Factual and Procedural Background
This appeal concerns the VAT consequences relating to input and output tax of two promotional schemes implemented by Company A to increase the circulation of two newspapers. The first scheme, known as SPICE, operated from 2007 to 2010 and involved Company A purchasing retailer vouchers (from retailers such as Company B) which were issued to Company A's customers and participating newsagents free of charge upon qualifying purchases of newspapers. These vouchers were redeemable at face value against goods or services from the issuing retailers.
The second scheme, commencing in 2011 and managed by Company C under contract, involved customers registering accounts to collect points from unique reference numbers in newspapers, redeemable for rewards including retailer vouchers. Company C purchased vouchers from retailers and invoiced Company A at cost plus VAT.
Disputes arose regarding the correct VAT treatment of these vouchers, particularly whether input tax on the purchase of vouchers was deductible by Company A and whether output tax was chargeable on the free supply of vouchers to customers under Article 3 of the 1993 Order. Initial correspondence with the tax authority began in 2007, with evolving positions on the application of VAT Information Sheet 12/2003 and relevant legislation.
The First-tier Tribunal (FtT) initially ruled in favor of Company A on output tax and input tax deductibility. However, the Upper Tribunal (UT) later allowed the tax authority’s appeal regarding input tax on vouchers directly supplied by retailers but dismissed appeals concerning vouchers purchased via intermediaries. Company A and the tax authority appealed further, raising issues concerning the interpretation of EU VAT directives, domestic legislation, and the application of Schedule 10A of the Value Added Tax Act 1994.
Legal Issues Presented
- Whether input VAT paid by Company A on the purchase of retailer vouchers used in promotional schemes is deductible as input tax under Article 168 of the Principal VAT Directive and domestic VAT law.
- Whether the free supply of vouchers by Company A to its customers constitutes a supply of services made for consideration and thus liable to output VAT under Article 3 of the 1993 Order.
- The proper interpretation and application of Schedule 10A of the Value Added Tax Act 1994 concerning face-value vouchers, particularly paragraph 4(2) related to retailer vouchers.
- Whether the VAT treatment under domestic law is consistent with the provisions and principles of the Principal VAT Directive and relevant CJEU case law.
- Whether a reference to the Court of Justice of the European Union (CJEU) is necessary for the interpretation of EU law in this matter.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Case C-4/94 BLP Group v Customs and Excise Commissioners [1995] STC 424 |
Input tax is deductible only if goods or services have a direct and immediate link with taxable transactions; the ultimate aim of the taxpayer is irrelevant. |
Used to reject Company A’s argument that input tax on vouchers could be linked simply because the ultimate purpose was to boost newspaper sales; the direct and immediate link test was applied strictly. |
| Case C-98/98 Midland Bank plc v Customs and Excise Commissioners [2000] STC 501 |
Input tax deductible only if expenditure is part of cost components of taxable transactions; costs incurred after output transactions may be overheads but not directly linked. |
Applied to distinguish between costs directly linked to taxable supplies and general overheads; helped clarify that voucher purchase costs might be overheads linked to taxable activities. |
| Case C-29/08 Skatteverket v AB SKF [2010] STC 419 |
Input tax deductible if costs are incorporated in prices of goods or services sold; distinction between exempt and non-taxable supplies relevant in determining link. |
Supported the analysis that the vouchers were linked to Company A’s taxable business of supplying newspapers and advertising, not to the free onward supply of vouchers. |
| Case C-126/14 Sveda UAB v Valstybine mokesciu inspekcija [2015] ECLI:EU:C:2015:712 |
Direct and immediate link requires objective assessment of whether input costs are part of taxable economic activity; free use does not necessarily break the VAT chain. |
Relied on for the proposition that expenditure on vouchers can form part of the cost of taxable activities despite the free supply of vouchers; objective economic link emphasized. |
| Case C-258/95 Julius Fillibeck Söhne GmbH & Co. KG v Finanzamt Neustadt [1998] STC 513 |
Free employee benefits (e.g., transport) generally treated as private use unless special business purpose exists. |
Used to analyze the distinction between private use and business use in the context of free supplies under Article 26 of the VAT Directive. |
