VALUE SHIFTING – furniture sold at a discount of 19 per cent of the retail selling price on condition that the customer takes insurance against manufacturing defects for a premium of 19 per cent of which about 17 per cent is returned to the Appellant as insurance commission – transactions not effective to create separate supplies with earlier documents – with later documents the transactions create two supplies but the apportionment of the consideration is not real – abuse of rights not applicable to the transactions generally but only to the apportionment of the consideration – issues of whether the assessment was made in time and of the correct apportionment to be determined at a further hearing

LONDON TRIBUNAL CENTRE

	COURTS PLC	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					JOHN BROWN CBE FCA CTA
					MICHAEL SILBERT FRICS

Sitting in public (with part of the evidence in private) in London on 14-18, 21-25, 28-30 June, and 1 July 2004

Roderick Cordara QC and Paul Key, counsel, instructed by PricewaterhouseCoopers, for the Appellant

Christopher Vajda QC and Ian Hutton, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

INTERIM DECISION

1.	This is an appeal by Courts plc against decisions (a) in a letter of 20 March 2002 to make an assessment for undeclared VAT in a figure subsequently reduced to £1,616,727 for period 03/99, (b) in a letter of 25 June 2002 to make a preferred assessment for VAT of £21,177,042 and an alternative assessment for £14,118,026 for periods 06/99 to 03/02, and (c) in a letter dated 25 September 2002 to make a preferred assessment for £1,383,870 and an alternative assessment for £922,580 for period 06/02.  The appeal concerns sales by Courts (UK) Limited and for convenience we shall include this company in references to “the Appellant.”  The Appellant was represented by Mr Roderick Cordara QC and Mr Paul Key, and the Commissioners by Mr Christopher Vajda QC and Dr Ian Hutton.
2.	This case concerns what is known as value shifting.  The Appellant is a furniture retailer.  In broad outline the transactions in issue are that, instead of selling furniture at the normal price of say £100, the customer has the option of paying £19 for a 5 year insurance cover against structural defects and at the same time the Appellant discounts the price of the furniture by £19.  This discount is available only if the insurance is taken up.  Commercially this makes sense to the Appellant because a large proportion, nearly £17 of the £19, is returned to the Appellant as insurance commission which is exempt from VAT.  The Appellant contends that VAT is payable only on the balance of £81.
3.	A difficulty with which we have been faced in deciding this case is that the Commissioners attack not only the legal effect of the scheme but also the manner in which it was carried out in individual transactions which number in the millions (about 850,000 transactions p.a.) during the five year period assessed.  How each transaction is carried out at the point of sale is potentially therefore relevant.  Before Mr Cordara finished his opening he asked us to rule in effect that the Tribunal would not make any findings of fact relating to the generality of transactions based on the evidence then proposed to be introduced by the Commissioners of a number of their officers who had privately, and not as directed by the Commissioners, purchased goods from the Appellant.  Mr Vajda opposed this application contending that it was for the Appellant to displace the assessment by evidence.  We announced that we would make findings of fact on all the evidence presented to us but that we would be unable, as Mr Vajda contended we should do, to make a finding that in general something did or did not happen at the time of sale because of the large number of transactions carried out in different places by different members of the staff.  
4.	We considered that such sparse evidence would not enable us to draw conclusions about the generality of transactions.  The possibly unrepresentative nature of the evidence precluded such findings based even on the balance of probabilities.  It would also prolong the hearing if many witnesses who had purchased goods from the Appellant were called when at the end we would be no nearer reaching a decision on the generality of sales.  Instead, the parties provided a number of sample situations, Mr Cordara providing 31 cases some with a number of alternatives, and Mr Vajda providing 7 general cases and 12 further cases for customer order Form A (see paragraph 25 below) and one each for Forms B and C, each divided into three possible types of information given by the salesperson, on which they might require a separate decision.  At the stage we made that ruling we had not heard the Commissioners’ case and had no idea whether (and, if so, to what extent) different factual situations might give rise to different results.  We said we would make a decision in principle on each of the factual situations so far as relevant to our decision.  We would then leave the parties to endeavour to agree figures based on our findings.  Such an approach is commonly used by the Special Commissioners in direct tax cases where decisions in principle are commonplace and in the Chairman’s experience little difficulty is usually found in agreeing figures.  We have the advantage in this case that the Appellant is a listed company and will need to quantify the effect of our decision in its accounts and possibly for the Stock Exchange.  Having announced that we would adopt this approach, Mr Cordara waived his objection to the Commissioners’ shopper witnesses so that their witness statements were admitted as evidence, but only as evidence of the particular transactions.  
5.	We would make a distinction between this case and a more usual type of VAT cases where an assessment is made on the basis of some estimate, for example a method based on a sample for determining how much of a trader’s turnover has not been declared.  Normally the Tribunal does decide on the quantum of such an assessment based on the evidence of a sample that was used to make the assessment.  Here, on the other hand, the Commissioners have, in their preferred assessment, assessed the whole of the Appellant’s turnover on the basis that VAT is payable on the whole rather than on 81 per cent.  In our view, the Appellant’s task is to displace that assessment but not to call evidence in order to quantify the true figure on every basis that the Tribunal might possibly decide that the assessment was good in part (should that be our decision), failing which the whole assessment would stand.  We also announced that with regard to the Commissioners’ alternative assessments which were based on a method of apportionment, we would decide whether we accepted the method.  If we did not, we left open the possibility that we would wish to hear further argument about another method of apportionment.
6.	This is therefore an interim decision that deals with the assessments in principle for these reasons.  In addition the Appellant’s contention that the assessments are to some extent out of time, should we decide that the assessments are otherwise good, has been reserved for a subsequent hearing the date for which has been fixed.  The Appellant also reserves for raising at a higher court some questions of misdirection that it is common ground cannot be considered by us in the light of the judgment in Telewest Communications v Customs and Excise Commissioners [2004] STC 517.
7.	We heard evidence from the following: Mr Nigel Blake (director of Courts plc), Mr Mark Muller (Financial Director of Courts (UK) Limited), Mr Malcolm Samuels (at the time Group Finance Director of Courts plc), Mr Kerry Michael (managing director of Regency Warranties Limited), Mr Glyn Morgan (Manager of the Appellant’s Newport store), Miss Alison Gunn (Carpet Sales Manager of the Appellant’s Newport store), and Mr Nicholas Dean-Webb (Commissioners’ tax avoidance team).  There were also witness statements from a number of shoppers who are officers of the Commissioners who had purchased goods from the Appellant in their personal capacity, and in one case at the request of the Commissioners, whose evidence we shall summarise when describing the transactions as they were carried out in practice.
8.	The documents before us are contained in 12 lever arch files, plus a further five files of witness statements and their attachments and one file of assessments etc.  There were a further 4 files of authorities.  We should like to suggest that in future for cases involving a large number of documents that the parties confer with the Tribunal in advance over the possibility of the documents being provided on a CD Rom and for everyone in court to access them on a laptop.
Facts
Background
9.	In 1986 the Office of Fair Trade (OFT) published a survey of customers’ dissatisfaction with goods and services in which the furniture industry was the third worst.  This was followed by a detailed report on the furniture industry in February 1990 which highlighted that the industry had a record of customer dissatisfaction with the quality of products and the way complaints were handled.  Following this an industry action group was set up which led to the formation in March 1992 of Qualitas, an industry body formed for the purpose of establishing a code of practice.  The Appellant was represented on this body and Mr Blake was a committee member.  One of the items in the code was that guarantees should be given in an easily understood form.  The OFT report had pointed out that guarantees were worthless if the retailer became insolvent.  Around this time a number of well-known retailers (Queensway, ELS and Perrings) who were competitors of the Appellant had gone into receivership leaving customers with worthless guarantees.  The Appellant wanted to introduce insurance-backed guarantees in order to regain customer confidence.  Another consideration was that in the mid to late 1990s customers were becoming more demanding. 
10.	At some time before 1995 the Appellant had a product for which the customer paid extra called Prime backed by insurance written through European Warranty Services covering stains and structural defects.  For a short time in 1995, and in two stores only, the Appellant introduced a free 5 year structural warranty against certain risks such as warping and separation of joints in order to meet competition from another furniture retailer, UNO, which offered a free 5 year guarantee that was not backed by insurance.
11.	Mr Kerry Michael was previously a partner in a firm of brokers called Wells Brokers.  He and a colleague founded Regency Warranties Limited (Regency) in 1996.  He introduced an insurance product sold by the Appellant called Supa Shield which was offered to the Appellant’s customers between July 1996 and May 1997 at an additional price.  This consisted of the application of the fabric protector Scotchgard, which protected against staining, and an insurance-backed 5-year structural warranty.  There was a lower take-up than expected of about 30 percent of purchases of fabric upholstery but lower percentages for leather upholstery which could not be treated with Scotchgard.  Supa Shield was superseded in May 1997 by an improved “warranty” (as the Appellant describes it), called Supa Shield Excel (in future unless the distinction is material we shall refer to both as Supa Shield).  This provides in addition insurance cover against accidental damage (rips, tears, burns and stains) and a right to a return of the premium if no claims were made in the 5 year life of the policy.  At the same time the insurance against structural defects was removed from Supa Shield and put into the product that is the subject of this appeal.  The Supa Shield insurance products are sold at an additional price which varies according to such factors as the number of seats, the size of beds and the price of carpets (or at some period the size of carpets).  The Appellant receives a commission from the underwriters on the sale of Supa Shield policies of the order of 70 per cent of the cost to the customer.  Salespersons are given a 5 per cent commission on the sale of Supa Shield and league tables of sales in different stores are compiled.
12.	In the past claims were handled by the Appellants in each store separately without keeping any central statistics.  A store would use either sub-contractors or a Field Service Manager who dealt with claims against the manufacturer’s guarantee in the first year.  In a number of stores Regency now handle these through a separate subsidiary, Regency At Home Limited.  Claims for manufacturing defects are significant: 11 per cent in the first year and 7 per cent in years 2 to 5.
13.	In order to improve the take-up rate for insurance products, Mr Michael, on behalf of Regency, approached the Appellant with a proposal for “mandatory” insurance of the customer against structural defects starting one year after delivery (when the manufacturer’s warranty expired) and extending until 5 years after delivery.  Mandatory in this context is an insurance term meaning that it is sold with all (or nearly all) goods so that the problem of adverse selection (that only people likely to claim would take out the insurance) is removed.  He indicated that there could be consequential tax advantages as a means of interesting the Appellant in his selling the proposal.  Mr Michael, at the Appellant’s request, put forward three possible options to Coopers & Lybrand on 17 June 1996, the first of which was similar to the transactions that were ultimately adopted but with 15 per cent being attributed to insurance; the second and third applied where was both the application of a protector and an insurance element, the second including an apportionment between the two elements, and the third treating the whole cost of both as being for insurance.  They replied approving the first proposal in principle subject to various reservations, and advising against the other two.  On the same day as they approached Coopers & Lybrand, Regency wrote to the Appellant contracting out of any liability for giving tax advice on the proposals.  The next proposal was for a discount that only partly reduced the amount attributable to the goods by the consideration apportioned to the insurance (goods £1,000, insurance £200, selling price together £1,050) about which Coopers & Lybrand had reservations.  This developed into the final proposal for a discount equal to the consideration apportioned to the insurance on which Coopers & Lybrand advised favourably in principle in a five-page letter of 20 February 1997.  That letter advised that the discount should be clearly communicated and advertised to customers, and that the discounted price of the goods and the price for the Product Guarantee should be itemised separately on an invoice that is given to the customer.  The 19 per cent discount is not stated anywhere in any advertising or brochures available in stores.  Mr Blake considered that it was too confusing when the price to the customer was unchanged.  Regency made a presentation to the Board of the Appellant on 21 April 1997.  The Appellant after negotiation of the terms agreed to adopt the proposal.
14.	In the presentation Regency suggested between 15 and 20 per cent of the price of goods should be apportioned to the Product Guarantee.  A numerical example in the presentation was based on 15 per cent which they stated should be agreed by Coopers & Lybrand.  The Appellant produced some sample order forms showing 15 per cent.  Coopers & Lybrand advised in a file note of a telephone conversation which must have been sent to the Appellant as it was disclosed by them:
“I asked him [Mr Samuels] how much they wanted commercially and he said between 15% and 20%.  I said that, as a matter of principle, the amount of the discount was irrelevant although the more the VAT charge was reduced the more likely Customs & Excise would be to attack the arrangements.”  
Mr Blake wrote on an internal memorandum of 23 April 1997 “go for 20% 19%.”  In an exchange of emails on 24 April 1997 Mr Blake said “…I feel that we must ‘milk’ this opportunity for as much as we can.  My recommendation is to go for 20%.”  Mr Samuels responded “as discussed at lunch today the rate will be 19.50%” and then wrote on the email in manuscript “but rounded to 19% as this is marginally easier to calculate!”  The 19 per cent attribution to insurance and corresponding discount rate on the goods was adopted.  It was understood by the Appellant and Regency that anything in excess of the cost of the insurance paid to Regency and the underwriters together with the insurance premium tax, would be retained by the Appellant as commission for introducing the insurance business.  Mr Michael said that the 19 per cent could be justified by comparison with Supa Shield which was of the same order of magnitude; he cited a Supa Shield premium of 18.85 per cent of the retail selling price of an average three-piece suite.  His evidence was also that Supa Shield was prone to adverse selection and if it were sold with every item of goods which it covered this would not be the case and the premium paid to the underwriter would be about one-third of the current amount.  
The Product Guarantee and the insurance arrangements
15.	The Appellant decided to go ahead with the proposal (“the Product Guarantee”—the Appellant always uses the expression “guarantee” for this, in distinction to “warranty” for Supa Shield) for sales from 27 May 1997.  The essential features of the Product Guarantee are that the customer pays 19 per cent of the retail selling price of the goods for the purchase of insurance cover against manufacturing defects in years 2 to 5 following delivery, liability in the first year being covered by the manufacturer’s guarantee.  Simultaneously, if the customer takes the insurance, the Appellant gives a discount on the cost of the goods of 19 per cent, so that the customer still pays the retail selling price of the goods in total.  The Appellant was voted Retailer of the Year in January 1998 by the furniture industry on account of the introduction of this arrangement, and Regency were awarded best insurance scheme of the year in 1997, 1998 and 1999.
16.	Regency placed the Product Guarantee insurance with various insurers at different times as follows:
(1)	From the beginning until the end of February 2001 (the customer order form A (see the heading Customer order forms below) period and part of the Form B period) by Lloyd’s underwriters (Lloyd’s).  The underwriters entered into a binding authority agreement giving named individuals of Regency an irrevocable authority (unless terminated in accordance with the agreement) to write insurance, issue policies and process claims on behalf of the underwriters.  Lloyd’s gave a binding authority from 23 May 1997 to 30 June 1998.  The policy in its final form was annexed to the agreement.  This authority was successively renewed until 30 June 1999, 6 April 2000 and 1 July 2000 and we infer until February 2001.  That authority expressly prevented delegation without written authority of the underwriters which was endorsed on the agreement.  No such authority was ever given by the underwriters.  Lloyd’s did not want to continue underwriting the arrangements because of the claims experience.
(2)	From March 2001 to February 2002 (during the Form B period) by New Hampshire Insurance Company Limited (New Hampshire).  There is a document concerning the terms of insurance by New Hampshire applying from 1 March 2001 to 28 February 2002 which does not mention Regency.  We understand that as policies with this insurance company lasted only a short time no written agreement was ever entered into but we infer that Regency acted in the same way as they did with other underwriters.  From March 2001 fabric covering was excluded; there had been disputes about whether claims were in respect of wear and tear, which was not covered, and often valid claims resulted in the goods being replaced as the material could no longer be matched.  The payment to the underwriters was also increased.
(3)	From September 2001 to the present (the end of the Form B period and the form C period) by AXA Insurance UK plc (AXA).  By an agreement dated 10 May 2003 AXA granted Regency a binding underwriting authority from 1 September 2001 as AXA’s agent.  Regency is also appointed AXA’s agent for claims handling.  The agreement provides that Regency is the agent of the policyholder and not AXA.  It also provides that AXA agrees to the appointment by Regency of sub-agents without AXA’s consent.  We infer that the Appellant was appointed sub-agent although the underwriting authority could not have been delegated to the Appellant.
