Open market value VAT rules can apply to earmarked goods sold through non-taxable persons for retail resale.

A statutory VAT direction fixing tax by reference to open market value applied to goods supplied to non-taxable persons for onward retail sale where the business structure was directed to large-scale retail distribution. Goods already ordered by customers and earmarked for resale could be treated as goods to be sold by retail, and the business did not need to be split into separate branches to satisfy that language. The direction also applied even where each item was not immediately individually identified, because VAT is self-assessed and traders must keep the information needed for correct assessment. The open market value basis did not contravene Community law, as the derogation was limited to what was strictly necessary to prevent tax avoidance or evasion.

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Issues: (i) Whether the business carried on by the taxable person consisted, in whole or in part, of supplying goods to non-taxable persons to be sold by retail. (ii) Whether the direction fixing tax by reference to open market value applied to supplies of goods earmarked for onward sale. (iii) Whether the direction or its application contravened Community law.

Issue (i): Whether the business carried on by the taxable person consisted, in whole or in part, of supplying goods to non-taxable persons to be sold by retail.

Analysis: Paragraph 3 of Schedule 4 to the Value Added Tax Act 1983 applied where part of a business consisted in supplying goods to non-taxable persons for retail sale. Goods already ordered by customers and earmarked for onward sale could properly be treated as goods to be sold by retail. The business need not be divided into separate branches or departments for the statutory language to be satisfied, and the commercial structure was directed to large-scale onward retail sale.

Conclusion: The requirement was satisfied, and the issue was answered in favour of the Revenue.

Issue (ii): Whether the direction fixing tax by reference to open market value applied to supplies of goods earmarked for onward sale.

Analysis: VAT is a self-assessed tax, and the trader must record or obtain the information needed for correct assessment. Where goods supplied to non-taxable persons were already earmarked for onward sale, the direction could be applied to those supplies. The absence of an immediate identification of each individual item did not prevent application of the statutory direction.

Conclusion: The direction applied to the earmarked supplies, and this issue was answered in favour of the Revenue.

Issue (iii): Whether the direction or its application contravened Community law.

Analysis: The derogation authorised under the Sixth Directive was valid only to the extent strictly necessary to prevent tax avoidance or evasion. The concept of open market value was not vague or imprecise, and where the final consumer price was unknown or excessively difficult to ascertain, national authorities could use open market value as the taxable amount. On the facts, use of the catalogue price as the best available indicator did not exceed what was necessary to prevent avoidance.

Conclusion: There was no contravention of Community law, and this issue was answered in favour of the Revenue.

Final Conclusion: The appeal succeeded because the statutory direction was valid and applicable, and its use did not infringe Community law.

Ratio Decidendi: A statutory derogation permitting taxation by reference to open market value is validly applied where the business structure is designed to channel goods through non-taxable persons for retail resale, and the chosen taxable base remains no wider than is strictly necessary to prevent tax avoidance.

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