19156
	VALUE ADDED TAX — “face value” vouchers — VATA 1994 Sch 6 para 5 — admission fees to nightclubs — customers receiving vouchers to be offset against cost of admission on subsequent occasion — whether vouchers supplied for consideration or free of charge — true nature of Appellant’s contract with customer — voucher not given in exchange for identifiable consideration — vouchers not “face value” vouchers — customer’s payment immediately taxable — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	BROOK LEISURE HOLDINGS LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Manchester on 7 April 2005

Nigel Gibbon, solicitor, for the Appellant 

Owain Thomas, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	The Appellant, Brook Leisure Holdings Limited, challenges assessments made on 24 October 2002 for what the Respondents contend is under-declared output tax in the aggregate sum of £240,094. The Appellant does not challenge the arithmetic of the assessments but disputes the Respondents’ underlying contention about the proper tax treatment of a promotional exercise which it adopted between about October 1999 and July 2001, the period covered by the assessments. The Appellant’s case is that it provided “face value” vouchers to its customers and that it was required to account for output tax on the value of the vouchers, not at the time of supply, but only when they were redeemed. The Respondents maintain that no consideration was given for the vouchers and that the entire payment by the customer, being attributable to a taxable supply, gave rise to an immediate output tax liability. If, instead, the vouchers were supplied for consideration, that supply was taxable immediately since the customers received no more than the right to a future price reduction (in effect, the customer made a pre-payment).
2.	The Appellant was represented by Nigel Gibbon, solicitor, and the Respondents by Owain Thomas of counsel. I heard evidence from John McLaughlin, now an area manager employed by the Appellant, from Dawn McCabe, a customer, from Richard Crosland, the Appellant’s financial director and from Martin Butterworth who, although not the assessing officer, was in reality responsible for the making of the assessments under appeal. His evidence was, in the event, only formal. I had helpful skeleton arguments, a small bundle of documents and a rather larger bundle of authorities.
3.	The essential fact of the case were not in dispute. The Appellant is one of a group of companies which owns bars and nightclubs in various locations in the north of England. I should perhaps make the comment that it was clear from the evidence that the Appellant is a substantial, professionally managed organisation. The two nightclubs which are relevant in this appeal are at Wakefield. At the time, even though they were physically connected, to the extent that it was possible for customers, having gained admission to one, to walk into the other, they set out to cater for different tastes and had separate names: “Ikon” and “Mustang Sally’s”. Now, the premises have been brought together and form a single nightclub named “Quest”. As they were, the nightclubs catered mainly for younger adults, aged up to about 30. 
4.	The evidence indicated that the clubs, together with others within the Appellant’s trading group, promoted themselves—that is to say endeavoured to increase the numbers of customers attending—by various different means, of which several might be in use at any one time. Only one of those means is of relevance in this appeal. While the scheme was in use, customers entering the club on certain nights, typically Friday and Saturday, received, in exchange for payment, admission to the club and a voucher which could be used in full or part payment of the price of admission on another night, typically a Thursday. The value of the voucher might be sufficient to pay for the admission of more than one person: the vouchers were not tokens, allowing the admission of one or more customers, but had a monetary value which could be offset against the price of admission. The Appellant’s case is that so much of the amount paid by the customers as was attributable to the price of admission on the day on which the payment was made was properly subject to VAT at the standard rate, while the remainder of the payment, attributable to the cost of the voucher, was not taxable, at that point. If a voucher was used as payment, or part payment, of the admission charge on a later occasion, the value of the voucher so used was taxable at that point. 
5.	During the relevant period, the Appellant accounted accordingly for value added tax on its income. The Respondents maintain that the total payment made by the customers, in exchange for admission and the voucher, is immediately taxable and the assessments are designed to recover the difference between the tax for which the Appellant, on its interpretation of the law, has accounted and the aggregate sum the Respondents maintain is properly due. 
6.	The Appellant’s argument depends upon the provisions of what was, at the time, paragraph 5 of Schedule 6 to the Value Added Tax Act 1994, which has since been repealed and replaced by rather different provisions at section 51B and schedule 10A of the Act, inserted by the Finance Act 2003 but without retrospective effect. It is, accordingly, necessary for the purposes of this decision to consider the law as it was before that repeal. Paragraph 5 read as follows:
“Where a right to receive goods or services for an amount stated on any token, stamp or voucher is granted for a consideration, the consideration shall be disregarded for the purposes of this Act except to the extent, if any, that it exceeds that amount.”
