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Cite as: [2006] EWHC 3353 (Ch)

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Neutral Citation Number: [2006] EWHC 3353 (Ch)
Case No: CH/2006/APP/0205


Royal Courts of Justice
Strand, London, WC2A 2LL
21st December 2006

B e f o r e :


- and -




Mr D Scorey (instructed by PricewaterhouseCoopers Legal LLP) for the Appellant
Mr Baldry (instructed by HM Revenue and Customs) for the Respondent
Hearing dates: 29th and 30th November 2006



Crown Copyright ©

    Mr Justice Lindsay :


  1. This is yet another case in the fact-sensitive area of VAT and reward schemes. The appellant, Baxi Group Limited ("Baxi"), appearing by Mr Scorey, is the representative member of a VAT group that has within it Baxi Heating UK Limited, a boiler manufacturer making, inter alia, Potterton Boilers. Having earlier run its own Potterton promotional scheme, Baxi chose then to delegate operation of a wider Baxi reward scheme to @1 Limited ("@1"), a company which carries on business as operator of such schemes. I shall describe the promotional scheme – the "Bonus Direct Scheme" or "BDS" – in more detail below but, in brief, installers of Baxi boilers earn "points" which they "redeem" with @1 for rewards – goods and services – chosen from a bespoke Baxi version of an @1 catalogue. The chosen rewards are then provided to installers by @1. @1 invoiced Baxi at the full recommended retail price ("the RRP") for what had thus been provided to installers and @1 charged VAT on the invoiced amount, which Baxi paid.
  2. Throughout the VAT periods from the 1st September 2000 to 1st March 2003 Baxi completed its VAT returns on the basis that it was not entitled to deduct as input tax the VAT thus charged to it and paid by it to @1. However, in May 2003 Baxi's accountants made a "voluntary disclosure" claiming to deduct as input tax for the relevant periods that which had thus been paid to @1. The sum involved was £405,481. The Commissioners for HM Revenue & Customs ("the Commissioners") did not accept that voluntary disclosure but were willing to allow the deduction of such part of the overall sums paid to @1 as represented not the provision of the rewards - the goods or services provided to installers - but only the associated marketing services which @1 supplied to Baxi. The Commissioners' decision was confirmed in a letter of the 3rd June 2004. Baxi did not accept that proposal and appealed against it; the appeal was heard at the Manchester Tribunal Centre before Mr Colin Bishopp, chairman, and Mr Brian Strangward, whose reserved decision, dismissing Baxi's appeal, is dated the 20th January 2006.
  3. Both Mr Scorey for Baxi and Mr Baldry, appearing for the Commissioners, criticise the route by which the Tribunal arrived at its conclusion. Each argues that, relying, inter alia, on authorities which had not been cited by either side to the Tribunal and as to which neither side had had any opportunity to comment and adopting an approach which had, at most, been only secondary during the hearing, the Tribunal held – it was a central part of its reasoning – that under the BDS rewards were supplied for VAT purposes to Baxi, a conclusion which neither side had supported and both had opposed, although it permitted the Tribunal, whilst rejecting the Commissioners' primary argument, to accept its secondary argument. The appeal to the Tribunal was thus dismissed. The Tribunal held (and I shall revert to its decision more fully below) that Baxi was entitled to recover as input tax the VAT included in @1's invoices but had to account for output tax on the value of such individual distributed rewards as had acquisition costs exceeding £50.
  4. By an Appellant's notice (undated and unsigned in my copy) Baxi appeals, under section 11 of the Tribunals and Inquiries Act 1992, against the Tribunal's decision. Baxi's primary contention is that the BDS represents an indivisible single supply of marketing services to it, albeit a supply to it of a service which includes provision of goods and services – the rewards – to others, namely to the installers. It is a service which, so Baxi asserts, is standard rated for VAT purposes. The VAT incurred by it and paid to @1 in respect of those services is incurred in the course of Baxi's business, was accordingly deductible as input tax in the relevant periods and, in turn, is now recoverable in full. The parties join issue on that primary contention.
  5. I shall first mention two minor points. Firstly, the rewards consisted of both goods and services. An installer could, for example, redeem his points for a package holiday. But both sides agree that nothing turns on whether it was goods or a service which an installer chose and which @1 provided to him save that Baxi argued that para 5(1) of Schedule 4 of the VAT Act 1994 – see para 18 - applies only to goods and not to services. It will be convenient to speak of all rewards as "goods" Secondly, there were some goods available for an installer's selection which bore the Baxi logo and belonged or were taken to belong throughout to Baxi albeit that they were held by @1. Those goods fall outside this appeal.
  6. The facts

