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Freemans plc sold goods listed in a catalogue to customers who paid for their purchases in instalments under an in-house financing scheme, and acted as agents to sell on goods to other people. Each time an agent made a payment, ten per cent of the amount was credited to a separate account maintained for the agent by the claimant. Money in that account could either be withdrawn or used for further purchases or to defray any sums owed by the agent or other customers. Amounts not claimed were retained by the claimant.
Freemans plc sold goods listed in a catalogue to customers who paid for their purchases in instalments under an in-house financing scheme, and acted as agents to sell on goods to other people. Each time an agent made a payment, ten per cent of the amount was credited to a separate account maintained for the agent by the claimant. Money in that account could either be withdrawn or used for further purchases or to defray any sums owed by the agent or other customers. Amounts not claimed were retained by the claimant.
The issue arose whether the taxable amount on which VAT was chargeable was the full catalogue price, or that price less the full ten per cent discount, or the price less the amount of the discount claimed. The VAT tribunal asked for a preliminary ruling from the European Court of Justice.
Article 11 provides:
'(A)(1) The taxable amount shall be: (a) ... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser ... (3) The taxable amount shall not include: ... (b) price discounts and rebates allowed to the customer and accounted for at the time of the supply; ... (C)(1) ... where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States. ...'
The amount did not come within Article 11(A)(3)(b) as there was only a discount within that Article if the customer paid a reduced price at the time of supply. However, in the light of Article 5(1), the time of supply in the present case was when the products were adopted by the agent, when the amount payable by the agents was the full catalogue price. The ten per cent credits occurred later as and when instalments of purchase price were paid. The Commission of the European Communities' submission that price discounts were accounted for as soon as the purchaser acquired a legal entitlement to them, was not correct, according to the basic rule in Article 11(A)(1)(a) as interpreted by the court, that the definitive taxable amount was the consideration actually received for the goods.
The taxable amount, under Article 11(C)(1), constituted by the original full catalogue price was reduced as soon as the agent withdrew the amount credited in his separate account, or used it in some other way.
The taxable amount was therefore the full catalogue price reduced by the amount of the agent's discount credit when it was withdrawn or used in another way.
(Freemans plc v Commissioners of Customs and Excise (Case C-86/99), European Court of Justice, 29 May 2001.)
Taxable vouchers
F & I Services had a business relationship with a car dealer network, and devised a scheme whereby books of vouchers were to be sold to car dealers for them to offer to purchasers of cars. The total nominal value of each book was £2,200, but they were sold to the car dealers for £10.40 each, who then sold them to their customers for £300, included in the overall price of the car. It was accepted that VAT would be chargeable on the supply from F & I to the dealers, but hoped that it would not be chargeable on the transaction between the dealers and the customers.
Customs initially agreed, but later changed their view. F & I therefore appealed, but the tribunal dismissed the appeal. So, F & I appealed and also applied for judicial review of Customs' decision to change their view, on the ground that the first opinion had created a legitimate expectation. The High Court found against the taxpayer, but said that the claim against Customs for damages for negligence should continue as though begun by writ. F & I appealed again.
Dismissing the appeal, the judges in the Court of Appeal said that the High Court judge had been correct in saying that as the vouchers did not entitle the owner to any goods, but simply a price reduction, they did not fall within paragraph 5 of Schedule 6 to the VAT Act 1994. There was no direct link between the marketing benefit derived by a participating retailer and the supply made by the retailer to the customer. The money paid to the dealer for the vouchers was not a pre-payment of the sums due to retailers because none of that money reached them. Furthermore, the sale of the vouchers should not be treated as an exempt supply of a financial service within Articles 13B(d), 3 and 5 of the Sixth Directive. The voucher did not represent an obligation to pay anything, and in the hands of the retailer was worthless. Thus it could not be regarded as a transaction concerning payment or a security within the meaning of the directive.
With regard to the judicial review, the Appeal Court judges agreed with the High Court judge again. Customs were bound by domestic and community law to administer VAT correctly, and collect the appropriate amount of tax. They had no dispensing power, and taxpayers could not have any legitimate expectation that Customs would administer VAT in any manner contrary to the law. F & I's only legitimate expectation had been that it would not be asked to pay tax retrospectively. The judges also noted that the company had resorted to judicial review without first exhausting all other remedies.
(F & I Services Ltd v Commissioners of Customs and Excise, Court of Appeal, 23 May 2001.)
Partially exempt
The Liverpool Institute for Performing Arts had provided educational services in the field of the performing arts since 1995, and these were exempt supplies of education. The institute also provided advertising and publicity services to a German company, the supply of which, if the company had been in the United Kingdom, would have been subject to VAT. However, under Article 4 of the VAT (Place of Supply of Services) Order 1992, advertising supplies were treated as having been made in the country of the recipient.
The institute appealed to the VAT tribunal against Customs' decision that its out-of-country supplies were not taxable supplies for the purposes of calculating the deductible proportion of input tax. The tribunal said that once the amount of residual input tax had been determined, the overseas supplies should be treated as taxable, for the purposes of Regulation 30 of the VAT (General) Regulations 1985. The High Court dismissed Customs' subsequent appeal, but the Court of Appeal allowed it, so the institute appealed.
The House of Lords said that Article 17(5) of the Sixth Directive, coupled with Article 19 contemplated a value-based approach to apportionment of residual input tax, but did not insist upon it. Regulation 32 required an apportionment to be made on the basis of use, but this only applied in respect of out-of-country supplies. Article 17(5) did not require that there had to be one régime; a use-base apportionment could be used in respect of the input tax on some of the goods and services, leaving the input tax on the other goods and services to be apportioned by a value-based method. Regulation 32 enables the amount of input tax used in making out-of-country supplies to be determined. The tax thus determined was tax attributable to supplies within section 15(2)(b), VAT Act 1983, and was tax for which the taxpayer was entitled to credit under section 14(2), VAT Act 1983. It was not necessary for the supplies to be taxable under Regulation 30 in order for the taxpayer to be so entitled.
The Court of Appeal's decision was affirmed, and the appeal dismissed.
(Commissioners of Customs and Excise v Liverpool Institute for Performing Arts, House of Lords, 23 May 2001.)
