LOYALTY TO REDROW. Philippa Whipple

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1 1 LOYALTY TO REDROW Philippa Whipple THE STARTING POINT VAT law, as everyone knows, defines the taxable amount as being everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies 1. The authors of the Sixth Directive doubtless thought that this was an easy enough concept: where consideration is paid by A to B in respect of a supply by B to C, the value of the supply from B to C, on which tax is due, is the amount of the payment from A to B. Article 11 is a provision looking at the value on which VAT is to be accounted for. But it knocks on to input tax deduction: because if the supply in question was truly made by B to C, then A cannot deduct any associated input tax. And it is in the context of input tax deduction, consequent on the concept of third party consideration, that litigation has prospered. THE REDROW LENS The House of Lords looked at the issue of third party consideration, in Redrow [1999] STC 161. The facts of that case are simple. Redrow builds houses, and as a sales promotion scheme undertook to pay, on behalf of any person who bought a new Redrow home, estate agency fees incurred in the sale of their former home. The Commissioners analysed this as Redrow paying fees incurred by a third party, on behalf of that third party: classic third party consideration. The taxpayer analysed this as Redrow paying fees for services supplied to it by the estate agent: not third party consideration at all but consideration for a service supplied to Redrow. 1 Article 11A(1)(a) of the Sixth Directive, 77/388, transposed in almost identical terms to Article 73 of the Principal VAT Directive 2006/112/EC.

2 2 The famous test was born: Once the taxpayer had identified the payment the question to be asked is: did he obtain anything anything at all used or to be used for the purposes of his business in return for that payment 2. The outcome of that case, once that question was posed, was a fairly easy yes. Redrow had got something it was not necessary to define what it was from its payment to the estate agent. Redrow could deduct the associated input tax. Meanwhile, the third party householder had also got something but as that person was not carrying on a business, no question of input tax deduction arose. The circle had been squared. Using A, B and C again: if Redrow is A, the estate agent is B, and the householder is C, the analysis in Redrow was that the payment by A to B was for two things, first, the supply of estate agency services from B to C, and secondly the supply of services from B to A, consisting of the right to the other supply from B to C. THE PHILOSOPHICAL BOUNDARY POST-REDROW The House in Redrow was much affected by the commercial reality of that case, which involved a taxable person who made fully taxable supplies in the course of its business. That being so, the starting position ought to be that the business should not incur sticking input tax. But when, one might ask, would a taxable person make a payment for business purposes which did not procure some advantage for that business, bearing in mind that services is very broadly defined to extend to anything at all? Businesses do not generally make payments unless some advantage or benefit is to be secured in return. Redrow in truth leaves very little room for the concept of third party consideration. The moment you analyse matters from the standpoint of the payer, and ask whether that payer has got anything at all in return for that payment, bearing in mind the business context in which the question is posed, it is difficult to imagine examples 2 Lord Millett, p 171 f

3 3 beyond the maverick, where there would be room to argue that the money paid procured nothing at all for the payer THE EURO DIMENSION If matters have seemed relatively clear in domestic law for some while now 6, the European stage has not been so settled although it is right to say that, to date at least, the ECJ has not considered precisely the same question as was posed in Redrow. In 2002 the ECJ considered two cases involving money-off vouchers issued by a manufacturer which were redeemable in whole or in part by a consumer against a retailer, in circumstances where the retailer could then recoup the value from the manufacturer: EC Commission v Germany 7 and Yorkshire Co-Operatives Ltd v CEC 8. The central issue in the cases was whether the manufacturer was entitled to abate the amount on which he accounted for VAT by the value of the voucher which he reimbursed to the retailer. But that involved some analysis of the retailer s position. He had to account for VAT on everything received including the amount reimbursed by the manufacturer: straightforward article 11A(1)(a). But importantly, it appears that the ECJ treated that amount as consideration for the goods supplied to the end consumer, and not for some separate or different supply by the retailer to the manufacturer. This is not a conclusion which would square with Redrow. These were valuation cases and not input tax cases. But the VAT analysis should provide a coherent answer for the economic transaction as a whole. These cases certainly suggest that the domestic approach is at odds with the Community approach. 3 Although I have to accept that as matters currently stand, the football cases concerning payments by clubs to agents would have to fall in the maverick category: see Newcastle United plc v HMRC [2006] UKVAT V19718 and Birmingham City plc v HMRC [2007] UKVAT V Chadwick LJ addressed the argument that following Redrow the reference in the Directive to third party consideration was effectively redundant at para 52 of WHA (1) see below. He was not deterred by it. 5 Subsequent case law tells us that even though services are widely defined to extend to anything done, if the payer obtains only a mere adventitious benefit from the payment that would not be sufficient to cross the threshold: WHA (1) para Redrow was confirmed and applied by the House of Lords in CEC v Plantiflor Ltd [2002] STC [2003] STC [2003] STC 234

