19648
	VAT — mail order companies — whether change in terms of trading conditions resulted in their continuing to make gifts of catalogues either at common law — yes — if not, did ownership pass when sent out pursuant to contract — yes — if not, did ownership of the catalogues pass when sent out pursuant to reg 24 Consumer Protection (Discount Selling) Regs 2000 — yes — was catalogue charging clause ineffective as not forming part of contract for goods — yes — was sale of catalogue prevented from being a supply — yes — does principle laid down in Card Protection Plan apply — no — does doctrine of abusive practice apply — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

REDCATS (BRANDS) LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	David Demack (Chairman)
Brian Strangward

Sitting in public in Manchester on 18 – 20 April 2005 and 21 – 25 November 2005

Kevin Prosser QC and Andrew Hitchmough of counsel instructed by Messrs Ernst Young, chartered accountants of London for the Appellant 

Christopher Vajda QC and Ian Hutton, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

DECISION
Introduction 
1.	The appellant company, Redcats (Brands) Ltd (“Redcats”), carries on the business of selling clothing and household goods by mail order, and providing financial services to purchasers of those products.  It advertises its wares in bi-annual catalogues.   Until 2000 it supplied the catalogues to its customers (other than to internet customers) free of charge.  It then planned and put into operation a scheme (“the scheme”) whereby it amended its trading conditions by purporting to introduce a zero rated charge for each catalogue, and to make a commensurate reduction in the price of the mainly standard rated goods ordered from it. Redcats acknowledges that the sole purpose of the scheme was to reduce the output tax on its sales of catalogue goods.
2.	HMRC for Her Majesty’s Revenue and Customs (“HMRC”) did not accept that, following the introduction of the scheme, Redcats supplied each catalogue for consideration, and maintained that it continued to make a gift of it.  Consequently, to recover output tax they considered it had underdeclared, on 15 March 2002 they assessed it to VAT of £1,144,273 in respect of periods 03/00 to 12/00 inclusive, and on 12 September 2002 to VAT of £1,211,040 in respect of periods 03/01 to 12/01 inclusive.  It is against those assessments that Redcats now appeals.  (We note that part of the assessment of 12 September 2002 may be out of time, but as it was a point neither party raised before us, we proceed on the basis that it is not something with which the parties require us to deal).    
3.	In its Notice of Appeal, given on 30 April 2002, Redcats gave its reason for appealing as: 
“HMRC contend that Redcats (Brands) Ltd, and, other companies within its VAT group make no separate supplies of catalogues to their customers.  The company rejects this contention and considers that supplies of catalogues have been made which have been correctly treated as zero-rated under Schedule 8, Group 3 of the VAT Act 1994.”
4.	In contrast, HMRC made four claims in the re-amended statement of case:
“a.	There is no contract as a matter of domestic law for the supply of a catalogue as claimed by the Appellant:
i.	there is no contract for the supply of the catalogue;
ii.	the catalogues are unsolicited;
b.	The catalogues are not supplied for consideration
c.	Alternatively, if there is a supply of the catalogue, that supply is ancillary to the supply of the goods; 
d.	Alternatively, the tax advantage sought under the arrangement falls to be disallowed under the Abuse of Rights principle: Case C-110/99, Emsland-Starke, 2000 ECR I-11569.” 
5.	The ‘principle of preventing abusive practices’ was the subject of part of the judgment of the Court of Justice of the European Communities (“the ECJ”) in Halifax plc and others v Commissioners of Customs and Excise (Case C-255/02) [2006] STC 919 which judgment was delivered after the hearing of the present appeal had ended.  As the principle is of considerable importance in relation to one particular question before us, the parties agreed to make written submissions on it which we must take into account in reaching our decision.  
6.	Most of our findings of fact are set out at paragraphs [8] to [55] of our decision and are followed at paragraphs [61] to [242] by the submissions of the parties and our conclusions on the seven questions before us.  Those questions are as follows:
1. Did ownership of the catalogues pass when they were sent out by Redcats by way of an unconditional gift?
2. If not, did ownership of the catalogues pass when they were sent out, pursuant to a contract with the recipients?
3. If not, did ownership of the catalogues pass when they were sent out, pursuant to regulation 24 of the Consumer Protection (Discount Selling) Regulations 2000 (“the DS Regulations”)?
4. Was the catalogue charging clause ineffective because it did not form part of the contract which Redcats and the customer entered into when the customer ordered goods from the catalogue?
5. Was the sale of the catalogue prevented from being a supply for VAT purposes?
6. Does the principle laid down in the case of Card Protection Plan Limited v Commissioners of Customs and Excise [1999] STC 270 (“CPP”) apply?
7. Does the doctrine of abusive practice apply?
Questions 1 – 4 relate to domestic law issues; 5, 6 and 7 are issues concerned with the VAT analysis of the supply of catalogues.
7.	The case for Redcats was presented by Kevin Prosser QC leading Andrew Hitchmough, and that for HMRC by Christopher Vajda QC leading Ian Hutton.  We were presented with seven agreed bundles of copy documents and took oral evidence from:
(a)	Mrs Marion McKenzie-Green, group finance director of Redcats UK plc;
(b)	Mr Robert Mitchell, group finance director of Littlewoods (another mail order trader);
(c)	Mr Frederick William Oakes, solicitor and company secretary of both Redcats UK plc and Redcats; and
(d)	Mr Iain Campbell, an officer of HMRC. 
From that evidence, we make the following findings of fact.
The Facts
8.	Redcats is a wholly owned subsidiary of Redcats UK plc, itself a wholly owned subsidiary of the French company Redcats (SA), in turn a wholly owned subsidiary of Pinault Printemps Redoute, a multi-national company.  Redcats is the representative member of a VAT group, the members of which, as mentioned above, carry on business as mail order retailers and providers of financial services.  Its main method of advertising the products it has for sale and obtaining orders for them is by means of bi-annual (Spring/Summer and Autumn/Winter) catalogues.   In all, the group produces seven catalogues, namely Empire, The Store, La Redoute, Verbaudet, Daxon, Igloo and Chadwick.  Redcats itself, which until 2000 was called Empire Stores Limited, sells goods through the Empire and The Store catalogues.  For convenience we shall throughout our decision refer to Redcats and to the Empire catalogue, any differences with other group members and other catalogues, including on-line catalogues, being noted where relevant.  Redcats also has an internet catalogue through which it sells goods on-line.  Currently some 15 per cent of Empire sales are on-line; other Redcats brands make lower percentages of on-line sales.  Catalogues have a life of some six months, becoming obsolete at the end of the season for which they are produced.  They contain an ‘end of season’ date.  Catalogues are of two types: full catalogues, which contain details of all the goods and clothes offered for sale, and prospection catalogues which contain but a sample of them.  Unless specific mention is made of prospection catalogues, all references to ‘catalogues’ in our decision are to full catalogues. In some cases the catalogues run to over 1,000 pages.  They give customers the convenience of home shopping and, by offering multiple brands, are designed to target specific market sectors.  
9.	Until 2000, at the beginning of each season, Redcats sent its catalogue to what it describes as “existing customers”, and to each potential customer satisfying certain identity and credit criteria who requested it, free of charge.  However, despite its being free, each catalogue other than an Empire one, had a price on the front or spine.  The purpose in including a price is, to quote Mrs McKenzie-Green, to give the customer the impression she is receiving something of value.  (As most of Redcats customers are women, we shall throughout our decision use feminine pronouns in describing its dealings with them).  But, she added, Redcats never intended to impose a self-standing charge for it might have resulted in adverse customer reaction.  
10.	The scheme was suggested to Redcats by Messrs Ernst & Young.  Prior to its introduction its effectiveness was the subject of discussions within the company and with its advisers.  In an internal memorandum from Mr Leach, Redcats’ tax manager, to Mrs McKenzie-Green dated 19 June 1998 (Catalogue Price VAT Project) he said:
“We have nothing to lose and everything to gain.  At present we have catalogue costs which we simply absorb.  Whilst there is no intention of directly charging customers we have the opportunity to move income from a fully VATable environment to one where VAT is still due at 0%, thus retaining our ability to reclaim input VAT on catalogue costs.  At the same time we will improve our sales margin, either by decreasing VAT payable on sales …”
“I believe you are aware that Next price their catalogue at £3 and actually charge customers on their statements, I understand this is so even if no order is received.  None of the ‘traditional’ mail order companies charge customers for catalogues but let’s not forget that we will not be charging ours, we will simply be highlighting the value of what we have ‘supplied’ to use VAT speak.”
11.	Similar points were made by Ernst & Young in a feasibility report entitled “VAT and Catalogues” dated September 1998:
“The purpose of this report is to consider the feasibility of the Group implementing a VAT saving arrangement …” (Section 1.1)
“The object of the arrangement is to obtain a reduction in the Group’s VAT liability by allocating part of the mail order turnover to the ‘sale’ of the catalogues, which at the moment are zero-rated …” (Section 1.2)
“The arrangement now under consideration is the sale of the catalogue for a price equivalent to a discount allowed off the first purchase (or purchases) made from it.   In this way the customer pays nothing extra for the catalogue but allocated to it is a proportion of the price of the first purchase.  A VAT saving is thereby achieved whenever the first purchase is liable to VAT …” (Section 1.3)
“We understand the inclusion of a face values (sic) is simply to give an impression to the customer that she is receiving something of value for nothing.” (Section 1.4)
12.	Following the purported change, confirmed catalogue “sales” were accounted for by Redcats under item 1, Group 3 of Schedule 8 to the 1994 Act, i.e. as zero-rated “supplies”.  Consequently, in Redcats’ return for the period 03/00, it reduced its output tax by £333,241.41 on the following basis:
Publication	“Charge” per catalogue	Standard-rated percentage	Output tax reduction	
Empire	£4	94.10	£211,964.17	
La Redoute	£3	90.29	£77,837.62	
Daxon	£2	100	£43,439.62	

