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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Dial-A-Phone Ltd v Customs & Excise [2004] EWCA Civ 603 (20 May 2004) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2004/603.html Cite as: [2004] EWCA Civ 603 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT CHANCERY DIVISION
Mr Justice Blackburne
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE JONATHAN PARKER
and
LORD JUSTICE DYSON
____________________
| Dial-A-Phone Ltd |
Appellant |
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| - and - |
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| Commissioners of Customs and Excise |
Respondent |
____________________
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Philippa Whipple and Shaheen Rahman (instructed by the Solicitor for Commissioners of Customs and Excise) for the Respondent
____________________
Crown Copyright ©
Lord Justice Parker :
INTRODUCTION
THE TRIBUNAL'S FINDINGS OF FACT
i) DaP's business is to market mobile phones and accessories and the arrangement of insurance services. It has a large call centre (in North London) that receives calls from customers wanting to purchase mobile phone airtime contracts, mobile phones and accessories, and insurance services. It has an annual turnover of £90 million.
ii) DaP has three main sources of income: (1) commission paid by airtime service providers ("ASPs") in respect of every customer introduced through DaP who enters into an airtime service agreement (or "ASA"); (2) network commission earned by reference to the number of introductions made to the mobile phone networks through DaP's agency; and (3) commission paid by Cornhill Insurance plc ("Cornhill") with reference to insurance services for customers (explained in greater detail below). DaP also earns commission (but in much smaller amounts than from Cornhill) from other organisations through sales to its customer base.
iii) The sale of mobile phones is marketed mainly through advertisements in the national press, leaflet distributions, direct response TV and the internet. DaP's advertising costs are approximately £1 million per month.
iv) The advertisements highlight the key factors of the package on offer. That package is enhanced through various incentives (over and above low line rentals, call charges which include a number of free minutes, text messaging and details of peak and off-peak calls) including free accessories and the provision of free insurance for a three month period. In addition items such as free cameras, free ring tones and logos and free fascias may be included.
v) The advertisements refer only to the initial period of free insurance and not the opportunity to insure with Cornhill thereafter.
vi) All operators at DaP's call centre lead potential customers through a call process which is treated in an identical manner. Upon receipt of a call the operator will ascertain the marketing reference from the potential customer. This reference is contained in the advertisement. The reference will indicate to the operator which script to use. The script sets out precisely what is to be said by the operator and the information to be gathered. The focus of the script is primarily to arrange completion of an ASA which triggers an upfront commission payable to DaP.
vii) When the customer has approved the terms and conditions of the ASA the operator informs him that the phone has a replacement value of approximately £100 and that if he were to lose the phone he would have to pay that amount to DaP for a replacement. As the ASA has a minimum term of 12 months before it may be cancelled, it is in the best interests of the customer to take out insurance cover in one form or another. The operator informs the customer that free insurance has been arranged, provided that he signs a direct debit agreement. He is told that "after three months you can either choose to continue your cover and be debited only £4.49 per month or you can cancel the direct debit if you decide not to continue with your cover".
viii) The original procedure was that customers signed a post-dated direct debit which started four months after the supply of the phone. They were free to cancel the direct debit at any time. They were not committed for any fixed period; the cover remained in place as long as they paid the premium; as soon as they ceased paying the premium the cover ceased. In March 2002 DaP's procedures changed. Instead of asking the client to sign a post-dated direct debit agreement, DaP merely advised, through their operator, that they were setting up a paperless direct debit. In the event of a customer having an enquiry regarding insurance, this would be referred to DIS Ltd (a Cornhill subsidiary) which manages the insurance process.
ix) Customers do not have to take up the insurance cover. If they choose not to have it, they can still acquire a mobile phone. If they do ask for insurance cover, they receive a certificate of insurance issued by Cornhill when they receive their phone. The certificate of insurance states that "the free insurance commences from the time of purchase until midnight on the day three months one day later. Upon receipt of your monthly premium this insurance will be extended by periods of one month. The monthly premiums will be collected by the insurer by direct debit from your bank or building society account. The insurance will be terminated immediately if the insurer does not receive your monthly premium "
x) The insurance premiums are collected from the customer by Cornhill. Each premium is effectively split into four parts: (i) insurance tax (ii) Cornhill's management fee (iii) risk premium and (iv) DaP commission.
