HM Revenue & Customs v Debenhams Retail Plc [2005] EWCA Civ 892

Case No C3/2004/2013[2005] EWCA Civ 892
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
Mr Justice Lindsay
Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Monday,18 July 2005
Before
LORD JUSTICE MUMMERYLORD JUSTICE MANCESIR PETER GIBSON
Between
Commissioners for Her Majesty’s Revenue and Customs (formerly known as the Commissioners of Customs and Excise)AppellantDebenhams Retail plcRespondent
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Kenneth Parker QC, Christopher Vajda QC and Philippa Whipple (instructed by the Solicitor for HM Revenue and Customs) for the AppellantDavid Milne QC, Andrew Hitchmough and Fred Philpott (instructed by Ernst & Young) for Respondent
JudgmentDate 2005-07-18

Introduction

[1]As from 1st October 2000, anyone who shopped at a Debenhams store, paid by card and took the unusual trouble to read the top copy of the till slip which he or she signed and returned it to the assistant would have seen at its foot the words:
“I agree that 2.5% of the above value is payable to DCHS for card handling services. The total amount I pay remains the same.”
The purpose (if the customer had known it) was to enable whichever Debenhams company was selling the goods to claim that it should pay VAT on only 97.5% of “the above value”. The question in this appeal is whether that purpose was achieved. Since 2000, many other retailers have, as we are told, adopted similar schemes to that put in place by Debenhams. But these have not been examined before us, and may differ in their operation, terms and effect. The same applies to the revised scheme or wording which we were told Debenhams put in place from some time after the decision in this case on 3rd June 2003 by the London Value Added Tax and Duties Tribunal.[2]The present appeal is by the Commissioners of Customs and Excise from the judgment ([2004] EWHC 1540 (Ch)) given on 29th June 2004 by Mr Justice Lindsay, allowing an appeal by Debenhams Retail plc (“DR”) against the Tribunal’s decision dated 3rd June 2003 ((2003) VAT Decision 18169). The underlying facts were succinctly and uncontroversially summarised by Mr Stephen Oliver QC as chairman of the Tribunal:
“4. Until 1 October 2000 DR, a 100% subsidiary of Debenhams Plc, used to sell goods whose price tag showed, for example, £100 (“the ticket price”). Where the customer used a credit card, a debit card or a store card to pay, DR then paid the credit or debit card handling company, or the company behind the store card arrangements, an amount of, say, £1.00 for its exempt card-handling supply. The result was a supply by DR of the goods for £100; and because the amount paid by DR to the card-handling company (the £1.00) was in return for an exempt supply, no VAT relief was obtained for that expenditure. 5. From 1 October 2000 onwards an arrangement was put in place. The arrangement was designed to change the terms on which “the Debenhams Group accepts credit cards in order to produce a position whereby less VAT is paid than was paid previously and for no other reason”
. Those words are taken from a letter dated 17 March 2003 written by Ernst & Young (E&Y), the architects of the scheme ….. The changed arrangements were designed to make the card-paying customer enter into two purported contracts at the point of sale. One was with DR for the sale of the goods (ticket price £100) for £97.50. The other was with another company called Debenhams Card Handling Services Ltd (“DCHS”). DCHS is a wholly owned subsidiary of DR, but is not a member of the same VAT group as DR. Under the latter purported contract 2.5% of the total ticket price was said to be payable to DCHS for exempt card-handling services. The arrangement, if successful, results in DR making a supply of the goods for a consideration of £97.50 - i.e. 97.5% of the ticket price. 6. DR contends that the arrangements produce exactly that effect. It is therefore chargeable to VAT on the £97.50, the balance of £2.50 goes to DCHS as an exempt card-handling fee. ….”[3]The Tribunal identified the grounds on which the Commissioners challenged DR’s contention under four headings:(i) “the contractual issue”,(ii) “the commercial reality issue”,(iii) “the single supply issue” and(iv) “the tax avoidance issues”. Under heading (i) the Commissioners contended that “There has been no contract for a supply of card-handling services between customer and DCHS that alters or affects the single contract between DR and the customer for the sale of the goods at the full ticket price”. Under heading (ii), they contended that, even if there was a contract between DCHS and the customer, the commercial reality was that DCHS supplied no services and the customer provided no consideration, and that this should determine the VAT position. Under heading (iii), they contended that, even if there was a contract between DCHS and the customer under which DCHS supplied any services, such supply should be regarded as forming part of a single supply by DR either (a) because the 2.5% payment was a charge within article 11A(2)(a) of the Sixth Directive or (b) because it was ancillary to the main supply by DR. Under heading (iv), they relied on a previous decision by the Tribunal in Halifax plc v. Commissioners of Customs and Excise [2001] VATTR 71 for a proposition that DR should be regarded as the only supplier either (a) as a matter of “economic reality” or (b) on grounds of abuse. The Tribunal decided in favour of the Commissioners on issues (i) and (ii). It declined to decide issue (iii). It was prepared if necessary to decide in the Commissioners’ favour on issue (iv) (a) and (b).[4]Lindsay J restated the issues before him under the headings:(i) “the contract argument”,(ii) “no supply by DCHS” - but only one supply by DR for 100% of the ticket price,(iii) ancillary supply,(iv) artificiality and tax avoidance and(v) abuse of right. Issue (iii) was, as his judgment recites, left over for further consideration by him or in the Court of Appeal. In the light of the House of Lords’ recent refusal of permission to appeal against the Court of Appeal’s decision in Telewest v Communications plc v. Commissioners of Customs and Excise [2005] EWCA Civ 102, Mr Parker QC accepts on behalf of the Commissioners that they cannot now pursue issue (iii), at least before us. The issue of “economic reality”, based on the Tribunal’s decision in the Halifax case, which was central to the argument on artificiality under issue (iv) was also left over before Lindsay J, and was not argued before us. Mr Parker accepts, in the light of the recent Opinion dated 7th April 2005 of Advocate General Maduro in the Halifax case (Case C-255/02), that it looks unlikely that the Commissioners will be able to sustain this aspect of the Tribunal’s jurisprudence. But he submits that the Commissioners’ case on abuse derives strong encouragement from the same opinion, while accepting that any decision of this court on that issue would have to be subject to the European Court of Justice’s decision in the Halifax case. Lindsay J decided issues (i), (ii), (iv) (save for the “economic reality” argument) and (v) in DR’s favour.[5]In the event we heard submissions on issues (i) and (ii), the contractual and supply issues, as well as on the issue of abuse identified as issue (iv)(b) by the Tribunal or (v) by Lindsay J. The contractual and supply issues are distinct because it is common ground that, although a contractual analysis under domestic law represents the appropriate starting point, the critical question for the purposes of VAT - both under domestic legislation and under the European directives which that legislation aims to implement - is whether there was a supply by DR for the whole 100% or for only 97.5% of the ticket price of goods.

The legislative scheme

[6]The European position is so far as relevant found in the First Council Directive of 11April 1967 (67/227/EEC) and the Sixth Council Directive of 17 May 1977 (77/388/EEC) on the harmonisation of legislation concerning turnover taxes. The First Directive provides:
“Article 2 The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportionate 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.”
The Sixth Directive provides inter alia:
“Article 2 The following shall be subject to value added tax: 1. the supply of goods or services effected for a consideration within the territory of the country by a taxable person acting as such; 2. the importation of goods. …… Article 4 1. ‘Taxable person’ shall mean any person who independently carries out in any place any economical activities specified in paragraph 2, whatever the purpose or results of that activity. 2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions ... …… Article 11A Within the territory of the country 1. The taxable amount shall be: (a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, 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; …… 2. The taxable amount shall include: (a) taxes, duties, levies and charges, including the value added tax itself; (b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement may be considered to be incidental expenses by the Member States. 3. The taxable amount shall not include: (a) price reductions by way of discount for early payment; (b) price discounts and rebates allowed to the customer and accounted for at the time of supply; (c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter and which are entered in his books in a suspense account. The taxable person must furnish proof of the actual amount of this expenditure and may not deduct any tax which may have been charged on these transactions.”
The following shall be subject to value added tax: Article 4 Article 11A

