Analysis - Rest in peace the rule of law.
There used to be a principle called the ‘rule of law’. Have I missed the legislation that repealed it, as Customs & Excise seems to believe the tax system is based on its whim and nothing to do with law any more?
Business Brief 9/00 set out ‘Customs’ revised policy’ on supplies through undisclosed agents. The changes bring the UK into line with the rest of Europe. As such they are to be welcomed as they remove a major administrative nightmare in relation to those that trade with other EC taxpayers.
But is it right for Customs to stretch UK domestic law to remove the competitive disadvantage that a different approach by the whole of the remainder of the EC has imposed on UK business?
And when I say stretch, I mean stretch. If Customs were to diversify into the manufacture of elastic it would dominate the industry. It tells us it ‘believes the wording of VATA 1994, s 47 offers some flexibility’.
It ‘is prepared to take a relaxed position under s 47(1)’ and, in relation to services, it is relying on its’ powers under s 47(3) ‘to think fit’ to treat the supplies in the way prescribed’.
That word ‘prescribed’ worries me. I can understand that someone can interpret the law differently today than they did yesterday. But surely yesterday’s interpretation must still be possible – after all it has stood the test of time?
The old interpretation was that the agent was making two supplies, a supply of the goods to his principal’s customer and a separate supply of his own services to his principal.
Thus if he sold goods to the customer for 100 and was entitled to a 20% commission, he made an acquisition from his principal for 100 and then made one supply of 100 to the customer and a second supply to his principal of 20.
The new interpretation is that he is acquiring the goods from his principal for 80 and selling them for 100.
There is no doubt the new interpretation is administratively simpler.
But what about the law? Section 47(1) deals with two specific situations; an intra-EC acquisition and onward supply by a non-taxable person through a taxable UK agent and an importation from outside the EC by a taxable person who supplies them as agent for a non-taxable person.
It provides that in those limited circumstances if the UK taxable person acts as an undisclosed agent he ‘shall’ be treated as acquiring and supplying the goods as principal. Section 47(2A) states that in any other case ‘the supply shall be treated both as a supply to the agent and as a supply by the agent’.
Neither subsection allows the supply of services by the agent to be ignored which is what Customs’ new interpretation effectively does. Also it is difficult to see how taking a relaxed view can enable the deemed acquisition to be deemed to be at a net of commission price.
Section 47(3) states that in the case of a supply of services the Commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent. It is settled law that where the tax authorities are given a discretion they must consider the facts of each individual case. They cannot bind themselves by laying down a rigid rule.
Yet in this instance Customs says it ‘will no longer recognise a separate supply of the agents’ own services to their principal’. Anyone who uses Customs’ old interpretation will be penalised – unless, that is, it is a domestic transaction when they will accept either the new or the old interpretation of the law as correct.
In the absence of clear words, how can the same law have one meaning if the customer is in the UK and a completely different one if he is not?
Curiously, anyone who takes the view that Customs’ new interpretations were correct in relation to a supply before 1 July 2000 will also be penalised.
Furthermore, prior to 1 May 1995 Customs had the ‘if they think fit’ power in relation to goods, but parliament took it away. To act as if it still had this power is not merely to hold the law in contempt, it is to defy the intention of parliament.
The fact that a change is sensible and welcome cannot justify the tax authorities ignoring the will of parliament and disregarding the clear wording of legislation.