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Cite as: [2006] UKVAT V19431

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Baxi Group Ltd v Her Majesty's Revenue and Customs [2006] UKVAT V19431 (20 January 2006)

19431

VALUE ADDED TAX — input tax — promotional scheme — manufacturer and distributor of domestic heating appliances awarding points to installers purchasing its appliances — points redeemable for gifts listed in catalogue — scheme run by marketing company which acquired and distributed the gifts — whether VAT included in marketing company's invoices to Appellant recoverable input tax — whether marketing company's services single supply of marketing services or multiple supplies of services and goods — whether goods supplied to installers for third party consideration — no — gifts supplied to Appellant for onward disposal —Sixth VAT Directive arts 5(1), (6), 11(1)(a), 17(1), VATA 1994 ss 24(1), 26(1), Sch 4 paras 1(1), 5 input tax recoverable but Appellant liable to account for appropriate output tax — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BAXI GROUP LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Brian Strangward

Sitting in public in Manchester on 12 and 13 October 2005

David Scorey, counsel, instructed by PricewaterhouseCoopers for the Appellant

Rupert Baldry, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The facts

This is an appeal by Baxi Group Limited ("Baxi") against the Commissioners' decision to reject a voluntary disclosure by Baxi by which it sought to recover input tax of £405,481 for which it claimed it had omitted to seek relief in its accounting periods from 09/00 to 03/03. The input tax was included in invoices sent to it by @1 Group Limited ("@1"), which Baxi has paid. @1 is a company which provides advertising and marketing services and Baxi argues that the invoiced charges, incurred in the running of a promotion scheme, were for supplies of such services. We were told that Baxi did not claim relief in the returns it rendered during the relevant period because of an earlier ruling by the Commissioners the correctness of which it had decided to dispute, although that ruling is not directly the subject of this appeal.

The Commissioners maintain that @1's charges relate to two supplies, of services and of goods. They accept that supplies of advertising and marketing services were made to Baxi, and that so much of the VAT as was included in the invoices and related to those supplies is recoverable input tax; but, they say, most (by value) of the supplies invoiced by @1 were of goods, and those goods were supplied not to Baxi but to third parties. Thus even though it was Baxi which paid for the goods, the requirements of section 24(1) of the Value Added Tax Act 1994 are not met, and so much of the VAT included in @1's invoices as is attributable to the supplies of goods does not rank as input tax in its hands. After some exchange of correspondence, they so ruled by a letter of 3 June 2004, which contains the decision now under appeal. As an alternative and additional argument, they say that if, contrary to their preferred argument, the correct view is that the goods were supplied to Baxi, it has a corresponding output tax liability by reason of its own onward disposal of those goods to the third parties.

Baxi is the representative member of its VAT group. Another member, Baxi Heating UK Limited, is a manufacturer of boilers for domestic heating systems, using the brand names Baxi, Potterton and Valor. We were told that about 1.5 million such boilers are sold in the UK each year, of which 85 per cent are sold as replacements for existing boilers, while the remainder are installed in new buildings. Baxi has about a quarter of the market. Most householders arranging for the replacement of their domestic boilers, understandably, leave the choice of the make and model of the replacement to the installer and Baxi's advertising and promotional exercises are, correspondingly, directed mainly, though not entirely, at installers rather than the general public. Typically, an installer buys the boiler he is intending to install from a builders' or plumbers' merchant which stocks a number of different manufacturers' boilers. Promotional activities such as the one with which we are concerned in this appeal are designed to encourage the installer to buy Baxi's products in preference to those of other manufacturers. The boiler market, we were told, is intensively competitive, and all of the major manufacturers concentrate their efforts on the installers, as the principal decision makers. It appears that there are only limited differences of price and specification between the various manufacturers' products, and the aim of a scheme such as that with which we are concerned is to encourage the installer to choose its promoter's products, not on isolated occasions, but as a matter of habit because of the benefits to the installer of so doing.

