FINDMYPAST LIMITED, APPEAL BY THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS AGAINST A DECISOIN OF THE UPPER TRIBUNAL IN AN APPEAL BY [2017] ScotCS CSIH_59 (08 September 2017))

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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> FINDMYPAST LIMITED, APPEAL BY THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS AGAINST A DECISOIN OF THE UPPER TRIBUNAL IN AN APPEAL BY [2017] ScotCS CSIH_59 (08 September 2017))
URL: http://www.bailii.org/scot/cases/ScotCS/2017/[2017]_CSIH_59.html
Cite as: [2017] STC 2335, [2017] CSIH 59, 2018 SCLR 217, [2017] BVC 38, 2018 SC 24, 2017 GWD 30-488, 2017 SLT 1071, [2017] ScotCS CSIH_59

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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 59
XA105/16
Lord President
Lord Drummond Young
Lord Tyre
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in an Appeal to the Court of Session
by
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS
Appellants
against
a decision of the Upper Tribunal dated 21 January 2016
in an appeal by
FINDMYPAST LIMITED
Respondent
Appellants: S. Smith QC, R. G. Anderson; Office of the Advocate General
Respondent: Simpson QC; Balfour & Manson LLP
8 September 2017
Introduction
[1]       The respondent taxpayer carries on the business of providing access to genealogical
and ancestry websites which it owns or in respect of which it holds a licence. Customers
who wish to search the historical records on the website may do so without charge. If a
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2
customer is to view or download most of the records on the website, however, he or she will
require to pay the respondent. This may be done by taking out a subscription for a fixed
period, which confers unlimited use of the records during that period. Alternatively, the
customer may use a system known as Pay As You Go (“PAYG”). This involves the payment
of a lump sum in return for which the customer receives a number of “credits”, sometimes
referred to as “units” or “vouchers”. The credits may be used to view records on the
website, and each time a record is viewed some of the credits are used up. The credits are
only valid for a fixed period, but unused credits may be revived if the customer purchases
further credits within two years; otherwise they are irrevocably lost.
[2]       During the period between September 2008 and 10 May 2012 the taxpayer accounted
for value added tax on the price of PAYG vouchers at the time when they were sold. The
result was that tax was paid not only in respect of vouchers that were used to access
genealogical records but also in respect of vouchers that remained unredeemed. In the
present proceedings the taxpayer has claimed repayment of the value added tax accounted
for in respect of unredeemed vouchers during the period from September 2008 to 10 May
2012. With effect from the latter date the VAT legislation was changed, and the result is that
the present issue does not arise in respect of products purchased thereafter.
[3]       The underlying question is whether value added tax should have been accounted for
at the time when the vouchers were sold or subsequently, at the time when the vouchers
were redeemed. It is in the latter event that the taxpayer would have a valid claim for
repayment. That claim raises three distinct issues. The first of these is the nature of the
supply made by the taxpayer to customers: whether it was the supply of genealogical
records selected by the customer and viewed or downloaded by him, or whether the supply
was a “package” of rights and services, which conferred a right to search the records on the
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3
various websites to which the taxpayer’s customers had access and, if so desired, to
download and print particular items from those websites. If the former is correct, the supply
only takes place if and when a particular record is viewed or downloaded; if the latter, the
supply includes a general right to search which is exercisable as soon as the credits are
purchased, with the result that the supply takes place at that point. The taxpayer contends
for the former construction and HMRC for the latter.
[4]       Even if the taxpayer is correct on the characterization of the supply, however, the tax
point will still be advanced to the time when the voucher is purchased if the payment made
for the voucher is characterized as a prepayment to which section 6(4) of the Value Added
Tax Act 1994 applies. The second issue that falls for decision is accordingly whether on the
purchase of a PAYG voucher the customer made a prepayment to which section 6(4) of the
Value Added Tax Act 1994 applied. If a prepayment was made so that section 6(4) applied,
the tax point would be advanced from the time when services were provided to the time
when the prepayment was received by the taxpayer. HMRC contends that the payment
made by a customer when a voucher was purchased constituted a prepayment falling
within section 6(4); it was a payment made in advance for a particular category of service.
The taxpayer, on the other hand, contends that such a payment did not fall within the
definition in section 6(4): for a prepayment to occur all of the relevant information
concerning the chargeable event must be known and the goods or services to which the
payment relates must be identified with precision, and that was not so in the present case.
[5]       The third issue is whether the credits purchased by customers were face-value
vouchers as defined in paragraph 1(1) of Schedule 10A to the Value Added Tax Act 1994, as
amended; “face-value voucher” is defined as “a token, stamp or voucher (whether in
physical or electronic form) that represents a right to receive goods or services to the value
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4
of an amount stated on it or recorded in it”. If that is correct the consideration given for a
voucher is ignored for the purposes of the Value Added Tax Act 1994, by virtue of
paragraph 4(2) of Schedule 10A. If that were so the sale of vouchers would not give rise to a
charge to value added tax. The taxpayer contends that the PAYG vouchers were face-value
vouchers and that their sale was accordingly not taxable; HMRC by contrast submits that the
PAYG vouchers were not face-value vouchers, on the basis that they did not “represent” the
right to receive services from the taxpayer, and moreover did not contain or record the
“value of an amount” stated or recorded in the voucher.
[6]       We propose first to set out the facts of the case as found by the First-tier Tribunal,
and then to summarize the decisions of the First-tier and Upper Tribunals. Thereafter we
will deal with each of the three issues in turn, setting out the relevant legislation at both a
national and a European level and discussing the applicable case law, before considering the
application of the law to the particular facts of the case.
Facts
[7]       The First-tier Tribunal made a number of findings based on evidence from
Mrs Pamela Short, who had been the taxpayer’s financial manager since September 2009,
and treated those findings as findings in fact. The taxpayer’s business was the provision of
online access to genealogical and ancestry information. The taxpayer owned or had licences
to access a range of datasets. Its services were advertised, and could be obtained either by
subscription for a fixed period or by the PAYG system. Under the latter system credits were
purchased by a customer and were subsequently redeemed when images or transcriptions
of the websites were purchased. A unitized system was employed, which assisted the
taxpayer in calculating royalties due to the business partners who provided access to their
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websites. Both subscribers and PAYG customers had equal access to all of the databases,
although PAYG customers might have a mixture of differently priced units. Promotional
vouchers could be made available for corporate customers. In such a case the customer
could not work out the cost of the individual units that he or she enjoyed. Vouchers
acquired by PAYG customers could not be redeemed or transferred to third parties, and
could only be used on websites registered by the taxpayer. The taxpayer’s computers would
have a record of monies expended in purchasing units, and the website would show the
structure and pricing of vouchers and units. Finally, Mrs Short had explained that the claim
for repayment of VAT had been prompted by the change in the taxation of vouchers in May
2012, at which point the taxpayer considered that VAT had been incorrectly accounted for
on the issue of PAYG vouchers rather than on their redemption.
