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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> BMW AG & Ors, R (on the application of) v HM Revenue & Customs [2008] EWHC 712 (Admin) (09 May 2008) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2008/712.html Cite as: [2008] BVC 519, [2008] STI 1330, [2008] BTC 5399, [2008] EWHC 712 (Admin), [2008] STC 3090

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th May 2008

Mr Justice Tugendhat :

1. This case is about VAT and its effects on cash flow for exporters and for the public revenue. Most traders account for VAT quarterly. At one month after the end of each accounting period they account to Her Majesty's Revenue and Customs ("HMRC") for the tax due on what they have supplied during the accounting period to their customers ("output tax"), after deducting the tax that they have paid to their suppliers ("input tax"). The balance will normally be in favour of HMRC. Traders in that position are known as "payment traders". Some supplies, including exports, are zero rated. A trader whose business is largely exporting will therefore find that the balance at the end of his VAT accounting period will normally be in his favour. In other words, he will be entitled to repayment from HMRC of the input tax he has paid to his suppliers, after deducting any output tax he may have received from his customers. Traders in that position are known as "repayment traders". Exporters, and other repayment traders, commonly account for VAT monthly.
2. A payment trader who pays his suppliers on delivery to him, and is paid by his customers on delivery by him, will enjoy a cash flow benefit. He will have the use of the output tax (less the input tax) for a period before he has to pay it over to HMRC. Whether a particular trader actually enjoys that cash flow benefit, and if so to what extent, will naturally depend upon the dates on which he in fact pays his suppliers, and is in fact paid by his customers. The later he pays his suppliers, and the sooner he is paid by his customers, the greater the cash flow benefit to the trader, and vice versa. In the case of large payment traders there is a scheme requiring the trader to make payments on account, and where this applies it will reduce any cash flow benefit that the trader enjoys.
3. A repayment trader will be in a very different cash flow position, because his customers will not pay to him any tax on his outputs. If he pays his suppliers on delivery to him, he will have to fund the input tax on those supplies from his own resources until he is refunded by HMRC. But again, whether a particular trader actually suffers that cash flow burden, and if so to what extent, will depend upon the dates on which he in fact pays his suppliers.
4. Since VAT was introduced in 1972 provision has been made to alleviate the cash flow burden potentially falling upon repayment traders by permitting them to adopt monthly accounting periods. This benefit to repayment traders is, of course, exactly matched by a corresponding burden to the Revenue. HMRC commonly has to refund to the repayment trader the input tax on supplies to him before receiving payment from his supplier of the output tax on the supplies of the same goods.
5. There are before the court three applications for permission to proceed with applications for judicial review. The applications have been ordered to be heard together, with the hearing of the application for judicial review to take place at the same hearing if permission is granted. The three applicants are BMW AG ("AG"), Jaguar Cars Export Ltd ("JCE") and Land Rover Exports Ltd ("LRE"). In the period up to and including the hearing JCE and LR were both associated with the Ford Motor Company Ltd ("FMCL"), and Mr Neale-Smith of that company conducted discussions on behalf of both JCE and LR with HMRC.
6. The issues that arise on the three applications are in part the same and in part very similar, except that there is an issue of delay in relation to JCE and LR, which does not arise in relation to AG. I shall therefore deal with the application of AG first, and those of JCE and LR second, and together.
THE APPLICATION OF BMW AG
7. AG buys Mini cars from the manufacturer, BMW (UK) Manufacturing Ltd ("UKM"), which is a subsidiary of BMW (UK) Holdings Ltd ("BUK"). AG acquires all of UKM's vehicle production, whether for the UK domestic market or for export. AG also acquires goods and services from third party UK suppliers. BUK and UKM are part of a UK VAT Group ("the BUK VAT Group"). AG is separately registered in the UK for VAT and is not part of the BUK VAT Group. It is a repayment trader. Since 1 December 2002 it has been permitted to adopt monthly accounting periods.
8. On 22 June 2006 HMRC directed AG that it was no longer allowed to make VAT returns in respect of period of one month, and was instead required to make returns in respect of the same three month period as UKM.
9. AG applies for permission to apply for an order quashing that decision. It does so on two grounds, first that HMRC had no power to make the direction, and secondly, if it did have power, that the decision was irrational.
10. AG is a company incorporated in Germany. Its principal business comprises the manufacture of cars in Germany and acquiring 'at the factory gate' vehicles manufactured outside Germany by suppliers under contract to it. AG accounts for VAT monthly. AG acquired BUK (formerly known as Rover Group Holdings Limited) on 16 March 1994. BUK's principal subsidiary at the time was Rover Group Limited ("RGL"). As part of a reorganisation in 2000 prior to the sale of RGL by BUK, the business of manufacturing motor vehicles at Cowley, Oxford was transferred to a newly formed, wholly owned subsidiary of BUK, namely UKM. The BUK VAT Group has a quarterly accounting period ending January, April, July and October. Another company associated with AG is Rolls Royce Motor Cars GmbH ("GmbH") which is on different quarterly accounting periods, ending March, June, September and December. Finally, so far as this litigation is concerned, there is the associated company, BMW Financial Services (GB) Ltd ("BMW(GB)"), which is on a third quarterly accounting period ending February, May August and November. AG sells goods for the UK market back to ("BMW(GB)").

APPLICATION FOR MONTHLY VAT RETURNS

11. On 25 October 2002 AG wrote to Her Majesty's Customs and Excise (now HMRC, as I shall refer to it) requesting that it be allocated monthly VAT return periods with effect from 1 December 2002. At that time it was on quarterly returns, the current one being due to end on 30 November 2002. The writer explained that because of the level of its export business AG was in a permanent VAT repayment position and that it was envisaged that this would continue for the foreseeable future. He enquired if any additional information was required. In evidence before me AG state candidly that the reason for this application was that it wished to ameliorate the disadvantageous cash flow consequences inherent in the VAT periodic system for repayment traders by reducing the period during which it suffered loss of use of its input tax. It also states that this must have been obvious to HMRC.
12. HMRC did not make any request for information from AG. They gave what they later said was a routine reply on 14 November 2002. It contains permission, which is expressed to persist only so long as a condition is complied with, as follows:

"This is to inform you that the application for monthly returns has been approved and you will be expected to submit returns on this basis… Please note that if monthly returns are rendered late, the computer automatically reverts monthly returns periods back to quarterly returns without notification. If this occurs you will then have to re-apply for monthly returns".

THE POLICY OF HMRC

13. The original purpose of providing for monthly staggers (that being the expression often used by HMRC to refer to accounting periods) was explained to Parliament in 1972. It was to alleviate the burden of the cash flow disadvantage of VAT for repayment traders. The explanatory note to clause 30 of the Finance Bill 1972 stated:

"4. Traders whose outputs consist wholly or mainly of zero-rated supplies of goods or services (eg exporters and food producers) will normally claim a net repayment of tax at the end of each accounting period. If they were able to claim a repayment only once every three months, they could experience some difficulty in financing the temporary tax burden. To overcome this problem as far as possible, regular repayment traders … will be permitted to lodge their claims once a month … it will usually be in a repayment trader's interest to submit a claim as soon as possible after the end of the accounting period, and he will usually therefore do so…"

14. In May 2004 the policy of HMRC was set out in the VAT Manual Section V1-24A headed "Stagger Manipulation and the Alignment of Accounting Periods between Associated Businesses". The Introduction states that "This guidance provides best practice on dealing with cases of perceived manipulation of stagger to obtain a cash flow advantage". In para 4.2 it states:

"Our policy is that staggers be aligned if there is a consistent pattern of supplies between associated businesses, timed so that there is a VAT cash flow advantage to the business with little or no apparent commercial reason for the supplies to be timed as they are. We are particularly concerned about high value cases, especially where there is a suspicion that supplies are overvalued".

