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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Loyalty Management UK Ltd v Customs and Excise [2005] UKVAT V19056 (06 April 2005)
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Cite as: [2005] UKVAT V19056

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Loyalty Management UK Ltd v Customs and Excise [2005] UKVAT V19056 (06 April 2005)

19056

VALUE ADDED TAX - input tax – the Appellant operates the Nectar programme under which customers who purchase goods (called primary goods) from certain retailers receive points which they may use to acquire goods (called secondary goods) from other suppliers – the Appellant pays the supplier for the secondary goods – whether, when a customer acquires secondary goods from a supplier using his points, the supply of the secondary goods is to the customer – no – or to the Appellant – yes –whether there should be a request to the Court of Justice for a preliminary ruling – no - appeal allowed – VATA 1994 S 2; Art 234 EC

LONDON TRIBUNAL CENTRE

LOYALTY MANAGEMENT UK LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR A N BRICE (Chairman)

MR R L JENNINGS FCA FTII

Sitting in public in London on 6 to 10 December 2004

Robert Venables QC with Rory Mullan of Counsel, instructed by Messrs Lovells Solicitors, for the Appellant

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

© CROWN COPYRIGHT 2005

DECISION

The appeal

Loyalty Management UK Limited (the Appellant) appeals against a decision of Customs and Excise dated 9 December 2003. The decision was that payments made by the Appellant to certain suppliers were third-party consideration for supplies made by the suppliers to customers and were not consideration for supplies made by the suppliers to the Appellant. Accordingly, output tax charged by the suppliers was not input tax in the hands of the Appellant.

The legislation

Section 24 of the Value Added Tax Act 1994 defines input tax as tax on the supply to a taxable person of any goods or services used or to be used for the purpose of any business carried on by him.

The issues

The Appellant operates the Nectar programme. Under the programme customers who purchase goods (called primary goods) from certain retailers receive points which they may use to acquire goods (called secondary goods) from other suppliers. The Appellant pays the suppliers for the secondary goods.

The issues for determination in the appeal were:

(1) whether, when the suppliers provide secondary goods to customers in return for points, the supply made by the supplier is to the Appellant (as argued by the Appellant) or to the customer (as argued by Customs and Excise). It was agreed that if the supply is to the Appellant then the tax on the supply will be input tax in the hands of the Appellant; if the supply is not to the Appellant then the Appellant will not be able to treat the tax on the supply as its input tax; and

(2) whether we should request a preliminary ruling from the Court of Justice.

The evidence

There was a draft statement of agreed facts. The Appellant produced two (red) bundles of documents and the Respondents produced two (blue) bundles of documents. Oral evidence was given on behalf of the Appellant by Mr Dermot Heffernan, the Chief Financial Officer of the Appellant. Oral evidence was given on behalf of Customs and Excise by Mrs Susan Green, a Chartered Tax Adviser and an Officer of HM Customs and Excise.

The facts

From the evidence before us we find the following facts.

The Appellant and its business

The Appellant is a private company limited by shares. The Appellant was incorporated in May 2001 and was registered for value added tax from 16 July 2001.

The business of the Appellant is the running of the Nectar customer loyalty rewards programme. The Nectar programme is a developed version of a single-company loyalty rewards programme. Under a single company loyalty rewards programme customers of a single company are awarded points when they purchase primary goods from the company which points they can then use to acquire other (secondary) goods from the same company at no cost or at a reduced cost. Under the Nectar programme customers can purchase primary goods from a number of retailers and receive Nectar points which they can use to acquire secondary goods from a number of other suppliers at no cost or at a reduced cost. The programme is thus designed to enable a number of retailers to retain the loyalty of their customers and to enable a number of suppliers to increase their turnover.

The contractual arrangements in outline

In order to operate the Nectar programme the Appellant enters into contracts with retailers, customers and suppliers. The agreement with the retailers is that the retailers will assist in the issue of the points to the customers and will pay to the Appellant a specified sum in respect of each point issued together with an annual fee for marketing the programme. The retailers benefit from the loyalty of the customers which leads to increased turnover. The agreement with the customers is that if they purchase (primary) goods from the stated retailers they will receive points which they may use to acquire (secondary) goods free of charge or at a reduced price from other suppliers. The customers benefit from the acquisition of free or reduced price goods. The agreement with the suppliers is that if they provide goods to customers in return for points the Appellant will pay them an agreed value for the points. The suppliers benefit from: an increase in the number of customers in their stores which leads to increased turnover; from the ability to sell their excess capacity to a new market at a reduced price; from the ability to make increased sales at a discount without reducing their prices generally; and from the fact that customers entering their stores are likely also to purchase other full price goods (incremental sales).

That is a much simplified version of the contractual arrangements which we now describe in more detail.

The details of the contracts with the retailers

The retailers at the date of the hearing were:

Adams Childrenswear Limited;

Allsports (Retail) Limted;

Barclays Bank plc (trading as Barclaycard);

BP Oil UK Limited;

Debenhams Retail plc;

First Quench Retail Limited;

Ford Motor Company Limited;

Hertz (UK) Limited;

London Energy plc;

Magnet Limited;

Sainsbury's Supermarkets Limited;

Vodafone Limited;

Winemark the Winemerchants Limited; and

Whitbread Group plc.

All retailers who wish to participate in the programme enter into a written agreement with the Appellant. The agreement states that the programme will consist of the issue of points by retailers, the acquisition of merchandise from suppliers by the Appellant to make available to customers on their redemption of the applicable number of points, and the collection and use of the data in respect of the customers by the Appellant, the retailers and the suppliers. The word "programme" is defined to mean the issue of points by the retailers; the acquisition of services or merchandise from suppliers by the Appellant to make available to customers on their redemption of the applicable number of points; and the collection and use of data relating to customers by the Appellant, the retailers and the suppliers. The word "rewards" is defined to mean goods and services made available by suppliers to customers on the redemption of the applicable number of points. The word "suppliers" is defined to mean those businesses participating in the programme by making rewards available to the Appellant.

Under the agreement with each retailer the Appellant agrees that each retailer has a licence to issue points in the market sector in which it operates. Certain information about customers from the Appellant's database is also made available for the benefit of the retailers. The retailers also agree that they will issue points to customers on all relevant transactions and will pay to the Appellant a "points price" which is a specified sum in respect of each point. The retailers also agree to pay the Appellant an annual fee for the marketing, development and promotion of the programme and the Appellant agrees that it will advertise, market and promote the programme which will increase the turnover of the retailers.

The agreement between the Appellant and the retailer states that it does not create a partnership or agency between the parties.

The details of the contracts with the customers

Any person over the age of eighteen years may register as a customer with the programme. The Appellant sends out promotional material to prospective customers by post and this material contains a Nectar card. The material asks the customer to register with the Appellant online or by returning the registration form by post. The promotional material states that points can be earned by shopping at the stated retailers (or using stated service providers). The card can be used immediately but points cannot be used to obtain free goods from a supplier until the customer has registered with the Appellant. The free goods obtained from suppliers in return for points are called rewards. The promotional material indicates that if a customer has a problem with a reward he should contact the supplier directly.

