CPG Logistics Ltd v Revenue & Customs [2010] UKFTT 345 (TC)

FTT-Tax
CPG Logistics Ltd v Revenue & Customs
[2010] UKFTT 345 (TC) · 2010-07-23
[1]This is an appeal by C P G Logistics Limited (“the Appellant”) from the decision dated 20 February 2008 by HMRC to assess VAT in the sum of £82,015.29 following rejection of a claim in period 12/05 for bad debt relief under section 36(1) of the Value Added Tax Act 1994 (“VATA”). The sum at issue in this appeal has since been refined, and is now £17,534.42.[2]The Appellant’s case, put briefly, is that it suffered a bad debt in respects of amounts due to it under two agreements with a customer, Ty Europe Limited, amounting in total to £1,256,495. It received an amount, in cash and in kind, under a compromise agreement (“the Compromise Agreement”) of £1million, and wrote off in its accounts the balance of £256,495. It claims that, of the total amount that it says was due, trading arrears on which VAT had been accounted for amounted to £576,494.79, or approximately 45.9%, and that accordingly the written off amount properly attributable to those trading arrears is the same percentage, namely £117,731.10. This gives rise to a claim for bad debt relief in the sum of £17,534.42.[3]HMRC do not dispute the Appellant’s figures, but deny that the Appellant has any right to claim bad debt relief. They say that at the relevant time the sole outstanding debt to the Appellant was that engendered by the then unpaid invoices in respect of the trading arrears, and that under the Compromise Agreement the Appellant received consideration, including in kind, such that no amount was then “outstanding” within section 36(3) VATA. Accordingly, they say, the Appellant is not entitled to any bad debt relief.[4]We had a witness statement of, and heard oral evidence from, Brian Summers who until he retired in March 2010 was the finance director of the Appellant. We also received in evidence a bundle of documents.[5]Michael Thomas appeared for the Appellant, and Christiaan Zwart represented HMRC. The facts[6]There was no dispute on the background facts, which we find as follows.[7]The Appellant is a company engaged in the provision of warehousing and logistical services. On 24 May 1999, it entered into two agreements with Ty Europe Limited (“Ty”), a company that imported and sold “Beanie” toys. The agreements were:(1) A Logistics Support Agreement (“LSA”) under which the Appellant was appointed to provide storage and distribution services to Ty. The LSA provided for a ten-year term, but early termination was possible in certain circumstances, including the appointment of an administrator in respect of a party. Ty agreed to pay the Appellant’s usual charges from time to time for the services (or if no usual charge, a reasonable sum). We should note, although it is not material to our decision, that although in his evidence Mr Summers said that under the LSA Ty agreed to accept a minimum annual charge of £2 million, with an annual review linked to the RPI, the agreement itself did not provide for a minimum charge as such, but merely provided that the Appellant would have a right of termination if payments equal to the minimum annual charge had not been received in a particular year. Invoices for the services were to be rendered at the end of each month and were payable within 30 days following the date of the invoice.(2) An Investment Amortisation Agreement (“IAA”) under which, although the drafting left something to be desired, Ty was to pay the Appellant a monthly amount of £14,166.67 over the ten-year term of the LSA. This was expressed as the amortisation of a principal sum of £1.7 million. In the event of early termination, in defined circumstances, of the LSA, Ty agreed to pay the Appellant the unamortised balance of the principal sum.[8]The LSA and the IAA were inextricably linked. The LSA is referred to, in recital (C), as being supplemental to the IAA. The recitals to the IAA refer to Ty having requested the Appellant to lease and fit out warehousing space for the purpose of providing logistics support to Ty under the LSA. The monthly payments/amortisation were linked to the term, and continuing subsistence, of the LSA, and payment of the unamortised balance was triggered by termination of the LSA.[9]Material to this appeal is the right of termination by written notice, under clause 11.3 of the LSA, by written notice given by one party in a case where the other has either committed a serious or repeated breach of the LSA, or, amongst other things, had an administrator appointed. A written termination by the Appellant on either of those grounds would give rise to a liability of Ty under the IAA to pay the balance of the unamortised principal sum.