“ would involve breaching the fundamental principle that the taxable party is only accountable for the amount of VAT paid by the consumer, in this case the hirer. This is so because, where the agreement terminates and clause 9 applies, the hirer does not pay the full VAT element of the cash price but only the VAT element of the instalments paid or payable at the time of termination and of that part of the outstanding instalments that remains after the resale proceeds have been deducted. ”. 70. As regards the voluntary termination scenario, Field J referred to the tribunal’s conclusion, at [18], that they were satisfied that the term “repossessed” in the de-supply provision applies whether termination is voluntary or forced and that the “evident purpose” of the provision, as set out in the Explanatory Note published when it was introduced is: “to avoid more than one charge to VAT on the same added value in relation to the same motor car.” 71. He set out, at [23], that, at [19] of their decision, the tribunal noted that HMRC argued that if their approach was not taken a mismatch would result in the sense that the total consideration received for the HP supply and the sale of the car would not be brought into account. The tribunal concluded, at [22], that this was not persuasive. In their view (a) there was nothing which required them to link the de-supply provision with regulation 38 when construing that provision (b) the de-supply provision was a much earlier provision than regulation 38 (which appears to have been introduced to implement article 11C(1)) and (c) they were not satisfied that “the circumstances of this one particular example are so representative as to demonstrate a necessary implication that the word “repossessed” should be given the narrow meaning”
“should be interpreted in light of the fundamental principle that VAT is a broadly based proportionate consumer tax levied at every stage of commercial supply on supplies of goods and services; pursuant to this principle, given that GMAC will benefit from a regulation 38 adjustment if there is a consensual termination, article 4(1)(a) should be construed as applying only where the hirer is in breach, since in this latter situation GMAC will be entitled only to bad debt relief…….” 73. GMAC disputed both these contentions arguing, as regards the second point, as set out at [27], that : “the article 4(1)(a) regime and the regulation 38 regime are quite separate and independent and GMAC is entitled to rely on both…….the Explanatory Note to the first Cars Order - which contained a provision identical to article 4(1)(a) - can be looked at to determine the article’s purpose, because the article is ambiguous…The Explanatory Note reads: “This Order removes from the scope of VAT disposals by finance houses … of certain used cars. Any such disposals would otherwise be a supply of goods…and would be chargeable to tax even though the goods had previously borne tax.” 74. GMAC said, as set out at [28], that this shows “that the purpose of article 4(1)(a) is to preclude a second charge to VAT on the resale of a used car which has already borne VAT on the occasion of the first supply to a non-taxable person i.e. the hirer”
“because there would be residual VAT from the first supply even after the regulation 38 adjustment. Sales of repossessed cars by finance companies have never qualified for the profit margin scheme that is the principal instrument for ensuring that traders are not disadvantaged in the used car market. Article 4(1)(a) was therefore enacted both to avoid double taxation and to relieve finance companies of what would otherwise be a disadvantage in the used car market that would distort competition….”