17.	While there are differences in policy wording, the following features are common to all of them: (a) the customer is the assured; (b) the policy certificate cross-refers to the purchase order by number and does not state the premium; (c) the period runs from the end of the year after delivery until 5 years after delivery; (d) structural defects are covered (and specifically manufacturing defects in the Lloyd’s policy); (e) electrical goods are not covered; (f) if the goods cannot be repaired the policy provides for replacement “with an identical or similar product up to the purchase price of the guaranteed product” (Lloyd’s) or “up to the original purchase price (less depreciation)” (New Hampshire and AXA): we discuss later whether such purchase price is before or after the 19 per cent discount; (g) Regency issues the policies on behalf of the insurers and handles claims.  A policy is issued to each customer although for purchases under £200 (before the 19 per cent discount) the policy document was not sent to the customer, who could ask for it, as stated in customer order Form C (see below).  This changed recently and the policy is now sent to all purchasers. 
18.	Among the differences between the policies are that (a) the Lloyd’s policies excluded use for other than private and domestic purposes, and loss or damage outside the United Kingdom; (b) the New Hampshire policy excluded use in business premises, and use outside the United Kingdom, Isle of Man and the Channel Islands; (c) the AXA policy excluded use in business premises or in residential premises which are let, and use outside the United Kingdom, Isle of Man and the Channel Islands.  Both Mr Morgan and Miss Gunn, the two sales staff from whom we heard evidence, were unaware that the terms of the Product Guarantee excluded business use, and Mr Muller accepted that no instructions about this had been given to staff.  The New Hampshire and AXA policies contain a right of cancellation with a full refund of the premium within 14 days of “the start date shown overleaf”.  No date is specified as the start date; there is the date the certificate was issued, and a delivery/inception date, and so we are unclear which date is intended.  We saw a case where the delivery date was 18 December 2003 and the certificate was 15 January 2004 which means that if the start date is the delivery date the customer was out of time to cancel the policy by the time he received it and first knew about the right to cancel.  For sales in the Channel Islands, where there is no VAT, it appears that the Product guarantee was initially provided but at the cost of the Appellant because they used the same documents for sales there.  Later the Product Guarantee was not provided on sales in the Channel Islands.  We were told by Mr Muller that it was too expensive to handle claims there but it may be that the real reason was that there was no VAT saving.
19.	The amount paid to Regency and the underwriters for the insurance has varied and the figure is regarded as commercially sensitive information by the Appellant and the underwriters.  Mr Muller asked us merely to state that it was less than 2 per cent of the retail selling price of the goods.  We have set out the actual rate in an addendum to this decision sent only to the parties which will be available to the court on appeal.  Where we have included numerical examples in this decision, we have used the purely illustrative rate of 1.5 per cent of the retail selling price of the goods.  
20.	Initially during June and July 1997 documents called certificate schedules were issued showing the assured as “Courts Furnishers” (a non-existent company; the UK sales company was then Courts Furnishers (UK) Limited).  The original policy wording which Regency sent to the underwriters on 29 May 1997 included the following: 
“Courts Furnishers agrees to indemnify the customer for the cost of repair or replacement to the specified products during the period shown below for damage to the product caused by structural defects as specified below under the heading ‘Risks Covered’ subject otherwise to the terms, conditions and exclusions shown overleaf.  Courts Furnishers liabilities hereunder are protected by a policy of insurance issued by duly authorised UK insurers and arranged by Regency Warranties Ltd.”  
In a revised version of the policy sent by Regency to the underwriters on 25 June 1997 all references in the policy terms to “insurance” were changed to “guarantee” and all references to “underwriters” changed to “Courts Furnishers.”  In an email to Regency of 1 August 1997 Mr Coote, the Appellant’s marketing manager, pointed to the need to ensure that the “Courts correct trading name” was used depending on the territory, thus indicating that he thought that the Appellant was the insured.   Mr Blake must have pointed out that insuring the Appellant rather than the customer was an error, on the basis, according to Mr Michael, that the Appellant might have a liability if Regency disappeared.  We saw an email reply from Mr Michael on 7 August 1997 apologising for the error which had arisen because they had put in place a block policy in advance of the budget in case the rate of insurance premium tax (IPT) changed, which it did not.  Amended certificates were sent to the Appellant for approval the next day.  The policy documents were revised and approved by the underwriters, and the customers were sent new certificates in the form described above.  
21.	No written contract between the Appellant and Regency exists although drafts have been discussed.  So far as necessary we have treated what actually happened as representing the terms of the oral contract between the Appellant and Regency.  There is a letter of 20 May 1997 between Regency and Mr Blake stating that “Courts will act as an intermediary, introducing customers to us.”  The letter also states that “All policies issued will show the retail selling price as the cost price of the policy including commissions, fees and IPT.”  This was not done.  The policy cross-refers to the customer order number from which the attribution to the premium can be found.
22.	The underwriters share profits in the following proportions: the Appellant 50 per cent, Regency 20 per cent and the underwriters 30 per cent.  Profits are unlikely before 2005, although Mr Blake mentioned that there had been one distribution in the past.  The initial trend of claims was much higher than had been forecast leading to the reduction in the cover and increase in the payment to the underwriters.
23.	Each Monday the Appellant transmits electronically a list of the deliveries made the previous week including details of the customer, the price and the goods (for an exception, see paragraph 27).  Regency makes computer checks which will, for example, detect whether the price for the Supa Shield warranty matches the goods.  A further manual check is made for the type of errors that the computer cannot pick up (such as the customer’s name being given as Mr ABCD).  Following that Regency writes the policy using the irrevocable authority given by the underwriters and issues the policies to the customers (until recently only if the purchase price of the goods (before discount) is over £200).  Regency invoices the Appellant monthly for both Supa Shield, setting out each transaction separately, and the Product Guarantee, as a total monthly figure.  The commission payable to the Appellant is deducted and the Appellant pays the net figure to Regency.
24.	When goods are replaced Regency is obliged to purchase the replacement goods from the Appellant, initially at cost plus a mark-up, and subsequently at retail selling price less 40 per cent.
Customer order forms
25.	Form A.  When making a purchase the customer is given a customer order form.  There are three phases of customer order forms relating to the Product Guarantee, which were called at the hearing Forms A, B and C.  For Form A, which was used from the beginning of the arrangements until about February 2001 (different branches may have computerised at different times), the order form is completed showing the sale of the goods at the retail selling price.  The form also has a rubber stamp on it which the salesperson should normally have pre-stamped on the blank form.  The stamp is usually in black but in some cases it is in red.  The following is a representation of the stamp approximately full size 5 cm high by 2.8 cm wide:

Courts 5 Year Guarantee @19% of retail selling price
£_____________             
£_____________             
Discount of 19% of retail selling price of goods applicable only where a 5 Year guarantee is also purchased

At the time when order Form A was used it was completed manually by the sales assistant.  The same figure is written in both spaces in the stamp at the time the form is completed with 19 per cent of the purchase price of the goods (after any other discount), excluding goods for which no guarantee is offered such as second-hand goods, accessories, Supa Shield premium, and delivery charges.  The customer signs the order form.  The information on the form, excluding the figures in the box, is then put into a computer terminal at the branch, which recalculates the 19 per cent cost of the Product Guarantee and the discount.  It follows that if the salesperson makes a mistake in calculating the figure in the box this is corrected by the computer, and consequently the figure is different from the figure the customer agreed.  Information from the branch computer is sent overnight to the head office computer.  If the Product Guarantee is declined, the box should be crossed out.  Mr Michael stated that the customer’s signature was obtained if he declined the Product Guarantee but this is not shown in any documents we have seen and we do not find that this is the case.  Initially where the Product Guarantee was declined an email was sent to the IT department but from 22 November 1999 this had to be directed to a particular person.  Since the Product Guarantee and discount figures are recalculated at head office it is possible for a Product Guarantee to be issued in a case where the box was crossed out, although we did not see any evidence of this.  We were not given any figures about how many customers declined the guarantee (a tick in the decline box covers many other circumstances, such as the salesperson not offering the Product guarantee on small items and on second-hand or clearance goods).  Mr Blake could not imagine that a customer would not take up the Product Guarantee; Mr Michael said (which we accept) that the take-up was almost 100 per cent; and neither Mr Morgan nor Miss Gunn could remember any case where the customer had declined it (which we also accept).  We infer that the number declined was negligible since the Product guarantee was a benefit available at no extra cost to the customer.
26.	For floor-covering sales an estimator has to visit the customer to take the exact measurements.  The procedure here was the same as for the salesperson in the store except that the transaction is suspended after discussing Supa Shield and the Product Guarantee.  The estimator visits the customer and will try to sell Supa Shield again.  The customer order form is completed in the store when the estimator returns from visiting the customer, and it is posted to the customer.  In such circumstances Form A is not signed by the customer.  Alternatively the customer may visit the store again before completing the purchase, for example to change the order, in which case Form A will be completed in the usual way.  If sales are made over the telephone the customer order will be sent to the customer by post.
27.	Sales of china occurred only in one store between 1998 and 2001.  The stamp did not fit onto the receipt used in relation to such sales and so in no cases was an equivalent to the Form A stamp issued to the customer.  However, in all cases money was paid to Regency without any name or address for the customer.  The same situation arises where the customer pays and takes any item away costing less than £150 in which case his name and address is not recorded.  No insurance certificate was issued or could be issued because Regency would not know the customer’s name or address.  Regency hold particulars of the number and content of the customer order form and so a customer demonstrating that he was the customer who to whom the particular customer order form applied could claim on the policy by being given details of Regency from the Appellant.  
28.	
Courts 5 Year Guarantee @ 19% of Retail Selling Price. £*** Discount of 19% off Retail Selling Price of Goods applicable only where a 5 Year Guarantee is purchased £***

Form B.  This is the first computerised order form, which was used from about June 2000 to about November 2002.  As before, the sale of the goods is shown at the retail selling price.  Unless the salesperson ticks the box on the computer entry form declining the Product Guarantee (or the goods have a product code for damaged goods) the following wording is printed in a box size 2 cm high by 3.2 cm wide (the version below is approximately full size) which is next to another box of similar size containing details of the Appellant’s address, registered office, company registration number and VAT number: 
The figures are filled in by the computer before the order form is printed and so do not stand out from the rest of the form.  The figure opposite the description of the goods and the total is the full retail selling price of the goods with any other discount shown as “Adjustment.”  The customer does not sign the order form.  Where Supa Shield cover is declined immediately after the description of the goods there is printed in bold:
“***** SUPASHIELD PROTECTION DECLINED *****”
Earlier versions of this merely say “Warranty declined”
29.	Form C.  This is a later version dating from about November 2002.  Here the cost of the Product Guarantee is set out as a separate item marked “*5 year Guarantee” with the price against it.  The next subtotal is the total of the retail selling price of the goods plus the Product Guarantee, any other discount is then deducted as “Discount 1” and then the same figure as the price of the Product Guarantee is deducted as “*Discount 2” being 19 per cent of the price of the goods (but not Supa Shield or accessories or delivery charges) after deducting Discount 1.  The asterisks relate to the following note in the comments box on the form which is 17.7 cm wide and 2.3 cm high occupying about one-third of the box, the rest of which is used for information such as delivery time:
*Courts 5 Year guarantee @19% of Retail Selling Price.  Discount of 19% off retail Selling Price of Goods, applicable only where a 5 year Guarantee is purchased at the same time.  The 5 Guarantee [sic] year guarantee is supplied by Regency Warranty Services Ltd, who will send you the guarantee Certificate for all purchases with a value of over £200.  If you require a guarantee Certificate for purchases of £200 and under, please contact Regency Warranty Services Limited at [the address is then set out].”
The printing error in the third sentence is corrected in later versions.  There is no such company as Regency Warranty Services Limited.  The Product Guarantee is in fact supplied by underwriters through Regency Warranties Limited.  If the insurance is declined neither Discount 2 nor the quoted passage appears on the form.  Although certificates are now sent to the customer for purchases under £200 the above statement is still included in the form.  The customer does not sign the order form, although in the Newport store they do obtain the customer’s signature and find that this reduces the number of mistakes.  Where Supa Shield is declined, the same statement as is quoted on Form B appears immediately after the description of the goods.
30.	By way of example one of the simpler Forms C that we were shown contained the following:
Description			  Qty	   Unit Price	  Price
[The goods are described]	1	69.99	69.99
*5 Year guarantee	1	7.41	 7.41
Sub-Total		77.40
Discount 1		-30.99
*Discount 2		-7.41
Total Cash Price		39.00
The asterisks refer to the paragraph quoted above.  The £7.41 cost of the Product Guarantee is 19 per cent of £69.99 minus £30.99 (rather than, as the customer might expect, of £69.99), which is, as one of the Appellant’s salesperson witnesses put it,“slightly confusing” to the customer (to say the least) since the £30.99 comes later in the calculation.  In practice the form can be even more complicated if Supa Shield, accessories or a delivery charge is included since they do not qualify for the discount.
31.	Mr Muller was shown a Form C on which there were two items of goods specified, each with its own price.  He was asked how much of the two discounts shown on the form was attributed to each item.  He was unable to do so, saying that one could only tell the total discounts from the form.  Where a deposit is taken, the whole of the deposit is treated as being on account of the price of the goods.
32.	The Appellant makes sales to businesses through its contract department.  The Product guarantee does not apply because the sale is for business use, although we saw one case in 1999 where a builder received an insurance certificate.  Our understanding was that the Product Guarantee was not given on sales by the contract department except for sales to insurance companies which would not lose input tax credit from the arrangement.  In 2000 notes of a meeting with PricewaterhouseCoopers stated that the Product guarantee was being given on sales to Regency presumably of replacement goods.  The Product Guarantee was also given on sales to insurance companies with the discount described as an “adjustment” because the Product Guarantee would be regarded by the insurance company as betterment if provided on replacement goods if it did not apply to the original goods, for example because the original goods had been purchased from another supplier.  
33.	Business customers can ask for a VAT invoice.  We saw a case where this correctly showed the discounted price of the goods, with the result that the customer’s input tax is limited to this amount, and another case where, although Form C was used, it showed the undiscounted price.  In the former case on the customer complaining that the effect was to limit his input tax the Product Guarantee was cancelled and the VAT invoice re-issued to show the full price.  The fact that it was a business sale would not have been clear to the Appellant since the customer order was in the name of the tenant.  
34.	Mr Blake told the head of marketing in February 1998 that they did not want any reference to the Product Guarantee at the Ideal Home Exhibition in order to promote Supa Shield Excel cover.  He stated that top sales staff were used at the Exhibition and so this was not necessary.  We find this unconvincing but are unable to find why no reference should be made there to the Product Guarantee.
Internet sales
35.	The Appellant has an internet site enabling orders to be placed on the internet.  When ordering the customer sees the item ordered at its retail price in the shopping cart.  The customer can tick a box against the words: “I want to apply for the 5 Year Guarantee under the terms of the special offer.”  The screen also contains the following:
“There is a 5 Year Guarantee available with all furniture and carpets ordered.  Click here for details.  A special offer is available if you order the 5 Year Guarantee today.  We will give you a corresponding discount on the price of the items identified above.  As a result, you can have the 5 Year Guarantee at no extra cost.”
It was explained that for technical reasons the price shown in the shopping basket cannot be recalculated if the customer takes up this offer.
36.	The terms of sale provide that the customer agrees to the sale terms by clicking on the “send this order” button, and that the order “is not binding until accepted by [the Appellant] either by sending you an email which is received by You or our despatching the goods to You with a despatch note issued to You by Us” (You and Us are defined terms meaning the customer and the Appellant).  The customer has a right to cancel the order up to seven days after delivery.  Questions and answers about using the on-line store contain the following:
“How will I know my order has been accepted?
