United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] BVC 2328, [2008] UKVAT V20644

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The Boots Company Plc v Revenue & Customs [2008] UKVAT V20644 (15 May 2008)

20644

VALUE ADDED TAX – retail scheme - Appellant accounted for tax in accordance with a bespoke retail scheme – a customer who spent £15 on qualifying goods was given a "voupon" which entitled the customer to a discount of £5 on purchase of other goods (redemption goods) – Appellant claimed that it should account for tax on the voupons by reducing the value of the qualifying goods by £5 and not reducing the value of the redemption goods – Customs agreed and made a repayment accordingly - later Customs decided that the repayment was a mistake and raised an assessment to recover the amount paid - whether repayment made on a correct view of the law – no – whether repayment made on correct view of published notice upon which Appellant entitled to rely - no - whether Customs had agreed a (binding) amendment to the Appellant's bespoke retail scheme – yes – whether, if no binding amendment, assessment invalidly made – no – appeal allowed – Sixth Directive (77/388/EEC) Arts 11 and 27- VATA 1994 ss 19, 58, 73, 78A(2) and 80; Sch 6 para 5 and Sch 11 para 2(6) - Value Added Tax Regulations 1995 SI 1995 No. 2518 regs 37, 66, 67 and 68 – Public Notice 727/4 para 7.18

LONDON TRIBUNAL CENTRE

THE BOOTS COMPANY PLC

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Tribunal: DR A N BRICE MRS C E FARQUHARSON Sitting in London on 25 to 28 February 2008

Melanie Hall QC with Tim Ward, Counsel, instructed by KPMG LLP for the Appellant

Owain Thomas, Counsel, with Andrea Lindsay Strugo, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The appeal 1. The Boots Company plc (the Appellant) appeals against (1) a decision of The Commissioners for Her Majesty's Revenue and Customs (Customs) dated 10 January 2005 withdrawing a decision made on 28 November 2003 that the Appellant could account for tax on the reduced value of a qualifying supply which was accompanied by a voucher for a subsequent supply and (2) an assessment dated 23 March 2005 for £2,006,794 which sought to recover most of the amount repaid to the Appellant in December 2003 as a result of the decision of November 2003.

Background

The Appellant accounted for value added tax by reference to a bespoke retail scheme. During 2002 and 2003 the Appellant ran five sales promotions during which a document called a voupon was given to each customer who purchased goods for at least £15 (the qualifying goods). The voupon entitled the customer to £5 off some subsequent purchases (the redemption goods). Initially the Appellant accounted for value added tax on the full value of the qualifying goods and on the reduced value of the redemption goods. On 28 November 2003 Customs decided that in 2002 and 2003 the Appellant could account for tax on the reduced value of the qualifying goods and the full value of the redemption goods and on 11 December 2003 repaid the Appellant the sum of £3,354,435. On 10 January 2005 Customs withdrew the decision of 28 November 2003. On 23 March 2005 Customs issued an assessment to the Appellant under section 80(4A) of the Value Added Tax Act 1994 (the 1994 Act) for £2,006,794 in order to recover most of the amount repaid on 11 December 2003.

The issues

The Appellant put forward four alternative arguments. These were: first, that on 28 November 2003 Customs had agreed a binding amendment to the Appellant's retail scheme and could not amend that agreement retrospectively; secondly, that the assessment was invalid because it should have been raised under section 73 of the 1994 Act (and not under section 80(4A)) and did any new assessment would not comply with the time limits in section 73; thirdly, that the repayment made on 11 December 2003 reflected the true value of the qualifying supply; and, fourthly, that the repayment made on 11 December 2003 accorded with the method of valuation in paragraph 7.18 of Notice 727/4 upon which the Appellant was entitled to rely.

Customs put forward four main arguments. These were: first, that the repayment made on 11 December 2003 did not reflect the true value of the qualifying supply because the voupons had been supplied for no consideration and so the legal position was that tax was due on the full price of the qualifying goods and on the reduced price of the redemption goods; secondly that paragraph 7.18 of Notice 727/4 only applied to vouchers which had been issued for a consideration and so did not apply to voupons and, in any event, Notice 727/4 did not apply to the Appellant who was not entitled to rely on it; thirdly, that Customs had not agreed a binding amendment to the Appellant's retail scheme but rather had given an erroneous ruling on a matter of law from which they were entitled to resile; and fourthly that the assessment was correctly made under section 80(4A) and was in time.

It seems to us that we first have to decide whether the repayment was made on the correct view of the law. If we find against the Appellant on that matter we then need to ask whether the repayment accorded with the method of valuation in paragraph 7.18 of Notice 727/4 and whether the Appellant was entitled to rely on that paragraph. If we find against the Appellant on that matter we need to ask whether there had, nevertheless, been an agreement to amend the Appellant's bespoke retail scheme which was binding on both parties. Again, if we find against the Appellant on that matter we have to go on to ask whether the assessment was validly made. Thus we have identified the following issues for determination in the appeal:

(1) whether the repayment was made on the correct view of the law; if not

(2) whether the repayment was in accordance with paragraph 7.18 of Notice 727/4 and whether the Appellant was entitled to rely on that paragraph; if not

(3) whether Customs had agreed a binding amendment to the Appellant's retail scheme; and if not

(4) whether the assessment was validly made.

The evidence 6. Five bundles of documents were produced by the parties. Oral evidence was given on behalf of the Appellant by Mr Jeremy Michael Hall, the Group VAT Manager of Alliance Boots, the successor of the Appellant, and by Mr Christopher John Bunyan of KPMG London. The facts 7. From the evidence before us we find the following facts.

The Appellant is the representative member of a VAT group whose main business activity is that of retail chemists, including photographic and optical sales. The Appellant has been registered for value added tax since 1973. 9. In four of the five accounting periods the subject of this appeal (namely the accounting periods ending in February 2002, May 2002, February 2003 and May 2003) the Appellant had to pay tax to Customs; in the other accounting period, namely that ending in November 2002, the Appellant claimed a repayment from Customs.

The Appellant's retail scheme

Businesses with an annual tax exclusive turnover in excess of £100 million are ineligible to use a published retail scheme and must agree a retail scheme with Customs. Such agreed schemes are called bespoke retail schemes. The Appellant accounts for value added tax under a bespoke retail scheme.

An Agreement in Principle in respect of a bespoke retail scheme was agreed between the Appellant and Customs on 24 June 1998. That agreement provided that fourteen matters were to be excluded from the agreed calculation methods and any value added tax arising would be dealt with as a separate calculation. One of the fourteen excluded matters was "sales of gift vouchers". The Agreement in Principle concluded by recording that best endeavours would be made by the Appellant and Customs to have a full formal agreement completed by 30 September 1998 but, until the formal agreement was signed, the Agreement in Principle would be binding on both parties.

In fact, no other formal agreement was ever signed but we saw a document called Draft 4 which was a draft of a Bespoke Retail Scheme Agreement between the Appellant and Customs. It did not bear a date but the (blank) commencement date mentioned the year 1998. Some parts of draft 4 referred to matters dealt with in published notices which were incorporated by reference but there was no reference to paragraph 7.18 of Notice 727/4. Paragraph 4.1.3 of Draft 4 provided that daily gross takings did not include payments received for gift voucher sales. Paragraph 4.1.4 provided that cash equivalents were coupons issued by the Appellant and redeemed gift vouchers. A letter from Customs dated 28 May 2003 stated that, despite the lack of a signature, the fact remained that the Appellant had used a retail scheme to produce the figures for its value added tax returns and so was committed to that retail scheme.

In the light of the evidence before us we find that the Appellant's bespoke retail scheme was as outlined in the Agreement in Principle, and in Draft 4, and as used in practice by the Appellant to produce the figures for its value added tax returns, and as amended in writing from time to time.

