EXCISE DUTY — VAT – SUPPLY  -  whether “reward” items included with supply of goods constituted business gifts or were part of the consideration for the supply -  items included “with compliments” provided free of charge  -  held to be chargeable to VAT as gifts  -  appeal dismissed       

MANCHESTER TRIBUNAL CENTRE

 
 	
	BOODLE & DUNTHORNE LTD 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	Mr M S Johnson (Chairman)
					Mrs R Dean

Sitting in public in Manchester on the 23rd July and 29th October 2003

Mr P Bendel, VAT consultant with Baker Tilly, Chartered Accountants, for the Appellant

Mr N Poole, counsel instructed by the Solicitor for the Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2003

DECISION
1.	This is an unusual appeal in which the appellant is seeking the repayment of allegedly overpaid value added tax accounted for in respect of supplies in relation to which the appellant now says the tax was not payable.  The Commissioners of Customs and Excise (“Customs”) have decided that the tax was properly paid in the first place and that no repayment is due.  It is against that decision, contained in a letter dated 1 November 2002 from Customs to the appellant’s representative, Mr P Bendel of Baker Tilly, that the appellant now appeals.

2.	The tribunal has heard no oral evidence.  Before the tribunal is an unchallenged witness statement dated 30 September 2003 from Mrs Amanda Jane Maddocks, Finance Manager of the appellant, which she made after we adjourned the appeal on 23 July 2003.  We adjourned the appeal of our own motion on the basis that the tribunal required evidence to find the facts on which our decision should be reached and so that such evidence might be provided.  The adjournment resulted in Mrs Maddocks’ statement.  

3.	Additionally we have been provided with sample invoices from the appellant, and a folder of correspondence and other documentation relevant to the appeal, produced by Customs.  The information placed before us has equipped us to make only limited findings of fact. 

4.	The appeal concerns how schedule 4, paragraph 5(1) and (2) and schedule 6, paragraph 6(2) of the Value Added Tax Act 1994 (“the Act”) fall to be applied in the circumstances of the appeal.  Those provisions are set out in the Appendix to this decision.  They provide for there to be treated as supplies for the purposes of section 5 of the Act situations where goods are transferred or disposed of for no consideration as well as situations where there is a consideration. A machinery is provided for ascertaining the value of supplies for no consideration, valuing these in essence at the cost to the supplier.  Gifts of business assets made in the course or furtherance of the business are thus clearly made supplies subject to VAT unless the supplies are exempt.  This is subject to a de minimis provision where the cost of the gift to the donor of the goods is not more than £50 and the gift is not part of a series or succession of gifts made to the same person from time to time.  

5.	The appellant is a well-known retailer of quality jewellery.  It operates four jewellery shops in London and has shops in Liverpool, Manchester and Chester as well. On a relatively small number of specific occasions with which this tribunal is concerned, occurring in 12 VAT periods between 1999 and 2002, the appellant supplied purchasers with items of jewellery and included, as a “reward”, an item or items of jewellery in addition (“the additional items”).

6.	The appellant was unclear as to how the additional items should be treated for the purposes of accounting for VAT.  It therefore sought the guidance of Customs.  That guidance was to the effect that the value of the additional items should be added to the amount of the supply made to the purchasers.  By way of illustration, if a purchaser bought jewellery priced at £10,000, and received a “reward” costing £1,000, then, according to Customs, the total value of the supplies for VAT purposes would be £11,000.

7.	The guidance given by Customs was acted on by the appellant, in that the appellant accounted for output tax at the standard rate on the gross value and not just on the price paid by the purchaser (in the above illustration, output tax on £11,000 and not merely on £10,000).  However the appellant was not at the time being advised by Mr Bendel.  When he began advising the appellant, Mr Bendel was instructed to write to Customs seeking “clarification” of the treatment of the additional items.  In a letter to Customs dated 30 September 2002, Mr Bendel put forward the case that value added tax was not due in respect of the additional items.

8.	We should quote from that letter, because it is described as “a request for a ruling” in the grounds of appeal contained in the Notice of Appeal.  The letter advanced a factual basis on which Customs were asked to decide upon the correct tax treatment of the additional items.  It is against the result of that request for a ruling that the appellant now appeals.

