V19648
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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Redcats (Brands) Ltd v Revenue & Customs [2006] UKVAT V19648 (26 May 2006) URL: https://www.bailii.org/uk/cases/UKVAT/2006/V19648.html Cite as: [2006] UKVAT V19648 |
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19648
VAT — mail order companies — whether change in terms of trading conditions resulted in their continuing to make gifts of catalogues either at common law — yes — if not, did ownership pass when sent out pursuant to contract — yes — if not, did ownership of the catalogues pass when sent out pursuant to reg 24 Consumer Protection (Discount Selling) Regs 2000 — yes — was catalogue charging clause ineffective as not forming part of contract for goods — yes — was sale of catalogue prevented from being a supply — yes — does principle laid down in Card Protection Plan apply — no — does doctrine of abusive practice apply — yes — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
REDCATS (BRANDS) LIMITED Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: David Demack (Chairman)
Brian Strangward
Sitting in public in Manchester on 18 – 20 April 2005 and 21 – 25 November 2005
Kevin Prosser QC and Andrew Hitchmough of counsel instructed by Messrs Ernst Young, chartered accountants of London for the Appellant
Christopher Vajda QC and Ian Hutton, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2006
DECISION
Introduction
"HMRC contend that Redcats (Brands) Ltd, and, other companies within its VAT group make no separate supplies of catalogues to their customers. The company rejects this contention and considers that supplies of catalogues have been made which have been correctly treated as zero-rated under Schedule 8, Group 3 of the VAT Act 1994."
"a. There is no contract as a matter of domestic law for the supply of a catalogue as claimed by the Appellant:
i. there is no contract for the supply of the catalogue;
ii. the catalogues are unsolicited;
b. The catalogues are not supplied for consideration
c. Alternatively, if there is a supply of the catalogue, that supply is ancillary to the supply of the goods;
d. Alternatively, the tax advantage sought under the arrangement falls to be disallowed under the Abuse of Rights principle: Case C-110/99, Emsland-Starke, 2000 ECR I-11569."
- Did ownership of the catalogues pass when they were sent out by Redcats by way of an unconditional gift?
- If not, did ownership of the catalogues pass when they were sent out, pursuant to a contract with the recipients?
- If not, did ownership of the catalogues pass when they were sent out, pursuant to regulation 24 of the Consumer Protection (Discount Selling) Regulations 2000 ("the DS Regulations")?
- Was the catalogue charging clause ineffective because it did not form part of the contract which Redcats and the customer entered into when the customer ordered goods from the catalogue?
- Was the sale of the catalogue prevented from being a supply for VAT purposes?
- Does the principle laid down in the case of Card Protection Plan Limited v Commissioners of Customs and Excise [1999] STC 270 ("CPP") apply?
- Does the doctrine of abusive practice apply?
Questions 1 – 4 relate to domestic law issues; 5, 6 and 7 are issues concerned with the VAT analysis of the supply of catalogues.
(a) Mrs Marion McKenzie-Green, group finance director of Redcats UK plc;
(b) Mr Robert Mitchell, group finance director of Littlewoods (another mail order trader);
(c) Mr Frederick William Oakes, solicitor and company secretary of both Redcats UK plc and Redcats; and
(d) Mr Iain Campbell, an officer of HMRC.
From that evidence, we make the following findings of fact.
The Facts
"We have nothing to lose and everything to gain. At present we have catalogue costs which we simply absorb. Whilst there is no intention of directly charging customers we have the opportunity to move income from a fully VATable environment to one where VAT is still due at 0%, thus retaining our ability to reclaim input VAT on catalogue costs. At the same time we will improve our sales margin, either by decreasing VAT payable on sales …"
"I believe you are aware that Next price their catalogue at £3 and actually charge customers on their statements, I understand this is so even if no order is received. None of the 'traditional' mail order companies charge customers for catalogues but let's not forget that we will not be charging ours, we will simply be highlighting the value of what we have 'supplied' to use VAT speak."
