19260
	VALUE ADDED TAX — car manufacturer offering free or low-interest credit — credit provided by finance company to retail customer — subsidy paid by manufacturer to finance company — whether price reduction within principles established in Elida Gibbs — whether subsidy to be deducted from consideration received by manufacturer for supply of car to dealer — no — subsidy consideration for separate exempt supply — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	PEUGEOT MOTOR COMPANY PLC	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Colin Bishopp (Chairman)

Sitting in public in London on 6, 7 and 8 July 2005

Roderick Cordara QC and Paul Key, counsel, for the Appellant 

Rupert Anderson QC, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	In this appeal by Peugeot Motor Company Plc (“PMC”) I am required to determine whether payments made by PMC to a finance company are, as PMC maintains, to be taken into account in calculating the value of the supply of a motor car made by PMC or another company within its VAT group; or, as the Respondents contend, is to be left out of account in calculating that value.  The payments are made by way of subsidy to the finance company in order that it may offer credit interest-free, or at low interest, to customers buying PMC’s cars.
2.	Formally, this is an appeal against a decision of the Commissioners of Customs and Excise, as they then were, set out in a letter of as long ago as 9 August 1996, by which they rejected PMC’s voluntary disclosure of over-payments of output tax amounting in the aggregate to £5,512,373.55 in the period from 1 January 1991 to 30 June 1996 (the claim was made before the three-year cap came into effect, and the cap is not an issue in this appeal).  I am not required to deal with any matter other than the central issue of principle, that is the impact, if any, of the subsidy on the value of PMC’s VAT group’s supplies.  I do, however, need to deal with PMC’s application, made during the course of the hearing, for a direction that the issue in the appeal be referred to the European Court of Justice, an application which the Respondents oppose.  I will deal with that issue after setting out the facts and the arguments as they were advanced at the hearing.
3.	Before me, the Appellant was represented by Roderick Cordara QC, leading Paul Key, and the Respondents by Rupert Anderson QC.  The facts were largely agreed and I heard brief, formal and unchallenged evidence from only one witness, Anthony Barnaby Smith.  I had the equally formal statements of Michael Henderson and Brian Smith.  Mr Barnaby Smith and Mr Henderson are employees of PMC able to speak about the workings of the subsidy scheme.  Mr Brian Smith is the Respondents’ officer who took the relevant decision.  I was provided with a bundle of documents, included within which were items such as promotional literature provided to potential purchasers of Peugeot cars and examples of agreements by which customers took advantage of the subsidised credit.
4.	The scheme was essentially very simple.   PMC is and at all material times was a manufacturer and importer of motor cars.  Typically, it sold cars to PSA Wholesale Limited, a company within its VAT group which in turn sold the cars to dealers.  The dealers then procured retail customers for the cars.  Those customers who wished to take advantage of the offer of cheap or free credit entered into an agreement with PSA Finance plc, a company partly owned by PMC but not within its VAT group. On acceptance of the customer by PSA Finance, the dealer sold the car to PSA Finance, which in turn sold the vehicle to the retail customer on the terms set out in its agreement with the customer.  The terms of the scheme varied from time to time and, it appears, were usually not the same for every car in PMC’s range.  The offer might be of zero-interest finance for one or two years with a commercial rate for any succeeding years; or it might be of a lower than usual rate for the entire term of the agreement.  Customers might have to satisfy other conditions, such as the provision of a deposit of a minimum amount, in order to qualify.  However, none of those variations affects the principle.  
5.	Typically, the customer paid a deposit – often funded, in whole or in part, by the value of a car which was traded in – and PSA Finance provided credit for the remainder of the retail price of the new car.  The example of an agreement between PSA Finance and a customer which was used at the hearing as an example, and which I take to be typical, recorded the ordinary selling price of the car, gave credit for the customer’s deposit – in the event, made up in part by a traded-in car and in part by cash – and described the balance as the “amount of credit”.  In the example, the customer was entitled to zero-rate interest for the period of the loan, and the rate and amount of the interest (obviously, nil) were both recorded, as were the monthly instalments the customer was required to pay.  