You will receive an e-mail from us informing you that we have received it.  The order will not be placed until we have reviewed your order details and are satisfied that the information on it is correct.  We will then call you within 48 hours if you wish to pay by credit or if the delivery charge is greater than the standard charge of £25.  Otherwise, your order will be automatically placed for delivery via your nearest store.
…
What about your 5 year guarantee?
If you chose to accept our current Special Offer, Courts 5 Year Guarantee covers any structural defects of our furniture, bedding merchandise to meet our exacting quality standards.  This guarantee is underwritten by a G.I.S.C accredited insurance company.  You will be advised of the breakdown on confirmation from us of your orders [sic] acceptance.  Full details of Courts Guarantee are available on request.  All these benefits are in addition to, and will not affect, your statutory rights.”
When the customer completes the internet order an automatic email reply is sent which states the total price and does not provide any breakdown of the cost of the Product Guarantee.  Subsequently the customer will be sent a customer order form, forms B or C being in use at the time. 
37.	An earlier website was provided through Yahoo Shopping.  There were no material differences in the terms or procedure from those described above.  Initially the customer received an email reply from Yahoo saying that the order had been passed to the Appellant and confirms receipt and acceptance of the order together with contact details of the branch that will supply the items. 
Accounting
38.	In the Appellant’s management accounts initially both the goods and the insurance were grossed-up by the discount thus causing a distortion.  Mr Samuels decided that the Product Guarantee and the discount would be included in the product category “other,” which would be analysed in a supplementary schedule.  In a specimen calculation he showed the gross margin on the Product Guarantee separately by comparing the gross margin with the sale price excluding IPT giving 91.79 per cent on his illustrative mark-up of the goods of 48% and adjusted using our illustrative figure for the cost of insurance.  In the management accounts from March 2002 there is a separate item “Guarantee Net Sales” which is the Product Guarantee with a separate mark-up.  Using the illustrative amount for the cost of the insurance and a retail selling price of £1,000, this is calculated as the ratio of the benefit to the Appellant of the insurance (£5.70 on our illustrative figure, see paragraph 103 below) to the commission net of IPT (£180.95) less the discount on the goods net of VAT (£161.70), equals £19.25, which is 29.6 per cent.  This calculation therefore treats the discount on the price of the goods as a cost of obtaining the insurance commission.  While this may be the normal accountancy treatment, in our view the former calculation shows the position more accurately.  
39.	The notes to the statutory accounts show a split between “goods sold” and “services charges earned”, the latter being explained as being earned on the provision of extended credit.  Mr Samuels explained that as they trade in Muslim countries they did not refer to the latter as interest.  The “goods sold” item must therefore include both goods and insurance commission, whether in respect of the Product Guarantee or Supa Shield.  Since the accounts are audited we accept that this is in accordance with generally accepted accounting principles which we understand are designed to show the substance or commercial effect of transactions rather than their legal form.  
40.	In the year of introduction of the Product Guarantee the sales per square foot increased which Mr Blake considered was attributed in a major part to the Product guarantee, but we are unable to find to what extent the Product guarantee was the cause.
Information and advertising  
41.	Trading policies displayed in the Appellant’s stores included the following wording:
“Courts 5 Year guarantee covers—at no extra cost—any manufacturing failure of our furniture, beds, and carpet merchandise to meet our exacting quality standards.  This guarantee is underwritten at Lloyds [sic]….Full details of Courts guarantee and Supa Shield Warranty are available on request.”
This wording changed from about 5 March 2001 to:
“Courts 5 Year guarantee covers—at no extra cost—against structural defects of our furniture, beds, rugs and carpets.  This guarantee is underwritten by Landmark….Full details of Courts guarantee and Supa Shield Warranties are available on request.”
AIG, which we assume is the parent company of Landmark and New Hampshire, had initially indicated that these policies would be issued by Landmark.  In fact Landmark never issued any policies; they were issued by New Hampshire but marketing literature already printed was used up with the agreement of the insurers.  From about 6 August 2001 New Hampshire is named instead of Landmark.  From about 26 December 2001 the wording states that the guarantee is underwritten by “a G.I.S.C. [General Insurance Standards Council] accredited insurance company.”  From about 4 March 2002 the reference to “at no extra cost” was dropped.  No reason for this change was given.  
42.	A “Guarantee & Warranty Protection Programme” leaflet was available in the Appellant’s stores containing similar wording to the above but saying “can be guaranteed” rather than that “the guarantee covers…”:
“All Courts furniture, including beds and carpets, can be fully guaranteed against structural defects for five years at no extra cost.  Fully underwritten by selected syndicates at Lloyds [sic]…
The Courts 5 Year Guarantee and the Supa Shield Warranty & Protection Programme is fully underwritten at Lloyd’s… 
This leaflet contains only a summary of insurance cover.  Full details can be obtained from Regency Insurance Brokers [address etc given].”
Other versions contain minor differences in wording, such as the earlier leaflet not mentioning structural defects and merely saying “fully guaranteed.”  Later leaflets refer to the different named insurers.  A version dated 03/2002 does not use the words “at no extra cost.”  There was also a separate leaflet about beds entitled “bonkers about beds” containing similar wording, including an example of October 2001 which also does not use the words “at no extra cost.”  Examples of policy wording were available in the Appellant’s stores at the main customer services desk and in the office.  
43.	Magazine advertisements also contain similar wording but without mentioning insurance, although at least one of these does refer to Supa Shield being covered by insurance:
“…we also provide Courts 5 Year Guarantee at no extra cost…” (November 1997)
“Each piece of furniture is comprehensively covered at no extra cost by our 5 year guarantee…” (Spring 1998)
COURTS 5 YEAR GUARANTEE A comprehensive 5 Year guarantee covering most eventualities is available at no extra cost on all furniture, beds and floorcoverings.” (Spring 2001, Autumn 2001).
44.	We were shown one example of a poster stating (without reproducing the layout):
“Courts 5 Year guarantee…All that is covered by the manufacturers [sic] 1st years [sic] guarantee will now be covered for 5 years at no extra cost!
Other posters do not contain any information about the Product Guarantee although many deal with Supa Shield. 
45.	The advertising never states that the Product guarantee is free; either it says “at no extra cost” or in later versions nothing is said.  Both Mr Michael and the Appellant’s witnesses justified the description “at no extra cost” by saying that there was a real cost paid to Regency and that the customer was more likely to appreciate a benefit if it cost something.  There is no marketing material that refers to the 19 per cent attribution to insurance and corresponding discount, although Coopers & Lybrand had advised that this should be stated.
Salesperson’s training and approved wording
46.	No recommended wording for explaining the Product guarantee was given to sales staff before 1999.  Mr Muller instigated training on the Product Guarantee for all salespersons in the circumstances set out in paragraph 50 below.  That training recommended using the following words: 
“If you take up this potential Five Year Product Guarantee, the cost is 19% of the purchase price of the goods.  Courts, as part of their service, are prepared to discount the cost of your merchandise by 19%, so that this Five Year Product Guarantee represents no extra cost to yourself.” (ACAL 599, 26 October 1999).
This wording is also contained in the Courts Best Practice document which contains detailed instructions to the staff on all aspects of selling.  An alternative was given in the Appellant’s newsletter of 5 November 1999:
“If you take up our Five Year product Guarantee, the cost is 19% of the purchase price of the goods; however we also are showing here a 19% discount so that the effect of this is that the Five Year Guarantee represents no additional cost to yourself—OK? (Needless to say, you do not need to use these words verbatim).”
The same newsletter made reference to the guarantee being underwritten at Lloyd’s.
47.	Regency provided training to the Appellant’s sales staff every month and new employees are trained on joining.  In addition the Appellant has its own trainers and there is a weekly training session for staff by the store manager.  Miss Gunn, the carpet sales manager at the Newport store, remembered that she had received training specifically on the Product Guarantee about twice in the previous two and a half years.  We saw some examples of training material dating from 1999.  The training for the Product Guarantee contained an example of how the figures in the box in Form A were calculated, showing the treatment of discounts other than the 19 per cent discount, “warranties” [Supa Shield] and delivery charges.  There is no mention of insurance in relation to the Product Guarantee.  One slide used in the training material states: “Courts 5 Year Guarantee.  All that is covered by the manufacturers [sic] 1st Year Guarantee can be covered for 5 years at no extra cost.”  The next slide states: “Remember!  The Courts 5 year optional manufacturers [sic] guarantee is at no extra cost but is NOT FREE!  Please ensure that you always explain this to your customers.”  By far the majority of the training material relates to Supa Shield.  This took up 27 of the 30 slides in one example.  We also saw some later training material dating from 2001 which includes the same salesperson’s wording as Mr Muller’s.  
48.	Miss Gunn and Mr Morgan produced a different wording which they said derived from Regency training material that we have not seen which for the first time mentions insurance: Miss Gunn kept this in her pocket and a copy was taped to the desk next to the computer terminal.  Mr Morgan said (which we accept) that it had been there since October or November 2003.  This was:
 “The cost of the Premium for 5-Year Insurance backed Product Guarantee is 19% of the purchase price of the goods.  As part of our Customer Service, Courts are prepared to discount the cost of your merchandise by 19%, so that this 5-Year Product Guarantee represents no extra cost to yourself.”
Another version produced by Miss Gunn and Mr Morgan said:
“We offer you the opportunity to take out an insurance backed 5-Year Structural Guarantee; the premium you pay to the insurance company is 19% of the purchase price of the goods.  If you choose to take up this Structural Guarantee now, as part of our service commitment to customers, Courts will offer a discount on the cost of your furniture/carpet/bed of 19%.  This offer therefore represents no extra cost to you.”
Defects in the selling of the Product Guarantee in practice
49.	Before setting out the evidence of defects in the execution of selling the Product guarantee we repeat the point made in paragraph 4 that we are unable to draw general conclusions about the level of errors based on what may be an unrepresentative sample.
50.	Form A.  PricewaterhouseCoopers, in their report to the Appellant’s audit committee for the year ended 31 March 1999 presented on 15 June 1999, identified that certain sales staff were not following the correct procedures in relation to the Product Guarantee.  Management stated that they would carry out investigations within the next month and re-train staff if necessary.  Mr Michael sent an email to Mr Blake stating that Regency would retrain all staff within the next four weeks.  It was also decided to have more notices in showrooms about this.  In spite of this Mr Samuels sent an email to Regency saying that he had just found out that the Milton Keynes branch had not been stamping order forms, then Form A.  An investigation of this was carried out in all stores by the Regional Accounts Supervisors who reported back on 5 October 1999  that 20 stores (out of about 100) were not stamping Forms A correctly, including Milton Keynes that had not stamped any customer orders for approximately six to nine months.  On the same day Mr Samuels asked Mr Muller to instruct all branches about this.  Mr Muller circulated a note on procedures for selling the Product Guarantee to all branches requiring the branch manager to sign a statement that all staff had been re-trained and would adhere to the procedures, and that new staff would be apprised of the procedures.  A branch manager then asked what to do if a customer asked for a discount of 19 per cent and no Product Guarantee which caused Mr Samuels to say that the training cannot have been done properly.  Mr Michael responded that this question had been raised when the product was launched but was not something they hear now.  A further newsletter was sent to branches on 5 November 1999 answering five questions about the Product Guarantee, including this one.  A regional manager asked by email on 19 November 1999 what to do if a customer refused the Product Guarantee.  Mr Michael responded that there was no danger of this happening because if the Appellant did not tell Regency about the transaction no Product Guarantee could be issued.  The procedure for declining the Product Guarantee was tightened by providing that a named individual was to receive this information.  
51.	We were shown many examples of numerous mistakes in completion of Form A, such as: no stamping of the form (7 out of 34 examples), figures not filled in on the stamp (5 examples), figures filled in where the stamp should have been but was not (4 examples), unsigned order forms (10 examples, but where it was the customer who produced the form we cannot make a finding that the form was not signed because the signed form might be in the Appellant’s possession), and indistinct stamps (but part of this may be caused by the copying).  Of the Commissioners’ two shopper witnesses whose purchases were on Form A, Ms Bradbury (Manchester) was not told about the Product Guarantee, and Mrs Yates (Guildford) was told about the Product Guarantee but not about the 19 per cent attribution.
52.	We were shown a number of complaints such as: the customer queried payment for Supa Shield when the Appellant was offering a 5 year guarantee at no extra cost; on receiving a form through the post the customer asked for an explanation of the stamp which neither the sales assistant nor the manager could explain; a customer whose order form did not contain a stamp was referred to Regency; a customer who was told to ring Regency but said he did not want to make an insurance claim because it related to a defect. We also saw some examples of branches not advising customers about the Product Guarantee.  
53.	Since the staff were not trained to exclude the Product Guarantee on sales for business use there are likely to be cases where no insurance cover was in fact obtained.  However, if goods are purchased for business use and subsequently used privately the insurance cover would start.  It is not possible to say that there are cases where something was paid for insurance for which no cover was obtained, but there are likely to have been some such cases.
54.	Form B.  Of the Commissioners’ witnesses whose purchases were on Form B, Mr MacPherson (Catford), Ms Strange (Reading), Mr Barnes (Manchester), Mr Marsh (Croydon) were given no explanation about the Product Guarantee and did not notice the box on the form at the time.  Ms Cox (Barnstaple) was aware from a notice on the carpet sample that there was a 5 year guarantee but no mention of it was made either by the salesperson or the estimator who visited her home and she noticed the box on the order form when it was subsequently sent to her.  Mr Dean-Webb and others visited the Croydon store by arrangement on the day after there had been staff training and was told by the salesman about the Product guarantee using the words “you don’t pay for it.”
55.	Form C.  Of the Commissioners’ witnesses whose purchases were on Form C Mrs Khatun (Southampton), Mr Moss (Doncaster) and Mrs Whiteley (Newport) were not told about the Product Guarantee by the salesperson.  Mrs Whiteley, who, unlike the other shopper witnesses was sent by the Commissioners with another officer, Mr Porter, to make a purchase asked at the customer service desk when paying what the item “5 year guarantee £4.75” was for.  She was told in Mr Porter’s presence that it should not have been put on the bill and that it had been taken off; and that it was meant for things like wardrobes, whereas her purchase was of a duvet.  The information she was given was wrong.  There is no reason in principle why the Product Guarantee should not be given for a duvet, although the salesperson has a discretion to tick the box on the computer which will inhibit the guarantee appearing on the form for small value items, say under £50 or £100.  We also saw correspondence with a customer who had not received any explanation about the Product Guarantee, which was later cancelled at the customer’s request. Another of the Commissioners’ witnesses, Mrs Taylor (Trafford Park), was told about a 5 year guarantee but the insurance certificate has a different number from the number on the customer order, and the receipt for the balance of the purchase price has a third different order number, for which we did not receive any explanation.  While it is possible that the order was changed there is no mention of this in the witness statement.  It was therefore not possible in this case to identify the insurance certificate with the order form or to determine the insurance premium from the policy.
Contractual analysis of the transaction as it appears to have been planned
56.	Having set out the primary facts we analyse the transaction as it appears to have been planned.  The Coopers & Lybrand letter of 20 February 1997 sets out the outline of the transaction but does not deal with such questions as how, or when, the insurance is supplied to the customer.  If the originator of the transaction had consulted a lawyer and told him about what he was trying to achieve an analysis such as the following might have been made.  We emphasise that this is not the analysis as seen from the point of view of the customer, which we shall consider later, but we are trying at this stage to understand the nature of the transaction that the Appellant planned in the absence of any analysis of it in the documents we have seen.  The customer wanting to buy something at one of the Appellant’s stores at the price marked on it will go to the salesperson, expecting to buy it at that price.  In legal terms the display of the goods and the price ticket is an invitation to treat; the customer makes an offer to purchase and expects the Appellant to accept the offer at that price (or possibly at a discount, for example, for slightly damaged goods).  The salesperson will suggest that the customer might like to make two different offers, first to purchase the goods for 81 per cent of the price on the price ticket and to purchase insurance from the underwriters for 19 per cent of that price.  If the customer makes these two new offers the Appellant can accept the first offer by completing the customer order and taking the money.  All the Appellant can do with regard to the second offer is to take the customer’s money, introduce the customer to Regency which it does, after delivery, by passing details of the transaction to Regency on the Monday after delivery, which may be some weeks after the offer is made, and then paying the money over to Regency when invoiced by Regency after the end of the month in which delivery took place.  After making checks, Regency accepts the customer’s offer by virtue of their binding authority from the underwriters by sending the insurance certificate to the customer.  Mr Cordara submitted that the Appellant made a counter offer by giving the customer order form to the customer.  We do not accept this analysis as it implies that Regency (on behalf of the underwriters) also makes an offer which is accepted by the customer at a time when they do not know of the customer’s existence; the Appellant has no authority to make any offer on Regency’s or the underwriters’ behalf.  In relation to the insurance the offer must be made by the customer and the acceptance by Regency.  Ultimately the customer receives the goods with an insurance-backed Product Guarantee, although in fact he does not leave the shop with the certainty of a Product Guarantee at all.  This may not matter as there is nothing to guarantee at that stage (and even after delivery the insurance does not start until one year after delivery, during which year the manufacturer’s guarantee applies).  
