Category Archives: Tribunal

VAT: Are sales from Student Union shops exempt?

By   5 November 2018
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Latest from the courts

In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here

The two issues before the UT were:

  • were the shops eligible bodies, and
  • were the sales closely related to education supplies?

 Background

The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.

Legislation

The legislation (where relevant to this case) is:

VAT Act 1994, Group 6, Item No 1, item 4

1 The provision by an eligible body of (a) education; …

4 The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply…

Decision

Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.

Commentary

The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.

Our offering to education bodies here

VAT: Valuation – interest free credit

By   15 October 2018
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Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

  • a consumer purchases goods in a Dixon store and pays a deposit to Dixon
  • the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
  • the customer gives authority to the loan company to pay the money borrowed to Dixon
  • the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
  • the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
  • the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms.  As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.

VAT e-books to be reduced rated?

By   10 October 2018
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The EC will put forward a proposal to permit EU Member States to introduce a reduced rate for the supply of e-books to bring them into line with traditional books (which, uniquely, are zero rated in the UK). Details of the latest court decision and reasoning here and an ECJ decision on the matter here

What are e-books for this proposal?

e-book is short for “electronic book.” It is a digital publication that can be read on a computer, e-reader, or other electronic device. e-books are available in several different file formats. There are many types of e-book formats, all of which support text, images, chapters, and page markers . An e-book may be a novel, magazine, newspaper, or other publication. However, the electronic versions of magazines and newspapers are often called “digital editions” to differentiate them from electronic books. It is likely that digital editions will be included in the proposed reduce rate proposal.

Timeframe

It is likely that the proposal will be adopted quite quickly once the formalities have been completed, so watch this space.

HMRC stance

Previous cases have underlined HMRC’s position that they view traditional physical books and online supplies as two different supplies, even if the content is similar, or even identical. It will be interesting to see how they react to the EC’s adoption of these proposals, especially in the current political environment.

Action

If you, or your clients, supply e-books, it is important to monitor this position. Failure to respond to any changes may mean too much VAT being accounted for and an EU-wide commercial competitive disadvantage. We will report on the latest on e-books as soon as possible any final decisions are made.

VAT – When is chocolate not chocolate (and when is it)?

By   4 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Kinnerton Confectionery Ltd the issue was whether a product could be zero rated as a cooking ingredient, or treated as standard rated confectionary (a “traditional” bar of chocolate.)

Background

The product in question was an allergen free “Luxury Dark Chocolate” bar. It was argued by the appellant that it was sold as a cooking ingredient and consequently was zero rated via The Value Added Tax Act 1994, section 30(2) Schedule 8. HMRC decided that it was confectionary, notwithstanding that it could be used as a cooking ingredient.

Decision

The judge stated that what was crucial was how the chocolate bar was held out for sale. In deciding that the chocolate bar was confectionary the following facts were persuasive:

  • the Bar was held out for sale in supermarkets alongside other confectionery items and not alongside baking products
  • it was sometimes sold together with an Easter egg as a single item of confectionery
  • although the front of the wrapper included the words “delicious for cakes and desserts”, it contained no explicit statement that the Bar was “cooking chocolate” or “for cooking”
  • the back of the wrapper made no reference to cooking. It also stated that the portion size was one-quarter of a bar. Portion sizes are indicative of confectionery, not cooking chocolate
  • Kinnerton’s website positioned the Bar next to confectionery items, and did not say that it was cooking chocolate, or that it could be used for cooking
  • neither the wrapper nor Kinnerton’s website contained any recipes, or any indication of where recipes could be found
  • the Kinnerton brand is known for its confectionery, not for its baking products. All other items sold by Kinnerton are confectionery, and the brand is reflected in the company’s name
  • the single advertisement provided as evidence positioned the Bar next to confectionery Items, and did not say that the Bar was “cooking chocolate”; instead it made the more limited statement that it was “ideal for cooking”
  • consumers generally saw the Bar as eating chocolate which could also be used for cooking 

Commentary

Clearly, the FTT decided that consumers would view the chocolate bar as… a chocolate bar, so the outcome was hardly surprising. This case demonstrates the importance of packaging and advertising on the VAT liability of goods. Care should be taken with any new product and it is usually worthwhile reviewing existing products. This is specifically applicable to food products as the legislation is muddled and confusing as a result of previous case law. This extends to products such as pet food/animal feedstuffs which while containing identical contents have different VAT treatment solely dependent on how they are held out for sale. And we won’t even mention Jaffa Cakes (oops, too late).