15. Para 6.1 of the Guidance sets out a number of factors to be considered and there is an Annex A which gives three illustrations. Illustration 2 is in certain respects similar to the facts in the present case (ie a company on a quarterly stagger making supplies to an associated exporter on a monthly stagger). There are two material differences: in the example given, the supplier invoices prematurely (ie in the first month of each quarter for the whole quarter) and the export company serves little commercial purpose other than facilitating the VAT cash flow benefit. It is the presence of one or both of these two factors which makes it understandable that HMRC characterise the example in the illustration as manipulation.
16. Two comments are to be made on the policy in para 4.2 in relation to the facts of this case. As to the first sentence of para 4.2, there is in the case of the BMW companies a consistent pattern of supplies between associated businesses, namely from UKM to AG. As to the timing, AG raises self-billed invoices in respect of the vehicles on every day that is a business day in Germany. The invoices are in respect of each car produced by UKM which is on that day a finished product. The time the invoice is issued counts as the supply to AG, and gives rise to the charge to VAT: Value Added Tax Act 1994 ss.1, 6(4) ("VATA"). Payment is made by bank transfer from AG on the 15^th of the month following that in which the invoice is raised. There is nothing in the timing of the invoices or the payments that could be described as manipulation, or out of the ordinary. There is a good commercial reason for the supplies to be timed as they are. HMRC have not suggested that the payment arrangements should be timed in any other way. But the effect of the timing is that there is a VAT cash flow advantage to UKM, such as is explained in para 2 above. UKM receives payment of the output tax from AG on the 15^th day of the second and third months of each quarter, but does not have to account for it to HMRC until the end of the first month of the next quarter. AG suffer a cash flow disadvantage as explained in para 3 above, but this is alleviated to the extent that it receives repayment from HMRC monthly, and does not pay for its purchases until the 15^th day of the month following the purchase. As to the second sentence of para 4.2, there is no suspicion in this case that supplies have been overvalued.
17. Since there is a commercial reason for the supplies to be timed as they are, there is nothing in the Policy as set out in the May 2004 document to suggest that it might apply to AG.
18. In May 2005 a guidance document V1-24A was re-issued by HMRC under the heading "Using the discretion to direct stagger: addressing stagger manipulation and suspected M[issing] T[rader] I[ntra] C[ommunity] fraud cases". Para 20.1 again states that it "provides best practice on dealing with cases of perceived manipulation of stagger to obtain a cash flow advantage". Para 21.1 is similar to the May 2004 para 4.2, but it includes a new second sentence:

"Similarly a direction may be issued where the primary motivation for the choice of stagger is to generate a cash flow advantage".

19. The new sentence enlarges the class of traders to whom the policy applies. If read on its own, this sentence would embrace most, if not all traders whose outputs consist wholly or mainly of zero-rated supplies of goods or services, whether or not they purchase their supplies from an associated company. That is to say, the new sentence would embrace substantially the whole class referred to in the explanatory note to the 1972 Bill. A supplier of goods will generally be motivated to choose the normal quarterly stagger, because that (rather than a monthly stagger) is more likely to give him a cash flow advantage (or alleviate any cash flow disadvantage) arising from VAT. And an exporter of goods (which makes no, or only relatively low value, supplies to customers in the UK) will generally be motivated to choose a monthly stagger to obtain a VAT cash flow advantage. While it is possible that there might be repayment traders who have some other motive for choosing a monthly stagger, the other motives suggested by HMRC are not likely to be common. Mr Pleming accepted that it is very difficult to think of commercial reasons for there being a mismatch of VAT accounting periods between an exporter and an associated company from which the exporter purchases supplies, but he submitted that does not mean that the policy is flawed.
20. In witness statements of Mr Harris and Ms Turner of HMRC three examples are given of motives other than cash flow for the choice of different staggers. One example given is where a business is able to demonstrate that a proposed change in accounting periods would lead to administrative or systems difficulties. But the witnesses comment that a proposed change from monthly to quarterly accounting would be likely to relieve administrative burdens, because it would reduce the number of VAT returns to be filed. A second example given by HMRC is where the trader is part of a multinational or international group, and varying the periods would affect the ability to file other statutorily or commercially required information. Again the witnesses comment that where company systems generate monthly reports for other reasons it is not hard to cumulate three monthly reports to derived quarterly figures. The third example given by HMRC is referred to at para 42 below.
21. However, the new sentence introduced into the policy in May 2005 was not intended to embrace all exporters, but is intended to embrace those who purchase all or most of their supplies from an associated company.
22. On 15 June 2005 HMRC issued a document headed "Business Brief" with a section headed "VAT: Aligning VAT accounting periods". It states that HMRC:

"continue to be concerned about situations in which businesses 'stagger' their VAT accounting periods in order to gain an unjustified and unintended cash flow benefit at the expense of the revenue".

23. The Business Brief goes on to state that HMRC:

"intend to continue to exercise [their power to align VAT periods between associated businesses] where there is little or no commercial rationale for the VAT period 'stagger' between the associated businesses besides obtaining the cashflow advantage. They may do so, notwithstanding that the usual policy for businesses expecting to make regular claims for repayment of VAT in other factual situations is to allow monthly returns."

24. This wording of the policy makes clear that the class of traders to whom the policy is to apply includes associated businesses with different VAT staggers. It is necessary to consider the distinction being drawn between situations "where there is little or no commercial rationale for the VAT period 'stagger' between the associated businesses besides obtaining the cashflow advantage" and "the usual policy … in other factual situations". As already noted, in practice the rationale for manufacturers and exporters to adopt different VAT staggers will almost always be the cashflow advantage, and this will be so whether they are associated or not. The Business Brief does not state that HMRC will exercise their powers wherever there are supplies from a manufacturer to an associated exporter. As I interpret the document, the usual policy will not apply where there are associated companies, and two conditions are both fulfilled: (1) they are on different staggers and (2) that is in order to obtain a cash flow benefit that is unjustified and unintended. These are separate conditions, which may or may not be present together.
25. It is the need for the cash flow benefit to be unjustified and unintended that explains the inclusion of such cases under the heading "addressing stagger manipulation". Understandably, much of the focus of the correspondence in this matter has been directed by AG to demonstrating that there has been no manipulation. Mr Peacock submits that HMRC have not made clear when a cash flow benefit is unjustified or unintended.
26. The Business Brief also goes on to make a statement which has given rise to separate submissions on behalf of the applicants:

"There is no intention to use these powers except in cases where a significant cash flow advantage arises and there is a need to protect the revenue".

27. Mr Peacock submits that HMRC has not made clear what is meant by "significant". On 2 November 2005, in response to a query about what was meant by "significant" in the Business Brief, HMRC wrote:

"In using the term, we do not have in mind either a specific amount of tax throughput or cash flow advantage. It applies to cases where there are large amounts involved but also includes smaller cases that we would wish to tackle because they are particularly abusive as well as groups of similar cases that are individually small but cumulatively significant. But the key point is that it is intended to indicate that the majority of businesses will not be affected".

28. On 13 September 2006 HMRC wrote a letter giving this explanation:

"The Commissioners will consider this in an absolute sense rather than in any relative sense, and from their own perspective rather than that of BMW. They will give the word 'significant' its usual everyday meaning of something that has a degree of importance. They will ask, 'is £50m (for example) deferred for up to two months a significant sum for HMRC to be without?" rather than "is £50m a significant sum for BMW to retain for up to two months in the context of annual VAT of £300m?" The Commissioners have decided that the answer to the question. "is £50m deferred for up to two months a significant sum for HMRC to be without?" is in the affirmative'."

THE DECISION MAKING PROCESS

29. On 11 July 2005, following a meeting on 30 June 2005, HMRC wrote confirming that they were "currently concerned about the possible adverse effects on the flow of VAT revenue caused as a result of mismatched VAT accounting periods between connected companies". The letter referred to the Business Brief as explaining the policy. The writer's description of HMRC's concerns is focussed on the mismatched accounting periods, rather than on the there being "an unjustified and unintended cash flow benefit at the expense of the revenue", which is what the Business Brief also directs attention to. The letter expressed their concern in relation to two manufacturing companies, one being UKM. The writer continued :

"There is no suggestion that the basis for the setting up of the separate VAT registrations is other than as a result of a perfectly well founded and commercial rationale. However, that in itself does not seem to provide any good commercial reason for the companies concerned to be on unaligned VAT accounting periods nor for the re-invoicing companies often being in the position of being able to recover, as input tax, tax charged to them up to two months before (that same) tax is accounted for as output tax other than, of course, for the purpose of achieving a VAT cash flow advantage. The same principles will apply to any associated VAT registrations, groups or otherwise, which have different VAT accounting periods….