The promotional material also sets out the terms and conditions of the arrangements between the Appellant and the customers. There are general reward conditions, special conditions, and collector rules. The general conditions indicate that the relevant terms and conditions of any supplier also apply. A very small proportion of all rewards are supplied by the Appellant direct and in these cases the special conditions apply. The collector rules state that the Appellant awards points to the customer when a retailer (or service provider) informs the Appellant that a customer has undertaken a relevant transaction with that retailer (or service provider). They also state that customers can redeem points to obtain goods and services at stated suppliers; all rewards are subject to availability; and points cannot be redeemed until credited to a Nectar account. Finally, the collector rules state that the Appellant will ensure that, while the programme is in operation, a range of rewards will be available to customers.

When he makes purchases from any participating retailer the customer is issued with points by the retailer. When the customer is purchasing goods from the retailer the issue of points takes place electronically by the retailer swiping the customer's Nectar card. When the customer is purchasing services from the retailer the issue of points is effected after the linking of the customer's Nectar account number with the account of the service provider. The number of points earned by spending £1 differ among the retailers. For example, two points are earned for £1 spent at Sainsbury's or Debenhams but one point is earned for £2 spent using a Barclaycard.

The rewards available to the customer are many and various. They include free goods, groceries or wines; free meals at stated restaurants; free admissions to cinemas; free adventure trips; free days out to, say, a zoo or a spa; free stays in a hotel; discounted holidays, free flights; free travel; free video hire or game rentals; free games of bowling; or free admission to aquaria. Many of these rewards can be obtained partly by presenting points and partly by paying cash. Or points can be presented to reduce the supplier's price; for example the supplier Argos offers £2.50 off any supply of goods in return for each 500 points. Although many of these rewards represent supplies of services, in fact by value most of the rewards are supplies of goods.

We saw what was called a "rewards menu" which is sent by the Appellant to customers. This listed the rewards available by reference to the number of points required to acquire each reward. The menu also indicated whether the rewards could be obtained by the use of vouchers, or from the Appellant direct by telephoning the Appellant; or by use of the Nectar cards. Some of the rewards were described as "money off your shopping".

Each quarter the Appellant informs each customer of the total number of points which have been issued to him in the quarter, the total points which the customer has used to obtain goods from a supplier; and the balance. The customer is also sent a brochure showing the goods or services which can be obtained in exchange for points, the number of points required to obtain them, and how to obtain them. Similar information is also published on the Appellant's website.

The details of the contracts with the suppliers

At the date of the hearing there were about sixty-five different suppliers. (During the period in question only one of the suppliers (Sainsbury's) was also a retailer.) Most contracts between the Appellant and the suppliers incorporate standard terms which apply to most suppliers. These are entered into in conjunction with commercial terms which apply to individual suppliers. There are also some special conditions which also apply to individual suppliers.

The standard terms state that they apply to all contracts between a supplier and the Appellant for the supply of redemption services to the Appellant by way of the supply of goods, services and cash discounts as rewards to customers. The Appellant will determine the number of points required for a specific reward. The supplier is to supply rewards to any customer redeeming points or vouchers in the same way as a supply to a customer paying by cash or any other method. The supplier is to be responsible for all aspects of the supply of the rewards and will indemnify the Appellant against any liability incurred by the Appellant arising from the rewards. The supplier will deal with all complaints and will replace faulty goods at the request of a customer or the Appellant. The standard conditions oblige the supplier to provide goods or services to a customer who presents points on the same terms as if the customer were paying by cash; they provide that the quality of the goods provided to customers who present points must be the same as goods provided generally by that supplier and that includes the usual warranties for defective goods. They also provide that the supplier must provide the Appellant with accurate information about the goods provided to customers in return for points. The agreement also provides that the Appellant can make use of any data or information collected by the supplier.

The commercial terms vary for each supplier and are negotiated separately with each supplier. They specify the goods or services available from each supplier, the number of points required to be presented by a customer in return for those goods or services, the method of redemption, the reward fee and the service charge. The reward fee is the sum payable by the Appellant to the supplier when goods or services are provided to customers in return for points and is fixed by reference to a stated sum for each point redeemed. Different amounts are paid to different suppliers for each point redeemed. The Appellant negotiates a reward fee that it can commercially afford to pay and the reward fee is always less than the market price of the supply. The service charge is the aggregate of all the reward fees in respect of the points redeemed within a month. The commercial terms may also provide that the supplier shall provide the Appellant with regular reports giving an analysis of redemptions. Although the suppliers have other obligations to the Appellant, for example, the provision of information, the fee payable by the Appellant is calculated only by reference to the number of points redeemed. However, we accept the evidence of Mr Heffernan that each reward fee is negotiated commercially and that the amount of information required by the Appellant from each supplier is related to the number of points redeemed by customers with that supplier. In other words, more information is required from a supplier redeeming many points than from a supplier who redeems few points.

The practical result of the agreements between the Appellant and the suppliers is that the Appellant pays a fee, or service charge, to the suppliers. In return the suppliers provide rewards to customers in return for points or vouchers; provide information to the Appellant and customers on the rewards available to customers; make their names and brands available to be promoted within the Nectar programme; inform the Appellant's computer of the numbers of points to be debited to each customer's account with the Appellant; and deal with customer service issues relating to rewards. All these matters are referred to as redemption services.

The points

The points exist electronically. Originally they belong to the Appellant and are issued to customers when purchasing goods from retailers. When the customer purchases goods from a retailer, and when the retailer swipes the customer's Nectar card, the retailer's computer informs the Appellant's computer of the number of points issued to that customer and the customer's account number with the Appellant. The Appellant then credits that number of points to its account with that customer. The customer is then entitled to acquire goods from a supplier using those points. When the customer acquires goods from the supplier for points the supplier swipes the customer's Nectar card and the supplier's computer informs the Appellant's computer of the number of points used by that customer. The Appellant then debits that number of points to its account with that customer. The points never belong to either the retailer or the supplier. In the hands of a customer the points are the measure of the customer's entitlement as against the Appellant and thus of the Appellant's liability to a customer. The supplier's agreement records that the points do not constitute property but represent only contractual rights for customers to redeem points for rewards.

A customer who has acquired points may use them in one of three ways: First, he can get a specified product or service free of charge from a supplier; examples would be the rental of a video for 500 points or a flight to Paris for 6,000 points. Secondly, he can purchase a specified product or service at a specified reduced cash price from a supplier; an example would be the hire of a hotel room for £40 and 2,500 points per night. Thirdly, he can get money off the cost of a purchase from a supplier; an example would be £2.50 off his shopping for 500 points. When a customer uses points in any of these ways a payment becomes due from the Appellant to the supplier.

In addition to the points being used by electronic swiping at a supplier's till, there are three other ways of using points. First, points can be used by telephoning the Appellant direct on its Rewards Hotline when the Appellant takes the customer's order or, in some cases, connects the customer to the supplier's telephone; in either case the appropriate number of points is deducted from the customer's account with the Appellant. Alternatively, points can be used by visiting the Nectar website and redeeming the points online. For example, one online offer is a toolkit for 7,600 points. That supply is made by the Appellant direct to the customer. Finally, points can be exchanged for vouchers.

Vouchers

A customer can exchange 500 points for one voucher. Vouchers can be obtained at the till at Sainsbury's or from the Appellant direct. Either way when a customer acquires a voucher his account with the Appellant is debited with the number of points exchanged for vouchers.

