Selfridges Retail Ltd v  Revenue & Customs [2007] UKVAT V20314 (23 August 2007)

20314

CONSIDERATION – Third party Consideration – Retail sales for cheques – Cheques dishonoured – Agreement by retailer with third party guaranteeing cheques – Payments by third party t retailer for dishonoured cheques – Whether third part consideration for supplies to customers – Need for reciprocity – Whether consideration for assignment of debts – Whether compensation – Sixth Dir Art 11A 1(a) – Appeal allowed

LONDON TRIBUNAL CENTRE

SELFRIDGES RETAIL LIMITED	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	THEODORE WALLACE (Chairman)
MRS CATHERINE FARQUHARSON ACA

Sitting in public in London on 26 and 27 June 2007

David Jamieson, of KPMG LLP, for the Appellant 

Peter Mantle, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This appeal concerns the VAT consequences when cheques paid by customers for retail supplies are dishonoured but the retailer is paid the full amount of the cheques by a third party which has provided a guarantee under an agreement with the retailer.

2.	The actual subject of the appeal is the refusal by Customs of a repayment claim under section 80 of the VAT Act 1994 dated 23 July 2004 for £25,371.11 for periods 08/01 to 02/04.  The claim was on the footing that the Appellant had incorrectly accounted for VAT on amounts which were not consideration for supplies by individual customers.

3.	The case for the Appellant in outline was that when the cheques were dishonoured it was entitled to make a deduction from its daily gross takings under its bespoke retail scheme and that the amounts received in place of the cheques were not consideration for supplies by the Appellant being compensation and not taxable; alternatively, they were consideration for the assignment of debts and therefore exempt.

4.	Customs contended that the receipts were third party consideration for supplies by the Appellant to customers and were not consideration for the assignment of debts.

5.	The evidence consisted of a bundle of documents, including the retail scheme and a contract commencing April 1991 between the Appellant and Certegy Ltd, and evidence by John Boyle, Head of Finance of the Appellant since he joined in 1998, who confirmed a witness statement and was cross-examined.

6.	There was no real dispute as to the facts, although some aspects could have been more clear.

7.	Certegy Ltd trades under the name “Transax”.  We use that name since it was used throughout hearing.

8.	The Appellant operated a retail scheme agreed with Customs under regulation 67 of the VAT Regulations 1995.  There was no evidence as to the date of the scheme which was exhibited, however it was treated as applying at the relevant time. Under the scheme output tax was calculated on aggregate daily gross takings rather than invoices on individual sales with a composite rate applied to each period reflecting the proportion of standard-rates sales, some sales such as children’s clothing, food and books being zero-rated.

9.	All sales were recorded on tills at the point of sale with a code showing whether the sale was standard-rated etc.  These included sales paid for by cash, cheque, credit-card or on credit.  Paragraph 4.4 of the scheme covered dishonoured cheques and included the following,

“The bank notifies the company of dishonoured cheques which are immediately posted to the sales ledger and re-presented to the Bank.  If returned unpaid net write-offs are posted on a monthly basis to the Profit and Loss Account – the composite rate for the VAT period is applied to net write-offs in the period.

The VAT amount is journalled to the VAT account in the Nominal Ledger (effectively reducing the VAT calculated at 3).”

Paragraph 3 laid down the method of calculation of output tax on retail sales or daily gross takings.

10.	The contract with Transax was headed “Contract for the provision of Cheque Authorisation Services.”  It is still in force.  Clause 2, headed “Cheque Information Service,” provides,

“2(a)	You may call the Transax Phone Number at any time to get a Code 1 response or a Code 4 response for any qualifying cheque.  You must not use our service for cheques presented to you for goods or services supplied by you on credit.

You may send a qualifying cheque if:

•	the bank or building society refuses to pay the cheque;
•	we have given a code one response;
•	you have kept to the rules below.

On the 20th day of each calendar month, we will pay you the full amount of all qualifying cheques which we have received by the 15th day of the same month.”

