Loyalty Management UK Ltd v HM Revenue & Customs

This is an appeal from an order made on 22 June 2006 by Mr Justice Lindsay on an appeal and cross-appeal from a decision of the Value Added Tax and Duties Tribunal (Dr A N Brice, chairman, and Mr R L Jennings FCA FTII) released on 6 April 2005.

The Tribunal had allowed an appeal by Loyalty Management UK Limited (“LMUK”) from a ruling made by the Commissioners of Customs and Excise (as they then were) in a letter dated 9 December 2003 in connection with the treatment for the purposes of value added tax (“VAT”) of payments made by LMUK in the course of operating the Nectar Loyalty Scheme. So far as material the issue was whether LMUK was entitled to recover, as input tax, the VAT element of the amount (“the reward fee” or “the Service Charge”) which it paid to suppliers (“Redeemers”) who, under the Scheme, had agreed to accept Nectar points, or vouchers, in consideration for the supply of goods or services to members of the public (“Collectors”). The Commissioners’ ruling was that LMUK was not entitled to do so. As it was put, in paragraph 9 of the letter of 9 December 2003:

“There is no supply of redemption services between the Redeemers (Suppliers) and LMUK as regards the rewards fee. The payments made by LMUK to Redeemers represent third party consideration for supplies made by the Redeemers to their customers (the final consumers). Any amounts charged as VAT to LMUK by Redeemers cannot be recovered by LMUK as input tax”.

The Commissioners appealed from the Tribunal to the High Court under section 11 of the Tribunals and Enquiries Act 1992. LMUK filed a respondent’s notice seeking to vary terms in which the Tribunal had expressed its conclusion. That notice was treated as a cross-appeal. Mr Justice Lindsay ([2006] EWHC 1498 (Ch)) allowed the appeal and dismissed LMUK’s cross-appeal. LMUK appeal to this Court with permission granted by Lord Justice Jonathan Parker on 2 November 2006.

The Tribunal made findings of fact based on a draft statement of agreed facts dated 10 December 2004, the documents which had been put before it and the oral evidence of the Chief Financial Officer of LMUK. Those findings are set out at paragraphs 7 to 33 of the Tribunal’s decision, [2005] UKVAT V19056. For the purposes of this judgment it is sufficient, I think, to refer, first, to the Tribunal’s summary of LMUK’s business and the contractual arrangements underlying the Scheme:

“8

The business of the Appellant [LMUK] is the running of the Nectar customer loyalty rewards programme [the Scheme]. The Nectar programme is a developed version of a single-company loyalty rewards programme. Under a single company loyalty rewards programme customers of a single company are awarded points when they purchase primary goods from the company which points they can then use to acquire other (secondary) goods from the same company at no cost or at a reduced cost. Under the Nectar programme customers can purchase primary goods from a number of retailers and receive Nectar points which they can use to acquire secondary goods from a number of other suppliers at no cost or at a reduced cost. The programme is thus designed to enable a number of retailers to retain the loyalty of their customers and to enable a number of suppliers to increase their turnover.

The contractual arrangements in outline

9

In order to operate the Nectar programme the Appellant enters into contracts with retailers, customers and suppliers. The agreement with the retailers is that the retailers will assist in the issue of the points to the customers and will pay to the Appellant a specified sum [the points price] in respect of each point issued together with an annual fee for marketing the programme. The retailers benefit from the loyalty of the customers which leads to increased turnover. The agreement with the customers is that if they purchase (primary) goods from the stated retailers they will receive points which they may use to acquire (secondary) goods free of charge or at a reduced price from other suppliers. The customers benefit from the acquisition of free or reduced price goods. The agreement with the suppliers is that if they provide goods to customers in return for points the Appellant will pay them an agreed value for the points. The suppliers benefit from: an increase in the number of customers in their stores which leads to increased turnover; from the ability to sell their excess capacity to a new market at a reduced price; from the ability to make increased sales at a discount without reducing their prices generally; and from the fact that customers entering their stores are likely also to purchase other full price goods (incremental sales)”

The Tribunal then examined the contracts between LMUK and the retailers (“Sponsors”) and the promotional material sent by LMUK to customers who had registered under the Scheme. There is a helpful description of the operation of the Scheme at paragraphs 17 to 20 of the decision:

“17

When he makes purchases from any participating retailer the customer is issued with points by the retailer. When the customer is purchasing goods from the retailer the issue of points takes place electronically by the retailer swiping the customer’s Nectar card. When the customer is purchasing services from the retailer the issue of points is effected after the linking of the customer's Nectar account number with the account of the service provider. The number of points earned by spending £1 differ among the retailers. For example, two points are earned for £1 spent at Sainsbury’s or Debenhams but one point is earned for £2 spent using a Barclaycard.

18

The rewards available to the customer are many and various. They include free goods, groceries or wines; free meals at stated restaurants; free admissions to cinemas; free adventure trips; free days out to, say, a zoo or a spa; free stays in a hotel; discounted holidays, free flights; free travel; free video hire or game rentals; free games of bowling; or free admission to aquaria. Many of these rewards can be obtained partly by presenting points and partly by paying cash. Or points can be presented to reduce the supplier’s price; for example the supplier Argos offers £2.50 off any supply of goods in return for each 500 points. Although many of these rewards represent supplies of services, in fact by value most of the rewards are supplies of goods.

19

We saw what was called a ‘rewards menu’ which is sent by the Appellant to customers. This listed the rewards available by reference to the number of points required to acquire each reward. The menu also indicated whether the rewards could be obtained by the use of vouchers, or from the Appellant direct by telephoning the Appellant; or by use of the Nectar cards. Some of the rewards were described as ‘money off your shopping’.

20

Each quarter the Appellant informs each customer of the total number of points which have been issued to him in the quarter, the total points which the customer has used to obtain goods from a supplier; and the balance. The customer is also sent a brochure showing the goods or services which can be obtained in exchange for points, the number of points required to obtain them, and how to obtain them. Similar information is also published on the Appellant's website.”

It is, of course, essential to the operation of the Scheme that suppliers (Redeemers) should be obliged to provide the “rewards” which the Collectors have been led to expect that they will obtain on presentation of points. Collectors must be able to redeem the points which have been issued to them. The relationship between LMUK and each individual Redeemer is governed by contractual terms. The Tribunal explained the position in paragraphs 21 to 24 of its decision:

“The details of the contracts with the suppliers

21

At the date of the hearing there were about sixty-five different suppliers. (During the period in question only one of the suppliers (Sainsbury’s) was also a retailer.) Most contracts between the Appellant and the suppliers incorporate standard terms which apply to most suppliers. These are entered into in conjunction with commercial terms which apply to individual suppliers. There are also some special conditions which also apply to individual suppliers.

22.

The standard terms state that they apply to all contracts between a supplier and the Appellant for the supply of redemption services to the Appellant by way of the supply of goods, services and cash discounts as rewards to customers. The Appellant will determine the number of points required for a specific reward. The supplier is to supply rewards to any customer redeeming points or vouchers in the same way as a supply to a customer paying by cash or any other method. The supplier is to be responsible for all aspects of the supply of the rewards and will indemnify the Appellant against any liability incurred by the Appellant arising from the rewards. The supplier will deal with all complaints and will replace faulty goods at the request of a customer or the Appellant. The standard conditions oblige the supplier to provide goods or services to a customer who presents points on the same terms as if the customer were paying by cash; they provide that the quality of the goods provided to customers who present points must be the same as goods provided generally by that supplier and that includes the usual warranties for defective goods. They also provide that the supplier must provide the Appellant with accurate information about the goods provided to customers in return for points. The agreement also provides that the Appellant can make use of any data or information collected by the supplier.

23

The commercial terms vary for each supplier and are negotiated separately with each supplier. They specify the goods or services available from each supplier, the number of points required to be presented by a customer in return for those goods or services, the method of redemption, the reward fee and the service charge. The reward fee is the sum payable by the Appellant to the supplier when goods or services are provided to customers in return for points and is fixed by reference to a stated sum for each point redeemed. Different amounts are paid to different suppliers for each point redeemed. The Appellant negotiates a reward fee that it can commercially afford to pay and the reward fee is always less than the market price of the supply. The service charge is the aggregate of all the reward fees in respect of the points redeemed within a month. The commercial terms may also provide that the supplier shall provide the Appellant with regular reports giving an analysis of redemptions. Although the suppliers have other obligations to the Appellant, for example, the provision of information, the fee payable by the Appellant is calculated only by reference to the number of points redeemed. However, we accept the evidence of Mr Heffernan that each reward fee is negotiated commercially and that the amount of information required by the Appellant from each supplier is related to the number of points redeemed by customers with that supplier. In other words, more information is required from a supplier redeeming many points than from a supplier who redeems few points.

24

The practical result of the agreements between the Appellant and the suppliers is that the Appellant pays a fee, or service charge, to the suppliers. In return the suppliers provide rewards to customers in return for points or vouchers; provide information to the Appellant and customers on the rewards available to customers; make their names and brands available to be promoted within the Nectar programme; inform the Appellant's computer of the numbers of points to be debited to each customer's account with the Appellant; and deal with customer service issues relating to rewards. All these matters are referred to as redemption services.”