No monetary amount is ever stated on a voucher only a specified number of points. The terms on the reverse of the voucher provide that they remain the property of the Appellant and that they cannot be redeemed for cash nor sold nor transferred for value. They also state that the voucher can be used for part-payment so that if the price of the goods or services exceeds the value of the voucher the balance has to be paid in cash. On the other hand if the price is less than the voucher no change is given.

Vouchers can be presented to any supplier who has agreed to accept them. The supplier should ensure that the number of the customer's Nectar account is entered on the reverse of the voucher (although this is not always done). The standard terms of the agreement between the Appellant and the suppliers provide that where a supplier has accepted vouchers the risk lies with the supplier until the vouchers are received by the Appellant and the Appellant requires to see the vouchers as evidence that they were presented by customers to the supplier in return for the provision of goods or services by the supplier.

Where a supplier accepts vouchers instead of electronic points it is the duty of the supplier to collect and count the vouchers, cancel them, collate them and identify the site at which they were redeemed. The supplier then sends the vouchers to the Appellant's collecting house. Only then will the Appellant pay the supplier the reward fee relating to those vouchers. The Appellant uses the information on the back of the vouchers about the customer's account number with the Appellant. (This information is of general interest only because the customer's account with the Appellant will have been debited with the appropriate number of points upon the issue of the voucher.)

The processing of vouchers by a supplier is treated as a redemption service.

Less than 15% of all redemptions are made for vouchers.

The Appellant and value added tax

When a customer purchases goods or services from a retailer the transaction is treated for value added tax purposes as a supply of those goods or services for the full consideration paid by the customer; no part of the consideration is treated as payment for points.

The Appellant treats as standard-rated supplies the supplies it makes to the retailers in return for the payments made by the retailers to the Appellant (including the points price and the annual marketing fee). The retailers treat the tax on those supplies as input tax which is deductible to the extent that they use the supplies to make taxable (and not exempt) supplies.

The suppliers account to Customs and Excise for output tax when they provide goods or services to customers in return for points; the value of the supply is the amount paid to the supplier by the Appellant and also the amount (if any) paid to the supplier by a customer. Each month each supplier sends to the Appellant an invoice for the relevant service charge (which is the aggregate of all the reward fees in respect of points redeemed by the supplier in that month). The standard rate of value added tax is charged on the full service charge even if a reward supplied to a customer is, for example, food or travel, and so is exempt or zero-rated. The Appellant pays each supplier's invoice. It is the treatment of the tax on the suppliers' invoices as the Appellant's input tax which is in issue in this appeal.

The disputed decision

Prior to the launch of the Nectar programme the Appellant wrote to Customs and Excise about the proposed value added tax treatment of the transactions in the programme. On 31 March 2003 Customs and Excise wrote to the Appellant to say that any tax on the invoices issued by the suppliers to the Appellant would not be input tax. Discussions followed and on 9 December 2003 Customs and Excise made the disputed decision which is the subject of this appeal.

Meanwhile, on 9 April 2003 Customs and Excise wrote to all suppliers stating that it was their view that the suppliers made supplies to customers and not to the Appellant.

We accept the evidence of Mrs Green that on 15 November 2004 she purchased petrol from Sainsbury's. She paid partly by Nectar voucher and partly by using her credit card. She was asked if she wanted a tax invoice and she said she did. The tax invoice was generated automatically and was given to her and was for the full amount of her purchase. This was in accordance with the views of Customs and Excise set out in their letter of 9 April 2003.

The arguments

The parties agreed that the suppliers made supplies and received consideration for those supplies. There was no dispute about the value of the consideration received by the suppliers nor about their liability to account for output tax on that consideration. The dispute concerned the identity of the recipient of the supplies made by the suppliers.

The Appellant argued that the supplies were made to the Appellant who paid for them. Although the service charge paid to the suppliers by the Appellant was calculated by reference to the number of points redeemed it was paid in return for all the redemption services carried out by the supplier for the Appellant. These included the provision by the supplier on behalf of the Appellant of goods or services to the customer in return for points; the assistance provided by the supplier to the Appellant in the operation of the Nectar programme; the provision of information to the Appellant's database; and the handling and processing of any vouchers. None of these services was supplied by the supplier to the customer. A supply was normally made to the person who was legally liable to pay for it rather than to a person who benefited from it.

Customs and Excise argued that the supplies made by the suppliers were made to the customers and that the payments made by the Appellant to the suppliers were third-party consideration in respect of the supplies made by the suppliers to the customers. They argued that the principles which should be applied were those established by the Court of Justice on the redemption of vouchers funded by a third party. The Appellant's voucher stated that it was part payment (or money off) and that is what it was. The vouchers had a value with the stated suppliers. The points were used in the same way as the vouchers. Whether a customer used his points to get money off goods from a supplier, or to get free goods or services, or to get goods or services at a reduced price the points represented a valuable asset which could be used to provide consideration for the whole or part of the price paid by the customer to the supplier. The service charge paid to the suppliers was really only for the provision of rewards to customers as the performance of the other services was minimal.

Reasons for Decision – issue (1)

The first issue in the appeal is whether, when the suppliers supply secondary goods to customers in return for points the supply is made to the customer (as argued by Customs and Excise) or to the Appellant (as argued by the Appellant).

Some of the rewards obtained by customers from suppliers are supplies of services but, by value, most are supplies of goods. For the purposes of this Decision, we have found it convenient first to consider a reward which is a supply of goods. We have also found it convenient first to consider the position where a customer acquires goods from a supplier for points only. We have in mind a customer who purchases his weekly shopping from Sainsbury's and saves up enough points with the Appellant to acquire a free toolkit from Argos. Later we will consider the position where the customer acquires goods from a supplier partly for points and partly for cash. Later still we will consider the position where a customer acquires goods from a supplier in return for vouchers (as that comprises less than 15% of redemptions).

However, in concentrating at first on the supply of goods by a supplier to a customer for points alone we bear in mind that a very small proportion of all rewards are supplied direct to customers by the Appellant. In these cases the rewards will be supplied to the Appellant who supplies them to the customers. As the Appellant is in business in our view such a supply is to the Appellant. In principle we would expect that the same value added tax treatment should apply both to rewards provided to customers directly by the Appellant and to rewards provided by suppliers who have agreed with the Appellant to supply them to customers in return for Nectar points.

In approaching the arguments of the parties we first consider some general principles of value added tax. We then consider the authorities cited to us to see what principles they establish and we apply those principles to the facts we have found.

Some general principles of value added tax

Article 2 of the First Council Directive (67/227/EEC) provides:

"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged….

The common system of value added tax shall be applied up to and including the retail trade stage."

Article 2 thus emphasises that value added tax is a tax on consumption, which is applied up to the retail stage (the supply to the final consumer) whatever the number of transactions in the production and distribution process. On the facts of this appeal the customer pays the full amount of value added tax when he purchases the primary goods from a retailer. He does not pay anything for the acquisition of the secondary goods from the supplier. The person who pays when the supplier provides the secondary goods to the customer is the Appellant. The Appellant pays because it is in the business of running the Nectar programme and because as part of that business it has agreed with the supplier that it will pay. If the supply by the supplier were to the Appellant, it would be part of the supply chain under which the Appellant supplied the secondary goods to the customer. If the Appellant were entitled to credit for input tax on the supply made by the supplier, the amount of tax payable on the whole transaction would be the amount paid by the customer to the retailer for the primary goods (and that is the only amount paid by the customer). However, if the Appellant were not entitled to credit for input tax on the supply made by the supplier, then the total tax on the production and distribution process would exceed that paid by the final consumer, namely the customer.