"The purpose of this report is to consider the feasibility of the Group implementing a VAT saving arrangement …" (Section 1.1)
"The object of the arrangement is to obtain a reduction in the Group's VAT liability by allocating part of the mail order turnover to the 'sale' of the catalogues, which at the moment are zero-rated …" (Section 1.2)
"The arrangement now under consideration is the sale of the catalogue for a price equivalent to a discount allowed off the first purchase (or purchases) made from it. In this way the customer pays nothing extra for the catalogue but allocated to it is a proportion of the price of the first purchase. A VAT saving is thereby achieved whenever the first purchase is liable to VAT …" (Section 1.3)
"We understand the inclusion of a face values (sic) is simply to give an impression to the customer that she is receiving something of value for nothing." (Section 1.4)
Publication | "Charge" per catalogue | Standard-rated percentage | Output tax reduction |
Empire | £4 | 94.10 | £211,964.17 |
La Redoute | £3 | 90.29 | £77,837.62 |
Daxon | £2 | 100 | £43,439.62 |
(a) When a customer's bill was processed, Redcats' system identified those catalogues which had been "purchased" and indicated it on the individual customer's statement by means of an asterisk.
(b) Sometimes the text relating to the "purchase" would be found on the back of a list of special offers rather than a customer statement.
(c) Redcats' representatives were unable to explain why there had been a long delay in implementing the arrangements for Verbaudet. (The significance of that delay was that Verbaudet mainly sold zero-rated children's clothes, so that adoption of the scheme had minimal impact on its VAT liability).
(d) Ernst & Young admitted that if an order for catalogue goods were not received from a catalogue holder, Redcats had in place no procedure to reclaim the catalogue.
(e) Redcats confirmed that a catalogue could not be returned to it for a refund after a customer placed a first order.
"Ownership of the catalogue remains with us until you complete your first purchase of goods at a minimum price of £8 after which the catalogue becomes yours. The cost of the catalogue is £4 and the price of the goods shall be reduced by this cost so that the total payment due for the catalogue and the goods is no more than the catalogue price for the goods (after any promotional discount to which you may be entitled). Whilst ownership of the catalogue remains with Empire you must, on request, return it to Empire in the same condition in which you receive it, subject to fair wear and tear. Empire may arrange a collection or alternatively will cover costs you reasonably incur in its return. Once the catalogue has reached the end of its season, you may dispose of it"
"& as a very special welcome your friend will also receive 2 introductory gifts
- 'la collection' – Your friend's own personal copy of the new La Redoute Spring-Summer 2000 Collection, with over 680 pages of French fashion
- The City Bag" – (a fashionable bag to hold work or shopping essentials).
"If a customer enquires about the charge of (sic) the catalogue we must avoid telling them it is free. The suggested dialogue below must be used. If there are any problems with this, let me [Sue Rooney] know and I can address this with Andrew Leach [tax manager]:
Suggested dialogue:
Q. Are you charging me for the catalogue? A. There is no additional charge for the catalogue. There is no additional amount you pay.
Q. Is the catalogue free? A. You do not pay any extra for the catalogue. There is no change to the amount you pay.
If the customer requires any further details write down as much information as possible and pass this to your manager. Managers then to contact Andrew Leach for a detailed answer."
"No we will not charge you for it however, the catalogue will remain the property of Empire until goods have been ordered and paid for".
The witnesses for Redcats were unable to explain that supplement or to say by whom it had been added.
"Current Balance
This is the total balance outstanding, excluding any items not yet charged, and will be the balance brought forward on your next statement. * indicates your purchase of the catalogue. The amount shown for the goods is inclusive of the total cost for the catalogue and goods which have been discounted by the cost of the catalogue."
1) Those designated "catalogue allocation". They are specifically selected "existing" customers who have not recently made a specific request for a catalogue but who may have done so when they first became a Redcats' customer. A customer is classified as "existing" if she has ordered goods from the relevant brand catalogue within the previous 24 months.
2) Those identified as "Two stage (excluding Internet)". They are potential customers who have requested a catalogue by responding to, e.g. "recommend a friend" coupons, displays in the form of what are called "outserts" in magazines and advertisements in various publications, or to targeted mailings.
3) "Prospection (including internet)": potential customers to whom a prospection catalogue has been sent. They are told that they will be sent the main catalogue with their first order for goods.
4) "Two stage internet": also potential customers, but are those who have specifically requested a catalogue by way of the "request" button on the relevant brand's website.
5) "Prospection internet": new customers who order goods directly by way of the relevant brand's website without having seen the main catalogue. Such customers are automatically sent a full catalogue for that brand on placing their first order for goods.
