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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Baxi Group Ltd v HM Revenue & Customs  EWHC 3353 (Ch) (21 December 2006)
Cite as:  EWHC 3353 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| BAXI GROUP LTD
|- and -
|THE COMMISSIONERS FOR HM REVENUE
Mr Baldry (instructed by HM Revenue and Customs) for the Respondent
Hearing dates: 29th and 30th November 2006
Crown Copyright ©
Mr Justice Lindsay :
The application form included questions, answers to which would give Baxi the age range of the individual installer; whether he or she had children and, if so, how many; how many of the children were over the age of 5 and what the installer's sporting and pastime interests were. Mr Ward's evidence included that, for marketing purposes, information of that kind was immensely valuable. He added:
"In essence, the value of a database in marketing terms is that it gives us information about a customer that we can then use intelligently. For instance, if beyond his name, address and phone number we also know that a customer is an avid Arsenal fan, then when Arsenal are playing in the Cup Final we can offer Cup Final tickets to him. The value of the database is that we can use the information therein to more closely target an offer."
I take it, though, that such provisions, not in the BDS catalogues, as those of Cup Final tickets were quite outside the BDS although, no doubt, facilitated by the information about the installer which Baxi would have acquired by way of the BDS.
"Claimed rewards are invoiced at RRP + post and packing at the point of order as ownership is then transferred and the points transaction made".
@1 would deliver the goods to the installer and deduct the relevant points from the installer's account.
"At the end of each month, I received reports from @1 as to which installers on the database had bought what boilers. The database, therefore, identified those installers who were loyal and who were not; the marketing department could then decide whether they wished to target those installers and decide how to do so; this could mean offering the loyal customers double points to reinforce the customer loyalty; conversely, depending upon the identity of the installer, it could mean offering double points to the disloyal installer in order to encourage future loyalty, i.e. the points/prizes are not ends in themselves but simply marketing tools."
"The profit made by @1 was calculated by reference to the margin between the value that it acquired the goods from third parties for and the recommended retail price. We agreed at the outset that the amount chargeable to Baxi by @1 for its services would be calculated by reference to the recommended retail value of the goods that @1 provided to members of the Scheme. The average margin that @1 made was of 33/34% and at the time this was felt to be a fair reward for @1's investment in goods/stock and the services that they provided in relation to the database and complaints management. By way of example, if @1 purchased a watch for £250 with a recommended retail price of £500, @1 would raise an invoice to Baxi for £500 being a margin of 100%. By way of further example, if @1 purchased a holiday for £1,000 with a recommended retail price of £1,050, @1 would raise an invoice to Baxi for £1,050 being a margin of 5%. Generally speaking, during the above period, the average margin @1 made on the goods was around 33/34%.
That reference to complaints management was, I would think, a reference to the fact that if goods provided by @1 to an installer were faulty, the customer was asked to call @1. That was conveyed to the installer from the documentation provided in relation to the BDS and was also stated on the delivery note that the installer got along with his reward.
The law: Was there a supply of goods to Baxi?
"It is in our view clear from the evidence that, even if it had delegated the administration of the scheme to @1, Baxi was disposing of the goods as, or as if it were, their owner. Title to the goods may have remained with @1 until it vested in the installer, but once @1 had allocated goods it already held to a particular gift, or acquired goods for the same purpose, it was disposing of them not as owner but in accordance with the terms of its agreement with Baxi. Until the moment of allocation it could do as it pleased with them; once allocated, they came within Baxi's control. It was, in other words, Baxi which was disposing of them as owner, in passing the goods and title to the installer. Thus the allocation or acquisition of goods by @1 for the purposes of Baxi's scheme had the effect of conferring on Baxi the right to dispose of them as owner and a supply within the meaning of article 5(1), as interpreted by the ECJ in Safe, was made by @1 to Baxi. That the goods did not come into Baxi's physical possession is of no consequence".
Neither side had argued below that there was a VAT supply to Baxi of the rewards sent to the installers; both sides had argued that there was no such supply. Before me both sides, at least as a matter of primary submission, were still united against this part of the Tribunal's decision. I am thus required to look into the irreducible and necessary ingredients of a VAT supply of goods to see if such was made by @1 to Baxi.
" (2) Subject to any provision made by that Schedule and to Treasury orders under subsections (3) to (6) below— "
(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;…."
Schedule 4 of the Act provides that:
" 1.—(1) Any transfer of the whole property in goods is a supply of goods";
And para 5 continues (with my emphasis):-
"5.—(1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.
(2) Sub-paragraph (1) above does not apply where the transfer or disposal is—
(a) a gift of goods made in the course or furtherance of the business (otherwise than as one forming part of a series or succession of gifts made to the same person from time to time) where the cost to the donor ……. is not more than £50;(b) ……."