In this appeal, the only supply to a consumer for consideration is the primary supply by the retailer to the customer. The consideration for that supply is the only amount paid by the consumer. Full output tax is charged on that supply. What the consumer gets for that consideration is the primary goods he purchases and the right to acquire secondary goods. He only acquires the latter right because of his contract with the Appellant and because of the Appellant's contracts with the suppliers both of which are made in the course of the Appellant's business of running the Nectar programme.

The application of these general principles appear, therefore, to support the view that the supply by the supplier is to the Appellant.

The authorities

The authorities cited to us deal with three main principles. First, the relevance of the contractual obligations. Secondly, how to deal with money-off coupons and vouchers. And, finally, the position where the consideration for a supply is not paid by the customer.

The relevance of the contractual arrangements

The relevance of the contractual arrangements was considered in Town and Country Factors Ltd v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263 at 1271 b-g where the opinion of the Advocate General was that the enforceability of contracts in legal proceedings was not relevant to the correct analysis for value added tax purpose. It was necessary to look at the framework of agreements to see if there was a legal relationship which contained a direct link between a supply and the consideration for it. It was not material that the agreements might not be legally enforceable. This opinion was confirmed by the Court of Justice at paragraphs 20 to 23 of their judgment.

Tesco Plc v Customs and Excise Commissioners [2003] STC 1561 concerned a loyalty programme called a clubcard scheme operated by Tesco. When a customer purchased primary goods from the appellant he was awarded points which the appellant converted into vouchers at the rate of one penny for each point and sent the vouchers to the customer. The customer could use the vouchers to obtain secondary goods in the appellant's stores. The appellant argued that the vouchers were granted for a consideration within the meaning of paragraph 5 of Schedule 6 of the 1994 Act and that the cost of the vouchers fell to be disregarded for the purpose of value added tax. Thus the issue in that appeal was not the same as the issue in this appeal but at [33] to [42] and [159] the Court of Appeal analysed the authorities which give guidance on the correct approach for value added tax purposes to the relevance of the contractual obligations.

From that analysis we have extracted the following principles. First, that it is necessary to examine the entire transaction which must be objectively determined by reference to the terms agreed; the purpose and motives of the parties to the contract are not relevant. Next, that the concept of making a supply for value added tax purposes is not identical with the performance of an obligation for the purposes of the law of contract; the true construction of a contractual document may not answer the question of the nature of the supply for value added tax. The nature of the supply for value added tax has to be ascertained from the whole facts of the case. It is the commercial reality of the contract which is of importance. It is necessary to find the contract's economic purpose. Any construction must not be contrary to the objectives of the value added tax system and must achieve a correct application of the principles in the Directives. There is no principle that transactions which have the same economic effect are necessarily to be treated in the same way for the purposes of value added tax. And, finally, the taxable amount on which value added tax is chargeable cannot exceed the consideration which the final consumer pays for the supply.

With those principles in mind we turn to consider the contractual arrangements. We do not regard the written contracts between the parties as conclusive of the value added tax treatment but they are a starting point.

We first note that in order to understand the arrangements in total it is necessary to consider all the contracts entered into by the Appellant, that is the contracts with the retailers, the customers and the suppliers. The contracts with the retailers state that the programme consists of the acquisition of merchandise from suppliers by the Appellant to make available to customers on the redemption of their points. The word "suppliers" is defined to mean those businesses participating in the programme by making rewards available to the Appellant. In the contracts between the Appellant and the customers the underlying obligation is on the Appellant to make secondary goods (rewards) available in exchange for points; this is done in some cases by the customer obtaining goods or services directly from the Appellant but in most cases by the customer obtaining the goods or services from a supplier. The contracts between the Appellant and the suppliers state that the supplier is supplying redemption services to the Appellant which include the provision of goods to customers in return for points, the provision of information, and the processing of vouchers. Payment for the goods provided by the suppliers to the customers is made by the Appellant and not by the customers.

These provisions lead us to the view that the supplies made by the suppliers are not made to the customers but to the Appellant and are made so that the Appellant can fulfil its business obligation to the customers to make secondary goods available in return for points.

The commercial and economic reality of the facts in this appeal, and their economic purpose, are that all the transactions are under-pinned by the commercial contracts between the Appellant, the retailers, the suppliers and the customers. The retailers wish to retain the loyalty of their customers; the customers wish to acquire free or reduced price goods or services; and the suppliers wish to increase their turnover. Retailers, customers and suppliers can only come together to fulfil their requirements because of the work done by the Appellant in operating the programme. All the work done by the Appellant is done commercially for the purposes of its business. The Appellant benefits by receiving the points price and annual marketing fees from the retailers from which it has to pay the suppliers but ultimately (we expect) makes a profit. All the transactions within the programme are treated as fully taxable.

As far as the transaction between the supplier and the customer is concerned, there is no sale at list price to the customer. The customer has no obligation to pay the supplier anything; all he has to do is to offer his points. The customer does not know the price of the goods provided to him by the supplier; the price is commercially negotiated between the Appellant and the supplier and is not the same as the supplier's usual price for those goods. The customer's ownership of the points comes from the Appellant and he can only acquire goods from a supplier with points because of the Appellant's agreement with the supplier. The agreements indicate that the obligation to provide rewards to customers is that of the Appellant; the customers are not parties to the agreements between the Appellant and the suppliers and cannot enforce them. The supplier is fulfilling his obligation to the Appellant to discharge the Appellant's obligation to the customer by providing the customer with goods up to the value of the points held by the customer.

In our view, the proper analysis of the transaction under which a supplier provides goods to a customer in return for points is that the supplier is providing a service to the Appellant in assisting it to discharge its obligation to customers that they can acquire rewards in return for points.

Mr Vajda, for Customs and Excise, referred to the agreements between the Appellant and the customers and the provisions that if there were a problem with the rewards the customer should contact the supplier direct. However, this arrangement results from the agreements between the Appellant and the suppliers that, in return for the payment to be made by the Appellant to the suppliers, the suppliers will be responsible for all aspects of the supply of the rewards to the customers and will indemnify the Appellant against any liability of the Appellant arising from the rewards. The supplier agrees to replace faulty goods at the request of the customer or the Appellant. These provisions confirm to us that the primary liability to supply rewards to customers is that of the Appellant who agrees with the suppliers that they will provide the goods (as part of the redemption services) to the Appellant but will physically deliver the goods to the customers and deal with any questions arising out of that delivery on behalf of the Appellant.

That analysis leads us to the view that the supply made by the supplier is made to the Appellant and not to the customer. We regard the Appellant as a taxable person in the chain of supply so that the supply of the secondary goods is from the supplier to the Appellant for a consideration and from the Appellant to the customer. It is the customer who is the final consumer. Accordingly, that conclusion gives a construction to the contracts which is not contrary to the principles of the value added tax system and achieves a correct application of the principles in the Directives. In particular, it ensures that the taxable amount on which value added tax is chargeable does not exceed the consideration which the final consumer pays.

