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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Willis Pension Trustees Ltd v Revenue and Customs [2005] UKVAT V19183 (25 July 2005) URL: http://www.bailii.org/uk/cases/UKVAT/2005/V19183.html Cite as: [2005] UKVAT V19183

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19183

Supply for a consideration – whether foreign exchange transactions always constitute such supplies by both parties – whether a counterparty's profit from foreign exchange transactions is consideration for its supply – Value Added Tax Act 1994 section 5(2) – Sixth Directive Articles 2 and 11. Interpretation of the operative part of a preliminary ruling by the ECJ.

LONDON TRIBUNAL CENTRE

WILLIS PENSION TRUSTEES LIMITED Appellant

and –

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

SHEILA EDMONDSON FCA

Sitting in public in London on 13 June 2005

Ian Preston UK tax manager of Willis Group Ltd, for the Appellant

Paul Key, instructed by the Acting solicitor for Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION
1. The central issue in this appeal is the meaning and effect of the decision of the Court of Justice of The European Communities (the "ECJ") in Customs and Excise Commissioners v First National Bank of Chicago [1998] STC 850 (the "FNBC" case). That case concerned foreign currency transactions (as later defined). The operative part of that Court's judgement was that:

"[foreign currency transactions] constitute supplies of services effected for consideration within the meaning of art 2(1) of the Sixth Directive."

2. The Appellant entered into a number of foreign currency transactions with a number of banks. HMRC contends that by doing so the Appellant made for VAT purposes exempt supplies of services for consideration to each of those banks, (and that, as a result, input VAT on services supplied to the Appellant attributable to those foreign currency transactions is not deductible by the Appellant because it is input tax attributable to an exempt supply).
3. HMRC's primary argument is that this is the case because that is precisely what the ECJ said – namely that such transactions "constitute supplies of services for a consideration…". They say the ECJ's judgement was direct and unequivocal.
4. The Appellant contends that the ECJ did not mean what the black letters of the operation part of its judgement might at first sight appear to say. They say that the ECJ were considering the position of a bank supplying foreign currency transactions to its customers as part of its trade, and was not giving a preliminary ruling which applies automatically to any person entering into a foreign currency transaction with a bank. The Appellants say that a bank's customers will not generally provide any service to the bank when they enter into foreign currency transactions with the bank, and even if it could be said that for VAT purposes the customer does make a supply to the bank, the customer will not generally receive any consideration for so doing.
5. The Appellant says that as a factual matter, it received no consideration from the bank for entering into these transactions. Therefore it says that no supply for consideration was made by the Appellants in relation to those transactions. As a result it says that input tax on services supplied to it in connection with those transactions is not irrecoverable, but recoverable in accordance with its partial exemption method (see paragraph 15(13) below).

The Appeal

6. Willis Pension Trustees Ltd (the "Trustee" or the "Appellant") appeal against (i) a decision of HMRC made on 26 November 2003 in which HMRC decided that input tax on supplies made by Record Currency Management Ltd ("Record") to the Trustee which were attributable to foreign currency contracts made between the Trustee and various banks was irrecoverable because it was attributable to supplies by the Trustee under those contracts and that those supplies were exempt supplies of services made by the Trustee; and (ii) the assessments consequent upon that decision.

Terminology – "Foreign Currency Contracts"

7. In FNBC the ECJ used a definition of "foreign exchange transactions" taken from the British Bankers' Association International Foreign Exchange Master Agreement (1993) which read –

"… any transaction between the parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transaction the parties have agreed (whether orally, electronically or in writing): the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date." (see paragraph 22 of the judgement).

8. This definition includes contracts for immediate delivery - such as that which takes place when a traveller goes to a bureau de change and exchanges over the counter sterling for euros, and also forward transactions where the exchange of currencies takes place at a future date - such as that under which a manufacturer might agree with a bank to sell to the bank in a year's time an amount of US$ (being the sale price it expects to receive on the fulfilment of a contract for the delivery of goods to a US client) for a set amount in £ sterling (being the currency in which it measures the profits of its business and in which its expenses in producing the goods may have been incurred) in order to protect itself against fluctuations in the $/£ exchange rate which might, absent such a transaction, deprive it of its expected return from the production and sale of the goods.
9. Mr Preston offered us an updated definition taken from the Foreign Exchange Committee's Foreign Exchange Master Agreement (1997):

"any transaction between the Parties for the purchase by one party of an agreed amount in one currency against the sale by it of an agreed amount in another currency, both such amounts being deliverable on the same Value Date or if the Parties have so agreed in Part VI of the Schedule, being cash settled in a single currency, which is or shall become subject to the Agreement and in respect of which transaction the parties have agreed (whether orally, electronically or in writing): the currencies involved, the amounts of such currencies to be purchased and sold, which Party will purchase which currency and the Value Date".

10. The underlined words in this second definition represent the additional scope of the second definition: the second definition additionally encompasses transactions which are not physically settled by the cross delivery of two currencies, but which are "net-settled" by the delivery of a single sum by one of the parties to the other which represents the difference in value between the two currencies which would otherwise be delivered. The situation in which net settlement takes place is particularly relevant to forward exchange contracts.
11. In this Decision we use the phrase "foreign currency transaction" to have the meaning adopted by the ECJ; and "net or gross settled foreign currency transaction" to have the extended meaning in the updated definition of 1997.

The Evidence

12. We had before us a bundle which included documents describing the services provided to the Trustees by Record, summary figures for the foreign currency transactions entered into by the Trustees in the period between 3 July 2000 and 30 June 2003, a standard form Master Foreign Exchange Agreement and the accounts of the Willis Pension Scheme (of which the Appellant was Trustee) for the year ended 31 December 2002. It was agreed by Mr Preston that we could rely on these documents for evidence of the matters contained within them.
13. In addition to his submissions, Mr Preston made certain factual assertions of which no evidence was given, Mr Keys told us that HMRC would not accept these statements as agreed facts, but on their view of the law these matters would be irrelevant to our decision. If they become relevant HMRC would be content if our decision was given on the alternative bases that the matters were, or were, not established.
14. No oral evidence was given.
15. From the evidence before us we found the following facts:

(1) The Appellant is the trustee of the Willis Pension Fund, and is registered for VAT.

(2) The Willis Pension Fund (the "Scheme") is a pension scheme for the employees and ex-employees of the Willis Group Holdings Ltd group of companies.

