Virgin Media Ltd v Revenue & Customs (VAT - CONSIDERATION : Discounts) [2018] UKFTT 556 (TC)

FTT-Tax
Virgin Media Ltd v Revenue & Customs (VAT - CONSIDERATION : Discounts)
[2018] UKFTT 556 (TC) · 2014-05-01
[127]As noted, it was common ground that in assessing whether para 4(1) applies, the starting point is to analyse the contractual nature of the arrangements following the approach set out by Lord Neuberger in Secret Hotels2 and Airtours . I have set out an overview of the relevant comments from those cases as well as comments to which Lord Neuberger referred in the earlier case of Revenue and Customs Commissioners v Newey (Case C-653/11) [2013] STC 2432 . 128. In Newey the Upper Tribunal sought a preliminary ruling from the CJEU on the extent to which the contractual position is determinative of the VAT analysis in the context of a situation where the taxpayer used Jersey companies to avoid having irrecoverable VAT. At [42] to [45], the CJEU held that economic and commercial realities are fundamental in applying VAT, but the contract usually reflects these realities unless the contractual terms constitute a purely artificial arrangement: “42. As regards in particular the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case-law of the Court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT….43. Given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a ‘supply of services’ transaction within the meaning of Articles 2(1) and 6(1) of the Sixth Directive have to be identified.44. It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.45. That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions.” 129. In Secret Hotels2 Lord Neuberger considered the role of contractual interpretation and the correct approach to contractual interpretation in the context of analysing the VAT position on supplies made by an online travel business. In considering whether the business acted as an agent or principal under English law, Lord Neuberger said, at [31], that where parties have entered into a written agreement “which, on the face of it, is intended to govern the relationship between them,” then, in order “to determine the legal and commercial nature of that relationship, it is necessary to interpret the agreement in order to identify the parties’ respective rights and obligations”, unless it constituted a sham. As regards interpreting an agreement under English law, in summary, he said the following:[32](1) The court must have regard to “the words used, to the provisions of the agreement as whole, to the surrounding circumstances in so far as they were known to both parties, and to commercial common sense” (at [32]). When deciding on the categorisation of a relationship governed by a written agreement, the label or labels which the parties have used to describe their relationship cannot be conclusive, and may often be of little weight.(2) Under English law it is not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement (at [33]).(3) Such behaviour or statements can, however, be relied on for other limited purposes including to support a claim that the written agreement was subsequently varied, or rescinded and replaced by a subsequent contract (agreed by words or conduct) or to establish that the written agreement represented only part of the totality of the parties’ contractual relationship (at [33]).[130]He continued (at [34]) that, in the circumstances, the correct approach was “to characterise the nature of the relationship between [the relevant parties in the light of [the relevant agreement/terms]”, next to consider whether “that characterisation can be said to represent the economic reality of the relationship in the light of any relevant facts” and finally, “the result of this characterisation so far as [the relevant European law (article 306)] is concerned.” At [35] he said that in order to identify the nature of the relationship between the relevant parties :
“one must first consider the effect of the contractual documentation, and then see whether any conclusion is vitiated by the facts relied on by either party. ”
[131]As regards the correct approach under European law, he said, at [55], that the “CJEU’s suggested approach as to how the issue should be determined seems very similar to that of the English court”. Referring to CJEU decisions including the passages from Newey set out at [128] above, he said that he took from those cases that :
“ ‘ the travel agent’s contractual obligations towards the traveller ’ are of particular importance in deciding whether [the relevant European law] applies but it is also necessary to ‘ hav[e] regard to all the details of the case ’ , and, in that connection, the ‘ economic and commercial realities ’ represent ‘ a fundamental criterion ’ . A contract which does not reflect ‘ economic reality ’ and a ‘ purely artificial arrangement ’ are similar to the shams, rectifiable agreements and other arrangements considered in para 33 above.” 132. At [57] he decided that economic reality did not in that case assist a contrary view to that based on his analysis of the contractual position noting that: “ one must be careful before stigmatising the contractual documentation as being ‘ artificial ’ , bearing in mind that EU law, like English law, treats parties as free to arrange or structure their relationship so as to maximise its commercial attraction, including the incidence of taxation – see RBS Deutschland …”
[133]In Airtours the issue was whether Airtours could recover as input tax VAT it paid on fees charged by PwC for services primarily relating to a report prepared for financial institutions as regards a refinancing of Airtours. It could do so only if it received the supply of PwC’s services. Lord Neuberger considered that , on the true construction of the contract, PwC did not contract to supply services to Airtours nor did PwC have a contractual duty to Airtours to provide the institutions with the services (and in particular the report) nor could any such duty be implied. 134. Lord Neuberger went on to consider, at [43], Airtours’ argument that, even if it was not contractually entitled to have the services provided to the institutions, the facts that(i) it had a substantial commercial interest in those services being provided by PwC to the institutions, and(ii) it not merely countersigned the contract pursuant to which they were provided, but thereby agreed to pay PwC for the services, lead to the conclusion that the services were “supplied” to Airtours (as well as to the institutions).[135]At [47], he referred to the comments of the Supreme Court in the case of WHA Ltd v Revenue and Customs Comrs [2013] UKSC 24 ; [2013] STC 943 where at [27], Lord Reed said that “ [t]he contractual position is not conclusive of the taxable supplies being made as between the various participants in these arrangements, but it is the most useful starting point ”. He noted that Lord Reed then went on to analyse the series of transactions in question, and at [39], explained that the tribunal had concluded that “ ‘ the reality is quite different ’ from that which the contractual documentation suggested”. He continued that, effectively, Lord Reed agreed with this, and assessed the VAT consequences by reference to the reality and concluded from this as follows:[48]“In other words, as I said in Secret Hotels2 Ltd v Revenue and Customs Comrs [2014] STC 937 , para 35, when assessing the VAT consequences of a particular contractual arrangement, the court should, at least normally, characterise the relationships by reference to the contracts and then consider whether that characterisation is vitiated by [any relevant] facts. ” 136. At [48] he noted that the same approach was adopted by the CJEU in Revenue and Customs Commissioners v Loyalty Management UK Ltd and Baxi Group Ltd (Joined Cases C-53/09 and C-55/09) [2010] STC 2651 , at [39] a nd [40], where they stated, citing previous judgments, that :
“ ‘ consideration of economic realities is a fundamental criterion for the application of the common system of VAT ’ , and added that that issue involved consideration of ‘ the nature of the transactions carried out ’ in the particular case.” 137. He continued, at [49], to cite comments from other CJEU cases as being much to the same effect such as the CJEU’s comments in Newey that a supply of services is effected for consideration only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, which the CJEU explained as meaning “the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient”
. He said that, at [41] of the decision in in Newey, the CJEU went on to explain that a supply of services is therefore : “objective in nature and applies without regard to the purpose or results of the transactions concerned and without its being necessary for the tax authorities to carry out inquiries to determine the intention of the taxable person”. 138. He noted that the court in Newey then observed, at [42] to [43] of that decision, that :[50]“ ‘ consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT ’ and that ‘ the contractual position normally reflects the economic and commercial reality of the transactions ’ . An exception to the normal rule that the contractual relationship is central was then identified by the court as being where ‘ those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions ’ (para 45). ”[139]He concluded at [50] that, from the authorities he set out, it was clear that, where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier. He said, at [51], that the contract did reflect the economic reality and was not in any way an artificial arrangement. 140. HMRC referred to the decision of the Upper Tribunal in ING as further authority for the proposition that the effect of these decisions is that the contract may not only be the starting point of the analysis of the nature of arrangements for VAT purposes but also the end point if the terms reflect economic and commercial reality. At [37], the Upper Tribunal said:
“In our view the correct approach is clear from Newey and Secret Hotels2 . The test is an objective one (see also on that Commission v Finland (Case C-246/08) [2009] ECR I-10605 at [37]). The contractual terms must be considered. It is also necessary to consider the ‘ economic and commercial reality ’. If the terms reflect the economic and commercial reality then it is not necessary to go any further.”