[10]Under clause 16.2 of the LSA, the Conditions of Contract, Customs and Tax Warehouses of the United Kingdom Warehousing Association 1997 edition (“the Warehousing Conditions”) were incorporated into the LSA, except if inconsistent with any of the other terms of that agreement. By clause 6 of those conditions the Appellant had “a particular lien, as well as a general lien entitling it to retain [Ty’s stock] as security for payment of all sums due from [Ty] on any account (relating to [Ty’s stock] or not)”.[11]Initially, the arrangement between the Appellant and Ty worked well and Ty paid promptly 30 days in arrears. Ty also installed a conveyor system in the Appellant’s warehouse at a cost of between £900,000 and £1 million. However, popular demand for “beanies” waned, and Ty got into financial difficulties. In the first quarter of 2005 payment terms gradually became extended. From March 2005 Ty began running up significant arrears in respect of liabilities under the LSA. By the end of June 2005 the amount outstanding under the LSA had risen to £576,494.79, including VAT of £82,015.29. The Appellant had accounted for and paid this VAT to HMRC.[12]On 8 June 2005. Ty was placed into administration. The joint administrators were Karen Dukes and Colin Haig of PricewaterhouseCoopers LLP.[13]The appointment of the administrators gave rise to a right on the part of the Appellant to terminate the LSA under clause 11.3.2. It is apparent also that the Appellant had a similar right to terminate under clause 11.3.1 having regard to the material breaches by Ty of the LSA. However, the Appellant did not exercise that right as it wished to retain its right to exercise a lien over stock, with an approximate retail value of £3.5 million in the Appellant’s warehouse. On 15 June 2005 the Appellant issued an application in the High Court to exercise that lien; that application was on 28 June 2005 adjourned by consent to 6 July 2005.[14]On 6 July 2005 the administrators filed an application in the High Court for authority to dispose of the stock despite it being subject to a lien in favour of the Appellant, and also subject to an alleged retention of title claim by Ty Inc, Ty’s own supplier. Karen Dukes made a witness statement in support of that application in which she referred to the position taken by the Appellant that on termination of the LSA, the sum of approximately £680,000 would fall due under the IAA, and the alleged lien would apply to sums due under both the LSA and the IAA. Ms Dukes’ statement also raised the question whether the IAA was in effect a loan agreement and thus void as not having been registered under section 395 of the Companies Act 1985.[15]Negotiations took place between the parties and on 19 July 2005 the Compromise Agreement was entered into between the Appellant and Ty, acting through its administrators. Having referred to the appointment of the administrators and to the respective court actions of the parties, by the Appellant for the exercise of its lien and by Ty for leave to sell the goods, the agreement provided:
“1. The Administrators acting as agents of the Company [Ty] shall pay CPG [the Appellant] the sum of £600,000 against the goods/stock of the Company howsoever arising and in respect of whatever agreement payable as follows: (a) £525,000 to be paid by close of business on Friday 15 July 2005; and (b) £75,000 to be paid by close of business on Friday 29 July 2005. 2. The Company acting through its Administrators will transfer whatever right title and interest it has to the conveyor belt located at the premises of CPG to CPG and confirm that they will execute any documents required to effect the transfer of title. 3. The applications of both parties to this Agreement shall be forthwith dismissed and each party shall bear their own costs in respect of the applications. CPG will refrain from bringing or continuing any further or other claim against the Company and/or the Administrators (and/or their respective officers, servants or agents) in any Court of competent jurisdiction save for carrying into effect the terms of this Agreement. 4. In consideration of the payment in Clause 1, CPG confirms that it shall, free of charge, load all of the stock of the Company permissible by law, along with any other property of the Company in its possession including but not limited to computer disks, computer servers, documents and copies onto lorries provided by the Administrators or anyone acting on their behalf (including TY UK Limited) in order that such goods can be removed from CPG’s premises. 5. The Administrators agree to remove the property of the Company from CPG’s premises within 7 days of this Agreement. 6. For the avoidance of doubt nothing in this Agreement prohibits CPG from proving in the administration or any subsequent liquidation of the Company or ranking for dividend or taking any legal proceedings in respect of such.”
