Romima Ltd & Ors v Revenue & Customs (VALUE ADDED TAX - vouchers) [2019] UKFTT 736 (TC)

FTT-Tax
Romima Ltd & Ors v Revenue & Customs (VALUE ADDED TAX - vouchers)
[2019] UKFTT 736 (TC) · 2019-06-26
[17]“17. It does not follow, however, that the Court is required to give to the phrase "aims of a civic nature" the most restricted, or most narrow, meaning that can be given to those words. A "strict" construction is not to be equated, in this context, with a restricted construction. The Court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption; so that if the Court is left in doubt whether a fair interpretation of the words of the exemption cover the supplies in question, the claim to the exemption must be rejected. But the Court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question.[19]… for the reasons which I have already sought to explain, I reject the premise that the proper approach to construction does require the court to confine the scope of an exemption if it can. The task of the court is to give the exempting words a meaning which they can fairly and properly bear in the context in which they are used. ”77. It is common ground between the parties that in identifying the nature of supplies it is necessary to consider transactions objectively, having regard not only to any contractual terms but also to the economic reality of the circumstances in which the transactions take place (see HM Revenue & Customs v Newey Case C-653/11). (1) Security for Money78. Article 135(1) PVD provides that the following transactions shall be exempt:
“c. the negotiation of or any dealings in credit guarantees or any other security for money … d. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.” 79. These provisions are implemented in UK domestic legislation by Item 1 Group 5 Schedule 9 VATA 1994 which provides for exemption of the following supplies: “The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.” 80. It is common ground that the financial exemptions in Item 1 Group 5 are not confined to supplies made by banks or other financial institutions. 81. The appellants contend that Chips are security for money when they are issued to customers and when there are subsequent dealings in Chips. Mr Akin referred us to a number of decisions as to the meaning of the term “security for money”. 82. In Kingfisher Plc v Customs & Excise Commissioners (Decision 16332, October 1999) the VAT Tribunal was concerned with a voucher scheme whereby Provident, a financial services firm sold vouchers to the public, usually on credit. Retailers who participated in the scheme agreed in advance to accept Provident’s vouchers and they were authorised by Provident to accept vouchers in their shops. The retailers then presented the vouchers to Provident who would pay the face value of the voucher less an agreed percentage of 10%. Kingfisher argued that when goods were supplied to a customer using a voucher, the consideration for that supply was the face value of the voucher less the agreed percentage deducted by Provident. Alternatively, if the supply was at face value, Kingfisher argued that Provident made a supply to it of the services of publicising the participating retailers which was a standard rated supply on which Kingfisher was entitled to input tax credit. It is the alternative argument that is relevant for present purposes. HMCE contended that the supply by Provident to retailers was an exempt supply. 83. The VAT Tribunal (Mr Stephen Oliver as he then was), held that the supply by Provident was an exempt supply consisting of the receipt or dealing with a security for money within Item 1 Group 5. He stated as follows: “The word ‘security’ when used without qualification or in a context which demands a narrow or specific construction has a wide meaning. The voucher when presented by the customer to the participating retailer, evidences Provident’s obligation to meet the price for the goods purchased by the customer to the extent of the face value of the Voucher(s). As such it is a security within the wide meaning of that word.” 84. On appeal to the High Court (reported at [2000] STC 992), Neuberger J agreed with the VAT Tribunal’s conclusion. He held that that the transaction between Provident and Kingfisher fell within what are now Article 135(1)(c) and (d). 85. Mr Akin submitted that the analysis in Kingfisher was entirely consistent with observations made in Customs & Excise Commissioners v Guy Butler (International) Ltd [1976] STC 254. That case concerned a money broker acting as an intermediary between two banks engaging in a loan transaction on the security of a certificate of deposit. The issues are not directly relevant to the present case, but Mr Akin relies on an observation of Roskill LJ at 258h where he stated as follows in relation to the term “security for money” in Item 1: “… the word ‘security’ is itself there undefined but would appear to be used in its ordinary sense, that is to say some instrument whereby the indebtedness of the borrower to the lender is by some means ‘secured’.” 86. Mr Akin placed particular reliance on a decision of the Upper Tribunal in Wiltonpark Ltd v HM Revenue & Customs [2015] UKUT 343 (TCC) (“Wiltonpark”). 87. Wiltonpark concerned the VAT treatment of vouchers known as “Secrets money” also in the context of lap dancing clubs. There are clear similarities between Chips and Secrets money, and some differences. Dancers received Secrets money which customers had purchased from the clubs and when they came to redeem them they were charged a 20% commission. Unlike Chips, customers could also use Secrets money to purchase food and drink from the clubs and only dancers could redeem Secrets money. Wiltonpark contended that the services it provided in exchange for the 20% commission were exempt pursuant to Item 1 Group 5. 88. For present purposes it is relevant that the FTT held that Secrets money was ‘security for money’. The FTT also held that the commission was consideration for the supply to dancers of a broad set of services including access to the taxpayer’s facilities and access to a broader market of non-cash customers. We shall return to that aspect of the case below. 