Judgment Approved by the court for handing down. | Baxi Group Limited –v-Commissioners for HM Revenue & Customs |
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LINDSAY)
CH/2006/APP/0205
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
LORD JUSTICE TUCKEY
LORD JUSTICE MAURICE KAY
and
SIR JOHN CHADWICK
Between :
BAXI GROUP LIMITED | Appellant/ Respondent |
and – | |
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS | Respondents/ Appellants |
Mr Nicholas Paines QC and Mr Rupert Baldry (instructed by Solicitors Office, HM Revenue & Customs, Ralli Quays, 3 Stanley Street, Salford, M60 9LB) for the Appellants
Mr David Scorey (instructed by PricewaterhouseCoopers Legal LLP, 1 Embankment Place, London WC2N 6DX) for the Respondent
Hearing date: 2 October 2007
Judgment
Sir John Chadwick:
This is an appeal from an order made on 21 December 2006 by Mr Justice Lindsay on an appeal under section 11 of the Tribunals and Inquiries Act 1992 from the decision of the Value Added Tax and Duties Tribunal (Mr Colin Bishopp, chairman, and Mr Brian Strangward) released on 20 January 2006. The issue before the judge was whether the Tribunal had erred in law in dismissing an appeal by Baxi Group Limited from a decision of the Commissioners of Customs and Excise, confirmed in a letter dated 3 June 2004, to refuse a voluntary disclosure claim for repayment of value added tax (“VAT”) in respect of a loyalty reward scheme.
The basis of that claim was set out in a letter dated 8 May 2003 from PricewaterhouseCoopers LLP (on behalf of a Baxi Group company) to Customs & Excise Large Trader Unit:
“As you may be aware, Baxi Heating UK Limited (‘Baxi’) operates as a manufacturer and wholesaler of heating products in the UK domestic central heating market. In this sector, prices for similar products do not vary greatly from one manufacturer to another and it is therefore difficult for businesses in this sector to compete on the basis of price alone. For this reason, manufacturers need some other way of setting themselves apart from their competitors and making their products more attractive to their customers [the installers, plumbers and heating engineers that buy the products from the merchants “installers”]. The manner in which Baxi has done this is through the adoption of Bonus Direct and Baxi Business Partners customer loyalty programmes. These types of programmes are common in the industry and are a necessary part of doing business for Baxi.
The manner in which these loyalty programmes work is simple. Installers are awarded points each time they purchase a Baxi product and collect these points in a ‘bank account’. Participating installers then receive either a Bonus Direct or a Baxi Business Partners catalogue, which illustrates a large range of goods or services against which points can be redeemed. The points are collected by the installers until they have a sufficient number of points to enable them to claim something of interest to them from the catalogue and the points are then redeemed. The installer’s points balance in their ‘bank account’ decreases accordingly.
Although the loyalty programmes are aimed at Baxi customers and are designed to encourage the installers to buy further Baxi products, Baxi does not run the customer loyalty programmes itself. Instead an independent marketing and promotions company called @1 Group (‘@1’) runs the scheme on behalf of Baxi. Periodically, @1 makes a charge to Baxi in respect of its supply of services made in connection with the customer loyalty programmes that it operates on behalf of Baxi, on which VAT is charged.
Historically, Baxi has not reclaimed, as input tax, any of the VAT that has been charged to it by @1.”
The letter went on to explain that, following review, Baxi Heating UK Limited had been advised that it was entitled to reclaim the VAT that it had been charged, and paid, on the services provided by @1.
Baxi Heating UK Limited made voluntary disclosure of under-deduction of input tax in respect of the accounting periods 09/00 to 03/03. The amount claimed was £405,481. The claim was rejected by Customs and Excise on 3 February 2004; and that decision was confirmed, following reconsideration, on 3 June 2004. Baxi Group Limited (as the representative member of its VAT group) appealed to the VAT and Duties Tribunal. In this judgment (save where it is necessary to distinguish between the two companies) I shall refer to both Baxi Group Limited and Baxi Heating UK Limited as “Baxi”.
The Tribunal’s findings of fact
The appeal was heard in October 2005. The Tribunal made the following findings of fact, [2006] UKVAT V19431:
“3. . . . Baxi Heating UK Limited is a manufacturer of boilers for domestic heating systems, using the brand names Baxi, Potterton and Valor. We were told that about 1.5 million such boilers are sold in the UK each year, of which 85 per cent are sold as replacements for existing boilers, while the remainder are installed in new buildings. Baxi has about a quarter of the market. Most householders arranging for the replacement of their domestic boilers, understandably, leave the choice of the make and model of the replacement to the installer and Baxi's advertising and promotional exercises are, correspondingly, directed mainly, though not entirely, at installers rather than the general public. Typically, an installer buys the boiler he is intending to install from a builders’ or plumbers’ merchant which stocks a number of different manufacturers’ boilers. Promotional activities such as the one with which we are concerned in this appeal are designed to encourage the installer to buy Baxi’s products in preference to those of other manufacturers. . . .
4. The scheme used by Baxi, known as Bonus Direct, is a loyalty programme similar in principle to those aimed by high street retailers at their customers. Although the scheme itself remains in use, there has been a material change in the arrangements between Baxi and @1 since the period covered by the voluntary disclosure, and the brief description which follows relates only to that period. . . .
