Barclays Bank plc.
Termination of VAT group registration

The Court of Appeal has overturned the VAT tribunal's decision in the case of This concerned the date on which a company would be removed from a group registration after it no longer fulfilled the criteria for group membership.

The tribunal had supported Barclays' contention that Customs did not need to be given notice of a company's removal from a group registration where that company had become ineligible. Thus, even if Customs was notified after the company became ineligible, the group would have to be retrospectively altered in order to remove the non-qualifying company. Customs had insisted that it should receive the usual 90 days' notice for a company's removal from the group, and that the ineligibility point should be treated as irrelevant. The tribunal agreed with Barclays, but the Court of Appeal overturned that decision in Customs' favour.

This is a surprising result, since it means that companies remain within group registration, with all the attendant conditions, even while they are not eligible. In Barclays' case, the bank would have made a significant saving had the tribunal's decision stood: this was the rationale for Customs taking the matter to appeal.

It seems extremely likely that Barclays will take the matter to the House of Lords, and it will be interesting to see whether the Lords will find the Court of Appeal's analysis acceptable. Meanwhile, Customs will no doubt insist that it should have the right to retain companies in a group even after they fail to qualify, for anything up to the 90-day period of notice that the rules appear to allow under case precedent as it stands at this moment.

Zero-rated hula-hoops

Most snacks that compete with potato crisps are standard-rated (as are crisps themselves). However, some of them fall within the zero rate since they are not manufactured from a potatobased product, and are not cereal-based using a swelling manufacturing process. Most hulahoops are made of potato and therefore standard-rated, but there is a version of hula-hoops made with a maize base. (17391) has taken to appeal a Customs' decision that the maize hula-hoops are standardrated. Its contention was that these hula-hoops are not obtained by a swelling process and should therefore be zero-rated. Although it was conceded that the process merely of cooking the raw ingredients did cause swelling of something in the region of 20%, this was not the kind of snack whose taste and consistency depended on swelling, nor did the degree of swelling compare with other swollen maize foods, which typically swell to six times the area of the raw ingredients.

The tribunal therefore had no difficulty in allowing the appeal to the effect that maizebased hula-hoops are zero-rated.

Supermarket loyalty cards

A significant case has come before the tribunal at the behest of (17378), in relation to the VAT treatment of 'vouchers' included in their loyalty card bonus scheme.

The question at issue was whether the price paid for goods, which directly lead to earning points under the card scheme, could be said to be partly paid for the points (as opposed to only being paid for the goods purchased). If that were true, and since both parties accepted that the arrangement involved issuing a token for cash, which therefore would not attract VAT if it was sold, Tesco's daily gross take would have to be reduced, in terms of the VAT liability it represented, by the value of the points sold.

Customs argued that the points were not sold, but were given away or earned by loyal customers. Thus, following the decision of the European Court of Justice, the vouchers could not be regarded as having been sold, and the daily gross take would have to be regarded as entirely received in return for goods sold and therefore entirely within the scope of VAT. Tesco, naturally, suggested that the arrangement did involve selling those points to the customers, and that therefore the daily gross take could be reduced by that value.

It may be helpful to point out that, if Tesco were correct on that matter, the redemption of these points would involve the payment of consideration for the redemption goods, at which point VAT would be due on the liability of the goods concerned. The advantage to Tesco in pursuing this arrangement appears to be twofold. First, it would delay Tesco's liability, and second, it would reduce that liability to the extent that points were not redeemed (in roughly 93% of cases they are redeemed).

The tribunal took the view that Tesco sold the points to the customers, rather than gifting them or rewarding them. Although the terminology of the offer to customers did not seem to make the point utterly explicit, there could be no doubt that that is the substance of the contract between the customer and Tesco. The customer had a legally enforceable expectation and therefore had purchased the points. This dealt with something in the region of 90% of the circumstances under which the Tesco point system is operated.