[141]Since the hearing, the Court of Appeal has released their decision on the appeal to them in the ING case ( ING Intermediate Holdings Ltd v HMRC [2017] EWCA Civ 2111 , [ 2018] STC 339 ) in which Arden LJ (with whom the other members of the Court of Appeal agreed) expressed a similar view. She said, at [37], that, in her view, “ the correct reading of Newey and Secret Hotels2 is that the court only goes behind the contract if the contract does not reflect the true agreement between the parties”. Hence whilst she accepted that “ when determining the nature of a transaction for VAT purposes, the court must look at the economic purpose of the transaction” nevertheless “the starting point is to determine what the parties have agreed”. Application of the approach in this cases 142. On the basis of the above authorities:(1) It is necessary to assess (a) the contractual effect of the arrangements between VML and its customers in relation to the provision of the FLR services in the relevant period, (b) in the light of the contractual nature of the arrangements, what was supplied to whom for what consideration and on what terms and (c) in the light of that analysis, whether the FLR services “are supplied for a consideration in money and on terms allowing a discount for prompt payment” within the meaning of para 4(1).(2) In assessing the nature of the contract between VML and its customers, as set out in Secret Hotels2 , the tribunal must consider the words used, the provisions of the agreement as whole, the surrounding circumstances in so far as they were known to both parties, and commercial common sense.(3) In analysing the effect of the arrangements for VAT purposes it must be borne in mind that consideration of economic and commercial realities is a fundamental criterion for the application of VAT. Whilst the contractual position normally reflects that reality, the contractual position may be vitiated on the relevant facts if, for example, the contractual terms constitute a wholly artificial arrangement. This is also reflected in the principle that there is a supply for consideration only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance. It follows that a supply of services is objective in nature and applies without regard to the purpose or results of the transactions concerned. 143. As set out in detail in the facts section above, VML provided a range of services. Customers often chose to receive a bundle or package such as for telephone, digital television and broadband services. When a customer first signed up with VML the customer received a residential services contract with a copy of the main terms (which were also published on VML’s website) which incorporated by reference the terms in “other legal stuff”. The saver terms were included within “other legal stuff” and were also advertised widely by a variety of means. 144. The residential services contract set out details of the particular services which the customer purchased. Where a customer contracted for the provision of FLR services, the saver terms were included only within contracts where the customer had chosen the saver basis. If an existing customer chose the saver basis, the customer received an email or letter setting out the saver terms. The main terms contained general provisions applicable to all customers (such as regarding payment and termination) and terms, such as those relating to specific services, which may or may not apply depending on what services a customer had contracted to receive. 145. The saver terms, whether set out in writing or as described in marketing material or on the phone, were expressed in very similar terms. It was set out that on payment in advance by debit or credit card of a specified sum, the saver price, the customer would receive 12 months of FLR services on the basis that (a) the saver price was non-refundable except in an initial cooling off period and (b) at the end of the 12 months the customer would automatically move to the monthly basis. It was stated that this could not be combined with certain other offers and that the customer’s normal call charges would apply. 146. In my view, the effect of the provisions, as interpreted having regard to the surrounding circumstances as regards the manner in which VML did business with its customers and commercial common sense, is that, as HMRC argued, there were in effect two different sets of contracts with monthly and saver customers pursuant to which the parties had materially different entitlements and obligations: (1) In return for a payment of £13.90 per month, a monthly customer contracted with VML to receive FLR services for one month at a time (albeit on an on-going month by month basis) subject to the parties’ rights to terminate. In that case the customer was potentially subject to price rises but could terminate on one month’s notice for no further charge subject to an early disconnection fee if termination was within a minimum period. (2) On payment of a fixed non-refundable amount of £120 a saver customer contracted with VML to receive FLR services for a defined period of 12 months on the basis that, thereafter, he/she would become a monthly customer. Such a customer could also terminate on 30 days’ notice but, if he or she did so within the applicable 12 month period, he or she did not receive a refund of the saver price. If the customer terminated the contract within a minimum period there was no disconnection fee by reference to the FLR services as the customer had already paid in full for the FLR services over the 12 month period. 147. The saver terms essentially comprised only an offer to contract on the basis set out and were binding contractually only on those customers who chose to take that offer up on paying the saver price. The terms provided a framework of terms and conditions only some of which may have applied contractually to a particular customer depending on the package of services he contracted to receive and which of the many advertised offers he took up. In my view, on the plain meaning and applying commercial common sense, the saver terms constituted one element of the overall suite of offers available which a customer could choose to contract for in the same way as he could choose to contract for a television service or a broadband service or a particular package. As submitted by HMRC that offer became a binding contractual term only as regards those customers who in fact took the offer up, as and when the saver price was actually paid by the customer. It was inherent in the way in which the saver terms were phrased that it was only on paying the saver price that a customer was subject to the saver terms. 148. I cannot see that, as VML argued, monthly customers somehow gave consideration for the saver terms such that they comprised a form of unilateral option, which was contractually binding from the outset of such a customer’s relationship with VML (or which became binding on existing monthly customers when the saver basis was introduced). There was nothing in the residential services contract signed by a monthly customer or in the surrounding circumstances, such as in bills issued to monthly customers, to indicate any link between the value given for the monthly supply of services, of £13.90 per month, and the ability to take the saver terms. There was no mention of the saver basis in the residential contract with monthly customers or in the bills issued to them. There was nothing to suggest that the monthly price paid was for anything other than the receipt of one month’s worth of FLR services. 149. The fact that the saver terms were widely advertised in a number of ways both to existing and potential customers (in similar ways to other offers of savings and different packages) merely emphasises that the saver terms were simply an offer until a customer took the offer up on paying the saver price. The offer was available to those with no existing contractual relationship with VML in precisely the same way as to those with an existing relationship. In that context I cannot see that in agreeing to receive the FLR services (or other services) on an on-going basis a customer thereby provided consideration for an “option” to take the saver basis. 150. Unlike some other offers made by VML, the saver terms were also included in “other legal stuff”, alongside other terms which may well be binding contractual terms. However, in the same way as the labels used by the parties are not determinative of the contractual relationship, the placing of an offer within other contractually binding terms does not somehow convert the offer into a contractually binding option if that is not its true nature (until it becomes binding on payment being made). 151. I note that VML’s view is that there was in each case a contract for an indefinite term noting that, as regards the saver customers, the contract reverted to the rolling on-going monthly basis at the end of the 12 month period (unless the customer terminated or chose the saver basis for a further 12 months). VML also said that it was relevant to the analysis that contracts with customers who received FLR services in fact lasted on average for 6.5 years; in its view that has a bearing as a factual commercial factor which was known to both parties at the date of contract. 152. However, the saver terms clearly stated that the saver price of £120 was a non-refundable payment for an entitlement to receive the FLR services for a defined period of 12 months. That the saver terms set out that, after the end of that period, the customer would receive services on a monthly basis, merely constituted the different basis on which VML contracted with the customer at the end of that defined period. 