The Code 1 response is that a cheque is accepted; Code 4 is that it is not accepted.

11.	The rules require that the customer writes his name legibly on the back of the cheque and produces a valid guarantee card with other proof of identity if required by Transax.  The Appellant must check that the cheque is made out correctly and must write the guarantee card number and the words “Code 1” with any Transax reference on the back.

12.	Clause 3(8) requires Code 1 cheques to be banked within five days.  Clause 3(h) provides,

“You must tell your bank not to present any qualifying cheque for payment more than once.”

Clause 3(1) requires the Appellant to send any Code 1 cheque which the bank refuses to pay to Transax within five days of the date when it is returned.

13.	Clause 4(a) provides as follows,

“You authorise us as your agent to get payment for any qualifying cheque which a bank or building society will not pay after we have given a Code 1 response.  We will pay all costs and keep the proceeds.  You will also automatically transfer to us all other rights you have against the person or company who wrote the cheque or the bank or building society which refused the cheque.”

14.	Clause 5 provides for a monthly payment of £15 plus VAT together with 1.79% plus VAT of the value of qualifying cheques which are given a Code 1 or Code 4 response.  Under Clause 7 the name and logo of Certegy Ltd is to be displayed at all points of sale.  It appears that the name “Transax” was so displayed.

15.	Although a guarantee card is required for a qualifying cheque, the Appellant did not notify cheques to Transco if they were actually covered by a card.  The cheques for which a Code 1 or Code 4 response was sought were those for amounts not covered by a guarantee card, since they were over the limit.  These only represented around half of one per cent of the Appellant’s sales.  The use of cheques has been declining, an increasing proportion of sales being by credit card.  Transax only guaranteed cheques by customers with UK addresses.

16.	When a customer tendered a cheque, the sales assistant obtained the material referred to at paragraph 11 above and telephoned Transax obtaining a response in 10 to 20 seconds; the query and response are now done electronically.  Sometimes a cheque was accepted by the Appellant although the response was Code 4; sometimes cheques were accepted by the Appellant without a query to Transax, perhaps from an overseas customer.

17.	Although the evidence was not clear on this, it seems that around ¼ per cent of cheques for which a Code 1 response had been given were subject to claims to Transax.  In spite of Clause 3(h) it appears that cheques were regularly re-presented by the Appellant’s bank before a claim was made.  The Appellant’s credit manager used his judgment on this.  A cheque initially dishonoured at the end of the month might be paid a few days later.  Where there was clear fraud cheques were not re-presented.  The Appellant’s bank charged for re-presentation of cheques; however if paid on re-presentation the Appellant would receive the funds earlier.  It appears that Transax must have been aware that cheques were regularly re-presented and acquiesced if it did not actually agree to a variation.

18.	When a cheque was returned unpaid, the Appellant posted it in the sales ledger under debtors pending a refund from Transax or re-presentation.  If paid within the month it was set against the debt so eliminating it.  If paid in the following month, a subsequent adjustment was made.  In such case the debt was not treated as written-off.  The payment was treated by the Appellant as recovery of the money owed rather than as payment for the goods.  There was no debt in the Appellant’s books at that point in respect of the goods sold; however the customer still owed money to the Appellant for the goods, in respect of which the cheque had been dishonoured.

Submissions

19.	Mr Jamieson submitted that under paragraph 4.4 of the retail scheme a deduction falls to be made for dishonoured cheques whether or not the Appellant receives the equivalent sum from Transax.  He said that the requirements of paragraph 4.4 had been complied with, albeit by the late section 80 claim.

