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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Tesco Plc v Commissioners for Customs and Excise Rev 1 [2003] EWCA Civ 1367 (14 October 2003)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2003/1367.html
Cite as: [2003] EWCA Civ 1367

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Neutral Citation Number: [2003] EWCA Civ 1367
Case No: C3 2002 2424 CHANF

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Ferris)

Royal Courts of Justice
Strand, London, WC2A 2LL
14-10-2003

B e f o r e :

LORD JUSTICE SCHIEMANN
LORD JUSTICE LATHAM
and
LORD JUSTICE JONATHAN PARKER

____________________

Between:
TESCO PLC

Appellant
- and -


THE COMMISSIONERS FOR CUSTOMS AND EXCISE
Respondents

____________________


____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    CONTENTS
    1 INTRODUCTION 1 – 10
    2. THE UNDERLYING FACTS 11 – 27
    3. THE LEGISLATIVE BACKGROUND AND SOME RELEVANT AUTHORITIES 28 – 94
    4 THE ISSUE 95 – 96
    5. THE TRIBUNAL'S DECISION 97 – 103
    6 THE JUDGE'S JUDGMENT 104 – 113
    7. THE BATTLE LINES ON THIS APPEAL 114 – 117
    8. THE ARGUMENTS 118 – 150
    9. CONCLUSIONS 151 – 179
    10. RESULT 180 - 182

    Lord Justice Jonathan Parker :

    PART 1. INTRODUCTION

  1. At issue on this appeal is the correct treatment for value added tax ("VAT") purposes of vouchers issued by a supplier pursuant to a scheme entitling a customer who is a member of the scheme to purchase the supplier's goods on preferential terms. The particular scheme in question in the instant case is the 'Clubcard' scheme operated by Tesco plc ("Tesco"). However, the instant case is in the nature of a test case, since its outcome may have an impact on the VAT treatment of other similar schemes.
  2. The appeal is a statutory appeal under section 83 of the Value Added Tax Act 1994 ("the 1994 Act"). It is brought by Tesco against an order made by Ferris J on 21 October 2002. By his order, Ferris J dismissed Tesco's appeal against part of a Decision of the Value Added Tax and Duties Tribunal (London) (chairman: Mr Malcolm Palmer) ("the Tribunal") released on 24 August 2001, and allowed a cross-appeal by the Commissioners of Customs & Excise ("the Commissioners") against the remainder of the Tribunal's Decision.
  3. Permission for a second appeal was granted by Arden LJ on the papers on 15 February 2003. On 15 May 2003 Master Venne granted the Commissioners permission to file a Respondents' Notice out of time. The Respondents' Notice invites the Court of Appeal to uphold the judge's order on different or additional grounds.
  4. The proceedings concern not only what I may call the 'basic' Clubcard scheme, involving only Tesco and its customers, but also certain specified variants of the basic scheme involving third parties. I will refer to these variants collectively as 'third party schemes'.
  5. The details of the basic Clubcard scheme are set out in Part 2 of this judgment (The Underlying Facts). For the present, the following short description of the Clubcard scheme will suffice. A customer of Tesco who joins the scheme acquires 'points' on purchases of goods ('premium goods') from Tesco. Periodically, Tesco issues vouchers by reference to the number of points accumulated by the customer during the period in question. The vouchers have a face value expressed in units of 50p, and will be accepted by Tesco ('redeemed') at face value on later purchases of goods ('redemption goods') by the customer. This appeal focuses on the VAT treatment of the vouchers, and in particular on whether they were issued by Tesco for consideration. It is common ground that 'consideration' in this context means consideration according to Community law.
  6. Tesco contends that the vouchers were issued for consideration (in the Community law sense). On that footing, it contends firstly that by virtue of paragraph 5 of Schedule 6 to the 1994 Act the face value of the vouchers, as and when they are issued, falls to be deducted by Tesco from the shelf-price of the premium goods when accounting for VAT on the supply of the premium goods. Secondly, it contends that, as and when vouchers are redeemed, the face value of such vouchers is to be treated for VAT purposes as consideration for the supply of the redemption goods, so that for VAT purposes the total consideration obtained by Tesco for the redemption goods consists of the face value of the vouchers accepted by Tesco in respect of those goods, plus any cash payment made by the customer on the purchase of those goods.
  7. From Tesco's point of view, the commercial significance of these contentions, if they are right, is twofold. In the first place, if Tesco is right it is accountable for the VAT element of the face value of redeemed vouchers on the supply of the redemption goods, rather than on the (earlier) supply of the premium goods. Hence there will be a cash flow benefit for Tesco, particularly if the popularity of the Clubcard scheme continues to grow. In this respect, the issue is (as the Commissioners described it in their Statement of Case to the Tribunal) "a tax point issue". Secondly, Tesco's VAT liability if its contentions are right will be less by an amount equal to the VAT element of the face value of vouchers which were not redeemed. On Tesco's unchallenged evidence, some 7 per cent of all vouchers issued are never redeemed.
  8. The Commissioners, on the other hand, contend that Clubcard vouchers are not issued for 'consideration', in the Community law sense. In support of this contention they submit (pursuant to their Respondents' notice) that if (which they deny) any consideration is provided to Tesco under the Clubcard scheme, such consideration is attributable not to vouchers issued under the scheme but to the 'points' earned or awarded on purchases of premium goods. It follows, the Commissioners contend, that the vouchers do not fall within paragraph 5 of Schedule 6 to the 1994 Act.
  9. Before the Tribunal was an appeal by Tesco against a decision of the Commissioners contained in letters from Mrs Gill Milliam of H.M. Customs & Excise to Mrs Sylvia Smith, Tesco's Group VAT Manager, dated 25 February 1998 and 15 April 1998. By those letters, the Commissioners rejected Tesco's contentions (as summarised above) on the ground that vouchers issued under the Clubcard scheme were not issued for consideration and accordingly do not fall within paragraph 5.
  10. On Tesco's appeal, the Tribunal held in favour of Tesco in relation to the basic scheme and certain of the third party schemes, but in favour of the Commissioners in relation to the remaining third party schemes. Tesco appealed; the Commissioners cross-appealed. Dismissing Tesco's appeal and allowing the Commissioners' cross-appeal, the judge upheld the Commissioners' contention that vouchers issued under the basic scheme or under any of the third party schemes are not issued for consideration, and that accordingly paragraph 5 does not apply. The judge's judgment is reported at [2002] STC 1332.
  11. PART 2. THE UNDERLYING FACTS

  12. The underlying facts are not in dispute. I take them primarily from Mrs Smith's witness statement, the contents of which were not challenged before the Tribunal.
  13. The basic Clubcard scheme

  14. The Clubcard scheme is a business promotion scheme devised by Tesco with a view to developing and increasing customer loyalty. As at April 2001 there were some 9.5M members of the scheme (more than 80 per cent of Tesco customers).
  15. A customer who wishes to become a member of the scheme fills up an enrolment form (enrolment forms are available in all Tesco stores), and 'posts' it in a box provided within the store. There is no fee for joining the scheme. The sample enrolment form exhibited to Mrs Smith's witness statement includes the following:
  16. "Start saving today!
    Simply complete this enrolment form and post it in one of the special in-store boxes. Then sign your Tesco Clubcard – it will now give you points when you shop. These turn into pounds and help save you money. Tesco Clubcard is free – it's our way of saying thank-you for shopping at Tesco. Here's how it works:
    Check in at the checkout
    Whenever you shop at Tesco have your Tesco Clubcard at the ready. The checkout assistant will swipe your card before your first purchase has been recorded. The points you earn will be shown on the till display and on your receipt. Your previous total will also be shown as long as you are shopping in the store where your card was issued.
    Turn your points into pounds
    Every quarter we will send you your statement. You'll see your points total and, providing you have collected 50 points or more [since increased to 150 points], we'll also send you Tesco Clubcard vouchers which you can spend in store. Simply present them at the checkout to claim your discount. They should be shown along with your card for security purposes."
  17. Then, under the heading "Immediate free enrolment" there are spaces for the applicant to insert his name, his address, his sex, the number and age-groups of members of his household (including himself), and his signature. The form contains a statement by the applicant that he agrees to be bound by the terms and conditions listed on the back of the form. Those terms and conditions provide (so far as may be relevant):
  18. "1. The Tesco Clubcard is issued by and remains the property of Tesco Stores Ltd, who reserve the right to decline issue [sic] or withdraw the card at any time, or to terminate the Clubcard scheme without notice.
    2. All participants in the Tesco Clubcard scheme must be resident in the UK and aged 18 years or over.
    ....
    4. To earn points for a transaction, your Tesco Clubcard must be presented at the checkout before your purchases are made .... The card is not transferable, and can only be used by the person whose signature is on the card.
    ....
    6. You must spend at least £10 in a single transaction for that transaction to qualify for points. Then one point will be awarded for every £5 that is spent. [NOTE: The ratio of points to £s spent has since been changed to 1 point for every £1 spent.]
    ....
    8. Rewards, in the form of Tesco Clubcard vouchers, will be mailed with a statement to customers who have accumulated at least 50 points by the end of each collecting period. [NOTE: The minimum number of points has since been increased to 150 points.]
    9. .... Vouchers will be redeemable on qualifying purchases at all participating Tesco stores, and will not be exchangeable for cash and no change will be given.
    10. The level of reward given will be based on the total number of points that a member has earned by the end of the last day of a collecting period.
    11. Any points that a member has earned that fall between the level of reward that the member has qualified for and the next level up will be 'carried over' as the starting balance for the next collecting period.
    12. Members who do not reach the minimum needed to qualify for a reward by the end of a collecting period will have their points total 'carried over' to the next collecting period.
    13. Members who do not collect any points for 8 weeks may be removed from the scheme but may reapply at any time.
    14. .... Tesco reserves the right to vary [the redemption value of points] at any time.
    ....
    16. Tesco reserve the right to alter or amend the conditions of operations of the Clubcard scheme, or to terminate the scheme at any time.
    ...."
  19. Also in evidence is a leaflet advertising the Clubcard scheme and including an 'Application Form' in slightly different terms to the sample enrolment form referred to above. However, it is common ground that for present purposes nothing turns on such differences.
  20. As the sample enrolment form demonstrates, the basic scheme works in the following way. A member of the scheme who purchases goods from Tesco ('premium goods') earns 'points' calculated by reference to the total amount spent on his purchase. Since the price of the premium goods is VAT-inclusive, the points earned reflect both the price of each item exclusive of VAT and (save in respect of items which are zero-rated) the VAT on that price. Currently, points are earned at the rate of 1p per £1 spent. The till receipt for the purchase of goods by a member of the scheme is identical with the till receipt for the purchase of the same items by a customer who is not a member of the scheme, save only that the till receipt of the customer who is a member of the scheme shows the number of points earned in respect of his purchase (and it may also show the total number of points which he has earned to date during the current period). Thus, in each case the till receipt will list the various items purchased, together with the (full) price of those items. The till receipt for goods purchased 'in-store' will not show the VAT element of the total price, but in the case of purchases of petrol the VAT element is shown. At the end of each quarter the total number of points earned by that customer during the quarter are, with three important qualifications, converted into vouchers bearing a face value, which are sent to the member with a statement showing the number of points earned. The three qualifications are these. First, the face value of the vouchers is expressed in units of 50p, with any odd points in excess of 50 or a multiple of 50 being carried forward to the next quarter. Secondly, no entitlement to vouchers will arise if the total number of points earned by the member during the quarter in question (including any points carried forward from the previous quarter) is less than (currently) 150 (see condition 8 above). In that event, the total will be carried forward to the next quarter. Thirdly, if no points have been earned for a continuous period of 8 weeks, the member is liable to be removed from the scheme (see condition 13 above).
  21. Vouchers issued under the scheme are accepted by Tesco at face value when tendered by the Clubcard member on future purchases of goods from Tesco ('redemption goods').
  22. It is usual for promotional and marketing material to be included with the quarterly statement and the vouchers. Tesco also uses the membership data to circulate such material at other times. In addition, members may be invited to a 'Clubcard night' to introduce new ranges or simply to meet the manager of the local store.
  23. Promotional literature for the Clubcard scheme exhibited to Mrs Smith's witness statement contains such statements as "You'll earn 1 point for every £1 you spend"; "Earn 150 points or more each quarter and we'll send your Clubcard Vouchers along with your statement and points balance"; and "For example, 150 points will give you £1.50 in Clubcard Vouchers".
  24. Approximately 93 per cent of vouchers issued under a 'Clubcard' scheme are redeemed. About 60 per cent of customers redeem their vouchers within six weeks.
  25. Third party schemes

