[2009] UKFTT 135 (TC)

TC00103

VAT – supply by Appellant of face value vouchers to its employees under contracts of employment – is art. 2(1) of Sixth Directive [now art. 2(1)(a) of Principal VAT Directive] to be interpreted as indicating that provision of vouchers constitutes a supply of services for consideration? – if no, is art. 6(2)(b) [now art. 26(1)(b)] to be interpreted as requiring provision of vouchers to be treated as supply of services where vouchers to be used by employees for private purposes? – if provision of vouchers neither supply of services for consideration within art. 2(1) nor is to be treated as supply of services under art 6(2)(b), is art. 17(2) to be interpreted as permitting employer to recover VAT incurred in purchasing and providing vouchers to employees in circumstances where vouchers to be used for employees’ private purposes – reference to ECJ of all 3 questions

MANCHESTER TRIBUNAL CENTRE			                     

 	
					ASTRA ZENECA UK LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	David Demack (Chairman)

Sitting in public in Manchester on 7 November 2008 and in London on 9 December 2008

Michael Conlon QC, instructed by Deloitte LLP, chartered Accountants, London, for the Appellant
 
Nigel Pleming QC and Rupert Baldry of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents on 7 November 2008 and Rupert Baldry on 9 December 2008

© CROWN COPYRIGHT 2009
DECISION

1.	The Appellant company, Astra Zeneca UK Ltd (“AZ”) is the representative member of a group of companies.  It provides retail vouchers to its employees under the terms of their remuneration packages.  It is the VAT treatment of those vouchers which is point in the appeal, and which, in the judgment of this tribunal, requires the Court of Justice to interpret Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of Members States relating to turnover taxes (“the Sixth Directive”) (now Council Directive 2006/112/EC, “the Principal VAT Directive”).
2.	Before me, AZ was represented at both hearings by Mr. Michael Conlon QC, and the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) at the first hearing by Mr. Nigel Fleming QC, leading Mr. Rupert Baldry, and at the second by Mr. Baldry.
3.	The facts are agreed and may be stated in the following way.
The facts
4.	The essential facts are these.  AZ carries on business in the pharmaceutical industry and is registered for value added tax in the United Kingdom as the representative member of a VAT group comprising sixteen companies, including Astra Zeneca PLC, the ultimate parent company.  
5.	AZ is the group’s main UK trading company and its principal activities are the development, manufacture and sale of pharmaceutical products.  These activities are taxable for VAT purposes.  
AZ Advantage
6.	AZ Advantage is a remuneration package provided by AZ to its employees.  The package is intended to incentivise, motivate and retain staff in order to maximise the sales of the group’s products, develop new products and increase profits.
7.	AZ Advantage was designed to make AZ competitive in the labour market by offering a wide range of benefits, including tax efficient benefits.  The recruitment and retention of staff is an important business objective for AZ and all permanent employees are eligible to participate in AZ Advantage.
8.	In summary, AZ Advantage allows an employee to choose from a range of benefits as part of his or her remuneration.  Some benefits, known as Core Benefits (such as a minimum level of holiday entitlement and pension cover), must be taken, but otherwise each employee is entitled to select the benefits he or she prefers.  
9.	The benefits include, amongst others, additional holiday entitlement, private healthcare, life assurance, additional pension contributions and season tickets for travel.  Retailer vouchers are also one of the available benefits.  
10.	Under the terms of his or her employment, which are set out in a Statement of Terms and Conditions of Employment, an employee is entitled to receive a fixed annual remuneration: this is known as his or her Advantage Fund and this Fund includes the total value of the mix of cash and benefits which constitutes the employee’s remuneration.  
11.	Deductions are made from this Fund as and when the employee selects benefits under AZ Advantage.  These deductions are referred to as Advantage Charges.  There is a prescribed charge for each type of benefit, which is made against the employee’s Advantage Fund.  
12.	A fixed Reference Salary is calculated, which is an amount, set by AZ, used to calculate certain salary-related benefits (such as pension, death-in-service benefit and personal accident insurance).   