57.	There are some surprising loose ends.  The lawyer might be expected to ask some obvious questions about what happens if both steps do not occur as planned, such as (a) the customer changes his mind about the goods (an eventuality envisaged on the customer order), (b) the customer changes his mind about the insurance (an eventuality specifically provided for in the policy (except for the Lloyd’s policy), or (c) Regency does not accept the offer for the insurance (which is admittedly less likely but suppose that in the meantime the underwriters had terminated the contract with Regency for breach, or Regency, recognising the name of a person who had made a fraudulent claim in the past, declined to insure him).  So long as (a) occurs before delivery, which we imagine is likely to be the case, the Appellant has not told Regency about the existence of the customer and so can presumably refund both the 81 per cent and the customer’s money that it is holding for the insurance.  As to (b) and (c) once the customer order has been completed the only way to deal with changes is to cancel the original order and start again, in which case the customer presumably agrees to purchase the goods at the retail selling price.  Once the goods are delivered it is not possible to cancel the original order.  In this case we have no idea whether the customer gets the 19 per cent back without the discount on the price of the furniture being revoked, as no doubt the Appellant would wish, or whether the Appellant is obliged to provide the goods and, if so, whether or not with a contractual 5 year guarantee for 81 per cent of the retail selling price of the goods. Such loose ends suggest to us that nobody ever analysed what type of transaction they had intended to create.  Indeed there is a file note of 21 May 1997 saying that lawyers had approved the Product Guarantee but they had not seen all the paperwork and that Mr Blake did not consider this necessary.  One might expect that some of these matters would be dealt with in the contract between the Appellant and Regency, but no written contract was ever agreed.  Another aspect that the Appellant might have wished to protect itself against is the insurers’ right, having paid a claim, to claim by way of subrogation from the Appellant the amount that the customer could have claimed from the Appellant under the Sale of Goods Act 1979, which Mr Michael said (which we accept) was never discussed.  While we find the existence of these loose ends surprising we do not think that they lead us to doubt the genuineness of the transaction planned to create two contracts to be entered into at different times.
Commercial transaction or tax avoidance scheme?
58.	Before considering the submissions of the parties we deal with one further preliminary issue of whether the transactions are commercial or a tax avoidance scheme.  Mr Vajda contended that, while he accepted that there was a non-tax advantage to the Appellant and its customers in providing insurance-backed guarantees, “the only purpose for introducing the Product Guarantee in this form that is the subject matter of this Appeal was tax avoidance.”  It seems to us that a number of factors came together at the same time.  Mr Blake was receptive to an insurance product following the OFT report and the setting up of Qualitas.  Insurance had been tried in order to compete with UNO, and in relation to the original Supa Shield products but the take-up was low for products sold at an additional price.  Mr Michael wanted to sell an insurance product with all sales, in the course of which he suggested that it might have tax advantages, but the transaction did not start as a tax avoidance scheme; the transaction ultimately adopted resulted from considering the tax effect of various alternative ways of providing the Product Guarantee.  Offering a 5 year guarantee rather than the normal 1 year manufacturer’s guarantee gave the Appellant a commercial advantage and avoided disputes about whether something was covered by the manufacturer’s guarantee.  The insurance element was real and gave the customer greater rights than he had under the Sale of Goods Act 1979.  The Product Guarantee gives wider protection to the customer because it includes replacement of the goods if they cannot be repaired.  Under the Act, once the goods had been accepted (which is likely to have occurred by the end of the first year when the Product Guarantee starts operating), only damages could be awarded which might be quite small, being the difference between the second-hand value of the goods with and without the defect.  It also covers the event of the Appellant becoming insolvent.  Insurance also had the advantage that the administration of claims by customers relating to manufacturing defects was handled by a third party.  Mr Blake, in an email, did say that that the Product Guarantee was always set up with one aim in mind, legally avoiding paying VAT on 19 per cent of the retail selling price of goods; and also that “in practice, all we are offering is the same that they are legally entitled to i.e. protection against GENUINE manufacturing defects.”  We consider that he was wrong in law in the latter, and overstating the case in the former, and so we should not take this email as a statement of the Appellant’s purpose.  
59.	Accordingly we find that this started as a genuine commercial transaction to which was added favourable tax features.  If one isolates the factor of the discount on the price of the goods equalling the consideration for the insurance, as Mr Vajda does in contending that the only purpose of the Product Guarantee in this form was tax avoidance, we would agree with him, but we do not consider that one should divide up the transaction in this way.  We do not accept therefore that the only purpose of the Product Guarantee was tax avoidance.  It was fairly described by PricewaterhouseCoopers in their report to the audit committee for the year to 31 March 1999 as “a VAT saving arrangement.”  We shall consider separately later in this decision the attribution of 19 per cent to the insurance and the extent to which this was commercial.  The question for us is whether the Appellant has succeeded in obtaining the tax advantages that it claims arise from the way the transaction is structured.
The law
60.	Article 11A of the Sixth Directive provides: 
1.	The taxable amount shall be: 
(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies; 
(b) in respect of supplies referred to in Article 5 (6) and (7), the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as the time of supply; 
(c) in respect of supplies referred to in Article 6 (2), the full cost to the taxable person of providing the services; 
(d) in respect of supplies referred to in Article 6 (3), the open market value of the services supplied. 
“Open market value” of services shall mean the amount which a customer at the marketing stage at which the supply takes place would have to pay to a supplier at arm's length within the territory of the country at the time of the supply under conditions of fair competition to obtain the services in question. 
2.	The taxable amount shall include: 
(a) taxes, duties, levies and charges, excluding the value added tax itself; 
(b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement may be considered to be incidental expenses by the Member States. 
3.	The taxable amount shall not include: 
(a)	price reductions by way of discount for early payment; 
(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply; 
(c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter and which are entered in his books in a suspense account. The taxable person must furnish proof of the actual amount of this expenditure and may not deduct any tax which may have been charged on these transactions.”
61.	Section 19 of the Value Added Tax Act 1994 provides:
“(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 subsections (2) to (4) below have effect subject to that Schedule. 
(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration. 
(3) If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. 
(4) Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it. 
(5) For the purposes of this Act the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value under subsection (2) above if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration.” 
Outline of our decision
62.	Because of the amount of detail in the facts and the number of alternative contentions of the parties some of which were addressed to possible findings of fact that we have not made, we shall summarise at the beginning an outline of our decision for which we shall set out our reasons below.  The Commissioners’ primary contention is that VAT is payable on the whole consideration, rather than on 81 per cent as the Appellant contends.  The Commissioners’ first reason is that the documents create only one supply of goods plus insurance.  We agree with that contention in relation to sales made using Forms A and B, sales on the internet, and any other sales where the customer only sees the customer order after conclusion of the contract.  We do not agree with that contention in relation to sales using Form C, and accordingly the rest of the decision relates only to such sales.  The Commissioners further contend that, even if there are two supplies, the entire consideration is taxable on Card Protection Plan grounds, which we do not accept; or on the abuse of law principle, which we discuss later in the decision, but do not accept either.  We consider that we are not bound by the parties’ attribution of 19 per cent to insurance and the corresponding discount, but nor do we accept the method of apportionment used in making the Commissioners’ alternative assessment.  Accordingly, we shall allow further argument on the apportionment.  Finally, we consider that the abuse of law principle applies in relation to the apportionment, but we have already reached the same conclusion on domestic law without recourse to the principle.
Is there a single supply of goods?
Contentions of the parties
63.	In outline, Mr Cordara for the Appellant contends:
(1)	There is a supply of insurance for consideration and a corresponding discount on the price of the goods.  The insurance is not provided free.
(2)	There are two supplies, of the goods and the insurance by two different suppliers.
(3)	Alternatively, insurance is supplied by the Appellant by virtue of section 47(3) of the VAT Act 1994.
64.	In outline Mr Vajda for the Commissioners contends:
(4)	The customer is often unaware of the existence of the Product Guarantee, for example by not signing the form, or the absence of stamp on Form A.
(5)	The internet system never indicates the cost of the Product Guarantee.
(6)	The discount does not comply with the Price Marking Order 1999 and Directive 98/6 which requires that the selling price and the unit price must be unambiguous, easily identifiable and clearly legible. 
(7)	For a VAT registered customer the transaction is disadvantageous since the input tax entitlement is reduced to 81 per cent of the cost.
(8)	There was no contract for the Product Guarantee, only a single contract for the goods.
(9)	Alternatively, if there is a contract for the Product Guarantee the contract is between the customer and the Appellant since the Product Guarantee is described as the Courts 5 Year Guarantee; no third party is involved.
Mr Vajda also set out a number of propositions of European law that we do not think are in dispute, and so we need not set out the authorities cited: that the concepts of supply and consideration in VAT are autonomous concepts of Community law; that in order to ensure uniformity and neutrality similar transactions should be treated similarly regardless of variations of national law; that the concept of supply is not identical to that of contractual obligation; and that one should look at the essential features of the transaction from the customer’s point of view.
Approach to this case 
65.	 It was common ground that we should adopt as our approach to this case the approach adopted by Jonathan Parker LJ in Tesco v Customs and Excise Comrs [2003] STC 1561, 1609a, as follows 
“[159] So what is the correct approach in the instant case? There are number of pointers in the authorities referred to in Part 3 of this judgment, under heading (a) ‘Authorities as to the approach to be adopted in analysing the relevant transaction’. The more significant of such pointers in the context of the instant case seem to me to be these: 1. The resolution of the issue as to the application of para 5 in the instant case depends upon the legal effect of the Clubcard scheme, considered in relation to the words of the paragraph (see British Railways Board especially [1977] STC 221 at 223, [1977] 1 WLR 588 at 591 per Lord Denning MR: see [34] above). 2. In considering its legal effect, the entire scheme must be examined (what is the ‘entire scheme’ for this purpose being objectively determined by reference to the terms agreed) (see Pippa Dee especially [1981] STC 495 at 501 per Ralph Gibson J: see [33] above). 3. The terms contractually agreed may not be determinative as to the true nature and effect of the scheme (Reed, see [36] to [38] above): it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say ‘the precise way in which performance satisfies the interests of the parties’ (see the Advocate General’s opinion in Mirror Group, para 27: see [41] above). 4. Economic purpose is not the same as economic effect. The fact that two transactions have the same economic effect does not necessarily mean that they are to be treated in the same way for VAT purposes (see Littlewoods especially at para 84 per Chadwick LJ: see [42] above). 5. Equally, the economic purpose of a contract (what the Advocate General in Mirror Group called the ‘cause’ of a contract: see para 27 of his opinion: at [41] above) is not to be confused with the subjective reasons which may have led the parties to enter into it (in so far as those subjective reasons are not obviously evident from its terms) (see Mirror Group para 28: at [41] above). The Advocate General went on to observe (an observation which seems to me to be particularly apt in the context of the tribunal’s decision in the instant case): 
   ‘… failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, … and has complicated the task of categorising the contracts at issue.’ 
   [160] Bearing all these considerations in mind, I consider that, for VAT purposes, the correct approach to the analysis of the Clubcard scheme (that is to say both the basic scheme and the third party schemes) is to examine the entire cycle of transactions which it comprises, in order to determine objectively (that is to say without regard to the parties’ subjective intentions, save in so far as they are reflected in the terms of the scheme), and having regard to the scheme’s economic purpose, whether its legal effect is such that vouchers issued under it fall within para 5: that is to say, whether vouchers issued under it are issued for ‘consideration’, in the Community law sense of that term.
[161] On that approach, it is irrelevant whether members of the scheme buying premium goods knew or considered whether the price they paid included a payment for points or vouchers; just as it was irrelevant in Professional Footballers’ Association ‘whether the diners knew or considered whether the price which they paid included or constituted the costs of the awards’ (see per Lord Slynn [1993] STC 86 at 90, [1993] 1 WLR 153 at 157: quoted in [54] above). Accordingly, in my judgment the tribunal erred in law in so far as it based its decision on its assessment as to what the ordinary Clubcard member (whoever he or she might be) would be likely to think when purchasing premium goods.” 
66.	Accordingly we identify the legal effect of the transactions, by considering the entire transactions objectively, whilst being prepared to go behind the contractual relationship to determine the true nature of the transactions according to their economic purpose.  We understand economic purpose (or the cause of the contract) to mean what the contract actually does, ignoring the motivation of the parties.  In this case the question is whether the contract actually supplies goods or insurance.  The fact that the same end result could be achieved by different routes does not mean that the economic purpose is the same.
Contractual analysis at it appears to the customer: customer order Forms A and B
67.	The analysis we made of the transaction in paragraph 56 was based on the whole evidence available to us about the proposed transaction.  The actual contract that the customer enters into is analysed differently using only the information reasonably available to the customer, regardless of whether he read or understood it.  We follow the approach of Lindsay J in Debenhams Retail plc v Customs and Excise Comrs at [25]  [2004] STC 1132, 1144h: 
At least as early as the introduction of railways in the second quarter of the 19th Century, it became common for suppliers – there the railway companies – to contract with countless members of the public on standard terms as to which, for good and practical reasons, it could not be required that the customer should have understood, agreed, read or signed some acknowledgment of them. The Courts recognised the impracticality of insistence upon such an informed consensus ad idem as to the existence and the language of the terms that one would properly require of an individual contract. Ticket cases were then decided in which it was not so much examined whether the particular complainant had read, understood, agreed to or signed any particular terms but whether, on a more objective approach, the existence of the standard terms had been sufficiently brought to the notice of a hypothetical reasonable customer. Individual circumstances such as whether the claimant-customer was illiterate or too hurried to have paused to see that standard terms existed or what they were, were in general irrelevant. As time passed standard terms which few read and, doubtless, fewer understood became commonplace. Contracts, by now, are regularly made without the customer from the general public being truly aware of, or even being greatly concerned as to, all the terms of the contract or even the exact identity of his contracting party. At the filling station, with whom, precisely, does one contract as one fills the tank? Who (to use an example which Mr Philpott used) arriving late, after a delayed flight, at a hire-car depot in some distant airport, pauses to read the very small print before signing and initialling "lu et approuvé" or its local equivalent? Which of DR's customers paused to notice that they were contracting with DR and not with Debenhams plc? Those who do sign without pausing to read and understand do, of course, take a risk but that is not to say, in the light of the practical view taken by Courts of arrangements relying upon published standard terms, that they do not contract.  
68.	Accordingly we look objectively at the whole transaction.  We start by considering a transaction in which customer order Form A or B is used.  Surprisingly there is no one place where all the elements of the transaction are described to the customer.  The salesperson using the wording originally recommended tells the customer about the 19 per cent and the equivalent discount for a (or “our”) 5 year guarantee, but not that the 19 per cent is for insurance provided by an insurer.  Indeed even the salesperson’s training material describes it as a manufacturer’s guarantee, although the Appellant’s 15 November 1999 newsletter states that the guarantee is underwritten at Lloyd’s.  (There was a later wording (see paragraph 48) that does say that the customer is buying insurance but we have no information about when this started except that it was first attached to the salesperson’s desk in the Newport store in October or November 2003, which is after Forms A and B were used.)  Forms A and B show separate consideration for a “Courts 5-year guarantee” also without mentioning insurance.  As an indication to the customer of what is being provided, the expression “Courts 5 Year Guarantee” is a misnomer reminiscent of Voltaire’s remark that the Holy Roman Empire was neither holy, nor Roman, nor an empire.  The “Courts 5 Year Guarantee” is neither provided by Courts, nor for 5 years, nor is it a guarantee; it is insurance for years 2 to 5 provided by underwriters.  Some of the advertising or marketing literature states that the Courts 5 Year guarantee is underwritten by named insurers, but this never mentions the 19 per cent consideration for the insurance or the equivalent discount on the goods.  The guarantee leaflet names both Regency and the insurer; the trading policy document names the insurer but not Regency.  