The five promotions 14. In 2002 and 2003 the Appellant ran five sales promotions in which a document called a voupon was issued to a customer who spent a minimum of £15 on qualifying goods at their normal price (the qualifying supply). Leaflets were distributed in the Appellant's stores stating "Free £5 voucher when you spend £15 or more at Boots" and stating that the customer was entitled to a £5 discount on subsequent purchases of certain goods if purchased within a specified time. The advertising material referred either to "a free £5 voucher" or, in the case of some promotions, a "£5 facial skincare voucher".

The sales promotions were commercially driven by a desire to increase turnover. The objectives were: to encourage customers to visit stores and make qualifying purchases to earn a voupon; to encourage repeat trade when the customer redeemed the voupon; to encourage the cross-selling of products from related ranges; and to market seasonal items. The volume of sales, the number of transactions, and the average transaction value, all increased during a period when voupons were promoted. 16. Details of the five promotions were:

£5 Boots No. 7 promotion valid until 31 March 2002 This entitled the customer to up to £5 off the purchase price of No 7 and Ruby and Millie branded cosmetics in the Appellant's retail stores. £5 Botanics promotion valid until 30 April 2002 This entitled the customer to up to £5 off the purchase price of any product in the Botanics branded range in the Appellant's retail stores. £5 Facial Skincare promotion valid until 17 September 2002 This entitled the customer to up to £5 off the purchase price of facial skin care products from the following brands: Time Delay, Olay, ROC, No. 7 and Botanics, subject to availability. Certain exclusions applied to the types of products to which this promotion applied, and these were detailed on the voupon. Second £5 Facial Skincare promotion valid until 4 February 2003 This entitled the customer to up to £5 off the purchase price of facial skin care products from the following brands: Time Delay, Olay, Total Effects, ROC, No. 7 and L'Oreal Plenitude. Certain exclusions applied and the offer was subject to the availability of the products. £5 Boots No. 7 and Ruby and Millie promotion valid until 1 April 2003 This entitled the customer to up to £5 off products in the No 7 and Ruby and Millie branded cosmetics in the Appellant's retail stores. Excluded products were detailed on the reverse of the voupon.

The operation of the promotions

All the promotions operated in the same way. The voupon was given automatically to each customer after he had spent £15 or more in one of the Appellant's stores; the customer did not have to ask for the voupon. Only one voupon was provided for each transaction even where the total value spent was above £15. The customer did not have the option of taking a price reduction for the qualifying goods instead of taking the voupon. Only one voupon could be redeemed in each transaction. No cash alternative was available and, if redemption goods under the value of £5 were purchased with the voupon, no change was given. The promotion expired after a certain date which was never more than a month after the commencement. After the end of the period of the promotion the voupon was not redeemable and so after that date the voupon was valueless. 18. There were other restrictions during the promotions; for example, only some of the products within the stated brands specified were eligible for purchase as redemption goods. Some of the promotions restricted the use of the voupon so that it could not be redeemed at certain stores. The terms and conditions upon which the voupon could be used, including the restrictions, only became known to the customer when he was presented with the voupon after he had purchased the qualifying goods.

The number of voupons redeemed as a proportion of the number issued was different for each promotion as the following figures show:

Number of voupons

Promotion issued redeemed

No 7 1,374,501 905,719

Botanics 775,489 395,447

Skincare 3,256,798 1,164,093

Skincare 1,649,499 719,033

No 7 3,585,004 2,025,449

When a voupon was issued to a customer, the Appellant's staff would scan the barcode on the back of the book of voupons so that the Appellant would know the value of voupons issued. When the voupon was redeemed the Appellant's staff would scan the barcode on the back of the individual voupon to show that the value of the voupon had been deducted from the consideration payable by the customer for the redemption goods.

The tax treatment of voupons, gift vouchers and other promotions

At the time of the voupon promotions the Appellant accounted for value added tax on the full amount received from the customer at the time of the purchase of the qualifying goods. When the customer chose to redeem the voupon the Appellant accounted for value added tax on the discounted price of the redemption goods (namely, the excess of the price for those goods over £5).

The Appellant adopted a different treatment for gift vouchers. Here value added tax was not accounted for on the issue of the gift voucher but was accounted for on the full price of the redemption goods purchased with the gift voucher. A customer who presented a gift voucher in payment for goods could receive change. There was no limit on the period for the redemption of a gift voucher; there was no limit on the range of products which could be purchased with a gift voucher; and there was no limit on the number of products which could be purchased in a single transaction with a gift voucher.

In addition to voupons, the Appellant also runs other promotions. These include "3 for the price of 2" where a customer who buys two of the same product gets a third free, and "buy one get one free" where a customer who buys one product gets a similar product free. The Appellant and Customs have agreed that in these cases the customer's payment is apportioned between the number of items; in other words the additional item is not regarded as free for value added tax purposes.

The three other agreements

Before turning to consider the Appellant's claim (made in June 2003) that it had incorrectly accounted for value added tax on the voupons we describe three other agreements made between the Appellant and Customs in 2003 which were relied upon by the Appellant to show that agreements to amend the Appellant's bespoke retail scheme were not unusual and were reached in an informal way. Correspondence between the parties usually took place between Mr Hall of the Appellant and Mr A Pernavas of Customs.

The first agreement related to the treatment of "3 for 2 Meal Deals". A customer could buy three food items together for the price of two. At the till the full value of the sale was recorded with the price reduction being entered as a discount. The discount was not shown against a specific item and so some method had to be found to apportion the discount between standard-rated items and zero-rated items. This was done by reference to the tax inclusive selling price of the items as that information was held in the till. On 12 March 2003 Mr Hall wrote to Customs to say that he believed that output tax should have been calculated by reference to the tax exclusive selling price of all the items which would reduce output tax by about £0.75M per annum. He asked that this method be used for future supplies and also as the basis of a retrospective claim. Customs confirmed that a change could be made for the future but that there could not be a retrospective change. At the time the method used to calculate the standard-rated element of the meal deals was not an agreed part of the bespoke retail scheme and the change was treated as an accounting adjustment. In evidence to us Mr Hall agreed that the change had been made to reflect the true liability for value added tax as far as possible.

26. The second agreement concerned pre-till thefts of cash. The Tribunal decision in W H Smith Ltd v The Commissioners of Customs and Excise [2000] VATDR 1 (Tribunal Decision No. 16505) upheld an assessment where customers had left cash on the counter for payment of goods they had purchased; the cash was not rung into the till but was stolen by cashiers. The Tribunal held that consideration had been paid by the customers and the business was obliged to account for the value added tax. Mr Pernavas of Customs asked Mr Hall for comments and suggested that some adjustment should be made. Mr Hall wrote to Mr Pernavas on 18 March 2003 to say that there was very little opportunity for that type of theft to be perpetrated within the Appellant; Mr Hall calculated that the value added tax due each year amounted to £3,225.60. Mr Pernavas replied on 12 May 2003 agreeing with Mr Hall and saying that he would use an annual figure of £3,225.60 as a basis of an assessment to cover the previous three years. This was agreed by Mr Hall and thereafter there was an annual adjustment of a similar amount which was incorporated in the Appellant's value added tax accounting. There was no formal amendment to the bespoke retail scheme.

The third agreement concerned the use of the Appellant's advantage card to purchase goods which cost more than £50. Customers who have an advantage card acquire points with each purchase which they can "spend" later. The question arose as to whether goods costing more than £50 purchased with an advantage card were business gifts within the meaning of paragraph 5(2) of Schedule 4 of the 1994 Act. Customs suggested that an appropriate adjustment should be made. On 25 March 2003 Mr Hall wrote to Customs with calculations showing monthly under-declarations from March 2001 to November 2002 amounting in total to £60,351,66. This was accepted by Customs. The bespoke retail scheme was not formally amended but the agreement now forms part of the Appellant's normal accounting. The agreement was reached through means of a voluntary disclosure.

