C00236

CUSTOMS DUTIES — importations of motor cars from Japan to United Kingdom — sale by Japanese manufacturer to associated intermediary company — onward sale by intermediary to distribution company in each Member State — sale by distribution company to retail customer before entry of car into Community territory — car entered, or purportedly entered, by retail customer — whether value for customs duty purposes to be fixed by reference to first transaction value — Customs Code art 29, Implementing Regulations, art 147
VALUE ADDED TAX — value of importation fixed by reference to value for customs duty purposes — Sixth Directive art 11B(1) — whether scheme for effecting sale to final consumer before importation designed to reduce incidence of VAT abusive — yes — execution of scheme also failed on facts — appeal dismissed in substance
MANCHESTER TRIBUNAL CENTRE

 LIMITED
Appellant
- and -

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS
Respondents

Tribunal:	Colin Bishopp (Chairman)

Sitting in public in North Shields on 21, 22 and 23 March 2006

Richard Barlow, counsel, for the Appellant
Melanie Hall QC, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
Dramatis personae
Mr Barlow	Richard Barlow, counsel for the Appellant	
Mr Davison	John Davison, author of the scheme in issue in the appeal	
Mrs Hall	Melanie Hall QC, counsel for the Respondents	
NESAS	Nissan Europe SAS, a French company	
Nissan	The Nissan group of companies, including NESAS, NMGB, NML and NMUK	
NMGB	Nissan Motors GB Limited	
NML	Nissan Motors Limited, a Japanese manufacturing company	
NMUK	Nissan Motor Manufacturing (UK) Limited (the Appellant), a company which manufactures cars within the UK and is also the registered keeper of a customs warehouse	
Vardy	Reg Vardy plc, an authorised Nissan dealer	
Introduction
1.	In form, this appeal by NMUK is against the Respondents’ decision, first communicated to it by letter of 1 September 2004, that NMGB is liable to account for additional customs duty and VAT on three cars imported into the United Kingdom from Japan. The import declarations, prepared by NMGB (acting as the importers’ agent) in each case described the importer as an individual, declared the value of the car by reference to the “first transaction” or “prior sale” value (to the meaning of which I shall come) and contained a calculation of the relevant duty and VAT based on that value. The Respondents’ decision was that the duty and VAT must be based on the significantly higher price actually paid by each importer. The letter was followed by a post-clearance demand, or C18, dated 11 October 2004 and addressed to NMGB. The aggregate amount demanded was £A, comprising customs duty of £B and VAT of £C, an amount which represents the difference between the duty and tax the Respondents say was due, and the duty and tax actually paid. A review of the decision was requested by NMUK (which it is accepted was competent to require a review), by letter of 1 October 2004, but the decision and the post-clearance demand were upheld on that review, the result of which was communicated by letter of 18 November 2004. As NMUK requested the review, it is the Appellant: see the Finance Act 1994, section 16(2).
2.	In reality, however, the appeal has been brought in order to test the effectiveness of a scheme devised on behalf of NMUK by Mr Davison, then employed by it as a senior controller with customs duty responsibilities (he has since retired from NMUK’s employment), by which it seeks to reduce substantially the incidence of United Kingdom VAT on cars imported into the territory of the European Community from Nissan’s manufacturing plants situated elsewhere. If the means by which the three importations with which I am concerned are found to be effective, Nissan intends, I was told, to import many other vehicles in the same way. The Respondents’ position is that the scheme relies for its effect on an abuse of rights, that it is a principle of European law that a person guilty of such an abuse is to be deprived of the advantage he would gain by it, and that the post-clearance demand has been properly issued for that purpose. They also contend that, whatever may have been intended, the three cars with which I am concerned were not in fact imported by the individual purchasers, but by NMGB.
3.	The four Nissan companies—NESAS, NMUK, NMGB and NML—all play a part in the execution of the scheme. Whenever it is unnecessary to refer to them individually, or when I refer to them collectively, I shall use the name “Nissan”. I heard evidence from Mr Davison and from several officers of HM Revenue and Customs who had been involved in the discussions with him about the scheme—David Robertson, Guy Clift, Sidney Hardy, Alan Douglas, Keith Pike and Lesley Forrest. I had also the purely formal statement of another officer, Lynette Driscoll, and bundles of relevant documents. I mean no disrespect to the HMRC witnesses when I say that the oral evidence I heard from them added little to the documents, and I shall make very limited reference to it in this decision.
4.	I should also mention that a particular feature of the case troubled me and, after the oral hearing of the appeal had been concluded, I invited the parties to make further submissions on that feature. They duly did so, in writing, and as they were in agreement about it, I decided not to increase the costs of the case, nor add further to the delay in releasing this decision, by asking for additional oral argument. I have instead prepared this decision on the footing that the parties are right. Nevertheless, I remain troubled by the point, and I shall return to it in the form of a postscript to this decision. I add my regret that I have dwelt on the matter for rather too long.
The scheme
5.	I was provided with a statement of those of the salient facts which had been agreed between the parties. A number of matters remained in dispute. I have come to the conclusion that this decision will be of greater utility to the parties if I first deal with Mr Davison’s scheme by taking its intended operation and examining its effectiveness, or lack of it, on the assumption that it is not impeded by any error in execution. Therefore in this section I shall deal with the scheme, as it was devised by Mr Davison, in a neutral fashion, in order to explain it and to put everything else which follows in its context. After dealing with the parties’ submissions about the scheme, and my conclusions, I shall return to the disputed facts. 