5. An installer who had registered as a member of the scheme (it was open only to bona fide gas appliance installers) earned points each time he bought a Baxi boiler, or other qualifying item. The number of points varied, and was dependent on the type of appliance purchased. The installers paid the same price for an appliance, whether or not they were members of the scheme, and whether or not they took advantage of the points. Each appliance carried a sticker bearing a bar code which the installer was required to remove and send to @1, which undertook all the administration of the scheme, in order that the points for which the bar code was the evidence could be credited to his account. Points could be converted into ‘gifts’, that is goods which the installer might select from a catalogue. The gifts included a wide range of household goods, such as hair dryers, cooking appliances, cameras, wines, soft toys, clothing, sports and travel goods, some tools and even motor vehicles and holidays. . . . The number of points which an installer had to redeem in order to acquire any item varied in line with its ordinary retail value. Gifts could be obtained only in exchange for points and there was no facility for payment, in whole or in part, in cash. Similarly, points could not be exchanged for cash. We deduce that the more valuable gifts were included with the aim of tempting the installers to buy more Baxi appliances in order to increase their points to the necessary level.
6. While the principal purpose of the scheme was to encourage installer loyalty and thereby increase Baxi’s sales, it had the additional benefit of providing useful information about Baxi’s customer base, enabling it to identify both those installers who were regularly buying its products and those who had ceased to do so—and who might be targeted with special offers to encourage them to buy its products again—and also to identify those of its products which were popular and those which were less so. The number of installers who joined the scheme was considerable—numbered in thousands—and the volume of data obtained through the scheme was formidable.
7. It was largely because Baxi did not have the ability itself to manage such a large database that it arranged to have the scheme administered for it by @1, whose business includes the running of such schemes (as well as the provision of more general advertising and publicity programmes). The administrative tasks delegated to @1 included handling the installers’ registration applications, recording the bar codes which they sent in, crediting their accounts, selecting the gifts which appeared in the catalogue, which it compiled, and undertaking the procurement of the gifts and their despatch to the installers when points were redeemed in exchange for them. It also ran a telephone helpline and a website which installers were encouraged to use in order to enquire about their points balances (although they were also sent regular statements) and to redeem their points.
8. Although there was no concealment of the fact that @1 was administering the scheme—its name was freely used within the promotional literature and installers were required to send items which must be posted, such as bar codes to be credited to their accounts to it—the capacity in which it did so, and its relationship to Baxi, would not have been apparent to the installers. The terms and conditions of the scheme, as they were provided to them, made it clear that their own relationship was with Baxi, rather than with @1. Although there was, it seems, some minor variation in the terms and conditions from time to time, clause 2 was in the following, or materially identical, terms:
‘Baxi (‘We’) operate the Bonus Direct Programme (‘The Scheme’) which is only available to Individual Members of The Scheme (‘You’). Head Office’ [there then followed Baxi’s own address].
9. The terms and conditions made no direct, unequivocal, promise that Baxi would, in the ordinary way, provide the goods illustrated in the catalogue in exchange for the surrender of the requisite points, but they can be read only upon the footing that it was so intended and that, by buying Baxi products and arranging for the points attributable to each purchase to be credited to his account an installer was acquiring the right to obtain a gift. For example, clauses 8 and 9 of a typical version of the terms and conditions read:
‘8 Points can only be redeemed against the gifts and offers illustrated in this brochure or other offers when made available to you by Baxi. The gifts and offers illustrated in this catalogue are subject to change from time to time without any prior notification.
9 We may at any time, without notice and without being liable to you in any way, supply goods or services of a similar nature and value to those ordered. If a suitable alternative is not available we will offer you:
the choice of another item from the brochure at the value quoted or
a return of the Points previously deducted in respect of the unavailable item.’
10. The words ‘brochure’ and ‘catalogue’ appear to have been used interchangeably. @1’s name does not appear anywhere in the terms and conditions. Thus while it would be clear to an installer that @1 was involved in the running of the scheme, he would not know (without making additional enquiries) that @1 was at arm’s length to Baxi, and not merely a subsidiary or associated company. If he read the terms and conditions he would think, and in our view correctly, that his agreement (for, in particular, the provision of goods in exchange for points) was with Baxi. Nothing in the other relevant literature, such as the registration application and the letter sent to new members of the scheme, suggests otherwise; the clear impression they give is that @1 was no more than the administrator of Baxi’s own scheme.
11. In fact, the Bonus Direct scheme was a tailored and labelled variant of a generic scheme made available by @1 to its clients. The documents produced to us show that @1 ran several such schemes, making the point in its own promotional literature, directed to potential clients, that its doing so enabled it to run the schemes economically, particularly because its large-scale purchases of goods to be used as gifts enabled it to secure them at low prices. It appeared, though the evidence was not entirely clear on this point (we had no direct evidence from @1 itself), that @1 bought goods which were frequently requested by participants in bulk, allocating or appropriating them to each scheme as requests for redemption arose. We deduce that each scheme’s gift catalogue listed the same, or similar, ranges of products. However, it was also clear to us that each scheme was in other respects run discretely from all the others managed by @1 at any given time, and it could not be said—nor was it suggested—that Baxi merely participated in, or its arrangements amounted to, a division of a single @1 scheme.