  7. Mr Scorey complains that the Tribunal's decision does not do full justice to the oral and written evidence and that too much regard was paid by the Tribunal to the BDS as viewed by installers and too little to the more relevant viewpoint of the taxpayer, Baxi. It is not said that the Tribunal misstates anything of relevance. Without my agreeing that there is any substance in Mr Scorey's complaint but lest the Tribunal's summary does fall short, I shall first attempt to flesh out the factual background looking chiefly through Baxi's eyes.
  8. Mr G R Ward, the only witness who gave oral evidence, was at the material time head of marketing for Baxi. The boiler market, in which Baxi operates, is, he says, "massively competitive". Baxi supplies builders' merchants who supply installers who, in turn, supply and install for the ultimate consumers. It is generally the installer, so believes Baxi, who is the decision-taker as to which boiler is to be chosen for an installation. Hence Baxi regards the installers as the most important link in the chain of supply. Baxi has thus sought a mechanism for the retention and enhancement of loyalty to it amongst installers. Rewards to installers, made available by way of a loyalty programme, can be such a mechanism. @1, to adopt their own literature and jargon, "provide a turnkey outsourced [customer relationship management] service to companies in the business-to-business field who do not have existing one-to-one business relationships with their key market drivers". A loyalty programme can also be used to enable the manufacturer – here Baxi - to establish and maintain a database to include valuable information as to its customers. Large numbers are involved; the earlier Potterton rewards programme had the names of some 36,000 installers on its database.
  9. In terms of the practical operation of the BDS, an installer, perhaps learning of the existence of the scheme from the internet or from other installers, would apply to be registered as a member. The application form or online equivalent would be received by @1. The form included categories of information that would interest Baxi; how many boilers per annum did the installer fix, what was the prime area of the particular installer's business (for example, heating, kitchen, bathroom etc); how were his installations divided as between high efficiency and standard boilers; how many employees did the installer have and so on.
  10. 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.

  11. Upon his registering, the installer would be sent a BDS "cheque book". When a Baxi boiler was then installed by a registered member of the BDS the installer would be in a position to pull off its adhesive "bar code" label and stick the label onto the "cheque", which would then be sent to @1. The points appropriate to that particular boiler at that particular time (previously agreed between Baxi and @1 in relation to Baxi's current wish to promote particular boilers and to the numbers of points needed for rewards in the current BDS catalogue) would then be credited to the installer's loyalty points' account at @1. Every three or four months @1 provided registered installers with a catalogue setting out all of the goods which were available in consideration for specified numbers of points. The catalogue was "a bespoke catalogue branded Baxi Potterton". Once the installer had a sufficient number of points for whatever reward he had chosen, he could contact @1 and "cash in" those points for the specific product that he had chosen from the catalogue.
  12. @1 had its own computer and call centre and warehouse from which to handle work. It bought in and stocked rewards and had dealer status with its suppliers and was thus able to buy goods at advantageous prices. The rewards stock was owned by @1 – see para 2.10 of the Statement of Service to Baxi, which Statement also states:
  13. "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.

