Debenhams Retail Plc v Customs & Excise

Every day literally millions of retail transactions are settled by payment not in cash or by cheque but by credit or debit cards. Needless to say, the companies making the cards available to the public and providing the accounting and financial services lying behind them make a charge for their services. It cannot be supposed that retailers could so organise themselves that such charges could be avoided. So if, in a single contract whereby the retailer sells and a consumer buys goods with a ticket price of, say, £100, the retailer relies on payment by card he will never receive £100 but rather £100 less a small charge. The charge will vary as a percentage, perhaps from 1%-1.5% at the low end to perhaps as much as 5% at the high end, but it will be inescapable if a card is used. It is part of the commercial reality when the retailer accepts payment by card. However, although, on such a card sale, the retailer receives only (for the sake of example) £97.50 of the ticket price, he would, for VAT purposes, pay VAT, for reasons which I shall explain, calculated on the basis that he had received £100. The difference is tiny – at the present 17.5% rate of VAT it represents a difference in VAT payable of only 37p per £100 of ticket price – but, when multiplied by the appropriate huge volume of sales, the total difference becomes truly significant. Thus in this case £644,382 is at stake as to one retailer only and over only a specified period. If one were to reflect on how many retailers there are who accept cards, the number and amounts of their card sales and to look also to the periods over which they have accepted them, the difference becomes truly massive.

Not surprisingly, therefore, advisers have turned their minds to seeking to procure that retailers are treated as if receiving no more than that which they truly receive. To that end Chartered Accountant advisers to the Appellant, Debenhams Retail plc (“DR”), which appears by Mr David Milne Q.C., Mr Fred Philpott and Mr Andrew Hitchmough, came up with a system. It required a degree of careful planning and implementation and the drafting, approval and execution of several written contracts. It was called the “PITA plan”. It seeks to procure (to use illustrative figures) there not being, as hitherto, one contract on a card sale for the £100 ticket price, but 2 contracts, one with the retailer, DR, for £97.50 for the goods and another, with an associated but different corporation, Debenhams Card Handling Services Ltd (“DCHS”), a wholly-owned subsidiary of DR but not a member of the same VAT group as DR, for £2.50 for card handling services said to be exempt from VAT. The customer pays only £100.

However, despite all the care that went into the PITA system, the Respondents, the Commissioners for Customs & Excise, (“the Commissioners”), who appear by Mr Christopher Vajda Q.C., Miss Philippa Whipple and Mr Mario Angiolini, took the view that it did not work; VAT was still payable as if £100 had been received by DR. Hence the assessment for £644,382 and interest.

DR, a subsidiary of Debenhams plc, appealed against that assessment to the London Tribunal Centre but the Tribunal, under the Chairmanship of Mr Stephen Oliver Q.C., dismissed the appeal. DR appeals that decision. The question for me, in broadest outline, is whether the Tribunal erred in law in its decision that the PITA plan does not work; given that not only DR but some 30-50 of the biggest retailers in the United Kingdom have adopted similar plans for their card sales, the issue becomes one of considerable fiscal importance. I shall first set out the legislative provisions relating to the charging of VAT.

The earlier Community legislation and its effect is set out in paragraph 28 of the judgment of Jonathan Parker L.J. in Tesco plc –v- Commissioners of Customs & Excise [2003] STC 156 1 C.A.. VAT is a tax on the supply to the ultimate consumer; it is based upon the consideration obtained for the supply by the supplier who supplies the ultimate consumer. Thus EC Council Directive 77/388 of 17^th May 1977 (“the Sixth Directive”) provides, so far as relevant, as follows:-

It is to be noted that, whilst the United Kingdom could have treated DR and DCHS as a single taxable person, that has not been done; it is common ground that they are two separate persons independently carrying out their respective economic activities and DCHS is not in DR’s VAT group.

There has been no decision by the United Kingdom as a Member State such as to require the expense of the DCHS card-handling charges to be considered as an incidental expense, incidental to the supply of goods to which that card-handling fee should relate. To continue with citation from Article 11:-

The Sixth Directive also makes provision for exemptions from VAT. At Article 13 A one finds:-

The provisions of the Sixth Directive are carried into our domestic law by provisions in the Value Added Tax 1994. Thus section 1 provides:-

Section 5 (2) provides:-

Section 26 is headed “Input tax allowable under section 25” and so far as material provides:-

The provisions of the Sixth Directive as to exempt supplies are brought into our domestic law by section 31 of the 1994 Act which, under the heading “Exempt supplies and acquisitions”, provides:-

Although, as I shall come on to, there has been a great deal of argument as to whether DCHS makes any supply to customers and as to the appropriate descriptive label for the supply if it did, there has been, as I have understood the argument, no case made that even if it did make a supply it was not an exempt one (no doubt because DCHS is not a party to this appeal). In the circumstances, although I might have been troubled by that, I have looked no further but have assumed that, if DCHS made supplies, they were exempt.

The reason why DR would have had to accept, before it introduced the PITA plan, that it was duly assessed to VAT as if no deduction were appropriate for the card-processing element it suffered and the reason why, as the Commissioners argue, that still is appropriate, both stem from the decision of the European Court of Justice in Chaussures Bally –v- Belgian State (Case C-18/92) [1997] STC 209. Bally sold shoes and accepted payment by card. The organisation issuing the card paid Bally the ticket price less a commission of about 5%. Bally was assessed to VAT as if it had received 100% of the ticket price. It disputed that assessment. Belgium argued that the transactions implicit in the card purchase were to be analysed as comprising two taxable transactions, one the sale by Bally to the customer of shoes and the other the service provided by the card organisation. The Advocate-General (C. Gulmann) at his paragraph 10 had no problem, he said, in regarding the card-issuer’s deduction from the ticket price as Bally’s payment for the services rendered to it by the card-issuer. The Court accepted – its paragraph 9 – the two-transaction analysis and the Advocate-General’s view; the card-issuer’s service was to Bally and:-

Bally argued that it was the customer not it which benefited from the card service; not so, said the Court, in its paragraphs 16 and 17:-

DR has a number of department stores. The PITA plan put into operation on and from 1^st December 2000 and still in place, requires that, at the foot of its notices as to opening times on or close by its doors and under a reproduction thereon of the logos of several leading card-issuers, including Debenhams’ own storecards, there should appear, in relatively small but undoubtedly legible print, notices saying:-

As the customer intending to use an unexcepted card comes to the till and details of the goods are entered he is handed a till slip which gives details of the goods and the total price and immediately under the space for his signature appear the words, in readily legible print:-

After the sale has gone through the customer is given a till receipt giving details of the transaction and at its foot it says “Please retain as proof of purchase. Dispose of securely when not required. Notified terms and conditions apply.”. The customer is not given a copy of the till slip that bears the words that he agrees that 2.5% should be payable to DCHS.

The object of all these stages in combination, as striven for by DR, is to bring about a position in which, whilst a customer paying by cheque, by cash or by one of the excepted cards would pay (to use the convenient example) £100 upon a £100 ticket price, those using the cards subject to the plan would make two contracts rather than one, one with DR at £97.50 for the goods and another with DCHS at £2.50 for card handling and processing. Only if the customer agreed, and by his signature indicated that he agreed, to that system, so it was intended, would the use of one of the cards within the plan be permitted.

If the PITA plan attains that object so that a sale by way of an unexcepted card leads to two contracts, one with DR and one with DCHS, the consequences, says DR, in comparison with the period before October 2000 and assuming a card-handling or processing deduction of 2.5% and a VAT rate of 17.5%, are as follows:-

I shall return to four of these in more detail later but the Commissioners raise five arguments to the effect that, for all that the PITA plan seeks to do, VAT remains payable on 100% of the ticket price, exactly, say the Commissioners, as the Community and domestic legislation, as illustrated by Chaussures Bally supra, requires that it should. In outline, the five arguments are as follows:-

Before the Tribunal none of these was decided against the Commissioners although, as to some, decision was put to one side as unnecessary.

Those outline arguments include within them some raised by way of the Respondents’ Grounds of Appeal, to which DR raised no objection. As for one of the five arguments, (iii), the ancillary supply argument, I am absolved from coming to any decision. It is an argument so hedged about by issues already referred to the ECJ and awaiting hearings and decisions that it is recognised by both sides that it can usefully only be held over generally with liberty to restore or (in view of the conclusion I come to) with the Commissioners reserving the right to raise it on appeal. In particular, I will not be concerned with whether card-handling is no more than an ancillary supply - a supply merely of a means of more conveniently acquiring or enjoying the main supply – compare paragraph 30 of the ECJ’s judgment in Card Protection Plan –v- C & E C [1999] STC 270. I shall take the remaining four arguments in turn.

