Signed:- ................................................ The Honourable
Mr Justice Hart
Date:- ................................................
- This is an appeal against the decision of the VAT and Duties Tribunal dated 14th December 2000 allowing an appeal by the taxpayer ("Ping") against assessments to VAT made by the Commissioners under section 73 of the Value Added Tax Act 1994 in respect of certain supplies of golf clubs made by Ping to its customers.
- Ping has at all material times been a wholesaler of golf clubs. The transactions in question arose as a result of a ruling by The Royal and Ancient Golf Club ("the R&A") on 2nd March 1990 that clubs sold by Ping and known as "Ping Eye 2" clubs ("old clubs") did not comply with its rules. As a result of the ruling use of such clubs after 31st March 1996 became "illegal". Ping determined to offer every owner of the old clubs, in return for the surrender of each old club, the right to purchase for £22.00 a new, conforming, club known as a "Ping Eye 2+" ("new clubs").
- The Commissioners considered that Ping was supplying the new club in return for both monetary and non-monetary consideration (i.e. the £22.00 and the old club) and that the value attributable to the old club was the difference between the wholesale price of the new club and the monetary consideration actually received. They assessed Ping accordingly. Ping appealed to the Tribunal on the ground that the monetary value properly attributable to the surrender of the old clubs was nil, alternatively that the price discount should be ignored by reason of Article 11A 3(b) of the Sixth Directive. The appeal succeeded on the first ground, the Tribunal expressing no view on the second. This is the commissioners appeal against that decision
- For the purposes of this appeal, it is necessary to set out certain critical findings of fact made by the Tribunal:
"13. Ping and [its sister company] Karsten USA agreed with the R&A that, in effecting the arrangements they had put in place to compensate the owners of the old clubs, they would ensure that the old clubs surrendered would be removed from the market. To that end, Ping was required by Karsten USA to return all the old clubs surrendered to the United States. Although we were not told which company paid the costs of transporting the old clubs across the Atlantic Ocean, it emerged, and we find, that Ping received nothing for the old clubs. Consequently, we also find that, even if the old clubs had a scrap value, Ping did not, and indeed never expected to, receive it. Thus we find that Ping attributed no monetary consideration to each old club surrendered.
"14. But clearly the old clubs had a value to their owner on Ping agreeing, on their surrender, to replace them with new clubs at a price substantially below the new clubs' wholesale price. We find that the value was the difference between the wholesale price of a new club, £49.99, and the price which the owner of an old club was required to pay for a new club, £22."
"15. It also follows that we find that the parties did not jointly agree the amount of the non-monetary consideration, nor did they attribute an amount thereto."
"16. It is common ground that the normal wholesale price of each new club supplied by Ping was £49.99, and that the recommended retail price of each was £72."
.....
"44. ....[T]he surrender of each old club represented a burden on Ping: it was not an advantage to it...."
"47. .........The figure of £27.99, the difference between the wholesale price of a new club and the price at which the owner of an old club could purchase a new one, has no commercial relevance to the "true value" of a surrendered old club to either party. It is relevant neither to its value to Ping, nor to its value to the customer, who no longer wants it.
"52. .........Nor are we able to accept that the extent of the reduction in price of the new clubs available on the surrender of the old clubs would have been "readily ascertainable" to the owner. The true wholesale price of products is normally a secret kept from retail customers at almost all costs: we are in no doubt that the wholesale price of Ping golf clubs is no exception."
"53. .........The removal of the old clubs from circulation did not mean that a positive monetary value had to be attached to them: that removal was solely for the specific purpose of preventing an unsuspecting public from acquiring Ping golf clubs which could not be used in the conventional sense. And, in so far as the protection of its reputation was concerned, Ping acted honourably and, in the gentlemanly world of golf, with the intention of abiding by the rules. In our judgment, Ping's action in so doing was not a matter that affected the value of the consideration: it constituted a burden rather than an advantage."
"55. ...........The facts of the present case are unique, and unlikely to be repeated: they contrast with every other case cited to us in that in each one of them there was at least some element of sales promotion as an object of the supplier. Ping took action to deal with a particular problem, and it was in that context that it came to the arrangement with the R&A whereby the owners of the old clubs were given the opportunity of purchasing the new clubs at a discounted price. Only if the difference between the wholesale price of the new clubs and the discounted price at which the owners of the old clubs could have purchased the new clubs had represented something of value to Ping would we have attributed some consideration to that difference. As it was, we find that there was nothing of such value. In our judgment, the value of the non-monetary consideration involved in the present case is nil...."