6.	In order to compensate PSA Finance for the loss of interest attributable to its granting free or low interest credit, PMC made a payment to PSA Finance.  The amount of the payment was precisely calculated, encompassing the lost interest discounted to reflect accelerated payment and the reduced risk of loss.  The details of the calculation are unimportant for present purposes.  Each week, PSA Finance sent a summary of the agreements into which it had entered to PMC giving various financial details including, particularly, the amount of subsidy due in respect of each individual contract.  Thereafter, PMC paid the aggregate subsidy which had accrued during the week.  The advertising material used by PMC, of which several different examples were included in the bundle, made it clear that the promotion was organised by Peugeot, as a group, but even an attentive reader scrutinising the “small print” would not be able to detect that PMC was making a payment to PSA Finance, in order to subsidise the offer, still less would he be able to calculate the amount of the payment.  There was no means within the scheme by which a customer who did not require a loan could instead secure a discount from the price of the car, or could negotiate a variation of the credit terms.  
7.	There was a minor variation in the arrangements when the dealer was Robins & Day Limited, a company owned by PMC and within its VAT group in that there was a direct sale from the VAT group to PSA Finance without the intervention of an independent dealer.  I do not think this difference of detail affects the principle.  As in the case of a sale by an independent dealer, there was a payment by PMC to PSA Finance after the credit agreement had been concluded, and the payment was calculated in precisely the same manner.
8.	PMC’s case is that the consideration it, or its VAT group, received for the car in an arrangement of this kind was the amount paid by the dealer (or, if the dealer was Robins & Day, by PSA Finance) reduced by the amount of the subsidy.  The subsidy, it says, is a price discount or rebate within the contemplation of article 11A(3)(b) of the Sixth VAT Directive (77/388/EEC) and is therefore not to be included in the taxable amount.  Alternatively, it comes within article 4C(1) as a price reduction with the consequence that the taxable amount is also to be reduced.  The argument that article 11A(3)(b) applies was touched on only briefly in Mr Cordara’s skeleton argument, and was not pursued at the hearing.  The authorities to which I was referred examine article 11C(1) rather than article 11(A)(3)(b), and I include the latter in the quotation of the article which follows for completeness only.  Article 11, so far as material, is as follows:
	“Taxable Amount
A.	Within the territory of the country
1.	The taxable amount shall be:
(a)	… 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; …
3.	The taxable amount shall not include: …
(b)	price discounts and rebates allowed to the customer and accounted for at the time of the supply; …
C.	Miscellaneous provisions
1.	In the case of cancellation, refusal or total or partial non-payment, or when the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.”
9.	In the domestic legislation, the provision by which article 11 is implemented is section 19 of the Value Added Tax Act 1994; the material parts of that section read:
“(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 …
(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 ….”
10.	Mr Cordara argued that, in substance, there was a considerable similarity between this case and Elida Gibbs Limited v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387.  There, the taxpayer, a manufacturer of toiletries, promoted their sale by means of two coupon schemes.  In one, the “money off” scheme, potential retail customers could cut coupons out of newspapers or magazines.  The coupons had printed on them a value; on presentation of the coupon to a retailer, the customer was allowed to pay the shelf price of the article less the value printed on the coupon.  The retailer then claimed from the taxpayer the aggregate face value of the coupons it had accepted.  In the other, “cash back”, scheme, customers who had purchased the taxpayer’s goods were able to cut vouchers from the packaging of the goods.  Again, the vouchers were printed with a value.  The customer sent the voucher to the taxpayer which paid the face value of the voucher to the customer.  In each case, the taxpayer sold the goods to the wholesaler or retailer at its normal bulk price; there was no adjustment to the price at that stage.  The taxpayer originally accounted for output tax on the gross price it received but later made a claim for a refund of what it claimed was the excess of the amount it had paid over its true liability which, it said, should be determined by deducting the sums it had paid to the retailers in the money-off scheme and to the retail customers in the cash-back scheme.  The Court of Justice decided that, in each case, the taxable amount must be the subjective value of the consideration received, that is the payment made by the wholesaler or retailer for the bulk supply, less the amounts paid by the taxpayer to the retailer or customer.  It was immaterial that there was no contractual link between the taxpayer and the final customer.  The Court put its reasoning in this way ([1996] STC 1387 at 1403):
“26.	By virtue of art 11A(1)(a) of the Sixth Directive, the taxable amount for supplies of goods and services within the territory of a state comprises all sums which make up the consideration which has been or is to be obtained by the supplier from the purchaser.
