LORD JUSTICE CHADWICK : This is the judgment of the Court.
- Three of these four appeals raise related questions as to the determination, for the purposes of the charge to value added tax, of the monetary equivalent of the consideration in respect of a supply of goods, where the supply is for a consideration not consisting or not wholly consisting of money. The fourth appeal was thought to raise a similar question and was listed for hearing (and was heard) with the others.
The legislative provisions
- Value Added Tax first became chargeable in the United Kingdom upon the coming into force of Part I of the Finance Act 1972; following, and in order to implement, the First and Second Directives of the Council of the European Economic Community, issued on 11 April 1967, relating to "the harmonisation of legislation of Member States concerning turnover taxes". Those directives were supplemented (and, in some respects, superseded) by the Sixth Directive of 17 May 1977. But, in order to understand the reasoning in the early decisions of the Court of Justice, it is necessary to have certain provisions of the Second Directive in mind.
- Article 2(a) of the Second Directive provided that:
"The following shall be subject to the value added tax:
(a) The supply of goods and the provision of services throughout the territory of the country by a taxable person against payment; . . ."
Article 8 was in these terms (so far as material):
"The basis of assessment shall be:
(a) in the case of a supply of goods and the provision of services, everything that makes up the consideration for the supply of the goods or the provision of the services including all expenses and taxes except the value added tax itself; . . . "
Annex A provided, at paragraph 13, that:
"The expression 'consideration' means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance, etc.) that is to say not only the cash amounts and charges but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received."
- Article 2 of the Sixth Directive replaced article 2 of the Second Directive. It is in these terms (so far as material):
"The following shall be subject to value added tax:
1. the supply of goods and services effected for consideration within the territory by a taxable person acting as such; . . ."
In that context "supply of goods" means, or includes, the transfer of the right to dispose of tangible property as owner see article 5(1). Tax is chargeable on the occurrence of a chargeable event see article 10(1). For present purposes it is sufficient to note that a chargeable event occurs when the goods are delivered see article 10(2). Article 11A defines the taxable amount in relation to supplies within the territory that is to say, the amount on which value added tax is payable at the rate applicable to transactions of the relevant kind. The article is in these terms, so far as material:
"(1) The taxable amount shall be:
(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;
. . .
(c) in respect of supplies referred to in Article 6(3), the open market value of the services supplied.
'Open market value' of services shall mean the amount which a customer at the marketing stage at which the supply takes place would have to pay a supplier at arm's length within the territory or the country at the time of the supply under the conditions of fair competition to obtain the services in question.
(2) The taxable amount shall include:
(a) taxes, duties, levies and charges, excluding the value added tax itself;
(b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. . . .
(3) The taxable amount shall not include:
(a) price reductions for early payment;
(b) price discounts and rebates allowed to the customer and accounted for at the time of supply; . . ."
- The provisions of the United Kingdom legislation are now found in the Value Added Tax 1994. They are plainly intended to give effect to the Sixth Directive; and are to be interpreted with that in mind. Section 1 of the 1994 Act is in these terms (so far as material):
"(1) Value added tax shall be charged, in accordance with the provisions of this Act -
(a) on the supply of goods or services in the United Kingdom (including anything treated as such supply), . .
and references in this Act to VAT are references to value added tax.
(2) VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply."
Section 2(1) of the Act provides that VAT shall be charged at the rate of 17.5 per cent (or at such other rate as may be in force from time to time) on the supply of goods or services "by reference to the value of the supply as determined under this Act".
- Section 4(1) of the 1994 Act provides 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. In that context, a taxable person is a person who is, or is required to be, registered under the Act see section 3(1); and a taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply see section 4(2) of the Act. Section 5 applies schedule 4 for the purposes of determining what is, or is to be treated as, as a supply of goods or a supply of services. It is sufficient to note that, subject to any provision made by that schedule and to Treasury orders made under section 5(3) to (6), "supply" includes all forms of supply, but not anything done otherwise than for a consideration.
- Section 19 of the Value Added Tax Act 1994 provides for the determination of the value of a supply of goods or services. The section is in these terms:
"(1) For the purposes of this Act the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6 and for those purposes subsections (2) to (4) below have effect subject to that Schedule.
(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.
(3) If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration.
(4) Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.
(5) For the purposes of this Act the open market value of a supply of goods or services shall be taken to be the amount that would be taken as its value under subsection (2) above if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration."
Section 19(5) may be read in conjunction with schedule 6 of the Act, which contains provisions which enable the Commissioners of Customs and Excise to direct that the value of a supply shall be taken to be its open market value where the person making the supply and the person to whom it is made are connected. The importance of the provision, in the context of the present appeals, is that it recognises that "open market value" is the exception to the general rule. The general rule is that the value of the supply is specific to the particular transaction which gives rise to the charge to tax. The value of the supply effected by that transaction is equal to the monetary consideration actually paid for the supply; or, where the supply is for a consideration not consisting or not wholly consisting of money, the monetary equivalent of the consideration see section 19(2) and (3) of the Act.
The principles established by the Court of Justice
- The principle that value added tax was chargeable by reference to the consideration actually paid by the consumer for the supply provided in the particular transaction and not (save where the legislation expressly so required) by reference to the consideration which might have been expected to be paid for the supply of those goods or those services in some notional, or "normal", transaction was established by the Court of Justice on a reference for a preliminary ruling from the Supreme Court of the Netherlands in Staatssecretaris van Financien v Coφperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445, [1981] 3 CMLR 337.
- The respondent in the Coφperatieve Aardappelenbewaarplaats case was a co-operative association of potato growers. It operated a cold-storage depot, or constant-temperature warehouse, on behalf of its members. Each grower was entitled to store 1,000 kilograms of potatoes for each share held by him in the co-operative. The co-operative had power to fix a storage charge, payable at the end of the season. It chose to fix no charge in respect of the financial years 1975 and 1976. Nevertheless, it was assessed to turnover tax in respect of those years under Dutch legislation enacted to give effect to the Second Directive on the basis of the storage charge ordinarily charged in other years that is to say, 2 cents per kilogram of potatoes. The question referred to the Court was whether there was any 'consideration' for the services provided by the co-operative in those circumstances.
- The argument advanced on behalf of the Dutch government was that the effect of the co-operative's decision to make no charge for the provision of storage facilities was that the value of its assets was less than it would have been if a charge had been made. So the effect of the decision to make no charge was to diminish the value of the shares held by its members. The diminution in the value of the shares was said to be 'consideration' for the provision of storage facilities. If that were a correct analysis, then the question referred should be answered in the affirmative. The further question which would then arise - but which was not the subject of the reference was as to the monetary equivalent of that consideration. As we have said, the co-operative had been assessed on the basis of what a member could be expected to pay for storage under a "normal" transaction.
- It is, we think, pertinent to note the argument advanced by the Commission in opposition to the Dutch government. After referring to the provisions of articles 2 and 8 of the Second Directive, and paragraph 13 in Annex A, the Commission submitted that the basis of assessment was what was actually received in return for the supply, or "in other words, by the 'subjective' value and not an 'objective' or rather 'normal' value, that is to say by a value estimated according to objective criteria." see [1981] CMLR 337, 340. The point is explained at page 341:
"[Value added tax] is in the nature of a tax on consumption which means that it is the actual outlay of the consumer which must be taxed and that it is only where no price has been paid by the consumer that there is cause to adopt the criterion of normal value."
The Commission's view, expressed at page 343, was that:
". . . there can be no question of a service subject to value added tax because the service in question was not provided against payment within the meaning of Article 2 of the Second Directive but free of charge as the co-operative association did not stipulate or receive anything in return for the services which it provided . . ."
- The Advocate General (Mr J-P Warner) agreed with the Commission. In a short Opinion, he said this:
"The crux . . . is that there is nothing here that can be described as a 'payment' within the meaning of Article 2(a) of the Directive, nothing that can be described as 'consideration' within the meaning of Article 8 consideration for the service provided for the members of the association and nothing that can be described as 'received' by the association within the meaning of paragraph 13 of Annex A. Certainly the reduction in the value of their shares suffered by the members cannot be so described. One cannot in my opinion escape from the fact that there is no payment by the members and no receipt by the association. To cover such a case as this one would need a specific provision deeming there to be consideration where there is not."
- The Court of Justice took the same view. At paragraph 12 of its judgment, [1981] CMLR 337, 345, the Court rejected the argument that the reduction in the value of the members' shares could be treated as consideration for the provision of the storage facility:
"So a provision of services is taxable, within the meaning of the Second Directive, when the service is provided against payment and the basis of assessment for such a service is everything which makes up the consideration for the service; there must therefore be a direct link between the service provided and the consideration received which does not occur in a case where the consideration consists of an unascertained reduction in the value of the shares possessed by members of the co-operative and such a loss of value may not be regarded as a payment received by the co-operative providing the services." [emphasis added]
But the Court went on, at paragraph 13, to say this:
"What is more it follows from the use of the expression 'against payment' and 'everything received in return' first that the consideration for the provision of a service must be capable of being expressed in money, which is further confirmed by Article 9 of the Second Directive which stipulates that 'the standard rate of value added tax shall be fixed . . . at a percentage of the basis of assessment', that is to say at a certain proportion of that which constitutes the consideration for the provision of services, which implies that such consideration is capable of being expressed in an amount assessed in money; secondly that such consideration is a subjective value since the basis of assessment for the provision of services is the consideration actually received and not a value assessed according to objective criteria." [emphasis added]
- Three principles find expression in the Court's judgment in the Coφperatieve Aardappelenbewaarplaats case: (i) there must be a direct link between the supply of goods or services and the consideration which is said to have been received for that supply; (ii) the consideration must be capable of being expressed in money or a monetary equivalent; and (iii) the basis of the assessment is the consideration actually received. The supposed dichotomy between a "subjective" value and a value "assessed according to objective criteria" was the subject of (implied) criticism in the opinion of Mr Advocate General Fennelly in Argos Distributors Ltd v Customs and Excise Commissioners (Case C-288/94) [1997] QB 499, 521 see at paragraph 21, which we set out later in this judgment but, seen in context, the distinction which the Court intended in the Coφperatieve Aardappelenbewaarplaats case is clear enough. The "subjective" value must be ascertained by reference to the consideration actually received for the goods or services actually supplied. The enquiry excludes any valuation which is independent of the actual transaction; that is to say, any valuation based on criteria which are not those adopted by the parties themselves.
- Those principles were affirmed and applied, in a different context, on a reference for a preliminary ruling from the London value added tax tribunal in Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 879. The appellant ("NYC") carried on business as a wholesaler of cosmetic products. The products were supplied by NYC to retailers, known as beauty consultants. The products were offered for retail sale by what was described as the 'party-plan' method that is to say, at private parties organised by 'hostesses' recruited by the beauty consultant. By way of inducement or reward the hostess received a 'dating gift' which, at the relevant time, was a pot of beauty cream. The recommended retail selling price for the pot of cream was £12.95; the normal wholesale price charged by NYC to the beauty consultant was £10.14; but, when supplied for use as a dating gift, the charge made by NYC to the beauty consultant was £1.50. The beauty consultants were exempt from value added tax because their turnover fell short of the threshold fixed by the Value Added Tax Act 1983. The Commissioners of Customs and Excise assessed NYC on the supply to the beauty consultants of pots of cream for use as dating gifts on the basis of the normal wholesale price (£10.14). NYC appealed to the value added tax tribunal. The tribunal sought a preliminary ruling from the Court of Justice on the question whether the consideration for the supply by NYC to the beauty consultant was (a) the actual monetary consideration received by NYC (£1.50); (b) the monetary consideration for which identical product was supplied by NYC to the beauty consultant for resale to the public (£10.14); (c) such amount as might be determined in accordance with such criteria as might be prescribed by the Member State; (d) the monetary consideration (£1.50) together with the value of the undertaking of the beauty consultant to use the pot of cream as an inducement or reward for the hostess' role in arranging the party and, if so, how the value of that undertaking was to be determined; or (e) some other, and if so what other, amount.
- The Commission supported the appellant's contention that the consideration for the supply of a pot of cream for use as a dating gift was the monetary amount actually received by NYC that is to say, £1.50. The Advocate General (Mr J L da Cruz Vilaηa) took the view that the consideration included not only the £1.50 actually received but also "the value of the service provided by the retailer, consisting in the procuring of another person to organise the party . . .". In his view ". . . the value of that service may be regarded as being equal to the difference between the price paid by the retailer for resale to the public and the price which the retailer actually paid". In effect, therefore, he concluded that the question referred should be answered in terms of (d) above. But his view that the value of the undertaking given by the beauty consultant to use the pot of cream as an inducement or reward for the hostess' role in arranging the party was equal to the difference between the wholesale price applicable to product which was intended for resale (£10.14) and the £1.50 actually paid to NYC, led to a result which was the same as that which would have been reached if the question had been answered in terms of (b).
- An important step in the Advocate General's reasoning was his conclusion, on the facts in the Naturally Yours case, that part of the consideration of the supply of the pot of cream by NYC to the beauty consultant on "dating-gift terms" was the beauty consultant's undertaking to use the pot of cream supplied on those terms as an inducement or reward to the hostess. The relevant passages are at paragraphs 33 to 35 of his opinion:
"33. NYC has an interest in the holding of the party because, since that method (it would appear) is its sole method of selling, the regular disposal of its products depends on the holding of numerous parties and, therefore, on the action taken by the consultants to organise them.
34 It is for that reason, and, without doubt, for that reason alone, that NYC agrees to supply the pot of cream intended as a gift at such a low price. If the only interest at stake were that of the beauty consultant, it would be logical for the wholesaler to charge her the normal price for the product, so that she would bear the total cost of the free gift (possibly with a discount) which would have to be recovered from the profit represented by the difference between the wholesale and retail prices.
35. As is apparent from the documents before the court, if the beauty consultant does not provide the agreed service to the wholesaler, that is to say if she fails to find a housewife to organise the party for her, the pot of cream has to be returned or paid for at its normal wholesale price, a fact which provides the required support for the statement that the consideration is not, therefore, merely the £1.50."