xi) The risk premium is paid into a fund and used to pay claims. The profit remaining after paying claims and a management charge to Cornhill is split between DaP and Cornhill.
xii) The insurance policy in each case is a contract between the customer and Cornhill commencing when the customer accepts the cover (at the outset) and continues until terminated.
xiii) The terms of the arrangements between Cornhill and DaP were set out in an undated letter (headed "Heads of Agreement All Risks Mobile Phone Scheme") between a Mr Cooper of Cornhill and a Mr Barry Beck of DaP and included the following provisions:
"1. Parties
Cornhill Insurance plc as insurer. Dial-a-Phone as the retailer who will promote and sell the insurance under the Scheme. DIS Ltd as administrator of the Scheme.
2. Association of British Insurers' code of practice for the selling of general insurance
Cornhill appoints Dial-a-Phone as its company agent "
xiv) DaP shortly thereafter confirmed its acceptance of the terms and the arrangements commenced. DaP accordingly acts in an intermediary capacity within the framework of the negotiations with customers on behalf of Cornhill.
xv) DaP does not become entitled to commission until a customer's direct debit is paid but commission is earned on every premium paid.
xvi) Approximately 65% of customers do not cancel the direct debit instruction within the three month period and commission is therefore earned for all those customers. There is quite a significant drop out rate during the second three month period when customers realise that they are making payments for insurance.
xvii) The insurance commission formed a substantial source of DaP's income. For the financial year 1999 DaP received £1.7 million in commission from Cornhill representing 6.5% of its total income. This figure has subsequently fallen to about 3%.
THE LEGISLATION
EC Directives
". On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components. ."
"1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person
5. As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 ., in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions."
Domestic legislation
"4(1) VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.
24(1) Subject to the following provisions of this section, "input tax", in relation to a taxable person means the following tax, that is to say
(a) VAT on the supply to him of any goods or services
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
(2) Subject to the following provisions of this section, "output tax", in relation to a taxable person means VAT on supplies which he makes
25(1) A taxable person shall
(a) in respect of supplies made by him
account for and pay VAT by reference to such periods (in this Act referred to as "prescribed accounting periods") at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.
(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
26(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business
(a) taxable supplies
(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above
31(1) A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 "
" . the bringing together, with a view to the insurance or reinsurance of risks, of persons who are or may be seeking insurance or reinsurance, and . persons who provide insurance or reinsurance".
"Item 4 does not include . the supply of any promotional or similar services".
"100 Nothing in this Part shall be construed as allowing a taxable person to deduct the whole or any part of VAT on the acquisition by him of goods or the supply to him of goods or services where those goods or services are not used or to be used by him in making supplies in the course or furtherance of a business carried on by him.
101(1) . the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) In respect of each prescribed accounting period
(a) goods imported or acquired by and goods or services supplied to the taxable person in the period shall be identified,
(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,
(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and
(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period ."
THE AUTHORITIES
"29. According to art. 2(1) of the First Directive, the common system of VAT is based on the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage is reached at which tax is charged. In order for the 'number of transactions which take place in the production and distribution process before the stage at which tax is charged' not to influence the amount of VAT ultimately due to the revenue authorities, art. 2(2) of the First Directive introduces the mechanism of deduction of input tax.
30. A consideration of those provisions together shows that the Community legislature, proceeding from an ideal image of 'chains of transactions' ., intended to attach to each transaction only so much VAT liability as corresponds to the added value accruing in that transaction, so that there is to be deducted from the total amount the tax which has been occasioned by the preceding 'link in the chain' .
31. On the question whether the goods or services supplied to taxable persons, on which the input tax has been charged, can be attributed to a transaction by the taxable person in such a way that deduction of tax is justified, the Community legislature decided on a criterion corresponding to the system: the amount which is to be deducted as input tax must have been 'borne directly by the various cost components' (see art 2 of the First Directive).
