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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Kingfisher Plc v Customs and Excise [2004] UKVAT V18668 (21 June 2004)
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Cite as: [2004] UKVAT V18668

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Kingfisher Plc v Customs and Excise [2004] UKVAT V18668 (21 June 2004)

18668

VALUE ADDED TAX – consideration – gift vouchers - before the judgment in Argos a subsidiary of the parent company supplied the parent's vouchers to retail companies in the group who sold them to purchasers and later exchanged them at face value for supplies of goods – agreed that the consideration for the supply of goods by a retail company in return for a voucher was then the face value of the voucher – after the judgment in Argos and as part of a tax planning scheme the group established another subsidiary outside the value added tax group and the parent sold the vouchers to that other subsidiary at a discount of 18.52%; that subsidiary sold the vouchers to purchasers through the retail companies at face value paying the retail companies a commission of 10%; the retail companies later exchanged the vouchers at face value for supplies of goods and were re-imbursed the face value by the parent subject to a redemption charge of 13.7% – the rates of the commission and redemption charge were set so as to ensure that the parent made neither a gain nor a loss on the voucher operation - whether the consideration for the supply of goods by a retail company to a customer was the discounted amount of the voucher received by the parent (81.48% of face value) – no – or the amount paid by the purchaser of the voucher (100% of face value) – yes – alternatively whether the arrangements after Argos amounted to an abuse of rights – yes – appeal dismissed - VATA 1994 s19 and Sch 6 para 5 - EC Sixth Council Directive (77/388/EEC) Article 11A.1(a)

LONDON TRIBUNAL CENTRE

KINGFISHER PLC

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: DR NUALA BRICE (Chairman)

MR J N BROWN CBE FCA ATII

MR R L JENNINGS FCA FTII

Sitting in London on 19 to 30 January 2004

Greg Sinfield, with Robert Hartley, both of Messrs Lovells Solicitors, for the Appellant

Christopher Vajda QC with Ian Hutton of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

PRIVATE AND CONFIDENTIAL

© CROWN COPYRIGHT 2004

DECISION

The appeal

Kingfisher Plc (the Appellant) is the parent company of a corporate group and is also the representative member of a value added tax group. As part of a value added tax planning scheme the Appellant established a wholly owned subsidiary called Flogistics Limited (Flogistics) outside the value added tax group. The scheme was that the Appellant sold vouchers to Flogistics at a discount of 18.52% (the internal discount). Flogistics sold some of the vouchers to individual purchasers through five retail companies in the Appellant's value added tax group at face value, paying the retail companies a commission of 10% based on those sales. The vouchers were then exchanged at any of the retail companies at face value for the supply of goods. Flogistics also sold some of the vouchers to corporate purchasers at a discount related to the volume of vouchers sold (the corporate discount). The corporate purchasers gave the vouchers to individuals who exchanged them at face value for goods supplied by the retail companies. The retail companies were re-imbursed the face value of all the vouchers by the Appellant who charged them a redemption charge of 13.7%.

The Appellant appeals against a decision of Customs and Excise dated 22 June 2001, and confirmed by letter dated 19 November 2001, that the Appellant, as representative member of the value added tax group, should account for value added tax on the basis that the consideration for the supplies of goods made by the retail companies in exchange for vouchers was the same as the amount paid by the purchasers of the vouchers; that is the face value of the vouchers sold to individual purchasers and the face value less the corporate discount of vouchers sold to corporate purchasers. We were told that the amount of tax currently in dispute was £3,565,966. We were also told that there were seven registered entities (including the Appellant) which had adopted schemes similar to that adopted by the Appellant. The value added tax concerned for all seven businesses was £10.562M.

The Appellant appealed because it was of the view that the consideration for the supplies of goods made by the retail companies in exchange for all the vouchers was the consideration which the Appellant obtained for the vouchers when it sold them to Flogistics at the internal discount of 18.52%; namely 81.48% of face value.

The legislation

The relevant parts of Article 11A of the EC Sixth Council Directive (77/388/EEC) provide:

"1. The taxable amount shall be:

(a) in respect of supplies of goods and services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.

3. The taxable amount shall not include

…

(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply; … "

The relevant parts of Section 19 of the Value Added Tax Act 1994 (the 1994 Act) provide:

"(1) For the purposes of this Act the value of any supply of goods or services shall … be determined in accordance with this section and Schedule 6 and for those purposes subsections (2) to (4) below shall have effect subject to that Schedule.

(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.

(3) If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration."

At the relevant time (that is before 8 April 2003) paragraph 5 of Schedule 6 of the 1994 Act provided:

"Where a right to receive goods or services for an amount stated on any token, stamp or voucher is granted for a consideration, the consideration shall be disregarded for the purposes of this Act except to the extent (if any) that is exceeds that amount."

The issues

The issues for determination in the appeal were:

(1) whether the consideration for the supply of goods by a retail company to a customer in exchange for a voucher was the discounted amount of 81.48% of face value received by the Appellant from Flogistics (as argued by the Appellant) or the amount paid by the purchaser of the voucher, namely the full face value of vouchers sold to individual purchasers or face value less the corporate discount for vouchers sold to corporate purchasers (as argued by Customs and Excise); and, if the former,

(2) whether the arrangements entered into by the Appellant amounted to an abuse of rights; and

(3) whether there should be a request to the Court of Justice for a preliminary ruling.

The evidence

The following documentary evidence was produced:

Three bundles of core documents (black)

Two bundles of scheme and promotional material documents (dark green)

One bundle of accounting information (yellow)

One bundle of contracts (purple)

One bundle of pleadings (red)

Oral evidence was given on behalf of the Appellant by:

Ms Tracy Aslam, the national account manager for Flogistics who was responsible for the sale of vouchers to corporate purchasers;

Ms Kim Dinan, the general manager of Flogistics; previously Ms Dinan worked as retail development manager for Kingfisher Gift Vouchers Limited and then was responsible at Flogistics for the sale of vouchers to individual purchasers through the retail companies;

Mr Iain Garden who was employed by the Appellant's corporate group from November 1990 to 12 September 2003; he was the financial controller at Comet until May 2000 when he became finance director of Time Retail Finance Limited, the company in the Appellant's group responsible for the in-house credit card operation; he was also a director of Flogistics between 13 June 2000 and 18 October 2001;

Mr Alan Kellock who was the corporate development manager of Flogistics until 1 December 2003 when he became retail development manager of Flogistics; and

Mr Alexander Sutherland who was group tax manager of the Appellant from 1990 to 2001 and then became its director of tax.

A witness statement by Mr David Fleming, containing evidence for the Appellant, was not objected to by Customs and Excise and so was read at the hearing. The Appellant also exhibited a quantity of point of sale material which we found most helpful. Some photographs of this material were taken and included in an additional red bundle which was given to us. We were also shown two greetings cards display stands.

Oral evidence on behalf of Customs and Excise was given by Mr Neil Mortimer and Mr Robert Jonathan Lever, both Officers of HM Customs and Excise.

The facts

We found in this appeal that it was important to be precise about the various parties to the transactions under consideration and the capacity in which they are mentioned. Accordingly, we have used the word "Appellant" for the Appellant when it is acting in its own capacity. We have used the words "Appellant as parent" when we refer to the Appellant in its capacity as the parent of its corporate group. We have used the words "Appellant as representative member" when we refer to the Appellant as the representative member of its value added tax group. We have used the word "purchaser" to refer to the purchaser of a voucher and the word "customer" to refer to the person who receives a supply of goods from a retail company in exchange for a voucher.

From the evidence before us we find the following facts.

The Appellant and its business

The Appellant is the parent company of the Kingfisher corporate group and the representative member of the Kingfisher value added tax group. At the relevant time both the corporate group and the value added tax group included five retail companies, namely B & Q Plc (B & Q); Comet; MVC Entertainment Limited (MVC); Superdrug Stores Plc (Superdrug); and Woolworths Plc (Woolworths). We refer to these five as the retail companies. Sometimes they were referred to in evidence as the operating companies or the "opcos". The Appellant's financial year ends on the Saturday nearest to 31 January in each year.

1993 to 2000 - the original arrangements

After 1993 and before 25 June 2000 the Appellant had a wholly owned subsidiary company called Kingfisher Gift Vouchers Limited (Vouchers). Following a restructuring in 1995 Vouchers was under the control of Woolworths and was treated, from a structural and management point of view, as "a satellite of the Woolworths' empire" or "effectively buried within Woolworths". Vouchers was part of the marketing department of Woolworths; its staff were employed by Woolworths; they occupied office space at Woolworths; and they used the same office systems. The Vouchers' staff reported to the Appellant through the Woolworths' directors and management decisions affecting Vouchers were taken by Woolworths' management. Vouchers did not pay rent to Woolworths nor did it pay to Woolworths any contribution for its use of Woolworths' staff or office facilities. At that time Vouchers had two people working on sales of vouchers to individuals and two on sales to corporate purchasers as well as administration staff. Both then and later it was Woolworths who sold and redeemed by far the most vouchers of all the retail companies.

Vouchers commissioned the printing by a security printing firm of what were called "Kingfisher Gift Vouchers". We saw some specimen vouchers; they were called Kingfisher Gift Vouchers and showed prominently the stores at which they could be redeemed, namely B & Q, Comet, MVC, Superdrug and Woolworths. They were in denominations of £1, £5, £10 and £25. When the vouchers had been printed they were held in the printer's secure vaults and then delivered to the stores of the retail companies by Securicor on the instructions of Vouchers. Thus the risk of loss or theft was either with the printers, or with Securicor, or with the retail companies; it was not with Vouchers.

Vouchers sold most of the vouchers at face value to the retail companies within the Appellant's value added tax group and the retail companies sold the vouchers at their face value to individual purchasers. Vouchers sold the rest of the vouchers to corporate purchasers at a discount (the corporate discount); the amount of the corporate discount was related to the volume of vouchers sold to that particular corporate purchaser. (The corporate discount was fixed by reference to commercial factors). The purchasers of vouchers usually gave them as gifts to recipients who then redeemed them at face value in exchange for goods supplied by the retail companies. When the vouchers had been redeemed the retail companies passed them back to Vouchers and Vouchers outsourced the function of counting them. Vouchers then paid the retail companies the face value of the vouchers which they had redeemed.

There were no contracts in place between Vouchers and the retail companies who were all companies in the same corporate group and value added tax group. The voucher scheme was run so that the Appellant made neither a profit nor a loss. Vouchers was run as a non-profit making company and was obliged to match its income against its costs. If it had any surplus or deficit these were passed back to the retail companies because it was the retail companies who benefited from the margin on locked in sales and incremental sales generated by the voucher scheme. However, the retail companies suffered a direct loss on voucher transactions and there was a view that there was little incentive for the retail companies to sell the vouchers.

Although neither Vouchers nor the retail companies made any margin on the sale of vouchers nevertheless the voucher scheme had four main benefits.

First, a small percentage of all vouchers sold are never redeemed.

Secondly, interest is earned from the date the cash is received from the purchaser of the voucher to the date on which the voucher is redeemed by the customer.

Thirdly, the sale of a voucher has the potential effect of increasing the market share of the group as a whole because the recipient of the voucher must redeem it at a retail company within the group thus locking sales into the group that would otherwise have gone elsewhere; "locked in" sales generate a margin on those sales for the retail companies.

Finally, a customer redeeming a voucher usually spends more than the face value of the voucher and this is referred to as incremental sales; incremental sales also generate a margin on those sales for the retail companies. In evidence which we accept Ms Dinan estimated that people would usually spend about 30 – 40% over the value of a voucher when they redeemed it.

We were shown an example of the benefits of a voucher scheme which indicated that, on the sale of £100 of vouchers at face value, £100 would be received and, in theory, the vouchers would be redeemed in exchange for goods worth £100. However, Vouchers benefited from the vouchers which would never be redeemed together with interest from the date the cash was received from the purchaser of the voucher to the date on which the voucher was redeemed by the customer. This exceeded the cost of printing and the cost of counting. In addition the retail companies in the group benefited from both locked in sales and incremental sales.

At this time the Appellant, as representative member of the value added tax group, accounted for output tax on the supplies of goods made by the retail companies in exchange for vouchers on the basis that the retail companies (and therefore the Appellant) had received consideration equal to the face value of the vouchers. Those arrangements were agreed with Customs and Excise.

On 24 October 1996 the Court of Justice gave its judgment in the case of Argos Distributors Limited v Commissioners of Customs and Excise (Case C-288/94) [1996] ECR I-5331. In that case a supplier of goods sold vouchers to purchasers at a discount and promised to accept them at face value in payment for the price of goods purchased by the recipients of the vouchers. The Court of Justice held that the consideration represented by a voucher when exchanged for goods was not the face value of the voucher but the sum received by the supplier of goods on the sale of the voucher (that is the face value less the discount).

After the decision in Argos the Appellant would periodically submit to Customs and Excise claims for repayment of output tax over-declared on the sales of goods made in exchange for vouchers originally sold by Vouchers to corporate purchasers at the corporate discount. The amounts of these claims were based on the discounts allowed to the corporate purchasers. Again these arrangements were agreed with Customs and Excise.

January 2000 to April 2000 - the development of the new arrangements

On 31 January 2000 there was a meeting between representatives of the tax department of the Appellant and of Messrs KPMG, Chartered Accountants (KPMG). The meeting discussed what would be the taxable amount of a supply of vouchers if they were sold by the Appellant at a discount to a company set up at arm's length outside the value added tax group, which company would then sell them to purchasers, who would give them to recipients who, as customers, would redeem them at retail companies in the group, which retail companies would be repaid by the Appellant. (We call this discount the internal discount to distinguish it from the corporate discount.) The view was expressed that, if the vouchers were printed by the new company, and if the risk for non-sales rested with the new company, the taxable amount would be the amount received by the Appellant from the new company (that is, the face value less the internal discount) relying upon the principles established in Argos. On 23 February 2000 there was a monthly group tax meeting with the Appellant's group finance director at which one of the items discussed was "VAT on gift vouchers – fresh, aggressive planning device".

The views of the marketing manager of Vouchers were sought and he actively supported the proposals. He thought that the positioning of Vouchers within Woolworths prejudiced the perception of the other retail companies about the voucher operation and that in turn affected the performance of the operation. He wanted to take the strategy of the business forward. We accept the evidence of Ms Dinan that Vouchers was eager to develop a structure which would enable the retail companies to be paid a commission as a reward for sales and was also keen to develop new areas of opportunity such as sales to unconnected third parties.