89. On appeal, the Upper Tribunal held that the Secrets money vouchers were security for money. At [26] – [30] Rose J as she then was stated as follows: “ Are the vouchers ‘security for money’ within the meaning of Item 1 26. I can deal with this first issue quite shortly as I am entirely in agreement with the reasoning and conclusions of the Tribunal as set out in the Decision. The Tribunal held (paragraph 70) that ‘security’ in Item 1 has a wide meaning and that nothing within the VAT Act restricts such meaning. When presented for redemption by a dancer , a voucher clearly evidences, albeit implicitly, a Secrets company’s obligation to meet the value stated on its face. They held that security for money can be issued without the issuer being a person within Note (4) to Group 5. The fact that Secrets suffer no significant exposure to credit risk as a result of their being the subject of chargebacks was irrelevant. 27. In my judgment, the voucher is given by the club patron to the dancer as an assurance to her that he has, by buying the Secrets money, made an arrangement with the club which means that she can confidently dance for him or provide table company without being paid by him in cash. This is because she knows, on taking the Secrets money, that she will be paid for her services at the end of the evening on redeeming the voucher. The voucher is given to the dancer by the patron precisely as a security for the money that the patron wants to pay her and which she will receive from the club when she redeems the voucher. It is well within the ordinary meaning of the words used in Item 1. 28. HMRC say that this is not a security for money because there is no extension of credit by the dancer, or even by the club, to the customer. However, I do not see that this is a necessary element and that was not part of the reasoning of either Sir Stephen Oliver or Neuberger J in Kingfisher. 29. HMRC sought to distinguish Kingfisher on the grounds that the judgments record that the Provident voucher had written on it that it authorised retailers with Provident Trading Accounts to charge their account to the sum shown. Here the Secrets money does not contain any such statement on its face. HMRC refer to the decision of the VAT Tribunal in Dyrham Park Country Club Ltd v The Commissioners [1978] VATTR 244 where the tribunal held that certain bonds issued by the club there were security for money, and defined that term as meaning ‘a document under seal or under hand at a consideration containing a covenant, promise or undertaking to pay a sum of money’. Miss McCarthy, appearing for HMRC, argued that the Secrets vouchers do not contain any such promise. If a piece of paper without such a statement on it could be treated as security for money, then she said the term might be used to cover any item or token such as the tokens used by players in a game of Monopoly – something that does not look like a security for money at all. 30. I consider that the Secrets money vouchers are securities for money even though they do not say on their face that the dancer is entitled to encash them. The Tribunal found that the club was under a legal obligation to redeem the vouchers when the dancer presented them. The Secrets money scheme depends on both patrons and dancers being confident that the vouchers can be used to pay the dancers what they earn. If the club refused to pay the dancer for the voucher, the Secrets money scheme would quickly collapse. I therefore uphold the Tribunal’s conclusion that the vouchers are security for money.”
Emphasis added 90. The appellant submits that the Chips in the present case evidence the appellants’ obligation to customers to meet the price for the dancers’ services purchased by the customers up to the face value of the Chips, or to meet the gratuitous intent of the customer if used as a tip to dancers or employees. As in Kingfisher, the Chips evidence and secure the obligation of the issuer to meet the price. 91. HMRC contends that the Chips are not security for money in the hands of customers , because customers could not exchange them for cash. In support of this submission HMRC relies upon the meaning of the term used in Item 1 Group 5 and Article 135, namely “security for money”, and on various authorities. In contrast, HMRC accept that Chips are security for money in the hands of dancers and employees . They evidence and act as security for an obligation on the part of the appellants to pay cash to the face value of Chips presented by dancers and employees redeeming them, less fees in the case of the second appellant. 92. Ms McCarthy submitted that in ordinary parlance “security for money” is something which can be exchanged for money. It is an instrument which recognises a debt to the owner or holder of the security from a third party. The terms of the exemption clearly exempt transfers of money or transactions which are equivalent to transfers of money because they give to the transferee a right to money. Not every voucher is a security for money, otherwise they would be exempt on issue and Schedule 10A would be redundant. 93. In support of these submissions, Ms McCarthy relied on the fact that in the hands of customers there was no obligation on the appellants to pay cash to the value of the Chips. Further, Chips could not be used to purchase food or drink in the clubs. They were not as good as money as between the clubs and customers. Ms McCarthy submitted that in both Kingfisher and Wiltonpark the focus was on vouchers in the hands of retailers and dancers, rather than the issue of vouchers to customers. When Chips were issued to customers they carried certain rights, including the right to be provided with £100 of entertainment on the club’s premises. At the point of issue, there was no obligation or debt which the Chips could be seen as securing. 94. Ms McCarthy sought to distinguish Kingfisher. She accepted that in the hands of the retailer, the voucher was security for money, because the retailer could demand payment of money in return for the voucher. She accepted that this was equivalent to Chips in the hands of the dancers. However, she submitted that the case said nothing about vouchers on issue to customers or in the hands of customers. 95. Similarly, Ms McCarthy submitted that in Wiltonpark, the Upper Tribunal was concerned with vouchers in the hands of dancers and not customers. The finding that Secrets money was a security for money was predicated on the basis that it was held by dancers and in their hands Secrets money could be exchanged for cash. 96. At one stage Mr Akin submitted that customers purchasing Chips had no right to be provided with entertainment because dancers could refuse to dance with anyone. We do not accept that submission. The reality is that dancers will dance with customers unless there is a good reason not to. There is a right to entertainment from dancers although it is on terms that the customer abides by the customer code of conduct. 