27.	According to the court’s settled case law, that consideration is the ‘subjective value’, that is to say, the value actually received in each specific case, and not a value estimated according to objective criteria …. 
28.	In circumstances such as those in the main proceedings, the manufacturer, who has refunded the value of the money-off coupon to the retailer or the value of the cash-back coupon to the final consumer, receives, on completion of the transaction a sum corresponding to the sale price paid by the wholesalers or retailers for his goods, less the value of those coupons.  It would not therefore be in conformity with the directive for the taxable amount used to calculate the VAT chargeable to the manufacturer as a taxable person, to exceed the sum finally received by him.  Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the manufacturer is one, would not be complied with. 
29.	Consequently, the taxable amount attributable to the manufacturer as a taxable person must be the amount corresponding to the price at which he sold the goods to the wholesalers or retailers, less the value of those coupons.  
30.	That interpretation is borne out by art 11C(1) of the Sixth Directive which, in order to ensure the neutrality of the taxable person’s position, provides that, in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount is to be reduced accordingly under conditions to be determined by the member states.
31.	It is true that that provision refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently.  The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral.  It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons.  Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.”
11.	The principles set out in Elida Gibbs were expressed even more strongly, Mr Cordara continued, by an 11-member Court in EC Commission v Germany (Case C-427/98) [2003] STC 301.  German domestic legislation restricted the deduction of the value of such coupons from the taxable amount to those cases in which the manufacturer made a payment to its own immediate customer, usually the wholesaler.  The German government also maintained that, when any such adjustment was made, there should also be corresponding adjustments to the amount of input tax for which the wholesaler and other registered traders in the chain of supply could claim credit.  The Commission had come to the conclusion that, in imposing those restrictions, Germany had failed to implement properly the Elida Gibbs judgment, and sought a declaration to that effect.  Germany (supported by the United Kingdom) attempted to persuade the 11-judge court that the three-judge court in Elida Gibbs (which had also declined to follow the opinion of the Advocate General) had been wrong.
12.	The Court not only rejected the argument that Elida Gibbs was wrongly decided, but went on to emphasise its conclusions.  At [2003] STC 301 at 325 it said:
“42.	Next, it should be emphasised that observance of the principle of neutrality is ensured since the conditions for deduction set out in Title XI of the Sixth Directive allow the intermediate links in the distribution chain to deduct from their own taxable amount the sums paid by each to his own supplier in respect of VAT on the corresponding transaction and thus to pass on to the tax authorities the part of the VAT representing the difference between the price paid by each to his supplier and the price at which he supplied the goods to his purchaser (see para 33 of the judgment in Elida Gibbs).
43.	In those circumstances, reduction of the manufacturer’s taxable amount cannot be made to depend on the subsequent alteration of the transactions effected by the intermediate links in the distribution chain which are in no way concerned by the price reduction or the reimbursement of the value of the voucher or the invoices relating thereto.  Accordingly, art 11C(1) of the Sixth Directive cannot be interpreted as precluding the approach adopted by the court in Elida Gibbs.
44.	Secondly, the German and United Kingdom governments maintain that the reimbursement of the voucher by the manufacturer to a retailer to whom he did not directly supply the goods constitutes consideration paid by a third party in the context of a transaction between the retailer and the final consumer.  Accordingly, there is no reason to consider that the consideration received at the time of the initial supply by the manufacturer should be modified following such reimbursement.
45.	In that regard it is sufficient to state, first, that although the manufacturer may in fact be regarded as a third party as regards the transaction between the retailer who receives reimbursement of the value of the voucher and the final consumer, that reimbursement entails a corresponding reduction in the amount finally received as consideration for the supply by him and that consideration constitutes, pursuant to the principle of VAT neutrality, the basis for calculating the tax for which he is liable (see, in that connection, Elida Gibbs, para 28).
46.	As regards, secondly, the supply by the retailer who receives the reimbursement, it is important to note that the fact that a portion of the consideration received for that supply was not actually paid by the final consumer himself but was made available on behalf of the final consumer by a third party not connected with that transaction is immaterial for the purposes of determining that retailer’s taxable amount (see in that connection, Chaussures Bally SA v Belgium (Case C-18/92) [1997] STC 209, [1993] ECR I-2871, para 17) …
52.	… there is no contradiction between, on the one hand, inclusion of the value of the money-off coupon in the consideration paid by the final consumer to the retailer and, on the other, the reduction in the manufacturer’s taxable amount.  On the contrary, inclusion of the amount stated on the voucher in the retailer’s taxable amount entails a corresponding reduction of the manufacturer’s taxable amount in order to ensure that the amount represented by the voucher is subject to VAT only once, namely at the stage of the supply made by the retailer.