These three examples indicate that there was a continuing full and frank exchange of views between the Appellant and Customs whenever it appeared that the Appellant's bespoke retail scheme did not deal with some new development. With the background of those three agreements in mind we now return to the claim made in June 2003 about the tax treatment of the voupons.

June and July 2003 – the claim is made and rejected 29. Mr Hall joined the Appellant as Group VAT Manager in 2002 and at an early stage considered the value added tax treatment of the voupons. They did not appear to be dealt with by the Appellant's bespoke retail scheme which had been agreed before the voupon promotions started. Mr Hall became aware of the treatment described in Notice 727/4 at paragraph 7.18. Paragraph 7.18 is headed "Gift, book and record vouchers" and is in the form of a table. The first three boxes deal with the sale of gift vouchers. The fourth box applies: "if you include gift vouchers with other products for a single charge" and provides:

"If you include gift vouchers with other products for a single charge … the supply of the goods and voucher is treated as a multiple supply. This means VAT is only due on the portion of the payment which relates to the goods. You should omit from your DGT [daily gross takings] that part of the payment which related to the gift voucher, usually the face value. But you must include in your DGT the face value of the voucher when redeemed by the customer."

Mr Hall took the view that, as a customer had to pay a price of at least £15 for the qualifying goods before he was entitled to receive a voupon, paragraph 7.18 applied. He hoped Customs would agree that the Appellant could adopt the treatment in paragraph 7.18 for the calculation of its daily gross takings.

Accordingly, on 25 June 2003 Mr Hall wrote to Mr Pernavas of Customs to say that the Appellant had incorrectly accounted for tax on the voupons because, under paragraph 7.18 of Notice 727/4, the amount received from the customer on the qualifying purchase should have been apportioned between the goods and the voupon. In Mr Hall's view, the value of the qualifying goods should be reduced by £5 and the value of the redemption goods should be increased by £5.

A spreadsheet was enclosed with the letter of 25 June 2003 showing each of the five promotions and the accounting period of each promotion; the accounting periods fell between February 2002 and May 2003. The spreadsheet showed the number of voupons issued, the face value of the voupons and the tax the Appellant claimed was overpaid on the issue of the voupons. It also showed separately the number of voupons redeemed and the tax which the Appellant claimed was due on the redemption of the voupons. The tax the Appellant claimed was due on the redeemed voupons was deducted from the tax the Appellant claimed was overpaid on the issue of the voupons leaving an amount of £3,574,250 which the Appellant claimed that it had overpaid. The claim for overpayment was made by way of voluntary disclosure.

As mentioned, the accounting periods in respect of which the claim was made were those between February 2002 and May 2003. The Finance Act 2003 repealed the existing law, which was in paragraph 5 of Schedule 6 of the 1994 Act, in respect of supplies of vouchers made after 8 April 2003 and enacted new provisions which are now in Schedule 10A of the 1994 Act. However, the supplies the subject of this appeal were made before 8 April 2003.

Mr Pernavas replied to Mr Hall on 3 July 2003 rejecting the voluntary disclosure claim. He said that paragraph 7.18 of Notice 727/4 had to be read with paragraph 5 of Schedule 6 of the 1994 Act which indicated that a voucher was only ignored at the time of purchase if there was consideration for the supply of the voucher. No consideration was paid for the supply of the voupon.

October 2003 – the claim is renewed

On 7 October 2003 Mr Hall of the Appellant replied to Mr Pernavas's letter of 3 July and supplied further information and argument. The letter referred again to paragraph 7.18 of Notice 727/4 and said:

"The conditions do not stipulate that the vouchers must be sold but merely included with other products for a single charge. The use of the word "treated" also demonstrates that the intention was to set out an accounting treatment for retailers where vouchers are included in the main supply regardless of what the supply position may be under basic principles."

Mr Hall's letter of 7 October 2003 concluded by saying;

"It remains our firm view that Boots are entitled to rely on section 7.18 of the Notice up to 9 April 2003 and reduce DGT [daily gross takings] by the value of the face value vouchers provided in our Voupons promotions."

On 24 October 2003 Mr Pernavas consulted the Retail Unit of Expertise within Customs. He said that he (Mr Pernavas) had initially rejected the Appellant's claim because the voupons were given away for no consideration but the Appellant thought it was entitled to use the treatment in Notice 727/4. The Unit replied to Mr Pernavas on 7 November 2003 and said that the Appellant was entitled to rely upon paragraph 7.18 of Notice 727/4 before 9 April 2003 and to reduce daily gross takings by the value of the voupons. The enquiry record noted: "This treatment accords not only with the wording of the legislation but also with our intention when the tertiary legislation was drafted".

November 2003 – the claim is accepted

On 28 November 2003 Mr Pernavas wrote to the Appellant and said:

"I have consulted with my colleagues in headquarters and it appears that you are right. The recent budget provision was made to correct the treatment to that which I applied in my earlier responses to you. We will process the voluntary disclosure as soon as possible … ."

On 2 December 2003 Customs conducted an audit visit at the Appellant's premises to verify the amount of the claim. As a result of that visit the amount of the claim was reduced to £3,354,435. The Form VAT 642 (voluntary disclosure) was completed by Mr Pernavas and a colleague on 8 December 2003 and on 11 December 2003 Customs paid the Appellant the sum of £3,354,435. The notice accompanying the payment indicated that it was made up of the following amounts:

Accounting period Amount

02/02 £259,735

05/02 £232,595

11/02 £1,347,641

02/03 £586,157

05.03 £928,307

£3,354,435

After 2003 the Appellant did not alter its till accounting treatment for the voupons. No reduction was made in the price of goods at the point the voupon was issued. When the voupon was redeemed against a later sale the value of the redemption goods was entered at the discounted price (if the value of the redemption goods exceeded the face value of the voupon) or a nil price (if the value of the redemption goods was less than the face value of the voupon). However, the Appellant was able to continue to extract for future accounting periods the same type of information about the voupons as had been entered in the spreadsheet attached to Mr Hall's letter of 25 June 2003.

January 2005 – the withdrawal of the agreement

On 13 September 2004 Mr Hall wrote to Mr Pernavas and asked for his agreement to continue, for promotions after 9 April 2003, the same accounting treatment as had been agreed in 2003. The letter said:

"You will recall that I wrote to you on 7 October 2003 regarding the VAT treatment of promotions that involve the issue of face value vouchers with qualifying purchases. Following this correspondence you agreed to the repayment of the voluntary disclosure submitted on 25 June 2003 on the basis that Boots was entitled to rely on the VAT accounting treatment contained in paragraph 7.18 of Notice 727/4 which has the force of law. I am now writing to obtain your agreement to the effect that Boots should be entitled to rely on the same VAT accounting treatment for promotions operated after 9 April 2003, and until such time as a fresh notice is issued or this part of the notice is either amended or withdrawn."

However, no agreement was forthcoming. It seems that as early as March 2004 Mr Pernavas knew that some of his colleagues were of the view that his original decision of 3 July 2003, to reject the Appellant's claim, had been correct because no consideration had been paid for the voupons. At a routine meeting on 13 December 2004 Mr Pernavas mentioned to Mr Hall that he would be writing to ask that the money which had been paid to the Appellant in December 2003 should be repaid.

On 10 January 2005 Mr Pernavas wrote to the Appellant to say that the initial rejection of the claim on 3 July 2003 was the correct decision. The position had not been changed by the 2003 Budget which was only a clarification of the policy which remained unchanged. The letter of 28 November 2003 contained a misdirection and was thereby withdrawn. The voluntary disclosure of £3,574,250 should not have been approved and an assessment would be raised to recover the amount which had been paid.

