Debenhams Retail Plc v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lindsay |
| Judgment Date | 29 June 2004 |
| Neutral Citation | [2004] EWHC 1540 (Ch) |
| Docket Number | Case No: CH/2003/APP/0589 |
| Court | Chancery Division |
| Date | 29 June 2004 |
[2004] EWHC 1540 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Honourable Mr Justice Lindsay
Case No: CH/2003/APP/0589
David Milne Q.C., Fred Philpott and Andrew Hitchmough (instructed by Ernst & Young LLP) for the Appellant
Christopher Vajda Q.C., Philippa Whipple and Mario Angiolini (instructed by the Solicitor for the Customs & Excise) for the Respondents
Hearing dates: 5 th-7 th May 2004, 10 th-13 th May 2004 with written supplements on the 26 th May, 4 th June and 11 th June 2004
Approved Judgment
Mr Justice Lindsay:
Introduction
Every day literally millions of retail transactions are settled by payment not in cash or by cheque but by credit or debit cards. Needless to say, the companies making the cards available to the public and providing the accounting and financial services lying behind them make a charge for their services. It cannot be supposed that retailers could so organise themselves that such charges could be avoided. So if, in a single contract whereby the retailer sells and a consumer buys goods with a ticket price of, say, £100, the retailer relies on payment by card he will never receive £100 but rather £100 less a small charge. The charge will vary as a percentage, perhaps from 1%-1.5% at the low end to perhaps as much as 5% at the high end, but it will be inescapable if a card is used. It is part of the commercial reality when the retailer accepts payment by card. However, although, on such a card sale, the retailer receives only (for the sake of example) £97.50 of the ticket price, he would, for VAT purposes, pay VAT, for reasons which I shall explain, calculated on the basis that he had received £100. The difference is tiny – at the present 17.5% rate of VAT it represents a difference in VAT payable of only 37p per £100 of ticket price – but, when multiplied by the appropriate huge volume of sales, the total difference becomes truly significant. Thus in this case £644,382 is at stake as to one retailer only and over only a specified period. If one were to reflect on how many retailers there are who accept cards, the number and amounts of their card sales and to look also to the periods over which they have accepted them, the difference becomes truly massive.
Not surprisingly, therefore, advisers have turned their minds to seeking to procure that retailers are treated as if receiving no more than that which they truly receive. To that end Chartered Accountant advisers to the Appellant, Debenhams Retail plc ("DR"), which appears by Mr David Milne Q.C., Mr Fred Philpott and Mr Andrew Hitchmough, came up with a system. It required a degree of careful planning and implementation and the drafting, approval and execution of several written contracts. It was called the "PITA plan". It seeks to procure (to use illustrative figures) there not being, as hitherto, one contract on a card sale for the £100 ticket price, but 2 contracts, one with the retailer, DR, for £97.50 for the goods and another, with an associated but different corporation, Debenhams Card Handling Services Ltd ("DCHS"), a wholly-owned subsidiary of DR but not a member of the same VAT group as DR, for £2.50 for card handling services said to be exempt from VAT. The customer pays only £100.
However, despite all the care that went into the PITA system, the Respondents, the Commissioners for Customs & Excise, ("the Commissioners"), who appear by Mr Christopher Vajda Q.C., Miss Philippa Whipple and Mr Mario Angiolini, took the view that it did not work; VAT was still payable as if £100 had been received by DR. Hence the assessment for £644,382 and interest.
DR, a subsidiary of Debenhams plc, appealed against that assessment to the London Tribunal Centre but the Tribunal, under the Chairmanship of Mr Stephen Oliver Q.C., dismissed the appeal. DR appeals that decision. The question for me, in broadest outline, is whether the Tribunal erred in law in its decision that the PITA plan does not work; given that not only DR but some 30–50 of the biggest retailers in the United Kingdom have adopted similar plans for their card sales, the issue becomes one of considerable fiscal importance. I shall first set out the legislative provisions relating to the charging of VAT.
The Community and domestic legislative background
The earlier Community legislation and its effect is set out in paragraph 28 of the judgment of Jonathan Parker L.J. in Tesco plc –v—Commissioners of Customs & Excise [2003] STC 156 1 C.A.. VAT is a tax on the supply to the ultimate consumer; it is based upon the consideration obtained for the supply by the supplier who supplies the ultimate consumer. Thus EC Council Directive 77/388 of 17 May 1977 ("the Sixth Directive") provides, so far as relevant, as follows:-
"Article 2
The following shall be subject to Value Added Tax:
1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. ……….
Article 4
1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity;
2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services …..
3. ………
4. The use of the word "independently" shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability;
Subject to the consultations provided for in Article 29 each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links."
It is to be noted that, whilst the United Kingdom could have treated DR and DCHS as a single taxable person, that has not been done; it is common ground that they are two separate persons independently carrying out their respective economic activities and DCHS is not in DR's VAT group.
"Article 5
Supply of goods
1. "Supply of goods" shall mean the transfer of the right to dispose of tangible property as owner.
……………. ."
"Article 6
Supply of services
1. "Supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.
……………… .
Article 11
A. Within the territory of the country
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, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;
………………
2. The taxable amount shall include:
(a) taxes, duties, levies and charges, excluding the value added tax itself;
(b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement may be considered to be incidental expenses by the Member States."
There has been no decision by the United Kingdom as a Member State such as to require the expense of the DCHS card-handling charges to be considered as an incidental expense, incidental to the supply of goods to which that card-handling fee should relate. To continue with citation from Article 11:-
"3. The taxable amount shall not include:
(a) price reductions by way of discount for early payment;
(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply;"
It will have been noticed that "consideration" within Article 11 A, 1 (a) is likely to include more than may be included in our domestic notion of contractual "consideration", namely that which under the contract moves from promisor to promisee.
The Sixth Directive also makes provision for exemptions from VAT. At Article 13 A one finds:-
"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;
…………..
…………..
(d) the following transactions:
1 the granting and the negotiation of credit and the management of credit by the person granting it;
2 the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;
3 transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;"
The provisions of the Sixth Directive are carried into our domestic law by provisions in the Value Added Tax 1994. Thus section 1 provides:-
"1. (1) Value Added Tax shall be charged, in accordance with the provisions of this Act:-
(a) On the supply of goods or services in the United Kingdom (including anything treated as such a supply),
(b) ………
(c) ………
(2) VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply."
Section 3, headed "Taxable persons and registration" provides:-
"(1) A person is a...
To continue reading
Request your trial
-
Debenhams Retail Plc v HM Revenue and Customs
...London Value Added Tax and Duties Tribunal. 2 The present appeal is by the Commissioners of Customs and Excise from the judgment ( [2004] EWHC 1540 (Ch)) given on 29 th June 2004 by Mr Justice Lindsay, allowing an appeal by Debenhams Retail plc ("DR") against the Tribunal's decision dated 3......