- The Court of Justice agreed with the Advocate General. The reasoning may, we think, fairly be summarised as follows: (1) In the light of the Court's decision in the Coφperatieve Aardappelenbewaarplaats case that the basis for assessment of the value of a supply is everything which makes up the consideration for the supply, there must be a direct link between the goods or service supplied and the consideration received see paragraph 11 of the judgment, at [1988] STC 879, 894. (2) There was a direct link between the pot of cream supplied on "dating-gift terms" and the beauty consultant's undertaking to use the pot of cream as an inducement or reward to the hostess for the reasons given by the Advocate General in the paragraphs of his opinion which we have just set out. (3) It was a further requirement, identified in the Coφperatieve Aardappelenbewaarplaats case, that the basis of assessment was the consideration actually received and not a value estimated according to objective criteria see paragraph 16 of the judgment. (4) On the facts, the parties to the contract had treated the wholesale price of the pot of cream supplied on "dating-gift terms" as reduced by a specific amount in exchange for the supply of a service by the beauty consultant namely, the procuring by the beauty consultant of a hostess to arrange the sales party. (5) "In those circumstances, it is possible to ascertain the monetary value which the two parties to the contract attributed to that service; that value must be considered to be the difference between the price actually paid and the normal wholesale price." see paragraph 17 of the judgment.
- The words which we have emphasised in paragraph 17 of the judgment - reflect a passage at paragraphs 68 and 69 in the opinion of the Advocate General. In considering whether consideration should be measured by reference to "normal value" or "open market" or "ordinary market" value the Advocate General had said this:
"68 But, as I observed in my opinion in Direct Cosmetics Ltd and Laughtons Photographs Ltd v Customs and Excise Comrs Joined Cases 138/86 and 139/86 [1988] STC 540 at 549, the normal value will only have to be taken into account where no price has been paid by the purchaser and where it is impossible (or at least, excessively difficult) to attribute to the consideration, by some other means, its true value for the purposes of the transaction [emphasis added], or, at least, its real market value. At this point it must be stated that the expression used in the United Kingdom legislation and in the English version of the Sixth Directive, 'open market value', which we could assimilate to 'ordinary market value', seems to me more felicitous than the expression 'normal value' used in the Romance-language versions of the directive. It is only where there is no market that it is necessary to have recourse to a value other than the real value, or to a deemed value.
69. In any event, being a tax on consumption VAT must be levied as precisely as possible on the actual amount spent by the consumer and, accordingly, reference to open market values rather than to real values should be permitted only (otherwise than in cases where such an approach is expressly provided for) where it is impossible to follow some other procedure which comes closer to a determination of what the court has called the 'subjective value' of the consideration."
- The decision of the Court of Justice in Empire Stores Ltd v Customs and Excise Commissioners (Case C-33/93) [1994] STC 623 provides a further example of the application of the principles. The appellant carried on a retail mail order business. It operated an "introduce a friend" scheme with a view to inducing existing customers to recommend others. Under the scheme the existing customer was entitled to receive, without charge, an article (of which the value was assumed not to exceed £10) offered by the company when the new customer (having been approved by the company) placed, and paid for, a first order. The appellant accounted for value added tax on the articles supplied without charge on the basis of the acquisition cost which it had incurred in providing the article. The Commissioners of Customs and Excise made an assessment on the basis of the tax-exclusive acquisition cost plus a 50% mark-up; that being the commissioners' estimate of the price which the appellant would have charged for the articles if they had been included in the mail order catalogue. On a reference from the Manchester value added tax tribunal to the Court of Justice for a preliminary ruling, it was held, following the decision in the Naturally Yours case, (i) that the articles were supplied in consideration of a service namely, the introduction of a potential new customer (ii) that, accordingly, there was a direct link between the article supplied and the service provided by the recipient, (iii) that the value of the service provided could be expressed in monetary terms, (iv) that, in the circumstances that a monetary value for the service had not been agreed between the parties, the value to be attributed for the purposes of a charge to value added tax on the supply of the article was the value actually attributed to the service by the appellant as the person to whom the service was supplied - (v) that, on the facts, the value actually attributed to the service by the appellant was the expense which it was prepared to incur in order to obtain the service, and (vi) that that expense was the cost to the appellant of acquiring the articles.
- At paragraph 18 of its judgment, [1994] STC 623, 636, the Court of Justice affirmed the principle established in the Naturally Yours case that "the consideration taken as the taxable amount in respect of a supply of goods is a subjective value, since the taxable amount is the consideration actually received and not a value estimated according to objective criteria." The Court went on, at paragraph 19, to say this:
"Where that value is not a sum of money agreed between the parties, it must, in order to be subjective, be the value which the recipient of the services constituting the consideration for the supply of goods attributes to the services which he is seeking to obtain and must correspond to the amount which he is prepared to spend for that purpose. Where, as here, the supply of goods is involved, that value can only be the price which the supplier has paid for the article which he is supplying without extra charge in consideration for the services in question."
- It is essential to an understanding of the decision in the Empire Stores case to keep in mind that the articles supplied free of charge as an inducement or reward for the introduction of a new customer were not (or were treated as if they were not) catalogue items see the terms in which the question referred for a preliminary ruling was posed (set out at paragraph 7 of the judgment, [1994] STC 623, 635) and, in particular, the definition of non-catalogue goods. It was because the articles supplied free of charge were not otherwise supplied by the appellant, and so did not have a retail sale price attached to them, that the Advocate General, at paragraphs 20 and 21 of his opinion, and the Court, at paragraph 19 of its judgment (in the passage which we have set out above), were able to find that the parties to the transaction had not, by agreement between themselves, put any monetary value upon the services provided as consideration for the goods in respect of the supply of which value added tax was to be charged. In that respect, the Empire Stores case differs, on the facts, from the position in the Naturally Yours case. In the Naturally Yours case, the parties had, by agreement between themselves, put a monetary value upon the services to be supplied by the beauty consultant in part consideration of the supply of a pot of cream on "dating-gift terms". They had done so because it was agreed between them that, if a pot of cream supplied on "dating-gift terms" was not, in fact, used as a reward or inducement for the hostess, it would be returned by the beauty consultant or paid for at the price applicable to a supply by NYC for retail sale.
- Comparison of the decisions of the Court of Justice in the Naturally Yours and the Empire Stores cases enables the third of the principles established in the Coφperatieve Aardappelenbewaarplaats case to be developed or refined. In the light of the later decisions it can be seen that, in cases where the consideration for the supply of goods does not consist (or does not wholly consist) of money, there are at least two factual situations in which it may be necessary to ascertain the monetary equivalent of the non-monetary element of that consideration. The first is where the parties have, as between themselves, put a value upon the non-monetary element. In those cases of which the Naturally Yours case is an example the monetary equivalent is to be taken at the value adopted by the parties. The second factual situation is where the parties have not dealt with each other on the basis of consensus as to the monetary equivalent of the non-monetary element. In those cases of which the Empire Stores case is an example - the monetary equivalent has to be ascertained in some other way. As the Court observed in the Empire Stores case the monetary equivalent of the non-monetary element of the consideration is "the value which the recipient of the services constituting the consideration for the supply of goods attributes to the services which he is seeking to obtain". The value which the recipient of the services attributes to those services "must correspond to the amount which he is prepared to spend for that purpose". In such cases, the monetary equivalent of the services supplied is the amount that the recipient of the services is prepared to pay for the purpose of obtaining those services. In the Empire Stores case the amount which the retailer as recipient of the services provided by its existing customer under the "introduce a friend" promotion scheme - was prepared to pay for the purpose of obtaining those services was readily ascertainable. It was the amount which the retailer was prepared to pay for the non-catalogue articles which constituted the reward or inducement to the existing customer by whom the service was provided. As the Court pointed out: "[the value which the retailer attributes to the services supplied by the existing customer] can only be the price which the [retailer] has paid for the article which he is supplying without extra charge in consideration for the services in question."
The decisions of this Court
- We were referred to two decisions of this Court which illustrate the application of the principles established by the Court of Justice: Rosgill Group Ltd v Customs and Excise Commissioners [1997] STC 811 and Customs and Excise Commissioners v Westmorland Motorway services Ltd [ 1998] STC 431.
- In the Rosgill case the taxable supplier sold ladies and children's clothing by the 'party plan' method. As a reward for holding a party the hostess was entitled to a discount on her own purchases from the supplier or to a smaller cash payment. The amount of the discount (or the amount of the payment, as the case might be) was referable to the aggregate retail value of the goods sold at the party. In the specimen transaction upon which a ruling was sought, the aggregate retail value of the goods sold at the party in question was £66.98. That entitled the hostess to a discount of £7.23 on her own purchases, or to a cash payment of £2.89. She chose to take her reward in the form of a discount against a blouse, the retail price of which was £27.99. Accordingly, the monetary amount which she paid to the supplier for the blouse was £20.76.
- The first question was whether the consideration given by the hostess for the blouse was limited to the monetary amount which she paid to the supplier (£20.76) or included her services in arranging and holding the party. In the light of the decisions in the Naturally Yours and Empire Stores cases it can be of no surprise that this Court held that the consideration given by the hostess to the supplier for the blouse included the services which she had provided in arranging and holding the party see [1997] STC 811, 816g, 817a, 818j, 821a.
- The second question in the Rosgill case was whether the monetary equivalent of the non-monetary element of the total consideration for the blouse that is to say, the value to be put on the hostess's services in arranging and holding the party should be taken to be the £2.89 which the supplier was prepared to pay in cash or the difference (£7.23) between the amount which she actually paid to the supplier (£20.76) and the full retail price of the blouse (£27.99). Lord Justice Morritt addressed that question at [1997] STC 811, 822d-f:
"The question is which of those two values should be taken. The supplier contends that the only value which can be taken is the cash sum the supplier was prepared to pay, namely £2.89. I do not agree. That is not the value the parties put on the services in the events which happened, namely the choice by the hostess of a discount off the price of the blouse she wanted rather than the payment of a cash commission. To take as a measure of value of the services the amount attributed to an alternative which was not chosen would not only fail properly to apply the principle expressed in Naturally Yours Cosmetics but would provide too ready a means for the artificial reduction of the value of the consideration."
Sir Richard Scott, Vice-Chancellor, reached the same conclusion, at [1997] STC 811, 817g-h:
"The value to Rosgill of the non-monetary consideration has to be assessed in the light of the events that actually happened; first, there were sales of £66.98; second, the hostess made the decision to purchase the blouse at a reduced price rather than to take the cash commission of £2.89. In these combined events Rosgill attributed a value of £7.23 to the hostess's non-monetary consideration. It is not to the point that if the hostess had decided to accept the cash consideration of £2.89 that sum would have been the measure of the value placed by Rosgill on the non-monetary consideration."
Lord Justice Hobhouse took the same view. He emphasised that the value of what he described as the 'barter' element in the supply of the blouse that is to say, the non-monetary element of the consideration received by the supplier "is that which the parties put on it, attributed to it, in the actual transaction between them." The relevant enquiry "is not a valuation exercise but simply the giving of an answer to a factual question . . ." see at [1997] STC 811, 819a.
- It is pertinent to note, also, the reason given by two members of the Court in the Rosgill case for rejecting the submission that a nil value should be attributed to the services provided by the hostess. The submission was based on the fact that the cost to the supplier of the blouse, for which the hostess paid £20.76 in cash, was only £8.00. It was said, in reliance on the decision in the Empire Stores case, that, in the circumstances that the monetary element of the consideration which the supplier had received for the blouse (£20.76) exceeded the cost to the supplier (£8.00), the non-monetary element of the consideration was of no value. Lord Justice Morritt in a passage which was adopted by Lord Justice Hobhouse exposed the fallacy in that reasoning. He said this, at [1997] STC 811, 822b-d:
"The difference between Naturally Yours Cosmetics and Empire Stores is that in the former the pot of cream had a wholesale value which the beauty consultant was required to pay if, instead of giving it to the hostess, she kept it for herself but in the latter the gifts were not included in the catalogue (see para 3 of the Advocate General (Van Gerven)'s opinion ([1988] STC 879 at 885, [1988] ECR 6365 at 6374). Thus in the latter case there was no value attributed by the parties to the service in question. In such circumstances the only available monetary value was the cost to the provider.
In this case the parties have attributed a value to the consideration for the services, namely the commission or the discount. In those circumstances it seems to me that the cost of the blouse to the supplier is immaterial. The services were part of the consideration for the blouse and the parties attributed values to those services."
As he went on to point out, the relevant question, in the Rosgill case, was which of the two values attributed by the parties cash commission or discount on own purchases should be taken as the value of the non-monetary consideration in the context of the actual transaction between them.
- In Customs and Excise Commissioners v Westmorland Motorway Services Ltd [1998] STC 431 the taxable supplier was the operator of motorway service areas. It offered a free meal to any coach driver who brought a coach with twenty or more passengers to one of its service stations and stayed for at least thirty minutes. It was accepted that the provision of the meal involved a taxable supply of goods in consideration of the service provided by the coach driver namely the bringing of custom to the supplier's outlet. The question was whether the monetary equivalent of the service provided by the coach driver was to be taken as the full retail price of the meal (the 'menu price'), or as the actual cost to the supplier of the food itself.
- Lord Justice Hutchison (with whose judgment the other members of the Court, Lord Justice Evans and Lord Justice Mantell, agreed) summarised the principles to be derived from the Naturally Yours and Empire Stores cases in a passage at [1998] STC 431, 434b-c:
"(1) Where the consideration is not money, it must be capable of being expressed in monetary terms, and there must be a direct link between the relevant supply and that which is alleged to have been the consideration for it. (2) The value of the non-monetary element must be assessed on a subjective rather than on an objective basis. (3) Where the parties have expressly or implicitly attributed a value to that element in money terms that determines its value. (4) Where, however, the parties have not done this, the value can only be the price which the supplier has paid for the articles which he is supplying free of charge in return for the services in question."
He identified what he described as 'the crucial difference' between those two cases in terms which follow closely the analysis which had attracted Lord Justice Hobhouse and Lord Justice Morritt in the Rosgill case. At [1998] STC 431, 436f-g, he said this:
"Thus the crucial difference between Empire Stores and Naturally Yours Cosmetics was that in the former the goods bore no price (see in this connection the contrast between catalogue and non-catalogue goods in the question referred to the Court of Justice in the Advocate General's opinion in Empire Stores [1994] STC 623 at 626, [1994] ECR I-2329 at 2332-2333 para 4)."
He accepted that at the time when the driver provided the service by bringing his coach to the service station neither the driver nor the service station operator would know the menu price of the meal which the driver would choose. But he rejected the submission that that made it impossible to hold that the parties had attributed any value to the driver's service. He went on, at page 437c:
"If regard is had to the particular transaction, the menu price of the meal chosen by that driver is plainly, it seems to me, the value attributed by both parties to that driver's service. It matters not that the choice of a differently priced meal by another driver may result in the attribution of a different value in his case to the same service."
It followed that the application of the principles derived from the Naturally Yours and the Empire Stores cases led to the conclusion that the monetary equivalent of the non-monetary consideration received by the service station operator, as the supplier of the meal, was to be taken as the menu price.