9.	The letter began by referring to the treatment of business gifts, which it is common ground between the parties attract output tax based upon their cost to the donor.  The letter then sought to distinguish from this the situation where goods are “given as part of a package”.  The letter stated:

“[The appellant has] for a number of years … been carrying on the practice of rewarding regular customers and customers buying high value goods.  The value of the ‘reward’, which is always in goods, depends on the value of the item or items purchased at the time it is given.  If for example, a customer buys jewellery retailing at £10,000 + VAT, he may be given an additional item worth £1,000 (cost net of VAT) as part of the sale.  In effect, the customer is receiving a discount in the form of goods or alternatively greater value for his money.

“In the circumstances described above it is our opinion that the additional goods form part of the supply for which the customer pays the consideration to [the appellant].  At present in the above example our client is calculating output tax on £11,000 despite the fact that the consideration from the customer is only £10,000.  We therefore believe that [the appellant] is over-declaring its output tax in respect of these transactions”.

10.	The letter enclosed a schedule of 12 VAT periods in which this was said to have happened, with the relevant amounts, all quite small, and asked Customs to confirm that Mr Bendel had correctly interpreted the circumstances he had described, “ … in that no VAT is due on the extra goods forming part of the supply for a single consideration”.

11.	Customs replied by letter dated 11 October 2002.  In that letter, Customs simply disagreed with Mr Bendel’s interpretation, quoting paragraphs 2.1 and 7.5 of Customs’ Notice 700/7 “Business Promotions”, relating to business gifts and their valuation for VAT.  That letter did not expressly address the factual basis put forward by Mr Bendel in his letter.

12.	Mr Bendel wrote further to Customs on 23 October 2002.  In that letter, Mr Bendel accepted paragraph 2.1 of Notice 700/7, but reiterated that, in his view, the appellant’s specified transactions were not covered by that paragraph.  This was because the additional items formed part of a supply for a single consideration.  He said that the situation was “more akin to those described in paragraph 4.1 of the Notice in that two or more items are offered for a single price”.  

13.	Mr Bendel enclosed with his letter of 23 October 2002 three sample sales receipts which included additional items, and he stated that these indicated that output tax was being fully accounted for on the sale price agreed, being more than the cost price of all goods included in the transactions.  He said that the “extra goods”, i.e. the additional items, formed part of a sale for a single consideration.

14.	Customs replied to that letter by the letter of 1 November 2002 referred to in the Notice of Appeal as containing the decision appealed against.  In that letter, Customs noted that, in contrast to “Buy one, get one free” – type promotions, which were generally advertised, the appellant was offering “rewards” to selected customers (it is common ground that the transactions specified represented a tiny fraction of all the appellant’s sales during the periods in which they arose).  Customs reiterated their view that the way in which the specified transactions had hitherto been treated was the correct one.

15.	The Notice of Appeal is dated 18 November 2002.  The grounds attached to the Notice of Appeal rehearse the correspondence and conclude:

“We believe that [Customs’] interpretation is incorrect.  As a high class retailer of jewellery, the appellant company is entitled to give its customers value for money by including additional items within a sale for a single price.  This practice is left to the discretion of shop managers and directors and the intention behind it is to target individual customers who are likely to return to buy additional goods and to give value to those buying very expensive items, for example, the purchaser of an expensive necklace may be given the matching earrings or bracelet as part of the sale, but for the retail selling price of the necklace alone.  Mark-ups on jewellery can be several hundred per cent and therefore there is a great deal of flexibility in reaching an agreed sale price.  On some occasions, this could be in the form of a discount but in all cases the price agreed will be well above the total cost of all items included”.  

16.	In her witness statement, Mrs Maddocks states that the appellant’s selling price of the majority of jewellery items is flexible.  She says that sales personnel are instructed that they should try to achieve the recommended selling price where possible.  She continues:

“However, where conclusion of a sale necessitates giving a discount, sales staff are authorised to do so at their own discretion.  In these circumstances it is the company’s policy to offer additional goods as part of the sale package in preference to monetary discounts as the former results in higher sales margins.  Discounts are more common where there is a potential high value purchase and are given in order to conclude a sale.  Discounts are sometimes offered to regular customers and where there are possibilities of repeat business.  Customers that have previously received a discount generally expect similar treatment for subsequent transactions.    In these cases the subject is often raised by the customer and any discount given is always negotiated before the sale is concluded.  Discounts are not offered once a sale has taken place, however where a customer is dissatisfied with a purchase, it is the company’s policy to offer a full refund where the goods are returned undamaged”.