It is necessary, also, to have in mind the findings made by the Tribunal in respect of points and vouchers:

“The points

25

The points exist electronically. Originally they belong to the Appellant and are issued to customers when purchasing goods from retailers. When the customer purchases goods from a retailer, and when the retailer swipes the customer’s Nectar card, the retailer’s computer informs the Appellant’s computer of the number of points issued to that customer and the customer’s account number with the Appellant. The Appellant then credits that number of points to its account with that customer. The customer is then entitled to acquire goods from a supplier using those points. When the customer acquires goods from the supplier for points the supplier swipes the customer’s Nectar card and the supplier’s computer informs the Appellant’s computer of the number of points used by that customer. The Appellant then debits that number of points to its account with that customer. The points never belong to either the retailer or the supplier. In the hands of a customer the points are the measure of the customer's entitlement as against the Appellant and thus of the Appellant’s liability to a customer. The supplier’s agreement records that the points do not constitute property but represent only contractual rights for customers to redeem points for rewards.

26

A customer who has acquired points may use them in one of three ways: First, he can get a specified product or service free of charge from a supplier; examples would be the rental of a video for 500 points or a flight to Paris for 6,000 points. Secondly, he can purchase a specified product or service at a specified reduced cash price from a supplier; an example would be the hire of a hotel room for £40 and 2,500 points per night. Thirdly, he can get money off the cost of a purchase from a supplier; an example would be £2.50 off his shopping for 500 points. When a customer uses points in any of these ways a payment becomes due from the Appellant to the supplier.

27

In addition to the points being used by electronic swiping at a supplier’s till, there are three other ways of using points. First, points can be used by telephoning the Appellant direct on its Rewards Hotline when the Appellant takes the customer’s order or, in some cases, connects the customer to the supplier’s telephone; in either case the appropriate number of points is deducted from the customer’s account with the Appellant. Alternatively, points can be used by visiting the Nectar website and redeeming the points online. For example, one online offer is a toolkit for 7,600 points. That supply is made by the Appellant direct to the customer. Finally, points can be exchanged for vouchers.

Vouchers

28

A customer can exchange 500 points for one voucher. Vouchers can be obtained at the till at Sainsbury’s or from the Appellant direct. Either way when a customer acquires a voucher his account with the Appellant is debited with the number of points exchanged for vouchers.

29

No monetary amount is ever stated on a voucher only a specified number of points. The terms on the reverse of the voucher provide that they remain the property of the Appellant and that they cannot be redeemed for cash nor sold nor transferred for value. They also state that the voucher can be used for part-payment so that if the price of the goods or services exceeds the value of the voucher the balance has to be paid in cash. On the other hand if the price is less than the voucher no change is given.

30

Vouchers can be presented to any supplier who has agreed to accept them. The supplier should ensure that the number of the customer’s Nectar account is entered on the reverse of the voucher (although this is not always done). The standard terms of the agreement between the Appellant and the suppliers provide that where a supplier has accepted vouchers the risk lies with the supplier until the vouchers are received by the Appellant and the Appellant requires to see the vouchers as evidence that they were presented by customers to the supplier in return for the provision of goods or services by the supplier.

31

Where a supplier accepts vouchers instead of electronic points it is the duty of the supplier to collect and count the vouchers, cancel them, collate them and identify the site at which they were redeemed. The supplier then sends the vouchers to the Appellant’s collecting house. Only then will the Appellant pay the supplier the reward fee relating to those vouchers. The Appellant uses the information on the back of the vouchers about the customer’s account number with the Appellant. (This information is of general interest only because the customer’s account with the Appellant will have been debited with the appropriate number of points upon the issue of the voucher.)

32

The processing of vouchers by a supplier is treated as a redemption service.

33

Less than 15% of all redemptions are made for vouchers.”

Paragraphs 34 to 36 of the Tribunal’s decision contain a convenient summary of the VAT treatment of the various elements in the Scheme:

“34

When a customer purchases goods or services from a retailer the transaction is treated for value added tax purposes as a supply of those goods or services for the full consideration paid by the customer; no part of the consideration is treated as payment for points.

35

The Appellant treats as standard-rated supplies the supplies it makes to the retailers [information about customers and the marketing, development and promotion of the Scheme] in return for the payments made by the retailers to the Appellant (including the points price and the annual marketing fee). The retailers treat the tax on those supplies as input tax which is deductible to the extent that they use the supplies to make taxable (and not exempt) supplies.

36

The suppliers account to Customs and Excise for output tax when they provide goods or services to customers in return for points; the value of the supply is the amount paid to the supplier by the Appellant and also the amount (if any) paid to the supplier by a customer. Each month each supplier sends to the Appellant an invoice for the relevant service charge (which is the aggregate of all the reward fees in respect of points redeemed by the supplier in that month). The standard rate of value added tax is charged on the full service charge even if a reward supplied to a customer is, for example, food or travel, and so is exempt or zero-rated. The Appellant pays each supplier’s invoice. It is the treatment of the tax on the suppliers’ invoices as the Appellant’s input tax which is in issue in this appeal.”

The Tribunal directed itself that the first issue for decision was “whether, when the suppliers supply secondary goods to customers in return for points the supply is made to the customer (as argued by Customs and Excise) or to the Appellant (as argued by the Appellant)”. It recorded that it was common ground that if the supply were to LMUK then the tax on the supply would be input tax in the hands of LMUK; if the supply were not to LMUK, then LMUK would not be able to treat the tax on the supply as its input tax. The tribunal’s conclusion on that issue (at paragraph 108 of its decision) was that “when suppliers supply secondary goods to customers in return for points the supply is made to the Appellant and not to the customers”.

In reaching that conclusion the Tribunal addressed, first, the case where the customer (the Collector) took his reward in the form of a supply of goods from the supplier (the Redeemer); and did so by the surrender of points alone, without making any cash payment. The Tribunal’s reasoning may, I think, fairly be summarised as follows:

The Tribunal were taken through the judgments of the Court of Justice in cases concerning the VAT treatment of money-off coupons and vouchers: in particular, it was taken to the judgments in Boots Co Plc v Customs and Excise Commissioners (Case C-126/88) [1990] STC 387, Argos Distributors Ltd v Customs and Excise Commissioners (Case C-288/94) [1996] STC 1359, Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387, EC Commission v Federal Republic of Germany (Case C427/98) [2003] STC 301 and Yorkshire Co-operatives Ltd v Customs and Excise Commissioners (Case C-398/99) [2003] STC 234. From its examination of those authorities the Tribunal derived the principle “that the taxable amount is what is actually received”. But that principle did not provide an answer to the question who is the recipient of the supply from the Redeemer. As the Tribunal explained (at paragraph 75 of its decision) in each of those authorities the only possible recipient of the supply from the retailer was the customer: neither the manufacturer nor the supplier could have been the recipient of the supply. By contrast, on an analysis of the contractual arrangements in the present case, “another possible recipient is the Appellant who pays for the secondary goods and who has arranged for them to be provided to the customer by the supplier as part of the Appellant's business arrangements”. The Tribunal concluded that “as all these authorities concern the taxable amount of supplies, and not the identity of the recipient of the supplies” they provided no assistance in the determination of first issue which it had to decide.

It had been argued on behalf of the Commissioners that the judgments of the Court of Justice in the five cases to which I have just referred established the principle that money paid to a retailer by a manufacturer for a voucher was third party consideration for the supply by the retailer to the customer and was not consideration for a supply made by the retailer to the manufacturer. In response to that submission the Tribunal considered a number of other judgments of the Court of Justice: Leesportefeuille “Intiem” CV v Staatsecretairs van Financiën (Case 165/86) [1988] ECR 1471, EC Commission v Kingdom of the Netherlands (Case C-338/98) [2003] STC 1506. Keeping Newcastle Warm Ltd v Customs and Excise Commissioners (Case C-353/00) [2002] STC 943, Customs and Excise Commissioners v First Choice Holidays plc (Case C-149/01) [2003] STC 934 and Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/2001) [2003] ECR I-01317. It found assistance in the observations of the Court - in the Intiem case (confirmed in Commission v Netherlands) – to the effect that the right of a trader to deduct (or reclaim) input tax could not be denied on the ground that the goods for which he had paid had been delivered to another person: provided that the goods were supplied for the purposes of the trader’s business and under pre-existing arrangements between the trader and the supplier. The Tribunal distinguished the other authorities for the reasons which it explained in paragraphs 85 to 90 of its decision: put shortly, it took the view that, in none of those cases, did the Court need to consider the question “to whom was the supply made”.

The Tribunal went on to consider, in the same context, two decisions of the House of Lords – Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 and Customs and Excise Commissioners v Plantiflor Limited [2002] UKHL 33; [2002] STC 1132 – and the decision of this Court in WHA Ltd and another v Customs and Excise Commissioners [2004] EWCA Civ 559; [2004] STC 1081. It will be necessary to return to those authorities later in this judgment. At this stage it is sufficient to note that the Tribunal expressed the view, at paragraph 101 of its decision that: “All these authorities lead us to conclude that the supply by the suppliers is to the Appellant and not to the customers”.

As I have said, the Tribunal had found it convenient to address, first, the case where the Collector took his reward in the form of a supply of goods from the Redeemer; and did so by the surrender of points alone, without making any cash payment. It went on (at paragraphs 102 to 105 of its decision) to consider the case where a customer obtained secondary goods in part in return for the surrender of points and in part for a cash payment. It noted that neither LMUK nor the Commissioners had contended that the fact of part payment in cash altered the identity of the recipient of the supply by the supplier. It concluded (adopting, in substance, the submission of LMUK on this point) that: “where a customer obtains goods partly in return for points and partly in return for cash, there are two supplies; one to the Appellant for the amount it pays and one to the customer for the amount he pays” It observed that that conclusion preserved the neutrality of the VAT scheme: “the customer, as final consumer, pays tax only on what he pays (both for the primary goods and for part of the secondary goods)”. The Tribunal then went on to conclude (at paragraph 106 of its decision) that there was no material distinction in the proper analysis of the position in a case where, before obtaining secondary goods from the Redeemer, the Collector had surrendered points in exchange for a voucher which he used for that purpose; and (at paragraph 107) that its conclusions were the same if the reward took the form of a supply of services rather than a supply of goods.

