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Feb 3, 2012
Donations to charitable causes do not reduce VATable amount
Donations to good causes do not reduce taxable amount
The First Tier Tribunal (FTT) has held that, even though the Appellant, a catalogue sales company, passed 25% of the amounts paid for goods on to charities and good causes, the consideration for those supplies was the full amount paid and not the amount net of the donation. The donation was a cost of the business seeking to increase its volume of sales.
The Appellant (formerly Fine Art Developments Plc, the Appellant in a case in the 1990s concerning valuation in similar circumstances) is a group of companies which sells goods advertised in catalogues to the public.
The sales are generated by distributing stocks of catalogues amongst 'fund-raisers', i.e. people who wish to aid a charity or other good cause. The fund-raisers then distribute the catalogues to 'supporters', i.e. friends, neighbours etc., who order and consume the goods. Part of the amount paid by the supporters (the donation) is passed on to the charity or good cause nominated by the fund-raiser.
HMRC considered that the taxable amount in respect of goods for VAT purposes was the 'whole sum', i.e. the full amount paid by the supporter. The Appellant sought to argue that the taxable amount should be the 'net sum', i.e. the whole sum net of the donation.
A further aspect of the dispute was the way in which the sales were made. HMRC contended that, where the goods were sold by the Appellant to the fund-raisers and then by the fund-raisers to the supporters, the sales were subject to the valuation provision in para 2 Sch 6 VAT Act 1994:
“Where –
(a) the whole or part of the business carried on by a taxable person consists in supplying to a number of persons goods to be sold, whether by them or others, by retail, and
(b) those persons are not taxable persons,
the Commissioners may by notice in writing to the taxable person direct that the value of any such supply by him after the giving of the notice or after such later date as may be specified in the notice shall be taken to be its open market value on a sale by retail.”
Prior to 2002, the sales were organised in two ways, depending on the type of catalogue and the group company making the sale:-
-
The catalogue advertised the goods for the whole sum, and the supporters ordered and bought the goods from the Appellant for that price. A sticker fixed to the catalogue and order form by the fund-raiser identified the good cause and the Appellant passed the donation, 25% of the whole sum paid, to the good cause. There was no option for the supporter to purchase the goods for 75% of the whole sum, and in the event of cancellation or refund the donation would not be paid to the good cause.
-
The catalogue distribution arrangements were essentially the same, but the goods were sold by the Appellant to the fund-raiser for the net sum and by the fund-raiser to the supporter for the whole sum, with the fund-raiser paying the donation to the good cause. HMRC issued a direction regarding this arrangement under para 2 Sch 6, deeming the value of the Appellant's supply to be the open market value (OMV), i.e. the whole sum.
In 2002, the Appellant changed the catalogues to state that up to 25% of the price paid by the supporter would be treated as a donation to the good cause and 75% would be the price of the goods. The catalogues now described the fund-raiser as agent of the Appellant in the sale of the goods and agent of the good cause in collection of the donation. The wording of catalogues was later altered to describe the donations as 'voluntary'. HMRC did not consider these changes relevant to the question of the taxable amount and maintained that VAT was due on the whole sum.
Argument
Argument
The Appellant sought to argue that the donations did not form part of the consideration for the goods. When the supporters paid the donations to the Appellant they did so knowing that they would be paid to the good causes. When they paid them to the fund-raisers, the Appellant never received them at all. The donations were not given in return for the goods under a contract for reciprocal performance (seeking to rely on the ECJ's decision in Tolsma, C-16/93 concerning amounts collected by a street entertainer), and the amounts paid away as donations should not be included in the consideration (seeking to rely on Glawe Spiel, C-38/93 in which the ECJ held that gaming machine takings should be declared net of prizes paid out). Based on an analysis of contract and trust law, the true position was that the donation was not part of the consideration for the goods.