“ and no one knew when the [1973 provisions were made] just what provision would be enacted for adjustments to VAT where the consideration is reduced or none becomes payable. It would therefore have been impossible to construe the previous provision in conjunction with the adjustment provisions. In any event, construing article 4(1)(a) in the light of regulation 38 does not help [HMRC] because I have already held that regulation 38 applies where the agreement terminates on the hirer’s breach and clause 9 operates.” 77. At [31], he accepted that if the de-supply provision is ambiguous, the Explanatory Note to the 1973 Order may be taken into account in interpreting the article and that it is clear from the Note : “ that the purpose of article 4(1)(a) is to preclude a second charge to VAT on the re-sale of a used car which has already borne VAT on the occasion of the first supply to a non-taxable person. In my opinion Mr Prosser is right when he says that article (4)(1)(a) was necessary because sales of repossessed cars by finance companies were not covered by the profit margin scheme, and such sales had to be made non-chargeable to avoid double taxation (there is residual VAT in the car even after the regulation 38 adjustment) and distortion of the used car market.” 78. VWFS relies in particular on this comment where the High Court accepted GMAC’s argument that there was residual VAT which needed to be relieved because the consumer was subject to a definitive charge to VAT on the HP supply notwithstanding that GMAC obtained an adjustment under regulation 38. VWFS considers that the High Court’s comments correctly reflect the principles outlined above and that, as interpreted in that case, the UK regime in place at the time accordingly operated entirely in accordance with EU law. Hence, in its view, the subsequent introduction of the 2006 exclusion, which was made expressly to counter the effect of that decision, renders the UK rules incompatible with EU law unless UK law provides another means of relief for the “embedded” irrecoverable VAT cost such as under the margin scheme. In its view the margin scheme is aimed precisely at providing relief in this situation. VWFS referred to a number of authorities on the margin scheme which, in its view, support that it is intended to apply in these circumstances which I have considered below. HMRC’s submissions 79. HMRC did not dispute that the fundamental principles underpinning the VAT regime and the margin scheme are as set out above. However, in their view VWFS’ approach in this case leads to a result directly contrary to those principles and the aim of the margin scheme. They take the same view essentially as that they took in GMAC 1 . VWFS’ approach would lead, they said, to the erosion of the tax base. It is inherent in the proportional nature of the tax, that VAT should be charged on the full amount of consideration received by the supplier for each supply ( referring to Elida Gibbs Ltd v CCE (Case C-317/94 )[1996] STC 1387 and Yorkshire Co-operatives Ltd v CCE (Case C-398/99 )[2003] STC 234 ). Taxing only the profit margin of VWFS on the resales or leaving the sales proceeds out of account altogether would result in VWFS recovering all of the input tax it incurred on purchasing the vehicle but accounting for VAT on an amount lower than it had actually received overall in respect of the HP supply and the resale. 80. HMRC said that the decision in GMAC 1 has been superseded by the introduction of the 2006 exclusion and by later cases, in particular, the judgments of the CJEU in NLB and GMAC 3 . The tribunal must decide this case on the basis of the law as it now stands. Moreover, the comments made by the High Court in GMAC 1 on the purpose behind the de-supply provision are not part of the binding decision made by the court. 81. In HMRC’s view the later cases establish that normally, where there is a hire purchase or similar supply, followed by repossession and sale of the goods, no issue of double taxation arises. The HP supply and the supply on the subsequent repossession sale are each to be taxed on the full consideration received for each supply. They submitted that there cannot be any question of double taxation which ought to be relieved under the margin scheme unless (1) the recipient of the HP supply is a final consumer and (2) that consumer makes a supply of the vehicle to the taxable dealer in return for consideration. Under the usual principles applied to determine who supplies what to whom, there is simply no such supply in this case and no “embedded” irrecoverable tax charge of the kind which needs to be relieved in VWFS’ hands. Comment on GMAC 1 82. I largely agree with HMRC’s points. In my view the decision in GMAC 1 is of limited relevance given the change in law made by the introduction of the 2006 exclusion and the decision of the CJEU in GMAC 3 . (I do not consider the decision in NLB to be of material assistance in this case for the reasons set out below). 83. I note that Field J of course made his decision in GMAC 1 on the basis of the law as it then stood with the attendant difficulties of interpreting the de-supply provision in the light of the adjustment provisions which were introduced sometime after the de-supply provision was originally enacted. 