  14. Baxi, it seems, played no role in the selection or delivery of goods; there is no evidence that it was other than @1 that chose what were in the Baxi catalogue. The installer chose what it was that he wished to receive from the rewards in the catalogue and it was @1 (who, it may be inferred, ran not dissimilar schemes and catalogues and thus stocked similar or identical goods and arranged their deliveries for other manufacturers) which chose which particular goods answering the description which the installer had chosen were to be sent to him and how they were to be sent. Baxi would not know until its later receipt of invoices what had been sent. I do not understand there to have been any necessary contact between the installer and Baxi when the installer indicated to @1 what goods it was that he wished to have in exchange for his "points" as his reward.
  15. Once a month @1 added up the recommended retail value of all the goods that had been provided to Baxi's customers in the previous month and sent invoices to Baxi. The invoices would cite the recommended retail price and would add VAT so as to arrive at a total payable by Baxi. The invoices make no express mention of any service provided to Baxi and, save perhaps that no mention was made of delivery, the invoices in all respects look as one would expect an invoice to be as between, for example, a retailer and his customer. The invoices did not themselves identify the installer to whom the goods had been sent but that was made known to Baxi as next appears.
  16. The marketing information which @1 supplied to Baxi would seem to have been of a rather simple and limited nature. Mr  Ward, in his paragraph 19, states:
  17. "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."
  18. @1 made its money, as would any more ordinary wholesaler, by receiving more for the goods and services it provided (to use a neutral word) as rewards to installers than its costs involved in acquiring and in distributing them under the arrangements made in the BDS. The Statement of Service provided that the Scheme was "financed only by the margin on the supply of the rewards" and that no charges were made for day-to-day operation of the BDS although pre-quoted charges would be made for, inter alia, database management, development and modification. Mr Ward explained in his paragraph 25 as follows:
  19. "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.

  20. The Tribunal took the facts from Mr Ward's evidence and, whilst he was cross-examined, I do not understand from the Tribunal's decision that the passages I have cited from his written evidence were departed from or ceased to be accepted as his evidence. There is, as I read it, nothing in the Tribunal's summary of the facts at its paras 3-12 which conflicts in any respect with the fuller material that I have cited above; if there was justice in Mr Scorey's complaint I trust that it has now been remedied and I shall approach the law on the basis that it has been.
  21. The law: Was there a supply of goods to Baxi?

  22. Fundamental to the Tribunal's conclusion was its view that under the BDS there was, for VAT purposes, a supply of goods by @1 to Baxi and then another supply to installers by Baxi. In paragraph 37 the Tribunal said as follows:
  23. "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.

  24. Leaving aside words not material for immediate purposes, Article 2 of the Sixth Directive makes subject to VAT "the supply of goods … effected for consideration … by a taxable person acting as such". There can be no question but that, in providing goods under the BDS, @1 was a taxable person acting as such. It was, moreover, doing what it did for consideration: the payment to it of the invoices which it rendered to Baxi. There is nothing in the EC legislation that limits consideration for a supply of goods to that which is received from the recipient of the goods. As for supply, Article 2 itself does not further define "supply" but Article 5 of the Sixth Directive defines a supply of goods as "the transfer of the right to dispose of tangible property as owner". I am not here concerned with the provisions that enlarge what is tangible property beyond the natural meaning of those words. Given, then, that there is a taxable person acting as such, @1, which is, at the outset, the owner of the goods, the person having the right to dispose of them in that capacity, then, at the end, another person, the installer, who by then has the right to dispose of them as owner, that no one else – para 2.10 of the Statement of Service is to be kept in mind - in the interim can be seen to have had that right, and that @1 receives consideration directly related, in causation and amount, to a transfer of the right to dispose as owner from @1 to the installer, it is difficult to see how there can have been a supply of the goods from @1 to Baxi, at any rate so far as concerns EC legislation.
  25. As for our domestic legislation, the Value Added Tax Act section 5(2)(a) provides, after reference to Schedule 4 of the Act:-
  26. "  (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.

  27. But to whom and of what was that disposition made? At this point I am looking only into whether there was a supply of goods to Baxi. As for that, the whole property in the goods before the redemption of points by and appropriation and delivery to the installer was, as I have mentioned, in @1. @1 selected which were the particular goods to be supplied in the sense of which, say, electric shaver or kettle from its stock was to be sent to the installer. The whole property in the goods immediately after the redemption of points and their provision to the installer was in the installer. No contractual or other terms provide, imply or require that the property should have moved in the interim from @1 to Baxi. Possession also shifted directly from @1 to the installer without ever being in Baxi. Baxi did not decide what goods should move, when goods should move or how goods should move. The disposition of particular goods to an installer never required nor was in fact initiated by any request from Baxi. It did not know until after provision of goods that goods or goods of a particular description were wished by the installer to be supplied to him or were to be supplied to him by @1 or whether they had in fact been provided to that or to any installer. Baxi took no responsibility for the goods sent to installers duly answering their description in the catalogue; it was @1 that handled complaints. This all suggested that the supply by @1 was of goods to the installers rather than to Baxi.
  28. But if that was the supply, was it "done" for a "consideration" as section 5(2)(a) requires? The word "consideration" in our domestic VAT legislation has, at any rate save where such is ruled out expressly or as a matter of necessary inference from the context, to be construed so as to accord with EC legislation and accordingly here the word has to accord with the meaning ascribed to consideration in article 11 of the Sixth Directive. That provides:
  29. "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.