The scheme used by Baxi, known as Bonus Direct, is a loyalty programme similar in principle to those aimed by high street retailers at their customers. Although the scheme itself remains in use, there has been a material change in the arrangements between Baxi and @1 since the period covered by the voluntary disclosure, and the brief description which follows relates only to that period. We take the facts of the case—which were not controversial—from the evidence of the only witness we heard, Mr Grenville Ward, whose idea the scheme was (it has, he said, since been copied by Baxi's rivals) and from the documentation provided to us.

An installer who had registered as a member of the scheme (it was open only to bona fide gas appliance installers) earned points each time he bought a Baxi boiler, or other qualifying item. The number of points varied, and was dependent on the type of appliance purchased. The installers paid the same price for an appliance, whether or not they were members of the scheme, and whether or not they took advantage of the points. Each appliance carried a sticker bearing a bar code which the installer was required to remove and send to @1, which undertook all the administration of the scheme, in order that the points for which the bar code was the evidence could be credited to his account. Points could be converted into "gifts", that is goods which the installer might select from a catalogue. The gifts included a wide range of household goods, such as hair dryers, cooking appliances, cameras, wines, soft toys, clothing, sports and travel goods, some tools and even motor vehicles and holidays. Some of the gifts were of services rather than of goods, but that difference does not, we think, affect the issue of principle we must decide. Most of the goods and other gifts were branded products available in ordinary shops and other outlets, but some were of uniforms and other items branded with Baxi's logo; they were treated a little differently and we shall ignore them for most of what follows, while mentioning them again at the conclusion of this decision. The number of points which an installer had to redeem in order to acquire any item varied in line with its ordinary retail value. Gifts could be obtained only in exchange for points and there was no facility for payment, in whole or in part, in cash. Similarly, points could not be exchanged for cash. We deduce that the more valuable gifts were included with the aim of tempting the installers to buy more Baxi appliances in order to increase their points to the necessary level.

While the principal purpose of the scheme was to encourage installer loyalty and thereby increase Baxi's sales, it had the additional benefit of providing useful information about Baxi's customer base, enabling it to identify both those installers who were regularly buying its products and those who had ceased to do so—and who might be targeted with special offers to encourage them to buy its products again—and also to identify those of its products which were popular and those which were less so. The number of installers who joined the scheme was considerable—numbered in thousands—and the volume of data obtained through the scheme was formidable.

It was largely because Baxi did not have the ability itself to manage such a large database that it arranged to have the scheme administered for it by @1, whose business includes the running of such schemes (as well as the provision of more general advertising and publicity programmes). The administrative tasks delegated to @1 included handling the installers' registration applications, recording the bar codes which they sent in, crediting their accounts, selecting the gifts which appeared in the catalogue, which it compiled, and undertaking the procurement of the gifts and their despatch to the installers when points were redeemed in exchange for them. It also ran a telephone helpline and a website which installers were encouraged to use in order to enquire about their points balances (although they were also sent regular statements) and to redeem their points.

Although there was no concealment of the fact that @1 was administering the scheme—its name was freely used within the promotional literature and installers were required to send items which must be posted, such as bar codes to be credited to their accounts to it—the capacity in which it did so, and its relationship to Baxi, would not have been apparent to the installers. The terms and conditions of the scheme, as they were provided to them, made it clear that their own relationship was with Baxi, rather than with @1. Although there was, it seems, some minor variation in the terms and conditions from time to time, clause 2 was in the following, or materially identical, terms:

"Baxi ('We') operate the Bonus Direct Programme ('The Scheme') which is only available to Individual Members of The Scheme ('You'). Head Office" [there then followed Baxi's own address].

The terms and conditions made no direct, unequivocal, promise that Baxi would, in the ordinary way, provide the goods illustrated in the catalogue in exchange for the surrender of the requisite points, but they can be read only upon the footing that it was so intended and that, by buying Baxi products and arranging for the points attributable to each purchase to be credited to his account an installer was acquiring the right to obtain a gift. For example, clauses 8 and 9 of a typical version of the terms and conditions read:

"8 Points can only be redeemed against the gifts and offers illustrated in this brochure or other offers when made available to you by Baxi. The gifts and offers illustrated in this catalogue are subject to change from time to time without any prior notification.