It seems to me that there are a variety of possible courses of action by which the Commissioners concerns could be addressed:

all could be accorded monthly tax periods to match … AG's tax periods

all could be placed on the same quarterly tax periods …

all, assuming the control requirements are met, could form a single VAT group."

30. HMRC's letter made clear that they accepted that there was "a perfectly well founded and valid commercial rationale" for the setting up of the separate VAT registrations. What HMRC queried, and the only thing they queried, was that the VAT accounting periods were not aligned, and that the exporting "companies were often being in the position of being able to recover, as input tax, tax charged to them up to two months before (that same) tax is accounted for as output tax".
31. On 10 August 2005, Mr Wharton replied on behalf of AG setting out the commercial rationale for their arrangements, which are not in dispute. He stated that the unaligned VAT accounting periods were a consequence of the ordinary operation of the VAT system. He drew a comparison with an exporter which is not associated with its supplier. He argued that it was inequitable to treat an exporter that sources its products from fellow group companies differently from an exporter that sources its products from unconnected third parties. Mr Wharton regretted that HMRC were considering withdrawing a previously given discretion when there was no change in the underlying circumstances. The letter also stated that goods are supplied and invoiced on a continuous basis without any manipulation to seek to advance the repayment of any VAT.
32. On 16 September 2005 Mr Wharton wrote again to expand on the views he had expressed on 10 August. He addressed the particular circumstances of supplies between UKM and GB, and between UK and GmbH. This letter does not refer to AG. But he does say that there could have been removed from the VAT Group those entities that would generally be in a repayment position if separately registered and those entities could have applied to be on monthly returns. He added that he could provide data, if requested, to illustrate that no attempt has been made to deliberately manipulate the timing of invoicing.
33. There was further correspondence between the parties and a meeting. On 2 November 2005 HMRC wrote to the CBI with whom they were also having discussions on this topic. They wrote that routing transactions through associated businesses did not affect the amount of tax payable by the business, but they explained that in their view the effect of the different staggers was that it provided the business with an interest free loan of the VAT involved at the expense of the exchequer.
34. On 8 March 2006 Mr Hartnett, the Director General, wrote on behalf of HMRC to the Society of Motor Manufacturers and Traders. He used the words "manipulate" and "manipulation" to refer to the use of different staggers for which there was no rationale other than the obtaining of cash flow advantage. The letter goes on to say:

"This is not an attack on UK exporters. Our action is not confined to circumstances in which a separately constituted export company is an essential element of the manipulation of accounting period …

Our actions in relation to accounting periods do not form part of any more generalised attack on the benefits available to businesses through the normal operation of monthly VAT returns. We are tackling what we believe are essentially artificial arrangements which have little or no commercial rationale. The 'normal' cash flow benefit that is inherent in monthly repayment returns is a long-established feature of the tax, which we have no wish to disturb.

We are not persuaded that it is in any sense logical or desirable for any action we do take to be applied in 'blanket fashion' across a whole sector … We are proceeding … on a case by case basis…".

35. On 22 June 2006 HMRC sent the Decision Letter in the following terms (they use UK to refer to UKM):

"BMW (UK) - VAT Group 239 3549 38

BMW Financial Services (GB) Ltd ("GB") – VAT Group 584 4519 13

BMW AG ("AG") – VAT Registration 748 0032 49

Rolls-Royce Motor Cars GmbH ("GmbH") – VAT Registration 8003665 63

Mismatched VAT Accounting Periods.

…

UK and AG

You ask that the Commissioners reconcile the withdrawal of monthly returns with our earlier acceptance of your request for monthly returns in 2002, and to explain our change of policy.

The Commissioners accepted the request in 2002 for AG to have monthly returns as a matter of routine. At the time of acceptance no enquiries were made as to whether there was a commercial rationale for the differing period ends. The Commissioners have now made these enquiries and have concluded that there does not appear to be a commercial rationale other than the creation of a cash flow advantage.

As regards the Commissioners' policy, this is clearly set out in Business Brief 12/2005, which restates existing policy rather than setting out a new one. We have, however, given more attention recently to cash flow cases because we have become increasingly aware of the considerable amounts involved…

UK and GmbH

UK and GmbH are on different quarterly VAT staggers and both make supplies to each other. You have previously explained the reasons for supplies being made from UK to GmbH, which are then, in part, supplied back from GmbH to UK. Taken together with the difference in VAT stagger this has the potential to create a cash flow advantage for either UK or GmbH.

UK and GB

UK and GB are on different quarterly VAT staggers. You have previously explained to the Commissioners the administrative benefits this difference provides to BMW. You have provided details of the small amounts of tax arising from supplies between UK and GB at this time.

AG and GB

The consequence of AG being directed on to the same quarterly VAT stagger as UK would be to create a potential for cash flow advantages to arise from supplies between AG and GB resulting from their then-different VAT staggers. For 2005 you demonstrated that any cash flow advantage was small. You have made the same proposal and given the same assurance as detailed in UK and GmbH above. The Commissioners again accept both your proposal and assurance.

Direction of AG onto a quarterly stagger

The Commissioners remain of the view that AG having a monthly VAT stagger does give a significant cash flow advantage and that there is no commercial rationale for having the monthly VAT stagger other than to obtain this cash flow advantage.

I therefore wish to formally advise you that the Commissioners will now take action to remove this cash flow advantage

I therefore wish to formally advise you that the Commissioners will now take action to remove this cash flow advantage by aligning the VAT accounting periods for AG and UK and I hereby DIRECT under Regulation 25(1)(a), VAT Regulations 1995, that AG will no longer be allowed to make returns in respect of periods of one month and instead will be placed on standard quarterly tax returns with accounting periods ending on 31 January, 30 April, 31 July and 31 October…"

36. On 7 September 2006 Mr Wharton wrote to HMRC stating that he did not believe that the arrangements with UKM and AG produced any significant cash flow advantage. He attached some calculations.

FURTHER EXPLANATIONS GIVEN BY HMRC

37. In addition to the information and explanations given in the meeting and correspondence referred to above, evidence has been filed on behalf of HMRC.
38. Mr Marriott explains that as both AG and UKM "are part of the same corporate group", the effect of the two companies being on different staggers was that

"the BMW group received a payment of input tax which it then held until was required to pay the identical sum as output tax in respect of the same supply up to two months later. The result was a cash flow advantage to the corporate group which came at the expense of the Treasury".

39. Mr Marriott gave some figures to illustrate the position. For the twelve month period August 2005 to July 2006 (that is four three month accounting periods of UKM) the total output tax charged by UKM to AG was £325m. The elements of this same figure naturally appears as input tax taken as credit by AG in its monthly returns. One of the three months in each accounting period of UKM corresponds to each monthly accounting period of AG, but the other two do not. The effect of Mr Marriott's calculations is that "the BMW group received payments totalling approximately £116m from the Exchequer, each of which it held for around two months before repaying" and that the group also received "payments totalling approximately £112m from the Exchequer, each of which it held for around one month before repaying". The amounts actually repaid by HMRC to AG were less than these amounts, because the sales by AG to BMW(GB) in the UK carry output tax which totalled about £69m over the twelve month period. These sums went to reduce the cash flow burden upon AG. In addition Mr Marriott made clear that UKM is subject to the Payments on Account scheme, and that payments on account of about £39m went to reduce the cash flow benefit to UKM, or, as he would put, to the BMW group. He concluded that:

"that leaves a total cash flow advantage of £190m. Sums of money amounting to this total were held by the BMW group for either one or two months before identical sums were repaid to the Exchequer".