  30. Further, and looking in more detail at the Tribunal's reasons for its conclusion that the goods were supplied to Baxi – see the citation in para l6 above, in suggesting that @1 disposed of the goods "not as owner but in accordance with the terms of its agreement with Baxi" the Tribunal was describing a false dichotomy. That a supplier of goods who is their owner disposes of them by way of a contract with another does not deny his disposition the characteristics of its being a disposition "as owner". Nor did the goods come "into Baxi's control". It did not know the identity of the relevant goods nor of the intention to send the goods nor the identity of the respective recipients of the goods until after they had been sent. It had no specified contractual or other means of revoking a decision by @1 to send this or that electric shaver or kettle to this or that installer. Nor, on the Nemo dat principle, could Baxi, as the Tribunal would have one believe, pass title to the goods to the installer. Nor, either, does the reference to Safe (Staatsecretatis van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1991] STC 627) assist the Tribunal to its conclusion. At paragraph 7 of the judgment of the ECJ the Court there said, as the Tribunal recites in its paragraph 35, that:
  31. "… '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.

  32. For these reasons which, unusually upon an appeal, accord with the arguments of both the appellant and the respondent, I hold that there was no supply of goods by @1 to Baxi. If that is right then the Tribunal's principal conclusion must be wrong. However, a conclusion that there was no supply of goods by @1 to Baxi does not, unfortunately, answer the questions of what it was that was for VAT purposes supplied, taking @1 as the supplier, and to whom was the supply made?
  33. A single or a multiple supply?

  34. Mr Scorey for Baxi argues that there is here one indivisible supply of advertising and marketing services by @1 to Baxi. Amongst the advantages which Baxi thereby acquires as recipient of those services is that, under the BDS, @1 supplies goods to installers to promote loyalty to and sales by Baxi. Mr Scorey relies first upon Customs and Excise Commissioners v Telemed Limited [1992] STC 89.
  35. Telemed each month made video tapes of a programme of interest to doctors. It sold space on the tapes to advertisers of pharmaceutical products and distributed the tapes gratuitously to a number of doctors. It was obviously implicit in the sale of the advertising space that the tapes would be so distributed – page 90j. The "short point in the case" was said by Hodgson J. to be "whether the supply of the tapes to the doctors was otherwise than for consideration" – page 91j. The Commissioners had taken the view that there was a supply of goods made gratuitously to doctors, the result of which, under the 1993 Act, was that Telemed would be required to pay VAT as if it had received the open market value of the goods. The Tribunal had there concluded that the tapes were not supplied to the doctors so as to be gifts – page 93F-G – and Hodgson J. was of the same view; at page 96H he said:
  36. "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."
  37. The case is helpful in circumstances in which the "short point" in it arises but there was no debate as to the divisibility or otherwise of mixed supplies of services and goods; in response to the Commissioners' argument in Telemed that there were two separate supplies, one of services to the advertisers and one of goods to the doctors, Hodgson J. merely observed:-
  38. "That seems obvious … "

    See p.91e-f

  39. Accordingly I leave Telemed aside as being a case not on divisibility but on whether there had been a gift or a transaction for a consideration and instead I turn to nine propositions advanced by Baxi on the question of whether multiple supplies or a single supply had here been made. Mr Scorey very helpfully set out his propositions in typescript and I will adopt his formulation of them and comment as appropriate. Thus Mr Scorey begins:-
  40. (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 [1999] STC 270 at paragraph 29; and International Masters Publishers [2006] EWCA Civ 1455 at paragraph 6.

