Vouchers and business promotion schemes: Associated Newspapers Limited VAT case analysis
Gareth Bevan 24 February 2017 No comments
Following on from our earlier blog post, in this article we bring you a more in depth analysis of the Court of Appeal decision in the Associated Newspapers Limited (ANL) VAT case on vouchers and business promotion schemes.
The decision covers both the output VAT and input VAT consequences of the schemes. It could have major ramifications for the voucher industry as a whole and significantly increase the cost of business promotion schemes involving vouchers.
HMRC have not yet publicly reacted to the decision but businesses likely to be affected should look out for any announcements of changes to current HMRC policy.
Background to the case
The case concerned two business promotion schemes run by ANL with a view to increasing the circulation of the Daily Mail and Mail on Sunday newspapers.
Both schemes involved giving away high street gift vouchers to customers who purchased copies of the newspapers. The schemes operated as follows:
- The first scheme, referred to by the acronym SPICE (Sales Performance Improvement by Circulation Excellence), operated between 2007 and 2010. It involved the purchase of vouchers from retailers such as Marks & Spencer which were issued by the retailers directly to ANL usually at a discount from their face value but at a price which purported to include VAT. Customers were entitled to receive the vouchers free of charge if they purchased the newspapers seven days a week for the relevant promotional period.
- The second scheme which began in 2011 is the Mail Rewards promotion. Customers who wished to participate in this scheme would register an account with ANL. All copies of the Daily Mail and the Mail on Sunday during the period of the promotion contained unique reference numbers which could be registered by customers either online or by telephone against their accounts. The system then credited them with points which could be redeemed for various rewards including retailer vouchers. This scheme was managed for ANL by a third party, The Hut.com Limited. The Hut charged a fee for this which was subject to VAT. ANL was entitled to reclaim this VAT. The Hut also purchased the retailer vouchers and issued invoices for them at cost price plus VAT to ANL.
ANL had initially obtained a ruling from HMRC that it could reclaim the input VAT charged on the purchase of vouchers and not account for output VAT on the vouchers given away to customers. However in July 2009 HMRC informed ANL that policy contained in VAT Information Sheet 12/2003 was applicable to the transactions. This stated that:
“14. Face value vouchers given away for no consideration
Where face value vouchers are purchased by businesses for the purpose of giving them away for no consideration, (e.g. to employees as ‘perks’ or under a promotions scheme) the VAT incurred is claimable as input tax subject to the normal rules. Output tax is due under the Value Added Tax (Supply of Services) Order 1993. Therefore all vouchers given away for no consideration will be liable to output tax to the extent of the input tax claimed.”
On appeal, the First-tier Tribunal (FTT) found in favour of ANL that no output VAT was due. In a second appeal, the FTT held that, in addition to not having to account for output VAT on the vouchers, ANL was entitled to deduct input VAT on the purchase of the vouchers.
HMRC then appealed to the Upper Tribunal (UT). The UT agreed with the FTT that output VAT was not due on the distribution by ANL of the vouchers. However, whilst the UT agreed with the FTT that VAT charged on vouchers by intermediaries could be recovered as input VAT by ANL, it held that no input VAT was deductible on the direct purchase of vouchers from retailers. This was because there was no VAT chargeable on the supply to be reclaimed. Both ANL and HMRC were given leave to appeal these decisions to the Court of Appeal.
The VAT issues therefore referred to the Court of Appeal were:
- whether output VAT was due on the free supply of the vouchers by ANL to customers taking part in the schemes and,
- whether input VAT incurred on the purchase of the vouchers was deductible either as a cost component of a taxable supply made by ANL to the customers, or as part of its overheads.
Value Added Tax (Supply of Services) Order 1993
The 1993 Order is derived from Article 26 of the Principal VAT Directive (“PVD”) which treats as a supply of services for consideration (and therefore a taxable supply) a supply of services carried out free of charge for the private use of the taxable person or his staff “or more generally for purposes other than those of his business”. Where these conditions are met the free supply is treated as one for consideration, and under the 1993 Order this will give rise to a charge to output VAT limited to the amount of any input VAT reclaimed in relation to the supply.
If ANL was entitled to deduct input VAT on the supplies of retailer vouchers it used for the purpose of the two schemes, the provisions of the 1993 Order would, if applicable, annul the financial benefit by imposing a counter-balancing charge to output VAT on what (if free) would not otherwise amount to a taxable supply.