40. There is no material dispute about these figures as figures. But Mr Peacock does not accept that it is correct to speak in this context of "the BMW group". He submits that the cash flow benefit was a benefit to UKM, and that there was a cash flow burden borne by AG. He submits that those benefits and burdens were exactly what they would have been if UKM and AG were not associated companies, but traded together on the same terms as those on which UKM and AG do trade with one another, namely daily invoicing with payment on the 15^th day of the following month.
41. In a witness statement for HMRC Mr Harris has a section under the heading "Stagger manipulation" (paras 7-10). He states in these paragraphs (and again in paras 46-47) that "Corporate groups may manipulate the timing of supplies, or the setting of VAT return dates, in order to ensure that the recipient company consistently recovers input tax on a supply before the supplying company is required to account for output tax on the same supply". In para 9 he gives as an example the case of a manufacturing company which sells all of its goods to its 100% subsidiary company, which only buys and sells goods which it obtains from the manufacturing company, and which exports all of those goods. Apart from the facts that AG is not a subsidiary of UKM, and that does not export all of the goods it buys from UKM, the example is apparently similar to the relationship between AG and UKM. As far as I can see, nothing turns on those two differences. But what is significant is that Mr Harris says nothing in his example of any commercial justification (or lack of it) for the routing of all the manufacturer's output through the associated export company. That seems to me to a crucial point. If there were no commercial reason for the routing of the exports through the associated company, then it might well be appropriate to describe the situation as manipulation of the VAT system. But if there is a commercial justification, and the VAT consequences are incidental, the use of the word "manipulation" seems less apt.
42. Mr Harris refers at a later passage, para 56(3), to his example in para 9 of his statement (see para 41 above), but with the difference that the exporting company also has supplies from third parties (meaning supplier companies that are not associated with it). He states that if moving the exporting company there referred to from monthly to quarterly staggers would mean that the exporting company is unable to recover the input tax that it has to pay under normal commercial terms to its supplier until the end of the period, then (if the amount is significant) HMRC would consider whether it was proportionate to remove monthly returns from the exporting company. Mr Peacock notes that AG does have supplies from third parties, but there has been no investigation or evidence as to the effect of moving AG on to quarterly staggers in so far as its third party business is concerned.
43. Mr Harris refers to the explanatory note to the 1972 Bill (see para 13 above) and he comments (at para 20 of his statement):

"It is clear that the intention behind the flexibility to grant monthly repayment returns is to alleviate financial difficulty. This financial difficulty does not arise in respect of supplies within corporate groups where money merely circulates between group members. HMRC's policy on monthly returns remains to alleviate such financial difficulties where they arise".

44. The expression "difficulty" in the explanatory note to the 1972 Bill could be understood to mean that a trader lacks the resources to fund the payment of the input tax to his suppliers in circumstances where he will not be refunded by HMRC for some months. If that were what it meant, it might have been expected that HMRC would require evidence of such difficulties before permitting an exporter to adopt monthly accounting periods. In the case of AG HMRC made no such enquiries. A difficulty is not the same as a burden. Some people are strong enough to bear very heavy burdens (financial and otherwise) without difficulty. Others would be in difficulty in bearing modest burdens. There is no evidence before me that the BMW group or AG were ever in any difficulty in funding the cash flow requirements of AG's VAT position as a repayment trader. But the cash flow implications of being an exporter and repayment trader were that AG had that burden to bear. In any well run repayment trader, whatever the resources available to it, the management would be likely to seek to reduce that cash flow burden by asking HMRC to allow it to adopt monthly accounting periods. That is expressly contemplated in the explanatory note to the 1972 Bill.
45. The expression "money merely circulates between group members" is also to be noted. I have seen no evidence as to the circulation of money within the BMW group, and no enquiries as to that topic appear to have been made by HMRC of AG. On the other hand, neither have AG commented upon this point through the witness statements of Mr Wharton.
46. Later in his witness statement (at para 28), under the heading "The cash flow effects for the Exchequer of the operation of VAT accounting periods", Mr Harris states:

"In general it is not within the power of an individual taxpayer to impose a cash flow disadvantage on the Exchequer and thereby take a cash flow benefit for itself".

47. I do not understand that statement, in so far as it is intended to distinguish associated traders from other traders. Any individual repayment trader can apply to go on to monthly accounting periods, and if it is allowed to do that it will thereby "impose a cash flow disadvantage on the Exchequer and thereby take a cash flow benefit for itself". Unless they manipulate the terms on which they trade with their suppliers (which AG has not done), exporters which obtain supplies from associated companies are no better placed than any other exporter to impose a cash flow disadvantage on the Exchequer in this sense.
48. Mr Harris's statement includes a heading "The cashflow effects of the VAT accounting system for associated companies". This addresses practices which are appropriately to be described as manipulation. Under that heading he states (at paras 29 to 35):

"Associated companies may obtain such a cashflow advantage because the impact of the VAT accounting system on them is different to the impact of the VAT accounting system on non-associated traders. That is because each company will have an interest in the other's cash flow position, which it will take into account in making its own decisions. Associated companies will arrange their affairs so that the benefits to the corporate group as a whole are maximised… Unlike non-associated traders, two associated traders will have an interest in the relative dates on which they each account for VAT in respect of supplies between themselves… Where traders are associated, they may choose to time the supplies between themselves so as to ensure they obtain a cash flow advantage… Ordinarily, HMRC is willing to accept that some VAT supply chains will impose a net cashflow disadvantage on the Treasury, and that some VAT supply chains will give the Exchequer a net cashflow advantage. However HMRC is concerned that associated traders may, by manipulating their VAT accounting periods, consistently obtain a benefit by imposing a cashflow cost on the Exchequer… That a business can structure itself in such a way as to enable it always to achieve a cash flow advantage from the payment of VAT and never be at a disadvantage is unfair to businesses that do not have such arrangements a may therefore suffer cash flow disadvantages as a result of their dealings with HMRC. This is contrary to the principle of avoiding distortion of competition".

49. What Mr Harris is saying in these passages is relevant to explain, in general terms, why HMRC should scrutinise the arrangements between associated companies more closely than arrangements between companies which are not associated. There is more opportunity for manipulation in the case of associated companies than in other cases. But these passages have no direct relevance to AG, given the express acceptance by HMRC that in the case of AG and the BMW group, there is nothing out of the ordinary, or objectionable, in the invoicing and payment terms that are in fact in operation between them. Whatever other associated companies may do, it is not suggested by Mr Harris, or by Mr Pleming, that AG and UKM have chosen "to time the supplies between themselves so as to ensure they obtain a cash flow advantage". What they have chosen has the result that UKM obtains a cash flow advantage, and that AG undertakes a cash flow burden, (which has, in part, been alleviated, but not removed, by their being permitted to account monthly). But there is no timing of supplies between them to ensure that.
50. Mr Harris's statement was made in February 2007, and similar points are made in the Detailed Grounds in March 2007, paras 45-62, which refer to the statements of Mr Harris and Ms Turner. Mr Wharton's second statement for AG explaining the terms of invoicing and payment which AG and UKM in fact operate was made in June 2007.
51. Mr Wharton's first statement was made in September 2006. That sets out the commercial reasons why AG purchases the manufactured cars from UKM and exports them. Those are the reasons which HMRC has always accepted as being good commercial reason, unrelated to VAT (see their letter of 11 July 2005). In the light of that stance taken by HMRC, Mr Wharton did not, in his first statement, set out the invoicing and payment terms between UKM and AG. But he did say that the cash flow cost to the revenue of staggered accounting periods was one that arose whether the manufacturer and exporter are under common ownership or not. And he did say that while, in the case of certain commercial groups, arrangements might be made for the timing of supplies between a manufacturer and an exporter to be manipulated to maximise the advantage from staggered accounting periods, no such manipulation had occurred in the transactions involving AG (and that HMRC had never suggested that it had).
52. In these circumstances, I understand that the points made in the Detailed Grounds paras 45-62, and the corresponding passages of the witness statements of Mr Harris and Ms Turner, were introduced into this case to explain why HMRC has a different policy on investigating associated traders. It is a separate question whether that policy extends beyond investigation, and includes withdrawing permission for monthly accounting from all repayment traders who obtain supplies from associated traders, whether or not those traders engage in any manipulative practices.

