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Cite as: [2009] UKFTT 97 (TC)

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Insured Vehicle Coatings Limited v Revenue & Customs [2009] UKFTT 97 (TC) (13 May 2009)
VAT - EXEMPT SUPPLIES
Insurance

[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

This case related to the provision of an insurance-backed protection treatment for motor vehicles under the trade name "GardX" that the Appellant supplied, using independent agents to market the policy by signing up motor distributors ("garages"), who in turn promoted the products. It was common ground that the Appellant was rightly treated as rendering an exempt insurance service to end-customers, and that the supply of chemicals and other products required to treat the cars as a condition of the insurance cover, and indeed the application of all products applied to the cars on their initial treatment, were ancillary to the principal insurance supply, and thus ranked as exempt supplies. The VAT dispute revolved around whether the Appellant succeeded in its claim that some car cleaning items provided (in most but not all cases) to customers, and placed in their cars when the cars were delivered, were free gifts, and whether the Appellant sustained its argument that this diminished the Appellant's VAT liabilities. The periods in which this was in dispute spanned from 03/04 to 09/06.

The case was confused by the features that:

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.

One of the consequences of the fact that many matters were, in retrospect, not made clear to us during the hearing is that this decision is only a decision in principle. It may very well be that the points on which we will give firm conclusions will enable the parties to accept that these points resolve the dispute, or identify the factors that enable the parties to agree the outcome. If that is not so, then the parties will have to revert to the Tribunal for further argument and evidence so that we can reach a final decision.

The evidence

Mr. Coutin gave his evidence on oath and we found him to be an entirely trust-worthy witness. There remained a major question as to whether certain names given by the Appellant to certain of the packs of chemicals and other items supplied, and the categorisations implied by those names, to which we will refer below, were subsequent rationalisations designed to fit the Appellant's contentions, but we accepted all the basic facts that Mr. Coutin summarised.

The facts

The Appellant, "IVC", devised various chemical preparations designed to be applied to the paintwork, internal fabrics and leather of cars that IVC claimed would result in the paintwork of cars remaining in "as new" condition merely with washing, and without the need ever to apply polish, and to prevent staining of the interior surfaces. The initial treatment of cars involved 5 stages (three being those for paint, fabrics and leather), with two other preparations that were applied to the exterior and interior of the glass surfaces, to repel rain and prevent misting. These latter two were not specifically relevant to the insurance element, but in the initial treatment, all were regarded as being ancillary to the insurance cover, and so were exempt for VAT purposes.

At the times material to this Appeal, the products were marketed as insurance-based products. IVC took out a master insurance policy, initially with Templeton Insurance Limited, which enabled it to add purchasers of cars who signed up to buy the product to be added, as insured parties, to the various rights under the policy. Under the policy, purchasers of cars obtained insurance cover for a three-year period against the lustre of their car's paintwork deteriorating, and against staining of the interior surfaces. It was a condition of the policy that the car would have benefited from GardX treatment, applied by trained professionals, and that the "stain-guard" type material would have been applied to the interior surfaces. When the treated car was delivered to the purchaser, the purchaser was provided with a bottle of "Conserver" (and usually with various other items which are the main subject matter of this appeal, and which we will list below), the Conserver being designed to "top-up" the initial treatment applied to the paintwork. The purchaser was told that he should add appropriate quantities of the Conserver to the car shampoo that he was using and that he should wash the car monthly with the shampoo and Conserver. It was a condition of the insurance cover that the Conserver be applied in this way, and also that the owner of the car bought further bottles of the Conserver from IVC at the end of the first year, such purchase being said to evidence the fact that the first bottle of Conserver had been used and consumed in the first twelve months. The insurance cover lapsed if the further bottles of Conserver were not purchased in this way, and used.

