[2010] UKFTT 621 (TC)

TC00863

 

Appeal number: LON/2006/0865

 

VAT – cashback subject to conditions relating to taking out and maintaining a specified loan – whether cashback a discount or rebate of price for home improvement supplies – whether taxable amount for those supplies reduced – art 11(C)(1), Sixth Directive

 

Procedure – costs – “current proceedings” – Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, Sch 3, para 7(3) – whether rule 29, Value Added Tax Tribunals Rules 1986 should be applied

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

                                             EVEREST LIMITED                            Appellant

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

 

 

 

                        TRIBUNAL: JUDGE ROGER BERNER

                                                MRS L M SALISBURY (Member)                                                                                                 

 

 

Sitting in public at 45 Bedford Square, London WC1 on 1 and 2 November 2010

 

 

Roderick Cordara QC and David Scorey, instructed by Prosperity Law LLP, for the Appellant

 

Sarabjit Singh, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.       This is the consolidated appeal of Everest Limited (“the Appellant”) from a decision of the Respondents dated 27 July 2006 that cash back payments do not amount to rebates on the consideration paid for certain taxable supplies made by the Appellant to its customers and related assessments to VAT dated 15 August 2006 (and treated also as including assessments issued on 23 February 2007) together covering VAT accounting periods 08/03 to 11/06 inclusive.

2.       The dispute relates to the proper VAT analysis of payments made by the Appellant to customers who took out loans for the purpose of paying for supplies of double glazing and other home improvement products by way of a cash back promotion.  The Appellant says this is a contingent discount on the price of its goods such that the taxable consideration of those goods – and consequently its liability to VAT - has been reduced.  The Respondents say that the cash back is not designed to reduce the taxable amount for the home improvement supply from the Appellant to the customer, but is to induce the customer to purchase the Appellant’s home improvement supply using credit from a particular source and to keep that loan account open for a specified period, and payment for fulfilling those conditions.

3.       Roderick Cordara QC and David Scorey appeared for the Appellant.  The Respondents were represented by Sarabjit Singh.

The facts

4.       We had a helpful statement of agreed facts, which we reproduce below.  We also had the benefit of witness statements for witnesses on each side, none of which were challenged.  The witnesses for the Appellant were Simon Jarman, who has been the managing director of the Appellant since 2005 and who before that was its finance director from March 2000; and Christopher Fawcett, who is now retired but who was between 1994 and March 2000 the finance director of the Appellant.  Those for the Respondents were Henry Caldecote, formerly a higher officer of HMRC; and Michael Andrews, a senior HMRC officer.  We were referred also to a number of material documents from which we shall make certain findings of fact.

Statement of agreed facts

5.       The parties’ statement of agreed facts is as follows (references to B are to the bundle of documents):

1. Everest Limited (“the Appellant”) has been registered for VAT since 3^rd April 2003 under VAT registration number 813 9521 32, and its address is Everest House, Sopers Road, Cuffley, Potters Bar, Hertfordshire, EN6 4SG.

2. The Appellant supplies home improvement products and services to members of the general public (the “home improvement supply”). Specifically, the Appellant is a well-known supplier and fitter of double-glazing and other related home improvement products and services, such as replacement windows, doors and conservatories, mainly to the general public.

3. A customer can choose to pay for the Appellant’s supply by paying a deposit and then taking out a loan with Clydesdale Financial Services Ltd (“Clydesdale”), subject to receiving credit approval. The term of the loan between the customer and Clydesdale is between 24 and 120 months, and the interest bearing charge is 25.1% APR variable (see the agreement between the Appellant and Clydesdale dated 1^st September 2005, under the heading “Product Details”, B/ tab 39, p.236).

4. In the Appellant’s experience, the order value is higher if funded by credit than if paid in cash by the customer. In addition, if the customer opens a loan account with Clydesdale, the Appellant receives commission from Clydesdale. The agreement between the Appellant and Clydesdale dated 1^st September 2005 indicates that the Appellant will receive commission from Clydesdale of between 12.4% and 22.6% of the loan amount, depending on the term of the loan. Clydesdale can recover any commission paid to the Appellant if the customer settles the loan account within 4 months of the advance date, i.e. within approximately 120 days of opening the loan account. Clydesdale cannot claw back the commission it pays to the Appellant on the advance date if the customer’s loan account remains open beyond 120 days. Clydesdale also pays the Appellant the full net cash price of the Appellant’s home improvement supply to the customer, i.e. the full price minus the deposit paid by the customer.

5. Clydesdale pays the Appellant the full net cash price of the supply and commission on the “Advance Date”, which in the agreement between Clydesdale and the customer is stated to be: “the date on which we shall advance your loan (paying the amount of credit to the Supplier). This date will not be before the goods or services financed by the loan have been supplied and fitted (if appropriate) to you” (B/ tab 36, p.230). The installation and completion report provided by the Appellant to the customer states that: “If you are paying by EVEREST HOME ACCOUNT, by signing this document you are confirming installation of your [sic] and authorising payment of the loan” (B/ tab 32, p.166). Therefore, when the installation and completion report has been signed by the customer and provided to Clydesdale, the loan by Clydesdale to the customer is authorised, and the Appellant can then receive from Clydesdale the full net cash price of the home improvement supply plus commission.

6. The Appellant’s promotional literature from time to time makes reference to various discounts and promotions offered. One such promotional offer was a “cash back” of 10%: the Appellant represents to its potential customers that if they open a loan account and keep it open for at least 180 days after the loan is taken out, the Appellant will pay the customer 10% of the amount of the loan. This is described by the Appellant as a ‘cash back’ offer.

7. The Appellant’s practice was to adjust its VAT account to reduce its VAT liability if it paid 10% of the loan amount to the customer, as it treated the amount paid to the customer as a reduction in the customer’s consideration for its supply.

8. It is agreed that the above arrangements give rise to three distinct supplies:

a. First, there is a home improvement supply from the Appellant to the customer. The consideration for this supply is the payment by the customer to the Appellant.

b. Secondly, there is the exempt supply of credit by Clydesdale to the customer. The consideration for this supply is the payment of interest from the customer to Clydesdale.

c. Thirdly, there is the supply of introduction services from the Appellant to Clydesdale, i.e. the introduction of the Appellant’s customer by the Appellant to Clydesdale. The consideration for this supply is the payment of commission from Clydesdale to the Appellant.

9. Following a telephone conversation between Henry Caldecote of the Respondents and Karl Munns of the Appellant on 21^st April 2006, the Respondents wrote to the Appellant on 24^th April 2006 (B/ tab 1) and informed it that the Respondents considered that the “cash back” offer was an inducement for the customer to enter into a loan agreement with a third party. The Respondents therefore stated that the Appellant was not entitled to reduce the value of its supply by the value of the payments made to customers under the “cash back” scheme.

10. On 6^th June 2006 (B/ tab 2), the Appellant’s representatives requested a reconsideration of this decision. On 27^th July 2006 (B/ tab 4), the Respondents informed the Appellant’s representatives that the decision would be upheld. Subsequently, on 11^th August 2006 (B/ tab 8), the Respondents calculated in a Notice of Assessment that output tax of £1,643,568 had been underdeclared between periods 08/03 to 05/06 inclusive. On 21^st February 2007, the Respondents calculated a further assessment for £236,033 in output tax said to have been underdeclared in periods 08/06 and 11/06 (B/ tab 12, pp. 44-45).

6.       In respect of this statement we should add that there was no dispute between the parties as to the VAT treatment of the three identified supplies.  The home improvement supply is a taxable supply, the supply of credit by Clydesdale to the customer and the supply of intermediary services from the Appellant to Clydesdale are each exempt supplies.

Further findings of fact

7.       In 1999, the Appellant company was acquired by Brian Kennedy, an entrepreneur who also owns a number of other home improvement companies.  Prior to that time the Appellant had built up its business in part on the basis of readily available finance.  When the availability of ready finance for customers declined, or the use of external finance became administratively complex, there was a decline in sales, although this was also attributable to the strategy of a previous owner of the business in focussing on cost reduction and operational efficiency rather than sales.

8.       The emphasis of the Appellant’s business changed under Mr Kennedy.  His strategy was to maximise sales and better exploit the fixed cost base.  A number of measures were introduced with the purpose of reaching a broader customer base and increasing top line sales in the direct sales market.  These included increasing the size of, and restructuring, the direct sales force.  A key strategy was the introduction of a more flexible and wide-ranging discount structure.

9.       Against this background a new strategy, described by Mr Jarman and Mr Fawcett as the Everest Home Account (“EHA”) Cash Back Discount Scheme, was introduced.  The EHA refers to those customers who purchase with the assistance of finance offered through the Appellant, so it excludes customers who pay in cash (irrespective of how they finance that payment, for example with a bank loan) or by credit card.  The scheme is that described in the statement of agreed facts; if a customer purchases goods and services from the Appellant with the assistance of the designated third party finance, and maintains that finance account for a defined period, he receives an amount by way of cash back equal to 10% of the amount of the loan finance.

10.    We were shown a memorandum prepared by Mr Fawcett on 17 February 2000 entitled “Cost of Extra Discount/Cashback from Credit Finance”.  The background to this was an idea for a cash back scheme floated by Mr Fawcett at a meeting with the new executive chairman of the Appellant, Roy Eady, in late 1999 or early 2000.  Mr Fawcett then discussed the idea with others, including Simon Thompson, the retail sales manager, and Gary Risley, sales director, in order to put a proposal together.  The memorandum essentially attaches spreadsheet calculations from which Mr Fawcett concludes that in order to break even on a “discount/cashback of 10%” it would be necessary to achieve one of two things, or a combination of the two: increase installed finance penetration to 23% (from the then current level of below 10%), or attract incremental sales on finance of £1.9 million net (£3.2m gross).  The essence of  the memorandum is that introducing the discount/cashback would result in a loss.  In order to break even, the scheme had to be accompanied by an incremental increase in sales.  To break even by relying on the commission generated from the finance company would have required the Appellant’s financial penetration to quadruple from 6% to 23%.  This was not considered viable as it would require a huge increase using an untested strategy.  By contrast, turnover would only have been required to increase by 2% to 3% to achieve the £1.9m required to break even, and this was considered to be achievable.  It was therefore believed that the cashback would serve to increase sales by such a margin as to enable it to break even.  On that basis, it was agreed to trial the cashback scheme.

