19681

VALUE ADDED TAX – INPUT TAX – vouchers (pre 8 April 2003) – sold at less than face value – VAT Act 1994 Sch 6 para 5 -  no output tax – input tax deduction by vendor on overheads recoverable? – yes – appeal allowed.

LONDON TRIBUNAL CENTRE

FIRST NATIONAL TELECOM SERVICES LTD	Appellant

-and–

HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

Tribunal: 	Richard Barlow (Chairman)
Ms Diana Wilson

Sitting in public in London on 15 December 2005.

For the Appellant Kevin Prosser QC and Oliver Connolly instructed by Messrs Deloitte and Touche. 

For the Respondents Christopher Vajda QC and Keiron Beal instructed by the acting solicitor and general counsel for HM Revenue and Customs.

© CROWN COPYRIGHT 2006

DECISION

1.	The appellant appeals against assessments for value added tax totalling £1,329,234 for the eight prescribed accounting periods from 1 December 2001 to 30 November 2003.  The calculation of the assessments is not in dispute and the sums assessed all relate to input tax claimed in those periods which the respondents contend was not properly deductible.

2.	At the hearing of the appeal the case of Commissioners of Revenue and Customs –v- IDT Services Ireland Ltd, which had then been heard in the High Court, was mentioned but neither party placed reliance upon it.  After the hearing but before the tribunal had reached its decision it came to the tribunal’s notice that that case had been heard in the Court of Appeal and the tribunal gave the parties an opportunity to make submissions about it.  That process was completed shortly after 18 May 2006.  The parties have not in fact placed significant reliance on that case.  That case is now reported at [2006] STC 1252.

3.	The facts are not in dispute and were stated in an agreed statement of facts and the documents submitted in an agreed bundle.

4.	The appellant’s business at the material time consisted of the supply of telecommunication services direct to consumers which accounted for 7% of its turnover and the purchase and resale of phone cards which accounted for 93% of turnover.  The 7% was rounded up and the 93% rounded down for the purpose of assessment, which would be in the appellant’s favour if the disallowance of input tax is correct because the respondents’ case is that input tax was deductible only in respect of the supplies to consumers.

5.	The phone cards were originally issued by several Irish companies (the statement of facts refers to only one but it was confirmed at the hearing that there were several).  The cards had a value stated on them but the Irish companies sold them to the appellant at a price that was less than the face value by a margin which allowed the appellant to sell them on profitably at more than it paid but still at less than the face value.  The appellant did not sell the cards to consumers.  It sold to retailers or other distributors.  Consumers could use the vouchers to buy telecommunications services at the full value shown on the cards from companies that had arrangements with the Irish companies that had issued the cards.  In theory both the appellant and the retailers or other distributors it sold the cards to could use them to pay for telecommunication services but in practice all but an insignificant number would eventually have been sold to and used by consumers.

6.	The Irish authorities took the view that article 9(2)(e) of the VAT Sixth Directive (77/388/EEC) had the effect that no VAT was chargeable by the Irish companies when they sold cards to the appellant.  Accordingly those companies did not charge VAT and there was no input tax for the appellant to claim on the purchase of the cards, nor did it claim any.

7.	The input tax in dispute in this case is in respect of the appellant’s overheads.  It has claimed recovery of all its inputs on overheads on the basis that all its supplies are taxable supplies.  The respondents claim that the sales of cards are ‘outside the scope’ of VAT and are not taxable supplies with the consequence that only partial recovery of input tax on overheads is possible i.e. limited to 7% of the total. 

8.	The assessments cover prescribed accounting periods both before and after the relevant provisions in the VAT Act 1994 were amended by the Finance Act 2003.  The relevant amendments were the repeal of paragraph 5 of Schedule 6 and the enactment of Schedule 10A to the VAT Act 1994.  

9.	The commissioners and the appellant came to an agreement about how the appellant should deal with stocks on hand as at 9 April 2003 which was the date when the amendments took effect.  The amendments applied to cards “issued” after 8 April and so it is not clear why there needed to be an agreement as the old law applied to cards issued on or before that date (apparently however much later they were sold) and the new law to cards issued after that date.  The agreement purported to allow the appellant to apply the old law to cards held by the appellant issued before 9 April only if they were sold before 1 October 2003.  Neither party raised any issue about this and we mention it here only to explain that all the transactions in question in this case were ones to which the legislation pre-dating the amendments applied and to explain why, despite that, the assessments continue beyond 8 April.