The marketing arrangements for the GardX insurance-based scheme were somewhat complicated. IVC itself engaged self-employed agents to approach garages to try to get the garages to sign up to market the scheme to intending car buyers. Where the agents were successful, the resultant arrangement appeared to have been as follows. Following some negotiation between IVC and the garage owner, the two would fix the price that the customer would pay for the whole package. This price apparently varied quite widely, but it is sufficient to use the example that the customer would pay £300. In return for this the customer would be given a Certificate, evidencing the fact that he had acquired individual rights under the master insurance policy referred to above.

Once a garage signed up to market the GardX product, the garage would be supplied with 6 packs of chemicals and other items. Before we summarise the basis on which these would be provided, and the amount that the garage would pay at this stage (i.e. before any customers had signed up) we need to give a considerable amount of further background information in relation to what was included in the packs, and how these packs were assembled.

The constituent elements of the chemicals and the "packs" provided to garages

IVC had initially contracted to buy all the constituent elements of its treatment package from a chemical company, Reabrook Limited. IVC was intimately involved with the sourcing of the various chemicals and other ingredients and items that Reabrook would supply. Some Reabrook sourced itself but others IVC arranged that other suppliers would deliver to Reabrook where IVC could source products more cheaply. Reabrook would then agree with IVC to supply IVC with complete packages of chemicals and the other items in the packs. This supply was a standard-rated supply for VAT purposes, and IVC paid Reabrook the relevant VAT-inclusive price. We were not given this price but will assume for the purposes of this decision that the price, per complete pack, was £15.

The contents of the pack just mentioned were as follows. There were sufficient bottles of the Stage 1 and Stage 2 product that would have to be applied to a new vehicle to protect its paintwork; there was sufficient of stain-guard material to treat the inner surfaces of the car, and the leather. As mentioned above, although the following two items were not relevant to the insurance cover, both versions of the marketing material that we were shown stressed that two further products, "Glass Guard" and "Mist Guard" were to be applied to the glass surfaces. We will refer to these products as the Category 1 products. The common feature to these products was that they were all intended to be applied to the car before the car was delivered. Accordingly the purchaser would never see these various items in their containers.

Reabrook also supplied a bottle of Conserver, this being the fluid that was intended to be added to shampoo when the car received its monthly wash, there being sufficient Conserver for 12 washes. We will refer to this as the Category 2 item. The characteristic of the Category 2 item was that it was accepted that it was an integral part of the paint-protection treatment. It was also placed in the car when the car was delivered, with of course the instruction about using it monthly when washing the car. The VAT significance of the Category 2 item will become clear below.

The remaining items supplied by Reabrook in the "complete pack", which we will call the Category 3 items, were also generally enclosed in a plastic draw-bag and placed in the customer's car when the car was delivered. The Category 3 items included the draw-bag, a bottle of "wash/wax", a sponge, a microfibre cleaning cloth, a polishing cloth, and a bottle of each of the exterior Glass Guard and the interior Mist Guard. The following were the significant characteristics of the Category 3 items. First they were unlike the Conserver in that the Conserver actually enhanced or preserved the initial paint treatment, and so it was the subject of the requirement that it be used monthly or else the insurance would lapse. By contrast the Category 3 items might have all been useful car cleaning items but they were not directly material to the paint treatment itself and the insurance feature of the whole product. More materially from a VAT point of view it was contended that the Category 3 items were "free gifts".

When IVC negotiated with garages, it was said that there was a discussion about whether the packs provided to the garages should include just the Category 1 and Category 2 items, or whether the Category 3 items should be included as well. Packs with only the Category 1 and 2 items were referred to as Silver packs, and those with all three Categories of product were called Gold packs. The Appellant said that in the vast majority of cases it was Gold packs that were provided. The Appellant also contended that, at least in the latter part of the period in dispute when the Appellant's marketing brochure was in its amended form mentioned below, the Appellant's agents instructed garage personnel to make no reference to the Category 3 items when Gold packs were to be provided, but simply to put the Category 3 items into the customer's car as a surprise free gift. The reason why it was suggested that no mention be made in the marketing efforts to the Category 3 items was either to support the proposition that they were free gifts, or perhaps predominantly because IVC thought that it was far better to focus on the insurance aspects of the product, and emphasise the significance of the insurance backing, when customers paying £300 for the treatments would be unlikely to be too influenced if told in advance that they would additionally receive a few car cleaning items in a bag, included in their £300 purchase. They might however think it a nice gesture if they received it unexpectedly when the car was delivered. Finally the packaging of the Category 3 items was said to be inferior to the packaging of similar Category 3 type items given or provided to customers by some of the competing non-insurance-based suppliers. Thus it was considered that mentioning them in advance of the delivery of the car would achieve little and might even tempt people to look at the equivalent (and better presented) "add-ons" provided by competitors.