The Tribunal (paragraph 139) held there to be one contract only, namely for the sale of goods between the customer and DR, and that it was at 100% of the ticket price. There was thus no contract between the customer and DCHS. The Tribunal’s reasoning, in outline, was as follows. (a) The words on or by DR’s doors, on the “toblerones” and on the mats, which the Tribunal together called the “Notification Words”, could not operate as terms of whatever contract or contracts were made (paragraph 127). (b) If that were wrong and if, therefore, the Notification Words could, this next point apart, form part of contracts, then, so significant were the detriments they would introduce, they should have been more prominently brought to customers’ attention and, that not having been done, they did not form part of any relevant contract – paragraphs 128-130. There was a Consumer Protection argument to the same end. (c) As for the words and signature on the till slips, the contract for the sale of goods came into being at and not earlier than the stage at which the till operator, having checked that the signature on the till slip corresponded with that on the card and having made appropriate security checks, pressed the “accept” button on the till. The signed slip was then placed in the till. Thus the till slip was signed by the purchaser before the contract came into being and could accordingly play a part in that contract. (d) However, the words on the till slip had no contractual significance and formed no part of any contract (paragraph 131). (e) Thus the only contract was between the customer and DR, at the full ticket price (paragraph 139). (f) The Chaussures Bally case was thus inescapable and VAT was payable by DR on 100% of the ticket price. If, contrary to that initial view of the contracts made, the Notification Words could form part of them, even so, (g) neither they nor (h) they together with the words and signature on the till slip, did in fact form part of any contract with the customer (paragraph 131). The arrangements made were a pretence; the true character of the dealings was a sale of goods at the ticket price (paragraph 140) and hence, again, (i), Chaussures Bally was inescapable and the consequence, again, was that VAT was payable on 100% of the ticket price.

At least as early as the introduction of railways in the second quarter of the 19^th Century, it became common for suppliers – there the railway companies – to contract with countless members of the public on standard terms as to which, for good and practical reasons, it could not be required that the customer should have understood, agreed, read or signed some acknowledgment of them. The Courts recognised the impracticality of insistence upon such an informed consensus ad idem as to the existence and the language of the terms that one would properly require of an individual contract. Ticket cases were then decided in which it was not so much examined whether the particular complainant had read, understood, agreed to or signed any particular terms but whether, on a more objective approach, the existence of the standard terms had been sufficiently brought to the notice of a hypothetical reasonable customer. Individual circumstances such as whether the claimant-customer was illiterate or too hurried to have paused to see that standard terms existed or what they were, were in general irrelevant. As time passed standard terms which few read and, doubtless, fewer understood became commonplace. Contracts, by now, are regularly made without the customer from the general public being truly aware of, or even being greatly concerned as to, all the terms of the contract or even the exact identity of his contracting party. At the filling station, with whom, precisely, does one contract as one fills the tank? Who (to use an example which Mr Philpott used) arriving late, after a delayed flight, at a hire-car depot in some distant airport, pauses to read the very small print before signing and initialling “lu et approuvé” or its local equivalent? Which of DR’s customers paused to notice that they were contracting with DR and not with Debenhams plc? Those who do sign without pausing to read and understand do, of course, take a risk but that is not to say, in the light of the practical view taken by Courts of arrangements relying upon published standard terms, that they do not contract.

With that in mind I turn to DR’s resistance to the Tribunal’s analysis, which DR seeks to resist at several points. The reason why, in the Tribunal’s view, the Notification Words could not operate as terms of contract was firstly because they had no clear contractual intent and, secondly, if they were clear enough to be terms of contract, they were not, on the facts, adequately drawn to customers’ notice having regard, in particular, to the nature of the detriments which they introduce to the customer.

As to the former, the Tribunal at its paragraph 127 said:-

As to that, I fail to share the Tribunal’s criticism of the first sentence of the Notification Words. It is clear enough that DCHS is a limited company, that its business is or includes processing card payments for DR’s card customers, that it does so for reward and that it is a company likely to be associated with Debenhams. Nor do I see the relevance of its not explaining what procedure has changed; in context, it could, surely, be reasonably enough understood that the change was to do with card-handling and that one intent lying behind the Notification Words was to warn previous customers that whatever had been done in the past was changing. In any event, it is no essential part of a contract made on day 2 to explain what had been the earlier practice in force on day 1.

Nor do I share the Tribunal’s criticism of the second sentence of the Notification Words; the words “customers may pay by …. card if they pay 2.5% of the price so paid to DCHS” are, in my judgment, competent to introduce the notion that that is a condition of the use of the unexcepted cards if they are to be used to make purchases and hence, if that condition is not met and if, therefore, the customer is unwilling to pay 2.5% to DCHS, that that customer will not be able to use such a card. The words are, in my view, far from stating only the obvious. As for the reference to “illusion” and the reference to the decision of the Court of Appeal in Thompson –v- LMS Railway Co [1930] 1 KB 41, in that case an illiterate plaintiff had suffered an accident whilst on an excursion on the defendant’s railway. The accident was due to the defendant’s negligence. The plaintiff’s ticket said “For conditions see back”. The back referred to conditions in timetables and excursion bills. On excursion bills the reference was made to the conditions on timetables. The timetables had to be paid for if a copy was required and only if a copy was acquired would one then find that the railway exempted itself from liability for injury however caused. The jury held that reasonable steps had not been taken to bring that condition to the notice of the plaintiff. Hence they awarded her damages. However, in the Court of Appeal it was held that the jury had not been entitled to conclude as it had; it was held that the indication of the special conditions by reference to the timetables was sufficient notice of their existence and contents. The plaintiff recovered no damages. The Court of Appeal indicated that the correct question to ask was whether the railway company had taken reasonable steps to bring the conditions to the notice of the plaintiff. If, on the facts in Thompson, it was proper to hold, even against the jury’s verdict, that reasonable steps had been taken, it is difficult to see how the combined effect of the notices on the doors, the mats and the “Toblerones” could represent steps short of being reasonable. It is difficult, also, to understand the Tribunal’s reference to “illusion” as the only reference to illusion in the three judgments in the Court of Appeal was at page 52 where Lawrence LJ indicated that the notice on the ticket was not “tricky or illusory”. I see no reason why the combination of the notices on the doors, the “Toblerones” and the mats should not together represent reasonable steps to bring to prospective purchasers’ notice the fact that if they wished to pay by one of the unexcepted cards then they would be required to pay 2.5% of the card price to DCHS, that only the balance would go to DR and that the 2.5% was the fee charged by DCHS for processing card payments. The three forms of bringing that to a prospective purchaser’s notice would equally bring to his notice the comforting news that the total price was unaffected by the type of payment used.

It can be the case, as Thompson illustrates (and this is a point I shall have to return to), that where the condition supposed to have been introduced is unreasonable to the knowledge of the party seeking to impose it, then the other party would be unlikely to be bound by it unless particular care had been taken to draw it to the second party’s attention. But I cannot see that there is anything inherently unreasonable about the proposal made by the Notification Words that if a card is to be used then 2.5% of the ticket price will go to DCHS for processing the card. That some charge should be made for card processing is likely to be within any card-purchaser’s knowledge and there is nothing exceptional about a rate of 2.5%. In reflecting on objective reasonableness or not, as also if one were permitted to take a subjective view, any prospective purchaser would, as I have mentioned, have been put at ease, no doubt, and hence would not have felt he had encountered unreasonableness, by the assertion that the total price he was to pay was unaffected by whatever method of payment he used. Thus, whilst I would leave the Tribunal’s paragraph 127 without quarrelling with its conclusion that the Notification Words do not operate as terms of the necessary contracts (not, in my view, an issue that needed an answer) I would conclude, subject to the next argument, (b), as to detriment, that they were sufficient indications both of the terms upon which DR would be willing to enter into contracts for the supply of goods in return for card payment and of the broad nature of the service – processing of card payments – which DCHS provided for the 2.5% fee.

