The High Court held that, under the terms of the Nectar programme, when suppliers provided secondary goods to customers in return for Nectar points, the supply of goods was made to the customers and not to the taxpayer, as the organisation which ran the programme and accordingly the taxpayer was not entitled to reclaim VAT on the supply as input tax.

Facts

The taxpayer operated the Nectar customer loyalty rewards programme under which customers were awarded points when buying goods, known as primary goods, from participating retailers. The accumulated points could be used to acquire secondary goods or services from a number of other suppliers at no cost or a reduced cost. Payment for those secondary goods or services became due from the taxpayer to the supplier. Customers were also able to exchange Nectar points for vouchers which could be redeemed against the cost of goods at the participating retailers.

The taxpayer paid the suppliers and reclaimed the input tax. It was common ground that the suppliers made taxable supplies and there was no dispute regarding the value of the consideration received. However a dispute arose as to the identity of the recipient of the supplies. The taxpayer contended that it was the recipient. Although it paid a service charge to the suppliers calculated by reference to the number of points redeemed, it was paid in return for all the redemption services carried out for it by the supplier. Those included the provision by the supplier on behalf of the taxpayer of goods and services to the customers in return for points; assistance with the operation of the programme; the provision of information to the taxpayer's database; and the handling and processing of vouchers. The taxpayer contended that none of those services were supplied to the customers. Customs argued that the supplies were made by the suppliers to the customers and that payments made by the taxpayer to the suppliers were third-party consideration for those supplies.

The VAT and Duties Tribunal allowed the taxpayer's appeal, taking the view that what the customer received in return for consideration was the primary supply from the retailer together with the right to acquire other secondary goods or services for no consideration. The secondary supply was from the supplier to the taxpayer. The tribunal refused to make a reference to the ECJ for a preliminary ruling (Decision No. 19,056; [2005] BVC 2,628). Customs appealed.

Issue

Whether, under the terms of the Nectar programme, when suppliers provided secondary goods to customers in return for Nectar points, the supply of goods was made to the taxpayer company or to the customers; and whether there should be a reference to the ECJ.

Decision

Lindsay J (allowing the appeal) said that the principle of fiscal neutrality required that the taxable amount serving as a basis of the VAT to be collected could not exceed the consideration actually paid by the ultimate consumer.

An unapportioned and unapportionable payment made between two parties could not simultaneously be consideration for VAT purposes in more than one direction, i.e. for different supplies as between different parties who were engaged in different arrangements. It could not be consideration (albeit third party consideration) for which the provision between supplier and collector was ‘done’ and yet at the same time be consideration for VAT purposes as between supplier and the taxpayer.

What suppliers did for the taxpayer was not done for consideration in VAT terms as the service charge was already used up as consideration for the supplier's supply to the customer and hence there could not be a supply by the suppliers to the taxpayer for VAT purposes.

The service charge did not reflect the time the server needed to employ to provide the service or the number or quality of the persons providing it. Nor did the service charge reflect the cost to the server of providing what it did to the taxpayer. Nor was any retainer paid to the supplier for holding himself ready to provide rewards even where it transpired that he was not called upon to do so. Conversely, the service charge was related only to rewards fees, in turn to points redeemed, and, in turn again, to a provision by the supplier to the customer as reward.

The service charge was paid for the provision to the customer, since if a reward was returned by a collector to a supplier and was not replaced by that supplier then the service charge was reduced accordingly on the supplier's next invoice.

In the light of the facts, the service charges, which were closely related to the occasions and often to the prices of provision by suppliers to customers, had more the characteristic of being a payment by the taxpayer for or towards the supply of goods or services by suppliers to customers than being of any other nature. But even if that was not correct, having regard to the dominant characteristics of the programme and of the payments within it from the taxpayer to suppliers, what was to be supplied for VAT purposes were rewards to customers rather than a service to the taxpayer.

In the alternative, Customs argued that in cases where there were goods provided to customers as rewards but which (it was to be assumed, upon the tribunal's view of matters) were properly to be regarded as having been supplied to the taxpayer before being passed on to customers, they would become, however briefly, assets of the taxpayer's business. However there was not a sufficiently direct link such as to make the assumed supply of goods from the taxpayer to the customer a supply for consideration. Thus the value of the (assumed) supply would be determined under VATA 1994, Sch. 6, para. 6. Under para. 6(2), that value had to be taken to be ‘such consideration in money as would be payable by the person making the supply if he were, at the time of the supply, to purchase goods identical in every respect . . . to the goods concerned’. Had it been properly before the court, Customs would also have succeeded on their alternative argument.

Finally, as the appeal was allowed, neither side was pressing for a reference to the ECJ and the terms of any reference had not been agreed. The question was best left over to be dealt with on appeal. If there was no appeal, the matters would have been settled without the need for a reference.

Chancery Division. Judgment delivered 22 June 2006.