- The relevant legislative provisions are contained in section 19 VATA 1994 and Article11A of the Sixth Directive. Section 19 (so far as material) provides:
"(1) For the purposes of this Act the value of any supply of goods or services shall, except where 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 "
- Article 11A provides:-
"(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;.....
(2) The taxable amount shall not include:
......
(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply"
- It was submitted by Mr James on behalf of the Commissioners that this was a case which fell directly within the principle established in Naturally Yours Cosmetics v. C&E Commissioners [1998] STC 879. In that case, in return for a beauty consultant procuring hostesses to arrange sales parties, the taxpayer company reduced its wholesale price for a pot of cream by a specific amount from £10.14 to £1.50. The European Court held that the difference constituted the monetary value which the two parties to the contract attributed to the service being provided by the beauty consultant to the taxpayer, and that that value plus the £1.50 constituted the taxable consideration. Mr James derived from that decision a general principle which he formulated in these terms: where an item is generally sold by a taxpayer at one price, but there is an offer that, if a purchaser supplies a service, a reduced price is payable, then the value attributed by the parties to the purchaser's supply of the service is the amount of the price reduction. There was he submitted, no reason for a different rule to apply where the purchaser supplies goods as opposed to services.
- In my judgment it is clear that the principle established by that case was a somewhat narrower one. The question referred to the European Court had assumed that the transaction in question took place between a wholesaler and a retailer at a price less than that at which the wholesaler would (but for the retailer's undertaking to provide the service) otherwise have supplied the particular retailer. There was no difficulty on the facts in finding that the wholesaler and the retailer had attributed a specific monetary value to the service provided by the retailer. Indeed, as the court noted at paragraphs 14 and 18 of its judgment, the terms of the particular trade appear to have included a provision either for return of the goods or payment of the full price in the event of the service not being provided.
- In the present case, by contrast, there was no directly comparable "normal" transaction between Ping and the purchaser from which the inference can be drawn that the parties to the transaction attributed a specific monetary value to the supply by the customer to Ping of the old clubs. Ping was a wholesaler which did not normally sell directly to the customer. Ping's "normal" transaction would have been a transaction with a retailer (at the wholesale price). The customer's "normal" transaction would have been a purchase from a retailer (presumably at or near the recommended retail price). The Tribunal's finding (at paragraph 14 of the Decision) that the value to the customer of the old clubs was the difference between the price paid for the new clubs and their normal wholesale price is perplexing, and only explicable if one assumes that customers could somehow have obtained new clubs at the wholesale price: otherwise one would have expected the value to the customer to have been higher.
- The Tribunal's finding that the customer would not have known what the wholesale price was makes it impossible to say, in any meaningful sense, that the parties to the transaction had expressly or by implication attributed a specific monetary value to the old golf clubs. However, as subsequent authorities in the Court of Appeal show, that is not necessarily fatal to Mr James' submission. Those authorities (Rosgill Group Ltd v. Customs & Excise Commissioners [1997] STC 811 and Customs & Excise Commissioners v. Westmorland Motorway Services Ltd [1998] STC 431) have recently been reviewed by Carnwath J in Customs & Excise Commissioners v. Bugeja [2000] STC 1. His comment on the authorities (summarised by him in an appendix to his judgment, including all those which I have so far mentioned and also Empire Stores Ltd v. Customs and Excise Commissioners (Case C-33/93) [1994] STC 623, [1994] ECR 1-2329, Boots Co plc v. v. Customs and Excise Commissioners (Case C-126/88), [1990] STC 387, [1990] ECR 1-1235, Argos Distributors Ltd v. Customs and Excise Commissioners (Case C-288/94 [1996] STC 1359, [197] QB 499, Elida Gibbs Ltd v. Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387, [1997] QB 499) bears citation in full:
"Comment on the Authorities
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 viewpoint is adopted. In deciding which viewpoint is to be taken, one finds in the case 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.