6) "Miscellaneous requests": potential and existing customers who write or telephone Redcats specifically requesting a catalogue.
i. The price of the catalogue is not intended to cover its production and distribution costs: it applies only to the 50 per cent of catalogues which produce sales of catalogue goods, and even then is counter-balanced by a matching discount on the goods;
ii. The decision as to the amount of charge for the catalogue is entirely tax driven, the customer being indifferent to the charge since she is not charged for the catalogue;
iii. Neither the price of the catalogue nor the discount off the goods is advertised, as would be the case were those prices genuine. The only price of interest to the customer is the advertised price of the goods, i.e. the price she pays for them;
iv. If the customer returns the goods, the sale of them is reversed and she obtains a full refund without having to return the catalogue;
v. In practice, the position of a customer who "purchases" the catalogue is no better than one who receives it but makes no purchase.
"160 … The correct approach to the analysis of the Clubcard scheme … is to examine the entire cycle of transactions which it comprises, in order to determine objectively (that is to say without regard to the parties' subjective intentions, save in so far as they are reflected in the terms of the scheme), and having regard to the scheme's economic purpose, whether its legal effect is such that … vouchers used under it are issued for 'consideration', in the Community law sense of that term".
"… it is impossible to investigate individual sales when an issue like the present [i.e. where any one of a number of features of an individual transaction may affect the contractual analysis in any particular case] arises regarding a general scheme … It might in some circumstances be possible to arrive at conclusions about numbers of sales falling within one or other of various defined categories. [But … in this case] each side has submitted that it is possible for us to reach a single overall conclusion, while contending for opposite conclusions. In this situation, we have, under the jurisprudence of both the Court of Justice [of the European Communities ("the ECJ")] and the House of Lords, to look at what was overtly or objectively stated, described or invoiced to the customer, or was 'agreed and adopted' as between the alleged supplier and the customer, both when determining the contractual position and in answering the directly relevant question what was the consideration for DR's undoubted supplies to its customers. Since the ordinary knowledge and understanding of any customer form part of the objective context of any such supply, I do not for my part see how they can be ignored in answering this question. When Jonathan Parker LJ expressed some scepticism about the value of a 'subjective' approach or of any attempt to take into account what customers 'would or might perceive'… , it may be that he was doing no more than exclude from account the purely subjective (or internal) thought processes of any particular customer. The reasonable expectations, reactions and understanding of an ordinary customer in relation to a transaction or document must in my view be relevant to its objective analysis. Even when a transaction is in writing, its interpretation involves 'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the condition in which they were at the time of the contract' (see Investors' Compensation Scheme Ltd v West Bromwich Building Society [1988] 1 WLR 896 at 912, [1998] 1 All ER 98 at 114 per Lord Hoffmann, an approach as relevant, in my view, in a European as in a domestic context)."
Question 1 - Did ownership of the catalogues pass when they were sent out by Redcats by way of an unconditional gift?
(1) It was never marketed as an item for sale;
(2) No indication of a prospective charge was given to a customer before the catalogue was delivered;
(3) On the contrary, the catalogue was either:
(b) asked for by a customer, in which case it was described as without charge or there was no mention of price; or
(c) it was unsolicited.
"… the taxable quality of any article handed by a retailer to a customer must depend on the particular circumstances of the case… [T]he nature of the transaction depends upon the terms upon which the parties entered into it and not upon the label which the parties attach to it."
Although the judgment of Pennycuick J was reversed on appeal, it was not reversed on this dictum.
"A gift made between living persons (inter vivos) may be defined shortly as the transfer of any property from one person to another gratuitously … It is an act whereby something is voluntarily transferred from the true owner in possession to another person with the full intention that the thing shall not return to the donor … A gift appears to be effective when the donor intends to make it a gift and the recipient takes the thing given and keeps it, knowing that he has done so…."
The second, to be found in paragraph 1253 at page 758 of Volume 35 (Personal Property), deals with the effect of delivery in relation to voluntary alienation in this way:
"Delivery is the voluntary transfer of the possession of goods to another. Where a moveable object is delivered to a person with intent to transfer ownership, for example in the case of gifts or sales, the property in the goods is transferred."
He submitted that the test was the subjective one of donative intent on the part of the donor. The donee's intention was not, however, completely irrelevant, for she might disclaim: but the view of an officious bystander was not relevant.
"What, if any, legal concept is involved in the use of this popular and pejorative word [sham]. I apprehend that, if it has any meaning in law, it means acts by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities … that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived. There is an express finding in this case that the defendants were not parties to the alleged 'sham'. [So the contention of the plaintiff that the transactions between himself, the hire-purchase company, and the defendants] fails").