6.	NMUK manufactures cars at a plant in Sunderland. It is also the authorised keeper of a customs warehousing facility in the United Kingdom. From that warehouse NMGB distributes, within the UK, cars manufactured by NMUK, as well as those manufactured by NML in Japan and elsewhere outside the European Union. Nissan’s practice has for some time been that NML sells cars manufactured in Japan and destined for sale within the European Union to NESAS; the contractual arrangements between the two companies provide that title passes when the invoice is issued. NESAS, after applying a mark-up, in turn sells the cars to the distribution company within each country, in the instant case NMGB. Again, title passes when the invoice is issued. On arrival in the UK, vehicles imported from outside the European Union are stored in NMUK’s warehouse from which, after payment of the appropriate duty and tax, they are released to dealers within the UK, for onward sale to retail customers. The Respondents accept that Nissan’s usual method of handling its importations from outside the European Union is perfectly proper and that Nissan does not engage in value-shifting (that is, they agree that the price charged on the sale by NML to NESAS and the mark-up applied by NESAS are commercially determined). The variation on that normal arrangement which Mr Davison devised was to arrange that the three cars were sold by NMGB to final customers while they were still at sea, outside Community waters. The scheme necessarily excludes the dealers from the chain of transactions.
7.	The arrangements which Mr Davison sought to make were, for all practical purposes, identical in each of the three cases. The customers Mr Davison selected for the purpose of the test were Nissan employees, since he could rely on their cooperation. As it happens, each had already placed an order with Vardy, at a local branch, for a Nissan 350Z car, a model manufactured only in Japan. Although the customers were Nissan employees, their intended purchases were treated in the same way as purchases by the public would have been—that is, the employees received no financial or other benefit in the context of their purchases by reason of their employment. Two cars were intended, it appears, for the purchasers’ own use, while the third was immediately sold on by the purchaser to a friend. None of the customers was VAT-registered. For present purposes I assume that Vardy was induced to release the three customers from their contracts with it, in order that they could place new orders for the same cars or, at least, cars with identical specifications, with NMGB; if the scheme achieves its intended purpose Nissan will, I understand, endeavour to sell cars in this manner to customers who have not yet placed an order. 
8.	For reasons to which I shall come, I was not provided with copies of the replacement orders, but copies of invoices from NMGB to the three purchasers were produced and I assume from them (in this part of the decision) that NML sold the cars to NESAS which in turn sold them to NMGB, for onward sale to the customers. Each customer also signed an authority enabling NMGB to act as his agent in the importation, and NMGB did indeed make all the necessary arrangements, requiring the customers to do no more, in that respect, than sign the import declarations. NMGB undertook to discharge the customs duty and VAT, and any other costs, out of the price paid by the customer and to indemnify the customer if, unexpectedly, he should be called on to make any further payment. That, at least, was Mr Davison’s evidence: there was no documentary support for it but I am satisfied that the three customers would not have agreed to participate had there been no assurance that they would be indemnified against any additional cost.
9.	 From the customer’s point of view, the only apparent difference was that he was required to enter into a second contract, with NMGB, to buy the same car at the same price, and to sign the import declaration. The car was delivered to him at Vardy’s premises, and Vardy’s staff undertook all the usual pre-delivery tasks of a dealer, such as procuring the registration of the cars, paying the initial road tax and preparing the car for delivery to a retail customer. The customers may have had some understanding of the purpose behind Mr Davison’s request that they buy their cars in this way, and were aware that they were guinea-pigs in a test, but they knew little or nothing of the detail. As I shall explain, it is clear that two at least were still under the impression that they were buying their cars from Vardy but, again, I shall assume for present purposes that they did in fact contract for their purchase with NMGB.
10.	I should add at this stage that Mr Davison, who was well acquainted with several of the officers who gave evidence, began to discuss with them his idea that it might be possible for Nissan to sell cars, by retail, from NMUK’s warehouse in 2002. That proved to be impossible, and he then put forward the possibility of selling cars while they were still at sea. He did not attempt to conceal what he had in mind, but he did not tell the officers about the three sales with which I am concerned until after they had taken place.
11.	The Respondents accept that it is possible to sell cars to final consumers while they are still at sea but, they say, such sales do not have the tax consequences for which NMGB argues. Their case is that NMGB’s structuring the sales in this fashion (assuming it was successful in so doing) amounts to an abuse of law because it is designed to circumvent the purposes of the Sixth VAT Directive (77/388/EEC). (I shall refer in this decision to the Sixth Directive, rather than its recent replacement, as it was the legislation in force at the relevant time.) In addition, they say, the first transaction rule, on which the scheme is entirely dependent for its effect, or supposed effect, applies only where the importer is a taxable person, which none of the customers was. Thus, although the arrangements achieved their purpose, when viewed from the perspective of the law of contract alone (assuming, that is, that they were as Mr Davison intended), other considerations come into play when one has regard to the fiscal consequences.