- The claim to value added tax failed in the Coφperatieve Aardappelenbewaarplaats case because, on the facts, it was held that the supplier received no consideration for the supply. A common feature of the other cases to which we have referred is that, in each case, goods were supplied for a consideration which comprised (in whole or in part) a non-monetary element. In each case the non-monetary element of the consideration for the taxable supply comprised services provided to the supplier by the recipient of the supply. In the Naturally Yours case and the Rosgill case the services were provided in connection with retail sales by the 'party plan' method. In the former case the service provided was the undertaking by the beauty consultant to use the pot of cream as an inducement or reward to the hostess who had organised the party; in the latter case the service was provided by the hostess herself, in arranging and holding the party. In the Empire Stores case the service was the introduction of a new customer; so also, in a different context, was the service in the Westmorland case. In each case the question was how to ascertain the monetary equivalent of the non-monetary element of the consideration. In cases of that nature it must now be regarded as settled, at least in this Court, that the principles to be applied are those set out by Lord Justice Hutchison in the Westmorland case in particular, those numbered (3) and (4) in the passage at [1998] STC 431, 434b-c which we have just set out.
The "coupons" cases
- It does not follow, however, that 'the transaction value' expressly or impliedly attributed by the parties themselves will, necessarily, be determinative of the monetary equivalent of non-monetary consideration in cases where what is said to be non-monetary consideration does not take the form of services provided to the supplier by the recipient of the supply. We were referred to two cases in which the Court of Justice considered the question whether there was a supply of goods for consideration and, if so, what was the monetary equivalent (if any) of the consideration in circumstances where goods were supplied against redeemable coupons previously issued by the supplier.
- In the first of those cases, Boots Co plc v Customs and Excise Commissioners (Case C-126/88) [1990] STC 387, the appellant company operated a promotional scheme under which customers who had purchased designated goods ("premium goods") at normal retail price received coupons, free of charge, which could be used in connection with the purchase of other specified goods ("redemption goods"). The coupons had a nominal, or face, value. On the purchase of redemption goods, the face value of the coupons tendered by the purchaser was allowed as a deduction from the normal retail price of those goods. The Commissioners of Customs and Excise assessed the retailer to value added tax on the supply of redemption goods on the basis that a monetary amount equal to the face value of the coupons surrendered was included in the consideration for the redemption goods. The assessment was upheld by the value added tax tribunal. On appeal by the retailer to the High Court, the matter was referred to the Court of Justice for a preliminary ruling on the question whether the difference between the normal retail price of the redemption goods and the amount of money actually received by the retailer in those cases where, on the occasion of the purchase of those goods, coupons were surrendered by the purchaser - was within the expression "price discounts and rebates allowed to the customer and accounted for at the time of the supply" for the purposes of Article 11A(3)(b) of the Sixth Directive. The Court held that it was. It followed, of course, that the taxable amount in respect of the supply was limited to the money actually received by the retailer. The question whether the coupons should be given any (and, if so, what) monetary equivalent did not arise.
- The Court of Justice explained, in the Boots case, that "discounts and rebates", in the context of article 11A(3)(b) of the Sixth Directive, represented a reduction of the price at which an article was offered for sale to the customer, "since the seller agrees to forgo the sum represented by the rebate in order precisely to induce the customer to buy the article."- see paragraph 18 of the judgment, at [1990] STC 387, 408. So understood, the provision in article 11A(3)(b) was merely an application of the rule laid down in article 11A(1)(a), as interpreted by the court in the Naturally Yours case and earlier decisions. The taxable amount was the amount actually received. The argument, advanced by the United Kingdom government - that the promotion scheme operated by Boots should be distinguished from the typical case of a price discount or rebate because the price reduction allowed on the purchase of redemption goods was granted in exchange for a coupon which, itself, had a value - was rejected. The Court said this, at paragraph 21:
"That viewpoint cannot be accepted. It is clear from the coupon's legal and economic characteristics described above that, although a 'nominal value' is indicated on it, the coupon is not obtained by the purchaser for consideration and is nothing other than a document incorporating the obligation assumed by Boots to allow the bearer of the coupon, in exchange for it, a reduction at the time of purchase of redemption goods. Therefore, the 'nominal value' expresses only the amount of the reduction promised."
- A similar question arose in a different factual context in Argos Distributors Ltd v Customs and Excise Commissioners (Case C-288/94) [1996] STC 1359, also reported - together with Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 - at [1997] QB 499. In the Argos case, the appellant was a retailer of catalogue goods sold from showrooms. It issued vouchers, with a monetary face value, which could be used as payment (in whole or in part) of the purchase price of the appellant's catalogue goods. The vouchers were available for purchase at a discount to their face value. Typically they were purchased by other companies for distribution to their own employees or to members of the public in connection with incentive or promotion schemes. Where that occurred the retail purchaser who used a voucher in payment of goods would be unlikely to know whether or not the voucher had been purchased at a discount or, if so, the amount of the discount. But Argos could identify those vouchers which had been issued at a discount (and the amount of the discount) from their serial numbers. The Commissioners of Customs and Excise claimed that Argos was accountable for value added tax on the goods sold on the basis that, in so far as payment was made by the surrender of vouchers, the consideration for the goods was the monetary face value of the vouchers. Argos appealed on the ground that the true consideration was the amount that had been paid for the vouchers that is to say, in cases where the vouchers had been issued at a discount, the discounted sum. The London value added tax tribunal referred three questions to the Court of Justice for a preliminary ruling: (1) Whether article 11A(3)(b) of the Sixth Directive was to be interpreted so that the expression 'price discounts and rebates' was capable of applying in circumstances where the face value of a voucher issued by the supplier of goods covered, or was available to cover, the entirety of the supplier's normal retail selling price? (2) In circumstances where a supplier of goods has sold to a purchaser at a discount a voucher which is subsequently presented for payment by a customer who was not the purchaser of the voucher and does not normally know what sum was paid for the voucher, was article 11A(3)(b) to be interpreted so that the expression 'price discounts and rebates allowed to the customer and accounted for at the time of supply' covered (a) the difference between the face value of the voucher and the price charged by the supplier to the original purchaser of the voucher or (b) the entire face value of the voucher or (c) neither? (3) If article 11A(3)(b) did not apply, was article 11A(1)(a) to be interpreted so that the part of the consideration represented by the voucher was (a) the face value of the voucher or (b) the sum actually obtained by the supplier of the goods from the sale of the voucher?
- Both the Advocate General (Mr N. Fennelly) and the Court itself took the view that the correct approach was to address, first, the third of those questions. As the Advocate General explained, at paragraph 12 of his opinion ([1996] STC 1359, 1363, [1997] QB 499, 518): "This approach is consistent with the view of the court that art 11A(3)(b) is merely an application of the rule laid down in art 11A(1)(a), which is the subject of this question (see, for example, Boots [1990] STC 387 at 408, [1990] ECR I 1235 at 1266-1267, para 19 of the judgment)." He went on:
"The question focuses on the role played by the voucher as consideration for the purchase of goods sold by Argos. Assuming that the voucher is something which, in part, at least, 'constitutes the consideration' for supplies of goods, the tribunal raises the central issue in dispute, namely whether it represents its full face value or only the discounted value obtained by Argos for its sale to a third party."
The Advocate General pointed out, at paragraph 16 of his opinion ([1996] STC 1359, 1364f-g, [1997] QB 499, 519) that the voucher played a part in two transactions. First, it was the subject of an earlier independent sale by Argos to a third party; secondly it was, itself, used to represent in part (or in whole) the purchase price for the goods supplied to the retail purchaser. On the basis that the voucher itself and not the monetary amount paid for the voucher in the earlier transaction - constituted the consideration for the supply of the goods, the Advocate General reached the conclusion that the third question fell to be answered in sense (a) that is to say, the part of the consideration represented by the voucher was the face value of the voucher. He took the view distinguishing the Naturally Yours case in this respect that there was no direct link between the sale of the vouchers at a discount and the subsequent supply of goods to the retail purchaser. "The sales of vouchers and of goods take place independently." see paragraph 18 of the Advocate General's opinion, ([1996] STC 1359, 1365f, [1997] QB 499, 520G). He went on, at paragraphs 19 to 21 ([1996] STC 1359, 1365g-1366d, [1997] QB 499, 520G-521F):
"19. The earlier discount does not affect or enter in any way into the transaction for the sale of goods. The prices are listed in catalogues, from which goods can be selected by customers. Each customer fills in a 'customer selection form' indicating the goods chosen, by a reference number, and the quantity required. A sales assistant, depending on the particular store, either completes the form or enters the details directly into a sales register. Although, it is, in principle, possible to ascertain the discount on the original sales price of the voucher, that is not done in practice. The tribunal has found that the buyer only rarely has any knowledge of that discount. Clearly it would serve no purpose. The voucher is assigned its full face value. In payment for the goods purchased, it is as good as cash. If the vouchers then clearly constitute consideration received from the buyer of the goods and not from any third party, their value can, in my view, only be their face value and not their earlier discounted price in a transaction with a third party.
20. At this point, I am in a position to comment on what seems to me to be misplaced emphasis by Argos on certain case law of the court. In Aardappelenbewaarplaats [1981] ECR 445, 454, para. 13, the court held that the value of the consideration actually received is "subjective" and is not a value assessed according to objective criteria. Referring to paragraph 26 of the opinion of Mr Advocate General Cruz Vilaηa in Naturally Yours [1988] ECR 6365, 6377, Argos submits that the value of the consideration depends on the facts of the individual contracts entered into rather than the state of mind of the customer.
21. It is acknowledged in the observations submitted in this case that, in this context, the word 'subjective' is not used here in its normal sense, but rather to describe the value placed by the parties on key elements in a transaction a meaning which is equally capable of being described as 'objective'. The effect of these cases is to distinguish and exclude, for the purposes of the consideration for a sale, any supposed independent valuation, different from that adopted by the parties (for example, the special provision for 'open market value' in article 11(A)(1)(d) in respect of services referred to in article 6(3). This issue is also decisively resolved by Naturally Yours, at p. 6390, para.17:
'the parties to the contract [had] reduced the wholesale price of the pot of cream by a specific amount . . . In those circumstances, it [was] possible to ascertain the monetary value which the two parties to the contract attributed to [the] service; . . .'
That reasoning applies equally to the valuation of the voucher in the present case. It represents consideration for the agreed, 'subjective' price of the goods to the full extent of its face value. In the sense thus intended, I agree with the United Kingdom that the attribution of face value to the vouchers is consistent with decisions such as Naturally Yours."
- If the Advocate General were correct to approach the matter as he had been invited to do (see paragraph 16 of his opinion, [1996] STC 1359, 1364h, [1997] QB 499, 519F) - on the basis that "the vouchers . . . clearly constitute consideration received from the buyer of the goods and not from any third party" then it is unsurprising that he took the view that the relevant question was "what monetary equivalent is to be attributed to the vouchers?". If that question fell to be answered by ascertaining the monetary equivalent attributed by the parties to the transaction under which the goods were supplied that is to say, by the supplier and the retail purchaser it is impossible to avoid the conclusion that, as the Advocate General held, "their value can . . . only be their face value and not their earlier discounted price in a transaction with a third party." As between the supplier and the retail purchaser, the value attributed to the vouchers in the context of the transaction under which the goods were supplied was, plainly, the difference between the retail price and the money actually paid by the retail purchaser. That was equal to the face value of the vouchers presented and accepted in connection with the purchase of the goods.
- The Court of Justice reached a different conclusion. The Court held, in answer to the third of the questions referred, that in so far as the consideration for the supply of goods to the retail purchaser was paid by presentation of the voucher, the monetary equivalent was the sum actually received by the supplier on the sale of the voucher. The reasoning which led the Court to differ from the Advocate General, can be seen from paragraphs 15 to 22 of the judgment, ([1996] STC 1359, 1372f-1373g, [1997] QB 499, 529B-530D):
"15. It should be noted that the transaction at issue in this question is the transaction whereby Argos goods are bought in one of its shops, the price being paid by the buyer, in whole or in part, by means of a voucher. The transaction at issue is not the previous sale of vouchers by Argos.
16. According to the court's settled case law, the taxable amount for the supply of goods and services is represented by the consideration actually received for them. That consideration is thus the subjective value, that is to say, the value actually received, in each specific case, and not a value estimated according to objective criteria: see Staatssecretaris van Financien v Coφperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445; Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] ECR 6363; Boots Co plc v Customs and Excise Commissioners (Case C-126/88) [1990] ECR I-1235, and H.J. Glawe Spiel- und Unterhaltungsgerδte Aufstellungsgesellshaft m.b.H & Co KG v Finanzamt Hamburg-Barmbek-Uhlenhorst (case C-38/93) [1994] ECR I-1679.
17. According to the same case law, that consideration, when not consisting of money, must be capable of being expressed in money; Coφperatieve Aardappelenbewaarplaats and Naturally Yours Cosmetics.
18. In this case the subjective consideration actually received by Argos for the sale of its goods is constituted wholly or in part by the vouchers presented by the buyer of the goods. Since Argos regards the voucher as representing such part of the catalogue price as is equal to its face value, the only question is as to the actual money equivalent of the voucher taken in payment by Argos.
19. According to the terms of the transaction which involves the initial purchase of the voucher, that voucher, by its nature, is no more than a document evidencing the obligation assumed by Argos to accept the voucher, instead of money, at its face value: see, to that effect, Boots [1990] ECR I-1235, 1267, para. 21.
20. In order to ascertain the actual money equivalent accruing to Argos when it takes a voucher in payment, regard must be had only to the transaction which is relevant in that regard, namely the initial transaction comprising the sale of the voucher, at a discount or otherwise. In view of the nature of that transaction, the actual money equivalent which the voucher represents for Argos, when the latter accepts it in payment, is the sum of money which it received on the sale of the voucher, namely its face value less any discount allowed.
21. The fact that a buyer of Argos goods does not know the real money equivalent of the voucher used by him is irrelevant: the important issue in this case is to determine the actual money equivalent received by Argos when it accepts vouchers in payment of its goods, since only that actual equivalent can constitute the taxable amount.
22. This interpretation is not invalidated by the fact that, in each transaction, the details of what Argos receives as consideration for the supply of goods are unknown. In that connection, it must be emphasised that in this case the burden of proof falls on the supplier. Argos claims, without having been contradicted, that as a result of the serial number appearing on each voucher, it is possible, when the voucher is presented in a shop, to identify the initial purchaser and to determine any discount allowed to him. Thus, it is not difficult to ascertain what proportion of Argos's total receipts is represented by the vouchers received: see, to that effect, H.J. Glawe Spiel- und Unterhaltungsgerδte Aufstellungsgesellshaft m.b.H & Co KG v Finanzamt Hamburg-Barmbek-Uhlenhorst (case C-38/93) [1994] ECR I-1679.
