“As you may be aware, Baxi Heating UK Limited (‘Baxi’) operates as a manufacturer and wholesaler of heating products in the UK domestic central heating market. In this sector, prices for similar products do not vary greatly from one manufacturer to another and it is therefore difficult for businesses in this sector to compete on the basis of price alone. For this reason, manufacturers need some other way of setting themselves apart from their competitors and making their products more attractive to their customers [the installers, plumbers and heating engineers that buy the products from the merchants “installers”]. The manner in which Baxi has done this is through the adoption of Bonus Direct and Baxi Business Partners customer loyalty programmes. These types of programmes are common in the industry and are a necessary part of doing business for Baxi. The manner in which these loyalty programmes work is simple. Installers are awarded points each time they purchase a Baxi product and collect these points in a ‘bank account’. Participating installers then receive either a Bonus Direct or a Baxi Business Partners catalogue, which illustrates a large range of goods or services against which points can be redeemed. The points are collected by the installers until they have a sufficient number of points to enable them to claim something of interest to them from the catalogue and the points are then redeemed. The installer’s points balance in their ‘bank account’ decreases accordingly. Although the loyalty programmes are aimed at Baxi customers and are designed to encourage the installers to buy further Baxi products, Baxi does not run the customer loyalty programmes itself. Instead an independent marketing and promotions company called @1 Group (‘@1’) runs the scheme on behalf of Baxi. Periodically, @1 makes a charge to Baxi in respect of its supply of services made in connection with the customer loyalty programmes that it operates on behalf of Baxi, on which VAT is charged. Historically, Baxi has not reclaimed, as input tax, any of the VAT that has been charged to it by @1.”
“17.2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: (a) value added tax due or paid . . . in respect of goods or services supplied or to be supplied to him by another taxable person. . . . ” (a) value added tax due or paid . . . in respect of goods or services supplied or to be supplied to him by another taxable person. . . . ”
“26(1) The amount of input tax for which a person is entitled to credit at the end of any period shall be so much of the input tax for that period . . . as is allowable by or under regulations as being attributable to supplies made within subsection (2) below. (2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business – (a) taxable supplies; . . .”
“input tax” is the VAT on supplies to him of goods and services used or to be used for the purpose of any business carried on or to be carried on by him (section 24(1)(a) VATA). . . .”
“37 . . . Title to the goods may have remained with @1 until it vested in the installer, but once @1 had allocated goods it already held to a particular gift, or acquired goods for the same purpose, it was disposing of them not as owner but in accordance with the terms of its agreement with Baxi. Until the moment of allocation it could do as it pleased with them; once allocated, they came within Baxi's control. It was, in other words, Baxi which was disposing of them as owner, in passing the goods and title to them to the installer. Thus the allocation or acquisition of goods by @1 for the purposes of Baxi’s scheme had the effect of conferring on Baxi the right to dispose of them as owner and a supply within the meaning of article 5(1), as interpreted by the ECJ in Safe ([Staatsecretatis van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88 )[1991] STC 627 , [7]) was made by @1 to Baxi. That the goods did not come into Baxi's physical possession is of no consequence.”
“But to whom and of what was that disposition made?”
“[19] . . . At this point I am looking only into whether there was a supply of goods to Baxi. As for that, the whole property in the goods before the redemption of points by and appropriation and delivery to the installer was, as I have mentioned, in @1. @1 selected which were the particular goods to be supplied in the sense of which, say, electric shaver or kettle from its stock was to be sent to the installer. The whole property in the goods immediately after the redemption of points and their provision to the installer was in the installer. No contractual or other terms provide, imply or require that the property should have moved in the interim from @1 to Baxi. Possession also shifted directly from @1 to the installer without ever being in Baxi. Baxi did not decide what goods should move, when goods should move or how goods should move. The disposition of particular goods to an installer never required nor was in fact initiated by any request from Baxi. It did not know until after provision of goods that goods or goods of a particular description were wished by the installer to be supplied to him or were to be supplied to him by @1 or whether they had in fact been provided to that or to any installer. Baxi took no responsibility for the goods sent to installers duly answering their description in the catalogue; it was @1 that handled complaints. This all suggested that the supply by @1 was of goods to the installers rather than to Baxi.”