Before we leave the contractual arrangements we record that there was a dispute between the parties about whether what the supplier provided to the Appellant was the supply of the goods obtained by the customer or a supply of services being all the redemption services provided by the supplier to the Appellant including the provision of goods to customers in return for points. Here we are of the view that the service charge paid by the Appellant to the supplier is in return for all the redemption services, which include the provision of goods provided to the customer, the processing of vouchers; and the provision of information. This service charge is directly linked only to the supply to the Appellant and not to any supply which might be made to the customer. This means that even if a supply by a supplier (for example of food or travel) is zero-rated it is still supplied to the Appellant as a composite supply of redemption services at the standard rate.

However, if we are wrong about that, and if it is the goods which are supplied by the supplier to the Appellant, then that would not alter our overall view. It would mean that the supplies by the suppliers to the Appellant would be of the actual goods and the Appellant would get the advantage of the zero-rate of tax for goods such as food and travel.

Having completed our analysis of the contractual arrangements we now turn to consider the second group of authorities cited to us which establish the principles which apply to money-off coupons and vouchers.

The principles which apply to money-off coupons and vouchers

The authorities concerning money-off coupons and vouchers are judgments of the Court of Justice and, apart from the first, were relied upon by Mr Vajda for Customs and Excise. We remind ourselves that in this part of our Decision we are considering only the normal case where a customer redeems his points electronically with a supplier (that is, not by using a voucher) and obtains goods in return for his points and does not pay any cash.

The authorities begin in 1993 with Boots Co Plc v Customs and Excise Commissioners Case C-126/88 [1990] STC 387. Boots offered money-off coupons free of charge to customers who purchased certain primary goods. The coupons could be used to get money off a later secondary purchase. The offer formed part of a promotion the costs of which were borne by Boots. The Court of Justice held that, on the later secondary purchase, the price reduction given by the coupon formed part of a price discount or rebate allowed to the customer which was not part of the taxable amount. Accordingly, the taxable amount of Boots in respect of the secondary goods was the price of the secondary goods less the face value of the money-off coupon. In other words, the taxable amount for the supply of the secondary goods was the amount actually received by Boots on that supply. At paragraphs 11 to 14 of its judgment the Court of Justice analysed the legal and economic obligations of the parties. In this appeal we are of the view that, on the sale of the primary goods by the retailer and the issue of points to the customer, it is the Appellant who engages to grant the customer the right to acquire rewards from a supplier in return for points and also engages that the rewards will be paid for by the Appellant.

Boots has some similarity to the facts of this appeal. Here customers who purchase primary goods are given points which they can use to obtain free secondary goods. The offer is part of a promotion. However, whereas in Boots there was only one entity who was the retailer of the primary goods, the supplier of the secondary goods and the entity who paid the costs of the promotion, in this appeal each of those functions is carried out by a separate taxable person. The costs of the points are primarily borne by the retailers who pay the Appellant the points price on the issue of the points. The Appellant uses the amounts received from the retailers to pay for the supply of the secondary goods from the suppliers. All these transactions, being between separate taxable persons, bear value added tax. That was not the case in Boots. Also, the issue in Boots was the taxable amount of the secondary supply whereas in this appeal the issue is not the taxable amount of the secondary supply but rather the identity of the recipient of the secondary supply.

The next relevant judgment was given in 1996. In Argos Distributors Limited v Customs and Excise Commissioners [1996] STC 1359 Argos issued vouchers and sold them at face value or at a discount. The purchasers of the vouchers would give them as gifts to consumers who could use them to purchase goods at Argos stores. The Court of Justice held that the taxable amount on the sale of the goods was only the amount actually received by Argos when the vouchers were sold. So if the vouchers were sold at a discount that discounted amount was the taxable amount when the consumer used the voucher to acquire goods. Again, in Argos there was only one entity who both sold and redeemed the vouchers and so that judgment can be distinguished from the facts of this appeal. Also, the issue in Argos was the taxable amount of the secondary supply whereas in this appeal the issue is the identity of the recipient of the secondary supply. However, Argos repeated the principle in Boots that the consideration for a transaction is the amount actually received.

Also in 1996 the Court of Justice gave judgment in Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387. There a manufacturer sold goods to retailers who sold them to consumers. As part of a promotion scheme the manufacturer circulated money-off coupons in magazines and newspapers. A consumer who presented a coupon to a retailer could purchase the manufacturer's product at a reduced price and the manufacturer paid the retailer the value of the coupons the retailer had accepted. The issue in the appeal concerned the output tax payable by the manufacturer. The Court of Justice held that the manufacturer should only be liable to pay tax on the sum finally received by it, namely the original price paid to it by the retailers less the amount it refunded to the retailers for the value of the coupons. The position of taxable persons had to be neutral and the tax authorities should not receive by way of tax a sum greater than that paid by the final consumer. It was the final consumer who was intended to bear the tax and the taxable amount on which value added tax was chargeable could not exceed the consideration which the final consumer paid for the supply.

For Customs and Excise Mr Vajda argued that the legal and economic analysis of the facts in Elida Gibbs was the same as that of the facts in this appeal. We do not agree. First the issue in Elida Gibbs concerned the taxable amount of the manufacturer whereas the issue in this appeal is the identity of the recipient of the supply from the suppliers. Secondly, in Elida Gibbs the arrangements involved a chain of three persons, namely the manufacturer, the customer and the supplier. In this appeal the chain is of four persons, namely the Appellant, the retailers, the customers and the suppliers. Nevertheless, we adopt the principle that the position of taxable persons has to be neutral and that the tax authorities should not receive by way of tax a sum greater than that paid by the final consumer. As mentioned above, we regard the Appellant as a taxable person in the chain of supply so that the supply of the secondary goods is from the supplier to the Appellant for a consideration and from the Appellant to the customer. It is the customer who is the final consumer. If Customs and Excise were right, and if the Appellant could not obtain input tax credit in respect of goods delivered by the supplier to the customer, then they would receive by way of tax a sum greater than that paid by the final consumer. The consideration which the final consumer pays for the secondary supply is the sum total of all the considerations paid by him for the primary supplies which earned him the points to acquire the secondary supply. As all the primary supplies bore tax at the standard rate when they were purchased no further tax should be chargeable to the customer when he acquires the secondary goods. If it were, the value added tax chargeable would exceed the consideration which the final consumer pays for the secondary supply.

The United Kingdom accepted the judgment in Elida Gibbs and changed its national law. The Federal Republic of Germany did not accept the judgment and did not change their law. Accordingly, in 2003 the European Commission brought infraction proceedings reported as EC Commission v Federal Republic of Germany Case C-427/98 [2003] STC 301. Again the facts were that manufacturers issued face value coupons to customers to promote the sales of their products; suppliers would supply the manufacturers' products to consumers at a reduced price with a coupon; and the manufacturers would pay the suppliers the value of the coupon which was the same as the difference between the reduced price and the supplier's full price. The issue was whether the manufacturer's taxable amount (upon which it had to account for output tax) was the full price at which the goods were sold to the supplier or that price reduced by the value of the coupons paid by the manufacturer to the supplier. That then raised the question as to whether, if the manufacturer's taxable amount was reduced, the amount of input tax claimed by the supplier should also be reduced. The Court of Justice held that the taxable amount of the manufacturer was the reduced amount he actually received and the taxable amount of the retailer was the full amount he actually received namely the price paid by the consumer and the amount received from the manufacturer. There was no need to alter the input tax claimed by the supplier.