The law and the operation of the scheme
12.	In the case of an importation of a car from Japan in Nissan’s normal manner (that is, by successive sales by NML to NESAS, by NESAS to NMGB and by NMGB to a dealer), customs duty is charged by reference to the value of the car determined in accordance with article 29(1) of Council Regulation 2913/92/EEC (“the Code”) which, so far as material, is in these terms:
“The customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community …”
13.	That provision must be read with article 147 of Commission Regulation 2454/93/EEC (“the Implementing Regulations”), the relevant part of which (as amended and in force at the material time) reads:
“For the purposes of Article 29 of the Code, the fact that the goods which are the subject of a sale are declared for free circulation shall be regarded as adequate indication that they were sold for export to the customs territory of the Community. In the case of successive sales before valuation, only the last sale, which led to the introduction of the goods into the customs territory of the Community, or a sale taking place in the customs territory of the Community before entry for free circulation of the goods shall constitute such indication.
“Where a price is declared which relates to a sale taking place before the last sale on the basis of which the goods were introduced into the customs territory of the Community, it must be demonstrated to the satisfaction of the customs authorities that this sale of goods took place for export to the customs territory in question.”
14.	Those provisions contain the first transaction rule to which I have referred. Taking Nissan’s normal practice for an example of its application, the customs duty levied on each car on importation is assessed by reference to the price by which it was sold by NML to NESAS, rather than on the higher price paid by NMGB to NESAS. That is because the sale by NML to NESAS was of a car “sold for export to the customs territory of the Community”. The fact that the car is released for free circulation in the United Kingdom—by transfer from NMUK’s warehouse to a selling dealer—is sufficient evidence, or “adequate indication” as article 147 puts it, that that is so. So much is common ground.
15.	The value of the car (or of any other goods) as it is assessed for customs duty purposes is relevant also for the purposes of determining the amount of import VAT which must be paid. Article 11 of the Sixth Directive deals with the “taxable amount”; and section B of the article specifically with the importation of goods. Paragraph 1 of that section states that
“The taxable amount shall be the value for customs purposes, determined in accordance with the Community provisions in force …”
16.	The “Community provisions in force” are those in the Code and the Implementing Regulations which I have set out. Paragraph 1 of article 11 is implemented in the United Kingdom’s domestic law by section 21 of the Value Added Tax Act 1994, entitled “value of imported goods”. The material parts of the section, as it was in force at the time, are as follows:
“(1)	For the purposes of this Act, the value of goods imported from a place outside the member States shall (subject to subsections (2) to (4) below) be determined according to the rules applicable in the case of Community customs duties, whether or not the goods in question are subject to any such duties.
(2)	For the purposes of this Act the value of any goods imported from a place outside the member States shall be taken to include the following so far as they are not already included in that value in accordance with the rules mentioned in subsection (1) above, that is to say—
(a)	all taxes, duties and other charges levied either outside or, by reason of importation, within the United Kingdom (except VAT); 
(b)	all incidental expenses, such as commission, packing, transport and insurance costs, up to the goods’ first destination in the United Kingdom; …
and in this subsection ‘the goods’ first destination’ means the place mentioned on the consignment note or any other document by means of which the goods are imported into the United Kingdom, or in the absence of such documentation it means the place of the first transfer of cargo in the United Kingdom.”
Subsections (3) and (4) have no present relevance.
17.	Thus the value on which import VAT is calculated includes not merely the cost of the goods themselves, but various other items, among which is the customs duty. In the case of an importation carried out in Nissan’s customary fashion the amount of VAT charged on importation is of no lasting relevance, since NMGB is required to pay it but may claim credit, as input tax, for the same amount. It then charges output tax on the price of the car when it is sold to a dealer and the dealer, having claimed credit for that sum as input tax, himself charges output tax on the retail value of the car when it is sold to a customer. Thus the objective of the VAT legislation is satisfied: the tax is borne by the final consumer on the price paid by him, while for others in the chain it is fiscally neutral (that is, they suffer no net cost).
18.	Mr Davison’s scheme, as he freely accepted, defeats, or circumvents, that objective. Its result, if it is effective, is that the final consumers—the individuals who buy the cars for their own use—are required to pay VAT by reference to the first transaction value, even though the prices they have actually paid are substantially higher. I take one of the transactions as an example; the others are materially identical. I assume, again, that the arrangements were as Mr Davison intended.
19.	The final purchaser, Peter Jones, agreed in March 2003 to buy a Nissan 350Z car from Vardy for a total sum, including optional extras, delivery, vehicle excise duty and VAT, of £28,744. An order for the car was placed by Vardy with NMGB. A consignment of cars left Japan, by ship, on 27 September 2003. The consignment included 304 cars of two slightly different specifications. NML’s invoice to NESAS, dated 18 September 2003, which identifies NMGB as the consignee, quotes prices of €D and €E per car, depending on the specification—at that time the sterling equivalent was approximately £F. That value, of course, excludes customs duty and VAT.
20.	One car, meeting Mr Jones’s requirements, was identified among those in the consignment, and Mr Jones agreed to take that car. On 20 October 2003 he entered into an agreement with NMGB to buy the car from NMGB for the same total price, £28,744, and on the same day authorised NMGB to act as his agent in the importation. 
21.	When the car arrived in the United Kingdom, it was necessary, as in any other case, to make a declaration of value for customs duty purposes. Normally NMGB would make a bulk declaration covering the entire consignment, but it was necessary for the operation of the scheme that Mr Jones make a declaration covering only the car he was to acquire. The declaration, a form DV1, was completed by an employee of NMGB or of NMUK (but not Mr Jones) and then handed to him for signature. Mr Jones signed his form on 3 November (or, at least, the form bears that date); the ship arrived on that day or the preceding day. The value declared was €E, converted to £G, and the duty and VAT were calculated by reference to that value (there was a small adjustment for reasons not now material). The duty and VAT were charged to NMGB’s duty deferment account, and the car was released to free circulation—as I have indicated, it was transferred, via the warehouse, to Vardy where it was prepared for delivery and handed over to Mr Jones. An invoice from NMGB to Mr Jones, showing a price for the car of £28,744, was produced. 
22.	NMGB duly accounted for the customs duty and VAT. The latter amounted to £H. NMGB could not claim credit for it since, if its case is right, it was not input tax in its hands; it was discharging Mr Jones’s liability. On the other hand, NMGB did not have to account for output tax on its sale to Mr Jones, since that sale occurred (if NMGB is right) outside the territory of the European Community and therefore did not come within the Community VAT regime. Nor did it have to account for VAT on the higher price for which it would, ordinarily, have sold the car to Vardy. It has, therefore, reduced its overall liability by the difference between the output tax for which it would have accounted if the car had been dealt with in the ordinary way and the £H which it has paid on Mr Jones’s behalf (the difference is approximately £I—I was not given a precise figure). As the cost of the car to Mr Jones was the same as the amount he would have paid in the ordinary way the saving of VAT is entirely to the benefit of NMGB. Mr Davison agreed that that was both the effect and the purpose of the scheme, although he added that in future it might be structured in order that part of the benefit would be passed on to the customer. 
Three subsidiary issues
23.	Before coming to the main area of disagreement, I shall deal with three comparatively minor issues: the burden of proof; the relevance, if any, of the fact that the customers were Nissan’s employees; and the customers’ capacity to sign the import declarations. A fourth issue, namely whether the post-clearance demand was correctly addressed to NMGB or the Commissioners should have issued separate post-clearance demands, for their respective amounts, to the customers, although subsidiary, gives rise to different issues and I shall deal with it later.
24.	As to the burden of proof, Mr Barlow pointed out that the Appellant’s challenge was to the post-clearance demand. Its case was the simple one that it had no liability, and that in consequence the demand was incorrectly made. It was the Respondents who advanced the positive case, that there had been an abuse. Both the Advocate General (at paragraph 83 of his opinion) and the Court (at paragraph 59 of the judgment) had said, in Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99) [2000] ECR I-11569, that it was for the tax authorities to establish the abuse. Although Mrs Hall did not, in terms, challenge that assertion, I think it worth setting out what the Advocate General (Alber) actually said, and which the Court, inferentially, endorsed:
“The actual determination whether the subjective element of the intention to commit an abuse of rights is established is a matter for the court of the Member State. The basic presumption as regards the burden of proof is that when asserting a right of recovery, it is for the authority to show and prove the required facts. However, a relaxation of the burden of proof is conceivable in the sense that prima facie evidence of irregular conduct would suffice initially, and the indicted trader would then have to show that he was not at fault.”
25.	In the context of a case such as this, I interpret that comment as meaning that it is for the tax authority—the Commissioners—to show that the transactions in question are out of the ordinary (that is, depart from recognised practice), that they have (or, if not nullified, would have) the effect of reducing or avoiding a tax burden in a manner contrary to the perceived purpose of the legislation, and that they have no apparent purpose other than the reduction or avoidance of that tax burden. If the authority can do so, the burden shifts to the trader who, being the person in possession of all the facts, is in a position to do so, to demonstrate that the transactions do in fact have a commercial purpose, other than the reduction or avoidance of the tax burden. In this case, however, I think there is a rather greater burden on the Appellant, since its arguments depend on my finding that the transactions occurred as it contends—and in particular that the sales to the customers took place before the cars reached Community territory. I shall return to that issue; for the present I shall assume that the Appellant’s case on that issue is correct.
26.	The relevance of the customers’ being Nissan’s employees stems from the comment by the Court of Justice in Halifax plc and others v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919 that legal, economic or personal links between participants in transactions are factors to be taken into account (see paragraph 81 of the judgment). I am not persuaded that in this case any conclusion is to be drawn from the relationship. Mr Davison selected employees because the three importations were in the nature of a test, and he made it clear that, if the scheme achieves its objective, it will be extended in order that members of the public may benefit from it (or Nissan may benefit from effecting sales to members of the public in the same way). It is not an arrangement which can be effected only if the participants are connected, such that one participant can exercise control over one or more others (or they are in common control), or one which takes advantage of a connection in a manner which would need to be varied if the connection were not present. In my judgment the fact that the customers were employees is irrelevant to the issues I must decide.
27.	The documents produced to me showed that each of the customers signed a “Declaration of particulars relating to customs value” in form DV1, the form prescribed by article 178 of the Implementing Regulations. Paragraph 1 of the article provides for the making of the declarations; paragraph 2 states that
“The value declaration provided for in paragraph 1 shall be made only by a person established in the Community and in possession of the relevant facts.”