The IVC, "GardX", marketing brochures

We should refer at this point to the fact that IVC's marketing brochures that we were shown were printed in two different forms, and the difference related entirely to the Category 3 items. Both versions contained a sentence, which read:

"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 second version of the marketing brochure was identical to the first except that the photograph just referred to and the text about the Gold system were all omitted. As stated in paragraph 14 above, however, the first sentence quoted there was still included in the second version of the brochure. We will refer in due course to various contentions as to the significance of the wording included in these brochures.

The marketing by IVC to the garages, and by the garages to customers

Having now explained the content of the various packs of chemicals and the contents of the three categories of product, we will now explain the steps taken when a garage was being signed up to provide the product, the initial provision of product to such garages, and the way in which ultimate customers were signed up.

Once a garage had signed up to market the product, IVC would arrange for 6 packs, generally Gold packs, to be supplied to the garage. Temporarily ignoring the details of ownership of the packs, and quite what the payment was for, we were told that at this stage the garage would pay £360 for the six packs. Using figures from now on for just one pack, £60 would be paid for each pack. The garage would also be supplied with IVC's GardX brochures, in one or other of the versions mentioned above, and a supply of blank insurance certificates that were to be completed if and when customers agreed to buy the product.

Assuming an agreed sale price of the Gold pack product to an end customer for £300, the consequence of a customer deciding to purchase the product would be that the customer would pay the garage £300, and the customer's name and address would be inserted into one of the insurance certificates. The garage personnel would then treat the car; the Category 2 and 3 items would be placed in the draw-bag and put into the customer's car, and the car would be delivered. Presumably at some point it would be made clear to the customer that he was meant to wash the car monthly with a mix of the Conserver and the wash/wax, and also made clear that when the bottle of Conserver was finished, at months 12 and 24 he should be buying more Conserver directly from IVC, or else his insurance cover would lapse.

The various payments

We were given a reasonably full explanation of the payment flows, albeit that we were given no indication of the contractual arrangements between the parties, and thus no indication of precisely what the payments were for.

Whilst the price to the customer could vary quite widely, perhaps depending on the size of cars and the price that buyers of particular cars might be prepared to pay for the treatments, we will use the example of a total charge to customers of £300. Of this £300, £240 would be retained by the garage, out of which the garage would be likely to pay a commission of £50 to the particular salesman who had sold the product. The garage's remaining £190 would presumably cover the garage's costs of paying its bodyshop workers to apply the products and the remainder would be the garage's profit both for marketing the product and for applying it to the car.

The remaining £60 out of the £300 would be paid by the garage to the "administrator". This was an independent entity that dealt with the various money flows and that would also administer claims made under the policies. On the reasoning that the garage would usually have pre-paid £60 on receiving delivery of each of the 6 packs, referred to in paragraphs 8 and 17 above, the garage would retain the full £300, so that its net receipt would still be the £240.

We were not given precise details of the destination of the £60, but it appears that roughly £9 was paid as premium to the ultimate insurer, £2 was paid to an insurance broker, £5 or £7 was retained by the administrator, £15 was passed to the insurer to cover the liability to Insurance Premium Tax ("IPT") (presumably calculated initially at the lower rate on the full £300 which was treated as the customer's premium payment), leaving roughly £29 to be paid to IVC. In its turn IVC would pay for the chemicals and other supplies (the bag, dusters etc) from Reabrook and others, and would pay its independent marketing agents, and the balance would be IVC's profit. Whether these figures are accurate is not particularly material.