[8]       Examples of documents downloaded from the taxpayer’s website were made
available to illustrate the procedures that are involved when a PAYG customer redeems
vouchers. When vouchers are purchased the customer’s account indicates the date when
vouchers were purchased and the date when they expire, three months later. It indicates the
cost of the vouchers and the number that remain valid at any given time. That number
obviously decreases as the vouchers are used. Before any subscription is taken out, any
potential customer can access the taxpayer’s website and introduce search criteria; the
example given was the name of an individual and his year and place of birth. The website
then indicated that a record was available in a particular category; in the example supplied
to the court this was the Register of Births for England and Wales 1837-2006, in the town of
Beverley, Yorkshire. No further details were provided, however, and the actual record was
not made available. To obtain access to the relevant record in the Register of Births, it was
necessary for the customer to redeem vouchers.
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[9]       We should further note certain provisions of the taxpayer’s contractual terms and
conditions, available online. These provided as follows:
These Terms & Conditions explain our conditions for you using the
findmypast.co.uk website….
You must agree to the Terms & Conditions if you use the website, or buy something
from us. If you do not agree with our Terms & Conditions or Privacy Policy, you
must not use the website.
Getting access to the records: you can search the historical records on the website for
free, but to view most records or use some features of the website you will need to
buy either PayAsYouGo credits or a subscription, or use a voucher. You can also
take a Free Trial. You have to register with us and be signed in to buy credits or a
subscription, use a voucher, or to take out a Free Trial. You can buy vouchers from
our vouchers stockists. A contract between us begins when we send you a
confirmation e-mail, after receiving your order and accepting your payment or
voucher code.
PayAsYouGo credits: You can buy PayAsYouGo credits from us these get used up
when you view records and can be used to view any record on the website. Credits
are only valid for a fixed time limit and will expire if you don’t use them in time
this is made clear on the payment page when you buy them. When you have unused
credits that expire, if you buy more credits within 2 years, we will add your expired
credits (up to a maximum of 280) onto the new credits that you buy so that you don’t
lose them. Some records cost more credits to view than others: you can see how
many credits each type of record cost to view.
Vouchers: If you have any kind of problem with a voucher, please contact the
company who sold it to you first (as they are the person you paid the money to). In
some cases this will be us, but normally it will be one of our voucher stockists…
Changes to the website or records: We reserve the right to make changes to the
website, including the records and services we offer, without notice; however, we
would not be in business very long if we suddenly took things away that you’ve paid
for without offering you a decent replacement. … We may also change prices, make
special offers to groups or individuals, or change the number of credits charged to
view a record from time to time
VAT: VAT at the current UK rate is included in the price…”.
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7
First-tier and Upper Tribunals
[10]       The First-tier Tribunal held first that what the customer acquired was a “package”
including the means of access to the records on the website, with a facility to search these,
and then to access and download particular items. Those matters were considered
interdependent. While the objective was to obtain the information in particular documents,
these had to be identified and traced. On that basis the supply for VAT purposes was made
at the outset, when the “package” was purchased. Secondly, the First-tier Tribunal held that
the document issued by the taxpayer did not qualify as a face-value voucher. While a
coding or microchip in a ticket with a computer reference might enable a document so to
qualify, the PAYG vouchers could be obtained by purchase, gift or in a promotion, and the
consideration would vary in each case. It might not be disclosed to the holder. Furthermore
unused units could be revived, which would frustrate any attempt to price the balance of
unexpired units. Thirdly, section 6(4) of the 1994 Act, dealing with prepayments, was
applicable, as the nature of the supply was known at the outset, and there was a direct link
at the time of payment. Consequently the taxpayer’s appeal was unsuccessful.
[11]       The Upper Tribunal reversed the decision of the First-tier Tribunal. It held first that
the use of the search engine was not part of any “package” paid for by a customer when he
purchased a subscription or PAYG credits. What the customer bought, which was in
addition to his free use of the search facility, was the right to access individual documents as
and when he chose to do so, up to the limit of the credits purchased. On that basis the
service was provided or supplied when the individual documents were accessed. There was
no link between the payment made by a PAYG customer and the use of the search facility on
the taxpayer’s website. Secondly, the Upper Tribunal held that the PAYG credits were a
face-value voucher that satisfied the requirements of Schedule 10A of the Value Added Tax
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8
Act 1994. They were a voucher in electronic form that represented a right to receive services.
Furthermore the voucher represented the right to receive services “to the value of an
amount”, and that amount was “recorded in it”. These requirements had to be approached
in a pragmatic way, in the context of an electronic document. The listing of unused credits
on the taxpayer’s website, made accessible to customers, should be understood as
representing so much money’s worth. The fact that the amount was recorded in credits
rather than by reference to money value did not affect this analysis. Nor did it matter that
the customer did not know the purchase price of the credits, for example if he or she
received a gift. In every case the number of units available could be ascertained and that
was sufficient. Thirdly, in relation to the prepayment argument, the customer bought a
certain number of credits, but it was by no means clear that he would know what he could
purchase with those credits; different documents or categories of document might command
different prices, and what the customer could buy with his credits depended upon the
current “price” (stated in credits) for those documents; prices might vary over time. Thus it
could not be said that at the time of purchase of the credits the services to which the
customer was entitled were fixed or clearly identified. Thus section 6(4) of the 1994 Act did
not apply.
Nature of the supply
[12]       The taxpayer contends that the service provided by it was the supply of genealogical
records selected by a customer and viewed or downloaded by that customer. On that basis
it is submitted that the supply only occurred at the point when credits were used or
redeemed and documents were viewed or downloaded. Consequently VAT only became
chargeable at that time. Correspondingly, because of the nature of the supply, no VAT was
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9
chargeable on credits at the time when they were purchased. Nor was VAT due on credits
which were purchased without being used or redeemed. HMRC, by contrast, contends that
what was supplied to the taxpayer was a “package” of rights and services, which conferred
a right to search the records on the various websites to which the taxpayer’s customers had
access and, if so desired, to download and print particular items from those websites. That
package was available at the point when PAYG vouchers were purchased. Consequently, it
is said, the service provided by the taxpayer was supplied as soon as a customer purchased
vouchers, and VAT was due at that point.
Legislation
[13]       The legislation governing VAT is found in the Value Added Tax Act 1994 as
amended. It is agreed that the supplies made by the taxpayer were a service for the
purposes of the Act. Section 5(2) of the Act provides that the word “supply” includes all
forms of supply, but not anything done otherwise than for a consideration. The time of
supply of a service is dealt with in section 6 of the 1994 Act. Subsection (3) of that section
provides that, subject to subsections (4) to (14), a supply of services is to be treated as taking
place at the time when the services are performed. Subsection (4) (which is discussed
further at paragraphs [35] et seq below) provides that, if before the time applicable under
subsection (3) the person making the supply receives payment in respect of it, the supply
shall, to the extent covered by the payment, be treated as taking place at the time when
payment is received.