"9 We may at any time, without notice and without being liable to you in any way, supply goods or services of a similar nature and value to those ordered. If a suitable alternative is not available we will offer you:

the choice of another item from the brochure at the value quoted or

a return of the Points previously deducted in respect of the unavailable item."

The words "brochure" and "catalogue" appear to have been used interchangeably. @1's name does not appear anywhere in the terms and conditions. Thus while it would be clear to an installer that @1 was involved in the running of the scheme, he would not know (without making additional enquiries) that @1 was at arm's length to Baxi, and not merely a subsidiary or associated company. If he read the terms and conditions he would think, and in our view correctly, that his agreement (for, in particular, the provision of goods in exchange for points) was with Baxi. Nothing in the other relevant literature, such as the registration application and the letter sent to new members of the scheme, suggests otherwise; the clear impression they give is that @1 was no more than the administrator of Baxi's own scheme.

In fact, the Bonus Direct scheme was a tailored and labelled variant of a generic scheme made available by @1 to its clients. The documents produced to us show that @1 ran several such schemes, making the point in its own promotional literature, directed to potential clients, that its doing so enabled it to run the schemes economically, particularly because its large-scale purchases of goods to be used as gifts enabled it to secure them at low prices. It appeared, though the evidence was not entirely clear on this point (we had no direct evidence from @1 itself), that @1 bought goods which were frequently requested by participants in bulk, allocating or appropriating them to each scheme as requests for redemption arose. We deduce that each scheme's gift catalogue listed the same, or similar, ranges of products. However, it was also clear to us that each scheme was in other respects run discretely from all the others managed by @1 at any given time, and it could not be said—nor was it suggested—that Baxi merely participated in, or its arrangements amounted to, a division of a single @1 scheme.

At the beginning of the period with which we are concerned, the arrangement between Baxi and @1 was that Baxi would pay to @1 the ordinary recommended retail price of the redeemed goods and @1 earned its profit (which included its fee for routine administration of the scheme and the database) from the difference between that amount and the price for which it actually acquired the goods It also charged a standard, uniform amount for postage and packing which we understand was designed to cover the cost and no more. For the latter part of the material time, the arrangement was that Baxi paid a fixed fee in addition to the acquisition cost of the goods and the post and packing charge. It was not suggested that the change is material to the issue we must decide. Separate fees were payable throughout for additional services, such as special promotions within the scheme or non-routine database development. @1 sent Baxi invoices, supported by detailed lists of the gifts distributed in exchange for redeemed points, at frequent intervals. The invoices also included @1's charges for more routine advertising and promotional exercises unrelated to the scheme. All of @1's supplies attracted VAT at the standard rate, and there is no dispute that the VAT attributable to those of its supplies which were of services, both routine and non-routine, is fully recoverable by Baxi. It is only so much of the tax as was attributable to the goods which is in dispute.

The parties' arguments

Baxi's case, as it was put by David Scorey of counsel, is that @1 made a single supply of marketing services, wholly taxable at the standard rate, and that Baxi is entitled to recover as input tax the VAT which @1 has properly charged it. The scheme must be considered as whole; if it is so considered, the provision to the installers of the gifts, on redemption of points, can be seen to be merely one component of the single supply of a promotion scheme. If that proposition is correct, there is no need for further analysis: the scheme is to be regarded in the same way as any other form of advertising and Baxi is entitled to recover the input tax charged to it by @1, being input tax incurred by Baxi in the course of its making taxable supplies of boilers. It is not appropriate to adopt the Respondents' approach of separating the supply artificially into its component parts, of advertising and administration, which give rise to the right to recover a proportion of the input tax, on the one hand and the distribution of the gifts, without a right of recovery, on the other. The proper approach was described by the European Court of Justice ("ECJ") in Card Protection Plan Limited v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270. The essential features of the transaction must be ascertained, as a matter of fact; whether there is one supply or several is to be determined in the light of that finding. At paragraphs 29 and 30 of its judgment the Court said:

"29 … taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

"30 There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied …"