As for the next argument, (b), as to detriments, the Tribunal at its paragraph 129 listed 5 detriments consequent upon the supposed 2 contract – 97.5% and 2.5% - system. One of the five – at paragraph 129 (i) - applies only to registered traders, very far from typical DR customers. Another – (iv) – does not exist at present but could do so in the future if, for example, DR became insolvent. Another again – (v) – makes suppositions as to customers insuring goods and as to the terms on which customers insure the goods which they shall have purchased. The detriments described are such that the likelihood of any one customer suffering all five would be in the highest degree improbable, if not impossible. The Tribunal held, firstly, that all fell within the reasoning seen in Interfoto Picture Library Ltd –v- Stiletto Visual Programmes Ltd [1989] 1 QB 433 CA and, secondly, that on that account the Notification Words did not form part of any contract with the customer (at paragraph 130). This requires a closer look at Interfoto supra.

Interfoto lent out photographic transparencies on printed standard conditions set out on their delivery notes. Borrowers were required to return transparencies within 14 days or otherwise a holding charge of £5 plus VAT per day thereafter per transparency would be levied. Stiletto had not used Interfoto before, had not read the conditions and returned the 47 transparencies it had borrowed after 4 weeks. Interfoto invoiced Stiletto for £3,783.50. On the evidence in the County Court the usual trade practice was to charge less than £3.50 a week so that Interfoto’s holding charge of £5 per transparency per day was some 10 times higher than what one might call the going rate. Stiletto refused to pay the invoiced sum. Interfoto succeeded in the County Court. Stiletto’s appeal was heard by a two-man Court of Appeal, Dillon and Bingham LJJ.

Dillon LJ held that the invoiced holding fee was exorbitant; there would have been a strong case for saying that the condition which imposed it was void and unenforceable as a penalty but that point had not been taken either below or in the Notice of Appeal. He therefore turned to whether the condition was a term of the contract; had it been sufficiently brought to Stiletto’s attention? He referred to J. Spurling Ltd –v- Bradshaw [1956] 1 WLR 461at 466 per Denning LJ and to Thornton –v- Shoe Lane Parking Ltd [1971] 2 QB 163 and their references as to particularly onerous conditions framed as part of a set of conditions. He referred also to Mellish LJ’s dictum in Parker –v- South Eastern Railway Co. (1877) 2 CPD 416 at 422-423 that what was reasonably sufficient depended on the nature of the condition in question. Dillon LJ concluded that Interfoto’s condition was very onerous and that therefore the party seeking to enforce it had to show that the particular condition was fairly brought to attention of the other party. That had not been done and in his judgment the relevant condition thus never became part of the contract between the parties. He, for his part, allowed the appeal and reduced the amount of the debt to the sum found on a quantum meruit basis, namely £3.50 per transparency per week beyond an initial period of 14 days from the receipt of the transparencies.

After reviewing Parker supra and a number of other cases Bingham LJ at p.443 held that the more outlandish the clause sought to be enforced was, the greater the notice of it which the other party, if he was to be bound by it, had in fairness to be given. At p.445 he concluded that to the extent that the conditions in Interfoto’s delivery note were common form or usual terms regularly encountered Stiletto could not have resisted them. He continued:-

It is notable that whereas Dillon LJ would not have enforced the relevant condition as he concluded it was not part of the contract, Bingham LJ held that the relevant condition was to be relieved against, a rather different approach – see p. 439h and p. 445 g-h.

The Notification Words or words like them could not, even when these proceedings were launched, be described as unusual or as not regularly encountered; as I mentioned earlier, some 30-50 of the biggest retailers in the United Kingdom have adopted similar plans for their card sales. Further, the detriments found by the Tribunal, depending, as they did, at most upon the difference between £97.50 and £100, were on a scale utterly different to that being dealt with in Interfoto. There were, moreover, countervailing benefits from the use of the cards: the convenience of not being required either to have carried cash or to be able to offer a cheque, and the period of credit before the card-bill had to be paid. It was, in my judgment, an error of law on the Tribunal’s part to apply Interfoto reasoning, specifically directed to particularly onerous or unusual conditions, to the case before it. The Tribunal held:-

With respect to the Tribunal, I cannot see that to be a conclusion that follows from Interfoto, even were the Interfoto reasoning to apply, which, in my judgment, it does not.

As for Consumer Protection, the Tribunal, whilst accepting that DR had fully complied with the Price Marking Order 1999 (SI 1999/3042) and thus with Directive 98/6 in marking a ticket price of £100, went on to hold that DR would, were the Notification Words to be given the effect which DR claimed for them, then be in breach as there would then, instead of one clear price, be two prices, they being shown in “an ambiguous, hardly identifiable and barely legible manner”. The Tribunal went on :-

I shall need to revert to “pretence” and “sham” later but, even at the stage of consideration of the domestic contractual position, the Tribunal, referring to the Rent Act avoidance case Antoniades –v- Villiers and Anor [1990] 1 AC 417, held that the contractual arrangements involved a pretence that disguised the true character “which is that the customer buys the goods at their ticket price”. In Antoniades supra the apparent contractual arrangements were such that no-one could have supposed that they were ever intended to be acted upon – per Lord Bridge at p. 454. That the crucial clause was a pretence appeared from its terms and from negotiations – per Lord Templeman at p. 463. There was an air of total unreality about the documents in the light of the circumstances – per Lord Oliver at p. 467. The parties never intended that the crucial clause should operate – per Lord Jauncey at p. 470. The case was decided against a long history of attempts to deny occupants the protection of the Rent Acts in a social and housing climate such that occupants could be expected to sign anything in order to obtain shelter – per Lord Templeman at p. 458.

By contrast there is no suggestion that such are the pressures upon consumers that they will agree to sign almost anything in order to be able to use the unexcepted cards; there are always one or more alternatives such as cash, the excepted cards or cheques. There is no evidence that prospective buyers never intend or expect that the two-contract system to which, apparently, they put their signatures should operate according to its letter. They may be indifferent to such operation but there is nothing to suggest that they never intend it. On the retailer’s side, it is the retailer’s wish and hope that the provisions which they have carefully devised should take effect according to their tenor. Even if the central features of Antoniades were mirrored in the facts before the Tribunal, I would be a little uneasy at attempting to derive from Antoniades broad propositions for application quite outside the very particular social and legislative conditions with which it was dealing but in any event I cannot see those essential features to be present in the case at hand.

The Commissioners seek to say that the PITA plan involves unfairness falling within the Unfair Terms in Consumer Contracts Regulations 1999. They rely upon the detriments identified by the Tribunal to which I have already referred. As the 1999 Regulations do not protect those in trade only those detriments that do not involve traders could be appropriate. The Commissioners also assert, arguing this to be an aspect of unfairness, that customers are unwittingly drawn into a tax avoidance scheme. The 1999 Regulations at paragraph 5 provide:-

Before the Tribunal the Commissioners argued that any contract between the customer and DCHS was to disregarded on “non est factum” principles. That argument failed before the Tribunal and although the Commissioners sought to raise it by cross-appeal it was abandoned at the hearing before me.

As for the very point at which a contract was made in the sequence of events of a typical purchase, the Tribunal concluded, as I have indicated, that it was not until the till operator pressed the “accept” button. By that point the customer would have signed the till slip. The Commissioners, by way of cross-appeal, argue that the very point of contract was earlier, after the customer, having selected goods, takes them to the till, after the operator scans the bar codes and at the point when a total price is rung up on the till and is shown to the customer. What then remains – payment – is, say the Commissioners, not any part of formation of a contract but merely performance of it. Such a view undoubtedly leads to oddities; if, after the total is rung up the customer then says, for example, that he does not, on reflection, want the socks or that the colour of the shirt is unappealing after all or that he had not realised he was spending so much and wished to hand some goods back, the retailer could nonetheless hold him to a concluded bargain and insist on the sales going through or, alternatively and ultimately, obtain damages in lieu. The Tribunal at paragraphs 122-124 rejected the Commissioners’ argument. The Tribunal held, speaking of the authorities cited to it:-

As for the effect of the till slip words and the signature made on the till slip by the customer, the Tribunal said (paragraph 131):-

I find parts of this passage impossible to accept. It is, surely, no necessary part of a contract to explain, beyond mere identification, “who” the other contracting party “is”; it is sufficient that the parties are identified and in my view the combination of the door notices, the “toblerones”, the mats and the till slip itself make it clear that if the customer wishes to pay by way of an unexcepted card he has to contract with a clearly identified other person, DCHS. DCHS is identified with at least as much clarity as, upon a cash sale, would be DR rather than Debenhams plc. Next the complaint is that nothing explains what card processing functions DCHS performs. But is that necessary as part of a determination of whether a contract is formed? If I commission a birthday cake at a confectioners a contract may form even though I might well not be told whether the baking is done by the very company that runs the shop or whether the icing is contracted out. If my car runs badly I may contract with my local garage in general terms as to their repairing it, without explanation to me that it is a rebore which is necessary and without my knowing that the garage will send out the cylinder block to a specialist. The Notification Words say that DCHS processes all card payments for a 2.5% fee and the till slips say the fee is for card handling services. I fail to see why that is not a sufficient description for the limited purposes of causing or permitting a contract to form. Next the complaint is that no-one explains that the till operator is accepting on DCHS’ behalf. But it is no necessary part of a valid agency that the existence of the agency is declared.

