QBCOF 95/1249/D
BAILII Citation Number: [1996] EWHC 384 (QB)
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(Mr. Justice Dyson)
Royal Courts of Justice
Strand
London WC2

Wednesday, 8th May 1996

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE MILLETT
and
MR. JUSTICE TUCKER

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THE COMMISSIONERS OF CUSTOMS & EXCISE	Appellants

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BRITISH TELECOMMUNICATIONS PLC	Respondents

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MR. K. PARKER QC (instructed by the Solicitor of Customs & Excise, London SE1) appeared on behalf of the Appellants.
MR. D. MILNE QC and MR. A.J. SHIPWRIGHT (instructed by the Solicitor of British Telecommunications Plc, London EC1) appeared on behalf of the Respondents.
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J U D G M E N T
Wednesday, 8th May 1996

LORD JUSTICE NOURSE:     I will ask Lord Justice Millett to deliver the first judgment.

LORD JUSTICE MILLETT:     This is an appeal by the Commissioners of Customs and Excise from a judgment of Mr. Justice Dyson given on 16th January 1995, when he dismissed an appeal by the taxpayer, British Telecommunications Plc ("BT"), from a decision of a Value Added Tax Tribunal which discharged an assessment to output tax.  The appeal raises a question of general importance both in the United Kingdom and in other Member States on the common system of value added tax upon which there is as yet no decision of the European Court of Justice.

The case is concerned with the liability to output tax of a taxable trader who makes continuous supplies of goods or services and invoices and receives payment from customers at periodic intervals in the course of a continuing contractual relationship with the customer.  Such arrangements are commonplace, particularly in relation to the supply of utilities, though they are not confined to such cases.  Under the domestic legislation of the United Kingdom, where there are continuous supplies of goods or services, the supplier must account for output tax at the date when payment for the supply is received or at the date when the supplier issues a tax invoice relating to the supply, whichever is the earlier.  The question on this appeal is concerned with the supplier's liability to output tax where the customer, in settling his present liability, mistakenly makes an overpayment and the supplier, instead of repaying the amount of the overpayment immediately, retains it and credits the customer with it when next invoicing him.  Customs and Excise contend that the amount of the overpayment must be treated as a payment on account of future supplies, with the result that value added tax is payable at the date of receipt of the overpayment.  If the overpayment were to be treated as a payment on account, this result would follow.  The judge, however, held that it was not and could not be treated as a payment on account, with the result that value added tax was not payable in respect of the overpayment until the date of the next invoice when the customer received credit for the payment. 

I am in such full agreement with the reasoning and conclusions of the judge, on which I find it impossible to improve, that I have been minded to dispose of this appeal by saying that it should be dismissed for the reasons given by the judge, without adding any reasons of my own.  It is only out of courtesy to the full and careful arguments of counsel that I give a reasoned judgment of my own.

THE FACTS
The facts are taken from the judgment of the judge.  BT supplies continuous telecommunications services to customers, issues invoices to customers quarterly, and accounts for output tax quarterly on the basis of the invoices issued in the relevant quarter.  From time to time customers mistakenly make overpayments of the amounts due from them.  Where the overpayment is deliberate and stated to be so by the customer, BT accounts for output tax on the amount of the overpayment when it is received.  In the overwhelming majority of cases, however, the overpayment is accidental.  The most common mistake is double payment, once when the customer receives the original invoice and once when he receives a reminder, the customer having forgotten that he has already paid.  Sometimes a customer will pay a previous invoice;  sometimes he will misread the amount due or transpose the figures;  sometimes he will have confused his telephone bill with another bill, say for gas.  In many cases BT is unaware of the reason for the mistake unless informed by the customer;   sometimes even the customer cannot explain the reason.    

BT's general terms and conditions of supply make no provision in respect of overpayments mistakenly made by customers.  It is conceded by Customs and Excise that, in the absence of a contractual provision to the contrary, the payment gives rise to an immediate liability on the part of BT to make repayment to the customer of the amount of the overpayment.  BT, however, does not do so.  It has 20 million customers, and the administrative inconvenience of communicating with each customer who has made an overpayment and the cost of making immediate repayment would probably be out of all proportion to the individual sums involved.  Accordingly, BT makes repayment only if asked to do so by the customer.  Unless repayment is requested, BT credits the customer's running account with the whole amount received, including the amount of the overpayment, and takes it into account when calculating the sum payable on the next quarter's invoice.  It does not account for output tax on the overpayment until the invoice is issued for the quarter following receipt of the overpayment (that is to say, the invoice which contains the credit entry), which it disregards in calculating the amount of tax chargeable.

