VAT Tribunal Decisions

ALLISON PLAGER reports three recent decisions: National Westminster Bank plc (17687); S J Phillips Ltd (17717); and Royal Bank of Scotland Group plc (17637).

Special cheques

National Westminster Bank used to provide special cheques and credit slip forms to certain corporate and personal customers who requested them. It was an optional service for which customers had to pay. If the customer wished, special cheques could be made by third parties provided that they met the bank's security standards. In 1998, the bank stopped printing any of its own cheques, and instead put customers who required special cheques in direct contact with third party printers. It subsequently came to the bank's attention that it had under-claimed input tax on the sale of special cheques, and in June 1999 it wrote to Customs making a voluntary disclosure for the period ended 30 June 1996.

Customs disagreed saying that the supply of special cheques was ancillary to a supply of exempt financial services, and therefore exempt from VAT.

The issue before the tribunal was whether the supply of special cheques constituted a taxable supply of goods or an exempt supply of services. The tribunal used the judgment in Commissioners of Customs and Excise v Card Protection Plan [1999] STC 270 as a starting point to establish the principles it should follow. As a result, it was necessary to consider the essential features of the transaction in order to determine whether providing special cheques could be considered a separate supply.

The tribunal concluded that the provision of special cheques was a separate supply of goods, and not ancillary to the exempt supply of services made by the bank. This was for a number of reasons. First, a business customer could obtain an ordinary cheque book from the bank if it preferred, so in asking for special cheques, customers were looking for something over and beyond the normal service. Second, customers could benefit by the advertising opportunities special cheques offered, and this was a reason for buying them. In short there was a clear separate supply of goods because:

• the cheques were obtained by special order;
• such cheques could be obtained by third parties;
• they were not necessary in the normal banking relationship;
• there was a significant extra charge for the special cheques;
• they had been regarded and accepted as a separate supply for many years, as output tax had been accounted for in their respect;
• the cheques were invoiced separately.

It would be highly distortive for the bank not to recover input tax on the supply of special cheques when a third party, which the customers could legitimately ask to supply the cheques instead of the bank, would be able to recover the tax.

The bank's appeal succeeded.

(National Westminster Bank plc (17687).)

Credit note confusion

A retail jeweller sold jewellery on the basis that the customer could bring back the piece bought, and receive a credit note to the value of the piece returned, enabling him to buy something else. This arrangement was purely at the shop's discretion. Customs said that the supply and repurchase of goods comprised two separate transactions for VAT purposes. That is, there was a sale to the customer in respect of the original piece, and a second sale by the customer to the company when it is returned. The taxpayer appealed.

The tribunal said that Articles 5, 10 and 11C(1) of the Sixth Directive had clearly anticipated that the tax charged on a taxable supply as a result of a sale of an item would be fully relieved if there was a cancellation of the original transaction giving rise to the charge. However, the directive offered little guidance as to the form that cancellation might take.

After considering relevant case law, including Commissioners of Customs and Excise v Bugeja [2001] STC 1568 the tribunal said that where a credit note was available as a matter of contractual right, the transaction would be effectively cancelled. In the instant case, the credit note arrangements were not part of clear written contractual terms.

The tribunal concluded that in general terms normal credit note trades did not necessarily justify the cancellation of the consideration for the supply of the first item. Thus the appeal failed. However, the tribunal was willing to hear further evidence concerning the oral nature of some agreements which would justify the cancellation of the consideration.

(S J Phillips Ltd (17717).)

Clearing services dispute

The Royal Bank of Scotland was in dispute with Customs over the VAT chargeable on the transfer to Electronic Data Systems of the part of National Westminster Bank which deals with clearing services.

Electronic Data Systems dealt with all the Royal Bank of Scotland's clearing and processing. When Royal Bank of Scotland acquired National Westminster Bank, it was decided to use Electronic Data Systems for National Westminster Bank's clearing also. The agreement in respect of this, included the transfer of certain assets including relevant assets, properties and employees. The dispute concerned whether the transfer should be treated as a supply of goods or services or as transfer of a going concern. Royal Bank of Scotland argued that it was the latter, but Customs disagreed.

The tribunal concluded that there had been a transfer of a going concern. The factors favouring this included the transfer of all the National Westminster Bank employees involved in the relevant activities, the supply of equipment, and the intention of the parties concerned. There was no significance in the option to repurchase. The agreement between the Royal Bank of Scotland and Electronic Data Systems was for ten years, by the end of which time, both the equipment and software were likely to have been replaced.

A part of the appellant's business had been transferred, and was capable of separate operation. The appeal was allowed.

(Royal Bank of Scotland Group plc (17637).)

Issue: 3890 / Categories: