Case analysis regarding the valuation of non-monetary considerations for VAT purposes
Published in the February 2001 issue of "Tax Adviser"
Where the consideration for a supply consists wholly or partly of something other than money, it is necessary to value that non-monetary consideration for VAT purposes. The legislation does not provide any basis for determining this value but the European Court of Justice has held that the non-monetary consideration must be given a ‘subjective value’ rather than being determined by some objective measure such as open market value. The first step in identifying this subjective value is to look for a value actually attributed to the non-monetary consideration by the parties (see Naturally Yours Cosmetics Limited v C & E Comrs
 STC 879). It is only where no such value has been attributed that it is permissible to adopt the value attributed by the recipients (see Empire Stores v C & E Comrs
 STC 623). The High Court has recently heard three cases on the issue of the value of non-monetary consideration which demonstrate that applying these principle in practice can lead to difficulties: Customs and Excise Commissioners v Bugeja
 STC 1, Customs and Excise Commissioners v Littlewoods Organisation plc
 STC 588, and Lex Services plc v Customs and Excise Commissioners
 STC 697.
Mr Bugeja supplied videos at the price of £20 to new customers (an introductory supply) or £10 if the customer exchanged a video previously bought from him (a replacement supply). Customs assessed Mr Bugeja on the basis that the supply of each video was for a consideration of £20. In other words, in the case of the replacement supply, £10 should be attributed to the returned video which was the difference between the so-called normal selling price of £20 on a sale and £10 paid in cash on a part exchange. They argued that this must be the value attributed to the returned video by the parties on Naturally Yours principles.
The VAT tribunal agreed with Mr Bugeja that the amount of the consideration for the replacement supply was £10, thus attributing no value at all to the returned video. Customs appealed to the High Court, still maintaining that the amount of the consideration for the replacement supply should be £20. In the High Court, Mr Bugeja put forward an alternative argument that, although some value should be placed on the returned video, the value of the returned video should be its value to Mr Bugeja. This must be a figure below the two or three pounds which Mr Bugeja could pay his supplier to get a new video.
Carnwath J. said that he had found it hard to extract a clear or consistent line of approach to the treatment of non-monetary consideration. He was, however, doubtful whether the Naturally Yours approach could properly be applied to Mr Bugeja’s case:
‘…there is nothing intangible about the consideration received by Mr Bugeja, nor any obvious problem of valuation. The consideration is partly in cash, and partly in the form of an object (a secondhand video), of a type which is regularly bought and sold. There is no need for any “approximation” or “indirect” method. We know that the “subjective value to the recipient” is not more than £2 to £3. If one is looking for the method which is “most direct and least distorting”, and which avoids him having to pay tax on more than he receives, that value provides a ceiling. It would be surprising and unfair if he were required to pay tax as though he had received something worth £10. I conclude that this is a case where it is appropriate to adopt a method analogous to that used in Empire Stores’.
On the facts of the case, Carnwath J. was not therefore prepared to ascribe a wholly artificial and unrealistic value to the returned video. The English courts have, however, arguably been prepared to do this in other cases (see for example Westmoreland Motorway Services  STC 431) and it was these cases that the court followed in Littlewoods.
Agents introduced customers to Littlewoods and ordered goods on their behalf. In return the agents earned commission on moneys remitted to Littlewoods in respect of those sales. The commission was 1 ten per cent if taken in cash, and Littlewoods accepted that that commission of ten per cent was consideration for the supply by the agent of his services. If the commission was not taken in cash, it could be used in future to obtain a discount of 12.5 per cent against the supply of goods. The question was whether the additional 2.5 per cent was part of the consideration for the agent’s services.
Lightman J held that where the agent chose the option of using the commission to obtain a future discount, then the consideration for his services included the additional 2.5 per cent. He largely based his decision on the English Court of Appeal cases such as Rosgill Group Ltd v Customs and Excise Comrs  STC 811, from which he rightly stated it was difficult to distinguish Littlewoods. His decision does mean the value of the non-monetary consideration (the service provided by the agent) must vary according to which of the ‘commission options’ was taken by the agent. This perhaps does not sit easily with the common sense approach taken by Carnwath J. in Bugeja on which Lightman J commented as follows:
‘I prefer to follow the orthodox approach as established and applied in Rosgill and Westmoreland. In any event, the decision in Bugeja can have no application , for this case is a case where the consideration in question is for services and further there can be nothing surprising or unfair in requiring Littlewoods to pay tax on the special allowance (as on the 10 per cent) as consideration for the agent’s services.’
It is not immediately obvious, however, why there should be any relevant distinction between goods and services in this context and Littlewoods might well think it is surprising and unfair that they should pay tax on the special allowance.
Lex sold cars to customers for cash and a car taken in part-exchange. The allowance for the car taken in part-exchange (the part-exchange price) was negotiated with the customer and usually exceeded the value that Lex could obtain on a trade sale (the trade value). Arden J. decided that the value of the non-monetary consideration consisting of the part-exchange car was the part-exchange price. Valuation on the basis of the value attributed to the transaction by the supplier was only permitted where the parties themselves had not attributed any value. Bugeja did not deal with the situation where they had done so and it apparently did not matter that it was clear from the surrounding facts that the value attributed to the car by the parties was a false one.
Clearly Bugeja stands out. It may be true that in Bugeja using a value attributed expressly or impliedly by the parties (i.e. the Naturally Yours approach) would have led to a particularly unfair result although both Littlewoods and Lex could say the same. The orthodox approach can clearly produce reasonable results in some cases. Naturally Yours itself involved valuing the service of beauty consultants organising parties. There was no obvious measure of valuation of this service and so looking to the amount of the discount on the pot of cosmetic cream which the consultants got in return for their endeavours was as good a measure as any.
The Court of Appeal has decided to join the three cases discussed above and they will be heard together in July. Ultimately, it may be necessary to obtain further guidance from the European Court as to the governing principles in these hard cases.
A number of recent cases have addressed the difficult issue of how accountancy principles and the law interact in computing profits for tax purposes, see for example Gallagher v Jones  537, Johnson v Brittannia Airways Limited  STC 763, Jenners, Princes Street Edinburgh  STC (SCD) 196 and Herbert Smith v Honour  STC 173 and Halifax plc v Davidson  STC (SCD) 251). Nevertheless the extent of the ‘legal override’ of accountancy principles is still very much open. Can the court intervene where, for instance, the application of an accountancy standard produces an absurd result for tax purposes? Or can it only intervene where the true and fair view conflicts with a statutory provision or seeks to determine what is considered to be a legal question, for instance, whether something is revenue or capital?
Further complication arises from the fact that, even if accountancy principles are to be determinative of the tax position, there may be more than one acceptable accountancy treatment. In a very recent decision (8 December 2000) of the Court of Final Appeal in Hong Kong, Commissioner of Inland Revenue v Secan Limited, Lord Millett stated as follows:
‘Where the taxpayer may properly draw its financial statements on either of two alternative bases, the Commissioner is both entitled and bound to ascertain the assessable profits on whichever basis the taxpayer has chosen to adopt. He is bound to do so because he has no power to alter the basis on which the taxpayer has drawn its financial statements unless it is inconsistent with a provision of the [Hong kong tax legislation]. But he is also entitled to do so, with the result that the taxpayer is effectively bound by its own choice, not because of any estoppel, but because it is the Commissioner’s function to make the assessment and for the taxpayer to show that it is wrong.’
This is the first time, to the authors’ knowledge, that this has been said expressly by an English judge.
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February 2001 by