The Tribunal addressed – as the second issue before it – the question whether it should request a preliminary ruling from the Court of Justice. It concluded that a preliminary ruling was not necessary in order for it to determine the appeal which was before it. It observed that: “the real issue in this appeal does not concern the interpretation of the First or Sixth Directives but rather concerns the correct analysis of the facts in the light of the arrangements between the parties”. The Court of Justice was likely to take the view that that was a matter for the national courts.

The Commissioners appealed to the High Court. LMUK did not seek to support the proposition that the relevant supplies by the Redeemers were supplies of the secondary goods to LMUK: save, perhaps, as a fall-back position. As I have said, LMUK filed a respondent’s notice. It sought to substitute for the Tribunal’s conclusion that “when the suppliers provide secondary goods to customers in return for points the supply made by the supplier is to [LMUK] and not to the customer” a conclusion in rather different terms. LMUK invited the High Court to conclude that: “There is a supply of redemption services between the Redeemers (Suppliers) and LMUK as regards the rewards fees”.

In that context it may be noted that, although the Tribunal did express its conclusion in terms which suggested that it was treating the relevant supplies by the Redeemers as the supplies of goods to LMUK for use in the business of LMUK, the Tribunal’s preferred analysis (expressed at paragraph 60 of its decision, which I have already set out earlier in this judgment) was that for which LMUK contended in its respondent’s notice. As the Tribunal had put it in that paragraph:

“60

In our view the proper analysis of the transaction under which a supplier provides goods to a customer in return for points is that the supplier is providing a service to the Appellant in assisting it to discharge its obligation to customers that they can acquire rewards in return for points.”

On that analysis, it was said, the payment made by LMUK to a Redeemer did not represent third party consideration for supplies made by the Redeemer to Collectors: which (as LMUK accepted) would lead, necessarily, to the conclusion that the VAT charged on that payment could not be treated by LMUK as input tax attributable to supplies made by it for the purposes of section 26 of the Value Added Tax Act 1994. Rather, the payment should be seen as a payment made by LMUK for the supply of services made to it by the Redeemer for the purposes of its business: which would lead to the conclusion that the VAT charged on that payment was available to LMUK as input tax.

In those circumstances, although the Commissioners needed to advance arguments to rebut the proposition that the relevant supplies were supplies of the secondary goods to LMUK in order to challenge the Tribunal’s conclusion, Mr Justice Lindsay did not find it necessary to address those arguments at any length. He referred to them at paragraphs [40] to [48] of his judgment. He accepted that the decision of the Court of Justice in Auto Lease compelled the conclusion that the supply of secondary goods was a supply by the Redeemer to the Collector: it could not be treated as a supply of goods by the Redeemer to LMUK.

Mr Justice Lindsay allowed the Commissioners’ appeal. He began his judgment by identifying the questions which he needed to decide:

“[1] . . . The appeal raises these questions; what is the proper characteristic, for VAT purposes, of the payment made by LMUK to those other suppliers; is it a payment for a redemption service supplied to LMUK or is it the whole or part of the price paid for the provision by those other Suppliers of the rewards to the customers? Is there, for VAT purposes, a supply of a redemption service to LMUK or of goods or services to the customers? ”

The judge found it convenient (for the reasons which he explained at paragraph [4]) to reach his own provisional conclusion on the arguments which had been advanced before him, before examining the analysis in the Tribunal’s decision. In that context, his conclusion (at paragraph [79] of his judgment) was that:

“[79] In the light of the facts I have described, I would regard the Service Charges, so closely related to the occasions and often to the prices of provision by Suppliers [Redeemers] to Collectors, as more having the characteristic of being a payment by LMUK for or towards the supply of goods or services by Suppliers to Collectors than being of any other nature. Were I left to decide only upon the argument I have thus far described, my judgment would be that the Service Charge is consideration for VAT purposes, third party consideration, for a VAT supply by Suppliers to Collectors”

He then turned to examine the Tribunal’s decision. He found (at paragraph [80] that the Tribunal had proceeded on the basis that “in such cases the supply was of the rewards themselves and was from the Supplier to LMUK – see paras 45 and 108 of the Tribunal’s decision”. That, he held, was an error of law: In taking that view he may, perhaps, have overlooked what I have described as the Tribunal’s preferred analysis – at paragraph 60 of its decision. Be that as it may, the judge was satisfied that he should decide the appeal in accordance with the provisional conclusion which he had already expressed.

At paragraphs [5] to [31] of his judgment the judge had set out his own account of the facts and, in particular, of the terms of the several contracts between the participators in the Scheme. At paragraph [16] he observed:

“[16] Mr Venables [on behalf of LMUK] rightly points out that as Suppliers [Redeemers] are obliged to send returns of information to LMUK on any footing it is not only in respect of the goods or services provided by Suppliers to Collectors that the Service Charge is paid. However, the Service Charge does not have within it any identified or identifiable part which reflects the provision of information by the Supplier to LMUK and the Service Charge, fixed by reference to points and Vouchers (collections of points) redeemed in a relevant period, would not be other than zero if, in that period, no points were redeemed with the Supplier in question. Whilst the information it receives from Suppliers is, no doubt, useful to LMUK it seems to me, as I shall return to below, so ancillary and minor a component of the overall provisions between Suppliers and LMUK as not to be capable of affecting the overall legal and financial characteristics of those provisions. ”

It is clear from that observation that the judge accepted that the supply of information by the Redeemer was the supply of a service; and that the only person to whom that service could be said to have been supplied was LMUK. He accepted that LMUK was obliged, under the terms of its contract with the Redeemer, to pay the Redeemer for the supply of that service; and that the payment which was made by LMUK to the Redeemer satisfied that obligation. But he did not accept that the supply of information was, of itself, the supply of a service by the Redeemer to LMUK for VAT purposes.

The supply of information was, of course, only one element in the package of “redemption services” which the Redeemer was obliged to provide under its contract with LMUK. The judge had recognised that when he said, at paragraph [15] of his judgment:

“[15] Suppliers in general are . . . obliged by their contracts with LMUK to provide rewards on redemption of points on the same terms, so far as concerns the customers seeking to redeem, as those available to customers paying by cash or by any other method. . . .”

But he did not accept that the supply of “redemption services”, taken as a whole, was the supply of a service by the Redeemer to LMUK for VAT purposes. At paragraphs [60] and [61] of his judgment the judge said this:

“[60] Mr Venables [on behalf of LMUK] begins by emphasising that the ‘redemption services’ which Suppliers provide include obligations outside the supply of goods or services to Collectors. They include the obligation to provide specified information to LMUK, information valuable to that recipient. Plainly that provision is not to Collectors and is to no-one but to LMUK. How can that be consistent, he asks, with there being a supply by Suppliers for VAT purposes only to Collectors, as the Commissioners assert?

[61] The answer, as I see it, is that it is not so consistent but that the inconsistency is not significant. It is a familiar principle of VAT cases that arrangements should be categorised by reference to their dominant characteristics and that ancillary and minor provisions within them may lose such colour as, had they been viewed on their own, they would have had. They take on, instead, the colour cast by the legal and financial characteristics of the arrangement looked at as a whole. . . .”

In the judge’s view the “dominant legal and financial characteristics” of the arrangements, looked at as a whole, compelled the conclusion that the supply made by the Redeemer for VAT purposes was the supply of secondary goods to the Collector: there was no supply to LMUK for VAT purposes.

It was not, I think, in dispute before the judge that, on any view, there was a supply of secondary goods by the Redeemer to the Collector. The judge was led to the conclusion that that was the only supply made by the Redeemer which was relevant for VAT purposes by his view that, on a true analysis, the payment made by LMUK to the Redeemer was to be treated as third party consideration for that supply. The payment could not also be seen as consideration for a supply of redemption services made to LMUK. He had identified the point when setting out the arguments advanced on behalf of the Commissioners:

“[58] It is . . . not, in my view, the requirements of a direct link or of reciprocity or even the nature of ‘consideration’ as an autonomous concept differing from the meaning of the word in our domestic contract law that finally contributes to the conclusion at which Mr Vajda's argument seeks to arrive. Rather that contribution springs, as it seems to me, from the idea that an unapportioned and unapportionable payment made between two parties cannot simultaneously be consideration for VAT purposes in, so to speak, more than one direction. It cannot at one and the same time be ‘consideration’ for different supplies as between different parties who are engaged in different arrangements. It cannot be consideration (albeit third party consideration) for which the provision between Supplier and Collector is ‘done’ and yet at the same time be consideration for VAT purposes as between Supplier and LMUK. This notion, of what I might call the ‘once and one way only’ nature of consideration, was not further developed by Mr Vajda nor was authority for it adduced. . . . If it is right (and I shall need to return to it below) then . . . I see real force in the Commissioners’ case that what Suppliers do for LMUK is not done for consideration in VAT terms as the Service Charge is already used up as consideration for the Supplier's supply to the Collector and hence that there cannot, for VAT purposes, be a supply by the Suppliers to LMUK. ”

The judge returned to that point in the section of his judgment headed: “The main arguments: a provisional conclusion”. He said this:

“[76] I indicated earlier that I would return to what I called the ‘once and one way only’ nature of consideration when viewed as an autonomous concept for VAT purposes – see [58] above. I am far from sure that the principle of fiscal neutrality could operate if that were not so. That principle (asserted in their respective favour by both sides) requires that the taxable amount serving as a basis of the VAT to be collected cannot exceed the consideration actually paid by the ultimate consumer – see, e.g., EC Commission –v- Germany (United Kingdom intervening) (Case C-427/98) [2003] STC 301, [2002] ECR I-8315 per Advocate-General Jacob at para 14 – or, as I think one has to add, on the consumer's behalf. In my judgment consideration as such an autonomous concept does have the ‘once and one way only’ nature which I have described. On that basis each side has produced to me a carefully reasoned argument, supported by authority, for a conclusion in its favour. The arguments, to borrow A-G Jacob's phrase, are not unevenly balanced.

