Co-operative Retail Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 May 1992 |
| Date | 08 May 1992 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Apple and Pear Development Council v C & E Commrs VAT(Case 102/86) (1988) 3 BVC 274
Naturally Yours Cosmetics Ltd v C & E Commrs VAT(Case 230/87) (1988) 3 BVC 428
Supply - Value of supply - Value of goods where dividends are paid by retailer - Whether dividends discounts or distribution of profits - Meaning of dividend - Meaning of price discounts and rebates - Whether payment of a dividend dependent on a contingency could amount to a discount - Value Added Tax Act 1983, Value Added Tax Act 1983 section 2 section 9 section 10sec. 2, 9 and 10; Value Added Tax Act 1983 schedule 4 subsec-or-para 4Sch. 4, para. 4(1); Sixth Council Directive 77/388 of 17 May 1977, eu-directive 77/388 article 11art. 11A (OJ 1977 L145/1).
The issue was whether payments made to certain customers on the purchase of goods by them amounted to a reduction in the price of the merchandise so that the value of outputs was to be calculated after deducting those payments, or whether the payments or dividends represented distributions of profits with the result that they were not to be taken into account in the calculation of the taxpayer's VAT liabilities.
In 1988 the appellant introduced the shareholder card scheme in two of its stores with a view to expansion if successful. The number rose to a further 15 in 1990 and an additional 20 in 1991. Participating customers were required to invest £50 or more with the appellant and were entitled to a shareholder visa card and to receive a "dividend" of five per cent on all non-food purchases. The dividend was transferred annually into the customer's account. The scheme differed from the traditional dividend stamp scheme (which had always been regarded as a deductible expense for VAT purposes) in that the shareholders card scheme was only open to investing members of the appellant.
It was accepted by the appellant that the main purpose of the scheme was not to benefit shareholders but to increase its capital by means of the £50 minimum investment. Moreover, the retention of the value of dividends up until the point of the annual transfer into customer's accounts was of additional benefit to the appellant.
The scheme was introduced as a marketing device by a decision of the deputy chief executive. The tribunal found as a fact that the dividends were not those which were divided out of remaining profits after the payment of interest on share capital as contemplated by the appellant's rule 111. Instead they were due as a contractual obligation owed by the appellant to members who had satisfied conditions imposed on them by the scheme and had made purchases from the appellant.
The commissioners contended that appellant offered a dividend properly so called and not a discount because:
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(2) it was so named;
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(3) unlike the stamp scheme the shareholders card scheme was open only to members;
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(4) the dividends could not be considered to have been accounted for at the time of sale as the payment depended on a contingency - namely the member's continuing to be a qualifying member until the dividend due to him was credited to his share account;
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(5) they were treated in the accounts as distributions of profit; and
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(6) they were indeed distributions of profit.
The appellant contended that the name dividend as applied to what it was offering was not of importance. What mattered was what it represented which was in fact a contractual discount and not the distribution of profits because they never formed part of its profit.
Held, allowing the company's appeal:
1. It was clear from the terms of the sixth directive,eu-directive 77/388 article 11art. 11A, that account had to be taken in determining the taxable amount to any rebate given to a customer. Further, there was no difficulty in construing the word consideration as used in Value Added Tax Act 1983 section 10 subsec-or-para (2)sec. 10(2) of the 1983 Act as meaning the amount which after adjustment for whatever cause the purchaser actually paid. The dividends were capable of being rebates within the meaning ofeu-directive 77/388 article 11(A)(3)art. 11A(3)(b).
2. It was pertinent that in the Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 486sec. 486 interest paid on share capital of an industrial and provident society (unlike in the case of an ordinary company) was deductible for corporation tax purposes from that society's income. Also, a dividend calculated by reference to a member's purchases and paid by a society, such as the appellant, was deductible as an expense and was not to be regarded as a distribution.
3. The word dividend was used in the co-operative movement in two senses, the one meaning distribution of profit and the other synonymous with discount. The word itself used to describe the payments was of no significance.
4. The fact that the scheme was only open to investing members did not mean that the dividends represented a distribution of profit. Many companies offered benefits to their shareholders usually consisting of price reductions on merchandise purchased by qualifying shareholders. The only difference in the instant case was that payment was deferred. That could not be said to turn a discount into a distribution of profit.
5. The fact that the payment was dependent on the contingency of a period of time elapsing and a qualifying amount remaining in the account was not a significant factor. Once the member had earned the dividend by making a qualifying purchase he was contractually entitled to receive it unless he took a step to disentitle himself to such a credit. Nor could it be said that potential dividends were to be treated as part of the appellant's profits until credited to the respective accounts. Effectively the amounts were held in trust until distributed.
6. There was no significance to be attached to the manner in which the dividends were treated in the appellant's annual accounts which were produced for the purpose of providing information to those entitled to receive it and which, pursuant to the Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 486sec. 486 had to contain separate identification of interest payable on shareholder's capital and dividends and their treatment as an expense deductible from profit before taxation.
7. The most decisive factor in persuading the tribunal that the dividends were to be regarded as rebates, rather than the distribution of profit, was the contractual obligation upon the appellant to make payments regardless of the level of profit, whether it made a profit or loss and without reference to the magnitude of such profit or loss.
We find as a fact that the dividends are not the dividends contemplated by the appellant's r. 111(5)(i) but are due as a contractual obligation owed by the appellant to members who have satisfied the conditions imposed upon them by the scheme and have made purchases from the appellant. We are not persuaded, though it was suggested, that the discretion conferred upon Mr Harpham [the company's treasurer and investment manager] to waive the rules in appropriate cases undermines that finding. The great majority of payments are made, we find, because the appellant undertook to make them in consideration of the members' provision of capital investments and their making of purchases. That the appellant chooses to make payments which it is not strictly obliged to make cannot, in our judgment, affect the character of those payments which it makes pursuant to a contractual obligation. Moreover, we have concluded that the payments which have been made following the exercise by Mr Harpham of his discretion (and no doubt for reasons of good customer relations) are to be treated in the same way. Although not strictly due, we are satisfied that the payment in each such case would not have been made but for the...
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