11.      The cashback discount is regarded by the Appellant simply as one of a range of discounts offered to potential customers.  The sales force has a variety of discounts at its disposal which can be offered to secure a sale.  A discount is offered on the basis of quantity; there is an “immediate order” discount; and a manager’s discretionary discount whereby the sales representative can choose to sacrifice a percentage of his or her commission, which is then matched by the Appellant, in order to offer a further discount.  The cashback was viewed by the sales force as a discount; each sales representative’s commission was calculated on the basis of the sale price less the cashback.

12.    The cashback is calculated, unlike other discounts which relate to the price, or the price as reduced by another discount, by reference to the value of the loan.  Since, after taking account of other discounts, and a deposit, the loan will be of an amount lower than the original gross cash price, if expressed as a percentage of the original price the discounting element would be in the range of 5% to 6%.  The rationale for this is explained by Mr Jarman: if the cashback was based on product value, those customers who were able to pay in cash could take out nominal finance in order to receive the full cashback amount.  This would not serve the Appellant’s aim of increasing the average order volume.  Linking the cashback to the sum borrowed encourages customers to borrow more, and hence also to buy more. 

13.    All the Appellant’s discounts are conditional in some way.  For example, to qualify for a quantity based discount, the value of the customer’s order needs to reach a certain order threshold.  The immediate order discount is conditional on the customer agreeing to a purchase at a certain point in time.  Product related discounts are conditional on the customer purchasing a specific product.  However, all such discounts are available to all customers as long as they comply with such conditions.  In the same way, the cashback is available to all the Appellant’s customers provided that they take out finance for the purchase of the goods and/or services and run the account satisfactorily for a certain period of time.

14.    The unchallenged evidence of Mr Jarman was also that, notwithstanding that the cashback is marketed on the basis that the customer is required to run the account for a certain period in order to qualify for the payment, in fact the Appellant will, at the request of the customer, provide cash back even where the account has been settled early or where the customer has failed to comply with a condition that the account be “run satisfactorily”.  This is designed to maintain good customer relations.  Only a very small percentage of the cashback is not paid.

15.    When the cashback scheme was being introduced, although it was regarded as one of the range of discounts offered at the point of sale, the decision was taken that it should be provided by means of a payment back to the customer once they had conducted their finance account for, at the inception of the scheme, 90 days (later extended to 180 days).  The discount was named “cashback” to reflect the fact that the payment was made at a later point in the transaction.  Mr Fawcett’s witness statement explained the rationale thus:

“(1) There was a concern that customers with available cash who would have purchased the product anyway would take out the finance agreement to obtain the discount and immediately cancel it to convert to cash.  A trend of early settlements would impact on the finance company’s willingness to offer such loan provision …  As such there was a concern that a trend of early settlements would result in the finance companies withdrawing from the market and hence Everest would potentially lose a huge amount of sales

(2) We were keen to devise a discount which was unique to Everest.  The finance packages offered by companies such as Everest are essentially very similar, that is, regardless of which company the goods are purchased from, the finance package will be the same.  The EHA scheme therefore assisted Everest in differentiating itself from other home improvement suppliers and hence attracting more customers and making more sales.  In addition, and just as importantly, a new and different idea was likely to appeal to the sales force…”

16.    In addition, Mr Jarman’s statement makes the point that the fact that there is a subsequent cashback payment to the customer affords an opportunity for the sales representative to renew contact with the customer at the time the payment is made.  This provides a marketing opportunity at a time when the potential customer has monies available to fund a deposit for further products.  The conditionality of the payment was appealing to the finance company as it had the effect of tying in the customer to the deal for longer.

17.    We accept from the evidence that the rationale behind the introduction of the cash back scheme was to grow the business by increasing sales to customers buying with the assistance of finance.  Customers purchasing with finance tend to spend more than customers purchasing in cash.  Mr Jarman’s evidence, supported by a graphical illustration, was that the average credit sale is consistently 150% to 200% of the average cash sale.

18.    Mr Jarman acknowledges in his statement that the Appellant receives a commission from the finance company.  However, he says that the increase in sales margins, and hence turnover and profit, brought about by the cashback is such as to justify the costs to the Appellant of offering this form of discount.  His statement continues:

“This is demonstrated by the fact that within only a few months of its introduction, the additional incremental financial sales were such as to enable the company not only to break even but to increase its profits – hence the scheme pays for itself due to the sales margins created.  That the commission is not the motivation for the discount is also demonstrated by the fact that, over the years, the return to Everest by way of commission has decreased dramatically, to the extent that the costs of the scheme are in fact greater than the amount of commission received.”

The scheme underpins some £60 million of the Appellant’s sales turnover and continues to be used as a key tool for sales growth.

19.    We were referred to a number of examples of the Appellant’s promotional literature with reference to the cash back.  Mailshots to homeowners included a prominent box, typically in the top right hand corner of the letter, containing the following wording: “UP TO 40% OFF* PLUS 10% CASHBACK**”.  The single asterisk is explained as “Off list price.  Dependent on order value.” and the double asterisk referable to the cashback directs the reader to “Payment by Everest Homeaccount finance.  Subject to status.  Terms and conditions apply.  Written details on request.”  The body of a typical letter (from September 2006) also includes reference to the cashback:

“… we are currently offering savings of up to 40%*.  All you have to do is call 0800 010 123 quoting SP0603, and tell us what interests you.

If you decide to go ahead you could even qualify for a further 10% cash back**.  Your total savings could be as much as £400 - £800 – even a whopping £3,000, depending what you are looking for.”

Another letter, reference APR502 (which we infer was for around April 2005) refers to the cashback in the following way:

“10% ** CASHBACK on your ‘homeaccount’

When you use our flexible finance facility ‘homeaccount’ to pay for your Everest home improvements, you also get 10%** CASHBACK

After 180 days of your ‘homeaccount’ running, you get back 10% of the value of the loan including VAT.

** Subject to status.  Terms and conditions apply.  Written details on request”

20.    Similar messages were given on the Appellant’s website.  In the homeaccount section there appeared the following:

“How to get 10% CASHBACK

Cash to spend as you choose

With homeaccount

When you pay with Everest homeaccount, you get back 10 per cent of the value of your loan

More Cash For More Changes

… With 10 per cent cashback, you’ll find those extra changes [easy to] afford”

On a corresponding website page headed “Everest Home Account”, the following was stated:

“Flexible finance – Have more say in what you pay for Everest home improvements”

The text goes on to refer to the flexibility of the home account, giving the customer more say in what he pays from the outset and through the term of the loan, for example by paying off lump sums to shorten the term of the loan, reduce the overall amount of interest paid, or both, and by paying off the whole or part of the loan at any time.  The text then goes on to say:

“Get 10% Cashback

When you pay with Everest homeaccount, you get back 10% of the value of your loan.  Written details are available on request.”

21.    Area agents and representatives tasked with obtaining orders for the home improvements were instructed to advise customers of the benefits of the home account, including the cashback scheme.

22.    We were provided with a pro forma, uncompleted, copy of the purchase agreement under which a customer would contract with the Appellant for the supply of double glazing and home improvements.  At the hearing the copy that had been included in our bundle behind the witness statement of Mr Jarman was replaced with an enlarged version that was more legible than the former document.  Unfortunately, when we came to consider this document in detail we discovered that it was not the same as the one it had replaced.  The enlarged version had a box headed: “Payment Details: Cash Price incl. VAT for: [                 ]”.  In that box was a series of descriptions of types of home improvement product (such as “Replacement Windows”) with space for prices to be inserted alongside those descriptions.  At the bottom these entries would then be added to give a “Total Price”, from which discounts on the next line would be deducted, where applicable, and the resultant calculation would be taken to a box entitled “NETT PRICE incl. VAT  £       ”.  From this on the following line there would be deducted any advance payment or deposit, giving a Balance.  Immediately below the Balance line is a line for a further deduction headed “Cash Back Discount”, following which a Net Value can be calculated, and an Account Value.  There then follows space for the method of paying the balance of the cash price, with the respective amounts divided between the Everest Home Account and other methods.  Finally a box must be ticked yes or no as regards “Cash Back”.

23.    We were rather curious when we read this, as neither party had drawn our attention to the specific elements of this box in the agreement.  But on checking back to the original copy that had been included in the bundle we found that the original version was different to what we have just described.  The original has the work descriptions and values as above, totalling to a Total Price less applicable discounts, giving the same NETT PRICE incl. VAT.  It has the deduction for advance payment or deposit, and the resultant Balance.  But then it moves directly to the method of paying the balance of the cash price, ending with the same yes or no question headed “Cash Back”.  What is missing from the original version is any reference or deduction line referable to “Cash Back Discount”.

