… (or a very odd view of what’s just and fair)

Peter Landon, FCA, ATII, Consultant, CW Tax Associates Ltd, Fleet House, 8–12 New Bridge Street, London EC4V 6AL, www.cwenergy.co.uk

I saw something the other day I’d been half expecting for some time.  Regular readers may recall my earlier article in issue 65 of CCH VAT NEWS about the present voucher rules in Schedule 10A of the VAT Act.  I have strong reservations about these and have written, in particular, on their application to phone cards.  The Court of Appeal ruling in IDT (R & C Commrs v IDT Card Services Ireland Ltd [2006] BVC 244) showed what a nonsense they made of what should be a fairly simple situation.  Now the tribunal decision in Prince Arachchige v Revenue & Customs Decision No. 20,698 demonstrates again what a complicated mess the rules really are – and how they can easily lead to a patently unfair result.

In IDT, which the taxpayer lost, IDT’s intent was itself perhaps, not exactly fair.  They structured what they did to arbitrage the differing tax treatments in Ireland and in the UK so that, ultimately, no VAT was paid at all.  IDT lost at the Court of Appeal but I suspect that might not have been the victory that HMRC wanted.  They still didn’t, I imagine, get any tax out of IDT (I’ll say more on this a little later.)  The Irish Revenue didn’t seem to either.  This is only just deserts, though, as neither Authority appeared to get it right, so they only had themselves to blame.

However, this present case involves the next stage in the chain of supply and is different.  The rules clearly caught a taxpayer unawares and have most probably allowed HMRC to collect tax twice-over or when not due.  That seems really unjust.  And many other taxpayers will be in much the same boat.

The situation in a nutshell

Whilst the appeal in IDT involved the issue of phone cards to wholesalers in the UK, the situation in Prince Arachchige concerned a retailer reselling cards to members of the public.

There was initially much discussion – confusion, perhaps – over who was supplying what, a fairly basic, and not uncommon, point that took up a large part of the decision.  But, whilst symptomatic of the taxpayer’s problems in understanding the position he was in, nothing really turned on this.  What seemed clear, though, was that Prince Arachchige (I’ll call him Mr A, for short), as well as not appreciating some of the niceties of his business, certainly didn’t understand the subtleties of the VAT rules on vouchers.

Briefly, Mr A had two shops in Hendon next door to each other.  One, ‘Poundworld’, sold phone cards for £3 or £5, but everything else at £1; the other ‘Poundworld Discount Store’ sold toys, toiletries and other fancy goods – but not phone cards.  For various reasons, Mr A didn’t account for VAT on the sale of the cards and was duly assessed.  He appealed and, apart from the debate over who was supplying what, the arguments advanced were:

• the cards were within the voucher rules in Schedule 10A, so their supply should be disregarded;
• even if some sales were VATable, the assessment was unsupportable as it didn’t properly distinguish sales that weren’t; and alternatively
• the sale of the cards was VAT-exempt.

The transactions

Poundworld sold the cards as a way of attracting customers to the shop.  They were generally sold for slightly less than their stated values, having been bought for about 10p or 20p below those amounts.  There was no evidence that purchasers bought them for business.

Mr A generally bought the cards each day from sellers coming to the shop first thing.  They were paid for each evening, when it was known how many had been sold.  There were usually no suppliers’ invoices.  Sales were recorded on the till and in a separate record used to fix the evening payments, a record also used to adjust the gross sales figures sent to Mr A’s accountants.  (Apparently, Mr A thought, as so little profit was made, the sales were immaterial to the information needed.)

Sales could vary daily but the VATable ones were estimated by HMRC to be around £481.

The voucher rules

Rules on vouchers have been with us since VAT was introduced in the UK in 1973.  As originally drafted, they were short and to the point:

‘Where a right to receive goods or services for an amount stated on any token, stamp or voucher is granted for a consideration, the consideration shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds that amount.’

This was part of a valuation schedule and had remained unchanged till amended in 2003, their last manifestation being, in paragraph 5 of Schedule 6 of the VAT Act 1994.

That seemed to work reasonably well until the Argos case (Argos Distributors Ltd v C & E Commrs (Case C-288/94) [1997] BVC 64) when it became clear that, in certain circumstances, when the person vouchers were issued to paid less than the stated sum, tax was only due on the amount received at issue.  Nothing wrong with that, you might say.  But to some that was a planning opportunity, so Customs thought it about time for a change.

