Next Group Plc v Revenue & Customs [2011] UKFTT 122 (TC)

FTT-Tax
Next Group Plc v Revenue & Customs
[2011] UKFTT 122 (TC) · 2011-02-16
[1]The principal issue in these consolidated appeals, shortly put, is whether a contingent charge made by a retailer to its customers for a sales catalogue, a charge which, if made at all, is then reflected in a credit against another payment due from the customer, is properly to be regarded as a charge for the supply of the catalogue or, instead, the reality is that the catalogue is supplied free of charge, the arrangements failing either because of their true contractual (or, if it is different, their true VAT) analysis, or because they are abusive.[2]The arrangements in issue in this appeal are similar in some respects to those considered by the VAT and Duties Tribunal in Redcats (Brands) Ltd v Revenue and Customs Commissioners (2006) Decision 19648. I have considered that decision, and have taken account of its conclusions, with which I respectfully agree. However, the factual differences between that case and this are such that it is not possible simply to adopt those conclusions, and I have therefore considered the matter afresh.[3]The appellant in this case is Next Group plc, the representative member of a VAT group one of whose members is Next Retail Limited. That company trades from many stores within the United Kingdom, using the well known “Next” name. It also makes large volumes of sales by what is generally, if nowadays inaccurately, described as mail order—inaccurate because although such orders may be placed by post, they are increasingly made by telephone or by means of the internet. As the means by which such orders are placed is immaterial to this decision I shall use “mail order” to cover all those methods. In addition, as the corporate structure of the Next group is of no present moment I shall use the terms “Next” and “the appellant” to refer indiscriminately to Next Group plc and Next Retail Limited.[4]For many years Next has published the “Next Directory”, a catalogue of the merchandise it offers for sale. The Directory is published in two parts, the “Main Book”, produced twice a year to cover the spring-summer and autumn-winter sales seasons respectively, and a mid-season “Brochure”, also produced twice a year, in about April and October. The Brochure repeats some of what is in the Main Book, but adds new lines and in some cases signals changes in the price of merchandise.[5]The Main Book has always been a hardback publication, printed on heavyweight paper, and it was not disputed that it is an item of conspicuously higher quality than a conventional catalogue. The Brochure originally took the form of a glossy magazine but by about 2002 or 2003 it had grown to such an extent that it too was produced in hardback form, closely resembling the Main Book, though its purpose remains to supplement, rather than replace it. The Main Book, meanwhile, has also grown and it now comprises two volumes. The purpose of the Directory is to enable customers to consider Next’s merchandise in their own homes before placing an order or, instead, before visiting a store to make a purchase in person, although Next has always sought to promote its Main Book and Brochure as the means of securing mail orders, and not as material for browsing before a store visit. With very limited exceptions, neither the Main Book nor the Brochure may be obtained in a store.[6]Next’s case is that it has always sought to distinguish itself from its competitors by offering a high-quality product and, as one element of the distinction, it has always charged those of its customers to whom it is supplied for the Main Book. It is common ground that the charge is the consideration for a zero-rated supply, falling within Group 3, Item 1, of Schedule 8 to the Value Added Tax Act 1994. In the period with which I am concerned in this appeal, 2004 to 2010, the charge was initially £3.50, rising in 2006 to £3.75, but I was told the charge represented only about a third of the cost of producing and distributing the Main Book. Until 2004 no charge was made for the Brochure. In that year Next decided that the cost of producing the Brochure, and its size, justified its making a charge. It is the manner in which the charging arrangements for the Brochure were implemented that led to the dispute which gives rise to this appeal.[7]The Directory—that is, the combination of the Main Book and the Brochure—is available only to those customers who have entered into an agreement with Next. In most cases that is a credit agreement (the relatively few exceptions consist of those customers to whom credit is not extended because of adverse risk factors, and who must pay for goods with their orders) which, in addition to ordinary credit terms specifying minimum payments, interest rates, penalties for late payment and the like, provides for the supply by Next of the Directory, and for payment by the customer of the charge levied for it or, latterly, the separate charges levied for the Main Book and the Brochure. The terms and conditions in use before 2004 did so, however, in an inconsistent manner: some versions suggested that the Main Book was supplied for a charge while the Brochure was free, others that the six-monthly charge included both publications. It was not disputed that the charge for the Main Book, whether or not it also encompassed the supply of the Brochure, was debited to the customer’s account on delivery of the Main Book, and shown on his or her next statement.[8]Goods ordered were supplied (subject to the exception I have mentioned) on credit, and customers with an outstanding balance were expected to pay each month a sum between a minimum specified payment and the full amount owed, which included the Main Book charge in those months in which one had been delivered. Customers who did not place orders soon after delivery of the Main Book were sent, at three-weekly intervals, letters reminding them of the benefits of placing orders. Even though an invoice for the charge for the Main Book was sent out Next did not pursue a customer who did not place an order and became, in effect, a lapsed customer, for payment of that invoice (provided he or she did not owe other money as well); the Commissioners accept that it refrained from enforcement action simply because it was uneconomic, and that the charge nevertheless represented a debt due from the customer.[9]A trial was conducted in the summer of 2004, to test customers’ reactions to the introduction of a separate charge for the Brochure. In the trial period a minority of customers were charged, while the majority were not. The trial was deemed a success, and a universal charge for the Brochure was introduced for that sent to customers in October 2004. At that time it was set at £3.50. Customers selected for the trial received with their autumn-winter Main Book, which was despatched in or about July 2004, what was referred to as an “inform letter”, which gave information about the manner in which orders could be placed, drew attention to new products and also contained this passage:
“Stop Press … Place your first order by 24/09/04 to reserve your copy of our exclusive Christmas 2004 Brochure (delivered in October).”
