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Tax Case - Wrong Advice from Customs

16 October 2008

The Court of Appeal upheld the High Court's decision in F & I Services Ltd v Commissioners of Customs and Excise.

The Court of Appeal upheld the High Court's decision in F & I Services Ltd v Commissioners of Customs and Excise.

A company sold books of vouchers to car dealers, who offered them on to car purchasers for a price which was part of the overall cost of the car. Customs first agreed that no tax was due on the onward supply of the vouchers to the car purchasers, but later withdrew this view, and said that VAT was chargeable. The taxpayer's appeal was dismissed by the courts, and finally by the Appeal Court which concluded that the vouchers did not fall within paragraph 5 of Schedule 6 of the VAT Act 1994 as they did not entitle to the holder to goods or services, rather to a discounted price.


A scheme was devised by F & I Services, a company which had an established business relationship with a car dealer network, whereby books of vouchers would be sold to car dealers who would offer them to purchasers of cars. The vouchers could be used by the recipient towards the purchase of various goods and services. The total nominal value of each book of vouchers was £2,200, and they were sold to the car dealers for £10.40 each. The dealers then offered the booklets to customers for a nominal price of £300, included as part of the overall price of the car.

In letters sent in November 1997 and March 1998, Customs said that the car dealers would not need to account for VAT on the sale of the booklets, provided that they were sold at or below face value. The March letter was sent when F & I was launching the product. However, in another letter sent in June 1998, Customs changed their view, saying that VAT would be chargeable on the supply of the voucher books by the car dealers to customers, and this altered view was to be applied after a 30-day time-lag.

The tribunal agreed with Customs' final view, so F & I appealed to the High Court. Mr Justice Carnwath dismissed the appeal on the grounds that as the vouchers could only be used by way of a discount or part payment, they were outside paragraph 5 of Schedule 6 to the VAT Act 1994, as they obtained in effect a price reduction, rather than actual goods or services.

Paragraph 5 of Schedule 6 says:

'Where a right to receive goods or services for an amount stated on any token, stamp or voucher is granted for a consideration, the consideration shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the amount.'

Furthermore, it was artificial to treat whatever the car dealer received for the vouchers as a prepayment of sums due to retailers, because the retailers would not receive that money. Finally, as the voucher was worthless in the hands of the retailer, it could not be regarded as a payment transaction or a security within the meaning of Article 13B(d)(3) and (5) of the Sixth Directive. F & I had also applied for judicial review, the judge rejected this, but he allowed the claim to continue as a private law claim for negligence.

The company then appealed to the Court of Appeal.

(Roderick Cordara QC and Perdita Cargill-Thompson for the taxpayer company; Michael Kent QC and Rupert Anderson for Customs.)

The Court of Appeal judgment

Lord Justice Robert Walker gave the first judgment. He reviewed certain relevant case law, including the decisions in Davies v Commissioners of Customs and Excise [1975] STC 28, Commissioners of Customs and Excise v High Street Vouchers [1990] STC 575, Boots Co plc v Commissioners of Customs and Excise (Case C-126/88) [1990] STC 387, Argos Distributors Ltd v Commissioners of Customs and Excise [1996] STC 1359 and Kingfisher plc v Commissioners of Customs and Excise [2000] STC 992. However, he devoted most attention to Commissioners of Customs and Excise v Granton Marketing Ltd [1996] STC 1049, since the facts in that case were closest to those in F & I Services.

Granton distributed discount cards specific to a particular outlet, which entitled the holder to obtain a discount on meal purchases. The card cost £14.99. Customs said that output tax was payable on the supplies of the cards, but Granton appealed saying that the cards were within paragraph 5 of Schedule 6 to the VAT Act 1994. The Appeal Court found for Customs, and said that the discount cards conferred a right to pay a discounted price for certain supplies, but not a right to actual goods or services. It said that paragraph 5 is designed to avoid double taxation where a supply can be subdivided into two transactions, these being the pre-payment to obtain a voucher and the purchase of goods, tendering the voucher as part payment.