12. At the beginning of the period with which we are concerned, the arrangement between Baxi and @1 was that Baxi would pay to @1 the ordinary recommended retail price of the redeemed goods and @1 earned its profit (which included its fee for routine administration of the scheme and the database) from the difference between that amount and the price for which it actually acquired the goods. It also charged a standard, uniform amount for postage and packing which we understand was designed to cover the cost and no more. For the latter part of the material time, the arrangement was that Baxi paid a fixed fee in addition to the acquisition cost of the goods and the post and packing charge. It was not suggested that the change is material to the issue we must decide. Separate fees were payable throughout for additional services, such as special promotions within the scheme or non-routine database development. @1 sent Baxi invoices, supported by detailed lists of the gifts distributed in exchange for redeemed points, at frequent intervals. The invoices also included @1’s charges for more routine advertising and promotional exercises unrelated to the scheme. All of @1’s supplies attracted VAT at the standard rate, and there is no dispute that the VAT attributable to those of its supplies which were of services, both routine and non-routine, is fully recoverable by Baxi. It is only so much of the tax as was attributable to the goods which is in dispute.”
The right to deduct input tax
The relevant legislative provisions are found in the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes (77/388/EEC) as implemented by the Value Added Tax Act 1994 (“VATA”).
Article 17 of the Sixth Directive confers on a taxable person the right to deduct from the tax payable on supplies made by him the tax which he has paid on supplies made to him for the purpose of his business. The article provides (so far as material):
“17.2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) value added tax due or paid . . . in respect of goods or services supplied or to be supplied to him by another taxable person.
. . . ”
That provision is reflected in section 25(2) VATA. A person is entitled to deduct from the output tax for which he is accountable so much of his input tax as is allowable under section 26. Section 26 VATA is in these terms (so far as material):
“26(1) The amount of input tax for which a person is entitled to credit at the end of any period shall be so much of the input tax for that period . . . as is allowable by or under regulations as being attributable to supplies made within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business –
(a) taxable supplies;
. . .”
In that context “output tax”, in relation to a taxable person, is the VAT on supplies which he makes (section 24(2) VATA): “input tax” is the VAT on supplies to him of goods and services used or to be used for the purpose of any business carried on or to be carried on by him (section 24(1)(a) VATA).
The first question, therefore, in cases of this nature is whether the VAT charged by the operator of the loyalty reward scheme to the manufacturer and paid by the manufacturer is charged and paid on the supply of goods or services supplied by the operator to the manufacturer. The second question is whether the goods or services supplied by the operator to the manufacturer are used or to be used for (or are attributable to) taxable supplies made or to be made by the manufacturer in the course or furtherance of its business. If each of those questions is answered in the affirmative, then the manufacturer can treat the VAT which it has paid to the operator as input tax which it is entitled to deduct from the output tax for which it is accountable.
In determining whether (and, if so, to what extent) the VAT charged by the operator of the loyalty reward scheme to the manufacturer and paid by the manufacturer is charged and paid on the supply of goods or services supplied by the operator to the manufacturer it is necessary to have in mind that “supply”, in a VAT context, includes all forms of supply, “but not anything done otherwise than for a consideration”: section 5(2)(a) VATA. Schedule 4 VATA applies for the purposes of determining what is, or is to be treated as, a supply of goods. Anything which is not a supply of goods but is done for a consideration is a supply of services: section 5(2)(b) VATA. “Consideration” is not defined in the Act; nor is it defined in the Sixth Directive. It is common ground that, in a VAT context, the word has an autonomous meaning which is not the same as that familiar in the domestic law of contract: its meaning is to be determined in the light of the relevant judicial authorities.
The Tribunal’s reasons for dismissing the repayment claim
The submission advanced before the Tribunal on behalf of Baxi was that @1 made a single supply of marketing services; the provision of gifts to installers was but one component in that single supply of services; that supply of marketing services was made to Baxi Heating UK Limited for the furtherance of its business. Accordingly, Baxi was entitled to treat the whole of the VAT charged by @1 in respect of that single supply as input tax; and to deduct the amount of that tax from its own output tax.
The Commissioners’ primary submission was that there was a supply of goods by @1 to the installers; that supply was made for third party consideration provided by Baxi; to the extent that the VAT charged to, and paid by, Baxi Heating UK Limited was charged by reference to the amount of that consideration, it was not VAT on the supply to Baxi of any goods; so that element of the VAT charged and paid could not be treated by Baxi as input tax.
As an alternative, or fall-back, submission it was said on behalf of the Commissioners that, if the goods provided to the installers were to be treated as part of a supply to Baxi, then the true analysis was that there was a supply of goods to Baxi Heating UK Limited for onward supply by Baxi to the installers. On that analysis, Baxi could treat that element of VAT charged and paid as input tax; but would be required, itself, to account for output tax on its onward (and gratuitous) supply of those goods to the installers pursuant to article 5(6) of the Sixth Directive and paragraph 5 of schedule 4 to VATA. In that latter context the Commissioners relied on the decision of the Court of Justice in Kuwait Petroleum (GB) Limited v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488.
