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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Associated Newspapers Ltd v HM Revenue & Customs [2017] EWCA Civ 54 (10 February 2017) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2017/54.html Cite as: [2017] BVC 10, [2017] EWCA Civ 54, [2017] STC 843 |
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A3/2016/0697 |
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Lord Justice David Richards and Judge Roger Berner
[2015] UKUT 641 (TCC)
Strand, London, WC2A 2LL |
||
B e f o r e :
LORD JUSTICE PATTEN
and
LADY JUSTICE BLACK
____________________
ASSOCIATED NEWSPAPERS LIMITED |
Appellant |
|
- and - |
||
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS |
Respondent |
____________________
John Walters QC (instructed by KPMG LLP) for Associated Newspapers Limited
Hearing dates : 13 and 14 December 2016
____________________
VERSION
OF JUDGMENT
Crown Copyright ©
Lord Justice Patten :
Introduction
"Where facevalue
![]()
vouchers
are purchased by businesses for the purpose of giving them away for no consideration (e.g. to employees as 'perks' or under a promotion scheme) the
VAT
incurred is claimable as input tax subject to the normal rules. Output tax is due under the
Value
Added Tax (Supply of Services) Order 1993. Therefore all
vouchers
given away for no consideration will be liable to output tax to the extent of the input tax claimed".
The statutory provisions
(1) The Principal VAT
Directive (2006/112/EC)
"The principle of the commonsystem
of
VAT
entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.
On each transaction,VAT,
calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of
VAT
borne directly by the
various
cost components".
"The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where theVAT
on those goods or the component parts thereof was wholly or partly deductible.
However, the application of goods for business use as samples or as gifts of smallvalue
shall not be treated as a supply of goods for consideration."
"1. Each of the following transactions shall be treated as a supply of services for consideration:
…
(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business."
"In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from theVAT
which he is liable to pay:
(a) theVAT
due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;"
(2) VATA
1994
"all forms of supply, but not anything done otherwise than for a consideration;"
"1. (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 "facevalue"
of a
voucher
are to the amount referred to in sub-paragraph (1) above.
2. The issue of a face-value
![]()
voucher,
or any subsequent supply of it, is a supply of services for the purposes of this Act.
….
4. (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 thevoucher,
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 avoucher
is referred to in this Schedule as a "retailer
voucher".
(2) The consideration for the issue of a retailervoucher
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—
(a) thevoucher
is used to obtain goods or services from a person other than the issuer, and
(b) that person fails to account for any of theVAT
due on the supply of those goods or services to the person using the
voucher
to obtain them.
(4) Any supply of a retailervoucher
subsequent to the issue of it shall be treated in the same way as the supply of a
voucher
to which paragraph 6 below applies.
…..
6. (1) This paragraph applies to a face-value
![]()
voucher
that is not a credit
voucher,
a retailer
voucher
or a postage stamp.
(2) A supply of such avoucher
is chargeable at the rate in force under section 2(1) (standard rate) except where sub-paragraph (3), (4) or (5) below applies.
…..
7A. 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."
The Value
Added Tax (Supply of Services) Order 1993
"3. Subject to articles 6, 6A and 7 below, where a person carrying on a business puts services which have been supplied to him to any private use or uses them, or makes them available to any person for use, for a purpose other than a purpose of the business he shall be treated for the purposes of the Act as supplying those services in the course or furtherance of the business, except for the purposes of determining whether tax on the supply of the services to him is input tax of his under section 24 of the Act.
6. This Order shall not apply in respect of any services–
(a) which are used, or made available for use, for a consideration;
(b) except those in respect of which the person carrying on the business has or will become entitled under sections 25 and 26 of the Act to credit for the whole or any part of the tax on their supply to him;
(c) in respect of which any part of the tax on their supply to the person carrying on the business was not counted as being input tax of his byvirtue
of an apportionment made under section 24(5) of the Act; or
(d) of a description within paragraph 10(1) of Schedule 6 to the Act."
Were the supplies of vouchers
to ANL cost components of a taxable supply?