And he went on:

[78] There is no single touchstone, no reliable litmus paper, that assuredly reveals the characteristics for which I am looking but why I would prefer the Commissioners’ argument is that it seems to me the more consistent with the requirements, illustrated in Auto Lease and the coupon cases, that one should stand back and look at the characteristics of the provision and payment in issue in a relatively robust and commonsensical way, not bound by a strict analysis of the mesh of the contracts or the language used in them. Whilst it is no part of the definition of the supply of a service for VAT purposes that it should have all or, indeed, any of the attributes of what, in ordinary usage, would be regarded as a service, it must, surely, tend against it as a service if it has only few or none. Here, the Service Charge does not reflect the time the server needs to employ to provide the service or the number or quality of the persons providing it. Nor does the Service Charge reflect the cost to the server of providing what it does to LMUK. Nor is any retainer paid to the Supplier for holding himself ready to provide rewards even where it transpires that he is not called upon to do so. Conversely, the Service Charge is related only to rewards fees, in turn to points redeemed, and, in turn again, to a provision by the Supplier to the Collector as reward. As may underline that the Service Charge is paid for the provision to the Collector, if a reward is returned by a Collector to a Supplier and is not replaced by that Supplier then the Service Charge is reduced accordingly on the Supplier's next invoice – Standard Term 4.2. As I have mentioned, if, in relation to a particular Supplier, he provides no reward over a given period, then for that period, he is paid nothing. No separate or separable fee can be discerned as the price for the provision to LMUK by the Supplier of whatever information the latter is obliged to supply.

[79] In the light of the facts I have described, I would regard the Service Charges, so closely related to the occasions and often to the prices of provision by Suppliers to Collectors, as more having the characteristic of being a payment by LMUK for or towards the supply of goods or services by Suppliers to Collectors than being of any other nature. Were I left to decide only upon the argument I have thus far described, my judgment would be that the Service Charge is consideration for VAT purposes, third party consideration, for a VAT supply by Suppliers to Collectors. If the ‘once and one way only’ point is right, it cannot simultaneously be consideration for VAT purposes for a service provided by the Suppliers to LMUK. But even if that point is not right, having regard to the dominant characteristics of the Programme and of the payments within it from LMUK to Suppliers, what I would take, for VAT purposes, to be supplied are rewards to Collectors rather than a service to LMUK. . . .”

The judge had been referred to the decisions of the House of Lords in Customs and Excise Commissioners v Redrow Group Plc [1999] STC 161 and Customs and Excise Commissioners v Plantiflor Ltd [2002] UKHL 33; [2002] STC 1132. At paragraph [70] of his judgment he set out the passages in the speech of Lord Millett, in Redrow, on which LMUK had placed particular reliance:

“[70] Lord Millett ([1999] STC 161 at 168, [1999] 1 WLR 408 at 415) identifies the key concept in VAT as being that of supply and cited section 5(2)(b) of VATA (then section 3(2)(b) of the Value Added Tax Act 1983). He continued ([1999] STC 161 at 171, [1999] 1 WLR 408 at 418):

‘Once the taxpayer has identified the payment the question to be asked is: did he receive 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.’

Lord Millett observed ([1999] STC 161 at 172, [1999] 1WLR 408 at 419):

‘It is sufficient that Redrow obtained something of value in return for the payment of the agents’ fees in those cases where it became liable to pay them and that what it obtained was obtained for the purposes of Redrow's business.’

He continued (with my emphasis):

‘From Redrow's stand point, which is what matters, the agents' fees incurred in the sale are …… a necessary cost of and exclusively attributable to the sale of a Redrow home …’ ”

The judge went on:

“[71] Mr Venables then follows through that Redrow sequence. The payment in question is the Service Charge which LMUK pays to Suppliers. Did LMUK receive anything – anything at all – used or to be used for the purposes of its business in return for that payment? Assuredly yes, says Mr Venables; LMUK received from Suppliers a pro tanto discharge of those obligations to Collectors which it had incurred under the Collector Rules, a discharge manifestly for the purposes of its business in carrying on the Programme. Looking at the transaction from LMUK's stand point, which is what matters, the Service Charges were incurred as a necessary cost of and were exclusively attributable to that business of LMUK. Even if one were to moderate Lord Millett's initial mention of the receipt of ‘anything – anything at all –’ to his later reference to ‘something of value’, still, says Mr Venables, something of value was obtained by LMUK in return for payments of Service Charges.”

The judge acknowledged that that approach had “the attraction not only of high authority but of apparent simplicity”. But he was persuaded that it provided no assistance on the facts of this case. He drew attention, at paragraphs [72] and [73] to “the very different facts of Redrow”:

“[72] . . . There it was Redrow not the prospective house purchaser who chose the estate agents and gave instructions to them. Redrow obtained a contractual right as against the estate agents and could even prevent or override changes in the agents’ instruction which the house purchasers might otherwise have been minded to make. Lord Millett said ([1999] STC 161 at 171, [1999] 1 WLR 408 at 418):

‘Everything which the agents did was done at Redrow's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to Redrow’

[73] By contrast, says Mr Vajda, it was not LMUK that selected the particular goods or services enjoyed by way of reward by Collectors, nor, (in the sense that no Collector was bound to use points in all his acquisitions but could deal with retailers who were not Suppliers) was it LMUK that selected who it was that was to supply them. LMUK had no rôle in determining whether goods or services should be acquired by Collectors only by the use of points or wholly by cash or partly for one and partly for the other or in what proportions between the two forms of satisfaction. Nor is it the case that such provision as is made to Collectors is exclusively at LMUK’s expense; in all cases where points alone did not suffice the Collectors, too, would bear some expense. In Redrow it was easy enough to see the legal and financial characteristics that were there being examined as pointing to a supply to Redrow but the overriding characteristics of the Programme suggest a provision to Collectors, says Mr Vajda, with third party consideration for that provision coming from LMUK. . . .”

At paragraph [77] the judge concluded:

“[77] . . . It seems to me that the attractive reasoning illustrated in Redrow is not available to me. Mr Venables was not alone in insisting on recognition of the sensitivity to their respective facts of decisions as to VAT and on the very different facts before me there can be no equivalent to the passage in Lord Millett's speech at [1999] STC 161 at 171, [1999] 1 WLR 408 at 418 which I have cited above and which I regard as crucial to his reasoning. The notion of third party consideration and the coupon cases played no part in Redrow, nor did the House of Lords have the benefit of any guidance from Auto Lease. I thus do not see Redrow as determinative of the case at hand. . . .”

In a concluding section of his judgment (paragraphs [86] to [93]) the judge, at the invitation of both parties – but (as he said) “with misgivings” - addressed an argument which had not been raised before the Tribunal. The argument – “The Commissioners’ alternative argument” - is summarised at paragraph [87] of the judgment:

“[87] It concerns only cases where there are goods provided to Collectors as rewards but which (it is to be assumed, upon the Tribunal’s view of matters) are properly to be regarded as having been supplied to LMUK before being passed on to Collectors. It is said by the Commissioners that they would thus become, however briefly, assets of LMUK’s business. Upon their disposal to Collectors LMUK receives nothing from the Collectors at that stage and certainly receives no ‘charge’, a word used, as will be seen, in contradistinction to ‘consideration’ in Article 5(6)). Schedule 4 paragraph 5(1) VATA, says Mr Vajda, requires a tax charge to arise upon such a gratuitous disposal (subject to paragraph 5(2) thereof) – see Kuwait Petroleum (GB) Ltd –v- CCE [1999] STC 488 which dealt with ‘free gifts’ provided to customers under a sales promotion scheme. Paragraph 5(1) provides: ”

‘5 (1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.’

Paragraph 5(2) disapplies 5(1) in de minimis cases.”

The judge indicated (at paragraph [96] of his judgment) that, had the issue been properly before him, he would have ruled that the Commissioners succeeded on their alternative argument. The effect would have been that LMUK were treated as making a taxable supply of the secondary goods to the Collectors for a consideration equal to that which LMUK would have paid if, at the time of that supply, it had purchased goods identical in every respect to the goods supplied – paragraph 6(2) of schedule 4 of the Value Added Tax Act 1994. LMUK would have been accountable for the VAT charged on that supply. It is important to keep in mind that the alternative argument can only arise if, on a true analysis, there has been a supply of the secondary goods by the Redeemer to LMUK.

The principal ground upon which LMUK appeals to this Court is that the judge should have held that the payments which it made to Redeemers in pursuance of the Scheme were payments by way of consideration for the supply of services: that is to say, for the supply of the redemption services to LMUK. It is said that the judge should have recognised that the decisions of the House of Lords in Redrow and in Plantiflor required him to reach that conclusion; and that he was wrong to hold that those decisions had no application in the present case.

In addressing the question whether the supply of redemption services by the Redeemer to LMUK is to be treated, for VAT purposes, as a supply for consideration it is convenient to have the relevant legislative provisions in mind. They are to be 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 2 of the Sixth Directive requires that there shall be subject to value added tax “the supply of goods or services effected for consideration . . . by a taxable person acting as such”. In that context “supply of goods” is defined, by article 5, to mean “the transfer of the right to dispose of tangible property as owner”. “Supply of services means “any transaction which does not constitute a supply of goods within the meaning of article 5”. Article 11.A.1(a) provides that the taxable amount shall be “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 the supply which he makes. It is common ground that “consideration” is not defined in the Sixth Directive; 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; and that its meaning is to be determined in the light of the relevant judicial authorities. 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: a right which has been described as “the keystone of the VAT system”. 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.