Before 9 March 2000 KPMG and the tax department of the Appellant consulted Counsel on the subject of "Gift Voucher Planning" and thereafter there was internal correspondence and also correspondence between the Appellant and KPMG which referred to the proposals as a planning scheme. The internal correspondence mentioned the desirability of the new company being run on a proper commercial footing charged with making a profit. It should pay rent to Woolworths for office space and should pay charges for other facilities; it should have service agreements with its staff; and should enter into contracts with the retail companies. It should bear the risk of secure delivery of vouchers to the stores of the retail companies and should look at opportunities to develop its sources of income. (In the event, not all of these recommendations were complied with).

On or about 24 March 2000 an undated draft proposal was circulated within the Appellant and KPMG which contained some paragraphs about "commercial justification". This indicated that, for value added tax planning to succeed, it was not necessary to demonstrate a commercial rationale for the re-organisation of a business because the principle in Ramsay (W T) Limited v Inland Revenue Commissioners [1981] STC 174 HL did not apply to value added tax. However, the document went on to say that the proposal could best be defended from attack if it could be commercially justified and so the new company should be placed on a normal commercial footing and expected to trade profitably and be accountable for its costs. The new company should also seek to expand the business and develop new profit streams for example, associations with non-group retailers and digitalised vouchers for use on the internet. The undated draft proposal also stated that, presentationally, it would be preferable for the new company not to borrow money from the Appellant to fund the business through its first trading period and so the first supplies of vouchers by the Appellant to the new company could be on 90 day terms; as the average period for a voucher to be in circulation was shorter than ninety days the new company would obtain the money from the retail companies before it had to pay the Appellant.

At that time it was hoped that the new scheme could commence on 29 April 2000 to coincide with the next value added tax accounting period. On 6 April 2000 a formal proposal "to reduce the amount of value added tax paid on sales of gift vouchers" was circulated internally at the Appellant by the tax department. It stated that the Argos decision provided an opportunity to account for value added tax on less than face value, whilst still obtaining full payment, by interposing a new company between the Appellant and purchasers, replacing Vouchers. The required re-organisation was limited and had "some" commercial justification. The level of benefit would depend on the discount to be given by the Appellant to the new company and, at an internal discount of 18.46% on sales of £85M per annum, the gross saving of value added tax would be £2.056M per annum. The higher the discount the higher the saving. It was acknowledged that the opportunity might have a limited life span because the legislation could be changed. The formal proposal did not include any paragraphs about commercial justification nor did it mention the suggestion that the new proposals would incentivise the retail companies to sell more vouchers.

Sometime before 13 April 2000 a presentation was prepared for the Kingfisher Executive entitled "Re-structuring Kingfisher Gift Vouchers Limited". (The Kingfisher Executive consisted of the managing directors of the retail companies in the Appellant's corporate group and it met monthly; it was distinct from the board of the Appellant). This presentation mentioned that the Appellant's tax department had identified "the significant VAT advantages" in setting up a separate voucher company and also mentioned that the payment of commission to the retail companies for the sale of vouchers would incentivise the retail companies to sell more vouchers. Reference was also made to the ability of the new company to develop new distribution channels for the Kingfisher Gift Vouchers. The presentation did not mention a redemption charge but made it clear that, although some of the retail companies would be better off under the new scheme, others would lose. In fact the presentation was most probably not made to the Kingfisher Executive but was approved by the Appellant's finance director on or around 13 April 2000. He informed the five retailing companies that the voucher business was to be re-organised and that the re-organisation would generate a VAT benefit of approximately £2M per annum.

Meanwhile plans were being made for the creation of a new company to replace Vouchers; it was intended that the new company would exist outside the value added tax group. In an email dated 12 April 2000 the tax department of the Appellant suggested that Mr Sutherland should not be a director as it was desirable "to avoid any obvious link between the creation of this company and tax". KPMG also advised that the name of "Kingfisher" in the title of the company should be avoided (although the vouchers were to remain the Kingfisher Gift Vouchers). The name of Flogistics was chosen and the new company was incorporated on 18 April 2000. It was a 100% subsidiary in the Appellant's corporate group. Its first directors were the Appellant's company secretary and group financial controller.

Also on 18 April 2000 the tax department of the Appellant wrote to the finance directors of the retail companies to give "an overview of the gift voucher project". Once more the scheme was described as "an opportunity to save VAT of approximately £2M per annum" and it was mentioned that the value added tax benefit would be shared among the retail companies. A by-product of the new arrangements would be that retailers would obtain "greater benefit for selling vouchers providing an incentive to store staff". The message said that contracts would be despatched to Flogistics and the retail companies early the following week for signature by the company secretaries of the retail companies. At that time the deadline for the implementation of the scheme was still 29 April 2000.

On 19 April 2000 Flogistics applied to be separately registered for value added tax. It stated that its main business activity was retail incentives, distribution, sales and marketing. The company intended to make taxable supplies from 1 May 2000 and in its first year the amount of supplies would be £80,000. A first meeting of the board of directors of Flogistics was held on 26 April 2000 to deal with formal matters only.

May 2000 –June 2000 - the implementation of the arrangements

On 11 May 2000 KPMG wrote to the Appellant with their terms of engagement for providing assistance in the implementation of the restructuring of the voucher activity. They would provide VAT advisory services, general advice and advice on point of sale material and KLegal (KPMG's legal department) would provide legal advisory services including the drafting of the relevant contracts. The letter also said that KPMG would provide suggested text for inclusion on point of sale material. The terms of engagement included a fixed fee together with a success fee for each value added tax return period during which the Appellant benefited from the revised structure. At about this time or sometime later internal authorisation was sought within the corporate group for the payment of KPMG's professional fees for a "VAT Planning Gift Voucher Business Re-organisation". The project description was to achieve a VAT saving on the sale of Kingfisher Gift Vouchers. The benefits associated with the project were described as "an expected VAT saving of approximately £2M per annum". There was no other commercial benefit mentioned. The fees were for the legal costs of drafting the contracts, VAT consultancy and Counsel's opinion.

At about this time Ms Aslam and Mr Kellock and a new accountant joined Vouchers. Ms Aslam and Mr Kellock had been recruited from a competitor with the aim of taking the business forward. On 16 May 2000 a presentation was made at the Appellant about the performance of Vouchers in 1999 (the financial year ending at the end of January 2000). This had been an "excellent" year for Vouchers in a difficult market. Sales had grown and the growth significantly outperformed the market which had grown at 3.5%. Sales had also grown each year for five years. A contract had been secured with a company outside the corporate group. The internet could prove a major opportunity over the next two years. An objective for 2000 (the financial year ending at the end of January 2001) was to grow sales yet further.

Also on 16 May 2000 a presentation was made to the employees of Vouchers about Flogistics and how the changes were to be presented to the outside world. One employee asked what impact the company name change would have on branding and was told that "we are the KGV [Kingfisher Gift Voucher] and this will stay. It was previously owned by a company called Kingfisher Gift Vouchers Limited and this was never used/shown very often. It is now owned by Flogistics and this won't be used very often either."

At about the same time an internal paper was prepared describing the process of the new operation. After Flogistics became operational it would request the printing of vouchers by the same security printers as had been used by Vouchers. At the end of each financial period the printer would provide the Appellant and Flogistics with a list of all vouchers printed at the request of Flogistics. The Appellant would prepare an invoice to Flogistics for the face value of the vouchers less 18.5% discount. Flogistics would pay the Appellant within sixty days. Flogistics would despatch vouchers to the retail companies on request and would pay the retail companies a 10% commission for each voucher sold. This would be credited at store level at the end of each quarter. Flogistics would manage the redemptions on behalf of the Appellant and provide the Appellant with redemption data on a monthly basis. The Appellant would pay the retail companies the full face value of vouchers that had been redeemed but would charge the retail companies a redemption charge of 12.7%. (As the scheme developed the various percentages were changed so that the internal discount became 18.52% and the redemption charge became 13.7%.) This appears to be the first mention of the redemption charge.

It will be seen that, with a redemption charge of 12.7% on vouchers redeemed and a commission of 10% on vouchers sold, those retailers who redeemed more vouchers than they sold would be worse off under the new arrangements. It also had to be borne in mind that one-third of all vouchers were sold direct to corporate purchasers and so none of the retail companies would receive commission on the sale of those vouchers. On the other hand every voucher purchased, whether by an individual or by a corporate purchaser, was redeemed by one or other of the retail companies. This pricing structure caused concern among the retail companies. Within the corporate group, budgets were set for the financial year which ended at the end of January each year and budgets had been set at the end of January 2000 on the basis that the arrangements with Vouchers would continue. The managements of the retail companies were very concerned about their performance against budget in the financial year ending at the end of January 2001 and, in the words of Mr Garden, "did not like the goalposts being moved within the game and the game lasted the financial year long". The reason was that bonuses for management were measured by performance against budget. Those retailing companies who redeemed more vouchers than they sold realised that the changes in way in which Flogistics would operate (as compared with the way in which Vouchers had operated) meant that they would not achieve their budgets for 2000 and that would have an adverse effect on staff bonuses.

Between 16 and 19 May 2000 there was an exchange of emails between the Appellant's tax department and a director of Flogistics. The tax department said that it had indicated to Comet and Superdrug (the retail companies who redeemed more vouchers than they sold) that in the current year the structure would be such that they would not be any worse off under the new arrangements. This was described as "the quid pro quo for obtaining their buy-in". Comet was not very happy with the new arrangements and on 22 May had to be re-assured by the tax department that "the redemption and commission percentages have been set to ensure that Comet is no worse off than under the existing arrangements with [Vouchers]. At year end an additional commission should be paid to Comet being your share of the VAT saving". Internal correspondence also took place between the tax department and B & Q about the draft contracts.

Sometime between 24 May and 13 June 2000 the original directors of Flogistics were replaced, at the suggestion of Mr Sutherland, by Mr Paul Mackin and Mr Iain Garden, the managing director and finance director respectively of Time Retail Finance Limited, which was the Appellant group's in-house credit card operation. (There may have been a board meeting to make these changes but we did not see the minutes). The two new directors were chosen because of the similarities between the credit card and voucher businesses both of which spanned the retail companies in the group. Mr Mackin and Mr Garden were building up a new site in Leeds for the credit card operation and there was a view that at some stage the voucher operation might also be moved to Leeds, although in the event that did not occur. The new directors were informed by Mr Sutherland that "formal board meetings may be comparatively few and far between" as "we are more concerned with managing the voucher business". In evidence which we accept Mr Garden described his role as a director of Flogistics as "hands off", part-time" and "overseeing"; he told us that his role in Flogistics was "to take over a concern which had been agreed previously, a concern whose structure had been agreed previously between Kingfisher and the operating companies". He said that the company secretarial aspects, the contracts, the taxation arrangements, et cetera, were effectively taken care of by other experts in the Appellant's group. The two new directors were paid no remuneration by Flogistics and were paid solely by Time Retail Finance Limited.

In June 2000 the marketing manager of Vouchers wrote to the finance directors of the retail companies about the results of Vouchers for the financial year ending at the end of January 2000. He repeated much of the information made at the presentation on 16 May 2000 including the growth in sales and the forecast for the end of the financial year in January 2001. The marketing manager said that the new company, Flogistics, would enable retail companies to earn commission on the sale of vouchers and Flogistics would pursue other revenue raising activities. On 12 June 2000 the marketing manager wrote to the finance directors again to tell them that the aim of Flogistics was to improve profitability and to incentivise sales at store level by the means of a commission. He mentioned that there would be redemption charges but that these would be offset by the commission. In the budget year 2000 (namely the financial year ending at the end of January 2001) the cost of the new scheme would not exceed the budgets which had already been set but in the budget year 2001 (namely the financial year ending at the end of January 2002) the cost of the scheme to each retail company would be influenced by the sales achieved.

On 13 June 2000 a meeting was held attended by representatives of Vouchers, Flogistics, the Appellant's tax department and Messrs PricewaterhouseCoopers. (Messrs Pricewaterhouse Coopers were the auditors of Woolworths and Flogistics.) The meeting discussed the voucher process from the points of view of the Appellant, Flogistics and the retail companies. It was noted that the Appellant would sell the vouchers to Flogistics at the internal discount; would receive "the VAT rebate", interest and redemption charges; and would pay the redemption payments, printing and administration so that it would make neither a profit nor a loss; that Flogistics would make a profit but would pass a year end balance back to the retail companies leaving it with a small profit; and that the retail companies would benefit from the year end balance from Flogistics but would still make a loss. (On the figures supplied, Woolworths, who sold more vouchers than it redeemed, still made a loss because the commission of 10% it received on sales of vouchers to individual purchasers was less than the redemption charges it had to pay for redeeming vouchers issued to both individual and corporate purchasers).

The documents considered at the meeting made it clear that the internal discount was calculated so as to ensure that the Appellant's position under the scheme remained neutral. They also made it clear that the redemption charge was set at a level so as to ensure that no significant gain or loss was incurred by the Appellant in relation to the voucher operation. They also made it clear that the retail companies bore the costs of the scheme but would be compensated for the difference between what they received by way of commission on the sale of the vouchers and what they paid to the Appellant by way of redemption charges. Such compensation would be by way of balancing payments at the end of the financial year. Another internal meeting was held on 15 June at which it was agreed that "the redemption charges will be set at a level to ensure that no significant gain or loss is incurred by Kingfisher plc in relation to the Kingfisher Gift Voucher operation."

It had originally been hoped that the scheme would commence on 29 April; then the date became 29 May; and finally the scheme commenced on 25 June 2000 when the contracts prepared by KLegal were signed.

June 2000 – the contractual arrangements

Sixteen contracts were dated on 25 June 2000 (but possibly signed later). These were:

- two contracts between Vouchers and the Appellant for the sale by Vouchers to the Appellant of (a) unsold vouchers, greeting cards and display stands held at the retail companies and (b) unsold vouchers held by the printers;

- a contract between the Appellant and Flogistics under which the Appellant agreed to sell the unsold vouchers to Flogistics at a discount of 18.52% together with the greetings card and display stands;

- a contract between the Appellant and Flogistics under which the Appellant agreed to sell vouchers to Flogistics in the future at a price of the face value less a discount of 18.52%; the Appellant would ensure that the printer maintained sufficient stocks and would release the quantity requested by Flogistics when title would pass; and the Appellant would invoice Flogistics and payment would be due within sixty days. The contract also contained the following clause:

"5.2 Kingfisher shall not try to interfere in or influence the liberty of Flogistics to conduct its business in relation to Kingfisher Gift Vouchers."