[10]The reader was then directed to a footnote reading:
“The new copy of the 400 page Christmas Brochure is available in October. This season we will charge £3.50 for the brochure, but you will receive a delivery credit (worth £3.50) on your subsequent order. If you do not wish to receive a copy please tell us when you order. Remember you only pay for the brochure if you order from it and then you will save the cost of delivery (£3.50) on your next order. If you require further information please call [a telephone number].”
[11]A letter in similar terms was sent with all the Main Books which were sent to customers in the following seasons. There were minor differences, of no present consequence, between the letters. The footnote is at first sight a little confusing, but it does accurately reflect the arrangements. A customer who received the Brochure but did not place an order was not required to pay the £3.50 charge, and did not receive an invoice for, or including, the £3.50 charge. A customer who did place an order by post, by telephone or through the internet would find, on his or her next account statement, as well as an entry for the cost of the goods ordered, a debit of £3.50 for the Brochure, a further debit of £3.50 for what was then Next’s standard delivery charge, and a credit of £3.50, being the delivery credit referred to in the footnote. Later, the Brochure charge and the delivery charge increased to £3.75, and later still the delivery charge increased to £3.95, while the Brochure charge remained at £3.75. A customer could avoid the delivery charge by having the ordered goods delivered to a Next store, for collection; in these cases the delivery credit was still available to be offset against the Brochure charge. The delivery charge waiver was available only once per Brochure season; a customer who placed a second order during the currency of that Brochure was required to pay the standard delivery charge.[12]Whatever the true contractual analysis of those arrangements, their net effects were, first, that a customer who placed an order was expected to pay the ordinary price of the goods plus (if the goods were delivered to his or her home) £3.50 (or £3.75), but no more; and, second, that a customer who received the Brochure but did not place an order from it (whether or not he or she used it in order to choose a product for purchase in person in a store) made, and was expected to make, no payment, directly or indirectly, for the Brochure, but was equally ineligible for the delivery credit. Apart from the changes in price I have mentioned the essentials of the arrangements did not alter during the relevant period. The price changes do not affect the underlying principles, and I shall not deal with them further below. The scheme was abandoned in 2010, for reasons which were not entirely clear to me, but which have no bearing on the present dispute.[13]In ordinary circumstances Next charges a discrete, standard, sum for delivery. Although it is shown as a separate charge on the customer’s bill, the parties agree that the aggregate of the cost of the goods and the delivery charge (when levied without the complication of the Brochure charge and delivery credit) is the consideration for a single supply of delivered goods. I should add for completeness that, because Next supplies both standard-rated and zero-rated goods (the latter mainly children’s clothing) it has a bespoke retail scheme and accounts for VAT on its supplies at an agreed composite rate. The details of those arrangements are not, however, relevant for present purposes.[14]The parties disagree about the proper contractual analysis of the arrangements, and their consequential VAT treatment. Next maintains that in those cases in which the customer’s account was debited with a charge of £3.50 for the Brochure it has received that sum as the consideration for the zero-rated supply of the Brochure and has supplied goods free of delivery charge—that is, the credit is to be offset wholly and exclusively against the standard delivery charge—while the Commissioners argue that, in reality, the Brochure is supplied free of charge and that the entire sum received by Next is the consideration for a supply of delivered goods made at a positive VAT rate. Next accounted for VAT in accordance with its own perception of the effect of the arrangements. The Commissioners then issued assessments, to the detail of which I shall come, based on their view that Next should have accounted for tax at the composite rate on all the payments it had received from its customers, ostensibly for the Brochures. The assessments were accompanied by letters explaining the Commissioners’ reasons, of which there were, eventually, three, described as the “Main Decision”, the “First Alternative Decision” and the “Second Alternative Decision”.[15]The Main Decision (although, as it was then the only reason advanced, it was not so described) was put in a letter of 23 May 2007 from the assessing officer, Mr Melvin Amos, to Next as follows:
“I have decided that, notwithstanding the arrangements implemented, the provision of the mid-season brochures does not constitute a supply for consideration. It is the Commissioners’ view that the brochures are provided free of charge to Next Directory active account customers. The amount ascribed by Next as being a charge for a zero-rated brochure is merely part of the overall charge for delivered goods.”