It cannot be thought, as between @1 and Baxi, that what @1 makes is a gift of any kind; it invoices Baxi for the whole RRP of whatever it supplies by way of goods. Whereas paragraph 1(1) of Schedule 4 does not go beyond whether or not there has been a supply, para 5(1) by its reference to "by him", imports that, on the facts here, there is a disposition of goods forming part of @1's business assets and disposed of under its direction, the disponor of which (had it otherwise been in doubt) is @1. There is, in other words, a VAT supply of goods by @1.
"1. The taxable amount shall be:
(a) in respect of supplies of goods …. everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidiaries directly linked to the price of such supplies;"
"Consideration" in section 5(2)(a) thus includes that which the supplier, @1, has obtained or shall obtain "for" such supplies as it makes (i.e. here, of the goods). As the supplier is @1, everything which it receives from "the purchaser, the customer or a third party" for the goods can be consideration. There is no requirement such that "the purchaser" can only be the recipient of the goods or, conversely, that only the recipient of the goods can be the purchaser but, even if there were, whilst, in relation to the goods delivered to the installer, it may be a little unnatural to recognise Baxi as "the customer", it would plainly be, in that relation, a "third party". Hence, when Baxi engages prospectively to pay invoices for goods provided by @1 to installers under the BDS and does so pay, it provides "consideration" for that provision and so makes good all the requirements of our domestic legislation for there being a VAT supply of goods by @1 to the installer. As I have mentioned, there is no contractual or other provision for such a supply to the installer to be in some way to be taken to be as if by and only by way of a supply to Baxi. Given the features to which I have drawn attention in paragraph 19 above (and those to which I refer in paragraph 21 below), the goods which come into the hands of an installer under the BDS come to him, in my judgment, by way of a supply for VAT purposes directly to him, the supplier of which is @1. On that basis there is no room for there having been any supply of goods from @1 to Baxi; there cannot be one VAT supply of goods by @1 which is both a VAT supply of them to the installer and a VAT supply of them to Baxi. That is, as I see it, not only a reading of the EC and domestic legislation which is possible but the only one which accords with the ordinary use of language. I accept that that is no reliable guide to the incidence of VAT but, whilst I do not propose this is any sort of sure touchstone, it cannot, I hope, weaken that conclusion that if one found a manager or worker at @1, innocent of the implications of tax but on the brink of directing the sending or taking steps actually to send, say, an electric razor or electric kettle for delivery to an installer as a reward under the BDS and asked him to whom it was being supplied, the answer "to Baxi" would surely be improbable and, I would guess, would be far less likely than something identifying the installer. Of course, the Commissioners would rightly say that all this is speculation and that, if the manager or worker were to be questioned at all and if their answers were to be of any true relevance, that the question would have to be "To whom are you making a supply for VAT purposes?" But answers such as "What on earth do you mean?" or "How should I know" would hardly be helpful and my supposition that a conclusion that there here is no supply of goods by @1 to Baxi is one which accords with the ordinary usage of language does at least provide one with a little comfort.
"… 'supply of goods' covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property."
But the contractual arrangements between @1 and Baxi did not empower either Baxi or @1 to dispose of the goods as if either respectively were the owner of them. So far as concerns @1, it was already owner of the goods; it did not need to be empowered to dispose of them as if it were owner. So far as concerns Baxi, it is impossible to regard Baxi as being put into a position to dispose of the goods as if it were owner of them. It could not, for example, require @1 to send goods to it on the footing that it was already the owner of them; it could not, under the BDS, say to @1, as an owner of the goods could, that, irrespective of there being no supply of scheme "cheques", it was to send the goods to this or that installer. That would have required a quite separate contract. It had, as I have mentioned, no power to revoke a decision of @1 that, upon its receipt of a due supply of points, it was to send particular goods to a particular installer. An owner of goods will not infrequently be in a position to direct that he who holds the goods should dispose of them in some such way as the owner of them requires but Baxi had no equivalent rights over the goods in @1's warehouse. It would only become an owner of those goods if, quite outside the provisions of BDS, it asked for goods to be allocated to it and paid for them in such a way power to dispose of them had moved to Baxi. But that would require steps to be taken quite outside the BDS and there is no hint in the evidence that anything such was ever done.
A single or a multiple supply?
"Looked at in commonsense terms it seems clear to me, as it did to the tribunal, that the taxpayer company were sending out the tapes to the doctors as the final stage of fulfilment of a contractual obligation to the advertisers for the totality of all of which they had paid. It seems clear to me that the taxpayer company were making the supplies for the consideration paid by the advertisers and that, but for that consideration, the supplies would not have been made."