The Tribunal rejected the Commissioners’ primary submission; but accepted the alternative submission. The Tribunal held that there was no supply of goods by @1 to the installers for VAT purposes: the only supply was to Baxi Heating UK Limited. The only agreement to which @1 was party was its agreement with Baxi. Despite the provision in that agreement that title in the “gifts” should not pass to Baxi, the goods were supplied to Baxi. When the “gift” was provided to the installer, there was a disposal of the goods by Baxi to the installer. As the Tribunal put it (at paragraph 37 of its decision):
“37 . . . Title to the goods may have remained with @1 until it vested in the installer, but once @1 had allocated goods it already held to a particular gift, or acquired goods for the same purpose, it was disposing of them not as owner but in accordance with the terms of its agreement with Baxi. Until the moment of allocation it could do as it pleased with them; once allocated, they came within Baxi's control. It was, in other words, Baxi which was disposing of them as owner, in passing the goods and title to them to the installer. Thus the allocation or acquisition of goods by @1 for the purposes of Baxi’s scheme had the effect of conferring on Baxi the right to dispose of them as owner and a supply within the meaning of article 5(1), as interpreted by the ECJ in Safe ([Staatsecretatis van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1991] STC 627, [7]) was made by @1 to Baxi. That the goods did not come into Baxi's physical possession is of no consequence.”
The effect was that Baxi was entitled to recover, as input tax, the whole of the VAT which it had paid to @1; but (as the Tribunal held) was required to account for output tax on the supply of goods which it was, itself, treated as having made to the installers, in so far as the acquisition cost of individual items exceeded £50. So the claim to repayment failed. The appeal was dismissed.
The appeal to the High Court
Baxi appealed to the High Court. By a respondents’ notice the Commissioners sought to uphold the Tribunal’s decision on the basis of what had been their primary submission: that there was a supply of goods by @1 to the installers. But, if they could not succeed on their primary submission, the Commissioners adopted – although without much apparent enthusiasm – the fall-back position on which the Tribunal had found in their favour. The appeal came before Mr Justice Lindsay in November 2006.
The judge accepted that, for VAT purposes, there had been a supply of goods by @1. But, with encouragement from the Commissioners as well as from Baxi, he rejected the Tribunal’s view that there had been a supply of goods to Baxi. He posed the question: “But to whom and of what was that disposition made?”. He went on to say this, [2006] EWHC 3353 (Ch), [19]:
“[19] . . . At this point I am looking only into whether there was a supply of goods to Baxi. As for that, the whole property in the goods before the redemption of points by and appropriation and delivery to the installer was, as I have mentioned, in @1. @1 selected which were the particular goods to be supplied in the sense of which, say, electric shaver or kettle from its stock was to be sent to the installer. The whole property in the goods immediately after the redemption of points and their provision to the installer was in the installer. No contractual or other terms provide, imply or require that the property should have moved in the interim from @1 to Baxi. Possession also shifted directly from @1 to the installer without ever being in Baxi. Baxi did not decide what goods should move, when goods should move or how goods should move. The disposition of particular goods to an installer never required nor was in fact initiated by any request from Baxi. It did not know until after provision of goods that goods or goods of a particular description were wished by the installer to be supplied to him or were to be supplied to him by @1 or whether they had in fact been provided to that or to any installer. Baxi took no responsibility for the goods sent to installers duly answering their description in the catalogue; it was @1 that handled complaints. This all suggested that the supply by @1 was of goods to the installers rather than to Baxi.”
If, as the judge held, there were no supply of goods by @1 to Baxi, it was necessary for him to decide what (if anything) was the subject of a supply by @1 to Baxi: for, unless there were a taxable supply by @1 to Baxi, the payment by Baxi of the amount that it was charged in respect of VAT could not be treated by Baxi as input tax. As I have said, input tax, in relation to a taxable person, means VAT on the supply to him of any goods or services. The choice, as presented to the judge on behalf of the parties, was between “one indivisible supply of advertising and marketing services by @1” and “separate supplies of, on the one hand, goods to installers and, on the other, advertising and marketing services provided by @1 to Baxi”. The judge preferred the former view, for the reasons which he gave at paragraph [29] of his judgment:
“[29] The answer, as I see it, is certainly not that there is a mere supply of goods, some anonymous or wholly gratuitous provision of goods to installers, nor a provision of goods to them which was unexplained to them or unpredictable by them. Baxi wished the provision of goods to installers to be firmly associated with Baxi in such a way that loyalty to and sales by Baxi would be promoted. If goods were to be received at an installer's address ‘out of the blue’, so to speak, neither loyalty to nor sales by Baxi would be enhanced. There had to be, if Baxi was to achieve its aims, an association developed in the minds of installers between their loyalty to and use of Baxi boilers and the foreseeable arrival of such goods as they might have chosen as rewards for their installation of Baxi wares. Just as, in C&E Commissioners v British Telecommunications plc [1999] STC 758 HL, the House of Lords arrived at the conclusion that what BT there wanted was not a supply to it of cars and a separate supply to it of the service of the delivery of cars but, rather, ‘a delivered car’ – per Lord Slynn at 766 e-f - here Baxi wanted not a mere provision of goods to installers and a separate provision of some advertising or marketing service to it but, as a predominant feature, a supply of goods to installers in such a way, made visible to them, explained to them and as would be predictable by them, that the supply would ultimately generate or at least tend to generate loyalty to and sales by Baxi. The advertising and marketing service which included the devising and formulation of the BDS, the selection of goods for the catalogue, the editing and dissemination of the catalogue, the provision of the ‘cheques’, the whole plan for application for and registration of membership, the acquisition and storage of rewards goods, the receipt and processing of requests for those rewards, their delivery to installers, the handling of any complaints and the supply of information as to installers for the database were, all taken together, not, in my judgment, economically dissociable from the provision of goods but a mechanism without which the provision of goods to installers could not achieve its purpose.”