"16. … a basic element of thevat
![]()
system
is that
vat
is chargeable on each transaction only after deduction of the amount of the
vat
borne directly by the cost of the
various
components of the price of the goods and services and that the deduction procedure is so designed that only taxable persons may deduct the
vat
already charged on the goods and services from the
vat
for which they are liable.
…..
19. From the provisions set forth above it may be concluded that the deductionsystem
is meant to relieve the trader entirely of the burden of the
vat
payable or paid in the course of all his economic activities. The common
system
of
value-added
tax therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to
vat,
are taxed in a wholly neutral way."
"19. Paragraph 5 lays down the rules applicable to the right to deductVAT
where the
VAT
relates to goods or services used by the taxable person 'both for transactions covered by paragraphs 2 and 3, in respect of which
value
added tax is deductible, and for transactions in respect of which
value
added tax is not deductible'. The use in that provision of the words 'for transactions' shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect.
…..
25. It is true that an undertaking whose activity is subject toVAT
is entitled to deduct the tax on the services supplied by accountants or legal advisers for the taxable person's taxable transactions and that if BLP had decided to take out a bank loan for the purpose of meeting the same requirements, it would have been entitled to deduct the
VAT
on the accountant's services required for that purpose. However, that is a consequence of the fact that those services, whose costs form part of the undertaking's overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions.
26. In that respect it should be noted that a trader's choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to theVAT
![]()
system.
The principle of the neutrality of
VAT,
as defined in the case law of the court, does not have the scope attributed to it by BLP. That the common
system
of
VAT
ensures that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way, presupposes that those activities are themselves subject to
VAT
(see in particular Rompelman
v
Minister
van
Financiën (Case 268/83) [1985] ECR 655 at 664, para 19)."
"29. It should be borne in mind that, according to the fundamental principle which underlies theVAT
![]()
system,
and which follows from art 2 of the First and Sixth Directives,
VAT
applies to each transaction by way of production or distribution after deduction of the
VAT
directly borne by the
various
cost components (see, to this effect, BP Supergas Anonimos Etairia Geniki Emporiki-
Viomichaniki
kai Antiprossopeion
v
Greece (Case C-62/93) [1995] STC 805 at 821, [1995] ECR I-1883 at 1913, para 16).
30. It follows from that principle as well as from the rule enshrined in the judgment of BLP Group plcv
Customs and Excise Comrs (Case C-4/94) [1995] STC 424 at 437, [1995] ECR I-983 at 1009, para 19 according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the
VAT
charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate.
31. It follows that, contrary to what the Midland claims, there is in general no direct and immediate link in the sense intended in BLP Group, between an output transaction and services used by a taxable person as a consequence of and following completion of the said transaction. Although the expenditure incurred in order to obtain the aforementioned services is the consequence of the output transaction, the fact remains that it is not generally part of the cost components of the output transaction, which art 2 of the First Directive none the less requires. Such services do not therefore have any direct and immediate link with the output transaction. On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, components of the price of an undertaking's products. Such services therefore do have a direct and immediate link with the taxable person's business as a whole, so that the right to deductVAT
falls within art 17(5) of the Sixth Directive and the
VAT
is, according to that provision, deductible only in part."
"76. It appears to me that the Court has accepted the distinction made by Advocate General Jacobs in his Opinion referred to above between, on the one hand, output transactions exempted from payment ofVAT,
and, on the other hand, those which entirely escape any
VAT
liability, because the latter cannot be deemed to be either supplies of goods or supplies of services, and has accordingly also confirmed the decision made in BLP Group, on which, moreover, the Advocate General's argument was based.
77. The approach outlined above, which seems to me to be that adopted in the case-law, may appear to treat share disposal transactions which fall outside the scope ofVAT
more favourably than those which, although within its scope, are exempted from
VAT
under the provisions of the Sixth Directive (and/or those of Directive 2006/112). Whereas the right to deduct may arise on services acquired to carry out a transaction outside the scope of
VAT
when such services are regarded as directly and immediately linked to the general economic activity of the taxable person, the
VAT
payable on services acquired to carry out an exempt transaction, on the other hand, cannot be deducted.