7.	The Appellant’s case, shortly put, is that its customers were aware, as they paid for admission, that they were paying an additional and separate sum for the voucher (and had the option of paying only the admission fee and not receiving a voucher) and that, accordingly, the Appellant was making two distinct supplies, in each case in exchange for monetary consideration. It was true that only a very small number of customers receiving vouchers redeemed them but that was beside the point. The vouchers were “face value vouchers”, the shorthand term customarily applied to those falling within paragraph 5, because they stated on their face the value which they bore and that value could be offset against the price of admission on a future occasion. The Respondents argue that the Appellant did not enter into two separate contracts with its customers, but into a single contract for the supply of admission and a voucher for which only one amount of consideration was paid; and that consideration could legitimately be linked to the admission charge. They argue too that the vouchers were not “face value vouchers” since they did no more than allow for customers a future price reduction. 
8.	At the time covered by the assessments, Mr McLaughlin was the manager of the two clubs. He described them by reference to some photographs. Although the photographs show the premises as they now are, the changes are not great. In several places readily visible to customers, notices were placed reading:
“Customer Notice
Our admission prices include your admission fee together with a voucher which is redeemable against entry on any Thursday [except special promotion nights.]
The voucher is valid for up to four persons entry up to the value of the voucher and cannot be used in conjunction with any other promotional offer. 
No cash change can be given for any unused part of the voucher.”
9.	I accept that the notices were readily visible and that most customers must have seen and read them. After paying for admission and (if the Appellant is right) the voucher, each customer received a ticket, usually in two parts. One part was surrendered on entry to the club while the other, the voucher, was to be retained. In some cases the voucher shows not only its own redemption value but also the price paid for admission, and the aggregate value of the customer’s payment, since, Mr McLaughlin explained, some of the tills could not produce two-part tickets. There were variations in the wording used at different times (and, I understood, different tills also produced different wording) but a typical example of a voucher, detailed from the other part of the ticket, reads:
“IKON
Redeemable against entry into Sallys any Thursday night. EXCEPT PROMOS. One voucher per transaction. No cash or change given against this voucher. Valid for one month from date of issue.”
10.	Mr McLaughlin told me that (in common with similar clubs) the charge made to customers varied during the course of the evening. In order to encourage customers to arrive early (and, I deduce to buy drinks from the Appellant rather than in public houses) the charge was initially set at a low level but as time passed the charge was increased. The time of each increase was not pre-determined, but decided upon by Mr McLaughlin, who also decided the amount of each increase. The price to be paid by a customer was prominently displayed on an illustrated sign, placed auspiciously behind the cashiers; the sign bore the words “The price now is” followed by the monetary amount determined by Mr McLaughlin. The payment made by the customer was so divided at the till that, whatever the time at which the customer arrived, and whatever the value of the aggregate charge applied at that time, £1 of the payment was attributed to admission and the balance to the voucher. However, none of the notices and signs to which I have referred, indicated that the customer was making two payments. Still less did they give any indication that, on request, a customer might pay the admission charge alone, and forego the voucher. Mr McLaughlin told me that, if a customer asked if he could pay only the admission charge, he would be allowed to do so and that the cashier had been instructed accordingly, but he conceded that the cashiers were not instructed to volunteer the information and that he knew of no occasion on which such a request had been made.
11.	He and Mr Crossland agreed that the number of vouchers which were actually used in payment or part payment of admission charges on later occasions was very small – less than one per cent. Mr McLaughlin said that, even so, he received complaints from some customers when the promotion was discontinued because those customers had been in the habit of using the vouchers. I did not gain the impression that the number of customers who complained was large. Neither he nor Mr Crossland could recall why the promotion had been discontinued, though it was apparent it had been replaced by other methods.
12.	Mrs McCabe works in the hotel business, also in Wakefield, and she, through her employers, has business connections with the Appellant. She gave evidence, however, of her relationship with the clubs as a customer. She told me that she and a group of friends attended regularly at Mustang Sally’s, and had been doing so for several years. She was, she said, aware that the charge she paid on admission to the club entitled her to a voucher which she could use on a later occasion or (as she did) give away to guests at the hotel. She and her friends pooled their vouchers and used them when they could; it was these vouchers which she and her friends could not use which Mrs McCabe gave away. Although there is no mention of this understanding in the statement made by Mrs McCabe in advance of the hearing, and which stood as her evidence in chief, Mrs McCabe said in her oral evidence that she knew not only that she received admission and the voucher in return for her payment, but also that she could pay only the admission charge and forego the voucher. She chose not to do so, she said, as she considered that the combined admission and voucher represented good value for money.