69.	Putting all the above together the customer can be taken to know that 19 per cent of what would otherwise be the price of the goods is attributed to the Courts 5 Year guarantee which is underwritten by named insurers.  The natural implication of the words is that the Appellant provides a 5 year guarantee, any liability arising under which is insured.  The customer might wonder why he is being told about the 19 per cent and might conclude that there was some tax or regulatory reason for it to be specified to which he need not pay any attention because it does not affect the total price he has to pay.  He would be fortified in reaching that conclusion by the low-key treatment of the 19 per cent by the customer order, not being separated in the total figures, and being contained in a not very prominent box (particularly on Form B where the box is inconspicuous and because the figures for the 19 per cent are printed so they do not stand out from the rest of the print on the form).  The use of the box to indicate the discount on the goods may also be contrary to the Price Marking Order 1999 but this does not assist our analysis of the contractual position.  There is nothing to suggest to the customer that he is making a contract with the insurer and, unless he has read the marketing literature, he does not know of the existence of any insurance.  This is not a case where the Appellant is contracting as agent for an undisclosed principal; the Appellant is not contracting on behalf of the insurer at all since the only authority the Appellant has in relation to the insurance contract is to introduce the customer to Regency.  The minimum requirement for finding the existence of another contract is that objectively it is clear that the customer is contracting with someone other than the Appellant for which the 19 per cent is the consideration for the Product Guarantee.  There is no such information available to the customer.  The economic purpose of the contract is that the Appellant has supplied goods to the customer at the retail selling price.  If one looks at the entire transaction eventually Regency send the customer an insurance certificate but that occurs long after the only contract that the customer sees, which is with the Appellant.  Mr Cordara pointed out that the Commissioners accept that Supa Shield can be marketed as a Courts’ warranty but still be taxed as a supply of insurance.  That seems different to us because with Supa Shield the issue is not whether there is a separate contract.  Here the question is whether there is a separate contract with Regency displacing the natural inference that the customer is contracting with the Appellant for the supply of the goods at the retail selling price.  With Supa Shield the customer is buying something extra under a separate contract, apparently from the Appellant but in fact from Regency (acting on behalf of the underwriters), and the issue is the VAT characterisation of that contract.
70.	Accordingly we do not consider that Forms A and B succeed in displacing the natural inference that the customer is contracting with the Appellant for the goods at the retail selling price, by introducing a second contracting party, Regency, in a way that is objectively clear.  The VAT consequences are determined by looking at the essential features of the transaction from the customer’s point of view.  The VAT consequence that automatically flows is that the Appellant has contracted to sell only one item, the goods (including a 5 year guarantee).  The attribution of 19 per cent to the “Courts 5 year Guarantee” (not to insurance) and the 19 per cent discount on the goods has no effect because a single supply is made by the Appellant.  While the VAT treatment need not follow the contractual analysis there is no other possible analysis.  Even if the goods and the guarantee are treated as two supplies made by the Appellant, which we would consider to be an artificial split, both are taxable at the standard rate (as is the case with any part of the consideration attributed to the manufacturer’s guarantee), because there is no contract with the customer to supply any exempt insurance.  Since the customer does not know about any contract for insurance, the contract with Regency (acting on behalf of the underwriters) must be made by the Appellant, rather than the customer.  Any supply of insurance is therefore made either to the Appellant, who is invoiced for the premium by Regency, with the customer receiving the benefit of the insurance; or, if there is a supply of insurance to the customer, since the customer has paid no consideration for it, there is no supply for VAT purposes.  
71.	Mr Cordara’s alternative contention is that insurance is supplied by the Appellant by section 47(3) of the VAT Act 1994:
“(3) Where services are supplied through an agent who acts in his own name the Commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent.”
This derives from article 6(4) of the Sixth Directive:
“(4) Where a taxable person acting in his own name but on behalf of another takes part in a supply of services, he shall be considered to have received and supplied those services himself.”
The Appellant might be said to have acted in its own name in relation to the insurance because the insurer’s name is not given to the customer.  However, the Appellant does not have any authority to supply the insurance; its only authority is to introduce the customer to Regency.  Accordingly we do not consider that the insurance services are supplied “through” the Appellant within section 47(3); the insurance services are supplied by Regency (acting on behalf of the underwriters) to the customer.  Article 6(4) is presumably intended to deal with the civil law commissionnaire who, it is understood, contracts in his own name but on behalf of a principal resulting in the commissionnaire (but not the principal) becoming liable to the third party on the contract.  In such circumstances, it is natural that he should be treated as if he were a principal, particularly as he will invoice the supply in his own name.  The Appellant does not enter into any contract for the supply of insurance and so does not take part in a supply of services within article 6(4).
72.	If we are wrong in this conclusion and there is a supply by the Appellant of the insurance in consideration of the 19 per cent, we would decide that the Product Guarantee was ancillary to the main supply of the goods and the VAT treatment should follow that of the goods.  The European Court said in Card Protection Plan Case C-349/96:
 “29. In this respect, taking into account, first, that it follows from Article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service. 
30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (Joined Cases C-308/96 and C-94/97 Commissioners of Customs and Excise v Madgett and Baldwin [1998] ECR I-0000, paragraph 24).” 
In our view on this basis, the supply of the goods is the principal supply because that is the principal purpose of the customer’s visit to the store.  The insurance is an ancillary service which does not constitute an aim in itself but a means of “better enjoying” the principal supply of the goods because it will be a benefit to the customer only if there is a manufacturing defect in the goods.  Much of what is covered by the Product Guarantee is covered by the Sale of Goods Act 1979 which is included in any commercial sale of goods.
73.	Dealing with specific cases where the conclusion might be different, the only exception we would make to this analysis is if the salesperson informs the customer that he was contracting with underwriters for insurance for the 19 per cent, as in the example produced by Miss Gunn and Mr Morgan reproduced in paragraph 48.  We are not aware that this wording was used during the Forms A and B period, and indeed we think it unlikely because the training material described the Product Guarantee as a manufacturer’s guarantee.  But if this did occur we would decide that it was successful in creating two separate contracts between the Appellant and the customer for the goods and between Regency and the customer for the insurance, with the same result as for Form C.  
74.	It follows that any other defects in carrying out the transaction, such as there is no marketing literature being available, or the salesman not using the right words, do not affect the result.  
75.	Mr Cordara contended that repeat customers must be taken to know that they will receive an insurance policy when they make the second and subsequent purchases and so will know that they are contracting with insurers.  We do not accept this.  Receipt of the first policy is consistent with our analysis that the Appellant (and not the customer) contracted for the insurance for the benefit of the customer.  There is no reason for the customer to suppose that anything has changed.  In any case, there is no means of knowing that the Appellant has not changed the method of trading since the earlier purchase. 
76.	 Having decided that Forms A and B are not successful in creating two contracts it is not necessary to decide how the situation was affected by the initial insurance contracts being written in the name of the Appellant from 23 May to the end of July 1997, but we shall express our view as the point was argued.  
77.	 Mr Cordara contended Mr Blake knew that he did not want the Appellant to be the insured, and the underwriters may or may not have authorised Regency to act as it did in issuing policies in the name of “Courts Furnishers.”  Mr Vajda contended that we had to determine what was in the minds of the parties when they entered into the policy.
78.	In our view we have to start from the wording of the original policy, which we repeat:
 “Courts Furnishers agrees to indemnify the customer for the cost of repair or replacement to the specified products during the period shown below for damage to the product caused by structural defects as specified below under the heading ‘Risks Covered’ subject otherwise to the terms, conditions and exclusions shown overleaf.  Courts Furnishers liabilities hereunder are protected by a policy of insurance issued by duly authorised UK insurers and arranged by Regency Warranties Ltd.”  
We do not consider it probable that Regency issued policies in these terms without the underwriters’ approval, although we have no direct evidence of this because their contract with Regency annexes the later corrected policy.  We also infer that the policies cannot have included an undertaking by the Appellant (even though naming a non-existent company, Courts Furnishers) to deal in a certain way with the policy money in a policy that is sent to the customer without the knowledge of somebody at the Appellant’s, though presumably not Mr Blake.  Support for this inference is obtained from the marketing manager’s email of 1 August 1997 to Regency pointing to the need to refer to the “Courts’ correct trading name” depending on the territory, thus indicating that he thought that it was the Appellant who was the insured because otherwise there was no need to mention any Courts company in the policy.  The further changes made in the 25 June 1997 draft substituting the Appellant for the underwriters cannot have been an accident.  We conclude that all parties intended at the time that it was the Appellant who was covered by insurance.  Later Mr Blake realised that this was not what he wanted because it would leave the Appellant with a liability, and as a result Regency issued a policy in the revised form to the customer.  Accordingly, the customer has received something for which he did not contract.  During this period the whole consideration was liable to VAT as there is no contract between the customer and the insurer.  Accordingly, even if we are wrong that under Forms A and B generally there was no such contract, during the period of the block policy we find that there was no such contract.
Internet sales
79.	So far as internet sales are concerned the customer has to opt into the Product Guarantee but at that stage he is not told that there is insurance, or that it costs 19 per cent, or that the price of the goods are discounted by 19 per cent.  He then gets an automatic acknowledgement which is the Appellant’s acceptance of his offer.  This is followed by Form B or C on which the customer is first told about the split of the consideration; this is after the formation of the contract.  The customer has already paid and is not required to do anything more, although he still has a right to cancel the order up to seven days after delivery.  We reject Mr Cordara’s submission that the Appellant has made a counter offer which is impliedly accepted by the customer accepting the goods and not cancelling the order.  The Appellant can certainly make a counter offer for itself but it cannot do so on behalf of the insurers.  We consider that the customer does not make two offers because only at the stage of acceptance by the Appellant does he know for the first time about the 19 per cent attribution to a different intended contract.  There is a right of cancellation both under the terms of sale and under the Consumer Protection (Distance Selling) Regulations 2000 deriving from EE Council Directive 97/7/EC but that seems to us irrelevant to the question whether objectively the customer makes two separate offers.  By definition one can have a right of cancellation only after there is a contract.  The fact that the customer does not exercise his right to cancel after learning about the attribution cannot result in his retrospectively making two different contracts when objectively he only made one contract.  Our conclusion is that internet sales are sales by the Appellant at the undiscounted price.  Since the customer gets the Product Guarantee this must have been contracted for by the Appellant for the benefit of the customer.  Internet sales using Forms A or B do not create two contracts for the additional reason that the customer does not know about the second contract until he receives the insurance certificate.  The VAT consequence is that there is a single supply of goods for the full retail selling price by the Appellant with the same result as for sales made using Forms A and B.
Customer order Form C
80.	Customer order Form C is different from Forms A and B in mentioning Regency although by the wrong name (which we propose to ignore on the basis that if it matters the parties could presumably rectify it) as the provider of the guarantee, but it still does not say that Regency is providing insurance.  It merely states that “The 5 year guarantee is supplied by Regency Warranty Services Ltd, who will send you the guarantee Certificate for all purchases with a value of over £200.”  The marketing literature tells the customer that the Courts 5 Year guarantee is underwritten by named insurers and so he is able to conclude that Regency, who are described as insurance brokers, must be arranging the insurance.  While strictly the insurance is provided through, rather than by, Regency, Regency is contracting as agent for the insurers, and so it is in that sense true to say that Regency is providing the cover.  Form C is in our view successful in creating two contracts: between the customer and the Appellant for the goods for 81 per cent of the retail selling price, and between the customer and Regency for the insurance for 19 per cent of the retail selling price, of which a large part is returned to the Appellant as insurance commission; it is not in dispute that this commission is exempt from VAT.  
81.	We also find that on Form C the customer has the option of not taking up the insurance and instead buying only the goods for the same total price.  The existence of the insurance is clear from Form C.  If the customer says that he does not want it the salesperson will no doubt point out that he will still have to pay the same total amount, but if the customer still says that he does not want it, there is a procedure for declining it by the salesperson ticking a box on the computer form.  There are cases where, if the customer is well informed, he will not want the insurance, such as that the goods are for business use, particularly where the customer is registered for VAT and by not taking the insurance he can obtain a higher input tax credit.  We have also found that the number of customers not taking up the insurance is negligible but that is because the non-business customer obtains a benefit at no extra cost and so it is in his interests to take it.  This does not mean that the choice of not having the insurance is not genuine.
82.	Dealing with specific cases which might affect this analysis, even if the salesperson says nothing, it is clear on the face of Form C that the 5 year guarantee is a separately priced item and that it is provided by Regency.  And even if the marketing literature was not available, the customer would know from Form C that Regency, a different party, was providing the guarantee; whether it was insurance or a third-party guarantee would make no difference to the customer.  However, in Mrs Whiteley’s case (see paragraph 55) she was told that the 5 year guarantee item should not have been put on the form and had been taken off, being intended for furniture and not the duvet she had purchased.  If a customer is told something contrary to what is stated on the order form we consider that objectively the contract does not include the item which she was told to ignore, in which case tax is payable on the entire consideration.  
83.	Tax will also be payable on the entire consideration in any case where the customer does not see the Form C until after making the contract.  We understand that this may occur for carpet sales where the estimator visits the customer’s premises and then completes the order form on return to the store, which is then posted to the customer, so the customer will never see the form until after he has made the contract for purchase.  We also understand that for telephone orders the customer will never see Form C until after he has made the contract for purchase.  Mr Muller said (which we accept) that the majority of telephone orders were by customers who had previously visited the store and so it is possible that the customer sees the form during the visit.  In such cases, unless the customer is told before making the contract that for 19 per cent he is contracting with Regency (whether or not insurance is mentioned), we do not consider that there are two separate contracts, and the result is the same as with Forms A and B.  
Consequences of our decision that Form C creates two supplies
84.	Accordingly, in relation to sales made using Form C we have concluded that there are separate contracts for the goods and the Product Guarantee for a total consideration equal to the retail selling price of the goods, but that the customer could refuse the Product Guarantee and pay the retail selling price of the goods for the goods alone.  We next consider the VAT consequences.  We say nothing at this stage about the attribution of the consideration between the two supplies.
Contentions of the parties
85.	Mr Vajda contends that if there is a supply of insurance, it forms part of a single supply of goods, or it shares the same tax treatment as the supply of goods because:
(1)	applying Card Protection Plan, the insurance is an ancillary supply taking its tax treatment from the principal supply.
(2)	under article 11A(2)(b) of the Sixth Directive:
“The taxable amount shall include:…
(b) incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer.  Expenses covered by a separate agreement may be considered to be incidental expenses by the Member States.”
(3)	(reserved for argument in a higher court in the light of the judgment in Telewest Communications v Customs and Excise Commissioners [2004] STC 517) If there is a separate supply of insurance by a third party it is also ancillary to the supply of goods.
86.	Mr Vajda contends that the principle in Card Protection Plan Case C-349/96 (CPP) applies.  In that case CPP provided indemnification of the cardholder against financial loss arising from loss or theft of credit cards.  It arranged a block policy (see [1999] STC at 203c) under which the assured was “Various individual Members of Card Protection Plan as per Schedule lodged with R.K. Harrison Insurance Brokers Ltd., and/or Card Protection Plan Limited, including products marketed under brand names, for their respective rights and interests.”  He contends that CPP was not providing the insurance and accordingly the principle of determining the dominant purpose where there is more than one supply applies here.  
87.	Mr Cordara contends that since there are two contracts with different suppliers the supplies for VAT purposes must respect the separate supplies under each contract, see, for example Millett LJ in Wellington Private Hospital [1997] STC 445 at 462 “Where supplies are made by different suppliers, they cannot be fused together to make a single supply…”.  