- a contract between the Appellant and Flogistics under which Flogistics undertook to provide voucher counting services for the Appellant and to provide the Appellant with monthly reports about redemptions made by each retailer;

- five identical contracts between Flogistics and each retail company under which each retail company agreed to act as the disclosed agent of Flogistics in selling the vouchers to purchasers in return for a commission of 10% of the value of the vouchers sold; the vouchers had to be sold at face value and the retail companies had to inform Flogistics of the number of vouchers sold; the retail companies also had to send the proceeds of sale of the vouchers to Flogistics;

- five identical contracts between the Appellant and each retail company; these agreements contained a clause 2.1 which provided that the Appellant would pay the retail company at every period end the full face value of the vouchers redeemed by the retail companies less the scheme charge; the scheme charge was defined in clause 1.5 as the sum of 13.7% of the full face value of the vouchers; the agreements also contained a clause 2.3 which provided that the scheme [redemption] charges could be varied at the Appellant's sole discretion; the agreements also provided that the retail companies should send redeemed vouchers on a weekly basis to the counting house;

- a contract between Woolworths and Flogistics under which Woolworths agreed to supply shared office space to Flogistics in return for a monthly licence fee and under which Flogistics agreed to reimburse Woolworths for utilities, telephones and insurance. (There was no written agreement governing the continued supply of employees by Woolworths to Flogistics.)

The amount of the internal discount and the other provisions were not negotiated by Flogistics because, in the words of Mr Sutherland, "the concept of arm's length between parent companies and wholly-owned subsidiaries is a slightly strange one".

For the sake of completeness we mention at this stage that on 23 August 2000 two contracts were entered into with the printers. One was between the Appellant and the printers and provided that the printers would print and store Kingfisher Gift Vouchers as directed by the Appellant. The other contract was between Flogistics and the printers and provided that the printers would deliver the vouchers to retail outlets to the order of Flogistics. The printers remained liable for loss, theft or damage to the vouchers from the date of the order until the delivery of the vouchers.

In summary, the contractual arrangements were meant to achieve the result that the Appellant sold vouchers at a discount of 18.52% to Flogistics; Flogistics sold some of the vouchers through the retail companies acting as its agent to individual purchasers at face value paying the retail companies a commission of 10% of the value of vouchers sold; the retailers redeemed the vouchers at full face value in exchange for supplies of goods; and the Appellant paid the retail companies the full face value of the vouchers they had redeemed less a redemption charge of 13.7%. For example, for vouchers with a face value of £100, Flogistics would purchase them from the Appellant for £81.48 and sell them through the retail companies to purchasers for £100 at the same time paying a commission of £10 to the retail companies. Thus Flogistics would earn £90 and pay out £81.48 leaving a profit of £8.52. The retail companies received a commission of 10% for every voucher sold but were charged by the Appellant a redemption charge of 13.7% on every voucher redeemed. Commission was only paid on sales of vouchers to individual purchasers, but all vouchers (both those sold to individuals and those sold to corporate purchasers) were redeemed. Accordingly, all the retail companies, including Woolworths, were in fact worse off under the new scheme.

As far as value added tax was concerned, when the Appellant sold vouchers to Flogistics it did not charge value added tax relying upon paragraph 5 of Schedule 6 of the 1994 Act. When the retail companies charged commission to Flogistics they accounted for output tax. Flogistics did not charge output tax on the sale of the vouchers to purchasers relying on paragraph 5 of Schedule 6. When the Appellant charged the redemption charges to the retail companies it did not account for output tax because the retail companies were members of the same value added tax group as the Appellant. Woolworths accounted for output tax on the charges it made to Flogistics for shared office space and other facilities. Customs and Excise agreed that all these arrangements were correct. However, the Appellant, as representative member of the value added tax group, accounted for value added tax on the supplies of goods by the retail companies to customers in exchange for the vouchers by reference to the internally discounted price which the Appellant had received from Flogistics (namely £81.48 for vouchers worth £100); Customs and Excise disputed this treatment because they were of the view that the Appellant should account for value added tax on the supplies made by the retail companies to customers on the full face value of the vouchers which the customers redeemed for those goods.

We were given an agreed financial example of the difference between the parties. Normally if goods are sold for £100 inclusive of value added tax the £100 would contain value added tax of £14.89 if the rate of tax were 17.5%. That is the amount of tax which Customs and Excise argue is due. However, £100 of vouchers were sold to Flogistics by the Appellant at the internal discount of 18.52%, that is for £81.48. If £81.48 were a value added tax inclusive amount, and the rate of tax were 17.5%, then the value added tax would be £12.14. That is the amount of tax which the Appellant argued is due. The difference between £14.89 and £12.14 is £2.75 for each £100 of goods supplied. (In fact the parties agreed that, as the retail companies sold both standard-rated and zero-rated goods, and that value added tax was charged on some goods at the standard rate and on other goods at the zero-rate, a composite rate which was less than 17.5% could be used.).

We accept the evidence of Ms Dinan that each store was told about the commission which would be payable and that it would benefit the store's profit and loss position. We also accept her evidence that no incentives for individual members of store staff were put in place.

In addition to selling vouchers to individual purchasers through the agency of the retail companies, Flogistics (like Vouchers before it) also sold vouchers in bulk direct to corporate purchasers at a discount (the corporate discount) which depended upon the value of vouchers sold. The corporate discount continued to be fixed by reference to commercial factors. At the commencement of the new arrangements the corporate purchasers were told that the vouchers would be supplied by Flogistics instead of Vouchers but that Flogistics was also a member of the Kingfisher group and would be staffed by the same people and that, in practice, the reorganisation should have no impact on dealings in relation to the supply of the Kingfisher Gift Vouchers. Flogistics did not account for value added tax on the sale of vouchers to corporate purchasers because of paragraph 5 of Schedule 6 and Customs and Excise agreed with this treatment.

Despite the legal and structural changes which were introduced after 25 June 2000 the staff responsible for vouchers remained employed by Woolworths and remained in the same location. Ms Aslam, Mr Kellock and the new accountant had joined the staff of Vouchers and they and all the other staff of Vouchers began to work for Flogistics. At the date of the hearing of the appeal, there were six people in Flogistics selling vouchers to corporate purchasers, two dealing with sales to individual purchasers through the retail companies, and five others. The vouchers remained the same and continued to be described and marketed as "Kingfisher Gift Vouchers". We accept the evidence of Ms Dinan that it was the Kingfisher Gift Voucher as a product which was marketed by Flogistics and that the product promoted the brands of the five retail companies because their brands were strong in terms of customer awareness. Flogistics as a name was deliberately never marketed.

July – August 2000 – implications of implementation

On 20 July 2000 a presentation was made about Flogistics' accounting. This described the effect on the Appellant, Flogistics and the retail companies of the sale of vouchers worth £100. The figures used must have been for illustrative purposes only as they were not the same as the figures in the contracts of 25 June 2000. The Appellant received £81.50 on the sale of vouchers to Flogistics and also the value added tax reclaim of £2.45. The Appellant also received the interest from the date the cash was received from the purchasers of the vouchers to the date upon which the vouchers were redeemed by the customers; the non-redemption profit (in respect of the vouchers which were never redeemed); and the redemption charges (shown as £13.18). This made a total received by the Appellant of £100.68. The Appellant had a liability of £100 to the retail companies together with printing costs and redemption (counting) costs which also totalled £100.68. Thus the Appellant remained in a neutral position. Flogistics purchased a voucher for £81.50 and paid commission to the retail companies of 10%. Thus its costs were £91.50. It sold the vouchers for £100 to the public and so made a profit of £8.50. The retail companies received commission of 10% from Flogistics but paid a redemption charge of 13.18% to the Appellant and so made a loss of £3.18 (if they redeemed the same number of vouchers as they sold). For the year 2001 the forecast of sales and redemptions showed that Flogistics would make a profit; the retail companies would make a loss; and the Appellant's position would remain neutral. This highlighted the problem of the retail companies and a suggestion was made that the profits of Flogistics be set against the losses of the retail companies.

September 2000 - discussions with Customs and Excise

The application by Flogistics to be separately registered for value added tax was sent to the office of Customs and Excise responsible for the Appellant. A meeting was held on 14 September 2000 between representatives of the Appellant, Customs and Excise and KPMG. Customs and Excise wanted to understand what had been done in relation to the voucher arrangements and why. The new arrangements were explained at the meeting. The purpose of the new arrangements was also discussed and the representative of the Appellant stated that the purpose was to mitigate value added tax but that there were also some commercial benefits as well. Correspondence between the tax department of the Appellant and Customs and Excise followed. Customs and Excise requested information and this was supplied by the Appellant. At about this time the previous tax manager of the Appellant left and Mr Sutherland took over the correspondence. In a letter dated 17 October 2000 he stated that it was not accurate to say that the sole purpose of the change in the arrangements for vouchers was to procure a reduction in output tax – there were other commercial purposes.

January 2001 – the year end accounting adjustments

At the financial year end, which occurred at the end of January 2001, the adjustments which had been promised to the retail companies (to ensure that they were no worse off under the new arrangements) had to be made. Flogistics' profit and loss account for the year ended 3 February 2001 showed a gross profit (being the difference between the purchase of vouchers from the Appellant with the 18.52% internal discount and the sale of the vouchers at full face value to purchasers through the retail companies). Selling expenses, including commission to the retail companies and corporate discounts, reduced the gross profit to £4,749,000 operating profit. After tax had been paid retained profit was £3,479,000. The profit and loss account did not disclose any balancing payments to the retail companies. Instead, what had previously been called balancing payments to be made by Flogistics to the retail companies took the form of adjustments in the management accounts. Even though Flogistics was not in the same value added tax group as the retail companies no value added tax was charged on these adjustments. The adjustments were not made in the statutory accounts as they were not regarded as transactions between legal entities. The adjustments were made in this way so as to compensate management performance as against budget. Flogistics' statutory accounts showed retained profit of £3,479,000.

January 2001 – Flogistics' budget for 2001/2002

On 12 January 2001 there was an internal exchange of emails with a draft budget for Flogistics for 2001/2002. The proposal was to reduce the rate of commission paid to the retail companies from 10% to 5%; to reduce the redemption charge paid by the retail companies to the Appellant from 13.7% to 5% for the redemption of vouchers sold to individual purchasers; and to reduce the redemption charge paid by the retail companies to the Appellant from 13.7% to 11% for the redemption of vouchers sold to corporate purchasers. We accept the evidence of Ms Dinan that the rate of commission was considered within Flogistics within the context of the rate applicable to other similar products like stamps, telephone cards and lottery tickets. There was also discussion in Flogistics about the redemption charges and the need to bring them into line with more commercial rates especially in view of the proposed demerger of the Woolworths group. Nevertheless, despite these discussions, we find that in fact the redemption charges were set so as to ensure that the position of the Appellant remained neutral. It was also proposed that Flogistics would pay the Appellant a "licence fee" of £9,714,212 in the same year. In the same document the "licence fee" was also described as "profit return". On the other hand Flogistics would no longer make any balancing payments to the retail companies. The same document indicated that the cost of the voucher scheme to the retail companies had increased. In evidence which we accept Mr Sutherland confirmed that the intention then was that the rates of the redemption charges were to be reduced to improve the position of the retail companies and that, instead of Flogistics making balancing payments to the retail companies, Flogistics would return money to the Appellant's group by paying a licence fee direct to the Appellant.

On 29 January 2001 Flogistics prepared the Kingfisher Gift Voucher 2001/02 Budget. We accept the evidence of Mr Garden that the budget was a consolidated one. The budget indicated that at the year end January 2001 there had been a 15% increase in sales and also an increase of scheme costs. It budgeted a sales increase of 9.7% for 2001/2002. It stated that the establishment of Flogistics half way though the year had led to a significant benefit in sales and "may also enable plc to reclaim £2M of vat for 2000/2001" It looked forward to the demerger and also noted that it was not considered prudent to recognise any value added tax reclaim until Customs and Excise had approved it. The Budget contained an overview of the voucher operation on the whole group for 2001/2002. The operating costs of the scheme to both the Appellant and Flogistics, less the operating revenues of interest and non-redemptions, were passed on to the retail companies through the difference between the commission they received and the redemption charges they paid. That explained why the new rates of commission and redemption charges were set as they were. The amount of the internal discount was not considered as any increase or reduction in it would have no effect on the budget but would only change the amount of profit in Flogistics.

In evidence which we accept Mr Garden told us that the primary source of a budget was the local management but all budgets were finally signed off by the Appellant. Although the reduced rates of commission and redemption charges applied as from 3 February 2001, we did not see any contracts between the relevant companies in which the changes were agreed.

June 2001 – The disputed decision

On 22 June 2001 Customs and Excise informed the Appellant that the Appellant, as representative member, should account for value added tax on the basis that the consideration for the supplies of goods made by the retail companies in exchange for vouchers was the same as the amount paid by the purchasers of the vouchers; that is the face value of the vouchers sold to individual purchasers and the face value less the corporate discount for vouchers sold to corporate purchasers. That decision was confirmed on 19 November 2001 and is the disputed decision under appeal.

By agreement the scope of the appeal covers supplies made by retail companies in the Appellant's value added tax group after the demerger in August 2001.

28 August 2001 – the demerger

There had been discussions within the Appellant about a possible de-merger of part of the corporate group from early 2000. There was an announcement in September 2000 and in about October 2000 attention turned to the future of the voucher arrangements after the de-merger. It was then thought that one of the options would be for the "VAT planning arrangements" to continue following the demerger through a joint venture arrangement. In January 2001 consideration was given to the future of the employees of Woolworths (which was included within the Appellant's value added tax group) who worked for Flogistics and the view was expressed that they should be transferred to Flogistics which was a company outside the value added tax group. On 6 June 2001 the voucher scheme was reviewed with the demerger in mind. It was agreed that it should continue in its current form as far as the retail companies were concerned. It was noted that the benefit of the scheme to the group was the belief that the scheme generated incremental sales in the retail companies. After the demerger both groups would sell the vouchers and they could be redeemed in any retail store in either group.