13.	The employee is provided with written guidance on how AZ Advantage operates: the AZ Advantage Guide; the AZ Advantage - Mini Guide to Flexible Benefits and Your Advantage – A summary for AZ Pension Fund investment account members.
14.	The employee is also provided on joining AZ with a Preference Worksheet which (a) confirms the amount of his or her Advantage Fund including the Reference Salary; (b) provides a summary of the personal benefit options available to the employee, together with the amount charged against the Fund for each option; (c) assists the employee to register his or her preferred benefits; (d) acts as a personal record of benefit choices; and (e) confirms the Employee Number and Password.  
15.	Every year, in about July, each employee is required to (re)confirm his or her choices for the next year.
16.	The employee registers which benefits (s)he prefers, usually, by logging on to AZ’s online registration and reference website “Your Benefits Resources”, using the Employee Number and Password.  That website enables the employee to access a table which lists the available benefits, together with the associated charge from his or her Advantage Fund.  The employee chooses which benefits (s)he prefers by clicking on the benefits listed on the table.  Once the employee has so chosen his or her preferences (s)he clicks on “Confirm” to complete registration.   If the employee’s choice is accepted by AZ, a Confirmation Statement is issued to the employee, which sets out the value of the monthly cash and benefits to be provided by way of remuneration.  The Statement of Terms and Conditions provides that the Confirmation Statement forms part of the employee’s contract of employment.  The employee is advised to print it off for his records.
17.	Employees who do not have access to a PC can register their preferences by telephone.
18.	The employee is informed of the total value of the monthly benefits selected as part of the employee’s Advantage Fund and the charges for those benefits.  The remaining amount, known as Residual Cash, is paid to the employee by way of monthly salary.  
19.	The employee’s payslip clearly shows the Advantage Fund amount, including the value of benefits selected and the residual cash payable for the month.  Income tax and national insurance contributions are collected in respect of the residual cash and certain benefits, including retailer vouchers.
20.	Normally, the employee’s benefits as set out in the Confirmation Statement remain unchanged until the next annual review date.  However, benefits may be changed within a scheme year if the employee experiences a qualifying lifestyle event, such as marriage, divorce or the birth of a child.  
21.	If the employee does not register his or her preferences within a set time (30 days for new joiners) he is automatically assigned default cover to ensure that the employee is fully provided with pension and death-in-service benefits.  
The vouchers
22.	Retailer vouchers are one of the benefits which may be selected under AZ Advantage.  The vouchers are all standard gift vouchers, as sold across the counter by retailers, and are in denominations of £10 each (although AZ purchases them at a discount).  The vouchers are issued by, and may be exchanged for, goods at high street retailers, such as Sainsbury’s, Asda, Marks & Spencer.
23.	If an employee chooses a £10 voucher, his Advantage Fund is charged (in accordance with the procedure set out above) with a discounted amount (between £9.25 and £9.55).  The voucher is therefore attractive for the employee, as he or she is entitled to redeem it for goods or services up to the value of £10.
24.	The retailer vouchers in question are acquired by AZ as follows.
25.	Vouchers are issued by the retailer to an intermediary company.  From 1 July 2005, vouchers were provided to AZ by one such intermediary, Projectlink Motivation Limited.  From 1 July 2006, vouchers were provided by Farepak Foods & Gifts Limited (as the supplier) and Xexec Limited (as agent).  From 17 October 2006  Xexec became the supplier.
26.	According to the contract between AZ and Xexec, Xexec will not provide vouchers to the employees until AZ has submitted a written order to Xexec and has paid for the vouchers.  Payment has to be made 3 days before the delivery is required to be made to the employees.  
27.	Originally, Projectlink Motivation Limited charged AZ VAT at 17.5% of the discounted price.  More recently, as a result of an agreement between the retailers, the intermediate suppliers and the Commissioners of Revenue and Customs (“the Commissioners”) VAT is calculated at a lower rate, to reflect the fact that the vouchers may be redeemed for both standard-rated and zero-rated goods.