[14]       The relevant provisions of the Value Added Tax Act 1994 are based on European
Directives, in particular predecessors of the Principal VAT Directive (2006/112/EC); they
must accordingly be construed in accordance with that Directive. Article 1(2) of the
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Directive sets out the principles of the common system of VAT, which 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”. Article 2(1)(c) provides
that the supply of services for consideration by a taxable person shall be subject to VAT. The
reference to a consideration is important, and is reflected in section 5(2)(b) of the Value
Added Tax Act 1994, which provides that a supply of services is to include “anything which
is not a supply of goods but [which] is done for a consideration”. Article 9 defines a
taxable person as “any person who, independently, carries out in any place any economic
activity, whatever the purpose or results of that activity”. Any activity of a person
supplying services is to be regarded as an economic activity, and the exploitation of
intangible property for the purpose of obtaining income therefrom on a continuing basis
falls within that concept. Under article 24, a supply of services is to mean any transaction
which does not constitute a supply of goods, a provision that is reflected in section 5(2)(b) of
the Value Added Tax Act 1994. It is clear from those provisions that the scope of VAT is
wide, and is intended to cover all forms of economic activity. That is subject to one
important qualification, however: there must be a consideration for a service if it is to be a
supply for VAT purposes. This means that there must be a direct link between the service
and the consideration, a point that was emphasized by the Court of Justice in Case C-520/10
Lebara Ltd v HMRC [2012] STC 1536, at paragraph 27 (discussed at paragraphs [17]-[18]
below).
Case law
[15]       The nature of the supply made by a taxpayer has been considered in a number of
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cases, by both the European Court of Justice and the United Kingdom courts. In Case C-
349/96 Card Protection Plan Ltd v Customs and Excise Commissioners [1999] 2 AC 601, it was
necessary to determine whether a transaction consisted of a single supply or a number of
distinct supplies, in order to discover whether those services wholly or mainly comprised
“insurance… transactions”, which were exempt from VAT. On that question, the Court of
Justice stated (at paragraphs 28-31):
“[W]here the transaction in question comprises a bundle of features and acts, regard
must first be had to all the circumstances in which that transaction takes place
… [T]aking into account, first, that it follows from [article 2(1) of the Principal VAT
Directive] that every supply of a service must normally be regarded as distinct and
independent and, secondly, that a supply which comprises a single service from an
economic point of view should not be artificially split, so as not to distort the
functioning of the VAT system, the essential features of the transaction must be
ascertained in order to determine whether the taxable person is supplying the
customer… with several distinct principal services or with a single service.
There is a single supply in particular in cases where one or more elements are to be
regarded as constituting the principal service, whilst one or more elements are to be
regarded, by contrast, as ancillary services which share the tax treatment of the
principal service. A service must be regarded as ancillary to a principal service if it
does not constitute for customers an aim in itself, but a means of better enjoying the
principal service supplied…”.
Those statements of principle were followed in Case C-41/04 Levob Verzekeringen BV v
Staatssecretaris van Financiën [2006] STC 766, where the critical question was whether the
supply and customization of computer software for a particular customer involved in
insurance business in the Netherlands should be regarded as a single supply or as two
distinct supplies, the software and its customization. The Court of Justice (at paragraphs 20-
22) largely repeated what had been said in Card Protection Plan, and stated:
“The same is true where two or more elements or acts supplied by the taxable person
to the customer, being a typical consumer, are so closely linked that they form,
objectively, a single, indivisible economic supply, which it would be artificial to
split”.
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On the facts of the case, the result was that if the software and its customization, considered
objectively on an economic basis, formed a transaction that it would be artificial to split,
there was a single supply. If the customization predominated, the result would be that the
supply of the totality was a single supply of services.
[16]       A number of important elements emerge from the foregoing statements of the law.
First, transactions must be considered in context. This obviously includes the economic
context. Secondly, each supply of a service will normally be regarded as independent, but if
as a matter of economic reality what is provided is a single service it should not be
artificially split. Thirdly, on a proper analysis, in some cases it will be found that there is a
principal service and a series of other services that are ancillary to that principal service; in
that event the ancillary services share the tax treatment of the principal service. It is
obviously a matter for the judgment of the national court as to how those principles are to be
applied to individual cases. In forming that judgment, an important question is whether a
service is not an aim in itself but rather an enhancement of the principal service. Fourthly,
the approach taken by the Court of Justice involves the application of a practical test, based
on economic reality and having due regard to the factual and legal context in which a
possible charge to tax arises.
[17]       We have already mentioned the importance of consideration in determining whether
the provision of services amounts to a supply for VAT purposes. This was emphasized by
the Court of Justice in Case C-520/10 Lebara Ltd v HMRC, supra. The taxpayer distributed
cards for making international telephone calls through intermediate entities in member
states of the European Union, and the ultimate purchaser was able to use the cards to make
inexpensive telephone calls to other countries. The case involved a complex set of
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contractual arrangements with intermediaries and telephone companies. The Court of
Justice held (paragraph 27) that:
“[I]t is settled case law that a supply of services is effected ‘for consideration’ for the
purposes of [article 2 of the Principal VAT Directive], hence taxable, only if there is a
legal relationship between the service provider and the recipient, pursuant to which
there is reciprocal performance, the remuneration received by the service provider
constituting the value actually given in return for the service supplied to the
recipient. There must therefore be a direct link between the service supplied and the
consideration received”.
That statement appears to us to accord with the standard analysis of contract in Scots law,
whereby reciprocal performance can be regarded as the essential criterion for a contract; the
existence of a link implies reciprocity. Consideration taken as signifying reciprocity is not of
course the same as the technical doctrine of consideration in English law; this is hardly
surprising given that the EU VAT legislation operates over a wide range of different legal
systems.
[18]       In applying the principle of reciprocity, the court must in our opinion apply the
general approach found in cases such as Card Protection Plan; consequently it is necessary to
examine the whole of the taxpayer’s relationship with its customers, and to do so in context,
in order to discover the true nature of the supply. On the particular facts of Lebara it was
held that the supply of the telephone cards was a supply of services to intermediaries, but it
did not follow that there was a second supply of services for consideration to the end user:
paragraph 43; see also the analysis by the Advocate General at paragraphs 25-29. At that
level, there was no direct link and therefore no consideration.
[19]       Finally, we should note that in characterizing the nature of a supply the terms of the
contracts used by the taxpayer are potentially important: Secret Hotels2 Ltd v HMRC
[2014] UKSC 16; [2014] STC 937, at paragraph 31. That is unsurprising, as the relationship is almost
inevitably contractual in nature.
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[20]       Certain further cases on the nature of a supply were cited by counsel for HMRC in
support of the proposition that the existence of a contractual right to a service could
demonstrate a supply for VAT purposes. We do not doubt that the existence of a
contractual right may be an important indication that a supply has occurred. Nevertheless,
in the light of the principles laid down in Card Protection Services we are of opinion that any
contractual rights must be interpreted in the context of the whole circumstances of the
individual case. We will return to this proposition when we consider the nature of the
present supply, but at this point we will comment briefly on the cases that were cited. We
do not think that any of these adds significantly to the statements of principle found in Card
Protection Plan, Levob and Lebara; indeed, these cases were relied on in large measure because
they appeared to provide analogies to the factual situation found in the present case. It
seems to us that the application of tax law is through principle rather than analogy; in every
case the underlying basis of the court’s reasoning must be discovered, and it is the principles
contained in that reasoning that govern future cases.