153. I cannot see that the fact that, in practice, the contractual relationship continued on average for 6.5 years has any relevance. It cannot simply be assumed that customers were aware of the average length of customers’ contractual relationships with VML; I can see no reason to suppose they were aware of that. In any event, I cannot see that an awareness that, in practice, the overall contractual relationship between the parties could last well beyond the 12 month period for which a customer paid the saver price, affects the nature of the relationship during that 12 month period. The tribunal is required to assess the precise nature of the contractual relationship at each point in time; the eventual overall length of the relationship does not if itself determine that nature. 154. As regards its view that there was one contract, VML emphasised that, aside from the different terms as to payment, the rest of the terms were the same for both saver and monthly customers. VML noted that a saver customer could still terminate the contract before the end of the 12 month period as could VML and gave illustrations of when that may arise. VML suggested that, in the example it gave, whereby VML could withdraw services in a particular area (such as the Outer Hebrides), in effect VML would be required to refund the saver price under a term of the contract (see [53(3)]). However, it is difficult to see that the provision VML relied on applies to saver customers given the clear statement in the saver terms that the saver price was non-refundable. If VML withdrew the services, it would simply have been in breach of its contractual obligation to provide the FLR services for 12 months in return for the non-refundable price albeit the customer may be able to claim compensation for that breach. 155. The contractual position entirely reflects the commercial and economic reality, namely, that a monthly customer was entitled to receive one months’ worth of services for a monthly price of £13.90 and a saver customer was entitled to receive 12 months’ worth of services for a single fixed upfront non-refundable price of £120. I cannot see that the views of Mrs Codd, Mr Perrin and Mr Davidson as to the effect of the arrangements are relevant in the context of assessing the commercial or economic reality or otherwise. Whether as a matter of contractual interpretation or VAT analysis the test is an objective one. The question is not how an individual customer or VML perceived the relationship or how VML presented it for marketing purposes. 156. In any event, it is uncontroversial that a typical consumer may well have viewed the saver basis as providing a saving, as that term is commonly understood, for the receipt of 12 months of services when compared with the monthly basis, and that VML consistently marketed the saver terms on that basis. Equally it is clear that Mrs Codd was aware that the saver price was non-refundable; she had no plans to terminate or change provider and so that was not a concern to her. I cannot see that these unsurprising perceptions or marketing strategies shed any light on the correct contractual and legal characterisation of the arrangements and/or the correct meaning of para 4(1). 157. My view is that it follows from this analysis, that during the relevant period correspondingly VML made two different sets of supplies to saver and monthly customers. In accordance with the contractual position (1) VML supplied FLR services to monthly customers for one month at a time for £13.90 per month and (2) VML supplied FLR services to saver customers for a 12 month period for a non-refundable price of £120 (and thereafter made monthly supplies (unless the contract was terminated or the saver basis was taken again)). 158. I note that VML emphasised that in each case, the underlying service provided to customers was the same. As set out above, there is a supply for consideration only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, in the sense that the remuneration received by the supplier constitutes the value actually given in return for the service. In my view, the nature of what is supplied in return for the value given is not necessarily the same where the same underlying services are provided to two sets of customers on different contractual terms thereby giving rise to different entitlements/obligations and resulting contractual consequences (such as on termination). The value given to a supplier for receipt of a service may well reflect and differ according to the particular characteristics of and consequences flowing from the particular legal relationship. 159. In this case the different values of £13.90 and £120 paid by a monthly and a saver customer reflect the different nature of the contractual relationship between the parties: (1) The payment of the higher monthly amount reflected that VML was obliged to provide and a monthly customer was entitled to receive a supply of services for one month at a time on the basis that the customer thereby had the flexibility to terminate on one month’s notice with no additional payment (except as regards a possible disconnection fee if within a minimum period) but that VML had the ability to increase the monthly price. (2) The lower saver price reflected that VML was obliged to provide and a saver customer was entitled to receive 12 months of services for a fixed price but with no refund on termination (and no disconnection fee as regards the FLR services if termination was within a minimum period). 160. In a sense these different consequences may be said, as VML argued, to result and flow from a customer making a single fixed lower payment of a sum upfront as opposed to payments of higher amounts over a period of time. However, that does not detract from the fact that in each case, the consequence of the different payment and different temporal entitlements is that there is a difference in the reciprocal relationship thereby created. 161. I note that VML said that para 4(1) can never operate if the fact that there are two different payment options means that it does not apply. However, it is not simply the fact that different payments were made that leads to this conclusion. The critical factor is that, in these circumstances, the different payments lead to different contractual entitlements/obligations and resulting consequences. On that basis the cases VML referred to as regards the effect of the method of payment are not in point. 162. This analysis does not render the provisions of para 4(1) redundant as regards supplies of services. Paragraph 4(1) may well apply if, for example, a customer were to contract for the provision of 12 months of FLR services on the basis that he or she would pay either (a) a total fixed non-refundable amount of £166.80 to be met by 12 payments of £13.90 per month or (b) within 10 days of commencement of the contract, a fixed non-refundable amount of £120. In those circumstances the ability to pay, at an earlier date, £120, instead of on-going amounts over 12 months totalling £166.80 can plainly be seen as a term allowing a discount for the receipt of early payment for the same supply of 12 months of FLR services. 163. Essentially, for all the reasons set out above, in this case, however, there was a different bargain or different reciprocal relationship between VML and the monthly customers and between VML and the saver customers and accordingly a different supply. In short, the ability for a customer to pay £120 was not provided simply in return for early payment of monthly sums otherwise due but for the provision of an entitlement to receive 12 months of FLR services at a fixed rate (the corollary being the lack of flexibility to terminate on one month’s notice for one month’s payment only). 164. I have concluded, therefore, that on the basis of the above contractual analysis, para 4(1) does not apply to the supplies of FLR services made by VML in the relevant period. The FLR services were not supplied on terms allowing a PPD; they were supplied to monthly customers on a monthly basis in consideration of the monthly amount paid and to saver customers for a 12 month period in consideration of the saver price. 165. In particular, I note that it cannot be concluded that the FLR services were supplied to monthly customers on terms allowing a PPD merely because they could have decided to take advantage of an offer to receive the services on a different basis, namely, for 12 months for a single fixed non-refundable price. The saver terms only applied and, accordingly, supplies were made on those terms, only to the customers (whether new or existing) who chose to contract on that basis on paying the saver price. 166. As regards VML’s alternative argument (see [119] to [126] above), my view is that the minimum period does not affect the duration of the contract between VML and a monthly customer. As VML itself argued in relation to the position under para 4(2) (see [197] to [202]), a minimum period requirement does not convert the contract into a fixed-term contract of limited duration. Unlike the position in Esporta , it is clear from the terms that VML could not enforce the advance payment of monthly payments falling due during the minimum period given VML was obliged only to provide its service on a monthly rolling basis. The customer retained the ability to terminate during the minimum period albeit that there may be an early disconnection fee; the customer was not otherwise liable for any fixed fee for the FLR services due over the remainder of the minimum period. 