    But "CPP" – Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] 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 [2000] STC 672 at paragraph 50; and see Levob [2006] 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 [1996] 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) [2001] STC 174 at paragraph 22; British Telecom [1999] STC 758 at 766; Dr Beynon & Partners [2005] 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 [2005] 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 [2004] 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.

  41. I did not understand Mr Baldry for the Commissioners to take real exception to any of the nine propositions but, of course, he drew different conclusions from them and chief amongst his added authorities were EC Commission v Federal Republic of Germany [2003] STC 301 ECJ and Auto Lease Holland BV v Bundesamt für Finanzen [2006] STC 598 but I do not understand either to qualify Mr Scorey's nine principles or to be illuminating on the issue as to whether, under the BDS, there is an indivisible single or, as the Commissioners argue, a divisible multiple supply made in the course of its implementation.
  42. Adopting the principles I have commented on above, I must ask myself such questions as these: what is it, if anything, looking at the acts performed under the BDS from an economic and commercial standpoint, that can be said to be their dominant purpose? What is it, striving to attain a level of generality that corresponds to economic reality rather than descending to fine detail, that can be seen to be their essential feature? Is there a core supply to which other distinguishable supplies are ancillary? In point of economic and commercial reality are there distinguishable supplies which are economically dissociable?
  43. The answer, as I see it, is certainly not that there is a mere supply of goods, some anonymous or wholly gratuitous provision of goods to installers, nor a provision of goods to them which was unexplained to them or unpredictable by them. Baxi wished the provision of goods to installers to be firmly associated with Baxi in such a way that loyalty to and sales by Baxi would be promoted. If goods were to be received at an installer's address "out of the blue", so to speak, neither loyalty to nor sales by Baxi would be enhanced. There had to be, if Baxi was to achieve its aims, an association developed in the minds of installers between their loyalty to and use of Baxi boilers and the foreseeable arrival of such goods as they might have chosen as rewards for their installation of Baxi wares. Just as, in C&E Commissioners v British Telecommunications plc [1999] STC 758 HL, the House of Lords arrived at the conclusion that what BT there wanted was not a supply to it of cars and a separate supply to it of the service of the delivery of cars but, rather, "a delivered car" – per Lord Slynn at 766 e-f - here Baxi wanted not a mere provision of goods to installers and a separate provision of some advertising or marketing service to it but, as a predominant feature, a supply of goods to installers in such a way, made visible to them, explained to them and as would be predictable by them, that the supply would ultimately generate or at least tend to generate loyalty to and sales by Baxi. The advertising and marketing service which included the devising and formulation of the BDS, the selection of goods for the catalogue, the editing and dissemination of the catalogue, the provision of the "cheques", the whole plan for application for and registration of membership, the acquisition and storage of rewards goods, the receipt and processing of requests for those rewards, their delivery to installers, the handling of any complaints and the supply of information as to installers for the database were, all taken together, not, in my judgment, economically dissociable from the provision of goods but a mechanism without which the provision of goods to installers could not achieve its purpose.
  44. Mr Baldry argues that @1 supplied reward goods to the installers for third party consideration provided to @1 by Baxi and that there were separate supplies of, on the one hand, goods to installers and, on the other, advertising and marketing services provided by @1 to Baxi. These separate services were not, he said, to be subsumed within a single supply of marketing services. It is, of course, central to this argument that, overall, there are, under the BDS, multiple services which, for VAT purposes, are separable and proper to be separated. However, for the reasons set out in the immediately preceding paragraph, the BDS, in my judgment, consists, for VAT purposes, of a single indivisible service from @1 to Baxi, albeit a service that includes the provision of goods to installers. I thus reject the Commissioners' principal argument (although for a different reason to those deployed by the Tribunal, which rejected it because it held that the supply of goods was not to the installers but to Baxi.).
  45. A conclusion that there is an indivisible single supply does not in all circumstances invariably lead to a conclusion that the consideration for it is equally indivisible; there can, in some circumstances, be apportionment of consideration. However, the Commissioners have not argued for apportionment in the case of the supply being found to be a single one. Indeed, in oral argument, the Commissioners were remarkably hesitant about apportionment even if the supplies being made were found to be the separate ones of goods to installers and a service to Baxi. Apportionment was described as a sort of runner's up prize that would console Baxi as giving it some measure of relief. Moreover, the apportionment which the Commissioners hinted at as possibly fair if the case was not one of a single supply was that the goods supplied to installers should be taken to be supplied to them at the wholesale price at which @1 acquired them and the advertising and marketing services should be taken to be supplied for the margin between that and the RRP which Baxi paid. An apportionment on those lines suggests that @1 would have been willing to acquire, store and distribute the goods in return for being paid only what it had paid for them, hardly a realistic basis for a supply of what was, ex hypothesi, a supply of goods separate from a provision of services. In the circumstances and on the basis that I have been right to regard the supply as being a single one, I do not see any apportionment of consideration as appropriate.
  46. In consequence, Baxi is entitled, in my judgment, to have all its VAT paid to @1 under the BDS in the periods with which I am concerned treated as part of its input tax in those periods.
  47. The Tribunal's decision