VAT – Catering at a university campus; exempt?

By   3 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Olive Garden Catering Company Ltd (OGC) the mian issue was whether catering which was provided to the University of Aberdeen (UOA) students was an exempt supply. The specific issue was whether the catering was a supply “closely connected to education” which in turn depended on which entity was actually making the supply to students. For exemption to apply, OGC would need to be a principal in purchasing the food and other goods and an agent of UOA (pictured above) in delivering the catering (the exemption could not apply to a supply by OGC to the students).

Background

The central issue was whether the supply of food and staff by the appellant to UOA was a single supply of catering services at the standard-rate for VAT purposes (HMRC’s case) or that the main supply was for food at the zero-rate, with the supply of staff being a separate supply and eligible for staff wages concession which was the appellant’s stance. I comment that the procurement as principal and the delivery of catering as agent is common practice in the education sector and this case focussed on whether the relevant documentation actually reflected the economic reality.

Decision

The HMRC internal VAT manual VTAXPER64300 sets out the general principles for determining the VAT treatment of supplies made under a catering contract, which in turn depend in some situations on the capacity in which the caterer supplies its service, whether as principal or agent in the agreement. Of relevance in this case were the following statements:

(1) In general, it has been established practice that agency contracts are most often used in the education sector.

(2) Under agency contracts for the provision of catering it is accepted that:

  • The client makes a taxable supply of catering to the consumer, or the catering is subsumed within an overall exempt supply, eg; of education
  • VAT is not charged to the client on wages of the catering staff employed at the unit
  • VAT is charged on any management fee plus taxable stock and other services
  • Schools may only exempt supplies which are closely related to the overall provision of education

(3) This contributes to fair competition with in-house providers, and the contract catering industry acknowledges the value of that.

In respect of the contract for the supply of catering services, UOA was the principal and OGC was the agent by reference to the control exercised over; menu specifications, pricing, and the premises in which catering was carried out. The relevant contracts set out that the terms were set by UOA and were indicative of its status as the principal in the catering contract. The judge stated that the catering contracts between UOA and OGC appeared to be an agency contract with OGC acting as the agent. Consequently, the food produced OGC and served by its staff at UOA’s halls of residence was potentially a supply of food in the course of catering that can be subsumed within the overall exempt supply of education by UOA.

Commentary

A win for the appellant, but only after comprehensive consideration of all points and the substantial detailed documentation by the judge. There has been a run of Tribunal cases on the agent/principal point (not just in education and which I have covered in previous articles) and this case serves to demonstrate that each case will be determined on its merits. There can be no blanket VAT treatment and certain factors will point one way and others to a different VAT treatment. In my experience, HMRC are always eager to challenge agent/principal treatment and it is an area which has an enormous tax impact on a business. I always recommend that any contracts/documentation which cover potential agent/principal issues are reviewed to avoid unwanted attention from HMRC. Slight adjustments to agreements often assist in reaching the desired tax treatment. Don’t leave it to chance!

VAT: Adecco Court of Appeal case. Agent or principal?

By   6 August 2018
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Latest from the courts

In the recent Court of Appeal (CA) case of Adecco here the issue was whether the services provided by Adecco – an employment bureau which supplied its clients with temporary staff (temps) were by way of it acting as principal or agent.

Background

Details of the issues as considered in the FTT and UT were covered here 

Overview

As is often the case in these types of arrangements, there are some matters that point towards the appellant acting as agent, and others indicating that the proper VAT treatment is that of principal. The important difference, of course, being whether output tax is due on the “commission” received by Adecco or on the full payment made to it (which includes the salaries of the relevant workers).

