“8 The business of the Appellant [LMUK] is the running of the Nectar customer loyalty rewards programme [the Scheme]. The Nectar programme is a developed version of a single-company loyalty rewards programme. Under a single company loyalty rewards programme customers of a single company are awarded points when they purchase primary goods from the company which points they can then use to acquire other (secondary) goods from the same company at no cost or at a reduced cost. Under the Nectar programme customers can purchase primary goods from a number of retailers and receive Nectar points which they can use to acquire secondary goods from a number of other suppliers at no cost or at a reduced cost. The programme is thus designed to enable a number of retailers to retain the loyalty of their customers and to enable a number of suppliers to increase their turnover. The contractual arrangements in outline 9 In order to operate the Nectar programme the Appellant enters into contracts with retailers, customers and suppliers. The agreement with the retailers is that the retailers will assist in the issue of the points to the customers and will pay to the Appellant a specified sum [the points price] in respect of each point issued together with an annual fee for marketing the programme. The retailers benefit from the loyalty of the customers which leads to increased turnover. The agreement with the customers is that if they purchase (primary) goods from the stated retailers they will receive points which they may use to acquire (secondary) goods free of charge or at a reduced price from other suppliers. The customers benefit from the acquisition of free or reduced price goods. The agreement with the suppliers is that if they provide goods to customers in return for points the Appellant will pay them an agreed value for the points. The suppliers benefit from: an increase in the number of customers in their stores which leads to increased turnover; from the ability to sell their excess capacity to a new market at a reduced price; from the ability to make increased sales at a discount without reducing their prices generally; and from the fact that customers entering their stores are likely also to purchase other full price goods (incremental sales)”
“17 When he makes purchases from any participating retailer the customer is issued with points by the retailer. When the customer is purchasing goods from the retailer the issue of points takes place electronically by the retailer swiping the customer’s Nectar card. When the customer is purchasing services from the retailer the issue of points is effected after the linking of the customer's Nectar account number with the account of the service provider. The number of points earned by spending£1 differ among the retailers. For example, two points are earned for£1 spent at Sainsbury’s or Debenhams but one point is earned for£2 spent using a Barclaycard. 18 The rewards available to the customer are many and various. They include free goods, groceries or wines; free meals at stated restaurants; free admissions to cinemas; free adventure trips; free days out to, say, a zoo or a spa; free stays in a hotel; discounted holidays, free flights; free travel; free video hire or game rentals; free games of bowling; or free admission to aquaria. Many of these rewards can be obtained partly by presenting points and partly by paying cash. Or points can be presented to reduce the supplier’s price; for example the supplier Argos offers£2.50 off any supply of goods in return for each 500 points. Although many of these rewards represent supplies of services, in fact by value most of the rewards are supplies of goods. 19 We saw what was called a ‘rewards menu’ which is sent by the Appellant to customers. This listed the rewards available by reference to the number of points required to acquire each reward. The menu also indicated whether the rewards could be obtained by the use of vouchers, or from the Appellant direct by telephoning the Appellant; or by use of the Nectar cards. Some of the rewards were described as ‘money off your shopping’. 20 Each quarter the Appellant informs each customer of the total number of points which have been issued to him in the quarter, the total points which the customer has used to obtain goods from a supplier; and the balance. The customer is also sent a brochure showing the goods or services which can be obtained in exchange for points, the number of points required to obtain them, and how to obtain them. Similar information is also published on the Appellant's website.”