For all these reasons I hold the Tribunal to have erred in law in its analysis of the contractual position. In my judgment the combination of the door notices, the “toblerones” and the mats sufficiently indicate to customers that if an unexcepted card is intended to be used for payment by the customer then card processing will be required to be done by DCHS, that it will be done for a fee of 2.5% of the ticket price payable by the customer, that the 97.5% balance of the ticket price will go to DR and that the total payable by the customer will be unaffected and will be the ticket price. There is no contract at that point but there is a sufficient indication that those are the terms and the only terms upon which DR will, in the appropriate card-payment cases, enter into contracts for the supply of goods. Then, at the point when the till operator presses the “accept” button (the customer by then having signed the till slip) two contracts are, as I see it, formed and (when the goods are delivered) are completed, namely one at 97.5% of the ticket price between the customer and DR for the supply of the goods and the other at 2.5% of the ticket price, between the customer and DCHS, for card handling services. There is, in dealings of this kind, no sale until acceptance of the price – Pharmaceutical Society of Great Britain –v- Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795per Lord Goddard CJ affirmed at [1953] 1 QB 401 CA.

I arrive at my conclusion by either of two routes. By the first, the customer, as he walks to the till, having taken account of any one or more of the door notices, “toblerones” or mats, or being taken to have done so by reason of their having been sufficiently drawn to his attention, recognises (or is taken to recognise) that if he wishes to use an unexcepted card in his purchase of the goods he has selected - a purchase in respect of which immediate settlement is conventionally expected - then he must allow DCHS to do the card-handling for 2.5% of the ticket price and must pay 97.5% of that price to DR for the goods. He must also be mindful that if, for any reason, his card is not such as may duly effect immediate settlement of the total ticket price, there will be no sale. His approach to the till, identifying the goods and handing over his card, represents an offer to enter into the two contracts with the two contractors; he affirms those offers by signing the till slip and DCHS (by DR, its agent for this purpose) and DR accept the respective offers, after verifying that the card is indeed good for the purpose, upon DR’s till operator pressing the accept button.

A more complicated analysis to the same end is this; the customer offers to buy the goods from DR at the ticket price. That is not accepted but, by implied reference to the door notices, the “toblerones” and the mats, the till operator (for DR and also as DCHS’ agent) is taken to indicate a counter offer (one which has a suspensory provision within it) that DR and DCHS will be willing to deal by way of the two contracts rather than the one, subject to satisfactory settlement. By signing the till slip the customer accepts the counter-offer and, when the card is verified to be able to effect the necessary immediate settlement, the suspensory condition is satisfied and the contract is completed upon the pressing of the accept button.

I do not, of course, pretend that either route represents what is actually likely to be in the mind of a typical customer or till operator but either route, it matters not which, in my judgment represents an analysis for the purposes of domestic law of the dealings between the parties as would have emerged were they to have been interrupted and to have had their objectively-disclosed intentions analysed by a pedantic officious bystander. I prefer these analyses to that of the Tribunal because, for the reasons I have explained, I have not felt able to render the door notices, “toblerones” and mats as nugatory or to negate the till slips and the signatures upon them.

Had the argument stopped at this point I would have concluded that Chaussures Bally had been distinguished. There would have been not one contract only made by the purchaser (with the supplier), but two, one with the supplier of goods, DR, and one with DCHS. As Mr Milne argues, the customer was not merely told of this separation, his agreement to it was obtained. Each of DR, DCHS and the customer commits to a specified appropriation of the total price. Even if some “value shifting” was involved, that is not (at all events on this scale) so reprehensible as to be unlawful – consider C.R. Smith Glaziers (Dunfermline) Ltd –v- C & E C [2003] STC 419 at paragraph 18. Had the argument gone no further, then the card handling service supplied by DCHS would have been supplied not to DR only but alternatively or additionally to the customer. The fiscal consequence would have been as described as “After 1^st October 2000” in paragraph 19 above; on a £100 ticket price there would have been a supply of goods not at £100 but at £97.50 split into £82.98 for the goods and £14.52 for VAT. However, the Commissioners have many more shots in their locker.

The rest of the argument, both before the Tribunal and before me, proceeds on of the basis that, contrary to the Tribunal’s holding and the Commissioners’ argument, there were, upon a due analysis of the PITA plan by reference to our domestic law, two contracts made on every purchase by way of an unexcepted card, namely one at 97.5% of the ticket price with DR and the other at 2.5% with DCHS. Nonetheless, the Tribunal concluded that for VAT purposes no supply of card-handling services was made to customers by DCHS.

The Tribunal’s reasoning runs as follows: the analysis appropriate for VAT purposes does not necessarily follow the domestic contractual position – Muys’ en de Winter’s Bouw –v- Staatssecretaris van Financien [1997] STC 665. If a transaction is artificially presented, account must be taken of its essential features irrespective of that artificial presentation – Maierhofer –v- Finnanzamt Augsburg-Land Case - 315/00; Auto Lease Holland BV –v- Bundestant für Finanzen Case – 185/01 and Card Protection Plan [1999] STC 270. Such an approach can be used to determine, for example, whether there has been a supply of goods or services – Faaborg-Gelting [1996] STC 774 and British Telecom [1999] STC 758. The reason why the ECJ looks to the economic substance is that VAT is a Community wide tax and if that is not done and if differences in domestic approaches and artificialities are not ironed out then the desirable neutrality and uniformity in the application of the tax is not achieved – BLP –v- Customs & Excise Commissioners [1995] STC 424; Elida Gibbs –v- Customs & Excise Commissioners [1996] STC 1387 and First National Bank of Chicago [1998] STC 850. Distortion of competition is to be avoided but the PITA plan does distort competition. Our own domestic authorities themselves point to the domestic contractual analysis not necessarily being conclusive – Customs & Excise Commissioners –v- Reed Personnel Services Ltd [1995] STC 588 at 595 in a well-known passage from the judgment of Laws J.

Nonetheless, continued the Tribunal, the starting point must be the determination of the apparent contractual position:-

Continuing with the Tribunal’s reasoning, it was (paragraph 149) that DCHS had no capacity to contract independently of DR. The Tribunal continued:-

That reference to “the Merchant Agreement” and the Tribunal’s remarks about DCHS’ capacity require me to break off from the Tribunal’s argument to give something more of the card-handling background.

DCHS was incorporated on the 20^th June 2000 but lay “on the shelf” until its change of name to its present name on the 21^st July 2000. Amongst its objects stated in its Memorandum of Association are the transaction of business in respect of, and the conduct of operations in relation to, any type of charge card, credit card, debit card or payment card for any person. When the Tribunal held that it had no capacity to contract independently of DR it was plainly not speaking of capacity in a vires sense but in some factual sense.

Before October 2000 DR’s card-handling arrangements and credit facilities had been made under a marketing agreement and other agreements with GE Capital Bank Ltd and under a written agreement with Streamline Merchant Services, part of NatWest and the Royal Bank of Scotland Group plc. Fresh arrangements were made as part of the PITA plan but I do not understand any to be such that DCHS contracted with anyone not to provide services to anyone but DR’s customers or DR. Hence the lack of capacity to contract independently of DR, of which the Tribunal spoke, was not a lack brought about by some contractual provision. DCHS’ accounts for 2001 showed net assets of £17m so the incapacity of which the Tribunal spoke was unlikely to have been for want of means. It had no staff of its own but could, of course, use agents and with such means available to it there can be no doubt it could have acquired staff. Hence the want of capacity was unlikely to have been contemplated as one of personnel.

I thus find the reference to “capacity” as misplaced. The facts that DCHS did not contract other than by way of the PITA plan and did so only with DR’s customers and that it chose to allow DR’s employees to be its agents in the course of the implementation of that plan was nothing to do with capacity but with choice. It had capacity to do other than it did but had not chosen to do so. I fail to see why, where a company, which, in point of capacity, could supply its services more widely chooses to supply them only to the customers of another, should thereby in any way deny the description of what it does as a supply of services.