  26. In evidence before the Tribunal were three different categories of third party scheme. One such category consists of schemes in which a third party retailer participates ("third party retailer schemes"). A second consists of special promotions of specific goods supplied to Tesco ("special promotions"). In addition, there was in evidence a variant of the basic scheme in which the third party is Tesco Personal Finance Ltd ("TPF"), a joint venture company part-owned by Tesco ("the TPF scheme").
  27. (i) Third party retailer schemes

  28. Three third party retailer schemes were in evidence before the Tribunal, the retailers in question being B & Q plc, Norweb plc and Going Places Leisure Travel Ltd. In each case, the participation of the third party retailer is regulated by a written contract with Tesco. Under these schemes, a member of the Clubcard scheme purchasing goods or services from the third party earns 'points' under the scheme in the same way as if he had purchased premium goods from Tesco. These points are treated in the same way as points earned under the basic scheme. In each case, the third party agrees to pay Tesco a fee for its participation in the scheme, and it also agrees to reimburse Tesco in respect of points attributable to purchases of the third party's goods or services.
  29. Such third party schemes are described by the judge in paragraphs 5 and 6 of his judgment, as follows:
  30. "5. Tesco sometimes enters into arrangements with third party retailers under which the third party allocates Clubcard points to its customers who tender a Tesco Clubcard at the time of payment for goods or services acquired from the third party. The points so allocated are included in the customer's quarterly Clubcard statement and converted into vouchers in the same way as points earned in respect of purchases from Tesco itself. These vouchers are redeemable in the usual way on the making of future purchases from Tesco, but not in payment for future purchases from the third party retailer.
    6. In each case such arrangements are governed by a formal agreement between Tesco and the third party retailer in question. The Tribunal received evidence of three agreements made between a Tesco subsidiary and B&Q plc, Norweb plc and Going Places Leisure Travel plc respectively. While the agreements are not in any standard form they all have the same essential features which the Tribunal described (in paragraph 21 of its decision) as follows:
    '(a) The rate at which customers will be entitled to Tesco Clubcard points is defined.
    (b) The Third Party Supplier is granted the right to operate the Clubcard Scheme in its business during the term of the agreement.
    (c) Tesco undertakes to assist the Third Party Supplier in various ways in the proper operation of the Clubcard Scheme during the term of the agreement.
    (d) Tesco undertakes to honour in accordance with the terms of the Clubcard Scheme the redemption of points awarded to customers for purchases of Premium Goods or services from the Third Party Supplier.
    (e) The Third Party Supplier undertakes to pay defined fees to Tesco. These fees in all cases include, but are not limited to, an element equal to the face value of the points acquired by Clubcard members through transactions with the Third Party Supplier. In one case this is described as a reimbursement. These fees also include an additional element payable quarterly, which in two cases is defined as a fixed sum (£300,000 and £150,000 respectively) and in one case is a variable fee of 60p per call to the Tesco call centre relating to the participation of the Third Party Supplier in the Clubcard Scheme.
    (f) The Third Party Supplier gives various undertakings relating to the proper operation of the Clubcard Scheme.'"

    (ii) Special promotions

  31. The nature of this type of scheme is explained by the judge in paragraphs 10 and 11 of his judgment, as follows:
  32. "10. Sometimes a supplier of goods to Tesco may agree with Tesco that, during a particular period or in respect of a particular product line, extra Clubcard points, over and above the standard one point for each £1 spent, will be awarded to customers purchasing goods originating with that supplier and tendering their Clubcards at the time of payment. An arrangement of this kind will enable in-store promotions to be mounted based upon such offers as four bonus points on each purchase of a particular product.
    11. The Tribunal did not have before it evidence of any particular example of such arrangements, although it must have accepted that they existed in some cases. There was no evidence of the terms agreed between Tesco and the supplier in any particular case. However it seems to me to be an inevitable inference that the arrangements between Tesco and the suppliers in question must include provisions for the cost of the promotion, including the cost of the additional points awarded, to be borne by the supplier. The customer will, of course, be made aware that additional points are to be awarded in respect of the purchase, this being the inducement which underlies the promotion, but he will not be told anything of the arrangements between Tesco and the supplier in question."

    (iii) The TPF scheme

  33. The judge describes the TPF scheme in paragraphs 7 to 9 of his judgment, as follows:
  34. "7. Tesco Personal Finance Ltd ("TPF") is a joint venture company owned by a Tesco subsidiary and the Royal Bank of Scotland ("RBS"). It is part of the RBS VAT group but not part of the Tesco VAT group. As part of its business TPF carries on a credit card operation, issuing to its customers a TPF Visa card which can be used, like any other Visa card, at any outlet linked with the Visa network. In addition the TPF Visa card can be used as a Tesco Clubcard. Thus a customer purchasing goods from Tesco, or from a third party retailer within a scheme of the kind just described, may produce a TPF Visa card at the time of payment. The cost of the goods will be charged to the customer's Visa card account.
    8. Under the arrangements which exist between Tesco and TPF the customer will also earn Clubcard points when he uses the TPF Visa card in this way. In the first place the customer will be credited with the number of Clubcard points appropriate to the cost of the goods purchased, without the need to produce a separate Clubcard. In addition the customer will be awarded an additional half a point for every £1 paid by the use of the TPF Visa card. Thus most purchases made at a Tesco store and paid for with a TPF Visa card will entitle the customer to one and a half points for each £1 spent.
    9. No formal agreement exists between Tesco and TPF but the Tribunal was satisfied that the Clubcard scheme operates in relation to TPF as follows:
    a) A TPF Visa card holder is entitled to Clubcard points as described above;
    b) TPF periodically pays Tesco amounts calculated to reimburse Tesco for the costs incurred by it in support of the joint venture business of TPF;
    c) The reimbursement does not, however, extend to the full face value of the points or vouchers acquired by the holders of TPF Visa cards. Instead it represents only 93% of that face value, that being the estimated rate of redemption of vouchers issued to Clubcard holders."

    The present dispute

  35. Prior to January 1997, Tesco's practice had been to include the full amount paid on the purchase of premium goods in its daily turnover, accounting for the VAT on that amount accordingly; and to deduct the face value of the vouchers from the amount paid on the purchase of redemption goods, as representing a discount on the full price for the redemption goods. The Commissioners contend that this was the correct procedure.
  36. In January 1997, however, Mrs Smith wrote to Mr Hughes at H.M. Customs & Excise contending that the vouchers were issued 'for a consideration' within the meaning of paragraph 5, in that part of the sum paid by the customer on purchasing premium goods represented consideration for the issue of vouchers; and that the correct VAT treatment of the vouchers, applying paragraph 5, was to omit their face value from the daily gross takings (DGT) at the stage when the vouchers were issued but to include their face value in the DGT as and when they were redeemed, on the basis that their face value is the equivalent of a payment in cash. This contention was rejected by the Commissioners in the letters to which I referred earlier. Tesco appealed to the Tribunal.
  37. PART 3. THE LEGISLATIVE BACKGROUND AND SOME RELEVANT AUTHORITIES

    A. Community law:

  38. The starting-point in Community law is art. 2 of EC Directive 67/227 issued on 11 April 1967 ("the First Directive"). Art. 2 sets out the basic principle underlying the VAT system, as follows:
  39. "The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the tax is charged.
    On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods and services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
    The common system of value added tax shall be applied up to and including the retail trade stage."
  40. Thus, value added tax is a tax on the supply to the ultimate consumer. It follows that, however many steps there may be in the process leading to such supply, the tax is based upon the consideration obtained for the supply by the supplier who supplies the ultimate consumer (see F & I Services Ltd v. C & E Commrs [2001] STC 939, [2001] EWCA Civ 762 ("F & I") at 947e per Robert Walker LJ).
  41. I turn next to EC Council Directive 77/388 of 17 May 1977 ("the Sixth Directive"), which provides as follows (so far as material):
  42. "Article 2
    The following shall be subject to value added tax:
    1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
    2. ....
    Article 5
    Supply of goods
    1. 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner.
    ....
    Article 6
    Supply of services
    1. 'Supply of services' shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.
    ....
    Article 10
    1. (a) 'Chargeable event' shall mean the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled.
    (b) ....
    2. The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed. ....
    ....
    Article 11
    A. Within the territory of the country
    1. The taxable amount shall be:
    (a) in respect of goods and services .... 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 subsidies directly linked to the price of such supplies;
    ....
    3. The taxable amount shall not include:
    (a) ....
    (b) price discounts and rebates allowed to the customer and accounted for at the time of supply;
    ...."
  43. In the context of the present appeal, it is to be noted that 'consideration' for the purposes of art.11A(1)(a) includes consideration which is obtained by the supplier prior to making the supply: see the words 'has been or is to be obtained' (my emphasis). Thus, 'consideration' includes prepayments in cash or its equivalent. Conversely, art.11A(3)(b) excludes from the 'taxable amount', and hence from that which is to be regarded as 'consideration' under art.11A(1)(a), 'price discounts and price rebates accounted for at the time of supply'. For VAT purposes, therefore, 'consideration' and 'price discounts and rebates' are mutually exclusive. 'Price discounts and rebates' reflect an absence of consideration. Conversely, to the extent that there is consideration for a supply, there can be no 'price discounts or rebates'.
  44. On this appeal, we were referred by Mr Roderick Cordara QC (who appears, with Mr Paul Key, for Tesco) to a number of authorities relating (a) to the approach which the court should take in analysing the relevant transaction and (b) to the Community law concept of 'consideration'. Mr Christopher Vajda QC (who appears, with Mr Tim Ward, for the Commissioners) does not take issue with Mr Cordara's analysis of these authorities, but since Mr Cordara relies on them I advert to them briefly. I shall then turn to the authorities relied on by Mr Vajda, relating specifically to voucher schemes.
  45. (a) Authorities as to the approach to be adopted in analysing the relevant transaction

