Dial-a-Phone Ltd v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judge | Lord Justice Dyson,Lord Justice Waller |
| Judgment Date | 20 May 2004 |
| Neutral Citation | [2004] EWCA Civ 603 |
| Docket Number | Case No: C3 2003 0137 |
| Date | 20 May 2004 |
| Court | Court of Appeal (Civil Division) |
[2004] EWCA Civ 603
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT CHANCERY DIVISION
Mr Justice Blackburne
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Waller
Lord Justice Jonathan Parker and
Lord Justice Dyson
Case No: C3 2003 0137
Rupert Anderson QC (instructed by Messrs McGrigors) for the Appellant
Philippa Whipple and Shaheen Rahman (instructed by the Solicitor for Commissioners of Customs and Excise) for the Respondent
Lord Justice Parker:
INTRODUCTION
1. This is an appeal by Dial-a-Phone Ltd (“DaP”) against an order made by Blackburne J on 13 December 2002 dismissing DaP's appeal against a decision (“the Decision”) of the Value Added Tax and Duties Tribunal (Mr Rodney Huggins and Mr Kenneth Manterfield) (“the Tribunal”) promulgated on 1 March 2002. By the Decision, the Tribunal dismissed DaP's appeal against a ruling by the Commissioners of Customs & Excise (“the Commissioners”), in a letter dated 18 January 2001, that valued added tax (“VAT”) paid by DaP on the supply by third parties to DaP of marketing and advertising services (that is so say, the ‘input tax’ in respect of such supply) was attributable, for the purposes of regulation 101(2) in Part XIV of the Value Added Tax Regulations 1995 (SI/2518) (“the Regulations”), to both taxable and exempt supplies made by DaP to its customers; and that accordingly only a proportion of such input tax was deductible against VAT charged by DaP to its customers (that is to say, against the ‘output tax’ charged by DaP) . In so ruling, the Commissioners rejected DaP's contention (repeated before the judge and in this court) that such input tax was attributable exclusively to taxable supplies made by DaP, and was accordingly deductible in full against output tax charged by DaP.
2. There is no issue as to the primary facts. The sole issue in the case is whether (as DaP contends) the supply of marketing and advertising services to DaP is attributable, for the purposes of regulation 101(2), exclusively to taxable supplies made by DaP; or whether (as the Commissioners contend and as the Tribunal found) the supply of marketing and advertising services is attributable to both taxable and exempt supplies made by DaP.
3. Permission for a second appeal was granted by Arden LJ on the papers on 15 February 2002.
THE TRIBUNAL'S FINDINGS OF FACT
4. In paragraph 2 of his judgment the judge summarised the undisputed facts, as found by the Tribunal, as follows:
i) DaP's business is to market mobile phones and accessories and the arrangement of insurance services. It has a large call centre (in North London) that receives calls from customers wanting to purchase mobile phone airtime contracts, mobile phones and accessories, and insurance services. It has an annual turnover of £90 million.
ii) DaP has three main sources of income: (1) commission paid by airtime service providers (“ASPs”) in respect of every customer introduced through DaP who enters into an airtime service agreement (or “ASA”) ; (2) network commission earned by reference to the number of introductions made to the mobile phone networks through DaP's agency; and (3) commission paid by Cornhill Insurance plc (“Cornhill”) with reference to insurance services for customers (explained in greater detail below) . DaP also earns commission (but in much smaller amounts than from Cornhill) from other organisations through sales to its customer base.
iii) The sale of mobile phones is marketed mainly through advertisements in the national press, leaflet distributions, direct response TV and the internet. DaP's advertising costs are approximately £1 million per month.
iv) The advertisements highlight the key factors of the package on offer. That package is enhanced through various incentives (over and above low line rentals, call charges which include a number of free minutes, text messaging and details of peak and off-peak calls) including free accessories and the provision of free insurance for a three month period. In addition items such as free cameras, free ring tones and logos and free fascias may be included.
v) The advertisements refer only to the initial period of free insurance and not the opportunity to insure with Cornhill thereafter.
vi) All operators at DaP's call centre lead potential customers through a call process which is treated in an identical manner. Upon receipt of a call the operator will ascertain the marketing reference from the potential customer. This reference is contained in the advertisement. The reference will indicate to the operator which script to use. The script sets out precisely what is to be said by the operator and the information to be gathered. The focus of the script is primarily to arrange completion of an ASA which triggers an upfront commission payable to DaP.
vii) When the customer has approved the terms and conditions of the ASA the operator informs him that the phone has a replacement value of approximately £100 and that if he were to lose the phone he would have to pay that amount to DaP for a replacement. As the ASA has a minimum term of 12 months before it may be cancelled, it is in the best interests of the customer to take out insurance cover in one form or another. The operator informs the customer that free insurance has been arranged, provided that he signs a direct debit agreement. He is told that “after three months you can either choose to continue your cover and be debited only £4.49 per month or you can cancel the direct debit if you decide not to continue with your cover”.