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.

As already mentioned we were not shown any of the contracts between the various parties, always assuming that there were written agreements, and no evidence was given to explain the legal nature of those various relationships.

It was however common ground that what the end customer received for his £300 was insurance protection on various conditions. Whilst the customer appeared to be given no direct right that the car must even have been treated with the various products, this was implicit since the insurance cover was dependent on the various treatments having been applied by trained professionals. Nevertheless the £300 was still paid "for insurance", and by virtue of the fact that it was IVC that held the master policy, and was treated as providing insurance under the ECJ's decision in Card Protection Plan Ltd v. HM C & E [1999] STC 270 when it effectively assigned elements of that master policy to end customers when they "signed up" at the garages, the initial VAT analysis was that IVC was providing exempt insurance services in return for the £300. It was also common ground that, insofar as IVC provided other ancillary supplies that merely fostered the better enjoyment of the insurance supply, those other ancillary services were to take their nature, i.e. of being exempt supplies, from the exempt nature of the principal insurance service. The provision of the Category 1 and Category 2 chemicals was, in other words, all agreed to be part of the overall exempt service by IVC.

The following remarks are purely based on supposition since no reference was made whatever to the following points. On the reasoning that IVC was rightly treated as rendering an insurance service for £300, but only in fact ever received a much lower net amount, it must follow that whilst other parties received their various payments by "retention", those other parties must nevertheless have been rendering services to IVC, and their retentions must have been their reward for their services. Thus the garages must have rendered one or other service, or perhaps two services, for the £240. The candidate services appear to be those of being an intermediary but not strictly an insurance agent in placing the insurance for IVC, and the sub-contract service of using IVC's chemicals and applying them to customers' cars. On the assumption that the Advocate General's opinion in the Card Protection case has been followed to the effect that the garage's role as an intermediary, but not strictly an insurance agent, would not be an exempt insurance service, and on the obvious basis that the sub-contract role of applying the preparations to a car would be a standard-rated service, it would appear that the garages should have been accounting for VAT within the overall £240 charged for their services. No mention was made of this, however, and it may have little significance to the outcome of this case.

The next point that was not made clear was who owned the chemicals and other products when they were supplied by Reabrook. Our assumption is that when IVC paid for these items, it became the owner of them, albeit that they would often or generally be delivered directly to garages. We assume that the chemicals were not then actually sold to the garages by IVC, but were retained in the ownership of IVC, and only held by the garages so that they could apply them to cars on behalf of IVC. On this reasoning, the initial payment by garages of the £60 (or £360 for six packs) would rank as a pre-payment on behalf of eventual premium payments for insurance, and not remotely as the purchase price for chemicals. This assumed arrangement appears to be supported by the proposition that, if packs were not eventually passed out to customers, the packs could, we believe, be returned, the IPT recovered by the insurer, and presumably the £60 refunded to the garages. Even this was not made totally clear, and would anyway not wholly confirm our assumption above. The proposition by the Appellant, however, that the Category 3 products were transferred by the Appellant to end customers could not have been advanced if the Category 3 chemicals were actually owned by the garages when they were ostensibly given away as "free gifts". And the proposition that the ownership of the three categories of chemicals could have varied as between Categories 1 and 2, and Category 3 items seems far-fetched.

The sales by Reabrook were standard rated sales. The insurance service rendered to IVC by the principal insurer, and the broker's service were obviously exempt inputs by IVC; we are unclear about the "administration service" and it may not matter. We are slightly confused as to why no mention was made of any input deduction in respect of the supplies from the garages, though the explanation may be that no such recovery was considered possible as all of the garages' supplies related to the exempt provision of insurance and to the application of the preparations to cars, this being ancillary to the exempt insurance supply.