84. The difficulty which HMRC faced in reaching what they considered to be the right VAT result in a default termination scenario was that, on the basis of the UK law as it stood at the time, they argued that the effect of the adjustment provisions should be restricted. As Field J set out, however, given his interpretation that the hire purchase agreement provided for a reduced price to be paid in that scenario, to deny the taxpayer an adjustment under regulation 38 to reflect that reduction would have been in breach of the fundamental principle that VAT should be charged only on the consideration actually received for a supply. That accords with the stance taken by the CJEU on the effect of article 11C(1) of the Sixth Directive (which is now article 90 PVD) in GMAC 3 as set out below. 85. In a voluntary termination scenario, on the other hand, HMRC argued that the de-supply provision did not apply. Field J held, however, that, on the plain meaning of the de-supply provision, there was simply no reason to distinguish between a resale made following a forced termination, where it was accepted that the de-supply provision applied, and that made following a voluntary termination. The reference to the Explanatory Note as showing that the aim of the de-supply provision was to avoid double taxation and related comments were relevant only if, contrary to Field J’s decision, the provision was ambiguous. These comments are not, therefore, part of the binding decision of the High Court; in lawyers’ terms they are obiter dicta. 86. I note that the Explanatory Note on the aim of the de-supply provision was issued before it was known when and how article 11C(1) of the Sixth Directive (as now reflected in article 90 PVD) would be given full effect in the UK; there was no equivalent of regulation 38 in place when the de-supply provision was enacted. The Explanatory Note stated that the relief given by the de-supply provision was necessary as otherwise resales would be “ chargeable to tax even though the goods had previously borne tax ”
“when to do so would produce an overall fiscal result in relation to the two transactions which neither national law nor the Sixth Directive applied separately to those two transactions produces or is intended to produce..”. 90. The CJEU decided essentially that, in these circumstances a taxpayer is entitled to rely on article 11C(1), as a provision of the PVD with direct effect. The fact that the de-supply provision, as a provision of UK law, may apply to give a result which in the UK’s view is not in accordance with the PVD is not a reason to deny the taxpayer the benefit of such a directly effective provision. 91. The CJEU noted, at [20] and [21], that until the decision in GMAC 1 HMRC did not accept that regulation 38 applied when the customer defaulted and the car was repossessed and sold and that the High Court “ also considered that the [de-supply provision] applied as well, with the result that GMAC does not have to pay VAT on the auction proceeds”
“that the application of those provisions, taken together, produces a “windfall” in that the VAT ultimately payable is less than it would have been if the Sixth Directive had been correctly implemented.” 92. At [29] to [33] the CJEU concluded that article 11C(1) fulfils the conditions for it to have direct effect. At [33] they said that the request for a ruling was explained on the basis that the UK tax authorities took the view: “ that the taxable person cannot, at the same time, benefit from the ‘windfall’ and from the first subparagraph of [article 11C(1)], in particular because of the fact that the cumulative application of Regulation 38…., [the de-supply provision] and that directive would produce an overall fiscal result which, in their opinion, neither national law nor the Sixth Directive, applied separately to those transactions, produces or is intended to produce.” 93. At [34], the CJEU continued to note that according to the UK: “the VAT charged to the final consumer and accounted for to the tax authorities is not calculated on the consideration actually received by the taxable person for the supplies made. It argues that direct effect is not a principle of EU law that can be used so as to achieve the opposite of the result intended by the directive. It therefore submits that the taxable person is not entitled to rely on the provisions of national law in relation to one transaction and on the direct effect of the first subparagraph of [article 11C(1)] in relation to another transaction.” 94. They said, at [35], that the UK government’s line of argument could not be accepted. At [36], they noted that as article 11C(1) has direct effect, in these circumstances: “ the question as to whether a taxable person such as GMAC may rely, after supplying goods under a hire purchase contract, on the right which that provision confers on it to obtain a reduction in the taxable amount depends on whether GMAC’s customers fail to perform in whole or in part their payment obligation under that contract”. 95. At [37] they said that this provision embodies one of the fundamental principles, according to which the taxable amount is the consideration actually received and the corollary of which is that the tax authorities may not charge an amount of VAT exceeding the tax paid to the taxable person. 96. However, they said, at [38], that it appeared that if the sale at auction of the repossessed car were not, under the national legislation itself, exempt from VAT the consideration received for each transaction would be subject to tax. The tax base would then be made up of amounts paid by the hire purchase customer and by the buyer at the auction sale. In that case, the taxable amount would correspond, in accordance with the principle set out at [37], to the consideration actually received by GMAC. 97. They continued, at [39], to refer to the settled case-law, according to which a member state which has not adopted the implementing measures required by a directive within the prescribed period may not plead, as against individuals, its own failure to perform the obligations which the directive entails. 