On 7 February 2005 the Appellant appealed to the Tribunal against Customs' decision of 10 January 2005. The grounds of appeal stated:

"The Appellant provides face-value vouchers to customers who make qualifying purchases of goods. The Appellant contends in accordance with Customs Retail Scheme notice 727/4 that the payment it receives in such cases should be apportioned between the goods and the vouchers. The vouchers will then act as consideration when redeemed to make further purchases of goods."

March 2005 – the assessment 45. On 23 March 2005 (although the letter was dated 23 March 2004) Mr Pernavas wrote to Mr Hall of the Appellant and his letter was headed "Notice of Assessment". The letter stated:

"Dear Mike, VAT registration number … Recovery assessment In exercise of the powers under section 80(4A) VAT Act 1994, which allows the Commissioners to assess amounts they paid on or after 18 July 1996 but were not liable to pay, an assessment has been made for the sum of £2,006,794. The assessment relates to the refunds detailed below. … Period for which refund claimed Amount of refund 02/02 £259,735 05/02 £232,595 02/03 £586,157 05/03 £928,307

Total £2,006,794."

It will be seen that the assessment sought to recover the amount paid by Customs to the Appellant for four of the five accounting periods for which the payment on 11 December 2003 had been made. It did not seek to recover the amount of £1,347,435 paid in respect of the accounting period ending in November 2002. In that accounting period the return had been a repayment return.

On 6 February 2006 the Appellant appealed against the assessment. The grounds of appeal were as stated in the appeal against the decision of January 2005 and, in addition, there was a further ground of appeal, namely, that the assessment was incorrectly made under section 80(4A) of the 1994 Act.

March 2005 – the claim for 2003 to 2005

On 29 March 2005 the Appellant submitted to Customs a claim for the repayment of value added tax of £16,547,320 being the amount overpaid on voupons in the accounting periods from August 2003 to February 2005. The letter stated that the Appellant was relying on "the same interpretation of the legislation as previous voupons claims". Mrs Hall for the Appellant informed us at the hearing that the claim for 2003 to 2005 was not to be pursued.

April 2006 - the Judicial Review proceedings 49. On 13 April 2006 the Appellant sought leave to apply for judicial review of Customs' decision to issue the assessment and those proceedings have been stayed pending the Decision of the Tribunal. In those proceedings the Appellant will argue that an officer of Customs, with the full facts before him, gave a clear and unequivocal ruling in writing and that the Appellant was entitled to rely upon extra-statutory concession ESC 3.5 as republished in March 2003. We were informed that the suggestion that there had been a binding amendment of the bespoke retail scheme was not made in the judicial review proceedings.

The oral evidence

In evidence to us Mr Hall accepted that his letter of 25 June 2003 did not state specifically that it was an application to amend the bespoke retail scheme; nor was there any difficulty in accounting for value added tax on the voupons. That letter, and his letter of 7 October 2003 with the voluntary disclosure, relied upon the legal effect of paragraph 7.18 of Notice 727/4 and were written on the basis that the Appellant's interpretation of the paragraph was correct and that the Appellant was entitled to rely upon that interpretation of the paragraph.

The evidence of Mr Bunyan concerned certain consultations between Customs and the British Retail Consortium leading to the publication of Customs' Notice 700/7/94 about business promotion schemes from which paragraph 7.18 of Notice 727/4 was subsequently derived. The evidence also concerned the advice given by Mr Bunyan to other clients who were retailers. Whilst we accept this evidence it does not seem to us to be relevant to the legal issues we have to decide.

We now consider separately each of the issues for determination in the appeal.

1. Was the repayment made on the correct view of the law?

The first issue is whether the repayment was made on the correct view of the law.

The legislation 54 Article 11 of the Sixth Directive (77/388/EEC) contains provisions about the taxable amount. Article 11A contains provisions applicable within the territory of the country. It defines the taxable amount and states what it includes. Article 11A 1(a) provides:

"1. The taxable amount shall be:

(a) in respect of supplies of goods and services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser … for such supplies … ."

Article 11A 3(b) provides:

"3. The taxable amount shall not include: … (b) price discounts and rebates allowed to the customer and accounted for at the time of supply."

Section 19 of the 1994 Act contains provisions about the value of the supply of goods or services. Section 19(1) provides that the value of any supply shall be determined in accordance with the section and Schedule 6. Before 9 April 2003 Schedule 6 contained provisions about valuation in special cases. Paragraph 5 of Schedule 6 provided:

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

The arguments

For the Appellant Mrs Hall argued that the voupon was not given free because it was only given if the customer paid more than £15 for the qualifying goods. The Appellant could not refuse to give a customer a voupon if the customer spent £15 on the qualifying goods. There was a direct relationship between the consideration paid for the qualifying goods and the receipt of the voupon. When the qualifying purchase was made the consideration for the qualifying goods should be apportioned between the goods and the voupon and tax should be payable on the part of the payment apportioned to the goods. When the voupon was redeemed tax should be accounted for on the face value of the voupon. Alternatively, Mrs Hall argued that the voupon was part of a multiple supply comprising the qualifying goods and the voupon and the fact that the customer could not forgo the voupon and pay a lesser sum for the qualifying supply was not relevant. She cited Card Protection Plan Limited v Customs and Excise Commissioners (C-349/96) [1999] STC 270 at paragraph 29. 58. For Customs Mr Thomas argued that, at the time of the qualifying purchase, tax should be accounted for on the full value of the qualifying supply. The voupons were not face value vouchers but were coupons provided for no consideration. They were not like gift vouchers; they had restrictions on redemption and no change was given if the value of the redemption goods did not amount to the face value of the voupon. The customer had to pay the full price for the qualifying goods and was not able to buy them for less than the ordinary price without the voupon. No consideration was stated or agreed for the voupon. The voupon was only given to the customer after the purchase of the qualifying goods and so the customer was not aware of the restrictions on redemption. No part of the consideration for the qualifying goods was attributed to the value of the voupon. The price reduction was given on the subsequent purchase of the redemption goods when tax was payable on the actual (reduced) amount paid by the customer. He cited Lex Services plc v Customs and Excise Commissioners [2004] STC 73 at [18] and [19] for the principle that the subjective value of non-monetary consideration was the value adopted by the parties to the transaction in question and that the price agreed by the parties was in most cases conclusive as to the quantum of the monetary consideration.

Reasons for decision

In considering the arguments of the parties we start with the legislation and begin with the Sixth Directive.

Article 11A 1(a) says that the taxable amount (on which tax is payable) is everything which constitutes the consideration obtained by the supplier from the purchaser for supplies. Looking at the supply of the qualifying goods, tax should be payable on the full amount of the consideration paid by the purchaser for those goods. When the purchaser buys the qualifying goods the whole purchase price is paid for those goods. No part of the purchase price is paid for the voupon. Thus tax should be paid on the whole purchase price of the qualifying goods.

It is clearly the intention of Article 11A 3(b) that a relevant factor is what is paid at the time of each supply. In our view what is paid at the time of the supply of the qualifying goods is the normal price for those goods (including value added tax on standard-rated goods) from which it follows that the taxable amount for the qualifying supply is the full price of the goods. Again in our view what is paid for the redemption goods is the normal price of the redemption goods less a discount of £5 if the customer tenders a voupon. From that it follows that the taxable amount for the supply of the redemption goods is their normal price less £5. However, the repayment was made on the basis that it was the price of the qualifying goods which was reduced and not the price of the redemption goods. Accordingly, in our view, the repayment made by Customs on 11 December 2003 was not made on a correct view of the provisions in the Directive.