[16]The First and Second Alternative Decisions were set out in a letter, also written by Mr Amos to Next, on 19 October 2007. In this letter he indicated he relied on three possible reasons, the principal reason being that advanced in the letter of 23 May (and which he now described as the Main Decision). The First Alternative Decision was that “Setting aside the UK contractual position, under VAT law, there is no supply of a brochure for the purposes of VAT. The concepts of supply and consideration are autonomous concepts of Community law.”[17]As this decision was based on Mr Amos’s view that no consideration was given for the Brochure, so that its provision by Next did not constitute, as art 2(1)(a) of the Principal VAT Directive (Council Directive 2006/112/EC) puts it, “the supply of goods for consideration within the territory of a Member State by a taxable person acting as such”, this is in substance the Main Decision expressed in a different way. There was and is no dispute that Next was “a taxable person acting as such” and that the Brochures were provided to customers “within the territory of a Member State”, the United Kingdom.[18]The Second Alternative Decision was that the scheme (by which Mr Amos meant the contractual arrangements between Next and its customers) was an abusive practice, in the sense developed by the Court of Justice in Halifax plc and others v Customs and Excise Commissioners (Case C-255/02 [2006] STC 919 (“ Halifax ”).[19]Relying on those reasons, Mr Amos raised several assessments, covering Next’s prescribed accounting periods from 05/04 to 02/10 inclusive, all of which are disputed; Next’s various appeals, brought as the assessments arrived, have been consolidated. Next disputes all of Mr Amos’s reasons. It also argues that some of the assessments were made out of time, a proposition which the Commissioners dispute.[20]Before me, Next was represented by Paul Lasok QC and the Commissioners by Andrew Macnab of counsel. I had the written and oral evidence of Andrew McKinlay, Next’s Director of Group Finance and Company Secretary, of Michael Law, the executive director responsible for the Next Directory, and of Mr Amos, as well as a substantial volume of documentation, including copies of the Main Book and of the Brochure. The facts as I have set them out in the summary above are taken from that evidence and were for the most part uncontroversial. There were, however, factual disputes about the true nature of the arrangements and the validity of the assumptions on which the Main Decision and the First Alternative Decision were based, about the motives behind the introduction of the scheme and their relevance to the abuse argument, and in respect of the timing of the assessments. The introduction and implementation of the arrangements[21]The evidence available to me on this subject consisted of Mr McKinlay’s and Mr Law’s written and oral evidence, together with a number of email exchanges, minutes of meetings, some correspondence, and a fairly substantial volume of material consisting, in particular, of standard letters to customers, sample invoices and the instructions provided to Next’s call centre staff. These were given in order that they could answer enquiries made by customers concerned about the introduction of a charge for the Brochure, including those selected for the initial trial who might find that they were expected to pay for it, albeit they would receive the delivery credit, while their friends, who had not been selected for the pilot, were treated differently.[22]The evidence was in parts unclear, and in parts inconsistent. The available documents showed that there had been a good deal of debate, leading to changes of mind, about the classes of customers to whom the delivery credit would be offered, especially whether the offer was to be extended to new customers, whether those purchasing through the internet were to be included, and about the manner in which the accounting arrangements were to be implemented by Next’s computer system. It seemed to me that the confusion and much of the inconsistency stemmed in part from the fact that members of Next’s staff perceived the scheme in different ways. Despite the terms in which the arrangements were presented to customers, as I have set them out above, the view was taken, by some at least of Next’s staff, that all customers receiving the Brochure, after the initial trial, would be charged for it, but that Next would not enforce the charge against those who did not place an order, and would not even trouble to send an invoice. Initially it was proposed that the charge for the Brochure would be levied, and the delivery credit offered, only to those customers who placed an order from the Brochure, but it was later recognised that it would be too difficult to eliminate those who had placed an order by reference to the Main Book rather than the Brochure, and instead any customer who received the Brochure and placed an order was charged, and received the credit, whether the prompt for the order was the Main Book or the Brochure, and whether the order was placed by post, by telephone or through the internet.[23]The delivery charge credit was also available to those who did not incur a delivery charge because, although they made a mail order purchase, they arranged for the goods to be delivered to a local store: such deliveries did not incur a charge, irrespective of the introduction of the arrangements. The net effect in these cases was that these customers, too, were in the same position as they would have been before the introduction of the arrangements, in that they received a Brochure the charge for which was immediately offset by a credit, while they continued to pay nothing for delivery.[24]There were, perhaps surprisingly, some inconsistencies between the terms and conditions of sale published in the Main Book and the Brochure, and those posted on Next’s website; this was due, I was told, to the fact that the website could be changed with little or no notice, while the Main Book and Brochure were printed about two months before they were despatched to customers, and of course could not be changed thereafter. The inconsistencies reflected, I have concluded, nothing more than the changes of mind to which I have referred and some uncertainties about the best way of wording the conditions. Perhaps the most important point is that all the examples of the terms and conditions I saw, despite those inconsistencies, did make it clear that those customers who received the Brochure and placed an order would incur a charge, while those who did not receive it or, having received it, did not place an order, would not incur the charge. I did not detect anything in the different terms and conditions which leads me to think that the approach to be adopted in one period or another, or in respect of any class of customer but not others, varied in any material way and I accordingly leave the differences between one version and another out of account.[25]It is apparent that the cost of sending the Brochure to inactive customers (Next’s criterion was that an inactive customer was one who had not placed an order within the preceding 26 weeks) was considerable, and it was for that reason that the Brochure was sent, as a rule, only to those customers who placed an order by the given deadline. In practice some customers, I understood those who had spent significant sums in the recent past, received the Brochure even if they did not place an order, but this factor does not seem to me to be of any enduring significance. Those customers, too, were liable to pay for the Brochure and eligible for the delivery credit if they placed an order.[26]As the footnote to the “inform letter” indicated, customers who qualified to receive it but did not want the Brochure were asked to telephone a free phone number in order to say so. The thinking behind the request was, in part, that customers who did not wish to incur the Brochure charge, even if it was offset by the delivery credit, should be offered a facility for avoiding it, but the main motive, as I find, is that Next would be required to send fewer Brochures to customers who were unlikely to place an order. There was evidence that a relatively small but nevertheless more than negligible number of such customers did telephone, although their individual reasons for doing so must be a matter for speculation.