98. They concluded, at [40], that the fact that the sale of the car was de-supplied under UK law did not prevent a taxpayer being able to rely on the direct effect of article 11C(1). They said, at [41], that it follows that according to the fundamental principle which underlies the common system of VAT: “VAT applies to each transaction by way of production or distribution after deduction of the VAT borne directly by the various cost components (see, inter alia, judgments in Midland Bank , C‑98/98….., paragraph 29, and Zita Modes , C‑497/01……. paragraph 37).” 99. Therefore, at [42]: “in the event of total or partial non-payment, the amount of the tax base of the hire purchase contract for a car must be adjusted by reference to the consideration actually received by the taxable person under that contract. The consideration received by that taxable person which is paid by a third party in the context of a different transaction -in the present case the sale at auction of the car returned by the hire purchase customer - has no effect on the conclusion that the taxable person may rely on the direct effect of the first subparagraph of [article 11C(1)] in the context of the hire purchase contract.” 100. They concluded, at [43], that it follows that the question as to whether or not the national law applicable to the auction sale is in conformity with the Sixth Directive is not relevant for the purpose of determining whether a taxable person such as GMAC is entitled to invoke the rights which it derives from article 11C(1). 101. They noted, at [44], that the UK further submitted that it would amount to abuse were a person to invoke the direct effect of article 11C(1) selectively, so as to engineer a situation in which the result intended by the legislation in question is not achieved. Having referred, at [46], to the judgment in Halifax and Others (C‑255/02) they said essentially that it was for the national court to verify whether there was an abusive practice but they could provide guidance as follows, at [47] : “ It should be noted that, if, as the United Kingdom Government states, the objective pursued by the Sixth Directive cannot be achieved, that is so because of a ‘windfall’ resulting solely from the application of national law. In fact, as is apparent from paragraph 38 of this judgment, the attainment of the tax advantage in question arises, in essence, from the fact that, under Article 4 of the Cars Order, there is no taxation of the sale at auction of the car recovered from the hire purchase customer.”
“every supply must normally be regarded as distinct and independent…….However, in certain circumstances several formally distinct services, which could be supplied separately and thus give rise, in turn, to taxation or exemption, must be considered to be a single transaction when they are not independent”. 111. They said, at [42], it is for the referring court to ascertain whether the relevant transactions, namely, “the services provided to [the lessee]” and the sale of immovable property to a third party, must be regarded as a “single supply”
“the principle of fiscal neutrality must be interpreted as not precluding, first, a leasing service relating to immovable property and, second, the sale of that property to a person who is a third party to the lease agreement, being taxed separately for VAT purposes, where those transactions cannot be regarded as forming a single supply, which is a matter for the referring court to determine.” 113. I note that the circumstances in NLB are materially different from those in this case. In particular it appears that there was no termination of the leases (they simply expired without the lessee having fully complied with the terms) and that in effect NLB acted as agent or pledgee for the lessee in selling the property when it was repossessed. It was for the national court to decide the matter in light of the CJEU’s guidance but the CJEU indicated that, in those circumstances, (1) NLB remained liable to account for VAT on all sums provided for on the supplies made under the leases of the property on the basis that there was no reduction in the consideration for those supplies by reference to the portion of the proceeds from the sale of the property which it applied in satisfaction of the sums owed by the lessee and (2) it was also liable to account for VAT on the sale of the property by reference to the sale proceeds unless the leases and the subsequent sale could be regarded as a single supply. 114. The decision reinforces that in a HP or leasing transaction which is treated as a supply of goods, the initial HP supply and any subsequent sale of the underlying asset are usually to be taxed as separate and distinct transactions. According to the CJEU the principle of fiscal neutrality did not prevent the particular transactions in that case being taxed separately unless they formed a single supply (which was for the national court to decide). The decision is in line, therefore, with the view that in this case the HP supply and the subsequent resales should be taxed in full (given that there is no argument that they form a single supply). It does not seem to me, however, that this decision of itself provides a definitive answer in these circumstances given the factual differences. 