53.	Moreover, the rule that the tax paid by the final consumer should accord with that imposed on the transactions at each stage of the distribution chain requires each trader to be liable to the tax authorities for the tax relating to the value added by him.  However, since the reduction in the manufacturer’s taxable amount does not alter the value added by the retailer, it cannot affect the amount of VAT payable by the retailer.  Conversely, if the reimbursement received from the manufacturer by the retailer were not included in the latter’s taxable amount, the principle of VAT neutrality would be likely to be infringed.”
13.	I should merely add at this point that, if confirmation were necessary that the value of a money-off coupon, once paid by the manufacturer to the retailer, forms part of the consideration for the supply by the retailer of the goods in question to the end customer, it was provided by the court in Yorkshire Co-operatives Limited v Customs and Excise Commissioners (Case C-398/99) [2003] STC 234.
14.	Analysis of the arrangements here, Mr Cordara said, must lead to the conclusion that there was no material difference between the payments made by PMC and those made in Elida Gibbs.  In order to promote the sales of its products, PMC made a payment.  It did not matter that the payment was not made directly to the retail customer, just as, in E C Commission v Germany it did not matter that the payment was not made to the wholesaler: privity of contract was not a factor.  The effect was the same:  the customer received the car at a price lower than he would otherwise have paid, and PMC received less, net, than the money it received from the dealer or, in the Robins & Day cases, its VAT group received less, net, than the price paid by PSA Finance.
15.	The Respondents’ analysis of the arrangements, as Mr Anderson put it to me, is rather different.  They say that there were two transactions: the sale of the car, for which the dealer, or PSA Finance, paid the full price; and a separate, and quite distinct, supply of credit, made by PSA Finance to the customer.  The payments made by PMC to PSA Finance did not subsidise the price of the car, but the cost of the credit.  It could not be said that, because PMC chose to make a payment to subsidise the supply of credit, it received less for the car.  There was no significant difference between this case and the facts of PMC’s earlier appeal, Peugeot Motor Company plc v Customs and Excise Commissioners [2003] STC 1438, in which PMC had offered free insurance to retail customers.  It claimed that the cost to it of buying the insurance from an authorised insurer amounted to a price reduction and that its output tax liability should be calculated by reference to the gross sums it received for the supply of cars, reduced by the cost of the insurance.  At first instance, the tribunal had concluded that PMC’s argument was correct in relation to supplies made by dealers within its VAT group but not in relation to supplies made by third party dealers.  In the High Court, Blackburne J rejected not only the distinction between the two chains of transactions, but also PMC’s contention that the cost of the insurance was, or was to be regarded as, a reduction in the price of the car.  He went on to conclude that Elida Gibbs did not assist PMC:
“[110]	Does the Elida Gibbs point assist the taxpayers?
[111]	There are two elements to the argument: (1) that, as regards Peugeot’s insurance supply, there was a single chain of supply passing from Peugeot to the independent dealer (or finance house) and thence by the independent dealer to the end-user; and (2) that the economic and commercial effect of the supply would have been the same if, instead of paying the premium to [the insurer] in order to procure the end-user with insurance, Peugeot had provided the end user with a voucher or coupon enabling him to acquire the insurance from [the insurer] himself and, having done so, to recover the cost from Peugeot.
[112]	Assuming that the principle in Elida Gibbs applies to the supply of a service as much as to the supply of goods (it is easy to understand how the principle applies to goods which pass down a chain of supply beginning with the original supplier and ending with the end-user but not so easy in the case of a service), I have difficulty in seeing how it applies to the supply of a service the nature of which, as Mr Anderson submitted, alters at each stage of the chain.  But, even if that is wrong and the supply remains essentially the same as it passes down the chain, the rationale for the decision in Elida Gibbs is that the tax authorities should not recover by way of VAT an amount greater than that actually paid by the end-user at the expense of the taxable person, or, as Mr Anderson put it, it is to avoid a mismatch between the price that end-user pays for the supply to him (ignoring any intermediate mark-up) and the price that the original supplier has received for the supply.  It is designed to deal with the case where there is a later transaction between the supplier and end-user which has the effect of reducing the price paid and therefore the supplier’s overall turnover.