[27]Mr McKinlay and Mr Law both emphasised that the underlying purpose of the scheme was to encourage orders. I accept that evidence. I accept too that the introduction of the scheme was coincident with an increase in mail orders, though I can make no finding about whether the former was the cause of the latter. The witnesses added that the cost to Next of producing and distributing the Brochure was significantly more than its price and that there was a desire to recover some of it, although the profit earned on a typical order outweighed the Brochure cost and it was, correspondingly, more important to Next to generate orders than to recover the charge for the Brochure. I accept that evidence too, while observing that it is difficult to see how the making of a charge for the Brochure which was either not incurred at all (because no order was placed) or offset by a corresponding credit could ever result in any recovery.[28]There was also some evidence from a market research programme that customers perceived the arrangements in the manner they were presented, that is they believed they were required to pay for the Brochure but were receiving a corresponding delivery credit. I regard that evidence as little more than anecdotal. A customer faced with such an arrangement is unlikely to care what the contractual analysis was, and even less likely to have undertaken the analysis for himself. I do not, therefore, regard supposed customer perceptions as a material factor.[29]The VAT implications of the proposal—essentially the extent of the saving of tax which might be achieved, since the underlying reasons for the saving were not developed—featured prominently in the material I saw, in some being described as the “icing on the cake”, but other documentation, as well as the oral evidence, showed that it was not the only motive for the introduction of a charge. I accept the evidence I heard to the effect that the scheme was introduced at the instigation of Next’s marketing department, and that the delivery credit was perceived by Next as a means of encouraging customers to place orders, by making them think they were getting something free (or, if Next’s case is right, by giving them something free).[30]I am satisfied by the totality of the evidence available to me, and find as a fact, that the driving motives behind the introduction of the arrangements were to maximise sales by encouraging customers to place orders, and to reduce the number of Brochures sent to customers unlikely to do so. The perceived VAT saving, important though it was, was not the primary objective: in other words, I am satisfied that the scheme would have been implemented, and in materially the same form, regardless of any tax advantage. Was there a supply of the Brochure for consideration?[31]Mr Lasok’s starting point was the breakdown of HMRC’s Main Decision into a number of discrete questions. His position, from which Mr Macnab did not demur, was that the First Alternative Decision, when properly analysed, amounts to the same conclusion as the Main Decision put in a different way. As I have indicated, I am of the same view.[32]The essence of the Commissioners’ position is that no customer ever truly pays for a Brochure. The charge could be avoided by the expedient of not placing an order; and the charge supposedly made for it in the case of a customer who did place an order was purely notional because it was immediately cancelled by the delivery credit. Next’s position is that the delivery credit could not be regarded as a means of cancelling the Brochure charge since it was a marketing tool, an offer of free delivery, designed to encourage customers to place orders. The credit was properly set against the delivery charge, with the consequence that the customer was required to, and did, pay for the Brochure. Mr Lasok added the argument that, if I were to prefer the Commissioners’ position, it did not follow from such a conclusion that that there had been an under-declaration of output tax because the Commissioners had not made good their case that the amount paid by the customer was attributable exclusively to a supply of delivered goods.[33]The claim that there was no domestic law contract for the sale of the Brochure for consideration was, he said, irrelevant since supply and consideration were concepts of European law, as the Court of Justice said in Staatsecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1991] STC 627 at [7]:
“It is clear from [art 5(1) of the Sixth VAT Directive] that ‘supply’ of goods does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property.”
[34]I interpose that there was little, if any difference between the parties on this point, Mr Macnab expressly agreeing that it was European rather than national law which was determinative, although he added that the respondents’ position was that there was no difference in this context between national and European law. It was also common ground that a customer receiving a Brochure could dispose of it either as true owner or as if he were the true owner. The Commissioners’ position was that the customer became the true owner, not only because that was the result of the arrangements by which he received it, but also because of reg 24 of the Consumer Protection (Distance Selling) Regulations 2000 (SI 2000/234). While Mr Lasok did not advance either possibility in preference to the other, on the ground that it was an immaterial consideration, he did not demur from Mr Macnab’s proposition and I need not dwell on the matter.[35]Mr Lasok then attacked the assertion in the amended statement of case that there was no direct link between the provision of the Brochure and the payment, because some customers were not required to pay for it, even notionally. That, he said, was irrelevant since it was indisputable that in those cases no consideration was paid, and correspondingly nothing to which VAT could attach; the appeal related only to those Brochures whose recipients had placed an order, triggering the liability to pay. Such customers had, he said, voluntarily agreed to pay for the Brochure, because they must be taken to have known that the placing of an order would make them liable to do so, even if the placing of the order also made them eligible to receive a delivery credit. It was impossible to argue, he said, that because some customers were not required to pay, none were.[36]The second of the arguments set out in the amended statement of case was that there was no consideration because (it had to be inferred since the draftsman’s meaning was obscure) the charge for the Brochure was immediately cancelled by the delivery credit. That, Mr Lasok said, was an unsustainable analysis. The credit was plainly offered as an inducement to the customer. It was necessary therefore to identify what it was the customer was being induced to do. The credit had no relation to the supply of the Brochure: the customer already had the Brochure, and the delivery credit could not be seen as the inducement to buy it, or another Brochure. It must therefore be, as a matter of logic as well as of evidence, an inducement to place an order. In most cases a delivery charge was incurred when the customer placed an order; if no goods were ordered, no delivery charge could be incurred. The credit was thus designed to encourage the customer to place an order, by offering free delivery when otherwise payment would be required. The fact that the credit was also available to those customers who arranged for their goods to be delivered to a store (and who did not incur a delivery charge) was consistent only with its being an inducement to place an order. It must follow that the credit could not be regarded as the cancellation of the Brochure charge.