Roderick Cordara, counsel for F & I Services attacked this decision. He said firstly that the decision went against Article 11 of the Sixth Directive, and that this called into question the legitimacy of paragraph 5 of Schedule 6. Lord Justice Walker disagreed saying that paragraph 5 was directed at vouchers granted for a consideration, such as savings stamp schemes, rather than the money-off or cash-back variety considered in the many cases examined earlier by the Court. Such savings schemes fell within the prepayment contemplated in Article 11A.

The judge said that counsel's second point, that a voucher never gave an enforceable right to goods, had 'considerable force', and that the Court may have gone further than it needed to in this respect in Granton.

The third point made by Mr Cordara concerned the distinction between discount vouchers and prepayment vouchers, which he said was inconsistent with European Community law. Lord Justice Walker did not accept this, saying that while it was probably true that a customer presenting a money-off voucher at a shop did not know or care if this represented a discount borne by the shop or a part-payment to the shop, it was not necessary for the customer to know. However, the retailer would know what the distinction was. The Court, when it ruled in Granton, clearly had European Community context in mind.

Lord Justice Walker said that the High Court judge had correctly recognised that the tribunal had said that there was no direct link between any marketing benefit a particular retailer derived from the services of F & I, and the supply made by the retailer to a customer.

With regard to the notion of prepayment, there was only one possible answer, namely that the money paid by the customer to the car dealer for the discount vouchers did not reach the retailers at all. This was therefore outside the scope of the provisions of paragraph 5 of Schedule 6 as the voucher was not any form of pre-payment.

The appeal was dismissed.

As to the judicial review, the judge agreed with the High Court judge that the application be rejected, saying that Customs were bound by both European Community and domestic law to collect the correct VAT due. Taxpayers could not expect that Customs would administer VAT in a way that was contrary to the law. There was no cross appeal concerning the negligence claim against Customs.

Lord Justice Sedley agreed, but made the following comment about the judicial review application. He said that Mr Cordara had argued that 'the mere fact that advice turns out to be wrong in law does not by itself entitle Customs to go back on it'. Lord Justice Sedley 'entirely' disagreed, saying that there was nothing 'mere' about official advice which was wrong in law, at least if the taxpayer was relying on it. It was not only serious for the taxpayer, but also for the public and the rule of law. The decision in R v Commissioners of Inland Revenue, ex parte MFK Underwriting Agencies [1989] STC 873 made it clear that the law recognised no 'legitimate expectation that a public authority will act unlawfully'.

Lord Justice Sedley also commented on the award for damages as a remedy in this case. In an earlier case, R v North and East Devon Health Authority, ex parte Coughlan (Secretary of State for Health) [2000] WLR 622, it was said that the unfairness caused by a change in policy on those who have relied on the old policy, can be mitigated by writing into the new policy an exception in their favour, or by compensating them financially. The judge said that the real point was that such a payment was not an anticipatory payment of damages, rather a practical way of eliminating unfairness caused by a change in policy.

Mr Justice Lightman agreed with both judgments.

Decision for Customs

(Reported at [2001] STC 939.)

Commentary by Allison Plager

The moral of the decision in F & I Services is that advice given by Customs cannot be relied on. The taxpayer company had acted upon Customs' initial ruling, and proceeded with their design, printing, etc. Then Customs changed their minds, and the taxpayer said that this was unfair, in effect amounting to an abuse of power. The taxpayer also claimed compensation in respect of the expenses that it had incurred in launching the scheme.

The appeal proceeded through the courts, all resulting in the opinion that Customs were obliged to administer the VAT system according to United Kingdom and European Community law, and that they did not have the power to go against the law. While it is impossible to quarrel with this, it is understandable that the company felt aggrieved that Customs could legitimately change their minds, after they had acted on previous official advice. The Appeal Court said that the most that the taxpayer could expect was to be excused paying the VAT in respect of past affected transactions, and the 30-day moratorium in this respect offered by Customs had been reasonable.

It will be interesting to see how the damages claim proceeds, since this is now the only recourse open to the taxpayer.

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