4 4 Then, in 2003, the ECJ decided Auto Lease 9. This was an input tax case. Lessees of vehicles entered into fuel management agreements with Auto Lease, pursuant to which the lessee could fill up his leased vehicle with fuel using a credit card issued in Auto Lease s name. Auto Lease paid the credit card company for the fuel, with the customer paying one twelfth of the estimated annual cost monthly with an adjustment at year end. The question was: to whom was the fuel supplied? To the lessee who took physical possession, or to Auto Lease who paid for it? The ECJ s analysis followed the physical possession of the fuel. It was the lessee who had the right actually to dispose of the fuel as owner, and therefore the supply was to the lessee. Auto Lease was simply supplying credit to the lessee. There is a clear difference of approach between the two cases, because in Auto Lease the analysis starts with the supply to the end user, whereas in Redrow the analysis starts with the payer of the money. In consequence, the VAT analysis is different depending on which approach you take. TENSION The tension between the two cases is clear. The ECJ case law suggests the linear path: payment by A to B, with supply from B to C: classic third party consideration. The domestic case law suggests a different analysis: payment by A to B, with supply from B to A and, very possibly, from B to C as well. These are two completely different models, with completely different VAT consequences. POST AUTO LEASE DOMESTIC CASE LAW Neuberger LJ was faced with this tension in WHA (1) 10 where he had to decide whether the garage which repaired the cars in that case supplied services to WHA who paid for the repairs, or to the policyholder whose car it was. You can see here a close analogy with the facts of Auto Lease. But Neuberger, having to choose between a Redrow and an Auto Lease analysis, brushed away Auto Lease saying that it was a case about goods, whereas WHA was a case about services, and between the two there was an important conceptual distinction 11. Plainly goods and services are 9 Case C-185/01 Auto Lease Holland BV v Bundesamt fur Finanzen [2005] STC 598, judgement 6 th February [2004] STC para 61

5 5 different; but to me anyway, it is not clear why that should be the basis for distinguishing Auto Lease. LJ Neuberger did not, however, spend long on the point! The next case in line has brought the point into sharp focus, because it is a goods case: LMUK 12. This is the Nectar loyalty scheme case: individuals collect Nectar Points which are redeemable for the whole or part of the cost of goods (and some services but let us stick with goods) from Redeemers such as Argos. The Redeemer is paid a service charge by Loyalty Management, the amount of which is relative to the number of Points that have been redeemed. The Court of Appeal agreed that Auto Lease was authority for the proposition that the goods supplied under the scheme were supplied to the Collectors and not to LMUK; but did not think that Auto Lease precluded the there being a supply of services by the Redeemers to LMUK, alongside the supply of goods to the Collector 13. Accordingly, relying on Redrow, the Court concluded that LMUK was entitled to input tax recovery on the service charges. LMUK certainly takes Redrow into new frontiers: (i) it applies Redrow in circumstances where what is provided to the consumer (B to C) is goods rather than services; and (ii) it applies Redrow in circumstances where, potentially at least, C may be a taxable person using the redemption goods for taxable purposes. Those features are important because they give rise to difficult consequential questions. (i) If goods are being supplied by a Redeemer without any charge to the Collector (because the only charge made by the Redeemer, B, is to the Promoter, A, for services provided to A), what of the deemed supply rules which impose a tax charge in given circumstances? 14 Is the Redeemer vulnerable to a Kuwait analysis? 15 (ii) Is the consumer entitled to deduct the input tax on the goods if those goods have in fact been the subject of a supply to him and if so, on what value? 16 So the application of Redrow in a case like LMUK does not lead to a nice tidy finish, a coherent analysis, as happened to be the upshot in Redrow. It actually leads to a 12 [2008] STC paragraphs 46, 50, VATA Schedule 4, para 5 read with Sch 6, para Case C-48/97 Kuwait Petroleum (GB) Ltd v CCE [1999] STC bearing in mind that the Collector may have part paid for the Redemption goods.

6 6 number of difficult consequential questions, which the Court of Appeal judgment does not resolve. Two months after delivering judgment in LMUK, the Court of Appeal gave judgment in Baxi Group Ltd v HMRC 17. This is another loyalty scheme case, this time concerning boilers or, more specifically, loyalty to Baxi boilers. Installers of boilers were able to collect points which they could redeem from the operator for reward goods. The operator recouped the retail price of those goods from Baxi, the promoter. The Court unsurprisingly adopted precisely the same approach as it had done in LMUK and concluded that payments by the promoter to the operator were for supplies of services by operator to promoter, giving the promoter the right of recovery of input tax on those sums. The same consequential questions, in relation to the provision of goods by the operator to the boiler installers, are raised as in relation to the LMUK scheme. REFERENCE TO THE ECJ The Commissioners petitioned the House of Lords in both LMUK and Baxi. The House of Lords agreed that there should be references in both cases and questions are being agreed. The ECJ is not of course bound by Redrow. The issues which underlie Redrow are at large. 17 [2008] STC 491

7 7 EVALUATION The rival cases appear stark. Either you take the view that expenditure for business purposes should give rise to a right of deduction, bearing in mind the very wide definition of services at Community and domestic level, and so long as it is possible to identify something capable of being a service which has been obtained by the taxable person you have a right to input tax deduction (Redrow). You further say that the reality of commercial life is that in most cases, businesses do not make payments for no good reason, so that there is, indeed, little room for a concept of third party consideration which precludes deduction of input tax by the payer. The alternative is that you take a mechanistic approach to VAT and ask: what is the consideration for the supply to the end consumer, C in each example above. Once that consideration is identified, the analysis is resolved: this is the once and one way only approach to consideration. 18 That analysis has the advantage of simplicity, and of avoiding the difficult and unanswered consequential questions which arise out of the Court of Appeal s analysis in LMUK. Conceptually it is hard to see a middle path between the two stark extremes. One issue, which is to be debated in the context of the ECJ reference, is whether, if the money paid by A to B is in truth consideration for two supplies (ie for a supply by B to A and a supply from B to C), it is possible to apportion that single payment in some way between the two supplies. CONCLUSION Redrow is already the old lady of VAT law, being now 9 years old. She has a strong fan club amongst taxpayers and advisors, but she has her detractors too. It remains to be seen whether the ECJ will allow her survival. The questions posed by these references are large, and engage fundamental principles of VAT law. 18 A phrase adopted by Lindsay J in LMUK in the High Court [2007] STC 536, paras 58 and 76, rejected by Chadwick LJ on appeal.