97. We have found that dancers are advised to request payment in advance and in most if not necessarily all cases dancers will be paid in advance. Where it is agreed that payment will be in the form of Chips, the Chips are given to the dancer in advance. It seems to us that the contract or legal relationship between customer and dancer is established only when the Chips are given to the dancer. At that stage, the dancer is obliged to provide her services and the club is obliged to redeem the Chip for money. 98. When the Chip is handed over to the dancer, it does not secure the customer’s obligation to pay the dancer. At that time, the customer has no obligation to the dancer. In our view it is only when the Chip is in the hands of the dancer that it becomes security for money. The Chip then represents the club’s obligation to pay cash to the dancer on presentation of the Chip. Ms McCarthy submitted that prior to that the Chip simply gave the customer a bundle of rights to obtain entertainment from dancers in the clubs. We accept that submission. As far as customers are concerned the Chips do not evidence a debt or secure the payment of money to the customers. It is only in the hands of dancers and employees that Chips secure any obligation on the part of clubs to pay money. Customers have no right to be refunded by the clubs for unused Chips. The only right they have is to use the Chips to secure entertainment. They could expect a dancer to accept a Chip as long as they were complying with the club’s code of conduct. 99. Chips when issued to customers might be seen as securing the right of customers to enforce a future obligation of the clubs to pay cash to dancers on redemption. But in reality, customers have no interest in securing payment of the dancers because they do not incur any debt or obligation to dancers. Chips might also be seen in the hands of customers as securing a right to be refunded if for any reason the customer is asked to leave the club. But the terms provide that Chips are non-refundable. Any refund that a customer might receive if asked to leave the club, or indeed in other exceptional circumstances is at the discretion of management. In our view therefore, Chips do not secure any right of the customer to payment of money Nor do they secure the right of a dancer to payment of money at that stage because the dancers have no rights until they accept the Chips as payment in advance of a dance or sit down. Chips represent a right of the customers to receive services from dancers in the club, which as we shall see defines them as face value vouchers for the purposes of Schedule 10A. If anything, the Chips are security for those rights, and not for the payment of money. 100. The same analysis applies if a Chip is used to tip a dancer or a club employee. The customer never has any obligation to the dancer or employee. It is only once the Chip is in the hands of the dancer or employee that it becomes a security for money. 101. The Agreed Statement of Facts provides as follows: “3.4 Dancers negotiate the precise terms of the services that they supply to customers, the price of those services and the means of payment, directly with customers. The clubs play no part in those negotiations but advertise suggested prices of £10 or £20 per dance, depending on the kind of dance” 102. We do not consider that our findings above are inconsistent with those agreed facts. It is only once a Chip is handed over that the contract between customer and dancer becomes legally binding. At that stage, the dancer is bound to perform the services but the customer has no further obligations to the dancer. In particular the customer does not have any debt to the dancer. When Chips are redeemed by dancers the clubs are not satisfying any obligation of the customer. The clubs are satisfying an obligation that they owe directly to the dancer to redeem the Chips. That obligation arose when the dancer came to hold the Chips. 103. Ms McCarthy also relied on Dyrham Park Country Club Ltd v HMCE [1978] VATTR 244 , where “security for money” was understood to be a bearer document containing a promise to pay money and enabling the holder to obtain value in cash. We do not consider that this case advances HMRC’s argument. It was referred to by the Upper Tribunal in Wiltonpark but it is not clear to what extent the Upper Tribunal regarded it as persuasive. It does not appear to us that it assists in relation to the arguments presented in this case. 104. Mr Akin submitted that it was not necessary for a security for money to be exchangeable for cash and that there was nothing in the authorities to support that submission. Otherwise, an instrument securing payment at a future date would not fall within the term and the status of such an instrument could change arbitrarily. For example, if a customer used a £100 Chip to pay for £80 and received a £20 Chip in change, the £20 Chip would have been a security for money in the hands of the dancer but would have then lost that status when given to the customer. 105. In our view a security for money must secure the payment of money. It is not a security for money if it secures the performance of some other obligation such as the provision of services. There is no reason an instrument should not objectively satisfy the definition of the term “security for money” in the hands of one person but not in the hands of another. It is not suggested that any VAT implications would arise from a change in status of such an instrument. In the hands of the customer a Chip evidences a right to be supplied with services during a visit to a club, whereas in the hands of the dancers and employees the Chip evidences a right to be paid cash. 106. Ms McCarthy submitted that if the appellant’s argument is right, then any credit voucher within para 3 Schedule 10A would be a security for money when it was issued. As such it would be exempt on issue. As to this point, Mr Akin submitted that in most if not all voucher schemes, the issuer undertakes to procure services for a customer but does not supply those services. They are not security for money, but they are still credit vouchers under paragraph 3 Schedule 10A. As will be seen, it is common ground that if Chips are not security for money on issue to customers, then they are face value vouchers. In other words, they are tokens representing a right to receive goods or services to the value of an amount stated on them. Ms McCarthy submitted that if Mr Akin is right that such tokens are also security for money, then Schedule 10A would be redundant because the issue and redemption of a token would be exempt. Mr Akin says that even if Schedule 10A is redundant, it does not necessarily follow that the appellants’ argument as to security for money fails. 