. . .”

Section 4(1) VATA requires that VAT shall be charged on any supply of goods or services made in the United Kingdom: “where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him”. “Supply” includes all forms of supply, “but not anything done otherwise than for a consideration”: section 5(2)(a). 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. In particular, the grant of a right is a supply of services (ibid). Again, “consideration” is not defined in the Act: it is common ground that it bears the same meaning as in the Sixth Directive.

Section 24(2) VATA defines as “output tax” in relation to a taxable person the VAT on supplies which he makes. “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). Section 25(1) VATA requires that, in respect of supplies made by him, a taxable person shall account for and pay VAT (output tax) by reference to prescribed accounting periods. Section 25(2) entitles him 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 . . .”

As I have said, it is common ground that, if there is a supply of redemption services by the Redeemer to LMUK (in relation to which the Redeemer must account for and pay output tax) the VAT on that supply is input tax in relation to LMUK; it is input tax attributable to taxable supplies which LMUK makes in the course or furtherance of its business (because the redemption services are provided to LMUK in the course of operating the Scheme); and it is input tax which would be allowable under the relevant regulations. The issue is whether there is a supply of redemption services by the Redeemer to LMUK for the purpose of the VAT legislation. And, as I have said, it is submitted on behalf of LMUK that the reasoning which underlies the decisions of the House of Lords in Redrow and Plantiflor – applied by this Court in WHA Ltd and another v Customs and Excise Commissioners [2004] EWCA Civ 559; [2004] STC 1081 - is determinative of that issue.

Redrow was a house-builder. Put shortly, Redrow 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. It claimed input tax credit in respect of the VAT on the estate agents’ fees which it paid. The issue on the appeal in Customs and Excise Commissioners v Redrow Group Plc [1999] UKHL 4; [1999] STC 161 was identified, both by Lord Hope of Craighead and by Lord Millett (with whose speeches the other members of the House, Lord Steyn, Lord Goff of Chieveley and Lord Hutton agreed), in terms which are equally apt to identify the issue in the present case. As Lord Hope put it (ibid, 164b-c): “The issue in this case is whether the tax which Redrow pays to the estate agent falls within the definition of ‘input tax’ in section 14(3) of the 1983 Act [now section 24(1)(a) VATA]”. Lord Millett (ibid, 167a) pointed out that the appeal was not concerned with the attribution of input tax “but with the prior question whether the services in respect of which Redrow claims to be credited with input tax are supplied to Redrow at all”.

The argument advanced on behalf of the Commissioners (who had succeeded in this Court in resisting Redrow’s claim to input tax credit) bears a striking similarity to that advanced in the present case. It was summarised by Lord Hope (ibid, 164g–165a):

“Dr. Lasok Q.C. for the Commissioners said that it was not enough to entitle Redrow to deduct the tax as input tax that it had had to pay for the services. Nor was it enough that it had benefited from them. He maintained that the rights and obligations which were created by the contractual relationship did not determine the relationship between the parties for the purposes of Value Added Tax. That relationship had to be determined by looking at the objective character of the transaction. The question was, where did the goods or services actually go? In this case the services went to the prospective purchasers. It was their houses which were being marketed and sold by the estate agents. It was they, and not Redrow, who had consumed these services. The scheme of the tax was that the burden of it fell on the final consumer of the goods or services. The tax which the final consumer had to pay was the product of links in the chain as each transaction was drawn into the economic activity which resulted in the ultimate supply. On the facts of this case it was unrealistic to say that the services of the estate agents were being passed through Redrow as a step in the chain of transactions which led to the prospective purchasers as the final consumer of their services. This was because those same services were being supplied to the prospective purchasers at the same time as they were, on Redrow's argument, being supplied to Redrow. The direct and immediate link was between the estate agents and the prospective purchasers. The aim of Redrow, which was to facilitate the sale of their homes by instructing and paying for the services of the estate agents, was irrelevant.”

Lord Hope rejected that argument. He pointed out (ibid, 165h) that the tribunal had concluded that the services of the estate agents were supplied both to Redrow and to the prospective purchasers. He went on (ibid, 165j-166e) to say this:

“. . . Clearly the estate agents were supplying services to the prospective purchasers, as they were engaged in the marketing and sale of the existing homes which belonged to the prospective purchasers and not to Redrow. But Redrow was prepared to undertake to pay for these services in order to facilitate the sale of its homes to the prospective purchasers. The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow.

The word ‘services’ is given such a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description which one might apply to the service is immaterial, because the concept does not call for that kind of analysis. The service is that which is done in return for the consideration. As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course or furtherance of a business carried on by that other person for which he takes a consideration in return. Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted Value Added Tax? The fact that someone else - in this case, the prospective purchaser - also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction. ” [emphasis added]

The two sentences which I have emphasised are central, also, to the reasoning of Lord Millett: as the passages cited by the judge (at paragraph [70] of his judgment) which I have set out above demonstrate. But I think it helpful to put those passages in context. In a section of his speech headed “Identifying the recipient of the services”, Lord Millett said this (ibid, 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.” [emphasis added]

He went on to conclude (ibid, 172c):

“It is sufficient that the taxpayer obtained something of value in return for the payment of the agents’ fees in those cases where it became liable to pay them, and that what it obtained was obtained for the purposes of the taxpayer's business. Both those conditions are satisfied in the present case. . . .”

And he pointed out (ibid, 172d) that, if it were necessary that there be a direct and immediate link between the services supplied by the agent and the sale of a particular Redrow home (which in his view it was not), that condition would be satisfied because:

“From the taxpayer's standpoint, which is what matters, the agent’s fees incurred in the sale of a prospective purchaser’s own home are not part of the taxpayer’s general overhead costs but a necessary cost of and exclusively attributable to the sale of a Redrow home to that same purchaser.” [emphasis added]

The passages which I have set out provide clear authority for two propositions. 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 in the context of the present appeal for reasons which will appear later in this judgment: 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.

Some three years later, in Customs and Excise Commissioners v Plantiflor Ltd [2002] UKHL 33; [2002] STC 1132, the House of Lords had an opportunity to consider its earlier decision in Redrow. Plantiflor carried on business selling plants and other garden products. Plantiflor had entered into a standing contract with Parcelforce, an agency of the Post Office, under which, in return for Plantiflor undertaking to use Parcelforce for the whole of its parcels traffic and to despatch a minimum number of parcels in each year, Parcelforce would charge Plantiflor at an agreed preferential rate per parcel. Parcelforce offered postal delivery to its customers for a standard contribution of £2.50 (to include packaging and postage). The Commissioners sought to charge Plantiflor VAT on the whole of that contribution (including the element attributed to postage: £1.63). The problem which confronted Plantiflor (as Lord Millett explained, ibid [58]; 1146f-g) was that article 13.A.1(a) of the Sixth Directive had the effect of making the supply of public postal services by Parcelforce an exempt supply – so that postal charges paid by Plantiflor to Parcelforce contained no element of output tax which Plantiflor could offset (as input tax) against its own output tax on the postage element of the contribution which it received from its customer.

The issue in Plantiflor was whether (as the Commissioners contended) the whole of the £2.50 contribution was to be treated as consideration for a service supplied by Plantiflor to its customer; or whether (as Plantiflor contended) the postage element of that contribution was to be treated as consideration for a service supplied by Parcelforce. As Lord Slynn of Hadley put it (ibid, [19]; 1139a) “The sole question raised on this appeal is whether the ‘Postage (£1.63)’ or that part of the ‘Contribution Towards Post and Packaging £2.50’ which relates to the postage cost is part of the consideration moving from the customer to Plantiflor for the relevant supply or whether it constitutes money handed to Plantiflor which is not part of that consideration”. The House of Lords (Lord Mackay of Clashfern dissenting) held that the postage element of the contribution was part of the consideration paid by the customer to Plantiflor for the supply of a service by Plantiflor.

Lord Millett (with whose speech Lord Hobhouse of Woodborough and Lord Scott of Foscote agreed) explained (ibid, [49]; 1145b) explained that: “In the ordinary case the supply and the liability to pay the consideration for the supply are reciprocal, that is to say the supply is made to the person who is liable to pay the consideration and the consideration is payable to the supplier by the person who receives the supply.” But, as he went on to say, that was not always the case: “Tripartite arrangements which result from two or three separate but related bilateral contracts call for close analysis in order to determine their tax consequences”. The Redrow appeal provided an illustration:

“[50] In Customs and Excise Comrs v Redrow Group plc [1999] STC 161; [1999] 1 WLR 408 there were three separate bilateral contracts between the three parties, but only one of them was liable to pay the consideration and accordingly there was only one taxable supply. The taxpayer, which built houses for sale, offered prospective purchasers who bought a new house from it the free services of a firm of estate agents to value and market their existing homes. It entered into an agreement with the firm to pay their fees for the work, but only where a customer sold his existing home and bought a new house from the taxpayer. In order to recover their fees if a prospective customer found a buyer for his home but did not proceed to buy a house from the taxpayer, the firm entered into separate contracts with the customers. The firm were held to have made two different supplies. One, made to the customer, was a supply of the ordinary services of an estate agent in valuing and marketing his house. The other, made to the taxpayer, was the supply of the services of an estate agent in valuing and marketing its customer's house. Thus a single course of conduct by one party may constitute two or more supplies to different persons.”