[21]       In HMRC v Esporta Ltd [2014] EWCA Civ 155; [2014] STC 1548, the taxpayer operated
health and fitness clubs which members of the public could join. A member had to sign up
for a minimum commitment period of 12 months or longer and pay fees in advance. If a
member defaulted on his her monthly instalments, the taxpayer would turn off the
member’s access card, although that did not terminate the membership. The taxpayer
ultimately sought to recover outstanding membership fees for the remainder of the
commitment period. The taxpayer was assessed to VAT on the outstanding membership
fees recovered in such cases for the remainder of the contract period. It was held that these
were subject to VAT; they were properly analyzed (per Vos LJ at paragraph 34) as
consideration for the membership and right of access to the clubs throughout the
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commitment period. Even though the contractual conditions provided for a member’s
exclusion for non-payment, that did not mean that the member was in the same position as a
member of the public; the member of the public had no right to demand access and facilities
even on payment of the fees, and the club was able to choose whether or not it wanted to
contract with him. In the case of a defaulting member, however, the member was entitled to
access to the club’s facilities provided that the arrears were paid (paragraph 36).
[22]       In our opinion that case turns on an analysis of the member’s rights during a period
of default, when there remained a possibility of paying arrears and resuming active
membership. The present case, by contrast, concerns the characterization of the services
supplied by the taxpayer to customers at the outset of the contractual relationship, in a
situation where the initial search facility is made available to the public generally, not
merely to members. In these circumstances the analysis of the supply is clearly different
from that applicable to the period of default in Esporta. In that case importance was attached
to the existence of a particular contractual right, but of course the significance that is
attached to any particular contractual right must depend on the nature of the right and the
manner in which it fits into the contractual and economic context of the particular case. In
the present case we are of opinion, for reasons discussed below, that the difference between
a contractual right to conduct a preliminary search, without access to the actual records, and
the ability of the public to conduct a similar search, albeit without a contractual right, is
insubstantial from an economic standpoint. On that basis we consider that Esporta should be
distinguished.
[23]       Case C-250/14 Air France-KLM v Ministère des Finances et des Comptes publics
[2016] STC 1451, concerned liability for VAT on air tickets that were not used. One of the issues in
the case concerned tickets which were no longer valid because the ticket was non-refundable
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16
and the customer had been a “no-show” at boarding. The Court of Justice considered the
obligations incumbent on an airline (paragraph 26) checking-in and boarding passengers,
transporting them to their destination, and disembarking them there. Performance of those
services, however, required the passenger to turn up on the agreed date and at the agreed
place for boarding. On that basis the court held that the consideration for the price paid
when the ticket was purchased consisted of the passenger’s right to benefit from the
performance of obligations arising from the transport contract, regardless of whether the
passenger exercised that right, since the airline company fulfilled the service by enabling
passenger to benefit from those services (paragraph 28). Consequently VAT was due in
respect of tickets that had been issued but not used, where the passenger was unable to
obtain a refund. Counsel for HMRC submitted that this demonstrated that the supply was
regarded as taking place as soon as a legal right arose, even in a case where the taxpayer’s
customers did not avail himself or herself of that legal right.
[24]       That appears to us to be too simplistic, however. As already indicated, the nature of
the supply for VAT purposes must be determined in the light of a range of factors, including
both the parties’ contract and the overall economic context in which that contract operates.
With a non-refundable airline ticket, the supply is of a specific service that must be utilized
at a particular time and place, and there is no scope for the passenger’s unilaterally
postponing the service. In the present case, however, the service for which the customer
requires to pay can be invoked at any time within a three-month period, with the possibility
of extension, and can be used in a very large number of ways. Furthermore, the initial
search facility, which is available free of charge to members of the public, is not something
that the customer would regard as an end in itself: it is merely a means to the end of viewing
or downloading particular documents held on the taxpayer’s websites. If one were to
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suggest an analogy (which we generally prefer not to do), it would be with the premises and
shelves in a bookshop rather than an airline ticket; the flexibility accorded to the customer is
very much greater.
[25]       In the light of the foregoing cases and the underlying legislation, we will now
consider the analysis of the service actually provided by the taxpayer in the present case.
Analysis of the taxpayer’s services
[26]       In determining the nature of the service supplied by the taxpayer, the factors
summarized at paragraphs [16]-[19] above are relevant. The court should have regard to
precisely what the taxpayer does and what it undertakes to do for its customers; the notions
of consideration and reciprocity are of fundamental importance. The contractual
relationship between the taxpayer and its customers is important, but that must be looked at
in context. It is also necessary to determine what the principal supply is that the taxpayer
makes to its customers, and whether any particular features of that supply are to be
regarded as merely ancillary or as independent supplies. At all times a practical test, based
on economic reality, must be applied.
[27]       The starting point must therefore be the services that the taxpayer provides to its
customers. In the present case the taxpayer essentially provides two services: a general
search function and the viewing and downloading of specific documents. The critical
question is what the consideration is for the amounts paid by PAYG customers, applying the
principle of reciprocity as explained in cases such as Lebara. In our opinion the consideration
for those payments is the viewing and downloading of specific documents. The customer is
engaged in genealogical research. He requires particular documents in order to carry out
that research documents related to the particular family that he is investigating. It is those
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documents that provide the necessary information about family history, and they are only
available through use of the viewing and downloading service. It is that service, and that
service alone, that can only be accessed by making use of the PAYG credits.
[28]       The search function, by contrast, does not provide the information about a family
that is contained in historical documents, usually from the public records of births,
marriages, deaths and the like. When the search function is used, it is impossible to know
with certainty whether a particular document is in fact relevant to the customer’s search; all
that is available is an indication that a document that might be relevant to that search exists
on the website. Consequently the search function cannot be considered an end in itself; it is
no more than a means towards the customer’s ultimate end, namely viewing and
downloading documents about the family that is being researched. On this basis, it appears
to us that the service provided by the taxpayer by way of consideration is the viewing or
downloading of documents, and so far as existing customers of the taxpayer are concerned
the search function is no more than ancillary. That applies in particular to the purchasers of
PAYG vouchers, who are existing customers because they have paid money with a view to
making use of the taxpayer’s services.
[29]       The search function is, however, available not merely to existing customers but to the
general public. It is available free of charge. As a matter of commercial reality, the reasons
for this appear obvious. In order to carry on business the taxpayer must attract users to its
website from among the general public. To achieve this, potential users must be persuaded
that the website has something to offer them, but that cannot be achieved without allowing
some degree of access to the website. There is perhaps an analogy with a traditional
bookshop, where customers can view the books on the shelves and examine them in a
relatively cursory manner; the same is true of websites such as Amazon, where a level of
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information is inevitably provided about the books (whether physical or digital) that are on
offer. It is clearly for this reason that the taxpayer allows the public free access to the general
search function, so that potential customers may discover whether there might be something
of interest to them. For this reason it appears to us that the general search function must be
available free of charge to the general public.
[30]       This is important in view of a major focus in the argument presented for HMRC. It
was submitted that a major factor supporting HMRC’s analysis of the service provided by
the taxpayer as a “package” which included the general search function was the existence of
a right of the customer to maintain access to the search function. Members of the public, by
contrast, had no such right, but merely a privilege to examine the general search function.