[16]Mr Summers signed the Compromise Agreement and delivered it to the Appellant’s solicitors on the morning of 18 July 2005. That afternoon Karen Dukes sent an e-mail to Mr Summers which confirmed that the Appellant’s solicitors had requested that the £600,000 consideration could be allocated to the IAA and not to the LSA, and made the point that the IAA had not at that time been terminated. In his evidence Mr Summers said that the Appellant’s lawyers had disputed the assertion that the IAA (and we infer the LSA) had not been terminated, and had said that it had been terminated orally. However, there was no provision for oral termination in either the LSA or the IAA, and we find that up to the finalisation of the Compromise Agreement there was no such termination of the LSA or the IAA.[17]Ms Dukes’ e-mail and a letter of the same date went on to say that the basis of the settlement figures was the sum due under the LSA of £579,000, and the Appellant’s professional costs of £45,000 plus VAT to date. She said that the administrators would be seeking to offset the payment under the Compromise Agreement against any VAT unrecovered in that invoicing, namely the VAT element of the June/July 2005 invoicing of approximately £161,000. Ms Dukes asked for confirmation that the allocation of the £600,000 cash payment could be against warehouse charges for June 2005 of £161,324.23 and a stock settlement figure of £438,675.77. The Appellant did not respond to this suggestion, and the Compromise Agreement did not allocate the cash payment.[18]We were shown a schedule for June 2005, which had been submitted to the administrators in July of that year, showing a description of the trading invoices outstanding, including an invoice for capital investment amortisation of £14,166.66 plus VAT, which represented an outstanding monthly amount under the IAA. We were told that there were three such amounts outstanding, and these had all been included in the list of outstanding trading invoices. The summary, which covered November 2004 and March to June 2005, showed unpaid invoices totalling £494,479.50 and VAT of £80,015.29.[19]In its accounts for the year ended 31 March 2006, the Appellant showed as a loss due to the administration of Ty and costs associated with the restructuring of the warehousing facilities a total amount of £647,663, including the whole amount of the unpaid invoices. The same accounts include, as a credit in the calculation of the operating profit both the cash compensation received of £600,000 and the conveyor belt (described as compensation received in specie) valued at £400,000. In cross-examination Mr Summers said that this was the figure agreed with the Appellant’s auditors as most appropriate for presentation in the accounts. Subsequently the conveyor system proved to be of little use and has now been partially dismantled. For corporation tax purposes for the year ended 31 March 2006 it was claimed that the realisable value on sale of the conveyor system was in fact nil.[20]It was on the basis of this write off in the Appellant’s accounts that the original claim was made for bad debt relief. It is from the refusal of that claim, as now modified to relate to a proportion only of the unpaid invoices, that the Appellant now appeals. The law[21]The genesis of the relief afforded in the case of bad debts is the relevant EC Directive, which at the material time with respect to this appeal was contained in Article 11C(1) of the Sixth Council Directive of 17 May 1977 (77/388/EEC) (“the Sixth Directive”) as follows:
“In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States. However, in the case of total or partial non-payment, Member States may derogate from this rule.”
[22]The UK law providing relief for bad debts is principally to be found in section 36 VATA. So far as material, section 36 provides:
“(1) Subsection (2) below applies where— (a) a person has supplied goods or services and has accounted for and paid VAT on the supply, (b) the whole or any part of the consideration for the supply has been written off in his accounts as a bad debt, and (c) a period of 6 months (beginning with the date of the supply) has elapsed. (2) Subject to the following provisions of this section and to regulations under it the person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of VAT chargeable by reference to the outstanding amount. (3) In subsection (2) above “the outstanding amount” means— (a) if at the time of the claim no part of the consideration written off in the claimant's accounts as a bad debt has been received, an amount equal to the amount of the consideration so written off; (b) if at that time any part of the consideration so written off has been received, an amount by which that part is exceeded by the amount of the consideration written off; and in this subsection “received” means received either by the claimant or by a person to whom has been assigned a right to receive the whole or any part of the consideration written off.”