167. This is sufficient to dispose of these appeal proceedings. However, in case this is found to be wrong, I have considered the further arguments raised. “Are supplied”/time of supply argument Overview 168. To re-cap, para 4(1) applies “where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment”. As set out above, that requires (a) the determination of the nature of the supply (in terms of what is supplied to whom for what consideration) on an analysis of the contractual position and (b) an assessment of whether, in the light of that analysis, para 4(1) applies on its correct contractual construction. 169. The question here is whether para 4(1) applies if, contrary to my view, the correct outcome of the required contractual and VAT analysis is that VML made a single form of supply of FLR services to all customers which was on-going and continuous (broadly, unless a customer gave notice to terminate or there was another termination event) and which was made on binding contractual terms as regards the saver basis. 170. In VML’s view it follows from its analysis that para 4(1) applies given that, on that analysis, a customer was contractually entitled to elect, at any point whilst the on-going supplies were being made to the customer, to pay the saver price for a 12 month period and that, if the customer did so, the customer would achieve a substantial upfront saving compared with the monthly amounts otherwise due for those supplies over the same period. In its view all supplies of FLR services were plainly made on terms allowing a PPD; what matters is that the binding contractual terms provided for a PPD not whether that PPD was taken up or not. 171. HMRC argued that the requirement in para 4(1) that goods or services “ are supplied ….on terms allowing a PPD” is in any event not satisfied. In their view this requirement can be met only if a supply or deemed supply occurs before payment is made. They said that was not the case as, under the time of supply rules, a deemed supply of FLR services was triggered on each occasion when a customer made payment (whether under s 6 VATA or regulation 90). As payment coincided with the making of the deemed supply (thereby triggering it), at that point there were no terms allowing for the payment of sum, X, at a subsequent date or a lower sum, Y, at an earlier subsequent date, as in HMRC’s view is required for para 4(1) to apply. 172. Evidently HMRC’s concern, as under their primary argument, is to avoid the position that VML is liable to account for VAT on all supplies of FLR services only by reference to the saver price even where the saver basis was not taken up and the higher monthly amounts were paid. HMRC disputed that, if para 4(1) applies, it has that effect but if their analysis on this point has the result they argue for, the need for that further debate falls away. 173. On this approach HMRC reach the desired result on the basis that whether para 4(1) applies as regards monthly customers is to be assessed, in effect, on a month by month basis by reference to each monthly supply which is deemed to take place when payment is made under the time of supply rules. On that view, therefore, the consideration or value for each monthly deemed supply in effect is fixed at the point in time when payment was made for it, by reference to the payment made. The corresponding position is reached as regards saver customers, namely, that a deemed supply triggered by payment of the saver price was made in return for the saver price. 174. I note that HMRC’s argument is premised on the basis that payment was made in advance of the provision of the FLR services in all cases. Whilst that is correct as regards payment of the saver price, the evidence was that monthly customers did not in fact pay in advance of the provision of the FLR services in all cases. Mr Davidson said that, whilst bills went out in advance of the period billed for, payment may not be made until later in the period, by which time the FLR service for that month was already being received by the customer (see [43] above). It appears, therefore, that HMRC’s analysis only potentially applies to some of the supplies made in the relevant period. Detailed submissions 175. A set out above, a supply of services is treated as taking place when the services are performed or, if earlier, when a VAT invoice is issued or payment is received in respect of the supply (under s 6(4) VATA). It was not disputed that the monthly document issued by VML to customers was not a VAT invoice (as defined in s 6(15) VATA, para 2A of Schedule 11 to VATA and regulation 14(1) of the Regulations). In HMRC’s view, where payments were made before the services were performed (whether a customer paid monthly or upfront) , payment triggered the time of supply under these provisions. 176. HMRC continued that further or alternatively, the supplies of FLR services were continuous supplies of services which, under regulation 90, are treated as “separately and successively supplied” on the earlier of the date a VAT invoice is issued and that on which payment is received in respect of the supply. HMRC said that again as no VAT invoice was issued, there was a separate monthly supply to monthly basis customers each time that a payment was made for that supply (again assuming payment was made in advance of the performance of the services for the relevant month). 177. On HMRC’s view, therefore, para 4(1) applies in the context of supplies of services only where a supply is triggered by performance of the relevant services or the issue of an invoice. HMRC said that their practice at the relevant time, as set out in their guidance, reflected the intention that para 4(1) applies to address the practical difficulty businesses have in accounting for VAT if, when the obligation to account for VAT arises, it is not known whether a discounted sum will be paid or not. Accordingly, in the relevant period, HMRC allowed businesses to account for VAT on a discounted sum (whether or not it was in fact paid) where a deemed supply was triggered by the issue of an invoice which provided (as a contractual matter) for payment of sum, X, on a subsequent date or of sum, Y, on a subsequent date before that on which sum X was otherwise due. HMRC said that they were prepared to abide by this guidance (notwithstanding that it may not be in accordance with EU law) but noted it is not in point here as VML did not issue VAT invoices. 178. In VML’s view there is simply no requirement for a prior supply or justification for the view that the regime only applies where an invoice is issued containing payment terms. VML said that HMRC’s analysis is wholly out of kilter with para 4(1) and the relevant provisions in the PVD which are clearly intended to apply where a discount is given for immediate payment. What matters is that there is a contractual term providing for a discount to be given for early payment. 179. VML noted that there are many situations in which a discount could arise where no supply has yet taken place or at the very time a supply is made. In its view, there is no reason, for example, why para 4(1) should not apply where, in response to a placard over the till stating that there is a “10% discount for immediate payment”, a person orders widgets on paying the reduced amount for delivery a week later and on receiving the invoice at that later time. Similarly there is no reason why the PPD regime does not apply where an immediate discount is offered for subscription to a monthly publication (such as a magazine) over a number of months or where, as here, a customer has an option to pay upfront for supplies which are to be received over a period of months under an on-going contract of indefinite duration. 180. In VML’s view, the PPD regime would be robbed of its very purpose if, in those circumstances, rather than it applying to reduce the taxable amount, there is actually a penalty for very prompt payment. VML said that such distinctions are not sustainable and are not found within the terms of para 4(1). In that regard, VML noted the following: (1) The predecessor of para 4 (para 4 of schedule 3 to the Finance Act 1972) specifically referred to a reduction in payment made immediately:
“Where goods or services are supplied for a consideration in money, which is to be reduced if payment is made immediately or within a specified time, the consideration shall be taken for the purposes of this part of this Act as so reduced whether or not payment is so made.” (2) Article 79 PVD states that the taxable amount shall not include not only price reductions by way of discount for early payment, but also “price discounts and rebates granted to the customer and obtained by him at the time of supply .” (3) On the plain meaning and certainly without resorting to any muscular interpretation the term “prompt” is more than able to cover “immediate” or “early”