Within the territory of the country

[7]The Value Added Tax Act 1994 contains provisions intended to implement the above articles:
“1(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 (including anything treated as such a supply), …… 3(1) A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act. ….. 4(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply. …… 5(2) ….. (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 a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.”
[8]It is elementary that the United Kingdom legislation is to be construed so far as possible so as to give effect to the purpose(s) of the European directives: see e.g. Trafalgar Tours Ltd. v. Customs and Excise Commissioners [1990] STC 127, 135a (CA). Under both the Directives and the 1994 Act, two points are in these circumstances clear:(a) the critical question is whether there is a supply of goods or services for a consideration; and(b) that question is to be answered by giving an autonomous European meaning to the concepts which it involves, rather than by reference to the technical legal position under domestic law. As to point (a), Laws J (as he was) said in a passage in Customs and Excise Commissioners v. Reed Personal Services Ltd. [1995] STC 588, 595, quoted with approval by the House of Lords in Eastbourne Town Radio Cars Association v. Customs and Excise Commissioners [2001] UKHL 19; STC 606:
“First, ….. the concept of supply for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law of contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the tax-payer may or may not determine the right tax result. They do not necessarily do so.”
As to point (b), reference may be made to the Trafalgar Tours case, at p.132g-h, citing the judgment of the European Court of Justice and the opinion of Advocate General Slynn in Apple and Pear Development Council v. Customs and Excise Commissioners [1988] STC 221. In a recent case, Auto Lease Holland BV v. Bundesamt für Finanzen (Case C-185/01) the European Court identified the need to give an autonomous meaning to the phrase “supply of goods” in article 5(1) of the Sixth Directive as follows:
“….. it is clear from the wording of that provision that ‘supply of goods’ does not refer to the transfer of ownership in accordance with the provisions prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party to dispose of it as if he were the owner of the property. The purpose of the Sixth Directive might be jeopardised if the preconditions for a supply of goods ….. varied from one Member State to another, as do the conditions governing the transfer of ownership under civil law.”
In Tesco Ltd. v. Customs and Excise Commissioners [2003] EWCA Civ 1367; [2003] STC 1561, paragraphs 114 and 119, this Court accepted that the existence of consideration under English law may not suffice to show consideration for the purposes of European VAT law. In Trafalgar Tours, the Court of Appeal said with regard to the meaning of “consideration” in the Sixth Directive:
“Having regard to art 11A(1)(a) of the Sixth Directive, we are, therefore, subject to one important qualification prepared to accept that the expression ‘consideration’ in s 10(2) of the 1983 Act means everything which the supplier has received or is to receive from the purchaser, the customer or a third party for the relevant supplies. The one important qualification is this. The concept of receipt for this purpose is not to be confined to mere physical receipt; anything which is received by persons for and on behalf of the supplier must be treated for this purpose as received by the supplier himself .…”
In Kuwait Petroleum (GB) Ltd. v. Customs and Excise Commissioners (Case C-48/97) [1999] STC 488, the European Court stated:
“Goods are supplied ‘for consideration’ within the meaning of art 2(1) of the Sixth Directive only if there is a reciprocal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods supplied …..”
In that case, ‘items’ described as gifts’ which Kuwait Petroleum exchanged under a petrol promotion scheme for vouchers received by customers purchasing petrol were held to have been issued ‘free of charge”: the purchase of petrol and the exchange of vouchers for gifts were separate transactions, and the petrol was sold and invoiced for the price paid, there being nothing to suggest that the price contained a component representing the value of the vouchers or of the redemption goods. In contrast, where a retailer allowed the consumer to settle the sale price partly in cash and partly by means of a reduction coupon issued by the manufacturer of a product, which then reimbursed to the retailer the amount indicated on the coupon, the nominal value of the coupon so reimbursed fell to be included in the amount subject to VAT on the retail sale to the consumer: Yorkshire Cooperatives Ltd. v. Customs and Excise Commissioners (Case C-398/99; [2003] STC 234. The necessary link between a supply and any consideration for it need not even derive from a relationship enforceable in legal proceedings: see Town and County Factors Ltd. v. Customs and Excise Commissioners (Case C-498/99; [2002] STC 1263). In her opinion in that case, cited by the Court of Appeal in Tesco, Advocate General Stix-Hackl also said:
“39. All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agreements – even ones that are binding in honour only – from which it is apparent that there is a direct link between them.”
[9]The proper approach under Community law to the identification of any supply and of any consideration for it depends “save in exceptional cases, [upon] the objective character of the transaction in question”: Customs and Excise Commissioners v. Cantor Fitzgerald International (Case C-108/99; [2001] STC 1453), paragraph 33. Perhaps confusingly, a number of other authorities emphasise the need to take the “subjective value” of any consideration: see e.g. Staatssecretaris van Financiën v. Coöperative Aardappelenbewaarplaats GA (the Dutch Potato case) (Case C-154/80) and Lex Services plc v. Customs and Excise Commissioners [2003] UKHL 67; [2004] STC 73, paragraph18. However what is meant is that taxable value for VAT purposes depends on “the consideration actually received and not a value assessed according to objective criteria”. Other European Court authorities also emphasise the importance of looking at what was actually stated and agreed at the time of any supply, rather than undertaking some objective economic assessment of the effect of what was agreed or happened: see Kuwait Petroleum (GB) Ltd. v. Customs and Excise Commissioners (Case C-48/97) paragraphs 26-31, and Customs and Excise Commissioners v. Primback (Case C-34/99; [2001] STC 803) per Advocate General Alber especially at paragraphs 44-45 and 49 and the Court at paragraphs 38-43. In paragraph 159 of the judgment in Tesco - a case concerned with the Tesco Clubcard scheme and the question whether Tesco vouchers, issued to customers accumulating through purchases a sufficient number of points, were issued for a ‘consideration’ - Jonathan Parker LJ identified the need to examine “the entire scheme” when determining its legal effect for the purposes of European VAT law. This in turn involved considering its “economic purpose” (as distinct from economic effect), or, using the terminology of the Advocate General in Cantor Fitzgerald, its “cause” (causa) or “the precise way in which performance satisfies the interests of the parties” (the Advocate General being careful to distinguish this from the parties’ motivation). But the reference to the “entire scheme” must be read bearing in mind that the Tesco Clubcard scheme involved a number of stages, at all of which the customer was involved. It is not an invitation to look at matters outside the scope of the actual relationship between the suggested supplier and its customer, such as for example terms in an agreement between the supplier and a third party about which the customer has no means of knowledge. Three months later, in Lex Services (in which Tesco was not it appears cited), Lord Walker, in a speech with which all other members of the House of Lords concurred, explained the correct approach to the operation and application of the VAT system as follows: “18. It is a system which is intended to be self-policing in the sense of operating automatically on the economic activities of registered taxpayers and final consumers, with the least possible need for VAT authorities to undertake independent investigation of the facts. In a straightforward case the "subjective value" of non-monetary consideration means the value overtly agreed and adopted by the parties to the transaction in question, just as the price overtly agreed and adopted by the parties is (in most cases) conclusive as to the quantum of monetary consideration. So far from introducing an element of vagueness or obscurity, the concept of subjective value (correctly understood) achieves legal certainty and ease of administration of the VAT system (just as a subjective apportionment of the consideration for a package of taxable goods and exempt services may achieve those results: see C R Smith Glaziers (Dunfermline) Ltd v Customs & Excise Commissioners [2003] STC 419, especially the speech of my noble and learned friend Lord Hoffmann at p 426, para 21).19. Subjective value is therefore, in a straightforward case, the value which the parties to the contract have themselves recognised in the course of their dealings, and have in that way attributed to goods or services which amount to non-monetary consideration. A clear case is Naturally Yours Cosmetics Limited v Customs & Excise Commissioners [1988] ECR 6365, where a wholesaler of cosmetics offered to a beauty consultant (who was in the position of a retailer) a pot of rejuvenating cream at the special price of £1.50. The consultant was to give the cream to a chosen retail customer (referred to as a hostess) as a reward for the hostess arranging a sales party, and the special price was available only if the sales party was actually held. The issue was as to the quantification of the consideration received by the wholesaler from the consultant. The ECJ stated (para 17, with the relevant amounts inserted), "In the present case, the parties to the contract have reduced the wholesale price of the pot of cream [£10.14] by a specific amount [£8.64] in exchange for the supply of a service by the beauty consultant which consists in procuring hostesses to arrange sales parties by offering them the pots of cream as gifts. In those circumstances, it is possible to ascertain the monetary value which the two parties to the contract attributed to that service; that value must be considered to be the difference [£8.64] between the price actually paid [£1.50] and the normal wholesale price [£10.14]." Naturally Yours Cosmetics illustrates that the consideration for a supply may consist not just in a monetary payment, but in the value to be attributed to a service which is to be undertaken by the person supplied. "In the present case, the parties to the contract have reduced the wholesale price of the pot of cream [£10.14] by a specific amount [£8.64] in exchange for the supply of a service by the beauty consultant which consists in procuring hostesses to arrange sales parties by offering them the pots of cream as gifts. In those circumstances, it is possible to ascertain the monetary value which the two parties to the contract attributed to that service; that value must be considered to be the difference [£8.64] between the price actually paid [£1.50] and the normal wholesale price [£10.14]."[10]In Tesco, Jonathan Parker LJ identified a problem which has resonance in the present case. Where millions of customers participate in a scheme, he said “a subjective approach, requiring a finding (on the balance of probabilities) as to how a particular (undefined, and I would have thought undefinable) category of member [i.e. here, customer] would or might perceive the scheme, seems to me of little assistance in resolving the issue [i.e. whether Tesco vouchers were issued for a consideration] which arises in this case”. He considered as a result that “the correct approach to the analysis of the Clubcard scheme ….. is to examine the entire cycle of transactions which it comprises, in order to determine objectively (that is to say without regard to the parties’ subjective intentions, save in so far as they are reflected in the terms of the scheme) and having regard to the scheme’s economic purpose, whether its legal effect is such that ….. vouchers issued under it are issued for ‘consideration’, in the Community law sense of that word.” (paragraph 160) The problem identified by Jonathan Parker LJ is a real one. Any supply, even by the same store, may in theory take place in different circumstances from any other. The presence or absence of a particular notice in the store of a till assistant’s answer to an enquiry about the till slip words or a customer’s insistence on striking out those words (as some of the investigating Customs officers did when making test purchases) may all alter the contractual analysis in any particular case. They could also affect the European legal analysis of what consideration was given for the goods supplied in the particular sale. However, it is impossible to investigate individual sales when an issue like the present arises regarding a general scheme. It might in some circumstances be possible to arrive at conclusions about numbers of sales falling within one or other of various defined categories. But no-one has suggested such an approach in this case. Each side has submitted that it is possible for us to reach a single overall conclusion, while contending for opposite conclusions. In this situation, we have, under the jurisprudence of both the European Court and the House of Lords, to look at what was overtly or objectively stated, described or invoiced to the customer, or was “agreed and adopted” as between the alleged supplier and the customer, both when determining the contractual position and in answering the directly relevant question what was the consideration for DR’s undoubted supplies to its customers. Since the ordinary knowledge and understanding of any customer form part of the objective context of any such supply, I do not for my part see how they can be ignored in answering this question. When Jonathan Parker LJ expressed some scepticism about the value of a “subjective” approach or of any attempt to take into account what customers “would or might perceive” (cf paragraphs 156 on of his judgment), it may be that he was doing no more than exclude from account the purely subjective (or internal) thought processes of any particular customer. The reasonable expectations, reactions and understanding of an ordinary customer in relation to a transaction or document must in my view be relevant to its objective analysis. Even when a transaction is in writing, its interpretation involves “the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the condition in which they were at the time of the contract” (see Investors Compensation Scheme Ltd. v. West Bromwich B.S. [1998] 1 WLR 896, 912H per Lord Hoffmann, an approach as relevant, in my view, in a European as in a domestic context). I note that in both Kuwait Petroleum and Primback the European Court - in refusing to accept that the price paid for the goods included any element in respect of (in Kuwait Petroleum) the cost of the vouchers or the goods obtainable in exchange for the vouchers or (in Primback) the financing facility - stressed the relevance of the fact that members and non-members of the respective schemes paid exactly the same for goods. But that fact can be taken to have been within the ordinary customer’s general knowledge.[11]Primback, above,is relied upon by DR as important background to the present case. It involved a financing facility whereby customers who had agreed to buy goods could pay for their advertised and invoiced price either directly or under an arrangement whereby, by a separate contract between the customer and one of a number of finance houses, the latter agreed to pay the invoiced amount to the supplier by way of loan to the customer and the customer agreed to repay that loan, with no interest added, to the finance house over a series of monthly instalments. The financing facility was described to the customer as (and so far as the customer was concerned was) “credit free of interest”. However, under oral agreements between the finance houses and the supplier which were not disclosed to the customers, the amount paid by the finance houses to the supplier was the invoiced amount less a percentage for commission. The European Court held that the supplier was properly charged to VAT on the whole invoiced price:
“38. …… The relationships between seller and purchaser and between seller and finance house must be distinguished for the purpose of determining the basis for calculating VAT. ….. 41. ….. where a customer makes use of the possibility of paying for goods purchased from Primback by way of interest-free credit, that customer receives from the seller an invoice stating the price of the goods as advertised in the store at the time of sale and concludes with a finance house a loan agreement for an amount equivalent to the cash sale price of the goods. The finance house undertakes to pay that amount directly to the seller, on the purchaser’s behalf, in settlement of the price advertised and invoiced by that seller. The customer repays to the finance house only the amount of the loan. 42. It follows that, in the present case, the price agreed between the parties to the contract of sale and paid by the customer was the same, irrespective of the means by which the purchase of the goods was financed, with the result that Primback cannot reasonably argue that the price advertised in fact contained a component representing the value of the credit (see by way of analogy, Kuwait Petroleum (GB) Ltd v Customs and Excise Comrs (Case C-48/97) [1999] STC 488 at 509, [1999] ECR 1-2323 at 2359, para 31).”
It is DR’s submission that it learned lessons to be derived from Primback, and that its sales to customers were carefully and overtly or (to use the Advocate General’s word in Primback) “transparently” structured on a basis which involved a consideration payable to it for goods of 97.5% of the total paid by the customer and a separate consideration of 2.5% payable under a separate contract with and to a different company for “card handling services”.