That privilege only existed for as long as the taxpayer saw fit, and would only be on such
terms as the taxpayer was prepared to allow. While that is technically correct as a matter of
legal analysis, it seems to us to ignore the fundamental practical point made in the last
paragraph: if the taxpayer is to maintain its business and attract new customers, it must
allow the public substantial access to the search function. Thus as a matter of economic
reality the search function cannot in practice be withdrawn from the general public.
[31]       If the search function is available free of charge to the general public as well as to
PAYG and subscription customers, it cannot be said that it is something that those
customers pay for; it is simply not part of the consideration for the payments made by those
customers. As the judge of the Upper Tribunal explained under reference to Lebara
(paragraph [21]), there is no link between the payment made by the customer and the use of
the search facility on the appellantswebsite. On that basis all that the customer gets for his
payment is the ability to access and download particular documents that he has identified as
being of interest to him. Furthermore, in our opinion it is apparent that the relationship
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between the ability to view and download particular documents and the search function is
essentially that of a principal service and an ancillary service; the search function is not an
end in itself, but is merely used by customers to identify the documents that may be of
interest so that those documents can be viewed and downloaded. That, as we have
explained, is the consideration for the payments made by customers.
[32]       Counsel for HMRC also placed reliance on the decisions of the Court of Justice in Air
France-KLM and the Court of Appeal in Esporta. We have already considered these cases
(paragraphs [21]-[24] above) and indicated why we think that they must be distinguished.
[33]       For the foregoing reasons we are of opinion that the taxpayer’s analysis of the nature
of the supply is correct. The consideration for the payments made by customers to obtain
PAYG credits is the ability to view or download particular items on the taxpayer’s website,
and does not extend to the general search facility that is available both to customers and to
the public. That conclusion will only entitle the taxpayer to succeed, however, if the
payments made by PAYG customers are not “prepayments” within the meaning of section
6(4) of the Value Added Tax Act 1994. We now consider that question.
Prepayment
Legislation
[34]       In the Principal VAT Directive, the normal rule regarding the time when VAT
becomes chargeable is set out in article 63:
“The chargeable event shall occur and VAT shall become chargeable when the goods
or the services are supplied”.
That rule is reflected in section 1(2) of the Value Added Tax Act 1994:
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“VAT on any supply of goods or services is a liability of the person making the
supply and (subject to provisions about accounting and payment) becomes due at
the time of supply”.
[35]       Section 6(3) of the 1994 Act provides that, subject to subsequent provisions, a supply
of services is to be treated as taking place at the time when the services are performed. This
general rule is, however, subject to an exception for payments made in advance that are
considered prepayments, that is to say, payments that fall within the terms of section 6(4) of
the 1994 Act. That subsection is in the following terms:
“If, before the time applicable under subsection (2) or (3) above, the person making
the supply issues a VAT invoice in respect of it or if, before the time applicable under
subsection (2)(a) or (b) or (3) above, he receives payment in respect of it, the supply
shall, to the extent covered by the invoice or payment, be treated as taking place at
the time the invoice is issued or the payment is received”.
That exception implements what is now article 65 of the Principal VAT Directive, which
provides as follows:
“Where a payment is to be made on account before the goods or services are
supplied, VAT shall become chargeable on receipt of the payment and on the amount
received”.
Case law
[36]       It is apparent from the terms of sections 1(2) and 6(4), interpreted in accordance with
the corresponding provisions of the Principal VAT Directive, articles 63 and 65, that the
general rule is that VAT is due at the time when a service is actually supplied, and that
section 6(4) and article 65 are exceptional in providing for payment at an earlier time, either
when an invoice is issued in respect of a service or when payment is received in respect of a
service. Because the provisions for early payment are exceptional, in the literal sense of that
word, they fall to be construed strictly. The general approach to these provisions has been
considered in a number of cases before the Court of Justice. Two of those cases contain
important general statements of the law. Case C-419/02 BUPA Hospitals Ltd v Customs and
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Excise Commissioners [2006] Ch 446, concerned an attempted prepayment that was held to be
caught by what is now article 65 of the Principal VAT Directive. Case C-270/09 Macdonald
Resorts Ltd v HMRC [2011] STC 412, was not directly concerned with prepayments, but it
contains a helpful discussion of the law applicable to the incidence of VAT under the
Principal VAT Directive.
[37]       BUPA Hospitals Ltd related to a change in the VAT regime applicable to supplies by
health providers in the UK; prior to 1 January 1998 they had been zero rated, but thereafter
they became exempt, with the result that health providers were no longer able to deduct
input tax on purchases of medical supplies. To pre-empt this change, prior to its becoming
effective, BUPA, an operator of private hospitals, set up a scheme to take maximum
advantage of the existing right of deduction of VAT. The scheme relied on what is now
article 63. BUPA entered into a contract with an associated company whereby, in
consideration of an immediate payment by BUPA of a sum that included £17.5 million of
VAT, the associated company would make future supplies to BUPA of drugs and prostheses
described in a schedule that was subject to amendment. Either party could terminate the
contract on notice, in which case BUPA would be entitled to recover the value of the goods
that had not yet been delivered. The claim to recover £17.5 million as input tax was refused
by HMRC, and a reference to the Court of Justice was made in subsequent judicial
proceedings.
[38]       The Court initially observed (at paragraphs 44-45) that what is now article 63 of the
Principal VAT Directive provides that the chargeable event occurs and VAT becomes
chargeable when the goods are delivered or services are performed. What is now article 65,
which provides that when payments are made on account before goods are delivered or
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services are performed VAT becomes chargeable on receipt of payment on the amount
received, is a derogation from the rule in article 63; as such it must be interpreted strictly.
[39]       In general, under the Directives the “chargeable event” for VAT is the occurrence of
an event whereby the legal conditions necessary for tax to become chargeable are fulfilled
(paragraph 46). Consequently tax may become chargeable at the same time as or after the
occurrence of the chargeable event, but not before that unless there is provision to the
contrary. In a case where what is now article 65 (then article 10(2) of the Sixth (VAT)
Council Directive 77/388/EEC) applies, there is a departure from the usual chronological
order in that, where a payment is to be made on account, the VAT becomes chargeable
without the supply’s having yet taken place. The Court observed (at paragraph 48):
“In order for the tax to become chargeable in such a situation, all the relevant
information concerning the chargeable event, namely the future delivery or future
performance, must already be known, and therefore, in particular,… when the
payment on account is made the goods or services must be precisely identified”.
Such a view was endorsed in the Court’s opinion by the Proposal for a Sixth Council
Directive on the harmonisation of turnover taxes (Bulletin of the European Communities
(1973), Supplement 11/73, p 13), in which it was observed by the Commission that:
“when payments on account are received prior to the chargeable event, receipt of
these amounts gives rise to a charge to tax, since the parties to the transaction in this
way demonstrate their intention that all the financial consequences of the chargeable
event should arise in advance”.
In BUPA the Court further observed (at paragraph 50) that:
“it is the supplies of goods or services which are subject to VAT, rather than the
payments made by way of consideration for such supplies…. A fortiori, payments
on account of supplies of goods or services that have not yet been clearly identified
cannot be subject to VAT”.