[113]	But that is not the case.  It is not suggested that the end-users have not paid VAT on the full price invoiced to them.”
There, as here, Mr Anderson appeared for the Respondents.
16.	The learned judge went on to conclude that PMC made a supply of procuring insurance which, if made for consideration, would be exempt; but he did not decide whether any part of the consideration received by PMC was referable to that putative supply, since the tribunal’s findings of fact did not address that point. He added that, had any such supply been made for consideration, it would be an ancillary supply, to be taxed in the same way as the principal supply of the car, by adopting the principles established by the Court of Justice in Card Protection Plan Ltd v Customs and Excise Commissioners (Case 349/96) [1999] STC 270 and developed in Customs and Excise Commissioners v Primback Limited (Case C-34/99) [2001] STC 803, in which the court was also required to consider a scheme by which a retailer offered free credit to its customers.  The customer in Primback was required to enter into a separate agreement with a finance company by which he agreed to pay to the finance company the normal retail price of the goods by instalments over an agreed period.  Provided the instalments were paid on time, the customer paid no more than the ordinary price of the goods.  The finance company paid the retail price of the goods to the retailer, less a charge which represented the value of the interest foregone.  The Court expressed the view that the offer of free credit was not a supply made for consideration but, even if it were, it must be regarded as an ancillary supply and thus should be taxed at the standard rate, reflecting the tax treatment of the goods themselves.  The Court then added:
“47.	Primback cannot … validly argue that the provision of interest-free credit as such reduces the countervalue 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.”
17.	A similar conclusion could be derived, Mr Anderson said, from Chaussures Bally to which the Court referred in both EC Commission v Germany and Primback.  There, a retailer accepted payment from its customers by credit card.  The customer paid the normal retail price for the goods to the credit card company, but the latter paid the retailer a smaller sum, the difference consisting of its charge for the service of handling the transaction.  The Court concluded that the taxable amount on which the retailer must account was the normal retail price and not the net amount received from the credit card company.  Its reasoning was put in this way, at [1997] STC 209 at 223:
“11.	By the first question the national court asks substantially whether art 11A(1)(a) of the Sixth Directive must be understood as meaning that where, in the context of a sale transaction, the price of the goods is met by the purchaser by means of a credit card and paid to the supplier by the organisation issuing the card after the retention of a percentage as commission in payment for a service rendered by the latter to the supplier of goods, the sum retained must be included in the taxable amount for the tax which the supplier, as a taxable person, has to pay to the revenue authorities.
12.	According to art 11A(1)(a) of the Sixth Directive within the territory of the country the taxable amount is, in respect of supplies of goods, 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.  The purpose of that provision is therefore, as may be seen from the ninth recital in the preamble to the Sixth Directive, to harmonise the taxable amount.
13.	Bally states that where payment is made by credit card the consideration which serves to determine the taxable amount should consist of the net sum actually received by the supplier after the organisation issuing the card has deducted its commission because otherwise a supplier who arranges to be paid by the issuer of the card a sum less than the full price would thus be bearing improperly the consequences of the exemption from VAT granted in Belgium to the card issuing organisations.
14.	That argument cannot be upheld.  The harmonisation sought by art 11(1)(a) of the Sixth Directive could not be achieved if the taxable amount varied according to whether the calculation was for the VAT to be borne by the final consumer or for determining the sum to be paid to the revenue authorities by the taxable person.  It follows that, when the supplier has calculated on the full price the VAT to be paid by the purchaser so as to charge it on behalf of the revenue authorities, it is the same taxable amount which must be taken into account to determine the corresponding amount of VAT which the supplier as a taxable person is to pay to the revenue authorities.
15.	Bally also claims that the supplier is compelled for reasons of competition to accept payment by card and that it is not therefore the supplier who is the beneficiary of any service rendered by the organisation issuing the card but the purchaser, the card holder, and that the percentage of the price retained by the issuing organisation does not represent the consideration for a service rendered to the supplier by that organisation.