Although the individual amounts involved are small, the total sums are substantial.  In a two-month period BT received no less than £17m in overpayments by customers.  The value added tax on these payments amounts to £2.6m.

THE LEGISLATION
Value added tax is a European tax and accordingly the governing legislation is the EC Council Sixth Directive 77/388EEC ("the Sixth Directive").  This establishes the basic system, and the domestic legislation which implements it must be interpreted, so far as possible, in conformity with the Sixth Directive.

Under the Sixth Directive, value added tax is a tax on "the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such":  Article 2;  and the taxable amount is "everything which constitutes the consideration which has been or is to be obtained by the supplier from the ... customer ...":  Article 11.1(a).  Decisions of the European Court of Justice establish the need for a direct link between the service provided and the consideration for that service.

At the time of the transactions in question in the present case the legislation in force in the United Kingdom was the Value Added Tax Act 1983.  That Act has since been replaced by the Value Added Tax Act 1994, but there is no material difference between the two Acts for present purposes.  I shall refer to the provisions of the 1983 Act and the regulations made thereunder.  The provisions of Articles 2 and 11 of the Sixth Directive have been given effect in the United Kingdom by Sections 2 and 10 of the 1983 Act.

The basic tax point (that is to say, the time at which output tax is chargeable) is by reference to the time when the goods are delivered or the services are performed:  see the first paragraph of Article 10.2 of the Sixth Directive and Section 4 of the 1983 Act.  The tax point is, however, brought forward or accelerated whenever "a payment is to be made on account before the goods are delivered or the services are performed", when the tax is chargeable on receipt of the payment and on the amount received:  see the second paragraph of Article 10.2 of the Directive.  This is given effect in the United Kingdom by Section 5(1) of the Act, which, so far as material, provides that if, before the time at which the tax would otherwise be chargeable, the person making the supply "receives a payment in respect of it", the supply shall, to the extent covered by the payment, be treated as taking place at the time when the payment is received.

Neither of these provisions applies directly in the present case.  The third paragraph of Article 10.2 of the Directive authorises Member States "by way of derogation from the above provisions" to provide that the tax shall become chargeable, for certain transactions or for certain categories of taxable person, either no later than the issue of the invoice or no later than receipt of the price.  The United Kingdom has taken advantage of this to enact a special regime for continuous supplies of services.  Regulation 23(1) of The Value Added Tax (General) Regulations 1985 provides as follows:
	"...  Where services are supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time, they shall be treated as separately and successively supplied at the earlier of the following times -
	(a)  whenever a payment in respect of the supplies is received; or
	(b)  whenever the supplier issues a tax invoice relating to the supplies."

Accordingly, the question which falls for decision in the present case is whether, where there is a continuous supply of services, the amount of an inadvertent overpayment by a customer in excess of the amount for which he has been invoiced, which is retained by the supplier and credited to the customer on his next invoice, falls to be treated as paid "on account of" or received "in respect of" future services.

CONCLUSION
In my judgment the answer to this question is plain.  There is nothing in the Sixth Directive or in the 1983 Act which requires it to be given an affirmative answer.  In the absence of an express provision to this effect, the legal characterisation of the overpayment is a question of English domestic law and, as such, depends upon the intentions of the parties.  The inadvertent overpayment of a present debt is not a payment on account of a future liability.  So far as the excess is concerned, it is simply a payment made under a mistake of fact.  It is not paid on account of or in respect of future supplies;  the customer intends it in payment for past supplies;  and, since it is not due when made, it is made for no consideration.  Under English law, the recipient is under a legal obligation to repay the amount of the overpayment immediately it is received.

The existence of this legal obligation is conceded by Customs and Excise and is, in my judgment, destructive of their claim.  If the money is repayable notwithstanding the continuation of the supply, then it cannot be a payment made on account of or in respect of the continuing supply.  To counsel's rhetorical question, "If the payment is not in respect of future services, what is the nature of the payment?" the judge, in my view correctly, answered that it is simply a payment made by mistake.

Nor is the overpayment received by BT in respect of future supplies.  The fact that BT credits the amount of the overpayment to the customer's running account in its books does not amount to this.  It is no more than an internal and uncommunicated acknowledgment by BT that it is liable to repay the amount of the overpayment.  It is not an appropriation by BT of the amount in question towards the customer's future liability.  Under English law, a creditor has no legal right (without the agreement of his debtor) to appropriate a payment to a debt unless the debt to which it is appropriated is presently due and payable.  In the present case, however, there is no debt due in respect of future supplies until the relevant invoice is issued.  Until then, there can be no question of appropriation by BT without the agreement of the customer.  Moreover, an appropriation which is not communicated to the debtor is ineffective:  see Simson v. Ingham (1823) 2 B. & C. 65.