115. I note that VWFS cast some doubt on the decision in this case because, in considering the double taxation argument, the CJEU referred to the supply under the leases as a supply of services whereas they were asked to consider this question only on the assumption that NLB made a supply of goods under the leases. This is an oddity but having regard to the overall decision and context the CJEU can hardly have been in doubt about what they were being asked to address. CJEU caselaw on the margin scheme 116. As noted VWFS also referred to the cases on the margin scheme as providing further support for its view that there is double taxation in this case unless relief is obtained under that scheme or the de-supply provision (ignoring the 2006 exclusion). In my view, on the contrary, the explanation provided in those cases of the principles behind the margin scheme, reinforces this is not a situation where the resales should be relieved from tax and that to do so would lead to under taxation as recognised in GMAC 3. 117. A comprehensive explanation of the need for the margin scheme is set out by the CJEU in Commission v Ireland (C-17/84). At [11] the CJEU referred to the general principle which is now in article 1(2) PVD that the VAT system provides for the application of VAT to goods and services up to and including “the retail stage” of: “a general tax on consumption which is exactly proportional to the price of the goods and services, irrespective of the number of transactions which take place in the production and distribution process before the stage at which tax is charged. 118. They noted, however, that VAT is chargeable on each transaction in the production and distribution process “only after deduction of the amount of VAT borne directly by the various costs components”
“ As regards goods, the chargeable event is the supply of goods for valuable consideration by a taxable person acting as such as only taxable persons are authorised to deduct from the VAT for which they are liable the tax already charged on the goods at a previous stage.” 119. They said, at [12], that it follows from this principle of proportional taxation that the goods are in fact taxed at each stage of production and distribution only on the basis of the value added at that stage. However once the goods reach the initial consumer who is not a taxable person: “the goods remain burdened with an amount of VAT proportional to the price paid by that consumer to his supplier.” 120. They explained, at [13], that if the consumer subsequently supplies the goods to another non-taxable consumer, no tax is charged or deducted in respect of that transaction. If the consumer supplies the goods to a taxable trader, such supply does not give rise to a charge to tax either, but where the goods are resold by the taxable person an amount of VAT proportional to the resale price is charged but the taxable person is not entitled to any deduction of the VAT which the goods have already borne. 121. They continued, at [14], to explain how the reintroduction of second hand goods (in the sense of goods which have suffered an irrecoverable VAT charge) into the commercial supply chain causes two potential problems: (1) The goods may suffer double taxation in the sense that if they are reintroduced into commercial circulation, they are taxed again “whereas second-hand goods which pass directly from one consumer to another remain burdened solely by the tax imposed on the occasion of the first sale to a non-taxable consumer”. (2) Especially where the rate of VAT is high, the difference in treatment “distorts competition between direct sales from one consumer to another and transactions passing through ordinary commercial channels, and thus places at a disadvantage branches of trade in which a large number of transactions involve second-hand goods, such as the motor-trade in particular.” 122. The CJEU acknowledged, therefore, that these issues lead to the need for a margin scheme. 123. VWFS referred to a number of authorities but most of these simply reinforce the aims behind the scheme set out in Ireland . In K Line Air Line Services Europe BV v Eulaerts NV and Belgian State C131/91[1996] STC 597 it was confirmed that the application of any such scheme depends on whether the goods have suffered a definitive charge to tax and not whether the goods have been used physically. At [32] of his opinion, the Advocate General said that: “the concept of consumption is undoubtedly more relevant to the definition of second-hand goods than the used condition of the goods, VAT being a tax intended to be imposed definitively on goods, after a cycle of taxation and deductions, when they reach the stage of final consumption, that is to say, the stage at which they pass to a non-taxable person….for the purposes of Article 32 second-hand goods are ones in respect of which the VAT chain of seller and purchaser has been interrupted by the intervention of a final consumer.” 124. In the CJEU at [19] the court similarly held that: “ ….the purpose of [the relevant provisions regarding the adoption of a margin scheme], in the context of the common system of VAT, is to provide for the adoption of a special system for the taxation of goods on which VAT has definitively been charged and which may, therefore, on their reintroduction into commercial channels, be taxed a second time without the tax still included in their price being taken into account. It follows that capital goods, even if used, on which a taxable person has been able to exercise his right to a deduction do not come [within the scheme].” 