Decision

The CA decided that the supply of temporary staff by Adecco was as principal and consequently, VAT was due on the full amount received, not just the commission retained.

Reasoning

The CA focussed on the contractual position. Among the reasons provided for this decision were as follows (I have somewhat summarised). I think it worthwhile looking in some detail at these:

  • There was no question of the temps having provided their services under contracts with the clients: no such contracts existed. The contractual position must be that the temps’ services were provided to clients in pursuance of the contracts between Adecco and its clients and Adecco and the temps.
  • Although the contract between Adecco and a temp referred to the temp undertaking an assignment “for a client” and providing services “to the client”, it also spoke of the client requiring the temp’s services “through Adecco” and of the temp being supplied “through Adecco”.
  • While temps were to be subject to the control of clients, that was something that the temps agreed with Adecco, not the clients. The fact that the contract between Adecco and a temp barred any third party from having rights under the Contracts (Rights of Third Parties) Act 1999 confirms that the relevant provisions were to be enforceable only by Adecco, which, on the strength of them, was able to agree with its clients that the temps should be under their control. Adecco can fairly be described as conferring such control on its clients. (Broadly; the employment regulations required Adecco to treat itself as a principal with the result that that it could not therefore treat itself as an agent).
  • Adecco paid temps on its own behalf, not as agent for the clients.
  • Adecco by did not drop out of the picture once it had introduced a temp to a client. It was responsible for paying the temp (and for handling national insurance contributions and the like) and had to do so regardless of whether it received payment from the client Adecco also enjoyed rights of termination and suspension. It is noteworthy (as the UT said) that the contract between Adecco and a temp proceeded on the basis that a temp’s unauthorised absence could “result in a breach of obligations which we owe to the client”.
  • Adecco did not perform just administrative functions in relation to the temps. The temps, after all, were entitled to be paid by Adecco, not the clients.
  • Adecco charged a client a single sum for each hour a temp worked. It did not split its fees into remuneration for the temp and commission for itself.
  • The fact that Adecco had no control over a temp in advance of his taking up his assignment with the client did not matter.
  • Adecco undoubtedly supplied the services of employed temps to its clients.
  • In all the circumstances, both contractually and as a matter of economic and commercial reality, the temps’ services were supplied to clients via Adecco. In other words, Adecco did not merely supply its clients with introductory and ancillary services, and VAT was payable on the totality of what it was paid by clients.

Action

Clearly this was not the outcome the appellant desired, and it may impact similar arrangements in place for other businesses.  Although found on the precise nature of the relevant contracts, the outcome of this case is not limited to employment bureaux and similar but must be considered in most cases where commission is received by an “agent”. These may include, inter alia; taxi services, driving schools, transport, travel agents, training/education, online services, repairs, warrantee work and many other types of business. It is crucial that contracts are regularly reviewed the ensure that the appropriate VAT treatment is applied and that they are clear on the agent/principal relationship. If there is any doubt, please contact us as it is often one of the most ambiguous areas of VAT.

VAT – Zipvit Court of Appeal decision

By   18 July 2018
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Latest from the courts

The Zipvit Court of Appeal (CA) case here

Background

A full background of this long running case may be found here

In summary: It was previously decided that certain supplies made by Royal Mail (RM) to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services made retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price. HMRC maintained that the absence of a VAT invoice showing that VAT was charged to Zipvit by RM, and giving details of the rate of tax and the amount charged, was fatal to Zipvit’s claim to recover input tax.

The decisions in the First Tier Tribunal (FTT) and the Upper Tribunal (UT) went against Zipvit so the appeal went to the CA.

Decision

The CA upheld the decisions in the previous courts. The appellant failed to demonstrate that the relevant VAT had been “due or paid” on the supplies received from RM. It further appeared that evidence which was not present at earlier hearings showed that the amounts paid were exclusive of VAT which meant that VAT was not embedded in the consideration paid.