For the remainder, Tesco also arranges for its points to be awarded with certain third party suppliers which sell its goods and thereby award the points. Here, again, the tribunal agreed with the analysis to the effect that the points were sold rather than gifted. But the interposition of a third party caused the tribunal to take the view that Tesco's own daily gross take could not be reduced. The arrangement for selling the points was one entirely between the third party retailer and the customer, and did not reflect back into Tesco's daily gross take. It would appear, under this logic, that Tesco would have to account for VAT as the points were redeemed, without having being able to reduce the VAT on their original daily gross take. The third party suppliers could, however, reduce their own gross take by the value of points sold.

A partial success, therefore, for the major retailer, but in particular a very useful gloss on the Kuwait decision. Although that decision is binding on all courts because it is an ECJ decision, the tribunal was able to distinguish the circumstances for the Tesco product from that of Kuwait on the basis of the sheer formality of the arrangements between Tesco and the customer, as well as the extremely high redemption rate. This, therefore, opens up a very wide range of potential interpretative issues surrounding such business promotion schemes in the wake of the Kuwait decision.

Philanthropic subscriptions

Item 1(e), Group 9, Sch 9, VATA 1994 exempts the payment of subscriptions to philanthropic organisations. Since this was introduced, Customs has issued very little guidance on what sort of organisations it would regard as falling within this exemption. Furthermore, there has been no test case in the tribunals.

A decision has now been issued by the tribunal in the case of (17394). It found that the membership subscriptions to this organisation are exempt as subscriptions to a philanthropic organisation. Customs had rejected this contention, taking the view that the members were very largely people engaged in shooting, and therefore had a vested interest in supporting the Game Conservancy Trust. This vested interest did not show it to be a philanthropic motivation. Furthermore, it took the view that philanthropic activities must relate to mankind rather than to the animal world.

The tribunal disagreed with these arguments because it took the view that the conservation of wildlife did have a beneficial effect on mankind. It appeared indeed from the tribunal's reasoning that all of mankind (within the relevant geographical area) benefited uniformly from a wildlife conservation type of activity.

Furthermore, although the Game Conservancy Trust did accentuate the benefits to the shooting fraternity in its literature, this was in order to obtain much needed funding from those people who would be most likely to provide it. Its own policies neither condemned nor condoned the shooting, and were not directed towards maintaining shooting stocks per se. In addition, if the actual activities described in the decision were reviewed, the link between the membership subscriptions and specific benefits provided to members did not seem particularly great. There was a general overall benefit, which was to provide a research basis to support the conservation of animals that happened to be appropriate for shooting, but there were few benefits that were earmarked to particular members for their particular use.

The tribunal totally rejected Customs' principal objections - namely that the organisation was not focused on the welfare of mankind, and that it was not of broad application, but rather served narrow interests - and held that the subscriptions were therefore exempt from VAT.

It is welcome to have a decision in respect of this exemption, although no doubt Customs would say that the decision was very narrowly based and is not transferable to other organisations. Yet this decision (assuming it is not successfully appealed) does clarify general principles. First, one cannot take a narrow view of the scope of the word 'philanthropic'. Second, a charity's literature and 'positioning' towards its members can appear to address their particular needs, while its actual function and objects can be much broader, and it is those broad functions and objects that count, rather than the specific aspirations of each individual member. Unfortunately, the decision does not go into any great detail on how one might deal with an arrangement that involves specified benefits being provided to members in return for subscriptions.

Printed matter or information?

There can sometimes be a grey line between the zero-rated provision of information in a printed form, and the standard-rated provision of information that happens to be delivered to a client in a printed format. In general, where the provision of information is bespoke to the client, and happens to be recorded in a written medium (such as a letter), then that is a standardrated consultancy service. But where the information is 'off-the-peg' and several clients receive effectively identical information in printed form, then the form of the delivery takes precedence and the supply is zero-rated.

This issue is debated in the case of (17404). The company received substantial subscription payments from organisations for providing a monthly printed brochure giving potential business 'leads' in the construction industry sector. Despite the fact that these were described as 'leads', many different subscribers received the information, thus rendering it of little exclusive value, and indeed all of the information was collated from public sources that merely listed the building projects to be undertaken. What was being provided was more a gazetteer than a service of providing information.

