20979
VAT – output tax – face-value vouchers issued by appellant to guests at health and beauty treatment spas – assuming vouchers issued by appellant face-value vouchers whether supplied for consideration – no – alternatively whether vouchers discount vouchers – yes – appeal dismissed 

MANCHESTER TRIBUNAL CENTRE			                     

 
 	
					SPA & RESORT OPERATIONS LTD	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	David Demack (Chairman)

Sitting in public in  Manchester on 9 and 10 November 2008

Roger Thomas of counsel instructed by GH VAT Consultancy Rotherham for the Appellant
 
James Puzey of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009
DECISION
Introduction

1.	The appellant company, Spa & Resort Operations Ltd (“Operations”) appeals against a decision of Her Majesty’s Commissioners for Revenue and Customs (“HMRC) by letter of 29 March 2006 and assessments to VAT totalling £430,560 made consequent upon that decision. The decision relates to the correct VAT treatment of certain vouchers supplied by Operations as part of a business promotion scheme designed to attract guests to its residential and day spas for health and beauty treatments.  Operations claims that such treatments constitute one supply, and that the vouchers, which are supplied to all guests for consideration, are another. It maintains that the vouchers are “face-value” vouchers being paid for by its guests at their full value, so that it is required to account for tax on them only when they are redeemed.
2.	HMRC’s primary case is that, assuming the vouchers are “face value” vouchers, no consideration is given for them, and that the entire payment made by the guest, being attributable to a taxable supply, results in an immediate output tax liability. Alternatively, first HMRC maintain that if the vouchers are supplied as part of a composite transaction, they fall outside paragraph 7(6) of Schedule 10A to the Value Added Tax Act 1994, and are thus to be treated as supplied for no consideration.  Secondly, they contend that the vouchers are discount vouchers, simply conferring a right to a discount on the price of a future stay at Operations’ residential spa.
3.	I set out in the Schedule to my decision the legislative provisions I am required to consider.
4.	Mr. Roger Thomas of counsel appeared for Operations, and Mr. James Puzey, also of counsel, for HMRC.  They produced an agreed bundle of copy documents, and I was provided with other bundles containing the authorities on which they rely. Oral evidence was given by Mr. Stephen Frederick Joynes, the president of Operations’ holding company and a director of Operations, and  by  Mrs. Dianne Roxborough, HMRC’s case officer.  From the whole of the evidence presented, I make the following findings of fact.
The facts
5.	 First, I must explain that this appeal is concerned only with vouchers provided to guests purchasing treatment packages.  However, in addition to those vouchers, Operations also separately sells vouchers which anyone may purchase for their full face value, and which may be applied in payment for treatments or for accommodation at its residential spa.  Somewhat confusingly, it describes both types of voucher as gift vouchers – a fact which in itself may mislead those reading its information about vouchers.  HMRC accept that vouchers on general sale purchased separately from a package are face-value vouchers supplied for consideration, and that Operations need account for VAT on them only on their redemption.  In order to avoid further confusion, all further references in my decision to vouchers, unless specifically stated, are to vouchers supplied as part of a package.
6.	Operations operates two spa resorts.  The main one at Hoar Cross Hall, near Yoxall, Staffordshire, provides both residential and day facilities. The day spa at Yoxall operates under the style of Eden Day Spa.  Operations other resort is at Eden Hall, near Newark, Nottinghamshire, where only day spa facilities are provided.  At both its residential and day spas Operations offers a variety of packages of health and beauty treatments and, whilst I was not told so in terms, I presume that the majority of its guests are women.  Where appropriate, I therefore propose to adopt the feminine gender in describing them.
7.	A potential guest of Operations usually asks for details of the accommodation, treatments available and activities on offer at its  spas. If she does, it will send her its brochure together  with a copy of its “tariff”, a booklet containing the prices of the various packages on offer.  Packages vary in price depending on e.g. whether they are taken mid-week, as part of a special offer for special occasions, and, in the case of residential visits, the type of accommodation the guest requires.  The information contained in the brochure and tariff is also available on Operations’ website. As  I understand it, payment for a package of treatments may be made in cash, by cheque, or by credit or debit card. It may also be made in whole or in part by the use of any type of gift voucher issued by Operations.
8.	As part of its marketing plan, Operations supplies every guest purchasing a package of treatment with a voucher with a stated face-value. I shall shortly deal with the terms and conditions on which it issues vouchers, but for the moment confine myself to finding that each such voucher represents the right to receive goods or services to the value of the amount stated on it. A guest need not accept the voucher she is given, but should she not do so is given nothing in lieu of it.  
9.	Operations claims the economic purpose of its marketing scheme to be to encourage its guests to return to its spas, thereby “increasing their loyalty”. That appears to me to be a strong indicator that the essence of the scheme – its “cause”, to use the Community term – is to encourage those guests to return to the spas and pay for their treatments at discounted rates.
10.	Operations maintains, but I make no finding,  that including a voucher in each package of treatments supplied has two marketing advantages:
a)	it increases the “value” of the package to the guest; the number of items being bought is thereby increased, which has an effect on a guest’s perception of value. It would be impossible to remove the supply of a voucher from a package without adverse reaction from potential guests; and
b)	it encourages guests to return to Hoar Cross Hall, or to change from being day visitors to residential guests (see the terms and conditions on which vouchers are supplied at [13] below). Operations maintains that in consequence a redeemed residential value is worth over £220 to the company.
11.	Although HMRC claim that not all the information available to guests refers to the provision of vouchers, I am quite satisfied that the vouchers are referred to in most of its publicity and other material of interest to potential guests.  I am also satisfied that notices at the spas, in reception, bedrooms and some other places draw attention to the provision of vouchers, but make no mention whatsoever of  their value, or their terms and conditions.
12.	Over the years the values of vouchers offered by Operations have changed on numerous occasions.  From the evidence, I am unable to say which vouchers were supplied at any particular times, except to say that in recent years the vouchers usually provided have been worth £15 each.
13.	In its early form a £15 voucher was valid for 5 months; then its validity was extended to 6 months; and it has lately been further extended to 9 months.  The 6 month form contains the following narrative:
Your £15 Gift Voucher
	WELCOME TO PARADISE
Relax have fun and enjoy every moment of your precious life!
This £15 Gift Voucher is valid for six months.  This voucher may be deducted from your inclusive accommodation rates or used to purchase any item of your choice during your next stay with us [my italics].
Select the room of your choice – normal treatments included.
This voucher may be gifted as a present to one of your best friends to encourage them to visit your favourite Spa Resort.”	