The matter in dispute, and the respective parties' contentions

As mentioned above, it was common ground between the parties that the supplies by IVC of the Category 1 and Category 2 chemicals were exempt supplies in that they were designed to enable the customers to enjoy the principal insurance service, and in accordance with the Card Protection decision, they took they VAT status from the nature of the principal supply.

The case revolved around the issue of whether, when Category 3 items were supplied to end-customers when Gold packs were supplied, they were "free gifts". The three competing analyses were as follows:-

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

We should mention two other 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

We accept, as our starting-point, that both parties agreed that the main supply was the supply of insurance by IVC and that this was an exempt supply, notwithstanding that IVC was not an insurer, and notwithstanding that it was not at liberty to sell insurance. We also accept that it was common ground between the parties that the supply of the Category 1 and Category 2 chemicals by the Appellant was ancillary to that supply of insurance, and also exempt for that reason. Both these conclusions appeared to be entirely consistent with the ECJ's decision in the Card Protection case.

Turning now to the fundamental point in dispute, we are not persuaded by the Appellant's argument that the Category 3 items were of a clearly different nature to the basic protection, and that their supply was distanced from the basic insured product and from the supply of the bottle of Conserver that was accepted to be ancillary to the exempt supply. Taking the Category 3 items in turn, we were told that the Conserver had to be mixed with shampoo, and applied monthly when the car was washed. The so called "wash/wax", supplied as a Category 3 item, was presumably a bottle of shampoo designed to be used when washing the car monthly, and was the very product with which the Conserver was meant to be mixed. It seems realistic to treat the two alike. The sponge was doubtless suitable to be used when washing the car monthly, as were the polishing cloths. That only leaves the two bottles of fluid to treat the exterior and interior of the glass surfaces. Both versions of the IVC brochures made it clear that the glass would receive initial treatment with these products, and it was common ground that the provision of these products for the initial treatment was ancillary to the insurance supply, albeit that the glass was not specifically covered by the policy. They were still all basically related to an insured product and the application of various cleaning and preserving products to a new car. Once it was accepted that the provision of the initial supplies of these two products were amongst the supplies that were ancillary to the main insurance supply, it seems difficult to say that further supplies in the Category 3 pack were of a fundamentally different nature.

From an end customer's perspective, we are again not persuaded that any end customer would actually treat the Category 3 items as "free gifts". Assuming that end-customers were viewing matters in a non-legalistic way, they would consider that they had purchased some sort of car-protection product, for which they would have paid a considerable amount, and if they received a bag of products in their car, all geared to car cleaning, and several (the Conserver, the wash/wax, the sponge and the cloths) all relevant to the after-care of the initial treatment, it seems reasonable that they would regard those items as an integral part of what they had bought. Far from being excited about receiving a "free gift", they might indeed be slightly irritated to note that a condition of the insurance would require them to make further purchases, and to wash the car regularly (obviously not in a Car Wash), such that the anyway limited terms of the insurance might prove to be somewhat (if not wholly) illusory.

The rare end customer who viewed the receipt of the Category 3 items legalistically might also find it difficult to draw much of a distinction between the Category 1 and 2 items, and the Category 3 items. If the end customer looked carefully at the first version of the GardX brochure, and his garage was supplying a Gold pack, he would clearly expect to receive the initial treatments, and the Conserver and all the other components comprised in the Category 3 draw-bag. All were shown in the photograph and, on buying the Gold system, the wording referred to at the very end of paragraph 14 above clearly indicated that he should expect all the items that he in fact received. If instead he looked carefully at the second version of the brochure, he would still see that the brochure indicated, in identical wording to that in the first version of the brochure, that "[he would] be provided with a Customer Care Kit at no extra cost". Since the customer might very well note that everything in the draw-bag could appropriately be described as relevant to "Customer Care", and since he would be aiming to take the car and the draw-bag home, it seems farfetched to suggest that any customer would consider for a moment that the Conserver was the sole item in his promised Customer Care Kit, whereas all the other items were unexpected free gifts, appropriately described as a Take Home Kit. Even the customer who read the second version of the brochure would assume without question that the entire contents of the draw-bag were what was referred to in the brochure as the promised Customer Care Kit. We consider that the "labels" of "Customer Care Kit" and "Take-home Kit" were labels evolved retrospectively by the Appellant to support the free gift argument, and not descriptions that were indicated by either brochure, or indeed remotely realistic.