The Tribunal said at its paragraph 152:

Next the Tribunal at its paragraph 153 says:-

As for the practice on refunds, DR had a refund policy expressed as follows:-

The Tribunal held that the only benefit to the customer from services allegedly provided by DCHS was that he was able to use his card. But that, continued the Tribunal:-

However, I have not understood the revised contractual arrangements with GE and Streamline to be such that DR is clearly obliged to them to accept card payment even where the customer has declined to pay the 2.5% to DCHS and where, accordingly, acceptability of the card has not been procured by way of DCHS. GE and Streamline well knew of the PITA plan and acceded to its implementation; they would have seen that a central plank was that only if the deal was done at 2.5% with DCHS was it intended that DR would accept unexcepted cards. If that is right then the benefit to the customer in having his card-use procured to be acceptable is a benefit bestowed by DCHS. I shall return to this point later.

There is, says Mr Vajda, a further argument under this heading which was raised before the Tribunal but which they did not deal with. It is this. There can be no difference permitted between the VAT element of the transaction as advertised and the VAT for which the trader actually accounts to the Commissioners. The advertised or ticket price is £100 which (say the Commissioners) a thoughtful customer could properly take to be the price inclusive of VAT, namely a price of £85.11 and VAT £14.89. Hence £14.89 is the VAT to be accounted for. But the argument ignores that in this part of the case what I am required to consider is that there were two contracts, one at 97.5% of the ticket price for the goods and another at 2.5% for the supply made by DCHS. A customer, aware of the exemption as to financial services, would have no reason to think, so far as VAT was concerned, that he was paying VAT other than on the 97.5% payable for the goods. Where there have been two separate contracts, to expect the retailer to account for VAT as if he had received, on a £100 ticket price, £85.11 and VAT of £14.89 would be to ignore that he had received, for the goods he supplied, only £82.98 and VAT of £14.52 and that there had been a separate service at £2.50 from DCHS which was free of liability to VAT. I cannot see that this additional point assists the Commissioners.

Whilst I shall have to return below, under the heading “Artificiality and tax avoidance”, to kindred issues, at this point in the argument, even accepting that for VAT purposes the domestic contractual analysis is not necessarily conclusive of the VAT position, I have not found the cases cited to provide any clear touchstone which suggests at what point, for what reasons and in what circumstances the domestic contractual position is to be departed from. The Tribunal accepted, as I have already noted, that the apparent contractual position is the starting point and went on to say, again as I have cited, that only if the totality of the evidence reveals something other than the apparent contractual position is it legitimate to replace those contractual relationships with something that might be described as the “real deal”. However, on the facts here I have not found that the totality of the evidence does reveal something other than the contractual position. There is a supply by DCHS to the customer in that without procurement by DCHS of the acceptability of the card to DR the customer will, or at the very least may, find that his card will not be accepted. In all the circumstances and given the immense width of meaning given to a supply of services for VAT purposes, I am unable to hold that no VAT supply is made by DCHS.

On this subject I received not only oral argument but there were written supplements supplied by the Commissioners on the 26^th May and the 11^th June and by DR on the 4^th June. Where there is relevant artifice it is proper, say the Commissioners, to strip it away and, for VAT purposes, to tax on the basis of the reality.

There has been a massive citation of both domestic and Community authority and I have not found it easy to decide whether and, if so, at what point to go into a case beyond mere reference to it, many authorities being cited more than once as to different parts of the argument. I have thus gone in any depth in this judgment only to what have seemed to be the chief authorities.

The Commissioners identify eight factors to be taken into account in determining whether, for material purposes, there has been artifice. I shall deal with each in turn, although there is a good deal of overlap.

By reference to Antoniades supra, Plantiflor –v- CCE [2002] STC 1132 and Trafalgar Tours –v- CCE [1990] STC 127 the Commissioners submit that where the terms of contracts are inconsistent with other material documents or with the conduct of the parties, that may suggest that the terms of the contract are artificial. I accept that. But on the facts the only inconsistency alleged by the Commissioners which seems to me of any possible significance is that, whilst DCHS purports to supply the customer with the service of procuring acceptance of his card, DR is already obliged by contract to accept the card. I am unconvinced that there is a material inconsistency here. Although there was a 3-year agreement between NatWest (“Streamline”) and DR on the 12^th April 1999, determinable on not less than 6 months notice, which provides that DR will accept payment by card, a later agreement to run from the 1^st October 2000 was made between Streamline and DCHS and had attached to it a signed letter that provided fresh terms upon which DR would accept card payment. The side letter plainly contemplated that DCHS would agree with customers that the customers should pay it a handling fee. There is nothing to suggest that DR was still to be obliged to the financing house to accept card payment even where the customer declined to pay DCHS the handling fee. Streamline plainly knew what arrangements were involved in the PITA plan and must have therefore known of the requirement of DR that it should accept payment by card only where DCHS was used and was paid the 2.5% of the ticket price for its service.

With the other finance house, GE Capital Bank Ltd, there was an agreement of the 18^th July 1990 with, inter alia, DR that DR should accept the cards over a period until 31^st December 2005 but then there was an agreement of September 2000 which altered the existing arrangements with a view to the implementation of the PITA plan. The new agreement contemplated payment of a handling fee by a customer to DCHS.

I have real doubts as to whether the new arrangements were such, even where the customer and DCHS did not agree upon the customer’s payment of 2.5% to DCHS, that nonetheless DR was obliged to the finance house to accept the card. Again the case, as with Streamline, was that GE Capital Bank were thoroughly well aware of the intended stipulation that DR would not accept card payment other than by way of the use of DCHS.

In the circumstances I do not find there to be inconsistency indicative of artificiality. In any event the type of inconsistency asserted, which depends on a careful study of the contracts made with the finance houses, is more theoretical than likely to be encountered in practice. There is no evidence, despite hundred of thousands of card dealings, of any customer asserting that DR was, by reason of its contracts with the financiers, bound to contract with the customer regardless of the customer’s failure to contract with DCHS, nor of any finance house making any corresponding assertion.

What might be said to be the high point of artifice in the arrangements made was that, after DR had gone to all the trouble of introducing DCHS into the arrangements, it also procured that DCHS then (to use Mr Vajda’s words) “dropped out”. DCHS appointed DR its agent to conduct, on DCHS’s behalf, all dealings with DR’s customers. And DCHS’s rôle in the financing was minimal; it was just a conduit for payment to DR. This, said Mr Vajda, was “Alice in Wonderland stuff”. However, the agency was real in the sense both that it was provided for by contract and that it was intended by the parties to, and did, take effect; the steps taken by DR’s till operators were consistent with the agency alleged even if, had such subjective considerations been relevant, one might doubt whether, upon cross-examination, all till operators would have been found to have been able to describe the capacity in which they were acting.

The PITA plan was plainly called into existence for the purpose of saving VAT and for no other purpose. That, though, does not point to any intention that the contracts required by the plan were not intended to be implemented. Nor, given the constraints of good customer relations, do I see it as significant that refunds were in fact (if not by way of contractual entitlement with the customer) made at a 100% of the ticket price rather than at 97.5%. To the extent that DR bound itself to the finance houses to refund at 100%, that was to do no more than good customer relations would in any event have dictated. Nor, either, am I impressed, as being indicative of any general intention on the part of DR or DCHS not to be bound by the apparent contracts made, by the fact that, of all the customers who must have signed the till slips, there was evidence of one case only, that of a Customs officer, where the purchaser was able to use his card notwithstanding that he had said he preferred to cross out the words as to 2.5% on the till slip and did so. The till operator said it was “OK” and the sale at £6.72 went ahead. The customs officer gives no reason for his preference for crossing out the words as to the 2.5% and it can only be that he did so in order to see if he could nonetheless get away with his crossing out of the relevant words. In any system involving hundreds of thousands or even millions of transactions occasional slip-ups are inevitable, particularly when they are sought. The one transaction cannot be taken as indicative of any general intent.

Then the Commissioners assert that whereas the Board of DR contemplated that the PITA plan could be undone at very short notice, even overnight, the contracts with the financiers required longer notice for their termination. The conclusion sought to be drawn is that if the arrangements between the banks and DCHS truly had had substance and were intended to be performed according to their letter they could not be unwound overnight without the full consent of the banks. However, firstly, there is no indication whatsoever that that consent would not have been forthcoming, so the Board’s contemplation may not have been misplaced and, secondly, one does not prove the absence of an intention in the contracting parties to perform a contract according to its letter by shewing that one party only believed that in some particular circumstances one particular provision could be escaped.

