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Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT cases.

Tribunal Says that Cashbacks are NOT a Separate Supply

This is an interesting case concerning the VAT treatment of ‘cashback’ payments.

The Appellant, a home improvement company, decided to boost its sales by introducing a ‘cashback’ scheme, which was available to customers who took out a loan to pay for part of their home improvement. The Appellant entered into an agreement with a separate financial services company whereby the customer purchases a product, pays a deposit, and then enters into an agreement to pay the remainder by a loan through a ‘Home Account’ operated by the financial services company. At the same time, the financial services company pays the Appellant the net value of the supply plus a commission. The disputed payment was a 10% ‘cashback’ paid at a later date where the customer was still operating their account and making the loan payments after 90 days. This was later extended to 180 days to prevent customers taking out finance purely to obtain the cashback and then immediately paying off the loan. The Appellant treated the cashback like any other discount, and reduced the value of original taxable supply. However, HMRC argued that this was a separate payment to induce the customer into entering into those arrangements (i.e., consideration for a supply by the customer).

The Tribunal first looked at the documentation. It noted that the original version made little reference to the cashback, and that there was not enough in the contract alone to conclude whether or not the cashback was a reduction in price. HMRC raised a number of arguments trying to link the cashback to the finance. The Tribunal found that the cashback being contingent on the loan still being in place was not enough to link it to the loan. The Tribunal dismissed HMRC’s arguments that the cashback was to reduce the cost of the loan, stating there was nothing in the documentation or surrounding circumstances to support this.

In support of the Appellant, the Judge pointed out that the promotional literature referred to the cashback in the same manner as other discounts offered. Taking this together with the context of the cashback being a payment back to the customer of sums paid, the Tribunal found that the payment was “in the nature of a discount and was a retrospective reduction in the price for the home improvements goods and services that the customer acquired.” The Tribunal then went on to look at the nature of the obligation of the Appellant in making the payment. It found that a distinction must be made between the mere satisfaction of a contingency, and the actions of a customer that amount to a service back to the supplier. There was a dividing line between those cases where a discount is given merely on satisfaction of a contingency, and those where the discount is given for a service provided by the customer. This case was in the former category, and as such, the cashbacks represented a reduction in the taxable amount. There was no supply by the customer back to the Appellant, and so the appeal was allowed.

Everest Ltd (TC00863)

Upper Tribunal says Facilities for Children's Parties are a Single Taxable Supply

This case concerns the provision of facilities for children’s parties, and whether there is a separate supply of food and use of the hall.

The Appellant’s premises, known as ‘The Barn’, are hired out for children’s parties, and can be booked for an inclusive price per head comprising the use of the hall for 75 minutes followed by a basic buffet. A staff member greets the children at the beginning of the session, and tidies up at the end in order to make sure the hall is ready for the next party. However, it is the responsibility of the parents to supervise the children. At the end of the 75-minute play session, the children move to a separate area to enjoy the buffet.

The First-Tier Tribunal (FTT) had previously held that the use of the hall and the provision of refreshments were two separate supplies, and that the supply of the hall was an exempt grant of a licence to occupy land. HMRC appealed on the basis that there was a single taxable supply, and that even if there were separate supplies, the provision of the play barn facilities fell short of being an exempt right to occupy land.

In its analysis, the Upper Tribunal (UT) said the FTT had made a significant error and had misdirected itself. The FTT held that the use of the hall and the provision of refreshments were both of use to customers and could each serve an economic purpose if supplied in isolation. As such, they were two separate supplies.  However, the UT said the correct test was the one established in the Weightwatchers and Baxendale cases, neither of which was referred to in the FTT decision. These cases established that the issue of whether a single supply existed should be viewed objectively from the perspective of a customer, which includes all the ancillary elements ignored by FTT.  Bringing these elements into account, the UT found that, from a typical customer’s perspective, there was a single standard-rated supply of facilities for a children’s party.

The Court’s finding of a single supply meant HMRC’s appeal was allowed. However, the UT still went on to consider whether exemption would apply to the provision of the hall if treated as a separate supply. The Judge found that the right to use the hall fell short of a right to occupy land, and so would not have fallen within the exemption. The main reasons for this were that the customers paid a charge per child, and could not bring extra children beyond the numbers paid for.  This was incompatible with a rental agreement, where the only limitations on numbers would be those imposed by health and safety rules.  As such, even if the Appellant had successfully argued for two separate supplies, she still would have lost on the basis that both supplies would have been taxable anyway.

Diana Bryce t/a ‘The Barn’ [2010] UKUT 26 (TCC)