“The details of the contracts with the suppliers 21 At the date of the hearing there were about sixty-five different suppliers. (During the period in question only one of the suppliers (Sainsbury’s) was also a retailer.) Most contracts between the Appellant and the suppliers incorporate standard terms which apply to most suppliers. These are entered into in conjunction with commercial terms which apply to individual suppliers. There are also some special conditions which also apply to individual suppliers. 22. The standard terms state that they apply to all contracts between a supplier and the Appellant for the supply of redemption services to the Appellant by way of the supply of goods, services and cash discounts as rewards to customers. The Appellant will determine the number of points required for a specific reward. The supplier is to supply rewards to any customer redeeming points or vouchers in the same way as a supply to a customer paying by cash or any other method. The supplier is to be responsible for all aspects of the supply of the rewards and will indemnify the Appellant against any liability incurred by the Appellant arising from the rewards. The supplier will deal with all complaints and will replace faulty goods at the request of a customer or the Appellant. The standard conditions oblige the supplier to provide goods or services to a customer who presents points on the same terms as if the customer were paying by cash; they provide that the quality of the goods provided to customers who present points must be the same as goods provided generally by that supplier and that includes the usual warranties for defective goods. They also provide that the supplier must provide the Appellant with accurate information about the goods provided to customers in return for points. The agreement also provides that the Appellant can make use of any data or information collected by the supplier. 23 The commercial terms vary for each supplier and are negotiated separately with each supplier. They specify the goods or services available from each supplier, the number of points required to be presented by a customer in return for those goods or services, the method of redemption, the reward fee and the service charge. The reward fee is the sum payable by the Appellant to the supplier when goods or services are provided to customers in return for points and is fixed by reference to a stated sum for each point redeemed. Different amounts are paid to different suppliers for each point redeemed. The Appellant negotiates a reward fee that it can commercially afford to pay and the reward fee is always less than the market price of the supply. The service charge is the aggregate of all the reward fees in respect of the points redeemed within a month. The commercial terms may also provide that the supplier shall provide the Appellant with regular reports giving an analysis of redemptions. Although the suppliers have other obligations to the Appellant, for example, the provision of information, the fee payable by the Appellant is calculated only by reference to the number of points redeemed. However, we accept the evidence of Mr Heffernan that each reward fee is negotiated commercially and that the amount of information required by the Appellant from each supplier is related to the number of points redeemed by customers with that supplier. In other words, more information is required from a supplier redeeming many points than from a supplier who redeems few points. 24 The practical result of the agreements between the Appellant and the suppliers is that the Appellant pays a fee, or service charge, to the suppliers. In return the suppliers provide rewards to customers in return for points or vouchers; provide information to the Appellant and customers on the rewards available to customers; make their names and brands available to be promoted within the Nectar programme; inform the Appellant's computer of the numbers of points to be debited to each customer's account with the Appellant; and deal with customer service issues relating to rewards. All these matters are referred to as redemption services.”
“The points 25 The points exist electronically. Originally they belong to the Appellant and are issued to customers when purchasing goods from retailers. When the customer purchases goods from a retailer, and when the retailer swipes the customer’s Nectar card, the retailer’s computer informs the Appellant’s computer of the number of points issued to that customer and the customer’s account number with the Appellant. The Appellant then credits that number of points to its account with that customer. The customer is then entitled to acquire goods from a supplier using those points. When the customer acquires goods from the supplier for points the supplier swipes the customer’s Nectar card and the supplier’s computer informs the Appellant’s computer of the number of points used by that customer. The Appellant then debits that number of points to its account with that customer. The points never belong to either the retailer or the supplier. In the hands of a customer the points are the measure of the customer's entitlement as against the Appellant and thus of the Appellant’s liability to a customer. The supplier’s agreement records that the points do not constitute property but represent only contractual rights for customers to redeem points for rewards. 26 A customer who has acquired points may use them in one of three ways: First, he can get a specified product or service free of charge from a supplier; examples would be the rental of a video for 500 points or a flight to Paris for 6,000 points. Secondly, he can purchase a specified product or service at a specified reduced cash price from a supplier; an example would be the hire of a hotel room for£40 and 2,500 points per night. Thirdly, he can get money off the cost of a purchase from a supplier; an example would be£2.50 off his shopping for 500 points. When a customer uses points in any of these ways a payment becomes due from the Appellant to the supplier. 27 In addition to the points being used by electronic swiping at a supplier’s till, there are three other ways of using points. First, points can be used by telephoning the Appellant direct on its Rewards Hotline when the Appellant takes the customer’s order or, in some cases, connects the customer to the supplier’s telephone; in either case the appropriate number of points is deducted from the customer’s account with the Appellant. Alternatively, points can be used by visiting the Nectar website and redeeming the points online. For example, one online offer is a toolkit for 7,600 points. That supply is made by the Appellant direct to the customer. Finally, points can be exchanged for vouchers. Vouchers 28 A customer can exchange 500 points for one voucher. Vouchers can be obtained at the till at Sainsbury’s or from the Appellant direct. Either way when a customer acquires a voucher his account with the Appellant is debited with the number of points exchanged for vouchers. 