The reference, in that passage, to “the BDS” is to the Bonus Direct Scheme which the judge had described earlier in his judgment: that is to say, to the loyalty reward scheme which has given rise to the issues in these proceedings.
The judge recognised (ibid, [31]) that “a conclusion that there was an indivisible single supply does not in all circumstances invariably lead to a conclusion that the consideration for it is equally indivisible; there can, in some circumstances, be apportionment of consideration”. But, as he observed, the Commissioners had not argued for apportionment in the case of the supply being found to be an indivisible single supply. The judge did not see any apportionment of consideration as appropriate on the facts which were before him.
The judge referred (ibid, [36]) to observations of Lord Millett in Customs and Excise Commissioners v Redrow Group plc [1999] UKHL 4; [1999] STC 161, 171g-h, and to his own decision in Commissioners for HM Revenue and Customs v Loyalty Management UK Ltd [2006] EWHC 1498 (Ch), [72]. He found no assistance in Redrow; the facts of which he described as “so very different”. In that context, he said this:
“[36] It cannot be said, in my view, on the facts before me, that everything which @1 did under the BDS, though, no doubt, ultimately done at Baxi’s expense and, in the sense that Baxi voluntarily joined the BDS with @1, at [Baxi’s] request, could be said to have been done in accordance with Baxi’s instructions. I have earlier pointed out how little Baxi did in relation to the selection of whether any goods should be supplied to a particular installer and, if they were to be, how they were to be supplied and which particular goods would serve to meet the installer’s request.”
When making those observations the judge had in mind that, in summarising the facts earlier in his judgment (at paragraph [11]), he had explained that:
“[11] Baxi, it seems, played no role in the selection or delivery of goods; there is no evidence that it was other than @1 that chose what were in the Baxi catalogue. The installer chose what it was that he wished to receive from the rewards in the catalogue and it was @1 (who, it may be inferred, ran not dissimilar schemes and catalogues and thus stocked similar or identical goods and arranged their deliveries for other manufacturers) which chose which particular goods answering the description which the installer had chosen were to be sent to him and how they were to be sent. Baxi would not know until its later receipt of invoices what had been sent. I do not understand there to have been any necessary contact between the installer and Baxi when the installer indicated to @1 what goods it was that he wished to have in exchange for his ‘points’ as his reward.”
On the basis of his finding that there had been no supply of goods by @1 to Baxi, the judge could not uphold the reasoning that had led the Tribunal to its decision. And, having held that, on a true analysis of the facts, there was one single and indivisible supply of advertising and marketing services by @1 to Baxi – and that it was not appropriate to apportion the consideration for that supply – the judge rejected the Commissioners’ primary submission that there had been a supply of goods to the installers for third party consideration provided by Baxi. Accordingly he allowed Baxi’s appeal from the Tribunal’s decision.
This appeal
The Commissioners appeal to this Court with permission granted by Lord Justice Laws on 15 February 2007. In support their appeal the Commissioners submit (as they did before the Tribunal and before the judge) that, on a true analysis of the facts, there was a supply of goods for VAT purposes by @1 to the installers, the consideration for which was the price invoiced to Baxi less a margin equal to the difference between the cost to @1 of acquiring the goods and that invoice price. That margin was said to be the consideration for the supply by @1 to Baxi of a service: that is to say, the consideration for @1’s services in operating the scheme. The Commissioners maintain the fall back position on which they succeeded before the Tribunal; but, again, without enthusiasm. It is said that: “. . . if, contrary to the learned Judge’s conclusion, the reward goods are supplied to Baxi (an outcome for which the Appellants do not contend) the learned Judge should have upheld the decision of the Tribunal”. The real question on this appeal, therefore, is whether the judge was correct to hold that the price of the goods invoiced by @1 and paid by Baxi was to be treated for VAT purposes as consideration for a single indivisible supply of advertising and marketing services by @1 to Baxi.
In my view the answer to that question is to be found in the speeches of Lord Hope of Craighead and Lord Millett in the Redrow case and in the judgments of this Court in Commissioners for HM Revenue and Customs v Loyalty Management UK Ltd [2007] EWCA Civ 965.