He went on (ibid, [51], [53], [54] ; 1145c-e, 1145j-1146a):

“[51] In the present case the three parties entered into two separate but related bilateral contracts. One was the contract between Plantiflor and its customer by which Plantiflor sold plants, bulbs and other horticultural and related products to the customer and, if the customer requested it and paid a sum of £2.50 (which included postal charges of £1.63), arranged to have the goods delivered by Parcelforce (part of Royal Mail) to the customer or to his order. This was a contract for the supply of goods and services. We are concerned only with that part of the arrangements which constituted a supply of services. The question is whether that was a taxable supply, and this depends on whether it was made for a consideration

. . .

[53] The other was the contract previously entered into between Plantiflor and Parcelforce by which Plantiflor had made the necessary arrangements to have its customers’ goods delivered. By this contract, which was to remain in force for a term of five years, Plantiflor undertook to despatch a minimum of 400,000 parcels in each year of the term of a specified average weight and was charged a preferential bulk rate of postage. As my noble and learned friend Lord Hobhouse of Woodborough observed in the course of argument, this was a contract for delivery and not a contract of delivery. It was not itself a taxable transaction.

[54] There was no third contract between Parcelforce and the customer under which Parcelforce agreed to deliver goods to the customer's order and the customer agreed to pay the postal charges. The customer’s agreement to pay postal charges was made with Plantiflor not with Parcelforce.”

Lord Millett explained (ibid, [55]; 1146b) that when Parcelforce made delivery of a parcel pursuant to its contract with Plantiflor, then (like the estate agents in the Redrow case) it made two different supplies. One was the supply to Plantiflor’s customer of the service of delivering his goods to his order: that is to say, to the addressee. The other was the supply to Plantiflor of the service of delivering its customer’s goods to the addressee. He went on (ibid, [56]; 1146c-d) to point out that Plantiflor also made a supply of services to its customer, but these did not include the service of making the actual delivery of the goods. It had not undertaken to do that. It had undertaken only to make arrangements for the goods to be delivered by Parcelforce.

Applying Lord Millett’s analysis in Plantiflor to the facts of the present case, it may be said that LMUK made a supply of services to the Collectors: it arranged, through the Sponsors, for the issue of points which the Collectors could use to obtain rewards; and it arranged, through the Redeemers, for rewards to be obtained for points. Put another way, by its agreement with the Collectors, LMUK granted rights which (by the arrangements made for the issue and redemption of points) the Collectors could exercise to obtain rewards. But, as it seems to me (notwithstanding the Tribunal’s contrary view), LMUK did not make a supply of the rewards themselves (whether the rewards were goods or services). It had not undertaken to do that. It had undertaken only to make arrangements for the rewards to be supplied by the Redeemers. When a Collector obtained rewards from a Redeemer, the Redeemer (like Parcelforce) made two different supplies. One was the supply of the rewards (whether goods or services) to the Collector: the other was the supply to LMUK of the services (the redemption services) of providing the rewards to the Collector, providing information to LMUK and otherwise participating in the Scheme. In relation to the supply by the Redeemer to LMUK the answer to each of the three relevant questions identified in Redrow is an affirmative: (i) LMUK make a payment to the Redeemer, (ii) that payment was consideration for services supplied by the Redeemer to LMUK – because LMUK received something of value in return for the payment – and (iii) the services supplied by the Redeemer to LMUK were used or to be used in the course of LMUK’s business of operating the Scheme.

The decisions of the House of Lords in Redrow and Plantiflor predated the decision of the Court of Justice in Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/01) [2005] STC 598. Auto Lease carried on the business of leasing motor vehicles. It offered to lessees of those vehicles a fuel management agreement under which the lessee was able to fill the leased vehicle with fuel using a credit card issued by a German card company, DKV, in the name of Auto Lease. Auto Lease accounted to DKV for the cost of the fuel purchased with the use of the card. The lessee made monthly payments to Auto Lease of an amount equal to one twelfth of the lessee’s estimated annual fuel cost. At the end of the year there was a settlement between Auto Lease and the lessee based on the actual consumption of fuel. Auto Lease paid VAT in the Netherlands on all the leasing supplies, including the fuel costs; and sought a refund from the German tax authorities of the amount of VAT charged on fuel provided by German undertakings. The basis of that claim were arrangements made, under article 17.3 of the Sixth Directive, by the Eighth Directive of 6 December 1979 (79/1072/EEC): as explained in paragraph 9 of the Advocate General’s Opinion ([2005] STC 598, 600). For purposes of the present appeal it is sufficient to have in mind that, to succeed in that claim, Auto Lease needed to establish that fuel had been supplied by it to the lessee in Germany.

The question referred to Court of Justice by the German Federal Finance Court for a preliminary ruling was whether, where a lessee fills up a leased car in the name and at the expense of the lessor at filling stations, there is a supply of fuel by the lessor to the lessee. But, as the Court explained at paragraph [33] of its judgment (ibid, 608g) – following the view of which the Advocate General had expressed at paragraph 19 of his Opinion (ibid, 601f-g) - that question raised the issue whether there was previously a supply of fuel by the filling stations to Auto Lease or whether the filling stations supplied the fuel directly to the lessee: it was necessary to determine “to whom, whether the lessor or the lessee, the oil companies transferred the right actually to dispose of the fuel as owner”. The Court held that there was no supply of fuel by the filling stations to Auto Lease: and so it followed that there could be no supply of fuel by Auto Lease to the lessee. The reasoning is found in paragraphs [34] to [36] of the Court’s judgment:

“[34] It is common ground that the lessee is empowered to dispose of the fuel as if he were the owner of that property. He obtains the fuel directly at filling stations and Auto Lease does not at any time have the right to decide in what way the fuel must be used or to what end.

[35] The argument to the effect that the fuel is supplied to Auto Lease, since the lessee purchases the fuel in the name and at the expense of that company, which advances the cost of that property, cannot be accepted. As the Commission rightly contends, the supplies were effected at Auto Lease's expense only ostensibly. The monthly payments made to Auto Lease constitute only an advance. The actual consumption, established at the end of the year, is the financial responsibility of the lessee who, consequently, wholly bears the costs of the supply of fuel.

[36] Accordingly, the fuel management agreement is not a contract for the supply of fuel, but rather a contract to finance its purchase. Auto Lease does not purchase the fuel in order subsequently to resell it to the lessee; the lessee purchases the fuel, having a free choice as to its quality and quantity, as well as the time of purchase. Auto Lease acts, in fact, as a supplier of credit vis-à-vis the lessee.

Mr Justice Lindsay was plainly correct, if I may say so, to take the view that Auto Lease was authority for the proposition that, on the facts of the present case, there was no supply of secondary goods (or, in the case where the rewards took the form of services, those services) by the Redeemers to LMUK; and so no supply of secondary goods (or those services) by LMUK to the Collector. In so far as the Tribunal based its decision on a supply of secondary goods and reward services by Redeemers to LMUK it was in error. But Auto Lease provides no authority for the proposition that there was no supply of any services by the Redeemers to LMUK: in particular, it provides no authority for the proposition that there was no supply of the redemption services. The question in Auto Lease was not “was there a supply of services by the filling stations to Auto Lease (a question to which, on the facts in that case, the answer was plainly “No”): the question in Auto Lease was “was there a supply of fuel to Auto Lease”.

The three cases to which I have referred – Redrow, Plantiflor, and Auto Lease were considered by this Court in WHA Ltd and another v Customs and Excise Commissioners [2004] EWCA Civ 559; [2004] STC 1081. WHA Ltd was in business to handle claims made (inter alia) under motor breakdown insurance policies issued to car owners. WHA entered into arrangements with approved repairers under which the work needed to repair an insured’s car would be paid for by WHA if within the terms of the policy and authorised by WHA. The repairers charged, and WHA paid, VAT on the cost of repairs. WHA sought to treat the VAT which it paid to the repairers as input tax; and to claim repayment of that tax. The issue before this Court (amongst other issues) was whether a repairer, carrying out works of repair pursuant to a motor breakdown insurance policy on the instructions of WHA, made a taxable supply of services to WHA. This Court determined that issue in favour of WHA: it held that WHA was entitled to input tax credit in respect of the VAT element of the payment which it made to the repairer.

Lord Justice Neuberger, with whose judgment the other members of the Court ( Lord Justice Waller and Lord Justice Latham) agreed, referred to passages in the speeches of Lord Hope and Lord Millett in Redrow which I have already set out. He observed ([2004] EWCA Civ 559, [45]; [2004] STC 1081, 1093a-b) that those passages presented the Commissioners with serious problems in relation to their contention that the only services supplied by the repairer were supplied to the car owner. Earlier in his judgment (ibid, [37]; 1091b-c) he had said this:

“[37] . . . Given the very wide definition of ‘services’ in s5(2)(b) [VATA], it is hard to resist the conclusion that, if something is supplied to WHA, it can be described as ‘services’: WHA receives a benefit from the carrying out of the repairs (namely satisfaction of an obligation to Viscount [the reinsurer on whose behalf it was handling the claims] and the ability to earn the £17.60 [under the claims handling agreement]) and it is work which WHA will have authorised to be done. The fact that there is another beneficiary of the work, who may even fairly be said to be the primary beneficiary, namely the owner of the vehicle, should not, at least of itself, prevent the arrangement operating as a supply of ‘services’ to WHA.”

He returned to that point at paragraph [45] (ibid, 1093b):

“[45] . . . Lord Hope’s confirmation [in Redrow] of the Tribunal’s view that there could be a supply of services to the prospective purchaser and to Redrow render it very difficult for the Commissioners’ case to get to first base. Even if the Commissioners are right in saying that there is in the present case a supply of services to the vehicle owner, that would not, it would appear, prevent there also being a supply of services to WHA.”