[37]Moreover, the supply to the customer of the Brochure had no connection to the placing of an order after it (the Brochure) arrived at the customer’s home. Its supply was triggered by the placing of an order from the Main Book before the prescribed deadline. A customer placing such an order would know, because of the “inform letter” he or she received, that the Brochure would arrive, and that it was sent subject to what Mr Lasok described as the condition subsequent that a charge would be made for it if a further order was placed. Customers were provided with a means of escaping the charge: it was possible to reject the Brochure before it was despatched by making a telephone call; and even if the customer received a Brochure the charge could be avoided by the expedient of not placing an order. By contrast, the customer who, having received the Brochure, elected to place an order took the decision to incur the charge.[38]Mr Macnab’s response was that the supposed charging arrangements were no more than a book-keeping exercise, since the customer who incurred the notional charge automatically and simultaneously received the notional delivery charge credit. The result was that no customer ever truly paid for a Brochure. That was not merely the effect of the arrangements, it was clear from the evidence that it was their purpose and it was the way in which they were presented to customers, that is that although there was a charge for the Brochure, the customer would nevertheless not be required to pay more than he or she had done before.[39]He pointed to a letter written by Next’s Group Tax Manager to Mr Amos, on 18 April 2006, in which it was mentioned that the delivery charge had increased from £3.50 to £3.75, and “[a]s a consequence, Directory management have revised the charge for the Summer 2006 Brochure to £3.75”. That letter, Mr Macnab said, was a clear indication that the Brochure charge was intimately linked to the delivery charge and that the arrangements were so structured that the one cancelled out the other.[40]Far from showing that the credit was a genuine credit against the delivery charge, the fact that it was available to those customers who arranged delivery to a local store revealed its artificial nature as a credit against (if Next was right) a charge the customer had not incurred. He pointed too to an email of 21 May 2009, describing the accounting procedure for giving the credit, in which appears the sentence “The credit is applied at the point where we bill the brochure”. That, he said, showed that the true link was between the Brochure charge and the credit. The sample invoices produced for the hearing likewise showed that the charge and the credit were invariably posted on the same day, and to the same invoice.[41]Mr Macnab sought to make something of the differences and inconsistencies in the terms and conditions, and the material sent to customers, to which I have referred. In particular, he drew my attention to the confusion about whether, and if so when, title to the Brochure passed to the customer, and the inconsistencies, in earlier periods, about whether the charge for the Main Book included the supply of the mid-season Brochure, or the latter was instead supplied free of charge. In many cases these might be important, even determinative, matters, but in this case, as I have indicated, I do not find them to be of great significance. The scheme was devised by Next’s marketing department, and not by contract lawyers, and it does not seem to me appropriate to pay close attention to the contractual conditions, confused as they were, in preference to other factors. I do, of course, accept his point (which Mr Lasok did not dispute) that, as a matter of fact, Next set out to, and did, achieve the result that its customers paid no more after the introduction of the Brochure charge than they had paid before.[42]He advanced two answers to Mr Lasok’s argument that a finding that the Brochure was provided free of charge did not, of itself, lead to the conclusion that there had been an under-declaration of output tax. First, if nothing was paid for the Brochure it was for Next to show that the money it received from its customers (the payment it had received supposedly for the Brochure) was the consideration for something other than a taxable supply, but it had not even attempted to do so. And if the correct analysis was that the supposed delivery credit was in reality nothing more than the means by which the notional charge for the Brochure was cancelled, it necessarily followed that the customer was in truth paying the delivery charge. The amount charged for delivery could not represent anything else.[43]Mr Macnab relied on a number of judgments of the Court of Justice but I think it necessary for present purposes to mention only two. In Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2003] STC 1453, at [33], the Court pointed out that “to facilitate the application of VAT, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question”. In Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 1451 it observed, at [26], that “As regards the transaction at issue in the main proceedings, it is for the national court to consider all the circumstances surrounding it in order to establish its characteristics”. Similarly, in Tesco plc v Customs and Excise Commissioners [2003] STC 1561 , at [3], Jonathan Parker LJ said, at [159], “The terms contractually agreed may not be determinative as to the true nature and effect of the scheme …: it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say ‘the precise way in which performance satisfies the interests of the parties’ (see the Advocate General’s opinion in [ Customs and Excise Commissioners v Mirror Group plc (Case C-409/98) [2001] STC 1453 at [27]]).”[44]The principle to be derived from those comments and several others to the like effect, Mr Macnab said, was that one had to determine the objective characteristics, the economic purpose, of the transaction. In this case it was clear that the economic purpose was that the customer was offered and received a Brochure free of any true charge—that is, for no consideration—and its objective characteristics were the same, since there was no circumstance in which the customer might ever be required to pay for a Brochure.[45]One was driven to the same conclusion by considering the manner in which the Brochure, and the right to dispose of it as owner, were acquired by the customer. He had only to place an order by the requisite date, an act which even Next did not suggest amounted to consideration. The customer’s acquisition of the Brochure could not be the consequence of a supply within the meaning of the VAT Directives, in the absence of consideration, and there was no scope for later consideration, whether pursuant to a condition subsequent or in any other way. No customer was ever under any obligation to pay for a Brochure, because there was no obligation to place a further order. Next’s own accounting system was consistent with that analysis since no charge, even a suspended charge, was recorded against the customer’s account when the Brochure was sent. It was the placing of an order, and only the placing of an order, which triggered the charge. The Distance Selling Regulations made it clear that a Brochure supplied in such a manner was an unconditional gift to the recipient. When the notional charge was recorded on the customer’s statement, the Brochure no longer belonged to Next, and it was not in a position to sell it. There was, consequently, no reciprocity between the provision of the Brochure and the charge which was supposedly made for it.