The High Court (allowing an appeal by the taxpayer) held that the taxable amount received by a fuel company for VAT purposes should be reduced by the cost of gift vouchers provided to customers as part of a customer loyalty scheme.

Facts

In 1991, the taxpayer introduced a ‘customer loyalty’ scheme, known as the Total Oil promotion scheme (TOPS). Under the scheme, purchasers of road fuel were given electronic points, and registered cardholders who collected 5,000 points were entitled to a £5 gift voucher issued by a selection of high street stores. The vouchers were purchased in bulk by the taxpayer at discount rates of up to 11.5 per cent. A dispute arose concerning the value of the taxable supply made by the taxpayer. The Revenue and Customs Commissioners (HMRC) rejected a claim by the taxpayer for the repayment of £1.6m overpaid output tax. The taxpayer took the view that the cost of providing face-value vouchers in the course of operating the TOPS constituted a retrospective discount given to customers and reduced the taxable amount in accordance with art. 11(C)(1) of Council Directive 77/388 (the sixth directive). HMRC argued that there was no relevant relationship between the supply of vouchers and the consideration received by the taxpayer for the sale of road fuel. They considered that the supply of vouchers could not serve to reduce the original consideration provided by the customer for the fuel.

The VAT tribunal held that the cost incurred by the taxpayer on the voucher to enable it to redeem TOPS points did not operate as a reduction in the price paid by the customer. Regardless of how the transfer of the voucher to the customer was characterised, it did not change the fact that the consideration obtained for the fuel remained the sum charged to the customer at the time of purchase. There was no relationship between the two supply chains, namely the sale of road fuel to the customer and the chain of supply commencing with the retailer's sale of a gift voucher for the taxpayer to use in the redemption process. No part of the cost components in the first supply chain was a cost component in the second supply chain and vice versa. Accordingly, the taxpayer's reliance on Elida Gibbs Ltd v C & E Commrs (Case C-317/94) [1996] BTC 5,513; [1996] ECR I-5339 was misplaced.

The tribunal agreed with the opinion of the Advocate General in Kuwait Petroleum (GB) Ltd v C & E Commrs (Case C-48/97) [1999] BTC 5,203; [1999] ECR I-2323, in which he held that, in reality, it was not possible to treat as a single economic transaction a series of events consisting of two distinct transactions: the sale of fuel coupled with the supply of stamps and the subsequent redemption of goods for those stamps. The redemption transactions were no part of the chain of supply that ended with the sale of the road fuel to the customer ([2006] BVC 4,070; Decision No. 19,502).

The taxpayer appealed to the High Court. It relied on art. 11(A)(1)(a) and 11(C)(1) of the sixth directive, contending that, in so far as it was required to transfer vouchers to motorists under the TOPS, the amount on which it was liable to pay output tax was not the sum originally received for the sale of fuel but the full fuel price reduced by an amount equal to the cost incurred in purchasing the vouchers transferred. Article 11(A)(1)(a) defined the taxable amount in respect of supplies of goods and services as everything which constituted the consideration which had been or was to be obtained by the supplier from the purchaser, the customer or a third party for the supplies, including subsidies directly linked to the price of such supplies. Article 11(C)(1) provided for a reduction in the taxable amount in the case of cancellation, refusal or total or partial non-payment, or where the price was reduced after the supply took place. It was left to member states to lay down the conditions for such a reduction.

Issue

Whether the output tax payable on the fuel should be reduced by amounts equal to the costs incurred in purchasing the vouchers.

Decision

Sir Andrew Park (sitting as a High Court judge) (allowing the appeal) said that the reasons given by the tribunal were insufficient to support its decision and so the court had to analyse the issues and reach its own conclusion.

Pursuant to art. 11(A)(1)(a), the taxable amount was the value actually received in each particular case, comprising all sums which made up the consideration obtained by the supplier from the purchaser. In Elida Gibbs v C & E Commrs (Case C-317/94) [1996] BTC 5,513 (a case which concerned a coupons provided to customers under a scheme similar to the present), the European Court of Justice had laid down the wide principle that where a trader supplied goods (or services) for a stated consideration but, under a sales promotion arrangement, was obliged to pay an amount away to the ultimate consumer, the consideration upon which the trader should be finally liable to VAT was to be reduced by the amount so paid away.

In the present case, the transfer of the voucher to the customer was part of a chain of transactions in which the VAT supply was a supply of fuel by the taxpayer. If the customer was a participant in the TOPS scheme, the taxpayer supplied fuel to him for the normal price and on terms that, if he purchased enough litres, the taxpayer would transfer to him a voucher with a nominal value of £5. When he satisfied that condition, the taxpayer transferred the voucher to him because of the purchases of fuel he had made. In those circumstances, it was plain that the transfer of the voucher was part of the supply chain which included the taxpayer's supplies of fuel. In all the circumstances, the Elida Gibbs principle applied to the present case.

That result was not changed by the fact that what was paid away was in the form of a voucher rather than money. A voucher was a right to have the price payable for goods or services satisfied in whole or in part by an amount equal to the face value of the voucher. There was no principle of law which prevented a reduction effected, not in money, but in kind from operating as a reduction in the taxable consideration previously received for a supply of goods or services (Goldsmiths (Jewellers) Ltd v C & E Commrs (Case C-330/95) [1997] BTC 5,380; [1997] ECR I-3801 and Euphony Communications Ltd v C & E Commrs [2004] BTC 5,413 considered).

In Elida Gibbs, reference had been made to the neutrality principle which, in the present context, meant that the trader should not be charged VAT on an amount greater that the true proceeds to him of the transaction of supply. In order to ensure observance of the principle of neutrality, when calculating the taxable amount for VAT, account had to be taken of situations where a taxable person who had no contractual relationship with the final consumer, but was the first link in a chain of transactions, gave a reduction to the final consumer through retailers or by direct repayment of the value of the vouchers. Any other conclusion would mean that the tax authorities would receive by way of VAT a sum greater than that in fact paid by the final consumer at the expense of the taxpayer. Although 11(C)(1) of the sixth directive referred to the normal case of contractual relations entered into directly between two contracting parties, which were subsequently modified, it was nevertheless designed to ensure the neutrality of the taxpayer's position. Where a manufacturer refunded the value of a money-off coupon to a retailer, or the value of the cash-back coupon to the final consumer, on completion of the transaction he received a sum corresponding to the sale price paid by the retailer (or wholesaler), less the value of the coupons. It would be contrary to the principle of neutrality and the sixth directive if the taxable amount used to calculate the VAT liability of a manufacturer were to exceed the sum finally received. Accordingly, the taxable amount for VAT purposes was the sale price of the goods less the amount stated on the voucher and refunded (Kuwait Petroleum (GB) Ltd v C & E Commrs (Case C-48/97) [1999] BTC 5,203 distinguished; Kuwait Petroleum (GB) Ltd v C & E Commrs [2001] BTC 5,516 not followed).

Chancery Division.
Judgment delivered 3 November 2006.