13.	Although I am quite sure Mrs McCabe did not deliberately tell me an untruth, I am equally sure she is mistaken in her recollection. Had she been aware that instead of paying (say) a total sum of £4 for admission and a voucher worth £3, she could have paid only £1 and foregone the voucher, it is impossible to understand why she elected nevertheless to pay £4. After some initial hesitation, she accepted that she was not gaining any monetary advantage by paying for the voucher, since it was not offered at a discount, but said that possession of a voucher enabled her to gain admission on a later occasion without queuing to pay. As the vouchers were not admission tickets, but only tokens to be offset against the admission charge, that explanation is unconvincing. 
14.	Mr Gibbons argument that the customer received two distinct supplies for separate prices depends for its success on my being satisfied that the customer was truly offered the opportunity to enter into two discrete contracts. I am not so persuaded. It is certainly true, on the evidence I have heard and which Mr Thomas did not challenge on this point, that there were clear notices, prominently displayed, indicating to customers that they would receive admission and a voucher, but it does not seem to me that the notices make it clear to the reader that he is being invited to enter into two contracts. On the contrary, in my view the natural meaning of the words of the notice “our admission prices include your admission fee together with a voucher” is that a single price is being paid, and that it includes both admission and voucher. There is no indication that a customer would be permitted to pay for one without the other. The impression given by the notice is that the voucher is given by way of “promotional offer” – the words used in the notice – from which, in my view, the customer will draw the inference that he was not paying extra for the voucher: it was offered to him, implicitly without additional charge.
15.	In my judgment, it was plausible that any customer would pay the full cost of admission and voucher if he knew he could pay only for admission. His decision might be different if the vouchers were offered at a discount, but they were not. Even then, There were the risks of loss of the voucher, and of not having the opportunity to use it. Even a relatively affluent customer such as Mrs McCabe would not find payment of the full price an attractive bargain; the students who, Mr McLaughlin told me, represented the major part of the clubs’ clientele would in my view have been most unwilling to pay more than the supposedly fixed £1 admission charge had they genuinely been given the opportunity to do so. It was quite clear from the evidence that no real attempt was made to indicate to customers that the option to do so was available. The fact that, as Mr McLaughlin conceded, no customer had ever asked to pay only for admission speaks for itself. It does not seem to me that the facts of this case support the conclusion that there was sufficient notification to the customer, such as Lindsay J found in Debenhams Retail plc v Customs and Excise Commissioners [2004] STC 1132, that he was entering into two contracts, and still less that he was expected to pay separate and identifiable amounts of consideration in respect of each such contract. I am satisfied that the proper conclusion is that all of the customers would have assumed, and would reasonably have assumed, that they were being invited to enter into a single, indivisible contract.
16.	It seems to me inescapably to follow that the single contract was for admission to the club, to which the provision of the voucher was no more than ancillary. It is quite unrealistic to suppose that any customer might consider he was paying for a voucher, with admission on the day on which he made his payment thrown in as a bonus; again the almost negligible use of the vouchers speaks for itself. Nor, as it seems to me, is it open to the Appellant to argue that its apportionment of the total price paid by the customer, by allocating a constant £1 to the admission and the variable balance to the voucher, is a proper reflection of the true contract. The negligible use of the vouchers shows that their value, to the customers was at best modest. The gross cost to the Appellant of providing them was also modest, being limited to the admission income foregone when customers who, without a voucher, would have paid for admission were able to avoid doing so, or at least to reduce its cost to them by using the voucher. Mr Crossland had produced no analysis which showed that the loss of admission income was outweighed by the profit earned on the customer’s purchases within the club, thus the true cost to it of giving the vouchers are negative (hence my conclusion that this was a genuine promotion and not merely a tax-avoidance device) But in my judgment the only proper analysis is that the vouchers were given in part as an inducement to customers to come to the club on a first occasion and in part as an inducement to them to come on a second. The argument that customers paid for the vouchers in any meaningful sense is unsustainable. I conclude, therefore, that no consideration was given by the customers for the vouchers.
17.	If that is the correct conclusion, the Appellant is required to account for output tax on the entirety of its charges to customers gaining admission to the clubs and the Respondents are correct. The appeal is therefore dismissed. The parties agreed that costs should follow the event, and I so direct. 

COLIN BISHOPP
CHAIRMAN
Release Date: 8 June 2005

MAN/03/0546 
18.	I accept that the scheme itself was genuinely introduced for promotional reasons, even if, as Mr Thomas agreed, the manner in which the Appellant had accounted for it might be regarded as driven by tax avoidance motives. Mr Butterworth explained that when he examined the Appellant’s records, he had concluded that the scheme was designed to avoid tax, while the Crossland’s evidence showed that the promotion did yield benefits for the Appellant and there was some commercial intention for it. However, it does not seem to me that I need to determine this appeal by reference to any perceived avoidance motives. The real issue is whether, irrespective of motive, the Appellant is properly entitled to account for output tax in the manner in which it did so in the period assessed.