[46]In my judgment Mr Macnab’s analysis is right, and clearly so. The main difficulty facing Next, as I see it, is that the arrangements it devised had the effect, which they were intended to have, that no customer actually handed over money in exchange for a Brochure. Those who did not place an order did not incur even a nominal liability to pay for the Brochure; despite the initial uncertainty and the lingering misapprehension of some of Next’s staff, it was quite clear from the promotional literature that the Brochure was, throughout the currency of the scheme, sent to customers upon the footing that there was no requirement for payment unless and until an order was placed. There is no possible room for a finding that the customer incurred the liability but Next chose not to enforce it. The scheme was designed, and deliberately so, with the objective that those customers who triggered the liability to pay, by placing an order, simultaneously triggered the grant of the credit which cancelled it. They were not required to do two discrete things, even things commonly if not invariably done together; it was the very act which triggered the liability which immediately cancelled it. I do not see how it can be said that a charge which, by the terms of the scheme by which it was supposedly imposed, could never truly become payable, is a genuine charge. The charge and the offsetting credit, though they may have been introduced for sound reasons, were nothing more than a marketing device.[47]The difficulty of Next’s position is even better illustrated in those cases in which the customer who placed an order, thus triggering the Brochure charge, asked that the goods be delivered to a Next store, with the consequence that no delivery charge was incurred. The delivery credit was nevertheless given. The argument that what was called, even in such a case, a “delivery credit” was offset against a charge the customer had not incurred is unconvincing, and I reject it. I agree, rather, with Mr Macnab that this feature of the arrangements is a further indication that the Brochure charge was no more than notional.[48]I do not doubt, as I have already said, that Next introduced the charge and the cancelling credit for sound marketing reasons, designed to encourage customers to place more orders, and that the scheme was presented to customers in a manner which was thought to achieve that objective, but presentation cannot affect the underlying reality. In my judgment the supposed liability for payment was illusory. It could not even be said that the Brochure was supplied on credit. By the time a charge was posted to his or her account, the Brochure was the customer’s to dispose of at will and no longer Next’s to sell; in this too I agree with Mr Macnab. I am not persuaded by Mr Lasok’s argument that the Brochure was supplied subject to a condition subsequent, and for much the same reason: the condition, if it can be properly so described, was that the customer would be charged a notional price which would be immediately cancelled by a corresponding credit. In other words, the condition was so designed that the customer did not make any payment.[49]I conclude therefore that the Brochure was not the subject of a supply for consideration.[50]I also reject Mr Lasok’s argument that the conclusion I have reached does not necessarily imply that the money Next received was the consideration for a taxable supply. Just as the reality is that the Brochure was supplied for no consideration, so is the reality that what Next received from its customers was the consideration for the taxable supply of delivered goods. Mr Macnab’s argument on this point seems to me to be unanswerable. Subject to the timing point to which I shall come, the assessments were correctly made. Abuse[51]It is, strictly, unnecessary to deal with the allegation of abuse in view of my earlier conclusions but it is nevertheless appropriate that I say something about it as I heard argument on the topic. The Commissioners’ position, as it was put in the statement of case (itself reflecting the decision letters), is that the arrangement by which the payment for the Brochure was offset by a delivery charge credit was abusive because “it distorts competition as [ sic ] not taxing final consumption of goods in a neutral manner” and “has no commercial purpose and is aimed solely at the creation of a tax advantage”. No further detail is provided, and one is left to draw the inference that the re-definition which the Court of Justice decided, in Halifax , should follow if abuse were found is to be achieved by treating the consideration supposedly charged for the Brochure as a delivery charge.[52]If that is so, it does not seem to me that the argument of abuse adds anything to the Commissioners’ Main Decision and first Alternative Decision. If the correct VAT analysis, as I have found, is that the Brochure charge is an illusion and in truth the money paid by customers is attributable exclusively to the supply of delivered goods, there is no room for an argument of abuse since output tax is due on everything which is paid for that supply. If instead the correct analysis is that there was a true charge for the Brochure, and the delivery credit is a genuine credit to be set against the delivery charge, it is difficult to see what is abusive about the arrangement. There can be no doubt, on that analysis, that Next has provided the Brochure to its customers, and has charged a price for it. I perceive nothing in that arrangement (were it to be the arrangement) which is contrary to the purpose of the VAT directives.[53]It also seems to me that the Commissioners’ argument fails as a matter of fact. I have already determined that while the potential VAT saving was, overtly, a factor which was taken into account when Next decided to implement the arrangements, it was by no means the only factor; and I have determined too that the desire to reduce the number of Brochures sent to inactive customers, the possible recovery of some of the cost of producing them (albeit that was not achieved) and the encouraging of orders which might not otherwise have been made were also important—indeed, as I have indicated, the last was clearly the most important. The only authority to which I think it necessary to refer in this connection is the judgment of the Court of Justice in Ministero dell’Economia e delle Finanze v Part Service Srl (Case C-425/06) [2008] STC 3132 , in which it indicated that abuse may be found if the principal aim of an arrangement is to achieve a tax advantage contrary to the legislative purpose. In case there is any residual doubt, I make it clear that I am satisfied that the tax advantage, should it be achieved, was no more than a subsidiary purpose of the scheme.[54]I should add for completeness that, after the hearing, the parties invited me also to consider the recent judgments of the Court of Justice in Revenue and Customs Commissioners v Loyalty Management UK Ltd and Baxi Group Ltd (Cases C-53/09 and C-55/09) [2010] STC 2651 and in Revenue and Customs Commissioners v Weald Leasing Ltd (Case C-103/09), released on 22 December 2010 and not yet reported. They do not seem to me to be of any real relevance to this case, in the light of my earlier conclusions, and I do not think it necessary to say any more about them. Whether the assessments were in time[55]The question whether the relevant time limits were breached arises in relation only to the first two assessments. The first was issued on 23 May 2007 (and seemingly reissued on 30 May 2007) in respect of tax of £38,671 said to have been under-declared in the accounting periods 05/04 and 08/04. The last day of Next’s 05/04 accounting period was 5 June 2004; the assessment, whether made on 23 or 30 May, was therefore made a few days less than three years after the end of that period. The second was intimated by a letter from HMRC dated 19 October 2007, followed by a second letter of 30 October to which was attached a schedule of the tax, amounting to £3,370,103, said to have been underpaid in the periods from 11/04 to 08/07 inclusive. That assessment was therefore made about a month short of three years from the end of the first of the periods assessed. Next accepts that the later assessments in dispute in this appeal were all issued in time.