At the beginning of August 2001 the demerger was imminent. It will be recalled that Flogistics' statutory accounts for the year ended 3 February 2001 showed a retained profit. There was a board meeting of Flogistics on 1 August 2001 when it was noted that the bank had continued to provide banking facilities based on Vouchers' mandate. It was resolved that a new mandate be given. It was also resolved to declare an interim dividend of an amount just less than the retained profit. There was another board meeting on 22 August 2001 when another interim dividend was declared.

The demerger occurred on 28 August 2001. A new holding company called Woolworths Group Plc was formed to own Woolworths, MVC and some other companies and a new value added tax group was formed for this new corporate group. The Appellant continued to own B & Q and Comet. Superdrug had been sold separately in July 2001 and was owned by neither group. The Appellant and Woolworths Group Plc agreed to continue the voucher scheme as it existed immediately before the demerger with Flogistics retaining the same role but as a joint venture owned equally by the Appellant and Woolworths Group Plc.

The joint venture agreement was dated 22 August 2001 and was between the Appellant and Woolworth Group Plc; it related to the operation of Flogistics as a jointly owned company. It provided that the profits would be shared by the two parties in the proportion that would result in the net costs being shared equally between them. On 28 August 2001 a series of new agreements was entered into with the retail companies the effect of which was to continue the pre-demerger arrangements. In particular, the redemption charge remained at 11% (for vouchers which had been sold to corporate purchasers) and 5% (for vouchers which had been sold to individual purchasers) and the commission paid to retail companies for selling the vouchers remained at 5%.

After the demerger both the Appellant and Woolworths Group Plc issued Kingfisher Gift Vouchers and sold them to Flogistics at an internal discount of 18.52%. Flogistics sold them to individual purchasers through the retail companies and also direct to corporate purchasers at corporate discounts varying according to the volume of vouchers sold. The Appellant accounted for value added tax on supplies of goods made by its retail companies in exchange for vouchers on the discounted amount of 81.48% of face value but Woolworths Group Plc accounted for value added tax on the full face value. Thus only the Appellant (and not Woolworths Group Plc) is a party to this appeal. A retail company who redeemed a voucher was paid the full face value by its parent company regardless of which company had originally sold the voucher to Flogistics.

After the demerger the staff of Flogistics remained employed by Woolworths and were seconded to Flogistics. Woolworths made a charge to Flogistics. Ms Aslam's business card described her as national account manager of the Kingfisher Gift Voucher and the card contained the logos of the five retail companies. There was no mention of Flogistics. Her address was given as The Kingfisher Gift Voucher Centre at Castleton, Lancashire, which is a call centre run by the voucher operation. Mr Kellock's business card was similar although he was described as corporate development manager.

As mentioned above Superdrug was sold separately in July 2001; in the sale agreement it was agreed that the redemption charges could not be varied without the agreement of both parties. If both parties could not agree then the only recourse was termination.

Mr Garden resigned as a director of Flogistics in October 2001. He felt that he had not been sufficiently close to the business to be truly responsible as a director and he suggested that someone in general management might take his place.

2001-2002 – Board meetings of Flogistics

After the original formal meeting of the board of directors of Flogistics on 26 April 2000, and the two meetings in August 2001 to declare dividends prior to the demerger, there were no formal board meetings until 9 November 2001 when new directors were appointed as Mr Mackin and Mr Gardner had resigned. The meeting of 9 November 2001 noted that the favourable value added tax treatment "was not intended to continue indefinitely but it was regarded as incidental to the principal business objective of helping to drive incremental sales through the retail operations". Difficulties with Superdrug were noted together with the low level of its sales of vouchers and the high level of its redemptions. Some new opportunities were also considered. Thereafter the board met on 23 January 2002 and continued to consider the Superdrug situation. There was a proposal to increase redemption charges in 2002/3 which was opposed by Superdrug. Although the redemption charges were a matter between the Appellant and Superdrug the negotiations were carried out by Flogistics on behalf of the Appellant.

The board met again on 22 February 2002 when it considered Superdrug's notice to withdraw from the voucher scheme. (Superdrug now promote their own vouchers.) There was also an update on electronic vouchers. In addition there was a presentation to the board with a key action plan to deliver 2002/3 sales and profits targets. Sales for 2001/2002 were above budget and were re-forecast so as to achieve a target of 7% growth for 2002/2003. Further board meetings were held at approximately monthly intervals in 2002. On 20 September 2002 the board considered a proposal for a trade card partnership with B & Q. At a typical meeting there would be a business review together with other commercial matters such as reports on sales made. A value added tax update would also be given.

As well as selling the Appellant's vouchers through the retail companies, Flogistics continued with a contract secured by Vouchers with a company outside the corporate group. In 2002 (when Flogistics was a joint venture company) Flogistics also undertook some research into electronic vouchers. It also ran a scheme for a bank which has now ended. It also runs a trade card scheme for B & Q which is separate from the Kingfisher Gift Voucher. Flogistics also provides "added value" services to a number of corporate purchasers. These include a "complete account management package" to support the corporate purchaser's own programme with promotional literature, presentational cards and envelopes, etc. For example, for one corporate purchaser who had 8,000 employees, Flogistics undertook a distribution exercise to ensure that each employee received an individual voucher pack within a two week period. There are other similar schemes for corporate purchasers. Mr Kellock estimated that, of the corporate clients who purchased the Kingfisher Gift Voucher from Flogisitcs, about one-fifth were provided by Flogistics with regular additional creative and marketing services. Flogistics also advertised in trade media and exhibited at trade exhibitions always, however, promoting the Kingfisher Gift Voucher.

January 2002 – the year end adjustments

It will be recalled that it was the intention that the Appellant should have neither a gain nor a loss. The Appellant sold vouchers to Flogistics at the internal discount of 18.52% but had to pay the retail companies the full face value of each voucher redeemed. The Appellant also paid for the printing and counting of vouchers. On the other hand the Appellant received the non-redemption profit for vouchers never redeemed and also the interest between the date of purchase of a voucher and the date it was redeemed. It also received the redemption charges from the retail companies. However, the redemption charges had been reduced in February 2001 and so in the year 2001–2002 the Appellant was budgeted to record a trading loss in respect of the voucher operation. Flogistics was budgeted to record a profit derived from the internal discount less the commission it paid to the retail companies at the reduced rate of 5%. In the budget of 12 January 2001 it had been proposed that the Appellant's budgeted loss should be made neutral by a transfer of money from Flogistics called a licence fee or a profit share. In fact, the money was transferred to the Appellant from Flogistics by way of dividend.

Flogistics' Annual Report for the year ended 2 February 2002 indicated that it had a profit for the financial year before tax of £10,070,000 and paid tax of £3,019,000 leaving net profit of £7,051,000. A dividend of £10,449,000 was declared payable to the two shareholders (the Appellant and Woolworths) in accordance with the joint venture agreement. Note 10 to the accounts indicated that this amount was made up as to £5,650,000 paid as an interim dividend (in August 2001) and £4,799,000 as a final dividend. The payment of a total dividend of £10,449,000 left a loss of £3,398,000 for the financial year. However, note 13 to the accounts explained that shareholders' funds of £3,479,000 had been carried forward from the year ended 3 February 2001.

We accept the evidence of Mr Garden that intra-group dividend policy was determined primarily by the group. As a director of Flogistics at the end of the financial year ending in January 2001 he had not been a party to the decision not to pay a dividend. Mr Garden was not a director in January 2002 and so did not know as a fact that the decision to pay the dividend in 2002 was a group decision but he could not imagine it was not.

2003 – the change in the law

On 9 April 2003 there was a change in the law when paragraph 5 of Schedule 6 of the 1994 Act was replaced by a new Schedule 10A which dealt specifically with face value vouchers. Flogistics found that, as a result of that change, there was an increase in administration and costs. It therefore decided to operate a credit voucher as from 4 August 2003. Under the credit voucher system it is the retail company who accounts for value added tax on the full amount of the voucher when it is redeemed. Accordingly, this appeal relates only to accounting periods before April 2003.

The point of sale material

When Flogistics commenced business in June 2000 it was part of the new arrangements that the vouchers would be sold to purchasers by Flogistics and not by the retail companies; the retail companies were to act as disclosed agents of Flogistics in selling the vouchers. However, this was not disclosed on the vouchers themselves. The vouchers continued to bear the logo of the Appellant and also of the five retail companies. On the reverse of the vouchers we saw, which were post–demerger vouchers, there was a reference to the Kingfisher and Woolworths Group Voucher Centre at Castleton in Lancashire and the voucher itself contained no mention of Flogistics.

In June 2000 it was also intended that all the existing point of sale material should be changed so as to disclose to individual purchasers that the vouchers were being sold by the retail company of behalf of Flogistics. A number of different point of sale materials, including posters advertising vouchers and card racks for holding the greeting cards which were sold with the vouchers, were exhibited to us. These emphasised the name of the Kingfisher Gift Voucher and the logos of the five retail companies at whose stores the vouchers could be redeemed. Most (but not all) of these stated "The Kingfisher Gift Voucher is sold on behalf of Flogistics Ltd". The text of the wording was provided by KPMG who also approved the size of type which was extremely small. On one poster which measured 36 cm x 20 cm the text was 2mm high. On a greetings card rack which was 52 cm high and 30 cm wide the text was about 1mm high.

Normally, point of sale material was changed at least twice a year. We accept the evidence of Ms Dinan that new point of sale materials, telling purchasers that the vouchers were sold on behalf of Flogistics, were sent to each store of a retail company prior to Flogistics commencing its operations. (There were altogether about 1,500 stores.) Flogistics also sent out agency staff (called merchandisers) to place point of sale materials in selected stores.

In July 2000 KPMG became concerned that there might be some retail stores which did not have the new point of sale material making it clear that the vouchers were being sold on behalf of Flogistics. They advised the tax department of the Appellant that the stores should be reminded to display the new point of sale material prominently. Flogistics then posted new point of sale material to the entire network accompanied by a letter which made it clear that it was compulsory to use the new materials.

In September 2000 the new Christmas point of sale material was placed by merchandisers in all the retail stores. Flogistics instructed the merchandisers to check that the stores had the correct point of sale material and, if not, to put up the Flogistics material. Later Ms Dinan personally checked a number of stores in London and found that not all had the correct point of sale material. On 9 November 2000 a complaint was made to the merchandisers who put the matter right. On a subsequent check in London Ms Dinan found all in order.

However, on 29 October 2003 Mr Mortimer (of HM Customs and Excise) visited a B & Q warehouse at Heywood, Lancashire and saw a large hanging banner, a small cardboard sign and a rack holding voucher greeting cards. He bought two £5 vouchers. Flogistics was not mentioned at all on the vouchers or on any of the signs. Ms Dinan and Mr Fleming for the Appellant accepted that the hanging banner did not mention Flogistics. Ms Dinan said that the hanging banners had been replaced early in 2003 and the fact that the banner in the Heywood store had not been changed was probably due to an oversight by the contractor who did the work. Other point of sale material mentioning Flogistics was put on display later in 2003.

Later on 29 October 2003 Mr Mortimer visited a B & Q store in Blackburn and saw two references to vouchers neither of which mentioned Flogistics. On 17 November 2003 Mr Mortimer visited the Woolworths store at Burnley. He saw many signs in the stock aisles advertising vouchers, a large hanging sign also advertising vouchers, and greeting card racks for vouchers at the tills. Flogistics was not mentioned on any of the displays or signs.

On 10 December 2003 Mr Fleming (of the Appellant) visited the B & Q store at Blackburn and saw a long rectangular poster at the front of the store and a poster located at the till both of which had the words "The Kingfisher Gift Voucher is sold on behalf of Flogistics Ltd". Mr Fleming then went to Woolworths in Burnley and saw a greetings card rack positioned by the till, a column poster advertising vouchers and a large poster on display at the entrance to the store; all containing the words "The Kingfisher Gift Voucher is sold on behalf of Flogistics Ltd".

Reasons for decision

Before turning to consider the issues in the appeal we mention a preliminary matter which is that many of the arguments in the appeal relied upon the fact that both the Appellant and the retail companies were members of the same value added tax group but that Flogistics was not. It may therefore be useful at this stage to recall the provisions about value added tax groups which are found in section 43 of the 1994 Act the relevant parts of which provide:

"43(1) Where … any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and-

(a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and

(b) any supply to which paragraph (a) does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member. … ."

Issue (1) - What is the consideration for the supply?

The first issue in the appeal is whether the consideration for the supply of goods by a retail company to a customer in exchange for a voucher is the discounted amount of 81.48% of the face value of the voucher received by the Appellant from Flogistics (as argued by the Appellant) or the amount paid by the purchaser of the voucher, namely the full face value of a voucher sold to an individual purchaser and face value less the corporate discount of a voucher sold to a corporate purchaser (as argued by Customs and Excise).

A summary of the arguments

We first summarise the arguments of the parties. It was the Appellant's case that the value of a supply of goods by a retail company to a customer in exchange for a voucher was the consideration obtained by the Appellant for the voucher from Flogistics, that is the face value of the voucher less the internal discount. It was the case for Customs and Excise that, as a matter of commercial reality, the value added tax supply of the vouchers was made by the Appellant who supplied vouchers to individual purchasers through the retail companies (from whom the Appellant received the full face value of the vouchers) and who supplied vouchers to corporate purchasers through Flogistics (from whom the Appellant received the full face value of the vouchers less the corporate discount).

In reply to that argument the Appellant contended that it did not supply the vouchers to the purchasers because there had to be a direct link between a supply and the consideration received for it and there was no direct link between an alleged supply of a voucher by the Appellant and the consideration paid for a voucher by a purchaser. Also, there had to be a legal relationship between a supplier and the person to whom he made a supply and there was no legal relationship between the Appellant and the purchaser of a voucher. It was the Appellant's case that the vouchers were sold to purchasers not by the Appellant but by Flogistics through the disclosed agency of the retail companies. The Appellant contended that the arguments of Customs and Excise would mean that the consideration for the sale of the vouchers by Flogistics to the purchasers would be taxed and that was directly opposed to the provisions of paragraph 5 of Schedule 6 of the 1994 Act as it existed before 9 April 2003.

Having summarised the arguments of the parties we now set them out in more detail.

