Flashback on ECJ cases C-419/02 (BUPA Hospitals and Goldsborough Developments) – No liability for non-binding advance payments for unspecified goods

On February 21, 2006, the ECJ issued its decision in the case C-419/02 (BUPA Hospitals and Goldsborough Developments).

Context: Sixth VAT Directive – Article 10(2) – Chargeability of VAT – Payment of amounts on account – Prepayments for future supplies of pharmaceutical products and prostheses.

Article in the EU VAT Directive

Article 10(2) of the Sixth VAT Directive (Articles 63, 64, 65 and 66 of the EU VAT Directive 2006/112/EC).

Article 63 (Chargeable event)
The chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied.

Article 64
1. Where it gives rise to successive statements of account or successive payments, the supply of goods, other than that consisting in the hire of goods for a certain period or the sale of goods on deferred terms, as referred to in point (b) of Article 14(2), or the supply of services shall be regarded as being completed on expiry of the periods to which such statements of account or payments relate.
2. Continuous supplies of goods over a period of more than one calendar month which are dispatched or transported to a Member State other than that in which the dispatch or transport of those goods begins and which are supplied VAT-exempt or which are transferred VAT-exempt to another Member State by a taxable person for the purposes of his business, in accordance with the conditions laid down in Article 138, shall be regarded as being completed on expiry of each calendar month until such time as the supply comes to an end.
Supplies of services for which VAT is payable by the customer pursuant to Article 196, which are supplied continuously over a period of more than one year and which do not give rise to statements of account or payments during that period, shall be regarded as being completed on expiry of each calendar year until such time as the supply of services comes to an end.

Member States may provide that, in certain cases other than those referred to in the first and second subparagraphs, the continuous supply of goods or services over a period of time is to be regarded as being completed at least at intervals of one year.

Article 65
Where a payment is to be made on account before the goods or services are supplied, VAT shall become chargeable on receipt of the payment and on the amount received.

Article 66
By way of derogation from Articles 63, 64 and 65, Member States may provide that VAT is to become chargeable, in respect of certain transactions or certain categories of taxable person at one of the following times:
(a) no later than the time the invoice is issued;
(b) no later than the time the payment is received;
(c) where an invoice is not issued, or is issued late, within a specified time no later than on expiry of the time-limit for issue of invoices imposed by Member States pursuant to the second paragraph of Article 222 or where no such time-limit has been imposed by the Member State, within a specified period from the date of the chargeable event.
The derogation provided for in the first paragraph shall not, however, apply to supplies of services in respect of which VAT is payable by the customer pursuant to Article 196 and to supplies or transfers of goods referred to in Article 67.