24.    We have no reference number on the copy of the original version.  The reference on the enlarged version is HS 0918 (Rev. 04/2007).  It looks to us that this enlarged version dates from April 2007, which post-dates the relevant period for this appeal.  We find that the enlarged version was not applicable to the period we have to consider.  We believe the explanation for the different versions of the agreement can be found in a letter dated 20 August 2008 from PricewaterhouseCoopers (then acting for the Appellant) to HMRC referring to certain recent changes to the Appellant’s cash back arrangements.  One of those changes was that for the future the purchase agreement with customers would clearly refer to the cashback as a discount, and calculations of the impact of the discount would show a reduction in price to a lower net price after deduction of the cashback discount.  This, it seems to us, is what the enlarged version of the agreement does, and we have therefore concluded (despite the rather puzzling difference between the date of the PwC letter and the date we deduce the enlarged version of the agreement to have been produced) that the enlarged version reflects changes to the agreement that are not material to this appeal.  We therefore find that at the material times the agreement was in the form of the original version.

25.    At the time the order was taken from the customer the sales representative would issue the customer with a confirmation that as an Everest Home account customer he was entitled to “a special cash back of 10% of your Home account Loan Value”.  He was informed by this that the relevant sum would be sent to him 180 days after the account was opened and subject to the account being conducted satisfactorily.  Conditions on the reverse of this confirmation included: “Standard Home Account terms only apply.” and “The Home account must still be open at the time payment of the cash back is made.”

26.    We were shown a copy of the agreement between the Appellant and Clydesdale Financial Services Limited dated 1 September 2005.  This agreement sets out certain details of home improvement loans of varying terms, including the rates of commission payable to the Appellant (the greater the length of the term, the greater the rate of commission).  The agreement includes provision for a claw-back of commission paid if the customer settles their account in full within four months of the advance date (that is, before three monthly payments have been made by the customer).  The Appellant was then required to repay (by netting off against the next commission settlement) the commission paid to the Appellant on that customer’s account.  There is no reference in the agreement to the cashback payment.  In the General Conditions Of Trade which apply, Clydesdale appoints the Appellant as agent, but solely for the purposes of completing customer agreements, and not in relation to any aspect of the cashback.

27.    When the work was completed the installer was required to make an Installation and Completion Report to the Appellant.  By signing the report the customer confirmed installation and authorised payment of the loan on the customer’s behalf to the Appellant.  The report contained reference, in an applicable case, to the Everest Home Account and notified the customer that he would receive a cashback cheque for the relevant amount 180 days after the commencement of the loan.  At the end of that period the customer was sent a cheque under cover of a letter that stated:

“Following the installation of your Everest products, your Everest Home account has now been open for 180 days.  It gives us great pleasure to enclose our Cash Back promotion cheque for [£       ] representing 10% of the Home Account Loan Value.”

28.    The cashback did not reduce the amount of the loan; there were no restrictions on the use of the cash received by the customer.

29.    We should note that, whilst we have recorded the Appellant’s description of the cashback as a discount, and we accept that at the inception of the cashback scheme, and throughout the relevant period, the Appellant operated its business on the footing that the cashback was a discount, that does not answer the question we have to consider, namely whether for VAT purposes the cash back was a reduction in the price for the home improvement supplies, and a reduction in the consideration for that taxable supply, or whether it was an inducement to the customer to enter into and maintain the loan, and a payment for doing so.

The law

30.    As a matter of UK law, applying Community law as expressed in the relevant directives, VAT is charged on the taxable supply of goods and services by reference to the value of the supply (see sections 2 and 4 of the Value Added Tax Act 1994 – “VATA”).  Section 19 provides for the value of goods and services.  So far as material it provides:

“(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.”

31.    At the material time the relevant Community law was contained in the Sixth Directive (Sixth Council Directive of 17 May 1977 – 77/388/EEC).  In this appeal we are concerned only with article 11(C)(1), which reads as follows:

“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.”   

Discussion

32.    What is at issue here is the amount of the consideration that should properly be regarded, for VAT purposes, as having been given for the taxable supplies of home improvement goods and services made by the Appellant to its customers.  The Appellant says that the cashback is a discount from, or reduction of the price, paid retrospectively to the customer subject to the satisfaction of certain conditions.  The Respondents say that the cashback payment is not a reduction in the price, but is a separate payment in return for the customer entering into the specified financing arrangements, and maintaining those arrangements for a set period; and as such the consideration for the Appellant’s taxable supply must be ascertained without reference to the cashback payment.

33.    It was common ground between the parties that, in determining the consideration, or the taxable amount, that is to be treated as provided for a given supply, the transaction should be examined as a whole, without being dissected artificially (Customs and Excise Commissioners v Pippa-Dee Parties Ltd [1981] STC 495).  However, it is equally the case that the general scheme of the VAT legislation nevertheless proceeds on the basis of examining separately each transaction in a chain of transactions to ascertain objectively what output tax is payable and what input tax is deductible (Customs and Excise Commissioners v Robert Gordon’s College [1995] STC 1093, per Lord Hoffmann at p 1099f, citing the Advocate-General (Lenz) and the ECJ in BLP Group plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424).  Here it is agreed that there are three separate supplies: from the Appellant to the customer, from the finance company to the customer and from the Appellant to the finance company.  We must consider all the surrounding circumstances in order to ascertain objectively the consideration to be attributed to the supply from the Appellant to the customer.  But each of the supplies maintains its integral character; it is not permissible to take a global view of a series of transactions in the chain of supply (Robert Gordon’s College, per Lord Hoffmann at p 1100c).

34.    This approach was similarly endorsed, in the context of a case concerning whether vouchers, issued by a retailer on conversion of points earned by customers when purchasing goods, were issued for consideration.  In the leading judgment in the Court of Appeal in Tesco plc v Customs and Excise Commissioners [2003] STC 1561, Jonathan Parker LJ said (at [160]:

“I consider that, for VAT purposes, the correct approach to the analysis of the Clubcard scheme (that is to say both the basic scheme and the third party schemes) is to examine the entire cycle of transactions which it comprises, in order to determine objectively (that is to say without regard to the parties' subjective intentions, save in so far as they are reflected in the terms of the scheme), and having regard to the scheme's economic purpose, whether its legal effect is such that vouchers issued under it fall within para 5[1]: that is to say, whether vouchers issued under it are issued for 'consideration', in the Community law sense of that term.”

35.    It is apparent that the approach does not focus on the motivation of the supplier.  An objective analysis is called for, and the scheme documentation should play an important part in that analysis (see Total UK Ltd v Revenue and Customs Commissioners [2008] STC 19, per Richards LJ at [22]).

36.    We were referred to a number of authorities on the question of the consideration to be attributed to a supply.  The case of Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 in the ECJ concerned certain chains of transactions involving the company, which was the manufacture of toiletries that were sold variously to retailers or to wholesalers and cash-and-carry traders for resale to retailers.  Two sales promotion schemes were in issue.  In the first the company reimbursed the retailer for the price reduction given on production of money-off coupons.  In the second the consumer could obtain a cash refund from the company by returning cash-back coupons printed on the labels of products.  The company claimed that the money refunded on the coupons constituted a retrospective discount reducing the price of its goods.

37.    As regards the money-off coupons, the claim was denied by the commissioners on the basis that the amounts they represented were part of the consideration received by the retailer for the supply of goods to the customer, and should be included in the taxable amount as third party consideration.  In relation to the cash-back coupons, the commissioners argued that there was no direct link between the supplies of goods by the company to the retailers or wholesalers and the reimbursement from the company to the consumer.

38.    In Elida Gibbs, the ECJ confirmed the settled case law that consideration is the “subjective value”, namely the value actually received in each specific case, and not a value estimated according to objective criteria.  The principle described in Elida Gibbs has its genesis in Staatsecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445 (commonly referred to as “the Dutch Potato case”).  From that case, in Customs and Excise Commissioners v Littlewoods Organisation plc [2001] STC 1568, Chadwick LJ described the following three principles (at [14]):

“Three principles find expression in the court's judgment in the Coöperatieve 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 the Advocate General (Fennelly) in Argos Distributors Ltd v Customs and Excise Comrs (Case C-288/94) [1996] STC 1359 at 1366, [1997] QB 499 at 521, para 21—which we set out later in this judgment—but, seen in context, the distinction which the court intended in the Coöperatieve 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 inquiry 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.”

39.    The court in Elida Gibbs held that a 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 be in conformity with the VAT directive for the taxable amount used to calculate the VAT chargeable to the manufacturer to exceed the sum finally received by him.  This would affect the principle of neutrality, in particular as provided by article 11(C)(1) of the Sixth Directive.  As Chadwick LJ remarked in Littlewoods (at [44]), the ECJ took the opportunity to restate the basic principles of the VAT system.  The court emphasised that (Elida Gibbs at p 1402):

“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.”

40.    Elida Gibbs was considered by the Court of Appeal in Total UK Ltd v Revenue and Customs Commissioners [2008] STC 19.  In rejecting a wider principle that had been extracted from Elida Gibbs by Sir Andrew Park in the High Court, Lord Justice Richards, with whom Maurice Kay LJ and Mummery LJ agreed, accepted the submission made by counsel for the commissioners that the propositions to be derived from Elida Gibbs are: (i) the VAT cannot exceed the consideration actually paid by the final consumer for the supply of goods; (ii) the first proposition applies however many stages there are between manufacturer and final consumer; (iii) where the consumer has paid less than the indicated shelf price of the goods and the cost of the discount is funded by the manufacturer either by paying the consumer directly (cash back) or by paying the retailer (money-off), the consideration received by the manufacturer for his supply is the price paid by the wholesaler or retailer less the cost of the discount; and (iv) the third proposition is supported by article 11(C)(1) of the Sixth Directive.

41.    In Elida Gibbs the ECJ also acknowledged that article 11(C)(1) refers to the normal case of contractual relations entered into directly between two contracting parties.  But article 11(C)(1) is an expression of the principle that the position of taxable persons must be neutral.  It is not in accordance with the principle of neutrality that the tax authorities should receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.  This is emphasised by the extension of this principle to more complex linear transactions, such as those in Elida Gibbs, where the final consumer is granted a reduction, not by anyone with whom the consumer has a contractual relationship, but by a taxable person who is the first link in a chain of transactions.