20.	He said that the payments by Transax were compensation for failure of the cheque information service under the agreement.  They were not consideration for a supply of goods.  He said that although the factual basis of the Tribunal decision in Holiday Inns (UK) Ltd v Customs and Excise Commissioners [1993] VATTR 321 was incorrect in the light of Lubbock Fine & Co v Customs and Excise Commissioners (Case C-63/92) [1994] STC 101 (see Croydon Hotel & Leisure Co Ltd v Customs and Excise Commissioners (1997) Decision No. 14920), the principle that a compensation payment was not consideration for a supply was correct.  He relied also on Hometex Trading Ltd v Customs and Excise Commissioners (1995) Decision No. 13012.

21.	Mr Jamieson relied on Societé Thermale d’Eugenie-les-Bains v Ministere de L’Economie, des Finances et de l’Industrie (Case C-277/05), which concerned hotel deposits retained when reservations were cancelled by customers, where Advocate General Maduro said at [34] that the fact that an advance payment was intended to compensate for any loss in the event of default was not conclusive for excluding such services from VAT “in the absence of any record of the existence of any real loss” suffered from the customer’s default.  He submitted that the Appellant here did suffer real loss and the Transax payments were compensation.

22.	He said that the payments by Transax were made under a contract with the Appellant and were not in consideration of any supply by the Appellant to its customers.  At [13] and [14] of Societé Thermale the Advocate General stated the need for a direct link and for reciprocal performance, citing Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509.  Here Transax was not paying on behalf of the customers and the payments did not discharge the customers’ obligations.

23.	Mr Jamieson said that, quite apart from the Transax payments not being consideration for supplies by the Appellant so as to come within its daily gross takings, the payments were consideration for an equitable assignment by the Appellant of the debt owed by customers and were exempt under Schedule 9, Group 5, item 1 of the VAT Act 1994.

24.	Mr Mantle accepted that in the light of the evidence that the Appellant did in fact re-present cheques to the bank the conditions of paragraph 4.4 of the Appellant’s retail scheme were satisfied.

25.	He said that the payments by Transax were not excluded from VAT as compensation.  There was no breach by Transax of any agreement : the payments were in pursuance of the agreement.  In Sociéte Thermale the Advocate General referred to judicial awards at [29].  Hometex Trading concerned a judicial award and was not parallel to this case.  He said that Holiday Inns was wrongly decided.

26.	He said that, if clause 4(a) of the agreement took effect as an equitable assignment of the rights in respect of the cheques, the payments by Transax were not consideration for the assignments.  In MBNA Europe Bank Ltd v Revenue and Customs Commissioners [2006] STC 2089, Briggs J said at [21] that the assignment of debts by a trader to a factor was merely a step to obtain the factoring service and was not itself a supply.  Here the Appellant paid for the service even when a Code 4 response was given in which case no assignment could arise.

27.	He said that the payments by Transax were not under exempt insurance contracts.  The contract had some features of insurance but this had not been suggested by the Appellant and there was no evidence that Transax was an authorised insurer.  There was no assessment of risk.

28.	Mr Mantle said that the payments by Transax were third party consideration for the supplies by the Appellant to its customers.  Article 11A.1(a) of the Sixth Directive in terms covered consideration obtained by the supplier from a third party.  In Chaussures Bally v Belgium (Case C-18/92) [1997] STC 209 the Court of Justice at [17] said that payment of consideration for goods purchased using a card could be made by the card issuer as a third party within Article 11A.1(a).  By analogy payment of a cheque by a bank is third party consideration.

29.	Mr Mantle said that the Sixth Directive contained no requirement for a legal relationship between the person paying the consideration and the person receiving the supply.  In Customs and Excise Commissioners v Redrow Group plc [1999] STC 161, Redrow paid the consideration and received the benefit of the services.  That was not a third party case.  Here the payer was a third party but there was the necessary direct link between the payments by Transax and the supplies to customers, see Apple and Pear Development Council v Customs and Excise Commissioners (Case 102/86) [1988] STC 221 at [11]-[13].  Tolsma did not address third party consideration.  He referred to Town and County Factors v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263.  