[23]Section 36(5) makes provision for regulations to be made under that section. Those regulations are contained in Part XIX of the Value Added Tax Regulations 1995 (“the VAT Regulations”). Nothing turns on those regulations, it being common ground that the Appellant complied with the formal requirements for making a claim for bad debt relief. Nevertheless, for completeness we should mention briefly regulation 170, which does contain provision for attribution or payments received by a claimant in certain circumstances, only to note that it was common ground before us that regulation 170 had no application in the circumstances of this case.[24]The attribution rules in regulation 170 apply only to determine the attribution of a payment received in relation to more than one supply (whether taxable or otherwise). Here, as Mr Thomas explained, and which was not disputed by Mr Zwart, the amount due under the IAA in respect of the unamortised balance did not represent consideration for any supply. The only supplies in issue are taxable supplies, and the issue is whether there is an outstanding amount in respect of the taxable supplies as a whole. Attribution under regulation 170 in respect of the supplies in question in this case would merely attribute the payment referable to those supplies as a whole between separate supplies forming that whole; it does nothing to answer the question – which we must consider – as to what element of the receipts under the Compromise Agreement are referable to the supplies. Discussion[25]As Mr Thomas described it, the Appellant’s case was a simple one. There were two elements to the amounts for which the Appellant had a claim under the LSA and the IAA. The first was an amount in respect of trading arrears of £576,494.79, under both the LSA and, to the extent of three months’ amortisation payments, under the IAA. The second was the amount of £680,000 which represented the amount falling due under the IAA on termination of the LSA in the defined circumstances. Value was received under the Compromise Agreement in the sum of £1 million, represented by cash payments totalling £600,000 and the transfer of the conveyor belt, valued in the Appellant’s accounts at £400,000.[26]This gave rise, submitted Mr Thomas, to a shortfall of £256,495. In the absence of any attribution by the parties he submitted that this amount should be apportioned on a just and reasonable basis, that is pro rata to the outstanding liabilities. On the basis of the undisputed figures, this would give rise to a written off amount properly attributable to the trading arrears of £117,731.10 and a valid claim for bad debt relief of £17,534.42. In support of a pro rata apportionment Mr Thomas referred us to section 19(4) VATA which provides that “where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be such part of the consideration as is properly attributable to it.”[27]Mr Thomas argued that the result for which the Appellant contented was the only sensible one. It recognised the reality that the Compromise Agreement did not provide the Appellant with the full amount that was due to it. To the extent that this left the appellant with a shortfall which is attributable to the trading arrears on which VAT has been accounted for and paid, then, it is said, the Appellant is entitled to recover that VAT. In this way the Appellant would not end up having suffered VAT in respect of consideration which it never received.[28]Mr Thomas referred us to the judgment of the Court of Justice in Goldsmiths (Jewellers) Ltd v Customs and Excise Commissioners (Case C-330/95) [1997] STC 1073 . This case was a reference to the ECJ for a preliminary ruling on whether the derogation provided for in Article 11C(1) of the Sixth Directive allowed a member state to permit a refund of VAT in the case of bad debts only where the consideration for the supply, in that case of jewellery, was in kind (there, the supply of advertising services). The ECJ held that there was no distinction in Article 11C(1) between consideration in money and consideration in kind; it was sufficient that the consideration was capable of being expressed in money. On the argument of the UK government that there was a greater risk of evasion or avoidance where the unpaid consideration was not expressed in money, the ECJ held that measures to prevent tax evasion or avoidance could only derogate from Article 11C(1) within limits strictly necessary for achieving that specific aim. The exclusion of transactions where the consideration was in kind was not authorised by the derogation.[29]In its judgment the ECJ said (at pp 1086-1087):
“14. … it should be borne in mind that art 11A(1)(a) of the Sixth Directive provides, with a view to harmonising the taxable amount, that within the territory of the country the amount chargeable in respect of supplies of goods is everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party. 15. That provision embodies one of the fundamental principles of the Sixth Directive, according to which the basis of assessment is the consideration actually received (see Naturally Yours Cosmetics Ltd v Customs and Excise Comrs (Case 230/87) [1988] STC 879 at 894 , [1988] ECR 6365 at 6390 , para 16) and the corollary of which is that the tax authorities may not in any circumstances charge an amount of VAT exceeding the tax paid by the taxable person (see Elida Gibbs Ltd v Customs and Excise Comrs (Case C-317/94 ) [1996] STC 1387 at 1403, [1996] ECR I-5339 at 5366, para 24). 16. In accordance with that principle, the first sub-paragraph of art 11C(1) of the Sixth Directive defines the cases in which the member states are required to ensure that the taxable amount is reduced accordingly, under conditions which are to be determined by the member states themselves. That provision therefore requires the member states to reduce the taxable amount and, consequently, the amount of VAT payable by the taxable person whenever, after a transaction has been concluded, part or all of the consideration has not been received by the taxable person.”