42.    The principle that the basis of the assessment to VAT is the consideration actually received was one of those applied by the ECJ in Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 879 (“NYC”).  There the company carried on business as a wholesaler of cosmetic products.  The products were supplied by the company to retailers, known as beauty consultants.  The products were offered for retail sale by what was described as the “party plan” method, at 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 charge made for the pot of cream so supplied was at a discount to the normal selling price.  It was held by the ECJ that, following the Dutch Potato case, the basis of assessment was the consideration actually received and not a value estimated according to objective criteria.  On the facts the parties to the contract had treated the wholesale price of a 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.  The service supplied by the beauty consultant accordingly had a monetary value which was therefore part of the consideration for the pot of cream.  The consideration for VAT purposes for the supply of the pot of cream was, as a result, the monetary consideration plus 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.

43.    The ECJ in NYC also relied on the fact that there was a direct link between the goods supplied for a price lower than the normal price and the value of the service which had to be provided by the beauty consultant.  The Advocate-General (da Cruz Vilaça) in his Opinion (at para 38) considered the case where the parties agreed that the purchaser should reimburse the supplier for the difference between the normal price and the reduced price in the event of his failing to fulfil his undertaking subsequently to purchase further quantities of the goods.  He said that it would then perhaps be possible to perceive a direct link between the price reduction and the undertaking given, and to make a precise “subjective” evaluation of the service provided, and not provided, in return for the goods supplied.  But even in that case the Advocate-General made clear that it would also be necessary to show that, having regard to the size of the reduction, it was not merely a discount or rebate which in principle would not be included in the taxable amount.

44.    As in NYC, so too in the judgment of the ECJ in Empire Stores Ltd v Customs and Excise Commissioners (Case C-33/93) [1994] STC 623 it was held there was a supply by a mail order company in consideration of a service.  In that case an existing customer who introduced a new customer who (having been approved by the company) placed, and paid for, a first order was entitled to receive, without charge, an article (of which the value was assumed not to exceed £10).  The supply of that article was held to have been in consideration of the supply of a service by the customer of introducing a potential new customer.  Accordingly, there was a direct link between the article supplied and the service provided by the recipient.

45.    A common feature of these cases is that goods were supplied for a consideration comprising (in whole or in part) a non-monetary element consisting in each case of services provided to the supplier by the recipient of the supply.  The same was also true in the domestic cases of Rosgill Group Ltd v Customs and Excise Commissioners [1997] STC 811 and Customs and Excise Commissioners v Westmoreland Motorway Services Ltd [1998] STC 431.

46.    In Boots Co plc v Customs and Excise Commissioners (Case C-126/88) [1990] STC 387, the UK government had argued that promotion schemes operated by Boots, whereby customers who had obtained coupons free of charge by buying certain goods could purchase other specified goods (“redemption goods”) at their normal retail price less the nominal value indicated on the coupons, should be distinguished from a typical case of a price discount or rebate since the reduction allowed to the purchaser had been granted in exchange for the coupon, which had a value.  The ECJ rejected this argument, holding that since the coupon had not been obtained by the purchaser for consideration, it was nothing other than a document incorporating the obligation assumed by Boots to allow to the bearer of the coupon, in exchange for it, a reduction at the time of purchase of the redemption goods.

47.    The case of Customs and Excise Commissioners v Mirror Group plc (Case C-409/98) [2001] STC 1453 did not concern price discounts or rebates.  The question there was whether the Mirror Group made a supply of services when it accepted an inducement payment to enter into a lease for certain London premises.  The Group was an “anchor tenant”, that is one whose presence as a tenant could attract other businesses to become tenants and could therefore expect favourable terms.  On the question whether the Mirror Group made a supply of services, the ECJ said (at paras 26 – 27):

“26. As to whether a supply of services was made, it must be noted that a taxable person who only pays the consideration in cash due in respect of a supply of services, or who undertakes to do so, does not himself make a supply of services for the purposes of art 2(1) of the Sixth Directive. It follows that a tenant who undertakes, even in return for payment from the landlord, solely to become a tenant and to pay the rent does not, so far as that action is concerned, make a supply of services to the landlord.

27. However, the future tenant would make a supply of services for consideration if the landlord, taking the view that the presence of an anchor tenant in the building containing the leased premises will attract other tenants, were to make a payment by way of consideration for the future tenant's undertaking to transfer its business to the building concerned. In those circumstances, the undertaking of such a tenant could be qualified, as the United Kingdom government in essence submits, as a taxable supply of advertising services.”

48.    In these circumstances it was for the UK domestic courts to ascertain whether the tenant had made a supply of services for consideration to the landlord, and if so what that supply was.  But it may be noted that, even though a tenant may be an anchor tenant, that mere fact, even when combined with the entry into the lease, is not enough for a supply of services to be found.  Something more, such as the future tenant’s undertaking to transfer its business, would be required.

49.    The task for the domestic courts in distinguishing between a discount and consideration for a separate supply of services is not always an easy one.  As Lord Walker commented in Lex Services plc v Customs and Excise Commissioners [2004] STC 73 (at [31]), the dividing line between services performed in cases such as NYC, and the giving of a discount, is obscure.  Nevertheless, legal certainty is important in the VAT system, along with fiscal neutrality, and “if a supplier wishes to give a discount it is up to him to make his intention clear, especially in the context of a part-exchange transaction.”

50.    In Lex Services, a company (Lex) sold new and used cars to customers, either for cash or for cash and a car taken in part exchange.  The allowance for the car taken in part exchange was negotiated with the customer and usually exceeded the value that Lex could obtain on a trade sale.  The difference between the part exchange price and the trade value was described by Lex as an “additional allowance” and appeared on Lex’s sale documentation as the “true value” of the part exchange car.  If the customer exercised a right of cancellation he was not entitled to the return of the part exchange car, but to its trade value.  The House of Lords dismissed Lex’s appeal, agreeing with the Court of Appeal that, firstly, the part exchange price was specifically agreed for commercial reasons and it could not be recharacterised as a discount, secondly that the “true value” served a separate and different purpose, namely to limit the refund which Lex would have to have made if the customer decided to cancel, and finally that the principle of fiscal neutrality did not go so far as to require that transactions which have the same economic effect (the additional allowance and a discount) should for that reason be treated alike for VAT purposes.

51.    Counsel for Lex had argued that the two different ways in which the part exchange transaction might have been structured (that is, with a high part exchange price for the traded-in car on the one hand, or an explicitly acknowledged discount on the Lex car) were not merely the same in their economic effects, but were essentially the same transaction.  He referred to Hartwell plc v Customs and Excise Commissioners [2003] STC 396 in which another car dealer achieved a saving of VAT by providing a “purchase price discount” (evidenced by a voucher) to perform the function of the “additional allowance” in Lex Services.  Lord Walker commented (at [29]) that these were not identical transactions.  What Hartwell showed was that it was possible for a supplier to make clear an intention to give a discount if the documentation was appropriate (at [31]).

52.    The importance of the relevant documentation was also emphasised in Total UK.  In that case Total had introduced a sales promotion scheme called a “TOPS” scheme, whereby participating customers at service stations received points for petrol purchased.  Accumulated points entitled the customer to vouchers that Total had purchased from retailing groups and which could be redeemed for goods at those retailers’ outlets.  Total contended that the amounts on which it was liable to VAT should not be the full price received for the sales of petrol, but the price reduced by amounts equal to the cost incurred in purchasing the vouchers, and that the subsequent transfer of the vouchers to the customers constituted reductions in the taxable consideration for supplies of fuel.

53.    It was held that to treat the transfer of a voucher as the grant of a retrospective discount or rebate on the price of fuel was to mischaracterise it.  On an objective analysis, and having regard to the scheme documentation, the scheme was presented to customers as a means of obtaining goods or services, or the opportunity of making a gift to charity.  The customer, whether or not he was a member of the scheme, paid the same price for the fuel: the pump price.  The customer who received a voucher did not receive a discount on the price of the qualifying purchase of fuel, but acquired something extra for the price he paid for the fuel.  Thus, TOPS was a scheme under which the customer got more at the same price rather than the same at a lesser price.  It was a customer loyalty scheme, the economic purpose of which was to promote sales of Total fuel by encouraging motorists to return for repeat purchases at the full pump price.  It was not a price discount scheme and the value of the voucher could not be treated as a reduction in the consideration obtained by Total.

54.    It was conceded in Total UK that the supply of the fuel and the transfer of the voucher were not a single economic transaction.  They were different transactions and different chains of supply, one relating to the fuel and the other to the vouchers.  While there was a link between the chains, Richards LJ in the Court of Appeal concluded (at [67]) that there was no relevant linkage for VAT purposes that would cause the transfer of the voucher to be treated as the grant of a discount on the price of the fuel.

55.    The ECJ case of Chaussures Bally SA v Belgian State (Case C-18/92) [1997] STC 209 concerned payments for goods by credit card.  The organisation issuing the credit card paid Bally the sum paid by the customer less a commission.  Bally argued that the consideration for its supply should be exclusive of the amount of the commission.  It was held that the commission was not a reduction of the consideration, but that the deduction made by the card-issuing organisation represented the consideration for a service rendered by it to Bally.  That service was an independent transaction in respect of which the purchaser (Bally’s customer) was a third party.  Furthermore, the method of payment used in the relations between the purchaser and the supplier cannot alter the taxable amount (see Judgment, paras 16 and 17).

