In the First Tier tribunal (FTT) case of TalkTalk Telecom Limited the issue was the amount of consideration received on which output tax was due. Specifically, whether “prompt payment discounts” which were offered, but not taken up by customers, reduced the value of a supply.
Background
TalkTalk offered most of its retail customers the option of receiving a 15% discount on its services if their monthly bills were paid within 24 hours.
TalkTalk accounted for output tax on the basis that the consideration received was reduced by the discount, whether or not customers had in fact paid within the 24 hours. In other words; whether or not the discount had actually been applied so that customers paid less.
The appellant considered that this approach was consistent with Value Added Tax Act 1994, Schedule 6 Para 4(1), which provides:
“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”
HMRC’s contention was that the offer only reduced the consideration for VAT purposes where customers had actually paid the reduced amount, and that there was no reduction when the discount was not taken up.
Decision
The above legislation only applies to services supplied “on terms allowing a discount for prompt payment”. In deciding whether this was the case in this appeal the FTT analysed the contractual position.
The contracts were governed by terms and conditions (T&Cs) published on TTL’s website. This discount was not referred to in the T&Cs, but on a separate dedicated page within the same website.
The judge decided that the discount contractual term comes into existence at exactly the same moment as the payment and the supply. There was not a contractual term under the T&C’s under which a lower amount was payable if payments were made earlier. On this point, TalkTalk contended that the T&Cs were varied by the subsequent discount option, and, as a result, the services had been “supplied…on terms allowing a discount for prompt payment” as required by Para 4(1), but this argument was rejected.
As per the Virgin Media Upper Tribunal case the Tribunal considered that the position was different between services billed in advance, and services billed in arrears.
Advance payments
The contractual variation did not include an offer for the customer to pay a discounted amount at some point in the future, so Para 4(1) did not apply to services billed in advance.
Payment in arrears
The FTT ruled that customers accepted the discount offer after delivery of the services. The supply had therefore been made on the terms set out in the T&Cs, and the customer was therefore contractually required to pay the full amount. The discount option was an offer by the appellant to accept a lower sum with an earlier payment date to discharge that pre-existing contractual obligation. As a matter of law, this was an offer to accept a post-supply rebate of consideration already due and therefore it could not be a discount.
The appeal was dismissed.
Commentary
Another case which highlights both the complexity of the rules on consideration and the importance of contracts. At stake here was VAT of £10,606,226.00 which was deemed to be underpaid during a four-month period only. If in doubt – take advice!