VALUE ADDED TAX Input Tax Promotional Scheme Manufacturer and Distributor of Domestic Heating

19431

VALUE ADDED TAX — input tax — promotional scheme — manufacturer and distributor of domestic heating appliances awarding points to installers purchasing its appliances — points redeemable for gifts listed in catalogue — scheme run by marketing company which acquired and distributed the gifts — whether VAT included in marketing company’s invoices to Appellant recoverable input tax — whether marketing company’s services single supply of marketing services or multiple supplies of services and goods — whether goods supplied to installers for third party consideration — no — gifts supplied to Appellant for onward disposal —Sixth VAT Directive arts 5(1), (6), 11(1)(a), 17(1), VATA 1994 ss 24(1), 26(1), Sch 4 paras 1(1), 5 input tax recoverable but Appellant liable to account for appropriate output tax — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BAXI GROUP LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

Respondents

Tribunal:Colin Bishopp (Chairman)

Brian Strangward

Sitting in public in Manchester on 12 and 13 October 2005

David Scorey, counsel, instructed by PricewaterhouseCoopers for the Appellant

Rupert Baldry, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

The facts

This is an appeal by Baxi Group Limited (“Baxi”) against the Commissioners’ decision to reject a voluntary disclosure by Baxi by which it sought to recover input tax of £405,481 for which it claimed it had omitted to seek relief in its accounting periods from 09/00 to 03/03. The input tax was included in invoices sent to it by @1 Group Limited (“@1”), which Baxi has paid. @1 is a company which provides advertising and marketing services and Baxi argues that the invoiced charges, incurred in the running of a promotion scheme, were for supplies of such services. We were told that Baxi did not claim relief in the returns it rendered during the relevant period because of an earlier ruling by the Commissioners the correctness of which it had decided to dispute, although that ruling is not directly the subject of this appeal.
The Commissioners maintain that @1’s charges relate to two supplies, of services and of goods. They accept that supplies of advertising and marketing services were made to Baxi, and that so much of the VAT as was included in the invoices and related to those supplies is recoverable input tax; but, they say, most (by value) of the supplies invoiced by @1 were of goods, and those goods were supplied not to Baxi but to third parties. Thus even though it was Baxi which paid for the goods, the requirements of section 24(1) of the Value Added Tax Act 1994 are not met, and so much of the VAT included in @1’s invoices as is attributable to the supplies of goods does not rank as input tax in its hands. After some exchange of correspondence, they so ruled by a letter of 3 June 2004, which contains the decision now under appeal. As an alternative and additional argument, they say that if, contrary to their preferred argument, the correct view is that the goods were supplied to Baxi, it has a corresponding output tax liability by reason of its own onward disposal of those goods to the third parties.
Baxi is the representative member of its VAT group. Another member, Baxi Heating UK Limited, is a manufacturer of boilers for domestic heating systems, using the brand names Baxi, Potterton and Valor. We were told that about 1.5 million such boilers are sold in the UK each year, of which 85 per cent are sold as replacements for existing boilers, while the remainder are installed in new buildings. Baxi has about a quarter of the market. Most householders arranging for the replacement of their domestic boilers, understandably, leave the choice of the make and model of the replacement to the installer and Baxi’s advertising and promotional exercises are, correspondingly, directed mainly, though not entirely, at installers rather than the general public. Typically, an installer buys the boiler he is intending to install from a builders’ or plumbers’ merchant which stocks a number of different manufacturers’ boilers. Promotional activities such as the one with which we are concerned in this appeal are designed to encourage the installer to buy Baxi’s products in preference to those of other manufacturers. The boiler market, we were told, is intensively competitive, and all of the major manufacturers concentrate their efforts on the installers, as the principal decision makers. It appears that there are only limited differences of price and specification between the various manufacturers’ products, and the aim of a scheme such as that with which we are concerned is to encourage the installer to choose its promoter’s products, not on isolated occasions, but as a matter of habit because of the benefits to the installer of so doing.