56.    Chaussures Bally was followed in Customs and Excise Commissioners v Primback Ltd (Case C-34/99) [2001] STC 803, a case on similar facts.  There customers paid for goods by means of interest-free credit.  By arrangement with a finance house the finance house paid the invoiced amount to Primback less a percentage commission, and the customers paid the finance house by monthly instalments with no interest added.  The ECJ rejected Primback’s argument that commercial reality required that the different transactions should not be viewed in isolation, and that the consideration for the two supply transactions of which the customer had the benefit – the supply of goods and the supply of credit – should be apportioned so that the consideration for the goods was the difference between the advertised sales price and the cost of credit which the retailer ultimately had to bear.  The ECJ held, following Chaussures Bally, that the relationships between seller and purchaser and between seller and finance house had to be distinguished for the purpose of determining the basis for calculating VAT.  The price agreed between the parties for the contract of sale and paid by the customer was the same irrespective of the means by which the purchase of the goods was financed.  The commission reduced the profit margin of the retailer, but this merely constituted a charge connected with its business, in the same way as, for example, its costs in respect of financing, advertising or rent (see Judgment, paras 35, 38, 42 and 47).

57.    In Kingfisher plc v Customs and Excise Commissioners [2002] STC 992, P Ltd provided credit facilities, which included selling vouchers on credit to its customers.  Those vouchers enabled customers to purchase goods from retailers who were members of a retail scheme, to which P Ltd was a party, without paying cash.  P Ltd deducted a discount from the invoices presented to it in respect of goods purchased with the vouchers.  W (part of the Kingfisher VAT group) argued that VAT should be accounted for on the basis of the amount that W actually received from P Ltd.  It was held in the High Court that the tripartite arrangement between the customer, W Ltd and P Ltd was closer to the relationship between customer, retailer and credit card company than it was to the retailer, customer and third party situations where, although third parties were involved, the retailer had given a discount directly to the customer and the taxable amount was the net figure paid by the customer.  Chaussures Bally was followed, and Boots and Elida Gibbs were distinguished.

58.    In that case Mr Cordara (who appeared for Kingfisher) had argued that, W having agree with P Ltd that it would honour P Ltd’s voucher, the taxable supply was the supply of honouring the vouchers when it sold goods to customers in exchange for the vouchers and accordingly that the value of the taxable supply was the discounted face value of the vouchers.  Mr Justice Neuberger rejected this analysis on the basis that, where there is a tripartite arrangement one must have regard to all the elements of the arrangement.  P Ltd was providing a service to W; W received a benefit from P Ltd not merely in the payment of money, but in the right to participate in the scheme.  It was argued that no express obligations were imposed on P Ltd to do anything except pay money and that, in the light of the observations made by Dillon LJ in Customs and Excise Commissioners v Diner’s Club Ltd [1989] STC 407, at p 419, as to the nature of the agreement between the retailer and the credit card company, P Ltd could not be regarded as supplying any service to W.  However, Neuberger J held that the reality of the agreement between P Ltd and W was that P Ltd had included W in the scheme, for example by informing others entering into the scheme that the vouchers might be used at W’s stores.  If P Ltd had not advertised to purchasers of the vouchers that W was included in the scheme, W would not have benefitted from the scheme and would not therefore have had to observe its obligations under the agreement.  In Kingfisher therefore, having regard to the reciprocity that was found to exist in the relationship between W and P Ltd, P Ltd was held to be providing a service to W.  The amount deducted from the invoices was accordingly consideration for that separate supply and not a reduction of the taxable consideration for W’s own supplies to its customers.

59.    Mr Singh referred us to two decisions of the VAT and Duties Tribunal.  We are not of course bound by tribunal decisions, but we should have due regard to them.  The first is Peugeot Motor Company PLC v Revenue and Customs Commissioners (2005, no 19260).  That was a case involving a payment by Peugeot to a finance company of an amount in compensation for loss of interest on the granting by the finance company of interest-free credit to customers purchasing cars from dealers to whom the Peugeot group had sold its cars.  The tribunal commented that it was necessary, having regard to Chaussures Bally and Primback, to identify what the payment in question represented, namely whether it truly was a reduction in the price of the goods, or was the consideration for another supply altogether.  Applying those two cases it was held that, as in those cases, the value of the supply of goods was not abated by the cost of procuring the advantageous credit terms.  The fact that such cost might well have been a cost component of the supply could not alter the output tax liability.  The payment to the finance company was consideration for a distinct supply of the granting of credit, even though that supply was made not to Peugeot but to the retail customer.

60.    The second tribunal decision referred to us by Mr Singh is Jag Communications (Plymouth) Limited v Revenue and Customs Commissioners (2007, no 20002).  There a trader in mobile phones offered its customers cashback terms in respect of contracts entered into by the customers with telecommunications service providers.  The service providers paid commission to Jag, generally conditional on the customer maintaining its contract with the service provider for a certain period of time.  On the facts, the cashback payment exceeded the sale price of the phone.  The only record of the cashback deal was an entry on the invoice for the sale of the phone (“1 Jag/4U Cashback Deal @ £120).  The tribunal held that in no sense could the conditional promise of the cashback payment be a reduction in the cost of the phone to a negative consideration, nor as a reduction in the customer’s monthly payments to the service provider.  Jag had not specified that it was making any reduction in such payments; the cashback was a generalised inducement to enter into the two contracts, for the purchase of the phone and with the service provider, and not a reduction in the price of either or both of them.  The tribunal commented that there had to be a reduction in the price of a particular supply.

61.    The tribunal in Jag went on to say that even if the cashback could have been regarded as a price reduction it could not solely have been related to the supply whose price was reduced.  Whilst not regarding the customer to have made any promise to maintain the contract with the service provider for any period, the tribunal nevertheless regarded the satisfaction of that condition as the consideration for the payment of the cashback.  Accordingly, the cashback was a payment to the customer for satisfying the terms of the contract with the service provider and not merely a reduction in the price of that contract.  This would not therefore have been treated as a discount or rebate so as to affect the taxable consideration for the supply of the mobile phones.

Analysis of the relevant transactions

62.    On the basis of the authorities, and in line with the approach adopted by Jonathan Parker LJ in Tesco (at [160]), we need to consider the legal effect of the cashback payment made by the Appellant to a customer, examining the entire cycle of transactions which impact upon the payment, in order to determine objectively (that is to say, without regard to the parties’ subjective intentions, save in so far as they may be reflected in the terms of those various transactions), and having regard to the economic purpose of those transactions, whether the legal effect of the cashback payment is such that the price for the Appellant’s taxable supply is reduced and that, by virtue of article 11(C)(1) of the Sixth Directive, the taxable amount for that supply is to be correspondingly reduced.

63.    We accept, and indeed it was not disputed by Mr Singh for HMRC, that at one level the purpose of the cashback arrangements was to increase the Appellant’s sales of home improvement goods and services.  The availability of finance was seen by the Appellant as increasing both the number and value of its sales transactions, and we accept that this was an effect of the introduction of the cashback scheme.  However, in itself that in our view is a finding in respect of the Appellant’s subjective intentions.  We need to consider the transactions objectively.

64.    We start with the contractual documentation.  As regards the agreement for the supply of the home improvements, this is inconclusive of the legal effect of the cashback payment.  The relevant contract between the Appellant and its customer at the material time, as we have found, was what we described as the “original version”.  That document makes scant reference to the cashback: it merely includes a box which appears under and separate from the calculation of the “Nett Price incl. VAT” and the balance after deducting the customer’s advance payment or deposit.  There is nothing in the contract itself that would enable an observer, on an objective basis, to conclude from the contract alone that the cashback was a reduction in the price.

65.    The only specific contractual documentation in relation to the cashback itself is the confirmation slip issued to the customer at the time of his order, which confirms to the customer that he is entitled to the cashback and that the amount will be sent to him 180 days after the Home Account has been opened and subject to the account having been operated satisfactorily and remaining open at the time that payment of the cashback is to be made.  But that document itself is not conclusive of the legal nature of the cashback.

66.    We have considered whether the inconclusive nature of the contractual documentation for the sales of the home improvement goods and services should of itself lead us to conclude that the cashback ought not to be regarded as a reduction in the price of those supplies, on the footing that the documentation ought to have made this clear if it was indeed the case.  Although we are mindful of Lord Walker’s comments in Lex Services as to the need for legal certainty and that “if a supplier wishes to give a discount it is up to him to make his intention clear”, that comment was made in the context of an argument that, where on the basis of the documentation it had been found that there was no discount on the price of a supply, the transaction was the same as another whose documentation had resulted in the opposite finding.  There is no such argument in this case.  The inconclusive nature of the contractual documentation for the home improvement supplies is not conclusive of the question whether the cashback should, as a matter of legal effect, be regarded as a discount.  That depends upon an examination of the transaction as a whole and its surrounding circumstances.

67.    In that respect, Mr Singh argued that, analysed objectively and having regard to the documentation, the manner in which the cashback scheme is presented to the customer and the surrounding circumstances, the only conclusion that could be drawn was that the cashback payment could not be seen as a retrospective rebate of the purchase price paid by the customer.  He supported this general proposition with the following submissions:

(1)        The customer pays the whole price for the supply on the making of the supply.

(2)        The Appellant is only obliged to pay cash back to the customer if the loan is taken out by the customer and maintained for the specified period of 180 days.

(3)        The customer has to pay interest on the loan.  On a typical loan, submitted Mr Singh, at the end of 180 days the customer would have paid to the finance company approximately 12.5% of the loan amount by way of interest.

(4)        On satisfaction of the loan conditions the Appellant then pays to the customer an amount calculated by reference to the loan amount, namely 10% of that loan amount.  Mr Singh submitted that, as far as the customer was concerned, that reduced the cost to him of the credit he had obtained from the finance company; the customer would receive back a large part of what he had paid by way of interest to the finance company.

(5)        The Appellant does not reduce the cost (or price) of its home improvement supply.  The Appellant is able to pay the cashback amount of 10% of the value of the loan because the Appellant will have received commission from the finance company.