Our comments on Elida Gibbs are also applicable to Commission v Germany.

Yorkshire Co-operatives Ltd v Customs and Excise Commissioners (Case-C 398/99) [2003] STC 234 was a very similar case. There manufacturers issued price reduction coupons to the public who could use them for the purchase of certain products from retailers. The customer paid the normal price less the value of the coupon. The retailer could claim reimbursement of the value of the coupon from the manufacturer. However, whereas in Elida Gibbs and Commission v Germany the issue concerned the taxable amount of the manufacturer, in Yorkshire Co-operatives the issue concerned the taxable amount of the retailer. The Court of Justice held that the fact that a portion of the consideration received by the retailer was not actually paid by the customer but by a third party did not affect the taxable amount. The taxable amount could not be less than the amount actually received by the retailer and was the whole of the price of the goods paid in part by the customer and in part by the manufacturer.

From all these authorities we derive the principle that the taxable amount is what is actually received. The taxable amount of the suppliers in this appeal is what they actually receive from the Appellant (and not any other list price of the supplier). Under the facts we are at present considering they receive nothing from the customer. That principle does not, however, answer the question as to who is the recipient of the supply from the suppliers. In all the authorities the only possible recipient of the supply from the retailer is the customer; neither the manufacturer or the supplier could be the customer. In this appeal, on an analysis of the contractual arrangements, another possible recipient is the Appellant who pays for the secondary goods and who has arranged for them to be provided to the customer by the supplier as part of the Appellant's business arrangements. Accordingly, as all these authorities concern the taxable amount of supplies, and not the identity of the recipient of the supplies, they have not assisted us to determine the issue in this appeal.

We were also referred to the judgment of the Court of Justice in Kuwait Petroleum (GB) Limited v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488. There an oil company operated a sales promotion scheme under which customers who purchased fuel at service stations were offered vouchers which they could exchange for goods listed in a catalogue (the redemption goods). The price of the fuel was the same whether or not the customer accepted the vouchers. The company purchased the redemption goods from another taxable person and claimed input tax credit in respect of the goods and this was not challenged. The issue in the appeal was whether the company was liable for output tax on the value of the goods supplied to the customers under Article 5(6) of the Sixth Directive which provided that a disposal by a taxable person of goods forming part of his business free of charge, where tax on the goods was wholly or partly deductible, was to be treated as a supply made for consideration. The Court of Justice held that the supply of the goods by the oil company was to be treated as a supply for consideration; as input tax had been claimed in respect of the redemption goods they were goods forming part of its business assets.

Thus the issue in Kuwait was not the same as the issue in the present appeal. In this appeal the issue is whether the Appellant can claim input tax in respect of redemption goods supplied to customers through the suppliers. In Kuwait it was accepted that the company could claim input tax in respect of its purchase of redemption goods. Thus Kuwait appears to support the arguments of the Appellant in this appeal.

Mr Vajda argued that the judgments of the Court of Justice in Boots, Argos, Elida Gibbs, Commission v Germany, and Yorkshire Co-operatives established the principle that money paid to a retailer by a manufacturer for a voucher was third party consideration for the supply by the retailer to the customer and was not consideration for a supply made by the retailer to the manufacturer. This argument leads us to a consideration of the third group of authorities cited to us which concern the principles which apply when consideration for a supply is paid by someone who is not the immediate customer.

The third party consideration cases

.

The relevance of this final group of authorities is that it was the argument of Customs and Excise that the payment by the Appellant to the supplier was third party consideration for a supply by the supplier to the customer. The concept of third party consideration occurs in Article 11A1 (a) of the Sixth Council Directive (77/388/EEC) which provides:

"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."

We note that Article 11A1(a) is defining the taxable amount and is not identifying the recipient of a supply.

This group of authorities falls into two sub-groups – some earlier decisions by the Court of Justice and some later judgments by our national courts.

Third party consideration – the Court of Justice

In 1988 in Leesportefeuille "Intiem" CV v Staatsecretairs van Financiën (Case 165/86) [1988] ECR 1471 the issue was whether an employer could claim input tax credit in respect of petrol delivered at the employer's expense to employees who used the petrol for the purposes of the employer's business. In holding that the employer could obtain input tax credit the Court of Justice said at paragraph 14:

"It must accordingly be concluded that this deduction system must be applied in such a way that its scope corresponds as far as possible to the sphere of the taxable person's business activity. Where, in such circumstances, Article 17(2) of the Sixth Directive restricts the taxable person's right of deduction, as regards the value added tax on supplied goods, to the tax due or paid "in respect of goods … supplied to him", the purpose of that provision cannot be to exclude from the right of deduction the value added tax paid on goods which, although sold to the taxable person in order to be used exclusively in his business were physically delivered to his employees."

We find that authority very relevant in this appeal in deciding whether the Appellant can claim input tax in respect of secondary goods delivered at the Appellant's expense to customers where the secondary goods are delivered to the customers for the purposes of the Appellant's business. Following the principles enunciated by the Court of Justice we should not exclude from the right of deduction the value added tax paid on goods which, although sold to the Appellant by the suppliers in order to be used exclusively in the Appellant's business, are physically delivered to the customers.

The principle in Intiem was confirmed in 2001 in EC Commission v Kingdom of the Netherlands (Case C-338/98) [2003] STC 1506. At 1522 paragraph 52 the Court of Justice emphasised the need for a prior arrangement for goods to be supplied to a customer at the expense of another person and the need for the supplier to send an invoice to the person who would pay for the supply. Such arrangements exist in this appeal.

We were also referred to the judgment of the Court of Justice in Keeping Newcastle Warm Ltd v Customs and Excise Commissioners (Case C-353/00) [2002] STC 943 where the issue was whether a grant paid by a public agency to a taxable person who carried out work for, and gave advice to, householders on home energy efficiency was the consideration for a supply. The householder applied for the grant and contracted with the taxable person to carry out the work for the price stated after which the taxable person was entitled to be paid by the householder and to receive the grant from the agency. If the agency failed to approve the grant then the householder had to pay in full. The Court of Justice held that the taxable amount was everything which made up the consideration for the supply; the grant paid by the agency to the taxable person was paid in consideration of the service supplied to the householder and formed part of the taxable amount in respect of that supply.

We distinguish that case on three grounds. First, because it concerned a subsidy which is not present in this appeal. Secondly, because there the issue was the taxable amount of the supply by the taxable person whereas in this appeal the issue is the identity of the recipient of the supply. And, finally because there there was an obligation on the customer to pay the supplier whereas, on the facts we are currently considering in this appeal, the customer is never under an obligation to pay anything the supplier.