Schedule 10A Value Added Tax Act 1994
Schedule 10A of the Value Added Tax Act 1994 (“VATA”), which prescribes the VAT treatment of vouchers under UK law, was also key to this case.
Paragraph 2 of Schedule 10A treats the issue of a face-value voucher (which the vouchers in both scheme were), or any subsequent sale of it, as a supply of services, and paragraph 7 treats the supply of a face-value voucher as part of a composite transaction for no additional consideration as a supply of the voucher for no consideration.
Schedule 10A is also relevant in respect of the input VAT which ANL wanted to reclaim on its purchase of the retailer vouchers. Paragraph 4(2) requires the consideration for the issue of a retailer voucher to be disregarded, or ignored, unless it exceeds the face value of the voucher. The issue of a voucher which falls within paragraph 4 is not therefore treated as a taxable supply for VAT purposes. VAT is accounted for by the retailer when the voucher is redeemed against a supply of goods and services.
Under paragraph 4(4) and paragraph 6 of Schedule 10A any onward sale of a retailer voucher, i.e. by an intermediary, is not disregarded for VAT purposes and is therefore subject to VAT at the time of its sale.
The Court of Appeal Decision
Was input VAT on the purchase of the vouchers recoverable?
The Court firstly looked at the question as to whether any input VAT charged on the supply of vouchers to ANL was recoverable. The Court agreed with the UT’s approach and therefore concluded that the vouchers were purchased for commercial purposes with a view to increasing the sales of newspapers and advertising space. So, whilst it is true that there is a link between the purchase of the vouchers and them subsequently being given away for no consideration, from an economic point of view the vouchers were purchased with a view to generating higher revenues. The vouchers were therefore cost components of ANL’s taxable business activities and any input VAT was recoverable.
Was output VAT due when the vouchers were given away?
This was only relevant under the 1993 order if the vouchers given away to customers were considered to be a free supply of services other than for business purposes.
Since the Court had found under the previous question that the vouchers were being used to fulfil a commercial purpose. It therefore followed that no output VAT was due when the vouchers were supplied to customers under the promotion scheme.
Does Schedule 10A Value Added Tax Act 1994 prevent the recovery of input VAT on the vouchers purchased directly from retailers?
This concerned the effect of Schedule 10A paragraph 4(2) on the ability of ANL to recover input VAT on its purchase of vouchers directly from retailers under the SPICE promotion. The Court agreed with the UT on this point. It held that since the retailer was not legally obliged to account for VAT on the issue of the voucher – as the consideration was disregarded for VAT purposes – ANL had no right to recover input VAT on their purchase.
The VAT which the retailer eventually accounts for is VAT due on the supply of goods or services which the voucher is exchanged for, and not on the supply of the voucher itself. If a voucher is not redeemed then no VAT is ever payable by the retailer. It therefore follows that if the supply of the voucher was not the taxable supply, there was no input VAT for ANL to reclaim.
Consequences of the decision
It remains to be seen whether any of these decisions will be appealed to the Supreme Court.
Taxpayers operating similar business promotions will welcome the decisions relating to the first two questions above. However HMRC’s win on the non-deductibility of input VAT on retailer vouchers bought directly from the issuer is likely to impact not just on business promotion schemes, but on the wider voucher industry.
As things stand that decision goes against current HMRC policy as set out in VAT Information Sheet 12/03 on face value vouchers (see paragraph 10) which states that:
“Issuers of face value vouchers, other than credit vouchers, who redeem them for goods or services will need to issue a full VAT invoice if the vouchers are sold to a VAT registered intermediate supplier. As the issuer who redeems the voucher does not need to account for VAT until the voucher is redeemed, it is suggested that the invoice is annotated with the following wording, ‘the issuer of the voucher will account for output tax under the face value voucher provisions in Schedule 10A VAT Act 1994’. “
In view of the ANL decision, it would no longer be correct for a retailer to issue a VAT invoice on the sale of the vouchers to an intermediate supplier. If intermediate suppliers purchasing vouchers directly from the retailer are no longer permitted to recover VAT this would reduce or even wipe out any profit margin the intermediary currently makes. Their business model in this situation is unlikely to be financially viable.
Any business who has concerns about the impact of this decision should maintain a watching brief both on whether ANL decide to make a further appeal, and on HMRC’s reaction to the case. If no further appeal is made it is difficult to see how HMRC’s currently published policy can continue to stand.
We will continue to monitor the situation and publicise any further updates on our blog.
The full decision can be viewed here.