88.	In relation to article 11A Mr Cordara contends that the House of Lords decided in Customs and Excise Comrs v BT plc [1999] STC 758 that the article could not be used to identify the supply.
Reasons for our decision
89.	In considering CPP, it is important to establish who was providing the insurance in that case.  This was the subject of considerable difference of view.  In the Tribunal, Judge Medd decided that there was no privity of contract between the cardholder and the insurer (see the extract quoted at [1992] STC at 805d).  Popplewell J disagreed and held that the insurer was providing insurance to the cardholder with the result that CPP was making arrangements for the provision of insurance ([1992] STC 797 at 803-4).  The Court of Appeal agreed and held that CPP was arranging for the provision of insurance (Balcombe LJ at page 208f, Megaw LJ at page 209a), in that CPP were the agents of the member in obtaining a policy under which the insurers would become directly liable to the member.  The House of Lords referred to the European Court (question 3) whether the supplies involved in the case constituted insurance.  The Advocate General agreed in paragraph 35 with the Commission (which argued that CPP was holding the group policy on behalf of its customers, see paragraph 30), with CPP (which argued that it formed the insurance contract as agent of the customers, see paragraph 30) and with the United Kingdom (which argued that this was a matter for the national court, but that CPP could not be providing insurance as it was not an authorised insurer, see paragraphs 30 and 35) that no insurance services were supplied by the insurer to CPP or by CPP to the customer.  The European Court disagreed with all of them, stating in paragraph 21 that 
“In those circumstances, it must be noted that CPP is the holder of a block insurance policy under which its customers are the insured.  It procures for those customers, for payment, in its own name and on its own account, to the extent of the services mentioned in the Continental policy, insurance cover by having recourse to an insurer.  Consequently [our italics] for the purposes of VAT, there is a supply of services between Continental and CPP on the one hand, and between CPP and its customers on the other, and the fact that Continental under the terms of its contract with CPP provides insurance cover directly to CPP’s customers is not material in this respect.”  
The reason for the last sentence following from the previous one is not stated, but a possible explanation is that the Court was applying a civil law approach in assuming that because CPP had taken out the insurance in its own name the customer would have no direct claim against the insurer (since it is understood that, in civil law, only the person in whose name a contract is made can enforce it).  This suggestion would explain the final part of the quotation as meaning that the terms of the contract were not material because the contract was not enforceable.  The Court therefore invented a back-to-back arrangement although not on the basis of article 6(4) which did not apply because the Court stated in the passage quoted above that CPP acted not only in its own name but also on its own account, as the Advocate General noted in paragraph 38.  But whatever the reason for its decision the Court found that CPP was supplying insurance services to the customer.  The Court then went on in paragraph 22 to hold that the onward supply by CPP to the customer was an exempt supply of insurance as the expression was broad enough to include the provision of insurance cover by a person who was not an insurer but who procures insurance cover for his customers in the context of a block policy, by making use of the supplies of an insurer who assumes the risk insured (it is relevant that in Taksatorringen Case C-8/01, the Court had decided that “an insurance transaction necessarily implies the existence of a contractual relationship between the provider of the insurance service and the person whose risks are covered by the insurance, that is to say, the insured party”).  This dealt with an argument put forward by the United Kingdom that even if CPP was providing insurance it was not exempt as it was not an authorised insurer.  When the case returned to the House of Lords, in spite of the European Court having accepted in paragraph 19 that it was for the national court to determine whether CPP itself had accepted insurance obligations, neither party is recorded as arguing that it did not (see [2002] 1 AC 202 at 203-4).  The House of Lords at [19] accepted the European Court’s analysis that CPP was providing insurance services and went on to consider whether there was a single supply with some ancillary services or two independent supplies, deciding that the dominant purpose was insurance to which the other services were ancillary.  Therefore even though in English law the customer had a direct claim against the insurer and so the insurer might be said to have supplied insurance services directly to the customer, the case is only authority for the VAT consequences on the basis of the European Court’s decision, accepted by the House of Lords, that the insurance (together with other services) was provided by CPP to the customer.  
90.	 We consider that Mr Vajda was trying to combine the English law position that the insurer, and not CPP, was providing the insurance to the customer, supported by Taksatorringen that CPP cannot have been supplying insurance in European law, with the final part of the European Court’s decision about what was the principal service in a single supply comprising several elements, in order to extend the decision to apply to the case where some of the elements are supplied by a third party.  We agree with Mr Cordara that this cannot be done because the European Court’s decision was on the basis that CPP was providing both the insurance and the other services to the customer, an analysis that the House of Lords expressly accepted in determining that the insurance was the principal service.  CPP cannot be extended to cover our case where, as we have decided in relation to sales made using Form C, the insurance is provided by a third party, the underwriters, to the customer, and the goods are supplied by the Appellant to the customer.
91.	Mr Vajda also relied on Primback Case C-34/99, in which, if the customer took up the option of interest-free credit, the finance company paid a reduced amount to Primback, so that even if there were two separate supplies, the whole was taxable at the standard rate.  The significant factors in that case, he contended, were that the retailer introduced the customer to the finance house, which made a contract with the customer, and the price of the goods was the same whether or not the credit was taken.  In our case the Appellant introduces the customer to Regency which contracts with the customer, and the price is the same whether or not the customer takes up the Product Guarantee.  He posed the question as “Would Primback be decided differently by the European Court if the credit in Primback had been advertised as being at no extra cost instead of being free?” 
92.	Mr Cordara contends that the Primback principle applied only where a single price was agreed for the two items, whereas here the price split was set out in Form C.  Cases on the method of payment, such as Bally Case C-18/92 [1997] STC 209, should be distinguished from other cases where there were two supplies to the customer.
93.	The European Court’s reasons for deciding Primback were:
38. First, as follows clearly from paragraph 16 of Bally, referred to in paragraph 29 of this judgment, the relationships between seller and purchaser and between seller and finance house must be distinguished for the purpose of determining the basis for calculating VAT. Consequently, the fact that the supply of services by the finance house is, in principle, VAT-exempt has no bearing on the basis of assessment for the charging of VAT in respect of the transaction between seller and purchaser, which alone is in issue in the main proceedings. 
39. For the same reason, Primback's alternative argument is irrelevant. 
40. Second, with regard solely to the legal relationship between seller and purchaser, Primback cannot validly claim that, for purposes of determining the basis of assessment for VAT, one must break down the single price advertised and invoiced to the consumer, distinguishing between the portion relating to the value of the goods and the portion relating to the cost of the credit ultimately borne by the retailer. 
41. According to the order for reference, where a customer makes use of the possibility of paying for goods purchased from Primback by way of interest-free credit, that customer receives from the seller an invoice stating the price of the goods as advertised in the store at the time of sale and concludes with a finance house a loan agreement for an amount equivalent to the cash sale price of the goods. The finance house undertakes to pay that amount directly to the seller, on the purchaser's behalf, in settlement of the price advertised and invoiced by that seller. The customer repays to the finance house only the amount of the loan. 
42. It follows that, in the present case, the price agreed between the parties to the contract of sale and paid by the consumer was the same, irrespective of the means by which the purchase of the goods was financed, with the result that Primback cannot reasonably argue that the price advertised in fact contained a component representing the value of the credit (see, by way of analogy, Case C-48/97 Kuwait Petroleum [1999] ECR I-2323, paragraph 31). 
43. It follows that, from the point of view of the final consumer, the transaction which, in this case, he concludes with Primback is to be seen as a single transaction consisting in the sale of goods, by reason of the fact that the retailer supplies goods to his customers in return for payment of a single price advertised by the seller, invoiced to the purchaser and payable by him, but also offers at the same time the possibility of credit described as credit free of interest or other costs to the consumer. That being so, the credit which Primback claims to have afforded the customer cannot be regarded as a transaction effected for consideration within the meaning of Article 2 of the Sixth Directive. 
44. With regard to the transaction concluded between Primback and the final consumer, which alone is relevant in the main proceedings, it should be added that, even if it were possible to distinguish the supply of services, allegedly consisting in the supply of credit, from the supply of goods, the former supply would, in circumstances such as those in issue in the main proceedings, have to be construed as being in any event ancillary to the principal transaction consisting of the sale of goods. 
…
47. Primback cannot therefore validly argue that the provision of interest-free credit as such reduces the counter-value of the supply of the goods. On the contrary, the option given to customers to purchase on credit not only increases the volume of the retailer's sales, but also enables the retailer to avoid having to accept payment by instalments and guarantees him payment for the goods sold, with the result that, in consideration of this supply of services provided by the finance house, the seller accords to the latter a commission which reduces his profit margin. That commission constitutes for Primback a charge connected with its business in the same way as, for example, its costs in respect of financing, advertising or rent. 
94.	The first reason (paragraph 38) rejects Primback’s argument based on the commercial reality that they had not received the amount paid to the finance house and should not therefore be taxed on something that they did not receive, on the ground that one should concentrate on the relationship between the seller and purchaser and not consider other relationships.  The court regarded the transaction as being the same as in Bally, a credit card case, in which the important factor was that the price had to be the same from the point of view of the customer and the taxable person; the payment by the retailer to the credit card company was made pursuant to an independent transaction caused by the purchaser not paying the price direct to the retailer but bringing in the card company.  The second reason in Primback (paragraph 40) is that one cannot break down the single advertised and invoiced price into different components.  It followed from these two reasons that the transaction must be analysed as a single transaction of the sale of goods for the advertised and invoiced price (paragraph 43).  The commission paid by Primback to the finance house was therefore a cost of doing business like advertising and rent (paragraph 47).
95.	It seems to us that the European Court concentrated on the transaction as seen by the customer (note the words “from the point of view of the final consumer” in paragraph 43), which was the sale of goods for a single advertised and invoiced price.  In this appeal we have a different situation from the customer’s point of view even though the transactions are similar in that in both the retailer introduces the customer to a third party who makes a separate supply to the customer, and the price is the same whether or not that separate supply takes place.  The customer starts by seeing a single advertised price, as in Primback, but unlike the situation in that case where he never knows what the finance company pays to Primback, by the time he concludes the purchase with Form C, he no longer sees a single invoiced price (the customer order being similar to the invoice in Primback which was also not a tax invoice), but two separately invoiced prices for supplies by two different named parties.  We do not consider that the principle in Primback can be extended to a case where the customer is taken to know that he is purchasing two separate supplies from two different people at two different prices.  Accordingly, while the answer to Mr Vajda’s question “Would Primback be decided differently by the European Court if the credit in Primback had been advertised as being at no extra cost instead of being free?” may well be no, but we do not consider this to be the right question, which is whether it would be decided differently if two separate prices were specified, to which the answer is yes.
96.	Mr Vajda also relied on Commission v France Case C-404/99 which concerned the legality of the French rule that restaurants providing fixed price meals including service did not pay VAT on the service charge so long as various conditions were satisfied, including that the customer was informed about the amount of the service charge and that it was shared out in full with staff.  The European Court held that VAT was payable on the full consideration.  Mr Vajda derived support from the case that showing the service separately on the bill was not conclusive.  We do not derive any assistance from this case.  The only contract was with the restaurant for the fixed price which included the service, and so the service was supplied by the restaurant and not by the staff.  In our case, there is a separate contract for the insurance with Regency, which would be equivalent to the staff having a separate contract for service.  This is clearly impossible as the customer cannot decide to have the meal without the service.
97.	We cannot detect any distinction between Mr Vajda’s arguments and the arguments that he pur forward in what was called “the ancillary supply issue” in Telewest Communications Ltd v Customs and Excise Commissioners [2004] STC 517 at [88] onwards, which were not accepted by the High Court.
98.	  With regard to Mr Vajda’s contention that article 11A includes in the taxable amount incidental supplies such as insurance whether or not by separate agreement, supports his contention that there is a single supply of goods, we think that this argument relied on the insurance being mandatory (which we have not found).  Also we agree with Mr Cordara that BT plc is authority for saying that the article cannot be used in this way.  BT was a case where the supplier of both supplies was the same.  Lord Slynn said at page 762e: 
“[Article 11A] does not provide that transport is or is deemed to be part of any particular supply of goods or services any more than it provides that packaging and commission are part of such supplies.  Like Nourse LJ ([1998] STC 544 at 549), I fully agree with the statement of the chairman of another London Value Added Tribunal (Mr P M Horsfield QC) in Plantifor Ltd v Customs and Excise Comrs [1997] V&DR 301 at 313-314, para 4.1: ‘Prima facie, therefore, Article 11A has nothing to do with the identification of a supply, but operates, when the supply has been identified, [under the earlier titles of the Sixth Directive] to quantify the taxable amount in respect of the supply.’”
99.	Mr Vajda pointed out that Lord Hope at page 768j did say that the article helps to show that transport can be incidental, although this need not be so and accordingly is not deemed to be so in all cases.  But this says no more than what is clearly implied by the article, that there are some cases where transport is incidental, in which case the cost of it is included in the consideration for the main supply.  We cannot read into article 11A any warrant for treating insurance supplied by a different person as an incidental expense of a different transaction.
Abuse of law
100.	We shall deal with the contentions of the parties on the principle of abuse of law later in this decision but here we record the reasons for our conclusion that, even assuming that the principle is fully applicable, there is no abuse of law in the transaction that leads to the conclusion that tax is payable on the full consideration.
101.	The definition of abuse set out in Emsland-Stärke Case C-110/99 [2000] ECR 1-11569, which will be discussed in more detail below, is the objective test that “despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved” plus the subjective one, which Mr Vajda contends refers to the primary purpose, of “the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it.”  Mr Vajda contends that the abuse here consists of the Appellant paying less tax than a trader who offers a 5 year product guarantee and accordingly pays tax on the full retail selling price.  If the Appellant had changed from giving a 5 year product guarantee in this way to the actual Product Guarantee, there would be more force in this contention, but this is not the case.  Before the Product Guarantee, the Appellant had a liability under the Sale of Goods Act; after it, the customer was receiving something extra from the insurer which is different in nature from having the benefit of the Sale of Goods Act by ignoring the normal calculation of damages for breach of contract, in providing the possibility of replacement goods for 5 years without reference to whether the goods have been accepted, and by the guarantee applying even though the Appellant was not there to fulfil it.  While some of these benefits might be provided by drafting a guarantee in a suitable way, that would not be a normal type of guarantee, and the last benefit could be achieved only if the guarantee was provided by a third party.  The better comparison is that before the transaction a customer could have purchased separately an exempt insurance policy with the same cover, no doubt at a higher price because the insurers would have been concerned about adverse selection.  Effectively therefore, rather than converting what was a taxable supply into an exempt one, the transaction provides a greater benefit to the customer in the form of two supplies for the same price, with the necessary consequence that the value of the standard-rated component is reduced.  Alternatively, if it be said that one should compare the effect of the Appellant taking out the insurance for the benefit of the customer, and of the customer doing so, we would say that the less artificial transaction is for the customer to contract for the insurance for his own benefit.  Although the guarantee is described as the Courts 5 year guarantee, Form C does state that the guarantee is supplied by Regency.  If there is a genuinely separate supply of insurance, the principle of neutrality is not breached since any trader can do the same.  It cannot be said that there is a formal observance of the conditions laid down by the Community rules (in this case, for the exemption of supplies of insurance) contrary to the purpose of those rules, nor can it be a case of the Appellant artificially creating the conditions laid down for obtaining the exemption.  Accordingly, we do not consider that either of the Emsland-Stärke factors is present in the fact of there being two separate supplies.
The value of the two supplies with Form C
102.	Accordingly we reject Mr Vajda’s argument that the consequence of their being two contracts with Form C is that tax is payable on the retail selling price.  We conclude that that there are two supplies by two different parties, the VAT consequences of which must be determined separately.  We are left with two possibilities, that we accept the apportionment as having been agreed by the parties, or a different apportionment should be made.
103.	It is necessary to analyse what is really happening in the attribution of the consideration in more detail.  The insurers (Regency and the underwriters between them) receive (on our illustrative figures) 1.5 per cent of the retail selling price of the goods.  After payment of IPT (which is a function of the attribution), whatever attribution to insurance is made the Appellant receives everything that is not paid to the insurers.  We illustrate this in the following table.