32. Article 17 et seq of the Sixth Directive lays down specific rules on the deduction of income tax, in so far as is relevant here, in two respects. Firstly, those articles take account of the circumstance that the Community legislature has in art. 13 et seq exempted certain transactions from VAT. Input tax in respect of exempt transactions is not deductible in the common system of VAT, because in such a case the taxable person acts as the final consumer, since he is unable to pass the VAT onto third parties (see the judgment in Becker v. Finanzamt Munster-Innenstadt (Case 8/81) [1982] ECR 53 para 44). Secondly, art. 17 et seq takes account of the fact that some goods and services are by their nature to be attributed to several transactions of the taxable person, and that attribution may relate to the group of taxable transactions and the group of exempt transactions at the same time.
33. Those details logically do not change the fact that input tax can be deducted only to the extent that the goods or services on which it has been paid are 'cost components' of a taxable transaction. On the contrary, the identification of goods and services as such cost components becomes all the more important with the introduction of the category of exempt transactions, since those transactions do not give the right to deduct input tax .
34. It follows that, subject to divergent rules such as those in art. 17 et seq of the Sixth Directive, the different types of transactions by the taxable person must be distinguished as clearly as possible. In particular, as follows from the system which has been demonstrated, in applying art. 17(2)(a) goods or services which have been identified as cost components of a specific exempt supply of goods or services cannot be attributed to other supplies of goods or services which are subject to VAT. The term 'purposes' in art. 17(2) must be interpreted in that light. The term therefore does not permit the clear distinction between taxable and exempt transactions to be blurred on the basis of considerations which are outside the system.
35. That conclusion is confirmed firstly by art. 17(5) of the Sixth Directive. That provision, without employing the word 'purposes', speaks merely of goods or services 'used . for transactions'. In the context of that provision, however, the same criteria naturally as in art. 17(2) apply for the attribution of goods and services on which input tax has been paid. Secondly, the above conclusion is confirmed by art. 17(3). Article 17(3)(c) in particular provides for a precisely defined exception to the rule that transactions which (like the disposal of the shares in this case) are exempted from VAT . confer no right to deduct input tax. .
36. With respect to the present case, the High Court found . that the services in question on which input tax had been paid were 'used . for an exempt transaction' by the taxable person . It is thus established that those services form a cost component precisely of the exempt supply (effected by the sale of the shares).
37. That is not affected by the argument put forward by BLP at the hearing that the costs of the services on which the input tax has been paid . are ultimately incorporated into the price of the goods and services which it sells by means of its taxable transactions. . That circumstance does not make the services in question into cost components of the taxable transactions and cannot therefore alter the attribution stated above.
38. On the basis of that attribution, the right to deduct input tax is excluded in the present case, it being of no relevance whether the sale of the shares was for the benefit of the taxable activity of the taxable person on the basis of the discharge of indebtedness intended and effected."
"19. [Article 17(5)] of the Sixth Directive lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person 'both for transactions covered by paragraphs 2 ., in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible'. The use in that provision of the words 'for transactions' shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by taxable person is irrelevant in this respect.
20. That interpretation is confirmed . by art. 2 of the First Directive .
21. Article 2 of the First Directive states that only the amount of tax borne directly by the various cost components of a taxable transaction may be deducted."
" . if BLP's interpretation were accepted, the authorities, when confronted with supplies which, as in the present case, are not objectively linked to taxable transactions, would have to carry out inquiries to determine the intention of the taxable person. Such an obligation would be contrary to the VAT system's objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question."
" . art. 2 of the First Directive and art. 17 of the Sixth Directive are to be interpreted as meaning that, except in the cases expressly provided for by those directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction."
"It is for the national courts to apply the 'direct and immediate link' test to the facts of each case before them and to take account of all the circumstances surrounding the transactions at issue."
"29. It should be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from art 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components .
30. It follows from that principle as well as from the rule enshrined in the judgment of [BLP] para 19, according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services required. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate."