29 No monetary amount is ever stated on a voucher only a specified number of points. The terms on the reverse of the voucher provide that they remain the property of the Appellant and that they cannot be redeemed for cash nor sold nor transferred for value. They also state that the voucher can be used for part-payment so that if the price of the goods or services exceeds the value of the voucher the balance has to be paid in cash. On the other hand if the price is less than the voucher no change is given. 30 Vouchers can be presented to any supplier who has agreed to accept them. The supplier should ensure that the number of the customer’s Nectar account is entered on the reverse of the voucher (although this is not always done). The standard terms of the agreement between the Appellant and the suppliers provide that where a supplier has accepted vouchers the risk lies with the supplier until the vouchers are received by the Appellant and the Appellant requires to see the vouchers as evidence that they were presented by customers to the supplier in return for the provision of goods or services by the supplier. 31 Where a supplier accepts vouchers instead of electronic points it is the duty of the supplier to collect and count the vouchers, cancel them, collate them and identify the site at which they were redeemed. The supplier then sends the vouchers to the Appellant’s collecting house. Only then will the Appellant pay the supplier the reward fee relating to those vouchers. The Appellant uses the information on the back of the vouchers about the customer’s account number with the Appellant. (This information is of general interest only because the customer’s account with the Appellant will have been debited with the appropriate number of points upon the issue of the voucher.) 32 The processing of vouchers by a supplier is treated as a redemption service. 33 Less than 15% of all redemptions are made for vouchers.”
“34 When a customer purchases goods or services from a retailer the transaction is treated for value added tax purposes as a supply of those goods or services for the full consideration paid by the customer; no part of the consideration is treated as payment for points. 35 The Appellant treats as standard-rated supplies the supplies it makes to the retailers [information about customers and the marketing, development and promotion of the Scheme] in return for the payments made by the retailers to the Appellant (including the points price and the annual marketing fee). The retailers treat the tax on those supplies as input tax which is deductible to the extent that they use the supplies to make taxable (and not exempt) supplies. 36 The suppliers account to Customs and Excise for output tax when they provide goods or services to customers in return for points; the value of the supply is the amount paid to the supplier by the Appellant and also the amount (if any) paid to the supplier by a customer. Each month each supplier sends to the Appellant an invoice for the relevant service charge (which is the aggregate of all the reward fees in respect of points redeemed by the supplier in that month). The standard rate of value added tax is charged on the full service charge even if a reward supplied to a customer is, for example, food or travel, and so is exempt or zero-rated. The Appellant pays each supplier’s invoice. It is the treatment of the tax on the suppliers’ invoices as the Appellant’s input tax which is in issue in this appeal.”
“58 The commercial and economic reality of the facts in this appeal, and their economic purpose, are that all the transactions are under-pinned by the commercial contracts between the Appellant, the retailers, the suppliers and the customers. The retailers wish to retain the loyalty of their customers; the customers wish to acquire free or reduced price goods or services; and the suppliers wish to increase their turnover. Retailers, customers and suppliers can only come together to fulfil their requirements because of the work done by the Appellant in operating the programme. All the work done by the Appellant is done commercially for the purposes of its business. The Appellant benefits by receiving the points price and annual marketing fees from the retailers from which it has to pay the suppliers but ultimately (we expect) makes a profit. All the transactions within the programme are treated as fully taxable. 59 As far as the transaction between the supplier and the customer is concerned, there is no sale at list price to the customer. The customer has no obligation to pay the supplier anything; all he has to do is to offer his points. The customer does not know the price of the goods provided to him by the supplier; the price is commercially negotiated between the Appellant and the supplier and is not the same as the supplier’s usual price for those goods. The customer’s ownership of the points comes from the Appellant and he can only acquire goods from a supplier with points because of the Appellant’s agreement with the supplier. The agreements indicate that the obligation to provide rewards to customers is that of the Appellant; the customers are not parties to the agreements between the Appellant and the suppliers and cannot enforce them. The supplier is fulfilling his obligation to the Appellant to discharge the Appellant’s obligation to the customer by providing the customer with goods up to the value of the points held by the customer. 60 In our view, the proper analysis of the transaction under which a supplier provides goods to a customer in return for points is that the supplier is providing a service to the Appellant in assisting it to discharge its obligation to customers that they can acquire rewards in return for points.” (6) The Tribunal addressed the question whether “what the supplier provided to the Appellant was the supply of the goods obtained by the customer or a supply of services being all the redemption services provided by the supplier to the Appellant including the provision of goods to customers in return for points. It concluded that “the service charge paid by the Appellant to the supplier is in return for all the redemption services, which include the provision of goods provided to the customer; the processing of vouchers; and the provision of information” (paragraph 63). It went on to explain that: “63 . . . This service charge is directly linked only to the supply to the Appellant and not to any supply which might be made to the customer. This means that even if a supply by a supplier (for example of food or travel) is zero-rated it is still supplied to the Appellant as a composite supply of redemption services at the standard rate.”