Then the Commissioners rely upon the unobtrusive manner in which the door notices, the “toblerones” and the mats drew customers’ attention to the new intended provisions. It is plain that DR and DCHS were apprehensive as to customers’ reactions and enquiries as to the PITA plan but their intent, whilst no doubt to do as little as would suffice to draw the intended new contractual arrangements to customers’ attention, was surely nonetheless to do such as would suffice for that purpose. Otherwise the scheme would fail in limine. The modesty of the publication of the new terms in order, it was no doubt hoped, to escape hostility to them was, if anything, more an indication of a hope and a wish that the PITA plan would go forward and work than of any intent that it should not take effect according to its letter.

I accept Mr Milne’s argument that this was not a case where there was evidence that the parties contracted to do one thing and then did another – c.f. Kieran Mullin –v- C & E C [2003] STC 274 at paragraph 36 per Park J..

So far as concerns our domestic law, the Commissioners rely upon Antoniades, which I have already dealt with. As to Community law, they rely upon Maierhofer supra and Muys supra.

As for Maierhofer, Member States are entitled to exempt the letting of immovable property from VAT. Mr Maierhofer constructed some prefabricated buildings bolted to the ground but which could be dismantled by 8 persons in 10 days and then moved elsewhere. He leased the buildings, with the necessary land, for 5 years for temporary housing. The Bavarian tax authority sought to tax him on the footing that he had not let immovable property. That approach was at first upheld but then Mr Maierhofer appealed. On the appeal questions were referred to the ECJ. The ECJ held, in answer to the first question raised, that a letting of a prefabricated building fixed to the ground and not easily dismantled or moved was a letting of immovable property even if, at the end of the lease, it was intended that the building should be removed and used elsewhere. In answer to the second question the ECJ held that it was irrelevant to the question of whether or not there had been a letting of immovable property whether the lessor had let the buildings and the land upon which it rested and to which it was bolted or merely the buildings. At first glance the case has nothing to do with any disguising of the true nature of arrangements but in the course of argument before the ECJ the United Kingdom had submitted, on the second question, that it was indeed relevant whether the letting was of the building alone or of the building and also the land upon which it stood. Otherwise, so the UK Government submitted, there was a risk that a taxable supply of services such as construction or repair works to a building might be made to look like an exempt transaction for the letting of immovable property.

In response to that somewhat, as I would see it, far-fetched submission, the ECJ pointed out that in order to determine whether a transaction did comprise a letting or construction or repair work account had to be taken of its essential features, irrespective of the way in which they might be artificially presented. Beyond illustrating that in appropriate circumstances VAT liability can be determined by reference to a transaction’s essential features rather than by some artificial presentation of the transaction, the case does not assist. It does not help on the question (referred to during the hearing as the Pirandello issue) of what is artifice and what is reality. Indeed, in Maierhofer the ECJ had no reason to look into what was artifice and what was reality given that, the far fetched submission of the United Kingdom Government apart, the point did not require consideration as it does not appear that it was said of Mr Maierhofer that he had been involved in any disguise of the true nature of his dealings.

In Muys en de Winter supra a Dutch builder contracted to supply both a plot of land and, at different prices for the two, the building to be erected upon it. Payment under the contract could be made by instalments down to the time the transfer of property in the land and of the completed house came to be effected. If instalments were used, interest was to be payable. Was there a separate supply of credit (exempt under Article 13 B (d) (1) of the Sixth Directive)? If there was, did it make a difference that the supplier supplied the credit before he supplied the goods? Some domestic legislatures require there to be a clear contractual distinction to have been made between the main supply and the supply of credit if the exemption is to be applicable. Whilst the case was not, I think, argued as being one of artifice, it did illustrate a possible form of artifice-value-shifting, whereby a very high interest rate in an exempt financing could be used to lower the price, for VAT purposes, of the main supply. If special separate loan agreements were to be insisted upon then, as the Advocate-General (F.G. Jacobs) commented (paragraph 11):-

In its judgment the ECJ spoke of:-

I thus see nothing in Maierhofer or Muys to drive me to consider that, whatever the domestic law position, Community law itself requires the PITA plan to be regarded as artificial and on that account to have its two-contract, two-contractor system disregarded. It is, as it seems to me, a good deal harder for the Commissioners to ignore arrangements intended to make card-handling “clearly dissociable” from the sale of goods (to use an expression seen in several authorities) where there is not one contractor making two contracts with the customer – see C & E C –v- British Telecommunications plc [1999] STC 758 – but two separate contractors making one contract each with him.

Mr Vajda refers also to Auto Lease Holland BV –v- Bundesamt Finanzen – Case C-185/01 ECJ 6^th February 2003. The case concerned fuel supplied to lessees of cars by way of “fuel management agreements” which, claimed the car-lessors, entitled the car-lessors to VAT refunds on some of the fuel supplied. Despite the fuel management agreements it was, held the ECJ, the lessee who bought the fuel, he having a free choice as to its quality and quantity as well as the time of its purchase. He was then free to dispose of it as if its owner. In the circumstances, ruled the Court, the car-lessor supplied credit not fuel; the supply of fuel was only “ostensibly” at the car-lessor’s expense as the lessee, over the longer term, wholly bore its cost. The case can be represented, as Mr Vajda asserts, to be one in which the Court departed from the strict contractual position. However, there the contractual arrangements suggested something – that the fuel was acquired at the car-lessor’s expense – that, on full regard being paid to the facts, was only “ostensible”, not real. I do not see any corresponding divergence between the facts and the contractual arrangements in the case before me.

I would add that there is nothing about 2.5% that is of itself indicative of artifice; the rate is a good deal lower than that dealt with in Chaussures Bally. Of course “neutrality” and equal treatment of taxpayers is desirable but the objective does not require, nor do the ECJ cases illustrate, that some procrustean adjustments have invariably to be made such that, regardless of real differences between the dealings of one body of taxpayers and another, they should nonetheless be treated as if they were all the same. The principle of neutrality has to co-exist with other general principles – per Lord Walker in Lex Services plc –v- C & E C [2004] STC 73 at paragraph 27 – amongst which is that considerable weight will be attached to the way in which the transactions are described to the ultimate consumer – see e.g. Lex Services supra at paragraph 19; C & E C –v- Primback – Case C-34/99 [2001] STC 803; Kuwait Petroleum GB Ltd –v- C & E C [1999] STC 4598 at paragraph 31 ECJ. Indeed, the general rule is that it is the contract between the person liable for VAT and the person receiving the service that is determinant – Advocate-General Alber at Primback supra, his paragraph 45. If, as I am here assuming, there were two contracts and two contractors on every card purchase, it must therefore be a compelling feature that the customer is so told and that he agrees that there are two prices, respectively at 97.5% and 2.5% of the total price – contrast where there is only one contract but with invoices rendered in different ways and with no agreement with the customer as to the difference – Commission –v- French Republic Case C-404/99.

I would add that I do not share the Tribunal’s view (one, I would think, of mixed law and fact) that the two-contract system, were it to work, would distort competition. DR’s competitors are the biggest retailers in the country, some 30-50 of whom have already adopted similar plans. Although, as will appear, card-handling operations such as those in issue before me have been discussed between Community taxing authorities, I was given no information as to whether they are common also in other parts of the Community amongst larger retailers. Even if one were to regard small retailers as competitors of DR, there is no evidence that smaller retailers, by using a card-handling agent that dealt with many small retailers, could not achieve similar two-contract systems. A difference between competitors does not necessarily represent a distortion of competition. In sum, I do not accept the Commissioners’ argument that here the true nature of the arrangements between customers, DR and DCHS were so disguised that the contracts made can, in consequence, be ignored or denied their ordinary fiscal consequences.

That card sales can be effected other than by way of a two-contract plan is quite obvious; to that extent the interpolation of DCHS is unnecessary. However, I have not understood there to be any Community provision, let alone any domestic provision, such that steps taken can be ignored where they could have been done without. It is, of course, clear that, where a taxpayer can choose between, say, two different ways of achieving his end, he cannot choose one and then expect to avail himself of the fiscal advantages of the other – see Tesco plc supra at paragraph 40 – but there is, surely, a correlative that a taxing authority, finding a taxpayer to have achieved his end one way, cannot avail itself of the fiscal disadvantage the taxpayer would have suffered had he adopted the other. The Commissioners argue that even if DCHS provides a “gateway” service whereby it procures the acceptability to DR of an unexcepted card, DCHS is providing nothing necessary to the customer nor anything of value to him as the customer would be able, by reason of DR’s contractual obligations to the finance houses, card-acquirers such as GE and Streamline, to oblige DR to accept the card even without agreeing any terms with DCHS. I have already mentioned that I have real doubts as to whether DR could be obliged, by GE or Streamline, to accept a card where the 2.5% had not been agreed to be paid to DCHS, but, of course, enforcement of the contracts between DR and its card-acquirers by a third party customer introduces yet further difficulties.