30.	He said that a direct link is possible without the recipient of the supply knowing of the payment.  In Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 the effect of the coupons was to reduce the consideration for the supply to the wholesaler who might not know that the goods were subject to a money-off coupon promotion scheme.  There was no one in a legal relationship with the wholesaler in relation to the coupon; nevertheless the value of the coupons was to be deducted in ascertaining the taxable amount of the supply by the manufacturer.  In EC Commission v Germany (UK intervening) (Case C-427/98) [2003] STC 301 the Court of Justice referred at [46] to the receipt of consideration from a third party not connected with the supply.  He accepted that payment by Transax did not remove the obligation of the customer to pay for the supply, but said that Article 11 is not about the discharge of debts but the receipt by the supplier of consideration for the supply. The Appellant treated payment by Transax as discharge of the debt for the supplies. When Transax gave a Code 1 response it entered into a contingent obligation to make a payment; the Appellant knew at the time of the sale that it would be paid by Transax if not by the purchaser.  The Appellant transferred its rights to Transax when Transax paid.  There was no possibility of the Appellant receiving more than the price of the goods.  The treatment of payments by Transax as consideration was non-distortive and avoided the result that there was no liability in respect of the supplies which gave rise to the payments by Transax.

31.	In reply Mr Jamieson said that the hall-mark of a compensation payment is that no service is provided to the recipient of the payment in consideration of that payment; there is no reciprocal performance.  That was the case here.

32.	He said that in EC Commission v Germany [2003] STC 301 there was a chain of supply; here there were only two transactions.  At [46] the Court referred to a payment “on behalf of” the final consumer.  Here the customer did not know that Transax would pay.  Tansax did not know what supply it was paying for.  The Appellant was not receiving money on behalf of the customer.  It could not be said subjectively that Transax paid on behalf of the customer.  Nor could it be said objectively that Transax paid on behalf of the customer because the customer’s debt still existed.  There was no reciprocal performance between the payment by Transax and any supply by the Appellant either to Transax or to customers.

33.	As to assignment, Mr Jamieson maintained that the payments by Transax were for assignment of debts.  He accepted that the reference to agent in clause 4(a) was difficult but said that on the evidence the Tribunal should conclude that the debts were assigned.  He said that MBNA was a wholly different case concerning factoring rather than assignment of debts.

Conclusions

34.	We accept that the payments by Transax were not excluded from VAT as being compensation payments for breach of an agreement by Transax.  There was no breach of any agreement by Transax : there would have been a breach if Transax had refused to make payments properly due.  As Mr Mantle pointed out if the payments were not taxable, they exceeded any loss by the amount of the VAT.  The real issue is whether they were consideration for supplies by the Appellant.

35.	We also accept Mr Mantle’s submission that the payments were not in consideration for the assignment of debts.  Under the agreement between the Appellant and Transax the consideration for the payments was the amounts payable under clause 5 which was unrelated to the dishonoured cheques.  The equitable assignment of debts under clause 4(a) was the consequence of the making of the payments by Transax.  If the assignment was to be treated as part of the consideration, it was a nominal part because the dishonoured cheques were of little value.

36.	The contract between the Appellant and Transax had many of the features of an insurance contract in that Transax agreed in return for prior payments to provide to the Appellant in the event of the risk of a cheque being dishonoured materialising a payment in respect of the cheque, see Simon Brown LJ at page 731 in Co-Operative Wholesale Society v Customs and Excise Commissioners [2000] STC 727, citing Card Protection Plan Ltd v Customs and Excise Commissions (Case C-349/66 [1999] STC 270.

37.	That does not however make the payments by Transax payments for insurance supplies and so exempt.  It is the premium paid to the insurer which is exempt; the payment by an insurer satisfying a claim is not for a supply but the discharge of the obligation for which the premium paid to the insurer is the consideration.

38.	The payments in this case which have considerable similarities to insurance payments are only subject to VAT if on a proper analysis they are third party consideration for the supplies for which the dishonoured cheques were given.

