In July, we sent round an update on the proposals for the VAT treatment of the import and sale of natural gas.

We expect to be able to provide more information on this later in the year. However, in the meantime, it appears there may have been some misunderstanding about the implications for imports.

Some companies may be under the impression that, because all imported natural gas (including liquefied natural gas imported by tanker) will be zero-rated from 1 January 2011, this will mean there will no longer be any need to complete the C88 import declarations.

However, the proposed change will not extend that far. This is because the C88 is a form principally used for controlling the actual movement of goods into the UK from outside the EU (and vice-versa). These forms will still be required from1 January 2011 to provide this information. The only difference, therefore, is that they will no longer show any amounts due by way of VAT – i.e. there will be no longer any need to pay VAT over to HMRC on account and to reclaim it in the VAT return. This will obviously have a useful cash-flow advantage (or will get rid of the cash flow disadvantage) and will give the treatment companies have been lobbying for since the original rules were introduced.

Anyone wanting further clarification on this may contact Peter Landon or their usual CWE contact.

On 15 June, HMRC published their views on theVAT treatment of non-compliance carbon credits and services supplied by carbon offset providers.

Carbon credits fall into two categories:

• compliance market credits, which derive from the Kyoto Protocol and the EU Emissions Trading System (‘EUETS’); and
• non-compliance credits, which do not.

Examples of compliance market credits include Emission Reduction Units (ERUs), Certified Emission Reductions (CERs) and EU Allowances (EUAs).

The most common example of a non-compliance credit is the Verified Emission Reduction (VER).

The important distinction, for VAT purposes, between compliance market credits and VERs is that the former are capable of consumption of the type envisaged by the VAT system, and the latter are not. As VAT is a tax on consumption, this means that compliance market credits are potentially subject to VAT, whilst VERs are outside the scope.

Compliance market credits

Compliance market credits are recognised under statutory ‘cap and trade’ regimes. Polluting businesses which are subject to these regimes must hold, or obtain on the open market (and then ‘retire’) sufficient credits to cover their emissions. If they do not, they will suffer financial penalties. The credits are consumed to enable businesses to engage in economic activity without penalty, and to meet their Kyoto commitments.

Kyoto and the EUETS provide for exacting verification and regulatory processes, which mean that both parties to a compliance market transaction are able to attribute a subjective value to the credit units. The credits are widely traded on national and international markets.

The motive of someone paying for a credit doesn’t matter; nor does it matter what is done with it. Thus, if a private individual buys a compliance market credit, the supply to the individual is still taxable – even though the individual is not subject to any regime (because the credit is capable of consumption).

Verified Emission Reductions

A Verified Emission Reduction, on the other hand, is essentially just a promise that carbon has been, or may be, reduced somewhere in the world. There may be a general benefit to the reputation of a business (good PR/marketing/corporate responsibility) in paying for a VER, but no particular service is rendered, which can be identified as a cost component of the business. There is thus no consumption. No service is being provided to an identifiable consumer and no benefit is being provided, which is capable of forming a cost component of the activity of another person in the commercial chain.

Payment for a VER might produce a general social benefit, it might produce a specified result, or it might give rise to a legal relationship with reciprocal obligations. However, a taxable person’s income is relevant for VAT purposes only if it constitutes the consideration for a supply of goods or services to a consumer. The mere fact that something is, or may be, done in exchange for a payment is insufficient to bring such a transaction within the VAT system. The public at large cannot constitute a specific recipient of the kind which must exist in order to give rise to a transaction chargeable to VAT.

HMRC have, as yet, seen no evidence of the existence of a genuine secondary trading market in VERs.

Carbon offset services

A growing number of businesses are providing carbon offsetting services. The range of services offered varies widely, but the VAT treatment of any individual transaction will depend on the particular arrangements.

In many situations, when a member of the public makes a payment to a carbon offset provider, there is no supply for VAT purposes. This is because there is no identifiable, direct benefit being received by the member of the public in return for their money.

Examples of where VERs might be used would be where a carbon offset provider makes a commitment that funds paid across by members of the public will be used to fund overseas projects, wind farms, development of environmentally friendly energy generation projects etc. without making any supply of direct benefit to the person making the payment. The payment by the member of the public is, on this basis, outside the scope.

An illustration given by HMRC is of an airline offering its passengers the facility to offset the carbon emissions generated by their flights (perhaps via a third party carbon offset provider). Generally the passenger pays across an amount, calculated to be the cost of offsetting the resulting emissions, but receives no identifiable, direct benefit in return. There are a number of possible variants, including:

where the passenger has no choice, being obliged to pay the offsetting charge – the airline is making a single zero-rated supply of transport;
where the offsetting facility is optional, but a separate administration charge is made to the customer for providing the service , the administration charge is standard-rated, but the amount paid to offset is outside the scope; or
where the offsetting service is optional, there is no administrative charge, and the entire payment goes to offset. In this case, the whole of the payment is outside the scope.