13.	Redcats made similar reductions in subsequent periods, and the aggregate thereof was included in the assessments under appeal.
14.	HMRC took the view that the changes made by Redcats did not create a separate supply of catalogues so as to reduce the output tax on the supply of goods by Redcats.  Consequently, they convened and on 16 February 2001 held a meeting with Redcats and Ernst & Young during which the following facts were established:  
(a)	When a customer’s bill was processed, Redcats’ system identified those catalogues which had been “purchased” and indicated it on the individual customer’s statement by means of an asterisk.
(b)	Sometimes the text relating to the “purchase” would be found on the back of a list of special offers rather than a customer statement.
(c)	Redcats’ representatives were unable to explain why there had been a long delay in implementing the arrangements for Verbaudet.  (The significance of that delay was that Verbaudet mainly sold zero-rated children’s clothes, so that adoption of the scheme had minimal impact on its VAT liability).
(d)	Ernst & Young admitted that if an order for catalogue goods were not received from a catalogue holder, Redcats had in place no procedure to reclaim the catalogue.
(e)	Redcats confirmed that a catalogue could not be returned to it for a refund after a customer placed a first order. 
15.	Redcats’ trading terms and conditions are primarily conveyed through their display towards the back of its catalogues.  They are described on the “Information” pages, which include the terms and conditions on which it operates together with information on sizing, ordering, delivery and payment. Goods may be paid for in cash, by cheque, or by credit or debit card.  
16.	For the Spring/Summer 2000 season, Redcats claimed to introduce a charge for each catalogue.  It sent out the new (Empire) catalogue containing the following term or condition:
“Ownership of the catalogue remains with us until you complete your first purchase of goods at a minimum price of £8 after which the catalogue becomes yours.  The cost of the catalogue is £4 and the price of the goods shall be reduced by this cost so that the total payment due for the catalogue and the goods is no more than the catalogue price for the goods (after any promotional discount to which you may be entitled).  Whilst ownership of the catalogue remains with Empire you must, on request, return it to Empire in the same condition in which you receive it, subject to fair wear and tear.  Empire may arrange a collection or alternatively will cover costs you reasonably incur in its return.  Once the catalogue has reached the end of its season, you may dispose of it”
17.	Beyond the information contained in the final sentence of that term, there is nothing to indicate to a Redcats’ customer who makes no purchase when it intends ownership of the catalogue to pass to her, and when it maintains it does in fact pass.   No charge was made for the Verbaudet catalogue until Spring/Summer 2001.  The Store catalogue was not launched until Autumn/Winter 2002. The charges for the other catalogues were: La Redoute £3, Daxon and Verbaudet £2, The Store £4.  
18.	The page in the (Empire) Spring/Summer 2000 catalogue containing the term was headed “Shopping with Confidence”, and the term  was included in the midst of the conditions of sale at page 1028 of the 1035 page catalogue, in the smallest print in the catalogue.  Since the charge for the catalogue was “included” in the discount, unless an existing customer had read the terms on which Redcats traded, or purported to trade, with her, she would not have known that anything had changed in relation to the supply of the catalogue.   Redcats took no other steps to bring the change to her notice.  
19.	Included in some, perhaps the majority of, catalogues or on a looseleaf sheet dispatched with them, is a form encouraging a customer to apply for a “free” catalogue for a friend.  Thus in the Spring / Summer 2000 La Redoute catalogue was an unpaginated four page section inviting holders to recommend friends and relatives to whom a catalogue might be sent.  The invitation was entitled “Share la différence” and offered the holder a choice from “16 valuable gifts” on the friend placing an order.  It continued:
“& as a very special welcome your friend will also receive 2 introductory gifts
•	‘la collection’ – Your friend’s own personal copy of the new La Redoute Spring-Summer 2000 Collection, with over 680 pages of French fashion 
•	The City Bag” – (a fashionable bag to hold work or shopping essentials).
20.	The Empire catalogue for Spring / Summer 2000 included an invitation to holders to recommend friends and relatives to Redcats, but it was worded differently from the La Redoute invitation.  As the catalogues for the other titles in the Redcats group for the same period were not produced to us, we are unable to say on what terms, if any, similar invitations were made.
21.	Although Redcats claims to set the price of each catalogue at a level which covers production and distribution costs and provides for a margin of profit, with consideration being given to what a customer might reasonably be expected to pay for a production of similar size and quality, the evidence adduced did not satisfy us that the price even covered, or was intended to cover, such costs for (as appears from paragraph [26] below) some 3.8 million catalogues or approximately 50 per cent of those it dispatches annually do not produce orders for catalogue goods, and thus on Redcats’ own case they are not paid for by their recipients.
22.	The Spring/Summer 2000 La Redoute prospection catalogue contained a form entitled “Why not introduce a friend”.  Before providing space for the friend’s name and address, the form stated, “To send a free copy of the La Redoute catalogue to one of your friends, simply complete the form below … Alternatively, call our Customer Care Team free on … (etc).  Thank you”.  The Verbaudet prospection catalogue for the same season contained an identical form mutatis mutandis.  Redcats now accepts that those forms failed to comply with the Data Protection Act 1998, and has since amended them to include a requirement that the friend join in the application.
23.	On 16 December 1999, Redcats instructed its telephonists how to deal with queries from customers about the catalogue charging arrangements. In them, Redcats said, “At catalogue issue, the customer will see nothing different unless they read the policy statements”.  Having dealt with the changes in fact made, the instructions continued: 
 “If a customer enquires about the charge of (sic) the catalogue we must avoid telling them it is free.  The suggested dialogue below must be used.   If there are any problems with this, let me [Sue Rooney] know and I can address this with Andrew Leach [tax manager]:
Suggested dialogue:
Q. Are you charging me for the catalogue? A. There is no additional charge for the catalogue.  There is no additional amount you pay. 
Q. Is the catalogue free? A. You do not pay any extra for the catalogue.  There is no change to the amount you pay. 
If the customer requires any further details write down as much information as possible and pass this to your manager.  Managers then to contact Andrew Leach for a detailed answer.”
24.	On the copy instructions with which we were provided, the following supplement had been added in manuscript: 
“No we will not charge you for it however, the catalogue will remain the property of Empire until goods have been ordered and paid for”.  
The witnesses for Redcats were unable to explain that supplement or to say by whom it had been added.
25.	As only some 650 customers had telephoned Redcats for clarification of its catalogue charging policy, in comparison with the millions of catalogues distributed (as to which see the next following paragraph), it dismissed their queries effectively as being de minimis, and invited us to follow suit.  We decline to do so, and find that the instructions, whilst not in isolation confirming that Redcats continued to make gifts of its catalogues after 2000, do nothing to substantiate its claim to have supplied them otherwise than as gifts.
26.	Redcats spends considerable sums of money in trying to procure business and recruit new customers. The money is spent on marketing mailings, offering gifts and other sales incentives, and in producing and distributing catalogues.  Orders resulting from its various marketing initiatives are received from only some three per cent of targeted potential customers in some cases, rising to 15 per cent in others. Overall, only one in every two catalogues Redcats distributes generates a customer order for catalogue goods; and since, in 2004, 7,598,000 of the main Redcats catalogues were distributed, we find that in that year Redcats distributed almost 3.8 million catalogues which did not result in its making any sales of catalogue goods to their recipients.  No evidence was adduced to indicate that 2004 was not representative and, in its absence, we infer that it was.
27.	Customers place orders for catalogue goods either by use of Redcats’ free telephone ordering service, by sending in a written order, or by submission of an order on the internet.  None of those methods of ordering goods makes provision for a catalogue request. Redcats’ system can make a charge for a catalogue only where a customer is in possession of the catalogue.  Redcats introduced on-line ordering in 2000, but its websites were very basic, so that on-line orders could be placed only by reference to a catalogue.  Thus a customer ordering goods had to hold a catalogue.  A prospective customer could submit her details on-line and request a catalogue, but, even when purchasing for cash, could not place an order until her credit rating had been checked.  On satisfying the checks, she was sent a catalogue and could place orders.  In the years since 2000, the websites have been greatly improved, and a cash customer is now able to place an order without prior credit checks being made on her.  An on-line customer can now open a credit account and, should she do so, is sent a catalogue; but she is not charged for it. She is then free to order either on-line or through the catalogue.  
28.	A customer wishing to purchase catalogue goods is required by Redcats to pay the catalogue price of all the items she selects, or, in the case of goods advertised at promotional discounted prices, at those prices.  A customer cannot obtain the goods at a price discounted solely because she does not wish to purchase the catalogue.  She therefore does not agree the attribution of the price between catalogue goods and the catalogue itself. 	
29.	Following Redcats’ dispatch of ordered goods, it sends the customer a statement and a dispatch note.  The note is sent with the goods and contains no reference to a catalogue charge: the statement follows between 7 and 28 days after dispatch of the goods, the precise date being determined by the billing cycle to which the customer has been allocated.  The statement contains details of all items ordered by the customer, items returned and payments made in the period since her last statement, a note of her current balance, and, in case she wishes to take advantage of  extended credit facilities Redcats provides, details of the minimum amount she is required to pay.
30.	On Redcats introducing the “charge” for the catalogue, its customer statements were amended to include on reverse side the following explanation of her “current balance”:
“Current Balance
This is the total balance outstanding, excluding any items not yet charged, and will be the balance brought forward on your next statement.  * indicates your purchase of the catalogue.  The amount shown for the goods is inclusive of the total cost for the catalogue and goods which have been discounted by the cost of the catalogue.”
31.	But we observe and find that in its customer statements Redcats does not allocate the catalogue charge to a particular item of catalogue goods on the first statement issued after the introduction of a new catalogue, but rather against the order value.  However, if a customer buys a zero-rated item and a standard-rated item, in practice Redcats applies the discount to the standard-rated item, but omits that application from the customer statement.  The statement merely indicates by use of the asterisk against the current balance that a catalogue charge of an unspecified amount has been made, and an amount equal thereto has simultaneously been credited to the account, resulting in the balance due from the customer remaining the same as before the charge was made.  Thus, the customer has no idea from the statement of what she has allegedly been charged for the catalogue.
32.	We were told by the witnesses for Redcats, and accept, that notwithstanding that a charge has been made to a customer for a catalogue, if she returns the catalogue goods for any reason, it will reverse the catalogue charge and, although it claims that she may not be legally entitled to it, will refund the price of the goods in full.  Redcats has in place a free service for the return of catalogue goods. But if a customer who has “bought” a catalogue returns it to Redcats – for which, incidentally, it has no service - under no circumstances will it refund the cost thereof.
33.	We infer, and thus find, from the way in which the catalogue charge is referred to in Redcats’ customer statements, the fact that Redcats reverses the catalogue charge and refunds to a customer the full price of catalogue goods returned to it (see the last preceding paragraph), and the fact that it has in place no arrangements to recover catalogues (see paragraph [39] below), that the charge is not truly made in its bookkeeping system (other than in its VAT account), and is otherwise only to be found (by reference and not as being particularised) in the customer statements as mentioned in the penultimate paragraph.
34.	Customers new to the Empire brand receive a “starter pack” which contains within it a document entitled “Your guide to Shopping with Empire”, the document being amended with effect in April 2001 to include the charging clause details.  (April 2001 was the date on which the guide was next reprinted after the introduction of the charging clause).  The starter pack also contains details of Redcats’ trading terms and conditions, and information about data protection. 
35.	Empire, alone among Redcats’ various brands, operates agency accounts which enable its customers to act as its agents in sales of goods to third parties.  Such agents make up 15 to 20 per cent of Empire’s customer base.  Empire’s traditional agency account offers customers the opportunity to earn commission from sales to third parties, with payment available to those parties on weekly terms.  Agency accounts also offer free delivery and a cash back facility.  Catalogues are dispatched only to agents, and not to third parties.  Statements are sent only to agents, who are provided with forms on which third parties’ weekly payments may be recorded. 
36.	Redcats distributes its catalogues to the following six categories of customers:
1) Those designated “catalogue allocation”.  They are specifically selected “existing” customers who have not recently made a specific request for a catalogue but who may have done so when they first became a Redcats’ customer.  A customer is classified as “existing” if she has ordered goods from the relevant brand catalogue within the previous 24 months.
2) Those identified as “Two stage (excluding Internet)”.  They are potential customers who have requested a catalogue by responding to, e.g. “recommend a friend” coupons, displays in the form of what are called “outserts” in magazines and advertisements in various publications, or to targeted mailings.
3) “Prospection (including internet)”: potential customers to whom a prospection catalogue has been sent.  They are told that they will be sent the main catalogue with their first order for goods.
4) “Two stage internet”: also potential customers, but are those who have specifically requested a catalogue by way of the “request” button on the relevant brand’s website.
5) “Prospection internet”: new customers who order goods directly by way of the relevant brand’s website without having seen the main catalogue.  Such customers are automatically sent a full catalogue for that brand on placing their first order for goods.
6) “Miscellaneous requests”: potential and existing customers who write or telephone Redcats specifically requesting a catalogue.
37.	The vast majority of catalogues are sent to “catalogue allocation” customers indicating, in Redcats’ view, the importance to it of repeat business.  It seeks to nurture and maintain the long standing relationships with customers which are a feature of mail order trading, and claims that customers expect to receive the catalogue for the following season without having specifically to request it.  Indeed, if a catalogue is not sent in accordance with their expectations, it maintains that they contact the brand to which they claim allegiance specifically to request their copy.  “Catalogue allocation” customers are sent a copy of a new catalogue automatically at the start of each season.  
38.	Although the same criteria are not used for every brand, each company considers a number of factors before deciding whether to dispatch a catalogue to a customer.  They include the number of seasons she has placed an order, and whether she has defaulted on her payments. Empire itself analyses the record of each “existing customer” by reference to her net goods purchases in the immediately preceding four seasons and allocates to her what it describes as a binary score.  The higher that score, the more likely it is that she will be sent a catalogue.   The maximum score is 15 and is achieved by customers who have purchased goods in each of the last four preceding seasons.  Scores between 14 and 8 cover customers who have purchased goods in the last preceding season and in one or more of the other three seasons.  Scores of less than 8 are reserved for those who did not purchase goods in the last preceding season, but made one or more purchases in the three seasons immediately preceding it.  In the Spring/Summer season 2005, 26 per cent of Redcats’ existing customers received a binary score of less than 8, and in the Autumn/Winter season 2005 the comparable percentage was 24 per cent.  
39.	Redcats does not seek or demand payment for a catalogue from a person who receives a catalogue but places no order to purchase goods from it; has in place no arrangements to enforce payment for or to collect or recover possession of its catalogue from her; takes no steps beyond including in the catalogue the term set out in paragraph [16] of our decision to indicate that she may not deal with the catalogue as its owner; and does nothing to prevent her from dealing with it as if she were its owner.  It has never sought the return of a catalogue from a person to whom it has been dispatched, or even contemplated doing so.  In evidence, Mrs McKenzie-Green said that Redcats might consider seeking the return of catalogues from persons who had placed no order from them were it “to run short” of them.   But she accepted that that situation had never arisen in practice.  We have concluded that it is so improbable that it can be disregarded as a realistic possibility.
40.	In practice, Redcats claims that it is unlikely that customers who have requested a brand catalogue and not ordered goods from it, or customers who have not placed an order within the previous 24-month period, will be sent the new season’s catalogue.  We accept its claim in that behalf. 
41.	The ownership of catalogue goods passes to a customer at the later of delivery of the goods and payment by her, there being a retention of title clause in Redcats’ trading conditions. 
42.	The term included at paragraph [16] of our decision is totally at variance with the provision of a “free” catalogue, and we find that it is of no effect in cases where a  catalogue has been dispatched to an existing customer or potential customer, or she has not been specifically notified of the term in circumstances where catalogue dispatch is described by Redcats as free. 
43.	Mr Campbell made a number of internet enquiries about the purchase of goods from Redcats and went on to make purchases from various of its catalogues.  His evidence, which went unchallenged, we accept without hesitation, it being supported by documents issued by Redcats at all appropriate points, and clearly indicating the way in which the company conducts its business.
44.	On 5 and 6 April 2005, Mr Campbell, as a new customer of Redcats, placed orders for goods via the internet with Empire, La Redoute, Daxon and Verbaudet, having selected his purchases from the on-line catalogue of the business in question.  In each case, he opened a credit account by providing his personal details, and charged his purchase to the account.  He used the internet order number of each item.   Redcats is able to identify the source of every order, identical items in each of prospection and standard catalogues and the on-line catalogue being numbered differently.  Payment for the goods was to be made on his receiving a statement from the relevant business.  At the time of placing each order, Mr Campbell printed a copy of the information submitted with it, together with selected other related website pages, such as the trading terms and conditions.  Each website offered the customer the option of requesting that a catalogue be sent to her (or him), but Mr Campbell did not complete and submit any such request.  On his submitting each order, Mr Campbell received an e-mail message acknowledging it.  Each message indicated (a) that the e-mail was merely an acknowledgment of the order, and (b) that there was no binding contract until the goods ordered were dispatched.  
45.	On 11 April 2005, Mr Campbell received the goods he had ordered from the Empire and La Redoute websites in separate parcels.  In each case, the goods were accompanied by a delivery advice note, which stated that a catalogue was included in the parcel.  In the Empire parcel was also a 92 page prospection catalogue entitled “Colours of Summer”, and, in that from La Redoute, an 824 page catalogue for “Spring/Summer 2005”.  The Empire parcel also contained a booklet entitled “Your guide to shopping with Empire”.  In the booklet was a section entitled “Buying with confidence” which included information about a £4 charge for the full catalogue, and stated that the cost of a first purchase of goods would be reduced by an amount identical to that charge.  On the back page of the prospection catalogue was a statement which read “This leaflet is supplementary to the main catalogue to which reference should be made for the general conditions of sale”.  There was no reference to a charge for the catalogue in the leaflet itself.
46.	In the La Redoute parcel was a delivery advice note on the reverse of which was a statement that the cost of its catalogue was £3 and that the goods purchased would be discounted by an identical amount.  It also contained a leaflet entitled “Welcome to style and service with la différence”, which included a paragraph dealing with conditions of sale.  Those conditions did not mention a charge for the catalogue.  At page 813 of the La Redoute catalogue in small print was a statement that the price of the catalogue was £3, and that the cost of the goods would be reduced by that amount.
47.	On 14 April 2005, Mr Campbell received the goods he had ordered from Daxon and Verbaudet.  Each parcel included the full Spring / Summer catalogue of the dispatcher.  He also received a small Verbaudet catalogue entitled “Putting children first”.  The delivery note in each case indicated that a catalogue had been included, but contained no mention of a catalogue charge.  (NB We observe that in the Verbaudet parcel was a note explanatory of its monthly statement of account.  In explaining the use of the asterisk against the balance due, the note wrongly stated that it included payment “from” the catalogue rather than “for” it). 
48.	Mr Campbell carried out further internet transactions with Redcats on 18 April 2005.  From La Redoute, he ordered the same items as he had ordered on 5 and 6 April, but on this occasion using the catalogue order number.  At no stage in the transaction was he informed of a catalogue charge.  On the same day, he ordered a catalogue from La Redoute.  Despite his order being processed, he was not informed of a catalogue charge.  Also on 18 April 2005, Mr Campbell placed an order with Daxon for a bath sheet, and requested its catalogue.  Both goods and catalogue were supplied, but in neither case was any mention made of a charge for the catalogue.  
49.	On 4 May 2005, Mr Campbell received a statement of his account with each of Empire, La Redoute and Daxon.  The Empire statement showed him as owing £14.99 and was accompanied by a covering letter and an explanation of the various items on the statement.  On the reverse side of the statement was a definition section wherein it was explained that if there was an asterisk alongside the balance showed as owing that indicated a charge had been made for the catalogue.  The Empire statement contained no asterisk against the balance owing, it indicated that there was no indication to Mr Campbell of a charge for its catalogue.  A similar situation prevailed in relation to both the La Redoute and Daxon statements, despite the order in each case exceeding the value attributed to the relevant catalogue.  
50.	Early in 2001 members of HMRC’s Unit of Expertise arranged for a notice to be placed in HM Customs & Excise Weekly Bulletin inviting members of staff who were also customers of a mail order company to complete a simple questionnaire about the terms of their agency agreement.  By that time all the major mail order companies had adopted similar schemes to that of Redcats for the sales, or purported sales, of their catalogues. Employees of the Inland Revenue were also invited to participate in the exercise.   Completed questionnaires which related to companies which openly charged for their catalogues and did not offer a discount on first orders  (Next and Marks & Spencer) were then excluded from an analysis carried out by Mr Campbell.  The remaining 40 responses related to 59 accounts with mail order companies.  They showed that none of the customers was aware that the companies’ terms and conditions of trade had changed to incorporate a catalogue charge, and 30 of them were not aware that a catalogue charge had been applied to their account.  Of the 30, seven were customers of Redcats. We accept that the exercise was not carried out scientifically or among a representative sample of Redcats’ customers.  Nevertheless, we consider its results to be indicative of customers’ awareness of the change in the company’s trading conditions.
51.	For completeness, although admitted by Redcats (see paragraph 1 above), we also find that the sole purpose of the scheme is VAT saving.   
52.	If the scheme is effective in reducing Redcats’ liability to output tax, it will distort competition amongst ourselves of goods similar to those sold by Redcats and give Redcats an advantage over its competitors.  We find that, if the scheme is successful, that advantage is not due to the operation of commercial factors, but is due entirely to the manipulation of the VAT system.
53.	We also find that Redcats has sought to obtain a tax advantage, namely the avoidance of VAT on part of the consideration received for its taxable supplies of goods to customers.  Our finding is based on the feasibility report on the scheme by Ernst & Young of September 1998 which, as previously mentioned, states at section 1: “The object of the arrangement is to obtain a reduction in the Group’s VAT liability by allocating part of the mail order turnover to the ‘sale’ of the catalogues, which at the moment are zero-rated …”
54.	Equally, Redcats has created an artificial situation to obtain that VAT advantage.  We so find on the basis of the following five matters relied upon for the purpose by HMRC: 
i.	The price of the catalogue is not intended to cover its production and distribution costs: it applies only to the 50 per cent of catalogues which produce sales of catalogue goods, and even then is counter-balanced by a matching discount on the goods;
ii.	The decision as to the amount of charge for the catalogue is entirely tax driven, the customer being indifferent to the charge since she is not charged for the catalogue;
iii.	Neither the price of the catalogue nor the discount off the goods is advertised, as would be the case were those prices genuine.  The only price of interest to the customer is the advertised price of the goods, i.e. the price she pays for them;
iv.	If the customer returns the goods, the sale of them is reversed and she obtains a full refund without having to return the catalogue;
v.	In practice, the position of a customer who “purchases” the catalogue is no better than one who receives it but makes no purchase. 
55.	No non-tax benefits exist that could not have been achieved by Redcats continuing to give the catalogue away without charge or by selling the catalogue for an extra charge.
56.	To those findings of fact, there are others we must add.  They are to be found throughout the remainder of our decision in appropriate contexts.  
57.	We propose to deal with the issues in this case by answering the questions set out in paragraph [6] of our decision, but before doing so find it necessary to deal with the problem identified by Jonathan Parker LJ in Tesco plc v Commissioners of Customs and Excise [2003] STC 1561 in cases involving very large numbers of transactions.  In that case, the court was required to decide whether Tesco’s Clubcard vouchers, which entitled customers to discounts on their purchases, were issued for consideration.  He observed (at [158]) that, in a case such as Tesco where millions of customers participate in a scheme, “a subjective approach, requiring a finding (on the balance of probabilities) as to how a particular (undefined, and I would have thought indefinable) category of member would or might perceive the scheme, seems to me to be of little assistance in resolving the issue which arises in the instant case.”  He considered as a result that:
“160 … The correct approach to the analysis of the Clubcard scheme … 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 used under it are issued for ‘consideration’, in the Community law sense of that term”.
58.	In Debenhams Retail plc v Commissioners of Customs and Excise [2005] STC 1155 (Court of Appeal) the question for decision was whether a tax avoidance scheme whereby a customer of Debenhams Retail (DR) purchasing goods on credit agreed to pay 2.5 per cent of the purchase price to a subsidiary of Debenhams (DCHS) for its card handling services succeeded.  Mance LJ (as he then was), delivering the judgment of the Court of Appeal, acknowledged at paragraph 10 that “the problem identified by Jonathan Parker LJ [in Tesco] is a real one”.  He continued: 
“… it is impossible to investigate individual sales when an issue like the present [i.e. where any one of a number of features of an individual transaction may affect the contractual analysis in any particular case] arises regarding a general scheme … It might in some circumstances be possible to arrive at conclusions about numbers of sales falling within one or other of various defined categories.  [But … in this case] each side has submitted that it is possible for us to reach a single overall conclusion, while contending for opposite conclusions.  In this situation, we have, under the jurisprudence of both the Court of Justice [of the European Communities (“the ECJ”)] and the House of Lords, to look at what was overtly or objectively stated, described or invoiced to the customer, or was ‘agreed and adopted’ as between the alleged supplier and the customer, both when determining the contractual position and in answering the directly relevant question what was the consideration for DR’s undoubted supplies to its customers.  Since the ordinary knowledge and understanding of any customer form part of the objective context of any such supply, I do not for my part see how they can be ignored in answering this question.  When Jonathan Parker LJ expressed some scepticism about the value of a ‘subjective’ approach or of any attempt to take into account what customers ‘would or might perceive’… , it may be that he was doing no more than exclude from account the purely subjective (or internal) thought processes of any particular customer.  The reasonable expectations, reactions and understanding of an ordinary customer in relation to a transaction or document must in my view be relevant to its objective analysis.  Even when a transaction is in writing, its interpretation involves ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the condition in which they were at the time of the contract’ (see Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1988] 1 WLR 896 at 912, [1998] 1 All ER 98 at 114 per Lord Hoffmann, an approach as relevant, in my view, in a European as in a domestic context).” 
59.	We observe that the Court of Appeal judgment in Debenhams has become final as a result of the House of Lords refusal to give the company leave to appeal. 
60.	We are, of course, bound by the decisions in the Tesco and Debenhams cases so that, in dealing with the instant case, we must carry out an objective analysis of the scheme. 
Question 1 - Did ownership of the catalogues pass when they were sent out by Redcats by way of an unconditional gift?
61.	Mr Vajda claimed that in analysing Redcats’ case it was necessary to make a clear distinction between the terms and conditions relating to catalogue goods purchased and those pertaining to the catalogue itself.  He submitted that the correct position with regard to the goods could not determine the issue of whether there was a contract for the provision of a catalogue.  The catalogue was no more than a marketing tool – Redcats’ “shop window”; it differed fundamentally from the catalogue goods a customer might wish to purchase.  A customer wishing to purchase such goods understood that she was entering into a contract to buy them on certain terms and conditions.  No such factors existed with regard to the catalogue.  The natural inference to be drawn from the following objective circumstances was that the catalogue was an unconditional gift provided free as a marketing tool:
(1) It was never marketed as an item for sale;
(2) No indication of a prospective charge was given to a customer before the catalogue was delivered;
(3) On the contrary, the catalogue was either:
(b)	asked for by a customer, in which case it was described as without charge or there was no mention of price; or 
(c)	it was unsolicited.