125. In the later cases of Jyske Finans A/S v Skatteministeriet (Nordania Finans A/S and BG Factoring A/S intervening (C-280/04)[2006] STC 1744 and Bawaria Motors Sp z oo v Minister Finansow (C-160/11)[2012] STC 2088 the CJEU noted that the margin scheme is a special regime which derogates from the general scheme and, therefore, should not be applied beyond the extent necessary to achieve its objectives. 126. In Bawaria the issue was whether the margin scheme applied on the basis that Bawaria acquired the vehicles from taxable persons, vendors, under exempt supplies under article 136(b) PVD such that article 314(b) of the margin scheme applied. Article 136(b) provides an exemption for the supply of goods on the acquisition of which the supplier was not entitled to VAT recovery (under article 176 PVD). The difficulty was that under national law the exemption applied on the basis that the vendor had a partial right to recovery of the input tax incurred on their acquisition. 127. It was recognised by the CJEU that, if the margin scheme did not apply, Bawaria was subject to partial double taxation. As it received the vehicles under an exempt supply it could not obtain relief for the portion of input tax which was not recovered by the vendors on their own acquisition and was, therefore, in effect embedded in the vehicles as an irrecoverable cost. The CJEU held that the margin scheme nevertheless did not apply largely following the analysis set out by the Advocate General in his opinion. 128. The Advocate General noted, at [29], that article 314 PVD contains an exhaustive list of the situations when a dealer qualifies for the margin scheme on acquiring goods from taxable persons. At [30] he said that the common feature in the listed cases is the fact that the person supplying the second-hand vehicle to the taxable dealer “has borne the total VAT burden. In other words, that person has had no right to deduct input tax on the purchase of the vehicle”
“…….a special scheme which makes it possible to prevent second-hand goods, on their reintroduction into commercial channels, from being taxed a second time - that is, it helps avoid double taxation -without the tax still included in their price being taken into account. When these second-hand goods are reintroduced into commercial channels subject to VAT, the special profit margin scheme is applicable only to cases where they were reintroduced by a non-taxable person (final customer) or, if they were reintroduced by a taxable person, only where this was done at a time when this reintroduction was completely exempt from VAT.” 131. He said, at [52] and [53], that it follows that whenever a supplier has exercised a right to deduct input tax, albeit merely a partial such right, the margin scheme should not be applied. It is incumbent on the Polish Republic to take the measures necessary to prevent the double taxation of taxable dealers such as Bawaria. 132. At [56] he said that to apply the margin scheme in these circumstances would, in any event, be contrary to the principles underlying the directive and would, therefore, be unjustified. At [57] and [58] he stressed that the VAT burden must have been borne in full for the margin scheme to apply: “The importance of avoiding double taxation is the reason why it is a common feature of the relevant provisions that the VAT burden must have been borne in full. That is obviously conditional on the supplier having absolutely no right of deduction in a case such as this - which means that the VAT needs still to be contained in total. If the profit margin scheme were applied in a situation such as that of Bawaria then the result would be a lack of taxation on the part where deduction was applied. That would be contrary to the principle of the universality of VAT, in so far as the turnover of the taxable dealer would not be taxed in full, whereas the supplier who supplied him the second-hand goods would have been able to exercise a partial right to deduction of the tax. It may be added that, at the same time, it would also be contrary to the principle of preserving competition.” 133. He noted, at [59] and [60], that the principle of the universality of VAT is enshrined in article 1 of the directive and is manifest both at the personal level (every transaction is taxed independently of the person who carries it out - as long as that transaction is effected in the context of an economic activity) and at the material level (each supply of goods is, in principle, taxed). This case demonstrated precisely why it is necessary that a derogation from the rule of the universality of VAT must be treated as “wholly and exclusively exceptional” and that any such derogation must be based on the provisions of the directive. 134. As noted the CJEU accepted that there was partial double taxation on the basis the margin scheme did not apply. However, t hey said, at [41], that article 136(b) was not capable of any interpretation which would enable Bawaria to avoid partial double taxation and, at [42], that it falls to the Polish legislature to end such a situation. They noted that “the elimination of that situation should not be at the cost of an interpretation of [the directive] which is irreconcilable with the actual wording of that directive and its general scheme”