Facts

The order for reference shows that BUPA Hospitals and BUPA Gatwick Park Hospital Ltd (hereinafter ‘BUPA Gatwick Park’) are each part of the BUPA Group, and also, for the purposes of the second subparagraph of Article 4(4) of the Sixth Directive, of the BUPA VAT group.
For some years, up to and including 1997, BUPA Hospitals carried on the business of, inter alia, running a large number of private hospitals. In accordance with a decision of the Court of Appeal in proceedings between BUPA Hospitals and the Commissioners which commenced in 1993, BUPA Hospitals’s supplies of drugs and prostheses to patients in its hospitals were zero-rated for VAT purposes, which enabled BUPA Hospitals to deduct the input VAT on purchases of those goods from its suppliers.
Following the refusal on 24 July 1997 by the House of Lords to grant the Commissioners leave to appeal, the United Kingdom Government announced, on 13 August 1997, its intention to bring in early legislation to remedy the effect of the Court of Appeal’s decision.
The national court observes that, following the announcement of that forthcoming legislation, the BUPA Group decided to use prepayment arrangements. The theory was that a trader whose supplies are zero-rated and who can therefore recover input VAT on purchases of drugs and prostheses to the extent to which they are used or to be used in making taxable supplies, contracts to buy in goods and services in anticipation of a change in the law. The trader then claims relief for input VAT for the period when payment was made or when an invoice was issued, notwithstanding that delivery might take place in a later accounting period.
For the purposes of those arrangements, it was decided to use a company in the BUPA group as the supplier, so as to keep the prepayment within the group. The company chosen was BUPA Medical Supplies Ltd (at that time still called Goldsborough Retirement Property Services Ltd, hereinafter referred to as ‘BUPA Medical’), a company in the Goldsborough group acquired early in August 1997 by the BUPA Group, which had subsequently become a shell. That company, although in the BUPA group, was not in the same VAT group as BUPA Hospitals.
The order for reference states that, in order to avoid the risk that the Commissioners might find some reason for delaying repayment of VAT, it was decided that another company in the Goldsborough Group, namely Goldsborough Developments, a company which operated four private hospitals and was also in a different VAT group from that of BUPA Hospitals, should enter into a prepayment arrangement for the same amount and within a co-terminous accounting period with a supplier in the BUPA VAT group. BUPA Gatwick Park, which was another shell company at the time, was selected as the second supplier under the prepayment arrangements.
On 5 September 1997 board meetings were held of the four companies involved. The boards of BUPA Hospitals and BUPA Medical decided to enter into two contracts for the purchase and supply of drugs and prostheses, respectively.
At the board meeting of BUPA Hospitals, it was resolved to make a prepayment of GBP 60 million plus VAT for the purchase of drugs and GBP 40 million plus VAT for the purchase of prostheses from BUPA Medical.
On the same day, a special resolution was passed changing the name of Goldsborough Retirement Property Services Ltd to BUPA Medical and altering its objects to include dealing in pharmaceutical products and prostheses.
Also on 5 September 1997, BUPA Medical issued invoices to BUPA Hospitals for GBP 60 million, plus GBP 10.5 million VAT, for the supply of drugs, and for GBP 40 million, plus GBP 7 million VAT, for the supply of prostheses.
On the same date, the boards of Goldsborough Developments and BUPA Gatwick Park decided to enter into two contracts for the purchase and supply of drugs and prostheses, respectively.
The board of Goldsborough Developments resolved to make payments forthwith to BUPA Gatwick Park of GBP 50 million plus VAT for the purchase of drugs and GBP 50 million plus VAT for the purchase of prostheses.
On the same day, BUPA Gatwick Park issued two invoices to Goldsborough Developments: for GBP 50 million, plus GBP 8.75 million VAT, for the supply of drugs, and also for GBP 50 million, plus GBP 8.75 million VAT, for the supply of prostheses.
According to the order for reference, the contracts on the basis of which the prepayments were made were similar. Those contracts stipulated that:
- the buyer was to pay the contractual price to the seller on the contract date;
- the products covered were those described in the schedule, and the schedule could be amended by agreement between the parties;
- the seller would deliver those products, or some of them, in accordance with further instructions from the buyer until the total delivered value was equal to the contract price;
- either party could terminate the contract by giving seven days’ notice, and
- in that case, the buyer would recover the contract price less the value already delivered at the date of termination.
According to the national court, the schedule was the same for the various contracts and contained a composite list of several hundred drugs, prostheses and other goods. The national court observes that it was clear that none of the directors of any of the four companies had paid attention to the contents of that document.
According to the order for reference, those arrangements, if successful, would enable the BUPA Group to avoid a loss of cashflow and to avoid paying the Commissioners any VAT under them. The BUPA VAT group was able, in its VAT return for the period ending in November 1997, to account for input VAT of GBP 17.5 million in respect of purchases by BUPA Hospitals from BUPA Medical, matched by output VAT of GBP 17.5 million in respect of sales by BUPA Gatwick Park to Goldsborough Developments. The Goldsborough Group, which was separate from the BUPA VAT group, could do likewise: its VAT return included input VAT of GBP 17.5 million in respect of Goldsborough Developments, purchases from BUPA Gatwick Park and output VAT of GBP 17.5 million in respect of BUPA Medical sales to BUPA Hospitals.
On 8 September 1997, Midland Bank was instructed to transfer from the account of another company in the BUPA group, BUPA Investments Ltd (‘BIL’), a total sum of GBP 235.5 million, and to credit GBP 118 million and GBP 117.5 million to the accounts of BUPA Hospitals and Goldsborough Developments respectively. Monthly interest was charged at the average overnight base rate for each month.
The same day, Midland Bank was instructed to transfer GBP 117.5 million, first from BUPA Hospitals to BUPA Medical, thereafter from Goldsborough Developments to BUPA Gatwick Park, and then back once more to BIL. BUPA Medical and BUPA Gatwick Park were credited with interest on the amounts of their deposits with BIL.
On 18 November 1997, the VAT (Drugs, Medicines and Aids for the Handicapped) Order (SI 1997/2744) was laid before Parliament. It took effect from 1 January 1998. It amended Group 12 of Schedule 8 to the VAT Act 1994 by removing supplies by private health providers in the United Kingdom from the zero-rating schedule. They became exempt supplies. As a result, in principle input VAT on such products can no longer be deducted.
Arrangements to implement the terms of the prepayment agreements between BUPA Hospitals and BUPA Medical were put into effect in September 1998. The order for reference states that the wholesale dealer’s licence for medicinal products was granted to BUPA Medical on 19 August 1998 and that all hospitals managed by BUPA Hospitals were ordering from BUPA Medical towards the beginning of December 1998. According to the order for reference, BUPA Hospitals is using its prepayments at a rate which will result in zero-rating being preserved for six to seven years after September 1998.
In the case of the prepayment agreements between Goldsborough Developments and BUPA Gatwick Park, the arrangements relating to the supplies of prostheses took effect in mid-2001, and those relating to the supplies of drugs took effect in November 2001. The order for reference states that serious problems appear to have arisen after the purchase of the Goldsborough group, which needed to be resolved before the ordering process could be implemented. For that reason, BUPA Gatwick Park did not obtain a licence for the sale of medicinal products until 8 June 2001.
The order for reference also states that, to enable it to participate in the pre-purchasing arrangement, Goldsborough Developments was required to borrow from BIL GBP 117.5 million, some seven times its turnover in 1997, which had the effect of increasing its debt position by some 270%. The Commissioners estimate that it would have taken between 50 and 100 years for Goldsborough Developments to use its prepayment in full.
By decision of 14 September 2000, the Commissioners refused to allow the deduction by BUPA Hospitals or Goldsborough Developments of input VAT paid by each of them under the prepayment arrangements of September 1997 on the supplies made by BUPA Medical and BUPA Gatwick Park.
On 25 February 2002, the VAT and Duties Tribunal, London, dismissed the appeal against the decision of the Commissioners, on the ground that BUPA Medical and BUPA Gatwick Park did not carry on any economic activity and made no supplies for VAT purposes. It held that every step in the prepurchase arrangements of September 1997 was taken solely for the purposes of avoiding VAT. Neither BUPA Medical nor BUPA Gatwick Park had any role in those arrangements other than to facilitate that objective.
However, the VAT and Duties Tribunal dismissed the Commissioners’ contention that a doctrine of abuse of rights denied BUPA Hospitals and Goldsborough Developments the right to deduct input VAT.
BUPA Hospitals and Goldsborough Developments appealed to the High Court of Justice of England and Wales, Chancery Division, and the Commissioners cross-appealed.