And he reminded himself (ibid, [48]; 1093g) that Lord Millett had accepted in Plantiflor ([2002] UKHL 33, [50]; [2002] STC 1132, 1145e) that “a single course of conduct by one party may constitute two or more supplies to different persons”.

Lord Justice Neuberger took the view that the decision of the Court of Justice in Auto Lease provided no assistance to the Commissioners. He explained his reasons for that view in the following paragraphs of his judgment:

“[61] . . . First, Auto Lease was concerned with a supply of goods, and not a supply of services. There is a clear and important distinction in the definition of the two expressions in the 1994 Act (mirroring the Sixth Directive in this respect) as is graphically illustrated by the observations I have quoted from the speech of Lord Millett in Redrow. Secondly, there is an important conceptual distinction between goods and services, particularly in the context of a statutory provision which refers to their ‘supply’.

[62] Thirdly, it is probably inappropriate to rely upon the essentially domestic point that the supply of goods will normally involve transfer of title to a particular person, whereas a supply of services need not. However, there is the more general point that it is much easier to envisage a particular service which is supplied, perhaps in a different way, to more than one person or group of persons, whereas there will normally only be one person, or one group of persons, to whom a particular supply of goods will be directed. This point is illustrated by what the ECJ said in Auto Lease at paragraph 32:

‘ ‘Supply of goods’ does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property.’

[63] Furthermore, it is clear from what the ECJ said in paragraph 35 of Auto Lease . . . that considerable weight was given to the fact that it was the lessee, rather than Auto Lease, who ultimately paid for the fuel. Although that might be invoked in the present case to suggest that one should look behind WHA, for instance to Viscount . . . as the person who ultimately pays for the repairs, it seems to me that, if one concentrates on the competing recipients of the supply in the present case as being WHA and the vehicle owner, the fact that it is WHA, rather than the owner, who pays for the works, is a strongly relevant factor for favouring WHA as the recipient of the relevant supply. Indeed, in the present case, the point can be said to be more strongly in favour of WHA being the recipient of the supply than it was in favour of the lessee being the recipient in Auto Lease: WHA has the direct liability to pay the garage, and indeed directly pays the garage, whereas the lessee in Auto Lease paid for the petrol through the two intermediaries of DKV and Auto Lease.

[64] In these circumstances, it appears to me that, at best from the Commissioners’ point of view, Auto Lease takes their case no further, although it is fair to say that there are aspects of that decision of the ECJ which can be said to support [WHA’s] argument.”

Lord Justice Neuberger’s emphasis on the distinction between a supply of goods and a supply of services must be understood in its context. As I have said, the question in Auto Lease was “was there a supply of fuel to Auto Lease”. He pointed out that the difference in the terms in which the concepts “supply of goods” and “supply of services” are defined in section 5 VATA make it easier to treat something done as a supply of services than as a supply of goods: in particular, it was easier to treat the same supply as a supply of services to more than one recipient. Nevertheless, on the facts in Auto Lease, it was impossible to identify anything which could be treated as a supply of services to Auto Lease. In my view Lord Justice Neuberger is not to be taken to suggest that, in a case where it is possible to identify, in the same transaction, a supply of goods to one person and a supply of services to another, the distinction between the two concepts is of significance.

Assistance is to be found, in the context of the present case, in the observations made by Lord Justice Neuberger at paragraph [40] of his judgment (ibid, 1091f-g):

“[40] . . . The suggestion that the vehicle owner, rather than WHA, is the person to whom the services should be treated as supplied has an initial attraction. However, such a conclusion suffers from the unattractive feature that the owner does not pay for the work, and receives no invoice in respect of it, and that, accordingly, even if the circumstances would otherwise justify someone recovering the input tax, there could be nobody entitled to recover the input tax, at least on the face of it. The owner could not recover input tax because he had not paid it, and neither could WHA, because although it had paid the VAT, it could not be treated as input tax because there would have been no supply of services to WHA. While I readily accept that there can be circumstances where such a dichotomy can arise, and while I accept that there may be regulations which avoid such dichotomies at least in certain circumstances, it appears to me that the court should certainly not lean in favour of analysis which results in such a dichotomy. Even assuming that Mr Peacock [for the Commissioners] is correct in his contention that there cannot have been a ‘supply of services’ both to the owner and to WHA, it appears to me that the proper analysis in the present case is that the services were ‘supplied’ to WHA, albeit that they were also provided to the owner.” [emphasis added]

The statement in the passage which I have emphasised – that the car owner could not recover input tax because he had not paid it – accords with the view expressed by Lord Millett in Redrow ([1999] STC 161, 171e-f) to which I have referred earlier in this judgment. Further, it is clear that Lord Justice Neuberger did not regard as self evident the argument which found favour with Mr Justice Lindsay in the present case: that, in a case where it was possible to identify different supplies to different recipients in the same transaction, only one could be the relevant supply for VAT purposes.

I should add that Lord Justice Neuberger addressed a further argument; based on the reference in article 11.A.1(a) of the Sixth Directive to the provision of third party consideration. It was said that to hold that there was a supply by the repairers to WHA for consideration obtained from WHA (as recipient of the supply), rather than a supply by the repairers to the car owners for consideration obtained from WHA (as a third party), rendered the reference to “consideration which has been or is to be obtained by the supplier from . . . a third party . . .” effectively redundant. The same, or a very similar, argument was advanced in the present case and found favour with Mr Justice Lindsay. As I have explained, he took the view that, to give effect to article 11.A.1(a), the payment by LMUK must be treated as third party consideration for the supply of the secondary goods by the Redeemer to the Collector; and so could not also be treated as consideration for the supply of redemption services by the Redeemer to LMUK. Lord Justice Neuberger disposed of the argument advanced before him at paragraph [66] of his judgment in WHA:

“[66] . . . I am not impressed with that point. First, if it resolved the issue in favour of the Commissioners in the present case, it would also have resolved Redrow in the Commissioners’ favour. Perhaps a more general way of putting the same point is that this argument proves too much, in that it would rule out any claim for input tax where the service benefiting, and paid for by, the person claiming input tax could be said to have been provided to a third party. Secondly, as is clear from its title, Article 11 is concerned with the ‘taxable amount’, and not with the identity of the person who is supplied. Thirdly, although I accept that the effect of decisions such as Redrow may be to cut down the circumstances in which Article 11A1(a) would apply to third party consideration, I do not accept that it would rule out the possibility of it ever having any application. Even if that was the effect, I find it very difficult to accept that such an indirect argument could justify arriving at a wholly different conclusion from that which is indicated by the factors I have so far been considering.”

In my view, the analysis and reasoning of the House of Lords in Redrow and Plantiflor point strongly to the conclusion (i) that there is, in the present case, a supply of services by the Redeemer to LMUK and (ii) that that supply is made for consideration, within the meaning of the Sixth Directive and section 5(2)(b) VATA. The consideration is the payment by LMUK to the Redeemer of the Service Charge. If that conclusion is correct, then it is not in dispute that LMUK is entitled to input tax credit in respect of the VAT paid on that supply. As I have said, it is not in dispute that, if there is a supply of services by the Redeemer to LMUK for VAT purposes, that supply is allowable for the purposes of sections 25(2) and 26 VATA as being attributable to taxable supplies made by LMUK in the course or furtherance of its business.

The Commissioners seek to avoid that conclusion. They rely upon the reasoning of the judge, upon the decision of the Court of Justice in Auto Lease and upon what may be generically described as the coupon cases. I have explained why I take the view that the decision in Auto Lease provides no assistance to the Commissioners’ argument.

Nor do I think it possible to support the judge’s reasoning for rejecting the contention that the payment made by LMUK to the Redeemer was consideration for a supply to LMUK; given that he seems to have accepted (at paragraphs [60] and [61] of his judgment) that there was a supply of services by the Redeemer to LMUK – albeit not a supply for VAT purposes – for which LMUK was obliged by contract to pay. To reason that the supply of services to LMUK could not be a supply for VAT purposes because it was made without consideration – on the ground that it was made without consideration because LMUK’s payment had to be treated as third party consideration for the supply of secondary goods to the Collector – is, as it seems to me, to beg the question. 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 (save in a case – not material in this context - where the secondary goods are obtained in part as a reward under the Scheme and in part for cash payment). 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 turn, therefore, to the decision of the Court of Justice in EC Commission v Federal Republic of Germany (Case C-427/98) [2003] STC 301 on which the Commissioners place much reliance.. That case concerned manufacturers’ money-off coupon schemes under which, in order to promote sales of their products, manufacturers issued coupons in exchange for which retailers granted to final consumers price reductions on goods (including goods which were not the manufacturers’ own products) and were reimbursed the face value of the coupons. The issue in the case was whether - in the light of the decision of the Court of Justice in Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996 STC] 1387 - in refusing to allow a manufacturer to deduct from its taxable amount the amount paid to retailers by way of reimbursement in respect of coupons accepted in exchange for goods which had not been the subject of a direct sale by the manufacturer to the retailer, the German tax authorities had failed to give effect to article 11.A.1 of the Sixth Directive. That issue was determined in favour of the Commission. In the present context it is, I think, sufficient to note that the Court distinguished manufacturers’ money-off coupon schemes – of which Elida Gibbs was an example – from retailer’s own money-off coupon schemes – exemplified in Boots Co plc v Customs and Excise Commissioners (case C-126/88) [1990] STC 387 and Argos Distributors Ltd v Customs and Excise Commissioners (Case C-288/94) [1996] STC 1359 – (ibid, 327e-f at [54]) and affirmed the principle established in the Elida Gibbs judgment: that the manufacturer’s taxable amount is equal to the selling price charged by the manufacturer, less the amount indicated on the voucher and refunded (ibid, 324b-c at [28]).