“where a customer obtains goods partly in return for points and partly in return for cash, there are two supplies; one to the Appellant for the amount it pays and one to the customer for the amount he pays”
“the customer, as final consumer, pays tax only on what he pays (both for the primary goods and for part of the secondary goods)”
“the real issue in this appeal does not concern the interpretation of the First or Sixth Directives but rather concerns the correct analysis of the facts in the light of the arrangements between the parties”
“60 In our view the proper analysis of the transaction under which a supplier provides goods to a customer in return for points is that the supplier is providing a service to the Appellant in assisting it to discharge its obligation to customers that they can acquire rewards in return for points.”
“[1] . . . The appeal raises these questions; what is the proper characteristic, for VAT purposes, of the payment made by LMUK to those other suppliers; is it a payment for a redemption service supplied to LMUK or is it the whole or part of the price paid for the provision by those other Suppliers of the rewards to the customers? Is there, for VAT purposes, a supply of a redemption service to LMUK or of goods or services to the customers? ”
“[79] In the light of the facts I have described, I would regard the Service Charges, so closely related to the occasions and often to the prices of provision by Suppliers [Redeemers] to Collectors, as more having the characteristic of being a payment by LMUK for or towards the supply of goods or services by Suppliers to Collectors than being of any other nature. Were I left to decide only upon the argument I have thus far described, my judgment would be that the Service Charge is consideration for VAT purposes, third party consideration, for a VAT supply by Suppliers to Collectors”
“[16] Mr Venables [on behalf of LMUK] rightly points out that as Suppliers [Redeemers] are obliged to send returns of information to LMUK on any footing it is not only in respect of the goods or services provided by Suppliers to Collectors that the Service Charge is paid. However, the Service Charge does not have within it any identified or identifiable part which reflects the provision of information by the Supplier to LMUK and the Service Charge, fixed by reference to points and Vouchers (collections of points) redeemed in a relevant period, would not be other than zero if, in that period, no points were redeemed with the Supplier in question. Whilst the information it receives from Suppliers is, no doubt, useful to LMUK it seems to me, as I shall return to below, so ancillary and minor a component of the overall provisions between Suppliers and LMUK as not to be capable of affecting the overall legal and financial characteristics of those provisions. ”
“[15] Suppliers in general are . . . obliged by their contracts with LMUK to provide rewards on redemption of points on the same terms, so far as concerns the customers seeking to redeem, as those available to customers paying by cash or by any other method. . . .”
“[60] Mr Venables [on behalf of LMUK] begins by emphasising that the ‘redemption services’ which Suppliers provide include obligations outside the supply of goods or services to Collectors. They include the obligation to provide specified information to LMUK, information valuable to that recipient. Plainly that provision is not to Collectors and is to no-one but to LMUK. How can that be consistent, he asks, with there being a supply by Suppliers for VAT purposes only to Collectors, as the Commissioners assert? [61] The answer, as I see it, is that it is not so consistent but that the inconsistency is not significant. It is a familiar principle of VAT cases that arrangements should be categorised by reference to their dominant characteristics and that ancillary and minor provisions within them may lose such colour as, had they been viewed on their own, they would have had. They take on, instead, the colour cast by the legal and financial characteristics of the arrangement looked at as a whole. . . .”