107. Arguments based on redundancy rarely carry much weight. However, Ms McCarthy’s submission does at least suggest that the meaning of security for money is not as wide as Mr Akin submits. The conclusion we have reached in relation to Chips in the hands of customers gives effect to both Item 1 Group 5 and Schedule 10A. In the hands of customers, Chips represent a right to receive services to the value stated on the Chip. That is a security for the right to receive value for the money paid rather than a security for the money itself. In the hands of dancers and employees, Chips represent right to be paid money by the clubs. They are a security for the money which the clubs are obliged to pay on presentation of the Chips. 108. If, contrary to our findings, Chips are security for money in the hands of customers, then HMRC accept that payment of the nominal value by a customer when purchasing a Chip is consideration for a supply which is exempt from VAT. However, they say that the premium paid on issue by customers paying by card is consideration for a supply of services, namely facilitating the purchase of entertainment services by non-cash customers. They say that the supply is directly analogous to the supply in Wiltonpark where the Court of Appeal found that as a matter of economic reality the 20% commission charged to dancers on redemption allowed dancers to access a market of non-cash customers and was too large to be for the supply of encashment services. Mr Akin submitted that if that was right, the supply in Kingfisher would have been a taxable supply. 109. In Wiltonpark the Upper Tribunal held firstly that Secrets money was security for money in the hands of dancers. Secondly, that the 20% commission charged to dancers on redemption went significantly beyond the simple receipt or dealing with security for money. It was the consideration for a standard rated supply to dancers of the facilities and opportunity to make more supplies to a wider market of non-cash customers. 110. The decision of the Upper Tribunal in Wiltonpark was appealed to the Court of Appeal (at [2016] EWCA Civ 1294 ). The taxpayers accepted that the supply was for more than mere encashment of vouchers and included facilitating access to the non-cash market, but contended that was a single supply falling within the exemption. 111. At [46] and [48] the Court of Appeal distinguished the voucher scheme in Wiltonpark to that in Kingfisher as follows:[46]“ 46. HMRC and Rose J were right to emphasise that the dancers trade not from their own premises but at the appellants' clubs. This distinguishes this case from cases such as Kingfisher and Diners Club where the retailer, equivalent to the dancer in this case, trade from their own premises. Rose J was also right to say at [40] that the reality is that both the club and the dancers are in effect dependent on each other for success and profitability and at [44] that the dancers cannot provide their services in exchange for vouchers without the facilities of the club. For the dancers to make money from the non-cash customers they need not only the voucher scheme but also the club's premises and facilities. Payment of the entrance fee does not give them access to the non-cash customers but, as a matter of economic reality, enables a dancer to use the club only for the provision of services to cash customers. As Ms McCarthy observed in her submissions, a dancer paying only the entrance fee could dance for a non-cash customer but would receive only valueless pieces of coloured paper in return. This would make no economic sense and would not happen in the real world. 47. …[48]…a commission of 20% for the encashment of a voucher, even with the benefits of inclusion in the scheme, is on the face of it very high, particularly as the appellants ran, as they knew, a very low credit risk. If they had wanted to demonstrate that it was a fair or market rate for those services, the burden was on them to adduce the evidence to support it. In the absence of such evidence, Rose J was entitled to take the view that the size of the commission suggested that it was charged for more than just those services. Neuberger J adopted a similar approach in the Kingfisher case at [46]. ”112. Mr Akin submitted that the 20% commission on issue should be seen as consideration for an exempt supply. He pointed to evidence as to the substantial amount of work done in relation to running the voucher scheme and in particular dispute resolution. He submitted that HMRC’s case on the £20 premium confused the nature of a supply with the effect of a supply. In this case the supply was exempt as the issue of security for money. The effect of the supply was that customers were able to use Chips as payment to dancers. We are not satisfied that the £20 fee charged to customers does merely reflect work in running the voucher scheme. The evidence and our findings of fact do not support the appellants’ submission.113. The respondents’ argument is that when a £100 Chip is purchased for £120 there are two supplies. An exempt supply of a security for money and a standard rated supply of services which facilitate the purchase of entertainment services by non-cash customers. We were not referred to any authorities on single and multiple supplies or how the analysis derived from those authorities would apply to the facts of this case. In those circumstances, having found that Chips are not security for money in the hands of customers we prefer to say nothing in relation to this alternative argument. (2) Face value vouchers114. This section of our decision proceeds on the basis that Chips in the hands of customers are not security for money. We also proceed on the basis, which is common ground, that Chips are face value vouchers for the purposes of Schedule 10A VATA 1994.115. Schedule 10A makes specific provision for the VAT treatment of face value vouchers. The relevant provisions of Schedule 10A are as follows:
“ 1. Meaning of “face-value voucher” etc (1) In this Schedule “face-value voucher” means a token, stamp or voucher (whether in physical or electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it. (2) References in this Schedule to the “face-value” of a voucher are to the amount referred to in sub-paragraph (1) above. 2. Nature of supply The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act. (a) is not a person from whom goods or services may be obtained by the use of the voucher, and (b) undertakes to give complete or partial reimbursement to any such person from whom goods or services are so obtained. Such a voucher is referred to in this Schedule as a “credit voucher”. (2) The consideration for any supply of a credit voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher. (3) Sub-paragraph (2) above does not apply if any of the persons from whom goods or services are obtained by the use of the voucher fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them. (4) … 4. Treatment of retailer vouchers (1) This paragraph applies to a face-value voucher issued by a person who – (a) is a person from whom goods or services may be obtained by the use of the voucher, and (b) if there are other such persons, undertakes to give complete or partial reimbursement to those from whom goods or services are so obtained. Such a voucher is referred to in this Schedule as a “retailer voucher”. (2) The consideration for the issue of a retailer voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher. … 7A. Exclusion of single purpose vouchers Paragraphs 2 to 4, 6 and 7 do not apply in relation to the issue, or any subsequent supply, of a face-value voucher that represents a right to receive goods or services of one type which are subject to a single rate of VAT.” 116. The appellants accept that Chips are face value vouchers even where, as we have found, they do not represent any right to receive goods or services from third parties other than dancers. Further, it is common ground that Chips are credit vouchers falling within paragraph 3 Schedule 10A. The effect of paragraph 3, where it applies, is that the consideration on the supply of a credit voucher is disregarded save to the extent that it exceeds face value. Hence it is only the £20 in excess of the £100 face value of a Chip purchased by a customer using a card which is taxable. 117. That is the agreed position in relation to supplies of Chips up to and including 10 May 2012. The significance of that date is that it is the date on which paragraph 7A comes into force. The effect of paragraph 7A for vouchers issued on or after 10 May 2012 is limited to what are called “single purpose vouchers”
. In the case of single purpose vouchers, paragraph 3 is disapplied. The parties agree that if Chips are single purpose vouchers then this has the effect that the whole consideration for the issue of a £100 Chip is taxable at the time the Chip is issued. 118. The dispute between the parties at this stage is whether in the period from 10 May 2012 the Chips are single purpose vouchers. 119. Schedule 10A does not define or give further guidance as to what is meant by “goods or services of one type which are subject to a single rate of VAT”. It is common ground that paragraph 7A was introduced following a decision of the Court of Justice of the European Union in Lebara Limited v HM Revenue & Customs Case C-520/10. It was introduced to bring UK domestic law into line with the decision in that case (see HMRC Business Brief 12/12). It was intended to establish a charge to output tax when a voucher is purchased and the VAT on goods or services intended to be acquired on redemption of the voucher is known at the time of purchase (see the discussion of the Upper Tribunal in Lunar Mission Ltd v HM Revenue & Customs [2019] UKUT 298 (TCC) ). 120. The appellants contend that Chips are not single purpose vouchers because at the time of issue it cannot be known what goods and services will be supplied, by whom and at what rate of VAT. Firstly, a Chip may be used to tip dancers or employees which would be outside the scope of VAT; secondly a particular dancer may or may not be registered for VAT. It cannot be said what rate of VAT would be applicable to any supply when Chips are purchased by customers. The Respondents are effectively seeking to charge VAT on a supply which may be outside the scope of VAT or on a supply of services by dancers who are not VAT registered. 121. Ms McCarthy submitted that the key question in relation to single purpose vouchers is whether what is supplied is subject to tax at a single rate, for example standard rated without the possibility of the supply being exempt, zero rated or subject to a reduced rate. That depends on the nature of the supply, and not the identity of the supplier. Sections 29A, 30 and 31 VATA 1994 define reduced rate, zero rate and exempt supplies by reference to the nature of the supply. Hence it is irrelevant that one dancer may be VAT registered and another dancer may not be VAT registered. 122. Ms McCarthy further submitted that the relevant supplies we are concerned with are supplies of entertainment by dancers. That is one type of supply which is charged to VAT at a single, standard rate. Even if Chips could be used to tip dancers or employees then just because those transactions were outside the scope of VAT did not mean that the voucher represented a right to receive goods or services of more than one type. 123. We accept Ms McCarthy’s submissions. Mr Akin did not point to any aspect of paragraph 7A which suggests that the VAT treatment of credit vouchers depends on the VAT registered status of the ultimate supplier of goods or services. We have since noted that paragraph 3(3) disapplies paragraph 3(2) if the ultimate supplier fails to account for VAT in which case the consideration for supply of the voucher up to face value is not disregarded. It seems to us that if parliament had intended the VAT treatment of credit vouchers to depend on the VAT status of the ultimate supplier of goods and services then it would have expressly made provision to that effect. We note in passing that there was no evidence before us as to the VAT status of any of the dancers at the clubs. 124. We do not consider that the potential use of Chips to tip dancers and employees affects the VAT treatment of Chips for the purposes of paragraph 7A. Paragraph 7A refers to the goods and services which the vouchers represent a right to receive. These are the same goods and services which define face value vouchers in paragraph 1. In other words, it is first necessary to look at the goods and services which the voucher represents a right to receive for the purposes of paragraph 1. It is that right which constitutes the voucher a face value voucher. It is then necessary to consider whether those goods and services are “of one type which are subject to a single rate of VAT”. 