28.	The customers were all established in the Community but, Mrs Hall argued, they were not in possession of all the facts—in particular, they had no independent means of verifying that the first transaction value, which they were using as the basis of the declaration, was correct. In fact, it seems that they were, if only briefly, shown the invoice from NML to NESAS, which showed that value, but I am not persuaded that they had any real understanding of its relevance. Thus I am not satisfied that the customers did any more than sign a document, relying on Mr Davison or his colleagues for its accuracy. Mr Barlow’s response was that it was immaterial what the customers knew personally; their knowledge had to be aggregated with that of their appointed agent, NMGB, which plainly did have the relevant information.
29.	On this issue, I am satisfied that Mr Barlow’s argument is to be preferred. In my view, “in possession of”, if the provision is to be capable of being operated in practice, must imply that the person making the declaration has access to the information, rather than that he carries it in his head. Had the Commissioners, using the powers conferred on them by article 181 of the Implementing Regulations or in some other way, asked for additional information, the customers could, and no doubt would, have supplied it, with NMGB’s assistance. A person signing a declaration on behalf of a corporate body, such as NMGB itself, might or might not have all of the relevant information to hand, but he would have access to it and it does not seem to me that the declaration would be any the less valid if he merely had access to the information. In addition, save in the conventional fictional sense, NMGB, on whose behalf the declaration was signed, would have no knowledge of its own of the information entered on the form. The Commissioners’ objection to the signing by the customers of the import declarations therefore fails.
The parties’ submissions on the main issue — is the scheme abusive?
30.	On the substantive issue, Mr Barlow’s principal point was that (as the Respondents had accepted, in the correspondence both before the scheme was put into practice and after) the transactions were effective and that, in the absence of an argument that the scheme was abusive, the first transaction value was correctly used; it was used by NMGB, without objection by the Commissioners, as a matter of routine for its own importations, and it was generally accepted, including by the Commissioners themselves, that importers had the right to declare their imports and pay duty by reference to that value. The proviso in article 29(1) of the Code, relating to successive sales before valuation, was of no application here as it was the very first sale, by NML to NESAS, which triggered the valuation. The issues therefore were whether the Commissioners could establish an abuse of European law, in the sense developed by the Court of Justice, and if so whether that abuse deprived the importer of the right he would otherwise have had.
31.	He argued that no abuse could be established: the impugned transactions were sales of cars, but NMGB was in the business of selling cars, and the customers were willing purchasers of the cars, which they bought for their own use. The arrangements did not artificially generate sales, nor did they artificially create the conditions in which the first transaction rule applied, since that was the ordinary rule. The rule was being used in the manner intended; it was not being abused at all. Moreover, a finding that an abusive advantage had been obtained implied that the transactions used to achieve it should be redefined, in a manner which would reflect the true purpose of the activity; but the Commissioners had not shown, nor could they, how any such redefinition might properly be accomplished.
32.	He referred me to article 181a of the Implementing Regulations, which prescribes the procedure to be adopted, and the Respondents’ powers, when a declaration based on the first transaction value has been used for the purpose of an import declaration. The article reads:
“1.	The customs authorities need not determine the customs valuation of imported goods on the basis of the transaction value method if, in accordance with the procedure set out in paragraph 2, they are not satisfied, on the basis of reasonable doubts, that the declared value represents the total amount paid or payable as referred to in Article 29 of the Code. 
2.	Where the customs authorities have the doubts described in paragraph 1 they may ask for additional information in accordance with Article 178(4). If those doubts continue, the customs authorities must, before reaching a final decision, notify the person concerned, in writing if requested, of the grounds for those doubts and provide him with a reasonable opportunity to respond. A final decision and the grounds therefor shall be communicated in writing to the person concerned.
33.	Mr Barlow emphasised two points. First, he said, the focus of paragraph 1 was on the Respondents’ being satisfied that the declared value matched that prescribed by article 29 of the Code; and that article required the declared value, in the cases with which I am concerned, to correspond with the first transaction value—no other was appropriate. Second, paragraph 2 prescribed a procedure which the Respondents must follow if they were not satisfied that the declared value was correct, and they had not followed it: they had made no enquiries of the customers, and had given them no opportunity to respond.
34.	Mrs Hall’s starting point was article 2 of the First VAT Directive (67/227/EC—now article 2 of Council Directive 2006/112/EC), which reads:
“The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
“On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.”
35.	There was, she said, no coherent explanation of the structure of the transactions save that it was designed to avoid the purpose of that provision and to reduce the VAT which was payable to an amount less than that properly chargeable on the sale to the consumer. The scheme was abusive because it sought to rely on one rule of Community law, the first transaction rule, in order to circumvent another, article 11(1) of the Sixth Directive:
“The taxable amount shall be:
(a)	in respect of goods and services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser …”
36.	Abusive conduct existed when two conditions were satisfied: that, despite formal application of the provisions of the VAT legislation, the result of the conduct was the accrual of a tax advantage which was contrary to the purpose of those provisions; and there was no other cogent explanation of the conduct than the desire to achieve that advantage.
