Commissioners of Customs and Excise v Euphony Communications Ltd
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Hart,Mr Justice Hart |
| Judgment Date | 10 December 2003 |
| Neutral Citation | [2003] EWHC 3008 (Ch) |
| Docket Number | Case No: CH/2003/APP/0475 |
| Court | Chancery Division |
| Date | 10 December 2003 |
VAT Tribunal
The following cases were referred to in the decision:
Argos Distributors Ltd v C & E Commrs VAT(Case C-288/94) [1997] BVC 64
Bertelsmann AG v Finanzamt Wiedenbrück (Case C-380/99) [1990] ECR I-5163
Boots Co plc v C & E Commrs VAT(Case 126/88) (1990) 5 BVC 21
C & E Commrs v Littlewoods Organisation plcVAT[2002] BVC 71
EC Commission v Germany VAT(Case C-427/98) [2003] BVC 205
Elida Gibbs Ltd v C & E Commrs VAT(Case C-317/94) [1997] BVC 80
Empire Stores Ltd v C & E Commrs VAT(Case C-33/93) [1994] BVC 253
Freemans plc v C & E Commrs VAT(Case C-86/99) [2001] BVC 365
Naturally Yours Cosmetics Ltd v C & E Commrs (No. 2) VAT(Case 230/87) (1988) 3 BVC 428
Taxable amount - Commission paid in cash to business consultants in respect of own purchases and for introducing customers -Whether supplier entitled to treat commission as discount under Directive 77/388, the sixth VAT directive, art. 11(C)(1)- Freemans and Littlewoods considered.
The issue was whether the effect of the payment of commissions by the appellant was retrospectively to reduce the appellant's taxable turnover and to bring the payments within art. 11(C)(1) of the sixth directive as a price rebate. The commissioners maintained that the appellant's turnover was unaffected by the payment of commissions and that separate payments represented consideration for supplies of services by the consultants.
The appellant's main business activity was the provision of telecommunications services. It used a sales network of consultants who both used the appellant's services personally and recruited other consultants. Two types of commission were relevant to this appeal: (1) variable commission, based upon the use of the appellant's services either by the consultants or by persons recruited by them; and (2) fixed commission, paid upon the introduction of a new customer to the appellant, including that paid to the consultant upon becoming a customer of the appellant. Consultants earned commission in a variety of ways, but the appeal was concerned only with commission earned at what was referred to as the "personal level" in respect of actual telephone calls, residential and business lines and mobile phone calls. Upon introduction by the consultant of a new residential customer, he received a £5 credit on a designated phone bill and £5 as a customer commission. For a business customer, the consultant received commission of £5 for a single line and £10 per line for a multi-line dialler. The consultant received commission in respect of both his own purchases and sales to third parties.
In November 2001, the appellant's accountants submitted a voluntary disclosure requesting a refund of overpaid VAT in the sum of £2,364,334, later reduced to £618,947 because the original claim had included all payments made to consultants, some later conceded to be properly overheads of the its business.
The appellant submitted that the commission earned by the consultants in respect of their own purchases of the appellant's products and the sale of those products to third parties represented a form of retrospective discount or price rebate within art. 11(C)(1). In such cases, the consultant was not supplying anything of value to the appellant for which the commission could be regarded as consideration. With regard to the other types of commission that consultants could earn, it was accepted that the appellant was simply paying for a service provided by the consultant. Prior to the judgments in Freemans plc v C & E Commrs (Case C-86/99) [2001] BVC 365 and C & E Commrs v Littlewoods Organisation plc [2002] BVC 71, the appellant had treated the commission payable as an overhead of the company, not affecting its taxable turnover, but in the light of those cases, the appellant considered that its previous practice was incorrect and that VAT had been overpaid. Whilst the European Court in Freemans had not been asked to consider the application of art. 11(C)(1) in relation to the commission earned by the company's sales agents in respect of third-party purchases, this had been the subject of some discussion by the Court of Appeal in Littlewoods. In particular, it was considered that if an agent took commission in cash then, at least insofar as the commission was attributable to payments made in respect of the agent's own purchases, a reduction was allowable under art. 11(C)(1). That was the position established by the European Court in the case of Freemans and although the Freemans judgment was silent as to the position where the cash commission was attributable to payments made in respect of purchases by third parties, the Court of Appeal in Littlewoods found it difficult to see why art. 11(C)(1) should not apply equally in that circumstance. In the court's view, the principle of neutrality pointed to that conclusion. The appellant submitted that, following Littlewoods, there was no justification for treating commissions earned in respect of the sale of the same services to third parties any differently from commissions earned by consultants as a result of their own use of the services. There was no direct link between the consultant's right to commission and any service he provided or did not provide in relation to a third-party sale. As in Littlewoods, the consultant was entitled to commission whether or not he had provided any services in relation to sales to third parties. In the absence of a direct link, the commission earned by the consultants must, in the appellant's view, be treated as a price discount.