In support of their contentions in the present case the Commissioners rely on the observations of the Court of Justice in paragraphs [57] to [60] of its judgment:

“[57] It is clear from the judgments in Boots Company and Argos Distributors, first, that assessment of the money-off coupons for the purpose of calculating VAT is determined by their legal and financial characteristics and, secondly, that the taxable amount of the trader who accepts them may not be less than the sum of money which he actually receives for the supply by him (see Boots Company, paragraphs 21 and 22, and Argos Distributors, paragraphs 19 to 23).

[58] It follows that, in situations such as that in the present case, the subjective consideration within the meaning of Article 11A(1)(a) of the Sixth Directive received by the retailer comprises the whole of the price of the goods, which is paid in part by the final consumer and in part by the manufacturer. In fact, the coupons substantiate the retailer’s right to receive from the manufacturer a reimbursement in the amount of the reduction granted to the final consumer. It follows that the sum represented by the face value of those vouchers constitutes for the retailer an asset item realised on their reimbursement and that they must be treated, to the extent of that value, as a means of payment.

[59] Consequently, it must be accepted that the retailer’s taxable amount for the sale to the final consumer is the full retail price, namely the price paid by the final consumer plus the amount reimbursed to the retailer by the manufacturer.

[60] Accordingly, the argument that the net value of the money-off coupon cannot be included in the retailer’s taxable amount must be rejected.”

The importance of those observations, in the context in which they were made, was that to allow the manufacturer to deduct the amount of its reimbursement to the retailer while requiring the retailer to treat the amount of that reimbursement as part of the consideration which it received in respect of the supply to the ultimate consumer (and for which it accounted as output tax) was consistent with the underlying principle of value added tax: that the actual burden of the tax should be borne only at the final consumption stage and tax levied at earlier stages in the chain should be passed along to that final stage (as explained by the Advocate General in his Opinion; in particular at paragraphs 46 to 67).

I am not persuaded that those observations provide assistance to the Commissioners’ arguments in the present case. The amount for which the Redeemer must account as output tax in respect of the transaction under which the Collector obtains secondary goods (taken as a whole) is not in dispute. The Redeemer must account for VAT on the whole of the consideration which he receives; that will include the payment made by LMUK (whether treated as consideration for the supply of redemption services supplied to LMUK or as third party consideration for the supply of the secondary goods to the Collector) and the additional amount (if any) which the Redeemer receives as a cash payment from the Collector. The VAT for which the Redeemer must account is the same whether the transaction is treated as two supplies or as a single supply.

But, in a case (the usual case) where the Collector is an ultimate consumer – and so not himself able to claim input tax credit in respect of a supply of the secondary goods to him – the overall amount of VAT recovered by the tax authorities does depend on whether the transaction is treated as two supplies or as a single supply. It is important to keep in mind – as the Tribunal found - that the Collector’s right to obtain the secondary goods as a reward under the Scheme is a right which he acquires when he purchases primary goods from a Sponsor. He bears the VAT charged on the payment which he makes to the Sponsor. The Sponsor accounts to the tax authorities for that VAT as its output tax. The Sponsor makes a payment (the points price) to LMUK based on the number of points which it has issued to Collectors. That payment is treated as payment for the supply of services by LMUK to the Sponsor. The Sponsor is entitled to input tax credit in respect of the VAT on that supply: which (prima facie) it deducts from its output tax. LMUK accounts to the tax authorities for the VAT on that supply as its output tax. In effect, therefore, the VAT received by the tax authorities at the time of (or in connection with) the supply of the primary goods includes VAT on the grant by LMUK of the right to obtain the secondary goods as a reward under the Scheme: itself a supply of services.

If, when the Collector exercises the right which he has acquired at the time of his purchase of the primary goods and does obtain secondary goods from the Redeemer, that latter transaction is treated as a single supply to him – so that LMUK is not entitled to input tax credit in respect of the VAT charged on that supply - the tax authorities receive not only VAT on the supply of the right to obtain the secondary goods but also VAT on the amount which LMUK must pay to satisfy that right. The tax authorities recover VAT on an amount which is greater than any amount which the ultimate consumer has paid for the secondary goods. If, on the other hand, when the Collector exercises the right to obtain the secondary goods from the Redeemer, the transaction is treated as two supplies – one of which is a supply of redemption services to LMUK - the tax authorities still receive VAT on the supply of the right to obtain the secondary goods; but (after taking account of LMUK’s entitlement to input tax credit on the supply of redemption services) do not receive VAT on the amount which LMUK pays to satisfy that right. The tax authorities recover VAT only on the amount which (taking the issue and redemption of points as a whole) the ultimate consumer has paid for the secondary goods. The latter treatment of the transaction, as it seems to me, leads to a result which is consistent with the reasoning which underlies the decision of the Court of Justice in Commission v Germany: the former treatment, for which the Commissioners contend, is inconsistent with that reasoning.

In the preceding paragraphs I have examined the position where the Collector is an ultimate consumer. The position is, in substance, the same – as it seems to me – in the less usual case where the Collector is himself a taxable person (within the meaning of VATA) and so potentially entitled to input tax credit on supplies made to him in the course or furtherance of his business. In such a case (as in the case where the Collector is an ultimate consumer) the first question is whether the transaction under which he obtains secondary goods from the Redeemer is to be treated as a single supply to him or as two supplies: a supply to him of the secondary goods and a supply of redemption services to LMUK. It is, I think, not open to serious dispute that the answer to that question cannot turn on the VAT status – taxable person potentially entitled to input tax credit or ultimate consumer – of the Collector: the answer must be the same in each case. The second question is whether the Collector has, in fact, acquired the goods for the purposes of supplies made or to be made in the course or furtherance his own business. If not, the possibility that each of the two supplies might give rise to an input tax credit does not arise. The third question is whether, the Collector could be entitled to input tax credit in respect of the VAT on the supply to him in circumstances in which he has not paid that VAT. Lord Millett, in Redrow, and Lord Justice Neuberger, in WHA, took the view that the recipient of a supply who has not paid the VAT on that supply is not entitled to an input tax credit. On that basis, the answer to that third question is “No”. The overall position is the same as it would be if the Collector were an ultimate consumer.

It could be said, perhaps, that the views of Lord Millett and Lord Justice Neuberger on that point were not necessary to their respective decisions; and so must be treated as obiter. If the point were open in this Court (which I doubt) then, for my part, I would respectfully agree with Lord Justice Neuberger that, if it were necessary to make a choice as to which of the two supplies (if not both) gives rise to an entitlement to input tax credit, there is no reason to withhold input tax credit from the person who has made the payment which constitutes consideration in order to allow input tax credit to the person who has not made the payment. On that basis it would be LMUK – and not the Collector who was entitled to the credit. Again, the position would be as if the Collector were the ultimate consumer. But if the true view were that, viewing each supply from the position of the recipient, each would be entitled to input tax credit, the underlying principle of value added tax - that the actual burden of the tax should be borne only at the final consumption stage – is preserved. At some later stage in the chain of which (on this hypothesis) the supply of the secondary goods to the Collector is a link, the tax will be borne by a final consumer.

For those reasons I find nothing in the arguments advanced on behalf of the Commissioners which should lead me to reject the conclusion to which, as I have said, the analysis and reasoning of the House of Lords in Redrow and Plantiflor point strongly: that, on the facts in the present case, there is a supply of redemption services to LMUK in respect of which LMUK is entitled to input tax credit.

For completeness I should add that, in the circumstances that I would reject the premise on which the Commissioners’ secondary argument was advanced – that there has been a supply of the secondary goods by the Redeemer to LMUK – I find it unnecessary to address that argument. I am not persuaded that there is any purpose to be served by expressing a view based on a hypothesis which, as it seems to me, is unreal.

The primary position taken by each party is that the provisions of the Sixth Directive, interpreted in the light of existing decisions of the Court of Justice, point so clearly in favour of the result for which they respectively contend that a reference to the Court for a preliminary ruling is unnecessary. But - adopting a stance with which this Court has become familiar in VAT cases – the Commissioners submit that, if the Court has doubts as to the correctness of the approach taken in the High Court, then the appropriate course would be to make a reference. Given that I would hold that Mr Justice Lindsay was wrong in the conclusion which he reached, it is necessary to address that submission.

For my part, I am satisfied that this is not an appropriate case for this Court to seek a preliminary ruling from the Court of Justice. I share the view of the Tribunal that the real issue in this appeal is not as to the interpretation of Community legislation, or as to the effect to be given to judgments of the Court of Justice. The principles which should guide this Court, as it seems to me, are clearly established by the decisions of the House of Lords in Redrow and Plantiflor. It was not suggested on behalf of the Commissioners, either in WHA or in the present case, that those decisions are inconsistent with the subsequent decision of the Court of Justice in Auto Lease. In any event, for the reasons which I have explained, I am not persuaded that a submission to that effect could be sustained. The real issue in this case – as the Tribunal recognised – is how principles which are not themselves in doubt should be applied to the particular facts. I agree with the Tribunal’s view that that is an issue which the Court of Justice would expect the national court to resolve.

I would decline to seek a preliminary ruling from the Court of Justice; on the grounds that a ruling is not necessary in this case. I would allow this appeal and set aside the order of 22 June 2006. The effect will be to restore the Tribunal’s decision that the appeal from the Commissioners’ ruling of 9 December 2003 be allowed; but on a basis which differs from that expressed in paragraph 108 of that decision.

I agree.

I also agree.