62.	Once the catalogue was delivered, he maintained, the gift was complete: any conditions within it were necessarily communicated after that point and could have no effect.  The description of a transaction by a donor was not a conclusive test of whether the transaction constituted a gift, but, he submitted, the court might look at its totality and regard the supposed gift as part of a commercial sale.  As Pennycuick J observed in Esso Petroleum Co Limited v Customs and Excise Commissioners [1973] 1 WLR 1240 (at p.1246):
“… the taxable quality of any article handed by a retailer to a customer must depend on the particular circumstances of the case… [T]he nature of the transaction depends upon the terms upon which the parties entered into it and not upon the label which the parties attach to it.”
Although the judgment of Pennycuick J was reversed on appeal, it was not reversed on this dictum.
63.	A reasonable man would have expected any information relevant to the sale of the catalogue to be provided on Redcats’ website, or in a document which registered his interest in it.  Yet, Mr Vajda observed (and we find), no such information was given: indeed, he claimed, Redcats’ own documents contradicted its case, for, e.g. when a customer ordered a catalogue from Daxon, its website informed her that “Your catalogue will be sent to you shortly”, but made no reference to any charge.    Where a catalogue was provided in such circumstances it was at best a document “where it would be quite reasonable that the party receiving it should assume that the writing contained no condition …” (Chitty on Contract, 29th Edition 2004 at 12-009).  As a matter of law, Mr Vajda submitted, the terms of the catalogue could not apply to the provision of the catalogue itself, and could be ignored because any conditions it contained were communicated only after the property in it had passed: in such circumstances, the customer was entitled to believe she was receiving a gift.  The placing of a price on the catalogue cover did not alter that analysis.  The price was in any event on the cover of most catalogues before the scheme was introduced.  Nor could the analysis be defeated by Redcats’ claim that the information pages in the catalogue indicated that it had no intention of making it a gift.
64.	In reliance on paragraph 10 of the judgment of Mance LJ in Debenhams (see paragraph [58] above), Mr Vajda contended that it was necessary to examine the reasonable expectations, reactions and understanding of an ordinary customer in relation to the document or transaction in question, and submitted that, were we to do so, we should conclude that ownership of the catalogues passed when they were sent out, by way of gift. 
65.	Mr Prosser maintained that HMRC’s reliance on the Esso Petroleum case revealed a complete misunderstanding on their part as to what constituted a gift.  In his submission, the Esso case was irrelevant to the question of whether Redcats intended to make a gift of the catalogue.  Esso had entered into a contract with a customer for the sale of petrol.  It was a purchase tax case and in any event of limited value.  It was a case of mislabelling.  
66.	A gift was made when the owner of goods delivered them to the donee with the full intention of transferring ownership in them to the donee.   In support of his claim in that behalf, Mr Prosser relied on the following two passages from Halsbury’s Laws of England, Fourth Edition.  The first, to be found at paragraph 1, page 3 of Volume 20(1) deals with gifts inter vivos.  It states:
“A gift made between living persons (inter vivos) may be defined shortly as the transfer of any property from one person to another gratuitously …  It is an act whereby something is voluntarily transferred from the true owner in possession to another person with the full intention that the thing shall not return to the donor …  A gift appears to be effective when the donor intends to make it a gift and the recipient takes the thing given and keeps it, knowing that he has done so….”
The second, to be found in paragraph 1253 at page 758 of Volume 35 (Personal Property), deals with the effect of delivery in relation to voluntary alienation in this way:
“Delivery is the voluntary transfer of the possession of goods to another.  Where a moveable object is delivered to a person with intent to transfer ownership, for example in the case of gifts or sales, the property in the goods is transferred.”
He submitted that the test was the subjective one of donative intent on the part of the donor.  The donee’s intention was not, however, completely irrelevant, for she might disclaim: but the view of an officious bystander was not relevant.
67.	In reliance on the definitions offered by Halsbury, Mr Prosser submitted that there was no evidence that Redcats intended to make a gift of its catalogues,  maintaining that all the evidence was to the contrary.  The (Empire) catalogue expressly stated that, on making her first purchase of goods, the actual price of the goods was £4 less than the price stated in the catalogue, and the customer purchased the catalogue for £4.  He maintained that the statement had legal effect for it was a term of the contract between Redcats and the customer.  The fact that she did not see the statement until later, if at all, was irrelevant.
68.	He further submitted that HMRC’s case, based on the fact that Redcats had no procedures in place to recover catalogues, appeared to confuse ownership and possession: Redcats may not have wanted to recover possession of a catalogue it had supplied, but it certainly wanted, indeed needed, to retain it, so as to exercise the rights of ownership and achieve the VAT saving by selling the catalogue later; that was the whole point of the scheme.  The statement as to retention of title was made when the catalogue was published: Redcats had no intention of transferring title to a catalogue on dispatching it.  Its call centre script was used only in relation to a very small number of customers who had read the statement that Redcats retained ownership, and were seeking clarification of the situation, so that the evidence relating thereto should be ignored as de minimis.  The fact that Redcats’ adverts referred to “your catalogue” did not indicate that ownership of the catalogue would pass immediately; rather that the customer would have exclusive use and possession of the catalogue.  The issue was that of Redcats’ intention, and that was clearly stated in the catalogue.  HMRC contended that the statement in the catalogue did not have contractual effect, not because it was a sham, but because it did not appear on the order form signed by the customer, or when she placed a telephone order, but that was equally true of the other terms, and they undoubtedly were terms of the contract.  He submitted that in those circumstances the statement did have contractual effect, and catalogues were not supplied by way of gift.
69.	Finally, on the present point, Mr Prosser invited us to accept and act on the observation of Sir Christopher Staughton at paragraph 33 of his judgment in Telewest Communications plc v Customs and Excise Commissioners [2005] STC 481, that the introduction of a charge for Telewest’s cable guide “… was a lawful aim at common law … We should not try to defeat it for the good of the Commissioners”.
70.	In applying the objective test laid down by Jonathan Parker LJ in Tesco (and approved by Mance LJ in Debenhams), we must examine the entire cycle of transactions comprised in the scheme.  Until 2000 Redcats supplied catalogues to its customers by way of gift.  An existing customer receiving the Empire Spring/Summer 2000 catalogue would have noticed no change in that arrangement: she was given no notice of it beyond a change in the small print on page 1028 of the catalogue and, in our judgment, would have proceeded in the belief that Redcats was continuing to trade on the terms with which she was familiar, even though she had probably never read them, and was making a gift of the catalogue. 
71.	When an ordinary customer contracts with a mail order company, she envisages a contract whereby she purchases goods for their catalogue price.  If she is required to purchase a catalogue in order to choose those goods, as is the case with customers of Next and Marks & Spencer, she expects to be told its price and to be required to purchase it outright.  She does not anticipate a prospective catalogue charge which she will be required to pay only in the event of her purchasing catalogue goods to a value exceeding its price, and which will immediately be refunded by way of a discount on the value of her first order.  And, further, the charge will not appear on her monthly statement.  In our judgment, it would require clear words to indicate to the customer why payment for the catalogue was required on the one hand, and a discount exactly equal to that payment was simultaneously being offered on the other.  “Neither the need for nor the basis of any such contract would be clear” (per Mance LJ at paragraph 38 of the judgment in Debenhams).  
72.	In paragraph 37 of the judgment in Debenhams (see paragraph [122] below), Mance LJ described the way in which that company presented its card handling scheme to customers as being “subdued”.  He asked, what then is “the interpretation, or (one might say) superimposition, of a contractual analysis in an everyday context where the retailer and customer are both normally interested in anything but that?”  He considered that a Debenhams’ customer would “appreciate that it made no difference to what he or she paid, whether he or she paid by card.  The ticket price was in all cases what was to be paid.  That is on any view a matter of potential significance under European VAT law … It is not I think without relevance under domestic law, when assessing what the ordinary customer would regard as the bargain being made”.  Likewise, in the instant case, in our judgment a customer of Redcats will appreciate that it makes no difference whether the catalogue is a gift or paid for by way of discount on the price of catalogue goods purchased; the catalogue price of catalogue goods is in all cases what is to be paid for the goods.  
73.	As Mr Vajda observed, the catalogue was never marketed as an item for sale, nor was any indication of a prospective charge given to a customer before delivery of her catalogue.  As we have found, of the 7.6 million catalogues Redcats dispatches annually, it expects, indeed knows from long experience, that only half of their recipients will purchase catalogue goods.  Thus, even on its own interpretation of events, Redcats is able to charge only approximately 3.8 million of its customers for their catalogues.  And since it has in place no arrangements to collect payment or to recover a catalogue from a recipient who places no order for catalogue goods, does not notify her (otherwise than in the catalogue itself) that it claims to retain title to the catalogue until the end of the season to which it relates, and does not inform her that she may not deal with it as owner, applying the Tesco ‘objective test’ we conclude that it makes gifts, as defined in Halsbury, of all the catalogues it distributes.  In so holding, we reject Mr Prosser’s claim that Redcats may not want to recover possession of catalogues distributed which produce no goods order but needs to retain title to them to obtain the tax advantage it seeks: the notice it gives of its intention in that behalf is, in our judgment, insufficient.  Our holding is reinforced by the evidence of Mr Campbell’s dealings with Redcats which show that “charges” for catalogues are imposed arbitrarily and inconsistently.  The discount the customer is said to receive on the goods on “purchasing” a catalogue is, in our judgment, not a genuine one. 
74.	Once a catalogue is delivered, the gift of it is complete.  Any terms and conditions it contains with regard to itself are communicated post-delivery, and thus post-gift.  That, in our judgment, is the totality of the transaction, and is arrived at from an examination of the reasonable expectations, reactions and understanding of an ordinary customer receiving a catalogue.
75.	Redcats has no interest whatsoever in retaining title to a catalogue other than to obtain the tax advantage it seeks.  Its interest is in distributing as many catalogues as possible to persons it regards as potential customers in the hope that they will proceed to purchase catalogue goods.  Mr Vajda submitted that there was an analogy with cases such as Antoniades v Villiers [1990] 1 AC 417 where a lease dressed up as a licence was held to create a tenancy governed by the Rent Acts.  He maintained that a “purchaser” of a Redcats catalogue had, in reality, no greater rights over it than any other customer: the catalogue had a limited shelf life; and Redcats did not seek its return from the 50 per cent or so of those customers who received it but made no purchase from it.
76.	Mr Prosser responded to the “mislabelling” allegation by observing that at the outset of the proceedings, HMRC alleged that the scheme was a “sham” in the sense that that word was used in Snook v London & West Riding Investments, Ltd [1967] 1 All ER 518, an allegation that had subsequently been withdrawn and had not been revived formally.  (In Snook, Diplock LJ considered at p. 528: 
“What, if any, legal concept is involved in the use of this popular and pejorative word  [sham].  I apprehend that, if it has any meaning in law, it means acts by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations  (if any) which the parties intend to create.  One thing I think, however, is clear in legal principle, morality and the authorities … that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a ‘shammer’ affect the rights of a party whom he deceived.  There is an express finding in this  case that the defendants were not parties to the alleged ‘sham’. [So the contention of the plaintiff  that the transactions between himself, the hire-purchase company, and the defendants] fails”).  
77.	Mr Prosser contended that the “sham” allegation had been revived in an informal sense of “labelling” in that the Antoniades case was, to all intents and purposes, a “sham” case; the only difference between that case and Snook being that,  in the former, only one of the parties had the intention to deceive, whereas in the latter both parties had that intention.  He contended that there was no sham or mislabelling in the instant case:  Redcats genuinely needed to retain ownership of the catalogue to achieve the VAT saving it sought.   He submitted that it was quite improper of HMRC to allege sham, withdraw the allegation and then resurrect it informally, so that the tribunal should ignore their submissions that Redcats was guilty of a “pretence”.
78.	We accept that the scheme is not a “sham” as defined in Snook for only one party, Redcats, has the intention necessary for it so to qualify.  But we are unable to accept that it is not a pretence, or case of mislabelling.  In our judgment, what Redcats is doing is to call a gift something else – something which, adopting as neutral a description of the scheme as possible, we describe as a case of misrepresentation or mislabelling.  As Lord Jauncey of Tullichettle observed in Antoniades of clause 16 of the agreement therein point, “I am driven to the conclusion that the parties never intended that clause 16 should operate and that it was mere dressing up in an endeavour to clothe the agreement with a legal character which it would not otherwise have possessed.  It follows that it should be treated pro non scripto”.  We similarly observe of the condition contained in paragraph [16] of our decision.  
79.	In reaching our conclusion, we have accepted all Mr Vajda’s submissions and rejected those of Mr Prosser.  We dismiss the appeal, and direct Redcats to pay HMRC’s costs of, and incidental to, and consequent on the appeal, such costs to be determined by a Costs Judge in the event of the parties being unable to agree them.  
80.	Notwithstanding that we need not deal with the remaining six questions before us, we propose to do so as it may prove of assistance to a higher court should the appeal be taken further.
Question 2 - If not, did ownership of the catalogues pass when they were sent out, pursuant to a contract with the recipients?
81.	Although during the hearing in April 2005 and in the amended statement of case, HMRC maintained that there was no separate contract for the supply of a catalogue, during the later part of the hearing, in the event of our holding that a catalogue was not supplied by way of gift, Mr Vajda argued to the contrary.  Mr Prosser maintained that he should not be permitted to do so.  Ordinarily, we should agree, but since we have determined the appeal on other grounds, we deal with his submissions.
82.	Mr Vajda submitted that there was a contract for the supply of a requested catalogue which was concluded at the latest when the catalogue was dispatched to the customer.  In an e-mail to Mr Campbell, Redcats claimed that “The contract for the sale of the above goods shall be formed at the time the company dispatches the goods.”  Mr Vajda claimed that the same analysis would apply to a catalogue: at the point of dispatch both parties had discharged all their obligations under the contract.   Specifically, Redcats invited potential customers to request a catalogue with the implication that if certain information was provided or its various criteria were satisfied or both, a catalogue would be dispatched.
83.	A customer who made a successful application for a catalogue was, in Mr Vajda’s submission, (a) satisfying Redcats’ credit and other criteria and (b) providing a benefit to Redcats of both the opportunity to sell goods to her and the provision of commercially valuable information, e.g. her contact details.  In those circumstances, Mr Vajda claimed that the customer had both offered to take the catalogue and provided sufficient consideration to support a contract (see the contract law analysis of the Tesco Clubcard scheme per Ferris J in the High Court in Tesco v Commissioners of Customs and Excise [2002] STC 1332 at paragraphs 32 and 33).  In the same way as a customer’s offer for goods was accepted when they were dispatched, the offer to receive the catalogue was accepted at the latest when it was dispatched.  At that point no retention of title clause (“RoT clause”) and no price had been brought to the attention of the customer.  Full property rights were transferred on dispatch: the attempt to impose further conditions was post-contractual. 
84.	In contrast, he maintained that the conditions of sale in the catalogue were pre-contractual in the case of goods since they were made available before the goods were ordered (whether or not a prospective purchaser chose to read them).  Moreover for the reasons he had given for claiming that a catalogue was the subject of an unconditional gift, Mr Vajda maintained that a customer could not reasonably be expected to consider that there would be contractual terms incorporated into the provision of the catalogue other than those expressly set out at the time she expressed an interest in receiving the catalogue.   Redcats’ case was, in Mr Vajda’s submission, diametrically opposed to claims such as that in its Daxon internet statement to the effect that “Your catalogue will be sent to you shortly”.  There was no change in the pre- and post-scheme position: consideration (in the shape of useful information) was provided at the time of the request, and there was a contract on dispatch of the catalogue.  There was no material change to the written material or oral explanations about the provision of a catalogue.  In both pre- and post-scheme provisions, Mr Vajda submitted that the property in the catalogue passed as a result of a contract on dispatch: a purchaser of catalogue goods priced at £100 was paying £100 for them.    
85.	Throughout, Mr Prosser maintained that there was no separate contract for the supply of a catalogue but a single one of the supply of a catalogue and goods.  He observed that HMRC’s claim that the statement in the catalogue as to its sale was not of contractual effect because it was neither mentioned on the order form which a customer signed when ordering goods by post, nor when she placed a telephone order, that that was equally true of many other terms which were undoubtedly terms of the contract, e.g. that a customer may return goods within 14 days of delivery.  He submitted that a statement contained in a standard form document given by a trader to a prospective customer at or before a contract was entered into would have contractual effect as a term of the contract even though the customer did not sign any document containing or referring to that statement if (1) the document was one which a reasonable customer would expect to contain contractual terms; and (2) either the customer knew that the document contained such terms or, even if she did not, the trader had done what was reasonably sufficient to give the customer notice of the statement in question (Chitty on Contracts, Vol 1 paragraphs 12-008 to 12-018).  What was “reasonably sufficient” depended on the circumstances, and was a question of fact in each case.  But it was for the court or tribunal, as a matter of law, to decide whether there was evidence for holding that the notice was reasonably sufficient: Thompson v LMS Railway [1930] 1 KB 41.  The court was specially concerned to avoid unfairness to the customer, so that more might be required to give notice of an exclusion clause.  In contrast, where the statement in question was not an exclusion clause, and it was not otherwise unreasonable or extortionate, the court would much more readily regard the test as satisfied, see Interfoto Library v Stiletto Visual Programmes Ltd [1989] 1QB 433, Lee Headley O’Brien v MGN Limited [2001] EWCA Civ 1279, and Telewest (paragraph 8).  It was well known and accepted practice for mail order catalogues to include contractual terms, often at the back.  Redcats’ customers were highly likely to know that, albeit that they might not bother to read the terms in detail, or at all. Nevertheless, he maintained, they were bound by them.  Mr Prosser contended that Redcats had done what was reasonably sufficient to give its customers notice of the statement as to the sale of a catalogue: it was legible and not ambiguous; it appeared in the same section of the catalogue as other terms; it was not unreasonable or extortionate; in so far as it was not neutral, it was advantageous to the customer who became owner of the catalogue; it was not unusual; Redcats’ major competitors did the same; and the fact that it was in small print did not matter.
86.	In the 2000 Empire catalogue, the statement as to the catalogue charge appeared on a page headed “Shopping with Confidence”, and in a section concerned with legal aspects.  In the 2003 catalogue, the relevant page was headed “Useful Info” and appeared in “The Small Print” section – a section known by all to refer to legal terms and conditions.  The customer was told in both catalogues, “For full details of trading terms and conditions please refer to the ‘Buying with Confidence’ leaflet or ‘Your guide to shopping with Empire’”.  Redcats made plain that there were indeed trading terms and conditions that were contractual in nature.  Moreover, new customers were sent the “starter pack” which contained “Conditions of Sale” including the statement in question; that in Mr Prosser’s submission, was sufficient to refute HMRC’s case.
87.	In relation to Empire, Mr Prosser placed reliance on Redcats’ financial statements to customers which contained the statement as to the charge for the catalogue.  He admitted that financial statements were post-contract documents, but claimed that they constituted further notice to the customer which was relevant to the analysis in relation to later catalogues.  We need not here deal with the other catalogues and statements.  Suffice it to say that arrangements similar to those of Empire were in place in relation to each of them.
88.	The fact that the charge for the catalogue represented a change in practice was not, in Mr Prosser’s submission, relevant.  It was obviously irrelevant in the case of new customers.  Existing customers were not entitled to assume that Redcats’ terms of trading would remain unchanged from one season to the next; they were merely entitled to be notified of any changes, and they were free to contract or not, subject to the new terms.  If they were so notified in the catalogue, and placed an order, they were to be taken to have contracted on the new terms.  It mattered not that Redcats’ customers were not actually aware of the terms: the test in that respect was objective.  HMRC’s so-called sampling exercise of seven customers (seven of their own employees) out of hundreds of thousands was irrelevant.
89.	In Tesco, Ferris J dealt with the question of consideration in a domestic law sense in the following way:
“[32]  If the question whether Clubcard vouchers are granted for consideration were governed by the concepts of English domestic law there would, I think, be no doubt that it must be answered in the affirmative.  Tesco invites customers to join its Clubcard scheme and offers them in return benefits in the form of vouchers.  Each customer provides consideration, in the domestic law sense, by providing the information which is required before membership is accepted (which is or may be of value to Tesco in that it facilitates Tesco’s analysis of the spending habits of particular customers) and subsequently by purchasing goods on the footing that the promised benefits will be forthcoming.  There is therefore an enforceable contract between Tesco and each Clubcard holder.  Under this contract Tesco is obliged to award or allocate points to each customer in accordance with the rules of the scheme and the amounts spent by the customer.  If Tesco were to decline to credit points to a customer who tenders his Clubcard when paying for goods or if it were to refuse to redeem a voucher at its face value in accordance with the scheme, the customer would clearly be entitled to sue for damages for breach of contract.”
90.	Whilst the Clubcard scheme differs from the arrangements involved in the scheme, in our judgment a Redcats’ customer who has made a successful application for a catalogue has provided consideration in a domestic law sense to the company in satisfying its credit and other criteria, in offering it the benefit of an opportunity to sell goods to her and in supplying commercially valuable information.  Were Redcats to refuse to act on the contract, we have no doubt that the customer would be entitled to damages for its breach.
91.	In so holding, we adopt Mr Vajda’s analysis of the arrangements Redcats makes with its customers set out in paragraphs [82] and [84] of our decision.  We hold that as at the time a catalogue is dispatched and no RoT clause or price has been brought to the attention of the customer, full property rights in the catalogue are transferred to her on its dispatch.  It follows that we reject Mr Prosser’s analysis summarised in paragraph [88] above.  
Question 3 - If not, did ownership of the catalogues pass when they were sent out, pursuant to regulation 24 of the Consumer Protection (Discount Selling) Regulations 2000 (“the DS Regulations”)?
93.	On the basis that Redcats’ VAT case depended entirely on there being a contract for the purchase of a catalogue at the time catalogue goods were ordered, Mr Vajda submitted that the scheme could not give rise to such a contract in respect of unsolicited catalogues.  He observed that Redcats accepted that certain of its customers were sent a catalogue without its having been requested, e.g. those who purchased goods from its internet online catalogue, and that took no steps to ensure that unsolicited goods were not subsequently treated as having been purchased.
94.	Mr Vajda’s case on there not being such a contract was based on Regulation 24 of the DS Regulations which deals with the provision of unsolicited goods in the following terms:
“Inertia Selling
24 (1) 	Paragraphs (2) and (3) apply if:
(a)	unsolicited goods are sent to a person (“the recipient”) with a view to his acquiring them;
(b)	the recipient has no reasonable cause to believe that they were sent with a view to their being acquired for the purposes of a business; and 
(c)	the recipient has neither agreed to acquire nor agreed to return them.
(2) The recipient may, as between himself and the sender, use, deal with or dispose of the goods as if they were an unconditional gift to him.
(3) The rights of the sender to the goods are extinguished.
(4) A person who, not having reasonable cause to believe there is a right to payment, in the course of any business makes a demand for payment, or asserts a present or prospective right to payment, for what he knows are —
(a)	unsolicited goods sent to another person with a view to his acquiring them for purposes other than those of his business, or
(b)	unsolicited services supplied to another person for purposes other than those of his business,
is guilty of an offence and liable, on summary conviction, to a fine not exceeding level 4 on the standard scale.
(5) A person who, not having reasonable cause to believe there is a right to payment, in the course of any business and with a view to obtaining payment for what he knows are unsolicited goods sent or services supplied as mentioned in paragraph (4) —
(a)	threatens to bring any legal proceedings, or 
(b)	 places or causes to be placed the name of any person on a list of defaulters or debtors or threatens to do so, or 
(c)	invokes or causes to be invoked any other collection procedure or threatens to do so,
is guilty of an offence and liable, on summary conviction, to a fine not exceeding level 5 on the standard scale.
(6) “unsolicited” means, in relation to goods sent or services supplied to any person, that they are sent or supplied without any prior request made by or on behalf of the recipient.”
Regulation 25 provides that there can be no contracting out of the DS Regulations.
95.	The DS Regulations were introduced to give effect to EC Directive 97/7/EC (“the Directive”) on the protection of consumers “from demands for payment for unsolicited goods and from high-pressure selling methods” (recital 5) in respect of distance contracts.  Regulation 24 implements article 9 of the Directive, but is in terms identical to section 1 of the Unsolicited Goods and Services Act 1971 (which it replaces), with the exception that under that Act the unconditional gift took place only after a period of six months.
96.	Thus, where a catalogue was unsolicited, in Mr Vajda’s submission, under Regulation 24, it became the property of the customer when sent: Redcats’ rights were extinguished.  There could be no question of any RoT clause operating, and no possibility of a customer being charged for a catalogue she already owned.
97.	He contended that article 9 of the Directive was designed to protect consumers both from the supply of unsolicited goods and from high pressure, i.e. inertia, selling: it prohibited a supply of goods without an order - not merely a request - from a customer where the supply involved a demand for payment.  On Redcats’ analysis a customer was buying both goods and a catalogue.  The customer could not pay for the goods and not for the catalogue: thus, there must be a demand for the payment for the catalogue.  Under the second part of article 9, an unsolicited supply must be a supply without an order.  The legislation did not provide for payment of money, but rather consideration, which had a wider connotation; and consent had to be express.  
98.	Article 9 provides as follows:
“Inertia selling
Member States shall take the measures necessary to:
prohibit the supply of goods or services to a consumer without their being ordered by the consumer beforehand, where such supply involves a demand for payment,
exempt the consumer from the provision of any consideration in cases of unsolicited supply, the absence of a response not constituting consent.”
99.	Mr Vajda contended that if Redcats’ contractual analysis was correct, the catalogues were sent out as a marketing exercise.  It then asked for payment for them; and (contrary to regulation 24 of the DS Regulations) attempted to deny that it had made a gift.  Mr Vajda dealt with the possibility that Redcats might hope to resist that analysis by asserting both that the catalogues were requested for the purposes of the DS Regulations, and that catalogues were not sent with a view to a customer acquiring them.  In relation to the former, he maintained that it involved two issues.  The first was whether, as a matter of fact, Redcats could prove that any form of request had been made for the relevant catalogues – a matter of evidence on which the burden of proof lay on Redcats.  The second was whether a customer, who may have asked for a catalogue in ignorance of any purported future charge or the RoT clause, could be said to have “requested” it for the purposes of the DS Regulations.
100.	Dealing with the second issue, Mr Vajda maintained that, when a customer requested a catalogue, she had no idea that she would have to buy goods.  If that were correct, none of Redcats’ six categories of customers qualified.  He submitted that any request for goods, within the meaning of regulation 24(6), must be made with knowledge of any prospective charge if regulation 24(2) and (3) were not to apply.  It would be difficult to imagine any more obvious form of high-pressure selling than to induce an order by implying that goods were free, and then to charge for them.  Redcats could not therefore offer a catalogue without mention of price (or charge) or the RoT clause, and then argue that it could avoid the consequences of its actions (and the DS Regulations) by relying on the uninformed “request” of its customers.  HMRC did not therefore accept that a request had been made for the purpose of the DS Regulations where the RoT clause and the prospective charge for those particular goods had not been brought to the customer’s attention before that request was made.
101.	HMRC had seen no evidence that such information was brought to that person’s attention.  None of Redcats’ methods of dealing with requests for a catalogue provided for communication of the RoT clause and prospective charge.  Consequently, Mr Vajda submitted, all the catalogues sent out by Redcats were unsolicited: all fell within the first and second limbs of article 9 of the Directive.  A fortiori, there could be no “prior request” for the specific goods which formed the basis of the alleged contract where catalogues were sent out to people who had: 
a.	ordered goods from earlier catalogues; or
b.	requested catalogues for earlier seasons; or 
c.	requested different catalogues or promotional material.