(3) At 31 December 2002 the scheme had about 10,900 members, 2,500 of which were pensioners, 5,300 deferred pensioners and 3,100 current employee members.

(4) At 31 December 2002 the funds of the scheme stood at £642m, having been worth £769m and £843m at the end of 2001 and 2000 respectively.

(5) The investment objectives of the scheme include the following:

(i) to "acquire assets of appropriate liquidity to generate income and capital growth which… meet the cost of current and future benefits" which the scheme is required to provide;

(ii) to "limit the risk of the assets failing to meet the accrued liabilities of the scheme";

(iii) to "limit the risk of failing to meet Minimum Funding Requirement"; and

(iv) to outperform bench-marks.

(6) The assets of the scheme are given into the management of a number of investment managers who manage assets in various sectors.

(7) Of the total assets of the Scheme, at 31 December 2002:

(i) 12% of assets were invested in North American equities;

(ii) 22% in other overseas equities.

The sterling value of the assets of the Scheme was therefore subject to movements in the value of foreign currencies against sterling.

(8) The Scheme's principle liabilities are in sterling.

(9) The Trustees entered into a Currency Exposure Management Agreement with Record, under which Record acted as agent and adviser to the Trustee in relation to the foreign currency exposure of the Trustee on its non-sterling assets. Record was required to hedge that foreign currency exposure by acting as the Trustee's agent to conclude forward foreign exchange transactions between the Trustee and various banks in accordance with an agreed strategy.

(10) In the period 3 July 2000 to 30 June 2003 Record's actions resulted in the Trustee entering into about 660 forward exchange transactions – an average of about 220 a year. The transactions were in Japanese Yen, US$ and Euro and were with a variety of counterparty banks. They were generally each for amounts involving a sterling payment of between £3m and £10m.

(11) These transactions were entered into in accordance with Record's "Active Currency Overlay Process". The objective of this process was "to add value to the benchmark currency exposure [on the investments] by means of systematically limiting the loss, but not the profit, arising from currency movements". It worked in the following way.

The Trustee's investment exposure in each relevant foreign currency was determined. For example in relation to US$ assets, it might be US$120m. It would be divided into 12 "pieces" of US$10m each. For each piece a "protection level" would be fixed at the beginning of a 12 month period. The "protection level" would be the 12 month forward £/$ rate at the beginning of the period. Suppose, for example, that the forward rate was; £1 = $1.5 at the beginning of the 12 month period for the first piece.

Thereafter on each day in the period the forward exchange rates would be monitored. If, on the second day of the period, the $ had strengthened – so that the US$ investments of the Scheme would (absent any other variation) be worth more at the end of the period than if the protection rate applied, no action would be taken. If the $ had weakened and the forward rate fallen to, say, £1 = $1.55, a forward contract to sell US$ at that rate would be taken out. Thereafter if the $ continued to weaken there would be no further currency loss to the Scheme (although it would have suffered the loss corresponding to the difference between £1 = $1.55 and £1 = $1.5 as applied to $10m): any currency loss on the value of its investments would, broadly, be offset by gains on the currency contract.

But if later on in the period the $ began to strengthen and the forward rate became better than the protection level, (say, it rose to £1 = $1.45), then maintaining the first forward contract in existence would deprive the Scheme of the benefit of the $'s rise. Accordingly, Record would enter into a transaction to cancel out the effect of the first contract. Rather than simply terminating that contract, however, it would enter into a new contract at the £1 = $1.45 rate to buy US$ forward. Apart from the difference in value (positive or negative) between the £1 = $1.45 "buy" contract, and the £1 = $1.55 "sell" contract – which would be a fixed amount, thereafter the Scheme would again be able to reap the benefits of the rising $ value of its investments.

If, however, the $ forward value fell again, then the process above would be repeated. And so on.

If at the end of the 12 month period the $ had strengthened, then there would be an even number of forward contracts to be settled at that time for an amount totalling the effects of the "£1 = $1.55 sell contracts" and the "£1 = $1.45 buy contracts" described above (although of course the rates of each contract would not be $1.55 and $1.45 in each case, but the relevant forward rate at the time each contract was made) (Assuming each contract was for the same $ amount we deduce, although the point was not expressly made to us, this amount should be a loss).

If at the end of the 12 month period the $ had weakened, then there would be an odd number of contracts and the difference between the spot exchange rate at the end of the period and the rate at which the last contract was struck would produce a profit to the fund. (And we deduce that in those circumstances the total net profit from all the contracts would be that profit less the losses on all the preceding pairs of contracts.)

We make further findings of fact in relation to these issues in paragraphs 74 to 79 below.

(12) Record charges a fee for its advice and agency services to the Trustee. That supply is standard rated.

(13) The Trustee is partially exempt. It operates a specified partial exemption method pursuant to Regulation 102 of the VAT General Regulation 1995. The terms of the method are evidenced in a letter dated 22 June 1997 addressed to Eastern Friar Nominees Ltd. The method provides for:

"1. Input tax directly related to taxable supplies… to be recoverable in full;

Input tax directly related to exempt supplies to be non-recoverable; and

The remainder of the input tax to be subjected to the following calculation:

[Diagram or picture not reproduced in HTML version - see original .rtf file to view diagram or picture] x residual input tax."

(14) Records' supply to the Trustee is directly related to the entering into of the forward foreign currency transactions by the Trustee with the banks.

Statements by Mr Preston

16. We were told the following by Mr Preston:

(i) contracts could be both net and gross settled. This was consistent with the terms of the standard contract in our bundle;

(ii) no fee was charged by the banks: they made their profit by the margins between their buying and selling prices;

(iii) the contracts were for periods of up to a year. This was consistent with the list of contracts in our bundles;

(vi) contracts were not closed out with the original counterparty: instead new contracts were entered into which effectively reversed the forward currency exposure. This was consistent with the Record documentation and with our findings in paragraphs 74 to 79 below;

Save as indicated above no direct evidence was offered in relation to any of these issues and we make no finding in relation to them.

The Statutory Provisions

17. Article 2 of the Sixth Directive provides:

"The following shall be subject to value added tax:

The supply of goods or services effected for a consideration within the territory of the country by a taxable person acting as such…";

and Article 11(1)(a) provides that the "taxable amount shall be:

(a) …everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;".