[40]       The decision of the Court in BUPA is summarized at paragraph 51. The case
involved the payment of lump sums for goods referred to in general terms in a list which
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might be altered at any time by agreement and from which the buyer might possibly select
articles. The buyer might unilaterally resile from the agreement at any time. Payments
(referred to as “prepayments”) of that kind did not fall within the scope of what is now
article 65. The facts of the case were accordingly some way from those now under
consideration. Furthermore, the case involved an aggressive tax avoidance scheme rather
than an ordinary commercial transaction. Nevertheless, in our opinion the statements of
principle made by the Court of Justice are pertinent, especially that in paragraph 48, quoted
above. Those statements are expressed in general terms, and they appear to us to be
intended to provide a general explanation of the meaning and scope of article 10(2), now
article 65 of the Principal VAT Directive.
[41]       In Macdonald Resorts Ltd, the taxpayer sold timeshare rights in properties in holiday
resorts. It set up an option scheme to utilize unsold timeshare inventory and to offer
customers greater flexibility. Customers were able to acquire “points rights” which could be
redeemed for various benefits, including accommodation in holiday resorts provided by the
taxpayer or hotel accommodation provided by third parties. The accommodation could be
situated in either the United Kingdom or Spain. Points rights could be purchased from the
taxpayer in return for the deposit of the customer’s own timeshare usage rights, together
with payment of an “enhancement fee”. HMRC contended that the sale of points rights
should be treated as a taxable supply in the United Kingdom of benefits derived from
membership of a club. Proceedings took place before the VAT and Duties Tribunal and then
in this Court, which referred certain questions for a ruling by the Court of Justice. These
were concerned with the proper characterization of the supplies made by Macdonald:
whether they should be characterized as the leasing or letting of immoveable property, or as
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25
membership of a club, or in some other manner. They also raised the question of the place
of supply: whether the United Kingdom or Spain.
[42]       The Court of Justice held that a fundamental criterion was the members’ ultimate
intention when they paid for the services received by them (paragraph 22). When points
rights were purchased, the intention was to use them for conversion into services offered
under the scheme. Thus the customer’s intention was not to collect points but to acquire the
use of accommodation or other services at a later date. The purchase of points rights and the
conversion of points was thus not an aim in itself, but merely a preliminary transaction in
order to achieve a further objective. It was therefore at the final moment of that conversion
that the purchaser of points rights received the consideration for his initial payment
(paragraphs 24-25). The Court continued (paragraphs 26-27):
“According to the case law of the court, the basis of assessment for a supply of
services is everything which makes up the consideration for the service supplied and
a supply of services is taxable only if there is a direct link between the service
supplied and the consideration received by the supplier….
Therefore, it appears that, in a scheme such as [the scheme under consideration], the
actual service for which ‘points rights’ are required is the making available to
participants in that scheme of the various possible benefits which may be obtained
by virtue of the points deriving from those rights. The service is not fully supplied
until those points are converted”.
This is essentially a reiteration of the basic principle that it is the supply of services, rather
than the making of a payment by way of consideration, that is the taxable event.
[43]       The Court then addressed the elements that are required for VAT to be chargeable
(paragraphs 29-31):
“[W]hen ‘points rights’ are acquired, the customer does not know exactly which
accommodation or other services are available in a given year or the value in points
of a holiday in that accommodation or of those services.
In those circumstances, the factors necessary for VAT to become chargeable are not
established when rights such as ‘points rights’ are initially acquired, which excludes
the application of [article 65 of the Principal VAT Directive].
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26
As follows from the judgment in BUPA Hospitals Ltd v Customs and Excise
Commissioners…, in order for VAT to be chargeable, all the relevant information
concerning the chargeable event, namely the future delivery of goods or future
performance of services, must already be known and therefore, in particular, the
goods or services must be precisely identified. Therefore, payments on account of
supplies of goods or services that have not yet been clearly identified cannot be
subject to VAT”.
The foregoing passage is obviously not directly connected with prepayment, which was not
in issue in the case. It is nevertheless a reiteration of the basic principle laid down in BUPA
Hospitals Ltd, namely that the normal point for the imposition of VAT is the time when
goods or services are supplied, and that if VAT is to be charged before that time the goods or
services in question must be “precisely” or “clearly” (the word used in paragraph 50 of
BUPA Hospitals Ltd) identified.
[44]       On the facts of Macdonald Resorts Ltd, it was only when points were converted into
accommodation or another service that it was possible to determine the VAT treatment that
was applicable, and the place of supply was therefore the place where the accommodation
was obtained. The elements of uncertainty that were identified were those at paragraph 29:
the customer did not know exactly what accommodation or other services would be
available in a given year; the customer did not know what the points value would be of a
holiday in that accommodation or of those services; and it was the taxpayer, Macdonald
Resorts, that determined the points classification, so that the customer’s choice was limited
to accommodation or services accessible within the points that he had available.
[45]       We were also referred to the decision of the Court of Justice in Case C-107/13 Firin v
Direktor na Direktsia Obzhalvane, [2014] STC 1581. The facts of the case were very different
from the present case. A circular arrangement for the supply of wheat had been concluded
between the taxpayer and other companies whereby the taxpayer contracted to buy the
wheat, made a prepayment of the price, and the funds so paid were used ultimately by
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27
another company to acquire shares in the taxpayer. The wheat was not supplied and the
seller became insolvent before output tax was paid, but the taxpayer reclaimed the input tax.
In this case the goods to be supplied were clearly identified when the prepayment was
made, but it was uncertain whether the chargeable event, the supply of the wheat, would
ever take place; indeed, it was possible that the whole scheme was fraudulent. If there were
uncertainty as to whether the supply would occur, article 65 could not apply (paragraphs
38-39). In these circumstances the Court of Justice held that it was permissible for the
national tax authorities to obtain repayment of the VAT that had been deducted by the
taxpayer on the basis that the supply had not been made. The Court affirmed the view that
it is the supply of goods and services that is the chargeable event for the purposes of article
65, and that uncertainty about the supply would prevent the prepayment rule from
applying. Nevertheless, the facts of the case are somewhat singular, and the decision as a
whole is of limited assistance.
[46]       The general approach taken by the Court of Justice in relation to article 65 and its
predecessors appears to us to have three principal components. First, the chargeable event
for the purposes of VAT is the supply of goods or services, not the payment of the price.
That underlies the structure of articles 63 and 65. Secondly, it follows that the normal rule is
that VAT is payable when the supply is made. Thirdly, VAT may be payable in advance of
that date if the requirements of article 65 are satisfied, but for that to happen there must be
precise identification of the goods and services that are to be supplied. This conclusion
follows from the general rule, discussed at paragraphs [14] and [17]-[18] above, that a supply
for VAT purposes requires a consideration, and there must be a direct link between the
consideration and the goods or services that are supplied: reciprocity is fundamental.
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Consequently both the goods or services and the consideration must be clearly identified
before there can be a charge to VAT.
[47]       Finally, we consider that the various factors discussed at paragraph [16] above are
relevant to the application of the prepayment rule. The rule must be applied in a practical
and pragmatic manner, having proper regard to the economic reality of the transaction
under consideration. Once again, the overall context in which the transaction occurs is of
fundamental importance.