78. However, that situation is no more than the consequence inherent in the commonsystem
established by the Sixth Directive (confirmed by Directive 2006/112) and in the dividing line which must be drawn as clearly as possible between taxable transactions, on the one hand, and exempt transactions, on the other; hence the direct and immediate link test and the breaking of the
VAT
chain when an input transaction on which
VAT
is payable is directly and immediately related to an output transaction which is exempted from
VAT.
![]()
79. Moreover, since theVAT
chain is not broken when the share disposal transaction is one which falls entirely outside the scope of
VAT,
there is equally, to my mind, no difference in treatment which adversely discriminates against the taxable person who acquires supplies of services in order to carry out disposal transactions which are covered by the exemption from
VAT
provided for in Article 13B(d)(5) of the Sixth Directive and who, consequently, does not have the right to deduct the input
VAT,
even in respect of general overheads which that taxable person has incurred."
"whether the costs incurred are likely to be incorporated in the prices of the shares which SKF intends to sell or whether they are only among the cost components of SKF's products."
"33. However, the Court has further developed its case-law since that case. It still remains the case that for Article 168 of theVAT
Directive to apply a direct and immediate link must have been found between a given input transaction under examination and a particular output transaction or transactions giving rise to the right of deduction. Such a link may nevertheless also exist with the economic activity of the taxable person as a whole if the costs of the input transactions form part of the general costs of the taxable person and are therefore cost components of all goods or services delivered or provided by him.
34. According to recent case-law, the decisive factor for a direct and immediate link is consistently that the cost of the input transactions be incorporated in the cost of individual output transactions or of all goods and services supplied by the taxable person. This applies irrespective of whether the use of goods or services by the taxable person is at issue.
35. Consequently, there is a right of deduction in the present case if the cost of acquiring or manufacturing the capital goods of the recreational path is incorporated, in accordance with case-law, in the cost of the output transactions, taxed under theVAT
Directive."
"41. However, should the national court find that the creation of the recreational path by Sveda does not represent a taxed transaction, the right of deduction would then depend solely on whether the capital goods of the recreational path are used, for the purposes of Article 168 of theVAT
Directive, for the provision of chargeable services to
visitors
in the future. For that to be the case, the costs of the acquisition and manufacture of these capital goods would have to be incorporated into the cost of these services.
a) Objective definition of costs
42. Contrary to theview
of the United Kingdom, this question is independent of the taxable person's intention of incorporating the relevant costs into the pricing of his output transaction.
43. In accordance with the judgment in Becker, the finding of a direct and immediate link between the input and output transactions depends on the objective content of the input supplies acquired. In the BLP Group judgment the Court had already found to this effect that the link required between input and output transactions may not be determined by the taxable person's intentions.
44. Furthermore, in the commonsystem
of
VAT
services are also taxed which were provided at less than cost price. Where this occurs, the pricing is set subjectively by the taxable person without including all the costs of providing the output transaction. None the less, where this is the case there is no doubt that all input transactions that objectively belong to the cost components of the output transactions in accordance with the second subparagraph of Article 1(2) of the
VAT
Directive also confer entitlement to deduct input
VAT.
According to settled case-law, the right of deduction is meant to relieve the trader entirely of the burden of the
VAT
payable or paid in the course of all his economic activities, because in the common
system
of
VAT
it is ultimately not the taxable trader, but the final consumer who is intended to be taxed.
45. The existence of an objective economic link between input and output transactions is therefore crucial to the question whether the costs are incorporated into the price of a service as understood in case-law. A merely causal link is clearly not sufficient. However, if an input transaction objectively serves the purpose of the performance of certain or all output transactions of a taxable person, there is a direct and immediate link between the two as understood in case-law. This is because in such a case the input transaction constitutes, from an economic perspective, a cost component in the provision of the respective output transaction. As the wording of Article 168 of theVAT
Directive already indicates, that therefore depends on the objective purpose of the use of an input transaction.
46. In the present case the national court found that the creation of the recreational path serves to attractvisitors
who may then be supplied with goods and services for consideration. Consequently, the creation of the recreational path belongs, from an economic perspective, to the cost components of these transactions.
47. It follows that there is in principle a direct and immediate link, as understood in case-law, between the acquisition or manufacture of the capital goods of the recreational path and the chargeable services offered tovisitors."