In somewhat smaller print, the voucher also states:
“Our gift voucher is issued and may be used by each guest for each night of each stay (this gift voucher may not be exchanged for cash, can only be exchanged for goods or services at Hoar Cross Hall Spa Resort). The purchase of this gift voucher is not compulsory. Please hand this gift voucher to our cashier upon departure (not to be used in conjunction with any other offer)”.
14.	The 6 month £15 voucher differs in form from the 5 month one not only in its period of validity but also in including the words I have italicised. Those words are completely absent from the earlier form. (I was not provided with a specimen of the 9 month voucher, and proceed on the basis that its terms and conditions are identical to those of the later 6 month voucher). 
15.	Having selected a package, and knowing that “a voucher” is to be included in it, a day guest is required to pay for her package in full prior to the date of treatment.  Operations accepts that the information necessary for her fully to understand the terms and conditions on which the voucher is provided is not to be found collected together in one document.  However, she is told in the letter confirming her booking, “You will also receive a £15 gift voucher which can be used towards a future stay at Hoar Cross Hall”. (Mr. Joynes acknowledged that the letter in question was written after HMRC issued their decision letter, but he claimed that letters confirming day spa bookings written before the decision letter were worded similarly).  That statement is in clear terms..  The receipt with which the guest is provided shows a single sum, i.e the cost of her package, and contains nothing to indicate either that she is purchasing the £15 voucher or that the value of the voucher will be refunded at the end of her visit should she apply to Operations in that behalf. 
16.	On arrival at a day spa, a guest is allocated a locker in which she will find a bathrobe and towelling for use during the day, together with an envelope containing her £15 voucher. Only then does she become aware of its terms and conditions
17.	A guest visiting the Eden Day Spa is also provided with a welcome note containing “information helpful in ensuring a most relaxing and enjoyable time with us”.  Under the heading “Gift Voucher”, the note states:
“Included within your visit to Eden is a non-obligatory £15 gift voucher which may be used on a residential visit to Hoar Cross Hall”
18.	The payment arrangements for residential guests differ from those for day guests, as do the arrangements for the supply of their vouchers.  A residential guest is required to pay a deposit of £95 on booking her accommodation and course of treatments.  On arrival at Hoar Cross Hall, Operations opens an account for her to which it debits her package cost, the cost of any treatments she takes additional to those booked, and any purchases from Operations’ shop.  On departure she is presented with an itemised invoice showing the total amount debited to the account, less the deposit and the value of any vouchers redeemed, both vouchers purchased separately from a package and those obtained as part of an earlier package.  To the resulting sum, a 10% gratuity is added.  The invoice states that the gratuity is optional, and may be deducted should the guest not wish to pay it.  The  voucher to be supplied is not mentioned on the invoice, and on the evidence I infer and thus find that Operations’ staff have been instructed to make no mention of the voucher when the guest receives the invoice, unless she raises the matter.  The guest then makes payment of her account, and in return receives a receipt and an envelope containing her voucher.  Thus she has paid for her package in full before she receives her voucher; she has no opportunity to suggest that its value be deducted from the account.  Further, until she receives the voucher, she is unaware of its terms and conditions.
19.	During the whole of the 8 year period Operations has been using the voucher system as a marketing tool and supplying what now number some 55,000 vouchers a year in the process, on the documentary evidence before me only two guests have applied by letter for a refund of the value of their vouchers.  I accept that Operations acted on both and paid both applicants. In the case of one of them, Ms. Hurstfield, Mr. Joynes accompanied the payment with a letter in which he referred to his action as a “gesture of goodwill for your niceness”. (I was also told, and accept, that guests who did not receive their vouchers have written to Operations asking to be provided with them, and it has acted on their requests. I do not consider that takes matters forward in the present context).
20.	Only one guest, a Mrs. McDonald, has rejected her voucher and demanded a cash refund by deducting its value from the amount due to Operations on settling her bill.  Mrs. McDonald announced that she was a VAT inspector, knew her rights in connection with vouchers, and insisted on the deduction.  The duty manager at the spa she visited, having told her that it was company policy to make a refund only on the basis of  a letter requesting it, eventually acceded to her demand.  But that was not the end of the matter.  Despite Mrs. McDonald’s visit being a purely private one, Operations wrote to HMRC complaining about her behaviour and accusing her of having abused her position.  
21.	Less than 5% of the vouchers issued annually by Operations to its guests are ever redeemed
22.	 Mr Joynes explained the difference between the presentation of the gratuity and the voucher in Operations’ invoices as indicating that the former was optional whereas the latter was the subject of a sale. I am unable to accept that explanation, considering it to be disingenuous. 