Here, Mr Scorey said, the only logical conclusion to be drawn from the structure of the scheme was that @1 supplied a composite marketing service, of which the distribution of gifts was a part. It could not be said, from Baxi's point of view, that their distribution was an aim in itself; it derived no benefit from the items and its intention was not to give away goods for philanthropic reasons. The gifts were given to the installers because their provision was a necessary feature of the scheme, but they were not distributed for any reason other than the making good of the promotion scheme itself, and were available to the installers only within the terms of the scheme. What Baxi wanted, and @1 provided, was a promotion scheme; the distribution of the gifts was no more than a means of better enjoying that scheme. While there might be differences of detail, this was in substance an advertising scheme like any other, and should be treated accordingly. The provision of the gifts to the installers was not a gratuitous gesture, but a means to the end of advertising Baxi's products.

The Commissioners were, he said, falling into the trap identified in Dr Beynon and Partners v Customs and Excise Commissioners [2006] STC 55 where the House of Lords held that the division of the prescription, dispensing and administration of a drug by a doctor who performed all three services for a patient into three distinct supplies was an example of the artificial dissection against which the Court of Justice had warned in Card Protection Plan. It was equally artificial to divide this scheme into distinct supplies of advertising and promotion on the one hand and the distribution of gifts, or rewards, on the other; it was all one scheme, no component of which could be treated separately. Similarly, in Customs and Excise Commissioners v FDR Ltd [2000] STC 672, Laws LJ, after referring to the European jurisprudence, said, at paragraph 54:

"… I think there is some danger of over-elaboration and needless complexity in this field. We are not here concerned with deep legal principle, but with the articulation of a fair and reasonable approach to those cases where there is a question how should the consideration given by a supplier for his reward be categorised for the purposes of VAT, when there are multiple acts of supply involved. The simpler it is the better, so long as it is kept consistent with the doing of justice …"

This was not, Mr Scorey continued, a case in which elements of the supply were economically dissociable. As in Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758, in which the House of Lords concluded that it was not possible to treat separately the charge for the delivery of a car from manufacturer to customer from the charge for the car itself, when the customer required not separate supplies of a car and a delivery service, but a delivered car, so it was not possible to segregate the charges for the administration of the scheme from the cost of the gifts; they were all part of the same thing, a single promotional scheme. Baxi's scheme was not dissimilar from that in Customs and Excise Commissioners v Telemed Ltd [1992] STC 89, in which it was decided that the distribution to doctors of video tapes containing material of medical interest as well as advertising, prepared by the taxpayer and paid for by the advertisers, did not amount to a supply to the doctors, giving rise to a separate output tax liability, but was merely part of the service for which the advertisers had paid. As Hodgson J put it, at page 96,

"Looked at in commonsense terms it seems clear to me, as it did to the tribunal, that the taxpayer company were sending out the tapes to the doctors as the final stage of fulfilment of a contractual obligation to the advertisers for the totality of all of which they had paid. It seems clear to me that the taxpayer company were making the supplies for the consideration paid by the advertisers and that, but for that consideration, the supplies would not have been made."

The Commissioners' alternative contention (that there was a supply of the goods to Baxi which then made an onward supply of them to the installers) was likewise incorrect. It did not reflect the fact that Baxi played no part in procuring and distributing the gifts, nor did it reflect the provision in the contracts between Baxi and @1 that Baxi would at no time acquire title to the goods. The only possible conclusion was that @1 made a single supply of marketing services to Baxi; in order to perform its contractual obligations it was required to make a supply of goods (and sometimes services) to the installers, but there was no basis for saying that there was a supply of goods to Baxi.