[56]There were, at the relevant time, three separate time limits which governed the making of VAT assessments. Section 77 of the 1994 Act imposed an overall limit of three years (which Next accepts has not been breached) while s 73(6) provided that an assessment of the kind in issue in this appeal “ … must be made within the time limits provided for in section 77 and shall not be made after the later of the following —(a) 2 years after the end of the prescribed accounting period; or(b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge, but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.”[57]Next argues (and the Commissioners do not disagree) that the limit in para (a) was breached in respect of both of the periods within the first assessment, and in respect of all the periods, up to and including 08/05, within the second assessment. The assessments can therefore be saved only if the Commissioners can bring themselves within para (b). The critical issue (as both parties agree) is the determination of the date on which “evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment” came into their possession. It was common ground, first, that the burden is on Next to show that the assessments were made out of time, and, second, that what was said by Dyson J in Pegasus Birds Ltd v Customs and Excise Commissioners [1999] STC 95 , at 101-102 (upheld on appeal at [2000] STC 91) remains the best analysis of the requirements. He first observed that “The evidence in question must be sufficient to justify the making of the assessment in question (see Customs and Excise Commissioners v Post Office [1995] STC 749 at 754 per Potts J).”[58]Thus the tribunal must examine the link between the available evidence and the assessment actually made; there is no scope for the consideration of any hypothetical assessments which might have been made instead. Then, after discussing a point of no present relevance, the judge added that “The correct approach for a tribunal to adopt is(i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the commissioners, justified the making of the assessment, and(ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the commissioners.”[59]He then made it clear that the tribunal is required to consider the opinion of the officer making the assessment, and that one has to examine the opinion itself, rather than a hypothetical reasonable opinion of the Commissioners:
“In my judgment, as a matter of statutory construction, it is not possible to read into s 73(6)(b) the qualification that the opinion of the commissioners as to the sufficiency of the evidence must be reasonable. If that had been the intention of Parliament, it would have been simple so to provide. If the test had been objective, there would have been no need to refer to the opinion of the commissioners at all. Nor is there any problem about identifying the person whose opinion is to be determined. The person whose opinion is imputed to the commissioners is the person who decided to make the assessment. It does not matter that he or she may not be the person who first acquired knowledge of the evidence of the facts which are considered to be sufficient to justify making the assessment. The knowledge of all officers who are authorised to receive information which is relevant to the decision to make an assessment is imputed to the commissioners.”
[60]In BUPA Purchasing Ltd and others v Customs and Excise Commissioners (No 2) [2008] STC 101 at [58] Arden LJ made the following observation:
“VATA thus requires the Commissioners to make an assessment only to the best of their judgment and no doubt it is implicit in this that the Commissioners will make that assessment at as early a stage as reasonably practicable. In setting the standard at best judgment, Parliament has as I see it recognised that there is no absolute certainty about the amount of the VAT due or its components in an assessment under s 73(1). It has also expressly recognised that as other facts become known or as the matter develops further assessments may be needed. Moreover, it has given the tribunal powers to direct that an amount of VAT is due even if the Commissioners have not followed the correct procedure under s 73(1). It is true that there is no express power for the Commissioners to amend the input and output tax elements of the computation where no alteration is made to the overall amount of VAT due. However, such a power, and likewise a power to take into account by deduction offsets of overclaimed input tax or underdeclared output tax (as the case may be), must in my judgment follow from and be implicit in the best judgment requirement. Those powers are reasonably necessary for carrying out the assessment process. Otherwise, the Commissioners could find that even though they raised an assessment to the best of their judgment at an appropriate time that assessment cannot be amended to reflect facts and matters becoming known later in the particular circumstances of this type of case in circumstances where it would be proper and reasonable for them to make those changes.”
[61]It is, therefore, necessary first to examine the evidence on which the assessing officer, in this case Mr Amos, relied when making the assessments. Mr Lasok emphasised that the only reason relied on for the first assessment (that is, the only reason advanced at the time it was notified to Next) was that Mr Amos had concluded the Brochure was supplied for no consideration. I must, he said, concentrate on that reason alone. I should add that it was not suggested that any other officer of HMRC had information relevant to that issue.[62]Mr Amos’s evidence was that he first became involved in the matter in September 2005, when he was asked to accompany Next’s assurance officer to a meeting at which the arrangements in issue in this appeal were to be discussed. HMRC’s understanding before the meeting was that new customers subscribing for the Directory for the first time would be required to pay for the Brochure, without receiving the delivery credit. At this meeting Mr Amos learnt that all customers were treated alike and that, whatever the contractual analysis, customers paid the same for their goods both before and after the introduction of the scheme, though only in respect of orders from the Brochure. He was given the explanation I have already described, that the arrangements were designed to reduce the number of Brochures sent to inactive customers and to increase the volume of orders, and that they had had some success in both respects. He did, however, understand from what he was told at the meeting that the Brochure charge was incurred immediately it was sent out, but not enforced if no order was forthcoming, and that Next considered that it retained title to the Brochure until payment for it was received. Mr Amos concluded the meeting by asking Next to supply him with further information from which he could satisfy himself that the arrangements had been introduced for motives other than the securing of a tax advantage.[63]No such information was forthcoming, Next contending that it did not exist. As will be apparent from what has gone before, there was some relevant documentation, though it may well be that Next’s staff did not realise at the time that it was relevant to Mr Amos’s enquiry. In the absence of the information he had requested, Mr Amos arranged a further meeting on 29 March 2006. On this occasion he learnt, contrary to what he had previously been told, that the delivery credit was available on the first order placed by a customer after receipt of the Brochure, whether the order was from the Brochure or the Main Book. Further material was sent to Mr Amos on 19 April 2006. As the following passage from his statement makes clear, it was apparent to Mr Amos from that material, and from what he had already been told, how the arrangements worked and what was their effect.