23.	There remain a few further findings of fact I must make. They are to be found in the next section of my decision, that dealing with submissions and discussion. 
Submissions and discussion
24.	It will be recalled that a VAT officer, Mrs McDonald, uniquely succeeded in rejecting her voucher and obtaining a refund by having its value deducted from her account. The impression of Mrs. McDonald’s behaviour I was given by Mr. Joynes, albeit that he was not involved in the incident so that his evidence was hearsay, was that her demand was forceful and vociferous, and might have been overhead by other guests. It appears to me that it was to discourage other guests from following Mrs McDonald’s example that the duty manager acted as he did.  It is quite plain from events involving Mrs. McDonald that, despite its claim that the purchase of vouchers is optional, Operations is not prepared to make refunds of their value to guests simply demanding them; they must, if I accept Mr. Joynes’s evidence, first make application for them by letter, and he will then refund, in cash, the value of the voucher.  (By the end of his evidence, Mr. Joynes indicated that he would be prepared to act on a note left at reception by a departing guest and not necessarily insist on a letter).  Mr. Joynes explained Operations’ policy as being necessary to prevent fraud by staff who, if a demand for payment were simply acted upon, might say that a guest had received payment when in fact she had not, and pocket the value of the voucher.  I observe that any such problem could easily be avoided by the simple expedient of requiring a guest seeking and being given a refund to sign for the money.  I In my judgment a letter requesting a refund is merely a device, using that word in a non-pejorative sense, to dissuade guests from seeking refunds and, notwithstanding Mr Joynes’s claim to the contrary, for reasons I shall later give, I find that they are provided with no satisfactory assurance that their application will be granted.
25.	Two points arise from the statement in the vouchers: “This gift voucher is not compulsory”. First, the voucher is described as a “gift voucher”.  In evidence Mr Joynes maintained that the wording makes plain that a guest may not use the voucher to purchase any items on her current visit, but may do so only on a future visit.  Whether it also prevents its application against the cost of accommodation, where appropriate, on the current visit is more problematic: it depends upon whether one is able to read the words, “This voucher may be deducted from your inclusive accommodation rates” separately from “during your next stay with us”, or whether the two parts of that sentence must be read together.  By adding the phrase “during your next stay with us” to the 6 month voucher, which, viewed against the background of all the evidence, I regard as quite deliberate, Operations has clearly catered for, and effectively precluded, a guest who has discharged her account in full from seeking to apply her voucher towards purchases from the spa shop at the end of her current visit.
26.	At the same time as it notifies a guest that the purchase of the voucher is not compulsory, Operations also informs her that the voucher “may not be exchanged for cash”. Mr Puzey maintains that the manner in which a voucher is supplied to a guest leads to the conclusion that it can never be rejected as a matter of law. In response. Mr Thomas submits that it suffices if the obligation to refund is binding in honour only. Alternatively, considering the matter from an English contract law perspective, he contends that the right approach is to seek to reconcile the two statements so that both are given commercial efficacy. He further submits that such reconciliation is possible by considering the statements to indicate that a voucher is supplied on approval and may be rejected within a reasonable period: mere unknowing receipt of a voucher does not amount to acceptance; a person cannot “exchange” something unless she has accepted ownership of it, and wishes to transfer that ownership to another. There is no evidence whatsoever before me of vouchers being supplied on approval, and thus I see no reason to attempt the reconciliation suggested by Mr Thomas. I find that a voucher is not supplied on approval, so that there is no question of a guest having to accept or reject it.
27.	Notwithstanding that Operations accepts that the information necessary for a guest fully to understand the terms and conditions on which she is to be offered a voucher are not collected in one document, Mr. Thomas submits that it would be as wrong to rely on the English rules for the formation or interpretation of a contract as it would be to insist on supplying the English rules on consideration.  Instead, as Jonathan Parker LJ stated at [160] in Tesco plc v Customs and Excise Commissioners [2003] STC 1561,  Mr. Thomas maintains, and I accept, that the right approach is to “examine the entire cycle of transactions which the [voucher scheme] 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 the vouchers issued under it fall within [Schedule 10A to the Value Added Tax Act 1994], that is to say, whether vouchers issued under it are issued for consideration in the Community sense of that term.”
28.	Mr Thomas claims the entire cycle of transactions in the instant case to consist of the publication of information about packages and about the existence of vouchers in the tariff, in Operations’ special offers brochure, on its website and in correspondence with guests; the booking made by the guest; and the publication as to the nature of the vouchers to be found at the spas, in their welcome letters and in the vouchers themselves. I agree. 
