F & I Services Ltd v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE ROBERT WALKER,LORD JUSTICE SEDLEY,MR JUSTICE LIGHTMAN |
| Judgment Date | 23 May 2001 |
| Neutral Citation | [2001] EWCA Civ 762 |
| Docket Number | Case No: A3/2000/2158 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 May 2001 |
[2001] EWCA Civ 762
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (CARNWATH J)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Robert Walker
Lord Justice Sedley and
Mr Justice Lightman
Case No: A3/2000/2158
Mr R Cordara QC and Miss P Cargill-Thompson (instructed by Hutchinson Mainprice for the appellant)
Mr M Kent QC and Mr R Anderson (instructed by the Solicitor to the Commissioners for the respondents)
Introduction
This is an appeal with the permission of Otton LJ from two orders of Carnwath J made on 14 April 2000 in two sets of proceedings between the same parties, F&I Services Ltd ("F&I") and the Commissioners of Customs & Excise ("the Commissioners"). By one order the judge dismissed an appeal by F&I from a decision made on 26 February 1999 by the London Value Added Tax Tribunal, dismissing F&I's appeal from a decision of the Commissioners contained in a letter dated 24 June 1998. By the other order Carnwath J dismissed F&I's application for judicial review of the decision made by the same letter, except that he gave directions for F&I's claim against the Commissioners for damages for negligence to continue as though begun by writ. This appeal relates to both of the judge's orders.
The background to the appeal, in brief outline, is that in 1997 F&I (which is in the business of providing project promotion and budget services) developed a new promotional scheme. This scheme involved the sale (primarily to car dealers) of books of vouchers intended to be used at various named retail outlets such as restaurants, theme parks, cinemas and suppliers of consumer goods. These books of vouchers were produced by a company called Entertainment Publications Ltd ("EP"). EP negotiated and entered into contracts with the various retailers. The retailers undertook to honour the vouchers presented by customers, and EP was to produce and promote the vouchers at its own expense. EP then sold books of vouchers in block to F&I (at about £4 per book, plus VAT) and so passed the business opportunity to F&I. There were no detailed findings about this aspect of the matter but neither side suggested that it was relevant to the appeal.
F&I sold books of vouchers to car dealers for £10.40 each (plus VAT). Dealers would normally sell a book to a customer who was buying a used car, charging the customer £300 for the vouchers (but, rightly or wrongly, no VAT). The total face value of the vouchers was about £2,200, but in practice it seems most unlikely that the average customer would wish to use, or would in fact use more than a relatively small number of the vouchers. They could not be used (with one possible exception) otherwise than in conjunction with a substantial cash payment (for instance one voucher was for £10 towards at least £150 spent on electronic goods from a named retailer, Tandy). In order to use all the vouchers the customer would have had to acquire six wristwatches, five televisions, and at least ten other items of electronic equipment, and to have stayed for a two-night break for two people at seven specified (and widely dispersed) branches of a chain of inns, Wayfarer Inns; and he would have had to pay out many thousands of pounds in cash. The goods and services covered by the vouchers included maps and insurance, that is zero-rated and exempt as well as standard-rated supplies.
F&I wished to obtain official clearance for its view of the VAT implications of the new scheme. Its accountants, Arthur Andersen, wrote on 25 October 1997 to the Commissioners' VAT Advice Centre in Torrens Street, London EC1, describing the scheme and inviting the Commissioners to agree that the vouchers fell within para 5 of Schedule 6 to the Value Added Tax Act 1994 (" VATA 1994") with the consequence that car dealers were not required to account for output tax on the supply of vouchers to customers.
On 18 November 1997 the Commissioners wrote agreeing that F&I's understanding of the VAT treatment was correct. The letter stated,
"F&I Services Ltd will need to account for VAT at the standard rate on the sale of the vouchers to the retailer.
The retailer will not need to account for VAT on the sale of the vouchers to the customer, provided that they are sold at, or below their face value. Schedule 6 Paragraph 5 of the VAT Act 1994 refers.
When redeemed for goods or services these vouchers are consideration for VAT purposes and output tax then becomes due."
Arthur Andersen wrote again to the Commissioners on 6 February 1998, saying that F&I had made the commercial decision to launch the voucher scheme. Their letter gave more details of the scheme:
"In accordance with your letter of 18 November 1997, the vouchers will be sold at or below their face value. Given that the vouchers will typically be sold in conjunction with second hand motor vehicles, it is intended that any car in question will be sold for say, £9,000 which will be expressed to be inclusive of a voucher booklet valued at £300. In this instance, the customer will be given an invoice which clearly expresses that the car has been sold for £8,700 and the voucher booklet for £300. At present, the vouchers in the booklet can be exchanged for goods and services to the value of approximately £2,200."
On 3 March 1998 the Commissioners replied confirming their previous view, but stating that the ruling applied only to F&I, and should not be treated as a general principle.
However after questions had been raised by a trade competitor, a tax-avoidance specialist at the Commissioners' Thames Valley Collection, Mr T J Lloyd, inquired into the matter and took a different view. He wrote to Arthur Andersen on 24 June 1998 setting out his view, reached after a review of the evidence and discussion with the relevant policy branch, that the scheme did not work and that the previous official ruling was clearly incorrect. After a meeting on 6 July Mr Lloyd repeated his view in a letter dated 17 July 1998 but offered a 30-day moratorium:
"As you may know, the Government is concerned about the effects of tax avoidance and is resolved that it should be tackled quickly. We recognise of course the need to strike a balance between securing the revenue and minimising the burdens on business, but we cannot allow a position to continue that results in a revenue loss and leads to distortion of competition between businesses. Nevertheless, on this occasion, Customs will allow you a period of 30 days from the date of this letter to apply the new ruling. I must emphasise that this concession is to allow you to notify your existing customers of the new ruling within this 30 day period. I must make it clear that the supply of any vouchers held by your existing customers, and unsold at the end of the 30 day period, must be treated as standard rated. This concession does not extend to any new customers you may secure during the 30 day period and who are not therefore, entitled to rely on the earlier decision."
It is the decision in the letter of 24 June 1998 that has given rise both to F&I's statutory appeal under s.83 of VATA 1994 and to its application for judicial review.
Community Directives and statutory provisions
In relation to the statutory appeal there are relatively few material provisions of Community and national legislation, but a good deal of Community and national case law. The most material provisions of Community legislation are in the Sixth Council Directive of 17 May 1977, 77/388/EEC ("the Sixth Directive"), although this court was also referred to the basic principle in Article 2 of the First Council Directive of 11 April 1967, 67/227/EEC:
"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional 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.
On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
The common system of value added tax shall be applied up to and including the retail trade stage."
Article 11 of the Sixth Directive lays down rules as to the taxable amount. Article 11 A 1(a) provides that (subject to exceptions which are not now material)
"The taxable amount shall be 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 subsidiaries directly linked to the price of such supplies."
The Court of Justice of the European Communities has emphasised the need, in the case of consideration provided by a third party, for a direct link between the consideration provided and the service received under the transaction in question: Naturally Yours Cosmetics v C&E Commissioners [1988] STC 879, 894 (paras 11–2); Empire Stores v C&E Commissioners [1994] STC 623, 636 (para 12). The nature and limits of the direct link have been important issues in this appeal.
Article 11 A 3 provides that the taxable amount shall not include
"(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply."
The Court of Justice has held that an allowance made by a retailer does not cease to be a discount or rebate merely because it is...
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