39.	Article 11A.1(a) provides in terms for the possibility of consideration being obtained for the supplies from a third party.  It is clear from Apple and Pear that there must be a direct link between the supplies to customers and the payments constituting consideration.  There was clearly a factual link here because if the supplies had not been made, the cheques would not have been given and Transax would not have made the payments.  The question arises however whether that is sufficient.

40.	There is no doubt that the Appellant made supplies of goods to its customers for consideration and that the dishonoured cheques were given in respect of those supplies.  Mr Mantle said that if those cheques had been paid by the banks in question, payment by the banks would have constituted third party consideration just as payment by the card issuer in Chaussures Bally [1997] STC 209 referred to at [17].  However it is important to note that in Chaussures Bally the Court of Justice specifically referred to “the method of payment used in the relationship between the purchaser and the supplier”.  In that case the customers tendered cards in payment, here the customers tendered cheques.  The method of payment was thus agreed at the time of the supply and the third party was identified.

41.	Payment by Transax when cheques were dishonoured was not the subject of any agreement between the Appellant and its customers.  It is highly unlikely that any customer was aware of the existence of Transax.  Furthermore payment by Transax did not discharge the obligations of the defaulting customers.

42.	The need for reciprocity or a direct link between consideration and supply is a basic principle of VAT, see Apple and Pear [1988] STC 221 at [11] and the opinion of the Advocate General. Article 11A.1(a) refers in terms to the consideration obtained “for such supplies.”  In Tolsma [1994] STC 509 the Court said this at [13] and [14],

“the basis of assessment for a provision of services is everything which makes up the consideration for the service and … a provision of services is therefore taxable only if there is a direct link between the service provided and the consideration received (see also … Apple and Pear … paras 11, 12).

“[14].	It follows that a supply of services is effected ‘for consideration’ within the meaning of Article 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied by the recipient.”

The same principle applies to a supply of goods.  Mr Mantle was of course correct in saying that Tolsma did not involve third party consideration. However the fact of third party consideration does not remove the need for reciprocal performance.  When a bank issues a cheque book or a card issuer provides a card it necessarily authorises the customer to use the cheque or card subject to its terms of business. When a retailer takes a cheque, he accepts that the bank will make the payment. Payment by the bank or card issuer discharges the customer’s obligation.  That did not happen here.  The fact that Town and Country Factors  [2002] STC 1263 established that the legal relationship between the supplier and the recipient of the supply does not have to be enforceable does not remove the need for reciprocity.

43.	The question however arises whether the requirement for reciprocity falls to be modified in the light of Elida Gibbs [1996] STC 1387 and EC Commission v Germany [2003] STC 301. 

44.	In Elida Gibbs, a manufacturer wished to promote retail sales of certain products and operated schemes under which retail customers could get a price reduction from the retailer on presenting a money-off coupon in which case the manufacturer would reimburse the retailer and schemes under which customers could get a cash refund from the manufacturer on presenting a cash-back coupon.  The manufacturer which had charged its full price on sales to wholesalers and retailers claimed a refund under Article 11C.1(1) of the Sixth Directive of the VAT attributable to the amounts paid out by it on the coupons.  The Court of Justice decided that the taxable amount was the manufacturer’s selling price less the amounts refunded.

45.	Mr Mantle relied on the fact that the wholesaler or retailer to whom the manufacturer sold the goods might not know that the goods were subject to a promotion scheme and that the sale by the manufacturer could take place before a scheme was even planned.  He said that the effect of the coupons was to reduce the consideration for the supply to the wholesaler who was unaware of the coupons and was not a party to any legal relationship with respect to the coupons.

46.	At paragraph [28] in Elida Gibbs the Court said this,

“[28]	In circumstances such as those in the main proceedings, the manufacturer, who has refunded the value of the money-off coupon to the retailer or the value of the cash-back coupon to the final consumer, receives, on completion of the transaction a sum corresponding to the sale price by the wholesalers or retailers for his goods, less the value of those coupons.  It would not therefore be in conformity with the Directive for the taxable amount used to calculate the VAT chargeable to the manufacturer as a taxable person, to exceed the sum finally received by him.  Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the manufacturer is one, would not be complied with.”