The commissioners identified two relevant supplies in this case: (1) telecommunications services supplied by the appellant to customers in return for a consideration; and (2) services of finding customers for the appellant, supplied by the consultants, also in return for a consideration. The consideration supplied by the appellant to the consultants did not, in the commissioners' view, reduce the consideration paid by the customers to the appellant and could not, therefore, be regarded as a discount. The commissioners submitted that if the appellant were to be entitled to deduct the cost of its payment of commissions from the taxable amount of its supplies, it would be paying less in output tax than it had received for the supply of its services. For the appellant to succeed it needed to show that the amount of tax paid exceeded the sum it finally received, but the reality was that the appellant accounted for output tax on the basis of the bills it submitted through its telecommunications services. It could not be said that the appellant was paying more in output tax than was represented by those bills. The amount paid by the appellant to the consultants was a separate supply and did not alter the fact that the appellant had received all the consideration due for its supply of services.
Held, allowing the company's appeal:
1. Contrary to the commissioners' submission, it was only the personal level with which the tribunal was concerned, and the evidence was that in order to earn commission a business consultant did not have to establish a structure or even introduce a single customer; it was possible to earn commission from the consultant's own use of the appellant's services.
2. With regard to the consultant's own purchases, for which the commission could only be taken in cash, there was no reason to distinguish the present case from Freemans. There was no difference between the consultant's own use of the appellant's services and the situation in Freemans where the agent, having made a purchase, took out cash assigned to her account in respect of the purchase. In Freemans, the payments relating to the agent's own purchases were treated as a reduction in price of the primary goods made after the supply had taken place, and a corresponding allowance was made under art. 11(C)(1).
3. The court in Littlewoods cited the decision of the European Court in Freemans with regard to the finding that where a commission was taken in cash a reduction under art. 11(C)(1) was appropriate. The fact that the consultants in the present case did not have the option of applying the commission in respect of future purchases did not alter the fact that the court had specifically considered the position where the commission was taken in cash and had made its finding accordingly.
4. The commissioners relied on the principle of fiscal neutrality in support of their argument that commission paid to the business consultants in respect of purchases by third parties did not come within art. 11(C)(1). However, the court in Littlewoods in concluding that art. 11(C)(1) would be engaged in the case of a monetary commission attributable to payments made in respect of purchases by third parties, stated that the principle of neutrality pointed to that conclusion.
5. The tribunal was not persuaded by the commissioners' argument that that the present case was distinguishable from Freemans and Littlewoods, although one distinction might be that some of the consultants were themselves registered for VAT. Registered consultants submitted claims for VAT in respect of their commission and such claims had in the past been met by the appellant. Those claims were made on the basis that the consultants had supplied a service to the appellant, but the tribunal accepted the appellant's explanation that no such service had been supplied and that its previous treatment had been incorrect.
[The tribunal set out the facts summarised above and continued as follows.]
1. This is an appeal against a decision of the commissioners dated 19 April 2002 to uphold on a local reconsideration a decision dated 20 November 2001 that commission paid by the appellant could not be treated as a discount on supplies made either to consultants or to customers.
2. The appellant's main business activity is the provision of telecommunications services. It has a sales...
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