Our national legislation, in paragraph 5 of Schedule 6, deals with two matters. First, it deals with vouchers granted for consideration. Such vouchers could be, for example, gift tokens. If a gift token is purchased for £20 (and no charge is made for a card) then paragraph 5 of Schedule 6 provides that there is no tax on the sale of the token but that tax is paid on the subsequent sale of the goods in exchange for the token. This accords with the purpose of the Directive which is to tax the supply of goods at the time of supply. Paragraph 5 of Schedule 6 also deals, by implication, with vouchers which are given away free. Because such vouchers are not granted for a consideration they do not affect the tax treatment of the supply which is made when the free vouchers are given.

That then leads to the question as to whether the voupons were granted for a consideration and we find that they were not. They were stated on their face to be "free". The customer did not have to ask for the voupon but received it automatically. The customer could not buy a voupon for a stated price. The customer had to pay the full price for the qualifying goods and did not have the option of taking a price reduction instead of the voupon. The customer might not want the voupon (and the redemption rates indicate that many did not). Applying the principle in Lex Services we find that the price paid by the customer was the price he agreed to pay for the qualifying goods and he did not agree to pay anything for the voupon. That leads to the conclusion that the voupons were not granted for a consideration.

The Appellant argued that, when the qualifying purchase was made, the consideration for the qualifying goods should be apportioned between the goods and the voupon and tax should be payable on the part of the payment apportioned to the goods. However, as the voupon was given free, and as the customer did not agree to pay anything for it, such apportionment would result in the full price of the qualifying goods being apportioned to those goods.

The Appellant also argued that the voupon was part of a multiple supply comprising the qualifying goods and the voupon and the fact that the customer could not forgo the voupon and pay a lesser sum for the qualifying supply was not relevant. Reference was made to paragraph 29 of the judgment of the Court of Justice in Card Protection Plan which stated:

"29. In this respect, taking into account, first, that it follows from article 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 services or with a single service."

In our view the essential features of the transaction which gives rise to the grant of the voupon is that a customer wishes to purchase goods of a value of at least £15. That is what the customer wants and that is what he pays for. It is relevant that the £15 paid by the customer would include value added tax on the standard-rated items purchased. After payment for those goods the customer is given, whether he wants it or not, a free voupon. The Appellant is supplying the customer with the goods he wants for the normal price for those goods. That is a single supply of goods. The gift of a free voupon is not a supply for which the customer pays any consideration.

We therefore conclude that the repayment of December 2003 was not made on the correct view of the law.

2. Was the repayment in accordance with notice 727/4?

The second issue is whether the repayment was in accordance with paragraph 7.18 of Notice 727/4 and whether the Appellant was entitled to rely on that paragraph.

The legislation

Notice 747/4 is one of a series of Notices published by Customs dealing with retail schemes. The legislative context of Notice 727/4 is, therefore, that of retail schemes generally.

Article 27 of the Sixth Directive permits Member States to introduce special measures for derogation from the principles of the Directive in order to simplify the procedures for charging the tax. However, the Article also provides:

"Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption."

Article 27 thus gives Member States authority to introduce simplification procedures. Section 58 of the 1994 Act contains provisions about administration, collection and enforcement and provides that Schedule 11 shall have effect. Paragraph 2(6) of Schedule 11 provides:

"2(6) Regulations under this paragraph may make special provision for such taxable supplies by retailers ... as may be determined by or under the regulations, and in particular –

(a) for permitting the value which is to be taken as the value of the supplies in any prescribed accounting period or part thereof to be determined … by such method or one of such methods as may have been described in any notice published by the Commissioners in pursuance of the regulations and not withdrawn by a further notice or as may be agreed with the Commissioners; …"

Thus the 1994 Act provides that regulations may provide that the value of taxable supplies by retailers may be determined by the use of a method published in a notice or by agreement with Customs.

The regulations made under the provisions of paragraph 2(6)(a) are in Part IX (regulations 66 to 75) of the Value Added Tax Regulations 1995 SI 1995 No. 2518. The relevant parts of regulations 66, 67 and 68 provide:

"66 In this Part- "notice" means any notice or leaflet published by the Commissioners pursuant to this Part; "scheme" means a method as referred to in regulation 67.

67(1) The Commissioners may permit the value which is to be taken as the value, in any prescribed accounting period or part thereof, of supplies by a retailer which are taxable at other than the zero rate to be determined by a method agreed with that retailer or by any method described in a notice published by the Commissioners for that purpose, and they may publish any notice accordingly. (2) The Commissioners may vary the terms of any method by-

(a) publishing a fresh notice; (b) publishing a notice which amends an existing notice; or (c) adapting any method by agreement with any retailer.

68. The Commissioners may refuse to permit the value of taxable supplies to be determined in accordance with a scheme if it appears to them-

(a) that the use of any particular scheme does not produce a fair and reasonable valuation during any period; (b) that it is necessary to do so for the protection of the revenue; or (c) that the retailer could reasonably be expected to account for VAT in accordance with regulations made under paragraph 2(1) of Schedule 11 to the Act"

Thus the scheme of the regulations is that retailers may account for value added tax using either an agreed method or a method described in a published notice. The published notices have the force of law as they are published under the provisions of Schedule 11 paragraph 2(6)(a) of the 1994 Act and regulations 66 and 67. Under those provisions Customs have published a series of notices.

For example, there is a Notice 727/2/02 which is entitled "Bespoke Retail Schemes". This indicates that retailers with an annual tax exclusive turnover in excess of £100 million are ineligible to use a method described in a published notice and must agree a bespoke retail scheme with Customs.

There is also a Notice 727/4 which is entitled "Retail schemes: How to work the Apportionment Schemes". Paragraph 1 says that the Notice is about Apportionment Schemes 1 and 2 which are two of the standard retail schemes. Paragraph 1.3 says that a business whose annual turnover exceeds £100M cannot use a standard scheme; instead they can agree a bespoke retail scheme. Paragraph 7.18 is headed "Gift, book and record vouchers" and is in the form of a table. The first three boxes deal with the sale of gift vouchers. The fourth box applies: "if you include gift vouchers with other products for a single charge" and provides:

"If you include gift vouchers with other products for a single charge … the supply of the goods and voucher is treated as a multiple supply. This means VAT is only due on the portion of the payment which relates to the goods. You should omit from your DGT that part of the payment which related to the gift voucher, usually the face value. But you must include in your DGT the face value of the voucher when redeemed by the customer."

The fifth box of paragraph 7.18 applies "if you issue gift vouchers free of charge" and provides:

"If you issue gift vouchers free of charge … no VAT is due on the issue. When the voucher is redeemed for goods no VAT is due unless the cost of the goods exceeds £50. If the cost exceeds £50 VAT is due on the full amount."

The arguments

The Appellant argued that until paragraph 7.18 was withdrawn the Appellant was entitled to rely upon it. There was no need to demonstrate any agreement – only permission under regulation 67(2). Paragraph 6(2) of Schedule 11 did not permit Customs to withdraw their permission by altering their interpretation of a published notice.

For Customs Mr Thomas argued that paragraph 7.18 was consistent with the law as set out in paragraph 5 of Schedule 6 of the 1994 Act. Notice 727/4 was published within the context of retail schemes under the derogation in Article 27 of the Sixth Directive. He cited British American Tobacco International Limited v Belgian State (Case C-435/03) [2006] STC 158 at paragraph 41 of the opinion of the Advocate General for the principle that a strict approach was required to any derogating measures as provided for in Article 27 as such measures were not permitted except within the limits strictly necessary for the simplification of procedures. Notice 727/4 was also published under the provisions of regulation 67 which did not permit fundamental departures from the principles underlying the charge to tax except to the extent necessary for simplification.

Mr Thomas also argued that the Appellant was not entitled to rely on paragraph 7.18. He referred to regulation 67 and argued that a retailer had to use either a method outlined in a notice or an agreed method. As the Appellant had a turnover in excess of £100M it was not entitled to use a method outlined in a notice but had to use an agreed method. That was its bespoke retail scheme. The bespoke retail scheme could include extracts from notices but only if that was agreed by Customs. In any event, even if there had been an agreement that the Appellant could use the method outlined in paragraph 7.18 of Notice 727/4 then such agreement was to use the correct interpretation of that paragraph.