18. Implementing Article 2, sections 1 and 5 VATA 1994 provide:

in section 1:

"Value added tax shall be charged, in accordance with the provisions of this Act – (a) on the supply of goods or services in the United Kingdom…",

and in section 5(2):

"Subject to any provisions made by [Schedule 4], and to Treasury orders under sub-sections (3) and (6) below:

(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

(b) anything which is not a supply of goods but is done for consideration… is a supply of services."

There is nothing in Schedule 4 or in the Treasury Orders of relevance to the issues in this Appeal. It is common ground that there is no supply of goods involved in the foreign currency transactions entered into by the Trustees.

19. Item 1 Group 5 Schedule 9 VATA 1994 provides that the following supply is exempt, namely:

"The issue, transfer or receipt of, or any dealing with, money and security for money or any note or order for the payment of money."

20. The Parties' Arguments

(a) General

It was implicit in each party's submissions that the Trustee made a supply within section 5(2) VATA 1994, if, and only if, it made a supply for a consideration within Article 2(1) of the Sixth Directive.

The FNBC case is central to both parties' arguments in this appeal. The ECJ judgement in that case was given on a reference by the High Court. The issue before the High Court was whether first National Bank of Chicago was making exempt supplies for VAT purposes when it entered into foreign exchange transactions for which it did not charge a fee. Although it did not charge a fee, broadly, it made its money from the spread between bid and offer prices. The Tribunal put the position thus:

"A bid and offer price is quoted, or at any rate assumed to be available. If the market value of the currency were to be expressed as the mid price between the quoted prices, the Bank, by providing the currency required [by the counterparty] at the lower bid price would in effect be taking the equivalent of a commission at a rate equal to the difference between the bid price and the mid price. In our judgement this is part at least of the value the Bank will put on the transaction at the time it is entered into." (Page 22, 11 – 25 of the Tribunal's Decision).

21. The Tribunal held that the foreign exchange transactions entered into by the Bank with its customers and other financial institutions [were] supplies for a consideration for the purpose of VAT. On appeal to the High Court, the High Court referred the following questions to the ECJ:

"On the proper interpretation of the Sixth Directive and in relation to transactions of foreign exchange as defined by the British Bankers' Association…:

Do such foreign exchange transactions constitute the supply of goods or services effected for a consideration?

If there has been a supply of goods or services effected for consideration, what is the nature of the consideration in relation to such transactions?"

22. Thus although the High Court was concerned with the question of whether the bank made a supply for a consideration, its question to the ECJ was whether - more generally - foreign exchange transactions constituted supplies for a consideration.
23. The Advocate General dealt with the question referred solely by reference to whether or not the bank was making a supply for a consideration, and did not address the wider question put by the High Court. His conclusion was that the questions referred should be answered thus:

"(1) In relation to foreign exchange transactions…, the bank effects a service for consideration within the meaning of the Sixth Directive where that service is not paid for by a charge but by a spread between the bid and offer rates.

"(2) The consideration for the service is what the bank receives by way of spread between the bid and offer rates." [our emphasis]

24. The ECJ having set out the background and the submissions made to it, set out its reasoning in paragraphs 27 to 35 of its judgement:

"27. Only where a person's activity consists exclusively in providing services for no direct consideration is there no basis of assessment and the services are therefore not subject to VAT (see Tolsma [1994] STC 509 at 515, [1994] ECR I – 743 at 758, para 12).

"28. In the present case, it cannot be disputed that a bilateral legal relationship exists between the bank and its counterparty under which the two parties to the transaction give reciprocal undertakings to transfer amounts in a given currency and to receive the counter value in another currency.

"29. Apart from the actual exchange transaction, the service provided by the bank is characterised by the bank's preparedness to conclude such transactions in the currencies in which it specialises.

"30 From the mere fact that no fees or commission are charged by the bank upon a specific foreign exchange transaction it does not follow that no consideration is given.

"31 Moreover, any technical difficulties which exist in determining the amount of consideration cannot by themselves justify the conclusion that no consideration exists.

"32 In addition, it is apparent from the case file that the rates at which the bank is prepared to sell or purchase currencies are different and are separated by a spread. The conclusion must therefore be that, in return for the service which it provides, the bank takes for itself a consideration which it includes in the calculation of those rates.

"33 To hold that currency transactions are taxable only when effected in return for payment of a commission or specific fees, which would thus allow a trader to avoid taxation if he sought to be remunerated for his services by providing for a spread between the proposed transaction rates rather than by charging such sums, would be a solution incompatible with the system put in place by the Sixth Directive and would be liable to place traders on an unequal footing for purposes of taxation.

"34 It must therefore be held that foreign exchange transactions, performed even without commission or direct fees, are supplies of services provided in return for consideration, that is to say supplies of services effected for consideration within the meaning of art 2(1) of the Sixth Directive.

"35 The answer to be given to the first question must therefore be that transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other party of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date, constitute supplies of services effected for consideration within the meaning of art 2(2) of the Sixth Directive."

25. We note that paragraphs 28 – 33 refer solely to the position of the bank or a trader, whilst the concluding paragraphs 34 and 35 are of a wider nature. Paragraph 35 is in the same terms as paragraph 1 of the operative part of the Court's judgement quoted at the beginning of this Decision.

(b) The Respondent's Argument

26. Mr Key said that in relation to application of VAT to foreign exchange transactions there were three issues:

(i) whether there was a supply at all and, if so, what was its nature?

(ii) is any such supply for a consideration? and

(iii) if so, what is the amount of consideration?

He said that we should be concerned only with (ii), and that the answer to that question had been given by the ECJ in FNBC. He admitted that (i) gave rise to difficult theoretical issues – particularly in finding words to describe the nature of the supplies, and that (iii) gave rise to difficult theoretical and practical issues, but, he said, neither of them should concern us: the Tribunals in Republic National Bank of New York (LON/92/601X) and FNBC had said that there was a supply, the ECJ had said the same; in the circumstances of the appeal the amount of the consideration received by the Trustees was irrelevant – all that mattered was whether or not there had been a supply for a consideration. If there had been, it would be exempt and the Record input tax would be irrecoverable no matter what the quantification of the consideration.

27. Mr Key said that the question put to – and answered by – the ECJ was not just about supplies by banks, it encompassed:

(i) transactions between banks or financial institutions and other banks or financial institutions;

(ii) transactions between banks and their customers;

(iii) transactions between non-banks.