" . The reference to cost components in BLP is a reminder of the basic principle set out in art.2 of the First Directive . Thus, what matters is whether the taxed input is a cost component of a taxable output, not whether the most closely-linked transaction is itself taxable. As the Commission submitted at the hearing, the conclusion to be drawn from [BLP] is that the question to be asked is not what is the transaction with which the cost component has the most direct and immediate link but whether there is a sufficiently direct and immediate link with a taxable economic activity. Indeed, it may be stressed that in that case the court was concerned with supplies which were not objectively linked to taxable transactions . Nevertheless, it remains clear from BLP that the 'chain-breaking effect' which is an inherent feature of an exempt transaction will always prevent VAT incurred on supplies used for such a transaction from being deductible from VAT to be paid on a subsequent output supply of which the exempt transaction forms a cost component. The need for a 'direct and immediate link' thus does not refer exclusively to the very next link in the chain but serves to exclude situations where the chain has been broken by an exempt supply." (Emphasis supplied)
" . It is for the tribunal to determine the primary facts (i.e. the commercial transactions). That it has done here, and no one quarrels with its findings which are set out immaculately and concisely. Whether or not those facts amount to a 'use' within the meaning of art. 17(2) as interpreted by the court is a question of law arising on those primary facts. "
"The land purchase transaction was commercially necessary to make its performance commercially possible, but it was not a cost component of the contract itself in the same way as the cost of the materials used [i.e. used in developing the land]. There is a link with the contract, but the link was not direct or immediate. The development contract would not have been made but for the associated land purchase and sale. But 'but for' is not the test and does not equate to the 'direct and immediate link' and 'cost component' test."
"Turning back to the tribunal, it concluded that there was a direct and immediate link between the land purchase and both the land sale and development contract, with both an exempt and a non-exempt transaction. VAT law does not work in such a generalised way. You have to look at transactions individually, component transaction by component transaction. They may be linked in the sense that one would not have happened without the other, but they remain distinct transactions nonetheless. Only if one transaction is merely ancillary to a main transaction can one disregard the distinct nature of each transaction . If that were not so, the principle of neutrality would be violated. Moreover, there would be intractable problems as to which input was being attributed to which part of the 'overall transaction'. You may find, as here, taxable and exempt transactions all mixed up in the same 'overall' transaction which is illegitimate."
"The direct and immediate link is clearly that of attracting students to the College. The link that thereby they contribute to the College's taxable activities such as, for example, using the bar, is indirect and not immediate, in the sense in which that term is used. If it has no students it will not be successful in its wider activities."
THE ISSUE IN THE CASE
THE DECISION
" . whether there is a direct and immediate link between the marketing and advertising costs and only the taxable supplies made by DaP or whether some part of the advertising costs can be said to have a direct and immediate link with the insurance intermediary [services] provided by DaP to Cornhill."
" . whether the input tax in question [is] directly and immediately linked with the supply of insurance intermediary services."
"47. The tribunal has found that there was a supply of insurance intermediary services provided by DaP to Cornhill. The vital question is when did this occur?
48. We find that the supply occurred upon conclusion of the negotiations with each customer. Mrs Brown contended the supply occurred some three months after the supply of the mobile phones and the associated connection to air time or indeed not at all. The evidence before the tribunal does not support this contention.
49. The arrangements of insurance [sic] is not ancillary to the advertising. Free insurance is not used merely to attract customers to sign air time service contracts for the phones. It is clearly intended to attract new customers to Cornhill Insurance as well and the appellants have a direct financial interest in customers staying with Cornhill on completion of the three free months. It is for that reason that the appellant not the phone service providers are funding a proportion of the free three month insurance with Cornhill.
50. In our view, a customer's mobile phone insurance cover commences on submission by the customer to Cornhill of the direct debit mandate. The proper contractual analysis of the submission of the mandate is a promise to pay for mobile phone insurance subject to an option to cancel. This promise is consideration for the insurance cover which is then provided for three months without premiums being payable. Therefore, although we accept that a customer, under the terms of the individual certificate of insurance, is 'free to cancel the insurance contract at any time and may revoke the direct debit prior to its (the direct debit's not the contract's) commencement' the tribunal does not accept the appellant's assertion that a customer does not enter into a contractual relationship with the Cornhill at the outset.
51. The advertisements relate both to the appellant's intermediary service introducing customers to mobile phone air time providers and to their insurance intermediary service introducing customers to insurance business with Cornhill. All insurance is paid for. The rate of the premium is set to include the 'risk premium' of a claim within the three month period.
.