10.	The most relevant provision is the now repealed paragraph 5 of Schedule 6 which read:

“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.”

11.	The respondents’ assessment is based on their contention that the phrase “disregarded for the purposes of this Act” has the effect that any supply of a voucher or token, if it is sold at or for less than its face value, is not a taxable supply because of the disregard of consideration in such cases, with the further consequence that no input tax is recoverable if it is attributable to that supply.  The appellant contends that paragraph 5 was purely a valuation provision and that although the value of the supply is effectively nil for output tax purposes it remains a taxable supply for the purpose of claiming input tax. 

The commissioners’ case.

12.	Mr Vajda cited sections 4 and 5(2)(a) of the VAT Act 1994 and pointed out that the tax is charged on “taxable supplies” and that “supply” includes all forms of supply but not anything done otherwise than for a consideration.  He referred also to section 19 which deals with the value of supplies and which so far as is material reads:

“19(1) For the purposes of this Act the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6, and for those purposes sub-sections (2) to (4) below have effect subject to that schedule.”

He also cited sections 25(2) and 26 which deal with credit for input tax and the material provisions read:

“25(2) Subject to the provisions of this section, [a taxable person] 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;
…”

13.	It is not in dispute that the appellant was a taxable person.  It was registered for tax.  It was making the supplies in question in this case in the course of its business.  The dispute is whether those supplies were taxable supplies and that brings into question paragraph 5 of Schedule 6 which we have already set out in paragraph 10 above.  

14.	Mr Vajda agreed that paragraph 5 could be read as purely a valuation provision but Customs contend that it should be read as having the wider effects that they contend for including the denial of input tax deduction.

15.	Mr Vajda pointed out that the appellant had paid no VAT when it acquired the phone cards and that it had not charged any VAT when it sold them.  He said that paragraph 5 of Schedule 6 is compatible with the Sixth Directive though he conceded that there is no specific vires (sic) for it in the Directive.  He contended that that paragraph should be read in the context of the Act as a whole and also so as to be consistent with Community Law by which he meant principally the principles of VAT provided for in the Sixth Directive.

16.	He pointed out that the effect of paragraph 5 contended for by the appellant would be to introduce a new category of zero rating and that zero rating, as an exception to the normal rules, requires authorisation which has not been given for this category of supplies.  

17.	However, we mention here that the wording of the provision now under consideration is materially the same as paragraph 5 of Schedule 3 to the Finance Act 1972 except for a minor contextual reference (that provision was for the purposes of “this Part of this Act” rather than the Act as a whole but that Act dealt with things other than VAT so that was a necessary restriction that no longer applies).  It therefore predates the Sixth Directive.    

18.	Mr Vajda cited the case of Rompelman –v- Minister van Financiën [1985] ECR 655 in which paragraph 19 of the judgement reads:

“From the provisions set forth above it may be concluded that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of his economic activities.  The common system of value added tax therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way.”

Mr Vajda emphasised the words “provided that they are themselves subject to VAT”.  He also cited Kretztechnik AG –v- Finanzamt Linz (unreported case C-465/03) in which the ECJ, in a similar context, referred to input tax deduction being available “provided, however, that all the transactions carried out  … constitute taxed transactions”.

19.	The contention by the respondents is that in light of those cases a construction of paragraph 5 that would deny input tax recovery would be in accordance with the scheme of the tax as a whole, both looked at from the point of view of the Act and of the Sixth Directive.

20.	Mr Vajda referred to the fact that in Customs and Excise Commissioners –v- Granton Marketing [1996] STC 1049 the Court of Appeal had been influenced by the fact that the result of the taxpayer’s argument would have been that transactions which were clearly of a type that the general rules would suggest should be taxed would fall outside the scope of the tax.  The general scheme of the tax was taken into account.  He argued in this case that the scheme of the tax should result in the input tax deduction being unavailable because there would be no corresponding output tax.

21.	In that case Customs had contended, and the Court had agreed, that paragraph 5 was intended to avoid double taxation.  In this case Mr Vajda contends that it also has the effect of avoiding the anomaly that input tax could be claimed without there having been a payment of output tax by the person claiming the input tax.  He added that that would lead to a breach of the principle of fiscal neutrality.