28. Thus the decision, he said, was as relevant to a transaction between, say, Barclays Bank and Lloyds TSB as it was to a transaction in which Miss Smith bought foreign currency for a trip abroad from Barclays Bank, or under which, on her return from her travels she sold her excess foreign currency to Mr Jones (the only constraint on its effect in the latter case being whether or not Miss Smith and Miss Jones were taxable persons making their supplies in the course of an economic activity).
29. Mr Key said that, in the operative part of its judgement, the ECJ did not adopt the restrictive language proposed by the Advocate General. He said that the ECJ often rephrases a question or addresses a question different from that referred. It could have done so in FNBC, but it did not. We should therefore treat the wider approach as deliberately eschewing the narrower formulation of the Advocate General. He argues that the ECJ was "stuck" with the facts given to it, but that did not mean that its answer to the questions was limited to those facts.
30. Mr Key says that the ECJ was saying that both parties to a foreign exchange transaction make supplies for consideration, each to the other. He says we should not find this odd – there are other transactions where both parties make supplies to each other. We discussed an imaginary transaction in which A transferred to B a quantity of Basmati rice in return for B transferring to A a quantity of coal: both A and B made supplies for a consideration. His point was not to liken, say, $ with Basmati rice and £ with Coal because he accepted that the actual flows of currency between the parties were not necessarily the consideration given and received, but to say that the logic of the VAT legislation did not exclude, but actually encompassed, the possibility of mutual supplies in the same transaction.
31. Mr Key said that in FNBC it was noted that the bank's counterparties could be other banks - see paragraph 10 of the Advocate General's opinion:

"The bank's customers for its foreign exchange transactions fall into three categories. The first includes corporate customers seeking the manage their foreign currency risks and needs through and spot and forward contracts and hedging. The second category covers fund managers, such as pension funds, customers in this group are typically organisations which manage other people's money. The third category includes other financial institutions."

32. He takes the example of two banks entering into a foreign exchange transaction. Each may do so for reasons dependent upon their circumstances (e.g. to hedge a position, or because the bank holds itself out as a market maker) and each with their own spreads, but each bank, he says is clearly providing a supply for a consideration.
33. There is no need to isolate one bank and say "this is the supplier" and to say that the other bank is the "customer". Both are suppliers and both are customers. One bank's view of its margin or profit from the transaction must necessarily be different from the other's, but that does not mean that both do not receive consideration. He says that the ECJ even recognised that it could be said that on a particular transaction a bank makes a loss, but that it holds that this does not prevent the supply being for a consideration when it says, in the answer to the second question, that the value is the "net result of the transactions of the supplier of the services over a given period of time".
34. We discussed with Mr Key the position of Miss Smith when she bought her, say, $ from the bank. The bank would expect to make a profit from the transaction: if Miss Smith sold the $ back straight after she bought them, she would make a loss because of the bank's spread. If the ECJ's judgement in FNBC meant that she was to be treated (in relation to both transactions) as making a supply for a consideration, then all she would keep and retain would be a loss. What she received would be negative consideration. Mr Key urged us to leave Miss Smith's position for another day. The ECJ had not dealt with negative consideration. It might not be consideration at all.
35. If, contrary to his main submission that we need go no further than the answer to the first question given in the operative part of the FNBC ECJ judgement, it was necessary to determine whether there was a positive consideration received by the Trustees, Mr Key contended that on the facts there was. In addition, the terms of Record's retainer indicated an intention to profit.
36. He said that paragraph 47 of the ECJ judgement required us to determine the net result to the Trustee over a period of time: "the consideration…must be regarded as consisting of the net result of its transactions over a period of time". Mr Key noted in particular the plural word "transactions". He said that we must look at the transactions undertaken by the Trustee not individually, but linking them together, and determine the net result over a period of time. This, he said, should include the results of currency fluctuations retained by the Trustee.
37. Mr Key noted that the ECJ had not limited its concept of the consideration received by the bank to the spread. Spread was the starting point, but not all. At paragraph 14 the Court noted that:

"The bank seeks to make a profit out of its foreign exchange dealings as a result of the spread between its bid and offer quotes. Each of its traders will have his or her book of particular currencies and will be expected to make a profit over appropriate periods. This profit is the result of their dealings over a particular period."

and at paragraphs 45 and 46:

"In this regard, the spread representing the difference between the bid price and the offer price is only the notional price which the bank would obtain if it were to conclude, at the same instant and on similar conditions, two corresponding purchase and sale transactions for the same amounts and the same currencies.

"However, these are simply theoretical considerations, since the bank carries out a large number of transactions relating to different amounts and involving different currencies, the rates of which are in constant fluctuation. A trader cannot normally foresee, when concluding one particular transaction, at what moment and at what price he may subsequently effect one or more transactions enabling him to eliminate or fix, at a specific amount, the risk of a change in rate to which he is exposed following the first transaction."

38. Mr Key said we should look at the profits made by the Trustee from these transactions. Just as, in the case of a bank, profit arising from currency fluctuations could be part of the consideration received from the transactions (see the paragraph quoted immediately above this paragraph), so it should be in the case of the Trustee.
39. Mr Key took us to the description of the Record Overlay Process in our bundles. That document contained an example showing how the Record Overlay process should work. The example showed five forward currency contracts being entered into in relation to a US$10.5m investment $ exposure over a year – in the manner described in our example at paragraph 15(11) above. Because there was an odd number of contracts the last contract remained active at the end of the 12 month period and when it was settled at the end of the period a net profit for the period arose of £497,561. This was, he said, the profit, the amount retained, and therefore the (positive) consideration for the supplies the Trustee had been making.
40. Finally, Mr Key took us to three cases which he said indicated the liberal approach typically taken to deciding whether there is consideration linked to a supply.
41. In Kennemer Golf & Country Club [2002] STC 502, the ECJ held that a member's subscription to a golf club was consideration for a supply made by the club - even to a member of the club who might not use the facilities provided.
42. In Town and Country Factors v C&E [2002] STC 1263, the ECJ held that the total amount of the entry fees received by the organiser of a competition constituted the consideration received by the organiser for providing the competition notwithstanding that the organiser paid out a large part of those proceeds in prize money.
43. In C&E v Professional Footballers Association Ltd [1993] STC 86, the House of Lords held that the payment made by diners to attend a dinner at which professional football awards were presented included a consideration for the supply of the awards to the winners.
44. Each of these cases, said Mr Key, indicated that a liberal approach could be taken to determining what, and how much, was the consideration for a supply.