[30]On this basis, Mr Thomas submitted that the Tribunal must ascertain the amount of consideration actually received for the supplies in question. That would form the basis of the assessment. He argued that this would be unaffected by the entry into the Compromise Agreement. What the Tribunal should consider is the substance of what was paid. In support of this he referred us to the decision of the VAT and Duties Tribunal (Chairman: J Gordon Reid QC) in Alpha Leisure ( Scotland ) Ltd v Customs and Excise Commissioners (16 June 2003, No 18199). In that case the appellant made certain supplies of goods and services for which no payment was ever received. Under agreements designed to sever the connection between the parties, the appellant essentially renounced all claims for debts and liabilities, present and future, due from the other party. It was argued for Customs that there was no debt on which bad debt relief could be claimed, as the effect of the agreements was to extinguish the indebtedness so that by the time relief was claimed there was no debt. This argument was rejected by the tribunal, which said (at page 11 of its decision):
“… Parliament did not intend to defeat a bona fide claim by a trader who has recognised the inevitable and formally discharged a claim for payment which had no value. [Section] 36 should be construed in a practical way. Its purpose is to enable a trader to obtain a refund of VAT accounted for in respect of a supply the consideration for which is genuinely irrecoverable in whole or in part and in respect of which no substitute consideration has been given.”
[31]Mr Zwart did not depart from the proposition that the Tribunal must concern itself with the question of the amount of the consideration received by the appellant for the supplies. However, he put the contrary argument to the Appellant’s submissions in two ways. Firstly, he argued that the only debts due at the relevant time were those in respect of the trading arrears, and that accordingly the cash sum of £600,000 received under the Compromise Agreement was wholly attributable to those trading arrears. Secondly, he argued that section 36(3) VATA assumes that there may be a change in circumstances between the time of the supply and the time of the writing-off of the debt. The original consideration for the supply may change after the date of the supply. In this case the Compromise Agreement represented substitute consideration, and accordingly there was no “outstanding amount” due and therefore nothing to which relief under section 36(2) could be applied.[32]Mr Zwart submitted that the reliance of the Appellant on the substance of what was paid was misplaced, and that the question of the amount of consideration received should be determined by the construction of the Compromise Agreement alone, and not by reference to antecedent negotiations. He referred us to the summary of the principles of the interpretation of documents in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 , at pages 114-115. We need not set out Lord Hoffman’s summary in full, but it is worth reminding ourselves of the first three principles:
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”
[33]Mr Zwart also referred us to what Arden LJ said in Carter Commercial Developments Limited (in administration) v Secretary of State for Transport, Local Government and the Regions [2002] EWCA Civ 1994 (at [28]), where the Lady Justice contrasted the construction of public documents (a planning permission in that case) with that of a commercial contract. The court will construe a commercial contract having regard to all the background information reasonably available to the parties.[34]We do not regard the question before us – the amount of the consideration actually received for the relevant supplies – as limited to construction of the Compromise Agreement. In our view, this is a question of fact which requires consideration of all the facts and circumstances, including, but not limited to, the interpretation of the Compromise Agreement having regard to the principles outlined above.[35]In relation to his first argument, Mr Zwart referred us to clause 3 of the IAA which set out the circumstances under which the unamortised balance of the principal sum became payable, namely “upon the termination” of the LSA in defined circumstances. He argued that as there had been no written termination of the LSA as required by clause 11.3 of that agreement, no obligation to pay the unamortised balance had at the material time arisen under the IAA. Accordingly, to the extent of that unamortised balance, there was no debt due at all to the Appellant. It followed that the only debt to which the amount payable under the Compromise Agreement could be attributed was that in respect of the trading arrears. The whole of the consideration for those supplies had therefore been received, and there was thus no “outstanding amount” within the meaning of section 36(3) VATA.