Question 2 - If not, did ownership of the catalogues pass when they were sent out, pursuant to a contract with the recipients?
"[32] If the question whether Clubcard vouchers are granted for consideration were governed by the concepts of English domestic law there would, I think, be no doubt that it must be answered in the affirmative. Tesco invites customers to join its Clubcard scheme and offers them in return benefits in the form of vouchers. Each customer provides consideration, in the domestic law sense, by providing the information which is required before membership is accepted (which is or may be of value to Tesco in that it facilitates Tesco's analysis of the spending habits of particular customers) and subsequently by purchasing goods on the footing that the promised benefits will be forthcoming. There is therefore an enforceable contract between Tesco and each Clubcard holder. Under this contract Tesco is obliged to award or allocate points to each customer in accordance with the rules of the scheme and the amounts spent by the customer. If Tesco were to decline to credit points to a customer who tenders his Clubcard when paying for goods or if it were to refuse to redeem a voucher at its face value in accordance with the scheme, the customer would clearly be entitled to sue for damages for breach of contract."
Question 3 - If not, did ownership of the catalogues pass when they were sent out, pursuant to regulation 24 of the Consumer Protection (Discount Selling) Regulations 2000 ("the DS Regulations")?
"Inertia Selling
24 (1) Paragraphs (2) and (3) apply if:
(a) unsolicited goods are sent to a person ("the recipient") with a view to his acquiring them;
(b) the recipient has no reasonable cause to believe that they were sent with a view to their being acquired for the purposes of a business; and
(c) the recipient has neither agreed to acquire nor agreed to return them.
(2) The recipient may, as between himself and the sender, use, deal with or dispose of the goods as if they were an unconditional gift to him.
(3) The rights of the sender to the goods are extinguished.
(4) A person who, not having reasonable cause to believe there is a right to payment, in the course of any business makes a demand for payment, or asserts a present or prospective right to payment, for what he knows are —
(a) unsolicited goods sent to another person with a view to his acquiring them for purposes other than those of his business, or
(b) unsolicited services supplied to another person for purposes other than those of his business,
is guilty of an offence and liable, on summary conviction, to a fine not exceeding level 4 on the standard scale.
(5) A person who, not having reasonable cause to believe there is a right to payment, in the course of any business and with a view to obtaining payment for what he knows are unsolicited goods sent or services supplied as mentioned in paragraph (4) —
(a) threatens to bring any legal proceedings, or
(b) places or causes to be placed the name of any person on a list of defaulters or debtors or threatens to do so, or
(c) invokes or causes to be invoked any other collection procedure or threatens to do so,
is guilty of an offence and liable, on summary conviction, to a fine not exceeding level 5 on the standard scale.
(6) "unsolicited" means, in relation to goods sent or services supplied to any person, that they are sent or supplied without any prior request made by or on behalf of the recipient."
Regulation 25 provides that there can be no contracting out of the DS Regulations.
"Inertia selling
Member States shall take the measures necessary to:
prohibit the supply of goods or services to a consumer without their being ordered by the consumer beforehand, where such supply involves a demand for payment,
exempt the consumer from the provision of any consideration in cases of unsolicited supply, the absence of a response not constituting consent."
a. ordered goods from earlier catalogues; or
b. requested catalogues for earlier seasons; or
c. requested different catalogues or promotional material.
(a) imposed a criminal penalty on the sender (see regulation 24(4)); and
(b) deprived the sender of his property without compensation.
As was said by Buckley LJ in Methuen–Campbell v Walters [1979] QB 525 at 542, in case of doubt as to the way in which language was to be construed, it should be construed in favour of a disappropriated party, rather than otherwise.
Question 4 - Was the catalogue charging clause ineffective because it did not form part of the contract which Redcats and the customer entered into when the customer ordered goods from the catalogue?