52. Further the tribunal does not accept that the appellant does not derive income from the 'free' three month period, as asserted by the appellant. The service as an insurance intermediary is supplied at the time the direct debit mandate (or equivalent under the new paperless administration scheme) is submitted to Cornhill. This is at the outset of the three month period. There is one supply of insurance intermediary services and the appellant's advertising costs are, in part, attributable to this exempt supply.
53. The appellant is clearly engaged as an insurance intermediary by Cornhill within the meaning of Item 4 Group 2 Schedule 9 VATA. This arrangement is particularised contractually in the Heads of Agreement. The commissions earned from arranging insurance form a substantial part of the appellant's income.
54. The arrangement of insurance by intermediaries is an exempt supply and input tax cannot be claimed upon costs relating to such supplies. The input tax on costs of advertising taxable phones with exempt insurance is directly and immediately linked to both the exempt and taxable supplies as held in the BLP Group decision. Therefore it is residual for partial exemption purposes."
THE JUDGMENT
- that it was only after a customer had agreed to take a mobile phone and to enter into an ASA that any question of the provision of insurance intermediary services arose;
- that in concluding that there was a 'direct and immediate link' the Tribunal had erroneously had regard to DaP's ultimate aim, which, as BLP and Midland Bank made clear, was an irrelevant consideration;
- that the Tribunal had failed to have proper regard to the fact that the advertisements referred only to the three-month period of free insurance, making no reference to insurance for any subsequent period, and that the offer of free insurance for three months was merely an inducement to customers to take up mobile phones and enter into ASAs; and
- that in any event the supply of insurance intermediary services was not made for consideration, and hence was not a supply for VAT purposes.
- that on the facts found by the Tribunal the supply of insurance intermediary services by DaP to Cornhill was dependent on the advertisements, and that such supply was neither ancillary nor incidental to the supply of mobile phones and ASAs; and
- that it was irrelevant that a customer who accepted the offer of insurance might never become liable to pay an insurance premium.
"27. In my judgment, Miss Rahman is correct. The Tribunal's conclusion that the advertising had this dual purpose or function and was directly and immediately linked to the supply of DaP's supply of services as an insurance intermediary is not open to successful challenge. The fact that the sale of insurance cover was subsidiary, in the sense of being less important than the sale of mobile phones and ASAs, does not detract from this conclusion.
28. Nor am I able to accept Mr Anderson's separate ground of attack (the Tribunal's failure to accept that unless and until a customer pays a premium (from which DaP receives a commission) DaP has made no supply at all (taxable or exempt) because a supply must be for a consideration). The supply by DaP of an insurance intermediary service is to Cornhill. Under the Heads of Agreement (to which the Tribunal referred in its decision) Cornhill and DaP have agreed that DaP will promote and sell insurance and, for this purpose, that DaP is appointed Cornhill's agent. Attracting customers to sign up for insurance cover with Cornhill is the role that DaP undertakes in this regard. It is remunerated for the supply on the basis of a commission on the premium collected and, less directly, by sharing with Cornhill the premium fund used to pay claims. This is clearly a supply for a consideration. As Miss Rahman submitted, the precise manner in which and time when DaP is remunerated is irrelevant. The underlying service provided by DaP to Cornhill is not affected by whether particular customers do or do not sign up for insurance cover or, having signed up, cancel the cover before the free three month period has expired.
29. In any event, as regards individual customers who do not cancel their cover and a premium becomes payable, the fact that it is not payable until the fourth month does not mean that there is no direct and immediate link between the advertising costs and that particular supply. As the Tribunal observed (in paragraph 52 of its decision):
" The service as an insurance intermediary is supplied at the time the direct debit mandate (or equivalent under the new paperless administration scheme) is submitted to Cornhill. That is at the outset of the three month period. There is one supply of insurance intermediary services and the appellant's advertising costs are, in part, attributable to this exempt supply."
The fact that the premium becomes payable as a result of the customer's failure (which may or may not be a conscious omission) to cancel his direct debit instruction is irrelevant to this analysis."
DaP's GROUNDS OF APPEAL
THE ARGUMENTS ON THIS APPEAL
CONCLUSIONS
RESULT
Lord Justice Dyson:
Lord Justice Waller:
Order:
(1) Appeal dismissed
(2) Appellant to pay the Respondent's costs in the sum of £7,842.50