102.	In relation to Redcats’ claim that its catalogues were not sent out with a view to the customer acquiring them, Mr Vajda maintained that, because its primary purpose was to sell goods from its catalogues rather than the catalogues themselves, or because the catalogues were not sent out with a view to customers purchasing them, they were not sent out with a view to customers acquiring them; the proposition was misconceived.
103.	If a catalogue were not to be treated as an unconditional gift by virtue of the common law rules as to gifts, it was deemed to be an unconditional gift pursuant to regulation 24 of the DS Regulations.  Goods were sent to a recipient “with a view to his acquiring them” whenever a recipient must satisfy some condition in order to gain rights over them, i.e. when they were not unconditional gifts: that followed from the first and second bullet points of article 9 of the Directive.
104.	Even if “acquire” could be more narrowly defined as “purchase” in the particular context, Mr Vajda maintained that the supplier’s hope of making sales from a catalogue could not alter the fact that they were sent with the knowledge and intention that they might, under Redcats’ analysis, purportedly be purchased.  The fact that that was only one of two possible outcomes was irrelevant.
105.	Furthermore, if the goods were in fact not sent with the intention of their being acquired or purchased by a customer, that clearly had important implications for Redcats’ argument on the VAT supply.  On the one hand, Redcats suggested that it sent the catalogues with no intention of their being acquired by the customer: on the other, it claimed there was a meeting of minds and reciprocal performance sufficient to create an express agreement for the supply of the catalogues.  Those positions were clearly contradictory.
106.	Against a background of Ernst & Young having failed to consider the impact of the DS Regulations on the scheme, Mr Prosser submitted that regulation 24 construed purposively had no application to the appeal.  The mischief at which the DS Regulations were aimed was protection of the consumer - see the short title of the Regulations, and recital 5 to the Directive.  That was equally true of the Unsolicited Goods and Services Act 1971, the preamble to which provided that it was “An Act to make provision for the greater protection of persons receiving unsolicited goods”.  He contended that the mischief at which all the distance selling legislation, including regulation 24, was aimed was not in point in the case of Redcats’ catalogue charging arrangements.  Under those arrangements, at the time a customer was charged for a catalogue sent to her, she was given an equal discount against the price of goods ordered by her.  Overall she was no worse off financially than beforehand; indeed, she was better off for she owned the catalogue and the goods ordered.
107.	Regulation 24 should, in Mr Prosser’s submission, so far as reasonably possible, be interpreted so as to avoid its application to Redcats’ charging arrangements.  For his submission he relied on the Australian case of Ingham v Hie Lee (1912) 15 CLR 267, which involved a similar situation.  There the legislation in point was a Victorian Act whose purpose was to limit the hours of work of Chinese workers in factories in order to protect other industries.  The defendant, who had been caught ironing his own shirt, was acquitted of an offence under the Act.  He also relied on Kingsley v Sterling Industrial Securities Limited [1967] 1 QB 747, a hire purchase case concerned with legislation designed to prevent credit being inflated by means of a “charade” of payment, and to prohibit bogus pretences of payment.  In order for a hire purchase agreement to be enforceable, there had to be “actual payment” of a minimum deposit.  The Court of Appeal held that “actual payment” was satisfied by “the giving of value”, and did not require a cash payment. 
108.	Mr Prosser maintained that the need for a purposive approach to interpretation of the DS Regulations was supported by the principle against double penalisation, which applied in the instant case because regulation 24: 
(a)	imposed a criminal penalty on the sender (see regulation 24(4)); and
(b)	deprived the sender of his property without compensation.