It is convenient to refer, first, to the Loyalty Management case. Put shortly, Loyalty Management UK Ltd (“LMUK”) operated a loyalty reward scheme (the Nectar scheme) under which members of the public (“Collectors”) were credited with points at the time when they purchased goods or services (“primary goods”) from certain well-known retailers (“Sponsors”). The Collectors could use those points to obtain other goods and services (“secondary goods”) without cash payment from suppliers (“Redeemers”) who had agreed to participate in the scheme. Only one of the Sponsors (Sainsburys Plc) was also a Redeemer. LMUK received payment from the Sponsors based on the number of points issued to Collectors. The Redeemers invoiced LMUK for amounts based on the number of points redeemed by Collectors. The issue in the case (as in this case) was whether LMUK was entitled to treat as input tax the VAT element of the amounts for which it was invoiced by, and paid to, the Redeemers. This Court – allowing an appeal from Mr Justice Lindsay – held that LMUK was entitled to do so. In reaching that conclusion the Court rejected the contention, advanced on behalf of the Commissioners in that case (as in this case) that, for VAT purposes, there was a supply of the secondary goods by the Redeemers to the Collectors. The Court held that, on a true analysis, the payment by LMUK of the amounts for which it was invoiced by the Redeemers fell to be treated as consideration for services supplied to it (for the purpose of its business as promoter and operator of the Nectar scheme) by the Redeemers.
At paragraphs [34] to [37] of my judgment in Loyalty Management I set out my understanding of the basis upon which the House of Lords had reached its decision in the Redrow case. Redrow was a house-builder. It had operated a sales incentive scheme under which it agreed to pay the fees of estate agents instructed in the sale of the existing house of a prospective purchaser if and when that purchaser completed on the purchase of a new house which Redrow had built. Redrow claimed input tax credit in respect of the VAT on the estate agents’ fees which it paid. The issue in that case was whether the payments which Redrow made to the estate agents were payments for services supplied by the agents to Redrow; or payments for services supplied by the agents to the house owners. The House of Lords held that they were payments for services supplied to Redrow.
It is, I think, sufficient in the present context to note the reasoning of Lord Millett in the Redrow case to which I referred in Loyalty Management (ibid, [37]). In a section of his speech headed "Identifying the recipient of the services", Lord Millett said this ([1999] STC 161, 171a-f):
“The Commissioners begin by describing the services in question as the ordinary services of an estate agent instructed to market and sell his client’s house. They then ask: to whom were those services supplied? Inevitably they answer: to the householder. They concede that the taxpayer derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them; but they insist that this is irrelevant. The question is: to whom did the agent supply his services, not who derived a benefit from them?
But this approach begs the question to be decided. The way in which the Commissioners describe the services dictates the answer. But it is equally possible to begin with the services which the taxpayer instructed the agents to perform. This would lead to a different definition of the services in question. They would not be the ordinary services of an agent instructed to market and sell his client’s house, but the services of an agent instructed to market and sell a third party’s house. The fact is that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Where, then, should one begin?
The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless the taxpayer has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services.
In my opinion, these two factors compel the conclusion that one should start with the taxpayer’s claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.”
At paragraph [38] of my judgment in the Loyalty Management case I held that those and other passages in the speech of Lord Millett which I have just set out – and passages in the speech of Lord Hope of Craighead (ibid, 165j-166e) - provided clear authority for two propositions:
“[38] . . . First, there is no reason why, in a VAT context, a supplier (S) may not be treated as making, in the same transaction, both a supply of services to one person (P1) and a supply of different services to another person (P2). In Redrow the estate agent was plainly making a supply of services to the householder: those were the ordinary services provided by an estate agent to the client whose house he is instructed to market. But the estate agent was also making a supply of services to Redrow: the agent was acting on Redrow’s instructions to market the existing house of its prospective purchaser. Second, in addressing a claim for input tax credit by a person (say, P2), to whom services have supplied in those circumstances, the relevant questions are (i) did P2 make a payment to S, (ii) was that payment consideration for services supplied to P2 and (iii) were those services used or to be used in the course of a business carried on by P2. The first of those questions is of importance . . . : if P2 made no payment to S (because the only payment was made by P1), P2 has no claim to input tax credit, as Lord Millett pointed out in the passage cited (ibid, 171e-f). The answer to the second of those questions is that the payment is to be treated as consideration if P2 obtained ‘anything at all’ or (perhaps) ‘something of value’ in return for that payment.”
In the Loyalty Management case I expressed the view (at paragraph [53] of my judgment) that the analysis and reasoning of the House of Lords in Redrow pointed strongly to the conclusion (i) that there was a supply of services by the Redeemer to LMUK and (ii) that that supply was made for consideration, within the meaning of the Sixth Directive and section 5(2)(b) VATA. The consideration, in the Loyalty Management case, was the payment by LMUK to the Redeemer of the amount invoiced. After examining the arguments advanced on behalf of the Commissioners in that case, I remained of that view. The other members of the Court agreed with that view. The Court held that LMUK was entitled to input tax credit in respect of the VAT paid on that supply.
The judgments of this Court in the Loyalty Management case were handed down very shortly after the conclusion of oral argument in the present case. The parties were invited to make written submissions (by way of further argument) in the light of those judgments. They each took advantage of that opportunity.
It was said on behalf of the Commissioners that there was a fundamental distinction between the arrangements entered into by LMUK and those entered into by Baxi. That distinction lay, it was said, in the fact that, in the Loyalty Management case, the Tribunal had found that the single “service charge” was paid by LMUK to the Redeemer “in return for all the redemption services, which include the provision of goods to the customer”: paragraph 63 of the Tribunal’s decision in that case, cited at paragraph [10(6)] of my judgment. By contrast, in the present case, “the parties expressly agreed that the service of operating the Bonus Direct Scheme would be financed ‘only by the margin on the supply of the rewards’”. So, it was said, the parties had agreed that “the consideration for the redemption services provided by @1 to Baxi, including the provision of the goods provided to the installers, was that margin: the balance of the recommended retail price (RRP) of the goods, viz the acquisition cost to @1, was expressly not consideration for the redemption services”.