Were any customer to view matters from a more technical legal point of view, we consider that he would also have reached similar conclusions. On the basis that the brochure contained representations, the legalistic customer might note that his only strict rights in return for his £300 were those under the policy. Whilst application of the protections was required to validate the policy, had the insurer waived this condition, it is not immediately clear that the customer would have had remedies had none of the products been supplied, other than for breach of representations. And both versions of the brochure represented that a Customer Care Kit would be provided at no extra cost. The customer would have appeared to be in an identical position had he not been given either the Conserver, or the Category 3 items, and we thus fail to see how the Appellant seeks to draw a distinction between those items.

We accordingly decide that the supply of the Category 3 items was an ancillary supply, along with the supply of the other chemicals and the Conserver, all of the items promoting the better enjoyment of the basic insurance based car protection plan, and we decide that the provision of the draw-bag together with the Category 3 items was not a free-gift. The provision of the Category 3 items was accordingly part of the overall exempt supply for VAT purposes.

We should just address the question of whether we are right to assume that once we have decided that there was no free gift of the Category 3 items, it follows that their supply should be treated as being ancillary to the main insurance supply. The alternative to this approach is to treat there as being two supplies in return for the £300, whereupon some proportion of the £300 would be the consideration for the standard-rated supply of the Category 3 items, and the balance the consideration for the exempt insurance and the supplies ancillary to that. Whilst this approach would enable the input tax attributable to the Category 3 items to be deducted, this would only be because more output tax would be due in respect of the onward supply of those items, so that the Appellant would be in a yet worse position. On the basis that no-one advanced this argument, that the £300 was expressed to be entirely for the main insurance service, and that in our view the supply of the Category 3 items was indeed ancillary to the main supply, we give no further attention to this possible analysis.

It appears to us that the consequence of the decision given in paragraph 36 above will either be that the input tax attributable to Category 3 items will be wholly irrecoverable, or conceivably it may follow under the partial exemption method in force (about which we were given no information in the hearing), that the related input tax may fall to be apportioned in accordance with the relevant partial exemption method. If we rightly understand, from reading the papers after the hearing, that unattributable input tax is apportioned by reference to the volume of exempt and standard rate supplies, it may very well follow that our decision would lead to the same end result under the partial exemption method as if the input tax attributable to the Category 3 items was wholly allocated to the exempt supplies and wholly disallowed. We hope and imagine that our decision in paragraph 36 will either settle the dispute or enable the parties to agree the result, according to the agreed method for dealing with input tax. Were this not so, the parties would need to revert to the Tribunal to advance further argument, essentially in relation to how our decision will interact with the Appellant's partial exemption method.

Whilst it may not strictly be material in view of the decision that we have reached that the supply of the Category 3 items is simply an ancillary supply to the main service, we will now deal shortly with various points relevant to the alternative free-gift approach.

This consideration assumes that we now assume that the supply of the Category 3 items is treated as something distinct from the main exempt supplies. On this basis, it first seems to us that unless further facts are advanced to suggest that the ownership of all of the chemicals is transferred by IVC to the garages, the chemicals and all the products are retained by IVC until applied to cars or transferred to customers. The garages are thus arranging insurance contracts as intermediaries, and they are using IVC's chemicals, as sub-contractors, when treating customers' cars. On the reasoning that they are thus agents, and on the further basis that everyone intends the Category 3 items to be passed to car buyers, and not retained by the garages, we consider that if IVC does make gifts of the Category 3 items, those gifts are plainly made to the end customers, and not to the garages. It would be a breach of duty for the garages to retain any part of the packs, which are intended by IVC to be passed out to end customers, and we consider that IVC would indeed have a remedy if garage salesmen retained some of the Category 3 items. The Respondents' argument, in support of their view that the gifts were to the garages, was largely based on the claim that the garages could retain the Category 3 items. Beyond being farfetched, we consider that IVC could have sued the garage for breach of its basic agency duties, had this been attempted.