29.	He then invites me to examine all the facts, but to disregard the subjective intentions of both parties, to see whether in the aggregate they lead to a conclusion that a guest who receives a voucher has the right to reject it and pay less.  If she does, he submits, there is consideration in the form required for Community law purposes, i.e. there is no necessity for the obligations flowing from the agreement to be legally binding, see Kuwait Petroleum (GB) Ltd v Customs and Excise Commissioners [1999] STC 488 and Hartwell plc v Customs and Excise Commissioners [2003] STC 396. Mr. Thomas further submits that the number of rejections, whether large or small, being a subjective consideration, is irrelevant. I disagree.  In dealing with a case such as the instant one it is necessary to look at the reality of the situation rather than at the illusory one Operations would have me accept.  What Mr. Thomas is asking me to do in the case of a residential guest at Hoar Cross Hall is to accept that, having  discharged her account in full immediately prior to departure and received a voucher she may reject, she is immediately entitled to apply for a refund of its value.  Were the matter to be put to any guest in those terms before payment, inevitably she would reply, “Why can’t you deduct the voucher’s value from my account?  Why should I write asking for a refund of monies I have paid which you acknowledge are not due?  What guarantee have I that a refund will be made?”  Mr. Joynes replied to those questions in his evidence saying that if a guest applied for a refund, it would be made.  I am unable to accept that Operations would refund were every or even a majority of its guests, to make such application for the success of its scheme in VAT terms depends on refunds being restricted to as few guests as possible. Further, on Mr Joynes’s own admission that Operations cannot afford to “give” the vouchers away, i.e. on its case provide refunds to large numbers of guests, I find that a residential guest applying for a refund has no guarantee that she will receive it.  Nor is a day guest likely to be treated differently; similar arguments apply in her case mutatis mutandis.
30.	Looking at the contract to determine the whole commercial relationship between Operations and its guests, for Mr. Thomas’s core argument to succeed, I must be satisfied, as a matter of fact and inference, that guests of Operations are truly offered an opportunity to enter into two discrete contracts, are aware that they are being invited to do so and, armed with that knowledge, they choose to pay for both.  The facts of this case point in their entirety to the opposite conclusion.  As I have found, Operations prominently displays notices and provides other information simply indicating to guests that they will receive a voucher.  But the notices and other information contain nothing to inform the reader that she is being invited to enter into two distinct contracts.  Indeed, in my judgment, Operations goes out of its way to ensure that its guests never consider the possibility of their entering into two contracts.  The only natural meaning of the words on the vouchers, and the associated documents and information, is that a guest is to pay a single price – the price at which the package she has purchased is advertised.  Not only is there no indication that a guest is permitted to pay for a package less the value of the related voucher, the impression given by Operations throughout is that she is not required to pay for her voucher: it is offered to her, impliedly without charge.
31.	Further, it is most unlikely that a guest would pay the full package price plus the full price of the voucher were she genuinely given the opportunity to deduct its value from her account. As I earlier found, less than 5% of the vouchers issued by Operations are redeemed, indicating, on Mr Thomas’s argument, that over 95% of their recipients are prepared to forego their entitlement to a refund – a result I consider most unlikely were they to be aware of it.  Different considerations might apply were a voucher to be offered at a discount. The reality of the situation is that the whole scheme I am considering depends for its success in VAT terms on but a handful of guests writing to apply for refunds, there being few of them fully understanding the terms on which Operations claims to issue vouchers, and few of those few being determined enough to pursue the matter through to its conclusion.
Conclusion 
32.	On examination of the facts and documents governing the relationship between Operations and its guests, I conclude that it is bound neither in law nor in honour to refund the value of a voucher to a guest who rejects it; there is no consideration for a supply in Community law terms. I find that Operations enters into a single contract with a guest – a contract for the package she has chosen, and no separate consideration is given for the voucher. 
33.	Having found that vouchers are supplied for no consideration, it seems to me naturally to follow that I must also find that they are discount vouchers, entitling their holders to discounts on future visits to Hoar Cross Hall. That leaves the question of whether vouchers are supplied as part of composite transactions falling outside paragraph 7(6) of Schedule 10A to the 1994 Act, and thus for no consideration. Both counsel acknowledged that paragraph 7 is not easy to interpret and, since it is unnecessary for me to deal with the Commissioners’ first alternative case, I shall not do so. 
34.	It follows that I dismiss the appeal.
35.   Mr Puzey made application for HMRC’s costs in the event of my dismissing the appeal – an application that was stoutly opposed by Mr Thomas. Having carefully considered the matter in the light of both the application and its opposition, I have decided that Operations should pay those costs. In the event of their not being agreed, I direct that they be assessed by a costs judge of the High Court. 