17.	There are in the tribunal bundle copies of three specimen invoices exemplifying the transactions concerned in this appeal, and we have been provided separately with copies of two others.  We note that all five of these describe the additional items included in them respectively as being “with compliments” or “with comps” for short. Mrs Maddocks explains this in her statement as follows:

“With the exception of cash discounts, sales invoices normally reflect the additional item or items as ‘with compliments’, however this does not suggest that they are free but merely makes the customer feel that he or she has received value for money.  Any goods included in this way are of minor value in relation to the main item and the package always achieves a profit margin in excess of 100% of the cost of the total goods reflected on the sales receipt”.   

18.	Appearing for Customs, Mr Poole drew our attention to the case of Kuwait Petroleum (GB) Ltd v C & E Comrs [1999] Simon’s Tax Cases 488, a decision of the European Court of Justice on a referral under article 177 of the EC Treaty.  That case concerned the question whether the provision, along with sales of fuel at service stations, of vouchers which could be exchanged for goods gave rise to disposals of the goods free of charge, or whether the price paid for the fuel constituted value given in return for the goods to be supplied.  Whilst holding that it was for the national court to investigate the facts of the case, the European Court said that the evidence tended to indicate that two separate transactions were involved, namely the purchase of the fuel and the exchange of the vouchers for goods.  That suggested that the exchange of the vouchers was a transaction free of charge .

19.	Mr Poole referred us to paragraph 26 of the decision of the European Court in that case, viz

“Goods are supplied ‘for consideration’ within the meaning of article 2(1) of the Sixth [EC] Directive only if there is a legal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods supplied (see, to that effect, concerning the supply of services, Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509 at 516, paragraph 14)”.

20.	Under article 2(1) of the Directive, only supplies effected for consideration are subject to VAT.  However, by article 5(6) of the Directive, supplies “free of charge” are to be treated as supplies made for consideration, and this is implemented in the United Kingdom by the provisions contained in the Appendix to our decision.    

21.	Mr Poole submitted that the additional items in this case were not supplied for consideration, having regard to the basis on which they were provided.  He submitted that the invoices before the tribunal showed the additional items to be gifts.  The use of the expression “with compliments” evidenced that.  The “reward” items, as they had been described by Mr Bendel, were expressly excluded from the consideration paid.  

22.	In answer to a question from us as to the correct analysis of the situation where the expectation of a “reward” constitutes an inducement to the customer to enter the premises and buy, Mr Poole pointed out that the “reward” was not advertised.  There would be little prospect of negotiating a reduction in the price of the goods purchased.  The result, Mr Poole submitted, was that the customer was receiving an additional item or items for no charge.  Therefore the value of the item(s) was properly taxed as had happened in this case.

23.	For the appellant, Mr Bendel submitted that the Kuwait case was distinguishable.  The reason that there was in that case no legal relationship between supplier and purchaser as regards the vouchers was that the purchaser was left to exchange his vouchers with the provider of the goods quite separately from the purchase of his fuel.  There was no such separation in the present case.  On the contrary, the purchaser was acquiring a “package”.  

24.	Mr Bendel invited us to accept Mrs Maddocks’ evidence as to the meaning and effect of the description of the additional items as being “with compliments”.  Her evidence was unchallenged by Customs.  The additional items were, he submitted, part of the transaction and not given away free.  The transactions in dispute constituted a very small proportion of the appellant’s total business; they were cases where the additional items had been included to “clinch the deal”.  The invoices were deliberately worded as they were to flatter the purchaser.

25.	Mr Poole replied that the invoices spoke for themselves, and that they were not as Mr Bendel pretended.  The request for a ruling put forward by Mr Bendel was on the footing that the additional items were “gifts”.  

26.	In approaching our decision, we have begun by considering what weight we should properly give to the decision in the Kuwait case.   We find the decision itself unremarkable and what one would expect.  We have no difficulty in appreciating the reasoning and conclusion of the court in the situation with which it was presented.  But, factually, the position was very different from that with which we are confronted.