125. In the present case, the Chips are face value vouchers because they represent a right to receive entertainment services from dancers. Those services are one type of service taxable at a single rate of VAT. The fact that a Chip may also be used to tip a dancer or employee because it has a value in the hands of a dancer or employee does not affect that analysis. Using the Chip in this way is, as Mr Akin says, a transaction which is outside the scope of VAT but the Chip is not being used in respect of the right to receive goods or services. 126. In the circumstances, for Chips issued prior to 10 May 2012 we find that VAT was due on the consideration paid by customers but only to the extent that the consideration exceeded the face value of the Chips. Chips issued on or after 10 May 2012 were single purpose vouchers and we find that VAT was due on the whole consideration paid by customers. Issue Two 127. HMRC have assessed the second appellant on the basis that the 20% or 40% fee charged to dancers and employees on redemption is consideration for a taxable supply of services by the second appellant. The second appellant contends that there is no taxable supply. 128. Both parties accept that the 20% or 40% deduction from the face value of a Chip is consideration for a supply. The second appellant argues that it is consideration for redemption of the Chip which, because the Chip was security for money, was an exempt supply. HMRC accept that Chips in the hands of dancers and employees are security for money. However, they contend that the fee charged to dancers was consideration for a range of taxable supplies by the second appellant to dancers to enable dancers to access the non-cash customers. In relation to employees they contend that the redemption by employees is an “incidental by-product of the Chip scheme” and should be treated as de minimis. In the alternative, the fee charged to employees was consideration for a supply of services enabling employees to earn tips from non-cash customers. 129. In the period January 2012 to December 2015 dancers were charged fees of £2.7m on redemption of Chips and staff were charged fees of £390,000 on redemption of Chips. We shall deal firstly with arguments in relation to dancers. 130. HMRC say that the relevant facts in relation to dancers are indistinguishable from Wiltonpark where dancers traded from Wiltonpark’s premises. As a matter of economic reality, the 20% fee gave dancers access to a market for non-cash customers and the size of the fee suggests the dancers are paying much more than for encashment. Clubs other than the London club charged dancers a fee per dance which was properly regarded as taxable. It was the absence of that fee in London which in part at least justified the second appellant charging dancers a fee on redemption of Chips. 131. The second appellant seeks to distinguish the facts of Wiltonpark. In particular, there was little evidence in Wiltonpark as to the extent to which Chips were used to tip dancers. In the present case, Chips are used to tip dancers and employees. In Wiltonpark the Upper Tribunal considered at [48] the redemption of Chips by dancers on behalf of waiters or to settle debts between dancers and found that was not part of the purpose of the scheme. However, the present scheme is not simply a scheme to charge dancers for a supply of services. It is a wider scheme which encompassed Chips being used by customers to tip dancers and employees and by dancers to tip employees. Mr Akin submitted that the Court of Appeal in Wiltonpark did not lay down any general rule independent of the facts. It simply accepted at [50] that the Upper Tribunal’s analysis was a legitimate interpretation of the facts. 132. Mr Akin relied on evidence of Mr Warr and Mr Gordon that the purpose of the Chip scheme was to encourage customers to spend more time and therefore more money in the club. He submitted that a consequence of the scheme was access to a wider market of customers for dancers but that was not a purpose of the scheme. Further, it was submitted that the lack of uniformity between clubs pointed towards the lack of a unifying scheme. 133. We accept that one purpose of the Chip scheme in each club was to facilitate customers spending more time and therefore more money in the clubs. We acknowledge that the Chip scheme did not operate uniformly, in particular with regard to the London club. However, we are not satisfied that giving dancers access to the non-cash customers was in some way an unintended consequence of the Chip scheme in the London club. We consider that the Chip scheme in London with a 20% redemption fee for dancers operated partly to encourage customers to spend more time and money in the club, partly to give dancers access to the non-cash customers and partly as a way to charge dancers for that access. 134. Mr Akin submitted that the retailer in Kingfisher also received benefits from the voucher scheme but this did not prevent the fee charged to the retailer being exempt. At [59], Neuberger J noted the following benefits to the retailers: “…the retailer is obtaining benefits. First, it is able to sell goods to a customer who might otherwise not have the cash to purchase goods, or who might not purchase goods from the retailer if the retailer were not part of the scheme. Secondly, the retailer has relative certainty of payment from Provident, rather than having to take the risk of customer's credit, which is almost certain to be significantly less good than that of Provident.” 135. Mr Akin also relied on a comparison with Note 4 Group 5 which exempts supplies by a person carrying on a credit card operation made in connection with that operation, irrespective of the benefits that a retailer gets from the arrangement. In Kingfisher it was acknowledged that the supplies by Provident were similar to those of a credit card company. 