Importance

In the words of the judge Lord Justice Henderson the appeal raised some important questions of principle in the law of VAT. They arise when supplies of goods or services, which were wrongly assumed by the parties to the relevant transactions and by HMR to be exempt from VAT at the time of supply, are later discovered to have been subject to the standard rate of tax when they were made, following a decision to that effect by the Court of Justice of the European Union. Where the recipient of those goods or services was itself a registered trader which made taxable supplies on which it accounted for output tax, the basic question is whether, once the true position has become known, the recipient is in principle entitled to recover as an input tax credit the tax element of the consideration which it paid for the original supplies. If so, does it make any difference if the supplier has failed to pay the tax which should have been paid on the original supplies, and if the recipient is in consequence unable to produce a tax invoice from the supplier showing the amount of the input tax which it seeks to recover?

So a fundamental tenet of VAT was considered, as well as the matter of this being the lead case behind which many others were stood. I understand that the quantum of claims submitted is circa £1 billion in total so there was a lot riding on this decision.

Commentary

In my view, this is an important case for the above technical reasons and the whole decision bears reading in order to understand some of the intricacies of a business claiming input tax.

New RCB 5 – VAT treatment of goods supplied on approval

By   25 June 2018
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Goods supplied on approval

Meaning

Goods supplied on approval is an arrangement under which items of durable nature are provided to a prospective customer for a pre-purchase trial. These items are returnable after a specified period in re-saleable condition if not accepted for purchase.

New publication

HMRC has announced via Revenue and Customs Brief 5 (2018) “RCB 5” changes to the way goods supplied on approval are treated for VAT purposes.

The broad thrust of RCB 5 is that, in HMRC’s opinion, taxpayers are using the rules for goods supplied on approval when this treatment is inappropriate.

The goods supplied on approval rules

Output tax is due at the end of the approval period. That is, tax is deferred until a time the goods are adopted (if they are). These rules are distinct from a supply of goods with a subsequent right to return them. In these cases the tax point is when title passes.

Sale on approval was considered by the Tribunal in the case of Littlewoods Organisation plc (VTD 14977). The Tribunal held that goods were supplied on approval where there is no contract of sale unless, and until, the recipient concerned adopted or was deemed to have adopted the goods. The judge in that case decided that Littlewoods did not supply goods on approval. This case appears to have triggered an HMRC initiative to look at the number of businesses which may be incorrectly deferring output tax by using these rules. It concluded that a lot fewer taxpayers were actually providing goods on approval than previously thought.

Technical

The basic tax point for a supply of goods in these situations is determined by the VAT Act 1994 section 6(2) (c) which applies in the case of goods on approval. It delays the basic tax point until the time when the goods are adopted by the customer or twelve months from the date they were originally despatched, whichever is the earlier

Section 6(2)

(2) … a supply of goods shall be treated as taking place –

(a) if the goods are to be removed, at the time of the removal;

(b) … ;

(c) if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time it becomes certain that the supply has taken place or, if sooner, 12 months after the removal.

The guidance

HMRC has published the RCB to provide guidance on how businesses should review their transactions in order to establish whether they are using sale on approval treatment correctly.

Indicators of goods supplied on approval

Whether or not goods are supplied on approval will depend on the facts in each case and will require consideration of a number of indicators which will have to be carefully weighed against each other.  Relevant indicators include the following factors but they are not exhaustive.

  • The terms and conditions of trading, and all contractual terms applying.
  • The time when title in the goods passes to the buyer.
  • The time at which the buyer has the right to dispose of the goods as owner.
  • The view presented to the customer in marketing literature, order forms, delivery notes, statements etc.
  • The rights of the customer to return unwanted goods.
  • The terms of any supply of credit finance provided with the goods.
  • The time when payment for the goods is demanded.
  • The time when payment for the goods is received.
  • The time when the buyer assumes responsibility for the upkeep and insurance of the goods.
  • Anything the buyer does to signify his adoption of the goods.
  • The calculation of the minimum payment due for goods delivered.
  • The time when a sale is recognised in the financial accounts of the business.

(these indicators are not featured in RCB 5).

Deadline

HMRC state that from 18 September 2018 all business must change their accounting systems and accurately apply the appropriate VAT treatment. However, no action will be taken for past inaccuracies and taxpayers will not be required to make any changes to records or declarations.