37.	That there was no commercial purpose to the scheme other than the attainment of the tax advantage was clear. Mr Davison did not conceal its purpose and it could not truly be said, as Mr Barlow had argued, that NMGB’s purpose was the selling of cars. It could, and did, achieve that, ordinarily, by means which did not offend the purposes of the Sixth Directive; the fact that the customers were required by the scheme to enter into an arrangement from which they derived no benefit themselves, in order to achieve a tax saving for NMGB, was an obvious indication that the arrangements were artificially contrived. It was equally obviously contrary to the purposes of the Sixth Directive that the tax borne was not directly proportional to the price paid by the final consumer, and that NMGB should itself retain the advantage which it had artificially created. Article 147 of the Implementing Regulations could not be construed in a manner which defeated the purposes of the VAT regime; it was necessary to look beyond its literal meaning to its purpose and, if that was done, it would be apparent that the first transaction rule could never be used by a private individual since its application in such a case would invariably conflict with the purposes of the Sixth Directive.
38.	Both Mr Barlow and Mrs Hall referred me to a number of decisions of the Court of Justice. They were all considered by the Court in the recent case of Halifax plc and others, the judgment in which, I think, contains a comprehensive review by the Court of the concept of abusive conduct. I shall come to that judgment shortly, but it is appropriate that I deal first, though briefly, with a number of other authorities to which I was referred.
39.	 In Dansk Denkavit ApS v Ministeriet for Skatter og Afgifter (Case 42/83) [1984] ECR I-2649 the Court said, at paragraph 13 of the judgment:
“… the principle of the common system consists in charging on goods and services, up to and including the retail stage, a general tax on consumption which is exactly proportional to the price of the goods and services, irrespective of the number of transactions involved in the production and distribution process before the stage of taxation.”
40.	In Adidas AG (Case C-223/98) [1999] ECR I-7081 the Court said, at paragraph 23 of the judgment, that “in interpreting a provision of Community law it is necessary to consider not only its wording but also the context in which it occurs and the objects of the rules of which it is part”, a proposition which Mr Barlow accepted remained the position. In BP Supergas Anonimos Etairia Geniki v Greece (Case C-62/93) [1995] STC 805 the Court was required to consider a provision of Greek law which purported to impose VAT at an early stage in the chain of transactions leading to the final consumer, while excluding the later stages from the VAT system altogether. At paragraph 17 of its judgment the Court said:
“Article 11 of the Sixth Directive defines the taxable amount for VAT purposes. That provision is intended, inter alia, to ensure that VAT is applied at each marketing stage on the price or value of the goods at that stage. It therefore precludes the application of taxation arrangements such as those at issue in the main proceedings, in which VAT is determined, once only, on the price at the first marketing stage.”
41.	Those comments, Mrs Hall maintained, demonstrated that the Appellant’s approach, of fixing the incidence of VAT at a stage earlier than that of the final, retail, sale, offended article 11. It relied on an excessively formalistic interpretation of the article 147 of the Implementing Regulations, an approach condemned by the Court of Justice in many cases where such an interpretation frustrated the underlying purpose of the provision. She gave as an example Firma Peter Cremer v Bundesanstalt für landswirtschaftliche Marktordnung (Case 125/76) [1977] ECR 1593. 
42.	Mr Barlow, while not disputing Mrs Hall’s interpretation of the case-law, pointed out (as I have already mentioned) that the scheme relied on the natural, rather than any artificial, meaning of article 29 of the Code, and that the sales to the customers had occurred while the cars were outside Community territory; thus no VAT was chargeable on those sales and it could not be said that NMGB (or the customers) had avoided the payment of VAT which was not due at all. It was the importation of each car by the individual which gave rise to a liability for VAT, that VAT was required to be calculated by applying article 29 of the Code and article 11B(1) of the Sixth Directive, and that was what NMGB had paid. Moreover, if an abuse was to be shown, it must also be demonstrated that the abusive objective was the sole purpose of the transaction. In Centros Limited v Ehrvervs-Og Selksabsstyrelsen (Case C-212/97) [1999] ECR I-1459 the Court was concerned with the formation of a company in the United Kingdom by Danish nationals, when the company intended to carry on business only in Denmark, and had been formed in the UK because the requirements of UK law were less onerous than those of Danish law. At paragraph 27 of the judgment the Court said:
“… the fact that a national of a Member State who wishes to set up a company chooses to form it in the Member State whose rules of company law seem to him the least restrictive and to set up branches in other Member States cannot, in itself, constitute an abuse of the right of establishment. The right to form a company in accordance with the law of a Member State and to set up branches in other Member States is inherent in the exercise, in a single market, of the freedom of establishment guaranteed by the Treaty.”
43.	There was, said Mr Barlow, no distinction of principle to be drawn between that case and this. In each case, the parties had chosen to structure their arrangements in a manner which was advantageous to them, but they had an underlying commercial purpose—of forming a company in Centros, and of selling cars here—which negated any allegation of abuse.
44.	The Court’s recent guidance, in Halifax plc, begins with an analysis at paragraphs 69 to 73 of the earlier case-law, to some of which I have already referred. It summary is in these terms:
“74. … it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in para 89 of his opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.