The detailed arguments for the Appellant

For the Appellant Mr Sinfield first relied upon Article 11(A)(1)(a) of the Sixth Directive and section 19(2) of the 1994 Act for the principle that tax was chargeable by reference to the consideration actually received by the supplier for the supply. He argued that the retail companies had no right to receive, and did not receive, any payment in addition to the consideration paid by Flogistics to the Appellant. The reimbursement to the retail companies of the full value of the vouchers by the Appellant had to be ignored because both companies were in the same value added tax group. Also, it was not possible to determine the value of a supply of goods by a retail company by reference to the consideration received by Flogistics for a voucher. Further, it was not possible for the value of a supply of a voucher by the Appellant to Flogistics to be determined by reference to the value of a supply of a voucher by Flogistics to a purchaser of a voucher.

Secondly, Mr Sinfield argued that the positions of the Appellant and the retail companies were identical as result of section 43. He contended that, although a supply of goods to a customer in return for a voucher was physically made by a retail company, nevertheless, as a result of section 43(1)(b), the supply of goods was treated as a supply by the Appellant as representative member. He relied upon Customs and Excise Commissioners v Kingfisher Plc [1994] STC 63 and Customs and Excise Commissioners v Thorn Materials Supply Limited and Thorn Resources Limited [1998] STC 725 at 732j to 733c for the principles that the representative member was deemed to make and receive all the supplies of the group and that the representative member dealt on behalf of all the members with non-members; the whole value added tax group was treated as a single taxable entity. He went on to argue that the Appellant did not receive the whole consideration paid by the purchaser of a voucher to Flogistics but only received from Flogistics the face value of the voucher less the internal discount; that was the only consideration that was received from outside the value added tax group. Although balancing payments and licence fees had been mentioned in the various forecasts and budgets they had not in fact been paid by Flogistics to the retail companies nor to the Appellant. He accepted that the profits of Flogistics had been returned to the Appellant by way of dividend payments but he relied upon Floridienne SA and Berginvest SA v Belgian State (Case C-142/99) [2000] STC 1044 at paragraphs 19 to 23 and CIBO Participations SA v Directeur régional des impôts de Nord-Pas-Du-Calais (Case C-16/00) [2002] STC 460 at paragraph 41 for the principle that the payment of a dividend could not be consideration.

Thirdly, Mr Sinfield argued that the consideration received by a supplier of goods in exchange for a voucher was consideration of a subjective value, that is the value to the recipient and not a value assessed according to objective criteria and that the value to the recipient of a supply by a retail company in exchange for a voucher was the amount of the consideration paid by Flogistics to the Appellant. He cited Naturally Yours Cosmetics Limited v Customs and Excise Commissioners (Case 230/87) {1988] STC 879; Boots Co Plc v Customs and Excise Commissioners (Case C-126/88) [1990] STC 387; Argos at paragraphs 16, 18 and 20; Elida Gibbs Limited v Customs and Excise Commissioners (Case 317/94 ) [1996] STC 1387 at paragraphs 26 and 27; EC Commission v Germany Case C-427/98 [2003] STC 301; Yorkshire Co-operatives Limited v Customs and Excise Commissioners (Case C-398/99) [2003] STC 234 at paragraphs 17 to 23; Commissioners of Customs and Excise v Euphony Communications [2003] EWHC 3008 and Lex Service Plc v Commissioners of Customs and Excise [2003] UKHL 67 at paragraph 18.

Fourthly, Mr Sinfield argued that there had to be a direct link between the goods supplied and the consideration received relying on Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445 at 454. He argued that there was no direct link between the Appellant and the purchaser of the voucher at the time of the sale of the voucher. There were three distinct relationships, namely: the supply of the voucher by the Appellant to Flogistics (which was outside the scope of the tax under paragraph 5 of Schedule 6); the supply of the voucher by Flogistics to the purchaser (which was outside the scope of the tax for the same reason); and the supply of goods by a retail company to a customer (which was the supply at issue in the appeal). The consideration for the supply of goods by the retail company to the customer could not be determined by reference to the supply of the voucher by Flogistics to the purchaser because Flogistics and the retail company were not the same person and the purchaser of the voucher was not the same person as the customer who received the supply of goods.

Fifthly, Mr Sinfield argued that there had to be a legal relationship between a supplier and the person receiving the supply under which the supplier received remuneration in return for the supply to that person. He argued that there was no legal relationship between the Appellant and the purchaser of the voucher at the time of the sale of the voucher and so it could not be said that the Appellant received remuneration in return for the voucher supplied to the purchaser. He relied upon Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509 at 516 paragraph 14 for the principle that it was the value received which determined the value of the supply not the value given. In determining the existence of a legal relationship it was not possible to consider a framework of agreements and he relied upon Town and Country Factors Ltd v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263 where the Court of Justice did not adopt the reference by the Advocate General at paragraphs 37 to 39 and held at paragraph 23 that the legal relationship had to be established by agreement between the provider of services and the recipient. He also argued that there was no legal relationship between the customer and a retail company until the customer offered the voucher in payment of goods. After the demerger the retail company redeeming the voucher did not have to be in the same corporate or value added tax group as the company issuing the voucher.

Sixthly, Mr Sinfield argued that the retail companies acted as agents for Flogistics when they sold vouchers to the purchasers of the vouchers. He relied upon the evidence of Ms Dinan and Mr Fleming that the point of sale material made it clear that the vouchers were sold on behalf of Flogistics. However, even if the retail companies supplied the vouchers in their own names the supply was to the purchaser by Flogistics because the retail companies were acting as undisclosed agents relying upon section 47(3) of the 1994 Act; paragraph 18 of VAT Information Sheet 3/00; and section 22.6 and 24.2 of Notice 700. Customs and Excise had not decided to treat the supply of a voucher to a purchaser as a supply by the retail company.

Finally, Mr Sinfield argued that, although Customs and Excise accepted that, because of paragraph 5 of Schedule 6, the consideration for the sale of the vouchers by the Appellant to Flogistics, and the consideration for the sale of the vouchers by Flogistics to the purchasers, were to be disregarded, their arguments would in fact have the result of bringing in to the charge to tax the consideration received by Flogistics from the purchasers. Paragraph 5 of Schedule 6 did not implement any provision of the Sixth Directive; it was referred to, but not commented on, by the Advocate General in his Opinion in Argos but ignored by the Court of Justice. Also, in F & I Services Limited v Customs and Excise Commissioners [2001] STC 939 the Court of Appeal ignored the submission that the source of the provision was Article 13(B)(d) of the Sixth Directive. It followed that Customs and Excise could not rely on the Directive where the Appellant wished to rely upon national legislation and he cited Pretore di Salò v Persons unknown (Case 14/86) [1987] ECR 2545 at paragraphs 19 and 20; Kolpinghuis Nijmegen BV (Case 80/86) [1987] ECR 3969 at paragraphs 9 and 10; Ufficio IVA di Trapani v Italiticca SpA (Case C-144/94) [1995] STC 1059 at paragraph 45; and Gemeente Emmen v Belastingdienst Grote Ondernemingen (Case C-468/93) [1996] STC 496 at paragraph 34 of the Opinion of the Advocate General.

The detailed arguments for Customs and Excise

For Customs and Excise Mr Vajda's main argument was that the value added tax supply of a voucher was made by the Appellant to the purchaser of the voucher because Flogistics did not act as a principal independently of the Appellant but only as an agent of the Appellant. The Appellant would not have sold the vouchers to Flogistics except on the condition that they would be sold at face value to the purchasers. Mr Vajda's alternative argument was that the consideration for a supply of goods by a retail company in exchange for a voucher included all the amounts payable by the purchaser of a voucher as those amounts must have been expended by the purchaser of the voucher as a condition of the Appellant (as representative member of the group) supplying him with the goods.

In support of his main argument Mr Vajda relied upon a number of general principles of value added tax. The first principle was that value added tax was a tax on consumption which should be directly proportional to the price paid by the final consumer relying on Article 2 of the First Council Directive (67/227/EEC). From that it followed that the tax must be based on the amount spent by the final consumer and he relied upon Elida Gibbs Limited v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 at paragraph 19. Usually that was the same amount as the amount received by the supplier and he relied upon Customs and Excise Commissioners v First Choice Holidays Plc (Case C-149/01) [2003] STC 934 at paragraphs 25 to 27. He also referred to paragraph 32 of the judgment in First Choice and argued that it was a condition of the supply of goods by the retail company that the consideration for that supply was the full face value of the voucher, namely the amount received by Flogistics from the purchaser. He also relied upon Article 11B of the Sixth Directive (which, he argued, had the same aim as Article 11A) and the Community Customs Code (Council Regulation (EEC) No. 2913/92) at Article 29 which referred to the price paid. He cited Commission of the European Communities v France (Case C-404/99) [2001] ECR I-2667 at paragraph 15 for the principle that it was the total price which constituted the consideration actually received. In this appeal the total price actually paid for the voucher was the full face value. He also cited Lord Advocate v Largs Golf Club [1985] STC 226 for the principle that it was the total sum demanded from the purchaser which constituted the consideration.

Mr Vajda's second principle was that value added tax looks to commercial reality. He argued that the sums received by Flogistics were received for and on behalf of the Appellant and the commercial reality was that the Appellant supplied the vouchers to the purchasers and received the full face value from the purchasers and that was the consideration for the supply of goods in exchange for the voucher. He cited Trafalgar Tours Ltd v Customs and Excise Commissioners [1990] STC 127 for the principle that the contractual arrangements did not determine the supply for value added tax purposes and that it was necessary to look at the substance and reality of the transaction. He also cited Maierhofer v Finanzampt Augsberg-Land (Case C-351/00) [2003] STC 564 at paragraph 39; Eastbourne Town Radio Cars Association v Customs and Excise Commissioners [2001] STC 606 at paragraphs 14-16; Autolease Holland BV v Bundesamt fur Finanzen (Case C-185/01) [2003] All ER (D) 75; and Telewest Communications Plc v Customs and Excise Commissioners [2003] EWHC 3176 (Ch) and [2003] All ER (D) 379 (Dec). He also relied upon Debenhams Retail Plc v Customs and Excise Commissioners ...April 2003) VAT Decision 18169 at paragraphs 85 to 87; 98 to 104; 140; 142-146 and 155 and Antoniades v Villiers [1990] 1 AC 417 and argued that the point of sale material showed that the contracts were not a sham but a pretence; it was necessary to look at the real world and not at the written contracts.

Mr Vajda's third principle was that the matter had to be looked at from the purchaser's point of view. He cited Card Protection Plan Limited v Customs and Excise Commissioners (Case C- 349/96) [1999] ECR I-973. In particular, the perception of the purchaser was relevant and he cited paragraph 29 of the Opinion of the Advocate General in Commission v France (Case C76/99) [2001] ECR I-249. The perception of the purchaser was also relevant in identifying the supplier and he relied upon Telewest at paragraph 78. It was his argument that the Appellant (through the retail companies) supplied the vouchers direct to the purchasers and that was the way in which the transaction was perceived by the purchasers. A purchaser of a voucher dealt exclusively with a retail company, paid his money to the retail company, and received a receipt from the retail company together with the voucher which only contained the logos of the Appellant and of the five retail companies where the voucher could be redeemed. He argued that the point of sale material was wholly ineffective (relying upon Debenhams) and that, as a result, there was no contract between Flogistics and the purchaser of the voucher. Thus the Appellant received the full face value of the goods from the purchaser of the voucher. As far as the corporate purchasers were concerned they had been led to believe that they were still contracting with the Appellant as parent and that the position was no different than it had been with Vouchers.

Mr Vajda's other principles were the principle of neutrality and the principle that value added tax law had to be construed so as to prevent tax avoidance and distortions of competition. As far as neutrality was concerned he relied upon EC Commission v Germany at paragraphs 29, 44, 52, 53, and 58. As far as the prevention of tax avoidance was concerned he relied upon Naturally Yours, Muys' en De Winter's Bouw-en Aannemingsbedrijf BV v Staatsecretaris van Financiën (Case C-281/91) [1997] STC 665, 682 at paragraph 18; Commissioners of Customs and Excise v First National Bank of Chicago (Case C-172/96) [1998] ECR I-4387 at paragraph 33; and Commission v Germany at paragraph 76 of the Opinion of the Advocate General. As far as the prevention of distortion of competition was concerned Mr Vajda relied upon Naturally Yours and Customs and Excise Commissioners v DFDS A/S (Case C-260/95) [1997] STC 384.

Mr Vajda's alternative argument was that, if there were two supplies of the voucher, one from the Appellant to Flogistics and the other from Flogistics to the purchaser, and also a supply of goods from the Appellant as representative member to the customer, the value of the supply of goods was the money paid by the purchaser of the voucher because there was an implied condition that the purchaser of the voucher had to pay the full price of the voucher to a retail company (or the face value less the corporate discount to Flogistics in the case of a corporate purchaser) because the Appellant as representative member was only willing to exchange goods if the full payment had been made. As the Appellant received the full payment tax should be proportionate to the full payment.

In reply to the Appellant's last argument Mr Vajda argued that Marleasing SA v La Comercial Internacional di Alimentacion SA Case C-106/98) [1990] ECR I-4135 was authority for the principle that national courts were required to interpret their national law in the light of the wording and purpose of a directive. Paragraph 5 of Schedule 6 was not inconsistent with the Sixth Directive. The purpose of paragraph 5 was to avoid double taxation on both the sale of the voucher and the later sale of the goods and double taxation would be contrary to the Sixth Directive. He relied upon F & I Services at paragraphs [16], [19] and [43].

Our conclusions

In considering the arguments of the parties we start with the legislation. Both parties presented their arguments by reference to Article 11(A)(1)(a) of the Sixth Directive rather than by reference to section 19 of the 1994 Act. Article 11(A)(1)(a) provides that the taxable amount is everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies.

In the supply under consideration the retail company is, of course, the supplier of the goods and so the question arises as to what a retail company receives when it receives a voucher as consideration for a supply of goods.

Of all the authorities cited to us there is only one which concerns vouchers and that is Argos (1996). Some of the authorities (Boots, Elida Gibbs and Commission v Germany) concern money-off coupons where the principles are not quite the same. However, before Argos, in Naturally Yours (1988) at paragraph 16 the Court of Justice had established the principles that consideration has to be capable of being expressed in money terms and that it has a subjective value, namely the consideration actually received, and not a value estimated according to objective criteria.

