In Associated Newspapers v HMRC [2017] EWCA Civ 54 (10 February 2017), the Court of Appeal found that retail vouchers, supplied free of charge to customers, had been acquired by the appellant for the purpose of its business, but that VATA 1994 Sch 10A para 4(2) precluded the recovery of VAT incurred in obtaining the vouchers.
The appeal related to two promotional schemes carried out by Associated Newspapers (AN) in order to boost the circulation of the Daily Mail and the Mail on Sunday. The first scheme involved the issue of vouchers by retailers directly to AN, at a discount price from their face value, purportedly inclusive of VAT. AN’s customers were contractually entitled to the vouchers if they purchased the newspapers seven days a week for the relevant promotional period. Customers who wished to participate in the second scheme had to register online the unique reference number of the copies they had purchased and the system credited them with points which could be redeemed for various rewards, including vouchers.
The first issue was whether the supplies of vouchers to AN were cost components of taxable supplies (Principal VAT Directive art 168). If the purchase of the vouchers by AN was directly (and exclusively) linked to the free supply of the vouchers to its customers, the input tax was irrecoverable. If, on the other hand, they were linked to its commercial activity, input tax would be recoverable. The FTT found that the vouchers were part of AN’s overall expenditure in the production and sale of its newspapers, which the vouchers were intended to promote.
The FTT also found that the supply of free vouchers could not be treated as made for consideration; and was therefore taxable by reason of the VAT (Supply of Services) Order 1993 art 3. The provision of vouchers as part of the two promotions was an activity outside of the VAT code, which was fiscally irrelevant to AN’s right to a deduction.
However, the FTT found that VATA 1994 Sch 10A para 4(2) precluded the recovery of input tax on the direct supplies of retailer vouchers. At the heart of the issue was the fact that part of the amount paid by AN for the directly supplied vouchers was used on redemption to pay the VAT, which the retailer would have to account for on its supply of the goods or services to the voucher holder. The FTT observed that para 4(2) removed the taxable status of the supply of directly issued vouchers by deeming them to have been made for no consideration. This meant that, under para 4(2), there was no legally enforceable obligation on retailers to include VAT within the price of the vouchers and to account for it in respect of their issue. AN therefore had no right to deduct input tax.
Why it matters: The Court of Appeal noted that the CJEU had ‘clearly moved away’ from any disregard of the ultimate economic purpose of the relevant expenditure in considering whether it should be treated as linked to the taxpayer’s wider economic activities. ‘This is not a question of subjective intent but requires an objective analysis in terms of the taxpayer’s identifiable economic activities of why the input supplies were acquired.’ AN therefore succeeded on that issue but failed on the Sch 10A issue.
In Associated Newspapers v HMRC [2017] EWCA Civ 54 (10 February 2017), the Court of Appeal found that retail vouchers, supplied free of charge to customers, had been acquired by the appellant for the purpose of its business, but that VATA 1994 Sch 10A para 4(2) precluded the recovery of VAT incurred in obtaining the vouchers.
The appeal related to two promotional schemes carried out by Associated Newspapers (AN) in order to boost the circulation of the Daily Mail and the Mail on Sunday. The first scheme involved the issue of vouchers by retailers directly to AN, at a discount price from their face value, purportedly inclusive of VAT. AN’s customers were contractually entitled to the vouchers if they purchased the newspapers seven days a week for the relevant promotional period. Customers who wished to participate in the second scheme had to register online the unique reference number of the copies they had purchased and the system credited them with points which could be redeemed for various rewards, including vouchers.
The first issue was whether the supplies of vouchers to AN were cost components of taxable supplies (Principal VAT Directive art 168). If the purchase of the vouchers by AN was directly (and exclusively) linked to the free supply of the vouchers to its customers, the input tax was irrecoverable. If, on the other hand, they were linked to its commercial activity, input tax would be recoverable. The FTT found that the vouchers were part of AN’s overall expenditure in the production and sale of its newspapers, which the vouchers were intended to promote.
The FTT also found that the supply of free vouchers could not be treated as made for consideration; and was therefore taxable by reason of the VAT (Supply of Services) Order 1993 art 3. The provision of vouchers as part of the two promotions was an activity outside of the VAT code, which was fiscally irrelevant to AN’s right to a deduction.
However, the FTT found that VATA 1994 Sch 10A para 4(2) precluded the recovery of input tax on the direct supplies of retailer vouchers. At the heart of the issue was the fact that part of the amount paid by AN for the directly supplied vouchers was used on redemption to pay the VAT, which the retailer would have to account for on its supply of the goods or services to the voucher holder. The FTT observed that para 4(2) removed the taxable status of the supply of directly issued vouchers by deeming them to have been made for no consideration. This meant that, under para 4(2), there was no legally enforceable obligation on retailers to include VAT within the price of the vouchers and to account for it in respect of their issue. AN therefore had no right to deduct input tax.
Why it matters: The Court of Appeal noted that the CJEU had ‘clearly moved away’ from any disregard of the ultimate economic purpose of the relevant expenditure in considering whether it should be treated as linked to the taxpayer’s wider economic activities. ‘This is not a question of subjective intent but requires an objective analysis in terms of the taxpayer’s identifiable economic activities of why the input supplies were acquired.’ AN therefore succeeded on that issue but failed on the Sch 10A issue.
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