Tribunal commented at p213 that the
charge could not “reasonably be treated as a ‘deposit’ in respect of the
cylinder”.
29. The
final decision of relevance is that made by the Special Commissioner in Gower
Chemicals Ltd v Revenue and Customs Commissioners (Note) [2008] STC (SCD) 1242.
Gower supplied chemicals in returnable containers. The supply contract provided
that the customer should pay a ‘refundable deposit’ in respect of the
container, which remained the property of the supplier. This was stated to be
refundable, only to the extent that the customer would receive a credit note
that he could use when purchasing further chemicals within 12 months, after
which it became void. In practice, however the credit notes would be redeemed
for cash if this were requested. In about 20% of the cases, no such request was
made. Unlike the present case, the supplier had in fact included credits
unclaimed by customers in its profit and loss account (para 2(8)), but sought
by an “error or mistake” claim to reverse this treatment, relying on the
decision of the Special Commissioner in Anise Ltd v Hammond (Inspector of
Taxes) [2003] STC (SCD) 258. The Special Commissioner held that, in these
circumstances the deposits received constituted as to 100% trading receipts,
against which an 80% provision could be made to reflect deposit which would
have to be repaid. He held:
“7. The issue for me turns primarily on the nature of
the receipt of the deposit by the appellant.
The appellant knows that about 20% of deposits will not have to be
repaid. In my view this makes it
impossible to say that the appellant is merely holding the deposit for the
customer. The straightforward analysis is that the deposit is a trading receipt
just as the payment for the goods is a trading receipt but with the difference
that about 80% of the deposits will have to be repaid, for which it is right to
make a provision.”
30. The
approach of the Special Commissioner is interesting in that he considered the
way that the deposits were treated in practice, rather than the contractual
provision in relation to them. This accords with the approach of the Board in
the present case to Total’s failure to make deductions from deposits in respect
of maintenance charges. The Board questions, however, whether the Commissioner
was right not to treat the payments as deposits held for the customers simply
because 20% of customers failed to claim repayment. The Special Commissioner recognised the
second point made by Sir Wilfrid Green
MR in Morley summarised at (b) in
para 21 and explained in para 24 above,
But he did not address the first point summarised at (a) in para 21
above.
31. In the
present case the Board finds it impossible to treat the deposits as being
consideration for supply of the service of the loan of the cylinders, so as to
attract VAT. The deposit was a one-off payment, regardless of the length of the
period during which the customers made use of the cylinders. More pertinently,
the deposits were repayable in full. The Board is satisfied that they were
taken simply to provide an incentive to customers to return the cylinders owned
by Total on ceasing to make use of them as containers for gas supplied by
Total. The proper treatment of deposits for the purpose of assessment of VAT is
accurately stated in the 2nd ed of Tolley’s Value Added Tax (2008) at
69.9:
“Security Deposits. A deposit taken as security (e.g.
against the safe return of goods on hire or loan) is not consideration for a
supply. In the event of the deposit
being forfeited, either wholly or in part, through the customer failing to
fulfil his contractual obligations, the amount retained by the supplier does
not represent additional consideration for the original supply or consideration
for an additional supply of goods or services.
Returnable containers. Where a charge is added to a
supply of goods for the container until it is returned (e.g. the keg with
beer), it is necessary to establish why the charge has been raised. If it has been raised to ensure the safe
return of the container and the charge is to be refunded on its return, it can
be treated in the same way as a security deposit (see above). If, however, the charge has been raised to
cover the loan, hire or use of the container, then the charge represents
consideration for a supply of services, even if it is refundable when the
container is returned.”
32. The
deposits held by Total properly constitute security deposits. They are not
consideration for the supply of goods or of services, and are not chargeable
for VAT. The Board has expressed the view that the supply by Total of the use
of their containers constitutes the supply of a service. The consideration for
that service forms, however, part of the payment that is made for the gas that
Total supplies to the customer.
Discussion: Income Tax
33. The
income tax issue is more difficult that the VAT issue. Total receives the
deposit when it commences to supply a customer with gas. The deposits are
merged with the consideration that Total receives for the sale of the gas and
help to provide working capital. The Revenue, in maintaining that the net
annual increase in deposits should be treated as trading profit, argued that “it
appears that the likelihood of claims for refunds from your clients are [sic]
very remote” (letter dated 28 May 2004). On the limited information available,
it does appear that few demands are made for repayment of deposits. To a large
extent this must reflect the fact that most who have paid them are continuing
to buy gas from Total. In some cases, however, customers are likely simply to
have overlooked their right to claim reimbursement of the deposit on returning
their last cylinder to Total, or its agent. But even then, the customer will
theoretically be entitled to a return of deposit until, ultimately, limitation
cuts in to bar the remedy.
34. In
these circumstances the Board does not consider that the Revenue has made good
its case that the deposits received should be treated as trading receipts and
their ultimate repayments as trading expenses. Every new deposit was received
from the outset on the basis that it was refundable, as and when the customer
returned, and did not replace, the bottles or containers used to hold gas.
There is no identifiable point at which the legal nature of any particular
receipt may be said to have changed to convert it into a trading profit. No
attempt was made by the Revenue supported by any sort of expert evidence to
show that the principles of commercial accounting that have been adopted in
Total’s annual audited accounts do not correspond with the International
Accounting Standards, properly understood and applied, with which such accounts
were required by the Companies Act 2001 to comply (para 10 above). The effect
of the authorities is that sums received from, or for the benefit of, a
customer that are to be held and ultimately paid to the customer without
reduction fall to be treated as if they belong to the customer and are not
trading receipts. The supplier has the use of the deposits and will be taxed on
the profits earned by such use, but this does not make them trading receipts.
Perhaps the best analogy with such a deposit is that of a loan. A loan is not
taxed as a trading receipt, albeit that the borrower enjoys the use of it and
it augments his working capital.
35. For
these reasons the Board has concluded that the Supreme Court erred in holding
that deposits were subject to income tax as trading receipts, just as it erred
in holding that they were chargeable to VAT. This appeal is accordingly
allowed. Written submissions on costs may be made within three weeks. Failing
such submissions costs here and below will be paid by the Revenue.