  46. Mr Cordara referred us first to a passage in the judgment of Ralph Gibson J in Customs & Excise Commissioners v. Pippa Dee Parties Ltd [1981] STC 495 at 501g-j, which was specifically approved by this court in Customs & Excise Commissioners v. Diners Club Ltd & Anor. [1989] STC 407 at 420c-d. In the passage in question, Ralph Gibson J said this:
  47. "It is clear therefore that a technical analysis of one part of a transaction, or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given, in a restricted way, is not necessarily the right answer in law to the application of the provisions of this statute [the Finance Act 1972]. I accept counsel for the Crown's submission that this approach does indicate that taxable transactions should not be artificially dissected so as to demonstrate as being the service provided, or the consideration given, something other or less than that which appears to have been the service provided or the consideration given upon examination of the entire transaction. The meaning of 'entire transaction' for this purpose must be objectively determined upon the facts of the transaction by reference to the terms agreed."

    Ralph Gibson J's 'entire transaction' test is reflected in the approach adopted by the European Court of Justice some 20 years later in Customs and Excise Commissioners v. Mirror Group plc [2001] STC 1453 (C – 409/98) (see paras 40 and 41 below).

  48. In British Railways Board v. Customs & Excise Commissioners [1977] STC 221 (a case concerning student rail cards) Lord Denning MR said this (at 223g):
  49. "The value added tax tribunal held that value added tax was payable on the £1.50. They regarded it as a question of fact …. I do not myself think it was a question of fact for the tribunal. We are told that some tribunals hold that value added tax is payable on these sums of £1.50 paid by the students; and that other tribunals hold that it is not payable. That will never do. Either value added tax is payable on all these sums of £1.50 or on none of them. It cannot depend on the state of mind of any individual student by asking him or her: what did you pay the £1.50 for? It must depend on the legal effect of the transaction considered in relation to the words of the statute. And that is a question of law."
  50. Later in his judgment in that case, Lord Denning MR said this (at p.224g-j):
  51. "I come back to the real question in this case: what did the board supply in consideration for the £1.50 they received? Did they supply transport by rail, or only an option to buy tickets? To my mind they supplied transport by rail; and the £1.50 was part payment for it. It is not correct to separate the £1.50 as if it was a separate payment for some separate service, separate from the travel by rail. The £1.50 is really part and parcel of the payment which the student makes for travelling on the railway."
  52. In Customs & Excise Commissioners v. Reed Personnel Services Ltd [1995] STC 588 the issue was whether the taxpayer's supply was of nurses or of nursing services. In the course of his judgment, Laws J considered the nature of the court's jurisdiction on an appeal on such an issue. At ibid. p.591c he said this:
  53. "I should at this stage break off to notice, and underline, the limited nature of my jurisdiction in an appeal of this kind. The right of appeal to this court arises under the Tribunals and Inquiries Act 1992 and is on law only. Just as with judicial review, that means that any findings of fact of the tribunal can only be impugned here on the familiar Wednesbury basis …. So much is common ground….. However, [the taxpayer] submits that where the issue for decision depends upon the construction of documents, the exercise of construction which the tribunal at first instance and the court on appeal must undertake is one of law, so that there is no difference between the nature of my task in relation to the contractual documents in this case, and the task which the tribunal had to perform. ….
    I certainly accept that where any issue turns wholly upon the construction of a document having legal consequences, the exercise of construction is one of law for the judge. But for the proper resolution of a case of this kind, there are I think two qualifications. The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of the law of contract, even where the obligation consists in the provision of goods or services. The second is that, in consequence, the true construction of a contractual document may not always answer the question – what was the nature of the VAT supply in this case? In so far as the answer to that question is not concluded by the legal process of construing the documents, there remains a question of fact; and for the purposes of an appeal of this kind, as I have made clear, the Wednesbury rule must therefore guide this court's approach in relation to it."
  54. Later in his judgment, at ibid. p.595e, Laws J said this:
  55. "In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties."
  56. In the result, Laws J held that the tribunal's decision "rested on its overall view of the facts", and could not be faulted on Wednesbury grounds.
  57. Laws J's approach was approved by the House of Lords in Eastbourne Town Radio Cars Association v. Customs & Excise Commissioners [2001] STC 606, [2001] UKHL 19 (see per Lord Slynn at para 14). In paragraphs 15 and 16 of his speech, Lord Slynn stressed the importance of the 'commercial reality' of the contract under consideration (an expression used by the European Court of Justice in H. J. Glawe [etc] [1994] STC 543, C – 38/93), and of not straying outside the four corners of the contract.
  58. In Mirror Group, the High Court referred to the European Court of Justice the question of the true interpretation of the expression 'the leasing and letting of immovable property' in art. 13B(b) of the Sixth Directive. Rejecting the taxpayer's contentions as to the interpretation of that expression, the court said this (in paragraph 33 of its judgment):
  59. "An approach of that kind would be contrary to the VAT system's objectives of ensuring legal certainty and a correct and coherent application of the exemptions provided for in art. 13 of the Sixth Directive. The court observes in this connection that, to facilitate the application of VAT, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question…. A taxable person who, for the purposes of achieving a particular economic goal, has a choice between exempt transactions and taxable transactions must, therefore, in his own interest, duly take his decision while bearing in mind the neutral system of VAT …. The principle of the neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other."
  60. In paragraphs 27 and 28 of his opinion in Mirror Group the Advocate-General (Tizzano) said this:
  61. "27. In order to identify the key features of a contract .... we must go beyond an abstract or purely formal analysis. It is necessary to find the contract's economic purpose, that is to say, the precise way in which performance satisfies the interests of the parties. In other words, we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the parties' respective interests, lying at the heart of the contract. In the case of a lease, as noted above, this consists in the transfer by one party to another of an exclusive right to enjoy immovable property for an agreed period.
    28. It goes without saying that this purpose is the same for all the parties to the contract and thus determines its content. On the other hand, it has no connection with the subjective reasons which have led each of the parties to enter into the contract, and which obviously are not evident from its terms. I have drawn attention to this point because, in my view, failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, even in the cases under consideration here, and has complicated the task of categorising the contracts at issue."
  62. In Customs & Excise Commissioners v. Littlewoods Organisation plc [2001] STC 1568, [2001] EWCA Civ 1542 Chadwick LJ, giving the judgment of the court, said this (in paragraph 84 of the judgment):
  63. "We reject the submission that there is any principle that transactions which have the same economic effect are, necessarily, to be treated in the same way for the purposes of VAT. The principle of neutrality, as explained by the Court of Justice in Elida Gibbs [1996] STC 1387 at 1403 and 1404, [1997] QB 499 at 561 and 562, paras 28 and 31, requires that the taxable person – that is to say, in the present case, the supplier – is not required to account for an amount of VAT which is greater than the amount actually paid by the final consumer – in the present case, the purchaser of the Lex car. As the Court of Justice emphasised in Elida Gibbs [1996] STC 1387 at 1402, [1997] QB 499 at 560, para 19, it is the final consumer who is intended to bear the tax; and the taxable amount upon which VAT is chargeable cannot exceed the consideration which the final consumer pays for the supply. But that principle does not provide the answer, in the present case, to the question 'what monetary equivalent did the parties attribute to the part exchange car?'; nor even to the question 'what monetary equivalent did the part exchange car represent to Lex when it accepted that car in part payment for the supply of the Lex car?' (see the judgment of the Court of Justice in Argos [1996] STC 1359 at 1373, [1997] QB 499 at 529, para 20)."

    (b) Authorities relating to the Community law concept of 'consideration'