THE VAT SYSTEM

53. The essence of the common system of VAT is set out in Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of member states concerning turnover taxes (OJ, English Special Edition 1967, p 14):

"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged. On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."

54. Under article 2(1) of Sixth Council Directive 77/388/EEC ("the Sixth Directive"), a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT. Article 4(1) of the Sixth Directive provides that "taxable person" is to mean "any person who independently carries out in any place any economic activity specified in paragraph (2), whatever the purpose or results of that activity".
55. Article 22(4) provides that "Every taxable person shall submit a return within an interval to be determined by each Member State. This interval may not exceed two months following the end of each tax period. The tax period may be fixed by Member States as a month, two months, or a quarter…."
56. Article 22(4) provides that "Every taxable person shall pay the net amount of the value added tax when submitting the return …"
57. The English legislation implementing the Directives, so far as material, is VATA 1994, and the Value Added Tax Regulations SI 1995/2518 ('the Regulations').
58. Regulation 25(1) provides, so far as is relevant:

"Every person who is registered … shall, in respect of… every period of 3 months ending on the dates notified either in the certificate of registration issued to him or otherwise, not later than the last day of the month next following the end of the period to which it relates, make to the Controller a return … showing the amount of VAT payable by or to him …;

provided that –

(a) the Commissioners may allow or direct a person to make returns in respect of periods of one month and to make those returns within one month of the periods to which they relate;…

(c) where the Commissioners consider it necessary in any particular case to vary the length of any period or the date on which any period begins or ends or by which any return shall be made, they may allow or direct any person to make returns accordingly, whether or not the period so varied has ended;…"

59. Other provisions relevant to these proceedings are reg 30(6)(a), 134(b) (supplies exported to a place outside the member States zero rated).

THE FIRST GROUND - THE POWERS OF HMRC

60. Mr Peacock submits that there is no express power conferred by VATA 1994 s.25, or by Regulation 25 or otherwise, on HMRC to direct that a person making monthly returns shall make quarterly returns. No such direction is authorised or envisaged by Regulation 25(1)(a) or (c) (on which HMRC also rely in these proceedings). Nor does Regulation 25(1)(a) provide for the withdrawal of a permission to use monthly returns once given. He accepts that the English legislation could, consistently with Art 22(4) have contained a power to revoke a decision, but that the Directive does not require there to be such a power to revoke a decision. He also accepts that if HMRC gave a permission expressed to be for a fixed period, or until further notice, then that would be effective to enable HMRC to direct that a trader revert from one month accounting periods to three month accounting periods. He accepts that the condition which was attached to the permission given to AG was validly attached, so that if AG breached the condition, it would revert to quarterly returns. In para 25(1)(c) he submits that "any particular case" means any particular period. He submits that if para 25(1)(c) gives a power, then it would embrace the circumstances envisaged in reg 25(1)(a), and render that part of the regulation otiose. He also submits that the power under para 25(1)(c) could not be exercised in this case to withdraw the permission for monthly accounting without thereby giving rise to double taxation.
61. Mr Peacock referred to a number of other provisions in the legislation where there is a power given to HMRC, and an express power of revocation: reg 43C(1) (termination of membership of a VAT group); Regulation 25(4G) (revocation of permission to make electronic VAT returns); Regulation 54 (removal from annual accounting scheme); Regulation 55P (removal from flat rate scheme); and Regulation 68 (removal from a retail scheme).
62. HMRC is the body charged with the management of the tax under VATA 1994 Sch 11, para 1. Mr Pleming submits that reg 25 is to be construed broadly and consistently with the purpose of the Directive. He submits that where HMRC has allowed or directed a trader to make a monthly return there is nothing in the text to suggest that HMRC may not withdraw that. Provided that HMRC exercise their powers to allow and direct under reg 25(1)(a) in other respects lawfully, that paragraph gives HMRC power to allow or direct subject to such conditions, and for such period, as they think fit. The power is not confined to allowing in perpetuity or not at all. HMRC point out that there may be cases where it would be to the advantage of a trader to revert from one month periods to three months periods. For example, a trader whose business was at first mainly that of export, might find that as time went by his business was mainly within the UK. In those circumstances it would probably be for his benefit to revert to three month periods.
63. I accept Mr Pleming's submissions. In my judgment reg 25 must be construed purposively. I cannot see what legislative purpose Parliament might have sought to advance in giving to HMRC a power to direct or allow a trader to make returns in respect of periods of one month, but only if they direct or allow that in perpetuity. In my judgment the power given by reg 25(1)(a) is a power to direct or allow for such period as HMRC may specify or until further notice. I do not find the other examples in the legislation helpful. I have not attempted to understand what the legislative purpose might have been in making express provision for revocation in those different cases. But if there is a discernable purpose in those cases for giving an express power of revocation, that cannot be a reason for interpreting reg 25 in a manner which advances no discernible legislative purpose, and which could, on the contrary, give rise to serious practical disadvantages.
64. I conclude that HMRC did have power to make the direction which is challenged. I also conclude that the contrary is not arguable, and I will refuse the permission sought in so far as it relates to the first ground relied on by AG.

THE SECOND GROUND

65. Mr Peacock makes five points to demonstrate what he submits is the irrationality of the decision in question: (a) the policy is incoherent and irrational; (b) the policy breaches EU law; (c) there are no grounds for purporting to apply the policy to the applicants; (d) there are no significant cash flow costs to the Treasury; (e) the decision making process was flawed.

IRRATIONALITY

66. There is no dispute as to the relevant test in law. The parties have referred me to R v Inland Revenue Commissioners, ex p Preston [1985] AC 835, 866H-867C, British Sky Broadcasting Group plc v Commissioners of Customs and Excise [2001] EWHC Admin 127, para [10] and BUPA Purchasing Ltd v Customs and Excise Commissioners (No 2) [2007] EWCA Civ 542; [2007] STC 101. I gratefully adopt the summary of the law given by Elias J in British Sky Broadcasting at paras [8]-[10], as follows:

"8. … There is no doubt that the duty to act fairly can be infringed where the taxing authorities treat similarly placed taxpayers differently. In the National Federation of Self Employed case [1982] A.C.617, Lord Scarman said this (p.651):

"I am persuaded that the modern case law recognises a legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims."

To similar effect are the following observations of Sir Thomas Bingham M.R. in the Unilever case (1996) STC 681 at 692:

"It is to be remembered that what may seem fair treatment of one taxpayer may be unfair if other taxpayers similarly placed have been treated differently."

No doubt it is these observations that have caused Mr. Lasok to make the concession in this case. However, it is only in an exceptional case that unfairness will amount to abuse of power. In Preston v Inland Revenue Commissioners [1985] STC 282 at page 293, another case involving alleged unfairness by the taxing authorities, Lord Templeman commented (page 239):

"The court can only intervene by judicial review......if the court is satisfied that the `unfairness' of which the taxpayer complains renders the insistence by the Commissioners on performing their duties or exercising their powers an abuse of power by the Commissioners".

He also observed that:

"The court cannot in the absence of exceptional circumstances decide to be unfair that which the Commissioners by taking action against the taxpayer had determined to be fair"

Similar observations were made by Lord Scarman (at page 299).

9. The need to find exceptional circumstances to warrant intervention was emphasised by the Court of Appeal in R v Inland Revenue Commissioners ex parte Unilever Plc [1996] STC 681. Simon Brown L.J. in that case used the term "conspicuous unfairness" to describe the quality of the unfairness necessary to constitute an abuse of power. He said this at page 695:

"Unfairness amounting to an abuse of power as envisaged in Preston and the other revenue cases is unlawful......because either it is illogical or immoral or both for a public authority to act with conspicuous unfairness and in that sense abuse its power".

