TC00065
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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Insured Vehicle Coatings Limited v Revenue & Customs [2009] UKFTT 97 (TC) (13 May 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00065.html Cite as: [2009] UKFTT 97 (TC) |
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[2009] UKFTT 97 (TC)
TC00065
Appeal number: LON/2008/1054
Value Added Tax - whether particular supplies were free gifts and if so, the identity of the donee - Interim decision in principle in favour of the Respondents
FIRST-TIER TRIBUNAL
TAX
INSURED VEHICLE COATINGS LIMITED Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS (Value Added Tax) Respondents
TRIBUNAL: HOWARD M NOWLAN (Judge)
JO NEILL
Sitting in public in London on 31 March 2009
Victor Coutin, Managing Director of Insured Vehicle Coatings Ltd, for the Appellant
Alex Ruck-Keene, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2009
DECISION
Introduction
- the facts had been unclear throughout the negotiations between the Appellant and HMRC;
- much of the hearing was dedicated to ascertaining and clarifying the basic facts;
- although Mr. Coutin, the Appellant's representative, summarised the facts clearly and explained the money movements with which he was familiar, he gave no evidence of documents to explain the nature of any of the contractual relationships between the parties in the supply chain, and we have had to speculate about what these relationships were; and
- the Appeal proceeded somewhat wrongly on the basis that if the Appellant's "free gift" analysis prevailed, the whole of the input VAT referable to the purchases of the free gift items would be deductible, and none would be deductible if the provision of the free gift items was held to be a supply, ancillary to the main exempt supply.
The evidence
The facts
The constituent elements of the chemicals and the "packs" provided to garages
The IVC, "GardX", marketing brochures
"In support of the 3 year GardX Insurance your vehicle will be treated with a range of revolutionary products and you will be provided with a Customer Care Kit at no extra cost"
The Version 1 brochure also included a picture of numerous cans and bottles, the draw bag, filled with four bottles and other items that could not be identified from the photograph, and also the sponge and the dusters and cloths. Under this photograph was the wording, in small print, to the effect that "The above products relate to the Gold system". The products photographed clearly included all three categories of product.
The marketing by IVC to the garages, and by the garages to customers
The various payments
What the various payments were for, the nature of the various services and supplies, and the agreed VAT treatment of certain steps in the transactions.
The matter in dispute, and the respective parties' contentions
- The Respondents contended that they were not free gifts at all, and that they were merely part of the overall package. Accordingly they should also be treated as being ancillary services, supporting the basic insurance, and so exempt on that ground. It was contended in support of this that all the Category 3 items were fundamentally related to the cleaning and protection service that the insured product was designed to deliver. More specifically, representatives of HMRC had obtained copies of one of IVC's brochures from one of the supplying garages at quite a late date in the period covered by the dispute, and that brochure was still the first version that showed pictures of all three categories of chemicals and products, indicating that purchasers of Gold packs would obtain all the chemicals and products shown in the picture, including all the Category 3 items.
- It was contended in the alternative by the Respondents that if the Category 3 items were free gifts, they were given by IVC to the garages, and not by IVC to the end customers. This contention was not advanced by reference to the point that we touched on in paragraph 26 above, where we speculated about the overall ownership of the chemicals before they were applied to customers' cars. Instead it was suggested that the garages were not under any obligation to hand over the Category 3 products to customers, even where the negotiations between IVC and the garages had resulted in the decision that Gold packs would be delivered. It was said that IVC would have no remedy if the garages chose to retain some or all of the items out of the Category 3 pack, and not pass them on to customers. The significance of the claim that the gifts (assuming now that they were gifts) were made to the garages was that, under paragraph 5 of Schedule 4, VAT Act 1994, the treatment of free gifts varies according to whether gifts made to one donee in a year cost the donor more than £50 or not. Where the costs exceeded that figure, the gifts are treated as supplies. It was argued that if the gifts were treated as made to the garages, the aggregated costs would exceed the £50, so that the gifts would be treated as supplies, the value of the supplies then implicitly being measured by the value of the gifts. By contrast, if the gifts were made to the end customers, the cost per customer would be well below £50 with the result that the gifts would be disregarded as supplies. We will comment below on the input and output tax implications of the various contentions concerning gifts, since we consider that many of the contentions were incorrect.