(b) The argument of the Appellant

45. Mr Preston started by saying that the currencies themselves do not form part of the consideration for a supply of foreign exchange. He says that this was made clear by the ECJ in paragraphs 43 and 44 of its judgment in FNBC:

"43. While they are the subject of a supply, the currencies transferred to a trader by his counterparty in the course of a foreign exchange transaction cannot be regarded as constituting the remuneration for the service of exchange in currencies for other currencies or consequently as constituting consideration for that service.

"44. Determining the consideration therefore comes down to determining what the bank receives for foreign exchange transactions, that is to say, the remuneration on the foreign exchange transactions which it can actually take for itself (see, in this regard…Glawe…1994 ECR I – 1679…)."

46. Next he says that there must be some other element before a foreign exchange transaction can be said to be for a consideration. He says that the Trustee is not a market maker. It does not charge a fee or commission, nor does it quote or make a spread. It does not build a consideration for a service rendered into a foreign exchange transaction that it undertakes. He says that the only profit made by the Trustee arises purely from the movement in foreign exchange rates over time.
47. He says that a profit deriving from market movements over the period a contract is held is not a profit from any service provided by the Trustee.
48. Mr Preston refers to paragraphs 14 and 32 to 34 of the ECJ judgement (quoted in paragraph 37 and 24 above). He says that these paragraphs, read with the case as a whole, are aimed at establishing the proposition that even if there is no fee charged by the bank, but only a spread, there is still a supply for a consideration.
49. Mr Preston notes that the Advocate General differentiates in his language between the supplier of a foreign exchange transaction and the customer. He drew our attention to paragraph 43 of the Advocate General's opinion in which he says:

"It is the customer who approaches the bank and asks for a service, namely the exchange of foreign currency. According to the bank, the customer is aware that the service will not be performed free of charge… customers… know by how much the selling price of a foreign currency exceeds the purchase price. Consequently customers know that they are paying for the service and are aware of how much they are paying."

50. Mr Preston says that a supply is made to a customer and not the other way around. The Trustees approached the bank through Record to obtain a service to meet their needs – not to offer a service to the bank. He accepts that this is a difficult principle to apply when two banks are contracting with each other, but says that where the facts indicate there is a customer and a supplier the position is different.

Conclusion

51. We divide our conclusions into four parts. In the first, we set out some general considerations; in the second, we discuss whether, as HMRC maintain, paragraph 1 of the operative part of the ECJ judgement in FNBC is determinative; in the third, we determine what, as a factual matter, the Trustee did receive; and then lastly determine whether any profit made by the Trustee was consideration for any supply it made.

(a) General Issues

52. We agree that the Trustee makes a supply for the purposes of section 5(2) VATA 1994 if, and only if, it makes a supply for a consideration within Article 2(1) of the Sixth Directive. It is common ground, we believe, and the ECJ held in FNBC (see paragraphs 25 and 26 of its judgement), that foreign exchange transactions are supplies of services within Act 6 of the Sixth Directive: there is a legal relationship between the parties pursuant to which there is a reciprocal performance.
53. What is less clear is how to describe that service: is it the service of facilitating or effecting the flow of monies (as the Tribunal suggested in First National Bank of Chicago), the agreement to exchange, the exchange itself (see paragraphs 43 and 66 of the Advocate General's opinion in FNBC), or the exchange transaction and something else – see paragraph 29 of the ECJ's judgement in FNBC "[a]part from the actual exchange transaction, the service provided by the bank is characterised by the bank's preparedness to conclude such transactions in the currencies in which it specialises" i.e. to act as a market maker. However, whatever the proper description of that supply, it is clear that the service is not simply the supply of one currency for payment, and, in particular as the ECJ said at paragraph 43 "the currencies transferred to a trader by his counterparty in the course of a foreign exchange transaction cannot be regarded as remuneration for the service of exchanging currencies for other currencies, or consequently as constituting consideration for the service."
54. That statement is in our view fundamental to foreign exchange transactions. As Lord Slynn said in Nell Gwynn House Maintenance Fund v C&E 1999 STC 79 @ 89 . "Cases involving simply the exchange of money on which a profit is made are really in a category of their own". They are not in our view properly analogous to the supply of, say, a toothbrush for a cash sum which the cash sum passing in one direction is the consideration for the toothbrush passing in the other direction. Instead, neither the $ (say) moving from the Trustee, nor the £ (say) moving from the bank are "consideration" for VAT purposes one for the other. A supply is being made, it is broadly the promises made and the composite actions under the agreement; but the flows of money are not, for VAT purposes, consideration either one for the other, or for the supply. One must look further to determine whether there is consideration.

(b) Is paragraph 1 of the operative part of the ECJ Decision determinative?

55. Mr Key identified three questions: (i) Was there a supply? (ii) Was there a supply for consideration? and (iii) What was the value of the consideration.
56. Put shortly, our conclusion is that we cannot divorce question (ii) and (iii). Consideration is something "obtained" or "received" by a supplier (see para 17 above). Something which is given, or lost, is not consideration "received". Negative consideration is not, in our view, consideration. Only if we can identify something or value directly retained, or kept, by the supplier for itself as a direct consequence of the supply can there be a supply for a consideration. In other words we do not believe that the answer follows automatically from paragraph 1 of the operative part of the ECJ decision.

We reach this conclusion in the following way.