Customs' handling of the case was somewhat compromised by its willingness to believe all the publicity that surrounded the selling of this product. The publicity did indicate that the information could be obtained by email or fax (no customer took this up and it was not in effect provided) and appeared to hint at some degree of extra service, although this was not actually defined or, indeed, provided. It also suggested that some form of research tool supported the product, whereas the research techniques were rudimentary. This led Customs to argue that there was a provision of information (standard-rated) rather than a provision of a printed brochure (zero-rated).

The tribunal faced a fairly easy decisionmaking process, since Customs had effectively misunderstood what the business was really providing. On the facts the tribunal found, this was clearly the provision of a zero-rated brochure.

However, there is one point in the tribunal's decision that Customs might want to take issue with, and which could have wider ramifications. The tribunal effectively said that the important point was what was actually provided to a customer rather than what was promised to him. That seems unexceptionable, except to say that there was no evidence recorded in the tribunal report on whether the appellant would have met a customer's request for all aspects of the advertised service. It was simply assumed that the customer would sue for non-performance.

This goes to the heart of the question of whether tax falls on the availability of an aspect of a supply, as distinct from falling on what is actually taken up within the range of available aspects. Customs has tended to argue, usually without serious opposition from taxpayers, that where a benefit is offered to a customer as part of the fee, that customer must be taxed on the nature of what is offered, even if he does not take it up. Clearly, if the offer is bogus, then he should not be taxed on something he cannot take up. On the other hand, if the offer is not entirely bogus, there does appear to be consideration paid for availability. It is possible that this tribunal decision adhered too closely to what was actually supplied, rather than to what was genuinely offered, and may have given too little attention to whether the offer was genuine or could be made to be genuine by a demanding customer.

This decision may therefore provide some ammunition for businesses and practitioners seeking to argue a case concerning differences between what a supplier promises and what he actually delivers.

Human rights and penalties for evasion

, the well known leading case in the area of the convention for human rights, has come up in front of the Court of Appeal.

The original tribunal decision, to the effect that hearings concerning penalties for dishonest evasion should be treated as though they were criminal hearings, has been upheld by the Court of Appeal. Under Art 6 of the Human Rights Convention, the nature of the penalties being opposed makes it of a criminal rather than of a civil nature.

It now seems unlikely that, if Customs were to appeal this decision further, there would be a different decision at the end of the process. This may leave the civil evasion penalty system in tatters. There are quite divergent opinions as expressed in the technical press about the true impact of this decision on legal procedure, so the following could be regarded as a worst-case scenario.

The advantage of a civil procedure both to Customs and to the community at large (including-certain taxpayers) is that it is far more streamlined, and it does not require the same level of preparation as a criminal case. Nor does it require the same level of proof in order to apply the penalties concerned, since the case can be determined on the balance of probabilities (although it is usually determined to a high standard of probability instead). All of this means that a civil case is far easier for Customs to win, thus making it possible to apply such penalties in a fairly streamlined fashion.

In the 1980s, the Keith Committee recommended the introduction of such civil penalties because, in practice, Customs was unable to pursue the evaders with the full rigours of a criminal penalty because of the pressure placed on its resources. This drastically reduced the deterrent effect of the penalties it had at its command at the time.

However, the introduction of civil penalties had its own special advantages for the evader. If he was subject to a civil procedure, he would not incur a criminal record, and there was no prospect of his spending time in prison. That meant that criminal procedures could be reserved for the most serious cases, leaving the less heinous activities for the rather milder regime of the civil system.

Following , it does appear that this is more or less impossible in the future. Although this case remains civil in that imprisonment is not an ultimate sanction, the level of preparation and the degree of proof needed make it as onerous as a criminal hearing.

Customs may revert to having to counter fraudulent evasion with an extremely heavy weapon, namely the criminal procedure, and those who are brought through that criminal procedure and are found guilty will incur more severe penalties than they otherwise would. Nonetheless, previous experience would suggest that the deterrent effect of the criminal procedure is not as great as the deterrent effect of the civil procedure. This is because only a certain number of criminal proceedings can be put in place, as compared to civil proceedings. Thus, the European Convention on Human Rights has introduced a marked change to the legal landscape relating to the pursuit of tax fraudsters.

Compiled by Graham Elliott of haysmacintyre

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