These different approaches result in some ambiguity in the language of the Court of Justice, apparent from the phrases emphasised in the appendix. All of them speak of the need to find the 'subjective' value, and it is clear that, if possible, this is to be derived in some way from the particular transaction, rather than from the market in general. However, it is interpreted variously as meaning the 'actual amount spent by the customer', the 'amount actually received by the supplier', or an amount assigned jointly by the parties. In the latter case, there is ambiguity as to whether one is looking, in the first instance, for an 'agreement' or merely an 'attribution'; and, if the latter, whether it is an attribution made by the 'parties', or by the recipient of the consideration.
These ambiguities are only partly resolved by the Court of Appeal cases. Sir Richard Scott V-C's statement of the 'settled' principle (in Rosgill Group Ltd v Customs and Excise Comrs [1997] STC 811 at 817) referred to the 'subjective value to the supplier (emphasis added)', and his own analysis of the facts directed attention to the attribution by Rosgill (the supplier). Hobhouse and Morritt LJJ agreed with his reasoning, but in their own separate judgments they spoke of attribution by the parties. In Customs and Excise Comrs v Westmorland Motorway Services Ltd [1998] STC 431, the leading judgment of Hutchison LJ refers (at 434) to an 'attribution' (express or implied) by the parties. He considered (at 437-438) that, notwithstanding the reference in Empire Stores to 'an agreement', what was required was an 'attribution, rather than a 'binding agreement'. However, Evans LJ (at 438), while agreeing with that judgment, spoke of it as a 'somewhat artificial contract'.
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 to tax on more than the value to him (that is, the 'subjective value') of what he had 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 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 Vilaça) 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."
- That review emphasises the need to look at the special facts of each case. The closest case on the facts to the present is, in one sense, Bugeja itself. That case involved the part exchange of old goods for new. There the taxpayer, a vendor of videos, ran a system whereby videos could either be purchased for £20 or, if at the same time the customer returned a video previously bought from the same shop, £10. Such returned videos, it was found, could be acquired by the taxpayer for £2/£3. The Commissioners contended that the value to be attributed by the parties to the returned video was £10, i.e. the difference between the "normal" selling price on a sale (£20) and on a part-exchange (£20). Carnwath J rejected that submission. He held that the taxable value of the returned video had to be assessed by reference to its subjective value to the taxpayer recipient. Since, unlike the services under consideration in Naturally Yours, Rosgill, and Westmorland, the returned videos were tangible and readily capable of being valued in the hands of the recipient, he held that there was no need to look further than the actual ("subjective") value of the returned videos to the recipient.
- The Commissioners do not accept that that approach was correct, although it is accepted that I should follow it. It does not, however, in my judgment provide a complete solution to this case. In particular the distinction between goods and services, helpful as it may be in a case like Bugeja, does not readily transplant here. This can be illustrated by considering (as the Tribunal did) what the case would have been if, instead of requiring customers to return the old clubs, Ping had required the customer to sign a certificate saying that he had destroyed them. It would then have been necessary to assign a value to the service (of destruction) represented by the certificate. Mr Barlow, for Ping, was, I think, inclined to accept that the problem posed by such an arrangement would have raised precisely the same problem as raised by the actual transaction under consideration.
- There is another important difference, however, between the facts of Bugeja and the facts in the present case. In Bugeja the returned videos undoubtedly had some commercial value for Mr Bugeja. The judgment allowed for the possibility that some of the returned videos might in fact not have proved to have been reusable, but to the extent that they were reusable the task was to assign a value to them for the purposes of the particular part exchange transaction to which Mr Bugeja had committed himself. In the present case there is a clear finding that the old clubs had no commercial value (qua goods) to Ping. It is clear that the reason why Ping wanted the old clubs back was because they had agreed with the R&A that they would supply owners of the non-compliant old clubs with new clubs at a discounted price (paragraph 55 of the decision) and had also agreed with the R&A that the non-compliant clubs would be taken off the market (paragraph 13 of the Decision). The return of the old clubs thus filled the dual role of proving the entitlement of the owner to the terms of the special deal, and of fulfilling the requirements of the R&A. This was a quite different type of transaction from that under consideration in Bugeja.
