The Court of Appeal upheld a decision of the High Court ([2007] BTC 5,298) that all the VAT paid by the taxpayer boiler manufacturer to the marketing company, which operated the taxpayer's loyalty scheme for boiler installers including the provision of gifts to them, could be treated as part of the taxpayer's input tax, because the price of the goods invoiced by the marketing company and paid by the taxpayer was to be treated for VAT purposes as consideration for a single indivisible supply of advertising and marketing services.

Facts

The taxpayer was the representative member of a VAT group, one member of which manufactured domestic heating boilers. Under a promotional scheme boiler installers earned points by buying boilers or other qualifying items. The points could be redeemed for goods selected from a catalogue produced by the marketing company which operated the scheme for the taxpayer.

During the early part of the relevant period, the arrangement between the parties was that the taxpayer would pay to the marketing 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 marketing 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 gifts for installers 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.

Revenue and 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 High Court allowed the taxpayer's appeal against that decision. On the basis of his finding that there had been no supply of goods by the company to the taxpayer, the judge said he could not uphold the reasoning that had led the tribunal to its decision. Having held that, on a true analysis of the facts, there was one single and indivisible supply of advertising and marketing services by the company to the taxpayer, and that it was not appropriate to apportion the consideration for that supply, the judge rejected Customs’ primary submission that there had been a supply of goods to the installers for third party consideration provided by the taxpayer ([2007] BTC 5,298). Customs appealed.

Issue

Whether the judge was correct to hold that the price of the goods invoiced by the company and paid by the taxpayer was to be treated for VAT purposes as consideration for a single indivisible supply of advertising and marketing services by the company to the taxpayer.

Decision

Sir John Chadwick (Tuckey and Maurice Kay L JJ agreeing) (dismissing the appeal) said that, on becoming a member of the scheme, an installer became entitled, as against the taxpayer, to obtain reward goods by the redemption of points. It was a term of the agreement between the taxpayer and the company that the company would provide reward goods to an installer against the redemption of points.

In return for the payment which the taxpayer made to the company, a payment equal to the whole of the price of the reward gifts, the taxpayer obtained the discharge of its own obligation to the installers. The performance by the company of its obligation to the taxpayer was plainly the supply of a service by the company to the taxpayer within the wide meaning to be given to that expression in the light of C & E Commrs v Redrow Group plc [1999] BTC 5,062. The advertising and marketing services which the company provided were not economically dissociable from the provisions of goods to installers. The provision of reward goods, associated with the purchase of the taxpayer's products, was integral to the services which the company had agreed to provide under the scheme. The benefit which the taxpayer received in return for the payment which it made to the company was the discharge of its own obligation to the installers. It could not be said that any part of that payment was made only as consideration for the supply of the secondary goods to the installers. The whole was made for services which included the service of procuring that the taxpayer was discharged from its own obligation to the installers.

The relevant question was not for what was the marketing company accountable by way of output tax; but could the taxpayer treat its payment of the VAT charged to it by the marketing company as input tax. Following Redrow, the latter question had to be approached by asking what the taxpayer was making the payment for. There was no doubt that the taxpayer was making payment to the company for redemption services, including the provision of goods by the company to the installers in circumstances which discharged the taxpayer from its obligations to the installers under the scheme (R & C Commrs v Loyalty Management UK Ltd [2007] BTC 5,854 applied).

Court of Appeal (Civil Division).
Judgment delivered 20 December 2007.