viii) The original procedure was that customers signed a post-dated direct debit which started four months after the supply of the phone. They were free to cancel the direct debit at any time. They were not committed for any fixed period; the cover remained in place as long as they paid the premium; as soon as they ceased paying the premium the cover ceased. In March 2002 DaP's procedures changed. Instead of asking the client to sign a post-dated direct debit agreement, DaP merely advised, through their operator, that they were setting up a paperless direct debit. In the event of a customer having an enquiry regarding insurance, this would be referred to DIS Ltd (a Cornhill subsidiary) which manages the insurance process.
ix) Customers do not have to take up the insurance cover. If they choose not to have it, they can still acquire a mobile phone. If they do ask for insurance cover, they receive a certificate of insurance issued by Cornhill when they receive their phone. The certificate of insurance states that “the free insurance commences from the time of purchase until midnight on the day three months one day later. Upon receipt of your monthly premium this insurance will be extended by periods of one month. The monthly premiums will be collected by the insurer by direct debit from your bank or building society account. The insurance will be terminated immediately if the insurer does not receive your monthly premium…”
x) The insurance premiums are collected from the customer by Cornhill. Each premium is effectively split into four parts: (i) insurance tax (ii) Cornhill's management fee (iii) risk premium and (iv) DaP commission.
xi) The risk premium is paid into a fund and used to pay claims. The profit remaining after paying claims and a management charge to Cornhill is split between DaP and Cornhill.
xii) The insurance policy in each case is a contract between the customer and Cornhill commencing when the customer accepts the cover (at the outset) and continues until terminated.
xiii) The terms of the arrangements between Cornhill and DaP were set out in an undated letter (headed “Heads of Agreement – All Risks Mobile Phone Scheme”) between a Mr Cooper of Cornhill and a Mr Barry Beck of DaP and included the following provisions:
“1. Parties
Cornhill Insurance plc as insurer. Dial-a-Phone as the retailer who will promote and sell the insurance under the Scheme. … DIS Ltd as administrator of the Scheme.
2. Association of British Insurers’ code of practice for the selling of general insurance
Cornhill appoints Dial-a-Phone as its company agent …”
xiv) DaP shortly thereafter confirmed its acceptance of the terms and the arrangements commenced. DaP accordingly acts in an intermediary capacity within the framework of the negotiations with customers on behalf of Cornhill.
xv) DaP does not become entitled to commission until a customer's direct debit is paid but commission is earned on every premium paid.
xvi) Approximately 65% of customers do not cancel the direct debit instruction within the three month period and commission is therefore earned for all those customers. There is quite a significant drop out rate during the second three month period when customers realise that they are making payments for insurance.
xvii) The insurance commission formed a substantial source of DaP's income. For the financial year 1999 DaP received £1.7 million in commission from Cornhill representing 6.5% of its total income. This figure has subsequently fallen to about 3%.
5. To the above summary I add the fact that DaP's entitlement to commission on insurance premiums received by Cornhill and to a share of Cornhill's profit on customers introduced to it by DaP arose under the Heads of Agreement referred to in subparagraph xiii) above.
THE LEGISLATION
EC Directives
6. The starting-point is article 2 of EC Directive 67/227 (“the First Directive”), which provides in general terms for a deduction of input tax, as follows:
“. … On each transaction, value added tax, calculated on...
To continue reading
Request your trial
-
Last Passive Ltd (t/a Aircoach) v Revenue Cmrs
...2001 1 WLR 769 2001 STC 297 2001 AER (EC) 385 2001 ECR I-1361 2001 2 CMLR 28 (CASE C-408/98) DIAL-A-PHONE LTD v CUSTOMS & EXCISE CMSRS 2004 EWCA CIV 603 2004 STC 987 2004 BTC 5581 2004 BVC 640 AER (D) 297 (MAY) PORTUGAL TELECOM SGPS SA v FAZENDA PUBLICA 2013 STC 158 2012 STI 2832 2012 AER (......
-
Commissioners of HM Revenue & Customs v Mayflower Theatre Trust Ltd
...in this court: CCE v Southern Primary Housing Association Ltd [2003] EWCA Civ 1662, [2004] STC 209; and Dial-a-Phone Ltd v. CCE [2004] EWCA Civ 603, [2004] STC 987. Two recent decisions in the House of Lords are also relevant: Beynon v CCE [2004] UKHL 53; and College of Estate Managemen......
-
St Helen's School Northwood Ltd v HM Revenue and Customs
...an irrelevance. He says, quite correctly, that entitlement to deduct input tax is not determined by motivation or purpose relying on in Dial-a-Phone Ltd [2004] STC 987 and the decisions of the ECJ Abbey National and BLP. One sees this objective approach being adopted in many other cases inc......
-
Volkswagen Financial Services (UK) Ltd v Revenue and Customs Commissioners
...an item is a cost component (within Article 2 of the First Directive) of two supplies, one taxable and one exempt: Dial-a-Phone Ltd v Customs and Excise Commissioners [2004] STC 987 (especially at [28] and [71]). If the standard (turnover) method does not result in a fair and reasonable att......