The Respondents' preferred argument, as it was put on their behalf by Rupert Baldry of counsel, was that the goods were supplied by @1 to the installers. That was the conclusion to be drawn from the contractual provision that title to the goods remained with @1 until they were despatched to the installers. Thus it was impossible to treat the supply of the goods to the installers as if it were subsumed in a supply to Baxi. The proper analysis was that there were distinct supplies to different recipients. Indeed, the contracts made it clear that, once goods had been acquired by @1 for the purposes of the scheme, they passed into @1's ownership until they were despatched to an installer, at which point ownership passed to the installer. Thus neither article 5(1) of the Sixth VAT Directive (77/388/EEC) nor paragraph 1(1) of Schedule 4 to the 1994 Act was satisfied in relation to any supposed supply of the goods to Baxi, since each defined a supply of goods by reference to the transfer of ownership: in the words of the Sixth Directive, a "'[s]upply of goods' shall mean the transfer of the right to dispose of tangible property as owner". There was, he said, an analogy with Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/01) [2006] STC 598 where the ECJ had to consider a scheme by which a vehicle leasing company provided its customers with a credit card which they could use to buy fuel. The customers paid an estimated monthly amount to the lessor, which paid the cost of the fuel bought each month to the credit card company. A balancing payment was made by the customer each year. The Court concluded that the fuel was supplied to the customers and not to the lessor. The fact that the lessor may have paid for the supplies was immaterial; the important consideration was that the customers, but not the lessor, acquired title to the fuel. The lessor did not procure the fuel and sell it to the customers; it merely financed its purchase.

It did not matter that, here, the installers gave no consideration for the supply since part of the sum included in @1's invoices to Baxi, and which Baxi paid, was third party consideration falling within article 11(1)(a) of the Sixth Directive. While it was possible, as the House of Lords found in Customs and Excise Commissioners v Redrow Group plc [1999] STC 161, for a trader to make simultaneous supplies of services to two recipients, of whom one, if he paid the entire cost and if he used the services for the purposes of his business, could recover as input tax the VAT included in the charge, that was not a possible result in the case of goods supplied by the trader to one person when another, who acquired no interest in the goods, met the cost; the latter could not recover the input tax as he had not received the goods for use in his business, or indeed at all. (In the instant case, the same would be true of those gifts which consisted of services.)

If the correct analysis was that @1 supplied the goods to the installers, it was an inescapable conclusion that the VAT included in @1's invoices to Baxi, or so much of it as was attributable to the cost of the goods, was not input tax in Baxi's hands. Section 24(1) of the 1994 Act defined input tax, "in relation to a taxable person", as "VAT on the supply to him of any goods or services" (emphasis added); thus no question of recovery of that VAT as Baxi's input tax could arise. Moreover, article 17(1) of the Sixth Directive and section 26(1) of the 1994 Act limit the recovery of input tax to that incurred in the acquisition of goods and services which were, or were to be, used in the taxpayer's business for the purpose of making taxable supplies (or supplies which were treated as taxable). It was not enough that (as the Commissioners concede) the Bonus Direct scheme had a business purpose; it was the goods themselves which must be used for the purpose of Baxi's business.

Baxi's reliance on Card Protection Plan was, he said, misplaced. It could not be said that there was a "cluster of features and acts", as the ECJ put it in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774, where it was found that the services provided in a restaurant—such as laying and clearing the tables, cooking and waiting—so dominated the supply of the food itself that there was a single supply of services. Here, the focus of the scheme was the distribution of the gifts to the installers; without that feature, there would have been no scheme. Thus it could not be said that the supply by @1 of goods to the installers constituted a means by which Baxi might better enjoy its advertising and marketing services. The advertising and marketing, and the data obtained in the course of running the scheme, were its by-products, and not the subject of the principal supply. It was necessary too to have regard to the high proportion of the total cost of the scheme which was accounted for by the goods, a factor which militated against there being a single supply: Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189, especially at paragraphs 36 of the Advocate General's opinion and 24 of the judgment.

Had Baxi chosen to run the scheme itself, it would have been able to recover as input tax the VAT it paid when acquiring the goods, but would be required to account for output tax on the value of the goods as they were supplied to the installers. That proposition stemmed from article 5(6) of the Sixth Directive, which reads:

"The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person's business shall not be so treated."

That provision is implemented in domestic law by paragraph 5 of Schedule 4 to the 1994 Act which, so far as material, and as it was in force at the material time, read as follows:

"(1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.

(2) Sub-paragraph (1) above does not apply where the transfer or disposal is—

(a) a gift of goods made in the course or furtherance of the business (otherwise than as one forming part of a series or succession of gifts made to the same person from time to time) where the cost to the donor of acquiring or, as the case may be, producing the goods was not more than £50 …":

There was no material difference between Baxi's arrangement and the scheme used by the taxpayer in Kuwait Petroleum (GB) Limited v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488, in which article 5(6) and its application were considered by the ECJ. There, Kuwait gave vouchers, free of charge (and with no discount on the price of the fuel if the vouchers were not taken), to customers buying its fuel at filling stations, most of which were owned by independent retailers. The vouchers could be redeemed later for gifts. The Court decided that Kuwait, which had recovered the input tax it incurred when acquiring the gifts, was required to account for output tax on the disposal of the gifts, save those below a nominal value, then £10, to its customers. The fact that Baxi chose to outsource the running of the scheme, Mr Baldry said, should not lead to a different fiscal result. The Commissioners' approach achieved the same outcome as that in Kuwait Petroleum, even if by a somewhat different route, whereas if Baxi were right, the goods would reach their final consumers untaxed.

Mr Baldry advanced the alternative argument, that the goods were supplied by @1 to Baxi for onward supply to the installers, only in case his first argument failed and he did not challenge Mr Scorey's contention that there was no contractual support for the proposition that the goods were supplied by @1 to Baxi; indeed, his preferred argument depended on there being a supply by @1 to the installers. If, however, we should nevertheless prefer the conclusion that there was a supply of the goods from @1 to Baxi, he said, Baxi's position would again be the same as in Kuwait Petroleum. It would be able to recover the input tax it had incurred, but would be required to account for output tax on the goods, save those whose value was below the prescribed limit.

We should mention that we were referred by both parties to the tribunal's recent decision in Loyalty Management UK Limited v Customs and Excise Commissioners (2005) VAT Decision 19056, in which it had to consider a promotional scheme with some similarities (though some significant dissimilarities) to this, but from the perspective of its organiser. That organiser was not in an identical position to @1, because of the differences between the two schemes. We are aware that the decision is the subject of an appeal. It is not, in our view, directly in point here, and we have derived no real assistance from it in the context of this case.

Discussion

It is, we think, appropriate to begin our own analysis by determining what was supplied, by whom and to whom. We remind ourselves at the outset of what Laws J said in the well-known case of Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 at 595, in a passage later cited with approval by the House of Lords in Eastbourne Town Radio Cars Association v Customs and Excise Commissioners [2001] STC 606:

"First … the concept of 'supply' for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's 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. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual party's obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties."

Taking those comments into account, we have come to the conclusion that the parties' analyses of the supplies, as they are to be viewed for the purposes of VAT, are incorrect. Mr Scorey made no positive assertion about the supply of the gifts, though he did contend that they were not supplied to Baxi. Inferentially, if they were the subject of any relevant supply at all, that supply must have been from @1 to the installers. The Commissioners have positively averred, for the purposes of their preferred argument, that @1 supplied the gifts to the installers, and their line of reasoning depends on that being the case. We are, however, not persuaded that @1 did supply the gifts to the installers.

It is necessary to examine first the ECJ's judgment in Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509. The question for its consideration was whether a street musician, soliciting payment from passers by who might or might not give him anything, was liable to account for output tax on the value of his receipts. At paragraph 14 of the judgment the Court said:

"… a supply of services is effected 'for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient."

Accordingly, since there was no contractual relationship between the musician and the passers by, who had not asked him to play and who were under no obligation to pay but gave him money only if they chose to do so, the money he received could not be regarded as the consideration for a supply. What was lacking was the element of mutual obligation, now often referred to as "Tolsma reciprocity", by which A agrees to do or provide something for or to B in exchange for consideration passing from B to A. Here, @1's only obligation was to Baxi. Had @1 failed to provide goods in exchange for redeemed points, Baxi would have had a contractual right to enforce the obligation, or to seek damages; but the installers could look only to Baxi for a remedy. As we have indicated in our description of the arrangements, @1 was no more than the administrator of Baxi's scheme. Similarly, nothing the installers did could be described as consideration in @1's hands (or, indeed, consideration at all: as in Kuwait Petroleum and Tesco plc v Customs and Excise Commissioners [2003] STC 1561, the fact that the price of the goods is the same whether or not the voucher is taken must lead to the conclusion that no consideration is given for the voucher). In addition, it is in our judgment not possible to regard the payments made by Baxi to @1 as third party consideration, as Mr Baldry suggested, since article 11 presupposes that a supply has been made by the recipient of the consideration. Payment alone cannot create the supply when it otherwise does not exist. Thus @1 made no supply, as that term is understood in the context of VAT, to the installers.