16.	It should be pointed out in that respect that the fact that the purchaser did not pay the price agreed direct to the supplier but through the intermediary of the organisation issuing the card, which retained a percentage calculated on the price, cannot change the taxable amount.  The deduction made by the card issuing organisation represents the consideration for a service rendered by it to the supplier.  That service represents an independent transaction in respect of which the purchaser is a third party.” 
18.	Mr Cordara’s proposed reference to the Court of Justice was designed to explore the scope of the Elida Gibbs principle by posing questions in this (draft) form:
“1.	Are Articles 11A(1)(a) and Article 11C(1) of the Sixth Directive to be interpreted as meaning that:
(a)	where a taxable person (who is a manufacturer) makes a supply of goods which then pass through a chain of supplies to reach the final consumer in any unaltered form, 
(b)	the goods supplied are of a type which are habitually sold to final consumers on credit terms, and
(c)	the manufacturer funds a promotion which takes the form of an offer by the final supplier in the chain to sell the goods to the final consumer on more attractive payment terms than normal, but without any rebate by the final supplier to the final consumer of the capital element of the price of the goods,
the taxable amount of the manufacturer’s supply to a subsequent trader in the chain (who may or may not also be the final supplier who makes the offer) is equal to the selling price charged by the taxable person less the sums paid by the taxable person to the final supplier to fund the promotion?
2.	Does it make a difference if the transaction between the final supplier and the final consumer constitutes a single supply of goods, or a supply of goods and a supply of services?
3.	Is it a requirement of fiscal neutrality that the price that the original supplier has received for the supply must match the price that the final consumer pays for the supply made to him (ignoring any intermediate mark-up)?”
19.	It seems to me, however, that there is clarity in the existing case-law of the court, and that it is sufficient to enable me to determine this appeal and, indeed, to answer Mr Cordara’s proposed questions, with that degree of confidence which is necessary if the test laid down by Sir Thomas Bingham MR in R v International Stock Exchange, ex p Else [1993] QB 334 at 545 is to be satisfied.  I have come to the conclusion that, despite the determination with which Mr Cordara advanced his arguments, the matter is by no means as complicated, and difficult of resolution, as he suggested.
20.	There are, in my view, only two factors of importance in this case.  First, Elida Gibbs and EC Commission v Germany show that overriding regard must be had to the principle of fiscal neutrality.  Although, in both of those cases, the court touched on article 11C(1), it did so only in order to use it as an example of the manner in which the directive sets out to respect that principle.  Second, in any case of this kind, it is necessary, as is apparent from the judgments in Chaussures Bally and Primback, to identify what the payment in question represents – that is, whether it truly is a reduction in the price of the goods, or the consideration for another supply altogether.
21.	I adopt with gratitude the approach of the Advocate General (Jacobs) in EC Commission v Germany of using a worked example, and I adopt too his use, for simplicity’s sake, of a notional VAT rate of 10 per cent.  In the typical example I have described, PMC might supply a car to an independent dealer for £10,000, plus VAT of £1,000.  Disregarding any input tax for which it may claim credit, PMC must account for output tax, at this stage, of £1,000.  If the dealer were to sell the car on to a customer, for cash, for a pre-tax price of (say) £11,000, he would charge in all £12,1000 - £11,000 plus VAT of £1,100 – and would account to the Respondents for tax of £100, being output tax of £1,100 less input tax of £1000.  The total tax accounted for, £1,100, would exactly match the tax paid by the final customer.  That remains the case if, instead of paying cash, the customer finances part of the purchase price (it is assumed that the dealer sells the car to the finance company at its normal retail price – the finance company’s input tax and output tax then exactly match).  If there is no subsidy, the customer pays to the finance company, even if by instalments, the normal price of the car, including £1,100 of VAT for which the finance company must account, and interest which, provided the agreement properly discloses the interest charge (as the Consumer Credit Act 1974 requires), is the consideration for the exempt supply of extending credit: see VAT Act 1994, Schedule 9, Group 5, Item 2 and Note (3), and Item 3.  