What we now have, in the new Schedule 10A, is more complex and based on the type of voucher and who it is issued by.  The main categories are credit vouchers and retailer vouchers but what is a voucher for this purpose remains essentially the same:

‘1(1) In this Schedule “face-value voucher” means a token, stamp or voucher (whether in physical or electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it.’

Credit vouchers (Sch. 10A, para. 3)

These, in broad terms, are vouchers issued by someone other than the supplier of the goods or services against which they are to be used.  As before, the consideration for any supply is be disregarded, except to the extent (if any) that it exceeds face-value.  (All Mr A’s vouchers were sold for less.)  However, this is subject to an important proviso that, if any of those from whom goods or services are eventually obtained fail to account for any tax due, it becomes the liability of the seller of the voucher (Mr A, for example).

On the face of it, therefore, Mr A had no output tax when selling these cards but had a potentially onerous liability if the issuer failed eventually to account.  As the tribunal observed, this caused difficulty as, on the supply of the voucher, what the supplier of the telephone call will do won’t be known.

Retailer vouchers (Sch. 10A, para. 4)

These are, conversely, vouchers issued by the ultimate supplier of the goods or services.  Like the rules in Sch. 10A, para.  3, the rules also disregard the consideration on issue (except to the extent (if any) it exceeds face-value) but not on any subsequent sale, which tends to be VATable.

Although the decision discussed other types of voucher (Sch. 10A, para. 6 onwards), I don’t really need go into what the rules say – or, for that matter, to say much on the rules on the place of supply (although I will touch on these later).  Neither set of rules is especially relevant to the point I want to make.

The trouble is, Mr A didn’t really know much, if he had, he wouldn’t, I suspect, have had a clue what type of voucher he was dealing with.  Admittedly, some cards did carry a reference to VAT.  Some, for example, bore a small (1p size) disc on their face which read ‘VAT paid’.  In 2005 few bore this symbol but latterly perhaps 90 per cent did.  Others carried words on the back on the lines of:

‘VAT paid at source by the service provider under para 3(3) Sch 10A.’

which Mr A took to mean he didn’t need to account for VAT.

The nature of the card issuers’ operations, in any event, changed over time.  Prior to the 2004 High Court decision in the IDT case (see below) many had structured their cards as retailer vouchers; after that, many restructured the cards so that they would be classified as credit vouchers.  After the Court of Appeal decision in IDT, in 2005, many changed back.

There was some debate as to whether Mr A was aware that some card sales were VATable, some not.  He said he wasn’t, but the tribunal felt it likely he had just closed his mind to the question of the VAT on his telephone card sales.  Either way, can you blame him for being confused?

Invoicing

Before going further, I should just say something about invoicing as it seems crucial to understanding the real problem.

Paragraph 10 of VAT Information Sheet 12/03 provides:

‘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”.

Intermediate suppliers of face value vouchers, other than credit vouchers, must account for VAT on the sale of the vouchers at the time the vouchers are sold.  They will need to issue a full VAT invoice to any further intermediate supplier in the supply chain.  They will be entitled to reclaim input tax on the purchase of the vouchers subject to normal requirements, and the evidence for this will be the VAT invoice they receive from their supplier.’

Now, bearing in mind that para.  4(2) of Schedule 10A provides that:

anything, about these complicated rules.  And, even if  ‘The consideration for the issue of a retailer voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher.’

nothing in Part III of the VAT Regulations 1995 (or elsewhere in the law) seems to cover such notional invoices, which, in the circumstances, seem to have no legal effect.  I’ll come back to this again.

The place of supply

I said earlier that a sale of a retailer voucher by a reseller, like Mr A, will always attract VAT (assuming the place of supply is the UK).  Telecommunications, however, are one of those services supplied where received within Schedule 5 of the VAT Act (art. 9(2)(e) of the Sixth Directive or art. 56(1)(i) of the new VAT Directive 2006/112/EC), so, on the face of it:

• supplies to business customers are thus taxable and subject to the reverse-charge if received from abroad; and
• supplies to private customers, such as Mr A’s, are taxed where the supplier of the service (the telecoms provider) belongs.

But articles 17 and 18 of the VAT (Place of Supply of Services) Order 1992 (SI 1992/3121) also look to the place of effective use and enjoyment and will treat these services as supplied in the UK to the extent that this takes place here as opposed to outside the EU.

On this basis, the tribunal summarised Mr A’s supplies as VATable:

(1) to the extent the cards are credit vouchers, if:

(a) the supplier fails to account for VAT (here or elsewhere in the EU); and

(b) the supplier of the telecoms service belongs in the UK or outside the EU;

(2) to the extent the cards are retailer vouchers, if the supplier of the telecoms service belongs in the UK or outside the EU.