  64. In Staatssecretaris van Financieren v. Cooperatieve Aardapelenbewaarplaats GA ("Dutch Potato") [1981] ECR 445, C – 154/80 the European Court of Justice stressed that the term 'consideration', when used in a VAT context, has an autonomous meaning, applicable in all member states. Thus, in paragraph 9 of its judgment, the court said this:
  65. "It should be noted in the first place that the expression in issue is part of a provision of Community law which does not refer to the law of the Member States for the determining of its meaning and scope; it follows that the interpretation, in general terms, of the expression may not be left to the discretion of each Member State."
  66. The court also stressed the need for a direct link between the supply in question and the alleged consideration for it, saying (in paragraph 12 of its judgment):
  67. "So a provision of services is taxable, within the meaning of the Second Directive, when the service is provided against payment and the basis of assessment for such a service is everything which makes up the consideration for the service; there must therefore be a direct link between the service provided and the consideration received which does not occur in a case where [as in that case] the consideration consists of an unascertained reduction in the value of the shares possessed by the members of the cooperative and such a loss of value may not be regarded as a payment received by the cooperative providing the services."
  68. In Commissioners of Customs & Excise v. Tron Theatre Ltd [1994] STC 177 the issue was as to the VAT treatment of fund-raising activities by the taxpayer company involving sponsorship of new theatre seats to raise money for the refurbishment of the company's theatre, and in particular whether there was a supply for consideration. The Lord President (Lord Hope), giving the judgment of the court, said this (at p.181c):
  69. "In our opinion the answer to the point which has been raised in this case is to be found by giving the phrase 'a consideration in money' in sub-ss (2) and (4) of s. 10 [of the Value Added Tax Act 1983] its ordinary meaning. No question arises here as to whether there was or was not a direct link between the consideration and the supply. .... [R]eciprocity is not in question in the present case. The relationship between the company and its sponsors was clearly a direct relationship. The sponsors paid their money direct to the company and they received, or at least were entitled to receive, the benefits direct in return. The consideration for these benefits was the amount of money which had to be paid in order to receive them. The tribunal was satisfied that the benefits were not being given gratuitously but only in return for the payment of money to the company. The question then is what the sponsor had to pay to obtain these benefits. The tribunal held that this was a contract constituted by offer and acceptance, and on this view it appears to us that the sum of £150 was the consideration in money for the supply. Thus, the value of the supply falls to be determined in terms of s. 10(2) of the 1983 Act, and it must be taken to be, when grossed up by the addition of the tax chargeable, equivalent to the sum of £150."
  70. In Tolsma v. Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509, C – 16/93 the issue was as to the VAT treatment of voluntary donations solicited from members of the public by a street musician. The European Court of Justice held (see in particular para 14 of the judgment) that a supply of services was effected 'for consideration' within the meaning of art. 2(1) of the Sixth Directive, and hence was taxable, only if there was a legal relationship between the provider of the service and the recipient pursuant to which there was reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient; and that those conditions were not fulfilled in that case.
  71. Town and County Factors Ltd v. Customs & Excise Commissioners [2002] STC 1263 (ECJ) was the converse of Tolsma in that there was a legal relationship creating the necessary link between the supply and the consideration for it. However, the court made clear that 'legal relationship' in this context did not necessarily mean a relationship which was enforceable in legal proceedings.
  72. In paragraphs 38 to 41 of her opinion in Town & County, the Advocate-General (Stix-Hackl) said this:
  73. "38. Whether there is a legal relationship in the Tolsma sense cannot depend .... on the presence of specific legal characteristics, in particular contractual or procedural ones, such as enforceability in legal proceedings. Since the conditions for the existence and content of legal relationships vary according to national legal systems, that would also be incompatible with the principle of fiscal neutrality and the objective of harmonisation of VAT. Otherwise the inclusion of a 'binding in honour only' clause could open the way to tax evasion.
    39. All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agreements – even ones that are binding in honour only – from which it is apparent that there is a direct link between them.
    40. In the Tolsma case there were no agreements of any kind whatever which might have created a link between service and payment sufficient for it to be possible to speak of a transaction 'for consideration' within the meaning of art. 2 of the Sixth Directive; the 'provider of the service' (in that case a street musician) admittedly received certain sums 'for his service', but the 'recipients of the service' paid them purely voluntarily and in principle received the service regardless of their consideration ....
    41. In contrast to the Tolsma case, in cases such as that in the main proceedings there is indeed a type of agreement under which the entry fee is paid for the service provided by the organiser of the competition. ...."
  74. In paragraphs 43 and 44 of her opinion the Advocate-General concluded that even illegal transactions may be subject to VAT, and that for VAT purposes a 'legal relationship' may exist even in the case of an agreement which is not legally enforceable.
  75. In Customs & Excise Commissioners v. Church Schools Foundation Ltd [2001] STC 1661, [2001] EWCA Civ 1745 this court held (Sir Andrew Morritt V-C and Arden LJ, Buxton LJ dissenting) that although there was a direct link in that case between the supply and the alleged consideration, nevertheless the supply was not a supply 'for' the alleged consideration, as required by art. 2 of the Sixth Directive; rather, the supply was effected 'with' the alleged consideration.
  76. In Yorkshire Co-operatives Ltd v. Customs & Excise Commissioners [2003] STC 234, C – 398/99 manufacturers issued price reduction coupons to the public. The coupons could be used to purchase products nominated on the coupons from retailers participating in the scheme. When a customer purchased such a product, he paid the normal retail price less the face value of the coupon. The retailer then claimed reimbursement from the manufacturer. The issue was whether the nominal value of the coupons should be included in the taxable amount in the hands of the retailer. The European Court of Justice held (following its decision in EC Commission v. Federal Republic of Germany [2003] STC 310, C – 427/98) that although the manufacturer was to be regarded as a third party in relation to the transaction between the retailer and the customer, nevertheless the fact that part of the consideration for the sale of the goods came from a third party was immaterial. Accordingly, when on the sale of a product the retailer allowed the final consumer to settle the sale price partly in cash and partly by means of a coupon issued by the product manufacturer, who in turn reimbursed the retailer the amount indicated on the coupon, the nominal value of the coupon had to be included in the taxable amount in the hands of the retailer.
  77. Mr Cordara cited Customs and Excise Commissioners v. Professional Footballers' Association (Enterprises) Ltd [1993] STC 86 (HL) for the proposition that it is not necessary for a customer to know how much of the money he pays constitutes consideration for a supply: the question is whether there was consideration for the supply. In that case the issue was whether (as contended by the association) the VAT-inclusive price paid by members of the association for an annual dinner at which trophies and medals were presented to award winners included an element of consideration for the supply of the trophies and medals, or whether (as the Commissioners contended) there was no consideration for such supply, with the result that VAT was chargeable on the cost of the trophies and medals. The House of Lords (affirming the decisions of the VAT tribunal, of the judge at first instance (Nolan J) and of this court) held in favour of the association.
  78. Lord Slynn (with whose speech the rest of their Lordships agreed) identified the issue as being "whether it can be said that there was a direct link between the price of the dinner ticket (or part of it) and the awards" (see p.89f-g). Lord Slynn concluded that there was a sufficiently direct link, saying this (at pp.89j-90a):
  79. "In my view the tribunal was perfectly entitled, indeed right, to find on the evidence that what each of those attending paid for included not merely seeing the presentation of the awards, but the actual provision or supply of those awards. It was a vital part of the evening."
  80. At p.90e-f Lord Slynn said this:
  81. "Nor does it matter in my view whether the diners knew or considered whether the price they paid included or constituted the costs of the awards. Such price in fact contributed to the cost of the evening which included the provision of the awards. That in my view is a sufficiently direct link."
  82. Mr Cordara also referred us in this connection to Customs & Excise Commissioners v. Telemed Ltd [1992] STC 89 (QBD), where Hodgson J said this (at p.96a-b):
  83. "[Counsel] for the commissioners .... points out that no individual advertiser can know what part of the money consideration provided by him is attributable to the supply of goods. That is no doubt true but not, in my judgment, relevant. The question is not whether the advertiser knew what part of the money he provided was for the supply of goods but whether there was consideration for the supply of goods."