- It can be seen that both the Advocate General (at paragraph 17 of his opinion) and the Court of Justice (at paragraph 18 of the judgment) accepted, as the basis of analysis, that the consideration actually received by the supplier for the goods was (in whole of in part) the voucher which it accepted in payment. Neither approached the matter on the basis that the money paid by the purchaser of the voucher itself (at the time of the purchase of the voucher) was properly to be regarded as consideration for the supply of the goods. Both the Advocate General and the Court addressed the question: "what was the monetary equivalent of the voucher?". The answers which they gave to that question differed because they applied different criteria. The Advocate General took the view that the answer was to be found by asking: "what monetary equivalent was attributed to the voucher by the parties to the relevant transaction?" As we have said, if that were the correct approach, the conclusion that the monetary equivalent of the voucher was its face value was inescapable. The Court took the view that the answer was to be found by asking: "what monetary equivalent did the voucher represent to the supplier when the supplier accepted the voucher in part payment of the goods?" see at paragraph 20 of the judgment. Adopting that approach, the conclusion that the monetary equivalent of the voucher was the sum received by the supplier on the sale of the voucher was equally inescapable, for the reasons which the Court gave at paragraphs 19 and 20 of its judgment:
"19. According to the terms of . . . the initial purchase of the voucher, that voucher . . . is no more than a document evidencing the obligation assumed by Argos to accept the voucher, instead of money, at its face value . . .
20. In order to ascertain the actual monetary equivalent to Argos when it takes a voucher in payment, regard must be had only to the transaction which is relevant in that regard, namely the initial transaction comprising the sale of the voucher . . ."
- The monetary equivalent to the supplier of a voucher which the supplier has undertaken to accept as payment for goods is the money which the supplier has received (or will receive) in respect of that undertaking. In a case where the voucher is issued by the supplier against payment, the monetary equivalent of the voucher will be the amount of that payment. In a case where the voucher is, itself, issued for no payment or consideration, the monetary equivalent of the voucher will be nil see the decision of the Court in the Boots case. In neither case is the face value of the voucher determinative of its monetary equivalent to the supplier.
Post-transaction discounts or rebates
- In the two cases to which we have just referred - 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, [1997] QB 499 the Court of Justice addressed the question before it under the provisions of article 11A of the Sixth Directive. In so far as there was a discount or rebate it was allowed to the customer at the time of supply. But similar questions have arisen where a refund by way of discount or rebate has been made after the supply of the relevant goods. In those cases the Court has addressed the question under the provisions of article 11C(1) of the directive. The article is in these terms :
"11C(1) In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States."
- The decision of the Court of Justice in Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387, [1997] QB 499) illustrates the approach which has been adopted. Elida Gibbs Ltd was a manufacturer of toiletries. Most of its sales were direct to retailers; but there were also substantial sales to wholesalers, or to cash and carry traders, for resale to retailers. The company operated two coupon schemes for the purpose of promoting retail sales of its products. Under the first of those schemes a retail purchaser could obtain a price reduction at the point of sale on production of a 'money-off' coupon. The coupons were made available, without charge, through magazines and newspapers. The price reduction allowed to the retail purchaser on presentation of the 'money-off' coupon was reimbursed by the company to the retailer. Under the second scheme the consumer could obtain a cash refund from the company by returning 'cash-back' coupons which were printed on the packaging of the products themselves. The company invoiced its own purchaser (whether retailer or wholesaler) at a price which included value added tax; and the invoice price was not affected by any present or future promotion scheme in operation from time to time. The purchaser from the company (whether retailer or wholesaler) would not, or might not, know at the time of purchase whether the goods purchased were, or were to be, the subject of a money-off coupon promotion scheme. The company had accounted for the value added tax included in its invoiced price; but subsequently sought repayment of output tax overpaid on the basis that the money refunded on redemption of the coupons constituted a retrospective discount. In support of its claim the company relied on article 11C(1) of the Sixth Directive.
- The Advocate General (whose conclusion the Court rejected) took the view that the claim for repayment of output tax should fail. In analysing the 'cash-back' scheme, he pointed out that a payment made by the company to the consumer on redemption of the 'cash-back' vouchers was independent of the transaction under which the goods were supplied by the company to the retailer (or to the wholesaler, as the case might be). Notwithstanding the payment by the company to the consumer, "the consideration for the original supply by the manufacturer to the retailer must remain the original invoiced price" see paragraph 19 of the Advocate General's Opinion ([1996] STC 1387, 1393j, [1997] QB 499, 549E). Further, the taxable amount of the transaction between the company and its customer (the retailer or the wholesaler, as the case might be) could not be treated as reduced for the purposes of article 11C(1). He referred to the need, established by the decision in the Coφperatieve Aardappelenbewaarplaats case, for a direct link between the goods or services provided and the alleged payment or consideration. He went on to say this, at paragraph 25 of his opinion ([1996] STC 1387, 1395h-j, [1997] QB 499, 552A-B):
"In my view, the taxable amount of a transaction so determined cannot be reduced in accordance with art 11C(1), unless there is a similarly direct link between the alleged subsequent reduction and the relevant taxable transaction. In the present case there is no such link. In one transaction, the company supplies goods, normally to a retailer, for a specified price, which does not change, and in the other it reimburses a third party some of the price paid for purchasing some of those goods from such a (but not necessarily the same) retailer."
He reached a similar conclusion in relation to the 'money-off' scheme. He accepted that the payment made by the company to the retailer on redemption, by the retailer, of the 'money-off' coupons taken by the retailer in part payment for the supply by the retailer of goods to the consumer was to be treated as part consideration received by the retailer for the supply of goods see at paragraph 35 of his opinion ([1996] STC 1387, 1398h-j, [1997] QB 499, 555G-H). But he held, at paragraph 37, that:
"It follows inexorably from the character of the refund as consideration for the retail sale that its payment does not have the effect that the price charged by the company to the retailer 'is reduced after the supply takes place' for the purpose of art 11C(1)."
- The Court of Justice took the opportunity to restate the basic principles of the value added tax system. The Court emphasised, at paragraph 19 of the judgment ([1996] STC 1387, 1402h, [1997] QB 499, 560E), that:
"The basic principle of the VAT system is that it is intended to tax only the final consumer. Consequently the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him."
And, at paragraphs 22 and 24 ([1996] STC 1387, 1403a-b, d, [1997] QB 499, 560G-H, 561B-C):
"22. It is not, in fact, the taxable persons who themselves bear the burden of VAT. The sole requirement imposed on them, when they take part in the production and distribution process prior to the stage of final taxation, regardless of the number of transactions involved, is that, at each stage of the process, they collect the tax on behalf of the tax authorities and account for it to them.
. . .
24. It follows that, having regard in each case to the machinery of the VAT system, its operation and the role of the intermediaries, the tax authorities may not in any circumstances charge an amount exceeding the tax paid by the final consumer."
- The application of the basic principles required that "the taxable amount attributable to the manufacturer as a taxable person must be the amount corresponding to the price at which he sold the goods to the wholesalers or retailers, less the value of [the coupons]" see paragraph 29 of the judgment ([1996] STC 1387, 1403j, [1997] QB 499, 561G-H). The reason is set out in paragraph 28:
"In circumstances such as those in the main proceedings, the manufacturer, who has refunded the value of the money-off coupon to the retailer or the value of the cash-back coupon to the final consumer, receives, on completion of the transaction a sum corresponding to the sale price paid by the wholesalers or retailers for his goods, less the value of those coupons. It would not therefore be in conformity with the directive for the taxable amount used to calculate the VAT chargeable to the manufacturer as a taxable person, to exceed the sum finally received by him. Were that the case, the principle of neutrality of VAT vis-ΰ-vis taxable persons, of whom the manufacturer is one, would not be complied with."
Article 11C(1) of the Sixth Directive had to be interpreted so as to give effect to the principle of neutrality. At paragraph 31 of the judgment ([1996] STC 1387, 1404a-b, [1997] QB 499, 562A-C), the Court said this:
"It is true that that provision [article 11C(1)] refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently. The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral. It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the final consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person."
- A further example of the relationship between articles 11A and 11C can be found in the recent decision of the Court of Justice in Freemans plc v Customs and Excise Commissioners (Case C-86/99) [2001] STC 960, [2001] 1 WLR 1713. The facts may be taken from paragraphs 9 and 10 of the judgment [2001] STC 960, 968g-j, [2001] 1 WLR 1713, 1721G-1722A):
"9. The claimant sells its goods to customers by means of mail order, using catalogues which it sends to individuals in order that they may act as agents. It has approximately 900,000 active agents, who order goods either for themselves ("agents' own purchases") or for other customers. Purchases are paid for under a self-financed credit scheme established by the claimant, the agents paying for the goods at the price set out in the catalogue ("the catalogue price") in instalments, generally spread over a period of 50 weeks. The claimant has created in its books a separate credit account for the agents to which a sum equal to 10% of each payment made by an agent to the claimant is credited to her automatically, that sum comprising more precisely a 10% discount in respect of the agent's own purchases (hereafter referred to as "AOP discount") or a 10% commission in respect of purchases made for other customers ("commission").
10. The agent may withdraw the amount credited to her account at any time by cheque, by post office giro or by National Lottery vouchers; she may also set off that amount against outstanding balances owed by herself or a customer, or use it against new purchases, which will entitle her to a further 10% discount. However agents are not entitled to pay, from the outset, the catalogue price less the AOP discount."
- The question referred to the Court of Justice for a preliminary ruling was whether the taxable amount in respect of goods supplied to the agent for the agent's own use was (1) the full catalogue price of the goods supplied less the OAP discount on that price or (2) the full catalogue price with a reduction as and when the OAP discount was credited to the agent or (3) the full catalogue price with a reduction as and when the OAP discount was withdrawn or used by the agent. It should be noted that the question referred was restricted to the treatment of the AOP discount that is to say, the Court was not asked to consider, separately or at all, the proper treatment of commission in respect of purchases made for other customers.
- The Advocate General (Mr J Mischo) proposed that the question referred should be answered in the sense of (1) above: in effect, the discount was allowed and accounted for at the time of the supply, article 11A(3) was engaged and the taxable amount was the full catalogue price less the AOP discount on that price. The Court reached a different conclusion. It pointed out, at paragraph 22 of the judgement ([2001] STC 960, 970d-e, [2001] 1 WLR 1713, 1723H) that the time of supply, for the purposes of article 11A(3)(b) of the Sixth Directive, was the time when the right to dispose of the goods was transferred to the agent. The Court went on, at paragraphs 23 and 24 ([2001] STC 960, 970e-g, [2001] 1 WLR 1713, 1724A-B), to say this:
"23. If, at the time of that transfer, the customers paid a reduced price, they would receive a discount; if the seller refunded to them part of the price already paid, the customers would receive a rebate within the meaning of art 11A(3)(b); see, to that effect, Boots [1990] ECR I-1235, 1266, para 18.
24. However, that is not the case here. At the time of that transfer, agents must pay the full catalogue price in instalments, and the claimant is required to credit a separate account with a sum equal to 10% in respect of each payment which agents make. The sums which will thus have to be credited as and when those payments are made do not yet constitute discounts within the meaning of art 11A(3)(b) of the Sixth Directive."
- The Court rejected Freemans' alternative submission that article 11C(1) should be interpreted so as to have the effect that the taxable amount must be reduced at the time when the amount paid as AOP discount was credited to the agent's account see paragraphs 34 and 35 of the judgment ([2001] STC 960, 972c-d, [2001] 1 WLR 1713, 1726A-B). It answered the question referred in the sense of (3) above:
"Upon a proper construction of arts 11A(3)(b) and 11C(1) of the Sixth Directive, the taxable amount in respect of goods supplied by mail order from a catalogue to a customer for the customer's own use where the supplier allows the customer a discount from the catalogue price, a separate account being credited in the customer's favour with the amount of that discount as and when instalment payments are paid to the supplier a discount which may then be immediately withdrawn or used in another way by the customer is the full catalogue price of the goods sold to the customer, reduced accordingly by the amount of that discount at the time when it is withdrawn or used in another way by the customer."
The instant appeals
- In the light of the principles to be derived from these authorities we now turn to address the appeals that are before the Court.
COMMISSIONERS OF CUSTOMS AND EXCISE V THE LITTLEWOODS ORGANISATION PLC
- This is an appeal by The Littlewoods Organisation Plc from the order made by Mr Justice Lightman on 20 June 2000 allowing an appeal by the Commissioners of Customs and Excise from the decision, dated 25 December 1999, of the value added tax tribunal at Manchester.
- The underlying facts are not in dispute. Littlewoods, through its home shopping division, carries on a retail business selling catalogue goods by mail order through a network of agents. When an agent is recruited to the network he (or, more usually, she) is given an information pack. She is told how to place orders for goods in the catalogue. She is told that she will receive a statement every four weeks which will contain details of all her transactions and will show the minimum amount that she needs to pay. She is told that: "You will receive commission every time you make a payment. You can choose to use your commission in one of two ways either 12.5% if taken in goods, or 10% if taken in cash".
- The agent may order goods from the catalogue either for herself or for a third party usually a friend or colleague. In either case the catalogue price of goods is debited to the agent's account and appears on the statement sent to her. Payments received by Littlewoods from the agent are credited to the agent's account. Those payments may be made by the agent out of her own monies or out of monies which she has collected from the third party customer. An amount of 'commission', based on the payments received during the previous four weeks, is credited to a commission account. The accumulated commission is shown as a separate item on the statement. The item takes the form: "Commission available if taken in goods £[X] or in cash £[Y]". The relationship between X and Y on all the statements that have been put in evidence is such that X is 125% of Y. That reflects the promise, in the introductory pack, that: "Commission will be paid on every payment received at a rate of 12.5% if taken in goods, or 10% if taken in cash."
- The agent 'takes' her 'commission' by claiming it on one or other of two forms which have been provided to her by Littlewoods. On one of those forms, headed "Commission in Goods 12½%", she enters particulars of the catalogue goods she wishes to claim, and the total catalogue price. Provided that the total price of those goods (£x) does not exceed the amount (£X) of commission available "if taken in goods", the goods claimed are supplied to her without any monetary payment. The price is debited against her accumulated commission. In such a case the amount of commission available "if taken in goods" is reduced by the total catalogue price of the goods claimed, leaving a balance of £(X-x); and the amount of commission available "if taken in cash" is reduced by a corresponding amount to £(Y- 4/5 x). If the total price of the goods claimed exceeds the amount of commission available "if taken with goods", the difference, £(x-X), is debited to her account under "Other Items: Charge for Insufficient Commission at Time of Order" and forms part of the new balance owing to Littlewoods for goods supplied. So, in such a case, the goods are supplied to her for a consideration of which the monetary element is part only of the catalogue price.