Attributed to goods	86.20	81.00	50.00	1.00	
Attributed to insurance	13.80	19.00	50.00	99.00	
Cost of insurance (illlustrative)	-1.50	-1.50	-1.50	-1.50	
IPT (4%)	-0.55	-0.76	-2.00	-3.96	
Commission to Courts	11.75	16.74	46.50	93.54	
VAT exclusive price of goods	73.36	68.94	42.55	0.85	
Courts receives	85.11	85.68	89.05	94.39	
VAT exclusive receipt if price of goods is 100	85.11	85.11	85.11	85.11	
Benefit to Courts	0.00	0.57	3.95	9.28	
(We have used an IPT rate of 4 per cent as this was the rate when the transaction was first set up; the figures change slightly if the current rate of 5 per cent is used.)
The first column of figures shows the break-even point below which the attribution of consideration to insurance will be disadvantageous to the Appellant.  Above that, the VAT saving pays for the actual cost of the insurance and the IPT.  The second column of figures shows the attribution used in this case of 81 per cent to the goods and 19 per cent to insurance.  Two other columns show the increased potential VAT savings of attributing 50 and 99 per cent of the consideration to insurance.  The attribution makes no difference to either party to the insurance contract.  Whatever the attribution between about 1.56 per cent of the retail selling price to the insurance (so that it is sufficient to pay the illustrative cost of the insurance plus the IPT) and just under 100 per cent, the insurers (Regency and the underwriters together) in all cases receive our illustrative 1.5 per cent of the retail selling price; and the customer in all cases pays 100 per cent of the retail selling price of the goods for the goods plus insurance.  Anything attributed to insurance that is greater than the 1.56 per cent is retained by the Appellant as insurance commission (or goes to pay the IPT) so that the amount of the increased attribution goes round in a circle (apart from paying IPT).  The only person who is affected by the attribution is the Appellant which gains so long as the attribution to insurance exceeds the break-even figure of 13.8 per cent, which explains the odd circumstance of Regency suggesting an attribution of between 15 and 20 per cent for the insurance and saying that it should be agreed with Coopers & Lybrand, the Appellant’s auditors.  This is a strange way for an insurer to fix a premium for insurance with the customer to which the Appellant was not even a party.  Coopers & Lybrand put the question back to the Appellant by asking what they wanted commercially (this seems to be a misuse of the term) which they were told was 15 to 20 per cent, and they noted in the file note of a telephone conversation quoted above that “as a matter of principle, the amount of the discount was irrelevant...” (they understood that the discount would always equal the cost of the insurance and so this is also a statement about the attribution of the price to insurance).  Mr Blake and Mr Samuels negotiated amongst themselves over lunch between 19, 19.5 and 20 per cent and finally settled on 19 per cent.  As the table shows, there is nothing magic about a maximum of 20 per cent; the output tax saving would be much greater if it had been 99 per cent.  
104.	Various attempts were made during the hearing to justify the attribution.  Mr Michael said it was similar to the premium for Supa Shield but he then weakened the analogy by saying that the amount paid to underwriters for Supa Shield would be one-third of the current price if it were sold automatically with all goods as this would eliminate adverse selection.  We accept that it does not automatically follow that the price to the customer would be one-third, but it does suggest that the analogy is unreliable because the sale price might also have altered considerably.  Mr Blake described the 19 per cent as a figure that the market will bear, which must mean what sounds reasonable to the customer (who does not bear the cost).  Mr Cordara said that at the 81 per cent attribution to the goods the Appellant was not selling them at a loss but this does not seem to us to affect the principle.  He pointed to other retailers adopting the same transactions who had made attributions to insurance at a similar level.
105.	The other side of the attribution of 19 per cent to the insurance is the 19 per cent discount on the price of the goods.  To what extent was this real?  A number of cases where the price of the goods was still the undiscounted price were identified as follows:
•	The “price pledge” in advertising material stating that if the customer finds an item available from a competitor for a lower inclusive price within 7 days of ordering, the Appellant will not only promise to match it but beat it by 10 per cent of the difference.  Clearly the price referred to must be the undiscounted price.
•	In the personal loan documents issued by HFC Bank, who finance about 30 per cent of purchases, the goods for which the loan is made are described for example as “furniture” giving the undiscounted price, although a customer order form will also have been issued to the customer.
•	The maximum replacement price payable under the insurance policy for replacement goods (although in most cases this will be academic since there is an arrangement under which the Appellant will supply to Regency replacement goods at retail selling price less a 40 per cent discount).  Presumably it could be relevant if the Appellant no longer supplied goods of the same type and so Regency had to buy the replacement goods in the market.  Mr Michael thought that the undiscounted price was referred to as this gave effect to the intention of being able to replace the goods, but Mr Cordara contended that he was wrong as a matter of construction of the policy.  It is well known that the meaning of a document is what the parties using the words they have used against the relevant background would reasonably have been understood to mean.  We prefer Mr Michael’s approach as someone familiar with insurance practice.  Whilst seeing the force of Mr Cordara’s approach on the strict wording, we consider that Mr Michael’s accords better with the commercial reality that if an insurance policy covers the replacement of goods with an undiscounted price of £1,000, it not reasonable to suppose that the parties intended to provide for their replacement with goods costing a maximum of £810.  
•	In determining the price of Supashield when this was calculated in bands depending on the price of the goods, as it was for carpets for at least part of the time
•	The maximum fee for cancellation of the transaction at the discretion of the Appellant which is 10 per cent (or 25 per cent for floor coverings) of the undiscounted price
•	The calculation of the salesman’s commission, which is 1 per cent of the retail selling price of the goods whether or not the Product Guarantee is taken up (the rate is higher for clearance goods)
•	The £200 limit for Regency sending the policy to the customer (that limit has now been removed).
•	The discount was treated as part of the cost of the Product Guarantee in the management accounts from March 2002 which is different from the treatment of other discounts.
106.	Our conclusion is that there are occasions where the 19 per cent discount has not been carried through, which suggests that this is less than a real discount.  In saying this we appreciate the force of Mr Cordara’s submission that in Lex Services plc v Customs and Excise Commissioners [2004] STC 73 the fact that the true value was used to limit the refund if the customer returned the car within 30 days was not a reason for not treating the part-exchange price as the agreed consideration for the sale of the car because the true value was the consideration for a different contract.  Here in the first two bullet points, it is the price under the contract for sale of the goods itself that is in issue, and in all of the other bullet points except the last one it is not merely a case of a different price being attributed to a separate contract made in different circumstances, but a consequence that flows directly from the price under the contract for sale of the goods.  We are not criticising the treatment in the last bullet point as a matter of accounting but the treatment is clearly different from any other discount applied to goods.  Accordingly, we consider that the above list lends support for doubting the reality of the discount.
107.	We start by accepting that the attribution is binding as a matter of contract law, so that for example if Regency were not paid 19 per cent (subject to the Appellant’s right to retain its commission) they could sue for it.  The question is whether this is a case where the contractual analysis is not binding for VAT.  Mr Cordara pointed out the acceptance by the House of Lords of the possibility of value shifting.  In CR Smith Glaziers (Dunfermline) Ltd v Customs and Excise Commissioners [2003] STC 419, 425j at [17] Lord Hoffmann (with whom Lords Woolf, Hope and Walker agreed) said “But when a supply of taxable goods is combined with a supply of exempt services in a single package, particularly to a consumer, there is a temptation for both parties to agree on an inflated price for the exempt services and a correspondingly lower price for the taxable goods.  This is called value shifting.  It suits the supplier because he obtains a competitive advantage from being able to reduce his total price.  It naturally suits the consumer to pay less.  The only losers are the commissioners.”  The issue in that case was whether it was necessary to specify the exempt part of the consideration as an amount or whether specifying it a percentage was sufficient.  By analogy with cases of non-monetary consideration, Mr Cordara submitted that the consideration for VAT was the subjective value, relying on cases such as Naturally Yours Cosmetics Case 230/87 [1988] STC 879: “…it [the consideration] is a subjective value, since the basis of assessment is the consideration actually received and not a value estimated according to objective criteria.”  The subjective value is the value agreed by the parties.  As the House of Lords explained in Lex Services plc v Customs and Excise Commissioners [2004] STC 73 at 79 (para.[17]): “In a straightforward case the ‘subjective value’ of non-monetary consideration means the value overtly agreed and adopted by the parties to the transaction in question, just as the price overtly agreed and adopted by the parties is (in most cases) conclusive as to the quantum of monetary consideration.”  There is no dispute about the principle; the question is whether it is applicable here.  We do not think it is.  The parties have not in any real sense agreed the attribution.  It is an arbitrary figure which makes no difference to the customer, or Regency, or, apart from the amount of VAT for which they are apparently liable, the Appellant, who decided on the attribution unilaterally after some internal discussions at which various figures were named.  The proportion attributed by the Appellant to insurance goes round in a circle back to the Appellant apart from the actual cost of the insurance (1.5 per cent on our illustrative figure) or goes to pay IPT.  In these circumstances, there is no reason why we should respect a figure of 19 per cent which is the figure that happens to have been fixed by the Appellant.
108.	The only factor that is real is that whatever the attribution the customer always pays the retail selling price marked on the goods.  We therefore consider this to be a case where section 19(4) of the VAT Act 1994 applies:
“(4) Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”
109.	In reality there is a single consideration that is split between the Appellant and the underwriters in an arbitrary manner.  The 81 per cent is not properly attributable to the supply of goods by the Appellant and accordingly there should be an apportionment.  In terms of article 11 of the Sixth Directive, the 19 per cent is not “consideration which has been or is to be obtained by the supplier from the purchaser” when whatever the attribution, (on our illustrative figures) only 1.5 per cent will be paid to Regency and the underwriters and the whole of the rest after payment of the IPT will be retained by the Appellant; see the reliance of the European Court on what the Advocate General described in paragraph 18 of the Opinion as the “commercial reality of the transaction” in determining what was the consideration obtained by the supplier in H J Glawe Spiel Case C-38/93 [1994] STC 543, and the Court’s reference in paragraph 9 of the judgment to what the supplier can “take for himself.”  As the Commissioners’ alternative assessments are based on an apportionment we shall consider next the merits of their method.  
Apportionment
110.	The Commissioners also made alternative assessments apportioning 6.2 per cent of the retail selling price, rather than 19 per cent, to the supply of insurance.  In view of our decision in relation to customer order Forms A and B and internet sales, apportionment is relevant only to Form C.  The method adopted by the Commissioners was to start with the total cost of insurance provided through Regency included in the invoice from Regency for February to March 2002 and deduct the figures for the Product Guarantee insurance, thus leaving Supa Shield.  Since this is a product sold to the customer separately, Mr Dean-Webb considered that the pricing was determined by market forces and was more reliable than the pricing of the Product Guarantee.  The analysis of the Supa Shield insurance showed that on average, of the total premium, 73.52 per cent was commission paid to the Appellant, 4.76 per cent was insurance premium tax (we are not clear why this method did not result in the actual rate), and 21.72 per cent was paid to the broker and underwriters.  He then started with the broker and underwriter costs of the Product Guarantee and marked them up by the same percentages, so that the commission paid to the Appellant was 73.52 per cent of the marked-up premium.  The result was that 6.2 per cent of the retail selling price of the goods was attributed to the Product Guarantee insurance, which was the method used in the alternative assessments.
111.	Mr Cordara pointed out that using the actual figures the cost per policy for the Product Guarantee was £16 greater than for Supa Shield, which was roughly the difference in the broker and underwriter costs, whereas the alternative assessments resulted in a cost per policy of about one-third of that of Supa Shield.  Mr Michael also criticised the method pointing out that one was comparing a policy sold in virtually all cases with the Supa Shield policy which was sold in a much lower proportion of cases resulting in adverse selection.  If Supa Shield had been sold in all cases he produced a letter from the underwriters saying that the cost would be about one-third of the present.  Mr Michael also pointed to the differences in risk.  Supa Shield covered stain and accidental damage; the Product guarantee covered structural damage.  During the hearing Mr Cordara amended his grounds of appeal, without objection by the Commissioners, to argue, if he lost on the main argument, for an apportionment based on either cost, or market value, or some other fair and reasonable basis.
112.	In our view the method of making the alternative assessments was a sensible one for Mr Dean-Webb to adopt in the circumstances; it was essentially a mark-up calculation using a different policy where the breakdown of the components of the cost were determined by market forces.  It used figures that were available to him and avoided the necessity of taking advice and delaying the time when he made the alternative assessments.  However, we consider that Mr Michael’s criticisms of the method are justified.  The two insurances are not comparable.  Supa Shield covers accidental damage and the Product Guarantee covers manufacturing defects; one is sold at an extra cost in a proportion of cases, and the other is sold at no extra cost in virtually all cases.  It is quite possible that a different commission would be paid to the Appellant for the introduction of additional business than for the introduction of virtually automatic business of a high volume.  These differences suggest that the comparison with Supa Shield may not be a reliable one.  We consider that both parties should have the opportunity to propose alternative apportionment based on the best evidence available.  The broker and underwriter cost is fixed (subject to the point made below) and the IPT is a function of the premium, and so the only unknown is the commission payable to the Appellant for introducing the business.  It seems to us that the existence of a commission is a proper element in the calculation; the question is what is a proper amount of commission.  One further point, that was not argued, occurs to us, which is that the insurance partly replaces (and partly extends) the Appellant’s Sale of Goods Act liability, which is a liability imposed by law on any commercial sale of goods that one would expect to be included within the standard-rated price of the goods for VAT.  Here the customer is paying in part for insurance that relieves the Appellant from that liability.  In other words, part of the cost of the insurance replaces a liability that is properly included in the selling price of the goods.  We put forward for consideration by the parties that the true cost of the insurance might be argued to be what it would be on the basis that the underwriters had exercised their right of subrogation to claim from the Appellant anything that they paid out to the extent that it was the Appellant’s proper liability under the Sale of Goods Act.
113.	Accordingly we adjourn the appeal to allow the parties to present further argument at a resumed hearing on the apportionment including the calling of further evidence (including expert evidence) to be disclosed in advance of the resumed hearing to the other party.  We considered whether Regency should be invited to become a party to the appeal for this purpose but it seems that since the main difference that a changed apportionment will make is to the amount of the Appellant’s commission this was unnecessary.  However, in view of the point made at the end of the previous paragraph we shall direct that a copy of this decision be sent to Regency.  
Abuse of law
Contentions of the parties
114.	We have reached our decision without needing to consider the European principle of abuse of law but as the point has been argued we shall set out our views.  Mr Vajda contends that the abuse of law principle enabled the Commissioners to prevent the Appellant’s from making supplies that were properly taxable into exempt supplies, which we have already stated we do not accept, or alternatively that it enables them to upset the attribution of 19 per cent of the retail selling price to insurance.
115.	Mr Cordara put forward 16 reasons against this contention:  
(1)	There was no such principle in English common law or statute law.
(2)	The constitutional principle is that only Parliament can impose tax.  Mr Vajda replied that Mr Cordara’s Nos 1 and 2 ignored the supremacy of European law in which the principle existed.
(3)	The abuse principle is at best one of interpretation of European law.  Mr Vajda replied that this was contrary to Emsland-Stärke Case C-110/99 [2000] ECR 1-11569.
(4)	As a principle of interpretation it can be used to help interpret a UK statute subject to the principle in Marleasing Case C-106/89 but it cannot be used to do violence to the UK statute.
(5)	A purposive interpretation is already applied to VAT to require commercial substance in such matters as “supply.”  Mr Vajda replied to Nos 4 and 5 that the principle was not restricted to interpretation.
(6)	The state cannot rely on the principle to use a Directive against the taxpayer.  Mr Vajda replied that while the contents of a Directive were addressed to the state, the principle was not so addressed but applied to everybody.
(7)	The principle can be applied only to EU rights, not obligations; no right is given by article 11 of the Sixth Directive.  Mr Vajda replied that this was incorrect and that the principle applied to VAT.