Argos (1996) concerned the sale of vouchers by a supplier of goods at a discount with a promise to accept them at full face value in full or part payment for goods sold by the supplier to a customer who was not the purchaser of the voucher. The Court of Justice held that the consideration represented by the voucher was the sum actually received by the supplier of the goods upon the sale of the voucher. At paragraph 16 the Court of Justice again emphasised that the taxable amount for a supply of goods was the amount actually received for them and not a value estimated according to objective criteria. The consideration actually received by Argos for the sale of goods was constituted wholly or partly by the vouchers and Argos regarded the voucher as representing such part of the price as was equal to the face value of the voucher. The only question was: what was the actual money equivalent of the voucher? The Court of Justice continued:

"19. According to the terms of the transaction which involves the initial purchase of the voucher, that voucher, by its nature, is no more than a document evidencing the obligation assumed by Argos to accept the voucher, instead of money, at its face value …

In order to ascertain the actual money equivalent accruing to Argos when it takes a voucher in payment, regard must be had only to the transaction which is relevant in that regard, namely the initial transaction comprising the sale of the voucher, at a discount or otherwise. In view of the nature of that transaction, the actual money equivalent which the voucher represents for Argos, when the latter accepts it in payment, is the sum of money which it received on the sale of the voucher, namely its face value less any discount allowed.

The fact that a buyer of Argos goods does not know the real money equivalent of the voucher used by him is irrelevant; the important issue in this case is to determine the actual money equivalent received by Argos when it accepts vouchers in payment for its goods, since only that actual equivalent can constitute the taxable amount. …

The answer to the third question must therefore be that Article 11(A)(1)(a) of the Sixth Directive is to be interpreted as meaning that, when a supplier has sold a voucher to a buyer at a discount and promised subsequently to accept that voucher at its face value in full or part payment of the price of goods purchased by a customer who was not a buyer of the voucher, and who does not normally know the actual price at which the voucher was sold by the supplier, the consideration represented by the voucher is the sum actually received by the supplier upon the sale of the voucher."

We first note that the facts in Argos are very different from the facts in the present appeal. Argos sold vouchers to independent and unconnected businesses and the discounts were determined by commercial and arm's length criteria; in this appeal the Appellant sold vouchers to a wholly-owned subsidiary company and the terms of the sale and the amount of the internal discount were not negotiated at arm's length. Again, Argos was both the issuer of the voucher and the supplier of the goods whereas in this appeal the Appellant argues that the voucher is sold to the purchaser by Flogistics although the sale of the goods is made by the Appellant (as representative member). Further, in Argos there were only two stages to the transaction (a sale of the vouchers followed by their redemption) whereas in this appeal there were three stages to the transaction (a sale of the vouchers by the Appellant to Flogistics, the sale of the vouchers by Flogistics through the retail companies to the purchasers, and the redemption of the vouchers by customers at the retail companies). Finally, Argos received nothing other than the discounted amount of the vouchers whereas in the present appeal Customs and Excise argue that the Appellant, as a matter of commercial reality, received the full amount of the vouchers from the purchasers of the vouchers.

Nevertheless Argos establishes two principles which are relevant in this appeal. First, that a voucher is no more than a document which evidences an obligation by someone to accept the voucher, instead of money, at its face value. Secondly, that in order to ascertain the actual money equivalent when a voucher is given in exchange for goods, regard must only be had to the initial transaction comprising the sale of the voucher; in other words, the consideration represented by the voucher must be the sum actually received by the supplier of the goods on the sale of the voucher.

There are two difficulties in applying the second principle to the facts of this appeal. The first difficulty is that the judgment in Argos is given on the basis that the vendor of the voucher to the purchaser is the same person as the supplier of the goods and that the consideration for the supply of goods is what the vendor of the voucher receives for the voucher. On the other hand in this appeal the Appellant argues that the vendor of the voucher to the purchaser was Flogistics who was not the same person as the supplier of the goods. The second difficulty is that in this appeal there were two sales of the voucher, one by the Appellant to Flogistics and the other through the retail companies to the purchasers. It was the Appellant's argument that the supplies of the vouchers to the purchasers were made by Flogistics but it was the argument for Customs and Excise that, as a matter of commercial reality, the supplies of the vouchers to the purchasers were made by the Appellant. If Customs and Excise are correct then the vendor of the voucher (the Appellant) is the same person as the supplier of the goods (namely the Appellant in its representative capacity) and so, following Argos, the actual money equivalent of the voucher is the full face value of vouchers sold to individual purchaser and the face value less the corporate discount for vouchers sold to corporate purchasers.

In support of their argument (that the Appellant was the supplier of the vouchers to the purchasers) Customs and Excise relied upon the principle that value added tax looks to commercial reality and cited a number of authorities. Of these we have been most assisted by the judgment of Sir Francis Ferris in Telewest as it is the most recent of the authorities cited to us and it summarises the previous authorities. At paragraph 63 of his judgment Sir Francis remarks that a contractual analysis cannot be regarded as conclusive of the result for the purposes of value added tax. He cites Laws J in Customs and Excise Commissioners v Reed Personnel Services Limited [1995] STC 588 at 595 where he said:

"In many situations, of course, the contract will on the facts conclude the VAT issue, as where there is a simple agreement for the supply of goods or services with no third party involved. … There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contracts' definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom."

The Appellant relied upon Ringside Refreshments v Customs and Excise Commissioners [2003] All ER (D) 295 (Dec) at paragraphs 33 and 34 for the principle that the contracts should be construed strictly on their terms alone unless the parties treated the written agreements as shams by actually operating their relationship differently or otherwise behaved inconsistently with the contracts between them. However, in stating this principle Evans-Lombe J relied upon the judgment of Park J in Kieran Mullin Limited v Customs and Excise Commissioners [2003] STC 274. Earlier in his judgment Park J also said:

"I accept that the matter is not automatically concluded just by considering the contractual position. It is necessary to examine what the evidence shows and ask whether the evidence requires a departure from what would otherwise be the result of the apparent contractual position."

We adopt that principle, which accords with the authorities considered in Telewest. Accordingly, in considering who, in this appeal, supplied the vouchers to the purchasers we examine what the evidence shows and ask whether the evidence requires a departure from what would otherwise be the result of the apparent contractual position. At the hearing the arguments on this matter centred round two questions, namely, whether Flogistics acted independently of the Appellant and who the purchasers of the vouchers thought made the supply of the vouchers.

Did Flogistics act independently of the Appellant?

Turning first to the question whether Flogistics acted independently of the Appellant, it was the Appellant's case that Flogistics did act independently and did not act as agent of the Appellant. The Appellant argued that the sale and purchase agreements and the supply agreements were inconsistent with Flogistics being an agent for the Appellant. The facts that: Flogistics never physically handled vouchers; that stocks of vouchers were held at the risk of the printers or the retail companies; that delivery of vouchers to corporate purchasers was at the risk of the printers; and that Flogistics had no financial risk save in respect of bad debts from corporate purchasers had all applied to Vouchers. The facts that: the Appellant reimbursed Flogistics for the value of returned vouchers; that Flogistics was not free to set its own terms of trade or selling prices; and that Flogistics was not free to take independent decisions such as the financing of its business, were consistent with Flogistics being part of the Appellant's corporate group. None of these facts were indicators of whether Flogistics acted as agent for the Appellant. Also, it was commercially unrealistic to assume that a wholly owned subsidiary would act at odds with the rest of the corporate group but after the demerger Flogistics had held regular board meetings and discussed commercial matters such as the relationship with Superdrug.

It was the case for Customs and Excise that, in the sale of vouchers to the purchasers, Flogistics did act as agent for the Appellant who was the principal. Flogistics never handled vouchers or took any risk. The real cost of any bad debts from corporate purchasers lay with the Appellant. Flogistics was not free to set its own terms of trade or prices. Indeed it did not set the terms of the scheme. Many of its decisions were directed by the Appellant's tax department or by KPMG.

Although we do not regard the contractual arrangements as being conclusive of the value added tax position they are a useful starting point in considering these arguments. Here it is relevant that all the contracts which were brought into effect on 25 June 2000 contain interlocking rights and obligations. It is not possible to consider any one contract in isolation because they are all interdependent upon each other. It is also clear from the way that Flogistics' budgets were set that the impact of the voucher operation on the Appellant, Flogistics and the retail companies was considered as a whole. It is also clear from the way in which the rates of commission and redemption charges were set, that the position of the Appellant, the retail companies and Flogistics were considered as a whole and that the over-riding requirement was to ensure that the Appellant remained in a neutral position, that the retail companies bore the costs of the operation and that Flogistics made a small profit. (In fact Flogistics made a large profit which ultimately had to be passed back by means of dividend payments while in the interim adjustments were made to the internal management accounts of the retail companies.) The overall effect of the budgets was the same as had been the case with Vouchers, namely that the position of the Appellant remained neutral and the retail companies paid the costs of the voucher operation. It is also relevant that it was the Appellant who paid the redemption money to the retail companies; if Flogistics had been completely independent it would have redeemed the vouchers it sold. Also, the fact that the Appellant claimed the annual non-redemption profit and the interest on vouchers between the date of sale and the date of redemption indicates to us that Flogistics was not independent; if it had been, then these amounts would have belonged to Flogistics.

Other relevant factors are that all the decisions relevant to the inception of the scheme were taken for Flogistics by the tax department of the Appellant; that the employees working for Flogistics were never transferred from Woolworths to Flogistics; and that before the demerger there were no board meetings at which commercial matters were discussed. Mr Garden accepted in evidence that Flogistics was not a "stand-alone" company. We find that it was a group company offering a service to other group companies but always acting under the direction of the Appellant (or of the Appellant and Woolworths after the demerger).

We conclude that, as a matter of commercial reality, Flogistics did not act independently of the Appellant. We do not reach this conclusion simply on the ground that Flogistics was a 100% subsidiary of the Appellant because we accept that a subsidiary can act independently of its parent. For example, from what we heard, the retail companies in the Appellant's group did act independently. We base our conclusion on the facts we have found about the inception of the voucher arrangements and the way in which they were implemented.

Who did the purchasers of the vouchers think made the supply of the vouchers?

Turning next to the question as to who the purchasers of the vouchers thought made the supply of the vouchers we have considered the authorities cited by M Vajda in support of his principle that the matter had to be looked at from the purchaser's point of view. Card Protection Plan (1999) concerned the issue as to whether there was a single supply or a number of separate supplies. The Court of Justice at paragraph 30 held that there was a single supply if one element was the principal supply and another element was ancillary to it and that a service must be regarded as ancillary to another if it does not constitute for customers an aim in itself. This principle was repeated by the Court of Justice in Commission v France (2000) where the issue was whether the analysis of a sample by a laboratory was exempt from value added tax as an activity closely related to medical care not only where there was a voluntary contractual arrangement but also where the laboratory providing a sample had to transit it to a specialised laboratory for analysis. At paragraph 28 of its judgment the Court of Justice held that the patient was indifferent as to whether the laboratory taking the sample also carried out the analysis or subcontracted it to another laboratory and at paragraph 30 concluded that all the services were closely related to the analysis and had to be treated in the same way, namely as exempt from tax. In Telewest the issue was whether there was one or two supplies and to reach his judgment Sir Francis Ferris analysed the value added tax position. At paragraph 78 he said that the crucial factor was the way in which the elements were offered to the customer. If there had been two separate offers, one of television services and one of a magazine, one made by one company and one made by another, and each separately charged for it would be relatively easy to say that there were two separate supplies.

These authorities indicate that, in analysing a supply for the purposes of value added tax, reference should be made to the point of view of the customer. The customer within the context of this appeal is the purchaser of the voucher. We are also mindful of the first principle in Argos which is that a voucher is no more than a document which evidences an obligation by someone to accept the voucher, instead of money, at its face value.

In this appeal it is clear that the vouchers evidenced an obligation by the Appellant. They were sold by the five retail companies. A purchaser of a voucher would pay his money to the retail company and obtain a receipt from that retail company. He would receive the voucher which was called the Kingfisher Gift Voucher and which displayed the logos of the Appellant and the five retail companies. On the reverse of the voucher would appear the name and address of the Appellant's voucher centre. Thus, the purchaser of a voucher would assume that he was purchasing a voucher from the Appellant which voucher would entitle the holder for the time being to obtain goods up to the full face value from a retail company in the Appellant's group. The purchaser was given to understand that the voucher evidenced an obligation by the Appellant (and not by Flogistics) to ensure that the voucher would be accepted by a retail company in the Appellant's group instead of money at its face value in exchange for goods. We find as a fact that a purchaser of a voucher would consider that he was contracting with the Appellant.

The question then arises as to the effect of the point of sale material. On the evidence before us we are unable to find that the point of sale material which mentioned Flogistics was placed in every store. Even where it was placed it was not all placed from the first day of the implementation of the scheme. Again, even where it was placed, the very small size of the wording could easily be missed by any purchaser of a voucher. Finally, we do not consider that words themselves were sufficient to inform the purchasers of vouchers that they were contracting with Flogistics and not with the Appellant or a retail company. In our view the purchaser of a voucher would think that he was receiving the supply of a voucher from the Appellant.

As far as the corporate purchasers were concerned we have found as a fact that, at the commencement of the new arrangements, the corporate purchasers were told that the vouchers would be supplied by Flogistics instead of Vouchers but that Flogistics was also a member of the Kingfisher group and would be staffed by the same people and that, in practice, the re-organisation should have no impact on dealings in relation to the supply of Kingfisher Gift Vouchers. In our view the corporate purchaser of vouchers would think that he was receiving the supply of vouchers from the Appellant.

We conclude that, as a matter of commercial reality, the supply of the vouchers was made to the purchasers by the Appellant. Flogistics did not act independently as a principal and had no power to deal with the vouchers as an independent owner. A purchaser would think that he was receiving the supply of a voucher from the Appellant.

In the light of that conclusion we return to apply the principles in Argos. First, the voucher is a document which evidences an obligation by the Appellant, on behalf of its retail companies, to accept the voucher, instead of money, at its face value. And, secondly, in order to ascertain the actual money equivalent when a voucher is given in exchange for goods, regard must only be had to the initial transaction comprising the sale of the voucher. The actual money equivalent which the voucher represents when it is accepted in payment for goods is the sum of money received by the supplier of the goods on the sale of the voucher. The sum of money received by the Appellant as supplier of the goods on the sale of the voucher was the full face value paid by an individual purchaser of the voucher. The corporate purchasers paid the face value of the vouchers less the corporate discount and that was the amount received by the Appellant. Accordingly, we are of the view that the consideration for the supply of goods by the retail company to a customer presenting a corporate discount voucher is the face value less the corporate discount.

