HM Revenue and Customs v Loyalty Management UK Ltd (Joined Cases C-53/09 and C-55/09)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Laws,Mr Justice Evans-Lombe |
| Judgment Date | 05 October 2007 |
| Neutral Citation | [2007] EWCA Civ 965 |
| Docket Number | Case No: C3/2006/1560 |
| Court | Court of Appeal (Civil Division) |
| Date | 05 October 2007 |
[2007] EWCA Civ 965
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LINDSAY)
CH/2005/APP/0476
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Chadwick
Lord Justice Laws and
Mr Justice Evans-Lombe
Case No: C3/2006/1560
Mr Robert Venables QC and Mr Rory Mullan (instructed by Lovells, Atlantic House, Holborn Viaduct, London EC1A 2FG) for the Appellant
Mr Christopher Vajda QC and Miss Philippa Whipple (instructed by Solicitor and General Counsel for HM Revenue and Customs, Solicitors Office, West Wing, Somerset House, Strand, London WC2R 1LB) for the Respondents
Hearing dates: 1, 2 and 3 May 2007
Judgement
This is an appeal from an order made on 22 June 2006 by Mr Justice Lindsay on an appeal and cross-appeal from a decision of the Value Added Tax and Duties Tribunal (Dr A N Brice, chairman, and Mr R L Jennings FCA FTII) released on 6 April 2005.
The Tribunal had allowed an appeal by Loyalty Management UK Limited (“LMUK”) from a ruling made by the Commissioners of Customs and Excise (as they then were) in a letter dated 9 December 2003 in connection with the treatment for the purposes of value added tax (“VAT”) of payments made by LMUK in the course of operating the Nectar Loyalty Scheme. So far as material the issue was whether LMUK was entitled to recover, as input tax, the VAT element of the amount (“the reward fee” or “the Service Charge”) which it paid to suppliers (“Redeemers”) who, under the Scheme, had agreed to accept Nectar points, or vouchers, in consideration for the supply of goods or services to members of the public (“Collectors”). The Commissioners' ruling was that LMUK was not entitled to do so. As it was put, in paragraph 9 of the letter of 9 December 2003:
“There is no supply of redemption services between the Redeemers (Suppliers) and LMUK as regards the rewards fee. The payments made by LMUK to Redeemers represent third party consideration for supplies made by the Redeemers to their customers (the final consumers). Any amounts charged as VAT to LMUK by Redeemers cannot be recovered by LMUK as input tax”.
The Commissioners appealed from the Tribunal to the High Court under section 11 of the Tribunals and Enquiries Act 1992. LMUK filed a respondent's notice seeking to vary terms in which the Tribunal had expressed its conclusion. That notice was treated as a cross-appeal. Mr Justice Lindsay ( [2006] EWHC 1498 (Ch)) allowed the appeal and dismissed LMUK's cross-appeal. LMUK appeal to this Court with permission granted by Lord Justice Jonathan Parker on 2 November 2006.
The Scheme
The Tribunal made findings of fact based on a draft statement of agreed facts dated 10 December 2004, the documents which had been put before it and the oral evidence of the Chief Financial Officer of LMUK. Those findings are set out at paragraphs 7 to 33 of the Tribunal's decision, [2005] UKVAT V19056. For the purposes of this judgment it is sufficient, I think, to refer, first, to the Tribunal's summary of LMUK's business and the contractual arrangements underlying the Scheme:
“8 The business of the Appellant [LMUK] is the running of the Nectar customer loyalty rewards programme [the Scheme]. The Nectar programme is a developed version of a single-company loyalty rewards programme. Under a single company loyalty rewards programme customers of a single company are awarded points when they purchase primary goods from the company which points they can then use to acquire other (secondary) goods from the same company at no cost or at a reduced cost. Under the Nectar programme customers can purchase primary goods from a number of retailers and receive Nectar points which they can use to acquire secondary goods from a number of other suppliers at no cost or at a reduced cost. The programme is thus designed to enable a number of retailers to retain the loyalty of their customers and to enable a number of suppliers to increase their turnover.