Analysis of payments to the taxpayer
[48]       When a customer acquires PAYG vouchers and makes a payment to the taxpayer, a
number of matters are uncertain. First, and most importantly, it is uncertain whether the
chargeable event redemption of a credit by viewing or downloading a document will
ever occur. This possibility is not hypothetical; the present proceedings have arisen because
in a substantial number of cases PAYG credits have not been redeemed. Secondly, it is not
clear when redemption will occur, and by that time a number of features of the service
might have changed. In particular, the items that are available for viewing and
downloading on the taxpayer’s website might have changed. The price in credits to view
and download any particular document might have changed by then. It is also theoretically
possible that the VAT rate might have changed. Of these factors, the possibility that the
available documents might have changed appears to be a real one. In its contractual terms
and conditions the taxpayer expressly reserves the right to make changes to the website,
including the records and services that are offered. The terms and conditions also provide
that the number of credits charged to view a record may be changed from time to time.
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29
[49]       The foregoing features are obviously different from those that were considered in
BUPA Hospitals Ltd and Macdonald Resorts Ltd. In the former case, lump sums were paid for
goods that were described in general terms in a list which could be altered at any time by
agreement between the parties. In the present case, the items available on the taxpayer’s
website can be changed by the taxpayer alone, without further agreement, although the
terms and conditions indicate that if anything is deleted a “decent” replacement will be
offered. In both cases, however, as a matter of economic reality, it is obvious that a good
selection of products must be made available if the commercial arrangement is to work. In
BUPA the taxpayer/customer was entitled to select articles from the list provided by the
supplier, which is similar to the present case. Finally, in that case the customer was entitled
to resile unilaterally from the agreement at any time and to recover the unused balance of
the prepayment. That feature is absent from the present case, although, as we have
remarked, it is not uncommon for the customer simply to fail to use credits that have been
paid for.
[50]       Macdonald Resorts Ltd was not directly concerned with prepayments, and therefore
the statements of law are only a reaffirmation of the principles laid down in BUPA. There is
a definite statement that payments on account of supplies of goods and services that have
not yet been clearly or precisely identified cannot be subject to VAT. In Macdonald Resorts
Ltd, a number of elements of uncertainty existed (paragraph 29). The customer did not
know exactly what accommodation or other services would be available in a given year, and
did not know what the points value would be of a holiday in that accommodation or of
those services at the relevant time. The taxpayer determined the points classification, thus
limiting the customer’s choice of accommodation or services. Thus a considerable level of
uncertainty existed.
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[51]       In the present case we are of opinion that the elements of uncertainty described at
paragraph [48] above are sufficiently important to exclude the application of the
prepayment rules contained in section 6(4) of the Value Added Tax Act 1994 and article 65 of
the Principal VAT Directive. If a prepayment is to be chargeable to VAT, it must relate to a
particular supply of goods or services, with a direct link between the goods or services and
the consideration paid in advance. Unless such a link exists, the payment made in advance
of the supply is a mere payment to the general account of the customer, without a sufficient
link to the service that is to be supplied. In the present case, the uncertainties are significant.
It is plain that a substantial number of PAYG credits are never redeemed, and there is
obviously no link with a service in such cases. Furthermore, the taxpayer has a contractual
power to vary the services that are offered, by varying the website, and also to vary the price
of the various services, expressed in credits. While those powers are no doubt constrained
by commercial considerations, as the terms and conditions acknowledge, the exact record
that is on offer at the time when PAYG credits are purchased may not be the same as the
record that is offered at the time when credits are redeemed, and the price may have varied.
[52]       These elements differ from those considered in BUPA Hospitals Ltd and Macdonald
Resorts Ltd (where in any event the question before the court was not the existence or
otherwise of a prepayment in terms of article 65), but the statements of principle in those
two cases are clear. Those statements are, moreover, expressed in terms of general
application. We consider that the principles laid down by the Court of Justice must be
applied to the facts of the present case in the manner in which they are stated; in the
application of EU law, as with Scots law, the proper approach is based on principle rather
than analogy. Thus the factual differences between the present case and earlier cases are of
less significance than the applicability of the general principles. On that basis, we are of
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31
opinion that the uncertainties in the present case are so material that the payment made
when PAYG credits are purchased cannot be considered a prepayment towards the cost of
any particular search. The important elements of uncertainty are stated at paragraph [48]
above. It is, moreover, significant that, as previously explained, credits are not purchased as
an aim in themselves but in order to view and download particular documents. The search
facility that precedes access to a particular document is available free, and is in any event at
a very general level. Thus both the practical purpose of the credits and the background in
which they occur, viewed as a matter of economic reality, lead to the conclusion that the
service paid for by a customer is supplied when a document is viewed or downloaded, and
not before that time.
[53]       In addition, a practical problem arises if the prepayment rule contained in section
6(4) is applied in the circumstances of the present case. If that section applies, the supply
takes place at the point when payment is made. At that stage, however, it is necessary to
determine what the consideration is for that supply. The supply is the viewing and
downloading of documents, but it cannot be known at the time when the payment is made
how many credits will actually be used and how many will remain unredeemed. That
makes it impossible at that stage for the taxpayer to know how much VAT should be
accounted for. It simply cannot be known in advance whether a credit will remain unused,
especially as unused credits can be revived if more credits are purchased within a specified
period. That problem supports the view that a prepayment does not occur at the point
when PAYG credits are purchased. In essence, article 65 and section 6(4) proceed on the
proposition that a deemed supply takes place, but if the extent of that supply cannot be
known at that point the system of accounting for VAT becomes unworkable.
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32
[54]       In view of our conclusions on the nature of the supply and the prepayment issue, the
appeal by HMRC must be refused, and the question of whether the PAYG credits amounted
to face-value vouchers does not arise. Nevertheless, full arguments were presented to us on
this issue, and we understand that it is regarded by HMRC as a matter of some importance,
in particular in relation to multi-purpose face-value vouchers; the law has been altered in
relation to single-purpose vouchers by removing them from Schedule 10A to the 1994 Act
following the decision in Lebara Ltd v HMRC, supra. We will accordingly consider the
arguments that were addressed on this issue.
Face-value vouchers
Legislation
[55]       The United Kingdom legislation governing face-value vouchers is found in
Schedule 10A to the Value Added Tax Act 1994. So far as material, this is in the following
terms:
Meaning of ‘face-value voucher’ etc
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 ‘face value’ of a voucher are to the amount
referred to in sub-paragraph (1) above.
Nature of supply
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.
Treatment of retailer vouchers
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
the voucher, and
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33
(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…”.