Later in his decision at page 697 he observed that there a distinction between

"on the one hand mere unfairness - conduct which may be characterised as "a bit rich" but nevertheless understandable - and on the other hand a decision so outrageously unfair that it should not be allowed to stand"

10. Ultimately, as the Court of Appeal observed in R v North East Devon HealthAuthority ex parte Coughlan [2000] 2WLR 622, it is for the court to determine whether there is an abuse of power. But the passages to which I have made reference are a strong reminder that the threshold of unfairness amounting to an abuse of power is a high one, and that the court must be careful not to interfere simply because a decision can be justifiably subject to some criticism."

67. Mr Peacock submits that (given the absence of any manipulation by them) there is no rational basis for distinguishing AG from any other exporters to whom, as HMRC make clear, the benefits of monthly accounting will continue to be afforded. If the benefits of monthly accounting are to be withdrawn from AG, then they should be withdrawn from all exporters, and in any event all exporters which are part of a group of companies. There has been no enquiry as to the financial circumstances of AG, or its associated companies. The case advanced at the hearing for HMRC is not addressed in the Business Brief, to which the Decision Letter refers. He submits that UKM and AG have done no more than any un-associated supplier and exporter (respectively) would do, and it is not open to HMRC to treat them differently from other suppliers and exporters merely because they happen to be associated.
68. Mr Peacock further submits that the policy of HMRC is too vague, and that the disadvantages said to be suffered by HMRC or the Revenue have not been demonstrated. He submits that there has been no sufficient explanation of what is meant by an unjustified and unintended benefit, or by a significant advantage giving rise to a need to protect the revenue.
69. Mr Pleming submits that the purpose of allowing a repayment trader to account monthly (as explained in the explanatory note to the Finance Bill 1972) is to protect it from a cash flow disadvantage. But where a supplier and an exporter are associated, there is no risk of such a disadvantage. He submits that HMRC are entitled to regard the cash flow benefit of the output tax held by the supplier of goods as available to offset the cash flow disadvantage of the associated company which is the exporter of those same goods. Although UKM and AG are separate traders for VAT purposes, he submits HMRC are entitled to have regard to the fact that they are nevertheless associated companies. He submits that the case for HMRC does not depend upon showing that anything unusual has occurred of the kind envisaged in the Detailed Grounds paras 45-62 and the corresponding passages of the witness statements of Mr Harris and Ms Turner. He submits that the policy of HMRC has evolved, and that by May 2005 and the publication of the Business Brief, the policy embraced exporters who purchased goods from associated suppliers, whether or not there was any manipulation of dates of supply or payment, even in those cases where there was a commercial rationale for the routing of exports through an associated company, unless there was also a commercial rationale for a mismatch in accounting periods (other than the cash flow advantage related to repayment of VAT).
70. I accept that relief from the difficulty in financing the temporary tax burden (as set out in the explanatory note to the 1972 Bill) is the benefit that is intended when HMRC allow monthly accounting. No other benefit is intended or justified. That is clear enough and no further explanation is required.
71. The cash flow implications of VAT provide opportunities to traders to attempt to obtain unintended and unjustified advantages by arranging their corporate structure, and other matters, with that in view. But it has never been suggested that those controlling the BMW group have made any unusual arrangements to its corporate structure, or that UKM and AG have made any arrangement between themselves, which had as its purpose to take advantage of, or seek relief from the burdens of, the cash flow implications of VAT. Nothing that follows in this judgment should be taken as relating to circumstances which are different from these.
72. The only step that has been taken with cash flow implications of VAT in view is the request by AG to account monthly instead of three monthly. The request by AG to account monthly instead of three monthly is a request that any repayment trader would be expected to make. It is what was contemplated in the explanatory notes to the Finance Bill in 1972.
73. So the first and main issue between the parties under the heading of irrationality is essentially whether it is open to HMRC to have regard to the fact that UKM and AG are associated companies, or whether in doing that HMRC have acted so unfairly or irrationally that this court can and should intervene. At this stage of the argument, I leave aside the requirements of EU law, which are considered separately.
74. I fully accept that UKM and AG have acted in relation to VAT exactly as they would be expected to act if UKM sold all its production to AG, and they were not associated companies. UKM would be expected to want to account quarterly in the usual way, if it routed its goods for export through another company. Any exporting company would be expected to want to account for VAT monthly, as does AG. To that extent, HMRC, or the Revenue, have lost nothing by the fact that UKM and AG are associated that they would not have lost if the two companies were not associated. The benefits that UKM and AG obtain from their respective VAT accounting arrangements are not benefits which they sought to obtain by arranging for UKM to route its exports through AG. The VAT benefits (such as they are) are incidental to arrangements they would make and keep in place, whatever the VAT consequences.
75. But it does not seem to me to follow from that that HMRC are bound to disregard the fact the two companies are associated. The policy set out in the explanatory notes to the Finance Bill 1972, and in the Business Brief, is such as to leave open to HMRC to consider whether there is "an unjustified and unintended cash flow benefit at the expense of the revenue". It may be that since 1972 HMRC have not made any enquiries of, or assumptions about, repayment traders on that issue. It may be that having formulated the policy that they did in 2005, HMRC might consider (or they might already be considering) whether exporters should be routinely permitted to account monthly, as it appears may have been the case hitherto. I express no view at all on these points. The question I have to consider is whether, given what is apparently allowed to other exporters and repayment traders, it is irrational or unfair for HMRC to deny to an exporter associated with its supplier the concession of monthly accounting.
76. I cannot see that, as a matter of principle, it is irrational or unfair, within the legal test set out, for HMRC to treat an export company differently where it is associated with its supplier, and where it is not. The fact that any cash flow benefit of the arrangements may be an unsought benign incident of arrangements put in place for other reasons does not seem to me to mean that HMRC are bound to allow it to continue. For the reasons set out on behalf of HMRC (namely the increased opportunities for manipulation where traders are associated), and subject to EU law, it seems to me that the fact that a supplier of manufactured goods, and the company which purchases those goods for export, are associated, may be one of the circumstances relevant to a decision whether HMRC should grant the concession of monthly accounting to the export company, or not. It is a separate question whether, in a particular case, HMRC should treat an export company differently where it is associated with its supplier, and where it is not.
77. I turn to the further ground on which AG challenges the policy on grounds of irrationality, namely that it is too vague. Mr Peacock submits that the requirement in the Business Brief that the advantage be significant (see paras 26 to 28 above) is a prerequisite to the application of the policy, but that it is unclear when it is satisfied.
78. The document V1-24A at Annex C is headed "Calculating the cash flow advantage of manipulation" and contains a formula by way of illustration. The illustration uses an interest rate of 6% applied to the total tax charged multiplied by the period of the benefit. The examples include figures for tax between £50,000 and £135,000 per quarter. AG criticise this calculation or formula. It is said that there is no provision for payments on account, no explanation for the rate of 6%, and that HMRC increased the benefit to AG by repaying the input tax to AG less than 30 days after the claims for repayment were made, when they were entitled to wait for 30 days.
79. Mr Wharton has carried out his own calculations with a view to showing that the benefit to AG from the arrangements is not significant in relation to BUK VAT Group's net payments of VAT. He also compares the figures with the Government's annual VAT receipts of £73 billion for 2004-2005. His calculations also include an interest rate of base rate minus 1%.
80. The witnesses for HMRC have given other examples of calculations. Mr Hulin was involved in the decision relating to AG. His evidence is that he did not conduct any calculations of notional interest. He states that he took into account the Payments on Account by UKM, as well as the figures returned by UKM and by AG. He wrote the letter of 13 September 2006 referred to above. He said the figures in that letter were illustrative.
81. Mr Pleming submits that Mr Peacock's submission on the significance the advantage is a red herring. HMRC's calculations are merely examples, and the reference to "significant cash flow advantage … and a need to protect the revenue" is in relation to the deployment of HMRC resources. The guidance is no more than guidance, and should be interpreted as such, that is in a broad and untechnical way. It should not be read as if it were legislation. What is said about significance in the policy should not be elevated into a threshold legal test.
82. I accept Mr Pleming's submission. The dispute in this case is not about particular figures or particular methods of calculation. The figures given by Mr Marriott and referred to in para 39 above are large by any standard. Of course, what is in issue here is not those sums of money, but the time value of those sums over periods of one and two months The sums involved for AG in the monthly accounting arrangements are plainly significant to AG. That is what this dispute is about. I see no basis for a challenge to HMRC's expressed view that those sums are significant, such as potentially to give rise to a need to protect the revenue. If these sums for the motor industry are not significant it is hard to imagine what sums would be significant.
83. A related submission for AG is that HMRC have not demonstrated the costs to the revenue. It is said that it is unclear whether HMRC allege the Revenue incurs an extra interest cost on borrowings or foregoes interest on a deposit. In my judgment there is no need for HMRC to explain in a calculation how the public finances are managed so as to demonstrate in figures what disadvantage is suffered when a sum due in tax of the order of the figures given by Mr Marriott is not available to the Revenue for a period of one or two months. It cannot be said that HMRC are irrational if they do not ignore the time value of such sums for periods of one or two months.
84. For these reasons I reject the submissions that the policy is incoherent or irrational, and that there are no significant cash flow costs to the Treasury.