In Customs and Excise Commissioners v First Choice Holidays plc (Case C-149/01) [2003] STC 934 the taxable person was a tour operator who organised package holidays which were sold to the public through agents. The agents frequently granted discounts from the brochure prices without the knowledge of the tour operator. The tour operator issued an invoice for the full price which was passed to the agent who amended it to the discounted price and passed it to the customer. The customer paid the discounted price to the agent and the agent paid the full price to the tour operator. Thus the tour operator received the full price partly from the customer and partly from the agent. The issue was whether the taxable amount of the tour operator was the full price or the discounted price paid by the customer. The case concerned the special scheme for travel agents in Article 26 of the Sixth Directive which referred to "the total amount paid by the traveller". However, the Court of Justice applied the general principle and held that the taxable amount was everything received by a supplier from a customer or a third party; accordingly the consideration was the amount paid to the tour operator both by the customer and by the agent. At paragraph 33 the Court of Justice said:

"There is therefore a direct link between that additional amount paid by a third party [the agent] and the supply of services provided to the traveller. It follows that it is included in the consideration for that supply received by the tour operator and so in the "total amount to be paid by the traveller" within the meaning of Article 26(2) of the Sixth Directive. It cannot be regarded as the consideration for a service supplied by the tour operator to the travel agent, consisting in providing him with a facility of selling the holiday at a reduced price."

Again we distinguish that authority because there the issue concerned what was received by the supplier; here the issue is to whom the supply is made.

The final authority of the Court of Justice is Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/2001) [2003] ECR I-01317 where the issue was whether a Dutch company was entitled to a refund of value added tax in respect of petrol supplied in its name and at its expense by German petrol companies to persons who leased the Dutch company's cars. The Court of Justice at paragraph 35 held that the fuel was supplied to the lessees and not to the Dutch company. As a result of the agreements between the parties it was the lessee who ultimately had to pay for the fuel consumed. The Dutch company did not purchase the fuel in order to resell it to the lessee; the lessee purchased the fuel.

We distinguish Auto Lease which was decided on its own facts. The Dutch company was in the same position as a third party who paid for a supply made to another and did not receive a supply itself. That is very far from the facts in this appeal where, as a result of the arrangements between the parties, it is the Appellant who has to pay for the supply by the suppliers. The Appellant does not purchase the secondary goods in order to sell them to the customers but in order to give them to its customers in the course of its business. The Appellant is not financing the purchase of the rewards by the customers because the rewards are given to the customers by the Appellant.

Of the judgments of the Court of Justice we have been most assisted by Intiem and Commission v Netherlands.

Third party consideration – the national authorities

The first of the national authorities cited to us, which concern the principles which apply when consideration for a supply is paid by someone who is not the immediate customer, was Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 which is a judgment of the House of Lords. There the main issue was whether the appellant, who was a builder, could claim input tax credit in respect of the tax on fees it paid to estate agents who sold the existing houses of those who purchased the appellant's new houses. The House of Lords held that the issue was whether the supplies of the estate agents had been used by the appellant in the course of its business. The relevant test was whether the supply was received in connection with the business activities of the taxable person for the purpose of being incorporated within its economic activities. The fact that someone else also received a service as part of the same transaction did not deprive the taxable person who gave instructions for the services, and had to pay for them, of the benefit of the deduction of input tax. There was a supply of services to the builder; the estate agents were doing what the builder had instructed them to do for which they charged a fee which was paid by the builder.

At 171e Lord Millett said that one should start with the taxable person's claim to deduct input tax. First one had to identify the payment of which the tax to be deducted forms part and if the goods or services are to be paid for by someone else then there can be no claim for deduction. Once the payment has been identified the next question is whether the taxable person obtained anything at all to be used for the purposes of his business in return for that payment. This will normally consist of the supply of goods or services to the taxable person but it could consist of the right to have goods delivered or services rendered to a third party.

Applying those principles to the facts of the present appeal we identify the payment of which the tax to be deducted forms part as the payment by the supplier to the Appellant. We then ask what the Appellant obtained in return for that payment and the answer is that the Appellant obtained the redemption services which included the provision of secondary goods as rewards to customers in return for points. These services are all used by the Appellant for the purposes of its business which is the operation of the Nectar programme. Part of the supply consists of the right to have goods delivered to customers but that is nonetheless a supply to the Appellant. Adapting the words of Lord Millett at 171g, in this appeal the Appellant does not merely derive a benefit from the provision of goods by the suppliers to the customers for which the Appellant pays. It chooses the suppliers and pays them. It also obtains a contractual right to have rewards available for provision to customers. Everything which the suppliers do for a customer with points is done at the Appellant's request and at its expense. The doing of those acts constitute a supply to the Appellant.

Mr Vajda distinguished Redrow on the grounds that it was not a voucher case but we have already concluded that the voucher cases do not assist us to determine the issue in this appeal. Mr Vajda also distinguished Redrow on the ground that it pre-dated Elida Gibbs, Commission v Germany and Yorkshire Co-operatives. We accept that it does but in our view it is not inconsistent with those authorities. They were concerned with the taxable amount of the manufacturer or the retailer whereas we are concerned with the identity of the recipient of a supply and in that context Redrow is of direct help.

Redrow was followed in 2002 by Customs and Excise Commissioners v Plantiflor Limited [2002] STC 1132 where the appellant supplied goods which were delivered by post to customers. The appellant had an agreement with a delivery service to deliver the parcels by post. The appellant's bill to a customer included a stated amount for postage. The issue was whether the appellant made one supply of goods to the customer or separate supplies of (standard-rated) goods and (exempt) postage and that turned on the question whether the appellant received the amount from the customer for postage as principal or as agent. The House of Lords held that the delivery service made a supply to the appellant of the service of delivering its goods to the customers; the delivery service had no contract with the customers. There was also a supply by the appellant to the customer of the arrangement to deliver the goods and what the customer received for his postage money was the benefit of the arrangements which the appellant had made with the delivery service. The appellant was not the agent of the customer in paying for delivery.

At 1146 [61] Lord Millett emphasised the importance of fitting the facts and not of following the words of the agreements between the parties only. We agree. The facts in this appeal lead us to conclude that when a supplier delivers goods to a customer in return for points the supply is not to the customer but to the Appellant who pays for the supply and under whose arrangements the delivery of the goods to the customer takes place.

The final national authority which considers the principles which apply when consideration for a supply is paid by someone who is not the immediate customer is WHA Ltd and another v Customs and Excise Commissioners [2004] STC 1081. There the issue was whether a garage carrying out works to a motor vehicle on the instructions of the insurer made a taxable supply of services to the insurer. The Court of Appeal held that the fact that the owner was also a beneficiary of the work did not prevent the arrangement operating as a supply to the insurer. The insurer authorised and paid for the work and the invoice was sent to the insurer. The services were therefore supplied to the insurer who could claim input tax.

We adapt the words of Neuberger LJ at [36] and find that the features which justify a conclusion in this appeal that the suppliers make a supply of services to the Appellant are as follows. First, the invoice from the suppliers to the Appellant is in respect of things done by the supplier pursuant to an instruction from the Appellant. Secondly, the only contractual arrangement pursuant to which the supplier does what he does exists under a contract between the supplier and the Appellant. Thirdly the only person who is liable to pay the supplier is the Appellant. Fourthly the Appellant enters into its contracts with the suppliers in the course of its business. And fifthly, by ensuring that the suppliers carry out their obligations under their contracts with the Appellant, the Appellant fulfils its contracts with its customers to provide rewards in return for points. Also, it is the Appellant who has the right to select the suppliers who will provide rewards in exchange for points and the Appellant who has a degree of control over the suppliers by virtue of its contracts with them.