    (c) Authorities relating to voucher schemes

  84. For a reason which will become apparent, Mr Cordara referred us to the decision of the Divisional Court in Davies v. Customs & Excise Commissioners [1975] STC 28 for the proposition that where a member of the Clubcard scheme redeems a voucher on the purchase of redemption goods the face value of the voucher is to be treated for VAT purposes as a payment of cash, and included in Tesco's turnover accordingly. In Davies the taxpayer was a retail draper who had an arrangement with a company (Provident) whereby he agreed to accept vouchers bearing a face value (referred to as 'checks') issued by Provident and presented by customers in exchange for goods supplied in his shop. Provident reimbursed the taxpayer, but subject to a deduction of 13.5 per cent, representing a commission paid by the taxpayer to Provident for encouraging custom in his shop by issuing the vouchers. The taxpayer was assessed to VAT on the total cash value of the goods supplied (that is to say, including the face value of the vouchers). He claimed that he was assessable to VAT on the discounted sum paid to him by Provident. A VAT tribunal found in favour of the Commissioners, and its decision was upheld by the Divisional Court.
  85. In the course of his judgment (with which Mais and Croom-Johnson JJ agreed), Lord Widgery CJ said (at p.30a-b):
  86. "This simple transaction has given rise to arguments at great length, many of which have gone up what I venture with respect to think were blind alleys. Consideration has been given to the question of whether a Provident customer acquiring goods through the Provident check is giving cash or something other than cash as a consideration. This point may be of some importance. From my point of view I am quite confident that the customer who presents the Provident check is paying cash and not consideration other than cash."
  87. Mr Vajda's starting-point in his citation of authority is the decision of the European Court of Justice in Boots Co plc v. Commissioners of Customs and Excise [1990] STC 387, C – 126/88. In that case, the relevant facts were briefly as follows. Boots launched two promotional schemes. In one of them, it bore the entire cost; in the other, the cost was shared between Boots and its suppliers. Under the schemes, a customer who purchased specified goods (premium goods), priced at their normal selling price, obtained coupons at no extra charge entitling him to purchase other specified goods (redemption goods) at a reduced price, the amount of the reduction being equal to the nominal value of the coupons. In the scheme in issue in the case the entire cost of the scheme was borne by Boots. The Commissioners decided that the coupons constituted part of the consideration for the supply of the redemption goods and assessed Boots to VAT on the basis that its gross takings included the nominal value of the redeemed coupons. A VAT tribunal upheld the Commissioners' decision. On Boots' appeal, the High Court stayed the proceedings and referred to the European Court of Justice for a preliminary ruling on a number of questions including (as the third question) whether, as Boots contended, the nominal value of the surrendered coupons constituted a price discount or rebate within the meaning of article 11A(3)(b) of the Sixth Directive and accordingly was not part of the taxable amount in Boots' hands. The court upheld Boots' contention.
  88. In paragraphs 11 to 13 of its judgment, in a section of the judgment headed 'Characteristics of the coupons', the court said this:
  89. "11. In order to provide a helpful answer to the problem of interpretation raised by the questions submitted to the court, that problem must be defined with reference to the national court's findings of fact as to what the coupons represent in the relations between Boots and its customers from the economic and legal point of view.
    12. According to the documents before the court, by the coupon given to the customer on the sale of the premium goods, Boots engages to grant the bearer of the coupon, on the subsequent purchase of one of the articles indicated in it, a price reduction equal to the nominal value also indicated on the coupon. Thus the coupon is constitutive of the bearer's right to a price reduction equal to the amount indicated on the coupon.
    13. From the economic point of view, since the obligation assumed by Boots forms part of a promotion scheme the cost of which is borne by Boots itself, it affords Boots no advantage other than the prospect of increasing its turnover by increasing the volume of its sales of premium goods and redemption goods. It is only where the coupon is surrendered to Boots and is then recovered by its supplier, when the latter bears all or part of the promotion costs, that the coupon has monetary value for Boots equal to the amount actually paid by the supplier to Boots pursuant to their own contract. In the case in question, the coupon represents for Boots only an obligation to grant a reduction, which is allowed with the aim of attracting the customer."
  90. In the next section of its judgment, headed 'The taxable amount', the court said this:
  91. "15. According to art. 11A(1)(a) of the Sixth Directive, the taxable amount within the territory of the country is to be, 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. Paragraphs (2) and (3) of art. 11A enumerate certain items which are to be included in the taxable amount and other items which are not to be included. Paragraph (3)(b) of art. 11A provides that the taxable amount is not to include 'price discounts and rebates allowed to the customer and accounted for at the time of supply'. Thus, the items referred to in para (2) of art. 11A are treated by the directive itself as constituting the 'consideration' and therefore the taxable amount and the items referred to in para (3) are excluded, likewise ex lege, from the concept of consideration.
    16. It follows that each time the question of classifying a specific item arises, it is first necessary to examine whether the item falls within one of the categories referred to in paras (2) and (3) and it is only when the answer is the negative that reference must be made to the general concept in para (1)(a)."
  92. Addressing the third question, the court said this (in paragraphs 18 to 22 of its judgment):
  93. "18. 'Discounts and rebates' which, according to art. 11A(3)(b) of the Sixth Directive, are not to be included in the taxable amount, constitute a reduction of the price at which an article is lawfully offered to the customer, since the seller agrees to forgo the sum represented by the rebate in order precisely to induce the customer to buy the article.
    19. That provision is merely an application of the rule laid down in art 11A(1)(a) of the Sixth Directive, as interpreted by the court in its decisions .... according to which the taxable amount is the consideration actually received.
    20. The United Kingdom states that the promotion scheme used by Boots should be distinguished from the typical case of a price discount or rebate since the reduction allowed to the purchaser is granted in exchange for the coupon which has a value.
    21. That viewpoint cannot be accepted. It is clear from the coupon's legal and economic characteristics described above that, although a 'nominal value' is indicated on it, the coupon is not obtained by the purchaser for consideration and is nothing other than a document incorporating the obligation assumed by Boots to allow to the bearer of the coupon, in exchange for it, a reduction at the time of purchase of redemption goods. Therefore, the 'nominal value' expresses only the amount of the reduction promised.
    22. The answer to the question must therefore be that art 11A(3)(b) of the Sixth Directive must be interpreted as meaning that the expression 'price discounts and rebates allowed to the customer and accounted for at the time of the supply' covers the difference between the normal retail selling price of the goods supplied and the sum of money actually received by the retailer for those goods where the retailer accepts from the customer a coupon which he gave to the customer on a previous purchase made at the normal retail selling price."
  94. The next case relied on by Mr Vajda is the decision of the European Court of Justice in Kuwait Petroleum (GB) Ltd v. Customs & Excise Commissioners [1999] STC 488, C – 48/97. Kuwait Petroleum is a supplier of fuel, both to consumers and to independent dealers. It operated a sales promotion scheme whereby customers buying fuel (premium goods) were offered vouchers which they were entitled to exchange for goods listed in a catalogue (redemption goods). The price of the fuel was the same, whether or not the customer accepted the vouchers. However, dealers who opted to join the scheme agreed to pay 0.22p (later, 0.33p) per litre for fuel, in addition to the normal wholesale price. In return, Kuwait Petroleum supplied all of the required promotional literature and other necessities. The Commissioners assessed the company to VAT on all redemption goods where the cost of the item exceeded £10, on the ground that such goods had been supplied otherwise than for a consideration. The company appealed to a VAT tribunal, contending that the redemption goods were supplied for consideration since there was consideration for the vouchers, and consequently for the supply of the redemption goods, such consideration consisting of a fraction of the VAT-inclusive price paid by the customer when purchasing fuel. The Tribunal stayed the proceedings and referred to the European Court of Justice for a preliminary ruling as to whether (among other things) the supply of the redemption goods was to be treated as a supply for consideration.
  95. The court held that in determining whether, for VAT purposes, there was a supply for consideration, the principle to be applied was that goods were supplied for consideration only if there was a legal relationship between the supplier and the purchaser entailing reciprocal performance, and the price received by the supplier constituted the value actually given for the goods supplied. It further held that although it was for the national court to investigate whether, at the time of fuel purchase, there was an agreement between the company and the customers that part of the price paid for the fuel represented payment for the vouchers or the redemption goods, the evidence suggested that there was in fact no such reciprocal performance by the parties, since the sale of fuel and exchange of redemption goods for vouchers were two separate transactions. One of the factors to which the court pointed as supporting this conclusion was the fact that the price for the fuel was the same whether or not the customer accepted the vouchers.
  96. The opposing arguments before the court in Kuwait bear a striking similarity to the arguments addressed to us on this appeal. In a section of his opinion headed 'Synopsis of the observations', the Advocate-General (Fennelly) summarised the opposing arguments as follows:
  97. "30. Kuwait Petroleum contests the approach of the tribunal in divorcing the previous supply of the premium goods (fuel) from the later supply of the redemption goods. .... Supported by the Commission, it contends that, in the case of redemption goods provided in exchange for stamps obtained from its own sites, the consideration for the supply of the goods constitutes an unascertained part of the VAT-inclusive price paid by the motorist. If the consumer chose not to accept the stamps, he was opting not to avail of a right that he had paid for. In support of this contention it relies, in particular, on the court's judgment in Elida Gibbs .... while asserting that the commissioners' reliance on [Boots] is misconceived. Kuwait Petroleum repeats its argument before the tribunal that the sale of the fuel with the stamps forms part of the same single economic transaction as the supply of the redemption goods.
    31. Kuwait Petroleum submits that this analysis also applies with respect to stamps supplied by dealers. In its view, the involvement of dealers should not affect the application of the Community VAT law principle of neutrality. It .... contends that the operation of the scheme imposed an additional burden on independent participating dealers; they, in effect, paid Kuwait Petroleum an extra 0.22p/0.33p per litre, plus VAT, for supplies of fuel in return for which they received a supply of stamps. ....
    32. The United Kingdom disagrees, saying that there was but one pump-price for each grade of fuel. The stamps were issued, like the coupons in Boots, for no consideration; however, the subsequent supply of the redemption goods was free of charge, whereas the coupons issued by Boots served directly as discounts off the price of the goods subsequently purchased. At the hearing, it was claimed that the very rationale of promotions such as that in issue in the present case is that the customer should receive something without being required to pay anything in return. The simple fact that Kuwait Petroleum incurred costs in operating the scheme does not affect the question whether consideration was provided. Consideration is what is received by the taxable person for the supply. In this case, it cannot be viewed as an unascertained part of the purchase price paid by motorists; the motorist merely paid for the fuel while at the same time receiving stamps, without .... providing any additional consideration to Kuwait Petroleum for those stamps. The United Kingdom, thus, does not accept that the supply of fuel and the later supply of redemption goods constituted a single economic transaction. It submits that the additional 0.22p/0.33p per litre was paid to Kuwait Petroleum by the dealers for fuel in return for the right to participate in the promotion and the resulting opportunity for increasing their own turnover. It did not constitute third-party consideration provided by the dealers to Kuwait Petroleum in respect of the supply of redemption goods, since the payment had no 'direct link' with the delivery of redemption goods by Kuwait Petroleum. ...."
  98. Then, under the heading 'Analysis', the Advocate-General said this:
  99. "33. The divergent views concerning whether Kuwait Petroleum received consideration for the redemption goods depend essentially on whether the sale of fuel with stamps and the subsequent supply of redemption goods for the surrender of stamps constitute a single economic transaction, as claimed by Kuwait Petroleum, or whether, as alleged in particular by the United Kingdom ...., no distinct discernible consideration can be identified.
    34. .... In the present case, then, the question is whether there was a 'direct link' between the supply of the redemption goods and the purchase of fuel by motorists who received stamps."
  100. Then, after referring to Dutch Potato and Tolsma, the Advocate-General continued (at paragraph 38):
  101. "38. It appears to me that the most useful point of reference for the resolution of the present case is [Boots]. .... Although the case was formally concerned with an alleged discount, the core issue was whether, as the United Kingdom asserted in Boots, the reduction on purchases of redemption goods was allowed 'in exchange for the coupon which has value' (see .... para 20); in other words, did the purchaser in the second transaction by surrendering coupons provide consideration equal to the face value of the coupon? Boots was, thus, in effect a price-reduction case. The court stated that the coupons at issue 'represents for Boots only an obligation to grant a reduction, which is allowed with the aim of attracting the customer' ....; the coupons were 'not obtained by the purchaser for consideration' and constituted 'nothing other than a document incorporating the obligation assumed by Boots to allow to the bearer of the coupon, in exchange for it, a reduction at the time of purchase of the redemption goods'."
  102. After quoting from the opinion of the Advocate-General in Boots (Van Gerven), the Advocate-General continued:
  103. "39. The supply of redemption goods under the sails scheme is not, in my view, made for consideration as explained in the above-mentioned cases.
    40. I do not think it is possible to establish the necessary direct link between the supply of redemption goods and any identifiable element in the price paid for fuel at the pumps, even acknowledging that each motorist is entitled to demand stamps in proportion to his purchases .... It is apparent from such cases as .... [Boots] that the scheme at issue created its own identifiable link, both qualitatively and quantitatively. If the sails scheme had entitled the motorist to a given reduction or even, for example, the supply of a litre of fuel free for every 50 litres purchased, there would have been a straightforward reduction in the price of the fuel supplied, akin to that in Boots. ....
    41. However, there are two other decisive considerations. Firstly, it is acknowledged that a significant proportion of the stamps to which motorists are entitled are not claimed, or, if they are, that they are not always used to claim redemption goods. Kuwait Petroleum's claim is that the price, ostensibly paid for fuel both at Kuwait Petroleum-owned and independent sites, is actually paid in part only for the fuel, the remaining part being paid for the redemption goods. Thus the motorists who do not claim stamps or goods are paying, pro tanto, for nothing. On that view, Kuwait Petroleum, or the independent retailers, should pay VAT calculated by reference to the amount of the stamps not claimed or used. That result, though logical, is too theoretical and unreal. ....
    42. Secondly and more seriously, it seems to me impossible to adapt Kuwait Petroleum's theory of the single economic transaction to take account of the proportion of the sales of fuel which took place through the dealers. The proposed allocation of the contribution paid by the dealers to Kuwait Petroleum (0.22p or 0.33p per litre) to the price paid by the motorist at the pumps is entirely arbitrary. It bears no relationship either to the actual price paid by the consumer – who has no interest in the cost of the sails scheme – or even to the price of the redemption goods. This, of course, is the result of the impossibility of fitting the intermediate transaction between Kuwait Petroleum and the dealer into the framework of a supposed single economic transaction between Kuwait Petroleum and the consumer. In fact, it exposes the weakness of the argument. Moreover, .... it is not even possible to segregate the two types of transaction. There is no way of distinguishing those stamps received at dealer-operated sites from those supplied directly by Kuwait Petroleum.
    43. In reality, it is not possible to treat as a single economic transaction a series of events consisting of two distinct transactions; sale of fuel coupled with the supply of stamps and the subsequent supply of redemption goods for those stamps. This applies a fortiori when, in addition to the above events, the sale of fuel to an independent dealer and the latter's participation in the sails scheme must also be considered. .... In the present case, as Kuwait Petroleum accepted at the hearing, a number of transactions are involved. At a minimum, the sale of fuel and the supply of the redemption goods were separable not only in time but as to subject matter. When the sails scheme is operated by a dealer, yet another transaction occurs."
  104. Agreeing with the Advocate-General, the court said this (in paragraphs 26 to 31 of its judgment):
  105. "26. Goods are supplied 'for consideration' within the meaning of art. 2(1) of the Sixth Directive only if there is a legal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods supplied (see .... [Tolsma]).
    27. It is for the national court to inquire whether, at the time of purchasing the fuel, the customers and Kuwait Petroleum had agreed – through the dealers, as the case may be – that part of the price paid for the fuel, whether identifiable or not, would constitute the value given in return for the Q8 vouchers. There is nothing, however, in the documents before the court to suggest that there was any such reciprocal performance by the parties concerned.
    28. As the Advocate-General pointed out in para 43 of his opinion, the sale of fuel and the exchange of goods for vouchers are two separate transactions.
    29. Moreover, there are two considerations in the case in the main proceedings which suggest that the exchange of goods for Q8 vouchers is a disposal free of charge, within the meaning of art 5(6) of the Sixth Directive, and that the application of those goods is therefore to be treated as a supply for consideration and, accordingly, taxable.
    30. First, under the sales promotion scheme set up by Kuwait Petroleum, the redemption goods were described as gifts.
    31. Second, it is not contested that the retail price of Q8 fuel [the premium goods], whether or not the purchaser accepted the vouchers, was the same, and this was the only price referred to on the invoice relating to the fuel purchase which .... [the company] or the independent retailers had to issue to the customers who were themselves taxable persons. That being so, [the company] cannot reasonably maintain that, contrary to the statements on the invoices which it issued, the price paid by the purchasers of fuel in fact contained a component representing the value of the Q8 vouchers or of the redemption goods."
  106. At a subsequent hearing before a VAT tribunal, the tribunal found that customers purchasing fuel provided no separate consideration for the redemption goods. Kuwait's appeal was dismissed by Laddie J (see [2001] STC 62).
  107. In paragraphs 23 and 24 of his judgment, under the heading 'The test for determining whether a disposal is 'free of charge', Laddie J said this:
  108. "23. It seems to me that the starting point for deciding whether [counsel for Kuwait Petroleum]'s objections to the tribunal's findings have merit, is to appreciate what inquiry it should have undertaken to determine whether a disposal is 'free of charge' within the meaning of those words in art 5(6). As both parties agreed, this was addressed by the Court of Justice and is set out in the Kuwait judgment (see [1999] STC 488 at 509, [1999] ECR I-2323 at 2358, para 27). What has to be determined is whether, at the time of purchasing the premium goods, the customers and Kuwait Petroleum had agreed, directly or indirectly, that part of the price paid for the premium goods, whether identifiable or not, would constitute the value given in return for the redemption vouchers or the redemption goods. It would be insufficient to prove that Kuwait Petroleum alone thought that the redemption vouchers and redemption goods were being paid for by the customer through the price paid for the premium goods.
    24. If the existence of such a consensus is the express and acknowledged view of the contracting parties, then the goods are not disposed of 'free of charge' and art 5(6) does not apply. However, here there was no such express and acknowledged view of the contracting parties. Both [counsel for Kuwait Petroleum] and [counsel for the Commissioners] agree that in those circumstances the inquiry is to be answered objectively. That is to say the fact-finding tribunal has to determine what the ordinary customer (the driver of the Clapham Ford Sierra) and Kuwait Petroleum should be taken to have agreed to at the time the premium goods were being purchased. That determination depends upon the inferences to be drawn from all the circumstances surrounding the transactions on the forecourt of the petrol stations. It is what the tribunal did here."
  109. In paragraph 34 of his judgment, Laddie J said this:
  110. "34. Furthermore, I do not accept [counsel for Kuwait's] criticism of the points which the Court of Justice in Kuwait thought were telling. The invoices supplied to the customers at petrol stations and the way in which the promotion was run by Kuwait Petroleum and its participating agents were likely to reinforce each other and convey to the customers the marketing message that they were indeed getting something for nothing. .... They were only incorrectly worded if the redemption vouchers and redemption goods were being paid for. If they were not, the invoices were correctly worded. In any event, as I have said above, what counts is what the customers thought they were agreeing to. Kuwait Petroleum and its agents went out of their way to make customers think that they were being given free gifts. That largesse was to be repaid by customer loyalty. Kuwait Petroleum can hardly complain if customers believed what it was telling them. In the light of these considerations, there is no difficulty in dealing with [counsel for Kuwait's] argument in relation to a promotion of the 'Buy one: get one free' kind. There is a limit to the reasonable gullibility of ordinary members of the public. A promotion of that kind would not persuade most customers that they were really getting half of their acquisitions free. They would think that they were receiving each of the products at half price and that they were paying for both. They would be likely to regard the vendor's assertion that one product was being given free as little more than a puff."
  111. Laddie J accordingly upheld the tribunal's decision.
  112. The next authority cited to us by Mr Vajda was Customs & Excise Commissioners v. Primback Ltd [2001] STC 803 (ECJ). Under the scheme operated in Primback: (1) Primback, as retailer, invoiced the customer for the full advertised price of the goods; (2) under a separate contract between the customer and one of a number of finance houses participating in the scheme the finance house agreed with the customer to pay the invoiced amount to Primback and the customer agreed to repay that amount to the finance house, interest-free, over a period; and (3) by oral agreements between the finance houses and Primback the finance house paid to Primback the invoiced price of the goods less a percentage by way of commission. Primback was assessed to VAT on the basis of the full invoiced price of the goods. Primback appealed, contending that it was only assessable to VAT on the discounted amount received from the finance house. The House of Lords stayed the proceedings and referred to the European Court of Justice for a preliminary ruling on the question whether, on a true construction of art. 11A(1)(a) of the Sixth Directive, the taxable amount in the hands of a taxpayer under a scheme of the Primback kind consisted of the amount paid by the purchaser for the supply (under the Primback scheme, the full advertised price of the goods) or the amount received by the retailer (under the Primback scheme, the discounted amount paid by the finance house).
  113. Before the European Court of Justice Primback contended (as Tesco contends in the instant case) that commercial reality required that, for VAT purposes, the invoiced price had to be broken down into two components, one relating to the supply of the goods and the other relating to the cost of the credit borne ultimately by Primback, and that only the first component fell to be included in the taxable amount.
  114. In paragraph 35 of his opinion, the Advocate-General (Alber) noted that there was (at least superficially) a clear agreement between Primback and the customer under which the consideration consisted of the full price of the goods. In paragraph 36 of his opinion, the Advocate-General turned his attention to the agreement between Primback and the finance house, and Primback's 'economic analysis' (that is to say the 'two components' analysis referred to above).
  115. In paragraphs 37 to 41 of his opinion the Advocate-General said this:
  116. "37. This manner of considering the transaction in economic terms is challenged in particular by the judgment in Chaussures Bally SA v. Belgium [1997] STC 209, C – 18/92. The issue for determination in Bally was whether, in the case of purchase by credit card, VAT was chargeable on the full price or whether the commission payable to the credit card company could first of all be deducted. The court ruled in that case that the taxable amount had to be the full price. However, the judgment in Bally is not directly transposable to the present case. .... Rejection of the economic method of considering the transaction in the present case can thus find support in the Bally judgment only to the extent to which general principles can be derived from that judgment. In addition to the Bally judgment, account should also be taken in the present context of that in [Kuwait] in which the court focused on how the transaction was perceived externally by the consumer.
    38. The court found as a fact in [Kuwait] that the handing out of vouchers on sales of fuel was expressly stated to be without consideration and could therefore also not be used to reduce turnover for the purposes of VAT assessment (see [ibid.] para 30). There is a parallel with the present case in so far as the credit was expressly to be granted interest free.
    39. In both [Kuwait] and Bally the party liable to VAT regularly carried on two types of transaction, in which it charged the same price to customers. In the credit card transaction – as formed the basis of the case in Bally – the same prices are typically charged between vendor and purchaser as in a cash transaction. The form of payment alone takes a different form. It is therefore consistent if VAT is charged in the same way as for a cash transaction. The court stressed in [Kuwait] that the price of the purchased fuel remained the same irrespective of whether or not the vouchers in question were accepted (see [ibid.] para 31).
    40. There are in the present case no clear grounds for arguing that the purchase of goods on interest-free credit is based on any price other than the cash price. Counsel for Primback stressed at the hearing that cash purchasers could negotiate rebates, but conceded that rebates were not expressly offered to cash purchasers. Consequently the facts of the present case are also in principle on a par with Bally and [Kuwait]. ....
    41. The court also pointed out in Bally .... that the retailer liable to VAT expressly indicated on the sales invoice the VAT for the full amount paid by the customer. That in principle does not occur in the present case, since Primback does not indicate any VAT whatever on the invoice. There was, however, a dispute during the hearing as to whether, if it were to indicate VAT on invoices, Primback would be entitled to limit that indication to the amount received from the finance company. Counsel for Primback conceded that, in the event of a cash purchase without rebate, VAT – were it to be indicated – would in any case relate to the full price."
  117. The court agreed with the Advocate-General. After referring to Bally, the court said this (in paragraphs 35 to 43 of its judgment):
  118. "35. According to Primback, the need to take account of the commercial reality leads inevitably to the conclusion that the different transactions between the parties involved cannot be analysed in isolation. Thus, in a situation where, as in the case in the main proceedings, the customer has the benefit, for a single price of two supply transactions, effected by two separate traders, one of which is taxable and the other exempt, but neither of which can be treated as being ancillary to the other, the correct method for determining the basis of assessment for VAT would be to divide the consideration in an appropriate manner between the two supply transactions at issue. Since the provision of credit undoubtedly has a value and the price advertised and invoiced to the purchaser in fact covers the cost of the interest-free loan enjoyed by the purchaser, the logical view would be that the consideration for the actual value of the goods is the difference between the advertised sales price and the cost of the credit which the retailer must himself ultimately bear.
    36. Primback adds, in the alternative, that the amount of commission retained by the finance house would amount to a discount or a rebate on the price within the meaning of art. 11A(3)(b) of the Sixth Directive, which should therefore not be included in the taxable amount for determining the VAT payable by the retailer in respect of the supply of goods to the final consumer.
    37. The arguments put forward by Primback cannot be upheld.
    38. First, as follows clearly from para 16 of Bally ...., the relationships between seller and purchaser and between seller and finance house must be distinguished for the purposes of determining the basis for calculating VAT. Consequently, the fact that the supply of services by the finance house is, in principle, VAT-exempt has no bearing on the basis of assessment for the charging of VAT in respect of the transaction between seller and purchaser, which alone is in issue in the main proceedings.
    39. For the same reason, Primback's alternative argument is irrelevant.
    40. Second, with regard solely to the legal relationship betwen seller and purchaser, Primback cannot validly claim that, for purposes of determining the basis of assessment for VAT, one must break down the single price advertised and invoiced to the consumer, distinguishing between the portion relating to the value of the goods and the portion relating to the cost of the credit ultimately borne by the retailer.
    41. According to the order for reference, where a customer makes use of the possibility of paying for goods purchased from Primback by way of interest-free credit, that customer receives from the seller an invoice stating the price of the goods as advertised in the store at the time of sale and concludes with a finance house a loan agreement for an amount equivalent to the cash sale price of the goods. The finance house undertakes to pay that amount directly to the seller, on the purchaser's behalf, in settlement of the price advertised and invoiced by that seller. The customer repays to the finance house only the amount of the loan.
    42. It follows that, in the present case, the price agreed between the parties to the contract of sale and paid by the consumer was the same, irrespective of the means by which the purchase of the goods was financed, with the result that Primback cannot reasonably argue that the price advertised in fact contained a component representing the value of the credit (see, by way of analogy, [Kuwait] para 31)."
  119. The court went on to observe that even if there were a separate supply of credit, such supply would in any event be ancillary to the principle supply, viz. the supply of goods, with the result that for VAT purposes there would still be a single supply; and that any reduction in the price of the goods would need to be negotiated and agreed with the customer. It continued (in paragraphs 47 and 48 of its judgment):
  120. "47. Primback cannot validly argue that the provision of interest-free credit as such reduces the countervalue of the supply of the goods. On the contrary, the option given to customers to purchase on credit not only increases the volume of the retailer's sales, but also enables the retailer to avoid having to accept payment by instalments and guarantees him payment for the goods sold, with the result that, in consideration of this supply of services provided by the finance house, the seller accords to the latter a commission which reduces his profit margin. That commission constitutes for Primback a charge connected with its business in the same way as, for example, its costs in respect of financing, advertising or rent.
    48. By calculating VAT on the total price advertised and invoiced by the seller, the commissioners are not therefore charging a taxable person such as Primback an amount of tax exceeding that ultimately borne by the final consumer (see Elida Gibbs ....). In contrast, if the tax authorities were able to charge VAT only on a fraction of the price invoiced to the purchaser and payable by him, as Primback argues, a portion of the advertised price of the goods sold to the final consumer would not be subject to tax, with the result that the principle of fiscal neutrality would be infringed."
  121. The court accordingly ruled that in a scheme of the Primback type the taxable amount for the purposes of calculating VAT on the sale of the goods consists of the full amount payable by the purchaser.
  122. B. National law:

  123. Section 5(2)(a) of the 1994 Act provides that 'supply' for the purposes of the Act includes all forms of supply:
  124. "....but not anything done otherwise than for a consideration".
  125. Section 19 of the 1994 Act (headed "Value of supply of goods or services") together with Schedule 6 to the 1994 Act (headed "Valuation: special cases") carry into national law the provisions of art.11A of the Sixth Directive. They must accordingly be construed in accordance with the Sixth Directive and other relevant Community legislation. Section 19 provides as follows (so far as material):
  126. "(1) For the purposes of this Act, the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6, and for those purposes subsections (2) to (4) below have effect subject to that Schedule.
    (2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.
    (3) If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration.
    (4) Where a supply of any goods or services is not the only matter to which consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.
    (5) ...."
  127. Paragraph 5 of Schedule 6 is in the following terms:
  128. "5. Where a right to receive goods or services for an amount stated on any token, stamp or voucher is granted for a consideration, the consideration shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds that amount."
  129. Since there is no directly equivalent provision to paragraph 5 in Community legislation, there is no direct European authority as to the interpretation and application of the paragraph. Moreover, notwithstanding that a provision in the terms of paragraph 5 has been part of national legislation since 1972 (see Finance Act 1972 Schedule 3 paragraph 5 and the Value Added Tax Act 1983 Schedule 4 paragraph 6), there is little authority in national law relating to it. In particular, there is no authority in national law which addresses directly the issue which arises on this appeal.
  130. In Customs & Excise Commissioners v. Granton Marketing [1996] STC 1049 at 1053f Waite LJ (with whom Swinton Thomas and Stuart-Smith LJJ agreed) accepted the submissions of leading counsel for the Commissioners that:
  131. ".... Schedule 4 [of the 1983 Act] is merely a valuation provision, and paragraph 6 [the immediate predecessor of paragraph 5 of Schedule 6 to the 1994 Act] needs to be read in its context as one of the provisions of that schedule designed to deal with distortions and anomalies. .... paragraph 6 is designed to avoid double taxation where a supply is capable of being subdivided into two separate transactions by reason of prepayment."
  132. As Robert Walker LJ observed in F & I (at paragraph 16 of his judgment):
  133. "Except in Granton Marketing, the statutory provision which now appears as Schedule 6, paragraph 5 of the 1994 Act has received very little attention either from the national court or in the Court of Justice."
  134. F & I was concerned with a proposed scheme devised by the taxpayer (F & I) under which books of vouchers were to be sold to car dealers to be offered by them to purchasers of cars. The vouchers were to be redeemable on purchases of goods or services from retailers participating in the scheme. The nominal value of each book of vouchers was £2,200, but the conditions for their use meant that the likelihood was that only a small proportion of them would in fact be redeemed. The books were sold to the car dealers by F & I at a price of £10.40 each plus VAT, and by the car dealers to their customers at a nominal price of £300 (without VAT). The £300 was included as part of the price for the car. The Commissioners took the view (contrary to their previous view) that the taxable amount in the hands of the car dealers included the proceeds of sale of the vouchers. F & I contended to the contrary. A VAT tribunal agreed with the Commissioners' view. It acknowledged that the retailers derived a general commercial benefit from the scheme, but it concluded that there was no direct link between that general benefit and the supply of goods when a voucher was redeemed; hence the vouchers were not issued for consideration. F & I appealed, contending (among other things) that paragraph 5 applied. Carnwath J dismissed the appeal, holding that as the vouchers could only be used by way of discount or part payment they were outwith para 5 as the only effect of using them would be to obtain a price reduction.
  135. This court upheld that decision. In paragraph 44 of his judgment, Robert Walker LJ said this:
  136. "Schedule 6, para 5 is directed to a voucher 'granted for a consideration'. It does not apply to the sort of 'money-off' or 'cash-back' vouchers considered in many of the cases cited to this court. Its most obvious application is to the sort of 'savings stamp' schemes which were used, at times when credit was not so easy to obtain as it is today, to enable consumers to put money aside in order to obtain goods or services, at some future time, from a particular supplier. That would be a clear case of prepayment contemplated by art. 11A(1)(a) ('the consideration which has been or is to be obtained'). If such savings stamps were sold by the supplier at a discount, it would appear to fall within art. 11A(3)(b) ('price reductions by way of discount for early payment'). But Sch 6, para 5 must not be construed so widely as to distort the general scheme of VAT as a Community tax, and I think that this court was right, in Granton Marketing, to be aware of that danger."
  137. Rejecting a submission on behalf of F & I that the distinction between discount ('money-off') vouchers and payment vouchers was inconsistent with Community law, Robert Walker LJ said this (in paragraph 46 of his judgment):
  138. "I cannot accept that submission. It is no doubt true that a customer who presents a '50p off' voucher at Boots probably does not know or care whether this represents a discount borne by Boots or a part-payment to Boots (because Boots can obtain reimbursement from the manufacturer). But it is not necessary for the customer to know that .... From the point of view of the retailer the distinction is of obvious economic and fiscal importance, as is illustrated by the different schemes considered in the Boots case. In that case the Court of Justice made clear that a voucher which was worthless in the retailer's hands was only 'an obligation to grant a reduction' – that is a discount."