Comment:

In other situations, a carbon offset provider might make taxable supplies of carbon credits. Supplies of compliance market credits are currently zero-rated (see our earlier e-mail of August 2009, which is reproduced in the News section of our website), or of the purchase and ‘retirement’ of compliance market credits (standard-rated), or of general advice on how an individual or a business can improve its energy efficiency (standard-rated). The zero-rating was introduced from 31 July 2009 as an attempt to combat MTIC fraud.

Businesses incurring VAT in order to offset their own carbon emissions must follow the usual rules to determine whether, and to what extent, any VAT incurred is recoverable as Input Tax.

Anyone wishing to discuss this should contact Peter Landon (landonp@cwenergy.co.uk) 020 7936 8306 or their usual CWE contact.

In February, we advised of a new EU Directive, Council Directive 2009/162/EU, which was issued in December 2009.  This heralded some important and welcome changes to the treatment of imports and supplies of natural gas and of electricity.  The Emergency Budget of 22 June 2010 provided further information in Budget Notice, BN40.

At present, gas supplied via the natural gas distribution system is treated as supplied where either a wholesale customer is established or the natural gas is consumed.  UK customers registered for VAT are required to account for VAT under a reverse-charge on the supplies of natural gas received from suppliers established abroad.  Other gas imports, though, can require the actual payment of VAT on entry into the UK, something that can bring significant cash-flow implications.

Importantly, from 1 January 2011, the rules, which also cover electricity, are to be amended so that, inter, alia:

• there will be no need to account for VAT on the import of gas via pipeline from outside the EU (EG from the UK, Dutch or Norwegian sectors of the North Sea) as these imports will now be zero-rated.  This will effectively, therefore, include wet gas and gas requiring processing onshore.
• this relief from VAT at importation is extended to all imported natural gas (including liquefied natural gas imported by tanker).
• the scope for the rules on supplies (as opposed to imports) is also extended to cover supplies in all categories of natural gas pipeline, not just pipelines accepted as part of the natural gas distribution system – but only where the pipelines are located in the EU or linked to such pipelines.

The rules will also be extended to apply to heat and cooling.

Legislation will be included the Finance Bill to be introduced after the summer recess amending VAT Act 1994, Section 9A (5) – to change the definition of “relevant goods” for the purposes of applying the reverse-charge and paragraph 3of Schedule 4.  There will be other consequent changes in due course by secondary legislation.

Comment

As observed previously, these changes will be much welcomed by industry as they will remove the uncertainty of whether VAT should or should not be paid when importing gas into the UK.  They will also avoid the potentially costly cash-flow implications of the current rules and the need to provide HMRC with financial guarantees.

Anyone wanting a copy of the new Directive or wishing to discuss anything arising from this should contact Peter Landon or their usual CWE contact.

The new coalition Government set out its stall in a robust Budget speech on 22nd June. However the oil and gas industry seem to have been exempted from the increased tax burden levied elsewhere.

Whilst it would seem that all the technical changes which should have been included in the previous Finance Act will now gradually be enacted, there are no developments on any structural changes to the North Sea regime, in particular the possible abolition of PRT, for example by way of a buyout, which has been a widely debated issue.

This note sets out details of the main measures relevant to our corporate clients operating in the Energy sector in today’s Budget announcements, and our initial comments thereon.

1. North Sea Taxation
There were no surprises with regard to North Sea taxation included in today’s Budget announcements.
The special ring fence CT rate of 30% will continue despite the planned stepped reduction in general CT rates and the reduction in the small companies CT rate, and 100% capital allowances will remain for ring fence expenditure despite the future reductions for non ring fence plant and machinery allowances.
The Government plans to continue consulting with industry on the future of the regime with the aim of “creating a stable and fair environment that encourages continuing investment and exploitation of remaining resources”.
Changes that have been previously announced but not enacted (predominantly because of the calling of the General Election) will all now be enacted, but over the next year and a half. In particular:

• the improvement to the HPHT field allowance rules will be introduced by way of secondary legislation as soon as possible over the summer, but before 29th July;
• the extension to the field allowance for redeveloped fields will all be introduced in the 2011 Finance Act with retrospective effect for development consents on or after April 22nd 2009
• the changes to extend the qualifying assets for reinvestment relief to include E & A and drilling costs will also be enacted in the 2011 Finance Act and will apply to disposals on or after March 24th 2010 (this year’s first Budget Date)
• the correction to the reinvestment allowance grouping rules will be introduced in the Finance Bill due after the summer recess, but with an effective date of April 22nd 2009, when the reinvestment relief rules were first introduced;
• amendments to the 2009 swap rules will apply from Budget Day 2011,

For further detail on these changes please see our March Budget Newsbrief in the News section on our newly redesigned website, or contact your usual CWE adviser.