[36]Mr Zwart sought to reinforce his argument in this respect by referring to clause 1 of the Compromise Agreement, and its reference to the sum of £600,000 being paid “against the goods/stock of [Ty]”. At the material time a lien had been claimed by the Appellant against the goods and stock of Ty in the Appellant’s warehouse and an application had been made to the High Court to exercise that lien. Mr Zwart argued that, since the lien had arisen under the terms of the LSA, that agreement should be regarded as the genesis of the clause 1 payment. Accordingly, the sum of £600,000 should be attributed to the amounts falling due under the LSA. Viewed in this way there was, he argued, no shortfall; in fact there was an excess of consideration.[37]We do not accept Mr Zwart’s arguments. It is clear to us on the evidence, and indeed from construction of the Compromise Agreement itself, that this was a global settlement of all the issues between the parties. In considering how, if at all, payments under the Compromise Agreement were allocated, it is immaterial in our view whether a particular debt had actually arisen under the IAA in respect of the unamortised principal sum. The reasonable person seeking to ascertain the meaning of the agreement would have been aware of the link between the LSA and the IAA and the prospective liability under the IAA for the unamortised amount. The Compromise Agreement clearly contemplated all claims being compromised. The Appellant agreed to refrain from bringing any further or other claim against Ty and the administrators. The agreement was intended to settle all matters outstanding under both the LSA and the IAA, subject to a residual right for the Appellant to prove for any remaining loss in the administration or liquidation of Ty. The LSA and the IAA were part of a single commercial arrangement between the parties. The LSA was expressed to be supplemental to the IAA, and liability for the unamortised principal sum would crystallise by reference to the termination of the LSA. It could not reasonably be concluded that the Compromise Agreement would be dealing with the LSA alone; it dealt with the IAA as well, notwithstanding that the LSA had not been formally terminated and the liability for the unamortised principal amount had not arisen at that stage under the IAA.[38]Although the issue had been referred to by the administrator in her statement in July 2005 in support of the application to sell stock, it was not argued by Mr Zwart that any debt under the IAA would have been unenforceable by reason of the non-registration of the Compromise Agreement under section 395 of the Companies Act 1985. This was in any event disputed by the Appellant. In our view, neither that issue, nor the fact that the LSA had not formally been terminated, prevented the claim in respect of the unamortised balance of the principal sum being an element of the compromise between the parties. Doubts about the validity of particular claims are apt to be raised in negotiations leading to compromise. Whether or not those claims had crystallised or been admitted, or remained open to doubt, we find that they were taken into account in the compromise effected by the Compromise Agreement, and we accordingly find that the total payments received, in cash or in kind, under the Compromise Agreement were received in respect of both the trading arrears, under the LSA and the IAA, and the unamortised balance of the principal sum under the IAA.[39]In relation to the argument of Mr Zwart concerning the genesis of the payment of £600,000 being the LSA, we accept that the lien arose under the provisions of the LSA. However, that did not confine the scope of the lien to sums due under that agreement alone. The Warehousing Conditions that were incorporated into the LSA as we have described provided that the lien covered all sums due on any account, including therefore any sums that would fall due under the IAA as well as the LSA. The Compromise Agreement, in our view, recognises this by referring, in clause 1, to “in respect of whatever agreement”, and not to the LSA alone.[40]We also accept that, at the date of the Compromise Agreement, there was no sum due in respect of the unamortised balance of the principal sum under the IAA, because that liability had not crystallised on termination of the LSA. Consequently, the lien itself had arisen on the basis only of the trading arrears (both under the LSA and the IAA) alone. Had the Compromise Agreement been expressed as solely compromising sums due that were covered by the lien, we could see an argument that the payments made under it could be regarded as referable only to those trading arrears. But, as we have found, the Compromise Agreement went further than that, and it is clear from its global coverage that the release of the lien was dependent upon the compromise of all the claims of the Appellant, under both the LSA and the IAA, and whether yet crystallised or not. We therefore find that payment of the sum of £600,000 was not confined to sums due under the LSA alone, or to the sums due in respect of the trading arrears alone. Clause 1 of the Compromise Agreement does not in our view operate to attribute the sum of £600,000 in either such manner.[41]Mr Zwart’s second argument was that, between the time of supply of the original supplies by the Appellant, at which time the original liability to VAT had arisen, the parties agreed to change the consideration for those supplies. The Compromise Agreement, he submitted, represented substitute consideration. As that was the consideration for the supplies, it had been received in full, and consequently there was no “outstanding amount” within the meaning of section 36(3). He argued that to this extent section 36 is a derogation from Article 11C(1) of the Sixth Directive.