[56]       The important requirements in those provisions, which are set out in paragraph 1(1),
are four in number. First, there must be a token, stamp or voucher, in physical or electronic
form; no distinction is drawn between physical and electronic vouchers. Secondly, that
token, stamp or voucher must represent a right to receive goods or services. We consider
the meaning of this requirement at paragraphs [57]-[58]. Thirdly, the right to receive goods
or services must be “to the value of an amount”. Fourthly, the amount in question must be
stated on or recorded in the voucher. We return to these requirements at paragraphs [59]-
[60]      . If a voucher satisfies those requirements the effect, stated in paragraph 4(2), is that the
consideration for the issue of the voucher is disregarded for the purposes of the 1994 Act
except to the extent, if any, that it exceeds the face value of the voucher. The result is that
the issuing of the voucher is not a taxable transaction, and VAT is only charged at the point
when the voucher is redeemed in exchange for goods or services. For this purpose,
however, it is essential that what is issued satisfies the requirements of a face-value voucher
as set out in paragraph 1(1).
Case law
[57]       The requirement in Schedule 10A that there should be an amount to the value of
which the voucher conferred on the holder a right to services was considered by Sir Andrew
Park in the English High Court in Leisure Pass Group Ltd v HMRC [2008] STC 3340. It was
held, in paragraph 15, that the statute only applied to a voucher which had a monetary limit
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placed upon it, in the sense that when that limit was reached the voucher was exhausted. A
book token was given as an obvious example. The case involved a pass that conferred
access to various tourist attractions in London. There were limits on the use of the pass:
each of the attractions could be viewed only once, and the duration of the pass was limited.
Nevertheless, these limitations were not monetary in nature. It followed that the pass was
not limited by reference to an “amount”, and was not a face-value voucher. That case is not
directly relevant to the present one, but the approach taken indicates that the requirements
set out in paragraph 1(1) are to be given due effect.
[58]       In Skyview Ballooning Ltd v HMRC [2014] UKFTT 32 (TC), the First-tier Tribunal
required to consider vouchers issued by a taxpayer who provided hot air balloon rides.
Those vouchers had a monetary limit, but the value was not printed on the face of the
voucher, essentially because they were frequently purchased as gifts. On the face of the
voucher there was printed a code that, when entered into the taxpayer’s computer system,
divulged the amount that the voucher was worth. It was held that this did not prevent the
vouchers from being face-value vouchers. The fourth of the requirements in paragraph 1(1)
(in the form in use at that time) specified that the amount of the voucher should be “stated
on it or recorded in it”. (In the Tribunal’s discussion “printed” is used in place of “stated”,
but this make no material difference). The value was clearly not printed on the voucher, but
it was held that it was “recorded in” the voucher. There was a code on the face of the
voucher, which was held equivalent to the value recorded on a retailer’s card. The critical
factor, however, was that information was contained on the face of a physical voucher that
represented the value of that voucher. Once again, the importance of the requirements in
paragraph 1(1) is apparent.
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Application to the facts
[59]       The essence of a face-value voucher is that it is a physical or electronic document that
represents a right to receive goods or services to a specified amount, which is stated on or
recorded in the document itself. That follows from the basic definition in paragraph 1(1) of
Schedule 10A. The document is therefore acquired for its own sake, as the representation in
physical or electronic form of a right to a specified product. The most traditional form of
such a voucher is perhaps the book token, which can be redeemed against the price of books
at a very wide range of retailers. A face-value voucher can be confined to a single retailer,
however, and vouchers of this nature are commonly issued by many retailers, whether over-
the-counter in physical form or online in electronic form, or sometimes in electronic form on
a card that is supplied by the retailer. So understood, the face-value voucher is
distinguishable from a mere credit with a retailer; the credit is an accounting entry, whereas
the face-value voucher is representative of a right. Moreover, the face-value voucher will
normally be capable of transfer to another person, typically by way of gift.
[60]       In our opinion the PAYG credits, or vouchers, issued by the taxpayer, do not amount
to face-value vouchers, but are rather mere credits that permit the customer to view and
download particular documents on the taxpayer’s website, through the operation of the
taxpayer’s accounting system. As we have already indicated in discussing the nature of the
vouchers, we are of opinion that they are not purchased for their own sake but as a means to
view or download documents. That is quite different from the typical face-value voucher.
Furthermore, if a customer (other than a subscription customer) wishes to access documents
on the taxpayer’s website, the only way of doing so is by using the PAYG credits; they
cannot be used, in the same way as book tokens or typical retailer vouchers, in conjunction
with the customer’s own funds to pay for the desired service. The PAYG credits are
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transferable at the point when they are issued, as they may be the subject of a gift made at
that point, but thereafter they cannot be transferred; in this respect too they are different
from typical face-value vouchers. For these reasons we consider that the PAYG credits
cannot be said to “represent” the right to receive services, but are merely a credit that can be
utilized to obtain such services.
[61]       Moreover, we are of opinion that the third and fourth of the requirements of
paragraph 1(1) of Schedule 10A are not satisfied. These require that the right represented by
the voucher should be “to the value of an amount” and that that amount should be “stated
on” or “recorded in” the voucher. The wording used indicates that the value must be
recorded within the voucher itself; that appears to us to be of the essence of a face-value
voucher which represents particular rights. In the present case, however, the PAYG voucher
itself does not contain information that “states” or “records” the amount of the credits; that
amount can only be ascertained through access to the taxpayer’s own accounting records. It
is only there that the actual value of the PAYG voucher can be discovered, because that
depends upon the prices currently charged for viewing or downloading particular
documents on the website. No doubt the sum is expressed in “credits”, and it was argued
for the taxpayer and accepted by the Upper Tribunal that that was sufficient to constitute an
“amount”. In effect it was argued that the credits were a form of private currency. The
value of those credits, however, cannot be discovered from the PAYG voucher itself, but
only from the taxpayer’s accounting system. Furthermore, because of their fluctuating value
at the point of use, it is difficult to accept that those credits take the form of a private
currency; the value can be changed at any time by the taxpayer. No doubt for good
commercial reasons any such changes are likely to be modest, but what the credits are worth
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in practice can be changed unilaterally by one party to the transaction, which appears to rule
out the taxpayer’s analysis.
[62]       For these reasons we are of opinion that the PAYG vouchers do not represent a right
to receive services “to the value of an amount”, because what the vouchers are worth is
uncertain until the time of redemption; thus the third requirement of paragraph 1(1) is not
satisfied. We are further of opinion that the value of the vouchers is not stated or recorded
on them; it is only ascertainable by reference to the taxpayer’s own accounting system. Thus
the fourth requirement is not satisfied. In relation to the third requirement, the uncertainty
in the ultimate value of the voucher when it is redeemed is an important factor in our
decision that the prepayment provisions of section 6(4) of the 1994 Act do not apply, but that
uncertainty also affects the question of whether the PAYG credits are face-value vouchers, in
a manner that excludes such a characterization.
Conclusion
[63]       For the foregoing reasons we agree with the result reached by the Upper Tribunal, on
the basis that the nature of the taxpayer’s supply to PAYG customers was the supply of
genealogical records selected by a customer and viewed or downloaded by that customer,
and that the payments made by customers when they purchased PAYG credits did not
amount to a prepayment within the meaning of section 6(4) of the Value Added Tax Act
1994. We consider that the PAYG credits did not amount to face-value vouchers within the
meaning of Schedule 10A of the 1994 Act; on this matter we agree with the decision of the
First-tier Tribunal. Nevertheless, on the basis of our decision on the nature of the supply
and the prepayment issue, we will refuse the appeal.



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