Before finally deciding this issue we consider the arguments of the Appellant.

Dealing with the Appellant's first argument (that the only amount received by the Appellant was the face value of the vouchers less the internal discount) we agree that tax is chargeable by reference to the consideration actually received by the supplier for the supply. Argos is authority for the principle that, where a supply is made in consideration for a voucher, it is the sum actually received by the supplier of the goods on the sale of the voucher that is relevant. We have found that, as a matter of commercial reality, the sale of the voucher was from the Appellant to the purchaser. The sum actually received by the Appellant on the sale of the voucher to an individual purchaser was the full face value and on the sale to a corporate purchaser was the face value less the corporate discount. There was no dispute that the Appellant, as the representative member, was also the supplier of the goods.

Turning to the Appellant's second argument (that the positions of the Appellant and the retail companies were identical as a result of section 43) we record that much of this argument was not disputed by Customs and Excise. In particular, Mr Vajda agreed that, as a general rule, dividends were not consideration for a supply because there was usually no direct link between a supply of goods and services on the one hand and the payment of a dividend on the other. Although Mr Vajda did not accept that the payment of a dividend could never be consideration for a supply he did not argue that in this appeal the payment of the dividends was a consideration for a supply. As far as the rest of the Appellant's second argument is concerned we have already found that the Appellant, as a matter of commercial reality, supplied the vouchers to the purchasers and received in return the full amount of the consideration, or the full amount less the corporate discount for sales of vouchers to corporate purchasers.

The Appellant's third argument was that consideration was an subjective value. We agree, following Naturally Yours, that consideration must be a subjective value and not a value assessed according to objective criteria. We also agree, following Argos, that the consideration for a supply made in exchange for a voucher is the sum actually received by the supplier of the goods on the sale of the voucher. In our view as a matter of commercial reality it was the Appellant who supplied the vouchers to the purchasers and actually received in return the full amount of the face value (or the face value less the corporate discount). Of the other authorities cited by the Appellant Elida Gibbs concerned money-off coupons issued by manufacturers where either a price reduction was given to a consumer for which the manufacturer re-imbursed the retailer or a cash refund was given to a consumer who returned a coupon to the manufacturer. The Court of Justice held that the basic principle of the value added tax system was that it was intended to tax only the final consumer and that the taxable amount could not exceed the consideration actually paid by the final consumer. The taxable amount of a supply of goods was, therefore the selling price less the amount indicated on the coupon and refunded to the consumer. Although the principles applicable to money-off coupons are not exactly the same as the principles applicable to vouchers, nevertheless our views in this appeal accord with the principle that the taxable amount is the consideration actually paid by the purchaser of a voucher (who is the final consumer in the transaction involving the sale of the voucher).

Of the other authorities cited by the Appellant we have also been assisted by judgment of the Court of Justice in Commission v Germany which also concerned money-off coupons. Manufacturers issued the coupons and consumers could get price reductions for them from retailers who received re-imbursement from the manufacturers. One of the issues was: what was the consideration received by the retailer? At paragraph 58 the Court of Justice decided that, because the sum represented by the face value of the coupon was an asset realised by the retailer when it was re-imbursed by the manufacturer it must be treated as a means of payment to the retailer. Yorkshire Co-operatives was a very similar case and, at paragraph 23, the Court of Justice said that, when a retailer allows a final consumer to settle a sale price partly in cash and partly by means of a reduction coupon issued by the manufacturer of the product, and the manufacturer reimbursed to the retailer the amount on the coupon, the nominal [face value] of the coupon must be included in the taxable amount. These decisions are of interest because they emphasise that consideration paid to a retailer can move from two directions (the purchaser of the goods and the manufacturer). They would also point to the conclusion that when, in this appeal, a retail company allows a customer to settle a sale price either wholly or partly by means of a voucher, on the basis that the retailer would be reimbursed by the amount of the voucher, then it is the nominal [face value] of the voucher which is the taxable amount.

Turning to the Appellant's fourth argument (the need for a direct link between the supply and the consideration received) we are of the view that there was a direct link between the supply of the vouchers by the Appellant to the purchasers and the consideration received from the purchasers. The vouchers were issued by the Appellant; they contained the Appellant's address (and no other address); and, from the purchaser's point of view it would be clear that he was receiving a supply from the Appellant and paying the consideration for that supply to the Appellant. As a matter of commercial reality an individual purchaser of a voucher paid the full value of the voucher to the Appellant and in return received a voucher which entitled the holder for the time being to obtain goods up to the face value of the voucher from a retail company in the Appellant's group.

As far as the Appellant's fifth argument is concerned (the need for a legal relationship between a supplier and the recipient of the supply) Tolsma is authority for the principle that there can only be a supply if there is a legal relationship between the supplier and the recipient pursuant to which there is reciprocal performance, the remuneration received by the supplier constituting the value given in return for the supply. Town and Country Factors goes on to decide that there is a legal relationship for value added tax purposes even if the obligation on a supplier is not enforceable if the impossibility of seeking enforcement is derived from an agreement between the supplier and the recipient. In our view there was a legal relationship between the Appellant and the purchaser of a voucher because there was intended to be reciprocal performance; in return for the individual purchaser of the voucher giving the Appellant as representative member money equal to the face value of the voucher, the Appellant as representative member agreed that the holder of the voucher for the time being could exchange it at a retail company in return for goods. The reality is that if the purchaser of a voucher had sought to enforce the rights given by the voucher he would have enforced them against the Appellant.

The Appellant's sixth argument was that the retail companies acted as agents for Flogistics when they sold vouchers to individual purchasers. We have already found that the point of sale material was not in every store, and, even where it was, it was not there from the first day of the implementation of the scheme. Even where the point of sale material existed the very small size of the wording could easily be missed by any purchaser. Finally we do not consider that the words themselves were sufficient to inform the purchasers of vouchers that the retail companies were acting as agents for Flogistics. We find as a fact that a purchaser of a voucher would consider that he was receiving the supply of a voucher from the Appellant.

The Appellant's final argument was that Customs and Excise were seeking to tax the supply of vouchers from Flogistics to purchasers which was contrary to paragraph 5 of Schedule 6. We do not agree that the conclusion we have reached has the result of bringing within the charge to tax the consideration received by Flogistics from the purchasers. We have analysed the supply of the voucher and have concluded that it was, as a matter of commercial reality, supplied to the purchaser by the Appellant. Customs and Excise do not seek to tax that supply of the voucher. However, following Argos, it is the value received by the Appellant on that transaction which ascertains the money equivalent accruing the Appellant as representative member when a retail company accepts the voucher instead of money for a supply of goods and it is the supply of goods which is being taxed.

Before reaching our final conclusion on the first issue we record that, if we are wrong in our view that it was the Appellant who supplied the vouchers to the purchasers then we would support Mr Vajda's alternative argument, namely, that if there were two supplies of the voucher, one from the Appellant to Flogistics and the other from Flogistics to the purchaser, and also a supply of goods from the Appellant to the customer, the value of the supply of goods was the money paid by the purchaser of the voucher because there was an implied condition that the purchaser of the voucher had to pay the full price of the voucher to the retail companies (or to Flogistics after the corporate discount in the case of a corporate purchaser) because the Appellant was only willing to exchange goods if the full payment (or the full payment less the corporate discount) had been made. As the Appellant received the full payment (or the full payment less the corporate discount) tax should be proportionate to the full payment.

Our conclusion on the first issue in the appeal is that the consideration for the supply of goods by a retail company to a customer in exchange for a voucher is the amount paid by the purchaser of the voucher, namely, the full face value of the voucher for vouchers sold to individual purchasers and the face value less the corporate discount for vouchers sold to corporate purchasers. Those were the amounts actually received from the purchasers on the sale of the vouchers.

Our conclusion on the first issue resolves the appeal and we do not need to consider the second issue. However, in case we are wrong in our conclusions on the first issue we record our views on the second.

Issue (2) – Was there an abuse of rights?

The second issue is whether the arrangements entered into by the Appellant amounted to an abuse of rights.

The arguments of the Appellant

For the Appellant Mr Sinfield first argued that there was no abuse because the Flogistics arrangements were not created artificially; they were genuine commercial arrangements; and Flogistics served a genuine commercial purpose. He distinguished paragraph 136 of BUPA Hospitals Limited and Goldsborough Developments Limited v Commissioners of Customs and Excise (2002) VAT Decision 17605 and argued that the arrangements were tax inspired but not tax driven; they were not administratively burdensome or costly; and they did not involve circularity of payments. The tax benefits to the Appellant were a direct result of the judgment in Argos and paragraph 5 of Schedule 6 and the arrangements were in the nature of tax mitigation and not tax avoidance. For his argument that the arrangements were in the nature of tax mitigation rather than tax avoidance Mr Sinfield relied on GIL Insurance Limited and others v Customs and Excise Commissioners (2001) IPT Decision 00006 at paragraph 135 and Telewest Communications Plc v The Commissioners of Customs and Excise (2003) VAT Decision 17986 at paragraph 94 and (2003) EWHC 3176. The sole purpose of the arrangements was not tax avoidance and the commercial purposes were: to increase sales to corporate purchasers; to incentivise retail companies to sell more vouchers; and to drive up incremental sales. The success of Flogistics and its continuation following the demerger and the change of the legislation in April 2003 were evidence of its commercial value.

Secondly, Mr Sinfield argued that in this case there was no abusive use of Community law to gain a financial advantage from Community funds which was one of the principles required in Elmsland--Stärke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99) [2000] ECR-I 11569. In this appeal the purpose of the Community rules had been achieved and the Appellant had not created any advantage artificially. The principle of abuse of rights was still developing (see Halifax Plc v Commissioners of Customs and Excise (No 2) (2002) VAT Decision 17721; BUPA; WHA Limited and Viscount Reinsurance v Commissioners of Customs and Excise (2002) VAT Decision 17605; and Blackqueen Limited v Commissioners of Customs and Excise (2002) VAT Decision 17680) but so far it had not been applied where Community law rights were not engaged directly or indirectly. In this appeal the Appellant did not seek to rely on any Community rules but on paragraph 5 of Schedule 6 which was not derived from Community law. The purpose of Article 11(A)(1)(a) was that the taxable amount was everything which constituted the consideration obtained by the supplier (that is actually received by the supplier); the supplier of the goods was the Appellant as representative member and all that the Appellant received from Flogistics was the face value less the internal discount.

The arguments for Customs and Excise

For Customs and Excise Mr Vajda argued that it was an abuse of Article 2 of the First Directive and Article 11(A)(1)(a) of the Sixth Directive for the Appellant to take part of its taxable supplies outside the scope of tax by interposing a third party in the transaction. The advantage sought by the Appellant should be denied and tax should be due on the whole amount paid by the ultimate purchaser of the voucher. He relied upon Elmsland-Stärke and argued that the objective circumstances of the transactions at issue in the appeal showed that the purpose of the Sixth Directive had not been achieved. That purpose was to tax the final consumption of goods and not to distort competition. Also the arrangements did not ensure that tax was levied directly proportional to the price paid by the customer. He also argued that there was an artificial situation. He accepted that Flogistics carried on a real commercial activity but the arrangements were artificial; they were motivated by tax avoidance; and the internal discount was not commercial. Mr Vajda also relied upon BUPA, Debenhams and WHA for the principle that the insertion of a company into a chain of supply was artificial and an abuse of rights.

Replying to the Appellant's second point Mr Vajda argued that Community law rights were engaged and he relied upon Marks and Spencer Plc v Customs and Excise Commissioners ECR [2002] I-6325 of 11 July 2002 at paragraph 27 for the principle that abuse of rights applied even if a directive had been fully implemented in national legislation.

Our conclusions

In considering the arguments of the parties we start with the principles in Elmsland-Stärke. That appeal concerned entitlement to export refunds where products were immediately re-imported into the Community after being released for home use in a non-member country. At paragraph 52 of its judgment the Court of Justice stated:

"A finding of abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it. The existence of that subjective element can be established inter alia by evidence of collusion between the Community exporter receiving the refunds and the importer of the goods in the non-member country."

Before turning to consider the arguments of the parties we first make findings on the disputed facts which are:

whether the sole purpose of the new arrangements was to avoid tax ;

whether the new arrangements were artificial;

whether the new arrangements gave incentives to the retail companies;

whether the internal discount was fixed at a commercial rate;

whether Flogistics was run commercially;

whether Flogistics achieved anything which could not have been achieved by Vouchers;

whether the existence of Flogistics assisted in the demerger; and

whether the arrangements resulted in the distortion of competition.

Was the sole purpose of the new arrangements to avoid tax?

The first area of disputed fact is whether the sole purpose of the new arrangements was to avoid tax. It was the Appellant's argument that the sole purpose of Flogistics was not to avoid tax and that there were commercial reasons for the change and that the Appellant judged tax planning ideas against its commercial objectives. On the other hand it was contended by Customs and Excise that the sole purpose of the new arrangements was to avoid tax and that none of the other benefits required the formation of Flogistics; from an accounting point of view the only effect of the scheme was to reduce the amount of value added tax paid.

In the light of the facts we have found we conclude that the sole purpose of the new arrangements when implemented was the avoidance of tax. That was the purpose of the meeting with KPMG on 31 January 2000; that was the reason for the proposal considered at the monthly tax meeting on 23 February 2000; that was the reason for the formal proposal of 6 April 2000; and that was the reason for the approval of the formal proposal. It was also the reason stated in the terms of engagement of KPMG on 11 May 2000 and the reason for the internal authorisation of their professional fees. It is also relevant that the whole scheme of the re-organisation was run by the Appellant's tax department. Although some commercial benefits appeared later, notably the fact that Flogistics was better able to adapt to the demerger than Vouchers would have been, in our view any such benefits were by-products of the new arrangements and not the reason for them; the sole reason was to avoid tax.

We conclude that the sole purpose of creating Flogistics as a company outside the Appellant's value added tax group, and the sole purpose for the contracts for the sale and redemption of the vouchers, was to avoid some of the value added tax that would otherwise have been due when the goods were sold by the retail companies to consumers in exchange for the vouchers.

Were the new arrangements artificial?

The second area of disputed fact concerns the question whether the new arrangements were artificial. It was the Appellant's case that the new arrangements were not created artificially but were genuine commercial arrangements which served genuine commercial purposes for the Appellant's group whereas it was the case for Customs and Excise that the operation of the scheme was artificial and was not reflected in the contractual arrangements.