(6)        This is an analysis of all the relevant facts and circumstances.  Taking the whole picture into account, there has been no reduction in the price of the Appellant’s taxable supply to the customer.

68.    Mr Singh’s argument focuses on the connections between the cashback and the loan arrangements between the finance company and, on the one hand, the customer, and on the other the Appellant.  We turn first therefore to the contractual documentation in those respects.  There is nothing in the loan agreement between the finance company and the customer about the cashback.  There is no contractual link between the payment of interest and the cashback.  Nor is there any reference to the cashback in the agreement between the finance company and the Appellant, and the Appellant is not the agent of the finance company for the purpose of making any payment to the customer.  There is no contractual link between the receipt of commission by the Appellant from the finance company and the payment by the Appellant to the customer of the cashback.

69.    Mr Singh placed heavy reliance on the linkage which he said could be found between the cashback payment and the loan arrangements.  He referred to the relationship between the timing of the cashback and the timing of the commission that was received by the Appellant from the finance company.  We do not consider that on these facts there can be any such relevant link.  The supply giving rise to the commission was purely between the Appellant and the finance company.  The timing of the payments was purely a question of funding, which in our view cannot give rise to any relevant link.  Whilst the source of a payment might, in a particular case, be a relevant consideration in ascertaining the legal effect of a transaction, it cannot in our view provide the answer in this case.  Merely because the Appellant receives commission from the finance company subject to the loan remaining in place and pays the cashback to the customer subject to a similar contingency cannot in our view lead to the conclusion that the cashback payment is, as Mr Singh argued, inextricably bound to the loan and must be analysed and characterised by reference to the credit agreement and not the agreement for the home improvement supplies.

70.    Mr Singh argued that the effect of the cashback payment was to reduce the cost to the customer of obtaining credit.  But the question is not one of economic effect, but one of economic purpose.  There is in our view nothing in the documentation nor in the surrounding circumstances that can treat the cashback as reducing the consideration for the supply made by the finance company to the customer.  Mr Singh sought to argue that there were similarities between the Appellant’s case and that of Chaussures Bally.  There the commission deducted by the finance company was not treated as a reduction in the taxable amount of the supply.  Mr Singh argued that, as the cashback was funded by the commission payment, and the cashback accordingly related to the commission, which was received by the Appellant for a separate supply made to the finance company, so there could be no reduction in the taxable amount of the home improvement supply on account of the cashback.  We do not agree.  The cashback was not related to the commission payment in the way that Mr Singh seeks to portray it.  Chaussures Bally shows that payments for independent supplies (which are a cost but not a price reduction) do not affect the taxable amount, but that case does not otherwise impact on the analysis of the cashback.

71.    For the same reasons we do not accept Mr Singh’s attempt to draw a comparison between the Appellant’s case and that of Kingfisher.  In Kingfisher the relevant amount was the commission deducted by P Ltd (the finance company) from payments it made to W.  That was held, following Chaussures Bally, to be consideration for a separate transaction between P Ltd and W which did not affect the taxable amount of the transaction between W and its customer.  Mr Singh argued that the reality of the Appellant’s arrangements was that the cashback was directly related to the benefits the Appellant received under its agreement with the finance company.  In our view, the payment of the cashback cannot be equated to a deduction of the commission by P Ltd in making payment to W.  The Appellant makes the cashback payment to the customer.  Although the Appellant does receive a benefit if the customer continues to maintain the loan agreement with the finance company for the specified period, that does not render the cashback as consideration for a separate transaction so as to prevent it from being a reduction in the price for the Appellant’s supply to the customer.

72.    Mr Singh developed his argument further by reference to the analysis in Total UK that characterised the supply of fuel in that case and the transfer of the voucher to the customer as separate economic transactions.  Mr Singh argued that in the Appellant’s case there was a chain of transactions involving the supply of home improvements and a separate chain of transactions involving the provision of credit by the finance company.  He submitted that the cashback payments formed part of, or properly belonged to, the latter chain and not to the former.  The difficulty, as we see it, for Mr Singh in advancing this argument is to identify the relevant link between the credit chain and the cashback.  For the reasons we have already given we do not accept that the factors that Mr Singh pointed to do create a link such that the cashback can be attached to the credit supply.  In Total UK the chain involving the voucher started with the retailer’s supply of the voucher to Total to use in the redemption process, and continued with the provision of the voucher to the customer.  Here, by contrast, we find no such chain encompassing the financing arrangements and the provision of the cashback.  Mere cashflows, separately identifiable from different individual chains, do not in our view combine to form a new chain.  We do not consider that the cashback can be regarded as anything other than part of the same chain, and the same economic transaction, as the supply of the home improvements.

73.    A customer is induced to purchase home improvements from the Appellant by means of a number of discounts from the advertised price.  The Appellant’s promotional literature refers to the cashback in terms, but in a manner that is indistinguishable from other incentives by way of discount that might be offered to the customer.  In the absence of conclusive contractual documentation, we consider that, viewed objectively, this is strongly indicative of the cashback being a retrospective reduction in the price.  The cashback was, as Mr Cordara argued, part of the price negotiation with the customer as one of a suite of potential discounts on offer, which would be negotiated on an individual basis.  The cashback differed from the other discounts only in that it was a rebate of something that was already paid, and it was payable only if certain conditions were satisfied.

74.    Taking this promotional material together with the fact that the obligation on the part of the Appellant to make the payment can only arise as part of a contract for the purchase of the home improvements and that the expression “cashback”, in that context can most readily be understood as the payment back to the customer of sums he has paid to the Appellant and not any other person, we consider that the proper analysis of the cashback is that it is part of the pricing mechanism of the Appellant.  Accordingly we find that the cashback was in the nature of a discount and was a retrospective reduction in the price for the home improvements goods and services that the customer acquired.

75.    That is our analysis of the nature of the payment.  The next stage in the analysis, in our view, is to consider the nature of the obligation of the Appellant in making that payment.  The mere fact that a payment is made by way of a rebate of a price, or part of a price, that has already been paid does not conclusively determine whether that payment is a reduction of the price for VAT purposes, and thus a reduction of the taxable amount.  The pot of cream that was offered by the company in NYC to the beauty consultant at a discount could equally have been sold to the consultant at the full price, subject to a rebate if a party was in the event organised.  The result would, in our view, have been the same, notwithstanding that there had been a rebate of the price.  The nature of the obligation, as well as the nature or mechanics of the payment, must be considered.

76.    It is in this context that we must consider the relationship between the payment and what the customer does to qualify for the payment.  Mr Singh submitted that the cashback is related to services that are distinct from the Appellant’s supply to its customer.  The purpose of the cashback offer is to induce prospective customers to purchase the Appellant’s goods and services using credit, to open a loan account with a specified finance company, and to maintain that loan account for long enough to enable the Appellant to retain commission payments it has received from the finance company.  Mr Singh argued that the cashback should be viewed as a reward to the customer for taking out the loan and for maintaining it for the specified period.

77.    In our view, in considering the nature of an obligation to make a payment, a distinction must be drawn between the mere satisfaction of a contingency, and actions of a customer that amount to a service by a customer to the supplier.  Each of these obligations on the part of a supplier to make a payment may be satisfied by a price rebate, or a retrospective discount, but in the case where the discount or rebate is linked to a service, that will not constitute a reduction in the taxable amount.  In cases such as NYC, where there were reciprocal obligations on the parties, or Empire Stores, where, although there were no reciprocal obligations, there was something in the nature of a service, the taxable amount was not reduced.  Although those cases were concerned with discounts at the point of supply, we consider that the same principle applies in the case of price rebates.  A similar distinction, albeit in a different context, can be derived from Mirror Group in contrasting a payment made for merely entering into a supply with a payment made for something in the nature of a service.

78.    The dividing line is between those cases where a discount, including a retrospective discount or rebate, is given merely on satisfaction of a contingency, which can include a behavioural shift on the part of the customer, and those where the discount is given for a service provided by the customer.  Around that dividing line there will be a spectrum of cases.  At one end there are discounts offered for behaviour such as purchasing in bulk, or purchasing certain combinations of goods or services, either with a combined discounted price or with the first purchase being acknowledged by the obtaining of coupons entitling the holder to a discount on a second purchase, as in Boots.  We do not consider that the ECJ would have arrived at a different conclusion in Boots if, instead of a coupon, the offer had been to give a discount, whether at that time or retrospectively, provided it could be shown that the customer had already purchased other eligible goods.  The coupon in Boots was no more than the evidence that the contingency had been satisfied.  A discount of the nature with which the ECJ was concerned in Boots was given because a contingency had been satisfied, and was a reduction in price and not consideration for any supply to Boots by way of satisfying the contingency.

79.    At the other end of the spectrum are those cases where the discount or payment is given for the performance of a service by the customer.  For that to be the case, in our view, on the ECJ authorities, the customer must be carrying on something in the nature of an economic activity, whether it is in the nature of an obligation of the customer or not.  There must, as in NYC, be a specific link between the payment and an economic activity of the customer.  That direct link follows from discount given on the relevant goods (as in NYC, Empire Stores and Peugeot) being the consideration for something in the nature of a service by the customer.  The same analysis must apply if the consideration is given by way of a cashback; we consider that we can properly infer that the result of NYC would have been the same if, instead of the pot of cream being supplied for a discounted monetary consideration, it had originally been supplied for full value, and a cashback payment had been made for the undertaking given by the beauty consultant.