“[58] It is . . . not, in my view, the requirements of a direct link or of reciprocity or even the nature of ‘consideration’ as an autonomous concept differing from the meaning of the word in our domestic contract law that finally contributes to the conclusion at which Mr Vajda's argument seeks to arrive. Rather that contribution springs, as it seems to me, from the idea that an unapportioned and unapportionable payment made between two parties cannot simultaneously be consideration for VAT purposes in, so to speak, more than one direction. It cannot at one and the same time be ‘consideration’ for different supplies as between different parties who are engaged in different arrangements. It cannot be consideration (albeit third party consideration) for which the provision between Supplier and Collector is ‘done’ and yet at the same time be consideration for VAT purposes as between Supplier and LMUK. This notion, of what I might call the ‘once and one way only’ nature of consideration, was not further developed by Mr Vajda nor was authority for it adduced. . . . If it is right (and I shall need to return to it below) then . . . I see real force in the Commissioners’ case that what Suppliers do for LMUK is not done for consideration inVATterms as the Service Charge is already used up as consideration for the Supplier's supply to the Collector and hence that there cannot, forVATpurposes, be a supply by the Suppliers to LMUK. ”
“The main arguments: a provisional conclusion”
“[76] I indicated earlier that I would return to what I called the ‘once and one way only’ nature of consideration when viewed as an autonomous concept for VAT purposes – see [58] above. I am far from sure that the principle of fiscal neutrality could operate if that were not so. That principle (asserted in their respective favour by both sides) requires that the taxable amount serving as a basis of the VAT to be collected cannot exceed the consideration actually paid by the ultimate consumer – see, e.g., EC Commission –v- Germany (United Kingdom intervening) (Case C-427/98 )[2003] STC 301 ,[2002] ECR I-8315 per Advocate-General Jacob at para 14– or, as I think one has to add, on the consumer's behalf. In my judgment consideration as such an autonomous concept does have the ‘once and one way only’ nature which I have described. On that basis each side has produced to me a carefully reasoned argument, supported by authority, for a conclusion in its favour. The arguments, to borrow A-G Jacob's phrase, are not unevenly balanced. And he went on: [78] There is no single touchstone, no reliable litmus paper, that assuredly reveals the characteristics for which I am looking but why I would prefer the Commissioners’ argument is that it seems to me the more consistent with the requirements, illustrated in Auto Lease and the coupon cases, that one should stand back and look at the characteristics of the provision and payment in issue in a relatively robust and commonsensical way, not bound by a strict analysis of the mesh of the contracts or the language used in them. Whilst it is no part of the definition of the supply of a service for VAT purposes that it should have all or, indeed, any of the attributes of what, in ordinary usage, would be regarded as a service, it must, surely, tend against it as a service if it has only few or none. Here, the Service Charge does not reflect the time the server needs to employ to provide the service or the number or quality of the persons providing it. Nor does the Service Charge reflect the cost to the server of providing what it does to LMUK. Nor is any retainer paid to the Supplier for holding himself ready to provide rewards even where it transpires that he is not called upon to do so. Conversely, the Service Charge is related only to rewards fees, in turn to points redeemed, and, in turn again, to a provision by the Supplier to the Collector as reward. As may underline that the Service Charge is paid for the provision to the Collector, if a reward is returned by a Collector to a Supplier and is not replaced by that Supplier then the Service Charge is reduced accordingly on the Supplier's next invoice – Standard Term 4.2. As I have mentioned, if, in relation to a particular Supplier, he provides no reward over a given period, then for that period, he is paid nothing. No separate or separable fee can be discerned as the price for the provision to LMUK by the Supplier of whatever information the latter is obliged to supply. [79] In the light of the facts I have described, I would regard the Service Charges, so closely related to the occasions and often to the prices of provision by Suppliers to Collectors, as more having the characteristic of being a payment by LMUK for or towards the supply of goods or services by Suppliers to Collectors than being of any other nature. Were I left to decide only upon the argument I have thus far described, my judgment would be that the Service Charge is consideration for VAT purposes, third party consideration, for a VAT supply by Suppliers to Collectors. If the ‘once and one way only’ point is right, it cannot simultaneously be consideration for VAT purposes for a service provided by the Suppliers to LMUK. But even if that point is not right, having regard to the dominant characteristics of the Programme and of the payments within it from LMUK to Suppliers, what I would take, for VAT purposes, to be supplied are rewards to Collectors rather than a service to LMUK. . . .”