47.	Having referred to Article 11C(1) the Court said this at [31],

“[31]	It is true that that provision refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently.  The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral.  It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the amount for VAT, of situations where a taxable person, who having no contractual relationship with the final consumer, but being the first link in a chain of transaction which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons.  Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.”

48.	The Court then considered the argument by the UK, Germany and Greece, that this would make the system unworkable because every wholesaler and retailer in the chain would have to adjust their prices retrospectively, but said at [33] that there was no need to adjust the taxable amount further intermediate transactions.

49.	The decision in Elida Gibbs was confirmed by the Court of Justice in EC Commission v Germany [2003] STC 301 which concerned infraction proceedings against Germany which had declined to amend its legislation following Elida Gibbs.

50.	At paragraphs [44]-[46] the Court said this,

“[44]	… the German and United Kingdom governments maintain that the reimbursement of the voucher by the manufacturer to a retailer to whom he did not directly supply the goods constitutes consideration paid by a third party in the context of a transaction between the retailer and the final consumer.  Accordingly, there is no reason to consider that the consideration received at the time of the initial supply by the manufacturer should be modified following such reimbursement.

[45]	In that regard it is sufficient to state, first, that although the manufacturer may in fact be regarded as third party as regards the transaction between the retailer who receives reimbursement of the value of the voucher and the final consumer that reimbursement entails a corresponding reduction in the amount finally received as consideration for the supply by him and that consideration constitutes, pursuant to the principle of VAT neutrality, the basis for calculating the tax for which he is liable (see, in that connection, Elida Gibbs, para 28).

[46]	As regards, secondly, the supply by the retailer who receives the reimbursement, it is important to note that the fact that a portion of the consideration received for that supply was not actually paid by the final consumer himself but was made available on behalf of the final consumer by a third party not connected with that transaction is immaterial for the purposes of determining that retailer’s taxable amount (see, in that connection, Chaussures Bally [1997] STC 209 para 17).”

51.	It is clear that in Elida Gibbs the taxable amount on the manufacturer’s supplies fell to be reduced by reference to transactions to which the recipients of the supplies by the manufacturer were not parties.  The payments arose out of transactions involving the same goods but at a later stage in the chain of supply.  While the Court held that the payments should be deducted from the amounts received by the manufacturer, it decided at [33] that there was no need to adjust the taxable amount on the intermediate transactions.  It does not appear that the Court was going further than deciding that the taxable amount payable by the manufacturer should not exceed the amount paid by the final consumer and received by the manufacturer.

52.	At [31] the Court referred to the chain of transactions which ended with the final consumer. In the present case it is difficult to identify such a chain.  The payments by Transax arose out of its contract with the Appellant under which it was obliged to make payments when cheques paid by customers were dishonoured.  We have no difficulty in accepting that there was a connection or link between the payments and the earlier suppliers to customers, however in our view it was not a direct link. The payments were not paid by Transax in return for supplies to customers, although they were paid in consequence of those suppliers coupled with the dishonoured cheques. They were in no sense paid “on behalf of the final consumer”, see EC Commission v Germany at [46].  The customers’ obligation to pay was not discharged by Transax.

53.	It does not seem to us that the result was as anomalous as Mr Mantle suggested.  The reason why the Appellant received the payments from Transax was because it made a payment to Transax of 1.79 per cent of the value of qualifying cheques.  No doubt Transax expected to make a profit otherwise it would not have entered into the transactions. The sums received by the Appellant were not in return for the sales to customers but were in respect of its entitlement under the Transax agreement when cheques were dishonoured.  We conclude that the Transax payments were not consideration for the supplies by the Appellant to its customers and are not liable to VAT.  The appeal is allowed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 23 August 2007

LON/04/1479