- The Tribunal described the transaction as unique. At one level of abstraction that may be accurate, but as a type of transaction it seems to me to be a relatively familiar one, namely the manufacturer's recall of the defective product. The car manufacturer who comes to appreciate that there is a defect in, say, the petrol pump in its product may, with or without legal liability to do so, put in place arrangements for owners of the affected model to have the defective part replaced. Typically that will be done for free (so far as the consumer is concerned). I imagine also that in such cases the manufacturer will have arrangements with the fitting garage to ensure that the defective pumps are taken out of circulation altogether, which might include their being sent back to the factory. The supply of the "free" product (and "free" service of fitting) to the consumer has a VAT consequence. Exactly what that is was not debated before me. What would seem to me extraordinary, however, would be if the VAT analysis of the supply of the goods and services involved to the consumer included the attribution of any value to the old defective product.
- So here, it seems to me quite unreal to say that the transaction expressly or impliedly attributed any particular value to the old clubs, still less a value determined by reference to the difference between the £22.00 and the "normal" wholesale price. The premise of the transaction was that the old clubs had no value, were non-compliant and needed to be taken out of circulation. Ping was persuaded to agree to price the supply to existing owners at £22.00. No doubt Ping perceived advantages to itself in coming to the arrangement it did with the Royal and Ancient, but the value of those advantages had nothing directly to do with price at which it was prepared to sell wholesale into the "normal" market. There was no necessary relation between the price of £22.00 at which it was prepared to supply new clubs to owners of the defective product and the price at which Ping was normally prepared to sell wholesale to persons who were ex hypothesi not owners of (or selling to owners of) the defective clubs. So far as Ping was concerned the price at which it was prepared to sell new clubs to owners of the old clubs was simply the £22.00. plus the return of the intrinsically valueless old clubs.
- As it seems to me, the only justification for attributing to the old clubs a value equal to the difference between the actual price (£22.00) of the new clubs and the normal wholesale price of the new clubs (£49.99) is the Tribunal's finding that this was the value of the old clubs to their owner once Ping had made its unilateral offer to replace the old with the new (see paragraph 14 of the Decision). I have already sought to indicate why this finding as to value strikes me as odd. The Tribunal did not say, however, that the owners of old clubs were assigning that value to the old clubs in connection with the actual transaction into which they entered with Ping. What the Tribunal seems to have had in mind is the possible value to the owner represented by his ability to sell the old clubs to a purchaser who wished to be able to acquire the new clubs under the terms of the special offer. As already indicated I would have expected such an owner to be able to achieve a price based on the retail price of the new clubs in the special market created by Ping's offer: the buyers and sellers in this imaginary market (imaginary because there was no evidence that such a market ever operated) would not have known of the wholesale price. But the existence of that hypothetical market does no more than help establish what the market value of the old clubs might have been. In the language of the European Court that is an "objective" value, and what Naturally Yours requires is that the court should look rather to see what value has been subjectively ascribed to the consideration by the parties. For this purpose one has to look at the value ascribed by the transaction itself. The transaction with which we are concerned is not a transaction in the hypothetical market between an owner of old clubs who wants to realise cash for his clubs (and who does not wish to buy Ping's new clubs) and a potential purchaser of the new clubs. It is a transaction between an owner of defective Ping clubs who would rather own a compliant version of the same product. The price which might have been achieved for the old clubs by that owner in a different transaction seems to me beside the point.
- There was no evidence before the Tribunal of what value was in fact ascribed by owners to the old clubs in connection with the transaction. I know little about golf, but what little I do know suggests to me that an owner of the old clubs would have had little fondness for them once it became apparent that they were regarded as non-compliant by the R&A, and might (like the owner of the car with a defective petrol pump) regard their early and cost effective replacement with a compliant product as something to which he was (at least morally) entitled. I think that he might have been surprised to be told that in paying £22.00 for a club which did not break the rules of the game he was ascribing a value of £27.99 to a club which did.
- In my judgment, for the reasons I have given, I consider that the findings of fact which the Tribunal made were (subject to the qualification I have made in relation to paragraph 14 of the Decision) ones which it was entitled to make, and that on those findings the Tribunal were entitled as a matter of law to conclude as they did. Mr Barlow's alternative argument (that the value of the old clubs, assumed for this purpose to be £27.99, should be seen as a discount or rebate allowed to the customer under Article 11(3)(b)) does not therefore arise, and I do not consider it. I would therefore dismiss the appeal.