(8)	This case was a fortiori in concerning section 19 of the VAT Act which is our implementation of article 11.  Mr Vajda contended that the Directive still operates when it has been incorporated into domestic law.
(9)	The principle was restricted to (a) abuse of EU law to circumvent national law; or
(10)	to (b) abuse to obtain a financial advantage from EU funds; or 
(11)	to (c) abuse EU law contrary to a national abuse provision.  Mr Vajda contended that (9) to (11) were merely cases that had arisen and in any case VAT was relevant to the Community’s own resources.
(12)	The Sixth Directive has its own anti-abuse provisions, for example in articles 13, 20 and 27.  Mr Vajda contended that in Emsland-Stärke the principle was applied although there was an anti-avoidance provision that was not in force, which showed that it has general application.
(13)	According to Direct Cosmetics avoidance does not even involve intent and the mechanisms of the Directive should be used to prevent it.  Mr Vajda contended that abuse involved artificiality which was not the case in Direct Cosmetics.
(14)	The objective part of the Emsland-Stärke definition was not satisfied; there was no formal observance of Community rules contrary to the purpose of the rules.  It was no purpose of the Directive to prevent genuine supplies from being made.  Mr Vajda contended that the issue was whether the exempt supply was created artificially.
(15)	The subjective part of the Emsland-Stärke definition was not satisfied; there was no intention to obtain an advantage from the Community rules by artificially creating the conditions laid down for obtaining it.  The transaction was entirely commercial.  Mr Vajda contended that this merely begs the question of whether the transaction was commercial.
(16)	The cases in the European Court describe the necessary abusive intent in strong language, such as “fraudulent and abusive” or “manifestly contrary to the purposes of the Community legislation.”  Mr Vajda contended that the language used by the Court was merely illustrative.
116.	In Emsland-Stärke the Commission contended (see paragraph 38 of the Judgment) that the abuse principle was a general principle of law already in force in the Community legal order.  The court agreed and applied the principle in circumstances where there was a specific anti-avoidance provision that was not in force at the relevant time saying: 
“51. In that regard, it is clear from the case-law of the Court that the scope of Community regulations must in no case be extended to cover abuses on the part of a trader (Cremer, cited above, paragraph 21). The Court has also held that the fact that importation and re-exportation operations were not realised as bona fide commercial transactions but only in order wrongfully to benefit from the grant of monetary compensatory amounts, may preclude the application of positive monetary compensatory amounts (General Milk Products, cited above, paragraph 21 [“the position would be different only if it could be shown that the importation and re-exportation of that cheese were not realised as bona fide commercial transactions but only in order wrongfully to benefit from the grant of monetary compensatory amounts”]). 
52. A finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. 
53. It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it. The existence of that subjective element can be established, inter alia, by evidence of collusion between the Community exporter receiving the refunds and the importer of the goods in the non-member country.” 
The Court went on to say that it was for the national court to establish the existence of the two elements in accordance with national rules of evidence so long as the effectiveness of Community law was not undermined, in contrast to the Commission’s argument that it was for the national administration to prove the case (paragraph 39).
117.	More recently in Gemeente Leusden Case C-487/01 the European Court referred to the principle in a VAT case, although in circumstances where abuse is specifically referred to in article 13B, and there was in fact no abuse because all the supplier had done was to exercise the option to tax.  Mr Vajda contended that this demonstrated that the principle applies in the VAT field.  The case may be more of an explanation of the meaning of the expression “abuse” in article 13B (“Without prejudice to other Community provision, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse….”) than a statement of the applicability of the principle to VAT generally, but that does not imply that it is not a general principle applicable also to VAT.  The Court said:
“76 In that connection, it must be borne in mind that, under Article 13(B) of the Sixth Directive, Member States are to exempt the leasing or letting of immovable property under conditions which they are to lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse. That wording demonstrates that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive. 
77 It would be contrary to that objective to prohibit a Member State to require immediate application of its law withdrawing the right to opt for taxation of certain lettings of immovable property entailing an obligation to adjust deductions made, where that State has become aware that the right of option was being used as part of tax evasion schemes. A taxable person cannot thus justify a legitimate expectation of maintenance of a legislative framework allowing tax evasion, avoidance and abuse. 
78 As regards abuses, the Court has held that a finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it (Case C-110/99 Emsland-Stärke [2000] ECR I-11569, paragraphs 52 and 53). The Court has held that the obligation to repay an advantage unduly obtained in the event that an abuse is thus established does not breach the principle of lawfulness, but is simply the consequence of a finding that there was an abuse (Emsland-Stärke, cited above, paragraph 56).”
118.	In BUPA Hospitals Ltd v Customs and Excise Commissioners (2002) VAT Decision No.17588 the Tribunal stated: “As we read it, the Emsland-Stärke decision goes beyond deciding that abuse is merely an aid to interpretation.  It has become a free-standing and independent principle” (paragraph 122).  However, it did not apply the principle, on the ground that it was domestic law which correctly gave effect to the Directive rather than the Directive that had been abused.  Mr Vajda pointed out that since that decision the European Court decided in Marks and Spencer plc v Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036 that the effect of a Directive was not exhausted when it was correctly implemented into internal law (judgment paragraph 27, p.1057b).  The Tribunal would have been justified in applying the principle, which it held was satisfied, following that case.  The Tribunal has applied the principle in Blackqueen v Customs and Excise Commissioners VAT Tribunal Decision 17680.  In RAL (Channel Islands) Limited (2002) VAT Decision No.17914 the Tribunal would have applied the principle but found that the objective requirement of the Emsland-Stärke test was not satisfied on the facts.  The Tribunal has recently applied the principle in connection with article 11 of the Sixth Directive to find that vouchers were issued for consideration in Kingfisher plc v Customs and Excise Commissioners (2004) VAT Decision No.18668 (paragraph 175).  The Tribunal found that the arrangements were created artificially not for a commercial purpose but only for the avoidance of tax.  However, in RBS Property Developments Ltd v Customs and Excise Commissioners (2002) VAT Decision 17789 the Scottish Tribunal decided that the principle had no relevance.
119.	Recently in Debenhams Retail plc Lindsay J referred to the Commissioners’ arguments based on abuse starting at [105] but concluded that in that case it did not afford the Commissioners any material assistance.
120.	We shall make some preliminary observations which we must make clear go beyond the contentions of the parties who have therefore not had the opportunity of commenting on them, but we do not consider this necessary as we have already concluded that the principle does not apply to make the whole consideration taxable, and our final position is that the principle supports the conclusion that we have reached about apportionment without it.  On the existence of the principle, which is Mr Cordara’s point 1, while the principle sounds like a civil law principle that has no application in a common law country, we suggest that, if one poses the issue differently, as to whether good faith is a principle recognised in English law in the interpretation of an international treaty, everyone would agree that it was.  If authority is needed it is found in the reliance in Fothergill v Monarch Airlines Ltd [1981] AC 251 on article 31 of the Vienna Convention on the Law of Treaties: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”  Since it is also a principle of international law that a treaty must be applied in good faith, a good faith interpretation is a means of determining the extent of the obligations of the parties: see van der Bruggen “Good Faith” in the Application and Interpretation of Double Taxation Conventions [2003] BTR 25. We think it is significant that in paragraph 51 of the judgment in Emsland-Stärke quoted above the absence of a bona fide commercial transaction is mentioned at the same time as abuse, and so the court must have considered them to be closely related concepts.  A court in the UK would apply the principle of good faith to the interpretation of the EC treaty and it would be odd that it did not also apply to the interpretation of a Directive.  There are differences between the abuse of rights principle in different Member States; for example, an article put in by Mr Cordara by Professor Neville Brown Is there a General Principle of Abuse of Rights in European Community Law? (Institutional Dynamics of European Integration, Essays in Honour of Henry G. Schermers) draws a distinction between the differences in the private law application of the abuse doctrine (as opposed to its application to the construction of statutes) in France, Belgium and the Netherlands, where intention to cause harm is not required for the principle to apply, Italy and Austria, where a subjective intention to harm is required, and Germany, Greece, Portugal, Spain and Luxembourg where an objective test of the harmful effect of the abuse is required.  But whatever the domestic law differences, there must be a considerable overlap of the Community principle with the principle of good faith.  We suggest therefore that there is nothing unusual in the application in the UK of the principle of good faith to international obligations.  VAT is concerned with commercial transactions (or, in the words of the Sixth Directive, economic activities).  The abuse principle may mean no more than when the Directive refers to a commercial transaction it is referring to a bona fide commercial transaction, and similarly to the amount of the consideration.
121.	Mr Cordara’s main objection is contained in his points 2 and 6, that even if such a principle exists, it cannot be used by the state against a taxpayer in order to impose tax which only Parliament can do.  He contends that the principle of effectiveness of European law is a principle to be used by the taxpayer against the state and not the other way round.  We believe that the parties are starting at opposite ends.  Mr Vajda starts from the pre-transaction situation of the sale of goods for the retail selling price and he contends that the Commissioners can use the principle to prevent the transaction from having effect for VAT purposes, or alternatively to change the attribution of the consideration made by the transaction; Mr Cordara starts from the transaction having taken effect and he contends that the principle cannot be used to upset the transaction and impose tax on the retail selling price of the goods, nor to change the attribution of the consideration so as to increase the tax.  We consider that Mr Vajda’s approach is more in accordance with the principle.  As a generality, in civil law private rights are granted in seemingly absolute terms but are restricted by the principle so that such rights are in reality granted only up to the point where they begin to be abused.  English law starts from the opposite basis that as a generality there is the liberty to do anything (whatever the motive for doing it, which is in contrast to civil law) unless it is specifically prohibited.  The result of starting at opposite ends can be that the dividing line of what is permitted may be drawn differently but essentially both approaches are seeking a similar end result.  In the present context we consider that the European Court is likely for the same reason to favour Mr Vajda’s starting point of the pre-transaction situation, using the principle not to impose tax but to prevent the transaction from having effect to reduce tax, on the basis that the taxpayer does not have a right to carry out a transaction that has the result that it abuses the Directive in order to reduce his VAT.  On that basis, there is no constitutional objection to the application of the abuse principle, the effect of which is not to impose tax but to prevent the avoidance of tax that Parliament has imposed.  Mr Cordara, on the other hand, has applied an English law approach, i.e. that the Appellant was at liberty to enter into the transaction to reduce tax and there is nothing to prevent it, to determine whether a civil law principle concerned with the extent of rights applies.  We do not agree with Mr Cordara that the principle of effectiveness is a principle to be used by the taxpayer against the state and not the other way round.  Such a limitation would always make VAT law ineffective because it is governed by Directives, a result contrary to the supremacy of Community law.  On Mr Cordara’s point 4 we do not think that any violence is done to a UK statute that gives effect to a Directive by restricting its interpretation to cases where the taxpayer has acted in good faith.  
122.	On Mr Cordara’s points 3 and 4 we think that the difference between the parties is one of semantics; abuse is a principle of interpretation in the sense that the interpretation of the extent of the obligation is that there must be no abuse by the person performing the obligation (as mentioned in paragraph 120 this is the sense in which good faith is a principle of interpretation of international law).  In other words in terms of good faith, if the Directive refers to a commercial transaction one could say either it is to be interpreted to mean a bona fide commercial transaction, or alternatively that the person carrying out the transaction must do so in good faith.  On his points 7 and 8 our understanding is that the right which is potentially abused here is the Directive (abuse of law, rather than abuse of rights) rather than a private right of the taxpayer, for example to a refund of input tax; this is the sense in which the expression is used in Emsland-Stärke in stating “that the scope of Community regulations must in no case be extended to cover abuses on the part of a trader.”  Abuse of law is a general principle of interpretation that is applicable in all cases and is not restricted to the three cases in his points 9, 10 and 11.  It follows that provisions of the Sixth Directive permitting Member States to prevent avoidance, evasion and abuse in article 13, avoid any unjustified advantage in article 20 and to derogate from the Directive to prevent avoidance or evasion in article 27 (Mr Cordara’s points 12 and 13), do not imply that abuse is not a general principle for the interpretation and application of the Directive.  They are aimed at a different point, the permitted content of domestic law.  It is relevant that article 13 starts with the words “Without prejudice to other Community provisions…”.
123.	We therefore consider that there is no reason why the principle cannot apply to the interpretation of the Sixth Directive and as an aid to interpretation of UK legislation  giving effect to the Directive.  We have recorded in paragraph 101 our reasons why we do not consider that the Emsland-Stärke tests are satisfied so as to treat two supplies as one fully taxable supply, which deals with with Mr Cordara’s points 14 and 15 (and the required degree of abuse in his point 16).
124.	Mr Vajda also relied on the principle in relation to the attribution of 19 per cent of the consideration to insurance and 81 per cent to the goods.  We conclude that when the Directive refers to consideration it means consideration attributed to each component without any abuse i.e. in good faith.  We consider that it is the case that in this respect the two Emsland-Stärke tests are satisfied: the objective one that “despite formal observance of the conditions laid down by the Community rules, the purpose of those rules [in the determination of the consideration for each of the supplies] has not been achieved” and the subjective one that “the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it” [by attributing 19 per cent of what was previously the consideration to an exempt supply and reducing the consideration of the taxable supply to 81 per cent].  Accordingly we consider that the principle applies to the attribution of the consideration.  When interpreting “consideration” in domestic law we can gain support from the application of the principle, although we have reached the same conclusion on the interpretation of domestic law in any event, thus agreeing with Mr Cordara’s point 5.
125.	Since we are using the principle only to support a conclusion we have already reached, we need not consider making a reference to the European Court.  
Summary of our decision
126.	As we have stated, this is a decision is in principle and in connection with determining the figures resulting from this decision both parties are at liberty to produce further evidence about the figures in any category of our decision if they cannot agree.
127.	In summary, our decision is that, subject to our determining whether the assessments are out of time, and to a higher court determining whether there has been any misdirection:
(1)	Sales using customer order Forms A and B are taxable on the retail selling price, and the appeal is dismissed in principle in respect of these sales.
(2)	As an exception to (1) if there are cases in which the customer was told that he was buying insurance from a third party in consideration of the 19 per cent mentioned on the order form, the result is the same as for sales using Form C.
(3)	Sales using customer order Form C result in two separate supplies for VAT purposes and are not an abuse of law, and the appeal against the preferred assessments is allowed in principle in respect of these sales.
(4)	As an exception to (3) if there are cases in which the customer makes the contract before seeing Form C, such as carpet sales where the Form C is completed after the estimator’s visit and then sent to the customer, and telephone sales, and cases similar to the one we have described where the customer is told to ignore what is on Form C, in all these cases the result is the same as sales using Forms A and B.  
(5)	In relation to Form C we do not accept the attribution of 19 per cent of the retail selling price to the supply of insurance and the corresponding discount on the price of the goods.  This attribution of the consideration does not represent the real consideration in domestic law and is an abuse of law.  We give the parties leave to argue for the basis of a different apportionment.  Subject to this, the appeal against the alternative assessments is dismissed in principle in relation to sales using Form C.
(6)	We direct that a copy of this decision be sent to Regency in case they wish to make submissions on the attribution.  
(7)	We invite the parties to agree on directions for the conduct of the resumed hearing (including whether they wish this to be combined with the hearing already fixed for dealing with the issue of whether any of the assessments are out of time by adding to the dates already reserved, in which case the Tribunal should be informed as soon as possible), failing which either party may apply to the Tribunal for Directions.
(8)	Internet sales are taxable on the retail selling price and the appeal against the preferred assessments is dismissed in principle in respect of these sales.
(9)	We reserve the question of costs until after the further hearings in relation to the issues whether the assessment is out of time, and as to the apportionment, unless either party gives notice that they wish to contend for an award of costs in principle at this stage.
128.	We certify pursuant to the Value Added Tribunals Appeals Order 1986 that the decision involves a point of law relating wholly or mainly to the construction of an enactment and a Community Instrument which has been fully argued before it and fully considered by it.  Accordingly either party may appeal direct to the Court of Appeal subject to obtaining leave of a single judge of the Court of Appeal.

J F AVERY JONES

CHAIRMAN
   Release Date: 2 September 2004

LON/02/312