"22. In the present case, the referring court has described the expenses relating to the capital goods at issue in the main proceedings as being ultimately intended for carrying out the economic activities planned by Sveda. According to that court's findings, supported by objective evidence from the file it submitted, the recreational path concerned may be regarded as a means of attractingvisitors
with a
view
to providing them with goods and services, such as souvenirs, food and drinks as well as access to attractions and paid-for bathing.
23. Therefore, it would appear from those findings that Sveda acquired or produced the capital goods concerned with the intention, confirmed by objective evidence, of carrying out an economic activity and did, consequently, act as a taxable person within the meaning of Article 9(1) of theVAT
Directive.
…..
29. It is apparent from the case-law of the Court that, in the context of the direct-link test that is to be applied by the tax authorities and national courts, they should consider all the circumstances surrounding the transactions concerned and take account only of the transactions which are objectively linked to the taxable person's taxable activity. The existence of such a link must thus be assessed in the light of the objective content of the transaction in question (see, to that effect, judgment in Becker, C-104/12, EU:C:2013:99, paragraphs 22, 23 and 33 and the case-law cited).
30. The findings of the referring court establish that, in the case in the main proceedings, the expenditure incurred by Sveda as part of the construction work on the recreational path should come partly within the price of the goods or services provided in the context of its planned economic activity.
31. The referring court nevertheless harbours doubts as to whether there is a direct and immediate link between the input transactions and Sveda's planned economic activity as a whole, owing to the fact that the capital goods concerned are directly intended for use by the public free of charge.
32. In that regard, the case-law of the Court makes it clear that, where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope ofVAT,
no output tax can be collected or input tax deducted (judgment in Eon Aset Menidjmunt, C-118/11, EU:C:2012:97, paragraph 44 and the case-law cited). In both cases, the direct and immediate link between the input expenditure incurred and the economic activities subsequently carried out by the taxable person is severed.
33. First, in no way does it follow from the order for reference that the making available of the recreational path to the public is covered by any exemption under theVAT
Directive. Second, given that the expenditure incurred by Sveda in creating that path can be linked, as is apparent from paragraph 23 of this judgment, to the economic activity planned by the taxable person, that expenditure does not relate to activities that are outside the scope of
VAT.
34. Therefore, immediate use of capital goods free of charge does not, in circumstances such as those in the main proceedings, affect the existence of the direct and immediate link between input and output transactions or with the taxable person's economic activities as a whole and, consequently, that use has no effect on whether a right to deductVAT
exists.
35. Thus, there does appear to be a direct and immediate link between the expenditure incurred by Sveda and its planned economic activity as a whole, which is, however, a matter for the referring court to determine."
"72. Although a right to a deduction exists if expenditure can be regarded as having a direct and immediate link to a taxable person's economic activity as a whole, the initial focus must be on whether there is a link with a particular activity, or type of activity. That accords with theview
of the Advocate General in Kretztechnik at [76]; it is only where inputs cannot be linked to specific output transactions that they may fall to be attributed to a taxable person's activity as a whole. If such a link can be established, there is then the question whether the link is with both economic and non-economic activity (in which case there must be an apportionment, as in Securenta and
VNLTO),
and whether the input
VAT
is fully or partially recoverable having regard to the taxable and exempt supplies that constitute the economic activity with which the link has been established.
73. In our judgment, having regard to all the circumstances andviewed
objectively from an economic perspective, the answer in this case is plain. The
vouchers
were acquired for the purpose of the business promotion scheme to increase the circulation of ANL's newspapers, and also to facilitate the associated sales of advertising. That is not to rely on the subjective intention of ANL; it can be objectively discerned from the nature of the business promotion scheme itself. It is to that element of the economic activity of ANL to which the acquisition of the
vouchers
and any input tax attributable to that acquisition is directly and immediately linked.
Viewing
the circumstances from an economic perspective, no such link can be established with the provision of the
vouchers
by ANL to its customers for no consideration, and the immediate use of the
vouchers
acquired by ANL in providing those
vouchers
to its customers free of charge cannot affect the direct and immediate link with ANL's economic activity. The costs associated with the acquisition of the
vouchers
were cost components of the sales of the newspapers and of advertising, and thus cost components of transactions within the scope of ANL's taxable activities. The output supplies by ANL in that respect were taxable supplies, and input tax is accordingly deductible."