Questions

1. Having regard to the relevant circumstances, the relevant transactions and the position of the vendor companies, how is the expression “economic activity” within the meaning of Article 4(1) and (2) of [the Sixth Directive] to be interpreted?

2. Having regard to the relevant circumstances, relevant transactions, and the position of the vendor companies, how is the expression “supply of goods” in Article 5(1) of the [Sixth] Directive to be interpreted?

3. (a) Is there a principle of abuse of rights and/or abuse of the law which (independently of the interpretation given to the Directive) is capable of precluding the right to deduct input tax?

(b) If so, in what circumstances would it apply?
(c) Would it apply in circumstances such as those found by the [VAT and Duties] Tribunal?

4. Does it make any difference to the answers to Questions 1 to 3 above if payment is made in respect of the relevant transactions at a time when any onward supply of the goods would have been an exempt supply with refund of VAT at the preceding stage as permitted by Article 28(2)(a) of the Directive?

5. How is the Directive to be interpreted with particular reference to the following questions? In circumstances such as the relevant circumstances and with reference to transactions such as the relevant transactions:

(a) should supplies be treated as having been made by the outside suppliers to the purchasing companies with no supplies being made to or by the vendor companies? or
(b) should supplies be treated as having been made by the outside suppliers to the vendor companies with no supplies being made by the vendor companies to the purchasing companies?

6. In circumstances where each vendor company, in the course of an economic activity, makes supplies to a purchasing company and:

(a) the purchasing companies have entered into agreements with the vendor companies to be supplied with goods;
(b) the goods are invoiced and paid for in advance of delivery;
(c) VAT is charged on the advance payment in accordance with the second subparagraph of Article 10(2) of the Directive;
(d) the goods are to be used by the purchasing companies in making supplies which, if made at the time of the payment, would have been exempt supplies with a right to refund at the preceding stage, but
(e) each purchasing company intends to take delivery of the goods under the agreements only if the law changes in such a way that the purchasing company’s use of the goods will be a use in making exempt supplies without a right of refund

how are Article 17 of the Directive and the rules on deduction to be interpreted? (With reference to paragraph (e), if the law does not change in the way described, the purchasing companies are entitled to terminate their contracts with the vendor companies and claim refunds of the prices paid. In the relevant transactions, the contracts between the purchasing companies and the vendor companies contain provisions permitting such terminations.)

7. The VAT and Duties Tribunal found (at paragraph 89 of the Decision) that “none of the individuals in a position to take decisions for [BUPA Medical and BUPA Gatwick Park] … had any motive or purpose of substance other than to carry through the VAT avoidance scheme”. The Appellants have, in their Notice of Appeal to the High Court, challenged that finding of fact. If that finding of fact were to be set aside on appeal would it make any, and if so, what, difference to the answers to Questions 1 to 6 above inclusive?’

AG Opinion

N/A

Decision

Prepayments of the kind at issue in the main proceedings whereby lump sums are paid for goods referred to in general terms in a list which may be altered at any time by agreement between the buyer and the seller and from which the buyer may possibly select articles, on the basis of an agreement which he may unilaterally resile from at any time, thereupon recovering the unused balance of the prepayments, do not fall within the scope of the second subparagraph of Article 10(2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995.

Summary

Advance payments of a lump sum paid for goods generally described on a list that can be changed at any time by mutual consent of the buyer and seller and which will allow the buyer to choose the goods, if necessary, on the basis of a contract which he may terminate unilaterally at any time with recovery of all advances not yet used do not fall within the scope of the second subparagraph of Article 10(2) of the Sixth Directive.

Source