- The other form is headed "Commission in Cash 10%". That enables the agent to specify the amount of commission available which she wishes to take "in cash" and offers her the choice between having that amount paid to her by cheque or applied to the credit of her account with Littlewoods. In effect, therefore, she can use her commission to discharge an existing balance on her account; but, if she does so, she is treated as having taken the commission in cash. The amount which she can take in cash (£y) cannot exceed the amount (£Y) of commission available "if taken in cash"; and is debited against her accumulated commission. In such a case the amount of commission available "if taken in cash" is reduced, leaving a balance of £(Y-y); and the amount of commission available "if taken in goods" is reduced by a corresponding amount to £(X- 5/4 y).
- As we have said, payments to the credit of the account are made by the agent at four weekly intervals either out of her own monies or out of monies which she has collected from the third party customer. A substantial period of interest free credit is allowed and it is usual for payments to be collected by the agent from third party customers by weekly instalments over a period of, say, twenty weeks. Provided that the third party customer pays all of the instalments due on each item purchased and the agent passes those instalments on to Littlewoods, the agent will be credited, in due course, with commission on the full catalogue price of the third party purchase. But the basis on which the agent is credited with commission is on payments received by Littlewoods from the agent; not on orders placed. This is recognised in those cases where the third party customer fails to keep up instalment payments. In such cases "the agent may invite Littlewoods debt recovery unit to take over the account and collect payments. If this happens the agent will cease to get commission for any further payments received by the debt recovery unit." see paragraph 6 of the witness statement of Mr Geoffrey Maitland, formerly financial controller of Littlewoods Home Shopping Division.
- There is no dispute in relation to the treatment, for the purposes of value added tax, of the supply of goods ordered by the agent on behalf of third parties. Littlewoods accounts for value added tax on the basis that the consideration for such supply is the full catalogue price. Nor is there any dispute in relation to the treatment for the purposes of value added tax of the supply of goods ordered by the agent for her own use in those cases where she does not claim the goods on a "Commission in Goods 12½%" form. Formerly Littlewoods sought to treat those goods as a supply at a discount of 10% and accounted for value added tax on 90% of the catalogue price. But that practice has been abandoned in the light of the decision of the Court of Justice in Freemans plc v Customs and Excise Commissioners (Case C-86/99) [2001] STC 960, [2001] 1 WLR 1713. We understand that it is now common ground that, in a case where the agent does not claim goods on a "Commission in Goods 12½%" form, the taxable amount in respect of goods supplied to the agent for her own use is the full catalogue price; with a reduction of 10% allowed to Littlewoods when the 'commission' is 'taken in cash'.
- The dispute is as to the treatment, for the purposes of value added tax, of the supply of goods to the agent herself in those cases where the commission which she has earned is 'taken in goods' that is to say, where goods are supplied to her in response to a claim on a "Commission in Goods 12½ %" form. In such cases the Commissioners have accepted that the taxable amount of those goods should be the catalogue price reduced by an amount equal to the commission claimed, but at the 'taken in cash' rate of 10%. It seems that this treatment is thought appropriate on the basis that it would be wrong to refuse a reduction equal to that which would be allowed if the commission were in fact 'taken in cash'. The issue is whether a further reduction of 2½ % should be allowed; or, more precisely, whether that further reduction should be allowed in so far as the commission 'taken in goods' is commission attributable to payments received in respect of sales to third parties. Littlewoods contends that it should be treated as an additional discount. The Commissioners argue that it should be treated as the monetary equivalent of non-monetary consideration provided to Littlewoods, as supplier, by the agent such non-monetary consideration being the agent's services in introducing, and procuring sales to, third party customers.
- The value added tax tribunal (the chairman, Mr David Demack, sitting alone) ruled in favour of Littlewoods. It is, we think, reasonably clear that the tribunal reached that decision on the basis that there was no sufficient link between the supply of goods to the agent for her own use and the services provided by the agent in introducing, procuring a sale to, and collecting payment from, the third party customer to satisfy the first of the requirements established by the decision of the Court of Justice in the Coφperatieve Aardappelenbewaarplaats case see paragraphs 40 to 46 of the tribunal's decision.
- The Commissioners of Customs and Excise appealed to the High Court. At paragraph 8 of his judgment ([2000] STC 588, 591e-f) Mr Justice Lightman pointed out that there were two distinct contracts between Littlewoods and the agent that is to say, the contract of agency and the contract for the purchase of further goods. He went on to say this:
"For the supply of services under the contract of agency to constitute part of the consideration for the supply of goods a direct causative and contractual link must be established. The twin issues raised in this case are (firstly) whether that direct link is established and (secondly), if it is, how the element of the supply of services is to be valued."
- The judge held that the necessary direct causative and contractual link was established by the existence and exercise of what he described as the third option in the agency contract that is to say, the right to take commission earned in respect of sales to third parties by way of allowance or discount against future own purchases. As the judge put it, at paragraph 9 of his judgment ([2000] STC 588, 591g):
"The reason and only reason why the agent could and did enter into the sale contract at the price reflecting the special allowance [of an additional 2.5%] was the existence and exercise by the agent of the third option contained in the agency contract."
- On the basis that the necessary link between the supply of goods to the agent and the provision by the agent of her services had been established, the judge addressed the second of the issues which he had identified: what was the monetary equivalent of the non-monetary element of the consideration represented by the provision of the agent's services? He concluded, applying the analysis in the Rosgill case, that the non-monetary element had to be valued by reference to the events which had actually occurred see paragraph 15 of his judgment ([2000] STC 588, 593f). The agent had chosen to take the commission earned on sales to third parties by way of an allowance or discount of 12.5% against future own purchases. It was immaterial that she might have chosen to take the commission in another form. Accordingly, the judge allowed the appeal against the tribunal's decision.
- Littlewoods appeals from the order made by Mr Justice Lightman with the permission of this Court (Lord Justice Mummery) granted on 8 August 2000. The grounds of appeal, set out in section 7 of its appellant's notice, are that the judge "erred in deciding that when an Agent purchased further goods using some or all of the commission she had earned, the value attributed by Littlewoods to the non-monetary consideration provided by the Agent in the form of her services in earning that commission was enhanced from 10% to 12.5%". In the skeleton argument lodged on its behalf (before the decision of the Court of Justice in the Freemans case) it is said that the judge ought to have held that the enhanced value of the commission (the additional 2.5%) was properly to be treated as a price reduction or discount within article 11A(3) of the Sixth Directive.
- The issue on this appeal is how the taxable amount in respect of the supply of goods to the agent herself, in response to an order made on a "Commission in Goods 12½% form", is to be ascertained. The relevant question is whether the difference between the catalogue price for the goods ordered and the monetary amount (if any) paid by the agent, or debited to her account as "Charge for Insufficient Commission at Time of Order", is to be treated as a price discount allowed to the customer and accounted for at the time of the supply within article 11A(3)(b) of the Sixth Directive or is to be treated (wholly or in part) as attributable to a non-monetary element of the total consideration which has been obtained by the supplier for the supply and so brought into the computation of the taxable amount under article 11A(1)(a) at an appropriate value.
- When the question is identified and posed in that form it can be seen that it raises two sub-issues: (i) whether there is any reason to apportion the amount claimed as 'commission in goods' so as to distinguish between so much of that amount (equal to 80% of the whole) as would represent commission at the 'taken in cash' rate of 10% and the balance of that amount (equal to 20% of the whole) which reflects the additional 2½ % allowed because the commission is 'taken in goods'; and (ii) whether there is any reason to distinguish between that part of the amount claimed as 'commission in goods' which is attributable (or which can be attributed) to commission earned on payments made by the agent in respect of her own purchases and that part which is attributable (or which can be attributed) to commission earned on payments in respect of third party purchases.
- It is, we think, important to keep in mind the factual context in which those issues arise. That factual context includes the following elements: (i) there is no direct link between the placing of an order and the credit of commission to the agent's commission account commission is credited when payments are received, not when orders are placed; (ii) an agent earns commission on all payments made by her to Littlewoods whether those payments are made by the agent out of her own monies in respect of purchases for her own use or out of monies which she has collected in respect of sales to third parties; (iii) as between Littlewoods and the agent there is no distinction between payments made in respect of purchases for her own use and purchases by third parties the right to commission, the amount of the commission and the option to take the commission 'in goods' or 'in cash' is the same whether the payment is made in respect of her own purchase or in respect of a purchase by a third party; and (iv) unless and until the agent chooses to take the commission whether 'in goods' or 'in cash' - the treatment for the purposes of value added tax is the same whether the commission is attributable to a payment made in respect of her own purchase or in respect of a purchase by a third party; in either case the taxable amount on the goods supplied is the full catalogue price and no reduction is allowed at the time when the commission is credited to her account.
- It is only when the agent chooses to take the commission that a difference in treatment can arise. If she takes the commission 'in cash' then at the least in so far as the commission is attributable to payments made in respect of her own purchases a reduction is allowed under article 11C(1) of the Sixth Directive. That was decided by the Court of Justice in the Freemans case. The decision in the Freemans case is silent as to the position where the commission taken 'in cash' is attributable to payments made in respect of purchases by third parties. But (without deciding the point) we find it difficult to see why article 11C(1) should not be engaged in such a case also. The principle of neutrality, upon which the Court relied in reaching its decision in the Elida Gibbs case, points to that conclusion.
- The basis of assessment for which the Commissioners of Customs and Excise have contended and which was upheld by the judge does involve an apportionment of the amount claimed as 'commission in goods' so as to distinguish between the part (80%) equivalent to commission at the rate of 10% and the part (20%) equivalent to the additional 2½ % allowed because the commission is taken 'in goods'. But it can now be seen, in the light of the decision of the Court of Justice in the Freemans case, that such a distinction cannot be supported. The true analysis of the position is this: (i) the agent's right to commission (whether 'taken in goods' or 'taken in cash') cannot be taken into account under article 11A(3)(b) of the Sixth Directive in order to reduce the taxable amount of goods ("primary goods") the sale of which (whether for the agent's own use or to a third party) has, upon payment, generated a credit to the agent's commission account; (ii) when the agent withdraws commission from her commission account 'in cash', the withdrawal is treated then at the least in so far as the commission is attributable to payments made in respect of her own purchases as a price reduction in respect of the primary goods made "after the supply takes place" and a corresponding allowance is made, at that stage, under article 11C(1); (iii) where the agent takes her commission 'in goods' there is no basis for an allowance against the taxable amount of the primary goods under article 11C(1) - unless commission taken in the form of goods ("secondary goods") can be regarded as a post-supply reduction in the price of the primary goods, which is a question which we do not need to address in this context; (iv) if commission taken 'in goods' has no effect on the taxable amount of the primary goods, the relevant enquiry and the only relevant enquiry in such a case is as to the taxable amount to be attributed to the supply of the secondary goods; (v) in that context, the question is whether the difference between the catalogue price of the secondary goods and the monetary amount (if any) paid by, or debited to, the agent is to be treated as a price discount allowed and accounted for at the time of the supply within article 11A(3)(b) of the Sixth Directive or is properly to be treated as attributable to a non-monetary element of the total consideration; and (vi) in addressing that question there is no basis for a distinction between so much of the commission 'taken in goods' as is equivalent to commission at the rate of 10% and so much of that commission as is equivalent to the additional 2½ %.
- Not only does the basis of assessment which the Commissioners of Customs and Excise seek to adopt involve an apportionment of the amount claimed as 'commission in goods' into two parts the one (80%) equivalent to commission at the rate of 10% and the other (20%) equivalent to the additional 2½ % - it also involves a further apportionment so as to distinguish between so much of the amount claimed as is attributable to commission earned on payments made in respect of the agent's own purchases and so much as is attributable to commission earned on payments in respect of third party purchases. If the basis of assessment which the Commissioners seek to adopt is to be supported, that is a necessary distinction. It is necessary because there is no basis that we can identify - and none has been suggested upon which so much of the amount claimed as 'commission in goods' as is attributable to commission earned on payments made by the agent in respect of her own purchases could be treated as a non-monetary element of the consideration obtained by the supplier for the supply of goods supplied in response to a "Commission in Goods 12½ %" form. The agent is entitled to 'commission' on payments made in respect of her own purchases and is entitled to take that commission as 'commission in goods' - whether or not she has done anything in relation to third party purchases. It seems to us beyond argument that in so far as the difference between the catalogue price for secondary goods ordered and supplied is attributable to commission on payments made by the agent in respect of her own purchases the amount of that difference must be regarded as a price discount or rebate allowed to the customer and accounted for at the time of supply within article 11A(3)(b) of the Sixth Directive. The position is indistinguishable from that in the Boots case.
- It follows that, unless there is some reason to distinguish between that part of the amount claimed as 'commission in goods' which is attributable to commission earned on payments made by the agent in respect of her own purchases and that part which is attributable to commission earned on payments in respect of third party purchases, the whole of the amount claimed as 'commission in goods' ought to be treated as a price discount or rebate with article 11A(3)(b).
- The reason advanced in support of a distinction between that part of the amount claimed as 'commission in goods' which is attributable to the agent's own purchases and that part which is attributable to third party purchases is that, in the latter case (as the judge found), there is the necessary direct causative and contractual link between the agent's services in relation to third party sales and the supply to her of secondary goods in return for a monetary payment which is less than the full catalogue price. It is said that, in such a case, the difference between the full catalogue price for the secondary goods and the monetary payment is attributable (in part at least) to a non-monetary element of consideration, provided by the agent in the form of services. As we have already pointed out, if that is the correct analysis, it applies as much to the whole of the amount claimed as 'commission in goods' so far as attributable to third party purchases as it does to the "enhanced rate" element of that commission. There is no distinction to be drawn, in this context, between commission at the 'in cash' rate of 10% and commission at the 'in goods' rate of 12½ %. The only relevant commission is commission at the 'in goods' rate.
- In our view the judge was wrong to find that the necessary direct link between the service provided by the agent in respect of third party sales and the consideration received by Littlewoods in respect of the supply to her of secondary goods had been established. It may be true, as the judge observed, in the passage at paragraph 9 of his judgment ([2000] STC 588, 591g) to which we have already referred, that:
"The reason and only reason why the agent could and did enter into the sale contract at the price reflecting the special allowance [of an additional 2.5%] was the existence and exercise by the agent of the third option contained in the agency contract."
But it is important not to overlook (i) that entry into the agency agreement imposed no obligations upon the agent, (ii) that commission was not earned on sales, but was generated by payments, (iii) that, as between Littlewoods and the agent, it was immaterial whether those payments were made in respect of the agent's own purchases or in respect of sales to third parties, and immaterial whether those payments were made out of the agent's own monies or out of monies collected from third party purchasers, (iv) that the agent could enter into "the sale contract" that is to say, the contract for the supply of secondary goods "at the price reflecting the special allowance" whether or not she had provided any service in relation to sales to third parties.
