Debenhams Retail Plc v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mance,Sir Peter Gibson,Lord Justice Mummery |
| Judgment Date | 18 July 2005 |
| Neutral Citation | [2005] EWCA Civ 892 |
| Docket Number | Case No: C3/2004/2013 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 July 2005 |
[2005] EWCA Civ 892
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
Mr Justice Lindsay
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Mance and
Sir Peter Gibson
Case No: C3/2004/2013
Kenneth Parker QC, Christopher Vajda QC and Philippa Whipple (instructed by the Solicitor for HM Revenue and Customs) for the Appellant
David Milne QC, Andrew Hitchmough and Fred Philpott (instructed by Ernst & Young) for the Respondent
Index
| Para. | Title of Section |
| 1 | Introduction to facts and issues |
| 6 | The legislative scheme |
| 12 | The arrangements in more detail |
| 24 | The size of the 2.5% handling fee |
| 31 | The decisions below on the contractual issue |
| 34 | Analysis of the contractual issue |
| 47 | Supply |
| 51 | Abuse |
| 57 | Conclusions |
Introduction
As from 1 st October 2000, anyone who shopped at a Debenhams store, paid by card and took the unusual trouble to read the top copy of the till slip which he or she signed and returned it to the assistant would have seen at its foot the words:
"I agree that 2.5% of the above value is payable to DCHS for card handling services. The total amount I pay remains the same."
The purpose (if the customer had known it) was to enable whichever Debenhams company was selling the goods to claim that it should pay VAT on only 97.5% of "the above value". The question in this appeal is whether that purpose was achieved. Since 2000, many other retailers have, as we are told, adopted similar schemes to that put in place by Debenhams. But these have not been examined before us, and may differ in their operation, terms and effect. The same applies to the revised scheme or wording which we were told Debenhams put in place from some time after the decision in this case on 3 rd January 2001 by the London Value Added Tax and Duties Tribunal.
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 rd January 2001 ( (2003) VAT Decision 18169). The underlying facts were succinctly and uncontroversially summarised by Mr Stephen Oliver QC as chairman of the Tribunal:
"4. Until 1 October 2000 DR, a 100% subsidiary of Debenhams Plc, used to sell goods whose price tag showed, for example, £100 ("the ticket price"). Where the customer used a credit card, a debit card or a store card to pay, DR then paid the credit or debit card handling company, or the company behind the store card arrangements, an amount of, say, £1.00 for its exempt card-handling supply. The result was a supply by DR of the goods for £100; and because the amount paid by DR to the card-handling company (the £1.00) was in return for an exempt supply, no VAT relief was obtained for that expenditure.
5. From 1 October 2000 onwards an arrangement was put in place. The arrangement was designed to change the terms on which "the Debenhams Group accepts credit cards in order to produce a position whereby less VAT is paid than was paid previously and for no other reason". Those words are taken from a letter dated 17 March 2003 written by Ernst & Young (E&Y), the architects of the scheme ….. The changed arrangements were designed to make the card-paying customer enter into two purported contracts at the point of sale. One was with DR for the sale of the goods (ticket price £100) for £97.50. The other was with another company called Debenhams Card Handling Services Ltd ("DCHS"). DCHS is a wholly owned subsidiary of DR, but is not a member of the same VAT group as DR. Under the latter purported contract 2.5% of the total ticket price was said to be payable to DCHS for exempt card-handling services. The arrangement, if successful, results in DR making a supply of the goods for a consideration of £97.50—i.e. 97.5% of the ticket price.
6. DR contends that the arrangements produce exactly that effect. It is therefore chargeable to VAT on the £97.50, the balance of £2.50 goes to DCHS as an exempt card-handling fee. …."
The Tribunal identified the grounds on which the Commissioners challenged DR's contention under four headings: (i) "the contractual issue", (ii) "the commercial reality issue", (iii) "the single supply issue" and (iv) "the tax avoidance issues". Under heading (i) the Commissioners contended that "There has been no contract for a supply of card-handling services between customer and DCHS that alters or affects the single contract between DR and the customer for the sale of the goods at the full ticket price". Under heading (ii), they contended that, even if there was a contract between DCHS and the customer, the commercial reality was that DCHS supplied no services and the customer provided no consideration, and that this should determine the VAT position. Under heading (iii), they contended that, even if there was a contract between DCHS and the customer under which DCHS supplied any services, such supply should be regarded as forming part of a single supply by DR either (a) because the 2.5% payment was a charge within article 11A(2)(a) of the Sixth Directive or (b) because it was ancillary to the main supply by DR. Under heading (iv), they relied on a previous decision by the Tribunal in Halifax plc v. Commissioners of Customs and Excise [2001] VATTR 71 for a proposition that DR should be regarded as the only supplier either (a) as a matter of "economic reality" or (b) on grounds of abuse. The Tribunal decided in favour of the Commissioners on issues (i) and (ii). It declined to decide issue (iii). It was prepared if necessary to decide in the Commissioners' favour on issue (iv) (a) and (b).
Lindsay J restated the issues before him under the headings: (i) "the contract argument", (ii) "no supply by DCHS"—but only one supply by DR for 100% of the ticket price, (iii) ancillary supply, (iv) artificiality and tax avoidance and (v) abuse of right. Issue (iii) was, as his judgment recites, left over for further consideration by him or in the Court of Appeal. In the light of the House of Lords' recent refusal of permission to appeal against the Court of Appeal's decision in Telewest v Communications plc v. Commissioners of Customs and Excise [2005] EWCA Civ 102, Mr Parker QC accepts on behalf of the Commissioners that they cannot now pursue issue (iii), at least before us. The issue of "economic reality", based on the Tribunal's decision in the Halifax case, which was central to the argument on artificiality under issue (iv) was also left over before Lindsay J, and was not argued before us. Mr Parker accepts, in the light of the recent Opinion dated 7 th April 2005 of Advocate General Maduro in the Halifax case ( Case C-255/02), that it looks unlikely that the Commissioners will be able to sustain this aspect of the Tribunal's jurisprudence. But he submits that the Commissioners' case on abuse derives strong encouragement from the same opinion, while accepting that any decision of this court on that issue would have to be subject to the European Court of Justice's decision in the Halifax case. Lindsay J decided issues (i), (ii), (iv) (save for the "economic reality" argument) and (v) in DR's favour.
In the event we heard submissions on issues (i) and (ii), the contractual and supply issues, as well as on the issue of abuse identified as issue (iv)(b) by the Tribunal or (v) by Lindsay J. The contractual and supply issues are distinct because it is common ground that, although a contractual analysis under domestic law represents the appropriate starting point, the critical question for the purposes of VAT—both under domestic legislation and under the European directives which that legislation aims to implement—is whether there was a supply by DR for the whole 100% or for only 97.5% of the ticket price of goods.
The legislative scheme
The European position is so far as relevant found in the First Council Directive of 11 April 1967 (67/227/EEC) and the Sixth Council Directive of 17 May 1977 (77/388/EEC) on the harmonisation of legislation concerning turnover taxes. The First Directive provides:
"Article 2
The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportionate to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged."
The Sixth Directive provides inter alia:
"Article 2
The following shall be subject to value added tax:
1. the supply of goods or services effected for a consideration within the territory of the country by a taxable person acting as such;
2. the importation of goods.
……
Article 4
1. 'Taxable person' shall mean any person who independently carries out in any place any economical activities 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 including mining and agricultural activities and activities of the professions …
……
Article 11A
Within the territory of the country
1. The taxable amount shall be:
(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the...
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