"37. DR's attempts to bring the notices to customers' attention, in a subdued way, must I think be viewed in a general way, and the till slip words appeared on the store copy of any slip signed by the customer. It is not suggested, and it is very unlikely, that many customers actually raised questions about them at all. But this leads to the opposite difficulty, which is the interpretation, or (one might say) superimposition, of a contractual analysis in an everyday context where the retailer and customer are both normally interested in anything but that. When the ordinary customer (not a representative of Customs and Excise sent on a scouting mission) shops in a retail store, he or she envisages the purchase of goods from the store. If he pays by cash, that is the only contract he envisages. If he uses a card to pay, he must be taken to appreciate that the purchase of goods in this way will give rise to rights and duties as between him and the company from whom he obtained the card, which in the case of a store card may be connected with the store. He or she knows that the position regarding any charges (and interest) is regulated by the terms of the store or other card … In the case of Debenhams, however, the ordinary customer would, I think, appreciate that it made no difference to what he or she paid, whether he or she paid by card. The ticket price was in all cases what was to be paid. That is on any view a matter of potential significance under European VAT law (see the discussion of Kuwait Petroleum and Primback at the end of paragraph 10 above). It is not I think without relevance under domestic law, when assessing what the ordinary customer would regard as the bargain being made. But it is not an essential factor in the conclusions that I reach under either domestic or European law.
- While an ordinary customer would not, I think, be very surprised if a retail store were to insist on an extra charge being paid where a customer paid for the goods by card, a DR customer would know that this was not expected in a DR store. The natural inference would be that any extra charges continued to be absorbed by the supplier. It would, I think, require clear words to bring home to an ordinary customer that he or she was required or expected to enter into some separate contract, with another company associated with the retail seller of the goods, to cover the charges which use of a card by the customer would or might involve for the seller. Neither the need for nor the basis of any such contract would be clear."
"The difficulty in identifying, and the artificiality of, any consideration that can be suggested to have moved from DCHS to the customer reinforces the conclusion expressed in the previous paragraphs. What would DCHS be offering or agreeing to do, in consideration of the customer's agreement to pay 2.5% to DCHS? For a customer paying by card, once the card is accepted at the till, the transaction is complete in relation to the store. The settlement of the payment obligations resulting from the use of the card is a matter between him and the card issuer. He has nothing to do with whatever may occur between the card issuer and the store (via the acquirer, where there is one). Even if the documentation seen by the customer could or would otherwise be read as indicating that the customer was required to contract with DCHS, contracts are not made by mere assertion. The natural interpretation of the course of events and documentation would accordingly be that any card handling (other than that covered by the agreement between the cardholder and his card-issuer) was and remained the responsibility of the seller accepting the card in discharge of the price".
"… The contract which cl 1.3 aims to create is unnecessary, and only makes sense to someone who appreciates the possible VAT advantage for the Debenhams group of creating a separate contract for a separate financial supply with a separate company, DCHS. No ordinary customer would appreciate that. The suggested contract conflicts with any such customer's responsibilities, and leaves him with no further role or obligation, save to pay his own card-issuer, and that services performed in relation to settlement or card-handling are performed, by the card issuer (or acquirer), for the supplier and paid for by the supplier by deduction or some other charge … Even under domestic law, consideration must have some 'value in the eye of the law' and not be 'illusory': see Chitty on Contracts (29th edn, 2004) vol 1, General Principles, paras 3-022 to 3-024; and it is questionable whether any consideration at all could therefore consist in DCHS's procuring, or undertaking to procure or effect, settlement of the price by obtaining payment from the card-issuing company (or acquirer) and/or making payment to DR. But, assuming that it could, the very remote and improbable nature of such consideration militates strongly against a conclusion that the transaction should be understood or analysed in terms of a contract between the customer and DCHS for DCHS to render services to DR".
(a) property in the catalogue would pass to the holder whether or not a purchase of goods was made;
(b) there was no intention of recovering the catalogue or retaining legal ownership of it;
(c) there was no mechanism for determining whether the customer had himself retained the catalogue;
(d) in the case of internet purchases, it led to a dual pricing system depending on whether one used the online or offline catalogue number.
(a) it purported to retain property rights in the catalogue notwithstanding those rights had already been freely given to the customer;
(b) it then purported to make a charge for those rights;
(c) a customer might purchase goods for £6, with a catalogue charge of £3. If those goods were faulty, she would have a legal right to recover only 50 per cent of the price she paid for the goods. Even if Redcats were to argue that it would not enforce its "right" to refund only 50 per cent of the purchase price, that did not alter the legal position;
(d) similarly, internet customers could purchase the same goods using the online catalogue, or by inputting the order number from the printed catalogue. If a customer using the former method received faulty goods, she could recover her full purchase price. The customer using the latter method had no such protection: there was no notice on the internet to warn her of the position.