Reasons for decision

In considering the arguments of the parties we start by establishing the correct meaning of box 4 of paragraph 7.18 of Notice 727/4. We note that the whole paragraph is headed "Gift, book and record vouchers". The first three boxes of the table which comprises the paragraph clearly deal with gift vouchers sold for a consideration. The fifth box deals with gift vouchers issued free of charge. Within that context we can see that the fourth box of paragraph 7.18 is meant to reflect the meaning of paragraph 5 of Schedule 6 of the 1994 Act and to apply only to vouchers granted for consideration. Because the voupons issued by the Appellant were given free of charge they should have been dealt with as stated in the fifth box and not as stated in the fourth box.

Accordingly we conclude that the correct interpretation of box 4 of paragraph 7.18 is that it applies to gift vouchers sold for a consideration and does not apply to vouchers given free of charge.

Having said that, however, we do consider that the wording of the fourth box could be improved so as to make it clear that it applies where a purchaser buys a gift voucher for consideration together with other goods and pays a single sum for all his purchases. We can understand why Mr Hall, and the Customs Officers in the Retail Unit of Expertise, thought that the fourth box had the meaning they gave to it.

However, even if we had concluded that the fourth box had the meaning given to it by the Appellant, that does not mean that the Appellant had an entitlement to rely on it. The fourth box of paragraph 7.18 appears in Notice 727/4. That Notice has the force of law because it is issued under the powers given by paragraph 2(6) of Schedule 11 and regulation 67 but it only has the force of law in respect of the retailers to which it applies. The Notice is about apportionment schemes 1 and 2 which are standard schemes and a retailer who, like the Appellant, has a high turnover cannot use a standard scheme. Thus Notice 727/4 has the force of law but only for retailers using apportionment schemes 1 and 2 and not for other retailers. Accordingly, Notice 727/4 has no application to the Appellant and the Appellant is not entitled to rely upon any parts of the Notice. The Appellant must account for value added tax in accordance with its bespoke retail scheme. Of course, it would be possible for Customs and the Appellant to agree that the Appellant's bespoke retail scheme should be amended to incorporate part of any Notice but the Appellant's entitlement would then be to use the bespoke retail scheme as so amended by agreement.

We conclude that the repayment was not in accordance with the correct meaning of paragraph 7.18 of Notice 727/4 but that, even if it were, the Appellant was not entitled to rely on that paragraph in the absence of an agreed amendment to its bespoke retail scheme.

3. Was there a binding amendment to the bespoke retail scheme?

The third issue is whether Customs had agreed a binding amendment to the Appellant's bespoke retail scheme. We have set out the legislation about retail schemes within our consideration of issue (2).

The arguments

For the Appellant Mrs Hall argued that the effect of Customs' letter of 28 November 2003, together with the repayment, constituted an agreement to amend the Appellant's bespoke retail scheme retrospectively and the Appellant had relied on that agreement. A retrospective amendment was permitted by regulation 67(1) which referred to "any" accounting period. The amendment had the effect of permitting the value, which was to be taken as the value of the qualifying goods when a customer who was given a voupon, to be determined by the method agreed with Customs. There was nothing to prohibit retrospective changes to a retail scheme if these were agreed. 88. Mrs Hall cited GUS Merchandise Corp Limited v Customs and Excise Commissioners (No 2) [1993] STC 738 at 753j and [1995] STC 279 (CA) for the principle that, if the correspondence between, and the conduct of, the parties taken as a whole evidenced an agreement then such agreement was binding and neither party could resile from it retrospectively. She relied upon Tesco plc v The Commissioners of Customs and Excise (1994) Tribunal Decision 12740 at 8.22 for the principles that it is a feature of a retail scheme that there will not necessarily be a link between the value of the supplies and the value upon which tax is payable, and that the legal nature of an agreement as to method is that of offer and acceptance which results in a binding contract from which one party cannot resile.

For Customs Mr Thomas argued that all the documentary evidence and the oral evidence of Mr Hall indicated that in 2003 the Appellant was not seeking an agreed amendment to its bespoke retail scheme. The request was unlike the procedure which had been adopted for the amendments dealing with the meal deals, the pre-till thefts of cash and the use of the advantage card to purchase goods costing more than £50 all of which were simplification adjustments. It was relevant that the Appellant did not think that its bespoke retail scheme had been amended in 2003 because in 2004 it had asked for the same treatment for the future. The Appellant's letter of 7 October 2003 was making a retrospective claim on the basis that it was entitled to rely upon paragraph 7.18 of Notice 727/4 and was seeking a ruling in law as to the correct treatment of the voupons for the purposes of value added tax. As requested Customs had given a legal ruling which had been erroneous and Customs were not bound by an erroneous legal ruling. The ruling was not a decision under regulation 67 to allow the Appellant to use the method outlined in paragraph 7.18. The purpose of a retail scheme was not to agree a treatment which was a fundamental departure from the legal principles of value added tax but to agree a method which simplified procedures within a context which gave effect to the overall purpose of value added tax.

Mr Thomas cited The Burton Group plc v The Commissioners of Customs and Excise (1997) Tribunal Decision No. 15046 at paragraph 91 for the principle that both sides had to know what was being agreed. He accepted the principles in GUS Merchandise and Tesco but argued that in this case there had been no meeting of minds. However, even if there had been a binding agreement then it did no more than allow the Appellant to operate paragraph 7.18 on the same basis as any other retailer, that is on its correct interpretation.

Reasons for decision

In considering the arguments of the parties we note that both parties accepted that the legal nature of a retail scheme agreement is that of a binding contract from which one party cannot resile. We therefore follow the guidance in GUS Merchandise and start by examining the correspondence between, and the conduct of, the parties to see whether, taken as a whole, they evidence a binding agreement to amend the Appellant's bespoke retail scheme. We state straightaway that in our view there was an agreement which was that Customs accepted the claim by the Appellant, first made on 25 June 2003, and made the repayment. However, what we have to decide is whether that agreement was in the nature of a binding agreement to amend the Appellant's bespoke retail scheme.

There are a number of factors which would support the conclusion that a binding agreement to amend the bespoke retail scheme had been reached and a number of factors which would militate against such a conclusion.

Factors which support the conclusion that an agreement was reached include: the fact that Mr Hall's first letter of 25 June 2003 spoke of an accounting treatment and referred to box 4 of paragraph 7.18 of Notice 727/4 which itself referred to the way in which daily gross takings should be calculated; the fact that Mr Pernavas's letter of 28 November 2003 said that Mr Hall was "right"; the fact that the repayment was made; and the fact that other amendments to the bespoke retail scheme (dealing with meal deals, pre-till thefts of cash and advantage card purchases costing more than £50) were made in an informal way.

We have also identified a number of factors which could point to the conclusion that a binding agreement to amend the retail scheme was not reached. First, none of the contemporary correspondence specifically indicates that it was the intention of the parties to agree a binding amendment. However, the whole course of dealing between Customs and the Appellant was relatively informal. The retail scheme agreement itself consisted of an Agreement in Principle made in 1998 and Draft 4 of another agreement of 1998 together with various amendments agreed in subsequent correspondence from time to time. Accordingly, we do not regard the wording of the contemporary correspondence as conclusive. Next, we agree that the request in Mr Hall's letter of 7 October 2003 was based on a perceived entitlement rather than being a request for a simplified treatment. However, although Mr Hall thought he was entitled to the treatment he claimed, he was in fact seeking the agreement of Customs to it and he received that agreement. Thirdly, we agree that Mr Pernavas's internal enquiries were made on the basis that he was seeking guidance about the law rather than about an accounting treatment but the fact is that Mr Pernavas's letter of 28 November 2003 amounted to an agreement that the Appellant's proposal was "right" for the accounting periods prior to the Budget of 2003.