The arrangements in more detail

[12]The Tribunal found it helpful to start with the arrangements prior to 2000. DR takes issue with their relevance. However, it is clear that the only motive for the change of arrangements in 2000 was to reduce the VAT payable. It is of potential relevance in understanding and analysing the new arrangements from 2000 to understand what the arrangements were, and presumably would still be, apart from that motive; and it is on any view relevant to understand the previous arrangements in so far as they took effect expressly by way of variation of the prior arrangements (as was the case in relation to Debenhams store cards). The arrangements took two forms, according to whether a customer used a Debenhams in-house account or store card or whether he or she used a credit or debit card.[13]Store cards: Debenhams store cards were issued to Debenhams customers by GE Capital Bank Ltd. (“GE”). The terms and conditions of store cards included these:
“1. DEFINITIONS ….. “Main Supplier” means the retailer named on the face of the Card; ….. “Supplier” means any person or company with whom we have arrangements for you to obtain goods or services from them using the Account, or in the case of a Credit Card, who display the logo of the Payment Scheme shown on the Credit Card; ….. ….. 2.1 We will open an Account in your name which may be used by you ….. in accordance with these terms and conditions. ….. We will debit the Account with all purchases of goods and services made, any purchases of cash or cash substitutes, the amount of any cash advances (together “Transactions”) ….. ….. 3.2 ….. Credit Cards will normally be accepted by Suppliers and cash machines throughout the world displaying the Payment Scheme logo shown on the Credit Card. Other Cards will normally be accepted by the Main Supplier and other members of the Retail Group of which we inform you but not elsewhere. We will inform you if the Card issued to you is a Credit Card. ….. 7. FINANCIAL AND RELATED PARTICULARS 7.1 We will determine your credit limit from time to time and give you notice of it. The initial rates of interest under this Agreement will be the highlighted rates set out below. …. 15. CHARGES 15.1 We may make charges for administering your Account, but will not do so unless we have first given you at least thirty days notice of the amount of any charges proposed. …..”
It is not suggested by DR that any notice relevant to any issue on this appeal was or could ever have been given by GE under clause 15.[14]GE’s rights and duties in relation to Debenhams store cards arose from a marketing agreement with Debenhams plc and its retail subsidiaries including DR made on 18th July 1990 and amended first on 9th December 1997 and again on 26th June 1998. Under the scheme of this agreement as amended on 9th December 1997 GE agreed to provide credit facilities including store cards to their customers, accountholders and cardholders, while the Debenhams companies agreed to accept the provision of such facilities at their retail outlets (clause 2.1). GE agreed to promote at its expense such facilities “with the object of promoting Accountholder and Cardholder loyalty and increasing the number of Accountholders and Cardholders and the level of sales using the Cards and the Credit Facilities” and not to reduce expenditure during a twelve month period below 1.5% of all credit sales, exclusive of VAT (clause 3.1). The Debenhams companies agreed to exhibit and maintain at their retail outlets signs indicating acceptance of the cards and other advertising and promotional material relating to the provision of the credit facilities (clause 3.4); and to “accept and honour” Debenhams store cards in each of their retail outlets and “honour and promote in all Retail Outlets …. Credit Facilities offered by [GE]” (clause 6). The Debenhams companies further agreed to pay GE a “merchant fee” exclusive of VAT on purchases made by Debenhams customers of 1.5% of the purchase price of the relevant goods or services exclusive of VAT (clause 9.1(a)). The amendment of the scheme effected on 26th June 1998 sub-divided the fee paid by Debenhams between exempt services provided by GE and taxable marketing services provided by GEC Global Consumer Finance Ltd (“GCF”). Thereafter, Debenhams paid a taxable “promotional fee” to GCF of 1.12% and an exempt merchant fee to GE of about 0.38%. That revised arrangement led to no dispute with the Commissioners.[15]This scheme operated as described in the following paragraphs of the Tribunal’s decision:
“15. The relationship between GE and the customer was governed by a regulated agreement under the Consumer Credit Act 1974 entered into when the customer applied (and was accepted) for a store card. Pursuant to such regulated agreement GE would supply credit facilities to individual customers and the customer would, in consequence, be liable to GE for any credit it received and for any interest charges relating to that credit. Supplies of those credit facilities by GE to the customer were, once again, exempt. 16. Whenever a customer used a store card to purchase goods or services from DR, a single contract for the supply of those goods or services came into existence between DR and the customer, and DR accounted for VAT at the appropriate rate on the total price paid by the customer, i.e. the ticket price. 17. Pursuant to its arrangement with GE and GCF set out above, DR then paid [to GE and GCF] 1.5% of the price charged to those customers as consideration for the financial and the marketing services, split as indicated above [i.e. about 0.38% to GE and about 1.12% to GCF], supplied by them.”
[16]The new arrangements were put in place from 1st October 2000 by a supplemental agreement dated 27th September 2000, which for the first time introduced DCHS into the scheme. Its recitals start by referring to the marketing agreement and its amendments, and continue:
“(B) Pursuant to the Marketing Agreement and the Variation Agreement GE-CB has supplied certain services to Debenhams and the Group Retailers including a service of processing, settling and making payments to Debenhams and the Group Retailers in respect of credit sales (the “Existing Settlement Service”). (C) Debenhams and the Group Retailers wish to alter the Existing Settlement Service in respect of specified credit sales so as to permit DCHS to enter into an agreement (a “Cardholder Handling Agreement”) with each Cardholder (as defined in the Marketing Agreement) in a Credit Purchase (as defined in the Variation Agreement) whereby DCHS will pay to Debenhams or, as the case may be, the relevant Group Retailers the amount due on the Credit Purchase in consideration for such Cardholder paying to DCHS a proportion of the price at which the goods or services are held out for sale (the “Handling Fee”). (D) Debenhams, the Group Retailers and DCHS wish the Cardholders to pay the Handling Fee by using their Cards and accordingly for the Handling Fees to be credit sales by DCHS; (E) Debenhams and the Group Retailers will enter into an agreement with DCHS (the “Acquisition Agreement”) to the effect that, subject to the Cardholder having entered into a Cardholder Handling Agreement, DCHS will pay to Debenhams or, as the case may be, the relevant Group Retailers the amount due to it from the Cardholder in respect of a Credit Purchase. (F) In order to permit DCHS to operate as contemplated in these recitals the parties hereto have agreed new arrangements such that the Existing Settlement Service shall no longer be supplied to Debenhams and the Group Retailers by GE-CB in respect of specified credit sales and whereby the new settlement services shall be supplied by GE-CB to DCHS in each case on the terms and conditions set out in this Agreement. (G) The purpose of this Agreement is to give effect as between the parties hereto to the said new arrangements. ….. 3.1 In consideration for the covenants and undertakings herein contained, DCHS agrees that it shall accept the Cards in settlement of each Handling Fee and hereby appoints Debenhams and the Group Retailers as its agents for the purpose of accepting the Cards in such circumstances. The Cards shall be accepted by DCHS and the Accounts shall be operated each in accordance with the provisions of Schedule 2 of the Marketing Agreement (as amended by this Agreement). 3.2 Clause 2.2(B) of the Marketing Agreement shall be deemed to be amended so that the reference to the price of supplying goods or services shall be construed to be the price of supplying the goods or services and the cost of the Handling Fee. ….. 3.4 If a Cardholder returns goods or services to Debenhams or a Group Retailer, Debenhams or the Group Retailer, as applicable, shall make a refund of the amount required to ensure that the Cardholder’s Account is credited with an amount equal to the price paid for the goods or services and the Handling Fee. 4.1 GE-CB shall supply to DCHS the settlement services described in Schedule 2 of the Marketing Agreement as modified by the amendments contained in this Clause 4 in consideration for the covenants and undertakings contained herein. ….. 4.4 Clause 9.1, 9.2, 9.3 and 9.4 of Schedule 2 of the Marketing Agreement shall be deemed to be replaced by the following clauses: 9.1(a) DCHS shall pay to GE-CB for GE-CB’s benefit: (i) [the merchant fee amounting in the event to about 0.38%], and (ii) any VAT due on the Merchant Fee (the “Merchant Fee”) (b) Debenhams and the Group Retailers shall pay: (i) the promotional fee amounting in the event to about 1.12%], and (ii) to GCF any VAT due on the Promotional Fee.” 9.1(a) DCHS shall pay to GE-CB for GE-CB’s benefit: (i) [the merchant fee amounting in the event to about 0.38%], and (ii) any VAT due on the Merchant Fee (the “Merchant Fee”) (b) Debenhams and the Group Retailers shall pay: (i) the promotional fee amounting in the event to about 1.12%], and (ii) to GCF any VAT due on the Promotional Fee.”
[17]The Tribunal explained the background to and effect of the new arrangements in these terms:
“51. ….. GE had stipulated that their fees should not be altered by the adoption of the arrangements. From DR’s angle they wanted to ensure that the revision of the arrangements with GE and with Streamline did not enable the latter two parties to participate in the benefits of the scheme. Moreover it was no part of the arrangements that GE should be doing less than under the existing arrangements and that DCHS should be doing more than what DR had been doing. Subject to that the Second Supplemental Agreement purported to make the following changes to the supplies between the parties: (i) The settlement services supplied by GE would be supplied to DCHS rather than to DR, as had been the case before (see Recitals (B) and (F)); (ii) DCHS would enter into agreements with card holders for handling payments made using store cards and would charge a “handling fee” for such services (Recitals (C) and (D)); (iii) DCHS agreed to accept store cards issued by GE in payment of the Handling Fee itself and agreed to pay DR the amount due from the card holder in respect of the goods orservices supplied by DR (Clause 3.1); (iv) It was provided that reference in the Marketing Agreement to “price of supplying goods or services” would be construed as “the price of supplying goods or services and the cost of the Handling Fee”: (Clause 3.2). [The effect of this change was that the fee payable to GE would be calculated by reference to the ticket price of the goods, i.e. the total price paid by the customer as had been the case before. This, we infer, was important because GE entered into the arrangements on the basis that its financial position should not alter.] (v) In the case of refunds, it was provided that DR would refund an amount equal to the price of the goods plus the Handling Fee (Clause 3.4); (vi) DCHS agreed to pay GE the exempt Merchant Fee less the Promotional Fee, as already defined above. As the calculation of the fee payable to GE was made by reference to sales net of VAT, the parties also agreed, by way of side letter of 25 September 2000; that the working assumptions previously made in relation to the average rate of VAT applicable to the yearly aggregate of transactions was to remain unaltered. [We infer that this provision was included to ensure that the changes would not alter the entitlement of GE.] (vii) “Annual Credit Sales” for the purpose of the agreement was stated to include the value of the Handling Fee charged by DCHS (Clause 7.4) and (viii) DR agreed to continue to pay GCF the taxable Promotional Fee plus VAT (Clause 4.4).”
[18]Credit and debit cards: In relation to credit and debit cards, even prior to 1st October 2000 the arrangements involved potentially four parties: the cardholder, the card-issuer, an intermediary company known as the “acquirer” and the Debenhams company. The acquirer was Streamline, a part of the National Westminster Bank plc (“NatWest”) (so that the card-issuer and the acquirer would in the case of NatWest cards be the same). The Tribunal found as follows:
“19. DR had an agreement [the merchant services agreement] with …. NatWest covering the arrangements for payments by customers using cards other than store cards to pay for goods or services. That agreement, dated 1 July 1998, authorized DR to accept a number of credit or debit cards and Streamline, the relevant part of NatWest, undertook to process those payments on behalf of DR. In return, DR agreed to pay NatWest a percentage of the price charged for sales paid by Visa and Mastercard, Visa Connect (Delta), Electron, Switch and Solo and JCB. The percentages varied from less than 0.1% upwards. The financial services supplied by Streamline to DR were exempt for VAT purposes. 20. Individual customers had regulated credit arrangements with their own card providers. The supply by card providers to customers was exempt. DR had no role or involvement in such credit agreements. 21. As with transactions financed by using store cards, whenever a customer used a credit or debit card to purchase goods or services from DR, a single contract for the supply of those goods or services came into being between DR and the customer and DR accounted for VAT at the appropriate rate on the total ticket price paid by the customer.”
[19]Paragraph 1.1 of the merchant services agreement between DR and NatWest to which the Tribunal referred in paragraph 19 recorded a composite agreement consisting of documents including a side letter dated 10 March 1999 and a service level agreement. The merchant services agreement further provided:
“2. Card Schemes and Types 2.1 You [i.e. DCHS] may only accept the types of cards issued under the various Card Schemes detailed on the side letter dated 10 March 1999 ….. 2.2 When You undertake a card transaction You must follow the procedures described in this Agreement between Us ….. 4. Acceptance of Cards 4.1 If offered by a cardholder, You will accept payment by the card types issued under the Card Schemes which You are authorised to accept on the basis indicated by the side letter dated 10 March …. for all goods and services that You supply. …... 4.3 You will not accept card payments other than for the genuine purchase of goods and/or services that You or Your concessionaires have supplied. 4.4 You may only accept card payments in respect of those goods and services which commonly fall within Your business. 5. Card Identification and Materials 5.1 You will only use such stationery and materials provided by or authorised by Us [ie NatWest] in card transactions. 5.2 You will display on each of Your premises the cards and scheme identification logos/decals. 7. Fees and Charges 7.1 In return for Us providing you with the services detailed in this Agreement You will pay to Us on demand the fees and charges set out in the Schedule of Commercial Terms. Such fees and charges are agreed on the basis that We are the sole processor of all card transactions by You for the Card Schemes listed on the Schedule of Commercial Terms ….. ….. 7.3 In addition to Our right to debit Your bank account arising elsewhere in this Agreement, we shall be entitled to debit Your bank account with the following items ….. 7.3.2 the amount of all refunds made by You to cardholders …..”
[20]As from 1st October 2000 DCHS was interposed as a potential fifth party. For this purpose, DCHS itself entered into a merchant services agreement with NatWest, recording by paragraph 1.1 a composite agreement including the earlier side letter dated 10 March 1999, a service level agreement and other documents incorporated from the prior agreement between DR and NatWest, supplemented now by a second side letter dated 26th September 2000. The general provisions of this merchant services agreement mirrored those which had applied between DR and NatWest as set out in the preceding paragraph of this judgment. It and the documents which it incorporated from the prior arrangement used terms appropriate to a retailer such as DR. That problem was covered by the side letter dated 26th September 2000, which I set out in full:
“THE AGREEMENT BETWEEN US The attached Agreement is entered into between us as part of an arrangement whereby Debenhams Retail plc (“Debenhams”) will accept card payment for its sales to customers and you will pay to Debenhams the amount due in the sale. You will agree with such customers to pay Debenhams the amount due in return for the customer paying to you part of the overall price that being the “Handling fee”
. Under the Agreement in consideration of the fees and charges set out there in, we pay to you the aggregate of the sale price and your handling fee. The language of the Agreement is in terms of you accepting cards in payment, which under the arrangement is not the case. The Agreement will be construed so as to give effect to the arrangement. Where procedures have to be followed at point of sale (including for Card Schemes and Types (clause 2), floor limits (3), acceptance of cards (4), card identification and materials (5) Transactions where the Cardholder and Card are not present (13) and purchases with cashback (14)) you will see that Debenhams do so and our obligation to pay you is conditional on them doing so. Our obligations under the Agreement are conditional upon your securing agreement from Debenhams to observe the terms of the documents specified in paragraph 1.1 of the attached Agreement and on them doing so. Where the attached Agreement speaks of amounts of all refunds made by you to cardholders that shall be taken to mean the amount of all refunds made by you to Debenhams in respect of their refunds to cardholders. You will indemnify us for all losses, costs, expenses, damages and liabilities incurred by us as a result of any claim brought against us by a genuine cardholder or card issuer as a result of your breach of the Agreement or your failure to procure Agreement or action from Debenhams as required in the Agreement or this letter or any breach or failure by them to take a required action and your actions or omissions and those of Debenhams including but not limited to any misrepresentation by you or them or breach of any obligation or duty that you or they owe to a cardholder. You will also indemnify us in respect of our reasonable legal and other costs incurred in relation to the implementation of the arrangement described in this letter. It is agreed between us that the services we supply to you under the Agreement are exempt from VAT. However, if it is found that VAT is properly due then you will indemnify us for all losses we suffer arising from not having accounted for such VAT, including interest and any civil penalties properly due. We agree to your appointment of Debenhams as your agent for the purposes of this Agreement.”[21]The Tribunal summarised the general effect of the new arrangements in these terms:
“In essence, this further agreement with Streamline purported to affect the following changes: (i) a change to the supply of financial services provided by Streamline from a supply to DR into a supply to DCHS with payments being made to DCHS rather than to DR (see Clause 7.1 and the side letter); (ii) allowed DCHS to charge a “Handling Fee” to customers to be paid using one of the credit cards handled by Streamline (see the side letter); (iii) made DCHS liable for the Merchant Fee payable to Streamline and previously paid by DR and (iv) left most other terms and conditions the same as those previously agreed. Clause I of this agreement is expressly stated to include both the side letter of 26 September 2000 between Streamline and DCHS and a side letter to the Schedule of Commercial Terms dated 10 March 1999. The effect of those letters, as we read them, is that DR continues to be under an obligation to accept credit cards as a means of payment. Gail Timmins’s evidence was that Streamline had only entered into the new agreement on the explicit condition that DCHS would procure that DR continued to comply with all relevant procedures as they had been before the introduction of Project Pita.”
Project Pita (“pain in the …..”) was the name given by Debenhams to the project giving rise to the new arrangements, which Gail Timmins as in-house accountant prepared on the advice of Ernst & Young.[22]All cards: The final agreement governing DCHS’s interposition was made between DR as “merchant” and DCHS as “acquirer” on 27September 2000, in these terms:
“1. GENERAL This Agreement is entered into so as to enable the following arrangements to have effect. 1.1 Merchant will accept payment by credit, debit, charge and store cards (“Cards”) in respect of its sales to Customers of goods and services (“Relevant Sales”) as Acquirer may from time to time authorise. 1.2 Acquirer will pay to Merchant the amount due in respect of Relevant Sales (“Settlement”). 1.3 Acquirer will for separate consideration (“Handling Charge”) enter into separate agreements with Cardholders (“Cardholder Handling Agreement”) to pay to Merchant the Settlement. 1.4 Acquirer has entered into an agreement (including a side letter thereto) (“the Reacquisition Agreement”) with National Westminster Bank plc and an Agreement with GE Capital Bank Limited (“the Banks”) providing for payment by Banks to Acquirer of amounts equivalent to those paid by Acquirer to Merchant as Settlement and to Acquirer as Handling Charge. 1.5 In the case of each Relevant Sale Merchant will reduce the price payable by the Cardholder by an amount equivalent to the Handling Charge under a Cardholder Handling Agreement. 1.6 Acquirer appoints Merchant to act on its behalf in its dealings with Cardholders (in particular for the purpose of entering into Cardholder Handling Agreements) and in dealings with the Banks. 1.7 Merchant will as agent of Acquirer provide such notices and other information to Cardholders as is reasonably necessary for the proper entry into Cardholder Handling Agreements by Customers with Acquirer. 1.8 Merchant will provide to Acquirer such management administration and other services as Acquirer may reasonably require to honour its obligations under this Agreement and the Reacquisition Agreement. ….. 3. SETTLEMENT 3.1 Subject always to Floor limits, Acquirer will pay to Merchant the amount due from Cardholder to Merchant in respect of a Relevant Sale (less any refunds) where the Cardholder has authorised that amount to be charged to his or her card account (“Settlement Payment”). Such authority may be given by use of a Card or Card number in some other way. 3.2 The price charged by Merchant to and the amount due from a Cardholder in a Relevant Sale shall be equivalent to the price which would have been due had the sale not been a Relevant Sale (that is where payment had been agreed by means other than Card) less the amount of the Handling Charge due from the Cardholder to Acquirer. Settlement Payments shall be calculated accordingly. ….. 5.4 The Merchant shall not accept any Card as payment unless the Cardholder has entered into a Cardholder Handling Agreement. 6. AUTHORISATION 6.1 The Floor Limit shall be a monetary amount specified by Acquirer or the Banks. Acquirer shall from time to time in writing notify the amount of the Floor Limit to the Merchant. Merchant shall, before accepting any card in payment above the Floor Limit, secure from Acquirer authority to do so. Acquirer will authorise the transaction only if it in turn is authorised by the Banks to do so. 6.2 Acquirer appoints Merchant as its agent for the purpose of seeking authorisation from the Banks for any Relevant Sale and, subject to any notice Acquirer may give to the contrary, Merchant may treat authorisation given by the Banks as being sufficient authorisation to it from Acquirer. ….. 10. NO ACQUIRER CHARGE For the avoidance of doubt the services of agreeing to and making Settlement are supplied to Customers by Acquirer as principal under Cardholder Handling Agreement entered into with Customers in consideration of the Handling Charge. Accordingly Merchant shall be under no obligation to make any payment to Acquirer in respect of Acquirer making or agreeing to make Settlement. 11. MERCHANTS CHARGE In consideration for Merchant providing its services as agent and other services of administration and management Acquirer shall pay £50,000 (plus VAT) per annum on the first and then on each subsequent anniversary of the date of this Agreement so long as it continues in force.”
[23]A further undated “Supplemental Agreement” was entered into between DR and DCHS which provided that, when customers used a debit card to settle an amount on their Store Card, they would be credited with the full amount and no “handling fee” would therefore be charged.