"That seems obvious … "
(1) The two fundamental principles of VAT law are that: (a) as a default rule, pursuant to Article 2(1) of the Sixth directive, every supply of goods or of a service must normally be regarded as distinct and independent; and (b) supplies must not be artificially split.
See CPP  STC 270 at paragraph 29; and International Masters Publishers  EWCA Civ 1455 at paragraph 6.
But "CPP" – Card Protection Plan Ltd v Commissioners of Customs and Excise  STC 270 - says that it is "every supply of a service" that must normally be regarded as distinct and independent and that it is a supply "which comprises a single service from an economic point of view" that should not be "artificially split". CPP has to some extent been relaxed, as I shall mention below, but was never a blanket prohibition on divisibility; indeed para 29 concludes with the requirement that "the essential features of the transaction must be ascertained to determine whether" there are several distinct principal services or a single service. It is implicit that where there are the former the split would not be "artificial". Para 6 of International Masters merely repeats CPP's para 29.
(2) Neither the European VAT directives nor domestic implementing legislation contain any provisions dealing with the proper fiscal treatment of mixed supplies. Therefore, the criteria for determining the fiscal treatment of a supply of distinguishable elements have been identified by the courts and deployed as a technique to determine the fair and proper tax.
See CPP ibid at paragraph 42 of AG's Opinion; see FDR  STC 672 at paragraph 50; and see Levob  STC 766 at paragraph 65 of AG's Opinion.
I accept that and save to identify "FDR" as Commissioners of Customs and Excise v FDR Ltd and "Levob" as Levob Verzekeringen BV & Anor v Staatssecretaris van Financiën, I need add nothing except to note that the ECJ's conclusions in CPP as cited above "may also be applied where supplies of goods and services are supplied together" – see the A-G's Opinion in Levob, para 66, thus enlarging or relaxing the CPP approach beyond that which its terms alone might suggest.
(3) Where a transaction is comprised of a bundle of features and acts, regard must be had to all the circumstances in which that transaction takes place.
See Faaborg – Gelting  STC 774 at 883; CPP ibid at paragraph 28.
I accept that.
(4) If a supply, from an economic point of view, is treated as a single supply, it should not be artificially split. Indeed, recent authorities have warned against micro-analysis which involves dissecting transactions into constituent parts; instead, one should look at the economic purpose in broad terms. In other words, one must identify the commercial reality of transaction.
See CPP ibid at paragraph 29; CPP (HL)  STC 174 at paragraph 22; British Telecom  STC 758 at 766; Dr Beynon & Partners  STC 55 at paragraph 31; and International Masters Publishers ibid at paragraph 6.
That is almost acceptable but what is not artificially to be split is not what, from an economic point of view, "is treated as a single supply" but what from that further view is a single supply. If artificial dissection is to be avoided the Court must seek the "level of generality which corresponds with … economic reality" – Dr Beynon supra at para 31.
(5) In order to determine whether a supply is a composite or mixed supply from an economic point of view, one must identify the essential features to determine whether the supplier is supplying a typical customer with separate services, or a single service. One should ask; what is the dominant purpose?
See CPP ibid at paragraph 29; CPP (UK) ibid at paragraph 25; British Telecom ibid at 769a; and Dr Beynon & Partners ibid at paragraph 20.
I accept that.
(6) One way – but not the only way – in which to determine whether there is a single or multiple supply is to determine whether one can identify a principal or core supply to which other distinguishable supplies are ancillary.
See CPP ibid at paragraph 30.
I accept that.
(7) Not all supplies fit this neat dichotomy between principal and ancillary supplies. There are cases where there may be a bundle of supplies in which none predominates over the others, i.e. integral supplies rather than ancillary supplies. In this situation, one must look at the "table top" (as opposed to the "apex") to determine the true and substantial nature of the consideration given for the payment.
See FDR ibid at paragraph 55; College of Estate Management  STC 1597 at paragraph 30; International Masters Publishers ibid at paragraph 2; and Levob ibid at paragraph 21.
(8) Neither approach requires deep legal principle. Instead, the principle is to articulate a fair and reasonable approach to cases of mixed supplies.
See FDR ibid at paragraph 54.
I accept both (7) and (8).
(9) The tests and analyses adopted by the courts to determine whether there is a single or multiple supply apply equally to the supply of goods as well as services and also mixed goods and services.
See British Telecom ibid at 765g-h; Kimberly-Clark  STC 473 at paragraph 44; and Levob ibid at paragraph 66.
I accept that. Again, this recognises an extension or relaxation of CPP beyond that which its language might strictly suggest.
The Tribunal's decision