22.	On Mr Cordara’s case, the customer’s position is unchanged.  The cost of the credit (the interest) may be reduced, or eliminated altogether, but the price of the car and, more particularly, the value of the VAT paid by the customer is not altered.  The dealer, too, must continue to account to the Respondents for the net tax due of £100.  By contrast, PMC’s position is altered.  If the subsidy is, say, £500, PMC pays that amount to PSA Finance, which utilises it to offset the interest foregone.  It does not, and the documentation produced to me makes it clear that it was never in contemplation that it might, pass on the benefit of the £500 to the customer in the form of a reduction in the capital sum owed; it is only ever applied to reducing or eliminating the interest charge.  If PMC is right, however, the effect of the payment is to reduce the consideration, excluding tax, in its hands from £10,000 to £9,500 with a commensurate reduction in the output tax for which it must account to £950.  Overall, the Respondents receive £1,050 although the customer has paid £1,100.  Thus the principle of fiscal neutrality, as it was explained in EC Commission v Germany, is offended.  There is no true analogy with Elida Gibbs, and the only possible answer to Mr Cordara’s first question is “no”.  While the court may have reinforced the Elida Gibs principle in EC Commission v Germany it is clear from the extract of the judgment which I have set out that the manufacturer cannot be expected to pay more tax than the final customer has borne; though the court was not required to address the converse, it is implicit in its reasoning that the tax for which the traders in the chain account, in total, equally cannot be less than the amount borne by the end consumer.  That is precisely what fiscal neutrality implies.  
23.	It is no answer to say that, in PMC’s hands, the payment of the subsidy leaves it with net consideration for the car of less than the nominal £10,000 price for which it was sold to the dealer.  As in Chaussures Bally, that is the result of the manner in which it chooses to do business.  I do not consider that a payment which is made in order to procure the granting of cheap, or free, credit and in order to satisfy the promise made in its advertising can be treated as if it were something else, a reduction in the cost of the goods themselves.  It is, I am satisfied, the consideration for a distinct, exempt, supply of the granting of credit, even if that supply is made not to PMC but to the retail customer.  Nor does it help PMC to argue, as Mr Cordara did, that the granting of cheap or free credit has the same effect as a price reduction.  It is true that a customer taking advantage of the scheme will pay less than a customer for whom the scheme is not available, but the structure of PSA Finance’s agreements is consistent only with his paying less for the exempt supply of credit; there is no reduction in the cost of the taxable supply of the car.  Moreover, as the Court of Justice said in Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453 at paragraph 33 of the judgment: 
“The principle of the neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other.”
24.	I have no doubt that PMC could have provided potential purchasers of its cars with money-off or cash back coupons so as to benefit from the Elida Gibbs judgment; but it did not do so.  Instead, it paid for an associated company to provide cheap or free credit facilities to those purchasers who desired them.  I can see no basis on which it could be said that the latter is the same as the former; nor do I see any need to seek the guidance of the Court of Justice on the point.
25.	I see no distinction of substance between this case and PMC’s earlier appeal, Primback and Chaussures Bally.  In each case the value of the supply of goods was not abated by the cost of the supply of insurance, credit or credit card handling because that cost was the consideration for a separate supply.  It may well have been a cost component of the supply of the goods; but that is a factor which is (or, at least, would be if the supply were taxable) relevant to the trader’s input tax credit.  It cannot alter its output tax liability.  Paragraph 47 of the judgment in Primback seems to me to be exactly in point and conclusive of the issue in this appeal.  I do not accept Mr Cordara’s argument that there is any factual difference or other complication in this case which removes it from the line of authority to which I have referred.
26.	It does not seem to me that the second of Mr Cordara’s draft questions arises, or at least it is not necessary to consider it. I am satisfied, for the reasons I have given, that PSA made two supplies, of car and of credit, but there is no need to conflate them as Mr Cordara suggests.  So far as question 3 is concerned, the principle of fiscal neutrality focuses on the tax rather than the consideration, albeit they usually go hand in glove.  It seems to me plain, as I have already said, that the tax accounted for to the taxing authority must exactly match the tax paid by the end consumer. 
27.	I have concluded that the taxable amount in PMC’s (or its VAT group’s) hands is the gross sum received from the independent dealer or, in the Robins & Day cases, from PSA Finance.  The appeal must therefore be dismissed.  
28.	The parties agreed that costs should follow the event and I direct that PMC shall pay the Respondents’ costs.  If they cannot be agreed, either party may apply for further directions about their assessment. 

COLIN BISHOPP
CHAIRMAN
Release Date: 23 September 2005

MAN/96/0946