As was said by Buckley LJ in Methuen–Campbell v Walters [1979] QB 525 at 542, in case of doubt as to the way in which language was to be construed, it should be construed in favour of a disappropriated party, rather than otherwise.
109.	Mr Prosser maintained that Redcats’ catalogues were not “unsolicited goods” as defined in regulation 24(4), i.e. goods sent “without any prior request made by or on behalf of the recipient”.  The evidence showed that the majority of catalogues were sent to specifically selected “existing customers”, i.e. customers who had purchased goods from one of Redcats’ catalogues in at least one of the immediately preceding four seasons, and who satisfied a number of specific criteria such as making payments as they fell due.  
110.	He denied that catalogues were “unsolicited goods” as having been sent “without any prior request”, interpreting request in that context as an express request for the particular catalogue.  In his submission, the ordinary meaning of “request” included one made by implication from a course of conduct; alternatively, he claimed that the ordinary meaning of “any” prior request included an express request for a first catalogue followed by the sending automatically of further catalogues in later seasons.
111.	Dealing with implied requests for catalogues, Mr Prosser observed that the nature of Redcats’ business was such that it built up an informal, long term relationship with its customers, included in which was the sending of catalogues to them automatically.  He maintained that customers knew that they would be, and expected to be, sent a new catalogue without having expressly to request it; and by continuing to do business with Redcats they impliedly requested one.  In Empire’s case, where agents were involved, the agents would be unable to select goods in lieu of commission earned without a catalogue.  Even to suggest that catalogues sent to customers as part of such long-term relationships were “unsolicited goods” not only involved placing a meaning on “request” unnecessarily to defeat the specific mischief aimed at by regulation 24, but also led to absurdity.
112.	As to “any” prior request, Mr Prosser maintained that in the majority of cases Redcats established a trading relationship with its customers as the result of an initial request for a catalogue – by telephone, internet, or in response to one of Redcats many promotions.  He submitted that in those cases a prior request had been made.  
113.	Of the remaining catalogues dispatched in a season, he claimed that in most cases they were dispatched following a specific request by an individual.  He accepted that exceptionally a catalogue was sent without prior request where a new customer ordered goods online, a catalogue being sent out automatically with the goods.  But, he added, such dispatches accounted for but 2.4 per cent of all dispatches in 2004, and even less in earlier years.  We accept that statement as fact, but do not consider it takes the matter any further. 
114.	For two broad reasons, Mr Prosser submitted that HMRC’s contention that a request for a catalogue was to be ignored for the purposes of regulation 24 if made by a person unaware of the prospective charge was wrong.   First, he observed that no requirement of such knowledge appeared in the legislation: it simply referred to a “request”.  Secondly, he contended that there was no evidence before the tribunal that a customer would not have made a request had she known of the charge. 
115.	Mr Prosser submitted that where a catalogue was sent following Redcats’ receipt of an “introduce a friend” form, that catalogue had been requested “by or on behalf of” the friend, particularly where the friend had expressly authorised the request.  To argue to the contrary was, he maintained, to place far too restrictive a construction on the words “on behalf of”, those words not involving the legal concept of authorised agent.  Moreover, he added, to satisfy the requirements of the Data Protection Act 1998, the “Introduce a Friend” form now made plain that the form should be completed in conjunction with the friend. 
116.	In the alternative to the arguments that the goods had not been solicited, Mr Prosser maintained that catalogues were not sent “with a view to his [her] acquiring them”.  First, he submitted that Redcats sent a catalogue with a view to the recipient using it to select and order goods, and not with any other view.  Ordinarily, “with a view to” in the context of action by a person “with a view to” a particular result referred to the purpose with which the person did the action, namely in order to produce the result: it was natural to say that the action was “with a view to” a result where the result was the sole or main purpose.  He claimed that that interpretation was supported by the Shorter Oxford English Dictionary definition, where the expression was defined as “with the object or design of”, and had judicial support, see e.g. the judgment of Lord Evershed MR in Re Cutts [1956] 1 WLR 728 where at 733-734 he explained the expression “with a view of giving … preference” in the context of bankruptcy legislation as requiring proof of a dominant intent to prefer.   Applying that requirement to regulation 24, as Mr Prosser maintained should be the case, criminal and disproprietary consequences should not attach unless selling the unsolicited goods was the object of the exercise.  Redcats’ object, motive, etc., in sending a catalogue was, in Mr Prosser’s submission, not that of selling the catalogue, but of encouraging customers to select and buy the goods displayed in it.   Secondly, he submitted that Redcats did not send a catalogue with a view to the recipient “acquiring” it.  Interpreted purposively, he maintained that “acquire” in the present context involved the recipient incurring a financial cost in becoming owner: thus there was no “acquisition” in Redcats’ case for the recipient was automatically given an equivalent discount on the goods.  
117.	The surrounding circumstances, the documents provided to the customer, the nature of the alleged obligations placed upon the customer and the customer’s reasonable expectations, in Mr Prosser’s further submission, all demonstrated that there was no effective incorporation of the catalogue charging terms into any arrangement between Redcats and the recipients of its catalogues.
118.	We find it unnecessary to consider all the submissions of the parties in answering this question.  It will be recalled that Mr Vajda observed (see paragraph [100] above), correctly in our judgment, that any request for goods within the meaning of regulation 24(6) of the DS Regulations must be made with knowledge of any prospective charge if regulation 24(2) and (3) are not to apply.  As he submitted, we hold that a request has not been made for the purpose of the DS Regulations where the RoT clause and the prospective charge for the catalogue have not been brought to a customer’s attention before the request is made.  No evidence having been adduced by Redcats of its having brought that information to its customer’s attention, we accept Mr Vajda’s submission that all the catalogues dispatched are unsolicited and thus fall within the first and second limbs of article 9 of the Directive.  Our detailed reasons for doing so are those advanced by Mr Vajda at paragraphs [102] and [103] above.  
119.	In arriving at our decision, we have most carefully considered all the submissions of Mr Prosser.  We see no reason why regulation 24 should be interpreted so as to avoid Redcats’ catalogue charging arrangements: the case law upon which he relies must be read in context, and the context is not that of obtaining a tax advantage from a scheme such as the scheme.  
120.	We accept that Redcats sends most of its catalogues to those of its customers it describes as “existing”.  But “existing customers” is a term for which Redcats has its own definition, and which we are unable to accept as accurate, particularly as it undoubtedly includes many persons who would not claim to fall within it, e.g. persons who have not bought goods for 12 months and have no intention of making future purchases.  Similarly, in relation to Mr Prosser’s submission that “without any prior request” should be read interpreting “request” as including one made by implication from a course of conduct, we observe that that too must necessarily encompass many who do not, or no longer, consider themselves customers of Redcats. 
Question 4 - Was the catalogue charging clause ineffective because it did not form part of the contract which Redcats and the customer entered into when the customer ordered goods from the catalogue?
121.	Mr Vajda advanced three submissions under this heading.  First, he submitted that a Redcats customer might reasonably assume that the catalogue was a contractual document in respect of catalogue goods, but not in respect of the provision of the catalogue itself.  Secondly, as the conditions in the catalogue were post-contractual, in relation to its own supply, they were ineffective.  And, thirdly, he maintained that, even if the terms were not post-contractual, it was now well established that one must embark on the exercise by reference to the specific condition sought to be relied on, and not by the conditions in general, see Interfoto.
122.	Assuming the catalogue terms were not post-contractual, in the context of the instant case, Mr Vajda submitted that it was necessary to consider whether the words used were sufficient to indicate to an ordinary customer that, contrary to the reasonable inferences to be drawn from the surrounding circumstances, she was not only entering into one contract for the goods, but also a separate contract for the catalogue.  As Mance LJ stated at paragraphs 37 and 38 of Debenhams:
“37.	DR’s attempts to bring the notices to customers’ attention, in a subdued way, must I think be viewed in a general way, and the till slip words appeared on the store copy of any slip signed by the customer.  It is not suggested, and it is very unlikely, that many customers actually raised questions about them at all.  But this leads to the opposite difficulty, which is the interpretation, or (one might say) superimposition, of a contractual analysis in an everyday context where the retailer and customer are both normally interested in anything but that.  When the ordinary customer (not a representative of Customs and Excise sent on a scouting mission) shops in a retail store, he or she envisages the purchase of goods from the store.  If he pays by cash, that is the only contract he envisages.  If he uses a card to pay, he must be taken to appreciate that the purchase of goods in this way will give rise to rights and duties as between him and the company from whom he obtained the card, which in the case of a store card may be connected with the store.  He or she knows that the position regarding any charges (and interest) is regulated by the terms of the store or other card … In the case of Debenhams, however, the ordinary customer would, I think, appreciate that it made no difference to what he or she paid, whether he or she paid by card.  The ticket price was in all cases what was to be paid.  That is on any view a matter of potential significance under European VAT law (see the discussion of Kuwait Petroleum and Primback at the end of paragraph 10 above).  It is not I think without relevance under domestic law, when assessing what the ordinary customer would regard as the bargain being made.  But it is not an essential factor in the conclusions that I reach under either domestic or European law.
38.  While an ordinary customer would not, I think, be very surprised if a retail store were to insist on an extra charge being paid where a customer paid for the goods by card, a DR customer would know that this was not expected in a DR store.  The natural inference would be that any extra charges continued to be absorbed by the supplier.  It would, I think, require clear words to bring home to an ordinary customer that he or she was required or expected to enter into some separate contract, with another company associated with the retail seller of the goods, to cover the charges which use of a card by the customer would or might involve for the seller.  Neither the need for nor the basis of any such contract would be clear.”
123.	Thus, in Mr Vajda’s submission, the standard of notice was necessarily high where the claimed position was at variance with what the ordinary customer reasonably expected, or had been led to expect.  In the instant case, as in Debenhams, he contended that neither the need for, nor the basis of, any such contract would have been clear.  Indeed, there was no reason for the alleged contract, save the VAT saving.
124.	The specific conditions relied upon by Redcats were the RoT clause and the catalogue charge, the former being critical since, if it were ineffective, there could be no basis for the catalogue charge.  Mr Vajda submitted that Redcats did not do what was reasonably necessary to draw attention to either of those conditions.  Furthermore, the artificiality of the RoT clause and the catalogue charge reinforced the fact that the customer did not agree to contract for the catalogue at the stated price.  When the customer received the catalogue, she received, in practice, all the rights of ownership.  That, in Mr Vajda’s submission, emphasised the necessary conclusion that there was no actual contract for the provision of the catalogue at the stated price.  As Mance LJ noted in Debenhams (at paragraph 42): 
“The difficulty in identifying, and the artificiality of, any consideration that can be suggested to have moved from DCHS to the customer reinforces the conclusion expressed in the previous paragraphs.  What would DCHS be offering or agreeing to do, in consideration of the customer’s agreement to pay 2.5% to DCHS?  For a customer paying by card, once the card is accepted at the till, the transaction is complete in relation to the store.  The settlement of the payment obligations resulting from the use of the card is a matter between him and the card issuer.  He has nothing to do with whatever may occur between the card issuer and the store (via the acquirer, where there is one).  Even if the documentation seen by the customer could or would otherwise be read as indicating that the customer was required to contract with DCHS, contracts are not made by mere assertion.  The natural interpretation of the course of events and documentation would accordingly be that any card handling (other than that covered by the agreement between the cardholder and his card-issuer) was and remained the responsibility of the seller accepting the card in discharge of the price”.
125.	Viewed against that background, the natural interpretation of the course of events and documentation in the instant case, in Mr Vajda’s submission, was that rights over the catalogue were provided free of charge in order to sell Redcats’ goods.  Mance LJ continued (at paragraph 43):
“… The contract which cl 1.3 aims to create is unnecessary, and only makes sense to someone who appreciates the possible VAT advantage for the Debenhams group of creating a separate contract for a separate financial supply with a separate company, DCHS.  No ordinary customer would appreciate that.  The suggested contract conflicts with any such customer’s responsibilities, and leaves him with no further role or obligation, save to pay his own card-issuer, and that services performed in relation to settlement or card-handling are performed, by the card issuer (or acquirer),  for the supplier and paid for by the supplier by deduction or some other charge … Even under domestic law, consideration must have some ‘value in the eye of the law’ and not be ‘illusory’: see Chitty on Contracts (29th edn, 2004) vol 1, General Principles, paras 3-022 to 3-024; and it is questionable whether any consideration at all could therefore consist in DCHS’s procuring, or undertaking to procure or effect, settlement of the price by obtaining payment from the card-issuing company (or acquirer) and/or making payment to DR.  But, assuming that it could, the very remote and improbable nature of such consideration militates strongly against a conclusion that the transaction should be understood or analysed in terms of a contract between the customer and DCHS for DCHS to render services to DR”.
126.	Mr Vajda maintained that, in the instant case, it was equally true that the suggested contract conflicted with a customer’s general expectation that provision of the catalogue brought with it all rights of ownership, and, even if any consideration existed, the remote and improbable nature of it also militated against the suggestion that there was an enforceable contract for the sale of the catalogue.  
127.	Mr Vajda made the following additional points on Redcats’ failure to draw a customer’s attention to the RoT clause and catalogue charge.  First, the RoT clause was purportedly imposed notwithstanding that the catalogue was delivered without a specific request or, where there was a specific request, the person requesting it was led to believe that she would receive title to it.
128.	Secondly, both conditions were unusual.  The RoT clause was unusual because:
(a)	property in the catalogue would pass to the holder whether or not a purchase of goods was made;
(b)	 there was no intention of recovering the catalogue or retaining legal ownership of it;
(c)	 there was no mechanism for determining whether the customer had himself retained the catalogue;
(d)	 in the case of internet purchases, it led to a dual pricing system depending on whether one used the online or offline catalogue number.
129.	The catalogue charge was also unusual and indeed artificial.  The catalogue was delivered free of charge; if one did not buy any goods, the catalogue remained free.  Mr Prosser’s argument depended on there being a liability to pay, even if unenforced in practice, but the very fact that the liability was never enforced led to the conclusion that in truth the catalogue was provided without charge.  Only if one bought goods during the seasonal life of a catalogue was there any charge.  The unusual and absurd nature of that charge was illustrated by  the fact that someone who (i) made a series of purchases below the normal price of the catalogue never purchased it, or (ii) purchased goods after the date on which Redcats abandoned its title to the catalogue, when she already owned it.
130.	Thirdly, both conditions were onerous.  In the case of the RoT clause:
(a)	it purported to retain property rights in the catalogue notwithstanding those rights had already been freely given to the customer; 
(b)	it then purported to make a charge for those rights;
(c)	a customer might purchase goods for £6, with a catalogue charge of £3.  If those goods were faulty, she would have a legal right to recover only 50 per cent of the price she paid for the goods.  Even if Redcats were to argue that it would not enforce its “right” to refund only 50 per cent of the purchase price, that did not alter the legal position;
(d)	similarly, internet customers could purchase the same goods using the online catalogue, or by inputting the order number from the printed catalogue.  If a customer using the former method received faulty goods, she could recover her full purchase price.  The customer using the latter method had no such protection: there was no notice on the internet to warn her of the position.
131.	Mr Vajda submitted that the methodology underlying that analysis was consistent with the decision in Interfoto.  Further, he contended the result would be the same whether one followed the approach of Dillon LJ – the condition never became part of the contract – or Bingham LJ – that the defendants were relieved from liability under the clause.  The existence of detriments was relevant to support the analysis that there was no contract for the supply of the catalogue at the stated price, see Mance LJ at paragraph 46 of Debenhams.
132.	He further contended that O’Brien did not assist Redcats, for the main issue there was whether one of MGN’s rules, which provided that a draw would take place for the prize if more prizes were claimed than were available, was “unusual”.  On the evidence in that case, the answer was that it was not.  In the instant case, he submitted, the effect of the RoT clause was not the effect that a possessor of the catalogue would expect, and so more needed to be done to bring that to the attention of the recipient of the catalogue.  
133.	Fourthly, even if Redcats did sufficient to draw to a person’s attention the RoT clause, it was to be disregarded as being a mere label, see Antoniades.  As previously mentioned, in that case, the parties were attempting to contract out of the Rent Acts: the right of the landlord to introduce further occupiers was a pretence as it was not intended to be acted upon.  The effect of the House of Lords decision was to disregard the clause which granted the landlord the right to introduce further occupiers with the result that the agreement was a lease not a licence.  Equally, in the instant case, the RoT clause was pretence: there had never been any intention by Redcats to enforce it, nor had it put in place procedures to do so for the whole period of the scheme.  In reality, full rights over the catalogue were transferred upon its provision without the customer paying any price.  In Mr Vajda’s submission, the RoT clause was therefore to be disregarded.
134.	Redcats’ reliance on Telewest was misguided.  In the case of new customers, the question in that case was not whether the relevant clause had been incorporated, but how it was to be interpreted.  With regard to such customers, the question did not concern the notice necessary to incorporate a clause into a contract, but rather whether there had been a partial novation of an existing contract from one party to another where it was accepted that the charge was neither unusual nor onerous.
135.	Mr Prosser’s contractual analysis of the scheme started from the premise that there was no contract for the catalogue when it was sent to the customer.  It then proceeded by way of an invitation by Redcats to treat to the customer whereby, in relation to her first purchase, she was invited to purchase catalogue goods for their catalogue price less £4, and to purchase the catalogue for £4, subject to the terms and conditions therein contained.  By placing her first order, the customer offered to buy the goods and the catalogue on those terms, and by dispatching the goods, Redcats accepted that offer.  At that stage, a contract was formed for the goods and the catalogue, and ownership of the catalogue passed to the customer under that contract. 
136.	Having acknowledged that HMRC’s case relied heavily on the Court of Appeal decision in Debenhams, Mr Prosser claimed the essence of that decision to be (i) that a DR customer would expect to enter into only one contract (with DR) with no separate charge for card handling services; (ii) against that background, in order to find that the customer entered into a separate contract with DCHS for such services, there would have to be clear wording to that effect (see paragraph 39 of the judgment); (iii) but the wording relied on was equally consistent with there being only one contract between DR and the customer, albeit that part of the price payable was to be paid to DCHS for its services to DR (paragraph 39); the natural meaning of the words was that the customers were contracting with DR alone (paragraph 41); moreover, it was difficult to identify any consideration moving from DCHS to the customer (paragraph 42).  Thus in Mr Prosser’s submission, the wording relied on was insufficiently clear for DR to succeed.
137.	In contrast, he observed that in the instant case there was no other party and no suggestion of separate contracts; merely that the catalogue charging clause was a term of the same contract.  And the wording in the catalogue relied on was perfectly clear; it was not ambiguous at all.  It appeared in a document which it was common ground must be taken to have contractual effect in relation to that condition.
138.	Mr Prosser accepted that the wording was in small print and at the back of the catalogue.  But, he explained, that was true of the other terms and conditions, at least some of which HMRC accepted as having contractual effect.  A typical customer must be taken to know that contractual terms and conditions applicable, inter alia, to her purchase of goods were to be found in small print at the back of the catalogue. 
139.	HMRC’s claim that the catalogue charging clause was different because it concerned the sale of the catalogue was, in Mr Prosser’s submission, a bad one: the clause applied inextricably to the goods (i.e. to their price) as well as to the sale of the catalogue.  Moreover, the terms and conditions applied generally to matters beyond the sale of goods contract itself, e.g. to Redcats’ use of information, etc. 
140.	The fact that Redcats communicated the catalogue charging clause in a “subdued” way was irrelevant because (i) it was not ambiguous, and (ii) all the terms and conditions were equally subdued.  All that could be said, in Mr Prosser’s submission, was that Redcats had decided not to communicate the catalogue charging clause any more prominently than the other terms and conditions.
141.	HMRC’s claim that the clause was ineffective because it was not brought to the customer’s attention before the contract was entered into assumed that she entered into a separate contract for the catalogue when it was sent.  That was incorrect in Mr Prosser’s submission: he claimed that there was a single contract for both goods and catalogue, which was entered into when the goods were dispatched.  It followed that the clause, and all the others, had been brought to the customer’s attention in time.
142.	The notice of charging extra for a catalogue was not unusual, particularly where, as in the instant case, there was no extra cost to the customer.  As Mance LJ explained in Debenhams (see paragraph 38), the natural inference would be that the supplier would absorb the charge.  Thus, more notice would have been required if there had been no equivalent discount.
143.	Mr Prosser maintained that the real issue was whether the effect of the clause was such that extra effort must be made to bring it to the customer’s attention, see O’Brien (paragraph 23).  But, given the equivalent discount, its effect could only be advantageous to the customer.
144.	He posed the question: why did it matter whether it was clear from the statements sent to customers which goods qualified for the discount?  In reply, he explained that the catalogue charging clause stated clearly that the discounted goods were the subject of the “first purchase” from the catalogue, and that the (Empire) discount was £4.  Combined with the passage on the back of the statement under “Current Balance”, it left the customer in no real doubt.  In any event, as HMRC themselves acknowledged, the statement was a post-contractual document so that any lack of clarity could not be relied upon in determining the terms of the contract.
145.	Although HMRC contended that the RoT clause was artificial because Redcats had never sought to recover catalogues and had no procedures in place to do so, they did not allege sham in the Snook sense, and the fact that an owner of goods in another’s possession privately had no intention of exercising his right to recover possession was irrelevant. In any event, Mr Prosser submitted, Redcats was the owner, not because of the clause, but because it had no intention to pass title in the first place.  Artificiality per se was irrelevant to the RoT clause issue, except in so far as it showed that the clause was unreasonable, but it did not so show.
146.	When an Empire agent placed an order with Redcats, it was not clear to Redcats whether it was being placed for the agent herself or for an indirect customer.  Mr Prosser maintained that that mattered not because, if the order were for the indirect customer, the agent paid for the catalogue and the customer received the discount.  He disagreed with HMRC’s description of that as artificial, saying that it made sense for the agent to own the catalogue.
147.	In the event of a transaction being reversed and the customer returning the goods, the catalogue charge was also reversed.  In Lex, the customer sold his old car for £100 by way of part-exchange, but it was agreed that he would receive only £70 were he to return the new car and claim a refund.  The “revising” arrangements in Lex were held to be irrelevant to the VAT analysis: Mr Prosser submitted that they could not be any more relevant to the contract issue in the instant case.