The contractual arrangements in outline
9 In order to operate the Nectar programme the Appellant enters into contracts with retailers, customers and suppliers. The agreement with the retailers is that the retailers will assist in the issue of the points to the customers and will pay to the Appellant a specified sum [the points price] in respect of each point issued together with an annual fee for marketing the programme. The retailers benefit from the loyalty of the customers which leads to increased turnover. The agreement with the customers is that if they purchase (primary) goods from the stated retailers they will receive points which they may use to acquire (secondary) goods free of charge or at a reduced price from other suppliers. The customers benefit from the acquisition of free or reduced price goods. The agreement with the suppliers is that if they provide goods to customers in return for points the Appellant will pay them an agreed value for the points. The suppliers benefit from: an increase in the number of customers in their stores which leads to increased turnover; from the ability to sell their excess capacity to a new market at a reduced price; from the ability to make increased sales at a discount without reducing their prices generally; and from the fact that customers entering their stores are likely also to purchase other full price goods (incremental sales)”
The Tribunal then examined the contracts between LMUK and the retailers (“Sponsors”) and the promotional material sent by LMUK to customers who had registered under the Scheme. There is a helpful description of the operation of the Scheme at paragraphs 17 to 20 of the decision:
“17 When he makes purchases from any participating retailer the customer is issued with points by the retailer. When the customer is purchasing goods from the retailer the issue of points takes place electronically by the retailer swiping the customer's Nectar card. When the customer is purchasing services from the retailer the issue of points is effected after the linking of the customer's Nectar account number with the account of the service provider. The number of points earned by spending £1 differ among the retailers. For example, two points are earned for £1 spent at Sainsbury's or Debenhams but one point is earned for £2 spent using a Barclaycard.
18 The rewards available to the customer are many and various. They include free goods, groceries or wines; free meals at stated restaurants; free admissions to cinemas; free adventure trips; free days out to, say, a zoo or a spa; free stays in a hotel; discounted holidays, free flights; free travel; free video hire or game rentals; free games of bowling; or free admission to aquaria. Many of these rewards can be obtained partly by presenting points and partly by paying cash. Or points can be presented to reduce the supplier's price; for example the supplier Argos offers £2.50 off any supply of goods in return for each 500 points. Although many of these rewards represent supplies of services, in fact by value most of the rewards are supplies of goods.
19 We saw what was called a 'rewards menu' which is sent by the Appellant to customers. This listed the rewards available by reference to the number of points required to acquire each reward. The menu also indicated whether the rewards could be obtained by the use of vouchers, or from the Appellant direct by telephoning the Appellant; or by use of the Nectar cards. Some of the rewards were described as 'money off your shopping'.
20 Each quarter the Appellant informs each customer of the total number of points which have been issued to him in the quarter, the total points which the customer has used to obtain goods from a supplier; and the balance. The customer is also sent a brochure showing the goods or services which can be obtained in exchange for points, the number of points required to obtain them, and how to obtain them. Similar information is also published on the Appellant's website.”
It is, of course, essential to the operation of the Scheme that suppliers (Redeemers) should be obliged to provide the “rewards” which the Collectors have been led to expect that they will obtain on presentation of points. Collectors must be able to redeem the points which have been issued to them. The relationship between LMUK and each individual Redeemer is governed by contractual terms. The Tribunal explained the position in paragraphs 21 to 24 of its decision:
“The details of the contracts with the suppliers
21 At the date of the hearing there were about sixty-five different suppliers. (During the period in question only one of the suppliers (Sainsbury's) was also a retailer.) Most contracts between the Appellant and the suppliers incorporate standard terms which apply to most suppliers. These are entered into in conjunction with commercial terms which apply to individual suppliers. There are also some special conditions which also apply to individual suppliers.
22. The standard terms state that they apply to all contracts between a supplier and the Appellant for the supply of redemption services to the Appellant by way of the supply of goods, services and cash discounts as rewards to customers. The Appellant will determine the number of points required for a specific reward. The supplier is to supply rewards to any customer redeeming points or vouchers in the same way as a supply to a customer paying by cash or any other method. The supplier is to be responsible for all aspects of the supply of the rewards and will indemnify...
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