- The third contention was that advanced by the Appellant which claimed that the transfers of the Category 3 products were free gifts made by IVC to the end customers so that the supplies were to be disregarded for VAT purposes. The Appellant then contended that the input tax attributable to the Category 3 items would be fully recoverable. Again we will address that point below because we consider that there are three separate issues. First there is the basic question of whether there were free gifts at all. If there were, the next question is whether the gifts were by IVC to the end customers, such that the cost fell below £50, whereupon there would be treated as being no supply of the gifted items. Thirdly there is the issue of the appropriate treatment of the input tax attributable to the Category 3 items.
In support of the contention that the Category 3 items were transferred as gifts to end customers, the Appellant argued that the Respondents had always failed to understand its marketing strategy, and had failed to understand the distinction that the Appellant drew between "Customer Care Packs", and "Take-home Packs". These were the names that the Appellant gave respectively to the Category 2 and to the Category 3 items. It was accepted by the Appellant that the Conserver (allegedly the only item in the "Customer Care Pack" on the Appellant's contention) was always ancillary to the basic insurance supply. Accordingly when even the first version of its brochure referred to the Customer Care Pack, this was a reference just to the Conserver, the only thing that was "promised", and no regard should be paid to the picture of other items to which no text referred, because they were included in the separate "Take-home Kit". The Category 3 items, the "Take-home Kit" were altogether different in that they had nothing to do with the insured product, and it was they that were the free gifts, having nothing to do with the basic supply.
Further relevant facts
• First, along with IVC's supply of insurance services, and the ancillary supply of the Category 1 and Category 2 items, IVC was rendering other services. It apparently received rent for a property that it had let out, so that it was making other exempt supplies, and it made taxable supplies as well. These fell into two related categories. If initial customers duly came back after 12 and 24 months and purchased more Category 2 product, i.e. Conserver, from IVC, those sales would be standard rated. In a similar manner, IVC apparently sold chemicals to a related company, which we believe were also taxable supplies. These facts obviously impacted on partial input recovery issues.
• The second fact is not particularly material. It appears that in August 2006 IVC ceased to supply the insurance-backed product, and commenced selling the same treatments as straight-forward preparations that would of course be taxable transactions for VAT purposes. Whether or not this was because of a ruling that the higher rate of IPT had to be paid, and whether this indicates that the provision of the insurance-backed service had largely been a device to substitute lower rate IPT for VAT is not material. It is somewhat odd however that IVC changed its name in December 2006 to Insured Vehicle Coatings Ltd four months after its services had ceased to be "insured", whilst in the earlier period none of its various different names had included the word "insured".
Our decision
"Whether an input tax deduction is available in the first place depends on whether it can be said that the cost of the free gift is directly attributable to the making of taxable supplies. Given that IVC sells products to the customer on a plus VAT basis, and a feature of the insurance product is that they will need to purchase products on a plus VAT basis going forward to be covered under the policy, it is arguable that such a direct attribution arises.
The alternative view is that the cost of the free gift is partly attributable to the exempt supply of the insurance product and partly attributable to the taxable supply of the sale of the chemicals. In such circumstances the input tax attributable to the cost of the free gift would fall to be dealt with as part of the special partial exemption method agreed with HMRC. However, given that the free gift does not form any part of the insurance product the better view is that it is directly attributable to the future taxable supply of the chemicals."
Save for the fact that that summary fails to mention the possibility that the free gift might be entirely attributable to the exempt supplies, we consider that Clyde & Co posed the right question.
HOWARD M NOWLAN
TRIBUNAL JUDGE
RELEASE DATE: 13 May 2009