Mr Vajda argued that in WHA the Court of Appeal had distinguished between goods and services and so it was doubtful whether the principles in Redrow and WHA applied to goods. In WHA at [61] to [66] Neuberger LJ stated that there was a conceptual difference between a supply of goods and a supply of services and that it was much easier to envisage a particular service which is supplied to more than one person whereas a supply of goods would normally be to one person. In this appeal it is our view that the supply of goods by the supplier, where a customer uses only points to acquire the goods, is to the Appellant. There is no question of the supply being to two persons. Later in this Decision we consider the case where goods are supplied to a customer for points and cash.

All these authorities lead us to conclude that the supply by the suppliers is to the Appellant and not to the customers.

Part payments by customers in cash

So far in this Decision we have considered the case where a customer obtains goods from a supplier in return for points only. We now turn to consider the case where a customer obtains goods partly in return for points and partly in return for cash.

It was not argued at the hearing by either party that a part payment in cash altered the identity of the recipient of the supply by the supplier. It was the Appellant's argument that when a customer acquired goods from a supplier by presenting both points and cash it was not the case that the customer ever had a liability to the supplier for the full payment. It followed that the Appellant was not discharging any liability of the customer to pay for the goods. In such a case the supply of the goods was to the Appellant in so far as the Appellant paid the supplier and to the customer insofar as the customer paid the supplier. In such a case the supplier should give the customer a tax invoice but only for the amount that the customer had paid in cash.

In Plantifor at 1145 [50] Lord Millett, referring to Redrow, stated that a single course of conduct by one party might constitute two or more supplies to different persons. So in this appeal if, say, a customer were provided with a night at a hotel for £40 and points, there would be a supply by the hotel to the Appellant for the amount paid by the Appellant and a supply to the customer for what he paid. If the customer were acting in a business capacity the customer could claim input tax for the amount he paid.

Thus, in the light of Redrow and the other third party authorities, we conclude that, where a customer obtains goods partly in return for points and partly in return for cash, there are two supplies; one to the Appellant for the amount it pays and one to the customer for the amount he pays. That conclusion preserves the neutrality of the value added tax system. The customer, as final consumer, pays tax only on what he pays (both for the primary goods and for part of the secondary goods).

Vouchers

Finally we consider the situation where a customer uses a voucher. The customer might have a voucher for 500 points and might use it to hire a video for the same number of points. The analysis of the transactions here is that the customer has purchased primary goods for the full price and paid value added tax on them. He is given free points through the Appellant's arrangements with the retailers. He then converts those points into a voucher which he uses in the same way as electronic points are used. We cannot therefore see any distinction between the use by a customer of points electronically and the use of points by voucher. The secondary supply is still made to the Appellant and not to the customer.

Services

So far we have only considered a supply of goods to the Appellant for a customer but in our view the same conclusion applies if the reward paid for by the Appellant is a supply of services.

Conclusion on issue (1)

Our conclusion on the first issue in the appeal is that when suppliers supply secondary goods to customers in return for points the supply is made to the Appellant and not to the customers. This accords with the general principle of value added tax which is that the tax is a tax on consumption. In this appeal, the only supply to a consumer for consideration is the primary supply by the retailer to the customer. The consideration for that supply is the only amount paid by the consumer. Full output tax is charged on that supply. What the consumer gets for that consideration is the primary goods he purchases and the right to acquire other secondary goods for no consideration. He only acquires the latter right because of his contract with the Appellant and the Appellant's contracts with the suppliers both of which are made in the course of the Appellant's business. That conclusion also ensures that the taxable amount on which value added tax is chargeable does not exceed the consideration which the final consumer pays for the supply. We regard the Appellant as a taxable person in the chain of supply so that the supply of the secondary goods is from the supplier to the Appellant in the course of the Appellant's business for a consideration and from the Appellant to the customer.

It was not argued before us that, following Kuwait, if the Appellant claimed input tax in respect of the redemption goods, those goods became part of its business assets and its supply to the customers should be treated as supplies for consideration. If such an argument had been put we would have distinguished the facts in Kuwait from the facts in this appeal. There the original chain of supply was the oil company selling oil to the customer and the chain of supply of the redemption goods involved the supplier of the redemption goods, the oil company and the customer. In this appeal there are two chains of supply. The original chain of supply involves the Appellant, the retailer and the customer and here the Appellant pays output tax in respect of its supplies to the retailers which include the points price and the marketing fees. The second chain of supply of the redemption goods involves the Appellant, the supplier and the customer. Thus in this appeal the Appellant is not funding the payment for the redemption goods; they are funded indirectly by the retailers making payments to the Appellant. In Kuwait the taxable person (the oil company) was in business to sell oil; here the taxable person (the Appellant) is in business to run a customer loyalty programme. Also, the judgment in Kuwait indicates to us that if, as in this appeal, the Appellant accounts for output tax in respect of all its supplies (including the supplies made to the retailers) it should be entitled to input tax in respect of a supply to it in the course of its business.

Reasons for Decision – issue (2)

The second 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 Customs and Excise Mr Vajda argued that if the Tribunal were in any doubt about the application of the principles in Commission v Germany or Yorkshire Co-operatives to the facts of this appeal then we should request a preliminary ruling from the Court of Justice. There was a need for legal certainty and the decision in this appeal would affect the position of the suppliers as well as the position of the Appellant. For the Appellant Mr Venables argued that no reference was necessary.

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. Primarily we are of the view that the real issue in this appeal does not concern the interpretation of the First or Sixth Directives but rather concerns the correct analysis of the facts in the light of the arrangements between the parties. The Court of Justice is likely to take the view that that is a matter for the national courts. Also, in reaching our decision on the first issue we have been guided by the judgments of the Court of Justice and have applied the principles enunciated by the Court of Justice to the facts of this appeal.

Decision

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

(1) that when the suppliers provide secondary goods to customers in return for points the supply made by the supplier is to the Appellant and not to the customer; and

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

The appeal is, therefore, allowed.

The Appellant is at liberty to make an application for costs.

Court of appeal certificate

Section 86 of the 1994 Act provides that the Lord Chancellor may by order provide that an appeal from a tribunal shall lie to the Court of Appeal if certain conditions are satisfied. The order made under the provisions of section 86 is the Value Added Tax Tribunals Appeals Order 1986 SI 1986 No. 2288. Article 2 of that Order provides:

"2. If any party to proceedings before a value added tax tribunal is dissatisfied in point of law with a decision of the tribunal he may … appeal from the tribunal direct to the Court of Appeal if-

(a) the parties consent;

(b) the tribunal endorses its decision with a certificate that the decision involves a point of law relating wholly or mainly to the construction of an enactment, or of a statutory instrument, or of any of the Community Treaties, or of any Community Instruments, which has been fully argued before it and fully considered by it; and

(c) the leave of a single judge of the Court of Appeal has been obtained …."

Under the provisions of Article 2(b) we hereby certify that this decision involves a point of law, relating mainly to the construction of section 24 of the 1994 Act, which has been fully argued before us and fully considered by us.

DR A N BRICE

CHAIRMAN

RELEASE DATE: 6 April 2005

Published to the Parties: 18 May 2005

LON/2004/0022

Released to the parties 06.04.05

05.05

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