. The natural meaning of the term is “without delay” or “immediate”. 181. VML said that on the basis that para 4(1) applies to immediate discounts, it is plain that it is not premised on the condition that there is a prior supply. There is simply no language in para 4(1) which is sufficiently robust to indicate that Parliament intended that the PPD regime is not to apply where a discounted payment is made in advance of the time when the supply is made (whether that is in a factual or tax point sense). 182. VML continued that, in any event on HMRC’s own analysis, where payment triggers the tax point, the deemed supply is coterminous with payment; it does not precede payment. The words “are supplied” must surely cover a supply which is co-terminous with payment. HMRC’s concern appears to be that for new customers there was no binding obligation to pay until they triggered the saver basis by paying the price. Clearly, that same objection does not apply to existing customers who were of course under an existing contract which gave rise to rights and liabilities. 183. In VML’s view, in any event regulation 90 (being in its view the applicable provision to determine the tax point of any given FLR supply) merely determines the accounting period in which a supply of services is deemed to fall for VAT accounting purposes. It does not create a distinction in the number of or the nature of supplies made to a particular customer. VML noted that this was recognised in Esporta (see [121] to [125] above for a description of that case). In that case, at [28], Vos LJ concluded in effect that regulation 90 had no bearing on the question of the nature of the relevant services:[28]“ I should also deal with the point on Regulation 90, which I regard as something of a red herring. Regulation 90 provides that where services are supplied for a period for a consideration payable periodically, those services "shall be treated as separately and successively supplied" at certain designated times. As Ms McCarthy submitted, that merely has the effect of modifying the tax point for VAT purposes by deeming the services to be separately and successively supplied at the earlier of the time that payment is received or a VAT invoice issued. It delays Esporta’s obligation to account for output tax to HMRC until it actually receives the payments. It says nothing about the nature of the services in exchange for which the payments are made, but seems instead to throw attention back to the contract under which the services are supplied . ” (emphasis added) 184. HMRC responded that VML’s hypothetical examples regarding widgets should be treated with caution given the fundamental difference between goods and services. They said that payment in advance in return for a performance of services on a continuous basis over a 12-month period is a very different set of facts from the classic widget example. 185. In HMRC’ view the circumstances in which there could be an immediate PPD for a supply of services are remote. For example a barrister could provide a client present in his office with an invoice for written advice not yet provided on the basis that, if payment is made immediately, £90 is due but, if payment is made within 90 days, £100 would be due. On the basis of HMRC’s guidance that may qualify for the PPD regime. However, as a matter of practical reality, that scenario starts to look like a sham. It would be very odd if a supplier were to issue an invoice based on the premise of immediate payment, knowing full well by the time that the advice is handed over that payment has not been made immediately. Decision on meaning of “are supplied” and time of supply argument 186. The dispute centres on the role, if any, which the time of supply rules play in determining whether para 4(1) applies to the supplies of FLR services made by VML in the relevant period. My view is that the time of supply rules plainly do not affect the analysis involved in determining what was supplied to whom for what consideration. As recognised in Esporta the provisions in regulation 90 simply trigger the tax point thereby determining when the supplier must account for VAT on the services supplied. Accordingly, in Esporta Vos LJ held that regulation 90 had no role to play in deciding on the nature of any services provided by a health and fitness club to its members in return for late paid fees (see the description of this case at [121] to [125] and [183] above). The same principle must apply as regards the time of supply rules in s 6 VATA to the extent that is in point. 187. The further question raised by HMRC’s argument, however, is whether, as a matter of statutory construction, in the context of on-going supplies of services, para 4(1) can be interpreted as requiring that its application is to be tested on each occasion when a supply is deemed to take place under the place of supply rules, in effect, by reference to the supply so far as it is deemed to take place at that point. In their view, on that basis, para 4(1) cannot apply where an advance payment triggers the making of the deemed supply. The on-going supplies, to the extent thereby treated as taking place at that time, were not made on terms allowing for a higher and a lower subsequent payment; necessarily, they were made in return for the sum then paid (£13.90 or £120 depending on whether the saver basis was taken up). This provides, therefore, a different way of arriving at the same end result as applies under HMRC’s primary argument. HMRC justified this on the basis that the opening words of para 4(1), “where services … are supplied …” require that there has been a supply/deemed supply before payment is made. 188. As set out above, HMRC accepted at the relevant time that, to avoid the practical difficulty a business may otherwise face in accounting for VAT, para 4(1) applied to allow it to account for VAT on a discounted sum whether or not that sum was in fact paid, where it was not known, when the tax point was triggered, what price would be paid. That was the case, for example, when the issue of an invoice triggered the making of a supply under the time of supply rules, if it was made on terms allowing for future payment. The concern appears to be that in this case, on the other hand, where a supply was deemed to take place on payment being made in advance of the services being provided the result was that, VML of course knew, when the tax point was triggered, what price had in fact then been paid. 189. I note that HMRC present a somewhat simplified position in this regard. There is not necessarily a VAT accounting difficulty in all cases where an invoice triggers a tax point. Whether in fact the business knows what price has been paid in time to account for VAT on the relevant sum depends on precisely when in an accounting period a supply is deemed to take place and what the precise payment terms are. I also note that in this case, a monthly customer could elect to take up the saver basis in any month notwithstanding the customer had already paid the monthly amount for that month. In that case the customer obtained a credit for the monthly amount already paid. 190. In any event, HMRC’s interpretation of the opening words of para 4(1) relies on a strained construction, which does not accord with the natural meaning of the words used. It seem to me that it is not permissible to construe the provision in this strained way to achieve the result HMRC argue for. The question of whether para 4(1) applies to allow VML to account for VAT on supplies of the FLR services by reference to the saver price even where the higher monthly price was paid is to be addressed through the analysis of the effect of para 4(1); it is not to be addressed by inappropriately constraining the circumstances in which para 4(1) may be held to apply in the first place. 191. A supply is defined in s 5 VATA to include all forms of supply, “but not anything done otherwise than for a consideration” and “anything which is not a supply of goods but is done for a consideration…..is a supply of services”. With this in mind, on their natural meaning, the words “where….services are supplied for a consideration and on terms allowing” a PPD require no more than that there is , as a factual and legal matter, the provision of a service for consideration or that something is done for consideration and that the provision of the service or something done takes place on the specified basis namely, that the consideration is in money and the services are provided on terms allowing a PPD. The reference to “on terms allowing” a PPD clearly connotes that a discount is merely provided for and not that it is actually paid. The words themselves do not suggest that para 4(1) requires an assessment of whether these conditions are satisfied by reference to each notional supply which is deemed to take place under the time of supply rules or that there is any timing requirement that there is a prior supply/deemed supply. 192. I note that, looking at para 4(1) in the context of its function within the overall VAT rules, it is a valuation provision the operation of which is, in a sense, linked with the time of supply rules. The time of supply rules provide the point by reference to which a business has to account for VAT on a particular supply and para 4(1) (in conjunction with s 19 VATA) determines what value is placed on that supply thereby determining the VAT due. In practice, a business has to assess whether para 4(1) applies as at each occasion when a deemed supply is triggered to work out the value on which it must then account for VAT. It seems to me, however, that this context does not of itself, given the plain meaning of the words used, justify the view that an assessment of the position is required by reference to each deemed supply as opposed to by reference to the on-going factual supply of services. 193. As set out above, for para 4(1) to apply, the supply must be made on terms allowing for the payment of one sum by a specified date or of a lower sum at an earlier time. The effect of HMRC’s argument is that para 4(1) necessarily does not apply where the terms allow for a lower sum to be paid immediately (for example, when the contract is made and before an invoice is issued and the services are performed). However, on its natural meaning, the word “prompt” means “without delay”. It is apt, therefore, to cover a supply made on terms allowing a discount for immediate payment; that simply constitutes a discount for the most prompt of payments. 