The scheme used by Baxi, known as Bonus Direct, is a loyalty programme similar in principle to those aimed by high street retailers at their customers. Although the scheme itself remains in use, there has been a material change in the arrangements between Baxi and @1 since the period covered by the voluntary disclosure, and the brief description which follows relates only to that period. We take the facts of the case—which were not controversial—from the evidence of the only witness we heard, Mr Grenville Ward, whose idea the scheme was (it has, he said, since been copied by Baxi’s rivals) and from the documentation provided to us.
An installer who had registered as a member of the scheme (it was open only to bona fide gas appliance installers) earned points each time he bought a Baxi boiler, or other qualifying item. The number of points varied, and was dependent on the type of appliance purchased. The installers paid the same price for an appliance, whether or not they were members of the scheme, and whether or not they took advantage of the points. Each appliance carried a sticker bearing a bar code which the installer was required to remove and send to @1, which undertook all the administration of the scheme, in order that the points for which the bar code was the evidence could be credited to his account. Points could be converted into “gifts”, that is goods which the installer might select from a catalogue. The gifts included a wide range of household goods, such as hair dryers, cooking appliances, cameras, wines, soft toys, clothing, sports and travel goods, some tools and even motor vehicles and holidays. Some of the gifts were of services rather than of goods, but that difference does not, we think, affect the issue of principle we must decide. Most of the goods and other gifts were branded products available in ordinary shops and other outlets, but some were of uniforms and other items branded with Baxi’s logo; they were treated a little differently and we shall ignore them for most of what follows, while mentioning them again at the conclusion of this decision. The number of points which an installer had to redeem in order to acquire any item varied in line with its ordinary retail value. Gifts could be obtained only in exchange for points and there was no facility for payment, in whole or in part, in cash. Similarly, points could not be exchanged for cash. We deduce that the more valuable gifts were included with the aim of tempting the installers to buy more Baxi appliances in order to increase their points to the necessary level.
While the principal purpose of the scheme was to encourage installer loyalty and thereby increase Baxi’s sales, it had the additional benefit of providing useful information about Baxi’s customer base, enabling it to identify both those installers who were regularly buying its products and those who had ceased to do so—and who might be targeted with special offers to encourage them to buy its products again—and also to identify those of its products which were popular and those which were less so. The number of installers who joined the scheme was considerable—numbered in thousands—and the volume of data obtained through the scheme was formidable.
It was largely because Baxi did not have the ability itself to manage such a large database that it arranged to have the scheme administered for it by @1, whose business includes the running of such schemes (as well as the provision of more general advertising and publicity programmes). The administrative tasks delegated to @1 included handling the installers’ registration applications, recording the bar codes which they sent in, crediting their accounts, selecting the gifts which appeared in the catalogue, which it compiled, and undertaking the procurement of the gifts and their despatch to the installers when points were redeemed in exchange for them. It also ran a telephone helpline and a website which installers were encouraged to use in order to enquire about their points balances (although they were also sent regular statements) and to redeem their points.
Although there was no concealment of the fact that @1 was administering the scheme—its name was freely used within the promotional literature and installers were required to send items which must be posted, such as bar codes to be credited to their accounts to it—the capacity in which it did so, and its relationship to Baxi, would not have been apparent to the installers. The terms and conditions of the scheme, as they were provided to them, made it clear that their own relationship was with Baxi, rather than with @1. Although there was, it seems, some minor variation in the terms and conditions from time to time, clause 2 was in the following, or materially identical, terms:

“Baxi (‘We’) operate the Bonus Direct Programme (‘The Scheme’) which is only available to Individual Members of The Scheme (‘You’). Head Office” [there then followed Baxi’s own address].

The terms and conditions made no direct, unequivocal, promise that Baxi would, in the ordinary way, provide the goods illustrated in the catalogue in exchange for the surrender of the requisite points, but they can be read only upon the footing that it was so intended and that, by buying Baxi products and arranging for the points attributable to each purchase to be credited to his account an installer was acquiring the right to obtain a gift. For example, clauses 8 and 9 of a typical version of the terms and conditions read:

“8Points can only be redeemed against the gifts and offers illustrated in this brochure or other offers when made available to you by Baxi. The gifts and offers illustrated in this catalogue are subject to change from time to time without any prior notification.

“9We may at any time, without notice and without being liable to you in any way, supply goods or services of a similar nature and value to those ordered. If a suitable alternative is not available we will offer you:

the choice of another item from the brochure at the value quoted or
a return of the Points previously deducted in respect of the unavailable item.”

The words “brochure” and “catalogue” appear to have been used interchangeably. @1’s name does not appear anywhere in the terms and conditions. Thus while it would be clear to an installer that @1 was involved in the running of the scheme, he would not know (without making additional enquiries) that @1 was at arm’s length to Baxi, and not merely a subsidiary or associated company. If he read the terms and conditions he would think, and in our view correctly, that his agreement (for, in particular, the provision of goods in exchange for points) was with Baxi. Nothing in the other relevant literature, such as the registration application and the letter sent to new members of the scheme, suggests otherwise; the clear impression they give is that @1 was no more than the administrator of Baxi’s own scheme.
In fact, the Bonus Direct scheme was a tailored and labelled variant of a generic scheme made available by @1 to its clients. The documents produced to us show that @1 ran several such schemes, making the point in its own promotional literature, directed to potential clients, that its doing so enabled it to run the schemes economically, particularly because its large-scale purchases of goods to be used as gifts enabled it to secure them at low prices. It appeared, though the evidence was not entirely clear on this point (we had no direct evidence from @1 itself), that @1 bought goods which were frequently requested by participants in bulk, allocating or appropriating them to each scheme as requests for redemption arose. We deduce that each scheme’s gift catalogue listed the same, or similar, ranges of products. However, it was also clear to us that each scheme was in other respects run discretely from all the others managed by @1 at any given time, and it could not be said—nor was it suggested—that Baxi merely participated in, or its arrangements amounted to, a division of a single @1 scheme.
At the beginning of the period with which we are concerned, the arrangement between Baxi and @1 was that Baxi would pay to @1 the ordinary recommended retail price of the redeemed goods and @1 earned its profit (which included its fee for routine administration of the scheme and the database) from the difference between that amount and the price for which it actually acquired the goods It also charged a standard, uniform amount for postage and packing which we understand was designed to cover the cost and no more. For the latter part of the material time, the arrangement was that Baxi paid a fixed fee in addition to the acquisition cost of the goods and the post and packing charge. It was not suggested that the change is material to the issue we must decide. Separate fees were payable throughout for additional services, such as special promotions within the scheme or non-routine database development. @1 sent Baxi invoices, supported by detailed lists of the gifts distributed in exchange for redeemed points, at frequent intervals. The invoices also included @1’s charges for more routine advertising and promotional exercises unrelated to the scheme. All of @1’s supplies attracted VAT at the standard rate, and there is no dispute that the VAT attributable to those of its supplies which were of services, both routine and non-routine, is fully recoverable by Baxi. It is only so much of the tax as was attributable to the goods which is in dispute.

The parties’ arguments

Baxi’s case, as it was put by David Scorey of counsel, is that @1 made a single supply of marketing services, wholly taxable at the standard rate, and that Baxi is entitled to recover as input tax the VAT which @1 has properly charged it. The scheme must be considered as whole; if it is so considered, the provision to the installers of the gifts, on redemption of points, can be seen to be merely one component of the single supply of a promotion scheme. If that proposition is correct, there is no need for further analysis: the scheme is to be regarded in the same way as any other form of advertising and Baxi is entitled to recover the input tax charged to it by @1, being input tax incurred by Baxi in the course of its making taxable supplies of boilers. It is not appropriate to adopt the Respondents’ approach of separating the supply artificially into its component parts, of advertising and administration, which give rise to the right to recover a proportion of the input tax, on the one hand and the distribution of the gifts, without a right of recovery, on the other. The proper approach was described by the European Court of Justice (“ECJ”) in Card Protection Plan Limited v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270. The essential features of the transaction must be ascertained, as a matter of fact; whether there is one supply or several is to be determined in the light of that finding. At paragraphs 29 and 30 of its judgment the Court said:

“29… taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

“30There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied …”

Here, Mr Scorey said, the only logical conclusion to be drawn from the structure of the scheme was that @1 supplied a composite marketing service, of which the distribution of gifts was a part. It could not be said, from Baxi’s point of view, that their distribution was an aim in itself; it derived no benefit from the items and its intention was not to give away goods for philanthropic reasons. The gifts were given to the installers because their provision was a necessary feature of the scheme, but they were not distributed for any reason other than the making good of the promotion scheme itself, and were available to the installers only within the terms of the scheme. What Baxi wanted, and @1 provided, was a promotion scheme; the distribution of the gifts was no more than a means of better enjoying that scheme. While there might be differences of detail, this was in substance an advertising scheme like any other, and should be treated accordingly. The provision of the gifts to the installers was not a gratuitous gesture, but a means to the end of advertising Baxi’s products.
The Commissioners were, he said, falling into the trap identified in Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC 55 where the House of Lords held that the division of the prescription, dispensing and administration of a drug by a doctor who performed all three services for a patient into three distinct supplies was an example of the artificial dissection against which the Court of Justice had warned in Card Protection Plan. It was equally artificial to divide this scheme into distinct supplies of advertising and promotion on the one hand and the distribution of gifts, or rewards, on the other; it was all one scheme, no component of which could be treated separately. Similarly, in Customs and Excise Commissioners v FDR Ltd [2000] STC 672, Laws LJ, after referring to the European jurisprudence, said, at paragraph 54:

“… I think there is some danger of over-elaboration and needless complexity in this field. We are not here concerned with deep legal principle, but with the articulation of a fair and reasonable approach to those cases where there is a question how should the consideration given by a supplier for his reward be categorised for the purposes of VAT, when there are multiple acts of supply involved. The simpler it is the better, so long as it is kept consistent with the doing of justice …”