148.	Finally, (i) the fact that Redcats, like Debenhams, attempted to save VAT by making another supply at no extra cost was neutral: the issue was whether the attempt was successful or not; (ii) the call centre script was irrelevant because only 650 people called, and by definition they would have read the statement in any event (iii) a possible detriment to the customer could arise only if she was VAT registered – a most unlikely event; unlike in Debenhams, in the instant case there was only one contract so that in the event of rescission the customer would have returned to her the whole purchase price; and (iv) no weight should be given to HMRC’s “pathetic” survey of seven out of millions of Redcats’ customers, except perhaps to conclude that customers did not bother to read any of the terms and conditions.
149.	In summary on this issue, Mr Prosser submitted that, once it was accepted that the catalogue charging clause was one of Redcats’ written terms and conditions of trade, that other terms had contractual effect, and that there was nothing onerous, unfair or unreasonable about the clause, it must follow that it too had contractual effect.
150.	As we held in relation to the first question before us, neither the need for, or the basis of, any contract which is at variance with what a customer reasonably expects, or has been led to expect, would be clear to her.  And, as Mr Vajda submitted, there is no reason for Redcats’ alleged contract, save the VAT saving.  In any event “contracts are not made by mere assertion” (see paragraph 42 of the judgment of Mance LJ in Debenhams).
151.	Assuming we are wrong in simply holding that the contract for the catalogue is separate from that for catalogue goods, we agree with Mr Vajda that Redcats does not do that which is reasonably necessary to draw attention to either the RoT charge or the catalogue charge clause; and that the artificiality of both clauses reinforces the fact that a customer does not agree to the contract for a catalogue at the stated price.  Thus, we conclude that when a customer receives a catalogue, she receives all the rights of ownership to it.
152.	 Once more, we accept the whole of the submissions of Mr Vajda, and reject those of Mr Prosser.  We hold the catalogue charging clause to be ineffective as not forming part of the contract between Redcats and a customer ordering goods from a catalogue.
153.	Whilst it may be the case that in a two-party situation the contract will usually conclude the VAT supply issue, it is not an absolute rule. We agree with Mr Vajda’s submission that the correct approach to determining the issue is to consider whether there is a direct link or reciprocal performance between any of the consideration paid by the customer and the provision of the catalogue.  As he pointed out, and as we have found, Redcats receives no consideration for some 3.8 million catalogue it dispatches each year and which result in no sales of catalogue goods.  We have already rejected Mr Prosser’s submissions on contract, but even had we accepted them, we should have agreed with Mr Vajda that in the instant case there is at the highest an indirect link between the consideration and the provision of the catalogue.
154.	The economic purpose of a transaction is a vital tool in determining its essential features.  Once more, we agree with Mr Vajda in accepting his claim that in the instant case the economic purpose of the transaction is exclusively the provision of goods from the catalogue: it is not the purchase of the catalogue.  Here, no consideration is provided in return for the catalogue, and there is no reciprocal performance.  We therefore hold that there is no supply of the catalogue for VAT purposes.  
155.	We need not repeat the contents of paragraphs [121] to [134] above.  Suffice it to say that we accept the correctness of Mr Vajda’s submissions therein in their entirety.  We believe that follows from our rejection of Redcats’ domestic law analysis of the scheme.
Question 5 - Was the sale of the catalogue prevented from being a supply for VAT purposes?
156.	In dealing with this question, Mr Vajda made a number of observations on the relevant principles of VAT.  First, he pointed out that under article 2 of the First VAT Directive (67/227/EEC) VAT was a general tax on consumption which should be directly proportional to the price paid by the final consumer.  As the ECJ explained at paragraph 20 of its judgment in Elida Gibbs v Commissioners of Customs and Excise [1996] STC 1387:
“… one of the principles on which the VAT system was based was neutrality, in the sense that within each country similar goods should bear the same tax burden whatever the length of the production and distribution chains.”
157.	Secondly, Mr Vajda reminded us that the concepts of supply and consideration were autonomous concepts of Community law, and that a supply could not be identified by its classification within the (often differing) national laws of Member States.  Only if transactions were looked at with a view to tax being applied uniformly and neutrally could they be treated similarly regardless of variations in national law.  Thus in, e.g. État belge v Temco Europe SA (Case C-284/03) 2003, the ECJ held that in deciding whether a transaction constituted a lease all the surrounding circumstances had to be considered as well as the contract.
158.	Further, in the Tesco case Jonathan Parker LJ (giving the judgment of the Court of Appeal) said at [159]:
“3.	The terms contractually agreed may not be determinative as to the true nature of the scheme ([Commissioners of Customs and Excise v] Reed [Personnel Services Ltd [1995] STC 588] …): 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 [Commissioners of Customs and Excise v Mirror Group plc [2001] STC 1453] para 27: …)” 
159.	A similar approach was adopted by Lord Slynn in Eastbourne Town Radio Cars Association v Commissioners of Customs and Excise [2001] STC 606 where, at paragraph 14, he held that a mere change in legal form would not change the VAT analysis if nothing changed as a matter of economic substance, that conclusion reflecting “the commercial reality whatever the drafting changes in the association’s constitution” (paragraph 24). 
160.	Turning then to the question of consideration, and having reminded us that under article 11(A)(1)(a) of the Sixth Directive “the taxable amount in respect of supplies of goods and services shall be 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 suppliers …”, Mr Vajda maintained that case law established the following four principles:
(a)	“consideration” was an autonomous concept of Community law;
(b)	there must be a direct link between goods supplied and the consideration received;
(c)	there must be a legal relationship between the supplier and recipient pursuant to which there was reciprocal performance, the remuneration received by the supplier constituting the value actually given in return for the supply; and 
(d)	consideration was the amount demanded from the customer for the supply regardless of whether that sum was actually received by the supplier.
We might usefully add a fifth point, to which Mr Vajda indirectly made reference, namely that the proper approach to the identification of any consideration depends “save in exceptional cases, [upon] the objective character of the transaction in question”: see paragraph 33 of the judgment of the ECJ in Commissioners of Customs and Excise v Cantor Fitzgerald International [2001] STC 1453.  
161.	Next, Mr Vajda maintained that, in determining what was being supplied, one should look at the essential features of the transaction from the customer’s point of view.  The case law of the ECJ established that in order to determine what was being supplied one must ascertain the “essential features” of the transaction (Case C-349/96 CPP [1999] ECR I-973 at paragraph 29 and Maierhofer at paragraph 39), “irrespective of the way in which it might be artificially presented” (Maierhofer, ibid).  In carrying out that exercise “it is the nature and purpose of a transaction viewed from a customer’s perspective that is critical”, see Fennelly AG at paragraph 29 of his Opinion in Case C-76/99 Commission v France [2001] ECR I-249 (the “French Laboratories” case), or as Lord Slynn put it in CPP, “If one asks what is the essential feature of the scheme or its dominant purpose, perhaps why objectively people are likely to want to join it” [2001] STC 174, 183 at paragraph 25.  
162.	He submitted that there was nothing in Tesco that was contrary to the above approach.  In Tesco Jonathan Parker LJ pointed out that there was no clear distinction between an objective and subjective approach to analysing a particular transaction for VAT purposes (paragraph 158).  He said:
“There are a number of pointers in the authorities referred to in Part 3 of this judgment … 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 501 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’.”
163.	Mr Vajda added that, in Tesco, Jonathan Parker LJ concluded on the facts that there was, in VAT terms, no consideration for the provision of Clubcard points to the Tesco Clubcard member.  In reaching that conclusion he looked at the scheme as a whole as well as the economic purpose or “cause” of the scheme which he found to be to encourage customers to make further purchases (in other words it was a customer loyalty scheme).
164.	Then, Mr Vajda submitted that VAT law was to be construed so as to prevent “possible tax evasion, avoidance and abuse” (see paragraph 76 of the ECJ judgment in Gemeente Leusden and Holin Groep BV v Staatssecretaris van Financiën [2004] All ER (D) 351), and that there was nothing in the Cantor Fitzgerald case to undermine the obligation to construe the provisions of the Sixth Directive accordingly.  Cantor Fitzgerald merely said that a trader could not choose one form of transaction and seek to be taxed (more favourably) by reference to another form he could have entered into.  He further submitted that VAT law was to be construed so as to prevent distortion of competition between undertakings, relying on, inter alia, the Fourth Preamble to the Sixth Directive and European Commission v France (Case C-404/99) [2001] ECR 1-2667 for the purpose.  He also relied on the factual distinction between Redcats’ treatment of customers other than internet customers, and internet customers.
165.	Applying that law to the facts of the instant case, Mr Vajda submitted that Redcats’ claim that in a two party situation the contract would conclude the VAT supply issue was unsustainable.  He maintained that the correct approach was to decide whether there was a supply in VAT terms of the catalogue; and to answer that question one had to determine whether there was a direct link or reciprocal performance between any of the consideration paid by the customer and the provision of the catalogue.
166.	He submitted that there was no such “direct link”, nor was there “reciprocal performance” by the customer in return for its provision.  Redcats received consideration from a customer only when she purchased goods.  It did not receive consideration for the approximately 3.8 million catalogues dispatched each year which resulted in no sales of goods.  Consequently, assuming Redcats to be correct in its submissions on contract, there was at the highest an indirect link between the consideration and the provision of the contract.  Further, a customer could not receive catalogue goods without tendering the full, i.e. the catalogue, price for them, and could receive no reduction in price if she did not wish to own the catalogue.  And when a customer returned goods that were the subject of an initial order, she was refunded the full cost thereof, including amounts purportedly charged for the catalogue.
167.	Mr Vajda contended that the absence of a direct link was reinforced by the fact that there was no reciprocal performance between the price paid by the customer and the provision of the catalogue.  All customers already had the catalogue: a customer who purchased goods was put in no better position as regards use of the catalogue than one who made no purchase, and who would not be required to return the catalogue or pay for it.
168.	There was nothing in the ECJ judgment in Halifax to contradict HMRC’s “correct approach”.  In particular, Mr Vajda claimed, Halifax in no sense cast doubt on the analytical methodology propounded by Jonathan Parker LJ in Tesco of considering the economic purpose (“cause”) of the arrangements properly to identify their effect.  Thus, whilst the subjective purpose of the supplier would not ordinarily determine whether or not there had been a supply, the economic purpose of the transaction was a vital tool in determining the essential features of that transaction.  In the instant case, the economic purpose of the transaction was exclusively the provision of goods from the catalogue: the catalogue was provided simply to encourage persons to purchase catalogue goods and not to purchase the catalogue itself.  No consideration was provided in return for the catalogue, and there was no reciprocal performance: there was therefore no supply of the catalogue for VAT purposes.
169.	Of the claim by Redcats that Halifax supported its case that if there was a supply it occurred when a customer placed her first order, Mr Vajda commented that the determining factor (as Redcats accepted) was the point at which one party empowered another party to dispose of the property as if she were the owner.  In Staatsecretaris van Financien v Shipping and Forwarding Enterprise Safe BV (Case C-320/88) [1990] ECR 1-285, [1991] STC 627, the ECJ held that there would be a supply of goods even if there was, under national law, no transfer of legal ownership of the property (judgment, paragraph 8).  What was decisive was whether the transferee “acquires a position which is de facto analogous to that of the formal legal owner” (judgment paragraph 13).  He submitted that the position was unchanged by Halifax.  A contractual right to reserve legal ownership to the transferor for a limited period (a season) did not therefore preclude there being a supply within the meaning of article 5 when the transferee had the right to act as a de facto owner.  For that reason he claimed that the RoT clause had no effect for VAT purposes.  Equally, and for the same reason, the clause had no commercial purpose, and was ineffective for the purposes of English contract law with regard to unsolicited goods.  In the instant case, Mr Vajda submitted that a customer gained full rights of ownership at the time she received the catalogue: those rights were therefore obtained without the provision of any consideration in return.
170.	Similarly, it was clear that Redcats did not consider “payment” of the notional price of the catalogue to be reciprocal performance for its provision, or believe that there was a direct link between the alleged tendering of that price and the “supply” of the catalogue.  Mr Vajda claimed that HMRC could put the position no more accurately than Mr Leach did in his memo of 19 June 1998 (see paragraph 10 above), when he said that “there is no intention of directly charging customers”.  Further, viewing the scheme documents as a whole led to the same conclusion.  From the point of view of the customer, the essential feature of the transaction was exclusively the purchase of catalogue goods – a conclusion reinforced by the fact that many customers would be totally unaware that they were purportedly entering into a contract to purchase the catalogue.
171.	Mr Vajda therefore submitted that the true position was that customers wished to purchase specified goods at their catalogue price (or at a previously advertised discounted price) – a price set without reference to whether or not a catalogue was provided.  As the customer could not obtain those goods without paying that price, she did not in any real sense agree the attribution of the price between the goods and the catalogue.  The same result was reached adopting the Tesco approach of looking both at the legal effect of the entire mail-order arrangements of Redcats, and identifying their economic purpose (“cause”).  And the legal effect that one was looking at was not whether there was a contract under English law for the supply of a catalogue, but whether a catalogue was provided for consideration as a matter of Community law (see Tesco at paragraph 160).  For all those reasons, Mr Vajda contended, there was no consideration for the catalogue, and hence no VAT supply of it to the customer.  The economic purpose (“cause”) of the arrangements was to sell catalogue goods to the customer: it was not to make sales of catalogues.
172.	Those conclusions were, in Mr Vajda’s further submission, reinforced by the fact that the scheme was a value-shifting avoidance technique intended to allow Redcats to sell goods worth £10 whilst only accounting for VAT on £10 minus the notional “price” of the catalogue; and it was well settled that the provisions of the Sixth Directive were to be interpreted so as to prevent tax avoidance.
173.	In summary, Mr Vajda maintained that the tendering of the price was reciprocal performance for the sale of the relevant goods: it was not consideration for the supply of the catalogue.  Equally, the price paid by the customer was directly linked to the supply of the goods.  The cost of the catalogue was a cost component of Redcats’ supply, and the scheme was merely an attempt to disguise that fact.  However, it was incapable of altering the essential features of the transaction.  In such circumstances, Mr Vajda claimed, there was no supply of a catalogue for consideration, and therefore no such supply for VAT purposes.
174.	Mr Prosser maintained that if Redcats’ domestic law analysis was correct, then for VAT purposes the consideration it obtained from its customers for the supply of goods was £4 less than the price stated in the catalogue; i.e. Redcats allowed the customer a £4 price discount, see the Sixth Directive, article 11A 1(a) and 3(b).  He contended that it was not possible to regard the transaction as a single supply of the goods, except if that were required by the application of the guidance in Card Protection Plan v Commissioners of Customs and Excise [2001] STC 174 (“CPP”) or that in Halifax concerning the abuse of law principle.  In his submission, HMRC were attempting to disregard the supply of the catalogue by reference to arguments about the concepts of supply and consideration, but they were illegitimate because they ignored the guidance in CPP and Halifax.
175.	He maintained that the application of the principle of legal certainty meant that, in the absence of sham, the question “what is the consideration for a supply (including that for two or more supplies made at the same time)?” must be determined by the agreement (if any) of the parties, including their allocation and apportionment of the consideration between two or more supplies.  It was not open to the parties, or to HMRC, subsequently to re-allocate the consideration.  Moreover, for that purpose there was no difference between the parties’ agreement and the domestic law analysis of their agreement. 
176.	Mr Prosser submitted that it was well settled that the taxable amount for a supply was a subjective value, not a figure estimated according to objective criteria.  It was the parties alone who decided the price which could be charged by reference to the criteria they considered appropriate: the taxable amount could not be determined on the basis of hypothetical reasonable behaviour.  That applied equally where the transaction involved two supplies, unless there was a package price covering both without distinction when the consideration within the meaning of article 11A(1)(a) could not be used as the taxable amount for part of the package (see paragraph 41 of the judgment of Madgett & Baldwin at paragraphs 64 and 65).  And from the judgment of Chadwick LJ in Lex Services plc v Commissioners of Customs and Excise [2001] STC 1568, Mr Prosser extracted the following principles which were subsequently confirmed in the House of Lords (see per Lord Walker at paragraphs 18-29):
“(a)	there was a direct link where there was a payment agreed in return for a supply (paragraphs 12 and 13);
(b)	the inquiry excluded any valuation which was independent of the actual transaction, i.e. any valuation based on criteria not adopted by the parties themselves (paragraph 14);
(c)	the inquiry was to ascertain the true value for the purpose of the transaction, i.e. the value which the two parties to the contract attributed to the supply, or the sum of money agreed between the parties: only in the absence of such attribution did one adopt different criteria (paragraphs 18 – 23); 
(d)	where the consideration for a supply was not money, the value of that consideration was determined by the parties’ own express or implicit attributions of value (paragraph 30).
(e)	a fortiori where the consideration was money and the parties had expressly attributed part of the money to the supply; the fact that the transaction could have been structured differently with the same economic effect (here, a gift of the catalogue) was irrelevant, for that would be a different transaction (paragraphs 82 – 87).
177.	Mr Prosser maintained that HMRC’s arguments as to why the apportionment for which the scheme provided should be rejected as illegitimate was misconceived for the following reasons:
(i)	There was necessarily a direct link between the supply of the catalogue and £4 for the parties had expressly attributed £4 to the sale of the catalogue: nothing more was required (see Telewest at paragraph 67).  The fact that the catalogue was sold as part of a package did not mean that there was no direct link.  Linked transactions were common in commercial life.
(ii)	The customer already had possession of the catalogue when the relevant supply, the sale of the catalogue, was made, and the fact that the customer became owner of the catalogue could not be disregarded: it was not a sham.  As owner of the catalogue, the customer could then do as she wished with it, and need not return it.
(iii)	The fact that a customer paid no more overall than before the scheme was introduced was irrelevant to whether there was a direct link.  It was what the parties had agreed (in the absence of sham) which counted, not what the supplier privately thought about it.
(iv)	HMRC’s claim that the “essential feature” of the transaction was exclusively the purchase of goods was “mere assertion” supported by their internal sampling exercise.  Whilst the essential feature of the transaction from the customer’s point of view might be relevant to the CPP issue, it was irrelevant to the instant case.
(v)	If by saying that a customer did not “in any real sense” agree the attribution of the price between the goods and the catalogue, HMRC meant that there were no negotiations between Redcats and its customer (who must take the contract on Redcats’ terms or leave it), that was always the case with standard form contracts.  Alternatively, if HMRC meant that the customer was subjectively unaware of the attribution, that might be true but it was irrelevant: the principle of legal certainty required the parties’ attribution as expressed in the documents, i.e. as determined objectively, to be determinative.  If retailers’ VAT liabilities depended on what customers were subjectively aware of and actually agreed, as opposed to what they were taken to have agreed, there would be utter confusion.
(vi)	HMRC not alleging sham, part of the transaction consisted in genuine sales of catalogues at £4 each, so that the economic purpose (“cause”) of the arrangements was not merely to sell goods.  In a straightforward two-party case, such as the instant one, there would be no difference between the correct analysis and the VAT analysis, including analysis by reference to economic purpose (see Reed Personnel at page 595 and Debenhams in the High Court at paragraph 98).  Moreover, HMRC’s reliance on what customers “wished” and were aware of was wholly inconsistent with an objective analysis of “economic purpose” (see Tesco at paragraph 159).
(vii)	Of the allegation that the scheme was a value-shifting tax avoidance technique, if by “value-shifting” HMRC meant that Redcats was inflating the price of one element, the answer was that Redcats was not value-shifting for the amount charged for the catalogue was perfectly reasonable having regard to the costs of production and distribution: the fact that the price did not exceed that charged prior to the introduction of the scheme confirmed that it did not exceed a reasonable price.  But if, by alleging value-shifting, HMRC meant that Redcats was charging for catalogues when previously it gave them away, that was perfectly lawful (see Debenhams in the High Court at paragraph 50).  As for tax avoidance, that too was denied.  The principle of neutrality did not mean that a taxable person with a choice between two transactions might choose one of them and avail himself of the effects of the other: by the same token, if one transaction was chosen, HMRC could not tax the effects of the other.
(viii)	HMRC’s reference to the scheme as an attempt to disguise the fact that the price was for the goods and not the catalogue was inapt where there was no allegation of sham and the parties’ agreement was not inconsistent with what they had in fact done (see Debenhams in the High Court at paragraphs 78-86).
178.	In the Halifax case, the ECJ was asked to consider whether transactions effected by each of the companies involved in the scheme there under consideration qualified as “supplies” for VAT purposes made in the course of an “economic activity” carried on by them, and held that they did.  Mr Prosser noted that the ECJ observed that the term “supply of goods” in article 5 of the Sixth Directive covered “any transfer of tangible property by one party who empowered the other party actually to dispose of it as if he were the owner of the property” (judgment, paragraph 51), and that the term was “objective in nature” and applied “without regard to the purpose or results of the transactions concerned” (judgment, paragraph 56).  It was “entirely irrelevant” to the question whether a transaction constituted a “supply” that it was carried out for the sole purpose of obtaining a tax advantage, without any other economic objective (judgment, paragraphs 59 and 60).  It was equally clear that the ECJ thought it irrelevant that the arrangements were “artificial”.  It was only in exceptional cases, such as fraud, where a different conclusion might be reached (judgment, paragraph 59).  In the instant case, Mr Prosser repeated, HMRC had specifically withdrawn their initial allegation of sham.
179.	Applying the ECJ’s reasoning in Halifax to the instant case, Mr Prosser submitted that Redcats’ sale of a catalogue to a customer on placing her first order from it must inevitably be a “supply” of the catalogue: it was a transfer of tangible property by one party who empowers the other party to dispose of it as if he were the owner of the property.  Redcats’ purpose in choosing to supply its catalogues, rather than simply to give them away, was entirely irrelevant to that issue, as was the suggestion by HMRC that the catalogue charging arrangements were in some way artificial.
180.	Whilst in most two-party cases the contract concludes the supply issue, it does not do so in every one of them.  In our judgment, the instant case falls outside the general rule.  We accept Mr Vajda’s submission that to decide whether Redcats makes a supply in VAT terms of a catalogue, we must determine whether there is a direct link or reciprocal link between any of the consideration paid by the customer and the provision of the catalogue.
181.	We have already rejected Redcats’ submissions on contract, but even had we not it would have availed Redcats nothing.  In our judgment, the submissions of Mr Vajda contained in paragraphs [165] to [173] above are correct in every particular and we adopt them in their entirety in answering the present question.  In our judgment, there is no VAT supply of a catalogue.  
182.	Not only have we rejected Redcats’ submissions on contract, so too have we held that the scheme is a pretence, or a case of mislabelling.  For these reasons, we consider Mr Prosser’s submissions to be incorrect, and we therefore reject them.
Question 6 - Does the principle laid down in the case of Card Protection Plan Limited v Commissioners of Customs and Excise [1999] STC 270 (“CPP”) apply?
183.	By way of introduction to his submission on this question, Mr Vajda observed that Community law showed a development from a close link between a principal and an ancillary supply (the ancillary supply taking the tax treatment of the principal supply, see e.g. Skatteministeriet v Henriksen  (Case 173/8) [1990] STC 768) to that expanded by the ECJ in Card Protection Plan Ltd, as follows: 
“29.	However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2412, paras 12 to 14, concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts regard must first be had to all the circumstances in which that transaction takes place.