194. Moreover, on the basis that para 4(1) is intended to give effect to the relevant provisions in article 79 PVD (albeit, on normal principles of construction it does not entirely reflect that article as set out below), I can see no reason in principle why para 4(1) applies where goods or services are supplied on terms allowing a payment, X, due in 30 days or a lower sum, Y, due within 10 days but does not apply if Y is due immediately. I note that on HMRC’s analysis in any event VAT would be due only on £120 where the saver basis is in fact taken up but, in my view, it does not require a strained construction, such as HMRC adopt, to reach that result. 195. In conclusion, therefore, if VML’s analysis on the contractual and VAT analysis is correct, it follows that on the natural meaning of the opening words of para 4(1) that this was a case where “services are supplied…..on terms allowing a PPD”. On that analysis VML’s customers were entitled, at any point in time whilst on-going supplies were being made to them, to pay the saver price for 12 months rather than the higher monthly amounts otherwise due over that period. The terms on which the FLR services were provided to customers, therefore, allowed for a “discount for prompt payment” on the basis that the saver price which could be paid upfront for any 12 months was considerably lower than the overall future monthly payments otherwise due. As noted, the reference to “on terms allowing” clearly connotes that a discount is merely provided for and not that it is actually paid. 196. That raises the prospect that, on this analysis, VML is liable to account for VAT on all its supplies of FLR services made in the relevant period by reference to the saver price, if that is this correct interpretation of the effect of para 4(1) (see [202] onwards for the discussion on that). HMRC’s alternative construction, however, is out of kilter with the plain meaning of the provision giving rise to the difficulties set out above. Discussion and decision on instalments argument 197. HMRC contended that, if their other arguments fail, the arrangements were nevertheless excluded from falling within para 4(1) on the basis they involved payment by instalments within the meaning of para 4(2) of schedule 6 VATA as regards:(1) supplies of FLR services made to a customer who was within a minimum period, and(2) supplies made to saver customers if, contrary to HMRC’s primary case, such supplies were properly to be treated as supplies of services made on a monthly basis over a 12 month period. 198. HMRC noted that regulation 90 determines the time of supply of services “where services … are supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time”. In their view, that wording reflects the ordinary meaning of “instalment”, namely, a payment of a sum of money by means of a series of payments spread over a period. In the circumstances specified above, the arrangements between VML and its customers were for continuous supplies of services for a 12 month period, payable by monthly instalments. 199. VML contended that the word “instalment”, on its plain and natural meaning relates to a due debt, which is certain or ascertainable, arranged into lesser amounts payable at certain intervals. In the present case, all customers contracted for the provision of FLR services on a monthly “rolling” basis which continued indefinitely until the contract was terminated. Given the indeterminate length of the relationship, it was not possible to determine how much a customer would actually pay to VML. Nor did money fall due in respect of any month other than that which was billed. In all cases the obligations on the parties were the same and were unaffected by whether the saver basis was adopted or not. VML concluded that it did not, therefore, make time-restricted supplies for 12 months; there was no larger total debt due for which the monthly payments could be said to be instalments. 200. VML continued that there is no difference in the analysis where a customer was subject to a minimum period requirement. That did not convert the contract into a fixed-term contract of limited duration: the contract remained one of indeterminate duration as described. That was further demonstrated by the fact that VML could not enforce the advance payment of monthly payments falling due during the minimum period, since the obligation on VML was to provide its service on a rolling basis. If the contract was terminated within a minimum period there may be an early disconnection fee but the customer was not otherwise liable for any fixed fee for the FLR services. Acceptance of the saver basis did not change the application or otherwise of any minimum periods in place under the contract. 201. VML also noted that the time of supply provisions in regulation 90 do not give rise to instalments where there are none (see Esporta at [34] as set out above). 202. My view is that if, contrary to my conclusions set out above, VML is correct that the contract for the provision of FLR services is in all cases a “rolling” monthly contract of indefinite duration, then the instalments provisions in para 4(2) do not apply. As VML argued, on the normal meaning, “payment by instalments” requires that there is a debt due of a specified amount which is to be satisfied by payments due at intervals. That is simply not the case assuming the contractual analysis is as VML argued for. I cannot see that the position is any different as regards supplies made to a customer who was within a minimum period. For the reasons set out above, the minimum period does not affect the duration of the contract. Nor can I see that regulation 90 provides any support for HMRC’s argument for the same reasons as set out in relation to the time of supply argument above. Discussion and decision on the effect of para 4(1) Submissions 203. HMRC considered that if, contrary to their view, the supplies of FLR services are supplies of services made on terms allowing a PPD regime within the meaning of para 4(1), para 4(1) does not in any event apply to reduce the consideration on those supplies where the saver price was not in fact paid. VML contended that, on the contrary, the plain meaning of the provision is that the consideration is reduced whether or not the discount is taken up. 204. HMRC noted that it is clear from the relevant provisions in the PVD that VAT is due on the consideration actually obtained for a supply. Accordingly, where a discounted sum may be paid as consideration, VAT is due on the discounted sum only if that is the amount actually paid. They said this accords with the case law of the CJEU in which it is clearly established that a supplier must account for VAT on the consideration actually obtained (referring, for example, to Case C-288/94 Argos Distributors [1996] ECR I-5311 ). 205. HMRC continued that it is also well established that UK law must be interpreted, so far as possible, in conformity with EU law in accordance with the established principle of conforming construction stated in Case C-106/89 Marleasing [1990] ECR I-4135 . As stated in Test Claimants in the FII Group Litigation v RCC [2012] UKSC 19 , [2012] 2 AC 337 at [176], Marleasing , at any rate as it has been applied in England:
“ is authority for a highly muscular approach to the construction of national legislation so as to bring it into conformity with the directly effective Treaty obligations of the United Kingdom.” 206. HMRC noted that this approach applies whether the EU law point is taken by the taxpayer or HMRC referring to HMRC v IDT Card Services [2006] EWCA Civ 29 , [2006] STC 1252 . In HMRC’s view, the correct approach is set out in that case and in Swift (trading as A Swift Move) v Robertson [2014] UKSC 50 , [2014] 1 WLR 2438 at [20]-[22] (Lord Kerr). (The relevant comments in these decisions are set out in the decision section.) 207. In HMRC’s view, on the muscular approach advocated in these authorities, para 4(1) can be interpreted in accordance with the PVD as only applying to reduce the consideration for the supply of FLR services to the extent that the “discounted” saver price was actually paid. That was the approach adopted in the Saga Holiday Ltd case and the same approach should be followed by the tribunal in this case. Details of the Saga case are set out in the decision section below. 208. HMRC accepted that if para 4(1) cannot be interpreted to conform in full with the PVD, and it is held that para 4(1) entitles a taxpayer to account for VAT based on an amount less than it had in fact received, then (subject to para 4(2)), the taxpayer can rely on that entitlement notwithstanding the correct position under EU law. 209. In HMRC’s view, when the PPD legislation was changed in 2014, there was a clear recognition that the previous version of para 4(1) in dispute here could be interpreted as being in line with the PVD but, because of the degree of ambiguity, it was amended to provide clarity. This was not, as VML asserted, a narrowing of the previous scope of para 4(1). The explanatory memorandum published with the draft legislation in 2014 stated that the PVD requires VAT to be accounted for on the consideration actually received and noted that whilst “UK legislation may be interpreted as being in line with the PVD” it “has a degree of ambiguity, so is being amended to provide clarity on the VAT treatment of prompt payment discounts.”