Another factor which could be in favour of the conclusion that there was no binding agreement is that when the repayment had been made the Appellant did not alter its till accounting treatment for the voupons but continued to enter into the tills the full value of the qualifying goods and the discounted value of the redemption goods. However, it is relevant that the agreement of 2003 applied only "up to 9 April 2003" as mentioned in Mr Hall's letter of 7 October 2003; that by October 2003 the law had been changed; and that after Mr Pernavas's letter of 28 November 2003 the Appellant knew that Customs was of the view that the change in the law had altered the position as from 9 April 2003. That could also explain why in September 2004 the Appellant asked for a new agreement for the same treatment to continue after 2003 and why the Appellant's letter of 29 March 2005 to Customs with the claim for 2003 to 2005 did not mention any binding amendment.

We have also considered the relevance of the fact that, when dealing with the meal deals, Customs refused a retrospective amendment whereas the decision about the voupons was retrospective; we ask whether this points to the conclusion that no retrospective agreement would be made. However, although the change to the meal deals was not made retrospective, the changes relating to pre-till thefts of cash, and the use of the advantage card to acquire goods of a value above £50, were. Customs do have power under regulation 67(1) to reach an agreement for "any" accounting period. We also recognise that the two notices of appeal to the Tribunal did not mention that the Appellant was of the view that there had been a binding amendment to the retail scheme but the fact remains that the argument was made fully before us.

Finally we have considered the oral evidence of Mr Hall, which we accept, that his initial claims were made on the basis that the Appellant was entitled to rely upon the law and Notice 727/4. As will be clear from our decisions on issues (1) and (2) Mr Hall was mistaken in his views about the law and about the Notice but so was Mr Pernavas and so was Customs' Retail Unit of Expertise. That does not alter the fact that they reached an agreement which was, in the terms of paragraph 2(6) of Schedule 11, an agreement permitting the value of the supplies of qualifying goods and redemption goods accompanied by a voupon to be determined by an agreed method. The agreement was not to apply paragraph 7.18 in its correct interpretation; the agreement was that the Appellant could account for value added tax on the reduced value of the qualifying goods, and the full value of redemption goods purchased with a voupon, for the accounting periods ending in April 2003. The agreement was only for the period up to 9 April 2003, the date specifically mentioned in Mr Hall's letter of 7 October 2003 and impliedly accepted by Mr Pernavas in his letter of 28 November 2003 when he said that the recent Budget had changed the treatment.

Finally we note that we did not receive any evidence from Mr Pernavas as to his intentions at the time the agreement was reached and the repayment made.

From all these factors we conclude that there was a meeting of minds in November 2003 and that the parties agreed a binding amendment to the bespoke retail scheme for a period which started in 2002 and ended with the Budget of 2003.

We conclude that Customs did agree a binding amendment to the Appellant's bespoke retail scheme. That conclusion means that the appeal must be allowed and that we do not need to consider issue (4) but as arguments were put to us we express our views.

4. Was the assessment invalid? 101. The final issue would only arise if there had not been a binding amendment to the retail scheme agreement and is whether the assessment was invalid because it should have been raised under section 73 of the 1994 Act and any new assessment would not comply with the time limits in section 73.

The legislation

The relevant parts of section 73 of the 1994 Act provide:

"73 Failure to make returns etc. …

(2) In any case where, for any prescribed accounting period, there has been paid or credited to any person-

(a) as being a repayment or refund of VAT, or

(b) as being due to him as a VAT credit

an amount which ought not to have been so paid or credited, … the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly. …

(6) An assessment under subsection … (2) … above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following:

(a) 2 years after the end of the prescribed accounting period; or

(b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of an assessment under subsection … (2) … above, comes to their knowledge.

The relevant parts of section 80 provide:

"80 Recovery of overpaid VAT

(1) Where a person has … paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose. …

(4A) Where-

(a) any amount has been paid … to any person by way of a repayment under this section, and

(b) the amount paid exceeded the Commissioners' repayment liability to that person at that time,

the Commissioners may, to the best of their judgment, assess the excess paid to that person and notify it to him….

(4C) Subsections (2) to (8) of section 78A apply in the case of an assessment under subsection (4A) above as they apply in the case of an assessment under section 78A(1).

(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations, and regulations under this section may make different provision for different cases."

Section 80(4C) incorporates the time limits in section 78A the relevant part of which provides:

"78A(2) An assessment made under subsection (1) above shall not be made more than two years after the time when evidence of facts sufficient in the opinion of the Commissioners to justify the making of the assessment comes to the knowledge of the Commissioners."

The regulations made under the provisions of section 80(6) are in regulation 37 of the 1995 regulations. Regulation 37 provides:

"37. Any claim under section 80 of the Act shall be made in writing to the Commissioners and shall, by reference to such documentary evidence as is in the possession of the claimant, state the amount of the claim and the method by which that amount was calculated."

The arguments

For the Appellant Mrs Hall argued that Customs only had the power to assess under section 80(4A) if an amount had been paid by way of repayment under section 80. Under section 80(2) Customs were only liable to repay an amount on a claim being made for that purpose. Any claim under section 80 was governed by regulation 37 of the 1995 Regulations. There was no evidence that the repayment had been made to the Appellant under section 80. Also, because section 80(1) only applied where a payment had already been made to Customs, it could not apply to an accounting period which was a repayment period where no tax was paid. Part of the Appellant's claim for repayment made in June 2003 was in respect of the accounting period ending in November 2002 and that was a repayment period. She relied upon University of Sussex v Customs and Excise Commissioners [2001] STC 1495 for the principle that section 80 could not apply to repayment traders. As therefore the repayment of 2003 had not been made under section 80 it followed that the assessment could not be under section 80(4A) and so it must have been made under section 73.

Mrs Hall went on to argue that and any new assessment would not comply with the time limits in section 73. She cited Customs and Excise Commissioners v DFS Furniture Co plc [2004] STC 559; Customs and Excise Commissioners v Laura Ashley Ltd [2004] STC 635 and referred to Business Brief 26/2004 dated 14 September 2004.

For Customs Mr Thomas first argued that the assessment dated 25 March 2005 stated that it was a recovery assessment under section 80(4A) for a single sum of £2,006,794. Section 80, and no other section, applied where a taxable person, like the Appellant, claimed to have paid too much tax and claimed a repayment. Customs had repaid too much overpaid tax and sought to recover the amount overpaid under section 80 (4A). There was no reference in section 80 to accounting periods. The assessment related to the recovery of refunds and the accounting periods mentioned indicated the periods to which the refunds related and not the periods which were assessed. Section 80 only applied where Customs sought to recover amounts of tax which had been overpaid and then repaid and the assessment was limited to those amounts; it did not seek to recover the repayment which had been made relating to the accounting period ending in November 2002 where tax had not been paid with the return. He cited Laura Ashley at [6] for the principle that assessments should be made under section 80 for payment periods and section 73 for repayment periods. Although the payment made in December 2003 included a payment for the repayment period, the assessment did not seek to recover that amount. The time limits were set out in section 78A(2) and were that the assessment could not be made two years after evidence of the facts came to the knowledge of Customs. The assessment had been made well within two years from the date of the repayment.