[64]At para 20 of his statement, Mr Amos observed that “Customers receiving the brochure were only charged for it if they placed an order, at which point they were given a ‘delivery credit’ equal to the brochure charge. As no additional income was generated, I could not see how these arrangements contributed to resolving the Appellant’s stated problem of the increasing costs of brochure production and distribution. It is true that, if considered in isolation, the costs of brochure production would be defrayed by the income from the brochure charges, but that benefit would be matched by an equal reduction of the income received from the delivery charges. In fact, the only effect on the Appellant would be that it treated the £3.50 income as zero-rated whereas it was formerly standard-rated. … I could not see how customers would be educated to accept the validity of the brochure charge when non-orderers are never charged and customers placing an order get a corresponding credit.”[65]Mr Amos was, however, still concerned about the possibility that the arrangements were abusive, and he engaged in further exchanges, by telephone and letter, with Next’s staff on that question. According to his statement, he learnt on 4 September 2006, during the course of an exchange of emails, that the Brochure charge was debited to the account of a customer who placed an order, whether or not it was placed by reference to the Brochure or the Main Book. He had hitherto understood, from the promotional material sent to customers, that the Brochure charge was incurred and the delivery credit offered only if the customer ordered from the Brochure. His statement also indicated that he did not have all of the financial information he needed in order to calculate an assessment until mid-September 2006.[66]On 28 November 2006 Mr Amos sent a request for further information to Next. His evidence was that his request was framed, in part, in the light of the Redcats decision to which I have referred, which was released in May 2006. Next had not supplied the requested information by May 2007, and Mr Amos decided he should make the first of the assessments in issue in this appeal, since the three-year time limit imposed by s 77 of the 1994 Act, so far as it related to the first prescribed accounting period in which the arrangements had been in operation, would shortly expire. The reason he gave for making the assessment was the Main Decision, as I have set it out at para 15 above, though it was not at that time so described. The letter went on to reserve the Commissioners’ right to make additional, or alternative, decisions at a later date, but I agree with Mr Lasok that if, at that juncture, Mr Amos felt sufficiently confident to make an assessment, it is his reason for doing so, and the evidence on which he relied, at that point, which must be examined. Moreover, as I have concluded that the First Alternative Decision is no more than the Main Decision put another way, and the Second Alternative Decision fails, additional reasons advanced after May 2007 cannot bring the Commissioners within s 73(6)(b) if the Main Decision does not.[67]Mr Lasok’s argument was that all the evidence of facts on which Mr Amos relied when making the first assessment was in his possession by April 2006 and therefore more than a year before it was made. He knew, as the passage from his statement set out above shows, that the arrangements did not generate any additional revenue for Next, and he knew, even if he did not fully understand all the details of the scheme, that customers paid no more, overall, after its introduction than they did before. The assertion in Mr Amos’s statement that he did not have the financial details on which the assessment was based was simply incorrect, as the information had been provided by a letter of 1 October 2004. In short, he had all of the information he needed in order to come to his conclusion that the Brochure was provided for no consideration (or, if one prefers the First Alternative Decision, was not the subject of a supply properly so called) by April 2006 at the latest. Moreover, he acquired no more relevant evidence before the second assessment was made.[68]Mr Amos’s response, as he gave his oral evidence, was that there was information he considered to be material to the decision to assess which came into his possession within the year before the first assessment was made. He learnt, by a letter of 16 June 2006 from Next, that it had no more relevant documentation regarding the motives behind the scheme; he learnt by the email exchange of 4 September 2006 that Next itself agreed that the scheme generated no additional income and that customers ordering from the Main Book were treated in the same way as customers ordering from the Brochure; and he relied on the contents of a letter of 12 September 2006, giving the financial information necessary for the calculation of the assessment. Even then, he said, he had no clear picture about the arrangements as they applied to customers who ordered goods for delivery to a Next store—he did not know whether, and if so how, they received a delivery charge credit.[69]He was, however, forced to concede that the letter of 16 June did not add any evidence to that which he already had (it was, rather, an absence of evidence), that he had already reached the conclusion that the scheme generated no additional revenue (thus the email exchange of 4 September 2006 did not add any information which assisted him to that conclusion); and that Next had provided the relevant figures as long ago as 2004, albeit before Mr Amos became involved. Mr Lasok pointed to a draft of the May 2007 decision letter, apparently produced about a year earlier and then amended on several occasions before reaching its final form, which revealed that Mr Amos had already come to a conclusion very similar to that expressed in the version of the letter which was sent to Next. Mr Amos explained that the draft evolved over time, as his understanding of the arrangements advanced. I accept that evidence.[70]Nevertheless, it does not seem to me to undermine the thrust of Mr Lasok’s argument that all Mr Amos needed by way of evidence sufficient in his opinion to make the first assessment was in his possession in April 2006. He had concluded by then, as the passage from his statement which I have set out shows, and as he conceded when he gave oral evidence, that the Brochure was supplied for no consideration, the reason on which he relied in the decision letter. I have considerable sympathy with Mr Amos since it seems to me that he was distracted from his enquiries by Next’s changing assertions (of which there were several) about the manner in which the scheme was operated, and by his own desire to satisfy himself whether or not the arrangements were abusive. The test is, however, clear: time begins to run from the date on which “evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”.[71]In my judgment the only conclusion open to me is that Mr Amos did know, by April 2006, all he needed to know in order to formulate the Main Decision and, if there is in reality any difference in it, the First Alternative Decision. I agree with Mr Lasok that what he learnt later was, at most, confirmation of what Mr Amos already knew. It does not help him that he was still seeking (as I accept he was) information about the scheme which might have, and in the event did, lead him to the additional conclusion that the scheme was an abuse, not merely because I have found against the Commissioners on that argument, but because Mr Amos had all the information he needed in order to make the assessments he did make.[72]The appeal is therefore allowed in respect of the assessed prescribed periods from 05/04 to 08/05 inclusive, but dismissed in respect of all other assessed periods. I understand there to be no dispute about the calculation of the amounts assessed.[73]Both parties asked for a direction in respect of costs if successful, a direction I am able to make in accordance with para 7(3)(a) of Sch 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009. Each party has, however, succeeded to some extent. I therefore invite further submissions, in writing, on the incidence of costs.[74]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Colin Bishopp Tribunal Judge Release date: 16 February 2011