Camrider Franchising Ltd v Customs & Excise [2003] UKVAT V18439 (30 December 2003) 

REGISTRATION FOR VAT – conflicting agreements attributing the same figure as consideration payable to two different parties – one agreement to be read as if amendments made with the result that the consideration was not turnover of the Appellant and consequently it was not registrable

LONDON TRIBUNAL CENTRE

	CAMRIDER FRANCHISING LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
LEON WILKINSON					

Sitting in public in London on 18 December 2003

Michael Conlon QC, counsel, instructed by Robert Killington of Vatark for the Appellant

Hugh McKay, counsel, instructed by the Solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal by against a decision contained in a letter dated 15 July 2002 that Camrider Franchising Limited should be compulsorily registered from 1 January 2002.  The Appellant was represented by Mr Michael Conlon QC and the Commissioners by Mr Hugh McKay.
2.	As a preliminary point, Mr Conlon QC contended that the notice requiring registration was bad in that it specified that the Appellant was registrable under paragraph 1(2)(b) of Schedule 1 to the VAT Act 1994.  The Commissioners’ Statement of Case said that the reference in the decision letter should have been to paragraph 1(1)(a) and that a correcting letter would be sent.  A letter from the Commissioners dated 2 June 2003 correcting the previous letter but to paragraph 1(1)(b) was produced at the start of the hearing which seems to have been sent to an old address of the Appellant and not copied to its representative and was accordingly never received.  Finally, Mr McKay asked leave to make a manuscript amendment to his statement of case contending for paragraph 1(1)(b), which he had communicated to Mr Conlon QC a few days before.  While agreeing with Mr Conlon QC that the Commissioners do seem to be in something of a muddle, we decided not to accede to his application.  The agreements entered into by the Appellant are unclear, as will be seen below, and may have contributed to the Commissioners’ problems of knowing how to put their case.  What is clear is that this is an appeal about registration, and Mr Conlon QC agreed that he was in a position to meet the case whether it was on paragraph 1(1)(a) or (b).  We accepted Mr McKay’s amendments to the Statement of Case on the basis that he then had to limit his case to paragraph 1(1)(b).  We would add that if last-minute amendments are proposed to the Commissioners’ Statement of Case it is desirable that they should be communicated also to the Tribunal to assist their reading of the papers.
3.	We find the following facts
(1)	In 1992 Mr Bernard Adams trading as Camrider Training started a business of motorcycle training in Cambridge.  The business was successful and expanded into a number of different locations, including Norwich, Colchester, Peterborough and London.
(2)	A company, Camrider Technical Systems Limited was formed in 1996 to provide engineering and mechanical repair services to the fleet of motorcycles originally owned by Mr Adams, which were transferred to the company.
(3)	After becoming ill, Mr Adams decided to restructure the business in order to reduce his personal involvement in running a business in different locations.  He proposed to sell each branch to a separate purchaser.  The motorcycles formerly transferred to Camrider Technical Systems Limited were transferred back to Mr Adams in June 2001.  The Appellant company was formed to hold the intellectual property rights, including two trademarks, which would be licensed to the purchasers as part of a franchising arrangement.
(4)	Two of the sales of the branches are relevant to this appeal: the sale of Colchester branch to Mr Brunt, and the sale of the Cambridge branch to Mr Benians.
4.	We shall concentrate on the sale of the Colchester branch.  Apart from the figures the documents for the sale of the Cambridge branch are identical.  There are two agreements relating to Colchester.  The first is a franchise agreement dated 31 December 2001 between the Appellant and Mr Brunt under which it is recited that the Appellant is engaged in the business of franchising the operation of an approved motorcycle training body which is operated in accordance with a distinctive system and plan using proprietary marks, confidential information, standards, specification, techniques, management methods, and standard operational procedures on which substantial time had been expended in their development and implementation.  The franchise agreement was for 5 years.  It granted to Mr Brunt the right to operate the business in Colchester under the trade marks and in accordance with the distinctive business format and method developed by the Appellant, and required Mr Blunt to have a sign stating, and to include on all documents “a Camrider Franchise owned and operated under Licence by” followed by his name.   The agreement provided that Mr Brunt would pay the Initial Fee and the fee for the Franchise Package.  Initial Fee is defined in the Agreement as the amount set out in Schedule 3 thereof.  Franchise Package is not a defined expression, although Management Service Fee is a defined expression, meaning 14 per cent of gross fees, although this expression is not cross-references to Schedule 3.  Schedule 3 is as follows:
“Commencement date: 1 January 2002
Franchise Package:
Franchise & training fee			Waived/inclusive
Goodwill and existing Status		Waived/inclusive
CBT certificates				Included in equipment costs
Test fees					to be purchased separately
Motorcycles at and equipment at site	£19,750
						Total cost £19,750
Initial Fee: £19,750 due on or before commencement date of 1 January 2002
Management Service Fee means: 14% of gross sales”