“[70] Lord Millett ([1999] STC 161 at 168,[1999] 1 WLR 408 at 415) identifies the key concept in VAT as being that of supply and cited section 5(2)(b) of VATA (thensection 3(2)(b) of the Value Added Tax Act 1983 ). He continued ([1999] STC 161 at 171,[1999] 1 WLR 408 at 418): ‘Once the taxpayer has identified the payment the question to be asked is: did he receive 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.’ Lord Millett observed ([1999] STC 161 at 172,[1999] 1WLR 408 at 419): ‘It is sufficient that Redrow obtained something of value in return for the payment of the agents’ fees in those cases where it became liable to pay them and that what it obtained was obtained for the purposes of Redrow's business.’ He continued (with my emphasis): ‘From Redrow's stand point, which is what matters, the agents' fees incurred in the sale are …… a necessary cost of and exclusively attributable to the sale of a Redrow home …’ ”
“[71] Mr Venables then follows through that Redrow sequence. The payment in question is the Service Charge which LMUK pays to Suppliers. Did LMUK receive anything – anything at all – used or to be used for the purposes of its business in return for that payment? Assuredly yes, says Mr Venables; LMUK received from Suppliers a pro tanto discharge of those obligations to Collectors which it had incurred under the Collector Rules, a discharge manifestly for the purposes of its business in carrying on the Programme. Looking at the transaction from LMUK's stand point, which is what matters, the Service Charges were incurred as a necessary cost of and were exclusively attributable to that business of LMUK. Even if one were to moderate Lord Millett's initial mention of the receipt of ‘anything – anything at all –’ to his later reference to ‘something of value’, still, says Mr Venables, something of value was obtained by LMUK in return for payments of Service Charges.” ‘Once the taxpayer has identified the payment the question to be asked is: did he receive 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.’ ‘It is sufficient that Redrow obtained something of value in return for the payment of the agents’ fees in those cases where it became liable to pay them and that what it obtained was obtained for the purposes of Redrow's business.’ ‘From Redrow's stand point, which is what matters, the agents' fees incurred in the sale are …… a necessary cost of and exclusively attributable to the sale of a Redrow home …’ ”
“[72] . . . There it was Redrow not the prospective house purchaser who chose the estate agents and gave instructions to them. Redrow obtained a contractual right as against the estate agents and could even prevent or override changes in the agents’ instruction which the house purchasers might otherwise have been minded to make. Lord Millett said ([1999] STC 161 at 171,[1999] 1 WLR 408 at 418): ‘Everything which the agents did was done at Redrow's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to Redrow’ [73] By contrast, says Mr Vajda, it was not LMUK that selected the particular goods or services enjoyed by way of reward by Collectors, nor, (in the sense that no Collector was bound to use points in all his acquisitions but could deal with retailers who were not Suppliers) was it LMUK that selected who it was that was to supply them. LMUK had no rôle in determining whether goods or services should be acquired by Collectors only by the use of points or wholly by cash or partly for one and partly for the other or in what proportions between the two forms of satisfaction. Nor is it the case that such provision as is made to Collectors is exclusively at LMUK’s expense; in all cases where points alone did not suffice the Collectors, too, would bear some expense. In Redrow it was easy enough to see the legal and financial characteristics that were there being examined as pointing to a supply to Redrow but the overriding characteristics of the Programme suggest a provision to Collectors, says Mr Vajda, with third party consideration for that provision coming from LMUK. . . .”
“[87] It concerns only cases where there are goods provided to Collectors as rewards but which (it is to be assumed, upon the Tribunal’s view of matters) are properly to be regarded as having been supplied to LMUK before being passed on to Collectors. It is said by the Commissioners that they would thus become, however briefly, assets of LMUK’s business. Upon their disposal to Collectors LMUK receives nothing from the Collectors at that stage and certainly receives no ‘charge’, a word used, as will be seen, in contradistinction to ‘consideration’ in Article 5(6)). Schedule 4 paragraph 5(1) VATA, says Mr Vajda, requires a tax charge to arise upon such a gratuitous disposal (subject to paragraph 5(2) thereof) – see Kuwait Petroleum (GB) Ltd –v- CCE[1999] STC 488 which dealt with ‘free gifts’ provided to customers under a sales promotion scheme. Paragraph 5(1) provides: ” ‘5 (1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.’ Paragraph 5(2) disapplies 5(1) in de minimis cases.”
“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 . . .”