Question 5 - Was the sale of the catalogue prevented from being a supply for VAT purposes?
"… one of the principles on which the VAT system was based was neutrality, in the sense that within each country similar goods should bear the same tax burden whatever the length of the production and distribution chains."
"3. The terms contractually agreed may not be determinative as to the true nature of the scheme ([Commissioners of Customs and Excise v] Reed [Personnel Services Ltd [1995] STC 588] …): it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say 'the precise way in which performance satisfies the interests of the parties' (see the Advocate General's opinion in [Commissioners of Customs and Excise v Mirror Group plc [2001] STC 1453] para 27: …)"
(a) "consideration" was an autonomous concept of Community law;
(b) there must be a direct link between goods supplied and the consideration received;
(c) there must be a legal relationship between the supplier and recipient pursuant to which there was reciprocal performance, the remuneration received by the supplier constituting the value actually given in return for the supply; and
(d) consideration was the amount demanded from the customer for the supply regardless of whether that sum was actually received by the supplier.
We might usefully add a fifth point, to which Mr Vajda indirectly made reference, namely that the proper approach to the identification of any consideration depends "save in exceptional cases, [upon] the objective character of the transaction in question": see paragraph 33 of the judgment of the ECJ in Commissioners of Customs and Excise v Cantor Fitzgerald International [2001] STC 1453.
"There are a number of pointers in the authorities referred to in Part 3 of this judgment … The more significant of such pointers in the context of the instant case seem to me to be these:
1 The resolution of the issue as to the application of para 5 in the instant case depends upon the legal effect of the Clubcard scheme, considered in relation to the words of the paragraph (see British Railways Board especially [1977] STC 221 at 223, [1977] 1 WLR 588 at 501 per Lord Denning MR: see [34] above).
2 In considering its legal effect, the entire scheme must be examined (what is the 'entire scheme' for this purpose being objectively determined by reference to the terms agreed) (see Pippa Dee especially [1981] STC 495 at 501 per Ralph Gibson J: see [33] above).
3 The terms contractually agreed may not be determinative as to the true nature and effect of the scheme (Reed, see [36] to [38] above): it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say 'the precise way in which performance satisfies the interests of the parties' (see the Advocate General's opinion in Mirror Group, para 27: see [41] above).
4 Economic purpose is not the same as economic effect. The fact that two transactions have the same economic effect does not necessarily mean that they are to be treated in the same way for VAT purposes (see Littlewoods especially at para 84 per Chadwick LJ: see [42] above).
5 Equally, the economic purpose of a contract (what the Advocate General in Mirror Group called the 'cause' of a contract: see para 27 of his opinion: at [41] above) is not to be confused with the subjective reasons which may have led the parties to enter into it (in so far as those subjective reasons are not obviously evident from its terms) (see Mirror Group para 28: at [41] above). The Advocate General went on to observe (an observation which seems to me to be particularly apt in the context of the tribunal's decision in the instant case): '… failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings … and has complicated the task of categorising the contracts at issue'."
"(a) there was a direct link where there was a payment agreed in return for a supply (paragraphs 12 and 13);
(b) the inquiry excluded any valuation which was independent of the actual transaction, i.e. any valuation based on criteria not adopted by the parties themselves (paragraph 14);
(c) the inquiry was to ascertain the true value for the purpose of the transaction, i.e. the value which the two parties to the contract attributed to the supply, or the sum of money agreed between the parties: only in the absence of such attribution did one adopt different criteria (paragraphs 18 – 23);
(d) where the consideration for a supply was not money, the value of that consideration was determined by the parties' own express or implicit attributions of value (paragraph 30).
(e) a fortiori where the consideration was money and the parties had expressly attributed part of the money to the supply; the fact that the transaction could have been structured differently with the same economic effect (here, a gift of the catalogue) was irrelevant, for that would be a different transaction (paragraphs 82 – 87).
(i) There was necessarily a direct link between the supply of the catalogue and £4 for the parties had expressly attributed £4 to the sale of the catalogue: nothing more was required (see Telewest at paragraph 67). The fact that the catalogue was sold as part of a package did not mean that there was no direct link. Linked transactions were common in commercial life.
(ii) The customer already had possession of the catalogue when the relevant supply, the sale of the catalogue, was made, and the fact that the customer became owner of the catalogue could not be disregarded: it was not a sham. As owner of the catalogue, the customer could then do as she wished with it, and need not return it.