HMRC’s own guidance published at that time stated that the changes were made “in order to protect the revenue and to put it beyond doubt that the UK legislation is aligned with EU legislation”. 210. VML did not dispute that under EU law VAT must be paid on the consideration actually obtained for a supply and that, under the Marleasing principle, the tribunal must construe para 4(1), so far as possible, to give effect to the correct application of EU law . VML disputed, however, that a conforming construction was possible in this case and argued that Saga was incorrectly decided. 211. VML said that the Marleasing approach has its limits. It does not permit the legislation to be re-written contrary to its plain meaning or the adoption of a construction which goes against the grain (see IDT ). The Marleasing approach does not permit a construction in this case which would cut through the very plain meaning of and intent behind para 4(1). In VML’s view in Saga the tribunal failed to take on board the deeming nature of para 4(1) and failed to apply a correct approach to statutory construction. 212. VML submitted that it is entirely plain that para 4(1) allows for a reduction in consideration whether or not the discount is paid. It is a purely technical deeming provision. There is no suggestion that a discount must be realised; in fact if a discount is allowed or provided for, it is the discounted sum that must be taken to be the consideration. VML considered that is clear, in particular, from the reference to terms “allowing” a PPD and that the consideration shall be reduced by “the discount”, meaning the discount allowed for, and the final words, “whether or not payment is made in accordance with those terms”. 213. In VML’s view this deeming provision is clearly aimed at providing a practical basis for taxpayers to account for VAT in discount cases, regardless of when the invoice is issued or whether there is a prior supply. The rules resolve the problem that, at the time when it is liable to account for VAT on the relevant supply, a business would not necessarily know whether the full amount or the discounted amount would be paid. It is clear that it does not matter whether the PPD is taken up by a majority of customers or indeed any customer. 214. VML said that whilst this may result, as it does in this case, in a VAT saving, that was simply the express intention and purpose of this deeming provision. VML noted that this is not an unusual type of provision in the VAT rules. There are other areas where, for convenience, the VAT rules deems a taxable amount to be other than that actually received (such as under the flat rate scheme). 215. VML submitted that the rules operate in this way is also demonstrated by the fact that they were changed in 2014; from that time the taxable amount is only adjusted if the discount is in fact realised. In its view, there was no ambiguity in the previous rules; HMRC accepted that they operated in this way under their clear practice at the time whereby they allowed suppliers to account for VAT on the discounted amount whether or not received. VML clarified that this was not a point about the applicability of HMRC’s guidance. It was accepted that any point on the applicability of that guidance is a public law issue for a different forum. VML’s point was simply that HMRC’s own view accorded with the plain meaning of the provisions. 216. HMRC noted that, if the provision is not construed as HMRC argued for, where the customer is a business, the result for HMRC would be worse than the loss of VAT on the difference between the actual amount paid and the discounted amount. In that case the business customer would recover input VAT on the full amount paid notwithstanding that VML only accounted for VAT on the lesser discounted sum. VML said that this was irrelevant as VML did not have business customers. HMRC responded that it was relevant as there could be cases in which a self-employed person was on a consumer or customer tariff with VLM and claimed a portion of the monthly bill back on the basis it could be allocated to home use for business purposes. Decision on effect of para 4(1) 217. The issue is whether or not under the Marleasing principle para 4(1) can be construed, in conformity with the PVD, as applying to reduce the consideration for supplies of FLR services made by VLM only in those cases where the saver price was in fact paid and not where the monthly basis applied.[218]HMRC referred to the decisions in Swift and IDT as demonstrating the correct approach under the Marleasing principle. In IDT Arden LJ noted, at [79], that it was held in that case that “the national court’s obligation is to interpret domestic legislation, so far as possible, in the light of the wording and the purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations”.[219]Arden LJ referred to the speech of Lord Nicholls in Ghaidan v Godin-Mendoza [2004] 2 AC 557 as providing authority for the correct approach under the Marleasing principle. That case was concerned with the application of human rights legislation which similarly had to be interpreted “so far as possible” in a manner which was compatible with European law. She summarised, at [89], the “critical point” made by Lord Nicholls in that case as follows :[90]“……the effect of interpretation in accordance with [the relevant provisions] may be to change the meaning of the legislation but…..the meaning adopted by the court must not conflict with a fundamental feature of the legislation…..the interpretation chosen by the court must “go with the grain of the legislation”. Lord Nicholls, Lord Steyn and Lord Rodger all accepted that there would be occasions when the courts could not adopt an interpretation that would make the legislation compatible with Convention rights because that would involve making policy choices which the court was not equipped to make……. It is also clear….that the interpretation of legislation under…..the Marleasing principle may involve a substantial departure from the language used though it will not involve a departure from the fundamental or cardinal features of the legislation. It is possible to read the legislation up (expansively) or down (restrictively) or to read words into the legislation…. ”[220]In the more recent Swift case the Supreme Court, at [21], endorsed the approach to the principle that a national court must interpret domestic legislation, so far as possible, in the light of the wording and purpose of the directive which it seeks to implement set out in Vodafone 2 v Commissioners for Her Majesty’s Revenue and Customs [2010] Ch 77 , at [37] and [38] as follows :
“……In summary, the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular: (a) it is not constrained by conventional rules of construction (per Lord Oliver of Aylmerton in the Pickstone case, at p 126B); (b) it does not require ambiguity in the legislative language (per Lord Oliver in the Pickstone case, at p 126B and per Lord Nicholls of Birkenhead in Ghaidan's case, at para 32); (c) it is not an exercise in semantics or linguistics (per Lord Nicholls in Ghaidan's case, at paras 31 and 35; per Lord Steyn, at paras 48—49; per Lord Rodger of Earlsferry, at paras 110—115); (d) it permits departure from the strict and literal application of the words which the legislature has elected to use (per Lord Oliver in the Litster case, at p 577A; per Lord Nicholls in Ghaidan’s case, at para 31); (e) it permits the implication of words necessary to comply with Community law obligations ( per Lord Templeman in the Pickstone case, at pp 120H—121A; per Lord Oliver in the Litster case, at p 577A); and (f) the precise form of the words to be implied does not matter (per Lord Keith of Kinkel in the Pickstone case, at p 112D; per Lord Rodger in Ghaidan’s case, at para 122; per Arden LJ in the IDT Card Services case, at para 114)….. ….The only constraints on the broad and far-reaching nature of the interpretative obligation are that: (a) the meaning should go with the grain of the legislation and be compatible with the underlying thrust of the legislation being construed: see per Lord Nicholls in Ghaidan v Godin-Mendoza [2004] 2 AC 557 , para 33; Dyson LJ in Revenue and Customs Comrs v EB Central Services Ltd [2008] STC 2209 , para 81 …” 221. HMRC argued that, as regards para 4(1) the conforming construction to be adopted in this case is that set out by the tribunal in the Saga case. In that case Saga claimed that it had overpaid VAT on its takings on supplies of holiday services, as it had accounted for tax on the full price, without taking account of discounts offered for early payment. HMRC accepted that tax was overpaid in cases where the appellant’s customers actually received discounts but not where discounts were available but were not taken up. 222. The tribunal set out at [30] to [32] the history of para 4(1) and the relevant wording in the European provisions and concluded that para 4(1) was clearly intended to enact the equivalent of article 79 relating to discounts for early payment. At [33], the tribunal noted that para 4(1) could be more clearly worded but concluded that the better interpretation is that the PPD regime applies to reduce the consideration for VAT purposes only where a discount is in fact achieved. The tribunal formed this view by ignoring, at this stage of the analysis, the final words of para 4(1) “whether or not payment is made in accordance with those terms” : “ The reference to terms “allowing” a discount does open up the possibility of reading the provision as applying where, although the terms allowed for it, the discount had not been achieved. The possibility of so reading it is diminished by the next phrase “the consideration shall be taken … as reduced by the discount ”