“[29] The answer, as I see it, is certainly not that there is a mere supply of goods, some anonymous or wholly gratuitous provision of goods to installers, nor a provision of goods to them which was unexplained to them or unpredictable by them. Baxi wished the provision of goods to installers to be firmly associated with Baxi in such a way that loyalty to and sales by Baxi would be promoted. If goods were to be received at an installer's address ‘out of the blue’, so to speak, neither loyalty to nor sales by Baxi would be enhanced. There had to be, if Baxi was to achieve its aims, an association developed in the minds of installers between their loyalty to and use of Baxi boilers and the foreseeable arrival of such goods as they might have chosen as rewards for their installation of Baxi wares. Just as, in C&E Commissioners v BritishTelecommunications plc[1999] STC 758 HL, the House of Lords arrived at the conclusion that what BT there wanted was not a supply to it of cars and a separate supply to it of the service of the delivery of cars but, rather, ‘a delivered car’ – per Lord Slynn at 766 e-f - here Baxi wanted not a mere provision of goods to installers and a separate provision of some advertising or marketing service to it but, as a predominant feature, a supply of goods to installers in such a way, made visible to them, explained to them and as would be predictable by them, that the supply would ultimately generate or at least tend to generate loyalty to and sales by Baxi. The advertising and marketing service which included the devising and formulation of the BDS, the selection of goods for the catalogue, the editing and dissemination of the catalogue, the provision of the ‘cheques’, the whole plan for application for and registration of membership, the acquisition and storage of rewards goods, the receipt and processing of requests for those rewards, their delivery to installers, the handling of any complaints and the supply of information as to installers for the database were, all taken together, not, in my judgment, economically dissociable from the provision of goods but a mechanism without which the provision of goods to installers could not achieve its purpose.”
“[36] It cannot be said, in my view, on the facts before me, that everything which @1 did under the BDS, though, no doubt, ultimately done at Baxi’s expense and, in the sense that Baxi voluntarily joined the BDS with @1, at [Baxi’s] request, could be said to have been done in accordance with Baxi’s instructions. I have earlier pointed out how little Baxi did in relation to the selection of whether any goods should be supplied to a particular installer and, if they were to be, how they were to be supplied and which particular goods would serve to meet the installer’s request.”
“[11] Baxi, it seems, played no role in the selection or delivery of goods; there is no evidence that it was other than @1 that chose what were in the Baxi catalogue. The installer chose what it was that he wished to receive from the rewards in the catalogue and it was @1 (who, it may be inferred, ran not dissimilar schemes and catalogues and thus stocked similar or identical goods and arranged their deliveries for other manufacturers) which chose which particular goods answering the description which the installer had chosen were to be sent to him and how they were to be sent. Baxi would not know until its later receipt of invoices what had been sent. I do not understand there to have been any necessary contact between the installer and Baxi when the installer indicated to @1 what goods it was that he wished to have in exchange for his ‘points’ as his reward.”
“. . . if, contrary to the learned Judge’s conclusion, the reward goods are supplied to Baxi (an outcome for which the Appellants do not contend) the learned Judge should have upheld the decision of the Tribunal”
“The Commissioners begin by describing the services in question as the ordinary services of an estate agent instructed to market and sell his client’s house. They then ask: to whom were those services supplied? Inevitably they answer: to the householder. They concede that the taxpayer derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them; but they insist that this is irrelevant. The question is: to whom did the agent supply his services, not who derived a benefit from them? But this approach begs the question to be decided. The way in which the Commissioners describe the services dictates the answer. But it is equally possible to begin with the services which the taxpayer instructed the agents to perform. This would lead to a different definition of the services in question. They would not be the ordinary services of an agent instructed to market and sell his client’s house, but the services of an agent instructed to market and sell a third party’s house. The fact is that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Where, then, should one begin? The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless the taxpayer has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services. In my opinion, these two factors compel the conclusion that one should start with the taxpayer’s claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.”
“[38] . . . First, there is no reason why, in a VAT context, a supplier (S) may not be treated as making, in the same transaction, both a supply of services to one person (P1) and a supply of different services to another person (P2). In Redrow the estate agent was plainly making a supply of services to the householder: those were the ordinary services provided by an estate agent to the client whose house he is instructed to market. But the estate agent was also making a supply of services to Redrow: the agent was acting on Redrow’s instructions to market the existing house of its prospective purchaser. Second, in addressing a claim for input tax credit by a person (say, P2), to whom services have supplied in those circumstances, the relevant questions are (i) did P2 make a payment to S, (ii) was that payment consideration for services supplied to P2 and (iii) were those services used or to be used in the course of a business carried on by P2. The first of those questions is of importance . . . : if P2 made no payment to S (because the only payment was made by P1), P2 has no claim to input tax credit, as Lord Millett pointed out in the passage cited (ibid, 171e-f). The answer to the second of those questions is that the payment is to be treated as consideration if P2 obtained ‘anything at all’ or (perhaps) ‘something of value’ in return for that payment.”