In either case, a non-UK but EU supplier of the service will mean the supply of the card is not VATable because it will not be a supply made in the UK.

IDT

A very brief word about IDT.

This, as you may remember, was an appeal over the treatment for VAT of prepaid phone cards issued by a company, IDT, in another member state, Ireland, to distributors in the UK.  It was primarily a dispute over jurisdiction and started as an application for judicial review aimed at preventing the UK from levying VAT on companies not parties to the appeal.  IDT won before Mr Justice Moses in the High Court – you may recall my writing on this last year – but have now had this decision reversed.

The Court of Appeal decided the place of supply for IDT was the UK.  However, although this was not spelled out, it seems clear that this only affected the supplies by IDT to the UK distributors (which were taxed on them under the reverse-charge with no real effect), not the supplies by the distributors or the supplies to the ultimate customers.

The supplies by Mr A, of course, were to private individuals.

Exemption

I can’t end without saying something about exemption.

Counsel for Mr A had argued that the sale of the cards was exempt within art.  13(B)(d)(1) of the Sixth Directive (or art. 135(1)(b) of Directive 2006/112/EC) as the granting or negotiation of credit, credit simply meaning placing funds at someone’s disposal.  It didn’t matter whether the person benefiting pays for it in advance or later.

However, the tribunal couldn’t accept either proposition.  Credit in this context meant a sum of money given to someone which must be repaid.  And what the buyer of a card actually got was the provision of a telephone service, not negotiation.

For completeness, the tribunal also looked at other indents of art.  13(B)(d), considering in particular whether the supplies were negotiable instruments.  However, this didn’t apply as a negotiable instrument meant something conferring a right to a payment of money, not to the receipt of a service.

What the tribunal didn’t seem to consider, though, was whether the card was a means of payment, exempt under the Directive as a ‘transaction concerning payments’.  Personally, I would have a lot of sympathy with that particular view, and, with the recent growth of gift and purchasing/prepayment cards of late, this might be a proposition hard to resist.  The only difference might be, I suppose, that gift and purchasing cards don’t have a face-value.  But then neither do many postage stamps, which HMRC say are also vouchers within these rules.  What price consistency?

When will they learn?

If you think about it, Mr A was always going to be on a hiding to nothing.  The voucher rules are hard to understand at the best of times and anecdotal evidence seems to show that even the more enlightened taxpayers find it hard to say whether they are looking at credit or retailer vouchers.

Even HMRC admitted that, with all their vast resources, the proper treatment of 65 per cent of cards wasn’t known.  If they, who understood the law, didn’t know, how could a small retailer like Mr A?!!

The tribunal even commented:

‘…this, it seems to us, is a serious concern about the operation of the system, but it is not one which we have any power to address.  It does not affect the question of whether or not a supply is VATable.  Whereas if a credit voucher card were redeemable by a UK company it might be reasonable to conclude as a finding of fact that VAT would be paid by it (so that paragraph 3(3) Schedule 10A did not bite), in the absence of information to the contrary, we could not, in the teeth of believable evidence as to the issuers and redeemers of the cards, conclude that the uncertainty from the retailer’s perspective meant that the cards should all be treated as credit vouchers and all within paragraph 3(2) and outside paragraph 3(3).’

But, the fact remains that the proper treatment of 65 per cent of cards wasn’t known.  Despite this, the tribunal allowed cards recorded ‘N/K’ on HMRC’s schedule to be treated as VATable (subject to some adjustment being made) and considered the assessment to have been made to the best of the Commissioners’ judgment!

Well, if that’s to the best of their judgment, there’s nothing much more to be said, is there?

Mr A didn’t stand a chance.  He had an output tax liability on his gross proceeds from the sale of what HMRC said were retailer vouchers but even less chance of knowing what were or were not than HMRC themselves.  He couldn’t even go by the few invoices he got as not every supplier issued them and none will have arguably been legally required, in any event, to issue tax invoices if they were issuers, rather than intermediate resellers, when supplying Mr A. Mr A had, I imagine, a pretty nigh-on impossible task to get all the evidence needed for an input tax deduction.

Now, bearing in mind that some relief he might get was going to be extra-statutory anyway (due to the notional invoices), why on earth couldn’t HMRC simply calculate an input tax figure by reference to his costs – and tax him on his 10 or 20p margin?  As it is they have exacted tax unfairly from Mr A and, as I said at the start, he certainly won’t be alone in suffering like this.  It’s almost as if HMRC couldn’t get tax out of IDT, so are determined to get it some other way.  What price fairness?