EU LAW

85. Mr Peacock submits that it is a fundamental feature of the VAT system, as derived from the Sixth Directive, that where there is a chain of supplies each supply must be regarded on its own merits, so that the character of a particular transaction in a chain should not be affected by the character of a prior transaction. He derives this proposition from Optigen Ltd and others  v Customs and Excise Commissioners (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] Ch 218. That case concerned a carousel fraud, in which Optigen was part of the chain, but was innocent of any involvement in the fraud. HMRC submitted that the participants in a carousel fraud had no genuine business motive, but only the aim of misappropriating VAT funds, with the result that all the transactions comprising the chain were devoid of real economic substance and so not part of an economic activity, and therefore fell entirely outside the VAT system. The Court did not accept this analysis. It said:

"44 In fact, that analysis and that of the definitions of "supply of goods" and "taxable person acting as such" show that those terms, which define taxable transactions under the Sixth Directive, are all objective in nature and apply without regard to the purpose or results of the transactions concerned.

45 As the court held in BLP Group plc v Customs and Excise Comrs (Case C-4/94) [1996] 1 WLR 174, 199, para 24, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question.

46 An obligation on the tax authorities to take account, in order to determine whether a given transaction constituted a supply by a taxable person acting as such and an economic activity, of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge, would a fortiori be contrary to those objectives.

47 As the Advocate General observed in para 27 of his opinion, each transaction must therefore be regarded on its own merits and the character of a particular transaction in the chain cannot be altered by earlier or subsequent events."

86. This case is dealing with an entirely separate point. The submissions made by HMRC to me bear no relation to the submissions advanced in the Optigen case. HMRC accept that the transactions of UKM and AG are all genuine, and subject to VAT. The question before me is whether HMRC are entitled to direct AG to account quarterly instead of monthly. Nothing in Optigen requires HMRC, in making that decision, to treat each trader in isolation and to ignore its economic links with other traders. I reject the submission that the policy breaches EU law.

APPLYING THE POLICY TO THE APPLICANTS - THE DECISION MAKING PROCESS

87. On 11 July 2005, HMRC in fact offered AG and its associated companies three choices as to how to put an end to the existing position. The third option of including the exporter in the same VAT Group as the other companies is not available in the case of AG for reasons which it is unnecessary to set out.
88. In his first witness statement Mr Wharton states that the three choices offered would have significantly different financial outcomes, and remarks that HMRC have put forward no calculations to show what the financial outcomes of the different choices offered would be. At that stage he himself put forward no calculations relating to the different options offered by HMRC. Mr Peacock's submits that HMRC have not investigated the banking and other financial arrangements of UKM and AG, or made other relevant comparisons. HMRC has argued the case at a conceptual level.
89. In his second witness statement made on 8 June 2007 Mr Wharton approached the matter again. He stated:

"26. If there was no separate export company (ie if UKM was both manufacturer and exporter), UKM would be a repayment trader and be eligible for monthly VAT returns (since a large proportion of its production is exported). For example, in the twelve months ending July 2006, the VAT element of the value of domestic sales of Minis (by AG) was £69 million and the total input tax incurred by UKM was £157 million. Thus, if there was no separate export company, UKM would plainly have been a repayment trader. In that situation, there would have been no basis for HMRC to refuse a request for monthly VAT returns.

27. It is accepted by HMRC that there are valid commercial reasons for having a separate export company. By their disputed decision, HMRC are seeking to deny monthly accounting treatment that would be available to the 'Mini' group whether or not there was a separate export company. This is to put the group at a substantial cash flow disadvantage compared to other like companies".

90. There has been no evidence in response to the second witness statement of Mr Wharton. HMRC did adduce evidence of later date than this, in the form of a witness statement of Mr Sheppard in relation to JCE and LR. Mr Neale-Smith had raised a number of points. Mr Sheppard addressed some of these, but he did not address Mr Neale-Smith's evidence that JCE and LR would have been repayment traders if they had exported their cars direct, and not through an associated export company.
91. This is a new point taken by Mr Wharton and Mr Neale-Smith. Neither the applicant companies nor HMRC had previously considered whether a benefit from mismatched staggers might be justified by comparing that benefit with the benefit the manufacturing companies might have enjoyed making the exports directly themselves (and so becoming repayment traders), instead of routing the cars through export companies.
92. HMRC's response to this point is set out in their Skeleton Argument. Mr Pleming submits that this new point is irrelevant. He submits that what is at issue is whether the corporate group of which AG forms part is entitled to obtain a cashflow advantage by reason of a mismatch in the VAT accounting periods of two associated companies. Drawing a comparison with a hypothetical situation in which there is only one company, and no mismatch of VAT periods is meaningless. The comparison to be made is between AG and UKM on mismatched accounting periods, and between them on matched accounting periods.
93. There are other possible comparisons that might be made in addition to, or alternatively to, the comparison for which Mr Pleming contends. The comparison that Mr Peacock has put at the forefront of his argument is with the situation as it would be if the cars were routed through a company that was not associated with UKM and which was a repayment trader. On this hypothesis UKM and the exporter would both be expected to account for VAT just as UKM and AG have in fact being doing. Yet, as Mr Peacock points out, the policy would not apply, although the position of the Revenue would be just as it has been since AG were allowed to account monthly. The answer given to this comparison is that where the supplier and exporter are associated companies then, looking at the group as a whole, the cash flow benefit to the supplier company can in effect be set off against the cash flow burden to the exporter, and so that there is not "the difficulty in financing the temporary tax burden" envisaged in the explanatory note to the 1972 Finance Bill. Mr Pleming submits that for this comparison it is of no concern to HMRC whether or not, or how, the flow of funds is dealt with within the group. It is not irrational or unfair to look at the group as a whole for this purpose.
94. As to this comparison, it seems to me that more than one view could be held. But the question is not whether more than one view can be held. It is whether HMRC's view is irrational or unfair. On this comparison I have concluded HMRC's view is not irrational or unfair. HMRC are entitled have regard to the economic links of UKM and AG, and those links are not irrelevant to the exercise of the power under regulation 25(1)(a) to allow monthly accounting, or not to allow it.
95. The third comparison, first made by Mr Wharton in his second witness statement is between the position as it is, namely the exports being routed through a separate company which is a repayment trader, and the position as it would be if UKM exported its cars itself.
96. Given that in this case the sole issue raised by HMRC is that exports have been routed through an associated company (and not that there has been any manipulation of dates of supply or payment, or anything else), it seems to me that the comparison made by Mr Wharton in his second statement cannot be dismissed as irrelevant.
97. I remind myself again of the concerns of HMRC, as set out in the Business Brief:

"situations in which businesses 'stagger' their VAT accounting periods in order to gain an unjustified and unintended cash flow benefit at the expense of the revenue"