The size of the 2.5% handling fee

[24]The Tribunal heard evidence about the size of the handling fee. It was described by Mrs Timmins as representing “a straight average rate of the card charges made by external card acquirers to DR plus an uplift of 0.25% to cover charge back costs and ongoing capital expenditure and other matters.” The Tribunal accepted that it “represented a straight average rate of external card acquirer’s charges to DR”. But as a straight average it took no account of the fact that, as from 26th June 1998, GE only charged 0.38% as a handling charge, and anyway it took no account of the different degrees of usage of different cards. On an average weighted to take these factors into account, the actual handling charges to DR (or after 1st October 2000 DCHS) amounted to only 0.51% of the total paid by customers. A percentage of 2.5% was thus some five times higher than necessary to cover any outlay of DR or DCHS. The Tribunal found this:
“70. Our conclusion from the evidence as a whole is that the “handling” percentage of 2.5% was adopted to suit Project Pita and was not designed to represent a fair return to DCHS for card-handling services. It did not reflect risks assumed, or special expertise introduced, by DCHS. It could not, as Gail Timmins accepted, have been any higher because then DR would have made a loss. To the customer it was six of one and half a dozen of the other; insofar as he or she was concerned it would not have mattered whether the fee was fixed at 2.5% or 97.5% unless, of course, the customer was a registered trader or, eg, had to make a claim on his insurance policy for loss or damage to the goods in question. Indeed a 2.5% handling fee could have been charged for handling cash purchases as well as card purchases, though Gail Timmins explained thatthis might have had an adverse PR impact. Overall therefore we are satisfied that the 2.5% handling fee was scheme-driven. As noted in paragraph 68, it is in the region of five times the cost of earning it.”
[25]The Tribunal rejected Mrs Timmins’s suggestion that “ongoing capital expenditure” played a part in fixing the 2.5% charge. It said that it was “directly contradicted by the accounts filed for DCHS for the periods to 31 August 2001 and 2002. These showed no capital expenditure either ongoing or otherwise and Gail Timmins accepted that no capital expenditure had been incurred by DCHS to date. Nor has any documentary evidence been produced to show that capital expenditureof DCHS was even under discussion. Other than £53,000 in 2001 and £60,000 in 2002 paid to DR for management fees DCHS has spent nothing else.” The Tribunal also said:
“The information derived from the accounts causes us to question the accuracy of the statement attributed by Gail Timmins to the directors of DCHS (referred to in paragraph 67 above) that they had been concerned to ensure “a reasonable return” from the fee charged to DR, let alone the 0.25% of uplift. DCHS’s profits before taxation of £24 million and £28 million for 2001 and 2002 respectively compare more than favourably with the fees and charges earned by GE and Streamline. The £53/60,000 fees and the return were, we think, dictated by the tax-saving objectives of Project Pita.”
[26]The Tribunal pointed out that for the outlay of £53,000 in 2001 and £60,000 in 2002 DCHS got “the benefit of, for example(i) DR’s staff at the tills and DR’s processing centre at Taunton handling over £1000 million worth of card transactions each year,(ii) DR’s till systems and the central server system,(iii) DR’s constant communication with GE and Streamline,(iv) DR’s involvement in designing and displaying the in-store notices containing the Notification words,(v) DR’s accounting systems that split the amounts payable by GE and Streamline between DR and DCHS and(vi) the setting-up costs of Project Pita (including the GE costs of £25,000 [costs funded by DR]).”[27]The Tribunal expressed the view in these circumstances that “the most any service from DCHS to the customer could consist of is its securing for the customer of access to the card-handling services provided by GE and Streamline” and that “as DCHS does not process any card, the claim in its Directors’ Report and Accounts that it provides card-handling services is, we think, unreal” (paragraphs 81 and 82). This view is challenged by DR and I return to DCHS’s position below.

The new arrangements as between DR and customers

[28]The Tribunal found as follows:
“55. From 1 October 2000, the part of the credit card slip normally signed by the customer and retained by DR was changed to include the following wording, which we refer to as “the till slip words”, from the Pita “Specification” (see para. 43 above): “I agree that 2.5% of the above value is payable to DCHS for card handling services. The total payment I make remains the same.”
The copy of the credit card slip retained by the customer remains the same as before and does not include the above wording. It simply states that “Notified terms and conditions apply”. 56. At the same time, from around 1 October 2000, Project Pita has required DR to display on its entrance doors, on “toblerone” till notices and on the “mat” upon which customers sign their credit card slips, notices which contain the following wording:
“As a result of a change in procedures Debenhams Card Handling Services Ltd (DCHS) now processes all* card payments made by our customers for a fee. Customers may pay by credit or debit card if they pay 2.5% of the price so paid to DCHS; the balance will go to Debenhams Retail Plc. The total price paid is unaffected by the type of payment used. *Amex, Diners and Style excluded We refer to these words as the notification words.”
The Tribunal added that “the evidence does not satisfy us that in-store notices carrying the Notification words have always been displayed to customers”. We refer to these words as the notification words.”[29]The Tribunal set out the procedures at the point of sale:
“The procedure (a) Goods for sale are placed by DR on “shelves”
. They have price tickets and bar codes attached. The price tickets show a single price, ie the ticket price for the particular item. (b) The customer takes the goods from the shelves and brings them to a till. (c) The till operator, a DR employee, scans the bar code attached to each item into the till. (The tills are DR’s and not the property of DCHS.) The ticket price for that item is then exhibited on a screen at the till. When the till operator has completed scanning in all the items presented by that customer, he or she presses the “total” button. This does the calculation and causes the screen to exhibit the aggregate of ticket prices (or the ticket price where a single item has been purchased). (d) The till operator requests payment from the customer. (e) Where the customer offers a card the till operator takes this, presses the button marked “card” and swipes the card through the till. (f) Where the till is on-line, the card details are transmitted to DR’s central server system at its processing centre in Taunton. (g) Where the till is off-line, the till automatically uses increased “floor limit” agreed specifically for this situation between DR and GE/Streamline (the “acquirers” of the right to payment by the customer): transmission above those limits will be rendered to GE/Streamline by telephone. (h) DR’s processing centre will check details against “hot” files provided by GE/Streamline which are updated on a daily and/or weekly basis. (i) Transactions below floor limits agreed by DR and GE/Streamline are authorized by DR’s processing centre. (j) Transactions above floor limits are passed from Taunton to GE/Streamline GE gives authorization of its own cards as does Streamline. Where the card is not a Streamline card. Streamline seeks authorization from the card issuer. If authorization is granted, an authorization code is provided to Taunton which in turn is passed on to the till in the store. (k) The amount authorized will be noted by the issuer of the card against the customer account as “available funds reserved”. The available funds reserved will not be charged against the customer’s account until the settlement data has been provided by DR to GE/Streamline and passed to the issuer bank. (l) Assuming authorization is granted, the till slip is automatically printed by the till and provided to the customer for signature. The credit card slip signed by the customer has pre-printed on it, the [till slip words] If the transaction is either rejected by DR’s central processing centre or Streamline/GE refuse authorization, a rejection message will be passed to the till. (m) When, following authorization, the till slip is signed, the signature is checked against the card and local security checks are made. Provided that the till operator is satisfied on the signature and the checks, the till operator presses the “Accept” button and the till draw opens. The signed slip is placed in the till. When the “Accept” button is pressed the till prints out the customer copy; this does not contain the [till slip] words …. (n) The till operator then hands the card and the customer copy of the till slip and the goods to the customer. (o) Information on the transaction is fed by the till to the back-of-store office system. All transaction details are stored within the back-of-store until the end of day process is completed. (p) Each till undertakes an end of day “cashing up” process which culminates in the transmission of summary data on each till to the back-of-store office system. (q) Each store then transmits the transactional data to the central processing unit. In addition a report is run overnight which details all card transactions by till terminal. The report will only include transactions on tills that have been correctly closed. (r) The details of card transactions are transmitted by each store to the central server at the end of each day which will be combined to create a report which shows all transactions that have been closed. (s) Those details (details by transaction not by item purchased) are then automatically convened into the correct format required by GE/Streamline and sent from DR’s central processing centre to GE and Streamline by the agreed method of communication for processing and settlement. (t) GE pays DCHS which in turn pays DR. (u) Streamline will forward to each card issuer details of every transaction between it and the card issuer. Those details are then applied to the customer account by the issuer. Streamline will pay DCHS on behalf of the issuer, and DCHS in turn pays DR.”[30]Before the Tribunal and the judge it was in issue at what point any contract was under English law made between DR and customers. Both the Tribunal and the judge held that it was only when stage (m) occurred. Before us, Mr Parker for the Commissioners no longer contests this conclusion. He also accepts that the contract so made included the till slip words (so far as their language was purportedly contractual at all) which were printed on the retailer’s (though not on the customer’s) copy of the till slip which the customer signed. And he does not, as I understand it, argue that customers had insufficient notice that 2.5% was to go to DCHS, rather than DR, by virtue of the till slip words and the Notification words. However, he does rely, as relevant to a correct legal analysis of the significance of all this, upon the unemphatic nature of the Notification and till slip words. The Tribunal found that this lack of emphasis was a matter of deliberate policy on DR’s part:
“102. The in-store notices were, as Gail Timmins said in her e-mail of 18 December 1998 ….. designed “to send the right message to customers”
. One construction of this was her explanation in cross-examination that they were designed to inform the customers that a fee would be charged for handling services. She also said in evidence that “the main issue with the customer was to make sure that the customer was aware of what they were entering into when they went into the shop”. Another construction of what she meant by “the right message” is found in her statement in the note of 28 May 1998 to DR’s lawyers stating that “it would not be glaringly obvious to the customer that any change has occurred at all” …...Later that year (in December 1988 ….) Gail Timmins sought advice as to precisely the “minimum requirements” for the information on the till slip. Then on 20 June 2000 the “Functional Requirements” specified that “the message must be printed in as small a size as possible whilst still being legible”. Those examples point, we think, to the real reason for the discrete positioning of the notices, the obscure wording of the Notification words and the non-committal words written in the retailer’s copy of the till slip. In this connection we recall Mr Maxwell’s is “Notice behind the plant pot” expression in his e-mail of 10 December 1998 …... Gail Timmins referred to those words as a private joke. But true words are uttered in jest, even in e-mails. That expression, we think, was no exception, particularly bearing in mind Gail Timmins’s message of 28 May 1998 that referred to this arrangement being “advertised on a small sign near the till point” and to it not “being glaringly obvious to the customer that any change has occurred at all”. 103. The choice of wording to comprise theNotification words was regarded as a public relations matter as well as a legal issue. Adverse customer reaction and customer queries were to be avoided. The till slip words were (as already noted) chosen following advice as to “what precisely the minimum requirements would be” ….. and approved by the executive directors of DR and DCHS. Those words were not printed on the copy taken away by the customer. Why the customer copy of the till slip did not split out the fee for card handling on the one hand and the price for the goods on the other can only be answered, we think and in the absence of any acceptable explanation (which Gail Timmins was unable to furnish), by the conclusion that the less the customer knew about the scheme the better for Debenhams and Project Pita.”

The decisions below on the contractual position between DR and its customers

[31]The Tribunal considered that neither the Notification words nor the till slip words were capable, individually or in conjunction, of forming part of any contract. It was not clear that they were intended to have any contractual effect. The Tribunal added with regard to the Notification words that, even if they were otherwise sufficiently clear in this respect, DR did not do what was reasonably sufficient to give notice of them to customers, bearing in mind the “significant potential detriments” for customers to which the Tribunal thought the Notification words would lead (if they had the effect for which DR contends). The Tribunal referred in the latter connection to Interfoto Picture Library Ltd. v. Stilletto Visual Programmes Ltd. [1989] 1 QB 433. The Tribunal did not address this latter point in the context of the till slip words.[32]Lindsay J disagreed with most of the Tribunal’s reasoning as well as with its conclusions regarding both the Notification words and the till slip words. He said, as to the Notification words, that:
“29 ….. the words "customers may pay by …. card if they pay 2.5% of the price so paid to DCHS" are, in my judgment, competent to introduce the notion that that is a condition of the use of the unexcepted cards if they are to be used to make purchases and hence, if that condition is not met and if, therefore, the customer is unwilling to pay 2.5% to DCHS, that that customer will not be able to use such a card.”
In paragraph 30 he went on:
“….. whilst I would leave the Tribunal's paragraph 127 without quarrelling with its conclusion that the Notification Words do not operate as terms of the necessary contracts (not, in my view, an issue that needed an answer) I would conclude, subject to the next argument, (b), as to detriment, that they were sufficient indications both of the terms upon which DR would be willing to enter into contracts for the supply of goods in return for card payment and of the broad nature of the service – processing of card payments – which DCHS provided for the 2.5% fee.”
As to detriment, Lindsay J disagreed both with the Tribunal’s assessment of the suggested detriments to customers and with its interpretation of Interfoto.[33]With regard to the till slip words and the general contractual position, Lindsay J said:
“45. ….. It is, surely, no necessary part of a contract to explain, beyond mere identification, "who" the other contracting party "is"; it is sufficient that the parties are identified and in my view the combination of the door notices, the "toblerones", the mats and the till slip itself make it clear that if the customer wishes to pay by way of an unexcepted card he has to contract with a clearly identified other person, DCHS. DCHS is identified with at least as much clarity as, upon a cash sale, would be DR rather than Debenhams plc. Next the complaint is that nothing explains what card processing functions DCHS performs. But is that necessary as part of a determination of whether a contract is formed? If I commission a birthday cake at a confectioners a contract may form even though I might well not be told whether the baking is done by the very company that runs the shop or whether the icing is contracted out. If my car runs badly I may contract with my local garage in general terms as to their repairing it, without explanation to me that it is a rebore which is necessary and without my knowing that the garage will send out the cylinder block to a specialist. The Notification Words say that DCHS processes all card payments for a 2.5% fee and the till slips say the fee is for card handling services. I fail to see why that is not a sufficient description for the limited purposes of causing or permitting a contract to form. Next the complaint is that no-one explains that the till operator is accepting on DCHS' behalf. But it is no necessary part of a valid agency that the existence of the agency is declared. 46. For all these reasons I hold the Tribunal to have erred in law in its analysis of the contractual position. In my judgment the combination of the door notices, the "toblerones" and the mats sufficiently indicate to customers that if an unexcepted card is intended to be used for payment by the customer then card processing will be required to be done by DCHS, that it will be done for a fee of 2.5% of the ticket price payable by the customer, that the 97.5% balance of the ticket price will go to DR and that the total payable by the customer will be unaffected and will be the ticket price. There is no contract at that point but there is a sufficient indication that those are the terms and the only terms upon which DR will, in the appropriate card-payment cases, enter into contracts for the supply of goods. Then, at the point when the till operator presses the "accept" button (the customer by then having signed the till slip) two contracts are, as I see it, formed and (when the goods are delivered) are completed, namely one at 97.5% of the ticket price between the customer and DR for the supply of the goods and the other at 2.5% of the ticket price, between the customer and DCHS, for card handling services.”