  48. The Tribunal, adopting some authorities and an approach which neither side had argued for and which both sides told me was not foreshadowed by anything said by the Tribunal during the hearing and which, accordingly, was an approach which neither side had an adequate opportunity to deal with, concluded that both sides' analyses for VAT purposes of the supplies made under the BDS were incorrect and, as I have shown, that the rewards goods were supplied by @1 to Baxi. The Commissioners had not argued for that but had, very much as a secondary argument, pointed out that if that was so, the case would fall within para 5(1) of Schedule 4 VATA. For the reasons I have given above, there was, in my judgment, no supply of goods to Baxi. Treating the goods as supplied to Baxi and hence, albeit only briefly, as falling within Baxi's ownership, the Tribunal rejected the Commissioners' primary argument which, as I have mentioned, had been that the BDS gave rise to two distinct VAT supplies to two different recipients, the goods to the installers and the marketing services to Baxi. The Tribunal rejected that but without ever wholly grappling with Baxi's primary argument that there was a single and indivisible supply of services. But, on the footing that, however briefly, the rewards goods were in Baxi's ownership, the Tribunal saw the case to be one, indistinguishable from Kuwait Petroleum and Tesco plc v Customs and Excise Commissioners [2003] STC 1561, as a case which fell within paragraph 5(1) of Schedule 4 of the VATA. That paragraph – see para 18 above - requires an identity between the business of which the distributed goods are an asset and the business a person carrying on which directs their transfer or disposal. On the facts as I have described them I would have seen @1 as the person under whose direction the reward goods were transferred or disposed and, if that were right, the necessary identity would not be achieved. However, the Tribunal took the view that it was Baxi that disposed of them and did so as their owner. The Tribunal concluded, accepting the Commissioners' second argument, that Baxi was entitled to recover as input tax the VAT which had been included in @1's invoices but that it must account for output tax on the value of those gifts whose costs of acquisition exceeded £50 (see paragraph 5(2)(a)). The Tribunal's reasoning, even were it right as to the transfer or disposal having been under Baxi's "directions" (note the plural which suggests repeated day-to-day directions rather than direction by way of some singular overarching mandate) cannot stand if, as I have held, the reward goods were never such that they were Baxi's business assets or disposable by Baxi as if it had been their owner because, in such a case, the required identity was lacking. Thus, if I am right in earlier concluding that there was no supply of goods to Baxi then the Tribunal was also wrong in accepting the Commissioners' secondary argument. I would add that I am far from confident that Kuwait supra would have been indistinguishable even on the footing that Baxi became owner of the goods sent by @1 to installers. The facts in Kuwait are not clearly stated on the point but it seems Kuwait, which ran its own promotion schemes, may have itself owned the goods distributed and not for a scintilla temporis or by way of a legal fiction but in every ordinary sense of its having title to them and possession of them.
  49. Other arguments