76. It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it (see Eichsfelder Schalchtbetrieb (Case C-515/03) [2005] All ER (D) 306 (Jul), para 40) …
81. As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke [2000] ECR I-11569, para 58).”
45.	It follows from paragraphs 74 and 75 that abusive conduct exists if, by formal application of the rules of Community law it achieves a tax advantage contrary to the purposes of the legislation; but it will not exist if there is an explanation which shows that there is a purpose to the transactions other than the obtaining of that tax advantage. From paragraphs 76 and 81 it is clear that it is for the national court—in the instant case this tribunal—to determine, as a matter of fact, whether abuse as so defined has taken place, and to determine also the “real substance and significance of the transactions”.
46.	There can, in my view, be no real doubt that the purpose of the scheme is to secure a tax advantage; that would be so even if Mr Davison had not conceded as much. The scheme depends on the formal application of article 29 of the Code in order to reduce the amount of VAT paid by the final consumer to an amount less than that consumer would have had to pay if the scheme were not in operation. The result is, in my view clearly, contrary to the purpose of article 11 of the Sixth Directive. The customer has obtained the car he wanted, at the price he expected to pay, by a means which has diminished the tax due to a level below that proportionate to the price, and to the benefit of the seller. Can it be said that NMGB has demonstrated another, commercial, purpose to the scheme? In my view it cannot: it is true that it is in the business of selling cars, but the scheme does not advance that purpose. Instead, it distorts Nissan’s normal method of distributing within the UK cars it has manufactured in Japan, and it cannot be said that the scheme achieves anything apart from the tax advantage. The real substance of the transactions is that NMGB sold cars to customers in order that they could enjoy those cars in the UK; it did not sell cars on board a ship, leaving the customers, even notionally, to their own devices in what they did with those cars after their purchases.
47.	Although I was not referred to it, it seems to me that there is an almost exact analogy between this case and Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758. There, BT bought cars for use in its fleet, paying for the car and for delivery of the car to its premises. The delivery charge was separately identified on the invoice for each car. BT accepted that recovery of the input tax incurred in the purchase of the car was blocked, but contended that it could recover the input tax included in the delivery charges. The House of Lords concluded that the two elements of the supply could not be segregated in that way. BT required a delivered car, and that is what it received: a single supply of a delivered car. 
48.	It is impossible to accept that any of the customers in this case would conceivably have entered into an arrangement under which, for no personal advantage, they would buy a car at sea, and make their own arrangements for its offloading from the ship, importation, registration, taxation and preparation for delivery. They each wanted a delivered car, exactly as they would have received from Vardy and, on his own evidence, that is exactly what Mr Davison offered. The invoices from NMGB to the customers which were produced for the purpose of the scheme are consistent only with that conclusion: they show a single price for the car, with additions only for the road fund licence and first registration fee. There is no mention at all of VAT, customs duty, transport costs or NMGB’s services in effecting the importation.
49.	It does not seem to me to help Mr Barlow that (if they occurred as the scheme demanded at all) the sales were made outside Community territory. The abuse is not the avoidance, by so selling, of a liability for the VAT which would be payable if the sale took place within Community territory, but the liability for VAT on a sale which, as I have found, was of a car, delivered and fit for use, within the United Kingdom.
50.	I am, therefore, satisfied that the scheme, as it is intended to operate, is abusive within the meaning developed by the Court of Justice in Halifax plc.
The disputed facts
51.	Whatever its effect might be if the scheme had been implemented as Mr Davison intended, the Respondents maintain that, as a matter of fact, it was not so implemented. They point to the lack of comprehensive documentary evidence, notes of discussions they had with two of the customers (the third, Mr Jones, was not available because of illness) and with Vardy’s sales staff (which notes have been signed as a correct record by the persons with whom the discussions took place) and to the manner in which Nissan accounted for the sales, that is as if they had made been to Vardy.
52.	It was apparent from the documents I saw that Mr Davison had not succeeded in putting together a proper audit trail, showing the rescission of the orders placed in March 2003 by the three customers with Vardy, and of Vardy’s corresponding orders for the cars with NMGB, the placing of new orders by the customers with NMGB and the making of payments by the customers to NMGB in exchange for the cars. The explanation given by Nissan employees to Mrs Forrest, which Mr Davison accepted to be correct when he gave his evidence, was that it had proved difficult to override Nissan’s computer system, which was designed to handle importations by NMGB and its sales to dealers, and not sales direct to the public. 
53.	Were this merely a case of the documentation not reflecting the reality, that explanation might be sufficient. As it is, I have no more than evidence of what was intended, and of the fact that the import declarations were made by the customers. The notes of their interviews show that they remained under the impression that they were dealing with Vardy—which I accept may be due to nothing more than an inadequate explanation to them by Mr Davison—while the notes of the discussion with Vardy’s employees show that they, too, had not realised that the sales had been restructured. Mr Davison accepted that he had been cautious in his dealings with Vardy as he did not want to find himself in a dispute about the division of the benefits of his scheme. I bear in mind that I had no oral evidence, or formal statements, from the customers or from Vardy’s staff, and I do not treat their perception of the arrangements as decisive, but it is nevertheless difficult to understand how the three orders could be restructured without Vardy’s being aware that it had been done.