30.	In this respect, taking into account, first, that it follows from art 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.

31.	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 (see Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24 (pages 28-31)” 

184.	Mr Vajda went on to explain how the courts had dealt with the ECJ Card Protection Plan judgment in the United Kingdom citing Card Protection Plan itself, Telecom Plc and Telewest.  When Card Protection Plan returned to the House of Lords following the judgment of the ECJ, [2001] STC 174, Lord Slynn applied the above principles saying, “If one asks what is the essential feature of the scheme  or its dominant purpose, perhaps why objectively people are likely to want to join it, I have no doubt that it is to obtain a provision of insurance cover”.  (page 183h).  The House of Lords also applied CPP in Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758 in which Lord Slynn stated (at page 765):

“In my opinion the fact that separate charges are identified in a contract or on an invoice does not on a consideration of all the circumstances necessarily prevent the various supplies from constituting one composite transaction nor does it prevent one supply from being ancillary to another supply which for VAT purposes is the dominant supply.  Even though it may be desirable to approach each supply as if it were a separate supply and even though each supply in a composite transaction may be an independent separate supply the essential features of a transaction may show that one supply is ancillary to another and that it is the latter that for VAT purposes is to be treated as the supply” (at page 765).

185.	In Telewest, the Court of Appeal accepted that:
“the expectation of the customer is relevant to the question whether two contracts constitute, for VAT purposes, principal and ancillary contracts” (paragraph 69).
The Court declined to apply CPP to the Telewest facts because there were, unlike here, two suppliers.

186.	Mr Vajda further claimed that Article 11A(2)(b) of the Sixth Directive was also relevant in this context.  It provides:

“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 maybe considered to be incidental expenses by the Member States.”
187.	He submitted that Article 11A(2)(b) made plain that expenses which were incidental to the supply of goods were to be treated as part of the supply of the goods for VAT purposes.  In Muys’ en De Winter’s Bouw-en Aannemingsbedrijf BV v Staatssecretaris van Financiën [1997] STC 665, the Advocate General stated that incidental expenses mentioned in that provision were those which were:
“inextricably linked to the sale and transport of goods to the customer.  There is no such link in the case of interest on credit granted by a supplier which is an optional service offered in addition to the supply of goods”  (para 16 of his Opinion).
188.	On the basis of those authorities, Mr Vajda submitted that where such expenses were mandatory, not optional, and were offered as part of the same price (i.e. for no additional payment), they formed part of the consideration for the supply of the goods.

189.	He then proceeded to apply those principles to the facts of the instant case, first pointing out that the essential features of the transaction from the point of view of a Redcats customer were as follows:

a.	the aim of the customer (should she decide to make a purchase) was to purchase catalogue goods, and
b.	the catalogue was the means by which she identified the goods and their price.

The customer had no interest in purchasing a catalogue.  She was generally not aware that there was even a notional charge for the catalogue.  Redcats’ aim was to sell goods. The catalogue was provided to the customer to facilitate or encourage her purchase of goods.  The catalogue was never an aim in itself, rather it was a way of selling goods.  One could not buy the catalogue on its own, it had no independent life.  It was only sold where goods from the catalogue were purchased.  Whether or not goods were purchased the customer would not be asked to return the catalogue.

190.	Mr Vajda submitted that there was  therefore a single supply of goods whether as a result of CPP principles or Article 11A(2)(b).  He  maintained that any contrary decision would  lead to what was in reality a single supply to the customer of goods being artificially split into separate supplies, when from the point of view of the customer they were at best designed to operate together to achieve a single economic event.

191.	Having observed that in Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC 55 the House of Lords indicated that, in applying the CPP guidance, the courts should no longer refer to pre-CPP law, Mr Prosser observed that the Henriksen case was not only pre CPP but was also irrelevant as being concerned with the interpretation of Article 13B(b) of the Sixth Directive and not with whether one element was ancillary to another.  He submitted that the test was not whether one supply was closely linked to another, nor whether there was a single transaction made up of elements which were not optional. He accepted that that was the position in CPP itself, but argued that it was not the test laid down.  The test was whether one element was ancillary to another.

192.	Mr Prosser maintained that CPP stated:

 1) that every  supply of a service (or of goods) must normally be regarded as distinct and separate : a fortiori where the elements were separately priced;
 2) that a supply which comprised a single service from an economic point of view should not be artificially split; and
 3) there was a single supply where one element was ancillary to the other, i.e. where the one was a means of better enjoying the other.

193.	Applying that guidance to the instant case where a customer purchased not only catalogue goods but also the catalogue itself, Mr Prosser contended that the supply of the catalogue was not ancillary to the supply of goods, it was not a means of better enjoying the goods.  He did, however, accept that the general purpose of the catalogue from the customer’s point of view was to facilitate shopping from home, so that in that sense the catalogue was not an end in itself but was a means of better enjoying the process of shopping.  But, he added, that could not mean that the supply of the catalogue was ancillary to the goods ordered by a customer at the same time: the supply of the catalogue did not facilitate the purchase of those goods, by definition the customer had already chosen the goods ordered at the same time.  At most, he submitted, ownership of the catalogue facilitated continued use of it, and therefore future purchases of goods in later transactions. Thus, it could be argued that the supply of the catalogue was ancillary to future sales of goods, but it could not be ancillary to the current goods or  their sale.  Further, the catalogue and the goods were physically separate and were economically dissociable.  They did not have to be sold together.  The only sensible conclusion, Mr Prosser further submitted, was that the sale of the catalogue was a principal supply in its own right. 

194.	HMRC asserted (in Mr Prosser’s view, without evidence) that the customer did not want to buy the catalogue.  But he maintained that she had agreed to buy it for £4 and, in the light of the Dr Beynon decision, it was not appropriate to focus on the particular facts of a case such as the present one where there was a  standard form contract containing unobtrusive terms not specifically drawn to the customer’s attention.

195.	Mr Prosser maintained that HMRC’s reliance on Article 11A(2)(b) of the Sixth Directive was misplaced for two reasons: first, he submitted, because that sub-article had nothing to do with the identification of a supply.  It operated, when the supply had been identified to quantify the taxable amount of that supply, see BT plc per Lord Slynn and, secondly, because that sub-article was concerned with charging a customer, as part of the price for a supply, expenses incurred by the supplier, but there was no such charge in the instant case. 

196.	Having considered the submissions of the parties against the background of the facts we have found, we conclude that if Redcats makes a supply of the catalogue it is a discrete supply.

Question 7 - Does the doctrine of abusive practice apply?

197.	It is now plain from the ECJ decision in the Halifax case that “the principle of preventing abusive practices applies in the sphere of VAT” (judgment, paragraph 70), so that the Sixth Directive must be interpreted as precluding any right of a taxable person to deduct input tax where the transaction from which that right derives constitutes an abusive practice (judgment, paragraph 99.2).  At paragraphs 74 and 75 of its judgment the court explained the conditions applicable as follows:

	“74.  In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

	75.  Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.  As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.”

198.	At paragraph 81, the ECJ elaborated on the second criterion, saying:
	
	“As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned.  In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and / or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke, paragraph 58).”

199.	Thus the two tests for a finding of abuse are these:

(a)	that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions (“the contrary to VAT purpose test”); 
(b)	that the essential aim of the transactions concerned is to obtain a tax advantage (“the essential aim test”).

200.	In this instance, we propose to deal first with the submissions of Mr Prosser.  Before dealing with the two tests.  He contended that although articles 17 to 20 of the Sixth Directive must be interpreted subject to the above principles, it did not follow that all the provisions of the Directive must be similarly interpreted.  In particular, provisions of the Sixth Directive which did not have the purpose of conferring a tax advantage on the taxpayer, but instead (like articles 5, 6, 11, 12 and 13) had the neutral purpose of determining whether or not a transaction constituted a supply and, if so, the taxable amount of that supply, and whether it was taxable or exempt (including exempt with refund, i.e. zero-rated), could not be interpreted subject to the above principles.  That was because it could not be contrary to the purpose of those articles for a particular transaction to give rise to a VAT advantage just because it was structured so as to be, or not to be, a supply, or to be taxable or exempt.  Indeed, “a trader’s choice between exempt transactions and exempt transactions may be based on … tax considerations” (judgment, paragraph 73).  Mr Prosser maintained that that was confirmed by the fact that the ECJ held the term “supply” in articles 5 and 6 to be objective in nature and to be applied without regard to the purpose of the transaction concerned, so that it was entirely irrelevant that the purpose was solely to obtain a tax advantage.  If the term “supply” had to be interpreted in that way, there could be no room for its interpretation whereby a transaction was prevented from being a “supply” by virtue of the abuse principle, which (by virtue of the contrary to VAT purpose test) could not apply unless the purpose of the transaction was to obtain a tax advantage: as a matter of interpretation of articles 5 and 6, purpose could not be entirely irrelevant and relevant simultaneously.  He therefore submitted that it was unnecessary to go on to consider the tests laid down by the ECJ as they were relevant only in relation to those articles in the Sixth Directive which fell to be interpreted subject to the abuse principle.  Nevertheless, he indicated his intention to consider the tests as, he maintained, they both precluded the abuse principle to the instant case in any event.