80.    We do not accept in this regard the argument advanced by Mr Cordara, which was founded on Mirror Group, that a payment that is for the mere consumption of a supply must in any event be disregarded as not comprising the supply of services.  Mirror Group was concerned with a purely bilateral situation in which a payment by a landlord (supplier) solely in return for a tenant (recipient) agreeing to receive the supply of the lease was held not to be consideration for a supply of services by the recipient.  We do not consider that any general principle can be derived from this as regards consumption of services outside a purely bilateral case.  In our view, where the consumption by a person of a supply provided by another can, in given circumstances, be regarded as a supply of services by the first person to a third party for a consideration, it is no answer that what is done amounts to the consumption of that third party supply.  The dividing line is not between consumption and non-consumption of a supply, but between the supply of a service and the mere satisfaction of a contingency.  Even in Mirror Group the terms on which the Group received the payment for entering into the lease were favourable on account of its status as an anchor tenant; absent any separately identifiable supply the payment was received merely because certain conditions were satisfied, and not because the Group made a supply of services.

81.    A similar distinction, which we consider illustrates the same dividing line, can be made between those cases where there is a genuine price reduction which operates to reduce the taxable amount, and accordingly the supplier’s taxable turnover, and those cases where a payment is made that is properly characterised as a cost component of the supply, or an expense of achieving the gross turnover.  This distinction was drawn in Primback. The consideration deducted by the finance house operated to reduce Primback’s profit margin, but did not reduce the price charged for its own supply; it was merely a cost.

82.    In our view, where a payment or discount is given for the supply of a service by the customer, that can properly also be regarded as a cost component of the supply, and is not a reduction in the price or taxable amount of that supply.  Where a payment or discount is given for the mere satisfaction of a contingency, and is not linked to a supply by the customer, such a payment or discount if otherwise operating as a reduction of the price does constitute a reduction in the taxable amount of the supply.

83.    In this case we are satisfied that the cashback payment that was made by the Appellant to its customer was a price reduction made solely on account of the customer satisfying a contingency, and not for the provision by the customer of anything in the nature of the making of a supply (of entering into and maintaining the loan with the finance company) by the customer to the Appellant.  In these circumstances the cashback was not merely a cost of acquiring additional turnover, nor a cost component of the supply made by the Appellant.  As such, in our view, the cashback was not consideration for a service provided by the customer to the Appellant and there was no direct link between the cashback and any such service.  Nor, for the reasons we have explained, was there any relevant link between the cashback and the separate supplies made by the Appellant to the finance company (for which the Appellant received the commission) or by the finance company to the customer (for which the finance company received interest paid by the customer).  Although its label could not be determinative, the cashback was indeed what its name suggested; the partial repayment of an amount paid by the customer to the Appellant for the home improvement supplies.  That partial repayment amounted to a reduction in the price of that supply for VAT purposes, and according to article 11(C)(1) of the Sixth Directive as a reduction of the taxable amount.

84.    In reaching our conclusion it has not been necessary for us to place any direct reliance on Elida Gibbs.  However, in so far as Elida Gibbs confirmed that the taxable amount that serves as the basis for the collection of VAT cannot exceed the consideration actually paid by the final consumer, we consider that our conclusion is consistent with that principle.  Once it is established, as we have decided, that the cashback payment was a genuine reduction in the consideration for the Appellant’s supply, and was not itself the consideration for anything in the nature of a supply by the customer or in respect of the loan arrangements, the only proper analysis is that the cashback reduced the consideration that was paid by the customer, and VAT should be collected only on that reduced amount.

85.    We have also considered carefully the decision of the VAT and Duties Tribunal in Jag.  On the facts of that case the tribunal held that there was no reduction in the price of the goods in question, a mobile phone, nor in the monthly payments to the provider of the telecommunication services.  The cashback was characterised as a general inducement to enter into the two contracts and not as a reduction in the price of either of them.  By contrast here, we have found that the cashback was indeed a reduction in the price of the goods and services provided by the Appellant.

86.    In Jag the tribunal went further, and found that even if the cashback could have been regarded as a reduction in the price of the phone, that would not have been a reduction in the taxable amount as the customer’s satisfaction of the contract with the service provider was itself consideration for the payment.  Whilst we agree with the experienced tribunal in Jag that it is not necessary for there to be a separate promise by the customer, or for the customer to be under any obligation, as we have described in our view for a reduction in price not to be regarded as a reduction in the taxable amount it must be linked to something in the nature of a service by the customer to the supplier and not merely be for the satisfaction of a contingency.  This is a distinction that in our view follows from the authorities, and it was not one that was addressed by the tribunal in Jag.  For this reason we are unable to derive any assistance from the comments made by the tribunal in Jag in this regard.

Reference to the ECJ

87.    Before us Mr Cordara renewed the Appellant’s application that a reference be made to the Court of Justice in relation to the questions at issue in this appeal.  An application in this respect had been made at an earlier stage of the proceedings, and had at that time been refused by Judge Berner.

88.    The proper approach to whether a reference should be made was succinctly summarised by Sir Thomas Bingham in R v International Stock Exchange ex parte Else (1982) Ltd [1993] QB 534 (at p 545):

“I understand the correct approach in principle of a national court (other than a final court of appeal) to be quite clear: 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 advantages enjoyed by the Court of Justice in construing Community instruments.  If the national court has any real doubt, it should ordinarily refer.”

89.    In this case we have referred to extensive authority, in particular of the Court of Justice, on the principles to be applied in determining the consideration for a supply where a discount or rebate of the price is the point in issue.  In our view those principles are by now well-established and are apt to be applied to a range of factual circumstances, including cases that are not confined to their own or similar facts.  It is for the national courts, guided by those principles, to determine the legal effect of the transactions at issue on the particular facts in any given case.  Once that legal effect has been determined, the application of the law is in our view clear on the basis of the existing authorities.  Accordingly we refuse the Appellant’s renewed application for a reference to the Court of Justice.

Decision

90.    For the reasons we have given we have concluded that the cashback was a reduction of the price for the supply by the Appellant of home improvement goods and services, and was a reduction in the taxable amount or consideration of that supply for VAT purposes.

91.    Accordingly, we allow the appeal.

Costs

92.    This appeal was made to a predecessor of this tribunal, the VAT and Duties Tribunal, on 17 August 2006.  Shortly thereafter, on 16 October 2006, the Appellant made a related appeal, which was consolidated with the earlier appeal by direction of the tribunal.  As such these proceedings are “current proceedings” within the meaning of that term in para 1(2), Sch 3, Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (“the 2009 Order”).

93.    This means that, under para 7(3) of that Schedule, the tribunal may give any direction to ensure that the proceedings are dealt with fairly and justly, and in particular may apply any provision in any procedural rules which applied to the proceedings before 1 April 2009 (when the new First-tier Tribunal (Tax Chamber) came into being, and the 2009 Order came into force), and disapply any provision of the rules which apply to proceedings in that chamber, namely the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”).

94.    When these proceedings were commenced, and up to 1 April 2009, the procedural rules which applied were those in the Value Added Tax Tribunals Rules 1986 (“the 1986 Rules”).  Under rule 29 of those Rules, the former tribunal had a general costs shifting discretion, according to which the tribunal could direct a party to pay to the other party such sum as it might determine on account of the costs of the other party “of and incidental to and consequent upon the appeal”.  Although this discretion enabled the tribunal to direct costs to be paid by an appellant to HMRC, as well as from HMRC to an appellant, it should also be recorded that, as a matter of practice, known as the Sheldon statement, HMRC did not seek costs against an unsuccessful appellant in most cases.

95.    The 2009 Rules, subject to an exception for cases that are categorised as Complex, do not provide for a general costs shifting regime of the nature that applied under the 1986 Rules.  Instead, for most cases, the power of the tribunal to award costs is confined to wasted costs (which is a separate category not relevant for present purposes) and in cases where the tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings (see rule 10(1)(a) and (b)).  This case, as “current proceedings”, has not been allocated to any category.

96.    It is against this background that the Appellant seeks a direction under para 7(3), Sch 3 of the 2009 Order that rule 29 of the 1986 Rules be applied to this appeal, and rule 10 of the 2009 rules be disapplied.  The Respondents oppose that application, and accordingly seek to apply the 2009 Rules in this respect.

97.    Mr Scorey, for the Appellant, drew our attention to the undoubted antiquity of the appeal which, as we have described, commenced as long ago as August 2006 (and the dispute had commenced some time before that).  He argued that considerable expense had been incurred by the Appellant at a time whist the 1986 Rules were applicable, and at a time when, under the Sheldon statement, the Appellant had not been at risk of any application for costs by the Respondents.  He submitted that fairness and justice could only be done in this case by the application of the 1986 costs rule.  Not to direct such application would frustrate the legitimate expectations of the Appellant.

98.    Mr Scorey referred us to para 7(7), Sch 3 of the 2009 Order, which is worth setting out in full:

“An order for costs may only be made if, and to the extent that, an order could have been made before the commencement date [1 April 2009] (on the assumption, in the case of costs actually incurred after that date, that they had been incurred before that date).”

Although he accepted, in answer to questions raised by the tribunal, that para 7(7) was a limitation on the power to award costs under the 2009 Rules, mostly applicable to old General Commissioners’ cases (where no power to award costs applied) and Special Commissioners’ cases (where the test for awarding costs– that conduct had to be “wholly” unreasonable - was higher than the test of reasonableness under the 2009 Rules), he nevertheless submitted that para 7(7) informed the way in which the tribunal should approach the issue fairly and justly.