22.	Customs rely upon the case of Mr and Mrs Oluwatuyi t/a LizJohn (decision number 18089) in which the tribunal held that the appellants were not entitled to claim, as input tax, the tax incorrectly charged as output tax by a supplier of phone cards when they purchased them for their business.  That is not the same situation as the one we are considering but in making its decision that the appellants were not entitled to deduct input tax the tribunal said this:

“The effect of paragraph 5 of Schedule 6 is that the consideration paid for telephone cards is disregarded for the purposes of the Act.  That means that the sale of telephone cards is not done for a consideration, and so it is not a supply, and so tax should not be charged.  Section 24(1) provides that input tax means tax on the supply to a taxable person of any goods or services.  Accordingly, if there is no supply there is no input tax and so there is no entitlement to credit for input tax.  Further, section 26(2)(a) provides that a taxable person is only entitled to credit for input tax attributable to his taxable supplies.  As there were no taxable supplies made by the appellants then there was no entitlement to input tax.”

The appellant’s case.

23.	Mr Prosser’s first submission was that paragraph 5 was clearly intended to be and was limited to affecting the valuation of supplies.  He pointed out that section 19 of the Act, which induces Schedule 6, is a provision dealing only with valuation and that the same is true of Schedule 6 itself.  

24.	He pointed out that section 19 makes no attempt to define what is meant by a supply and contended that that is because the definition and scope of “supply” is provided for by section 5 together with Schedule 4 which it induces and the Treasury Orders for which it provides the vires.   

25.	He contended that it is logically necessary to define a supply before it can be valued and that accordingly the valuation provisions are likely to follow the defining provisions rather than to modify them.

26.	The same is true of the Sixth Directive in that taxable transactions (supplies) are dealt with in Title V and taxable amount (value) in Title VIII.  Mr Prosser cited Customs and Excise Commissioners –v- British Telecommunications [1998] STC 544 at 548/9 and [1999] STC 758 at 762 in which the Court of Appeal and House of Lords had drawn a clear distinction between provisions identifying supplies and those valuing them.

27.	In support of his contentions about the limited effect of the specific provisions of Schedule 6 Mr Prosser referred to the well known passage in the judgement of Lord Sterndale MR in the case of IRC –v- Gittus [1920] 1 KB 563 at page 576:

“If the Act says that the Schedule is to be used for a certain purpose and the heading of the part of the Schedule in question shows that it is prima facie at any rate devoted to that purpose, then you must read the Act and the Schedule as though the Schedule were operating for that purpose, and if you can satisfy the language of the section without extending it beyond that purpose you ought to do it.”

We would add however that the relevant passage continues:

“But if in spite of that you find in the language of the Schedule words and terms that go clearly outside that purpose, then you must give effect to them and you must not consider them as limited by the heading of that part of the Schedule or by the purpose mentioned in the Act for which the Schedule is prima facie to be used.  You cannot refuse to give effect to clear words simply because prima facie they seem to be limited by the heading of the Schedule and the definition of the purpose of the Schedule contained in the Act.”

A Schedule does not have a lower status in legislation than any other part of the Act and its terms have to be interpreted in the same way as any other.
 
28.	Mr Prosser then dealt with the wording of paragraph 5.  There are two issues.  The first is as to the meaning of the word “disregarded” and the second is as to the meaning of the phrase “for the purposes of this Act”.  

29.	As far as “disregarded” is concerned Mr Prosser referred to paragraph 10 of the Schedule where the phrase used is “without regard to” and said that as there is no consistency in the phraseology nothing can be read into it.  Clearly the word has to have some effect and its meaning as an ordinary word is plain so the real question is for what purposes does the consideration have to be disregarded and the answer to that question depends on whether we agree that the paragraph deals only with valuation or whether it has a wider range of applications in the Act.  That issue concerns the effect and scope of the phrase “for the purposes of this Act”.   

30.	Mr Prosser referred to paragraph 3 of Schedule 6.  It deals with the valuation of goods whose supply involves their removal to the UK in cases where they are chargeable with excise duty or in some cases customs duty or agricultural levy.  It provides that “for the purposes of this Act” the value is to be calculated in a certain way.  Mr Prosser said that although the phrase “for the purposes of this Act” was used it had no effect beyond the valuation in that case because, on any view, the supply remained a taxable supply and its nature is unchanged.

