The High Court held that a scheme set up to reward installers of its boilers constituted a single supply of marketing services so that all the VAT paid to the company delegated to run the scheme could be treated as part of the taxpayer's input tax.

Facts

The taxpayer was the representative member of a VAT group, one member of which manufactured domestic heating boilers under the brand names Baxi, Potterton and Valor. The company sold 1.5 million boilers in the UK each year, representing approximately one quarter of the UK market. Most buyers left the choice of boiler to their installers and the taxpayer's marketing was, therefore, directed mainly at gas appliance installers.

The promotion scheme with which the appeal was concerned was known as Bonus Direct. Under that scheme, installers earned points for buying Baxi boilers or other qualifying items. Those points could be converted into gifts of goods or, to a lesser extent, services which the installer would select from a catalogue. The main purpose of the scheme was to encourage customer loyalty, but it had the additional benefit of providing useful data regarding Baxi's customer base.

In view of the popularity of the scheme, the taxpayer considered it necessary to engage a marketing company, @1 Group Ltd (‘the company’) to administer it. The tasks delegated to the company included handling scheme registration applications, recording claims and procuring gifts for the claimants. It also operated a telephone helpline and internet website to assist scheme users. During the early part of the relevant period, the arrangement between the parties was that the appellant would pay to the company the recommended retail price of the redeemed goods and the company would earn its fee from the difference between that amount and the discounted cost price. Later, the taxpayer paid the company a fixed fee in addition to the acquisition cost of the goods. The taxpayer paid the company further sums for additional services and there was no dispute that the VAT on those services was deductible. The dispute related to the recovery of VAT by the taxpayer on the cost of the goods.

The taxpayer argued that the company had made a single supply of marketing services and that the VAT charged was deductible as input tax. In the taxpayer's view, the scheme had to be considered as a whole, with the provision of the gift being merely one component of the single supply of a promotion scheme. The company had supplied a composite marketing service of which the distribution of the gifts was part. The elements of the supply were not economically dissociable.

The Revenue and Customs Commissioners (‘Customs’) argued that the gifts were supplied by the company to the installers. Thus, it was not possible to treat the supply of the goods as if they were subsumed in a supply to the taxpayer; there were distinct supplies to different recipients. It followed, contended Customs, that if the company supplied the goods to the installers, the VAT attributable to the cost of the goods that was included in the invoices issued by the company to the taxpayer was not input tax. Customs advanced the alternative argument that the goods were supplied by the company to the appellant for onward supply to the installers. If that were the case, the taxpayer would be entitled to recover the VAT as input tax but would be required to account for output tax on the onward supply of the goods.

The VAT tribunal dismissed the taxpayer's appeal on the basis that, under the scheme, there was one supply of goods by the company to the taxpayer and another supply to installers by the taxpayer, so that the taxpayer was entitled to recover as input tax the VAT included in the company's invoices but had to account for output tax on the value of rewards with acquisition costs in excess of £50 ([2006] BVC 2,553; Decision No. 19,431). The taxpayer appealed.

Issue

Whether the scheme represented a single supply of marketing services so that the taxpayer was entitled to treat all VAT paid to the company under the scheme as input tax.

Decision

Lindsay J (allowing the appeal) said that the contractual arrangements between the company and the taxpayer did not empower either party to dispose of the goods as if either respectively were the owner of them. So far as concerned the company, it was already owner of the goods; it did not need to be empowered to dispose of them as if it were owner. So far as concerned the taxpayer, it was impossible to regard it as being put into a position to dispose of the goods as if it were owner of them.

An owner of goods would not infrequently be in a position to direct that he who held the goods should dispose of them in some such way as the owner of them required but the taxpayer had no equivalent rights over the goods in the company's warehouse. Accordingly, there was no supply of goods by the company to the taxpayer and the tribunal's principal conclusion was wrong. However, the question remained as to what was supplied for tax purposes, taking the company as the supplier, and to whom the supply was made.

The fundamental principles were that, as a default rule, pursuant to art. 2(1) of the sixth directive, every supply of goods or of a service had normally to be regarded as distinct and independent, and supplies were not to be artificially split. The requirement was that the essential features of the transaction had to be ascertained to determine whether there were several distinct principal services or a single service. It was implicit that where there were the former, the split would not be artificial.

Neither the European VAT directives nor domestic implementing legislation contained any provisions dealing with the proper fiscal treatment of mixed supplies. Therefore, the criteria for determining the fiscal treatment of a supply of distinguishable elements had been identified by the courts and deployed as a technique to determine the fair and proper tax. Where a transaction was comprised of a bundle of features and acts, regard had to be had to all the circumstances in which that transaction took place.

If a supply, from an economic point of view, was a single supply, it should not be artificially split. One had to identify the commercial reality of transaction. If artificial dissection was to be avoided the court had to seek the ‘level of generality which corresponds with economic reality’ (see Dr Beynon & Partners v C & E Commrs [2004] BTC 5,794, at para. 31).

In order to determine whether a supply was a composite or mixed supply from an economic point of view, one had to identify the essential features to determine whether the supplier was supplying a typical customer with separate services, or a single service: one test was whether one could identify a principal or core supply to which other distinguishable supplies were ancillary. Not all supplies fitted that neat dichotomy between principal and ancillary supplies.

There were cases where there might be a bundle of supplies in which none predominated over the others, i.e. integral supplies rather than ancillary supplies. In that situation, one had to look at the ‘table top’ to determine the true and substantial nature of the consideration given for the payment. Neither approach required deep legal principle but one needed to articulate a fair and reasonable approach to cases of mixed supplies. The tests and analyses adopted by the courts to determine whether there was a single or multiple supply applied equally to the supply of goods as well as services and also mixed goods and services (C & E Commrs v Telemed [1992] BTC 5,003 and C & E Commrs v British Telecommunications plc[1999] BTC 5,273 considered).

In the present case, the advertising and marketing service which included the devising and formulation of the scheme, the selection of goods for the catalogue, the editing and dissemination of the catalogue, the provision of the ‘cheques’, the whole plan for application for and registration of membership, the acquisition and storage of rewards goods, the receipt and processing of requests for those rewards, their delivery to installers, the handling of any complaints and the supply of information as to installers for the database were, all taken together, not economically dissociable from the provision of goods but a mechanism without which the provision of goods to installers could not achieve its purpose.

In all the circumstances, no apportionment of consideration was appropriate and the taxpayer was entitled to have all its VAT paid to the company under the scheme treated as part of its input tax in the relevant periods.

Chancery Division.
Judgment delivered 21 December 2006.