18681

VAT — incentive scheme for sales staff of car dealers — scheme including provision of food, entertainment and accommodation for successful sales staff and their partners — whether business entertainment — whether input tax recovery precluded — VAT (Input Tax) Order 1992, art 5 — consideration given by recipients of entertainment — not business entertainment — whether instead provision of entertainment a taxable supply in return for non-monetary consideration — yes — appeal dismissed in part

MANCHESTER TRIBUNAL CENTRE
	
	PEUGEOT-CITROËN AUTOMOBILES LIMITED	Appellant
	
	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Birmingham on 9 March 2004

Simon Taylor and Murray Taylor, appellant’s tax managers, for the appellant 
Rupert Anderson QC, instructed by the Solicitor for the Customs and Excise, for the respondents

	© CROWN COPYRIGHT 2004
DECISION

1	In this appeal Peugeot-Citroën Automobiles Limited, the well-known car manufacturer, challenges two assessments, each relating to the periods 03/01, 06/01 and 09/01, made in the alternative and notified to the appellant on 2 May 2002. Each assessment relates to the appellant’s “Gold Recognition” incentive scheme in which the sales staff of dealers selling its cars may participate. Successful participants are rewarded by the supply to them by the appellant of certain benefits; those relevant to this appeal are, essentially, the provision of accommodation, entertainment and food.
2	The first assessment, which reflects the Commissioners’ view of the correct VAT treatment of those benefits, and which was referred to as the “preferred assessment”, assumes that they constitute “business entertainment” within the meaning of article 5 of the VAT (Input Tax) Order 1992 (SI 1992/3222), with the consequence that the appellant is precluded from recovering the input tax incurred by it in procuring the supplies from third parties. The second, the “alternative assessment”, is supported by the Commissioners only in the event that the preferred assessment is found to be incorrect. It depends upon the conclusion that the benefits are supplied in return for a consideration; if that is right the appellant is entitled to recover the input tax it has incurred but must account for output tax on the value of the supplies it makes. It was agreed that if I decide in the Commissioners’ favour in respect of the preferred assessment, I do not need to consider the alternative assessment. The appellant’s case is that both of the assessments are incorrect.
3	I heard evidence from only one witness, Alison Stewart, who was at the material time the manager of the appellant’s sales motivation team, though I had the unchallenged statement of Robert Jeffery, whom I understand to be Mrs Stewart’s successor. Mrs Stewart and Mr Jeffrey described the manner in which the incentive scheme worked, which was also illustrated by printed material given to participants and potential participants. Participation was open to sales staff of Peugeot dealers (mostly independent, franchised dealers although one dealership is owned by the appellant itself). Those wishing to do so joined the Lion Sales Club. In each year awards of points were made for sales of new vehicles; participants were also required to complete some training and to have been participants in the scheme for a period of time, and it was possible to earn points in some other ways, but the essential purpose of the scheme was to maximise sales of new vehicles by rewarding those most successful in achieving those sales. There were some changes in the scheme from year to year, in the details of the manner in which points were earned, and there were some differences between the entitlements of those making individual retail sales and those selling in the fleet market, but those differences are immaterial to the dispute between the parties.
4	 The most successful participants could achieve “Gold Recognition Level”. The evidence indicated that some entered the scheme for competitive reasons (the appellant produced league tables and other material designed to encourage competition), and not merely because of the available rewards. However, there were tangible rewards which were designed to, and no doubt did, encourage the participants to greater efforts. That reward which is of relevance in this appeal was described (in the printed material relating to the 1999 scheme) in these terms:
“All Gold achievers will receive an invitation for you and your partner to the Lion Sales Club Gold Recognition Event. This event usually takes place in the early Spring—ie the 1999 Gold Recognition Event will take place in the early part of 2000.”
5	In the earlier part of the period with which I am concerned it was not merely the best hundred (for example) of the participants who were entitled to attend the event, but all those, regardless of number, who achieved the requisite level, and there was then no means by which the appellant could modify the scheme as the year progressed in order to limit the number who qualified. Latterly, the rules were changed so that the number attending was limited to a pre-determined total. I do not, however, think that this change materially affects the issue I must decide.
6	The Gold Recognition Event consists of a dinner dance followed by overnight accommodation in a hotel. As Mrs Stewart explained, the nature of the event was such that it would not be attractive if those attending could not bring their partners and it was for that reason that partners were invited as well. Some of the appellant’s marketing personnel also attended, in order to manage the event and to represent the appellant. The Commissioners accept that the input tax incurred on the costs of attendance of the appellant’s own staff (including the staff of the dealership owned by the appellant) is recoverable, but maintain, in supporting the preferred assessment, that the input tax incurred on the costs of attendance of the staff members’ partners, and of the independent dealers and their partners, is not. They adopt a similar, though not precisely identical, demarcation in respect of the alternative assessment (though the difference does not affect the issues of principle I must decide), and contend that the appellant should account for output tax on the value of the supplies to the staff of the independent dealers and their partners. I am not required to examine the arithmetic of the assessments.
7	The outcome of the appeal depends entirely upon the correct interpretation in this context of article 5 of the 1992 Order, which reads (now and as it was in force at the material time):
“(1) 	Tax charged on any goods or services supplied to a taxable person, or on any goods acquired by a taxable person, or on any goods imported by a taxable person, is to be excluded from any credit under section 25 of the Act, where the goods or services in question are used or to be used by the taxable person for the purposes of business entertainment. 
 (2) 	Where, by reason of the operation of paragraph (1) above, a taxable person has claimed no input tax on a supply of any services, tax shall be charged on a supply by him of the goods in question, not being a letting on hire or on a supply by him of the services in question, as if that supply were for a consideration equal to the excess of— 
 (a) 	the consideration for which the services are supplied by him, over 
 (b) 	the consideration for which the services were supplied to him, 
 and accordingly shall not be charged unless there is such an excess.
(3) 	For the purposes of this article, ‘business entertainment’ means entertainment including hospitality of any kind provided by a taxable person in connection with a business carried on by him, but does not include the provision of any such entertainment for either or both— 
 (a) 	employees of the taxable person; 
 (b) 	if the taxable person is a body corporate, its directors or persons otherwise engaged in its management, 
unless the provision of entertainment for persons such as are mentioned in sub-paragraph (a) and (b) above is incidental to its provisions for others.”
8	The parts of that provision on which the Commissioners rely for the preferred assessment are paragraphs (1) and (3), which together amount to a restriction on the right to deduct the input tax which would otherwise arise under sections 25 and 26 of the Value Added Tax Act 1994; the Order was made pursuant to what is now section 25(7) of the Act. For the purpose of the appeal against the preferred assessment it is necessary merely to decide whether what the appellant provides to those attending the Gold Recognition Event amounts to “business entertainment” within the meaning attributed to that phrase by paragraph (3), since the appellant accepted that, if it does, paragraph (1) must apply.
9	The appellant’s contention, advanced on this issue by one of its taxation managers, Simon Taylor, is that what it provides is not properly described as “business entertainment” because it is supplied pursuant to a contractual obligation: those sales people who satisfy the conditions of the scheme are entitled as of right to attend the event with a guest. There is no element of bounty since those who become entitled to attend do so as a result of providing something of value to the appellant, namely a significant number of sales of vehicles, greater than they might have achieved without the incentive of the scheme. They have, therefore, provided consideration in return for the supply they receive. That fact is inconsistent with the ordinary meaning of entertainment, namely something supplied without the recipient providing anything in return. For the Commissioners, Rupert Anderson QC argued that the supplies were not made in return for consideration but were properly to be regarded as “free”; and that those supplies for which the Commissioners contended input tax deduction was not available came clearly within paragraph (3).
10	I was referred to a number of authorities, each side seeking to draw something out of the decision in support of its case. In Customs and Excise Commissioners v Shaklee International [1981] STC 776, the earliest of the cases cited, the Court of Appeal considered the provisions of article 2(2) of the VAT (Special Provisions) Order 1977 which have been replaced, with immaterial amendment, by article 5(3) of the 1992 Order and which are designed to implement article 17(6) of the Sixth VAT Directive (77/388/EEC). In Shaklee, the taxpayer required its distributors, who were not employed by it, to attend training courses at which food and, when the course lasted more than one day, accommodation were provided. The Court determined that the food and accommodation amounted to “entertainment” within the ordinary meaning of the word, and were supplied in the course of the taxpayer’s business; thus “business entertainment” had been provided. The appellant sought to distinguish that case on the ground that there was no suggestion there that anything the distributors did represented the consideration for the supplies of food and accommodation. That may be true; certainly there is no discussion in the only judgment of the significance of the presence or absence of consideration. It seems to have been regarded as sufficient that those attending provided no monetary consideration for what they received and the Court did not consider whether anything the distributors did amounted to non-monetary consideration. Since the point was not actively considered, it seems to me that Mr Anderson is right in saying that Shaklee shows no more than that the primary task is to ask oneself whether what was supplied amounted to entertainment in the ordinary sense of that term, and whether it was supplied in the course of business. It is, I think, an inevitable conclusion that what the appellant supplies does amount to “business entertainment” if one leaves consideration out of account.
11	Subsequent cases do, however, demonstrate that the presence or absence of consideration, and in the wider sense, is a critical factor. In Celtic Football and Athletic Co Ltd v Customs and Excise Commissioners [1983] STC 470 the Inner House held that “entertainment”, if it was to come within the terms of the Order, must be provided free to the recipient. At p 474, Lord Cameron said: “From the Shorter Oxford English Dictionary under ‘hospitality’ I take the definition ‘the act or practice of hospitality, of being hospitable, the reception and entertainment of guests or strangers with liberality and goodwill’. This is not suggestive of the fulfilment of an obligation antecedently entered into even with a reciprocal obligation laid on another party to the arrangement out of which the obligation arose.” And Lord Avonside said, also at p 474, “Using the words in their ordinary and accepted meaning, if I ‘entertain’ a person, or give a person ‘hospitality’ I do so on my own volition. I do not wish or ask payment from the person whom I entertain, nor do I expect that that person must entertain me in turn or be under any form of compulsion to do so.” 
12	I proceed, therefore, to consider whether participation, or successful participation, in the scheme can amount to consideration. I propose to examine first the parties’ arguments so far as they relate to the sales staff of the independent dealers, before moving on to the different considerations which come into play in relation to their, and the in-house dealers’ sales staff’s, guests.
13	In Celtic Football and Athletic Co the taxpayer was required by the Union of European Football Associations (UEFA) rules, which governed the playing of matches between teams from different member countries, to provide board and lodging for teams visiting it to play matches, as well as travel expenses, board and lodging for the match officials, but upon the basis that when it was the away team, those expenses would be borne by its hosts. The Court concluded that what the taxpayer supplied was not entertainment within the meaning of the Order, since it was not provided free to the recipient, but was supplied in return for the reciprocal supply of board and lodging when the taxpayer played away.
14	In Customs and Excise Commissioners v Kilroy Television Co Ltd [1997] STC 901 the taxpayer produced television discussion shows at which the participants were selected members of the public who made up the studio audience. Those selected were expected to attend a briefing session before the programme, at which a meal was provided, and to participate in the programme. Both the tribunal and, on appeal, Carnwath J held that the meal which was provided would not constitute business entertainment if it was provided in return for cash, goods or services. The tribunal went on to conclude that the members of the audience did provide a service—of participating in the programme—sufficient to amount to consideration for the meal. Although he described the decision as borderline, the judge did not disturb it.
15	The question was considered again by the tribunal in DPA (Market Research) Ltd v Commissioners of Customs and Excise (1997, Decision 14751). There, the taxpayer arranged that members of the public would consume alcoholic drinks and complete questionnaires about them for the purposes of the taxpayer’s market research business. Food was provided to the participants principally in order to “soak up” the quite large quantities of alcohol they were expected to consume. The Commissioners accepted that the provision of the drinks did not amount to entertainment, since the participants were required to answer questions about those drinks, and therefore provided the necessary consideration. They did not concede that consideration was given by the participants for the supply of the food, but the tribunal disagreed, concluding that the food was supplied as a necessary part of the responsible conduct of the survey, and that the consideration provided by the participants correspondingly extended to the supply of the food.
16	The appellant’s case is that the successful participants in the scheme provided a real benefit to the appellant: an increase in sales which would not, or at least might not, otherwise have occurred. That, they maintain, amounts to consideration. The right to attend the Gold Recognition Event was not granted on a discretionary basis at the end of each year, but was earned by those who worked hard to achieve the requisite number of sales. There was, in substance, a contractual right to the reward if the condition of achieving the prescribed number of sales (in the earlier years) or of coming within the highest group (in the later years) was satisfied. Mr Anderson argued that there was an insufficiently close link between participation in the scheme and the award to the successful sales staff. He relied upon what was said by the Court of Justice in Empire Stores Ltd v Customs and Excise Commissioners (Case C-33/93) [1994] STC 623 at 636 (paragraph 12):
“…the consideration for a supply of goods may consist in a provision of services, and so constitute the taxable amount within the meaning of art 11A(1)(a) of the Sixth Directive in respect of such supply, if there is a direct link between the supply of goods and the provision of services and if the value of those services can be expressed in monetary terms.”
17	There was, Mr Anderson said, no direct link between the achievement of sales and attendance at the event such as there was in Kilroy Television, where the provision of the food and the participation in the programme were the consideration, each for the other, and the programme could not have been produced without the participants. Here, the cars might well have been sold even if the sales person effecting the sales did not participate in the scheme, or the scheme did not exist; thus the requisite direct link between sales and reward was lacking.
18	While I accept that the link between the reward and that which is done to earn it must be more than tenuous, it seems to me that Mr Anderson’s argument, that there must be effective equivalence, takes what was said by the Court of Justice in Empire Stores too far. It is true that a participant might, by reason of the inducement of the scheme or for reasons of his own, work hard but achieve little, or conversely might, through good fortune, achieve sales with little effort, and that there is not the same immediate link between effort and reward which the tribunal found in Kilroy Television. However, the purpose of the appellant’s scheme was not to encourage effort for its own sake, but to maximise sales, and it was the maximising of sales which represented the value of the scheme to the appellant and, more importantly still, triggered the participant’s entitlement to attend the event. There is, in my view, a clear direct link between the level of sales and the reward.
19	I think, too, that there is merit in the appellant’s argument that there was a contractual, or at the least moral, entitlement to the reward if the sales person achieved the appropriate level of sales. Whether or not there was any true contractual entitlement, any successful participant would certainly have a legitimate complaint if the appellant failed to provide the promised event. That fact, too, seems to me quite inconsistent with the concept of “entertainment” as it was described in Celtic Football Club, namely that it is not something offered by reason of an obligation. I conclude, therefore, that what is provided to the sales staff employed by independent dealers is not “business entertainment” within the meaning of article 5 of the 1992 Order.
20	In this case it is clear that the partners of the successful sales people provided no consideration to the appellant. From their perspective the invitation to attend the Gold Recognition Event was entirely gratuitous, and it could not be said that they had any contractual or moral claim to attend. Mr Anderson, unsurprisingly, relied on the tribunal’s decision in KPMG v Customs and Excise Commissioners (1997, Decision 14962), where it was decided that, while the provision of entertainment to members of staff fell within what is now article 5(3)(a) of the 1992 Order, the provision of the same entertainment—again, a dinner-dance—to their partners could not be regarded as incidental to the provision to members of staff, and input tax credit was blocked. 
21	However, in Peugeot Motor Company plc v Customs and Excise Commissioners (2000, Decision 16731) the tribunal was required to consider a rather different incentive scheme promoted by a company within this appellant’s group, which rewarded employees who had good attendance records by allowing them to participate in a draw by which pairs of tickets to sporting events were allocated. The decision itself is not, I think, of great relevance to this appeal, but it is I think worth quoting the chairman’s remark at paragraph 17 of the decision:
“…in my opinion, there is nothing in the point that each employee successful in a draw was awarded two tickets. It was quite clear from the evidence that Peugeot carefully thought about how the incentive scheme should be structured and applied, and it concluded, quite justifiably, that, if it were to award a winner only one ticket, the incentive scheme would prove unsuccessful.”
22	In my view that comment reflects the approach I should adopt here. It does not seem to me that there is a true analogy with KPMG since, there, there was no suggestion that the members of staff had done anything beyond remain employees in order to receive an invitation to the event, nor that they would have any form of redress if the employer had decided not to hold the event. If one accepts, as I have done, that the sales staff here provided consideration for the supply of the right to attend the event, it must follow that the consideration extends to the supply of a ticket for two. That is what the printed material to which I have referred offers as the incentive—it is not a case in which the sales person earns the entitlement to attend, and the second ticket is then offered as an afterthought or gesture. I accept Mrs Stewart’s evidence that the scheme would have been unsuccessful if the offer had consisted only of single tickets. It would not be realistic to expect the sales people to attend an overnight event such as this without their partners.
23	It does not seem to me to make any difference in this respect whether the partners concerned came with sales staff of the independent dealers, or with the staff of the in-house dealer, even though the treatment of the supply to the sales staff themselves may differ. In each case, the successful sales person had provided the consideration for a double ticket. The gratuitous element which was the important feature of the invitations to the employees’ guests in KPMG is lacking.
24	Accordingly I discharge the preferred assessment, and move on to consider the alternative assessment.
25	The Commissioners maintain that if the supplies (to the independent dealers’ staff and their partners) are not to be regarded as “business entertainment” but were, as the appellant contends, made pursuant to a contractual obligation owed by them to the successful participants, they were taxable supplies made for a non-monetary consideration. If that is correct, the appellant is required to account for output tax on the value of the supplies, though it will be able to offset the input tax it has incurred. Mr Anderson, reflecting the Commissioners’ letters accompanying the alternative assessment, described the scheme as a barter arrangement, though I am not sure that description adds much.
26	For the appellant, another of its tax managers, Murray Taylor, argued that the incentive of the scheme was available to all sales staff employed by Peugeot dealers, and not merely those who were successful, and the cost of the event should be regarded in the same light as any other cost component of the appellant’s sales, such as advertising, which led to no taxable supply other than the supply of more vehicles to customers. The incentive scheme is not offered for altruistic reasons, but as a means of increasing sales. He pointed out that the Commissioners’ letters were incorrect in referring to transactions with dealers, rather than their staff, though I am sure this is no more than an infelicity of wording, and that the letters are intended to refer to the individuals rather than the dealers. He also pointed out that the partners of the successful participants provided no consideration and the Commissioners’ arguments could not apply to the provision to them of the entertainment.
27	I have come to the conclusion that on this issue the Commissioners’ arguments must succeed. Indeed, I think Mr Anderson is right in his contention that if the preferred assessment fails, the alternative assessment must succeed, and in large measure for the reasons advanced by the appellant in attacking the preferred assessment. If, as I have already decided, the successful participants provided consideration for the supply to them of the right to a double ticket to the event and that supply was made—as is obviously the case here—in the course of the appellant’s business, it must represent a taxable supply on which output tax is due. It is no answer to say that the incentive was offered to all participants, some of whom were unsuccessful. As in an auction, where the vendor offers to enter into a contract with the person making the highest bid, so the appellant offered to supply a double ticket to any participant in the scheme who achieved the requisite number of sales. In either case there is a contract with the successful bidder or participant. What a successful participant did, on the appellant’s own case, was of value to it and that value represents the consideration for the supply which was made in return for it. Likewise it is immaterial that the partners attending the event provided no consideration; the successful participants, as I have already determined, were each entitled to a double ticket. The supply relevant to the alternative assessment is of double tickets, rather than of the underlying entertainment.
28	Accordingly I uphold the alternative assessment, and to that extent the appeal is dismissed. I was not asked to make any direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release date: 17/05/2004
MAN/02/0566