31.	He said that it may have been unnecessary to use the phrase “for the purposes of this Act” and there is certainly no consistency in Schedule 6 about how the scope of application of any of its valuation provisions are dealt with.  We note, for example, paragraph 4 in which the phrase “for the purposes of section 19” is used but section 19 itself says it is operating “for the purposes of this Act”.

32.	Mr Prosser pointed out that all the other provisions of Schedule 6 affect the valuation of supplies without affecting their status as supplies.  He also referred to paragraph 10 which deals with certain supplies by employers to employees and contended that the treatment of those supplies as having a nil value did not affect the employer’s input tax recovery.  Mr Vajda did not agree with that though some support for Mr Prosser’s position is provided by paragraph 21 of the tribunal decision in Co-operative Insurance Society Ltd –v- Commissioners of Customs and Excise (decision 14862).  Also we note that, although not authoritative, Public Notice 700 appears to suggest that Customs take the view that input tax would be recoverable (see paragraph 12.1.2 of the Notice).  The point was not fully argued and is not essential to our decision so we will reach no conclusion about it.  The Co-op case is certainly authority for the proposition that paragraph 10 does not turn something that would not be a supply into a supply or deem it to be a supply and so, as Mr Prosser pointed out, it only deals with the case where there is a supply and yet it can lead to that supply having a nil value apparently without it ceasing to be a supply. If that is so of paragraph 10, he asks, why can it not also be so of paragraph 5. 

33.	Mr Prosser emphasised that paragraph 5 is intended to avoid double taxation and there is no doubt that is, at least, one of its aims as was recognised in the Granton case.  Schedule 6 as a whole is described in Granton, by counsel for the Commissioners but with the apparent approval of the Court, as dealing with anomalies and distortions, not just with double taxation.

34.	Mr Prosser said that Rompelman and Kretztechnik did not answer the question posed in this case.  It is true that they establish that input tax recovery depends upon there being a taxable transaction but that does not mean that a transaction could not be a taxable transaction even where there is a provision artificially treating the value of that transaction as nil or directing that it be disregarded.

35.	He pointed out that where a card with a face value of £10.00 is sold for £10.01 there would be full recovery of input tax but where it is sold for £10.00 there would be none, on Customs argument.  Mr Vajda disagreed with that proposition and said that only a proportionate recovery of input tax would be allowed.  However, the least that can be said is that on Customs case one of those supplies would be a taxable supply for all purposes of the Act and the other would be a taxable supply for none of those purposes.  

36.	Finally, Mr Prosser drew our attention to Schedule 10A of the Act which has replaced paragraph 5 with a much more elaborate regime.  

37.	He said that paragraph 2 of that Schedule which enacts that the issue of a face value voucher “is a supply of services”, in effect recognises the correctness of his argument and confirms it.  The consideration for the supply of credit vouchers is “disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher”, in other words the wording is the same as in paragraph 5 of Schedule 6.  But, Mr Prosser contended, the effect of paragraph 2 quite specifically makes the supply of the voucher a supply.  It is true that there can be a supply which is not a taxable supply but, he contends, there would be no purpose in making a supply a supply of services unless the supply is to be treated as a taxable supply for at least some of the purposes of the Act.

Discussion.

38.	The definition of “supply” in section 5(2)(a) of the VAT Act 1994 is:

“ “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration;”.

That definition pre-supposes that the meaning of supply is known because the reference to ‘all forms of supply’ is not an attempt to define the concept ‘supply’ as such but only to incorporate all forms of it.  The definition then excludes cases of supplies that are not for a consideration.

39.	Article 2 of the Sixth Directive follows a similar pattern except that it includes cases which are for consideration and by its silence about them excludes those that are not; again without defining ‘supply’ as such.

40.	The legislation and the Directive both deal separately with concepts of goods and services into which supplies are divided (section 5 and articles 5 and 6); and value or taxable amount (section 19 and article 11 respectively).

41.	The scope of the tax is provided for in section 4 and article 2 both of which restrict the tax to supplies for consideration.  Section 4 provides that taxable supplies means all supplies (i.e. those done for a consideration - because of the definition in section 5) except exempt supplies.  Article 2 does not specifically introduce the concept of a taxable supply but as well as defining supply in terms of consideration it also restricts the tax to such supplies and exemptions are dealt with separately.   