  139. Robert Walker LJ (with whose judgment Sedley and Arden LJJ agreed) went on to uphold the judge's finding that there was no direct link between the marketing benefit derived from the scheme by a retailer and the supply which the retailer made to the customer.
  140. In Hartwell plc v. Customs & Excise Commissioners [2003] STC 396, [2003] EWCA Civ 130, the facts were briefly these. Hartwell sold new and used cars. On the sale of a used car Hartwell gave the purchaser three MOT vouchers, each of which entitled the customer to a free MOT test. The vouchers had a total face value of £96.33. Hartwell contended: (i) that the vouchers took effect as a discount, and (ii) that they were granted for a consideration within the meaning of paragraph 5, with the consequence that part of the price for the car should be deducted from its turnover. The Commissioners contended: (i) that the £300 formed part of the consideration for the car, and (ii) that in any event the supply of the car and the supply of the vouchers constituted a single supply, the supply of the vouchers being ancillary to the supply of the car, and that accordingly paragraph 5 had no application.
  141. The tribunal dismissed Hartwell's appeal, on the basis that the supply of vouchers was ancillary to the supply of the car. Hartwell's further appeal was allowed by Patten J. On the issue as to the application of paragraph 5, the judge held that the tribunal had been in error in assuming that the provisions of paragraph 5 were avoided by its finding that the supply of vouchers was ancillary to the supply of the car. The Commissioners appealed to this court.
  142. In this court, Chadwick and Ward LJJ allowed the Commissioners' appeal on the basis of their alternative contention, holding that the transaction under which the dealer supplied the car and the vouchers had to be treated for VAT purposes as a single transaction; that there was no separate consideration for the supply of the vouchers; and that no part of the consideration for the separate supply could be attributed to the vouchers. It followed that the vouchers were not 'granted for a consideration' for the purposes of paragraph 5.
  143. In paragraphs 33 to 35 of his judgment Chadwick LJ said this:
  144. "33. In my view it is clear that the transaction under which the dealer provides to the customer both the replacement car and the three MOT vouchers ought to be treated for VAT purposes as a single transaction. .... But, even if I were to take a different view (which I do not) I would not think it right to differ from the tribunal on a finding which it made after considering the evidence before it and directing itself correctly in the light of the authorities.

    34. Nevertheless, I agree with the judge that a decision that the transaction is to be treated as a single supply is not determinative of the question whether para 5 .... has any application. The single supply is plainly a supply of goods; and, if it were necessary to categorise that supply, it would take its character from the dominant or principal element – the supply of the replacement car. But, as it seems to me, that does not lead to the conclusion that the goods supplied do not include the MOT vouchers. And so it remains necessary to consider whether the consideration for the single supply includes some separable element of consideration attributable to the vouchers. If it does, then that element of the consideration for the single supply must be disregarded except to the extent (if any) that it exceeds the amount of the face value of the vouchers. That is what para 5 .... requires.