For similar reasons we have concluded too that Mr Baldry's analogy with the Auto Lease case, to which we have referred, is false. There, the customers contracted with the filling stations for the purchase of the fuel. The arrangements by which the filling stations accepted payment by credit card, and Auto Lease paid the credit card companies, amounted to separate agreements about the manner in which the customers' obligations to pay were satisfied, but it did not affect the principal contracts, for the sale by the filling stations to the customers of fuel. Here, as we have said, the only agreement to which the installer was a party was with Baxi: in exchange for the surrender by the installer of a sufficient quantity of points, Baxi undertook to provide a gift selected by the installer from a prescribed range. Mr Baldry sought to equate Baxi with Auto Leasing, whereas it is, in our view, @1 which was in a position akin to that of Auto Leasing, the outsider facilitating the principal agreement.

Although he did not do so as part of the Commissioners' primary case, as we have mentioned, Mr Baldry argued that Baxi's arrangements were materially identical to those of Kuwait Petroleum. In our view he was right; there is no difference of substance between the two schemes. In each case, purchasers of the promoter's products were provided, without additional charge, with tokens as evidence of a future entitlement. That in the Kuwait Petroleum case some of the outlets were owned by Kuwait itself, whereas here, as we understand, none was owned by Baxi, and that Baxi did but Kuwait did not limit the possible participants to a defined class, who were required to register, are in our view differences of no consequence. Of course, in Kuwait Petroleum the manner in which the gifts were procured was not a consideration whereas here it is the focus of the debate, but we find the case, nevertheless, of considerable assistance.

If we are right in our view that @1 did not make supplies of the gifts to the installers, the only possible conclusion must be that they procured them on Baxi's behalf, in order that Baxi might make good its own undertaking to the installers. It makes no difference whether the promoter of such a scheme buys goods itself and keeps them in stock until they are requested by a participant, buys them in one by one as they are requested, or enters into an arrangement such as that with which we are concerned; in each case it is acquiring the goods which are necessary if it is to satisfy its obligations to the participants. In our judgment the proper VAT analysis is that, despite the provision of the agreement between Baxi and @1 that title would not pass to Baxi, the goods were supplied to Baxi. As Laws J said in the passage from his judgment in Reed Personnel Services which we have set out above, private contractual provisions are not determinative. In any event, as we shall explain, we do not accept that it is always necessary for the making of a supply of goods that title should pass.

Typically, as we understand the arrangements, @1 held a stock of popular items, allocating and despatching them as demand arose to the participants of the several schemes it was administering at any given time. Less popular items would be acquired as necessary. It may be that title to the goods passed directly from @1 to the installer to whom they were despatched, and that Baxi did not acquire title, even for an interval; or the correct view may be that, if only for an instant, title did vest in Baxi. In our judgment the outcome is the same, whichever of those interpretations is correct. As we have already said, the Sixth Directive, by article 5(1), defines a supply of goods as

"… the transfer of the right to dispose of tangible property as owner."

That provision was considered by the ECJ in Staatsecretatis van Financiën v Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1991] STC 627. At paragraph 7 of the judgment, the Court said:

"It is clear from the wording of this provision that 'supply of goods' does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property."

We are conscious that paragraph 1(1) of Schedule 4 to the Value Added Tax Act 1994 provides that "[a]ny transfer of the whole property in goods is a supply of goods", but the purpose of the paragraph is to draw a distinction between supplies of goods and supplies of services, and the words we have set out are not to be regarded as an exhaustive domestic law provision defining a supply of goods. Rather, one should look to the Sixth Directive, and interpret domestic law in a manner which complies with it, as the ECJ indicated. Transfer of ownership, therefore, is not the test; it is the ability to dispose of goods as if the disposer were owner which matters.