Given that the card-acquirers, GE and Streamline, well knew of the PITA plan and of its contractual provision that, in effect, only if a dealing was agreed with DCHS would the customer’s card be accepted by DR, there must be real doubt, as I have mentioned, as to whether the earlier pre-PITA plan contracts remained effective in unamended form. A customer seeking to assert that they did and that accordingly DCHS did not even provide a “gateway” service would have immense difficulties in his way. He would at first need to establish that there was any contract at all as to card acceptance which might be operable in his favour, then to establish what the terms were of the pre-PITA plan contracts with card-acquirers such as GE and Streamline and then to investigate how far, if at all, they had changed, expressly or impliedly, upon the introduction of the plan. Then he would need to consider whether the contract between DR and the card-acquirer which he was seeking to assert was one made before or after the 10^th May 2000. If the contract was made before that date the Contracts (Rights of Third Parties) Act 1999 would be unavailable to help him. Then, assuming the contract was made after that date, he would need to reflect on whether, given that the card-acquirer had sole conduct of the operation of the account, the customer would effectively be able to insist upon the card-acquirer accepting whatever particular use of the card the customer sought to have honoured notwithstanding the friction it would be likely to cause between DR and the card-acquirer. When one considers that all this doubt and elaboration could be avoided by the customer simply by his agreeing, at no added expense to himself, the 2.5% system with DCHS, it is, in my judgment, quite unrealistic to regard even the “gateway” service provided by DCHS as being a service which does not benefit the customer or which the customer does not need. In determining whether there has been a service provided one does not attempt some assessment of the value of the provision or its necessity or utility but rather whether the customer received “anything – anything at all” – per Lord Millett in C & E C –v- Redrow Group plc [1999] STC 161 HL at 171 e. The provision of a convenient short-cut may be a service and a welcome service even if there is a long way round to the same destination and especially so when the long way round is uncertain and inconvenient.

I would readily accept that the absence of any need for DCHS’ interpolation or the want of any commercial necessity in its involvement in dealings with customers (an enhancement of the VAT position apart) is well illustrated by the Merchant Agreement of the 27^th September 2000 between DCHS and DR whereunder DCHS appointed DR its agent in dealings with customers. However, to echo a point already made, in my judgment I have not been shown any authority that requires me to ignore the existence of a contract which was intended by both parties to take effect according to its letter as, in my view, was the Merchant Agreement of the 27^th September 2000.

The Commissioners rely upon Commissioners of Customs & Excise –v- Plantiflor [2002] STC 1132 HL. Plantiflor sold plants by post. They were delivered by an agent of the Post Office, Parcelforce. In its catalogue to customers Plantiflor said that it could arrange delivery on the customer’s behalf by Parcelforce, in which case the customer was asked to include £2.50 extra for post and packing which would, said Plantiflor, be passed on to Parcelforce on the customer’s behalf. Postage itself (an exempt service) cost only £1.63. The Commissioners sought to tax Plantiflor on the basis of the whole sum received from the customers, including the £2.50. The obscurity or difficulty of the law in this area can be seen from the fact that at every stage from the Tribunal to the House of Lords the later Tribunal reversed the immediate preceding one. Lord Millett at paragraph 58 identified the problem:-

Lord Millett identified there being three supplies in the case. Parcelforce supplied to Plantiflor the service of delivering its customers’ goods. A second supply was by Parcelforce to the customer of the service of delivering his goods to him. The third supply was supplied by Plantiflor to the customer of an arrangement service for which Plantiflor charged £1.63 per parcel. Continuing [paragraph 67] with Lord Millettt’s speech, he said:-

Accordingly Lord Millett, as others of the majority, allowed the appeal.

But Plantiflor is not a case in which contracts were ignored or overridden in determining the VAT consequences of the transactions effected but rather one in which the contracts were minutely analysed. It provides no warrant for disregarding contracts. Moreover, insofar as the authority may be taken to apply to the case at hand, there was in Plantiflor no third contract between Parcelforce and the customer under which Parcelforce agreed to deliver goods to the customer (paragraph 54 of Lord Millett’s speech) and no agency was suggested (paragraph 61). By contrast, in the case at hand there were three tiers of contracts between (not necessarily in temporal sequence), firstly, DR, DCHS and the card-acquirers, then, secondly, between DR and DCHS (including provision for agency) and, thirdly, as I have held, between DCHS and the customer. Nothing, as I read Plantiflor, suggests that the full contractual position can be ignored merely because it could, in commercial terms, have been very easily arranged to be other than as it was or because what was done was done in order to avoid a fiscally unenviable position.

I would accept that the PITA plan had no reason or purpose other than mitigation of the “unenviable position” that DR was in, before the plan, whereunder it was made liable to output tax on the full ticket price without being able to recover input tax on the card-handling charges it inevitably suffered. The Commissioners again rely, under this heading, on Muys supra but, in my opinion, to no effect. They rely also upon Trafalgar Tours Ltd –v- Customs & Excise Commissioners [1990] 127 and upon Tesco supra.

In Trafalgar Tours the tour operator in this country published brochures to prospective holidaymakers who were abroad. In the brochure Trafalgar described itself as the principal responsible for the tours which it described. It described the brochure as the entire contract between the passenger and the operator. A holidaymaker wishing to take advantage of one of the holidays would pay a travel agent overseas who then accounted to Trafalgar’s overseas parent company. After the tour was over Trafalgar would send an invoice relating to the tour to its parent company in order to receive the payment due to it from the parent, which was of a sum up to 20% less than the brochure price. Upholding the Tribunal, Popplewell J held that the agreement between the overseas parent and Trafalgar was wholly inconsistent with the brochure. The agreement between Trafalgar and its overseas parent (“the 1985 Agreement”), was, he held, a façade. The Court of Appeal, upholding Popplewell J, held that the Tribunal had been entitled to take that view. That agreement was a façade in that it intended to represent that the supply of the relevant services was being made by Trafalgar to the parent company and to conceal the fact that in truth the supply was made by Trafalgar to the holidaymakers. The Court of Appeal held that the Tribunal had been entitled to infer that the tour operator was the person with whom the passengers contracted and that it permitted the deduction of up to 20% by way of commission. The very invoice between parent company and Trafalgar had described the sum as commission. In the judgment of the Court of Appeal delivered by Slade LJ he said, speaking of Popplewell J’s conclusion on the facts:-

Trafalgar was hoist by its own petard; it had described itself as the sole principal and the brochure as the entire agreement between the holidaymaker and itself. The agreement which it made with the parent company by way of the 1985 Agreement was inconsistent with that. When it came to VAT, Trafalgar was not permitted to depart from the position it had described to the holidaymaker. But that, as it seems to me, is of no help to the Commissioners. So far from DR describing itself as the sole party to any sale and purchase contracts and so far from its describing the sale and purchase as involving only one contract, it gave notice by way of the door notices, the “toblerones” and the mats that it would accept the unexcepted cards only where DCHS was brought in by way of a contract between DCHS and the customer, a contract additional to that between DR and the customer. In Trafalgar the “façade” consisted of a dealing which was inconsistent with the position which had been described to the customer, the payor; there is, as it seems to me, no corresponding inconsistency in the case at hand.

As for Tesco supra, at paragraph 33 Jonathan Parker LJ cited a passage from the judgment of Ralph Gibson J in Commissioners of Customs & Excise –v- Pippa Dee Parties Ltd [1981] STC 495 at 501 where, in emphasising the need, when assessing the nature of a transaction for VAT purposes, to look at the entire transaction, Ralph Gibson J had said:-

In his paragraph 159 Jonathan Parker LJ approved that citation. Thus, as has been said in other cases, the starting point is always the true contractual position albeit that that may not be determinative of the true nature and effect of the scheme. The summary in Jonathan Parker LJ’s paragraph 159 continues that one must look behind the strictly contractual position to consider what is the economic purpose of the scheme:-

It is not, in my view, possible, as the Commissioners would seek to do, to infer from the name of the PITA plan that it has no commercial purpose; equally consistent with the name is the reflection that it involves a lot effort for only 37p per £100. Nor was there any evidence that commercial organisations seek to reduce the costs of running their businesses rather than increasing them where the increase in administrative costs (if any) is thought to be more than offset by some advantage.