Alternatively, Mr Thomas argued that if the assessment should have been made under section 73 then it should be treated as having been made under section 73. There was no requirement in the legislation that an assessment had to specify the section under which it was made. He cited International Language Centres Limited v Customs and Excise Commissioners [1983] STC 394 and House (trading as P & J Autos) v Customs and Excise Commissioners [1996] STC 154 for the principle that there was no statutory provision which prescribed the form of notification of assessments so long as the taxable person was informed, in reasonably clear terms, of the effect of the assessment and the period of time to which it related. He cited Corston v The Commissioners for HM Revenue and Customs (2006) at [32] and [39] for the principle that the information to the taxable person could be given by documents sent before the assessment. He cited BUPA Purchasing Limited v Others v Customs and Excise Commissioners (No 2) [2007] EWCA Civ 542 at [3] and [4] for the principle that the reasons for an assessment were not part of the assessment and at [60] for the principle that the purpose of time bars was to protect the taxable person from being faced with a stale claim after the limitation period had expired.

Mr Thomas went on to argue that if the assessment were to be treated as made under section 73 then the question arose as to whether it was within the time limits set out in section 73(6)(a). Here the authorities cited by Mrs Hall established different principles. Croydon Hotel was authority for the principle that time ran from the accounting period in which the claim was made; here the claim had been made in June 2003 and the assessment was made in March 2005 which was within two years. Laura Ashley was authority for the principle that time ran from the accounting period to which the repayment related; here those accounting periods ran from February 2002 to May 2003 so all but the last would be out of time. DFS was authority for the principle that time ran from the end of the prescribed accounting period in which the mistaken repayment was made; here the mistaken repayment was made in December 2003 which was in the accounting period ending in February 2004 and the assessment was made in March 2005 which was well within two years As DFS was a judgment of the Court of Appeal it should be preferred.

Reasons for decision

In considering the arguments of the parties we first ask whether the assessment should have been made under section 73 or 80; if it should have been made under section 73 we then ask whether it can be treated as having been so made and, if so, whether it is in time. We remind ourselves that the repayment was made in December 2003, which was during the Appellant's accounting period ending in February 2004. The assessment was made in March 2005.

We begin by analysing the repayment. This was made on 11 December 2003 and related to five accounting periods. In four of those periods the Appellant had paid tax to Customs with its return and in one period it had claimed a repayment. Although the repayment did not say so, the statutory provisions governing the repayment were different. The repayments for the four accounting periods where the Appellant had paid tax were governed by section 80. Section 80(1) applies where a taxable person claims that he has paid too much tax and that was the case in those four periods. Section 25(3) applies where the amount of input tax credit in any period exceeds the output tax due and provides that the amount of the excess shall be paid to the taxable person. That applied to the repayment for the accounting period ending in November 2002. The claim for repayment was in effect a claim to increase the amount of input tax credit in that period, and so to increase the amount of the excess which should be paid by Customs to the Appellant.

113. The assessment related only to the refunds in the periods in which the Appellant had paid tax; it did not relate to the period in which a repayment return had been made. The assessment stated that it was made in exercise of the powers contained in section 80(4A). Section 80(4A) applies where a repayment under the section has been made which is greater than Customs' liability and that was the case in this appeal. Section 80(4A) gives the power to assess and Customs assessed the Appellant under that power. Although section 80(1) only applies where a payment of tax has been made by a taxable person, and so does not apply in a repayment period, the assessment did not seek to recover any overpayment made for the repayment period ending in November 2002.

The question then arises as to whether the assessment was made within the time limits set out in section 78A(2). We note that the provisions of section 78A(2) mirror those of section 73(6)(b) but with a time of two years rather than one year. However, the provisions of section 78A(2) contain no equivalent of section 73(6)(a). Section 78A(2) refers to "evidence of facts" and the meaning of the phrase was clarified by the Court of Appeal in DFS.

In DFS the judgment of the Court of Appeal was given on 16 March 2004. There a judicial decision in 1996 meant that the appellant had overpaid tax. The appellant claimed repayments for the period from 1993 to 1996 and in 1997 Customs made the repayments to the appellant. In 2001 the Court of Justice held, in effect, that the judicial decision in 1996 had been wrong and in September 2001 and December 2001 Customs issued assessments under section 80(4A) to recover the repayments. The appellant argued that the assessments were out of time and the question arose as to whether the effect of a judgment of the Court of Justice was "evidence of facts" within the meaning of section 78A(2). The Court of Appeal held at [44] that the phrase did not include the legal effect of either a statute or a judicial decision. At [52] the Court said that section 73(6)(a) provided a limitation period applicable to cases where money was paid under a mistake of law and that the "prescribed accounting period" mentioned in section 73(2) was that in which the repayment was made. At paragraph [58] the Court applied the provisions of section 73(6)(a) to the facts of that case. The Court did not say that that could not be done because the assessment had been made under section 80(4A).

From DFS therefore we derive the principle that the time limit for cases where money was repaid under a mistake of law is found in section 73(6)(a) and that that provision can be applied to an assessment made under the powers given by section 80(4A). The two year time limit in section 73(6)(a) runs from the prescribed accounting period in which the repayment was made. In this appeal the repayment was made in December 2003 which was in the accounting period ending in February 2004 and the assessment was made in March 2005 which was well within the two year period.

We conclude that the assessment was correctly made under the powers given by section 80(4A) and that it was in time.

That conclusion means that we do not have to go on to consider Mr Thomas's alternative arguments but we briefly express our views. Mr Thomas's alternative argument was that, if the assessment had to be made under section 73, then it should be treated as if it had been so made. We have sympathy with this argument because we are not aware of any authority which has declared an assessment invalid just because it was stated to be made under the powers given in the wrong section. In considering the question whether the assessment, if it was made under section 73, was in time we have referred to the authorities cited to us but prefer the judgment of the Court of Appeal in DFS to the judgment of the High Court in Laura Ashley as DFS was a later judgment of the Court of Appeal.

Decision

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

(1) that the repayment was not made on the correct view of the law;

(2) that the repayment was not in accordance with paragraph 7.18 of Notice 727/4 and that, in any event, the Appellant was not entitled to rely on that paragraph;

(3) that Customs had agreed a binding amendment to the Appellant's retail scheme; that conclusion means that the appeal must be allowed and the assessment quashed and so we do not need to consider the final issue but as arguments were put to us we express our views which are:

(4) that, if there had not been a binding amendment to the retail scheme, then the assessment was correctly made under the powers given by section 80(4A) and that it was in time.

The appeal is accordingly allowed.

DR A N BRICE

CHAIRMAN

RELEASE DATE:

LON/2005/0151

04.04.08

Authorities referred to at the hearing but not mentioned in Decision

Roger John Vulgar v The Commissioners of Customs and Excise [1976] VATTR 197

Silvermere Golf and Equestrian Centre Ltd v The Commissioners of Customs and Excise 1981) Tribunal Decision No.1122

A K & A R Din trading as Indus Restaurant v The Commissioners of Customs and Excise (1984) Tribunal Decision No 1746 .

Customs and Excise Commissioners v J Boardmans (1980) Ltd [1986] STC 10

International Language Centres Ltd v Customs and Excise Commissioners [1983] STC 394

House (trading as P & J autos) v Customs and Excise Commissioners [1994] STC 211

Garcia Group v The Commissioners of Customs and Excise (1994) Tribunal Decision No 13130

Alexander and Christine Wadlewski v The Commissioners of Customs and Excise (1995) Tribunal Decision No 13340

Ian Briggs v The Commissioners of Customs and Excise (1995) Tribunal Decision No 13603

L & P Fryer v The Commissioners of Customs and Excise (1996) Tribunal Decision No 14265

The Burton Group plc v The Commissioners of Customs and Excise (1997) Tribunal Decision No 15046

Kuwait Petroleum (GB) Ltd v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488

Debenhams Retail plc v Customs and Excise Commissioners [2005] STC 1155

Ford Motor Company Limited v Her Majesty's Revenue and Customs [2007] EWCA Civ 1370

This Decision was originally released to the parties on 9 April 2008.

This version corrects clerical mistakes under Rule 30(6).

DR A N BRICE

CHAIRMAN

RELEASE DATE: 15 May 2008

LON/2005/0151/14.05.08