| Case C-371/07 Danfoss A/S and another v Skatteministeriet [2009] STC 701 |
Provision of free meals to employees at business meetings can be for business purposes if certain conditions are met. |
Applied to illustrate the test for determining whether free supplies are for business purposes under Article 26 and the 1993 Order. |
| Case C-48/97 Kuwait Petroleum (GB) Ltd v Customs and Excise Commissioners [1999] STC 488 |
Disposal of goods free of charge is taxable even if for business purposes; distinction between goods and services provisions noted. |
Supported the interpretation that free supply of goods triggers output tax, but services have a different test under Article 26. |
| Case C-414/10 V leclair SA v Ministre du Budget [2012] STC 1281 |
Right to deduct input VAT arises only when VAT is due or paid on supplies to the taxable person. |
Supported the conclusion that direct supply of retailer vouchers at no consideration precludes input VAT deduction. |
| Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252 |
Marleasing principle allows interpretation of domestic law consistent with EU law. |
Considered in context of whether domestic provisions could be interpreted to allow input VAT deduction despite literal wording. |
| Case C-408/98 Abbey National plc v Customs and Excise Commissioners [2001] STC 297 |
Distinction between exempt supplies and supplies outside the scope of VAT relevant to input VAT deduction. |
Discussed in relation to breaking the VAT chain and the effect on input tax recovery. |
Court's Reasoning and Analysis
The court began by examining the deductibility of input VAT on the purchase of retailer vouchers by Company A under Article 168 of the Principal VAT Directive and corresponding domestic law. It applied the established "direct and immediate link" test from CJEU case law, requiring that input costs be linked either to specific taxable transactions or to the taxable economic activity as a whole (overheads).
The court acknowledged that while the vouchers were supplied free of charge to customers (a non-taxable supply), the cost of acquiring the vouchers objectively formed part of Company A's expenditure in promoting its taxable business activities (newspaper sales and advertising). This economic link justified the deduction of input VAT on vouchers purchased via intermediaries.
However, the court found that Schedule 10A paragraph 4(2) of the Value Added Tax Act 1994 treats the direct supply of retailer vouchers by retailers to Company A as made for no consideration, thus removing the supply from the scope of VAT and precluding input VAT deduction on such purchases. The court rejected Company A’s argument that this provision should be interpreted or disapplied to preserve input VAT rights under EU law, holding that the provision did not conflict with EU law principles.
Regarding output tax, the court considered Article 3 of the 1993 Order (derived from Article 26 of the VAT Directive), which imposes VAT on free supplies of services made for private use or purposes other than the business. The court held that the free supply of vouchers to customers was made for business purposes, as part of a contractual obligation under promotional schemes designed to boost newspaper circulation. Therefore, no output tax arose on these supplies.
The court rejected the tax authority's submission that a strict necessity test should apply under Article 26, requiring that free supplies be essential to the business to avoid output tax. Instead, the court adopted a purposive approach, focusing on whether the free supply fulfilled a business purpose rather than whether it was indispensable.
Finally, the court declined to refer questions to the CJEU, considering the relevant EU law principles to be clear (acte clair) and adequately addressed by existing jurisprudence.
Holding and Implications
DISMISSED
The court dismissed both appeals, concluding that:
- Input VAT on vouchers purchased directly from retailers is not deductible due to the application of Schedule 10A paragraph 4(2) of the Value Added Tax Act 1994, which treats such supplies as made for no consideration.
- Input VAT on vouchers purchased via intermediaries is deductible as these costs are linked objectively to Company A's taxable business activities.
- The free supply of vouchers to customers under the promotional schemes is made for business purposes and is not subject to output VAT under Article 3 of the 1993 Order.
The decision clarifies the application of VAT rules to promotional voucher schemes, confirming that the economic purpose and objective link to taxable activities govern input VAT deductibility, while the free supply of vouchers fulfilling business obligations does not trigger output VAT. No new precedent was established beyond the application of existing principles.