(iii) The fact that a customer paid no more overall than before the scheme was introduced was irrelevant to whether there was a direct link. It was what the parties had agreed (in the absence of sham) which counted, not what the supplier privately thought about it.
(iv) HMRC's claim that the "essential feature" of the transaction was exclusively the purchase of goods was "mere assertion" supported by their internal sampling exercise. Whilst the essential feature of the transaction from the customer's point of view might be relevant to the CPP issue, it was irrelevant to the instant case.
(v) If by saying that a customer did not "in any real sense" agree the attribution of the price between the goods and the catalogue, HMRC meant that there were no negotiations between Redcats and its customer (who must take the contract on Redcats' terms or leave it), that was always the case with standard form contracts. Alternatively, if HMRC meant that the customer was subjectively unaware of the attribution, that might be true but it was irrelevant: the principle of legal certainty required the parties' attribution as expressed in the documents, i.e. as determined objectively, to be determinative. If retailers' VAT liabilities depended on what customers were subjectively aware of and actually agreed, as opposed to what they were taken to have agreed, there would be utter confusion.
(vi) HMRC not alleging sham, part of the transaction consisted in genuine sales of catalogues at £4 each, so that the economic purpose ("cause") of the arrangements was not merely to sell goods. In a straightforward two-party case, such as the instant one, there would be no difference between the correct analysis and the VAT analysis, including analysis by reference to economic purpose (see Reed Personnel at page 595 and Debenhams in the High Court at paragraph 98). Moreover, HMRC's reliance on what customers "wished" and were aware of was wholly inconsistent with an objective analysis of "economic purpose" (see Tesco at paragraph 159).
(vii) Of the allegation that the scheme was a value-shifting tax avoidance technique, if by "value-shifting" HMRC meant that Redcats was inflating the price of one element, the answer was that Redcats was not value-shifting for the amount charged for the catalogue was perfectly reasonable having regard to the costs of production and distribution: the fact that the price did not exceed that charged prior to the introduction of the scheme confirmed that it did not exceed a reasonable price. But if, by alleging value-shifting, HMRC meant that Redcats was charging for catalogues when previously it gave them away, that was perfectly lawful (see Debenhams in the High Court at paragraph 50). As for tax avoidance, that too was denied. The principle of neutrality did not mean that a taxable person with a choice between two transactions might choose one of them and avail himself of the effects of the other: by the same token, if one transaction was chosen, HMRC could not tax the effects of the other.
(viii) HMRC's reference to the scheme as an attempt to disguise the fact that the price was for the goods and not the catalogue was inapt where there was no allegation of sham and the parties' agreement was not inconsistent with what they had in fact done (see Debenhams in the High Court at paragraphs 78-86).
Question 6 - Does the principle laid down in the case of Card Protection Plan Limited v Commissioners of Customs and Excise [1999] STC 270 "CPP") apply?
"29. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2412, paras 12 to 14, concerning the classification of restaurant transactions, where 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.
- In this respect, taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, 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, being a typical consumer, 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 (see Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24 (pages 28-31)"
"In my opinion the fact that separate charges are identified in a contract or on an invoice does not on a consideration of all the circumstances necessarily prevent the various supplies from constituting one composite transaction nor does it prevent one supply from being ancillary to another supply which for VAT purposes is the dominant supply. Even though it may be desirable to approach each supply as if it were a separate supply and even though each supply in a composite transaction may be an independent separate supply the essential features of a transaction may show that one supply is ancillary to another and that it is the latter that for VAT purposes is to be treated as the supply" (at page 765).
"the expectation of the customer is relevant to the question whether two contracts constitute, for VAT purposes, principal and ancillary contracts" (paragraph 69).
The Court declined to apply CPP to the Telewest facts because there were, unlike here, two suppliers.
"The taxable amount shall include:
. . . .
(b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement maybe considered to be incidental expenses by the Member States."
"inextricably linked to the sale and transport of goods to the customer. There is no such link in the case of interest on credit granted by a supplier which is an optional service offered in addition to the supply of goods" (para 16 of his Opinion).
a. the aim of the customer (should she decide to make a purchase) was to purchase catalogue goods, and
b. the catalogue was the means by which she identified the goods and their price.