THE SCHEDULE

Schedule 10A to the Value Added Tax Act 1994 (“the Act”) was inserted in the Act with effect on 8 April 2003 by section 19 and Schedule 1(2) of the Finance Act 2003.  So for as relevant, Schedule 10A provides as follows:

MEANING OF “FACE VALUE VOUCHER” ETC

1(1)	In this Schedule “face-value voucher” means a token, stamp or voucher (whether in physical or electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it
1(2)	References in this Schedule to the “face value” of a voucher are to the amount referred to in sub-paragraph (1) above.
NATURE OF SUPPLY
2	The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act
TREATMENT OF RETAILER VOUCHERS
4(1)	This paragraph applies to a face-value voucher issued by a person who – 
(a)	is a person from whom goods or services may be obtained by the use of a voucher, and
(b)	if there are other such persons, undertakes to give complete or partial reimbursement to those from whom goods or services are so obtained.
	Such a voucher is referred to in this Schedule as a “retailer voucher”.
4(2)	The consideration for the issue of a retailer voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher
VOUCHERS SUPPLIED FREE WITH OTHER GOODS OR SERVICES
7	Where - 
(a)	a face-value voucher (other than a postage stamp) and other goods or services are supplied to the same person in a composite transaction, and
(b)	the total consideration for the supplies is no different, or not significantly different, from what it would be if the voucher were not supplied,
	the supply of the voucher shall be treated as being made for no consideration
INTERPRETATION
8(3)	A reference in this Schedule to a voucher being used to obtain goods or services includes a reference to the case where it is used as part payment for those goods and services.
Of further relevance are the EU and UK provisions relating to the value of a supply.  Although now superseded, Article 11A(1) of the Sixth Directive was in force for much of the period concerned in this case and provided as follows:
		A. Within the territory of the country
	1	The taxable amount shall be:
(a)	in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;
Article 11A(1) is now essentially reproduced in Article 73 of Directive 2006/112/EC.
Section 19(1) and (2) of VATA are the equivalent provisions of the UK domestic legislation and provide as follows:
	Determination of value
		19	Value of supply of goods or services
(1)	For the purposes of this Act the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6, and for those purposes subsections (2) to (4) below have effect subject to that Schedule.

(2)	If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.

 DAVID DEMACK
CHAIRMAN
Release Date: 17 March 2009
MAN/06/238