42.	The transactions with which this case is concerned are supplies in the ordinary sense of that word and they are done for a consideration.  The retailers and other distributors pay the appellant for them.  If it were not for paragraph 5 of Schedule 6 there would be no doubt that they would be taxable supplies as provided for in the provisions quoted above.

43.	 The question therefore arises as to the scope of application of paragraph 5.

44.	The provisions of Schedule 6 are stated in section 19 and in the heading to the schedule to be for valuation purposes and Mr Prosser’s citation of the Gittus case (see paragraph 27 of this Decision) is apt, although clear words would override the first part of the passage cited as is explained in the second part we have quoted.

45.	We were told that paragraph 5 is regarded as being compliant with the Sixth Directive.  As we have noted in paragraph 17 above the legislation took its present form before the Council adopted the Directive.  There is no clear explanation about how paragraph 5 implements any provision of the Directive. There is no provision in the Directive in similar terms.  In view of the comments made in the IDT case (see paragraph 99 of the judgement of Arden LJ) that the similarly worded provision in schedule 10A was to be interpreted in light of the principles of the Sixth Directive (rather than a particular provision) we would not expect to find a provision in the Directive that was directly implemented by paragraph 5.  However we should interpret paragraph 5 in light of the principles of the Directive.

46.	We also bear in mind that it has been said with some authoritative support that the purpose of paragraph 5 (in the form of its predecessor in the VAT Act 1983 but with the same wording) is to deal with potential distortions and anomalies; as to this see page 1053 of the judgement in the Granton case.  In particular in that case there is reference to the avoidance of double taxation but the IDT case makes it plain that the avoidance of non-taxation and distortion of competition are also general principles of the Sixth Directive (see paragraph 95 of the judgement of Arden LJ) and that the legislation ought to be interpreted in light of those principles as well.

47.	Our understanding of the correct approach to the interpretation of paragraph 5 is derived from paragraph 68 of the judgement of Arden LJ in IDT.  We have to decide what the requirements of the Sixth Directive are and that may involve deciding what the general principles contained in the Directive are; not just the specific rules which are spelled out in detail (see paragraph 70 of the same judgement).  Then we have to interpret that UK legislation to be in conformity with those principles, if possible.

48.	Mr Vajda emphasised that it is a principle of the Directive that the tax is neutral and that the deduction of input tax only where there is a corresponding taxable output is part of the method of achieving that neutrality.  He cited the Rompelman and Kretztechnik cases in that context.  That is certainly the usual way in which the tax is accrued cumulatively at each stage in the chain of transactions and by which it is paid by the final consumer on the value added throughout the chain when the final consumer pays the tax to the last supplier in the chain but is unable to recover it as input tax because he is not in business.

49.	However, Mr Vajda’s submission asks us to consider only one aspect of the chain of transactions.  The end of the chain involves a final consumer who pays tax to the last supplier in the chain.  We note that in paragraph 37 of the judgement of Arden LJ in IDT counsel for the Commissioners submitted that telecommunications services supplied direct to a consumer would be subject to VAT whether the consumer is in the UK or Ireland and we were not told in detail how the tax would be charged in this case but we will proceed on the basis that the final supply is taxable, as it seems clear it must be.  

50.	There is a choice to be made about which of the principles of the VAT Directives should be applied in this case.  Article 2 of the First VAT Directive refers to the tax being “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” (our emphasis) but it also says that “on each transaction, value added tax, calculated on the price … shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components” (our emphasis).  If “on each transaction” means at each stage in the chain of transactions rather than on the last one the appellant’s claim to deduct input tax would be in apparent conflict with that rule but on the other hand the appellant’s overheads are cost components of the retail supply which is finally made to the consumer and must have been built into the cost to the consumer of that supply.  We hold that the first part of article 2 that we have quoted establishes the principle involved and that the second part of it that we have quoted is the normal method of achieving that result.  That first part is therefore the basis by which we have to interpret the legislation rather than the second part. 