This analysis is confirmed by a consideration of the position when the later invoice is issued and contains a credit of the amount previously overpaid.  This, of course, extinguishes the supplier's admitted liability to repay.  It follows, however, that BT is correct in paying value added tax on the gross amount of the invoice, disregarding the amount of the credit, for under Article 11.1(a) of the Directive the consideration for the new supply consists not only of the net amount receivable from the customer but also of the amount of the liability of the supplier which is discharged by the credit.  If the analysis of Customs and Excise were accepted, output tax would appear to be payable twice in respect of the same output.  In my judgment, however, both the overpayment and the credit fall outside the ambit of the tax.  The overpayment does so because it is not a payment for services at all, and the credit because it is not a deduction for money paid in advance for future supplies but a means of discharging the debt due from the supplier to the customer in respect of past supplies.

Counsel for Customs and Excise submitted that BT must be treated as conducting itself as if there were a contractual term which entitled it to retain for its own use, without enquiry of the customer, overpayments made by him and to credit the amount of such overpayments to the customer's next statement of account, unless the customer, on discovering his mistake, expressly requires BT to make repayment.

There are several difficulties with this argument, not least of which is the fact that there is no warrant for such treatment.  In the first place, in the absence of any communication with the customer, BT's conduct is equally consistent with the absence of any such contractual term.  In the second place, the argument is inconsistent with the legal requirements for appropriation of payments to debts to which I have already referred.  In the third place, I must not be taken as assenting to the proposition that it would make any difference if the contract with the customer contained an express term to the effect suggested.  Even in such a case, the amount of the overpayment would still be repayable by BT on demand, with the consequences which I have already indicated.  In such a case, I would for my part characterise the customer's agreement that BT should credit him with the amount of the overpayment and deduct it from the next invoice rather than make immediate repayment as an agreement on the manner and timing of the discharge of an admitted liability by BT to the customer and not as an agreement by the customer to make a payment on account of future supplies.

I would dismiss this appeal.

MR. JUSTICE TUCKER:     I agree.

LORD JUSTICE NOURSE:   I also agree.

The essential flaw in the reasoning of Mr. Parker QC, for the Commissioners, is exposed by his recognition of the need to establish that BT is conducting itself as if there were a contractual term entitling it to retain an overpayment made mistakenly and to credit it against the customer's next bill, unless he requests repayment in the meantime.  That is something which cannot be established, for the simple reason that the overpayment, having been made under a mistake of fact, is repayable immediately, whether or not repayment is requested.

The mistake of fact made by the customer lies in his belief that the overpayment is made in return for services already supplied and billed.  Having been made in that belief, the overpayment cannot be said to be received by BT "in respect of" later supplies within regulation 23(1)(a) of the Value Added Tax (General) Regulations 1985 or to be made "on account before ... the services are performed" within Article 10.2 of the Sixth Directive.  If it can be said to be received in respect of any supplies, it can only be in respect of those already made.  Equally, it can only be said to be made on account of services already performed.  Moreover, I entirely agree with Mr. Justice Dyson that before a payment can be one made on account within Article 10.2 it must be "consideration" for the services, as interpreted in the case law of the Court of Justice of the European Community.

While heeding Mr. Parker's admonition that it is not for the courts of a member state to narrow that concept by reference to its own jurisprudence, I see nothing in the European authorities which could characterise the overpayments here in question as consideration for services not yet supplied and billed.  That appears most clearly from paragraph 14 of the judgment of the court in Tolsma v. Inspecteur der Omzetbelasting Leeuwarden   [1994] STC 509, at p.516A-B:
	"It follows that a supply of services is effected `for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient."

For the reasons already given, it cannot be said that the overpayment received by BT constitutes the value actually given in return for the service thereafter to be supplied to the customer.

For myself, I desire to reserve my position in regard to any question which might arise on contracts containing a provision to the effect that overpayments may be retained against future bills or the like.  Subject to that point, for the reasons given by Lord Justice Millett and myself, I think that Mr. Justice Dyson's decision of this question was entirely correct.  Accordingly, I too would dismiss this appeal.

Order:	appeal dismissed with costs;  leave to appeal to the House of Lords refused.