There is a further matter to be considered, however, before we conclude that there were gifts by IVC at all. It was mentioned that garages were always involved in the negotiation, both of the basic price (i.e. the £300 in our example), and in the decision as to whether Gold or Silver packs were to be provided. That choice governs whether the Category 3 items are to be provided at all. If the garages are involved in this negotiation, it may well follow that in splitting the overall receipts between IVC and the garage, the garage may bear the cost of the Category 3 items. If the garage's commission is reduced where the Category 3 items are supplied, then the case seems to be analogous to the one where A renders a service to B, albeit that it is C that procures the service for B, and C that pays for it. The right analysis of that transaction is that even if the service is to B, A makes no gift because C has paid A for the service, and in reality it is C (quite possibly not a taxable person at all) that has made the gift to B. No evidence was given in relation to this matter, but the stated fact that the garage was involved in the question of whether the claimed gifts were to be provided suggests that it may have been the garages that bore the cost of the Category 3 items.

Assuming finally that evidence established that the cost of the gift to customers was borne by IVC and not by the garages, such that on the gift analysis, the gifts would be treated as "non supplies", there still remains the question of what element of the input tax should be deductible. As we have said, the assumption during the hearing was that the whole of the input tax would then be deductible, and we consider that this was wrong.

We consider that the deductibility of the input tax was approached correctly in the letter from Clyde & Co, dated 2 August 2007, i.e. written during the course of the negotiations. In that letter, Phil Norton of Clyde & Co said:

"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.

In the Appellant's Statement of Case, there is a statement that is designed to support the resolution of the question that Clyde & Co posed in a manner that favours the Appellant's case, in that it is stated that "The THK is intended to create goodwill given that the customer will be purchasing products in the future and is not ancillary to the supply of the insurance backed vehicle protection."

There was no argument before us on these aspects, and they are not now directly relevant in the light of our decision at paragraph 36 above. However we are far from convinced that the input tax should be seen as entirely attributable to the future taxable supplies. From a business point of view, even if we set aside our own view that the Category 3 supplies were ancillary to the main services, it is entirely tenable that the desire to create goodwill was designed to foster sales of the product generally. We consider it realistic to suppose that IVC might have hoped to influence customers to recommend the whole process to others, and that existing customers might use the product again on other car purchases. We have no idea how many customers in fact bought the future supplies of Conserver. Even on the assumption that the product would appeal in the first place to private owners who would take care of their cars, we question whether many would be washing their cars monthly with the shampoo and Conserver, and aiming to buy the top-up supplies. Since indeed we were told that at the outset no-one knew how long the basic treatment would remain effective, and it has now transpired that it basically remains effective for eight years, we imagine that many customers would have thought that even if they had bought something worthwhile at the outset, the insurance cover was probably fairly illusory and that it was pointless to continue with the follow-up treatments. For these and other reasons, we consider that even on the free-gift analysis, that we dismiss, and that has in any event not been established on the facts, it remains strongly arguable that the input tax related to the purchase of the Category 3 items might either fall to be apportioned, or indeed seen as entirely attributable to the supplies (fundamentally related as they were) of the basic insured product.

This Appeal is accordingly dismissed in principle. It may be necessary to hear further argument in relation to partial exemption allocation (as mentioned in paragraph 38 above). We add the point that even if, on producing further evidence in relation to the deal between IVC and the garages, it had been established that our basic conclusion in paragraph 36 was wrong, we would still have considered it very far from clear that the cost of the free gifts, and the related input tax, should have been treated as exclusively attributable to the possible future taxable sales of Conserver. Accordingly our decision might not have been that different in effect, even if we had accepted the free-gift analysis.

HOWARD M NOWLAN

TRIBUNAL JUDGE

RELEASE DATE: 13 May 2009