57. In 1977 in the case of Robert Bosch GmbH v Hauptzollant Hildershein, Case 1– 77, the ECJ gave a preliminary ruling on a question on the application of the Common Customs Tariff. The issue was whether the value of a machine for those purposes should include the value of a patented process incorporated into the machine. In the operative part of its judgement the Court held that the relevant value included "the value of a patented process when the protected process is inseparably embodied in and constitutes the only economically viable use of the goods."
58. The Court's reasoning was embodied in only six paragraphs, but in paragraph 5 the Court expressed a conclusion which was slightly more restrictive that the answer given in the operative part of the judgement. It said (at paragraph 5) "…the result of an interpretation of Article 3… is that a patented process, the carrying out of which constitutes the only economically viable use of the goods and which is only put into effect by the use of those goods, is regarded as embodied in the imported goods." (Our emphasis).
59. It was not clear to those who had to apply this judgement whether the underlined words were part of the answer. The question was referred back to the Court. In case 135/77 (also sub num Robert Bosch GmbH v Hauptzollant Hildershein) the ECJ said that "the operative part of that judgement must… be understood in the light of [paragraph 5] of the Decision" and held that the underlined words were part of the answer.
60. This case was not referred to in the argument before us, but we take it as authority that the operative part of an ECJ judgement should be construed in the light of the judgement as a whole.
61. Torfean Borough Council v B&Q plc [1990] 2 QB 19 (also not referred to before us) was a case about Sunday Trading. Torfean Borough Council had prosecuted B&Q for opening on a Sunday. B&Q argued that, because it imported and sold goods from the EU, the prohibition on Sunday trading constituted a restriction on trade between member states contrary to Article 30 of the Treaty. The question was referred to the ECJ.
62. One of the arguments put by the UK was that the effect of the prohibition on Sunday trading was felt only by an individual trader and that there was no evidence of an effect against a specific product. The Advocate General dealt with this argument in paragraph 8 of his opinion:

"Whilst it is true that an interpretation of Community Law given in a preliminary ruling applies erga omnes, judgement is given with reference to the application of national rules to a well-defined factual situation arising in the main proceedings. It is certainly not always possible (nor desirable) that in a preliminary ruling that the court should express its views on application situation which go beyond those arising in the main proceedings and of which the precise facts are not known or sufficiently known."

63. In its judgement the ECJ made no comment on this issue.
64. We take this as a strong indication that we should be wary of applying a judgement of the ECJ made in the light of a specific situation to situation not considered by the Court. That is not to say that the decision should have no relevance but we believe that, taken with the comments in Robert Bosch GmbH v Hauptzollant Hildershein, means that we should pay particular attention to the reasoning of the Court when seeking to apply a judgement of the Court in circumstances different from those before the ECJ when giving its judgement.
65. In our view the effect of the ECJ's decision in FNBC is that where it is possible to identify consideration received by a party to a foreign exchange contract which is directly related to his supply in relation to that contract, then there is a supply for a consideration for the purposes of the Sixth Directive: and that in determining whether there is such consideration regard is to be had to all that is retained from the supply by the supplier.
66. As the Advocate General said at paragraph 58 of his opinion:

"Given that in the course of answering the first question referred for preliminary ruling it was already necessary precisely to determine the consideration, the second question has already been answered. However, it was not unnecessary to answer the second question… since it cannot be proved that there is consideration within the meaning of the Sixth Directive without precisely defining that consideration." [our italics]

67. In other words, before you can say that there is a supply for consideration, you have to be able to identify the consideration received. In the case of a bank or financial trader, the starting point of that identification is the spread, and because it can be identified it can be said that there is a supply for consideration. If the consideration necessary cannot be identified (not, we note, is simply difficult to value), then there cannot be such a supply.
68. The operative part of the ECJ's judgement must we believe be read in the light of its reasoning. Its reasoning set out at paragraph 24 above relates to the position of a bank or financial trader, but that reasoning is directed towards identifying what the supplier "takes for itself" from the transaction (see paragraph 32 of the judgement), and to the question of whether, absent the charging of a fee, there can be consideration. The Court is considering whether in a bank or trader's circumstances there is consideration, it is not saying that the very nature of a foreign exchange transaction is such that there is always consideration received by each party.
69. We accept that the decision is capable of application erga omnes, and can therefore apply to transactions between Miss Smith and her bank. But its effect is, in our view, that Miss Smith makes a supply for consideration to her bank only when, as a factual matter, a consideration can be identified as received by her.
70. We accept that the reasoning (thought not the language) of the ECJ and the Advocate General is not dependent on classifying one party as the "customer" and one party as the client. There is a supply by virtue of the transaction, the only question is whether the party under consideration obtains a consideration. Thus when two banks contract with each other, each may make a supply for consideration to the other.
71. We accept that the ECJ is not embarrassed to reformulate the question asked of it, and that it did not do so in this case. But we see nothing in the reasoning of the ECJ which would suggest that failing to do this was an integral part of the answer it intended to give.
72. Finally, we note that Article 11(1) of the Directive defines the taxable amount to be "everything which constitutes the consideration which has been or is to be obtained by the supplier…"; Since the payments of currency under the contract are not themselves the consideration (see paragraph 43 of the ECJ decision and paragraph 54 above), one has to identify something capable of being "obtained". The making of a loss, or the incurring of an expense, is not "obtaining" anything. A consideration must be capable of being received. Negative consideration is not in our view consideration for these purposes.

...c) As a factual matter did the Trustee receive anything which could be a consideration?

73. In the second paragraph of the operative part of its decision the ECJ said that in a foreign exchange transaction "in which no fees or commission are calculated with regard to specific transactions, the taxable amount is the net result of the transactions of the supplier of the services over a given period of time." In this section we describe the financial results accruing to the Trustee from its dealings in the foreign exchange contracts. We address the question "what period of time" and draw inferences of fact at the end of the section.
74. In our bundle of papers was a report from Record for the month ending 31 December 2002. It included a "Position inventory report" for ¥, US$ and € for the month and a "transaction report" for the month. Each position inventory report showed for various numbered positions, whether each of these was an "active" position and, if so, what its value was. For these purposes a position is held in relation to one of the "pieces" of foreign currency investment exposure (see paragraph 15(11)) above according to whether or not an odd number of foreign exchange contracts is held in relation to that piece. If an odd number is held then each successive pair of contracts made prior to the last will have a fixed value (as a pair) but the last will have a value which varies with market exchange rate movements. We describe the holding of an odd number of contracts in relation to a particular "piece" of investment exposure as holding an "open" or "active" position.
75. Thus, for ¥ position 29 (of ¥496m), the Position inventory report shows the Value Date (the date on which the relevant contracts settle for that piece) as being 9 October 2003, the protection level as ¥187.02 and no open position as being held. The transaction report indicates that four foreign exchange transactions were undertaken in relation to that piece in December 2002:

(i) on 3 December 2002, ¥496m were agreed to be sold on 9 October 2003 at a rate of ¥187.77 = £1 (i.e. the forward value of ¥ had fallen below the protection level);

(ii) on 16 December 2002, ¥496m were agreed to be bought on 9 October 2003 at the rate of ¥196 = £1. Thus it appears that the forward value of ¥ had risen and there was no longer any need for the protection afforded by the first contract. This second contract thus closed out the position. At this stage the Trustees had crystallised a loss: under the first contract they would receive £2,641,529.53 for ¥496m, under the second they would pay £2,666,666.67 ¥496m. Thus a net loss of £25,137.14 would accrue to them. This loss would arise whatever happened to future exchange rates.