99.    Mr Scorey also referred to the procedure for allocation of cases to categories under rule 23 of the 2009 Rules.  This provides that when the tribunal receives a notice of appeal it must give a direction allocating the case to one of four categories: Default Paper, Basic, Standard and Complex.  As this appeal had been made well before the advent of the 2009 Rules, rule 23 had not applied, and there had been no allocation.  Mr Scorey submitted, and Mr Singh did not dispute this, that had this appeal been categorised it would have satisfied the conditions for it to be classified as Complex.  We agree.  The complex and important principle and issue raised by this appeal is clearly of a nature that would merit categorisation as Complex (see rule 23(4)).  The consequence of such a categorisation would have been, subject to any exercise of the Appellant’s opt-out right, which we can ignore as a possibility in these circumstances, that the cost shifting regime in rule 10(1)(c) would have applied, rather than the more restrictive regime in rule 10(1)(b).  Mr Scorey’s argument, in essence, was that in this case, absent categorisation, the only way to replicate a Complex case cost shifting power would be to apply rule 29 of the 1986 Rules.

100.Mr Singh submitted that the 2009 Rules provided the default position, and it was for the Appellant, as the party seeking to apply a provision of the 1986 Rules, to persuade the tribunal that the case could only be dealt with fairly and justly if those Rules were applied.  It was evident that this power would not be exercised in every case of “current proceedings”; whether the tribunal’s discretion would be exercised in this way should depend on the circumstances of each case.

101.Mr Singh argued that the largest part of the work involved in this appeal has taken place after 1 April 2009.  He referred us to the service of witness statements and skeleton arguments, the preparation for the hearing and of course the hearing itself.  He made the point that there had been no application until the first day of the hearing for the 1986 Rules to apply.  Accordingly, he submitted, the 2009 Rules should apply; he confirmed nevertheless that, irrespective of the outcome, the Respondents would not be seeking a costs order, in line with the Sheldon statement.

102.As we have noted, the first appeal in this matter was made in August 2006, and was consolidated with the second appeal in December of that year.  The Respondents’ statement of case and list of documents were served on 18 December 2006.  Following what appears to have been a rather premature request by the tribunal for dates to avoid for a substantive hearing, sent to the parties on 22 December 2006, the Appellant, by letter dated 12 January 2007, requested further and better particulars of the Respondents’ case.  The Respondents served their witness statements on 28 February 2007.  The parties agreed directions for the future conduct of the appeal, and these were approved by the tribunal on 16 March 2007.  The Appellants’ list of documents was served on 25 May 2007.

103.On 20 July 2007 the Appellant made an application for a two-month stand over of the appeal, on the ground that the Appellant had provided the Respondents with a detailed submission, and that time was required for this to be considered, and for a detailed response to be made.  Having been approved by the tribunal, this was followed by a further application (also approved) of the Appellant for a further two-month extension, to enable both parties to consider the positions adopted by the other.  This was then extended by two months more on application dated 19 November 2007.  Further extensions were granted, this time to accommodate a possible meeting between the parties, up to 20 August 2008.  A hearing for directions was listed for 4 November 2008, but was vacated on the parties agreeing directions, amended by the tribunal to provide for a time estimate for the substantive hearing to be given by 30 January 2009.  On 13 March 2009 the Appellant sought an extension of time for service of its witness statements, which was granted without objection by the Respondents.

104.The Appellant’s witness statements were served on 11 May 2009.  The earlier directions having become outdated, the parties agreed fresh directions, and these were approved by the tribunal on 4 June 2009.  Following that the parties provided dates to avoid for a substantive hearing.  On 6 July 2009, in advance of a listing of the substantive appeal, the Respondents served a skeleton argument on the Appellant.  On 21 October 2009 the tribunal approved further agreed directions, including for the listing of the substantive appeal for 5 days commencing 1 November 2010.  The appeal was listed for those dates on 30 December 2009.

105.On 19 July 2010 the Appellant served its skeleton argument.  On 27 August 2010 the Appellant made an application for the appeal to be stayed pending a reference to the Court of Justice.  That application was heard by Judge Berner on 4 October 2010 and refused.  The parties then made final preparations for the hearing, including the preparation of supplemental skeleton arguments and the usual document and authorities bundles.

106.There is no doubt that, with effect from 1 April 2009, the 2009 Rules are at least prima facie the applicable rules, subject only to a discretion under para 7(3), Sch 3 of the 2009 Order to disapply them, or to apply parts of the 1986 Rules (see per Briggs J in Atec Associates Ltd v Revenue & Customs Commissioners [2010] UKUT 176 (TC) at [42]).  The tribunal’s discretion in this respect is directed towards considering whether it is in the interests of fairness and justice to disapply rule 10 of the 2009 Rules and instead to apply rule 29 of the 1986 Rules.  This, it seems to us, must depend on the circumstances of the particular case, and we find nothing in para 7(7) to inform the exercise of that discretion in any way.  Paragraph 7(7) operates as a limitation on the exercise of a power to award costs under the 2009 Rules; it does not suggest that the tribunal should favour the application of the previous rules in any case of current proceedings.  It is evident from the way in which para 7(3) is framed that the mere fact that an appeal qualifies as “current proceedings” is not itself sufficient for the 1986 Rules, or any particular provision of those Rules, to be applied.

107.At, and indeed prior to, the inception of this appeal, and in its conduct up to the time of the promulgation of the 2009 Rules, the parties would have had a reasonable and legitimate expectation that the 1986 costs shifting rule would apply.  The Appellant could therefore at that time reasonably have assumed that, if it were successful in its appeal, it could apply for its costs on the basis that the tribunal would have a full discretion to award them.  Indeed, a letter from the Appellant’s then advisers, KPMG LLP, of 9 August 2006 makes the point that the Appellant was even then incurring significant professional fees and that if successful in a challenge to the Respondents’ decision would be able to seek payment of its costs.  In the period from the commencement of proceedings in August 2006 to 31 March 2009 there was considerable work done in relation to the appeal.  This therefore points in the direction of applying the 1986 Rules.

108.On the other hand, it is the case that, from 1 April 2009 the appeal proceeded under the 2009 Rules.  No application was made prior to the hearing itself for the 1986 costs rule to be applied in place of the 2009 rule.  Whilst this position remained the case, it created a legitimate expectation that the 1986 Rules did not apply and that the 2009 Rules would govern the question of costs over the entire conduct of the appeal.  Much work was done on the appeal from 1 April 2009.

109.One factor that should be taken into account is that it was not disputed that this would, if it had been categorised at all under the 2009 Rules, have satisfied the conditions for categorisation as a Complex case.  Assuming therefore that it would have been so classified, this would have meant that the full costs shifting regime in Rule 10(1)(c) would have applied, instead of the more restrictive power in rule 10(1)(b).  If this appeal had been brought on or after 1 April 2009, that is the costs regime that would have applied to it.  Although it would have been open to the Appellant to opt out of that regime (so that the more restrictive power would have applied as if the case had not been categorised as Complex), we can infer from the circumstances of this case, and the application that has in the event been made, that the Appellant would not have opted-out.

110.It may be asked why this case was not categorised as Complex, if, as is agreed to be the case, it satisfies the conditions for such classification under Rule 23.  The answer is likely to be that there has been some doubt as to the power of the tribunal to classify an existing appeal (that is, one that qualifies as “current proceedings”).  In Surestone Ltd v Revenue & Customs Commissioners [2009] UKFTT 352 the President, Sir Stephen Oliver QC, expressed the view that Rule 23 and the allocation of appeals has no application to “current proceedings”; it applies only to appeals that have been made from 1 April 2009 onwards.  Whilst this tribunal does not share that view, its own view being that Rule 23 imposes an obligation on the tribunal to categorise on receipt of the notice of appeal, but does not constrain the tribunal from allocating in any other case, including in “current proceedings”, we do not consider that a failure by the Appellant to apply for categorisation can weigh in the balance against the application of the 1986 Rules, if it is otherwise fair and just to make such a direction.

111.On the other hand, there is no satisfactory explanation why the Appellant did not apply at an earlier stage for the 1986 Rules to apply.  That did result in the position that, from 1 April 2009, the parties were progressing the appeal under the 2009 Rules, subject of course to the exercise of a discretion of the tribunal to apply the 1986 Rules.  This factor must be considered in weighing the question of fairness and justice between the expectations of the respective parties on the one hand, and the prejudice that would be suffered by either party were the tribunal to exercise its discretion to apply the 1986 Rules or not to do so.

112.Taking all these considerations into account, we have reached the conclusion that the issue of costs in these proceedings can only be dealt with fairly and justly by the application of rule 29 of the 1986 Rules and by disapplying rule 10 of the 2009 Rules.  The appeal was commenced a number of years before the advent of the 2009 Rules, and although much of the preparation for the hearing took place after 31 March 2009, nevertheless substantial work was also carried out up to that date.  The nature of the case, and its potential categorisation under the 2009 Rules as Complex, has the effect that, if it had been so categorised, the more general costs shifting regime would have applied even under the 2009 Rules.  In the circumstances of this case, however, the effect of our refusing to exercise our discretion in favour of the former costs rule would be to confine the Appellant to an award of costs only if it could show that the Respondents had acted unreasonably in defending or conducting the proceedings.  In the context of this appeal, both as regards timing and its nature, that would not be fair or just.

113.We must therefore turn to consideration as to how we should exercise our power to award costs under rule 29 of the 1986 Rules.  We consider that we should do so informed by the context in which we have applied that rule, including the respective legitimate expectations of the parties and our consideration of the effect if the case had been categorised as Complex.  In that latter regard, we note the recent comments of the Upper Tribunal (Warren J and Sir Stephen Oliver QC) in Capital Air Services Ltd v Revenue & Customs Commissioners [2010] UKUT 373 (TCC) to the effect that allocation to the Complex category does not mean that the tribunal must make an award in favour of the successful party.  In the circumstances we consider that the tribunal should hear any representations the parties may have as to the appropriate costs order in this case.  Accordingly we make no costs order at this stage.  Judge Berner will issue further directions in this respect with a view to a costs order being made by him alone.

      

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

ROGER BERNER

 

TRIBUNAL JUDGE

RELEASE DATE: 1 December 2010