136. We do not accept that HMRC’s case is inconsistent with Kingfisher or the treatment of supplies by credit card companies. We accept Ms McCarthy’s submission that HMRC’s case in relation to dancers on the present facts is on all fours with Wiltonpark and that Wiltonpark was not inconsistent with the treatment of fees charged to the retailers in Kingfisher. The latter point is illustrated by what was said by the Upper Tribunal in Wiltonpark at [42]: “In my judgment, the Kingfisher case establishes that when a voucher is redeemed of the kind in issue here, there is more than the encashment that is being provided. It is, at the least, the whole voucher system. I agree with Miss McCarthy’s submission that Kingfisher and Diners Club show that the scope of the supply in the case of a credit card scheme, and schemes akin to a credit card scheme is determined not just by looking at the final step in the transaction, namely the presentation of the voucher for payment but at the whole scheme, including giving the retailer access to the customers it could [not] otherwise access. As Neuberger J said in Kingfisher the benefit that Woolworth derived from Provident was not merely the payment of money: it was the right to be included in the scheme operated by Provident and the ability to redeem the vouchers. Without Provident's consent, Woolworth could not benefit from the scheme. It could not, for instance, advertise the fact that it was prepared to accept Provident's vouchers for purchase of goods in their stores. Similarly, in the present case, the benefit that the dancer derives from the Secrets money is the right to be included in the scheme which the clubs set up for patrons to be able to pay for entertainment at the club even though they have no cash. Without the club’s role in operating the Secrets money scheme, the dancer would not be able to accept the invitation of non-cash customers to dance at their table or provide them with table company.” 137. The Upper Tribunal went on to find that the supply to dancers in that case was not a single supply of encashment, but a composite supply characterised as the wider services which it described as follows: “44. … In the present case, the retailer, that is the dancer, cannot provide the service for which she receives the voucher from the patron without the facilities of the club. It is the club which attracts the patrons and provides them and her with the facilities needed for her to perform table dances and offer table company to non-cash customers. For the dancer to make money from non-cash customers she not only needs the Secrets money scheme but the rest of the facilities that are provided by the club to her and to the patrons as the environment in which she can earn money. … 47. Further, I agree with HMRC’s submission that the size of the commission is an indication that the dancer is paying for much more than encashment or for the narrow composite service of access to the Secrets money scheme. …I agree that the 20 per cent charge reflects the fact that the dancer cannot provide her services to the non-cash customers without the much wider bundle of facilities and services provided by the clubs to create the environment in which the dancer can earn the Secrets money. That is what she is paying for. 48. This conclusion is not undermined by the fact that the vouchers are also redeemed by dancers on behalf of waiters or in settlement of a debt owed to her by another dancer. That is not the purpose for which the scheme is operated. Clearly the 20 per cent commission has to be charged on those encashments too because it would be too difficult to police a differential commission rate since the club does not monitor how many dances the dancer performs during the evening.” 138. As mentioned above, the Court of Appeal agreed that this was a legitimate interpretation of the facts. 139. In the present case, Mr Akin did not rely on any argument concerned with single or composite supplies. The only question for us in relation to Issue Two is whether the supply is consideration for encashment of the Chips or consideration for a wider supply including access to facilities to earn money from non-cash customers. 140. We accept Ms McCarthy’s submission that the 20% charged to dancers on redemption of Chips is simply one of a number of ways the second appellant charges fees to dancers in return for providing facilities and services to enable dancers to earn money from non-cash customers. It is only because it is impractical in the London club to charge dancers a fee per dance that a redemption fee is charged to dancers. The services provided to dancers at all clubs however are the same. 141. The second appellant also contended that if HMRC were right then supplies by two different dancers, one for cash and one for Chips, would be treated differently for tax purposes even though they had received the same services from the club. The result would be inconsistent with the EU principle of fiscal neutrality and equal treatment described in Finanzamt Steglitz v Zimmermann Case C-174/11. It is more logical to strip away the similar services received by the two dancers which leaves the only supply received for the fee as the encashment service, which is a dealing in securities for money and exempt. 142. No neutrality arguments were raised in Wiltonpark. We do not accept the argument here. In our view it ignores the fact that what is received by the dancer performing for Chips is a composite supply which includes encashment services but which is properly characterised as a supply of services enabling dancers to earn money from non-cash customers. 143. For the sake of completeness, we should note that we were also referred to a decision of the FTT in Dazmonda Ltd v HM Revenue & Customs [2014] UKFTT 337 (TC) . That case concerned use of booths by dancers in a lap dancing club and whether the supply of booths to dancers was exempt as a supply of land. The FTT found that the supply of booths was part of a composite supply of services supplied by the club to dancers which was standard rated. It is decided on its own facts and it does not assist us in the context of the arguments presented on this appeal. 144. We turn now to consider fees charged to employees redeeming Chips. HMRC’s primary case is that consideration charged for the redemption of Chips by employees is an “incidental by-product of the Chip Scheme” and will follow the VAT treatment on redemption by dancers. HMRC relied on what was said by the Upper Tribunal in Wiltonpark at [48] (set out above) and by the Court of Appeal at [49]:[49]“49 …the services supplied for the commission are to be ascertained from the standpoint of the typical dancer. The judge was clearly correct to say that the encashment of vouchers on behalf of waiters was not a purpose, but an incidental by-product, of the scheme and sheds no light on the services supplied in return for the commission payable under the scheme. Still less does the commission paid on vouchers given by one dancer to another in discharge of a debt. In that case, the appellants will have provided the same services as with any voucher given by a customer to a dancer. ” 145. HMRC say that the typical user