5.	The second agreement is undated and signed by Mr Adams.  It is headed “Bill of sale of business.”  Unlike the franchise agreement this one appears to have been drawn up by the parties.  It provides that Mr Adams sells to Mr Brunt first, the goods and chattels listed in the Schedule, which includes “all motorcycles in use at the Colchester office as (sic) 1/1/02 as prior agreed and detailed” and a list of other goods, such as radios and training aids and books and other equipment used solely for the Colchester business and located at the Colchester premises.  Secondly, it sells “the whole of the goodwill of the business [described as the area of Colchester described in the franchise agreement] operated as a franchise formerly operated by the undersigned [Mr Adams] which is the subject of this sale.”  It provides for 1 January 2002 to be the date of transfer.  The price is £19,750 of which £10,000 is stated to have been received.
6.	Anyone reading the two agreements would conclude that Mr Adams had sold motorcycles and goodwill for £19,750, and the Appellant had licensed intangibles etc for an initial fee of £19,750 plus a royalty of 14 per cent of turnover (or even, on a literal interpretation, plus a further £19,750 as the fee for the Franchise Package).  They would no doubt wonder why reference was made to the motorcycles in both agreements.  The problem is that everyone agrees that there is only one payment of £19,750, which cannot be for both the motorcycles (and goodwill) and the Initial Fee under the franchising agreement.  Mr Conlon QC contends that it is for the motorcycles and goodwill only, as stated in the bill of sale of business, and Mr McKay that it is the Initial Fee as stated in the franchise agreement.  Either interpretation will do considerable violence to the agreements: under the Appellant’s one must ignore the Initial Fee stated in the franchise agreement, and under the Commissioners’ one must ignore the price for the sale of the motorcycles and goodwill under the bill of sale of business.  We are therefore being asked by both parties to do something more like rectification than interpretation.
7.	Mr McKay drew out attention to Lord Hoffmann’s summary of the principles of interpretation of documents in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912H which includes the following:
“(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other had, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not required judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201:
‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”
8.	This is clearly a case where something has gone wrong and we must look for the business commonsense of the deal.  In our view there can be no doubt about this.  The £19,750 is for the sale by Mr Adams of motorcycles and goodwill pursuant to the “bill of sale of business.”  It is not for the franchise agreement.  The franchise agreement is a professionally drawn agreement, which the parties have obviously completed by themselves in particular including Schedule 3.  The body of the franchise agreement is itself wrong in referring to a fee for the undefined expression Franchise Package.  In addition, Schedule 3 is wrong in including the items listed under the heading Franchise Package, and in particular the item “motorcycles at and equipment at site £19,750” when these are owned by Mr Adams and not by the Appellant and the franchise agreement says nothing about their sale.  If one reads the agreement as if those items were not included in Schedule 3 we must also read it as if the amount of the Initial Fee of £19,750, which is clearly the same amount as the price of the motorcycles, were deleted.  One should also ignore the unnecessary words “due on or before commencement date of 1 January 2002,” since the body of the agreement provides for payment upon or before the execution of the agreement, and also the reference to the Management Service Fee, which has already been defined in the body of the agreement.  The body of the agreement should be read as if the consideration was stated to be the Initial Fee and Management Service Fee, instead of the fee for the Franchise Package.  We read the agreement as if those alterations had been made because it must be that it is Schedule 3 rather than the bill of sale of business that is wrong. There is nothing inconsistent with the bill of sale document: the motorcycles were owned by Mr Adams; it provides for their sale for £19,750; and £10,000 out of that sum was paid to Mr Adams who gave a receipt.  If the bill of sale rather than Schedule 3 were wrong, it would mean that the motorcycles and goodwill were supplied by Mr Adams for nothing.  This does not make business commonsense and we consider that to do so would be to attribute to the parties an intention that they plainly could not have had.  When a businessman in a short document says that he is selling motorcycles and goodwill for £19,750, he is likely to mean it.  When he is filling in a Schedule to a 24 page agreement prepared by solicitors who themselves make a mistake in referring to a fee for the undefined expression Franchise Package, it is not unlikely that mistakes will be made.  
9.	Mr McKay put forward a third possibility that something has been supplied by the Apellant as agent for Mr Adams.  That “something” was not the motorcycles (because that would not make the Appellant registrable since they are clearly capital assets of the business) but services relating to the business carried on by Mr Adams.  Under section 47(3) of the VAT Act 1994:
“(3) Where services are supplied through an agent who acts in his own name the Commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent.”
The submission is extremely ingenious and has the advantage that only one sum of £19,750 is required: first payable to the Appellant as the Initial Fee and then payable by the Appellant to Mr Adams, and with £10,000 paid direct to Mr Adams for convenience.  But it does not fit the facts because there is nothing in the franchise agreement (or any other document) to suggest that Mr Adams supplied anything to the Appellant for it to supply in its own name to Mr Brunt as Mr Adams’ agent.  Mr Adams sold the motorcycles directly to Mr Brunt under the bill of sale of business; he paid Mr Adams who gave him a receipt.  The only way to attribute the £19,750 to services is not to attribute it to motorcycles, which is essentially the same issue as we have previously considered.  We come back once again to the business commonsense that Mr Adams and not the Appellant supplied motorcycles (and goodwill) for £19,750 and so we cannot attribute the same sum to anything else.  In the circumstances we need not go into a number of difficulties in the interpretation of section 47(3), or to consider Mr Conlon QC’s contention that if there was a supply of services it was part of a continuous supply and the supplier (the Appellant) received nothing.
10.	Accordingly, having determined the business commonsense of the deal, we are confident that we must read the franchise agreement as if reference to the £19,750 Initial Fee had not been there.  The same reading must apply to the second franchise agreement relating to Cambridge as if the Initial Fee of £50,000 provided for in the agreement dated 7 January 2002 had not been there.  Accordingly those sums were never due to the Appellant and cannot count as its turnover for registration purposes.  It follows that the Appellant is not registrable on 1 January 2002.
11.	We must add that we sympathise with the Commissioners for being misled by the two franchise agreements into thinking that these sums were turnover of the Appellant when those agreements clearly stated that the sums were payable to the Appellant as the Initial Fee.  If the Appellant and Mr Adams had taken legal advice over the completion of the franchise agreements and the bills of sale of the businesses, the agreements would not have conflicted with each other and the dispute would never have arisen.  We should also like to thank Mr Conlon QC for the very comprehensive bundles of documents.
12.	Accordingly we allow the appeal with costs of and incidental to the appeal to be determined by a Tribunal Chairman in default of agreement.

J F AVERY JONES

CHAIRMAN

LON/02/688