- Upon a true analysis the agent's right to take commission 'in goods' at the rate of 12½ % arose from a combination of two factors: (a) her appointment as an agent and (b) payments made by her in respect of the supply of primary goods. There was no direct link between her right to take commission 'in goods' at the rate of 12½% and any service which she had, or had not, provided in relation to a third party sale. The position is not the same as that in either the Naturally Yours case or the Rosgill case. The decisions in those cases do not provide the answer in the present case.
- The point may be illustrated by an example. Suppose a case in which the agent makes purchases for her own use to a catalogue value of £200, and makes purchases for third parties to a catalogue value of £100. The amount debited to her account will be £300. She makes payments to the credit of her account which total £150. She is credited with commission which is expressed as "£18.75 if taken in goods, £15 if taken in cash". She chooses to take her commission partly in goods and partly in cash. The catalogue price of the secondary goods which she orders on a "Commission in Goods 12½%" form is £6.25. On a "Commission in Cash 10%" form she requests that £10 be applied towards the discharge of the balance (then £150) on her account. Those dispositions exhaust her commission. In the circumstances that she has made no monetary payment for the secondary goods supplied to her the difference between the catalogue price of those goods and the monetary payment is equal to the amount of the commission 'taken in goods' that is to say, £6.25. But there is no basis upon which it can be said that there is any direct link between that amount and the sales to third parties. There are at least two points at which the link fails: (i) it is not established that any part (or, if so, what part) of the £150 which she has paid to the credit of her account is to be treated as payment for the third party purchases; and (ii), even if it were established that that sum was to be applied, first, in paying the amounts owing in respect of third party purchases (£100), it is not established that any part of the commission 'taken in goods' (£6.25) is attributable to commission earned on payments (£100) made in respect of third party purchases.
- In the absence of any direct link between (a) the difference between the full catalogue price of the secondary goods supplied to the agent and the monetary amount (if any) which she pays for those goods and (b) services provided by her as agent in connection with the sale of primary goods to third parties, there is no basis for treating the provision of services as a non-monetary element in the consideration for the supply of the secondary goods; and no basis for taking a non-monetary element into account (at an appropriate value) under article 11A(1)(a) of the Sixth Directive when ascertaining the taxable amount to be attributed to that supply. In those circumstances the commission 'in goods' must be treated as a price discount or rebate allowed to the agent at the time of the supply of the secondary goods; and cannot be included in the taxable amount see article 11A(3)(b).
- For those reasons we allow Littlewoods' appeal.
lex services plc v commissioners of customs and excise
- This appeal is against the order made on 20 July 2000 by Mrs Justice Arden on an appeal by Lex Services Plc from the decision, released on 26 May 1999, of the London value added tax tribunal. The tribunal (the chairman, Mr Theodore Wallace, sitting alone) had upheld the refusal of the Commissioners of Customs and Excise to admit a claim by Lex for repayment of value added tax said to have been overpaid. The judge dismissed the appeal from that decision. In granting permission to appeal to this Court on 30 October 2000 Lord Justice Mummery directed that the Lex appeal be heard with the Littlewoods' appeal for which he had granted permission some two months earlier.
- The appellant, Lex Services Plc, is the representative member of a VAT group of companies which carry on business as car dealers. In the course of that business Lex companies enter into sales transactions under which they supply cars to their customers. The sales transactions relevant to the present appeal have three common features: (i) the purchase price for the car supplied by the Lex company ("the Lex car") is satisfied partly in cash and partly by a car ("the part exchange car") offered by the customer and accepted by the Lex company in part exchange; (ii) the customer is entitled to cancel the transaction upon giving notice within a specified time (30 days); and (iii) where the customer exercises that right of cancellation he is entitled to the return of the part exchange car or (in cases where the part exchange car has already been sold on by Lex) to a refund of an amount which is not the amount which had been allowed by way of part exchange ("the part exchange price") but a lesser amount, described in the sale documentation as "the true value".
- It is common ground that, in the cases just described, the consideration for the supply of the Lex car and hence the taxable amount for the purposes of value added tax chargeable in respect of that supply comprises two elements: (i) the part exchange car and (ii) a monetary amount equal to the difference between the stated selling price for the Lex car and the part exchange price. The issue raised by the appeal is whether the value to be attributed to the non-monetary element of the consideration that is to say, the value to be attributed to the part exchange car - is, as the Commissioners of Customs and Excise contend and as the tribunal and the judge have held, the part exchange price; or, as Lex contends, the lesser amount described as the true value.
- The judge directed herself, correctly in our view, that in a case where the parties to the transaction have placed a value on the non-monetary element of the consideration for the purposes of the transaction between them it is that value that must be taken for the purposes of ascertaining the taxable amount on which value added tax is payable. That gives effect to the third of the principles enumerated by Lord Justice Hutchison in the Westmorland case ([1998] STC 431, 434b-c). It is true that the non-monetary element of consideration in that case and in the Naturally Yours case before the Court of Justice, upon which this Court relied both in the Rosgill case and in the Westmorland case was the provision of services rather than the supply of goods; but that is a distinction without a difference, as is clear from the reference in the judgment of Lord Justice Hobhouse in the Rosgill case ([1997] STC 811, 819a) to the 'barter' element. As we have said, that principle must now be regarded as settled in this Court. The relevant enquiry, therefore, is whether the parties to the transaction have placed a value on the non-monetary element of the consideration for the purposes of the transaction between them; and, if so, what is that value. As Lord Justice Hobhouse emphasised, in the passage at [1997] STC 811, 819a to which we have just referred, that does not require the court to engage in an exercise in valuation; it requires the court to examine the transaction itself in order to determine what is likely to be a simple question of fact. Where the transaction is recorded in documentation, the answer is likely to be found in that documentation.
- That, as it seems to us, is the position in the present case. The documentation in relation to a specimen sale the sale of a used car to a customer (Mr King) where no finance house was involved - is described in paragraphs 24 to 28 of the tribunal's decision. Those paragraphs are set out in full by the judge in her judgment ([2001] STC 697, 700d-701c). The salient features may be summarised as follows: (1) The sale transaction between Lex and its customer was recorded in a Vehicle Order form signed by the customer and on behalf of Lex. The Vehicle Order form comprised three pages the first headed "Vehicle Order", the second headed "Conditions of Sale" and the third headed "Part Exchange Details and Declaration". (2) The first page "Vehicle Order" contained details of the customer and the vehicle sold by Lex. It showed a "Vehicle Price" (£21,302), a "Total Vehicle Price" (£21,447) and a "Total Sale Price" (£21,950). The relationship between those three prices was such that the Total Vehicle Price was the Total Sale Price after deduction of values attributed to warranties; and the Vehicle Price was the Total Vehicle Price after deduction of road fund licence. A sum (£2,000) described as "Part-Exchange Allowances" was deducted from the Total Sale Price. The balance (£19,950) was described as "Total Payment Outstanding". (3) The third page "Part Exchange Details and Declaration" contained details of the part exchange car. It contained, also, the following details of the part exchange transaction - "Part Exchange Price: £2,000", "Less additional allowance: £600", "True Value (Note 1): £1400". Note 1 was in these terms:
"Note (1): In the event of cancellation of the sale the amount refundable by Lex will be limited to the true value shown."
The transaction recorded on the Vehicle Order form was reflected in invoices: one in respect of the Lex car to Mr King at a stated selling price of £21,302, and the other in respect of the sale of the part exchange car by Mr King to Lex at a stated price of £2,000. The latter contained a declaration, signed by both parties, that the car had been sold by Mr King at that price.
- The relationship between Part Exchange Price and True Value was explained in evidence. Put shortly, True Value was the amount which Lex was willing to refund if it were unable to return the part exchange car in the event of cancellation. It was fixed unilaterally by Lex; usually (but not invariably) after Lex had obtained trade quotes in the market. If the customer was willing to effect a part exchange on the basis of that figure, then Part Exchange Price would be equal to True Value. But if the customer required a higher figure, then in order to secure the sale a further sum, or "over allowance", might be added to True Value so as to bring it up to the Part Exchange Price which the customer would accept. The tribunal found that that was what happened in about 75% of cases. The reason why Lex chose to add an "over allowance" to what it regarded as the trade value of the part exchange car rather than to allow a corresponding discount off the stated selling price of the Lex car was explained by the tribunal at paragraph 14 of its decision:
"From the point of view of Lex it was immaterial whether a customer received a discount in the price of the car he bought or received a higher price on the car taken in part exchange; the net effect was the same. Since most customers were primarily concerned with the car traded in, Lex responded by offering good trade-in prices in order to obtain the business. It was a marketing tool."
- The effect of the transaction was that Lex supplied a Lex car for a consideration which comprised £19,302 in cash and Mr King's part exchange car, of which the true (or trade) value in the market was £1,400. So, it was submitted, the total value of the consideration which Lex received was £20,702; rather than the stated selling price of £21,302. It was said that the economic effect of the transaction, for both parties, would have been the same if, instead of including an "over allowance" of £600 in the part exchange price, a discount or rebate of £600 had been allowed off the stated selling price. The principle of neutrality requires that transactions which have the same economic effect should be treated in the same way for the purposes of value added tax.
- We reject the submission that there is any principle that transactions which have the same economic effect are, necessarily, to be treated in the same way for the purposes of value added tax. The principle of neutrality, as explained by the Court of Justice in the passages at paragraphs 28 and 31 of the judgment in the Elida Gibbs case to which we have referred ([1996] STC 1387, 1403j, 1404a-b, [1997] QB 499, 561G-H, 562A-C), requires that the taxable person that is to say, in the present case, the supplier is not required to account for an amount of value added tax which is greater than the amount actually paid by the final consumer - in the present case, the purchaser of the Lex car. As the Court of Justice emphasised, at paragraph 19 of its judgment in Elida Gibbs, it is the final consumer who is intended to bear the tax; and the taxable amount upon which value added tax is chargeable cannot exceed the consideration which the final consumer pays for the supply. But that principle does not provide the answer, in the present case, to the question "what monetary equivalent did the parties attribute to the part exchange car?"; nor even to the question "what monetary equivalent did the part exchange car represent to Lex when it accepted that car in part payment for the supply of the Lex car?" see paragraph 20 of the judgment of the Court of Justice in the Argos case ([1996] STC 1359, 1373a-b, [1997] QB 499, 529G).
- The answer, in the present case, is the same whether the question is posed in the form "what monetary equivalent did the parties attribute to the part exchange car?" or in the form "what monetary equivalent did the part exchange car represent to Lex when it accepted that car in part payment for the supply of the Lex car?" That is because, in the present case, the monetary equivalent of the part exchange car, in the context of the supply of the Lex car, was agreed between Lex and its customer for the purposes of that transaction. It is not possible to hold, on the facts of the present case, that the monetary equivalent attributed by Lex to that element of the consideration represented by the part exchange car was not the same as the monetary equivalent agreed between Lex and its customer.
- In our view the judge was correct when she said, at paragraph 9 of her judgment ([2000] STC 706j-707a, 707d-e):
"There is no doubt that the part exchange car formed part of the consideration for the Lex car. The only question is its value. That value is the value placed on it for the purposes of the transaction whereby the customer bought a Lex car (see Naturally Yours case, above). It is clear from the sale documentation that for that purpose they valued it at the part exchange price. The part exchange price was specifically agreed and there are commercial reasons for it (Decision, paragraphs 14 and 18). In those circumstances, the court cannot substitute the value of the part exchange car to Lex, i.e. its trade value. This in truth would not be the requisite subjective value of the part exchange car at all . . ."
"Finally, it is not open to the court to value the consideration constituted by the part exchange car as if the customer had been given a discount on the list price of a Lex car. That transaction would have had the same economic effect but the court is bound on the authorities to take the subjective value of the non-monetary consideration and that entails valuation in accordance with the transaction as it was in fact structured."
- The only question for the judge, as she appreciated, was whether the sale documentation did lead to the conclusion that the value which the parties attributed to the part exchange car for the purposes of the transaction between them was the amount described in that documentation as the Part Exchange Price or the amount described as the True Value. We are satisfied that there is only one possible answer to that question. The documentation makes it clear that the value attributed to the part exchange car for the purposes of the supply of the Lex car was the Part Exchange Price. The True Value served a different and distinct purpose. It was the amount which the parties would accept as the value of the part exchange car for the purposes of a different transaction that is to say, for the purposes of any refund to be made by Lex in the event that the principal transaction were cancelled.
- We dismiss the Lex appeal.
commissioners of customs and excise v bugeja
- This appeal is against the order made on 25 November 1999 by Mr Justice Carnwath on an appeal by the Commissioners of Customs and Excise from a decision of the value added tax tribunal at London (Mr Stephen Oliver QC, chairman, and Mr Aziz Khan) released on 30 June 1998.
- Mr Bugeja sold video cassettes at a price of £20 each. But he would accept a cassette previously sold by him in part exchange. In such a case the amount paid by the customer, in addition to the return of the cassette previously sold, was £10. The Commissioners of Customs and Excise assessed the value added tax for which Mr Bugeja was accountable on the basis that the taxable amount in respect of each supply (whether or not a cassette previously sold was taken in part exchange) was £20. Mr Bugeja contended that the taxable amount where a cassette was taken in part exchange was only £10. The tribunal upheld that contention and allowed Mr Bugeja's appeal against the assessment. The Commissioners appealed to the High Court.
- The facts found by the tribunal are set out by the judge in the third paragraph of his judgment, [2000] STC 1, at page 3f-j:
"The tribunal found the following as 'primary facts'. (1) The published terms of business are: £20 to buy and £10 to exchange. (There was in fact a notice which read: 'Videos. Sale £20: Part-Exchange £10'). (2) The videos that are on offer in Mr Bugeja's shop are all marketed with the unique Bugeja security tag. The tag cannot be removed without leaving a mark on the video. (3) Videos bought in by Mr Bugeja from 'wholesalers' as stock of the business cost £2 to £3. (4) Apart from the videos purchased by Mr Bugeja from wholesale sources and those with Bugeja security tags already affixed to them which are taken back from customers, no other videos are stocked. In particular a video which does not bear the Bugeja security tag is not accepted by Mr Bugeja from a customer. (5) Where an 'introductory supply' is made to a customer, i.e. in return for the £20 payment, that customer learns that if he brings the video back he will be able to take another on payment of £10. (6) There is no obligation on any customer to return any video taken from the shop. 70% to 80% of the videos taken by customers from the shop are brought back, mostly within a week, by customers in return for replacement supplies. (7) The right to a replacement supply does not depend on the length of time which the handed-in video has been away from the shop or on the time the replacement video is to be away. (8) No record is kept of the persons taking videos either following introductory supplies or following replacement supplies. (9) Mr Bugeja will not accept a badly damaged video in return for a replacement supply. A replacement supply is not available to a customer who has lost a the video that was previously supplied to him by Mr Bugeja."
