Brief 213168 I have been asked to provide the Luminous Lighting Company with a legal opinion on the likely tax implications of section 10(1) of the Environmental Taxes Act 2007, which came into force in the UK on 31st January 2008, on its current business activities: The impact of section 10(1) of the Environmental Taxes Act 2007 on the Company’s current business activities; namely, manufacturing and supplying standard light bulbs, lamp bases and lampshades on a wholesale basis to supermarkets, garden centres, DIY stores, department stores and office equipment suppliers: The first thing to note is that s10(1) of the 2007 Act will only apply to those products which are likely to be used in domestic premises. While this cannot be gleaned from a literal interpretation of s10(1), it is clear, from the long title of the Act, that Parliament did not intend for this tax to apply to products sold for use in non-domestic premises. Therefore, I would advise the Company to request a tax exemption for all those products sold to retailers who will sell them for use in commercial premises, and a tax reduction for those goods sold to retailers who are unable to determine whether or not the products are more or less likely to be sold for use in domestic premises. In regard to those products which are likely to be sold for use in domestic premises, the first question to be determined is whether or not the standard light bulbs, standard lamp bases and/or standard lampshades manufactured by the Company can be classed as ‘qualifying products’ for the purposes of s10(1) of the 2007 Act. For the purposes of s10(1) a ‘qualifying product’ means: “Any item (or component of an item) which is not environmentally friendly and where the following conditions are satisfied: (1) An alternative item (or component) to the one in question is available at the time of sale or such an alternative item (or component) could be manufactured at no significant additional cost to the manufacturer; and (2) The said alternative item would be regarded as environmentally friendly under this Act.” Let us assess each type of product that the Company manufactures, in turn, to determine whether or not they are likely to be classed as ‘qualifying products’ under the 2007 Act: The Standard Light Bulbs: Assuming that these light bulbs would not be classed under the Act as being ‘environmentally friendly’, it appears that the sale of these products would attract an additional 3% tax, in accordance with s10(1) of the 2007 Act, because (i) there is an alternative product on the market; and (ii) this alternative product is energy saving, and thus, ‘environmentally friendly’. Additionally, the Company has admitted that the cost of manufacturing these alternative light bulbs is not significantly greater than the cost of manufacturing its existing light bulbs, and so even if no alternative could be identified as being ‘on sale’, the first limb of the ‘qualifying products’ test would be satisfied. The Standard Lamp Bases: Again, we must assume, because these lamps cannot facilitate the use of energy-saving bulbs, that they will not be considered ‘environmentally friendly’ for the purposes of the 2007 Act. However, it is not clear whether or not there are already available in the marketplace standard lamps ready to accommodate the energy-efficient bulbs. If such alternatives do exist, then the sale of the non-environmentally friendly lamps would likely attract the 3% surplus tax because (i) an alternative product is on sale in the market; and (ii) this alternative product is energy saving in that it facilitates the use of energy saving light bulbs, and may therefore be considered ‘environmentally friendly’. If there are no such alternatives for sale in the marketplace, then the test as to whether or not the existing lamps will be classed as ‘qualifying products’ hinges on (i) how much of the A£1,560,000 (the sum estimated to be required in order to commence the manufacture of environmentally friendly lamp bases and lampshades) will need to be allocated to the manufacture and production of the environmentally friendly lamp bases, only; and (ii) whether or not this additional manufacturing cost would be classed as ‘significant’ for the purposes of the 2007 Act. In the absence of the information required to answer enquiry (i), it is not possible to provide a definitive answer to enquiry (ii). However, we can provide the following insight into what, for the purposes of the 2007 Act, might be considered ‘significant’ additional cost: It is likely that the test for significance will develop with a strong subjective element, i.e. an enquiry will be made into how significant the additional cost would be for the Company in question. An example of the Courts inferring a subjective element into the definition of ‘significant’ can be seen in the case of McCafferty v Metropolitan Police District Receiver  1 WLR 1073, 1081. For example, if the total additional cost involved in preparing for the manufacture of the modified environmentally-friendly lamp bases accounts for half of the estimated total additional expense of A£1,560,000, i.e. A£780,000, then this additional cost would represent 10.4% of the Company’s total annual turnover [A£7.5 million]. Any reasonable Company would consider an additional expense representing over 10% of the Company’s total annual turnover to be significant. On this basis, I would advise that the Company would be able to argue that it should not pay the 3% surplus tax on the manufacture and sale of its standard (non-environmentally friendly) lamp bases because it would cost significantly more to prepare for the manufacture of the environmentally-friendly alternatives. If the significance of these additional manufacturing costs are disputed, then I would advise the company to make the following, additional, argument:
The Standard Lampshades: Assuming that the standard lampshades would not be considered ‘environmentally friendly’ for the purposes of the 2007 Act, then the position in regard to whether these will be classed as ‘qualifying products’ is the same as that described above in relation to the standard lamp bases currently manufactured by the Company. Opinion in regard to the tax status of stock which existed prior to the Act coming into force: I have been informed that, at the time the Act came into force, the Company was in possession of approximately A£200,000 of product stock. I would advise the Company to sell this stock into the commercial sector where it is unlikely to be used in domestic premises. In this way the Company can seek a valid exemption from s10(3) of the 2007 Act. References/ Bibliography: A v Hoare & others  UKHL 6 Grey v Pearson (1857) 6 HL Cas 1 McCafferty v Metropolitan Police District Receiver  1 WLR 1073 EC Defective Product Directive, Directive 85/374/EEC Heydon’s Case (1584) 3 Co Rep 7a
 While the 2007 Act does not provide a working definition of what will be considered a ‘product’ for the purposes of the Act, having reviewed the definition of ‘product’ as contained in Article 2 of the EC Defective Product Directive, Directive 85/374/EEC3, it seems highly unlikely that the Company would be able to argue that any of the items it manufactures are not ‘products’.  This type of statutory interpretation is known as ‘the mischief rule’, a term originally coined in Heydon’s Case (1584) 3 Co Rep 7a.  For example, those products sold to office equipment suppliers.  E.g. Those products which are sold to DIY or department stores.  It should be noted that the standard is likely to remain impersonal, i.e. it will not matter whether or not the Company actually believes the additional expense to be significant. What will matter is whether or not a reasonable company in the same position as the Company in question would regard the additional expense as being ‘significant’ This point has been clarified at law by the House of Lords on the case of A v Hoare & others  UKHL 6, at para. 34.  A literal interpretation of the wording of the definition of ‘qualifying products’ does not preclude loss of profits being taken into account when calculating the “additional cost to the manufacturer”. A case authority for the validity of this approach to statutory interpretation is provided by the case of Grey v Pearson (1857) 6 HL Cas 1, in which Lord Wensleydale stated: “[T]he grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity…” In this case, it is certainly not absurd to include losses of profits in assessments of total cost.
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