28.	The vouchers are sent by post monthly by the intermediary company direct to the employee’s private address.   AZ instructs the intermediary to deliver the precise number of vouchers which have been requested by employees.   
29.	When the retailer vouchers are received the employee is then free to use them as he or she wishes.
Proceedings before the national court
30.	Whilst awaiting a ruling from the Commissioners, AZ completed its VAT returns on the basis that it was not required to charge VAT (output tax) on the provision of the vouchers to the employees and that it was not entitled to deduct as input tax the VAT it had incurred on purchasing and providing the vouchers to the employees.  
31.	AZ claimed that:
a)	it should be entitled to deduct the input tax it incurs on purchasing a voucher on the basis that the cost of the voucher is a business overhead; and
b)	AZ is nevertheless not required to charge VAT on the provision of the voucher to the employee on the basis that the voucher is not provided to the employee for any consideration.   
Accordingly, AZ has made protective claims from the Commissioners for repayment of the input tax it has so incurred.
32.	The Commissioners have decided:
a)	AZ is not entitled to deduct the input tax it has incurred on purchasing the voucher, on the basis that the voucher is not used by AZ for the purposes of any taxable transactions;
b)	subsequently, in the alternative, AZ is entitled to deduct the input tax it has incurred on purchasing the voucher, but is required to account for VAT on the provision of the voucher to the employee, on the basis that, either:
i.	the voucher is provided for consideration, namely the charge to       the employee’s Advantage Fund, or
ii.	the voucher is made available to the employee for use for a purpose other than a business purpose within the meaning of article 3 of the United Kingdom’s Value Added Tax Supply of 
Services Order (Statutory Instrument 1993/1507).  If that is the case, the value of the supply is taken as the cost of providing the vouchers, and AZ is required to account for output tax on that amount.
33.	The Commissioners accordingly (i) refused to repay AZ the input tax it has claimed and (ii) subsequently raised protective output tax assessments to recover the VAT due if the vouchers are supplied for consideration.
34.	AZ appealed against both the Commissioners’ alternative decisions on input tax and output tax to the Value Added Tax and Duties Tribunal (“the Tribunal”).  The two sets of appeals were consolidated and the consolidated appeals have commenced in the Tribunal.
35.	The Tribunal has concluded that, in order to decide the appeal, it requires a ruling from the Court of Justice on the interpretation of the Sixth / Principal VAT Directive.  The Tribunal has accordingly decided to stay the proceedings before it and to refer to the Court the following three questions:
1)	In the circumstances of this case, where an employee is entitled under the terms of his or her contract of employment to opt to take part of his or her remuneration as a face value voucher, is Article 2(1) of the Sixth Council Directive 77/388/EEC [now Article 2(1)(c) of the Principal VAT Directive] to be interpreted such that the provision of that voucher by the employer to the employee constitutes a supply of services for consideration?
2)	If the answer to question 1 is no, is Article 6(2)(b) [now Article 26(1)(b)] to be interpreted as requiring the provision of the voucher by the employer to the employee in accordance with the contract of employment to be treated as a supply of services, in circumstances where the voucher is to be used by the employee for his or her private purposes?
3)	If the provision of the voucher is neither a supply of services for consideration within the meaning of Article 2(1) nor is to be treated as a supply of services under Article 6(2)(b), is Article 17(2) [now Article 168] to be interpreted so as to permit the employer to recover the value added tax it has incurred in purchasing and providing the voucher to the employee in accordance with the contract of employment, in circumstances where the voucher is to be used by the employee for his or her private purposes?       
36.	I therefore direct:
1)	That the three questions set out above concerning the interpretation of Directive 77/388/EEC be referred to the Court of Justice of the European Communities for a preliminary ruling in accordance with article 234 of the Treaty establishing the European Community;
2)	That all further proceedings in the above appeals be stayed until the Court of Justice has given its rulings on the said questions or until further order;
3)	That the costs be reserved

 DAVID DEMACK
CHAIRMAN
Release Date: 16 January 2009
MAN/06/0619