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Steve Allen, Director of VAT Solutions (UK) Ltd, reports a selection of recent VAT case decisions.

Steve Allen

Tribunal agrees taxpayer was principal for supplies of temporary workers

The Appellant (Helping Hand) had appealed against a decision by HMRC that said they had wrongly treated themselves as a supplier of temporary workers.

HMRC argued that the actual supply of staff was from certain ‘employment businesses’ used by the Appellant.  They cited the heading on the Agreement between the Appellant and the employment businesses which stated “Providing that Helping Hand when you need it most. Finance, Payroll and Credit Control,” and also the Appellant’s promotional materials which advertised it as providing “Complete Back Office Solutions” and stated that “Helping Hand lets you do what you know best… Recruitment and making money”.

Despite the wording of the actual contracts, HMRC said the true position was that the Appellant was a back office resource in support of employment businesses which find and recruit staff for their clients.

Though the employment businesses contact potential clients to find out whether they require any temporary staff, and if so, negotiate rates, number of workers and dates with the contractor, they also issue a confirmation order notifying the clients that they act for the Appellant. They then source the temporary workers required.

However, the employment businesses are not party to any agreement relevant to the actual supply of temporary workers to the clients. They have no contractual links with the temporary workers, and are under no obligation to supply remuneration to them. They do not receive any consideration from the clients either - their sole contractual link is with the Appellant.

Both the client and the individual temporary workers have contractual agreements with the Appellant, who is responsible for issuing weekly invoices to clients, and any bad debts that may result from non-payment. 

As the Appellant is the registered recruitment agency (rather than the employment businesses), and is also an approved ‘gangmaster’ and holder of a CIS5 card, it has the responsibility for accounting for National Insurance and Income Tax payments, and is also responsible for the payment of each temporary worker’s remuneration.

In its decision, the Tribunal found that the true position was the one reflected in the contractual structure; i.e. the Appellant is the supplier of temporary workers to the end client, and the employment businesses are their agents.

Comment: One wonders why HMRC ever took on this case, notwithstanding that the officers apparently misunderstood the situation on a site visit. In the absence of any contracts or consideration between the employment businesses and the end client, it is difficult to see how there could ever have been an assumed supply between them for VAT purposes.

Helping Hand Asset Management Ltd (VTD 20,408)

ECJ says falsified proof of UK removal papers did not prevent an innocent supplier from applying zero-rating

A case concerning the burden of proof on suppliers to hold documentary evidence showing that the goods supplied to an EU VAT registered customer have left the UK.

In 2002, the Appellant sold mobile phones to a Spanish company.  The supplies were on ex-works terms, whereby Teleos was required only to deliver the goods to the UK warehouse of the Spanish customer’s forwarding agent for despatch to France and Spain. For each transaction, the customer sent by courier a stamped and signed original Cargo Movement Request Form (CMR) to the Appellant showing that the goods had reached their destination. Following checks by HMRC, it transpired that some of the CMR notes contained false indications concerning the destination and vehicles used. HMRC acknowledged that the Appellant had not been involved in any fraud, and was unaware that the phones had not left the UK, but still raised assessments running into several million pounds.

The High Court decided to refer the matter to the ECJ via four questions. The first two questions essentially asked the ECJ to confirm whether the goods have to physically leave the Member State of despatch for exemption to apply or whether it is enough for there to be an intention for the goods to be delivered. The third (key) question then asked whether the Sixth Directive allows a Member State to refuse exemption on the basis that, contrary to the supplier's belief, it transpired that the evidence provided was false. The fourth and final question asked whether a corresponding intra-EU acquisition is sufficient proof of an intra-EU despatch.

The ECJ ruled that the exemption of such intra-EU supplies depends on the supplier establishing that those goods have been despatched (i.e., have physically left the Member State). The Court added that even if the purchaser declared corresponding intra-EU acquisitions this does not constitute conclusive proof for exemption. However, where the supplier acted in good faith but the evidence is found to be false, the court ruled that Member States should not seek to recover the VAT from the supplier.