Analysis of the contractual position

[34]The contractual effect of the new arrangements represents, as I have said, a starting (although not necessarily the finishing) point in any analysis of the incidence of VAT. DR’s submission is that, under the new arrangements, two separate contracts came into existence, one between the customer and DR for the supply of goods for 97.5% of the total paid, the other between the customer and DCHS for “card handling services” for the other 2.5%. Before us, Mr Philpott, following Mr Milne in order to develop DR’s submissions on the contractual position, submitted at one point that it would make no difference to the VAT analysis if there was only one contract, under which the customer agreed with DR to pay 97.5% to DR and the remaining 2.5% to a third party, DCHS. But, on the next day of the hearing, Mr Milne wisely made clear that this was no part of DR’s case. A company cannot avoid VAT simply by providing for part of the price of goods either to be paid to a subsidiary or to be given away, for example to a charity. The European Court said of consideration in the Apple and Pear Development Council case that: “The concept of receipt for this purpose is not to be confined to mere physical receipt; anything which is received by persons for and on behalf of the supplier must be treated for this purpose as received by the supplier himself .…” and in Kuwait Petroleum that there must “a legal relationship between the supplier and the purchaser entailing reciprocal performance” (cf paragraph 8 above). But reciprocal performance cannot be restricted to performance involving the actual delivery of, or payment for, goods or services to the other contracting party. Delivery to the other contracting party’s order must suffice; while a person must be treated as having received consideration under a contract, if he stipulates for it to be paid to an associate or given to a complete third party (such as a charity). I add in this connection that I should not be taken as accepting Mr Milne’s suggestion that it would make any difference, if a supplier, instead of stipulating for a promise to give money to a third party, simply made it a non-promissory pre-condition to any sale that the purchaser should have paid such a sum to the third party. It is not suggested that any such pre-condition existed here, and, even if the suggestion were otherwise correct (which I doubt), it could not enable a supplier to introduce a pre-condition of a prior payment either to itself or to an associate when this would involve corresponding benefit to itself. It follows that DR cannot uphold the judge’s decision in this case, unless there were two separate contracts. But even that may not, necessarily, suffice.[35]Before us, Mr Parker submits that(a) the Tribunal was right to conclude that the Notification and till slip words have no contractual effect, but that(b) even if that be wrong, their effect is merely between DR and its customers in requiring the latter to make a payment to a third party, DCHS. Mr Milne and Mr Philpott support the judge’s contrary conclusion.[36]There is, for reasons already touched on (paragraph 10 above) some difficulty about identifying the relevant circumstances against the background of which any objective contractual analysis must be undertaken. This difficulty arises here in part because we have to consider the position regarding DR’s retail trading overall, when in fact such trading involves a myriad of individual contracts entered into between different individuals in potentially differing circumstances. This point can be illustrated by reference to the Tribunal’s findings as well as draft Answers (bundle 5 p. 9) produced for use by DR shop assistants to use in answer to observant customers raising possible questions about the new arrangements. The Tribunal found:
“117. The evidence [from Customs officers making test purchases in the course of the investigations leading to this case] ….. went unchallenged. It was pointed out for Debenhams that that evidence was unrepresentative. Otherwise, no evidence was produced by DR to respond to the statements and letters referred to above or to present a different picture. Recognizing that the evidence of customer perceptions has been obtained and collected by Customs officers, we nonetheless find as follows: (i) there has not been a full display of store notices containing the Notification words either at all entrances or on all the tills; (ii) where the in-store notices have been displayed the wording has on occasions not been noticed or, if noticed, has not been readable by customers; (iii) the staff have not been able to provide customers with any consistent explanation of the meaning of the till slip words or of the significance of the arrangements generally and (iv) customers who sign the till slips, having crossed out the till slip words, may still have their card payments accepted.”
The draft answers prepared for use by DR shop assistants read:
“1. Why has Debenhams introduced this change? As a convenience to customer’s Debenhams are pleased to accept payment for purchases in store credit or debit card, but the handling of such payment involves a cost to us. To keep this to a minimum all such handling will now be done by a separate Debenhams company, DCHS. We are required by law to notify you of this change. We have merely split the amount you pay between two Debenhams companies. CUSTOMERS WILL PAY NO MORE OVERALL THAN IF THEY HAD PAID BY ANY OTHER MEANS. …… 5. Does this mean that a customer is paying more for an item today by using a credit card than yesterday? No. For legal reasons we now have to explain the basis of charges associated with credit transactions. However, Debenhams has discounted the price of goods purchased by customers using a credit or debit card so that the price paid by customers wishing to pay in this way remains unchanged. ….. General Response Debenhams has set up a new handling company to focus attention on the changes in the credit card market such as handling costs. We are required to advertise these changes by law. The price remains the same whether you use a credit card or pay cash. We have merely split the amount you now pay between two Debenhams companies.”