“ any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property”. 176. The CJEU confirmed that it covers any such transfer “even if there is no transfer of legal ownership of the property” (at [9]). That accords with the earlier opinion given by the Advocate General (at [13] of the opinion) that: “the transferee does not have to be the formal legal owner but need only obtain a right of disposal provided that he thereby acquires a position which is de facto analogous to that of the formal legal owner”. 177. The CJEU was also asked if there is a supply of goods where the legal owner has entered into an agreement with another party under which the owner (a) has actually placed the property at the disposal of that party (b) agreed that any changes in the value of the property and all profits or outgoings are for the benefit or at the expense of that party (b) agreed to transfer legal ownership of the property to that party at any future time and to grant that party an irrevocable power of attorney to carry out any transactions necessary to execute that transfer of legal ownership. 178. The CJEU said, at [11], that in posing these questions the national court was in reality asking the CJEU to apply article 14(1) to the relevant contract but, at [13], that “it is for the national court to determine in each individual case, on the basis of the facts of the case, whether there is a transfer of the right to dispose of the property as owner…”
“there is not necessarily any acquisition of the goods since such a contract may provide that the lessee has the option of not acquiring those goods at the end of the lease period.” 181. However, at [38], they said that it is clear from the relevant international accounting standards that an operating lease must be distinguished from a finance lease: “the nature of the latter being that substantially all the risks and rewards of legal ownership are transferred to the lessee. The fact that a transfer of ownership is provided for on the expiry of the contract or the fact that the present value of the lease payments is practically identical to the market value of the property constitute, separately or together, criteria which permit a determination of whether a contract can be categorised as a finance lease.” 182. They continued, at [39], to note the criteria for when there is a supply of goods within article 14(1) as set out in the Safe case and said that accordingly, at [40]: “where a financial leasing contract relating to a motor vehicle provides either that ownership of that vehicle is to be transferred to the lessee on the expiry of that contract or that the lessee is to possess all the essential powers attaching to ownership of that vehicle and, in particular, that substantially all the rewards and risks incidental to legal ownership of that vehicle are transferred to the lessee and that the present value of the amount of the lease payments is practically identical to the market value of the property, the transaction must be treated as the acquisition of capital goods.”
“ monthly instalments are, as a rule, lower than under a [HP agreement]; total instalments thus represent only approximately 60% of the vehicle sale price, including the cost of financing. If the user wishes to exercise the option to purchase the vehicle, he must therefore pay approximately 40% of the sale price. That ‘balloon’ payment represents the estimated average residual value of the vehicle at contract maturity. The customer is asked, three months before the end of the contract, whether he wishes to exercise the option….” 186. HMRC argued that the agreement constituted a “supply of goods” within the meaning of article 14(2)(b). The question referred to the CJEU was (at [22]) whether : “… the phrase “in the normal course of events” [in article 14(2)(b)] require a tax authority to do no more than to identify the existence of an option to purchase which can be exercised no later than upon payment of the final instalment….[or] … to go further and to determine the economic purpose of the contract?” 187. If the authority has to determine the economic purpose of the contract, the further question was whether it is relevant to that exercise to look at (a) how likely the customer is to exercise such an option and (b) the size of the price payable on the exercise of the option. 188. The CJEU noted, at [25], that it : “ is a particular feature of such agreements [which they said may be termed hire purchase or finance leases] that they serve as a substitute for the immediate acquisition of full ownership, the lessee having the use of the goods without being required to pay the full purchase price for them when they are handed over to him”. 189. They said, at [26], that this type of contract : “ may have features which are comparable to the acquisition of goods, or it may not, since it is open to the parties to provide that the lessee has the option of acquiring or not acquiring those goods at the end of the lease ” (referring to Eon at [34] and [37]). 190. They referred, at [27], to Eon and NLB as authority that for the proposition that the fact that a transfer of ownership is provided for on the expiry of the contract or that the present value of the lease payments is practically identical to the market value of the property “constitute, separately or together, criteria which permit a determination of whether a contract can be categorised as a ‘finance lease’”. 191. They said, however, at [28] and [29], that the classification of a contract as a “finance lease” is not, in itself, sufficient for the actual handing over of goods pursuant to that contract to be categorised as a transaction subject to VAT. It is also necessary to determine whether the contract is a contract for “hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment”, within the meaning of article 14(2)(b). That legal classification requires two conditions to be satisfied. 192. The first condition, as set out at [30] to [33], is that the relevant agreement pursuant to which the goods are handed over must contain a “clause expressly relating to the transfer of ownership of those goods from the lessor to the lessee”
