The issue was the treatment for VAT of payments made by a third-party guarantor of amounts unpaid by customers due to cheques being dishonoured. The appellant retailer operated a retail scheme under which output tax was calculated on aggregate daily takings rather than on individual sales, and a composite VAT rate was applied to each period to reflect the proportion of standard-rated and zero-rated sales. All sales were recorded on electronic tills at the point of sale. The appellant entered into a contract with a company trading under the name Transax which, in return for a payment amounting to 1.79% of the value of qualifying cheques, guaranteed payment for the cheques in respect of which payment was refused by the customers’ banks.

The dispute concerned the rejection by the commissioners of a claim by the appellant for overdeclared VAT of £25,371. The claim was made on the basis that the appellant had incorrectly accounted for VAT on amounts received from Transax which it did not believe to be consideration for retail sales but compensation. Alternatively, the appellant contended that the amounts received from Transax were consideration for the assignment of debts and were exempt from VAT. The commissioners decided that the receipts were third-party consideration for supplies by the appellant to customers and were subject to VAT at the applicable rate.

In evidence, the appellant submitted that under the retail scheme provisions, a deduction fell to be made for dishonoured cheques whether or not an equivalent amount was received from Transax. In the appellant's view, the Transax payments were compensation and not consideration for supplies of goods. The payments were made under contract between the parties and were not made on behalf of defaulting customers; the payments did not discharge the customers’ obligations. The appellant submitted that the hallmark of a compensation payment is that no service is provided to the recipient of the payment in consideration of that payment; in this case there was no reciprocal performance between the Transax payment and any supply that it made. The appellant further submitted that, quite apart from the payments not being consideration for supplies made by it which came within its daily gross takings, the payments were consideration for an equitable assignment by it of the debts owed by customers and were, therefore, exempt under VATA 1994, Sch. 9, Grp. 5, item 1.

The commissioners submitted that the payments by Transax were not excluded from VAT as compensation. There was no breach of an agreement; the payments were in pursuance of an agreement between the appellant and Transax. In the commissioners’ view, the payments were third party consideration for supplies from the appellant to its customers. The situation was similar to that in Chaussures Bally SA v Belgium (Case C-18/92) [1993] ECR I-2871. In that case, the European Court of Justice said that payment of consideration for goods purchased using a card could be made by the card issuer as a third party within art. 11(A)(1)(a) of the sixth directive. By analogy, payment of a cheque by a bank was third-party consideration. The commissioners submitted that the sixth directive contained no requirement for a legal relationship between a person paying the consideration and a person receiving the supply. Here, the payment was made by a third party, but there was the necessary direct link between the payments by Transax and the supplies by the appellant to its customers.

The tribunal allowed the company's appeal.

1. The payments made by Transax were not excluded from VAT by being compensation payments for breach of an agreement by Transax and they were not consideration for the assignment of debts.
2. The contract between the appellant and Transax had many features of an insurance contract in that Transax agreed in return for prior payments to make payment to the appellant in the event of a cheque being dishonoured. However, that did not make the payment from Transax exempt; it would only be the insurance premium paid by the insured risk that fell within the exemption.
3. The payments in the present case could be subject to VAT only if, on a proper analysis, they were found to be third party consideration for the supplies for which the dishonoured cheques were given. Undoubtedly, there was a connection or link between the payments and the earlier supplies to customers, but it was not a direct link.
4. The Transax payments were not made in return for supplies to customers even though they were made in consequence of those supplies; the customers’ obligation to pay was not discharged by Transax. 4. The payments received by the appellant were not in return for its supplies to customers but in respect of its entitlement under the agreement with Transax when cheques were dishonoured. Accordingly, the payments were not consideration for supplies made and were not liable to VAT.

No. 20,314