HMRC internal manual

International Manual

INTM263040 - Non-residents trading in the UK: Trading/contracts made in the UK: case law (2)

The “Champagne” cases

The Erichsen v Last principle of considering where the contracts for sale were made was developed in the slightly later so-called ‘champagne cases’ which involved agents acting in the UK for the foreign trader. There were three ‘champagne cases’. In the first two, both in 1888, the Inland Revenue succeeded in contentions that the French champagne houses concerned were trading in the United Kingdom through agents in London. In the first case [Pommery and Greno v Apthorpe 2TC182] there was no express finding as to where contracts were made but most orders were met from stock held in the United Kingdom. In the second case [Werle v Colquhoun 2TC402] the Court of Appeal made it clear that they considered the contracts to be made by the agents here on behalf of their principal.

These two houses were producers of champagne as well as sellers of champagne and it is reasonably clear that the Revenue did not claim to tax the producer’s profit. In the Pommery case at page 189, the Judge specifically referred to the difficulty of calculating the profit; he said that there might be some difficulty as to the manner of calculation in deciding what amount of expenditure to put against the profits and wondered whether it would be proper to look at the goods sent over to England and to put a fair valuation upon them as they arrived. That he said was a matter of quantum, a matter for the consideration of persons skilled in such things.

In the Werle case on page 413 Fry LJ had a similar approach, he said

`A small shopkeeper………. is plainly carrying on a trade in the place where the shop is….. The question, however, becomes more difficult when the trade is carried on, as in the present case, in a far more complicated manner….. when the contract may be in one place, the goods in another, the principal in another and the goods may be delivered in some other place. We have, however, simply to do this, to take all the relevant facts and the mode in which the business is carried on, and to ask ourselves whether that business be or be not carried on within the United Kingdom. It appears to me that the same business may in some sense be carried on in many places. The Head Office of a firm, the place where the goods are manufactured, the place where the contracts are made, may all of them be places in which the business or parts of the business is or are carried on. Now, in the present case what we find is this, that the appellants reside in France, carrying on there the business of vineyard proprietors, champagne makers and champagne merchants, no doubt a large portion of that business is carried on within France, but a portion of that business is that of champagne merchants. Now, that means, as I understand, the selling of champagne and that business they carry into effect in England through the intervention of a firm of agents in this country.’

Grainger v Gough

The last of the champagne cases is Grainger v Gough [3TC311 and 462] from 1896 and it is a very significant case. The Court of Appeal made no distinction between this and the earlier cases and found that the champagne house was liable on its trading here. Lord Esher, the Master of the Rolls was plainly of the view that it was the merchanting profit that was assessable and not the producer’s profit. He also incidentally made it clear that, in his opinion, there might be trading in the United Kingdom although there was only manufacture here and not a single thing sold here.

But Lord Esher and his fellow judges were overruled by the House of Lords on the question of whether there was liability at all. That was on the basis that in this particular case, contracts were not made in the United Kingdom. Although to the customer there may have been little difference between buying through the agents in the first two cases and buying through the agents in the third, there was a difference in the arrangements which the House of Lords saw as vital in determining the non-resident’s liability to United Kingdom tax. In finding that the contracts were not made in the United Kingdom the House of Lords drew the now classic distinction between trading in the United Kingdom which creates chargeability and trading with the United Kingdom which does not. Non-residents with customers here commonly rely on this distinction.