It is in our view clear from the evidence that, even if it had delegated the administration of the scheme to @1, Baxi was disposing of the goods as, or as if it were, their owner. Title to the goods may have remained with @1 until it vested in the installer, but once @1 had allocated goods it already held to a particular gift, or acquired goods for the same purpose, it was disposing of them not as owner but in accordance with the terms of its agreement with Baxi. Until the moment of allocation it could do as it pleased with them; once allocated, they came within Baxi's control. It was, in other words, Baxi which was disposing of them as owner, in passing the goods and title to them to the installer. Thus the allocation or acquisition of goods by @1 for the purposes of Baxi's scheme had the effect of conferring on Baxi the right to dispose of them as owner and a supply within the meaning of article 5(1), as interpreted by the ECJ in Safe, was made by @1 to Baxi. That the goods did not come into Baxi's physical possession is of no consequence.

If that is right, it follows (as Mr Baldry agreed) that Baxi is entitled to credit for all of the VAT included in @1's invoices to it, and Card Protection Plan and the line of authority to which it leads are immaterial to the outcome of this case. However, it also follows that the Commissioners' alternative argument becomes relevant.

If, as we have found, the goods were supplied by @1 to Baxi, they must, even if only momentarily, have formed part of the "assets of [its] business" and were "transferred or disposed of by or under the directions of the person carrying on the business", to adopt the words of paragraph 5(1) of Schedule 4 (which we have set out above), when they were despatched to the installers; indeed, Mr Scorey did not suggest the contrary. His argument depended on our finding that the goods were not supplied to Baxi, in which case Baxi could not have transferred or disposed of them. We do not need to decide whether that proposition (that, absent a supply to it, Baxi could not itself dispose of the goods) is correct. We are satisfied, for the reasons we have given, that Baxi's position is in all material respects identical to that in Kuwait Petroleum: it is entitled to recover as input tax the VAT included in @1's invoices, but it must account for output tax on the value of those gifts whose cost of acquisition exceeded £50.

We were not addressed on any distinction which might be drawn between gifts which consisted of goods, and those which consisted of services, such as holidays. Without the benefit of argument, it seems to us that it was, in each case, Baxi which was "disposing" of them to the installers, having agreed with @1 for their procurement. Thus gifts consisting of services, too, were supplied by @1 to Baxi. They do not come within article 5(1) of the Sixth Directive, which is restricted to goods, but in our view article 6(1) is in terms which adopt the effect of article 5(1) and apply it to services, so far as that is possible. One cannot "own" services to be provided in the future, but it is possible, as Baxi did, to confer the right to receive them. In our view that is tantamount to disposing of the right to receive as owner. However, article 5(6) of the Sixth Directive and paragraph 5 of Schedule 4 refer only to disposals of goods, and do not impose an output tax liability on equivalent disposals of services. Provisions of a similar kind appear in article 6(2) of the Sixth Directive and in paragraph 5(4) of Schedule 4, but they are rather more limited in scope and are not apt to include disposals of the type with which we are concerned. If the different treatment of goods and services gives rise to further disagreement between the parties which they cannot resolve, we give permission for the appeal to be continued in order that the tribunal may hear further argument.

We return, finally, to the goods branded with Baxi's logo. These, as the contracts provided, did come into Baxi's ownership, since @1 could not use them except within Baxi's scheme, and they were of no value save for use in that scheme. It seems to us clear, regardless of our conclusions about the other goods, that the branded items became assets of Baxi's business and that their disposal to the installers fell squarely within paragraph 5.

The result is that the appeal is dismissed, but in dismissing it we accept the Commissioners' second, but not their first, argument. Mr Baldry sought a direction for costs in their favour on the grounds that this was an appeal falling within the exceptions to the usual rule that the Commissioners would not seek costs. Although we have adopted rather different reasoning in reaching our conclusions, we agree, and direct that Baxi pay the Commissioners' costs, to be the subject of detailed assessment by a costs judge of the High Court if they cannot be agreed.

COLIN BISHOPP

CHAIRMAN
Release Date: 20 January 2006

MAN/04/0341