The Commissioners argument here is, as I see it, based on a misconception, namely that to the customer’s eye the transactions are conducted after, just as they were before, 1^st October 2000. True it is that it is still the ticket price which is the total required to be paid but to regard the transaction as having remained the same is to disregard the effect which, in my view, the law requires to be paid to the door notices, the “toblerones”, the mats and the signed till slips as well (though invisible to the customer) as the new arrangements between DCHS and DR and the amendments as between DR and its card-acquirers, the financiers.

Here the Commissioners rely on Trafalgar Tours supra and Muys supra. For reasons already explained I do not think that either materially assists the Commissioners. Moreover, there is no evidence in support of the Commissioners’ assertion that DCHS is not in a position to operate commercially by providing its services to other, unconnected, retailers. The Commissioners repeat the point that 2.5% represents a rate which, as between unconnected parties, would be unrealistic but that overlooks that in Chaussures Bally the rate was far higher.

As Mr Milne emphasises, the fact that parties are connected does not, without more, prove either tax avoidance or a want of independence in the parties’ dealings – Staatssecretaris van Financien –v- Heerma Case C-23/98 per Advocate-General at paragraph 24 and the Court at paragraph 19.

I hold that here there is one side (DR and DCHS, connected parties) who wish the PITA plan to take effect according to its letter and another side, the purchaser, who, so far as one can judge, is indifferent to that effect so long as he is left with no greater price than the ticket price and has a respectable vendor attributing almost all of the price of that ticket price to the price of the goods.

Drawing together the many strands of the Commissioners’ argument, I have not found any authority or principle that, on the facts of this case, requires some effect other than the apparent effect of the contracts to be regarded as determinative for the purposes of VAT, even where, as here, tax mitigation is manifestly the reason for the underlying plan and even where the plan is “artificial”in the sense that, such mitigation apart, there would have been no need for the contracts to have been framed as they were.

Here the Commissioners rely on principles said to be derived from or illustrated by three authorities.

In its judgment the Court held that the formal requirements for a refund had, indeed, been satisfied – paragraph 46. In paragraph 51 and succeeding paragraphs the ECJ ruled:-

I find it difficult to derive from Emsland-Stärke anything supportive of the Commissioners’ case as to abuse although it does, if anything, illustrate the ECJ’s disinclination to adopt blanket solutions to particular problems where particular solutions could have been used – see paragraphs 81 and 82 above. There is, as it seems to me, a world of difference between, on the one hand, a vendor setting up a plan for obtaining export refunds as to agricultural products in a manner which undoes the broad Community purpose of such refunds and a retailer, on the other hand, merely seeking to avoid the “unenviable position” of its being required to account for VAT as if it was receiving more or other than as it truly does. There is no broad Community objective, let alone one as to refunds, to which the retailer fails to pay respect. The retailer seeks only to limit respect for the exemption for financial services to an ascertained element of the overall dealing with the customer and to do so in such a way that the Member States’ creation of that exemption does not bear unfavourably upon him.

Next the Commissioners relied upon Case 17680 Blackqueen Ltd, a decision of the London Tribunal. The Tribunal relied upon Emsland-Stärke supra. Then the Commissioners rely upon two joined cases between, as claimants, Gemeente Leusden and Holin Groep BV,the respondent in each case being Staatssecretaries van Financien – Cases C-487/01 and 487/02. Advocate-General Tizzano referred to abuse in his paragraphs 98 and 99 but in the judgment the Court, at its paragraph 78, did not, as it seems to me, extend Emsland-Stärke beyond indicating the possibility that it was applicable in VAT cases. Indeed, in its paragraph 79 the Court indicated that a taxpayer cannot be censured for taking advantage of a provision or a lacuna in legislation which, without constituting an abuse, has allowed him to pay less tax.

A fourth authority said to be on this point is RBS Property Developments Ltd –v- Commissioners of Customs & Excise, a decision of the Tribunal at Edinburgh of the 14^th June 2002. At page 21 of the print of the decision with which I have been provided, immediately following the heading “Abuse of right”, the Tribunal says “This has no relevance”.

This is a developing area in which a number of cases have already been referred to the ECJ for answers to be given to specific questions but at this juncture I have found nothing going further in the Commissioners’ favour than Emsland-Stärke supra and, as I have already indicated, I do not see that case as going far enough to afford them any material assistance.

The day after the conclusion of oral argument before me the Court of Appeal released its judgments in WHA Ltd and Anor –v- C of C & E [2004] EWCA Civ 559. In their subsequent written submissions the Commissioners draw attention to four points. Firstly, Neuberger LJ, with whom Waller and Latham LJJ agreed, made it plain that the Court had not been concerned with a case in which it had been argued that the contractual arrangements were “sham or bogus” – paragraph 38. Secondly, Neuberger LJ showed that whilst the domestic characterisation of the contractual position did not necessarily decide that VAT position – paragraph 29 – the contractual position was at least the starting point – paragraph 35. There was, however, previous binding authority in support of both such views and I do not expect that Neuberger LJ thought he was breaking fresh ground – see e.g. Eastbourne Town Radio Cars Association –v- C & E C [2001] STC 606 HL at 612-613. I would agree, though, with Mr Vajda that where there is a contest between not straying beyond the four corners of the contract – see Sinclair Collis Ltd cited in paragraph 16 of Lord Slynn’s speech in Eastbourne – and Laws J’s reference in Reed – see Lord Slynn’s speech at paragraph 14 – to the laws of the contract possibly not determining the right tax result, Neuberger LJ’s decision would seem to prefer the Reed approach to that of Sinclair Collis.

Thirdly, as a tacit part of an argument to move away from Lord Diplock’s well-known definition of “sham” in Snook –v- London & West Riding Investments [1967] All ER 518 at 528, (as sham had not been alleged below and as, in Mr Vajda’s argument, “sham” differed from a VAT “pretence” or “façade”) Mr Vajda refers, as if they had been alternatives, to Neuberger LJ’s reference to “sham or bogus”. Bearing in mind that he was describing an argument that had not been raised, it seems to me that his reference was no more than a passing reference and far too slight to import an intention to distinguish between “sham” on the one hand and “bogus” on the other, he not pausing to define either term. Lord Diplock’s definition requires, of a sham, that all parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. In the case at hand that would require such an intent in, inter alios, the customers, as to which no sufficient evidence was before the Tribunal. I would accept that in VAT cases “pretence” or “façade” could be found in evidence that would not prove “sham” within our domestic definition but I hold there was none such in the case.

Fourthly, Mr Vajda draws attention to Neuberger LJ’s references to Plantiflor supra and to C & E –v- Redrow Group Ltd [1999] 1 WLR 408 HL. I have already dealt with Plantiflor and do not take the reference to Redrow to add anything material. All in all, the Court of Appeal’s judgment in WHA neither adds to nor subtracts from the position of either party in the case before me.

Mr Vajda had an additional argument based on the deliberations of the VAT Committee at its 65^th meeting on 19^th June 2002. The UK Government had raised for discussion questions as to how Member States should deal with card-handling arrangements such as those before me. The Committee agreed as follows:

I hope I have dealt with the main submissions of both sides. I indicated at paragraph 49 supra what my conclusion would have been had the Commissioners’ argument been limited to its first and principal one, namely as to the true contractual position. Upon the alternative arguments by the Commissioners, on the basis that there were, indeed, two contracts made on every purchase by way of an unexcepted card, I have found no reason for the Commissioners’ arguments to succeed and I hold the Tribunal to have erred in law in that regard. The Commissioners thus succeed or fail overall on their first and principal argument. On that basis, for the reasons I have given, they fail. I therefore allow the appeal by DR subject only to argument as to ancillary supply, which I have dealt with in paragraph 23 above. The fiscal consequence, after the 1^st October 2000, is thus, in my view and subject to the held over issue, that on a £100 ticket price there would have been a supply of goods at £97.50 split into £82.98 for the goods and £14.52 for VAT and that the assessment at £644,382 needs to be adjusted to take that into account. I shall discuss with Counsel the appropriate form of Order. I add only this: both sides have mentioned to me that it may be appropriate for one or more questions to be referred to the ECJ. Neither has supplied drafts of the questions proposed to be raised. In a case such as this, one improbable to be concluded at this level, I have thought it preferable to decide issues raised before me without referring to the ECJ in the hope that, if and when there is a reference to the ECJ, the issues will have come into sharper focus.