The customer had no interest in purchasing a catalogue. She was generally not aware that there was even a notional charge for the catalogue. Redcats' aim was to sell goods. The catalogue was provided to the customer to facilitate or encourage her purchase of goods. The catalogue was never an aim in itself, rather it was a way of selling goods. One could not buy the catalogue on its own, it had no independent life. It was only sold where goods from the catalogue were purchased. Whether or not goods were purchased the customer would not be asked to return the catalogue.
1) that every supply of a service (or of goods) must normally be regarded as distinct and separate : a fortiori where the elements were separately priced;
2) that a supply which comprised a single service from an economic point of view should not be artificially split; and
3) there was a single supply where one element was ancillary to the other, i.e. where the one was a means of better enjoying the other.
Question 7 - Does the doctrine of abusive practice apply?
"74. In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages."
"As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and / or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke, paragraph 58)."
(a) that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions ("the contrary to VAT purpose test");
(b) that the essential aim of the transactions concerned is to obtain a tax advantage ("the essential aim test").
(a) at paragraph 68: "Community law cannot be relied on for abusive or fraudulent ends."
(b) at paragraph 69: "The application of Community legislation cannot be extended to cover abusive practices …"
(c) at paragraph 76: "It is for the national court to verify … that the effectiveness of Community law is not undermined".
(a) passing costs directly on to the customer;
(b) emphasising the value of the catalogue to the customer; and
(c) facilitating further shopping from the catalogue.
(a) on supply and construction (articles 2 and 11(A)(1)(a) of the Sixth Directive) as well as zero-rating (article 28(2));
(b) that VAT should be exactly proportionate to the price paid by the consumer for standard-rated goods (article 2 of the First Directive);
(c) on neutrality and distortion of competition;
(d) in article 11A(3)(b) of the Sixth Directive which provides that the taxable amount shall not include "price discounts and rebates allowed to the customer and accounted for at the time of the supply".
"68. Notwithstanding that finding, it must be borne in mind that, according to settled case-law, Community law cannot be relied on for abusive or fraudulent ends (see, in particular Case C-36796 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2005] ECR I-1599, paragraph 32).
- The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for Community law (see, to that effect, Case 125/76 Cremer [1977] ECR 1593, paragraph 21; Case C-8/92 General Milk Products [1993] ECR I-779, paragraph 21; and Emsland-Stärke, paragraph 51).
70 That principle of prohibiting abusive practices also applies to the sphere of VAT.
71 Preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive …" [emphasis added]
"It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice."
"The referring tribunal states that, in its original decision of 5 July 2001, it had relied on an interpretation of Article 4(2) of the Sixth Directive according to which regard had to be had to the objective characteristics of the transactions in determining that the transactions in question were not supplies for VAT purposes. It considers that the interpretation of that provision should now be referred to the Court." [emphasis added]
"In that regard, the referring tribunal states that the evidence given by the directors of Halifax, Leeds Development and County shows that the sole purpose of the two latter companies in entering into the transactions concerned was the avoidance of VAT. In other words, it was the intention of Halifax, Leeds Development and County to obtain a tax advantage through the implementation of an artificial tax avoidance scheme."
"In any event, it is clear from the order for reference that the VAT and Duties Tribunal considers that the sole purpose of the transaction at issue in the main proceedings was to obtain a tax advantage." [emphasis added]
(a) For the reasons given above, the upfront charge imposed by Next was not comparable to Redcats' purported charge;
(b) Telewest in no sense suggested that in the circumstances of the instant case, the so-called "discount" was unobjectionable;
(c) That only a limited number of mail order traders had adopted a scheme similar to that of Redcats. Furthermore, the fact that they had done so did not mean that the essential aim of the scheme was not tax avoidance;
(d) There was clear artificiality within the scheme. In particular:
a. The RoT clause had never been intended to operate according to its terms: it was a façade;
b. The position of a catalogue "purchaser" was in practice no different from that of a non-purchaser;
c. Redcats received no more revenue for the catalogue than previously; it could not be said that the charge was a contribution to the cost of the catalogue – in fact, viewed overall, most catalogues distributed were not charged for;
d. The discount from the catalogue price was never advertised;
e. The customer still had to pay Redcats the catalogue price of the goods;
f. The ECJ did not suggest that the economic or personal links were necessary for a finding of abuse: indeed, such a pre-requisite would be absurd.
DAVID DEMACK
CHAIRMAN
Release Date: 26 May 2006
MAN/02/0275