Comment: Importantly, the answer was caveated on the proviso that "the supplier took every reasonable measure in his power to ensure the intra-Community supply he was effecting did not lead to his participation in such evasion".  This could be widely interpreted, and opens the debate on what is meant by 'every reasonable measure', and has interesting parallels with the new penalty regime which focuses on reasonable care. HMRC may choose to challenge businesses where they deem insufficient processes and controls are in place to verify the identity of customers and to validate the evidence of despatch they provide. Any businesses involved in ex-works transactions or cross- border trade generally, should consider the implications of this case.

Teleos Plc & Others (C-409/04), ECJ 27 September 2007

Court of Appeal says supplier payments in loyalty scheme were for redemption services, so the right to input tax existed.

The Appellant operates the Nectar loyalty scheme, under which there is a tripartite agreement between retailers, redeemers and customers. Retailers would issue points to customers on a qualifying purchase and would pay the Appellant a specified sum for each point in addition to an annual fee for the marketing of the scheme. When sufficient points had been collected, they could be used to discount the price of reward goods or services. When the customer obtained the reward goods/services, the Appellant would pay the redeemer an agreed value for these.

HMRC contended that when the Appellant made a payment to suppliers in respect of points redeemed, the payment represented third party consideration by it in respect of the supplies of goods made to customers. The Appellant, however, considered the payments to be consideration for a supply of redemption services offered by the supplier, which was taxable, and in connection with which, they were entitled to recover input tax.

The Court of Appeal overturned the High Court judgment, finding that the payments made by the Appellant were indeed for redemption services and did not constitute third party consideration.

In the High Court case (which had found in favour of HMRC), Mr Justice Lindsay stated that this case differed from Redrow, in that the Appellant had no discretion over what goods or services the end customer chose to redeem his points against. This distinction meant that Redrow had no judicial precedent to the Appellant.  However, the CoA rejected this conclusion. It held that there was nothing in the Redrow case that suggested that its findings were restricted to instances where the end customer has no choice in what he would receive, and thus, it was applicable to the Appellant.

The CoA agreed with the Tribunal's approach, meaning that, for the transaction between the supplier and the customer, there was no sale at the list price. The customer, when redeeming points, had no obligation to pay the supplier. The supply of goods or services to the customer arose from the contractual arrangements which existed between the Appellant and the supplier. Accordingly, the proper analysis of the transaction, under which the supplier provides goods or services to a customer in return for points, is that the supplier is providing a service to the Appellant in assisting it to discharge its obligations to customers that they can acquire rewards in return for points.  The CoA further stated that he did not feel it necessary to refer questions to the ECJ, as the decisions in Redrow and Plantiflor were sufficient in interpreting the EC Legislation.

Comment: This is a positive decision for the taxpayer and other businesses with third party loyalty schemes. This CoA judgment has extended the Redrow principle to situations where the end consumer has a choice about the goods or services he obtains. Businesses operating similar tripartite loyalty schemes should not have their input tax recovery restricted, and should now be considering the submission of repayment claims if applicable.

Loyalty Management UK Ltd, CoA, 5 October 2007

Court of Appeal says free gift vouchers cannot be used to reduce taxable value of fuel sales

The Appellant operated a promotion whereby customers collected points when they purchased fuel. Having collected the required number of points, customers could then redeem them for gift vouchers at High Street retailers, which the Appellant had purchased in bulk.  The Appellant argued that the transfer of the vouchers to customers constituted a reduction in the consideration for the original supply of fuel.

The CoA has overturned the High Court’s decision. In reaching its decision, the Court placed importance on the documentation and presentation of the scheme as one allowing the customer to obtain more goods and services rather than ‘money off’ or ‘cash back’. They added the customer paid the full price for the fuel regardless of whether they took part in the promotion scheme – those customers who received a voucher did not, therefore, receive a discount on the price of the fuel, but got something extra for the price paid for the fuel. The Court also referred to the Tesco case to support the use of economic purpose and objective analysis.

Comment: If the CoA found for the Appellant, the VAT implications may have been extensive. Nonetheless, this decision still illustrates the need to consider the VAT implications of business promotions carefully. The Court emphasised that whilst some promotions can be VAT efficient, other promotions which appear similar, can have very different VAT consequences.

Total UK Ltd, CoA, 18 October 2007