“I have now had an opportunity to review the same and confirm that this is a correct reflection of the nature of the arrangement between Baxi and @1”
“2.14 The way in which the schemes [the Bonus Direct and Baxi Business Partners loyalty programmes] are operated and financed is part of a detailed contract agreed in 1998.”
“2.8 The schemes are operated by @ DIRECT financed only by the margin on the supply of the rewards. No charges are made for day-to-day operations covering: Capital charges, call handling, order handling, mail handling, data entry and processing, claims validation, e-commerce order processing, document and records storage, purchasing, stock holding and storage, stock management, supply chain management, fulfilment management and online tracking, fire and theft insurance, security. 2.9 @1 buy in all rewards and stock for Bonus Direct and Baxi Business Partners and have dealer status with their suppliers and are thus able to buy goods at advantageous prices due to the synergies generated by operating a number of loyalty programmes for various companies. 2.10 Bonus Direct rewards stock is owned by @1 DIRECT. 2.11 Claimed rewards are invoiced at RRP + post and packing at the point of order as ownership is then transferred and the points transaction made. A standard post and packing charge was agreed across all reward items of£7.50 . @1 has a fixed price agreement with UPS for next day delivery anywhere in the UK mainland. This figure is included in the points value of the rewards. 2.12 . . . 2.13 Areas for which pre-quoted charges are made are: Database management, development and modification Inbound telephone calls Statements and scheme stationery Freepost Scheme postage out Production and generation of statements Design and production of catalogues, membership pack cards, chequebooks, website, etc. Direct marketing”
“6 The Commissioners accept that, where A pays money to B and B hands over goods to C, the transaction may amount in VAT terms to a VAT supply by B to A of the service of providing goods to C, or a VAT supply of goods by B to C funded by the third party consideration from A, or both. The Commissioners’ submission is that both those two supplies are made in the present case. 7 However, (1) there cannot be a VAT supply unless there is consideration: VATA s5(2); and (2) no part of the sum paid by A to B can simultaneously be both consideration for a VAT supply by B to A of the service of providing goods to C and third party consideration provided by A for a VAT supply of goods by B to C. . . . [Otherwise] B would be liable pursuant to VATA section 4(1) to account for VAT twice over in respect of the same money received by him. 8 Consequently, no part of the payment by Baxi to @1 of the RRP of a reward item provided by @1 to an installer can simultaneously be consideration for a VAT supply to Baxi of the service of providing the reward goods to the installer and third party consideration for a VAT supply of the goods to the installer. However it is possible for part of the sum to be consideration for a supply to Baxi and part to be third party consideration for a supply to the installer. Section 19(4) of VATA provides that ‘where a supply of goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it’. 9 Here, neither the supply of the service of providing reward goods to the installer nor the supply of the reward goods to the installer is ‘the only matter to which’ Baxi’s payment of the RRP of the item relates; consequently, each of those supplies is to be deemed to be for such part of the consideration as is properly attributable to it; and here the parties have by their agreement attributed @1’s margin (together with any other charges payable pursuant to clause 2.13) to the supply of the redemption service. 10 Accordingly, applying in the present case Lord Millett’s approach of identifying the payment in respect of which input tax deduction is sought and asking whether Baxi obtained anything used or to be used for the purposes of his business in return for that payment, the payment can only be that sum which the parties have expressly agreed is the consideration for the redemption service supplied to Baxi – viz the margin. Clearly Baxi did obtain something to be used for its business in return for that payment: it obtained from @1 the service of operating the scheme, which included providing the goods. 11 Baxi did not, however, obtain anything in return for the balance of the RRP of the goods. That payment was agreed not to be consideration for the service supplied to Baxi and was in fact consideration for the supply of the goods; they were obtained and enjoyed exclusively by the installers, and it is common ground that they were not supplied to Baxi.”
“They [the installers] can then ‘spend’ points by choosing a reward from the schemes’ rewards catalogues. The points they spend are deducted from their account”
“[55] . . . The correct approach is to recognise that the Redeemer makes two supplies in the same transaction: a supply of secondary goods to the Collector and a supply of redemption services to LMUK. Payment is made by LMUK. No payment is made to the Redeemer by the Collector . . . The relevant question is whether LMUK received any real benefit – or (as Lord Millett put it in Redrow) ‘anything at all’ or (perhaps) ‘something of value’ - in return for that payment. If that question is answered in the affirmative, then there is no basis on which it can be said that the payment by LMUK was made only as consideration for the supply to another (the Collector).”
“for what was Baxi making the payment?”