In our view the Flogistics arrangements were highly artificial. The arrangements were orchestrated by the Appellant's tax department and were not transactions which would have been entered into on a commercial basis between independent third parties. Without the internal balancing adjustment at the end of the financial year ending at the end of January 2001, from Flogistics to the retail companies, the latter would not have agreed to enter into the new arrangements which would have resulted in losses to them. The effect of the balancing adjustments was to neutralise any changes to budgets introduced by the new arrangements. Another area of artificiality was the way in which the rates of commission and redemption charges were set. These were not set by reference to commercial criteria but were set by the group as a whole to ensure that the Appellant made neither a gain nor a loss. As the core of the scheme was that the Appellant would sell vouchers at a discount to Flogistics it was highly artificial for the Appellant also to ensure that it did not make a loss. It is also relevant that, in the contracts of 25 June 2000 between the Appellant and the retail companies, it was provided that the redemption charges could be varied at the Appellant's sole discretion; the fact that this was not an arm's length commercial arrangement became obvious on the sale of Superdrug in July 2001 to an arm's length company when this provision was changed so that the redemption charges could not be changed without the agreement of both parties.

We conclude that the new arrangements were artificial.

Did the new arrangements give incentives to the retail companies?

The third area of disputed fact is whether the new arrangements gave incentives to the retail companies. It was part of the Appellant's case that the new arrangements were commercial as they created an incentive to retailers to sell more vouchers by introducing a commission which would increase store profits. On the other hand it was contended for Customs and Excise that the changes had no incentive effect and that, on the contrary, the scheme had to be "sold" to the retail companies.

In considering this question we have distinguished between the incentivisation of the management of a retail company and a store manager on the one hand and the incentivisation of a salesperson in a store on the other. We accept the evidence of Mr Garden that the bonuses of the management of a retail company and a store manager were calculated by reference to the degree in which they achieved budgeted sales and salespersons received bonuses by reference to what they personally sold.

Dealing first with the incentivisation of the management of the retail companies and the store managers it is relevant that the arrangements which were implemented meant that all the retail companies were worse off under the new scheme. The combination of a commission rate of 10% on vouchers sold to individuals (but not on vouchers sold to corporate purchasers) and a redemption charge rate of 13.7% on all vouchers redeemed (both those sold to individual and corporate purchasers) could not incentivise any retail company to sell vouchers. A commission alone without a redemption charge might well have been an incentive and it is significant that the early references to incentives in the scheme were to commissions only without a redemption charge. The fact that, far from incentivising the retail companies, the new scheme was a disadvantage to them, is illustrated by the fact that the disadvantages had to be overcome by the agreement to make the balancing adjustments which were made at the end of financial year ending at the end of January 2001. We agree that the voucher system as a whole was an advantage to the retail companies to the extent that they benefited from locked-in sales and incremental sales but these benefits had been available when the voucher system was run by Vouchers and did not emerge only on the formation of Flogistics.

As far as the incentivisation of the salespersons in the stores are concerned, we accept the evidence of Ms Dinan that no incentives for individual members of store staff were put in place.

We conclude that the totality of the new arrangements did not give incentives to the retail companies.

Was the internal discount fixed at a commercial rate?

The fourth area of disputed fact concerned the question whether the internal discount was fixed at a commercial rate. It was argued for the Appellant that the giving of discounts on bulk purchases of vouchers was normal commercial practice and that competitors had given higher discounts than those given by the Appellant to Flogistics.

In the formal proposal of April 2000 it was said that the amount of the discount of 18.46% had been reached after taking into account: the corporate discount; the fact that the new company would pay for storage and bear the risk for loss, theft and fraud; that the new company had to cover its costs; and that the Appellant would offer the new company a prompt payment discount which the new company would always use. However, we are of the view that this was an artificial means of looking at the amount of the discount which did not accord with reality. The discount was actually set at a figure which would ensure that the Appellant made neither a gain nor a loss. Even taking the figures at face value, the average corporate discount given by Vouchers and Flogistics was less than that mentioned; the new company did not bear the risk for loss, theft and fraud; the new company did not have to cover its costs which were passed on to the retail companies; and the payment arrangements were such that there was no need for a prompt payment discount.

We accept the evidence of Ms Dinan that a discount of up to 12.5% could be commercial. We also accept the evidence of Mr Garden that 18.42% was an unusually high margin. However, we find that the internal discount was fixed at 18.42% (later changed to 18.52%) in order to get the tax advantages. (We were never informed how the figure for the internal discount was actually arrived at.) The internal discount which is at the core of the scheme was not a true discount because the group budget and accounting arrangements ensured that throughout the scheme the position of the Appellant remained neutral, in that it recovered the amount of the internal discount in the first half year by the redemption charges paid to it by the retail companies and in the second year by a mixture of the redemption charges paid to it by the retail companies and the budgeted licence fee (later paid to it by Flogistics as a dividend). As with Vouchers, the costs of the voucher scheme were borne by the retail companies and the value added tax savings reduced the costs of the voucher scheme as a whole.

Accordingly, we conclude that the internal discount was not fixed in the same was as it would have been in a commercial transaction between independent parties. Also, it was not negotiated with the board of Flogistics. The only purpose of the internal discount was to achieve the value added tax advantages.

Was Flogistics run commercially?

The fifth area of disputed fact concerns the question whether Flogistics was run on a commercial basis. The Appellant argued that, whereas the original voucher business was not taken seriously as an independent business, Flogistics was run on a commercial basis.

Here it is relevant that before the demerger the board of Flogistics did not meet in order to discuss commercial matters. There was one first formal meeting and two meetings in August 2001 to declare dividends prior to the demerger. Having said that, however, the management of Flogistics did operate in a commercial manner very much in the way that the management of Vouchers had operated before June 2000. After the demerger there were regular board meetings in which the directors made commercial decisions.

We conclude that Flogistics did operate on a commercial basis in much the same way that Vouchers had operated before it.

Did Flogistics achieve anything which could not have been achieved by Vouchers?

The sixth area of disputed fact was whether Flogistics achieved anything that could not have been achieved by Vouchers.

We are of the view that any of the commercial advantages identified for Flogistics could have been achieved equally well by Vouchers. Vouchers was already achieving the four benefits of a voucher operation, namely, the non-redemption profit, the interest between sale and redemption of a voucher, the locked-in sales and the incremental sales. Vouchers was also a very successful company as its results for the financial year ending at the end of January 2000 show. We accept that Flogistics continued the improvement established by Vouchers but the rate of growth slowed. Again we accept that it is more difficult to maintain a high rate of growth than to establish it but nevertheless we are not convinced that Vouchers could not have done equally as well as Flogistics. It is also relevant that sales did not increase immediately upon the establishment of Flogistics. The presentation given by Vouchers on 16 May 2000 included the sales objective for the year ending on 31 January 2001. In June 2000 Vouchers were still forecasting that the sales objective would be met. In fact Flogistics' budget of 29 January 2001 showed that the sales objective had been exceeded by about 0.5% which could well have been achieved by Vouchers.

We were impressed by the commitment and competence of Ms Dinan, Ms Aslam and Mr Kellock and it is significant that Ms Aslam, Mr Kellock and the new accountant joined Vouchers in May 2000 just before it was replaced by Flogistics. Although their effort was of great assistance to Flogistics, it would have been of equal assistance to Vouchers.

Further, Ms Aslam accepted that the success she had had was not due to the use of the name Flogistics because in the corporate market she was selling a voucher and recipients needed to know where the voucher could be redeemed. Mr Kellock accepted that the success of Flogistics' business was due to the combination of the choice of the five well known retail companies in which to redeem the vouchers, the well known Kingfisher brand, and the human resources available to Flogistics. The formal proposal indicated that one of the commercial justifications was to enable the new company to develop its business but it is not clear how the name of Flogistics assisted it in that aim. Mr Sutherland accepted in evidence that Flogistics was in no better position to develop new distribution channels for the voucher than Vouchers had been.

We conclude that Flogistics did not achieve anything that could not have been achieved by Vouchers.

Did the existence of Flogistics assist in the demerger?

The seventh area of disputed fact was whether the existence of Flogistics had assisted in the demerger.

It was contended for the Appellant that the existence of Flogistics meant that the voucher arrangements were in a better position to continue after the demerger of Woolworths in August 2001 and Superdrug in July 2001; and that since the demerger Flogistics had concerned itself almost entirely with promoting voucher sales.

We agree that when the demerger occurred there were advantages in having a voucher company which was not as buried in the Woolworths group as Vouchers had been. That made it easier to establish the joint venture arrangements. Also, the fact that the arrangements had been regularised by the contracts of June 2000 was helpful. However, although we accept the evidence of Mr Sutherland that he foresaw these advantages when the new arrangements were being considered, they were not in the minds of any other person at that time and so the fact remains that the sole purpose of the new arrangements was the avoidance of value added tax.

Did the arrangements result in the distortion of competition?

The last area of disputed fact was whether the new arrangements resulted in the distortion of competition

It was Mr Lever's opinion that schemes such as that adopted by the Appellant were capable of a significant distortion of competition because those adopting them obtained a tax advantage over their competitors. Even if such a scheme were successful it would still distort competition because smaller businesses would find it difficult to meet the costs of implementation and operation of the scheme and would not have the volume of transactions to make the scheme viable. However, it was generally accepted that after April 2003 such schemes could no longer be operated successfully.

We do not consider that we have sufficient evidence to make any findings about the significance of the distortion of competition in this appeal. However, it is our view that if one trader obtains tax advantages which are not available to all similar traders then there must be some distortion of competition.

Having reached our decisions on the disputed facts we now turn to apply the principles in Elmsland-Stärke to the facts we have found First, we conclude that in this appeal there was a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. We also conclude that there was a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it.

Dealing with the Appellant's first argument we have found that the arrangements were created artificially and they were not implemented for a commercial purpose but only for the avoidance of tax. We accept that, after the arrangements had been implemented, Flogistics operated in a commercial manner in the same way as Vouchers had operated before it, but that was not the reason for the change. We do not agree that the arrangements did not involve circularity of payments; the money paid by a purchaser for a voucher was passed to Flogistics who passed it to the Appellant who passed it back to the retail company who redeemed the voucher. This was not tax mitigation but tax avoidance. The Appellant did not suffer the financial consequences of selling vouchers to Flogistics at a discount because the totality of the arrangements ensured that the Appellant did not make a loss. The arrangements did not incentivise the retail companies to sell more vouchers and any increase of sales of vouchers to corporate purchasers, and any increase in incremental sales of goods, could equally have been achieved by Vouchers.

Dealing with the Appellant's second argument we are of the view that there was an abusive use of Community law. The Appellant sought to rely on both Article 11(A)(1)(a) of the Sixth Directive and also on the decision of the Court of Justice in Argos. In our view the arrangements entered into by the Appellant meant that the purposes of the First and Sixth Directives were not achieved because the Appellant tried to ensure that the tax on the supply of goods was not exactly proportional to the price of the goods (Article 2 of the First Directive) and that everything obtained by the supplier of the goods from the purchaser was not taxed (Article 11(A)(1)(a) of the Sixth Directive). Also, we have already found that the facts in this appeal were not the same as the facts in Argos.

Our conclusion on the second issue in the appeal is that the arrangements entered into by the Appellant amounted to an abuse of rights.

Issue (3) – Should there be a request for a preliminary ruling from the Court of Justice?

The third issue in the appeal is whether we should request a preliminary ruling from the Court of Justice.

Article 177 of the EC Treaty (now Article 234 EC) provides that the Court of Justice has jurisdiction to give preliminary rulings concerning the interpretation of Directives and, where such a question is raised before any court or tribunal, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court of Justice to give a ruling thereon.

For the Appellant Mr Sinfield stated that the Appellant did not ask the Tribunal to request a preliminary ruling and he argued that such a request was not necessary to resolve the issues in this appeal. All the issues had been resolved by Argos. However, if the Tribunal saw fit to make such a request then the Appellant would welcome an opportunity to make representations. For Customs and Excise Mr Vajda argued that, if the Tribunal were to decide the appeal in favour of Customs and Excise, he would not ask that the Tribunal should request a preliminary ruling but argued that if the Tribunal were in any doubt then there should be such a request.

What we have to decide is whether, in the words of Article 177 of the EC Treaty (now Article 234 EC), a decision on any question concerning the interpretation of a Directive is necessary to enable us to give judgment. In our view such a decision is not necessary. In reaching our decision on the first issue we have been guided by the judgment of the Court of Justice in Argos and have applied the principles enunciated by the Court of Justice to the facts of this appeal. In reaching our decision on the second issue we have been guided by the judgment of the Court of Justice in Elmsland-Stärke and have applied the principles in that judgment to the facts of the present appeal.

Decision

Our decisions on the issues for determination in the appeal are:

(1) that the consideration for the supply of goods by a retail company to a customer in exchange for a voucher is the amount paid by the purchaser of the voucher namely the full face value of vouchers sold to individual purchasers and the face value less the corporate discount of vouchers sold to corporate purchasers; that decision means that the appeal must be dismissed but in case we are wrong we express our views on the second issue which are:

(2) that the arrangements entered into by the Appellant amounted to an abuse of rights; and

(3) that we will not request a preliminary ruling from the Court of Justice.

The appeal is, therefore, dismissed.

Costs

WE DIRECT that the Appellant shall pay to the Respondents their costs of and incidental to and consequent upon this appeal the amount of such costs to be agreed between the parties but failing agreement to be assessed by a Taxing Master of the Supreme Court by way of detailed assessment.

We record that there was some dispute about the cost of copying and the cost of the transcript. Mr Vajda argued that Customs and Excise had paid for the transcript of the evidence. Mr Sinfield argued that the Appellant had been put to great expense by Customs and Excise's requests for disclosure of documents, very many of which had not been before the Tribunal. Accordingly, if the Appellant had to pay the costs of the hearing it should not also have to pay for the costs of the transcript; if, however, the Appellant had to pay for the transcript it should get credit for one-half of the costs of copying the documents which cost was in excess of £10,000. Having recorded this dispute we do not wish to reach any view on it as we regard that as a matter for

decision by the Taxing Master on the detailed assessment.

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 6 April 2004

LON/2003/1275

This Decision was released to the parties on 6 April 2004. This is a redacted version which removes some matters of commercial sensitivity.

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 21/06/2004

LON/2003/1275

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