General Response

[37]Whatever might otherwise have been the position, it is not inconceivable that it might be altered in an individual case in the light of such findings or by the giving to a particular customer of one of such answers. But it is, as stated in paragraph 10 above, necessary to put that possibility aside when considering the generality of DR’s trading overall. DR’s attempts to bring the notices to customers’ attention, in a subdued way, must I think be viewed in a general way, and the till slip words appeared on the store copy of any slip signed by any customer. It is not suggested, and it is very unlikely, that many customers actually raised questions about them at all. But this leads to the opposite difficulty, which is the interpretation, or (one might say) superimposition, of a contractual analysis in an everyday context where the retailer and customer are both normally interested in anything but that. When the ordinary customer (not a representative of HM Customs and Excise sent on a scouting mission) shops in a retail store, he or she envisages the purchase of goods from the store. If he pays by cash, that is the only contract he envisages. If he uses a card to pay, he must be taken to appreciate that the purchase of goods in this way will give rise to rights and duties as between him and the company from whom he obtained the card, which in the case of a store card may be connected with the store. He or she knows that the position regarding any charges (and interest) is regulated by the terms of the store or other card. He or she must be taken to know that the use of a card, at least other than a store card, will (as stated in Debenhams’ own draft answer 1 above) involves a retail store in further and separate charges levied by the card issuer (or acquirer, although ordinary customers are unlikely to know that such entities even exist). Until not long ago at least one well-known retail store refused to accept outside cards for this reason; and the ordinary retail customer may also be taken to be aware that some suppliers of goods or services (e.g. budget airlines) levy on their customers a small additional charge to cover the costs to them of customers’ use of some cards. In the case of Debenhams, however, the ordinary customer would, I think, appreciate that it made no difference to what he or she paid, whether he or she paid by card. The ticket price was in all cases what was to be paid. That is on any view a matter of potential significance under European VAT law (see the discussion of Kuwait Petroleum and Primback at the end of paragraph 10 above). It is not I think without relevance under domestic law, when assessing what the ordinary customer would regard as the bargain being made. But it is not an essential factor in the conclusions that I reach under either domestic or European law.[38]While an ordinary customer would not, I think, be very surprised if a retail store were to insist on an extra charge being paid where a customer paid for goods by card, a DR customer would know that this was not expected in a DR store. The natural inference would be that any extra charges continued to be absorbed by the supplier. It would, I think, require clear words to bring home to an ordinary customer that he or she was required or expected to enter into some separate contract, with another company associated with the retail seller of the goods, to cover the charges which use of a card by the customer would or might involve for the seller. Neither the need for nor the basis of any such contract would be clear. The conventional contractual position involves three (or where there is an acquirer in fact four) separate contracts. The contract of supply remains a contract of sale for a price, even where the buyer chooses to satisfy that price by means of a card: see per Millett J at p.164 in re Charge Card Services Ltd. [1987] Ch. 150. Payment by card is not conditional upon anything that may or may not happen in the chain of separate contracts between the buyer, the card-issuing company and the store, since “the general understanding of the public” is “that when a customer signs the voucher he has discharged his obligations to the supplier and that he pays for the goods or services he has obtained when he pays the card-issuing company”: see per Millett J at p.169, and also Customs and Excise Commissioners v. Diner’s Club Ltd. [1989] STC 407 (CA). Any services performed in relation to settlement or card handling are on this basis services performed, by the card issuer (or acquirer), for the supplier and normally paid for by the supplier by deduction or other charge, as the European Court of Justice also recognised in Chaussures Bally SA v. Belgium (Case C-18/92) at paragraphs 9, 11 and 16.. The Court of Appeal upheld Millett J’s reasoning and decision in re Charge Card: [1989] Ch. 497. It observed that, where payment is made by card, some form of underlying contractual scheme will pre-date any individual contract of sale: see per Sir Nicolas Browne-Wilkinson at p.509C. Commonly this will include not merely the contract between the card-holder and card-issuer, but also an arrangement between the card-issuer or acquirer and the store. The Court of Appeal also pointed out that, in the case of over-the-counter sales, the retailer commonly has no record of the customer’s address and no means of tracing the customer other than through the card-issuer; and it listed among the “normal features of credit card or charge card transactions” that they “have come to be regarded as substitutes for cash: they are frequently referred to as ‘plastic money’” (per Sir Nicolas Browne-Wilkinson V-C at p.509G). The Vice-Chancellor went on to observe that a credit card scheme “provides advantages for both seller and purchaser. The seller is able to attract custom by agreeing to accept credit card payment. The purchaser, by using the card, minimises the need to carry cash and obtains at least a period of free credit during the period until payment to the card company is due”.[39]Against this background, the question is whether there is anything in the till slip words, read against the background of the Notification words, which shows sufficiently clearly that the customer is required to enter into some separate contract with DCHS. I agree with the Tribunal that there is not. The till slip words are consistent with DR having to engage DCHS to undertake card handling services, and either informing the customer that 2.5% of the price will go to DCHS for DCHS’s services or requiring the customer to pay 2.5% of the price to DCHS for DCHS’s services. The effect of the latter analysis is merely that DR required the customer to contract with it to pay to a third party 2.5% of the price. That does not assist DR (see paragraph 34 above). In the passages from paragraphs 29-30 of Lindsay J’s judgment cited in paragraph 32 above, the judge used words that would cover the latter analysis, but without considering whether such an analysis would, without more, assist DR. In the further passage quoted in paragraph 33 above, he went on to conclude that it followed from the Notification and till slip words that the result was a contract between each customer and DCHS “for card handling services” by the latter. In circumstances where there would be no apparent need or rationale for such a second contract, I do not regard the words on the slip as sufficiently clear even to purport to bring about such a contract.[40]This conclusion is reinforced by the use throughout, on and from the shelf to check-out, of a unitary ticket price, and at check-out by the description of the transaction appearing on both the retailer and customer copies of the till slip. This read (taking a case where the customer paid £50.00 by card) “TOTAL: SALE TRANSACTION £50.00 VISA £50.00” The note referring to DCHS and card handling at the foot of the copy signed by the customer was phrased so as to obtain the customer’s agreement “that 2.5% of the above value is payable to DCHS for card handling services. …..” The “above value” refers to the total of £50 which is attributed expressly to a “sale transaction”. There is, in other words, a sale for £50, a small part of which price is to go to DCHS for unexplained card handling services. At the foot of the customer copy of the till slip also appeared the words:
“PLEASE RETAIN AS PROOF OF PURCHASE …..”
. The conclusion reached above is also consistent with the explanations which Debenhams themselves suggested to their own shop assistants should be given to customers asking about the new arrangements (paragraph 36 above). The suggestion that the only plausible reason for the till slip or Notification words was to require customers to make a separate contract with DCHS is not consistent with the explanations that Debenhams themselves proposed to give, and which, knowing their customers, they must have thought would be plausible to and accepted by even the more inquisitive. VISA £50.00”[41]The fuller language of the Notification words does not lead to any different analysis. These words refer to a “change in procedures” whereby DCHS (identified by its full name as a separate company) “now processes all card payments” made by “our” (i.e. DR’s) customers for a fee. Customers (i.e. DR’s customers) are then advised that they may pay by card if they pay 2.5% of the “price so paid” to DCHS, and that the balance will go to DR. The “price so paid” is the full 100%. The “total price” is unaffected, i.e. is the same, whether it is paid in cash or by card. The natural reading of these words is that customers are contracting with DR alone, for a single or total “price”, 2.5% of which price they must however pay to DCHS. The explanation is given that DCHS is to have this part of the price because it is processing card payments, but, so far as the customer is informed, this is all part of the “price” (i.e. the cost of the goods being bought from DR) that he must pay to DCHS if he is to buy such goods from DR.[42]The difficulty in identifying, and the artificiality of, any consideration that can be suggested to have moved from DCHS to the customer reinforces the conclusion expressed in the previous paragraphs. What would DCHS be offering or agreeing to do, in consideration of the customer’s agreement to pay 2.5% to DCHS? For a customer paying by card, once the card is accepted at the till, the transaction is complete in relation to the store. The settlement of the payment obligations resulting from the use of the card is a matter between him and the card issuer. He has nothing to do with whatever may occur between the card issuer and the store (via the acquirer, where there is one). Even if the documentation seen by the customer could or would otherwise be read as indicating that the customer was required to contract with DCHS, contracts are not made by mere assertion. The natural interpretation of the course of events and documentation would accordingly be that any card handling (other than that covered by the agreement between the cardholder and his card-issuer) was and remained the responsibility of the seller accepting the card in discharge of the price.[43]Two contrasting analyses were in these circumstances advocated by Mr Philpott and Mr Milne for DR. Mr Philpott suggested that the consideration supplied by DCHS to customers was to be found in DCHS’s procuring, or undertaking to procure or effect, settlement of the price by obtaining payment from the card-issuing company (or acquirer) and/or making payment to DR. That corresponds with what was envisaged as between DCHS and DR by clauses 1.3 and 10 of the merchant agreement made on 27 September 2000 between DR as “merchant” and DCHS as “acquirer” (paragraph 22 above). But not only was clause 1.3 unknown to any customer, it was preceded by clause 1.2, whereby DCHS undertook its own independent obligation to DR to pay DR the settlement. Clause 1.2 reflects the ordinary expectation that settlement would be a matter of no concern to the customer. The contract which clause 1.3 aims to create is unnecessary, and only makes any sense to someone who appreciates the possible VAT advantage for the Debenhams group of creating a separate contract for a separate financial supply with a separate company, DCHS. No ordinary customer would appreciate that. The suggested contract conflicts with any such customer’s general expectation that acceptance of his card discharges the customer’s responsibilities, and leaves him with no further role or obligation, save to pay his own card-issuer, and that services performed in relation to settlement or card handling are performed, by the card issuer (or acquirer), for the supplier and paid for by the supplier by deduction or other charge. Prior to 1st October 2000 that was explicitly recognised in the arrangements then existing – see as regards store cards recital (B) quoted in paragraph 16 above and as regards other cards paragraph 19 of the Tribunal’s decision and clause 7.1 of the merchant service agreement set out in paragraphs 18 and 19 above. Even under domestic law, consideration must have some “value in the eye of the law” and not be “illusory”: see Chitty on Contracts, Vol. 1 General Principles paragraphs 3-022-024; and it is questionable whether any consideration at all could therefore consist in DCHS’s procuring, or undertaking to procure or effect, settlement of the price by obtaining payment from the card-issuing company (or acquirer) and/or making payment to DR. But, assuming that it could, the very remote and improbable nature of such consideration militates strongly against a conclusion that the transaction should be understood or analysed in terms of a contract between the customer and DCHS for DCHS to render services to DR.[44]The alternative, suggested by Mr Milne, is that DCHS supplied consideration to the customer by procuring the acceptability of the card to DR. This was, it appears, the judge’s view, when he said in paragraph 65 that “There is a supply by DCHS to the customer in that without procurement by DCHS of the acceptability of the card to DR the customer will, or at the least may, find that his card will not be accepted”. But the customer was given no idea by the till slip or Notification words that the acceptability of any card needed to be procured from DR by DCHS or anyone else. On the contrary, DR was proclaiming to the world by the Notification and till slip words, by the very existence of its own store cards and the display of other card logos, that it would accept cards on the basis stated, whereby DCHS’s only stated role was card handling or processing and the receipt of 2.5% of “the above value” or of “the price so paid”. Any suggestion of consideration of this nature would also have appeared implausible to any customer.[45]The position is moreover no different even if one looks at the contractual arrangements (unknown to any customer) as between the card-issuer (or acquirer), DCHS and DR. GE continued, so far as appears, to have the right to require Debenhams retail companies to accept and honour cards and to promote GE’s credit facilities under clause 6 of the marketing agreement (paragraph 14 above); while Streamline continued to have the right to expect Debenhams companies to accept payments by cards when offered by customers (see clause 4 of the merchant services agreement and the fifth paragraph of the side letter agreed between Streamline and DCHS, as set out in paragraphs 19-20 above). Under its merchant agreement dated 27 September 2000 with DCHS, DR was to “accept payment by ….. cards ….. in respect of its sales to Customers of goods and services (“Relevant Sales”) as [DCHS] may authorise” (clause 1.1) and DCHS was given a role in setting DR’s floor limit, as well as in authorising any payment above that limit, which DCHS was only to do, if it in turn was authorised by the banks to do so (clause6.1 ). But under clause 1.8 DR was to provide to DCHS “such management administration and other services as DCHS may reasonably require to honour its obligations under this Agreement” and under clause6.2 DCHS specifically appointed DR as “its agent for the purpose of seeking authorisation from the Banks for any Relevant Sale”, while, subject to any notice DCHS might give to the contrary, DR was entitled to “treat authorisation so given by the Banks as being sufficient authorisation to it from [DCHS]”. An agency whereby the agent purportedly sub-delegates its authority to the principal calls to mind Tweedledum in Alice in Wonderland:
“I know what you're thinking about, but it isn't so, nohow”
. I cannot for my part see how a principal’s act on its own behalf within the scope of a purported sub-delegated authority can take effect by way of agency at all. The Tribunal took the same view about the unreality of DCHS’s suggested agency in its paragraph 84:
“84. There is no evidence that DCHS has done anything to authorize DR’s acceptance of payment by card in respect of its sales to customers (see clause 1.1 of the Management Agreement) otherwise than through DCHS’s appointment of DR as its agent. DR therefore has self-authorizing powers. In theory DCHS could bring to an end DR’s agency to authorize acceptances of card transactions by terminating the Merchant Agreement. But that would totally destroy DCHS’s means of carrying on any card-related activity. Nor is there any evidence that DCHS has done anything to direct or supervise DR’s dealings, as DCHS’s agent, with the banks as provided for in clause 1.6 of the Merchant Agreement. The initial agreements with the banks appearto have been set up before DR was finally appointed as DCHS’s agent.”
However, the unreality of DCHS’s role, looking at its actual agreement with DR and its actual activity or lack of activity, cannot determine whether, looking at the position as it would have appeared to customers, contracts were by virtue of the till slip and Notification words created between customers and DCHS for DCHS to supply card handling services. My reasons for considering that they were not appear in paragraphs 39-44 above.[46]I should add a brief word about the suggested detriments to at least some customers which the Tribunal identified, but which Lindsay J discounted or considered to be met by the countervailing benefits from the use of a card. Such countervailing benefits are anyway obtained on the analysis which I would adopt. But some of the suggested detriments have in my view some minor relevance, as being supportive of the analysis I adopt, although I do not regard them as in any way decisive. If customers buying goods from DR were entering into a separate contract with DCHS for 2.5% of the total paid, then(i) a customer registered for VAT could only recover the VAT on 97.5% of that total,(ii) likewise a EU customer claiming a VAT refund should, only recover VAT on 97.5% of the total paid, and(iii) a customer claiming to rescind (as opposed to claiming damages) for breach of a contract of sale would technically only recover 97.5% of the price from DR, with the position in relation to DCHS being at least uncertain. (If DCHS had genuinely rendered services to the customer under contract for its 2.5%, why should it refund the 2.5%?) I do not however consider that there is force in the other detriments suggested by the Tribunal (relating to the measure of damages for breach of warranty, DR’s refund policy and insurance).