27.	A typical purchaser from the appellant, even one who had received a “reward” in a transaction with the appellant on a previous occasion, would have no right to expect that the transaction would include anything other than the goods he was offering to buy.  In the Kuwait case, the purchaser could expect to have the vouchers for the goods, which he would inevitably be offered on entering into his transaction to purchase fuel.  In the appellant’s case, there would be no such inevitability.

28.	The appellant would not intend to offer any additional items unless it had to do so.  The very small number of occasions on which it actually did so is proof of that.  The premise of the appellant’s case, and the basis on which it requested a ruling from Customs, i.e. the ruling that is appealed against, is that the appellant was “rewarding” particularly valued customers.  That connotes that, in the case of other customers, not so highly valued, they would not be so rewarded.  In contrast to the valued customers, those customers would have to be content with the items they wanted to purchase, with no extras.

29.	So far as Mrs Maddocks’ statement differs from the factual basis put forward for decision by Mr Bendel in his letter dated 30 September 2002, we must adopt the letter rather than the statement as the basis of the ruling and hence of the appeal against the ruling.  Mrs Maddocks’ statement was, after all, only produced between the two hearings of this appeal, whilst the hearing stood adjourned.  In any case, Mrs Maddocks’ statement is in our opinion carefully phrased.  If thereby the appellant attempts to present the additional items as amounting to a discount, we do not see how the additional items can be described as provided in lieu of such.  In fairness to Mrs Maddocks, we do not read her statement as going that far.  The obvious conclusion, if the purchaser has been prepared to buy the goods he has purchased at the price that the appellant has insisted upon, is that the additional items provided, if any, are then “free”.  

30.	We therefore think that the additional items described as being “with compliments” did not form part of the consideration for the transaction.  The appellant cannot lightly explain away the “with compliments” label as meaning that the additional items are not free, as it has sought to do.  The invoices constitute contemporaneous evidence of the intention of both parties, supplier and purchaser.  Such evidence is the best evidence we possess; a subsequent gloss by Mrs Maddocks on what was allegedly intended at the time by that label is evidence that we ought not to admit .

31.	We conclude that the guidance originally given in this matter by Customs to the appellant was sound, that the decision of Customs in respect of the request for a ruling contained in the letter from Mr Bendel dated 30 September 2002 was correct, and that the appellant is not due a refund of tax from Customs as contended.

32.	This appeal is accordingly dismissed.  So far as costs are concerned, the appeal may if desired by either party be restored for argument limited to the questions whether the tribunal should make an award of costs and, if so, in what amount.  It may assist for us provisionally to indicate, as we therefore do, that at this stage we feel that it would be appropriate for costs to follow the event and to be summarily assessed by the tribunal.  But that is without our having had the benefit of hearing argument.

APPENDIX

SCHEDULE 4
5.—(1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.

(2) Sub-paragraph (1) above does not apply where the transfer or disposal is—
 
(a) a gift of goods made in the course or furtherance of the business (otherwise than as one forming part of a series or succession of gifts made to the same person from time to time) where the cost to the donor [of acquiring or, as the case may be, producing the goods was] not more than [£50] …

SCHEDULE 6

6.—(1) Where there is a supply of goods by virtue of—
 
(a) a Treasury order under section 5(5); or

(b) paragraph 5(1) or 6 of Schedule 4 but otherwise than for a consideration); or

(c) paragraph 8 of that Schedule,

then, except where paragraph 10 below applies, the value of the supply shall be determined as follows.

(2) The value of the supply shall be taken to be—
 
(a) 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 (including age and condition) to the goods concerned; or

(b) where the value cannot be ascertained in accordance with paragraph (a) above, such consideration in money as would be payable by that person if he were, at that time, to purchase goods similar to, and of the same age and condition as, the goods concerned; or

(c) where the value can be ascertained in accordance with neither paragraph (a) nor paragraph (b) above, the cost of producing the goods concerned if they were produced at that time.

(3) For the purposes of sub-paragraph (2) above the amount of consideration in money that would be payable by any person if he were to purchase any goods shall be taken to be the amount that would be so payable after the deduction of any amount included in the purchase price in respect of VAT on the supply of the goods to that person.

M S JOHNSON
CHAIRMAN
RELEASE DATE:

MAN/2002/0761

			

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