54.	That impression is fortified by the absence of any documentary evidence of the rescission of the orders placed with Vardy and of the orders supposedly placed by the customers with NMGB, coupled with the fact that Vardy presented an invoice to each of the customers on delivery of the cars, the clear evidence that the customers made all their payments to Vardy (they paid deposits in March and the balance on delivery of the cars, and in one case the customer’s car was taken in part exchange) and the evidence that both Nissan and Vardy accounted for their respective sales and purchases in exactly the same way as they would have done had there been no scheme. Indeed, Mr Davison was trying to “undo” the accounting (including the VAT accounting) in order that it might match what he had intended. My views are further borne out by the extremely rudimentary nature of the invoices produced by NMGB as evidence of its supposed sales to the individuals, which I have already mentioned. One would, I think, expect to see details such as the price paid net of customs duty and VAT, and the amounts of duty and VAT for which NMGB has accounted on each customer’s behalf in the case of a true sale such as the Appellant maintains took place.
55.	I have already expressed the view that the burden is on the Appellant to demonstrate that the series of transactions on which it relies took a particular form. I am satisfied from the evidence that Mr Davison attempted to put his scheme into execution but a combination of his reluctance to involve Vardy any more than was absolutely necessary (in fact, barely at all) and Nissan’s established systems frustrated him in that attempt. I am not, therefore, persuaded that there was in truth a sale, in any of the three cases, by NMGB to a customer—the evidence favours the conclusion that NMGB sold the cars to Vardy which in turn sold them to the customers—and, consequently, I do not accept that the customers bought the cars while they were outside Community territory or, despite the import declarations, that they imported them.
56.	That conclusion leads to an outcome which was not, I think, contemplated by the parties. If NMGB was the importer, the post-clearance demand was correctly addressed, but was inappropriate since NMGB has paid the duty and import VAT which was properly due. It may be that it has accounted for no output tax on its sale to Vardy (although Mr Davison, as I have said, told me that by mistake it had done so), but that is not an issue before me. Since the appeal is, in form, against the post-clearance demand it seems that I must allow it, even though I have resolved the real matter in dispute against the Appellant.  If that conclusion gives rise to any difficulty which the parties cannot resolve for themselves I give permission for the appeal to be continued for the purpose.
Conclusions
57.	I am satisfied that, in the three individual cases with which I am concerned, NMGB did not succeed in its intention of making sales of the cars to the customers while the cars were outside Community territory, but that in reality the cars were sold by NMGB to Vardy, and by Vardy to the customers. But even if the cars had been sold to the customers outside Community territory, the true substance of the transaction was in each case the sale of a delivered car within the United Kingdom. In such a case, NMGB is liable to account for output tax on its full selling price. Although, as I have indicated, the post-clearance demand must, I think, be discharged, the substantive appeal is determined in the Respondents’ favour. Mrs Hall asked for a direction in respect of costs in the Commissioners’ favour. Even though the appeal has succeeded on the formal issue, I have resolved the substantial dispute in the Respondents’ favour and in my view they should have their costs. I shall not make a formal direction immediately, in case either party wishes to make further submissions on the point (and on the outcome of the appeal itself). I direct merely that either party may apply for further directions about the incidence of costs and, if necessary, about their assessment.
Postscript
58.	I mentioned at the beginning of this decision my concerns about a particular feature of the case. My concern was first prompted by Mrs Hall’s contention, for which she offered no direct authority but an argument from principle, that the first transaction value was not intended to be used by a private importer. In her later submissions, delivered following my request, she seems to have modified that stance by accepting, as she puts it, that “The Commissioners cannot apply a rule as to what constitutes a sale for export to the Community which differs according to whether or not the importer is a private individual.” If that is so, article 29 of the Code must apply to the private individual as it applies to the trader and in the case of a genuine sale outside the Community to a private individual who, himself, arranges the import of the goods article 11 of the Sixth Directive must also apply. I have accepted her argument that the scheme does not have that result.
59.	That, however, was not my concern, which is the acceptance by both parties of the proposition that the first transaction value is available to the customer, if Mr Davison’s scheme operates as intended. In my view they are mistaken in that acceptance. There is, it seems to me, a logical difficulty in arguing that the sale by NMJ to NESAS (or the sale by NESAS to NMGB) is “for” export to the Community when in fact the car is intended to be the subject of a sale on the high seas to a customer who, however notionally, is entirely at liberty to take it anywhere in the world he wishes. Even if, because it is already on a ship, he is forced to allow it to reach the UK, he is not obliged to import it, but may arrange for it to be sent elsewhere, without passing through UK customs controls. The sale “for” export to the Community is that by NMGB, assuming the customer in fact imports the car, since only then can an intention to import the car into the Community be demonstrated. In other words, it does not seem to me that article 147 of the Implementing Regulations can be used in respect of sales indefinitely in the past. Where, as here, there is a sale to a purchaser (NMGB) which certainly does not intend to import the goods into the Community, but whose objective is to dispose of them outside it in order to satisfy the condition on which the scheme depends, the chain is broken. If, instead, the correct view is that the sale by NMJ to NESAS is “for” export to the Community the logical consequence matches the conclusion I have already reached, that NMGB was in fact selling a car imported into and delivered within the UK, since it necessarily implies that no other outcome was possible (and, indeed, the scheme could not accommodate to any other outcome).

COLIN BISHOPP
CHAIRMAN
Release date: 1  March  2007

MAN/04/7044