Delivery charges

In normal circumstances, the fee charged for delivery follows the VAT liability of the goods being supplied (it is a single supply of delivered goods). However, the RCB somewhat controversially, states that when goods are supplied on approval the delivery charge is not ancillary. HMRC conclude that as delivery occurs before the customer or the supplier know whether there will be a supply of goods, delivery is an aim in itself, represents a separate, independent supply and is not dependent upon the supply of goods. The purpose of the delivery service is to facilitate the customer inspecting the goods to decide whether or not they wish to purchase them. This is always a standard rated supply and consequently, output tax is due on this fee, whether or not the goods are adopted (and with a tax point prior to adoption or return). I expect that this analysis will be challenged at some point as it does not, in my mind, sit comfortably with previously decided case law.

Action 

Businesses which consider themselves to be supplying goods on approval (usually mail order businesses) need to review their terms and manner of trading to identify whether that is indeed the case. Consideration must be given to the above indicators, the ruling in the Littlewoods case and the information in RCB 5. If what is being provided falls outside the definition of a supply on approval, the necessary changes are required in order to recognise a sale at an earlier time. Even if goods are supplied on approval, the VAT treatment of delivery charges need to be reconsidered and adjusted if need be. We can assist if required.

VAT: Wakefield College – Court of Appeal case

By   1 June 2018
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Latest from the courts

Further to my article on the Wakefield College case here the Court of Appeal (CA) has dismissed the college’s appeal that certain of its activities were non-business.

Background 

The detailed background was set out in the above linked article, but to recap: In order for certain building works supplied to the appellant to be zero rated the resultant building has to be used for a “relevant charitable purpose” – that is; not for business purposes. This is the case even if there is a small amount of business activity in the building (as long as these can be shown to be insignificant; which is taken to be less than 5% of the activities in the whole building).

The issue

The issue here was whether the education provided by the college could be deemed non-business because, although the majority was grant funded, students were also required to make a contribution to their education. This is dependent upon whether the provision of courses by the college to students paying subsidised fees was, an economic activity carried on by it for the purposes of article 9 of the VAT Directive and consequently, a “business” within Note (6)  of Group 5 in Schedule 8 to the VAT Act 1994.

The 1994 Act provides, at group 5 of schedule 8, for the zero-rating of various supplies made in the course of construction of certain buildings including:

“The supply in the course of construction of

(a) a building … intended solely for use for … a relevant charitable purpose…

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity”.

Note (6) to group 5 provides:

“Use for a relevant charitable purpose means use by a charity… –

(a) otherwise than in the course or furtherance of a business.”

Decision

The CA found that the fact that the students paid for education (an exempt supply) meant that it was a business activity as consideration flowed in both directions. The proportion of the costs paid by the student amounted to between 25% and 30% of the total cost and could therefore not be deemed insignificant.

Commentary

It is worth reconsidering comments made by the judge in his summing up in the Upper Tribunal hearing.

 “We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

So, although the result may be seen as “unfair” on the college, the strict letter of the VAT legislation does not provide the courts with any alternative but to impose a VAT charge on the construction works – a charge which the college will have to bear as it is unable to recover it as input tax due to the partial exemption rules.

This illustrates the complexity with both the concept of business/non-business and property and construction issues. When the two technical areas collide, as in this case, matters can get very complicated and proper advice is vital. This is especially important with charities as they benefit from very few VAT reliefs and it is important to ensure that those available are correctly taken advantage of.

VAT: No such thing as a free meal (or drink) – The M&S case

By   14 May 2018
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Latest from the courts – Marks & Spencer First Tier Tribunal (FTT) case; what is the value of a “free” bottle of wine?

Background

I shall do this without the seductive TV ad voiceover… Like many retailers M&S has and does run various promotions designed to improve its financial performance. A number of those promotions are based on the proposition that a customer who buys certain products from M&S will receive something “free”. In this instant case, M&S sells a combination meal known as a “Dine In”. This comprises; a main course, a side dish and a pudding, along with a bottle of wine which is advertised as free: “Dine In for £10 with Free Wine”. I’m sure many have sampled these offers. The commercial rationale for the promotion involved M&S taking a calculated risk. It reached a decision to lower its aggregate profit margin on the separate items in the offer compared to their retail sales price in the expectation that this will be more than compensated for by changes in customer behaviour as a result of the promotion.