“The issue in this case is whether the tax which Redrow pays to the estate agent falls within the definition of ‘input tax’ in section 14(3) of the 1983 Act [now section 24(1)(a) VATA]”
“Dr. Lasok Q.C. for the Commissioners said that it was not enough to entitle Redrow to deduct the tax as input tax that it had had to pay for the services. Nor was it enough that it had benefited from them. He maintained that the rights and obligations which were created by the contractual relationship did not determine the relationship between the parties for the purposes of Value Added Tax. That relationship had to be determined by looking at the objective character of the transaction. The question was, where did the goods or services actually go? In this case the services went to the prospective purchasers. It was their houses which were being marketed and sold by the estate agents. It was they, and not Redrow, who had consumed these services. The scheme of the tax was that the burden of it fell on the final consumer of the goods or services. The tax which the final consumer had to pay was the product of links in the chain as each transaction was drawn into the economic activity which resulted in the ultimate supply. On the facts of this case it was unrealistic to say that the services of the estate agents were being passed through Redrow as a step in the chain of transactions which led to the prospective purchasers as the final consumer of their services. This was because those same services were being supplied to the prospective purchasers at the same time as they were, on Redrow's argument, being supplied to Redrow. The direct and immediate link was between the estate agents and the prospective purchasers. The aim of Redrow, which was to facilitate the sale of their homes by instructing and paying for the services of the estate agents, was irrelevant.”
“. . . Clearly the estate agents were supplying services to the prospective purchasers, as they were engaged in the marketing and sale of the existing homes which belonged to the prospective purchasers and not to Redrow. But Redrow was prepared to undertake to pay for these services in order to facilitate the sale of its homes to the prospective purchasers. The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow. The word ‘services’ is given such a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description which one might apply to the service is immaterial, because the concept does not call for that kind of analysis. The service is that which is done in return for the consideration. As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course or furtherance of a business carried on by that other person for which he takes a consideration in return. Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted Value Added Tax? The fact that someone else - in this case, the prospective purchaser - also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction. ”
“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.”
“It is sufficient that the taxpayer obtained something of value in return for the payment of the agents’ fees in those cases where it became liable to pay them, and that what it obtained was obtained for the purposes of the taxpayer's business. Both those conditions are satisfied in the present case. . . .”
“From the taxpayer's standpoint, which is what matters, the agent’s fees incurred in the sale of a prospective purchaser’s own home are not part of the taxpayer’s general overhead costs but a necessary cost of and exclusively attributable to the sale of a Redrow home to that same purchaser.”
“In the ordinary case the supply and the liability to pay the consideration for the supply are reciprocal, that is to say the supply is made to the person who is liable to pay the consideration and the consideration is payable to the supplier by the person who receives the supply.”
“Tripartite arrangements which result from two or three separate but related bilateral contracts call for close analysis in order to determine their tax consequences”
“[50] In Customs and Excise Comrs v Redrow Group plc[1999] STC 161 ;[1999] 1 WLR 408 there were three separate bilateral contracts between the three parties, but only one of them was liable to pay the consideration and accordingly there was only one taxable supply. The taxpayer, which built houses for sale, offered prospective purchasers who bought a new house from it the free services of a firm of estate agents to value and market their existing homes. It entered into an agreement with the firm to pay their fees for the work, but only where a customer sold his existing home and bought a new house from the taxpayer. In order to recover their fees if a prospective customer found a buyer for his home but did not proceed to buy a house from the taxpayer, the firm entered into separate contracts with the customers. The firm were held to have made two different supplies. One, made to the customer, was a supply of the ordinary services of an estate agent in valuing and marketing his house. The other, made to the taxpayer, was the supply of the services of an estate agent in valuing and marketing its customer's house. Thus a single course of conduct by one party may constitute two or more supplies to different persons.”
“[51] In the present case the three parties entered into two separate but related bilateral contracts. One was the contract between Plantiflor and its customer by which Plantiflor sold plants, bulbs and other horticultural and related products to the customer and, if the customer requested it and paid a sum of£2.50 (which included postal charges of£1.63 ), arranged to have the goods delivered by Parcelforce (part of Royal Mail) to the customer or to his order. This was a contract for the supply of goods and services. We are concerned only with that part of the arrangements which constituted a supply of services. The question is whether that was a taxable supply, and this depends on whether it was made for a consideration . . . [53] The other was the contract previously entered into between Plantiflor and Parcelforce by which Plantiflor had made the necessary arrangements to have its customers’ goods delivered. By this contract, which was to remain in force for a term of five years, Plantiflor undertook to despatch a minimum of 400,000 parcels in each year of the term of a specified average weight and was charged a preferential bulk rate of postage. As my noble and learned friend Lord Hobhouse of Woodborough observed in the course of argument, this was a contract for delivery and not a contract of delivery. It was not itself a taxable transaction. [54] There was no third contract between Parcelforce and the customer under which Parcelforce agreed to deliver goods to the customer's order and the customer agreed to pay the postal charges. The customer’s agreement to pay postal charges was made with Plantiflor not with Parcelforce.”