That submission is founded on the terms of the “Statement of Service” in respect of the Bonus Direct and Baxi Partners Loyalty Programmes, dated 9 March 2001. It is not clear whether that document was before the Tribunal: the Tribunal does not refer to it. It was mentioned in (but not, I think, exhibited to) the witness statement of Mr Grenville Ward, Baxi’s Head of Marketing. It was before Mr Justice Lindsay, who referred to it at paragraph [10] of his judgment. It purports to be a report prepared and provided by the managing director of @1 for Baxi’s information. Mr Ward describes it (at paragraph 30 of his witness statement) as having been drafted in response to a request from the company secretariat department of Baxi who, following the transfer of the Bonus Direct Scheme into Baxi on the acquisition, in 2000, by Baxi of the Potterton brand, “wanted the terms of the agreement with @1 to be set out in writing”. As he put it, when making his statement in 2005: “I have now had an opportunity to review the same and confirm that this is a correct reflection of the nature of the arrangement between Baxi and @1”. There was no finding by the Tribunal that the Statement of Service did, or did not, have contractual effect between the parties. Paragraph 2.14 of the Statement of Service suggests that it was not intended as a contract:
“2.14 The way in which the schemes [the Bonus Direct and Baxi Business Partners loyalty programmes] are operated and financed is part of a detailed contract agreed in 1998.”
Be that as it may, the paragraphs of the Statement of Service on which the Commissioners place reliance are these:
“2.8 The schemes are operated by @ DIRECT financed only by the margin on the supply of the rewards.
No charges are made for day-to-day operations covering:
Capital charges, call handling, order handling, mail handling, data entry and processing, claims validation, e-commerce order processing, document and records storage, purchasing, stock holding and storage, stock management, supply chain management, fulfilment management and online tracking, fire and theft insurance, security.
2.9 @1 buy in all rewards and stock for Bonus Direct and Baxi Business Partners and have dealer status with their suppliers and are thus able to buy goods at advantageous prices due to the synergies generated by operating a number of loyalty programmes for various companies.
Bonus Direct rewards stock is owned by @1 DIRECT.
2.11 Claimed rewards are invoiced at RRP + post and packing at the point of order as ownership is then transferred and the points transaction made.
A standard post and packing charge was agreed across all reward items of £7.50. @1 has a fixed price agreement with UPS for next day delivery anywhere in the UK mainland. This figure is included in the points value of the rewards.
2.12 . . .
2.13 Areas for which pre-quoted charges are made are:
Database management, development and modification
Inbound telephone calls
Statements and scheme stationery
Freepost
Scheme postage out
Production and generation of statements
Design and production of catalogues, membership pack cards, chequebooks, website, etc.
Direct marketing”
The Commissioners accept that items within paragraph 2.13, for which a separate charge is invoiced and paid, do constitute supplies of services by @1 to Baxi: it is accepted that the VAT element of that separate charge is properly treated by Baxi as input tax.
The distinction between the arrangements entered into by LMUK and those entered into by Baxi is said to be “critical” in relation to the application of the test laid down by the House of Lords in Redrow and applied in Loyalty Management. It is convenient to set out the arguments advanced on behalf of the Commissioners in their written post-hearing submissions:
“6 The Commissioners accept that, where A pays money to B and B hands over goods to C, the transaction may amount in VAT terms to a VAT supply by B to A of the service of providing goods to C, or a VAT supply of goods by B to C funded by the third party consideration from A, or both. The Commissioners’ submission is that both those two supplies are made in the present case.
7 However, (1) there cannot be a VAT supply unless there is consideration: VATA s5(2); and (2) no part of the sum paid by A to B can simultaneously be both consideration for a VAT supply by B to A of the service of providing goods to C and third party consideration provided by A for a VAT supply of goods by B to C. . . . [Otherwise] B would be liable pursuant to VATA section 4(1) to account for VAT twice over in respect of the same money received by him.
8 Consequently, no part of the payment by Baxi to @1 of the RRP of a reward item provided by @1 to an installer can simultaneously be consideration for a VAT supply to Baxi of the service of providing the reward goods to the installer and third party consideration for a VAT supply of the goods to the installer. However it is possible for part of the sum to be consideration for a supply to Baxi and part to be third party consideration for a supply to the installer. Section 19(4) of VATA provides that ‘where a supply of goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it’.
9 Here, neither the supply of the service of providing reward goods to the installer nor the supply of the reward goods to the installer is ‘the only matter to which’ Baxi’s payment of the RRP of the item relates; consequently, each of those supplies is to be deemed to be for such part of the consideration as is properly attributable to it; and here the parties have by their agreement attributed @1’s margin (together with any other charges payable pursuant to clause 2.13) to the supply of the redemption service.
10 Accordingly, applying in the present case Lord Millett’s approach of identifying the payment in respect of which input tax deduction is sought and asking whether Baxi obtained anything used or to be used for the purposes of his business in return for that payment, the payment can only be that sum which the parties have expressly agreed is the consideration for the redemption service supplied to Baxi – viz the margin. Clearly Baxi did obtain something to be used for its business in return for that payment: it obtained from @1 the service of operating the scheme, which included providing the goods.