51.	We hold therefore that the principles of VAT as enshrined in the Directives require that the appellant should be entitled to deduct input tax on its overheads.  If that tax was not deductible by the appellant it would have been passed on as part of the cost to the appellant of making the supplies to the retailers and they would have passed it on down the chain.  It was in fact claimed as input tax and so the system operated as normal except that there was no output tax relating to the supply itself.  The retailers would then have passed on (or presumably did pass on) the cost of the appellant’s overheads by incorporating it in the price charged to the consumers and at the end of the chain there was a taxable transaction.  If the rules about valuation of supplies of vouchers means that the output tax on the final supply was less than it would have been if the vouchers had always been sold at or above their full face value, we do not regard that as relevant to the recovery of input tax in earlier stages in the chain.         

52.	In principle, therefore, it can be said that recovery by the appellant of input tax actually incurred rather than non-recovery would be more in accord with the general principles or scheme of the tax.  Paragraph 5 is clearly an exceptional provision introduced to deal with a potentially anomalous situation and so it can be expected to depart from some at least of the normal rules on any view and so the real issue is which of the normal rules should apply.  We consider recovery of input tax actually incurred will accord more with the general principles of the tax than non-recovery.  That will be the case if paragraph 5 can be interpreted on the basis that the output supplies in question retain their status as taxable supplies despite the disregard of consideration.    

53.	We then have to consider whether the UK legislation can be interpreted in conformity with what we regard as those principles which we hold ought to be applied.

54.	The Collins English Dictionary defines “disregard” as “to give little or no attention to; to ignore” and the Concise Oxford Dictionary defines it as “pay no attention to, ignore, treat as of no importance”.  The use of the word disregard therefore does not imply that the consideration for a voucher at or below face value notionally ceases to exist or is deemed not to exist.

55.	The phrase “for the purposes of this Act”, as we have already pointed out, is used inconsistently.  It may simply have been adopted from an abundance of caution and to make it clear that the value of the consideration is not affected for purposes outside the VAT Act (for example for the calculation of other taxes).

56.	There is considerable force in the argument that paragraph 5 is and should be interpreted as purely a valuation provision that affects the value to be placed on consideration without affecting the existence of the consideration.  

57.	It is the consideration itself that is disregarded and that does not necessarily or obviously affect the nature of the supply, for example, it may not make a supply that would be a taxable supply into something other than a taxable supply.  

58.	We agree with Mr Prosser’s argument that schedule 10A recognises that supplies for which the consideration is disregarded “for the purposes of this Act” because of a provision which is in the same terms as paragraph 5 are still taxable supplies despite the disregard.  As we have pointed out there would be no point in making those supplies “of services” as opposed to goods if they are outside the scope of the tax but paragraph 2 of Schedule 10A does specify services.  Those subsequent provisions are in pari materia with paragraph 5 so far as “disregarded” and “for the purposes of this Act” are concerned and we see no reason to think that Parliament meant to change the effect of those words by the introduction of paragraph 2 in the later enactment so we are entitled to have regard to the subsequent enactment in interpreting the earlier version.

59.	On Customs argument a supply valued at one penny more than face value would be a taxable supply but an otherwise identical supply valued at face value or one penny less would not be a taxable supply.  That could lead to very serious conceptual difficulties.  How would a person intending to make those supplies but who had not yet put a price on them know whether he needed to register for VAT or how much input tax to claim?  We think Mr Vajda is wrong to say that the input tax would fall to be apportioned in a case where the price of a voucher exceeds the face value and certainly the VAT Regulations do not appear to provide for such an apportionment.  The consequence of Customs argument would be that full recovery of input tax or no recovery of input tax could depend on a very small difference in price and a negligible difference in output tax.

60.	We hold that the supplies in this case remain taxable supplies despite paragraph 5 and so full recovery of input tax on overheads is available to the appellant.

61.	We are conscious that our decision is contrary to that of the tribunal in the LizJohn case but we have heard a much more extensive argument than the one that seems to have been presented to that tribunal and it was decided before the enactment of Schedule 10A.      

62.	Although we have interpreted paragraph 5 in light of the principles established in the VAT Directives we also regard our interpretation as the correct one in light of the general scheme of the Act, though that is not surprising as that is itself derived form the Directives.

Conclusion.

63.	The appeal is allowed and the assessments should be discharged.  The appellant is entitled to its costs and we award them accordingly, to be assessed by a chairman sitting alone if the parties cannot agree them.  

CHAIRMAN

RELEASED:3 August 2006

LON/2004/0270