“..it must be clear from the terms of the contract, as objectively assessed at the time when it is signed, that ownership of the goods is intended to be acquired automatically by the lessee if performance of the contract proceeds normally, over the full term of the contract. The only inference to be drawn from [the relevant words]….is that the final payment of sums to be paid by the lessee under the terms of the contract results by operation of law in the transfer to that lessee of ownership of the goods to which the agreement relates .” 194. They said, at [37], that this “ this contractually determined outcome - of ownership being transferred - is incompatible with a genuine economic alternative for the lessee under which he may, at the appropriate time, opt either to acquire the goods, or to return them to the lessor, or to extend the lease, depending on his particular interests at the time when he is required to make that choice”
“The position would be different only if exercising the option to purchase, optional though it is in formal terms, appeared in fact, given the financial terms of the agreement, to be the only economically rational choice the lessee could make. That may in particular be the case where it is evident from the agreement that, when the possibility of exercising the option arises, the aggregate of the contractual instalments will correspond to the market value of the goods, including the cost of financing, and that the lessee will not be required, as a result of exercising the option, to pay a substantial additional sum.” 195. The CJEU continued, at [41], that this approach is consistent with the VAT system’s objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question. They noted, at [42], that it is for the national court to determine whether the contract satisfied the conditions they had set out. Their conclusion, at [43] was that the words used in article 14(2)(b) must be interpreted : “as applying to a leasing contract with an option to purchase if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term, which it is for the national court to ascertain.”
“ In reality, BCT was exercising a right arising on a breach of contract under the original HP agreement. In doing so it was protecting its position and not supplying a service to the customer. It is true that the primary obligation under the HP agreement, on termination, was for the customer to deliver the vehicle to BCT and that BCT's right to repossession arose only when the customer was in breach of that obligation (BCT having first elected to terminate the agreement as a result of the customer's earlier failure to pay the agreed instalments). However, in reality, BCT was simply realising its security (the recovery of possession of the vehicle to which BCT had legal title) in the context of and under the terms of the HP agreement and doing so for its benefit.” 220. The tribunal considered that they should follow a similar approach to that used to determine whether there is a composite single supply or multiple supplies. At the end of the above passage they said that, borrowing the language of the CJEU in Card Protection Plan Ltd v Customs and Excise CommissionersCase C-349/96 at [30], the company’s “action in repossessing the vehicle under the HP agreement could not be regarded as being, for the customer, “an aim in itself””
“ It is clear from the Court of Justice’s judgment that the national court’s task is to have regard to the 'essential features of the transaction' to see whether it is 'several distinct principal services' or a single service and that what from an economic point of view is in reality a single service should not be 'artificially split'. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.” 221. At [57] they said that following the same approach in this case : “It seemed to us artificial to split the right of BCT to repossess a vehicle from the rest of the rights and obligations under the HP agreement in order to treat it as a separate supply. BCT’s repossession rights were simply ancillary to its other rights and obligations under the HP agreement and arose on a breach of contract by the customer. Accordingly, we conclude that BCT did not make a separate supply of repossession services to its customers.” 222. In the Darlington Finance Ltd case resales made by a financier did not fall within the de-supply provision on the basis that they were not in the same condition as when repossessed (as the financier did substantial work on them prior to sale). Similarly to the argument in this case, the financier said that it was nevertheless entitled to tax the supplies under the margin scheme. The tribunal rejected the argument that the purchase price for the purposes of the scheme was to be taken to be the price at which the financier originally bought the car from the dealer for the purpose of the HP transaction (in which case no margin in fact arose). 223. The tribunal said that given that the vehicles acquired from the dealer had already been subject to an onward supply of goods to the hirer, they did not see how it is possible for the finance company “to revert to the original acquisition price which it paid to the dealer.....this became exhausted as the relevant consideration on the onward supply of the vehicle as goods”