11 Baxi did not, however, obtain anything in return for the balance of the RRP of the goods. That payment was agreed not to be consideration for the service supplied to Baxi and was in fact consideration for the supply of the goods; they were obtained and enjoyed exclusively by the installers, and it is common ground that they were not supplied to Baxi.”
Those submissions, as it seems to me, overlook two important factors. The first is that, on becoming a member of the Bonus Direct scheme (by registration), an installer became entitled, as against Baxi, to obtain reward goods by the redemption of points which had been credited to his account at the time of his purchase of a Baxi product: paragraph 9 of the Tribunal’s decision. The second is that it was a term of the agreement between Baxi and @1 that @1 would provide reward goods to an installer against the redemption of points: paragraph 5 of the Tribunal’s decision. Paragraph 2.6 of the Statement of Service made that clear: “They [the installers] can then ‘spend’ points by choosing a reward from the schemes’ rewards catalogues. The points they spend are deducted from their account”. It is not correct to assert (as the Commissioners do in paragraph 11 of their post-hearing submissions) that Baxi did not obtain anything in return “for the balance of the RRP of the goods”. In return for the payment which Baxi made to @1 (a payment equal to the whole of the RRP of the reward gifts) Baxi obtained the discharge of its own obligation to the installers. The performance by @1 of its obligation to Baxi (and the corresponding discharge, by that performance, of Baxi’s own obligation to the installers) was, plainly, the supply of a service by @1 to Baxi within the wide meaning to be given to that expression in the light of Redrow. As the judge observed, at paragraph [29] of his judgment (to which I have referred earlier in this judgment), the advertising and marketing services which @1 provided were not economically dissociable from the provisions of goods to installers. The provision of reward goods, associated with the purchase of Baxi products was integral to the services which @1 had agreed to provide under the Bonus Direct scheme.
The submissions advanced by the Commissioners must be rejected in this Court, as it seems to me, for the same reasons as led the Court to reject the submissions which were advanced on their behalf in the Loyalty Management case. As I said at paragraph [55] of my judgment in that case:
“[55] . . . The correct approach is to recognise that the Redeemer makes two supplies in the same transaction: a supply of secondary goods to the Collector and a supply of redemption services to LMUK. Payment is made by LMUK. No payment is made to the Redeemer by the Collector . . . The relevant question is whether LMUK received any real benefit – or (as Lord Millett put it in Redrow) ‘anything at all’ or (perhaps) ‘something of value’ - in return for that payment. If that question is answered in the affirmative, then there is no basis on which it can be said that the payment by LMUK was made only as consideration for the supply to another (the Collector).”
I would add, in the present context, that if the benefit which Baxi receives in return for the payment which it makes to @1 is the discharge of its own obligation to the installers – a benefit which, plainly, Baxi would not receive unless it had agreed to pay to @1 the whole of the invoiced sum (equal to the RRP of the secondary goods) – it cannot be said that any part of that payment was made only as consideration for the supply of the secondary goods to the installers. The whole was made for services which included the service of procuring that Baxi was discharged from its own obligation to the installers.
It is important to keep in mind that the relevant question in the present case is not “for what is @1 accountable by way of output tax?”: the relevant question is “can Baxi treat its payment of the VAT charged to it by @1 as input tax?”. As Lord Millett pointed out in Redrow, the latter question must be approached by asking : “for what was Baxi making the payment?”. In my view, the answer to that question is not in doubt. Baxi was making payment to @1 for redemption services: those services included the provision of goods by @1 to the installers in circumstances which discharged Baxi from its obligations to the installers under the Bonus Direct Scheme.
It is said that the payment made by Baxi to @1 cannot be both consideration for a VAT supply by @1 to Baxi and consideration for a VAT supply by @1 to the installer. To hold otherwise, it is said, would lead to the conclusion that @1 would be liable to account twice over in respect of the same receipt. But, if that submission were correct, it would have led to the result that the agents, in the Redrow case, would have been liable to account for VAT both on the supply of services to Redrow and on the supply of services to the house owner. It would lead to the result that the Redeemers, in the Loyalty Management case would be liable to account for VAT both on the supply of services to LMUK and on the supply of secondary goods to the Collectors. That is not a result for which, so far as I am aware, the Commissioners have ever sought to contend.
As I understand the Commissioners’ practice, they have been content with VAT on the consideration actually received by the supplier. And there is no good reason, as it seems to me, why the supplier should be required to account for VAT on a sum greater than the consideration actually received. It is pertinent to have in mind that there cannot be two claims to input tax in cases of this nature: the recipient of the goods (or, in the case of the house owner in Redrow, services) cannot claim as input tax VAT which he has not paid. It is not necessary, in the present case, to decide whether the Commissioners have been right to be content with VAT on the consideration actually received by the supplier. It is not necessary to decide whether, on a true analysis, there is only one taxable supply – because no consideration is given for the supply of secondary or reward goods – or (as I think may be the better view) there are two taxable supplies made for the same consideration. Those questions can be determined if and when they arise.
Conclusion
I would dismiss this appeal.
Lord Justice Tuckey: I agree.
Lord Justice Maurice Kay: I also agree.