| Date | 3 February 1999 |
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| Judgment | Tony Cox (Dismantlers) Limited -v- Jim 5 Limited, ORB 28 August 1996 |
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| The Issue | Whether a contract amount is to be quoted as inclusive of VAT or whether VAT should be added to that sum in the absence of an express term to that effect. |
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| Implication |
A contract term will normally be implied by law to the effect that Value Added Tax is to be paid in addition to a contract amount, by reason of custom between those engaged in the construction industry. |
printIf properly handled, construction contracts and professional services agreements will generally make clear whether the contract amount is to attract Value Added Tax or otherwise. Occasionally however the contract is silent on the matter. This may in particular happen when an agreement is drawn up to settle outstanding moneys under the final account for a project. It should be made clear whether Value Added Tax is to be added to the settlement figure, but often this is overlooked. The case of Tony Cox (Dismantlers) Limited-v-Jim 5 Limited considered this question. Cox were demolition specialists who had entered into a contract with Jim 5, whereby Cox would transfer development land and carry out certain infrastructure work for a contract price of £800,000. The agreement made no mention of VAT. Disputes arose and amongst other matters the question of whether VAT should be paid on the contract amount was put before the court. Jim 5 argued that the £800,000 was to be treated as "inclusive of VAT". This, they said, was the only proper interpretation which could be placed on the Value Added Tax Act 1994. In particular they quoted section 19(2) of the Act which provided that "if the supply (of goods or services) is for a consideration in money, its value shall be taken to be such amount as with the addition of the VAT chargeable, is equal to the consideration". Parliamentary draftsmen win few awards for plain English, and the Value Added Tax Act provides no exception. Jim 5 argued that the objective behind section 19(2) of the Act was to establish the 'value' for the purpose of calculating the tax, since of course the tax is a tax on value. The clause in question must be taken to mean that the 'value', plus Value Added Tax, must equal the contract amount (consideration). In other words, a contract amount of £800,000 must be made up of £680.85 'value', plus 17½% VAT being £119.15. Cox argued that even if this was so, this should be overridden by a custom in the construction industry that prices quoted are always exclusive of VAT. An expert quantity surveyor was called on behalf of Cox who said that in his experience construction contracts are almost always quoted exclusive of VAT, and there is a general understanding in the industry that VAT will be charged for and paid in addition to the principal sum. He noted that in the present case both parties were registered for VAT and in the circumstances in his experience they would think, estimate, negotiate, and reach agreement for sums exclusive of VAT. He continued that for most parties in the construction industry VAT is not a cost, because any VAT paid is recovered. He was not suggesting any custom that VAT should not be paid, merely a custom as to the manner of its calculation. His Honour Judge Bowsher QC sitting as an Official Referee noted that ever since the tax was introduced it had been recognised that it was perfectly lawful to supply goods or services for a consideration which is exclusive of VAT. For example he noted that if he were to buy a computer marked at £1,000, he would not be at all surprised if VAT were added on top of the £1,000, even if he had not noticed the small print on the advertisement, or price tag "plus VAT". He reasoned that if it is lawful to make an express agreement that VAT should be charged on top of the price quoted, he could see no reason why there should be no similar arrangement by the operation of an implied term. Certainly the revenue collecting authorities would be unlikely to object since such an arrangement would result in the payment of more, rather than less, tax. He continued that section 19(2) of the Value Added Tax Act and its predecessors did not provide the only way of calculating value. In his opinion that section provided a way of calculating value when no other method had been provided. In conclusion he held that it was the custom within the construction industry to quote prices which are exclusive of VAT. He held that the custom was notorious, certain, and reasonable. Crucially that custom was not contrary to law, including the intention or policy of any statute. Judge Bowsher clarified however that the custom relied on was a custom between those habitually involved in the construction industry. It was not a custom between builders and individuals outside the construction industry. Accordingly, this case was to be distinguished from the 1993 case of Franks & Collingwood-v-Gates which established that where the employer was a consumer, and he or she accepted a quote for building work which made no mention of VAT, then it was likely that VAT would be treated as included in the price. A further point to note which was not considered in this case is that settlement agreements will generally embrace both sums paid in respect of work carried out or services rendered, and sums paid in lieu of damages for breach of contract. This latter would for example include interest for late payment. HM Customs & Excise have made it clear that the former element of the settlement (that is, in respect of work or services rendered) would attract Value Added Tax, whereas the latter would not.
CJ-9905
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