“[37] . . . Given the very wide definition of ‘services’ in s5(2)(b) [VATA], it is hard to resist the conclusion that, if something is supplied to WHA, it can be described as ‘services’: WHA receives a benefit from the carrying out of the repairs (namely satisfaction of an obligation to Viscount [the reinsurer on whose behalf it was handling the claims] and the ability to earn the£17.60 [under the claims handling agreement]) and it is work which WHA will have authorised to be done. The fact that there is another beneficiary of the work, who may even fairly be said to be the primary beneficiary, namely the owner of the vehicle, should not, at least of itself, prevent the arrangement operating as a supply of ‘services’ to WHA.”
“[45] . . . Lord Hope’s confirmation [in Redrow] of the Tribunal’s view that there could be a supply of services to the prospective purchaser and to Redrow render it very difficult for the Commissioners’ case to get to first base. Even if the Commissioners are right in saying that there is in the present case a supply of services to the vehicle owner, that would not, it would appear, prevent there also being a supply of services to WHA.”
“[40] . . . The suggestion that the vehicle owner, rather than WHA, is the person to whom the services should be treated as supplied has an initial attraction. However, such a conclusion suffers from the unattractive feature that the owner does not pay for the work, and receives no invoice in respect of it, and that, accordingly, even if the circumstances would otherwise justify someone recovering the input tax, there could be nobody entitled to recover the input tax, at least on the face of it. The owner could not recover input tax because he had not paid it, and neither could WHA, because although it had paid the VAT, it could not be treated as input tax because there would have been no supply of services to WHA. While I readily accept that there can be circumstances where such a dichotomy can arise, and while I accept that there may be regulations which avoid such dichotomies at least in certain circumstances, it appears to me that the court should certainly not lean in favour of analysis which results in such a dichotomy. Even assuming that Mr Peacock [for the Commissioners] is correct in his contention that there cannot have been a ‘supply of services’ both to the owner and to WHA, it appears to me that the proper analysis in the present case is that the services were ‘supplied’ to WHA, albeit that they were also provided to the owner.”
“[66] . . . I am not impressed with that point. First, if it resolved the issue in favour of the Commissioners in the present case, it would also have resolved Redrow in the Commissioners’ favour. Perhaps a more general way of putting the same point is that this argument proves too much, in that it would rule out any claim for input tax where the service benefiting, and paid for by, the person claiming input tax could be said to have been provided to a third party. Secondly, as is clear from its title, Article 11 is concerned with the ‘taxable amount’, and not with the identity of the person who is supplied. Thirdly, although I accept that the effect of decisions such as Redrow may be to cut down the circumstances in which Article 11A1(a) would apply to third party consideration, I do not accept that it would rule out the possibility of it ever having any application. Even if that was the effect, I find it very difficult to accept that such an indirect argument could justify arriving at a wholly different conclusion from that which is indicated by the factors I have so far been considering.”
“[57] It is clear from the judgments in BootsCompany and Argos Distributors, first, that assessment of the money-off coupons for the purpose of calculating VAT is determined by their legal and financial characteristics and, secondly, that the taxable amount of the trader who accepts them may not be less than the sum of money which he actually receives for the supply by him (see BootsCompany, paragraphs 21 and 22, and Argos Distributors, paragraphs 19 to 23). [58] It follows that, in situations such as that in the present case, the subjective consideration within the meaning of Article 11A(1)(a) of the Sixth Directive received by the retailer comprises the whole of the price of the goods, which is paid in part by the final consumer and in part by the manufacturer. In fact, the coupons substantiate the retailer’s right to receive from the manufacturer a reimbursement in the amount of the reduction granted to the final consumer. It follows that the sum represented by the face value of those vouchers constitutes for the retailer an asset item realised on their reimbursement and that they must be treated, to the extent of that value, as a means of payment. [59] Consequently, it must be accepted that the retailer’s taxable amount for the sale to the final consumer is the full retail price, namely the price paid by the final consumer plus the amount reimbursed to the retailer by the manufacturer. [60] Accordingly, the argument that the net value of the money-off coupon cannot be included in the retailer’s taxable amount must be rejected.”