In addition to the facts found by the tribunal, the judge was told by counsel for Mr Bugeja that:
"A large proportion of the videos were thrown away. Mr Bugeja cannot remember the exact proportion. Some of the videos were resold. Reasons why Mr Bugeja might throw away a video are: (i) the video is no longer in a useable condition; (ii) the video is out of date."
The Commissioners were content to accept that some returned videos were thrown away by Mr Bugeja; although they did not accept the reference to 'a large proportion' as necessarily correct.
- Before the tribunal the primary argument advanced on behalf of Mr Bugeja was that the videos were supplied by way of rental or hire. The tribunal rejected that argument; holding that, in respect of each transaction whether the customer paid £20 (an 'introductory supply'), or paid £10 on the return of a video previously supplied (a 'replacement supply') - the supply of the video was by way of sale. The rejection of his primary argument led Mr Bugeja to advance, as a secondary argument, the analysis that "£10, or at least some part of the £20 paid in return for the introductory supply, was paid for the right to obtain the replacement supply of a video for £10." In addressing that argument the tribunal sought assistance in a contractual analysis of the transactions between Mr Bugeja and the customer:
"The result of this case depends on the determination of the real nature of the replacement supply. The starting point in the enquiry is the introductory supply. The customer who is party to the transaction involved in the introductory supply has to pay £20. In return for this he gets the video marked with the Bugeja security tag. He is free to keep the video and in other respects to treat it as his own property. But because he has bought a video with a Bugeja security tag attached, he or the holder for the time being of that video has the right to hand it to Mr Bugeja and obtain another such video in return for a £10 payment; and the replacement video in its turn will (unless Mr Bugeja has changed the terms of the trade in the meantime) confer the same right to obtain a further video. The contractual analysis of the introductory supply is, therefore, this. In return for the payment of the £20 the customer obtains the video marked with the Bugeja security tag together with the benefit of Mr Bugeja's undertaking to keep open and unrevoked the offer to make a replacement supply for £10. The benefit of Mr Bugeja's undertaking is transferable in the sense that it is given to the recipient of the introductory supply in the first place but it passes to any other person who has possession of the same video. Acceptance is made by handing in that video and paying £10.
The contractual basis of the replacement supply is this. The customer exercises his right of acceptance of the open offer given at the time of the introductory supply. He hands over the video and pays £10 and gets the replacement supply in return."
The tribunal went on:
"The replacement supply is for a consideration which is partly cash (£10) and partly the customer's service in handing in a Bugeja video. The value to be attributed to the replacement supply is, on Naturally Yours Cosmetics principles (page 854j), £10 plus the monetary value if any which the two parties to that supply attributed to the customer's service of handing in the Bugeja video. The Commissioners say that that value is £10. This is because the return of the old Bugeja video allows the customer to obtain a new one for £10 rather than the £20 which he would have had to have paid had he no Bugeja video to hand in. £10 must therefore (so the argument runs) have been what the parties had in mind as the consideration for the customer's service of handing in the old Bugeja video at the time of the replacement supply.
There is no doubt that the customer who enters the shop with an old Bugeja video in his hand can obtain a replacement video for £10 less than the customer who comes in empty-handed. This does not however answer the question of what monetary consideration the parties to the replacement supply transaction attributed to the customer's service of handing in his old Bugeja video. This is because the question cannot be answered by focussing on the replacement supply in isolation. The consideration for the replacement supply has to be determined in its legal context. Seen in that light, Mr Bugeja can have attributed no monetary consideration to the customer's service in handing it in. So far as he was concerned he had no choice: he had to take the old video back, assuming it was in acceptable condition, and supply a new one for £10. This followed from the fact that he had made the introductory supply and had incidentally received a consideration of £20 at that earlier stage. It was the introductory supply that secured for the customer a video coupled with Mr Bugeja's obligation, evidenced by the security tag attached, to make a replacement supply to anyone who returned the video and paid £10. The introductory supply put that customer, or the holder in due course of the Bugeja video, in the preferential position referred to above as compared with the empty-handed buyer. The terms of the replacement supply were dictated by the introductory supply. The parties had no scope to attribute any monetary consideration to it, other than the £10."
- The effect of the tribunal's analysis is to treat the returned Bugeja video as having no intrinsic value. That might have been appropriate if the tribunal had made a finding of fact that returned videos could not be resold. But, as the judge pointed out, at [2000] STC 1, 3j, the tribunal made no such finding. Indeed, it was accepted before him that (as might be expected) some returned videos were resold. The judge rejected the analogy which, before him, counsel for Mr Bugeja sought to draw with the Boots case. He said this, at page 8b-c:
"There is, however a fundamental difference. The coupon [in the Boots case] was held to be 'nothing other' than a document incorporating an obligation. It represented a burden on the supplier, not an advantage to him. No such finding is, or could be made, on the facts of this case. The videos returned to Mr Bugeja, apart from the obligation represented by the security tag, represented something of potential value to him. As [counsel for the Commissioners] submits, to ignore the return of the old videos is to offend the terms of the Sixth Directive, which deems consideration to be 'everything which has been obtained by the supplier'. The real issue is how that element of the consideration is to be valued."
We agree.
- Although the tribunal referred to the customer's 'service' in handing in a Bugeja video as part consideration for the supply of a replacement video, the true analysis is that the consideration for the supply of the replacement video comprised in part money (£10) and in part goods (the return of the video previously sold). The only distinction between that transaction and the more usual part exchange transaction such as that which we have considered in the Lex appeal - is (i) that the only item of goods that Mr Bugeja would accept in part exchange on the supply of a video was a video which he had previously sold that is to say, a video bearing a Bugeja security tag - and (ii) that Mr Bugeja had undertaken in advance to accept goods of that description in part exchange. But in the context of an enquiry as to the monetary equivalent of the goods accepted in part exchange, that distinction is irrelevant. There can be no basis for a conclusion that the monetary equivalent of a Bugeja video accepted in part exchange is affected by the fact that other videos not bearing a Bugeja security tag would not have been accepted; and no basis for a conclusion that the monetary equivalent of the video accepted in part exchange is affected by the fact that (unless damaged) Mr Bugeja could not (or would not) have refused to accept it. The relevant question is what is the monetary equivalent of the non-monetary element of the consideration provided by the customer in the context of the transaction which actually took place.
- The Commissioners of Customs and Excise relied before the judge as they do in this Court on the principles identified by Lord Justice Hutchison in the Westmorland case ([1998] STC 431, 434b-c); in particular, upon the third of those principles:
"Where the parties have expressly or implicitly attributed a value to the [non-monetary] element that determines its value."
In the present case the application of that principle would lead, necessarily in our view, to the conclusion that the monetary equivalent of the returned video was £10. We see no answer to the submission that the value attributed by the parties to the returned video in the part exchange transaction in which they were engaged was the difference (£10) between the amount of money (£20) which the customer would pay for the supply of the replacement video if he did not return a Bugeja video and the amount of money (£10) which he does pay for the supply of the same replacement video if he does return a Bugeja video.
- The judge rejected that approach. After referring to the authorities including, in particular, the decisions of the Court of Justice in the Naturally Yours case and the Empire Stores case and the decisions of this Court in the Rosgill case and the Westmorland case the judge said this, at [2000] STC 1, 6f-g:
"I have not found it easy to extract from these cases a clear or consistent line of approach to the treatment of non-monetary consideration. They reflect two characteristic features of transactions of exchange: first, that on such a transaction (unlike one for cash) there may be VAT consequences in both directions; and, secondly, that consideration consisting of goods or services (again, unlike cash) will often have different values depending on whose view point is adopted. In deciding which viewpoint is to be taken, one finds in the cases two distinct, and potentially inconsistent lines of thought: (1) the viewpoint is that of the consumer, since VAT is a tax on consumption; (2) it is that of the supplier, since the 'taxable amount' is 'everything . . . obtained by the supplier' as consideration."
After pointing out that what he perceived as "these different approaches" had led to "some ambiguity in the language of the Court of Justice", the judge went on, at page 6j, to observe that "these ambiguities are only partly resolved by the Court of Appeal cases." He drew attention to the distinction, in the Rosgill case, between the reference, in the statement of the 'settled principle' in the judgment of Sir Richard Scott, Vice Chancellor, to the 'subjective value to the supplier' and the references, in the judgments of Lord Justice Hobhouse and Lord Justice Morritt in the same case, to 'attribution by the parties'. He continued, at [2000] STC 1, 7b-g:
"The 'settled principle' as stated by the Vice-Chancellor is, in my view, fully supported by cases such as Empire Stores, Argos and Elida Gibbs. It also reflects a sound taxation principle: that no one should be accountable for tax on more than the value to him (that is, the 'subjective value') of what he has received. Although there is an apparent difference between his formulation and that of the other members of the court, the distinction was immaterial on the facts of Rosgill, since his 'subjective value to the supplier' was the same as the 'value attributed by the parties', as found by the other members of the court. The same could have been said in Naturally Yours and Westmorland Motorway.
However, it is important to bear in mind what was being valued in each of those cases. The consideration the 'taxable amount' consisted of the services; but the valuation was derived from the price of the goods. This was because there was no obvious way of attributing a value to those services, other than by treating them as having a value identical to the goods supplied in return. It was therefore an 'approximation' or 'indirect' method (as the Advocate General (da Cruz Vilaηa) observed in Naturally Yours [1988] STC 879 at 892, [1988] ECR 6365 at 6383, para 71). The figure is referred to as one 'attributed by the parties'. On analysis, however, it is the subjective value of the goods, to the recipient of those goods (the beauty consultant) since it is based on the price paid by her; it is then treated, in effect, as a proxy for the subjective value of the services to the recipient of the services (the manufacturer).
To summarise, in my view, the true criterion is the 'subjective value to the supplier' of the goods or services received as consideration. The Court of Appeal cases provide general guidance, but must be looked at with regard to their special facts. The method adopted to attribute a monetary amount to the consideration will vary according to the facts. It must, however, be 'the one which proves most direct and least distorting and which is most in conformity with the general scheme of the Sixth Directive, as interpreted by the court' (see the opinion of the Advocate General in Naturally Yours [1988] STC 879 at 891, [1988] ECR 6365 at 6382, para 65). Part of that scheme is the principle that no one should be accountable to tax on more than the subjective value of what he has received."
- The judge's analysis of the authorities led him to question whether what he described as 'the Naturally Yours approach' could properly be applied to the case before him. He said this, at [2000] STC 1, 9d-h:
"As I have said, the facts in that case (and in the two Court of Appeal cases) were very different. In each case the consideration consisted of services which were intangible in nature and not readily capable of direct valuation by any normal method. It is understandable, therefore, that it was necessary to adopt an indirect method, by treating the value of those services as equivalent to the value of the goods for which those services were consideration. Since the value of the services to the supplier was otherwise undefined, the result did not offends the principle that the taxable amount should not exceed what the supplier had actually received.
In the present case, by contrast, there is nothing intangible about the consideration received by Mr Bugeja, nor any obvious problem of valuation. The consideration is partly in cash, and partly in the form of an object (a secondhand video), of a type which is regularly bought and sold. There is no need for any 'approximation' or 'indirect' method. We know that the 'subjective value to the recipient' is not more than £2 to £3. If one is looking for the method which is 'most direct and least distorting', and which avoids him having to pay tax on more than he receives, that value provides a ceiling. It would be surprising and unfair if he were required to pay tax as though he had received something worth £10. I conclude that this is a case where it is appropriate to adopt a method analogous to that used in Empire Stores."
- In the Empire Stores case the Court of Justice had reached the conclusion that the monetary equivalent of the non-monetary element of the consideration in that case, the introduction of a new customer under the 'introduce a friend scheme' was the cost to the supplier of the article which he was supplying without charge in consideration of the service in question see [1994] STC 623, 636, at paragraph 19. Adopting that approach by analogy, Mr Justice Carnwath held in the present case that the value to be attributed to the returned video was £2 that being the figure which he took to be the cost to Mr Bugeja of purchasing a similar video from wholesalers after taking account of the fact that some of the returned videos would not be re-usable. Accordingly, he allowed the Commissioners' appeal against the decision of the tribunal in part; but reduced the assessment in respect of each replacement supply to £12 (being £10 cash and £2 in respect of the old video).
- The Commissioners appeal from the order of 25 November 1999 with the permission of the Judge. It was made clear to us that the Commissioners take the view that it is important to resolve the question, in principle, whether Mr Justice Carnwath was correct to distinguish the decision of the Court of Justice in the Naturally Yours case, and the decisions of this Court in the Rosgill case and the Westmorland case, on the grounds that, in those cases, the non-monetary element of the consideration for the supply comprised goods and not services. The Commissioners have undertaken that, if they succeed in their appeal, they will not seek to disturb the financial consequences of the judge's order in so far as it affects Mr Bugeja.
- In our view there is no reason, in principle, to distinguish between those cases of which a part exchange transaction is an obvious example - in which the non-monetary element of the consideration for the supply takes the form of goods and those cases in which the non-monetary element takes the form of services. In each case the enquiry is the same: what is the monetary equivalent of consideration not consisting or not wholly consisting of money see Article 11A(1)(a) of the Sixth Directive and section 19(4) of the Value Added Tax Act 1994. Nor, in our view, is there conflict in the case of a bi-partite transaction under which goods are supplied by one party for consideration provided by the other wholly or partly in the form of goods or services between the enquiry as to the monetary equivalent of the non-monetary consideration and the principle that a person should not be required to account for tax on the basis of a taxable amount which exceeds what he has received. There is no difficulty, in such a case, in identifying what the supplier has received as consideration for the supply. The problems with which the Court of Justice was faced in the Argos case and the Elida Gibbs case do not arise. It is pertinent to note that, in the Rosgill case, Sir Richard Scott, Vice-Chancellor, found those cases of no assistance. The question, in a case such as the present, is not "what is the consideration for the supply?"; rather, the question is "what is the monetary equivalent of the non-monetary element of that consideration?"