[42]Mr Zwart sought to distinguish Alpha Leisure from the circumstances of this case. He pointed to the fact that in Alpha Leisure there had been two agreements, one between the shareholders and the other between the companies. Included in the tribunal’s findings was that no consideration for the supply of goods and services by the appellant could be identified in the agreement between the shareholders as the appellant was not a party to that agreement. The tribunal found also that no substitute consideration had been given. Mr Zwart argued that here there was only one Compromise Agreement which did represent substitute consideration, and that this was a change of circumstances within section 36(3). He submitted that Alpha Leisure could be distinguished from this case because in Alpha Leisure no consideration was received, whereas here there was consideration in the form of the Compromise Agreement.[43]Mr Zwart argued further that his submission gained support from the ECJ judgment in Goldsmiths . In that case, as we have seen, the ECJ decided that the Sixth Directive had to be applied so that bad debt relief would be available where the initial consideration for the goods or services was expressed in kind, where it was available when expressed in money. Mr Zwart argued that the same principle applied to substitute consideration, and that accordingly the Compromise Agreement, both as regards monetary and non-monetary consideration, should be treated as substitute consideration.[44]Mr Zwart also relied on Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 879 as illustrating the principles that consideration can be anything capable of being expressed in monetary terms, and that the value of the consideration is a subjective matter. As regards the latter point, Mr Zwart referred us additionally to Customs and Excise Commissioners v Ping ( Europe ) Ltd [2002] STC 1186 in the Court of Appeal.

Lady Justice Arden summarised the position succinctly when she said (at [42]):

“The consideration must be capable of being expressed in money and the appropriate method of valuation is to ascertain the 'subjective' value of the goods or services supplied. This constitutes the value placed on the consideration by the parties, or, if none, the value of the goods or services supplied to the recipient.”
Then, referring to Empire Stores Ltd v Customs and Excise Commissioners (Case C-33/93) [1994] STC 623, in the ECJ, where it was held that where the parties did not place a value on the goods or services supplied, the value attributed by the recipient to the goods or services supplied “must correspond to the amount which he is prepared to spend for that purpose”, and to the judgment of Chadwick LJ, giving the judgment of the Court of Appeal in Customs and Excise Commissioners v Littlewoods Organisation plc [2001] STC 1568 , Arden LJ in Ping expressed the view that in the context “spend” must, in any event, have a very wide meaning and include the making of expenditure by way of the foregoing of a benefit or the obtaining of a discharge from a liability. On this basis Mr Zwart argued that forbearance to sue can be consideration.[45]We do not accept Mr Zwart’s arguments that the Compromise Agreement represented substitute consideration in the sense contended for by him, and that this consideration was the whole consideration for the relevant supplies and accordingly there was no “outstanding amount”. We consider that the principles on which the tribunal’s decision in Alpha Leisure was based are correct and should be applied in this case. The facts in Alpha Leisure are not the same as those in this case, but in our judgment that does not affect the principles that are to be applied. In Alpha Leisure the tribunal explained that the purpose of section 36 is to provide relief where the consideration (and this means, in our view, the original consideration for the supplies) is irrecoverable, whether in whole or in part. If consideration is received, that will affect the claim for relief, but only to the extent of that consideration received. The consideration that is actually received, whether or not of the same nature, in money or in kind, as the original consideration, does not supplant the original consideration. Put shortly, if the value of the consideration received, however that may be described, is less than the amount of the consideration on which VAT has been accounted for and paid, and which has been written off, the purpose and effect of section 36 is to enable relief to be obtained for the shortfall.[46]This, in our view, is clear from the way in which the expression “the outstanding amount” is defined in section 36(3). It looks to the original consideration for the supply on which VAT has been accounted for and paid all or part of which has been written off in the accounts as a bad debt. It then asks whether any part of that consideration written off has been received. If none has been received, then the whole amount written off is the outstanding amount, in respect of which the supplier is entitled to a refund. If part of the consideration written off has been received, the outstanding amount is the shortfall.