of the Chip scheme is a dancer and that encashment by employees should be disregarded, either as an incidental by-product of the scheme or on the basis that it was de minimis. We do not accept these submissions. There appears to have been little if any evidence in Wiltonpark as to the extent to which Secrets money was used to tip employees. To this extent we accept Mr Akin’s submission that the second appellant’s Chip scheme is wider than the Secrets money scheme in Wiltonpark. The London club encourages customers to tip staff using Chips as appears from the documentation in relation to Rachel. We do not consider that the level of tips to staff can be viewed as simply a by-product of the Chip scheme. It seems to us that it is a part of the scheme. Further, the fees charged to employees in a four year period were £390,000. Whilst that is considerably smaller than the £2.7m charged to dancers in the same period it is not in our view de minimis. It indicates Chips with a face value of £975,000 being given to employees by way of tips. 146. Alternatively, HMRC say that the 40% charge on redemption by employees is consideration for a supply of services to employees, namely facilities to enable employees to earn tips from non-cash customers. The amount charged suggests that it was not a redemption fee. 147. The second appellant’s employees are paid a salary and in some cases receive a share of the service charge added to bar bills. However, their jobs also give them other opportunities to earn money from customers. For example, Rachel was able to earn significant amounts by way of tips. The clubs themselves are able to earn income from these opportunities by charging staff a 40% redemption fee. Ms McCarthy submitted that the employees effectively become part of the Chip Scheme. Unlike Wiltonpark, where staff could not redeem Secrets money, staff at the appellants’ clubs could redeem Chips. Outside London there was no redemption fee but in London the 40% fee was consideration for services provided to staff outside their employment contracts. Those services were access to the Chip Scheme and facilities to earn tips from non-cash customers. 148. Ms McCarthy submitted that there was no legal distinction between dancers and employees for these purposes. Employees were supplied with facilities to enable them to obtain tips from non-cash customers. Employees outside London get 100% of the face value of Chips because those clubs monetise their services in a different way. What the employees were doing was not part and parcel of the duties of their employment. 149. The second appellant contends that the appellant does not provide a service to employees for a consideration. It was a distortion to say that clubs provided facilities to employees to enable them to earn tips. Even if there was a service, there was no direct link between the service provided and the redemption fee charged to employees. 150. It is common ground that there must be a direct link between the consideration and the service provided. We were referred to what was said by the Advocate-General in Town and County Factors Ltd v Customs & Excise Commissioners Case C-498/99 at [35]: “…the concept of a supply for consideration … presupposes the existence of a ‘direct link’ between the supply made and the consideration received. Only if that connection between the supply and the consideration exists can there be a supply for consideration and a taxable transaction.” 151. The requirement for a direct link, or “reciprocal performance” is not controversial and was confirmed by the CJEU in that case, which also confirmed the requirement for a “legal relationship” between the service provider and recipient. 152. There was no evidence before as to the salaries of any employees, or of any salary differential to reflect the fact that outside London employees were able to earn Chips by way of tips without any redemption fee. 153. We note that dancers are required to pay an entrance fee to obtain access to the club. Employees obtain access as employees and there is no supply to employees of access to the club. Nor do we consider that it can realistically be said that the club provides facilities to employees which enable them to earn tips from non-cash customers. We are satisfied that Chips are given to employees as tips in the course of their employment. It was not suggested that employees are doing anything other than fulfilling the terms of their employment contracts. The only service that is provided to employees over and above what they need to do their job is the encashment service. We accept that the redemption fee charged to employees is far too high to suggest that it is merely an encashment fee. However, we consider that the fee charged to employees is inextricably bound up with the employment relationship. The income of the employees derives from the work they do in the club. For the purposes of VAT, the economic reality is that the net payment received by employees where they are tipped by way of Chips is simply another form of income derived from their employment, along with their salary and cash tips they might receive. The deduction is not consideration for a supply of services by the employer to the employee. As such there is no taxable supply of services by the second appellant to employees. conclusion 154. For the reasons given above we are satisfied that:(1) The supply of Chips to customers is not exempt as the issue of a security for money.(2) Chips are face value vouchers and fall to be treated as credit vouchers for the purposes of Schedule 10A VATA 1994. In the period up to 10 May 2012, output tax is due on the consideration paid by customers for Chips over and above face value. In the period from 10 May 2012 onwards, Chips fall to be treated as single purpose vouchers pursuant to paragraph 7A Schedule 10A. Output tax is due on the whole consideration paid by customers for Chips.(3) The 20% redemption fee charged to dancers is consideration for a taxable supply of services.(4) The 40% redemption fee charged to employees is not consideration for a supply of services. 155. At the invitation of the parties we have determined these appeals in principle. The parties shall have permission to apply to the Tribunal within 90 days of the release of this decision if they are unable to agree any issues of quantum arising from this decision. Right to apply for permission to appeal 156. 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. JONATHAN CANNAN TRIBUNAL JUDGE RELEASE DATE: 04 DECEMBER 2019

Cited in 1 later judgment