Supply

[47]I come to the question which is of direct relevance for VAT purposes. Did DR make a taxable supply of goods for a consideration which consisted of 97.5% or 100% of the total paid by customers? If as I consider there was only one contract between a customer and DR, whereby at the most the customer was required and agreed to pay 2.5% of the total consideration to a third party, DCHS, then it is common ground that DR is to be treated as having made a supply for a consideration consisting of 100% of the total paid by the customer: see paragraph 34 above. The domestic contractual position is, in other words, not just the starting point, but also the finishing point on this hypothesis.[48]At the European legal level at least, this conclusion is buttressed by a further factor. The European authorities show that, where the price paid by a member and a non-member of a scheme is the same, that militates against any argument that the price includes, in the case of a member, an element attributable to the vouchers or other benefits obtainable under the scheme: see the references to Kuwait Petroleum and Primback in paragraph 10 above. Here, the price payable by a cash customer of DR was the full ticket price, with no reduction for the fact that a cash customer needs no possible “card handling service”. Further, in respect of certain “excluded” card companies (Amex, Diners and Style) and in respect of payments by card of store card accounts, DR made no card handling charge. These factors support the conclusion that, for the purposes of European VAT law, the full ticket price should be regarded as the price, whether or not such price was paid by card.[49]I shall also say something about the VAT position if the analysis of the contractual position which I have adopted above is wrong and it is possible to treat some form of contract as having been created between a customer and DCHS. If the contract coming into existence were truly a separate contract for DCHS to supply separate services to the customer in return for a 2.5% fee out of the total paid by the customer, the case would be analogous to Telewest Communications plc v. Customs and Excise Commissioners [2005] EWCA Civ 102; STC 481. There the 28 regional subsidiaries of Telewest Communications plc (“Telewest”) provided in their agreements with customers that, if customers subscribed for Telewest television services, they also agreed to the supply of a Cable Guide by another Telewest subsidiary company (“Publications”, a member of a different VAT group). The Cable Guide was published by and procured by Publications from Cable Guide Ltd. (itself ultimately part of the Telewest group as to 80%). Publications agreed with each regional subsidiary to supply a Guide to each customer of such subsidiary, and to procure sufficient copies of the Guide from Cable Guide Ltd. for that purpose. Publications also authorised each regional company(a) to create a contract for sale between it as seller and each customer as purchaser, and(b) to collect from each customer under such contract the cover price of the Guide, which each regional company then remitted to Publications on a monthly basis. Publications paid each regional company a debt collection fee of 3% p.a. The court held that the effect of the arrangements, although not “crystal clear”, was “plain enough” to make Publications as a principal the contractual supplier of the Cable Guide (see per Sir Christopher Staughton at paragraphs 32-33 and Arden LJ at paragraph 35). It also rejected the Commissioners’ submission that the two separate supplies could be regarded as a single supply, either because they were effectively part of a single package or because one could be described as ancillary to the other or on grounds of artificiality or economic reality (see per Arden LJ, with whom Kennedy LJ agreed, at paragraphs 66-90). Argument was reserved before the Court on the Halifax principle said by the Commissioners to exist in respect of transactions whose sole purpose was tax avoidance (see paragraph 90). There was no suggestion in Telewest that Publications was a “mere cipher” for Telewest, nor any evidence of “value shifting” (see paragraph 82).[50]Telewest could not, however, determine the result of this case unless a contract was made between the customer and DCHS for separate consideration, which cannot, or cannot also, be regarded as consideration received by DR in return for its agreement to sell to its customer. If, contrary to my view, the course of events and documentation brought any contract into existence between a customer and DCHS, then in the light of paragraphs 43-46 it was, I consider, a contract whereby DCHS either agreed with the customer to provide, or provided, DR with card handling services in return for the payment to it by the customer of the 2.5%. Even assuming that there would under English domestic law be any valid consideration for such a contract, this would not determine(a) whether any supply took place by DCHS to the customer for the purposes of European VAT law or(b) more importantly for present purposes, what the consideration was for DR’s undoubted supply of the goods to the customer. If it were necessary to answer question (a), I would do so in the negative. But it is question (b) that is central. Any such contract between the customer and DCHS would come into existence at DR’s insistence, it would be for services to be supplied to DR (and which DR had also required DCHS to undertake to DR to supply: see clause 1.2 of the merchant agreement of 27 September 2000), and it would be of value to DR. In these circumstances, I consider that, in return for the supply of the goods to any customer, DR would be regarded as stipulating for and obtaining consideration consisting of both the 97.5% paid to it directly and the 2.5% paid at its insistence to a third party (DCHS) to cover the cost of services which DR had (both practically and legally) required to be rendered to it by that third party. The value to DR of such services can and should be measured by the value of 2.5% put on them by DR. If A supplies goods to B in consideration of a payment to A out of which A will have to meet expenses payable by A to C for services rendered by C to A, there is no doubt about A’s liability for VAT on the whole consideration: see Chaussures Bally (paragraph 44 above). If A instead requires B to pay C at a particular rate for the services rendered by C to A, the value thus attributed to such services must be regarded as consideration received bya. A. The value to DR of such services can be equated with the value of 2.5% put on them by DR, when agreeing to forego that part of its normal price and to have it paid to DCHS for “card handling”. If a monetary value can be attributed to a service consisting of activity by B in relation to a third party which is of benefit to A (cf Naturally Yours Cosmetics), then such value can as easily be attributed to a service consisting of payment of C for rendering services to A. This should be so whether or not as a matter of law C has any enforceable right against B either under a contract made with B or as a third party to the contract between A andb. B. Since, on the present hypothesis, the payment to C is for services rendered by C to A, the case is a fortiori to that of a sale by A to B on the basis that B will pay A (say) £97.5 and will give to a subsidiary of A, or to an unconnected third party, a gift of £2.50 (see paragraph 34 above). If DR were to object to the equation between the 2.5% paid to DCHS and the value to DR of the “card handling” services supposedly rendered by DCHS, the objection might have some force if one were to ask what DCHS might be expected to be paid for its intervention on any arm’s length basis. But parties cannot so easily escape from “the value which they have themselves recognised in the course of their dealings” – see per Lord Walker at paragraph 19 in Lex Services, cited in paragraph 9 above, and also see per Lord Hoffmann at paragraph 17 in C R Smith Glaziers (Dumfeline) Ltd. v. Customs and Excise Commissioners [2003] UKHL 7; STC 419.

Abuse

[51]We heard argument on this subject with particular reference to the European Court’s decision in Emsland Stärke GmbH v. Hauptzollamt Hamburg-Jonas (Case C-100/99; [2000] ECR I-11569) and Advocate General Maduro’s recent opinion in the Halifax case (Case C-255/02). In the former case the European Court was concerned with the export of goods from the Community to a non-Member state (attracting payment of an export refund) followed, immediately after the release of the goods for home use in the non-Member state, by their re-export into the Community under the external Community transit procedure (giving rise on release of the goods for home use there to an obligation to pay import duties in an amount less than the export refund received on the export). All this occurred without any formal infringement of Community law, but the European Court held that a Community exporter might in such circumstances forfeit his right to the export refund on the ground of “abuse”. This, it said, pre-supposed “an intention on the part of the Community exporter to benefit from an advantage as a result of the application of the Community rules by artificially creating the conditions for obtaining it. Evidence must be placed before the national court in accordance with the rules of national law, for instance by establishing that there was collusion between that exporter and the importer of the goods into the non-member state.” More specifically, the European Court explained in paragraphs 51-54:
“51. In that regard, it is clear from the case-law of the Court that the scope of Community regulations must in no case be extended to cover abuses on the part of a trader (Cremer, cited above, paragraph 21). The Court has also held that the fact that importation and re-exportation operations were not realised as bona fide commercial transactions but only in order wrongfully to benefit from the grant of monetary compensatory amounts, may preclude the application of positive monetary compensatory amounts (General Milk Products, cited above, paragraph 21). 52. A finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. 53. It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it. The existence of that subjective element can be established, inter alia, by evidence of collusion between the Community exporter receiving the refunds and the importer of the goods in the non-member country. 54. It is for the national court to establish the existence of those two elements, evidence of which must be adduced in accordance with the rules of national law, provided that the effectiveness of Community law is not thereby undermined…”
[52]Advocate General Maduro in his opinion in Halifax considered that there was a notion of abuse which operates as a principle governing the interpretation of Community law, and that “a decisive factor in affirming the existence of an abuse is the teleological scope of the Community rules invoked, which must be defined in order to establish whether the right claimed is, in effect, conferred by such provisions, to the extent that it does not fall manifestly outside their scope” (paragraph 69). While he thought that the test enunciated in Emsland Stärke provided considerable guidance, he said that “the specificity of VAT as a tax of an objective character means that automatic transposition is not to be recommended” (paragraph 83). In the result he was of the view that “the Community law notion of abuse, applicable to the VAT system, operates on the basis of a test comprising two elements. Both elements must be present in order to establish the existence of an abuse of Community law in this area. ….” The facts and reasoning in both Emsland-Stärke and Halifax were directed to situations where a person was claiming a positive benefit under Community law, of which benefit he might in case of abuse be deprived. The present case differs in concerning the reverse situation of a person claiming not to have made a supply or to have received consideration for the purposes of Community law. But, if the underlying principle is one of interpretation, it may be possible to conclude that such a person should be viewed as having made a supply within the meaning of the VAT legislation, if any contrary conclusion would involve an abuse, established by the presence of the two elements identified by Advocate General Maduro.[53]The question of abuse does not arise on the analysis which I accept of the new arrangements; on that analysis DR fall “manifestly” within the scope of the VAT regime in relation to 100% of the total paid by any customer paying by card. So it is not easy to address the issue of abuse, since it can only arise on a different hypothesis as to either the facts or their correct legal analysis. Further, the Advocate General’s opinion is not the last word; the decision of the European Court is awaited. The most that I would say therefore is that, if, on the facts as I have set them out, DCHS were regarded as having contracted with DR customers to supply either DR or DR customers with card handling services in return for payment by customers of 2.5% of the total paid, it is clear that there was no other economic justification for interposing DCHS or for causing it to contract as it did other than that of creating a tax advantage. In Telewest the Cable Guide was supplied to customers by Publications. Here DCHS did nothing, and nothing was supplied to any customer, while DR continued to deal with GE and other card-issuers or acquirers as before. The case is not comparable with Telewest.[54]Further, any suggestion that the extra costs of handling card transactions could constitute an economic justification for the new arrangements, independent of tax advantages, is undermined in circumstances where(a) customers were charged no more overall if they paid by card than if they paid in cash (and customers paying off their store card accounts were also not called on to pay 2.5% to DCHS) and(b) the 2.5% charge payable to DCHS was, on the Tribunal’s findings, five times in excess of any required to cover the actual charges levied by GE and other card-issuers or acquirers. The first element of the Advocate General’s suggested test would appear to be satisfied.[55]As to the second and more judgmental element of the Advocate General’s test, I say only that there would be a considerable case for disregarding DCHS’s interposition and any contract which it did make and for treating DR as the supplier of goods in consideration of 100% of the amount paid by any card-using customer; whatever the formal position, the position was in substance that(a) DCHS’s intervention was purely formal,(b) DR itself had arranged and was continuing to deal with all relevant matters as before and(c) DR was in one way or another continuing to receive the benefit of 100% of the sum paid by any customer. Some four-fifths of the 2.5% payable to DCHS (i.e. 2%) was pure profit effectively “given” to DCHS by DR. The balance (0.5%) was used by DCHS to cover the ordinary charges of card-issuers or acquirers for services rendered to DR or DR via DCHS which in any ordinary circumstances DR would itself have had to discharge.[56]It is however inappropriate and unnecessary in the present circumstances to say more or to decide this appeal on the issue of abuse.

Conclusions

[57]The Commissioners’ appeal should in my view be allowed and the Tribunal’s decision restored on the ground that, quite apart from any Community principle of abuse, DR falls to be regarded as the supplier to its card-using customers of goods (or in some cases services) for a consideration consisting of the whole 100% payable by such customers on any such transaction. The reasons for these conclusions are stated in paragraphs 39-45 and 47-48 above. Even if the analysis there adopted were however wrong, the same conclusion would follow from the reasoning in paragraphs 49-50 above. It follows that it is unnecessary to decide this appeal (or to adjourn it pending the European Court of Justice’s decision in the Halifax case) by reference to the issue of abuse considered in paragraph 51-56 above.

Sir Peter Gibson:

[58]I agree.[59]I also agree.

Cited in 1 later judgment