HMRC sought principally to rely on Kuwait Petroleum (GB) Limited (C-48/97) in which it was held in the context of a reward scheme that the whole sum paid by the customer was consideration for the supply of fuel and could not be regarded as including a separate amount of consideration in respect of redemption vouchers or goods. In Primback Limited (C-34/99), the ECJ had held that the taxable amount was fixed between the supplier in a transaction and the customer, and the fact that the supplier actually received less in payment from a finance company than the full amount of the consideration due on the supply could not be used to reduce the taxable amount of the transaction. The finance company's commission was a cost to the supplier, just as the donation was a cost to the Appellant, a cost incurred in order to boost its sales. In Debenhams Retail plc [2005] EWCA Civ 892 concerning merchants' card handling services, the Court of Appeal had established six principles:
(i) that the contractual effects were just the starting point in any VAT analysis;
(ii) that more than one contract could be created out of a single contract was not sustainable;
(iii) that a company could not avoid VAT by providing that part of the price of goods supplied could be given away;
(iv) that the concept of receipt was not confined to mere physical receipt;
(v) that a person must be treated as having received consideration for a contract if he stipulated that payment was to be made to a third party; and
(vi) that any such stipulation would be irrelevant.
HMRC considered that the supporters had no option to purchase the goods for less than the whole sum, art 11A Sixth VAT Directive determined the taxable amount by reference to the amount of consideration, not by reference to what was actually received, as this would run contrary to Primback.
Held
The FTT considered that there was a supply with a direct link to the consideration given under a contract for reciprocal performance, and that the real issue for the FTT to resolve was whether the parties had agreed that the whole sum was the value of the goods or only part of it, the net sum.
The FTT distinguished this case from Tolsma due to the contract for reciprocal performance, and Glawe Spiel on the basis that in Glawe Spiel there was a statutory provision providing that 60% of the stake money had to be returned to the players and the Taxpayer did not have those amounts freely at its disposal. The analysis of contract and trust law was not relevant to the issue, and the consideration ascribed subjectively to the supply of goods was determinative. The FTT agreed that HMRC could rely on Primback and the six principles in Debenhams, holding that the donations were a cost of increasing sales and not a reduction in consideration.
Applying those findings to the ways in which the Appellant had conducted its business pre-2002, the FTT held as follows:-
The FTT distinguished this case from Tolsma due to the contract for reciprocal performance, and Glawe Spiel on the basis that in Glawe Spiel there was a statutory provision providing that 60% of the stake money had to be returned to the players and the Taxpayer did not have those amounts freely at its disposal. The analysis of contract and trust law was not relevant to the issue, and the consideration ascribed subjectively to the supply of goods was determinative. The FTT agreed that HMRC could rely on Primback and the six principles in Debenhams, holding that the donations were a cost of increasing sales and not a reduction in consideration.
Applying those findings to the ways in which the Appellant had conducted its business pre-2002, the FTT held as follows:-
- As the catalogue advertised the goods for the whole sum, and the supporters subjectively considered that to be the price of the single supply of the goods, the Appellant must account for VAT on the whole sum.
- Where the goods were sold by the Appellant to the fund-raiser for the net sum and by the fund-raiser to the supporter for the whole sum, the FTT was bound by the House of Lords' judgment in the original Fine Art Developments [1996] STC 246 case. The OMV direction issued by HMRC was valid, even though HMRC conceded that, absent that judgment, the Appellant's arguments might have had some substance.
Turning to the position after the 2002 changes, the FTT did not consider the fund-raisers to be agents of the Appellant, as a principal would not have invoiced its agents for goods as the Appellant did. Supporters were not offered goods for the net sum, nor were they told that no VAT was due on the donated amount. The 2002 changes did not alter the VAT analysis, nor did the inclusion of the word 'voluntary' in 2007.
The case was therefore dismissed.
Comment
This case is fact-specific but it does highlight the importance of recognising the correct VAT treatment where sales involve the intervention of other parties in the 'chain of supply'.
If you would like any advice on the issues raised in this case, please contact 4 Eyes Ltd.
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