98. The essential concern of HMRC is the gaining by traders of unjustified and unintended cash flow benefits at the expense of the revenue. Mismatched accounting periods are not in themselves a matter for concern, unless they give rise to such unjustified and unintended gains.
99. If the calculation made by Mr Wharton in his second witness statement is correct (and it is not contradicted) it appears that there may be little cash flow benefit accruing to the BMW group at the expense of the revenue by the existing arrangements between UKM and AG, compared with the situation as it would be if UKM was the exporter of its own cars. On Mr Wharton's calculation it appears that, if the accounting periods were aligned, then the revenue would be better off than it would be if UKM were a direct exporter. In other words, the commercial considerations which make it appropriate for exports to be routed through AG would (if HMRC's arguments prevail) carry a cost to the BMW group in terms of VAT, and a corresponding benefit to the revenue. So the policy, seen from that point of view, would produce a benefit for the revenue from UKM's commercial need to export the cars through AG. Seen from this point of view, the policy as applied by HMRC may not protect the revenue from a disadvantage. The disadvantage arising from the mismatched accounting periods may be no more than the disadvantage that HMRC accept they ought to suffer if the exports were made by UKM directly. In other words, the interposition of an associated export company may do no more than shift to the export company a cash flow benefit substantially equivalent in value to the benefit which the manufacturer would enjoy if it were the direct exporter, with the result that the group as a whole enjoys no new benefit from the arrangement. If the disadvantage which concerns HMRC arises in this way, then in my judgment it is not logical or fair to characterise it as unjustified or unintended.
100. The questions which HMRC asked themselves before deciding to issue the Decision Letter are three in number, as described by Mr Hulin in his witness statement:

"[1] was there a cash flow benefit to BMW at the expense of HMRC and if there was, was the amount significant? [2] was there a commercial rationale for having the VAT registrations that existed? [3] was there a commercial reason why … AG completing a quarterly return instead of a monthly return would cause them significant administrative difficulties or expense?"

101. The third question Mr Hulin raised appears to address the first and second of the three reasons which have been put forward by HMRC as possible justifications for mismatched staggers (see para 20 above). The questions Mr Hulin raised do not address the third possible justification suggested by HMRC (see para 42 above). So, Mr Peacock is correct when he submits that there was no consideration given to the effect of moving AG to quarterly staggers, in so far as its third party business was concerned.
102. Further, none of the questions raised by Mr Hulin address the issue whether the BMW group, or either of UKM or AG, have gained an unjustified and unintended cash flow benefit at the expense of the revenue. Rather it appears to have been assumed that if there were no significant administrative difficulties or expense involved in completing quarterly returns, then the cash flow benefit obtained must be unjustified and unintended.
103. I have held that the policy is not itself irrational. But in my judgment logic and fairness requires that, in applying the policy in a particular case, there should be some enquiry as to what financial difference, if any, results to the traders (and thus also to HMRC) by the use of the associated export company. It is not logical or fair to apply a policy directed to preventing unjustified and unintended cash flow benefits at the expense of the revenue under the assumption that the benefit will be unjustified and unintended if there is a mismatch of accounting periods which is not explained by administrative difficulties, and ignoring what the position would be if the trader exported his cars direct.
104. It may, of course, be that, if the comparison made by Mr Wharton in his second witness statement is investigated, then it could still appear that that the benefit to AG is significant, unjustified and unintended. In that case there would be a sound basis for a direction to AG to account monthly. But as matters stand, there has been no such investigation, and the decision making process was flawed.
105. The application of the policy is flawed in two respects. First, HMRC did not consider the third possible ground which they accept might justify mismatched accounting periods (see para 43 above). Second, they did not consider whether the export through an associated repayment trader (namely AG) results in a significant cash flow advantage for the BMW group that it would not obtain if UKM were itself the exporter, and so a repayment trader itself.
106. On this limited basis I grant the permission sought by AG and make the order it seeks.
THE APPLICATIONS OF JCE AND LRE
107. The Decision Letter in the case of JCE and LRE is dated 11 November 2005. It is substantially similar to the letter sent to AG, in so far as concerns the issues I have to decide. The Claim Forms were not issued until 21 September 2006. They were thus not filed promptly, or within the three month time limit, as required by CPR 54.5(1).
108. JCE's principal business is the acquisition and then export out of the UK of cars made by Jaguar Cars Ltd ("JCL"), which is also a UK affiliate of FMCL. JCE and JCL were acquired by FMCL in 1989. The arrangements that are in place today are substantially the arrangements that existed before FMCL acquired the companies, and are substantially similar to the arrangements involving AG and UKM.
109. LRE's principal business is the acquisition and then export out of the UK of cars made by Land Rover ("LR"), which is also a UK affiliate of FMCL. LRE and LR were acquired by FMCL in 2000. The arrangements that are in place today are substantially the arrangements that existed before FMCL acquired the companies, and are substantially similar to the arrangements involving AG and UKM. The makers of Minis, Jaguars and Land Rovers were at one time, as is well known, all under common ownership for some years, for part of that time under public ownership.

DELAY

110. JCE and LRE apply for an extension of time. Following a letter from FMCL HMRC reviewed their decisions and on 12 January 2006 they confirmed the Decision Letters. HMRC take no point on delay up to 12 January 2006. On 17 February 2006 FMCL referred the matter to the Adjudicator's Office for Complaints about HMRC saying that the complaint "is essentially as to the manner in which [HMRC] have issued the direction, and in particular the extremely short timetable, rather than the direction itself". On 21 June 2006 the Adjudicator notified FMCL that she did not uphold the complaint.
111. Mr Peacock accepts that good reason must be shown for an extension of time. He submits that the Claim Forms were issued within three months of the Adjudicator's letter of 21 June 2006. He submits that where there is no prejudice to the defendant and a litigant has behaved sensibly and reasonably, the courts should not deprive the litigant of relief, citing R v Commissioner for Local Administration , ex p Croydon LBC [1989] 1 All ER 1033, 1046g.
112. The reasons given for the delay are said to be attempts to resolve the matter otherwise than through litigation, the possibility that HMRC might reverse their policy to take into account concerns expressed by the motor industry generally, and the difficult circumstances in which it was said that the Ford group of companies then found itself. Since the hearing there has been announced the sale by FMCL of the businesses of making Jaguar and Land Rover vehicles.
113. Mr Pleming stresses that the application to the Adjudicator was only as to timing, and submits that there is nothing in any of the points relied on as explaining the delay. He is clearly correct in these submissions. As long ago as 30 July 2004 solicitors for FMCL had advanced in a letter to HMRC substantially the arguments advanced before me. While HMRC cannot identify other motor manufacturers affected by the disputed policy, they state that other manufacturers have been subject to similar decisions and have not applied to the courts. It would be unfair that JCE and LRE should be allowed to piggy-back on AG's application, when the other manufacturer could not make applications out of time. The discussions between HMRC and FMCL had been taking place for a period of some two years before the Claim Forms were issued.
114. In my judgment it cannot be said that these applicants have acted reasonably in delaying the issue of proceedings. What has happened is that after the Adjudicator rejected their complaint based only issues of timing, they changed their minds and decided to raise complaints of substance.
115. Mr Pleming submits, and I do not understand it to be contested, that the test to be applied in this case is such that if the applicants are correct, it would follow that HMRC could not refuse an application by an exporter in a similar position to AG's to be permitted to account monthly. So in any event, it is open to JCE and LRE, as to other manufacturers, to make a fresh application to be allowed to account monthly in the light of this judgment, if so advised. I do not grant permission to bring these proceedings out of time.

THE MERITS

116. In the light of my decision not to grant permission I need say little about the merits of the applications. There are no material differences between the cases advanced by Mr Peacock on behalf of these two applicants and the case advanced for AG. He advanced all his arguments together, with very little reference to documents other than those relating to AG. Apart from the issue of delay, Mr Pleming advanced no arguments to the effect that these applicants should succeed or fail other than on grounds which applied equally to AG.

CONCLUSION

117. For these reasons I refuse the applications of JCE and LRE. I refuse the application of AG to challenge the Decision Letter on the ground that HMRC lacked the power to make the direction. I grant permission to AG to apply for an order quashing the Decision Letter, and I make that order.