- That question has to be answered in the light of the decisions of the Court of Justice in the Naturally Yours case and the Empire Stores case. We think that the judge may have been misled by references, in those cases and in the subsequent decisions of this Court in the Rosgill case and the Westmorland case, to 'the subjective value' of non-monetary consideration. Lord Justice Robert Walker, in his recent judgment in this Court in F & I Services Ltd v Customs and Excise Commissioners [2001] STC 939, referred, at page 956a, to "the special sense in which the Court of Justice uses that term in this context". Mr Advocate General Fennelly explained, at paragraph 21 of his opinion in the Argos case in a passage to which we have already referred ([1996 STC 1359, 1366b, [1997] QB 499, 521C-D) that: ". . .in this context, the word 'subjective' is not used here in its normal sense, but rather to describe the value placed by the parties on key elements in a transaction . . .". The sense in which the term 'the subjective value' is used by the Court of Justice in this context may, we think, be expressed as 'the value for the purposes of the transaction'; the distinction is between the value placed on the goods or services in the context of the particular transaction and some 'objective' value which the goods or services might command in the market generally.
- It is clear, from the decision of the Court of Justice in the Empire Stores case, that where no monetary value has been placed upon the non-monetary element of consideration for the supply of goods whether that non-monetary element takes the form of goods or services by agreement between the parties, the relevant enquiry is as to the monetary equivalent which the supplier (as the recipient of the consideration) places upon that element for the purposes of the transaction. We would accept that that is the relevant enquiry, also, in a case where the parties to the transaction have agreed on the monetary equivalent of the non-monetary element. That is made clear by the decision in the Argos case as appears from the contrast between the approach of the Court of Justice and that of the Advocate General. But, in the case of a bi-partite transaction under which goods are supplied by one party for consideration provided by the other wholly or partly in the form of goods or services and the parties have agreed on the value to be attributed to those goods or services, the answer to the enquiry "what monetary equivalent has the supplier placed upon the non-monetary element for the purposes of the transaction?" is provided by the agreement. In such a case there can be no difference between the value which the parties have agreed to place upon the non-monetary element for the purposes of the transaction between them and the value which one of those parties (the supplier, as the recipient of the consideration) places upon that element for the purposes of the transaction.
- We are satisfied, therefore, that the judge's decision in the present case could be upheld if, but only if, he were entitled to (and did) take the view that there was no agreement between Mr Bugeja and his customer as to the value to be attributed to the Bugeja video which the customer returned by way of part exchange. Although there is some indication that the judge may have been attracted to that view see the passage at [2000] STC 1, 9b-d - it cannot be said that he decided the appeal before him on that basis. Nor do we think that he would have been entitled to do so. In our view the only conclusion open to him on the facts found by the tribunal was that both Mr Bugeja and his customer treated the returned video as having a value equal to the difference between the "Sale" price of £20 and the "Part-Exchange" price of £10.
- We should add that there was no reason why Mr Bugeja and his customer should not be taken to have dealt with each other on that basis. The returned video was an item for which the customer had paid at least £10 (or £20, if it was his first purchase); and it was an item which (unless it had become obsolete or was no longer in a useable condition) Mr Bugeja could be expected to resell for at least £10 (or for £20 as an introductory supply).
- We allow the Commissioners' appeal against Mr Justice Carnwath's order of 25 November 1999.
kuwait petroleum (gb) limited v commissioners of customs and excise
- This is an appeal against the order made on 20 December 2000 by Mr Justice Laddie dismissing the appeal of Kuwait Petroleum (GB) Limited against the decision of the value added tax tribunal at London (Mr R K Miller CB, chairman, and Mr R L Jennings FCA FTII) released on 24 March 2000. That decision followed a reference by the tribunal to the Court of Justice on 15 January 1997, after an earlier hearing. The decision of the Court of Justice was handed down on 27 April 1999 and is reported at [1999] STC 488.
- The appellant company is the supplier of petroleum fuel ("the premium goods") under the brand name "Q8". Between 1991 and 1996 the company operated a sales promotion scheme, described as the "Q8 sails scheme" (sic) under which customers buying Q8 fuel at service stations which the company owned or supplied were offered stamps or vouchers which they could exchange for goods ("the redemption goods") listed in a catalogue. The price of fuel supplied was the same whether or not the customer accepted the stamps. The company accounted for value added tax on the full price of the fuel supplied; but deducted input tax on its purchase of the redemption goods. It was assessed to output tax on the redemption goods on the ground that those goods had been supplied to customers otherwise than for a consideration and were therefore chargeable to value added tax under paragraph 5 of schedule 4 to the Value Added Tax Act 1994 which gave effect to article 5(6) of the Sixth Directive. Article 5(6) is in these terms:
"The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration."
- The company appealed to the tribunal. As we have said, the tribunal took the view that it should refer questions to the Court of Justice for a preliminary ruling. The questions referred included the following: "(2) Are the redemption goods to be treated as "supplies made for consideration" for the purposes of article 5(6) of the directive; (3) If the redemption goods are provided otherwise than for consideration or "free of charge", is article 5(6) to be interpreted as requiring that the provision of the redemption goods be treated as a supply for consideration notwithstanding that such provision is for business purposes." The Court of Justice answered those questions as follows: "On a proper construction of art 5(6) of the Sixth Directive, the application by an oil company of goods which are disposed of to a purchaser of fuel in exchange for vouchers which he has obtained in varying quantities, depending on the volume of fuel purchased, on payment of the full retail price for fuel from the pump under a sales promotion scheme such as that in issue in the main proceedings - must, where the goods are not of small value, be treated as a supply for consideration within the meaning of that provision." But, in reaching that conclusion, the Court said this, at paragraph 27 of its judgment ([1999] STC 488, 509b):
"It is for the national court to enquire whether, at the time of purchasing the fuel, the customers and Kuwait Petroleum had agreed through the dealers, as the case may be that part of the price paid for the fuel, whether identifiable or not, would constitute the value given in return for the Q8 vouchers or the redemption goods." . . .
The Court observed that there was nothing in the documents to suggest that there was, in fact, any such reciprocal performance by the parties concerned. But, plainly, if the redemption goods had been paid for, as part of the price paid for the fuel, then article 5(6) of the Sixth Directive could have no application: the disposal of the redemption goods would not be "free of charge".
- Following the judgment of the Court of Justice, the company's appeal against the assessments made upon it was restored for further hearing before the tribunal. The issues which the company invited the tribunal to address at that hearing appear from a letter dated 25 June 1999 from its tax consultants. First, the tribunal was asked to hold that the facts did establish that part of the price received by the company on the sale of fuel was consideration given in return for the vouchers or the redemption goods. The tribunal had already expressed a provisional view, in the interim decision which it had released on 13 January 1997 when making the reference to the Court of Justice, that that contention was unfounded see paragraph 97 of that decision. At paragraph 9 of the decision of 24 March 2000, the tribunal confirmed its provisional view. The judge held that the tribunal were correct to take that view. There is no appeal to this Court from the judge's conclusion on that first point. We need say no more about it.
- The second issue that the tribunal was invited to address was put, in the letter of 25 June 1999, in these terms:
"[I]f contrary to [the company's] first submission, Art 5(6) requires the output tax charge to be imposed based on the cost of redemption goods supplied by [the company], nevertheless the assessment appealed against falls to be discharged because [the company] is entitled to an abatement of output tax accounted for in respect of supplies of fuel, by reference to the subsequent provision of redemption goods free of charge. The provision of redemption goods free of charge operates as a reduction of the price of the fuel after the supply (of the fuel) has taken place, by an amount equal to the cost of the redemption goods, within Article 11(c)(1). It is equivalent to the reduction of the price of the manufacturer's goods by reference to the cash back coupons in Elida Gibbs."
The company accepted that this was a new point, not raised at any earlier stage in the proceedings. As the tribunal pointed out (at paragraph 11 of its decision of 24 March 2000): "Mr Walters [counsel for the company] quite frankly conceded that this argument had not occurred to him until he was able to study the judgment of the European Court in Elida Gibbs." But, as the tribunal recognised (correctly in our view) the contention which the company wished to advance under article 11C(1) of the Sixth Directive was "not so much a new point in relation to the appeal as it is constituted before us but a wholly new matter."
- In order to understand the tribunal's reservations in relation to the second issue which it was invited to address it is necessary to have in mind the provisions of rule 3 of The Value Added Tax Tribunals Rules 1986 (SI 1886/590) - which govern appeals to the value added tax tribunal - and the terms of the decision against which the company appealed under those rules. Rule 3, so far as material, is in these terms:
"(1) An appeal to a tribunal shall be brought by a notice of appeal served at the appropriate tribunal centre.
(2) A notice of appeal shall be signed by or on behalf of the appellant and shall - . . .
(c) state the date of the document containing the disputed decision . . .;
(d) . . . have attached thereto a copy of the document containing the disputed decision; and
(e) set out, or have attached thereto a document containing the grounds of the appeal, . . ."
In the present case the notice of appeal, which is dated 5 July 1995, identifies the document containing the disputed decision as a letter dated 16 June 1995 from the VAT Policy Directorate (VAD3); and sets out the grounds of appeal in these terms:
". . . that the supply of redemption goods to a customer under a trading stamp/voucher scheme is not a gift but is a supply for consideration paid by the customer on the occasion of the original purchase. VAT is not therefore due when the cost of the redemption goods exceeds £10."
The letter of 16 June 1995 contains a statement of the Commissioners' decision that there is no direct link between any uplift in the price of fuel and the supply of the redemption goods. It goes on, under paragraph 9(d):
"redemptions: Kuwait must account for output VAT on cost where cost exceeds £10. We do not see a series or succession of gifts. Kuwait are entitled to input tax in respect of the supply by Argos."
- It is plain that the decision against which the company appealed in July 1995 was a decision as to the treatment, for the purposes of value added tax, of the supply of redemption goods. The issue was whether article 5(6) of the Sixth Directive required redemption goods to be treated as supplied for a consideration. Article 11C(1) to which we have referred earlier in this judgment is directed to the reduction of the taxable amount upon which value added tax is to be charged on the supply of fuel. As the tribunal observed, in paragraph 12 of its decision of 24 March 2000; "the price reduction issue [under article 11C(1)] relates to a different supply and was not the subject of the decision against which the appeal was made."
- We will assume that it would have been open to the company, or to the Commissioners, to apply under rule 14(1) of the 1986 Rules for an amendment of the notice of appeal so as to raise the price reduction issue. We will assume that it would have been open to the tribunal to direct amendment of its own motion. But no application was made and no direction was given. We were invited by both parties to deal with the matter as if an application had been made and granted. We do not think it right to do so. It is by no means self evident that the tribunal in whose discretion the decision to allow or direct an amendment to the notice of appeal before it was vested by the 1986 Rules - would have thought it appropriate, in the circumstances of this case, to accede to such an application. It might properly have taken the view that it was far too late for the company to advance a new case. It is pertinent to have in mind that the decision of the Court of Justice in the Elida Gibbs case was handed down some months before the reference to that Court in the present case; and that if some new point had been revealed by the reasoning of the Court in the Elida Gibbs case as counsel for the company suggested at the restored hearing of the appeal - the time to take that point was in advance of the reference to the Court of Justice in the present case.
- In those circumstances we take the view that the price reduction issue that is to say, the point under article 11C(1) of the Sixth Directive was not properly before the tribunal. Although the tribunal addressed the point but, as it observed: ". . . only briefly, in recognition of the full argument that was addressed to us" its decision on that issue must be regarded as having no legal effect. The tribunal is a creation of statute and it cannot operate outside the rules which govern its procedures. More to the point, perhaps, the issue was never properly before the judge; and cannot be before this Court. The jurisdiction of the High Court, and of this Court, to entertain appeals in respect of a decision made by a value added tax tribunal is circumscribed by statute. It cannot be conferred by the agreement or acquiescence of the parties. It would serve no purpose for this Court to express what would be, in effect, a consultative view on an issue which is not properly before it for decision.
- It follows that the appeal against Mr Justice Laddie's order of 20 December 2000 is misconceived and will be struck out. The order itself, which reflects his decision on the first issue, which was properly before him, stands.
Is there a need for a reference to the Court of Justice?
- We were invited to refer for a preliminary ruling by the Court of Justice the question raised in the Lex and Bugeja appeals; that is to say the question whether, in a case where the supply is made for consideration which includes, as a non-monetary element, the provision of goods by the recipient of the supply, the value of that element ought to be measured not by the value which has been placed upon it by the parties in the context of the transaction but by what has been described (wrongly, we think) as its subjective value to the supplier independently of the transaction. We accept that the question is one which turns on a correct interpretation of Community law; and that it is necessary to resolve it in order to reach a decision on those appeals.
- In Regina v International Stock Exchange, ex parte Else [1993] QB 534 Sir Thomas Bingham, when Master of the Rolls, explained the approach which this Court should adopt to a question, at page 545D-F:
". . . : if the facts have been found and the Community law issue is critical to the court's final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself. In considering whether it can with complete confidence resolve the issue itself the national court must be fully mindful of the differences between national and Community legislation, of the pitfalls which face a national court venturing into what may be an unfamiliar field, of the need for uniform interpretation throughout the Community and of the great advantage enjoyed by the Court of Justice in construing Community instruments. If the national court has any real doubt, it should ordinarily refer."
But it is, we think, important to have in mind, also, the observations of the Advocate General (Mr Francis Jacobs QC) in Wiener S I GmbH v Hauptzollamt Emmerich (Case C-338/95) [1998] CMLR 1110. A measure of self-restraint is required on the part the national courts, if the Court of Justice is not to become overwhelmed. A passage at paragraph 61 of his opinion is of particular relevance in the present context:
". . . another development which is unquestionably significant is the emergence in recent years of a body of case law developed by this Court to which national courts and tribunals can resort in resolving new questions of Community law. Experience has shown that, in particular in many technical fields, such as customs and value added tax, national courts and tribunals are able to extrapolate from the principles developed in this Court's case law. Experience has shown that that case law now provides sufficient guidance to enable national courts and tribunals and in particular specialised courts and tribunals to decide many cases for themselves without the need for a reference."
- In our view this is not an appropriate case for a reference by this Court. For the reasons which we have set out we are satisfied that there is ample guidance on the question of principle in the existing decisions of the Court of Justice. We feel confident that we can apply the principle to the particular facts of the appeals which we have to decide.
Order: Littlewoods' appeal in 2000/2463 allowed with costs here and below; Customs and Excise to have liberty to apply in writing for permission to appeal to the House of Lords in the Littlewoods case within seven days;
Lex appeal in 2000/2970 dismissed with costs; permission to appeal to the House of Lords in the Lex case refused;
Customs and Excise's appeal in the Bugeja case 1999/1319 allowed; by consent Customs and Excise to pay the agreed costs of the appeal in Bugeja;
Kuwait Petroleum (GB) Ltd's appeal in 2000/0144 be struck out with costs; permission to appeal to the House of Lords in the Kuwait case refused.
(Order does not form part of the approved judgment)