[47]Under the Compromise Agreement it was agreed that the total amount receivable by the Appellant was £600,000 in money and the transfer of the conveyor belt to the Appellant. The value of the conveyor belt, following established authority, is the subjective value attributed to it by the Appellant; this was the value of £400,000 included in the Appellant’s audited accounts. We have found that the total amount received was attributed to all amounts referable to claims under the LSA and the IAA, including therefore both the trading arrears under both agreements and the claim for the unamortised amount of the principal sum under the IAA that would arise on termination, in the circumstances that then applied, of the LSA.[48]The Compromise Agreement did not change in any way the consideration for the original supplies, and did not replace that consideration. That consideration was, at the relevant time, either actual payment or the agreement to pay the invoiced sums. It was that consideration that was, and remained throughout, the consideration for the supplies, which, to the extent it was written off, was the benchmark against which any consideration actually received had to be measured. In our view an agreement such as the Compromise Agreement under which a supplier agrees to accept a reduced sum does not have any effect on the amount of the original consideration. It may be described as substitute consideration, but the use of that phrase in Alpha Leisure was not, in our judgment, intended to refer to the supplanting of the original consideration. However it is described, it is still a receipt referable to the original consideration, and the comparison must be made under section 36(3) in order to ascertain if there is an outstanding amount and, if so, what that amount is.[49]Section 36(3) cannot in our view be construed as introducing a concept of substitute consideration, such that an amount received on a compromise that is less than the original consideration written off must be regarded as the whole consideration for the supply, with the consequence that no shortfall and thus no “outstanding amount” can be identified. Section 36(3) is merely a definition provision that compares the amount of the consideration written off with the amount actually received. With respect to the arguments of Mr Zwart, we do not consider that any of the authorities can support his proposition. Nor do we consider that in this respect section 36 can be regarded as derogating from Article 11C(1) of the Sixth Directive; on the contrary, in this respect, we regard section 36 as fully implementing the rule in Article 11C(1) as it provides for a refund in the case of partial non-payment, which is our finding in this case. In any event, having regard to what the ECJ said in Goldsmiths , we can see no basis for any derogation in this respect.[50]In our view the total amount received by the Appellant under the Compromise Agreement was £1 million. We do not accept that the forbearance to sue under that agreement can be regarded as consideration to which any value could be attributed. The sums due were to the Appellant, so any forbearance to sue on the part of the Appellant that could be regarded as consideration would be consideration going in the wrong direction. As in Alpha Leisure , it is of no matter that the Compromise Agreement removed the claims in respect of the financial differences between the Appellant and Ty.[51]Accordingly we conclude, firstly that the value received under the Compromise Agreement was in aggregate £1 million, and secondly that this amount was received in settlement of all claims, subject only to the right of the Appellant to prove in the administration or liquidation of Ty, under both the LSA and the IAA. These claims were for the trading arrears of £576,494.79, and the unamortised amount of the principal sum of £680,000.[52]There was no attribution of the sum of £1 million in the Compromise Agreement to either the trading arrears or to the unamortised amount. In those circumstances we need to decide what amount of the total amount received is properly attributable to each of those sums. We consider that it is just and reasonable to apportion the total amount received on a pro rata basis. Indeed, this seems to us to be the only proper approach that can be adopted. Although it is not applicable to this case, we are fortified in this approach to attribution by the calculation method provided for in regulation 170(3) of the VAT Regulations, which adopts a pro rata method in the case of multiple supplies occurring on a single day, to which the time of supply approach in regulation 170(2) cannot be applied. The result of the attribution we have decided is appropriate in this case is that the Appellant’s claim for bad debt relief is accepted. Decision[53]For these reasons, we allow this appeal. Costs[54]The Tribunal having directed that rule 29 of the Value Added Tax Tribunals Rules 1986 applies to these proceedings, we direct that HMRC pay the costs of the Appellant, such costs to be assessed by a costs judge if not agreed. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. ROGER BERNER TRIBUNAL JUDGE RELEASE DATE: 23 July 2010