    35. In considering whether the MOT vouchers were supplied for consideration the tribunal asked itself whether, if Hartwell failed to honour the undertaking expressed in the vouchers (to provide an MOT test), the customer could enforce that undertaking. The tribunal thought that the customer could do so. In my view it was correct to reach that conclusion. But the conclusion that the undertaking to supply a service (the MOT test) in the future would be enforceable – because that undertaking is supported by consideration, in the sense recognised by domestic law – does not answer the question whether anything which has been obtained by the dealer (Hartwell) for the single composite supply (within which the supply of MOT vouchers is comprised) can be treated, for the purposes of art. 11A(1)(a) of the Sixth Directive, as a separate consideration for the supply of the vouchers. In my view the commissioners are correct in their contention .... that there is nothing which constitutes a separate consideration for the supply of the vouchers; and that no part of the consideration for the single composite supply can be attributed to the vouchers. ...."
  145. The Commissioners' appeal was accordingly allowed. Arden LJ would have allowed the appeal on the primary basis contended for by the Commissioners, viz. that the £300 was to be treated for VAT purposes as part of the consideration for the car.
  146. PART 4. THE ISSUE

  147. As will by now have become apparent, the issue in the instant case is whether vouchers issued under the basic Clubcard scheme, and/or under all or any of the third party schemes, are vouchers to which paragraph 5 of Schedule 6 to the 1994 Act applies. That issue has been expressed in argument as being whether such vouchers are issued for consideration, for the purposes of paragraph 5. Formulated more precisely, perhaps, the issue is whether, for the purposes of paragraph 5, the right to receive goods up to the face value of a Clubcard voucher is 'granted for a consideration'.
  148. In addressing this issue, it will be necessary to consider separately the basic Clubcard scheme and each of the three categories of third party scheme in evidence before the Tribunal, since Mr Cordara submits that, as the Tribunal's Decision itself demonstrates, different conclusions may follow depending on the precise nature of the scheme in question.
  149. PART 5. THE TRIBUNAL'S DECISION

  150. In determining whether the Clubcard vouchers were 'granted for a consideration' for the purposes of paragraph 5, the Tribunal adopted the test set out by the European Court of Justice in paragraph 27 of its judgment in Kuwait (quoted above). It also adopted Laddie J's elaboration of that test, as set out in paragraphs 23 and 24 of his judgment in Kuwait (quoted above). (See paragraph 51 of its Decision.)
  151. Then, turning to the basic Clubcard scheme, the Tribunal said this (in paragraphs 52 to 57 of its Decision):
  152. "52. The test can be restated for Clubcard Scheme In-store purchases. It is for this tribunal to determine whether, at the time of purchasing the Premium Goods In-store the Clubcard members and Tesco had agreed, directly or indirectly, that part of the price paid for the Premium Goods, whether identifiable or not, would constitute value given in return for the Clubcard vouchers. If the existence of such an agreement is the express and acknowledged view of both of the contracting parties, that is to say Tesco and its Clubcard holding customer, then the Premium Goods have been purchased for a consideration. If there is no such express and acknowledged view then the inquiry is to be answered objectively. We have to determine what the customer who drives to the store in a Ford Sierra and Tesco should be taken to have agreed at the time the Premium Goods were purchased. That determination depends upon the inferences to be drawn from all the circumstances surrounding the In-store purchases.
    53. We do not believe that we have sufficient evidence of an express and acknowledged agreement on the part of both Tesco and the customer that part of the price paid at the till on the purchase of the Premium Goods is paid for the vouchers. The statement of entitlement to points on the till receipt is clearly an acknowledgement by Tesco of an entitlement to the vouchers. But the issues remain as to whether that entitlement was as the result of a gift, and, if not, whether it was agreed by both Tesco and the customer that part of the price was paid for the vouchers.

    54. We are looking for a consensus. It is relevant what both Tesco and the Ford Sierra driver considered to be the agreement and the nature of the transaction. Was it a gift of a voucher? Or was part of the purchase price paid at the till paid for the right to receive vouchers? We have no difficulty in concluding that Tesco saw it as a right to receive vouchers the cost of which was borne partly out of the price paid at the till. There is no such thing as a free lunch. Tesco knew it had costs that must be covered to justify the Clubcard Scheme. While it might not have attributed the cost individually to each sale of Premium Goods, it was the prices received on those sales as a whole that it looked to to cover the costs. We have no doubt that Tesco considered itself bound to issue the vouchers in accordance with the terms of the Clubcard Scheme. Tesco considered itself both contractually bound by the purchase of the Premium Goods and as receiving consideration for that commitment from part, if an unidentified part, of the price paid at the till. We see no significance in the point made by Miss Whipple that the cost of the Clubcard Scheme can be looked at as overheads of Tesco. They are not a necessary cost for the sale of products at a store. They were introduced to improve or maintain turnover.

    55. The real issue for us is whether we are satisfied that the Ford Sierra driving Clubcard member at the time of the purchase of Premium Goods at the till considered the vouchers to be a gift, or whether he or she considered that part of the purchase price paid at the till was paid for the right to receive the appropriate vouchers.
    56. We have no hesitation in saying that we are satisfied that such a customer did consider that the price paid at the till was paid partly for the right to get the vouchers. We are satisfied that the vouchers were not considered to be simple gifts. In coming to that conclusion we take into account all the factors raised by Miss Whipple and set out in paragraph 32(d). What we find of overwhelming influence is the very high rate of redemption. Even if the first time the Ford Sierra driver uses his or her Clubcard, that is done with little thought to the future value of the vouchers, that cannot be the case after any reasonable length of time. The Clubcard member knows from experience that the Vouchers will come. The number of points promised is mentioned on the till receipt. A regular statement is received showing the number of points and vouchers that are due. The vouchers arrive. Trouble is taken to keep them. Trouble is taken to take them to a Tesco store. They are valued by the Clubcard members, or at any rate by Clubcard members holding 93% of the vouchers issued. If they are valued when used, it is simple to infer that they also become valued at the time the right to get them is obtained, that is to say at the time when the customer purchases the Premium Goods for a cash sum.

    57. In short, it is difficult to believe that vouchers that are redeemed to the extent of 93% are looked on as mere gifts. It is not difficult to infer that the average Clubcard member realises that the value is part of what he is paying for at the time of purchase of the Premium Goods."

  153. After considering Boots and other European authorities, the Tribunal expressed its conclusion in relation to the basic Clubcard scheme as follows (in paragraph 64 of its Decision):
  154. "64. For these reasons we conclude for the purposes of this decision in principle that the Appellants appeal succeeds in so far as it relates to vouchers obtained by Clubcard members from In-store purchases. Those vouchers are obtained for the purposes of paragraph 5 of Schedule 6 to the 1994 Act for a consideration. It is not relevant for the purposes of this decision in principle to attempt to identify the extent of that consideration, whether by reference to the face value of the vouchers, the price paid for the Premium Goods, the proportion redeemed or otherwise, that is to be disregarded in accordance with that paragraph. Nor are we asked at this stage to make any decision upon when any amount is to be 'disregarded'."

  155. The Tribunal then turned to the third party retailer schemes, saying this (in paragraphs 65 to 72 of its Decision):
  156. "65. We apply the same test for these vouchers. But that means focussing on what happened at the time when the Clubcard member purchases goods or services from a Third Party Supplier. Mr Cordara effectively asked us to focus on the payments by the Third Party Suppliers to Tesco. He submitted that part of their payments to Tesco was the consideration to be disregarded under paragraph 5 of Schedule 6. [Kuwait] is however clear authority for the proposition that we should, at least in the first instance, look at the point when the Clubcard member purchases the relevant goods or services from the Third Party Supplier.
    66. Restating the test for vouchers issued in relation to purchases from Third Party Suppliers, we conclude that it is for this tribunal to determine whether, at the time of purchasing the Premium Goods from the Third Party Supplier the Clubcard members and Tesco had agreed, directly or indirectly, that part of the price paid for the Premium Goods, whether identifiable or not, would constitute value given in return for the Clubcard vouchers. Again in the same way we have to determine that question with the inferences to be drawn from all the circumstances surrounding the purchases from Third Party Suppliers.

    67. We conclude that the same consensus exists. The Clubcard terms envisage the possible use of Clubcards with Third Party Suppliers. In its promotional material Tesco tells the members the names of the appropriate Third Party Suppliers. Once a Clubcard member has purchased goods or services from a Third Party Supplier Tesco is bound to the member to supply the vouchers to him or her. That is when the right to the points and vouchers accrues. It would make no difference if the Third Party Supplier for some reason failed to make the appropriate payment to Tesco. In the same way that Tesco knows that part of the price paid for In-store Premium Goods covers the cost of vouchers, so it must know and agree that part of the price paid for Premium Goods paid to a Third Party Supplier by the Cardclub member covers the cost to the Third Party Supplier of paying to Tesco an equivalent sum for the vouchers.

    68. In the same way that the Clubcard member agrees that part of the price paid for In-store Premium Goods is paid for the right to receive vouchers, so will the member agree that part of the price paid to the Third Party Supplier is paid for the right to receive vouchers. The same very high redemption rate applies. We see no reason why the Clubcard member should look at his or her purchases of Premium Goods from Third Party Suppliers in any different way to the purchase of Premium goods In-store. He or she equally knows that they are entitled to the vouchers, that they will arrive from Tesco, that they will have the same value and consequently that part of what they are paying for is the vouchers.
    69. It follows that we are satisfied that when the Clubcard member uses his or her Clubcard to purchase Premium Goods from a Third Party Supplier the resulting vouchers are obtained for a consideration. It makes no difference in our view that the consideration is paid by the Clubcard member to a third party. The payment remains clearly linked to the agreement between the member and Tesco created by the membership of the Clubcard Scheme. Under the terms of that agreement Tesco is equally as bound to supply the vouchers as it is when the purchase is In-store.

    70. Citing Telemed, Mr Cordara submitted that the payments by the Third Party Supplier to Tesco were the consideration for the vouchers to be disregarded for the purposes of paragraph 5 of Schedule 6 to the 1994 Act. He submitted that the Third Party supplier (A) is paying Tesco (B) to make a supply of the vouchers to the Clubcard member (C). But that ignores the fact that Tesco is committed to the Clubcard member to provide the vouchers as soon as the Premium Goods are purchased. It would make no difference that the Third Party Supplier might fail to make payment. The relevant consideration is that that has already been paid to the Third Party Supplier. That has to be the consideration to be disregarded under provisions of paragraph 5 of Schedule 6. This is a situation that is much more akin to the conventional voucher, for which paragraph 5 of Schedule 6 was apparently introduced. The voucher is purchased from retailer A and redeemed against a supply by retailer B. Here, as must be common in such a conventional situation, the purchaser of the voucher does not know, and is not interested in, the arrangements between the trader who supplies the Premium Goods and the trader who supplies the Redemption Goods. He simply knows that by making the payment he will get the voucher, which is part of what he wants.

    71. Mr Cordara, when he heard that this was how we were tending to treat purchases from Third Party Suppliers, suggested that the Third Party Suppliers had an ostensible authority to receive the payments for the vouchers from the Clubcard members. It might well be possible to structure the Clubcard Scheme so that the payments of consideration for the purchase of these Third Party Supplier Premium Goods are received by the recipients as agents for Tesco. But Tesco has expressly denied that that is what is happening. The relevant agreements all make it clear that there is no agency between Tesco and the Third Party Supplier. While it may be possible in many instances to ignore the specific and express terms of an agreement and to look at the true commercial effect and reality of the relationship entered into by a registered trader, we do not see that can be done in favour of the trader who has himse