It is interesting to note that  M&S anticipated the benefits could arise in a number of ways. Sales of the items included in the promotion might increase, which would improve turnover and put the retailer in a stronger negotiating position with its suppliers of those items. More casual customers might take up the promotion, increasing footfall. In doing so, they and other customers might take the opportunity to add other items to their shopping basket, the so-called “halo effect”. In a less tangible sense, the M&S’s brand might be generally enhanced.

In M&S’s online T&Cs the following narrative appears “For the avoidance of doubt, as the value attributed to the free wine in this deal is £0.00, if returned, no refund will be due…”

The aggregate shelf price of the three food items in the Dine In promotion, if bought separately, varied considerably but would always have been at least £10, and in most cases more.

The VAT issue

Should output tax be accounted for on the whole supply? Or, assuming that the food was zero rated, what, if any, output tax should be declared on the wine? Or should the entire supply be VAT free?

The contentions

M&S’s first contention was that the wine was free so no output tax was due. The reason why the wine was provided free was for M&S to receive certain benefits (set out above).  Secondly, the Dine In Promotion is in fact two promotions. The first is an offer of three food items for £10. The second promotion, conditional on the first, is an offer of free wine. The former offer makes commercial sense both for M&S and the customer on its own terms. The food offer is complete in its own right, and the supply of wine for no consideration is a separate transaction. Thirdly, this is a multiple supply. The Dine In Promotion results in three or four separate supplies for VAT purposes, namely the three food items and the wine. This is not a case of what would otherwise be a single supply being artificially broken down. There are separate transactions, entitled to be valued separately for VAT. A further argument was that there is no separate or allocable consideration for the wine element of the Dine In Promotion. The free wine is an inducement, and is conditional on the food offer, but does not generate any separate identifiable consideration for VAT purposes.

Clearly HMRC disagreed and argued that the Dine In deal represented the sale of four items for £10. There was no free gift of the wine and consequently, an element of the £10 should be allocated to the value of the wine.   Or put another way, it was a single promotional deal and is not a sale of food items for £10 plus a supply of wine for nil consideration. HMRC further contended that the duty to account for output tax and the right to deduct input tax form an “inseparable whole”. M&S’s position, if correct, would result in a failure to impose a charge to tax on the ultimate consumer, and untaxed (or, in effect, zero rated) consumption of standard rated goods and that militates very strongly against M&S’s position.

It was agreed that, by purchase value, the wine represented the most expensive part of the meal deal. HMRC proposed a value of output tax of 70 pence per meal deal was appropriate.

Decision

The judge agreed with HMRC and that output tax was due on the element of the £10 price attributable to the wine. Contractually, the meal deal was a single offer with a conditional element, ie; the provision of the wine was conditional on the customer paying £10 for the purchase of the food items. Although the customer may perceive the wine to be free (presumably as a result of the way in which the meal deal was held out and advertised) however, for VAT purposes, the customer paid £10 for all four elements of the deal. The Dine In promotion was a single offer, with all four items supplied simultaneously and in the same till transaction for consumption on the payment of £10. Receipt of the wine was conditional on payment of the £10 and the purchase of the food items. The wine was not provided unconditionally and with no strings attached.

Commentary

This was hardly a surprising decision. Similar retail offers have been considered in the past and the outcomes were broadly similar to this decision.  The FTT distinguished Hartwell, Lex, Kuwait Petroleum, and Tesco plc cases in this respect which the appellants put forward to support their arguments. As always with VAT, promotions and offers can create valuation issues. It is important to consider VAT when marketing offers are provided.

UPDATE

July 2019

Via the Upper Tribunal (UT) case Marks and Spencer plc v Revenue and Customs Commissioners [2019] BVC 514 the UT upheld the FTT decision and dismissed M&S’s appeal.