  50. After the hearing before me had concluded but before this judgment was written The Times briefly reported a case before Sir Andrew Park, Total UK Ltd v Commissioners of HM Revenue and Customs. At a point at which, it transpired, no transcript of the decision was then available, I asked both counsel whether either intended to address me further, in writing, by reference to Sir Andrew's decision. Since then an approved transcript of the decision has become available and neither side sees the decision as relevant to matters before me. It is, they tell me, in any event intended to be appealed by the Commissioners. I shall accordingly not look further at that Total decision.
  51. As I have mentioned, Mr Baldry relied in part of his argument on Auto Lease Holland BV v Bundesamt für Finanzen supra. The ECJ was required to answer the highly specific preliminary question – para 20 – as raised by the Bundesfinanzhof. In a sense, up to six roles were played in the relevant transaction, although, as so often in the more lively plays, dual roles were played by some of the actors. The lessee of a car (also, in another guise, the ultimate payor of the fuel used in the car), the lessor of that car, the service station which, at the lessee's request, put fuel into the car, the credit card company and, playing another role, the lessor of the car to whose account with the credit card company the cost of the fuel was initially debited all took part. The case shows that he who pays for goods, or, at any rate, he who initially pays for goods, is not necessarily the person to whom they are, for VAT purposes, supplied – para 35 – and also emphasises that questions as to the right to dispose of goods as owner are susceptible of a robust and practical answer. The lessee of the car was empowered to dispose of the fuel because no other candidate for the description of owner had the right to decide in what way or to what end the fuel was to be used – para 34. But I do not see the decision as impeding the view which I have already taken on such issues and certainly do not see the case as enabling me to regard Baxi, a person who never had the right to decide what goods should be supplied to whom, as a person to whom a supply of goods was made.
  52. I was also referred to Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 HL and, in particular, to the passage at page 171 g-h to which I referred to in para 72 of my decision in Commissioners for HM Revenue and Customs v Loyalty Management UK Ltd [2006] EWHC 1498 (Ch). There, as Lord Millett pointed out, everything which the agents did was done at Redrow's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts, held Lord Millett, constituted a supply of services to Redrow. But the facts were so very different that I do not find that very much can be made of Redrow. It cannot be said, in my view, on the facts before me, that everything which @1 did under the BDS, though, no doubt, ultimately done at Baxi's expense and, in the sense that Baxi voluntarily joined the BDS with @1, at @1's request, could be said to have been done in accordance with Baxi's instructions. I have earlier pointed out how little Baxi did in relation to the selection of whether any goods should be supplied to a particular installer and, if they were to be, how they were to be supplied and which particular goods would serve to meet the installer's request.
  53. Equally, I did not find Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509 ECJ applicable to the facts before me. In that case passers-by tossed money into the collecting tin held out by a barrel organ player on the public highway in the Netherlands. That player, Mr Tolsma, was assessed to VAT. Mr Tolsma argued that he did not provide a service for consideration because there was no agreement between the passers by and himself and there was no necessary link between the musical service that he provided and the payments to which it gave rise. The passers-by did not request music to be played to them and the sums which they paid depended not on the musical service but on subjective motives such as feelings of sympathy. The ECJ held that for there to be a supply of services effected "for consideration" within the meaning of Article 2(1) of the Sixth Directive there had to be a legal relationship between the provider of the service and the recipient pursuant to which there was reciprocal performance. There was not the adequate reciprocity on the facts of Tolsma. There is nothing about Tolsma that precludes there being a service (albeit one which included provision of goods to installers) supplied by @1 to Baxi; the two were related by contract. Had there been other than a single indivisible supply here, I doubt whether Tolsma would have stood in the way of a conclusion that @1 supplied goods for consideration (third party consideration) to installers but that is a matter I do not need to decide.
  54. Mr Scorey raised arguments that would be relevant, were there to be divisible supplies to Baxi, as to the costs below and as to the Commissioners' general practice as to costs as illustrated in the Tribunal decision, South Herefordshire Golf Club v Her Majesty's Revenue and Customs, a decision of the Birmingham tribunal of 11th September 2006. There was argument, too, as to the proper consequences of the tribunal's decision especially in relation to the absence as yet, of any refund of tax on goods below the £50 bar. Such arguments, I apprehend, will fall away if Baxi's appeal is allowed. As that is what I am about to do I do not deal with those arguments but leave them to be dealt with where they are questions that require decision.
  55. Conclusion

  56. For the reasons I have given, I allow Baxi's appeal. I will discuss with Counsel what is the proper Order consequential upon my allowing the appeal.

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