(iii) on 18 December 2002, ¥496m were agreed to be sold on 9 October 2003 for £2,641,388.86 (a rate of ¥187.75 = £1 – representing a forward value of ¥ below the protection level); and

(iv) on 27 December 2002, ¥496m was agreed to be bought on 9 October 2003 for £2,659,945.30 (a rate of ¥186.47 = £1 – representing a forward value of ¥ above the protection level). As (ii) had closed out (i), this contract closed out (iii) producing, with (iii), a net fixed loss of £18,556.44.

76. Thus, at the end of December no open or active position was held in relation to this ¥496m piece of ¥ investment exposure. And the Inventory report shows no position held at the end of the period.
77. Position 46 relates to a US$ piece of $10,500,000 with a Value Date of 10 December 2003 and a protection level of $l.5614 = £1. The transaction report indicates three transactions for this period:

(i) on 19 December 2002, a forward sale at £1 = $ 1.5675 – so for £6,698,564.54;

(ii) on 24 December 2002 a forward purchase at £1 = $1.5556 – so for £6,749,807.15; and

(iii) on 27 December 2002, a forward sale at £1 = $1.5659 – so for £6,705,409.03.

78. Contract (ii) closed out the open position on contract (i) leaving a fixed net loss of £6,749,807.15 - £6,698,564.59 = £51,242,56. Contract (iii) remained open at the end of December. The inventory report thus showed an open position of $10.5m at the end of December 2002 for this piece.
79. If the 10 December 2003 forward value of $ had stayed the same or fallen in the next 11 ¹/₂ months, this contract would, as we understood it, have remained open (i.e. there would have been no subsequent contract in relation to this piece) and on 10 December 2003 would have delivered a profit equal to the difference between the sterling cost of $10.5m at the then £/$ spot rate and the sterling amount receivable under the contract.
80. Mr Key said that HMRC agreed that we could rely on the documents in the bundles as evidence of the matters contained in them. The only monthly report before us was for December 2002. We therefore had no direct evidence of the nature of the transactions undertaken in other months. However, the December 2002 report showed transactions which were consistent with the methodology described in the document "Record Currency Overlay Process" which was before us and which HMRC also agreed we could rely upon.
81. From this we therefore reached the following conclusions in relation the whole of the period concerned:

(i) if each foreign exchange transaction is regarded in isolation (as it would be if the Trustees had entered into only one such transaction), the Trustee received and retained nothing from entering into that transaction;

(ii) having regard to the pattern of the Trustee's dealing, any amount kept by the Trustee in respect of its foreign exchange transactions must be determined by reference to the piece of investment foreign currency exposure hedged. There is no profit which can be said to derive from the combined results of transactions which do not relate to the same piece.

(iii) to the extent it is permissible to look at the results of the foreign exchange transactions over a period of time, that period, in relation to any piece, is the 12 month period by reference to the end date in relation to which those transactions are entered into;

(iv) where in that period the Trustee has entered into an even number of transactions in relation to that piece it receives and retains a loss;

(v) where in that period the Trustee has entered into an odd number of transactions in relation to that piece, it makes a profit on the last transaction by reason of a movement in exchange rates between the forward rate for the date of the end of the period at the date the transaction was entered into and the spot rate at the end of the period, but that profit to the Trustee is reduced by the losses which accrued on any earlier matched pairs of transactions undertaken in relation to that piece.

82. In other words, the only amounts kept by the Trustee which arose as a result of having undertaken the transactions were the foreign exchange movement profits on contracts held to maturity (as reduced by the matched transaction losses). Although these were the amounts which arose from having undertaken the transactions, the question we have to address is what was the "net result of the transactions of the supplier of the services" over the period.

(d) Was the exchange rate profit, "consideration"?

83. In Apple & Pear Development Council v C& D Commissioners 1988 STC and 221 the Court of Justice said at paragraph 12 of the judgement:

"it must therefore be stated that the concept of the supply of services effected for consideration within the meaning of article 2(1) of the Sixth Directive presupposes the existence of a direct link between the service provided and the consideration received" [our emphasis].

84. Therefore the question for us in relation to the Trustee is whether, as a factual matter, anything identified in the previous section of this decision as retained by the Trustee, is directly linked to the supply made.
85. As we note above, "active positions" held by the Trustee will consist of an odd number of contracts in relation to any piece. Only the last contract will, in effect, give rise to any profits because the preceding contracts will cancel out and produce no ongoing effect. Indeed the combined effect of a pair of contracts will, as noted above, always produce a loss. A profit, on the other hand, can derive only from an "active position". That profit will be unrealised (subject to the later closure by reason of change in the forward rate) until the final exchange date, when if the contract is still active the value of the currency will be realised (and a net sum received if the contract is net settled).
86. A contract may remain active for the whole of the 12 month period, alternatively it may only have a few months, or weeks, life before being closed. But if it lasts to the end of the 12 month period, the profit retained derives from currency movements in that period.
87. It seems to us that such a profit is not something retained by the Trustees for doing something. It is not akin to a fee or commission or a spread. It does not derive directly from the entering into the contract or from facilitating the currency flows under it or making available bank facilities, or from entering into two opposite contracts to profit from the spread. Instead, it derives from something external to the supply made, namely from fluctuations in market rates. It is not a "result of the transactions of the supplier".
88. The profit derived from fluctuations in market rates is not, in our view, directly linked to any supply made to the counterparty.
89. If FNBC had decided to take a position in the say $, e.g. by entering into contracts under which it had a long forward position – i.e. under which it would be committed to buy $ in the future at a rate fixed today, and it made a profit from that position, because actual forward rates differed from those for the $ it had agreed to buy , that profit would derive from the decision to take the position and not from its activity of providing any supply to any counterparty. It would not make that profit from the transacting, but from the holding, of a position. Such a profit would, in our view, not be "a consideration which it includes in the calculation of [the] rates [at which the bank is prepared to buy and sell]". (Paragraph 32 of the judgement), or part of the "turnover" of the bank, and would not be directly derived from the supply under the foreign exchange transactions. It would not be consideration received for the reciprocal undertakings under the foreign exchange transaction.
90. HJ Glawe Spiel – und Unterhaultungsgeräte mbH & Co KH v Finanzant Hamburg-Barmbek-Uhlenhorst (Case C-38/93 [1994] STC 543, [1994] ECR 1 – 1679)