. If it had been meant to reduce the consideration as long as the discount had been available, even if it was not achieved, the provision might more accurately have been expressed as “the consideration shall be reduced in accordance with those terms”, or words to that effect. The words “by the discount” can more readily be interpreted as a reference to a discount that has actually come into existence than to one that is available but may never come into existence. We hold that although the provision does contain an element of ambiguity the better construction of the words used is that the consideration is only reduced where the discount is achieved.” 223. The tribunal continued at [34] that the last phrase of para 4(1) also gives rise to some ambiguity but that did not affect the conclusion :
“Whether or not payment is made in accordance with those terms” could suggest that it is the existence of the right to a discount that gives rise to the reduced consideration for VAT purposes. However, if the earlier words mean that the discount has to be achieved before it can affect the consideration, as we have held they do, the last words in the paragraph can be taken to apply to the situation where the discount is in fact allowed, even though on the strict terms agreed between the parties it could have been refused. We do not therefore hold that the closing words contradict the interpretation that we have put on the opening words.”
[224]At [35] the tribunal said that this interpretation was confirmed in two separate but related ways. First, at [36], the tribunal noted that the general scheme of VAT both in UK law and in community law is that the tax is payable by reference to the actual consideration paid, in the case of a monetary consideration, rather than by reference to the terms agreed between the parties, where there is a difference between the two. It was appropriate to resolve an ambiguity in this general context. Secondly, at [37], the relevant article could not be said to contain the same ambiguity as para 4(1). The phrase “price reduction by way of discount” cannot sensibly be read as meaning “a price reduction available by way of discount whether or not achieved”. In the tribunal’s view that also bolstered the conclusion. 225. VML submitted that the tribunal misinterpreted the provision, in particular, in failing to construe it as a whole in its context having regard to its deeming nature, whereby, in VML’s view, it is clearly looking at deemed sums and not actual amounts. VML said that, as a matter of statutory construction, it was improper for the tribunal in effect to divorce its interpretation of the final words “whether or not payment is made in accordance with those terms” from its interpretation of the earlier words. VML noted that the comments made at [37] of the decision may be right as a matter of interpretation of European law but the tribunal simply did not deal with the UK language. HMRC responded that, given the duty to interpret the legislation in conformity with the PVD, the approach in Saga is perfectly legitimate noting that the tribunal had not had to resort to reading in words (although that is permitted where necessary). 226. My view is that on normal principles of statutory construction it is not permissible to interpret para 4(1) as the tribunal did in Saga on a disjointed view of the provision; the provision has to be construed as a whole. On that approach, my view is that it is very plain from the wording used that the legislature intended the provision to apply where(a) there are terms “allowing” a PPD and(b) that the consideration is reduced by the discount allowed for, whether or not the discounted sum allowed for is paid in accordance with those terms or not. 227. The word “allowing” clearly connotes that a discount is provided for under the terms but not necessarily paid. In construing the words in the overall context of the provision, the natural meaning of the subsequent reference to “the discount” by reference to which the consideration is reduced, is to the discount as so allowed or provided for under the terms. The matter is put beyond doubt by the final wording “whether or not payment is made in accordance with those terms ”, meaning that the consideration is reduced by the discounted sum whether or not payment is made in accordance with the terms allowing or providing for the discount. In other words, the consideration is reduced by the discount whether the recipient of the supply pays the discounted amount or the higher amount by reference to which the discount applies. 228. In view of the very clear meaning of the words used it appears that the purpose was to ensure that VAT was charged only on the discounted sum in all cases; both whether the discounted sum was paid and where it was not paid. It can only be assumed, from this plain meaning, that the intention was to charge VAT on this lesser sum as a practical measure to alleviate the problem businesses may have in accounting for VAT in discount cases given that, at the time they are required to account for VAT, the actual price (whether discounted or full) may not be known. (The rules in place during the relevant period did not contain specific provisions allowing for any subsequent adjustment to be made to the VAT account unlike the rules which apply from 1 May 2014). 229. It is not disputed, however, that this interpretation is not in conformity with European law; under European law VAT must be charged on the actual consideration paid. The question arises, therefore, whether a conforming construction can be adopted whether on the same or a different basis to that adopted in Saga . I note that, as set out in IDT and Swift , the obligation on the English courts to construe domestic legislation consistently with the PVD is a a broad and far-reaching principle which is not constrained by conventional rules of construction and permits, for example, the meaning of the wording used to be altered. The only constraint on the broad and far-reaching nature of this interpretative obligation are that the meaning should “go with the grain of the legislation and be compatible with the underlying thrust of the legislation being construed”. 230. My view is that the thrust of the legislation in this case is (and indeed the intended meaning of para 4(1) could hardly be clearer) that the consideration on which VAT is to be charged is to be reduced where supplies are made on terms allowing or providing for a discount for prompt payment by the amount of the discount whether or not the discount provided for is in fact paid. To adopt an interpretation (whether by reading in words or otherwise) that the effect of para 4(1) is that the relevant consideration is reduced only where a discounted sum is in fact paid would, therefore, go against the grain or thrust of the provision Parliament decided to enact. The rule in para 4(1) may be something of a blunt instrument to alleviate the practical problems in accounting for VAT in discount cases and, in a case such as this it may go further than desired if these particular circumstances had been drawn to the attention of the legislature. However, it is not for the tribunal in effect to counter the very clear intent as to how the provision is to apply. 231. In any event, for all the reasons set out at [127] to [166] I have concluded that para 4(1) simply did not apply in these circumstances. In my view, the correct analysis is that VML made monthly supplies of FLR services to the monthly customers for the monthly amounts paid and of twelve months of services to the saver customers for the saver price. The conclusion on the effect of para 4(1) (and on the time of supply argument) is relevant, therefore, only if that is found to be wrong. Conclusion 232. For all the reasons set out above, the appeal is dismissed. 233. 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. HARRIET MORGAN TRIBUNAL JUDGE RELEASE DATE: 25 SEPTEMBER 2018

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