"Indeed, far from constituting a component the acquisition cost of which forms part of the undertaking's overheads, thevoucher
is transferred directly, together with the
VAT
which it incorporates, by the employer to the employee, who 'pays' for the
value
of the
voucher
with a corresponding reduction in that part of his remuneration that is paid in cash. By contrast, in the cases in which the Court acknowledged the right to deduct input
VAT
in respect of the acquisition of goods or services used to carry out exempt transactions, the
VAT
in question related to activities (typically, consultancy work) for which the tax was, clearly, ultimately borne by the undertaking."
Are the supplies of free vouchers
to be treated as made for consideration and therefore taxable by reason of Article 3 of the 1993 Order?
"carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business."
"[22] However, it is clear from thevery
wording of Article 5(6), first sentence, of the Sixth Directive that this provision treats as a supply made for consideration, and therefore as subject to
VAT,
a taxable person's disposal free of charge of goods forming part of his business assets, where input
VAT
was deductible on those goods, it being in principle immaterial whether their disposal was for business purposes. The second sentence of that provision, which precludes taxation of applications for the giving of samples or the making of gifts of small
value
for the purposes of the taxable person's business would make no sense if the first sentence did not make
VAT
payable on the disposal free of charge of such goods by the taxable person, even where this is done for business purposes."
"25. Secondly, it is difficult to avoid the conclusion that the contrasting treatment of services by Article 6(2)(b) of the Sixth Directive is deliberate. Without wishing to speculate, I suggest that among the obvious differences between goods and services is that services do not lend themselves, at least not so readily, to free promotion schemes. The more significant labour content would presumably reduce capacity for mass supply of free services. Thus, it seems likely that the disparity in the wording of the two provisions was deliberate."
"60. It must be acknowledged that, for the employer, ensuring the provision of meals to its employees allows it, in particular, to limit the reasons for which meetings are interrupted. Therefore, the fact that the employer alone is in a position to guarantee that meetings will run smoothly and without interruptions might oblige it to ensure that meals are provided for participating employees.
61. On the other hand, as Danfoss explained at the hearing, the meals at issue consist of sandwiches and cold platters, served in the meeting room in particular circumstances. It is clear from those explanations that employees have no choice as to where, when and what they eat, the employer itself being responsible for those choices.
62. In such particular circumstances, the provision of meals to employees by the employer is not for the private use of the employees and is not for purposes other than those of the business. The personal advantage which employees derive from such provision appears to be merely accessory to the requirements of the business.
…..
64. It is, however, for the national court to establish whether, in the light of the indications provided by the Court, the particular characteristics of the main proceedings before it make it necessary, having regard to the requirements of the companies in question, for the employer to provide meals free of charge to business contacts and to staff in connection with work meetings held on company premises."
Does Schedule 10A VATA
preclude the recovery of input tax on the direct supplies of retailer
vouchers?
"88. Merely bearing theVAT
on a supply is not, however, sufficient to found a right to deduct
VAT.
The right to deduct can arise only with respect to "
VAT
due or paid … in respect of supplies to [the taxable person] of goods or services" (art 168(a), Principal
VAT
Directive). The fact therefore that the consideration paid by ANL for the acquisition of the
voucher
includes an amount that, on redemption, would satisfy the
VAT
element of the price for the goods or services supplied to the customer redeeming the
voucher
does not render ANL the consumer of the relevant supply. The consumer of that supply is the customer to whom ANL has provided the
voucher.
The supply to ANL is the supply of the
voucher
on which, by
virtue
of para 4(2), Sch 10A, no
VAT
is chargeable at all.
89. We respectfully disagree therefore with the analysis of the FTT in this respect, and with the submissions of Mr Walters to the same effect. We see no possible construction of Schedule 10A, whether by reference to the Marleasing principle or otherwise, according to which the effect of paragraph 4(2) is confined to relieving the retailer of the obligation of accounting for theVAT
on the supply of the
voucher,
or in subsuming the original supply of the
voucher
into the supply on redemption of the
voucher."
A reference
Conclusion
Lady Justice Black :
Lord Justice Jackson :