Glawe were the operators of gaming machines in bars and restaurants. In accordance with statute, these were set so as to pay out on average at least 60% of the coins inserted. The Court of Justice held (see [1994] STC 543 at 551, [1994] ECR I –1679 = 1697, para 9) that "the consideration actually received by the operator in return for making the machines available consists only of the proportion of the stakes which he can actually take for himself". As to the German government's contention that the amount obtained by the operator as supplier was the whole of the stake inserted into the machine, the Advocate General (Jacobs) observed (see [1994] STC 543 at 547, [1994] ECR I – 1679 at 1686, para 18) –

"…that view is inconsistent with the commercial reality of the transaction… for all practical purposes the operator's turnover consists in the amounts he is able to remove from the machine, and not in the total amounts inserted by players."

The case turned on what was meant by "obtained" in art 11A(1)(a) of the Sixth Directive and was in our view decided by reference to "the commercial reality".

91. In Glawe, the gambling machine operator's profit was what remained in the machine (being the difference between what the gamblers had put into the machine and the prize money paid out). That was the consideration received by the operator for the provision for the service of the machine. If the machine had taken foreign currency, and the operator had decided that, rather than taking out his share each day and converting it into his local currency, he would instead keep it in foreign currency – whether within the box inside the machine or outside the machine – the consideration he received for VAT purposes would, we believe, not be the amount in his local currency when he eventually exchanged the contents of the box into the local currency, but the accumulated value of the local currency equivalent of the daily increments in the money in the box. Any currency profit derived from holding the foreign currency in foreign currency form, rather than local currency, would not be directly linked to the service he provided.
92. Likewise, in our judgement, any profit made by the Trustee by continuing to hold an open position to maturity is not consideration derived from any supply by it in relation to the foreign exchange contracts.
93. On that basis, the Trustee received no consideration for any supply made to the banks because the transactions under which a position was opened and closed when taken together always gave rise to a loss, and for transactions under which profits arose, those profits derived only from the holding position to maturity not from the entering into the contract.
94. Mr Key had said that we should treat the profits of the Trustee in the same way as the profits of a bank in relation to these transactions. We do not think the parallel is appropriate: first, in paragraph 70 of his opinion the Advocate General makes a clear distinction between the bank's net profit (after deducting costs of operations etc) and that which it receives by way of spread; the ECJ did not adopt the "spread" formula, but in paragraphs 44 to 46 of its judgment it concentrates on the profit "on" foreign exchange transactions, and indicates that the taxable amount is limited to the results of the transactions. Thus it is not any profit of the bank which is relevant, but the profit on these transactions ignoring other features. Second, as output VAT is a tax on turnover, we should resist extending the concept of consideration to any profit howsoever derived: it must be limited to the direct result of the transactions.
95. We did not find Kennemer Golf Club of much assistance. In that case, once the supply was identified as being the making available of the facilities by the club, rather than their use, the fees payable by the members could be seen as directly linked to that service. It was not a case about the broad meaning of consideration being linked to a service, but about the identification of the supply.
96. Town and County Factors was decided after FNBC, but FNBC does not appear to have been cited to the ECJ. In Town and County Factors the ECJ held that the gross amount of the entry fees was the consideration obtained by a spot the ball competition organiser for the service he supplied by the organiser consisted of both organising the competition and providing a chance of winning (See Advocate General's opinion paragraph 89). The fees received were held to be the consideration for that supply even though the operator's profit was reduced by paying out a large proportion of his receipts as prize money. We do not find this case a helpful guide to determining what (if any) consideration was received and retained by the Trustees: in that case the fees were cash paid for a service; in the foreign exchange transactions of the Trustee the amounts paid were not themselves "consideration" at all (as we note in paragraphs 53 and 54 above).
97. In the Professional Footballers' case Lord Slynn said that it did not matter that no identifiable part of the purchase price of each ticket could be shown to go specifically towards the cost of trophies, but there was a consideration – the price of the ticket and that was consideration directly linked to the supply of the trophies. In the case of the Trustee we have to identify what (if anything) was that the Trustees obtained for its supply; in that case there was an identified price paid for the awards evening and the question was whether any of it was directly linked to the awards. In that case the consideration obtained was directly linked to the supply of the trophies because the consideration was obtained for (and directly linked to) the supply of the evening, and an important part of the evening was the supply of the trophies; any exchange rate movement profit obtained by the Trustee is not obtained for the mutual covenants in the contract or their performance but as a result of market movements extraneous to any supply made by the Trustee.
98. Accordingly, we find that the Trustee did not make supplies for a consideration in relation to the foreign exchange transactions entered into through the agency of Record.
99. There are two further points to make. First Mr Key accepted that his arguments in relation to foreign exchange transactions also applied to transactions such as interest rates swap contracts (where, for example, a manufacturer who has borrowed at a floating rate of interest but wishes to fix in advance at the effective rate of interest, agrees with the bank that he will pay to the bank a fixed rate of interest on a notional amount of, say, £100m, and in return for that payment receive a floating rate of interest on a notional amount of £100m from the bank). We agree: depending on the facts there may be a supply for a consideration, but there will only be such a supply if it is possible to identify consideration obtained by the party for entering into the contracts. That would be rare in the case of a manufacturer for similar reasons as those which apply to the Trustee.
100. Second, our analysis is not dependent upon whether the foreign exchange transactions were net or gross settled. Although the FNBC decision related to a definition of foreign exchange transactions which did not expressly include net settled contracts, the reasoning of the Court is, in our view, equally applicable to net settled contracts.
101. We therefore allow the appeals against the assessments made pursuant to the decision of HMRC made on 26 November 2003.
102. We were grateful to Mr Preston and Mr Key for their measured and amicable approach to their appeal, Neither asked for costs to be awarded, and accordingly we have decided to make no award of costs.
103. The decision was unanimous.
CHARLES HELLIER CHAIRMAN RELEASED: 25 July 2005

LON/04/1303