201.	Dealing first with the contrary to VAT purpose test, Mr Prosser claimed that it was hard to see how the introduction of a charge by Redcats for its catalogue ran contrary to the policy of the Sixth Directive as encapsulated by the ECJ in CPP when it observed (CPP judgment, paragraph 29) that every supply “must normally be regarded as distinct and independent”.  He maintained that that was precisely what Redcats achieved by its catalogue charging arrangements, the effect of which was to identify the costs of the catalogue and then to pass them on directly to the customer.

202.	Moreover, he contended, the “tax advantage” which accrued from that supply arose not as a result of any provisions of the Sixth Directive (or any other provisions of Community law), but as a result of the domestic zero-rating provisions applicable in the UK (retained by derogation from Community law under article 28.2(a) of the Directive).  It was quite clear from the Halifax judgment that the abuse principle was confined to those practices which abused Community (as opposed to domestic) law.  By way of examples, Mr Prosser noted the following statements in the Halifax judgment:

(a)	at paragraph 68: “Community law cannot be relied on for abusive or fraudulent ends.”
(b)	at paragraph 69: “The application of Community legislation cannot be extended to cover abusive practices …” 
(c)	at paragraph 76: “It is for the national court to verify … that the effectiveness of Community law is not undermined”.

203.	Mr Prosser maintained that it followed that the abuse principle could have no application to the instant case.  HMRC could not deny that, because it was their argument in Marks & Spencer plc v Commissioners of Customs and Excise [2005] STC 1254 (see the speeches of Lord Hoffman at paragraphs 8-10 and Lord Walker at paragraphs 52-54).  If the zero-rating legislation was essentially a national measure, it was so not only for Marks & Spencer purposes, but also for abuse purposes.  And, for good measure, Mr Prosser added that in their very recently submitted written observations to the ECJ in the case of Talacre Beach Caravan Sales Limited v Commissioners of Customs and Excise (Case C-251/05) they had said that “since zero-rating … is permitted by way of derogation, it gives rise to no directly effective, or indeed any other, form of Community law right …”.

204.	Turning then to the essential aim test, Mr Prosser noted that a transaction had to be judged by reference to “objective factors” in order to ascertain whether it “may have” (not “does have”) some explanation other than the obtaining of a tax advantage. He maintained that important among those factors was the question whether the transactions were carried out “in the context of normal commercial operations” (judgment, paragraph 69).  And the national court must ask itself whether the transaction was of a “purely artificial nature”, and consider the legal, economic or personal ties (if any) between the parties involved (judgment, paragraph 81).  Redcats’ evidence showed that it was “normal commercial practice” in the mail order industry for operators to charge for their catalogues, and it simply followed suit.  

205.	Assuming HMRC’s response to that point to be that those other operators did not offer a corresponding discount against the price of catalogue goods, Mr Prosser maintained that that too had been found to be unobjectionable by the Court of Appeal in the Telewest case.

206.	Redcats repeated its reply given in relation to the question of whether there was a supply of the catalogues for VAT purposes: if there was a supply of the catalogue for consideration, it must follow that the consideration attributed by the parties to the catalogue was not consideration attributed to the goods, and therefore the goods had been supplied at a discount.  The courts’ laissez faire approach to the apportionment of consideration by the parties was exemplified in Lord Hoffman’s speech in CR Smith Glaziers.

207.	Mr Prosser maintained that the practice of imposing a charge for catalogues with a corresponding discount was followed by many of Redcats’ competitors and was now widespread in the mail order industry.  He added that it was also normal commercial practice within the industry to introduce changes in the terms and conditions of business through amendment of the “small print” at the back of the catalogue.  

208.	On the basis that the test of abuse was objective, and not subjective (opinion of Advocate-General Maduro in Halifax at paragraph [71]), Mr Prosser next dealt with the question of whether Redcats’ catalogue charging arrangements were artificial, i.e. whether they had any economic justification.  He maintained that it was not relevant to ask whether there was such justification for introducing the arrangements, i.e. to compare them with those in place before 2000:  why should Redcats be treated differently from a trader who began trading with the post-2000 arrangements? 

209.	Mr Prosser submitted that there were three objective economic justifications for the activity of selling catalogue to customers:

(a)	passing costs directly on to the customer;
(b)	emphasising the value of the catalogue to the customer; and 
(c)	facilitating further shopping from the catalogue.

212.	He dismissed a claim by HMRC that (i) was demonstrably false because of the equivalent discount as “missing the point”: Redcats still recovered the cost of the catalogue by charging for it even if it did so as part of a transaction under which it made a smaller profit on the goods.  Of (ii) he observed that HMRC maintained that that was already done by making the catalogue available free and putting a price on it, but he claimed that that was not relevant.  As for (iii), HMRC questioned its propriety as an assertion unsupported by evidence, Redcats’ concern about adverse customer reactions being to the contrary.  But, in Mr Prosser’s submission, that confused subjective (irrelevant) and objective (relevant) justifications: it was hardly controversial to suggest that it was easier for a customer to use the catalogue if she owned it than if she did not.

213.	In contrast, Mr Vajda submitted that both the Halifax conditions were fulfilled in the instant case.  Dealing first with the contrary to VAT purpose test, he submitted that the scheme was abusive in the sense identified by the ECJ.  The purpose of the VAT system was to tax final consumption of all goods in a neutral manner which did not distort competition.  If the scheme were successful, it would violate the principle of neutrality in that Redcats would pay less VAT than a trader who also offered goods by mail order but did not discount the price of the goods against the notional cost of a catalogue.  

214.	He maintained that that result was not in accordance with the following Community rules:

(a)	on supply and construction (articles 2 and 11(A)(1)(a) of the Sixth Directive) as well as zero-rating (article 28(2)); 
(b)	that VAT should be exactly proportionate to the price paid by the consumer for standard-rated goods (article 2 of the First Directive); 
(c)	on neutrality and distortion of competition; 
(d)	in article 11A(3)(b) of the Sixth Directive which provides that the taxable amount shall not include “price discounts and rebates allowed to the customer and accounted for at the time of the supply”.

215.	Mr Vajda observed that article 11A(3)(b) was the provision relied on by Redcats to reduce the value of the taxable supply of the goods.  Even if it formally achieved the situation where there was a discount from the price of the goods, he submitted that the purpose of the provision was not achieved because it was an artificial, as opposed to real, discount: Redcats received the same money as before the scheme.

216.	Mr Vajda maintained that Redcats, if successful, would achieve the result that part of the amount it received for standard-rated taxable supplies of goods would be zero-rated.  It had attempted to do that by taking advantage of, and abusing, the rules concerning supply, consideration, discounts and zero-rating.  Such a result was clearly abusive under the test set out by the ECJ. 

217.	In an attempt to avoid that inevitable conclusion, Redcats raised various technical arguments – an approach which Mr Vajda maintained showed the weakness of its case, and a failure to appreciate the proper application of the ECJ’s decision in Halifax.  That decision was specifically intended to ensure that the purpose of the relevant rules was achieved, notwithstanding such formal technical arguments.

218.	Mr Vajda firmly rejected Redcats’ claim that the principle against abuse applied only to the provisions which provided an advantage to the taxpayer.  The ECJ gave no indication that it intended certain provisions of the Sixth Directive to be immune from the principle against abuse: indeed, it confirmed the general applicability of the principle, in paragraphs 68-71 of its judgment, as follows:

“68.	Notwithstanding that finding, it must be borne in mind that, according to settled case-law, Community law cannot be relied on for abusive or fraudulent ends (see, in particular Case C-36796 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2005] ECR I-1599, paragraph 32).
 
69.	The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for Community law (see, to that effect, Case 125/76 Cremer [1977] ECR 1593, paragraph 21; Case C-8/92 General Milk Products [1993] ECR I-779, paragraph 21; and Emsland-Stärke, paragraph 51).  

70	That principle of prohibiting abusive practices also applies to the sphere of VAT. 

71	Preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive …”  [emphasis added]

219.	Mr Vajda added that it would be contrary to the principle of legal certainty to attempt to distinguish between provisions of VAT law on the basis of whether they were considered to be advantageous, neutral or disadvantageous.  

220.	Redcats attempted to bolster its argument by reliance on paragraph 73 of the ECJ judgment in Halifax to the effect that “a trader’s choice between exempt transactions and taxable transactions may be based on … tax considerations”.  Mr Vajda accepted that as being correct, but he submitted that it provided no support for the suggestion that a transaction which was properly categorised as standard-rated might be abusively portrayed as zero-rated without engaging the principle against abuse.  A taxpayer with two possible ways of structuring its transactions might choose the most tax advantageous method of so doing, but that did not mean that if it created an abusive alternative the principle against abuse would not apply.

221.	Contrary to Redcats’ submissions, Mr Vajda contended that the abuse of law point did not turn solely on the zero-rating provisions in article 28(2)(a): it turned on the provisions of the Sixth Directive and the principles identified in paragraph [218] above.  Further, there was nothing in the opinion of the Advocate General in Halifax or the BUPA case (C-419/02) to support Redcats’ argument on that point even if the only relevant provision in play was article 28(2)(a).  On the contrary, Mr Vajda explained, the Advocate General rejected BUPA’s argument that the abuse doctrine could not apply to its scheme because it fell within the zero-rating regime (see paragraphs 93 and 94 of the opinion).

222.	Mr Vajda then dealt with the essential aim test, equating essential aim with the objective purpose of a scheme or arrangement.  By “objective purpose” he explained that HMRC meant the purpose of the transactions looked at by a court from the point of view of the reasonable businessman.  The underlying requirement of the principle of abuse was to compare the actual transactions with normal commercial transactions (judgment, paragraph 94): 

“It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.”

223.	With that in mind, where abuse was alleged, Mr Vajda submitted that the tribunal should ask itself: would the reasonable businessman adopting those actual transactions in all of the detailed objective circumstances of the case have adopted them with the essential aim of securing a tax advantage?

224.	In that context, he maintained that, following the ECJ decision in Halifax, it was readily apparent that the factors applicable to the actual individuals who decided to adopt the transactions were relevant to the comparative question of how the reasonable businessman would have acted.  Thus for example, at paragraph 40 the ECJ stated that: 

“The referring tribunal states that, in its original decision of 5 July 2001, it had relied on an interpretation of Article 4(2) of the Sixth Directive according to which regard had to be had to the objective characteristics of the transactions in determining that the transactions in question were not supplies for VAT purposes.  It considers that the interpretation of that provision should now be referred to the Court.” [emphasis added]

225.	And at paragraph 42, the ECJ noted that:

“In that regard, the referring tribunal states that the evidence given by the directors of Halifax, Leeds Development and County shows that the sole purpose of the two latter companies in entering into the transactions concerned was the avoidance of VAT.  In other words, it was the intention of Halifax, Leeds Development and County to obtain a tax advantage through the implementation of an artificial tax avoidance scheme.” 

226.	Although the Halifax tribunal made those findings with reference to the supply and economic activity arguments (which were rejected by the ECJ), Mr Vajda observed that at paragraph 82 the ECJ nevertheless referred to the tribunal’s findings in the context of its decision regarding the abuse principle:

“In any event, it is clear from the order for reference that the VAT and Duties Tribunal considers that the sole purpose of the transaction at issue in the main proceedings was to obtain a tax advantage.” [emphasis added]

227.	Mr Vajda also observed that the need to consider all the circumstances of the case had been accepted by the President of these tribunals, His Honour Stephen Oliver QC, in his decision in MM02 plc, 02 Communications v Her Majesty’s Commissioners of Revenue & Customs (2006) Decision No 19514.

228.	It was plain, in Mr Vajda’s submission, that the essential aim of Redcats’ scheme was to avoid VAT: the documentary evidence made clear that there was no commercial purpose.  Redcats also admitted that the sole purpose of the scheme was to create a tax advantage.  Redcats’ attempt to suggest that the scheme had a commercial purpose since other mail order traders charged for catalogues was, in Mr Vajda’s further submission, an attempt to withdraw the admission and, as such, should not be permitted.  In any event, the alleged comparison with Next at best merely highlighted the non-commerciality of the scheme.  As Mr Leach said in his memo of 19 June 1998 to Mrs McKenzie-Green: “I believe you are aware that Next price their catalogue at £3 and actually charge customers …”.  Thus Next made an upfront charge for its catalogue in a normal commercial manner.  Redcats contrived a means of attempting to shift value from standard-rated goods to zero-rated catalogues whilst ensuring that there was no cost to the consumer.  That was in no sense comparable to a commercial transaction.  Indeed, it could have no purpose save to obtain a tax advantage.  

229.	Mr Vajda observed that Redcats had had no intention of making a charge for the catalogue which would be off-set by an equivalent discount off the price of goods prior to the Ernst & Young proposal.  Nor had it considered imposing a retention of title clause.  Equally, there had never been a suggestion of a self-standing charge because it was concerned it might result in adverse customer reaction.  Mr Vajda also maintained that there were no commercial reasons for implementing the purported charge: both before and after the introduction of the scheme, the reason for the inclusion of a price on certain of the catalogues was merely to give the customer the impression that she was receiving something of value.  

230.	Similarly, Mr Vajda claimed, there was no commercial justification for the RoT clause: it was included in the catalogue because it was considered necessary in order to facilitate the VAT scheme.  It was clear that since the introduction of the scheme Redcats had never asked for the return of a catalogue.  Equally, it had in place no procedure for checking whether a catalogue had been subject to excess wear and tear.  

231.	Taking Redcats’ commercial justifications in order, Mr Vajda submitted: 

(a)	For the reasons given above, the upfront charge imposed by Next was not comparable to Redcats’ purported charge; 

(b)	Telewest in no sense suggested that in the circumstances of the instant case, the so-called “discount” was unobjectionable; 

(c)	That only a limited number of mail order traders had adopted a scheme similar to that of Redcats.  Furthermore, the fact that they had done so did not mean that the essential aim of the scheme was not tax avoidance;

(d)	There was clear artificiality within the scheme.  In particular:

 a. The RoT clause had never been intended to operate according to its terms: it was a façade;
 b. The position of a catalogue “purchaser” was in practice no different from that of a non-purchaser;
 c. Redcats received no more revenue for the catalogue than previously; it could not be said that the charge was a contribution to the cost of the catalogue – in fact, viewed overall, most catalogues distributed were not charged for;
 d. The discount from the catalogue price was never advertised; 
 e. The customer still had to pay Redcats the catalogue price of the goods; 
 f. The ECJ did not suggest that the economic or personal links were necessary for a finding of abuse: indeed, such a pre-requisite would be absurd.

232.	In conclusion, Mr Vajda submitted that the essential aim of the scheme was to obtain a tax advantage.  There was no commercial purpose for the scheme other than to obtain such advantage, and the scheme was wholly artificial.

233.	We entirely agree with the submission of Mr Vajda contained in the last preceding paragraph.  In our judgment, the essential use of the scheme is to obtain a tax advantage: there is no commercial purpose for it other than to obtain that advantage, and it is wholly artificial.  

234.	The scheme is abusive in the sense identified by the ECJ in Halifax for it does distort competition as not taxing final consumption of all goods in a neutral manner.  Redcats does not offer a genuine discount from the price of catalogue goods for it continues to receive the same amount for them as it did before implementing the scheme.  If the scheme were successful, Redcats would be able to account for part of the price it received for standard-rated goods at the zero rate.  Again, we consider that abusive.  

235.	As Mr Vajda claimed, in rejecting a submission of Mr Prosser, there is nothing in the Halifax judgment to indicate that abuse is confined to provisions which provide an advantage to the taxpayer.  In our judgment, the principle of abuse is of general application (see paragraph 68 – 71 of the judgment).  We agree with Mr Vajda that it would be contrary to the principle of legal certainty were it to be necessary to distinguish between provisions of VAT law that are advantageous, and those which are not.  

236.	We accept that Redcats may choose between exempt and taxable transactions in ordering its affairs, as indicated by the ECJ at paragraph 73 of the Halifax judgment, but agree with Mr Vajda that a transaction properly characterised as standard-rated may not be artificially portrayed as zero-rated (even in part) without contravening the principle against abuse.  

237.	We also accept Mr Vajda’s submission that the abuse of law point in the instant case founds on provisions of the Sixth Directive other than article 28(2)(a) and the various Community law principles identified in paragraph [214] above.

238.	If we redefine the transactions involved in what we have held to be Redcats’ abusive practice, as paragraph 94 of the Halifax judgment requires, considering all the circumstances of the case, we conclude that the company is liable to account for VAT at the standard-rate on all the catalogue goods it sells on their catalogue prices.  There are no input tax considerations in the instant case.

239.	From our conclusion on question 7 thus far, it should be plain, but in case it is not we state, that the scheme has no commercial purpose, and is aimed solely at the creation of a tax advantage.  The fact that other mail order traders have adopted a scheme identical or very similar to that of Redcats does not mean that the scheme has a commercial purpose.

240.	Nor is there any justification of the RoT clause: it found a place in Redcats’ catalogues solely to facilitate the scheme.  It has never been acted upon, and no evidence was adduced to indicate that Redcats has any intention of acting on it. 

241.	Superficially, Mr Prosser’s submission on question 7 may have attractions, but substance they have not. 

242.	We confirm that the scheme contravenes the principle of abusive practice. 

DAVID DEMACK
CHAIRMAN
Release Date: 26 May 2006
MAN/02/0275