Comment:
With many different views within industry as to if and how the regime needs to change, and a fear that as one of the few remaining profitable industries in the UK the Government may have seen it as a target for to raising some of their additional tax revenues, the absence of any changes will be welcomed by most.
The opportunity to consult further on the regime and the fact that the previously announced changes are all to be enacted will also be welcomed by industry.
No doubt interested parties will want to continue to lobby for changes which will be of benefit to their particular portfolio.
2. Capital Distributions
As previously announced the rules concerning the treatment of dividends received by UK companies are to be clarified. Finance Act 2009 introduced an exemption from tax for UK companies on the receipt of most forms of distributions. However, “capital” distributions were excluded from this exemption.
HMRC practice has been to treat all UK distributions as income in nature (subject to certain specific exemptions). This was arguably not correct in law and there has been considerable uncertainty since this doubt was raised as to how certain distributions should be treated.
The dividend exemption introduced in Finance Act 2009 is therefore to be amended with retrospective effect to remove the exclusion from the exemption for capital distributions.
The new law is also to include changes to make it clear that distributions made out of reserves arising from a reduction in capital (whether under the Companies Act or under corresponding overseas provisions) are not to be regarded as repayments of share capital, and therefore they will not be excluded from being treated as distributions.
Distributions which would fall to be treated as giving rise to a deemed disposal for capital gains tax, for example those arising from a redemption of shares, are also to be excluded from capital gains tax treatment where they fall within the amended dividend exemption. However the fact that an actual disposal of shares, for example as a result of a purchase of own shares, gives rise to a distribution, which would be exempt from corporation tax on income under the 2009 dividend exemption, will not prevent that distribution from being brought within the charge to capital gains tax.
These changes are effective for corporation tax purposes for distributions made on or after 1st July 2009 but are applied retrospectively in the case of distributions made out of reserves created by capital reductions whenever they occurred, with an option to elect out of this change for any distribution made before 22nd June 2010.

Comment:
The changes in Companies Act 2006 to the rules concerning reductions in share capital has lead to many more companies paying up dividends from reserves created by a reduction in capital. This in turn caused HMRC to revisit their previous practice of treating all dividends out of reserves as income in nature. These proposals remove the threat of dividends arising in these circumstances from being brought within the charge to capital gains tax. There is no indication in the Press Release that the value shifting rules will be amended to prevent capital reductions being used to strip down the value of companies prior to a sale or liquidation, where for example the substantial shareholdings exemption is not available, although this possibility has been suggested as part of the ongoing discussion on changes to the capital gains tax regime (as mentioned below).

3. Corporate Capital Gains – Simplification for groups
HMRC and HM Treasury issued a joint consultation document in February 2010 on simplifying capital gains rules for groups of companies.
There were three main areas for “simplification”
· value shifting
· capital losses after a change of company ownership and
· degrouping charges.

Further draft legislation is to be issued later in the year with a view to implementing any changes in Finance Bill 2011.

Comment:
The proposals concerning the de-grouping charge rules are potentially very significant and the draft legislation will be keenly anticipated.

4. Over and Underpayments of PRT
As announced in the previous Budget, the CT and PRT interest legislation in respect of over and under payment of tax is to be aligned with the rules relating to other taxes contained in FA 2009.
With effect from 1st April 2011 the time limit for an error or mistake claim for PRT will be changed to four years (from the current six) and exclude claims where the return followed general practice or is subject to another statutory claim. There will also be various other changes to the mechanism of the claim procedure including an exclusion for the requirement for such a claim to be as a result of a mistake in a return.

Comment:
The intention is that there will be one set of administrative provisions to align the rules for interest payable or repayable for all taxes. It will be interesting to see how these will apply to the “appropriate repayment” rules in para 17 Sch 2 OTA 1975 where there is a mechanism to cap the amount of interest on a repayment.

5. Capital Allowances
The rate of plant and machinery writing down allowances for chargeable periods ending on or after 1st April 2012 will be reduced to 18% per annum for main pool items and to 8% per annum for special rate pool items. As mentioned above the rates of allowances applicable to oil and gas ring fence activities will be unchanged.

Comment:
FA 2010 included cushion gas in gas storage fields in the list of items in the special rate pool, so the rate of writing down allowance on cushion gas will accordingly reduce from that date.

6. Asbestos victims trusts
Trusts set up before 23rd March 2010 to compensate victims of asbestos are to be exempt from Capital Gains Tax, Inheritance Tax, and Income Tax with effect from 6th April 2006.

Comment:
The fact that the Government is prepared to grant tax exemptions to such trusts is encouraging in that they hopefully recognise there is an anomaly which will encourage them to make a similar change for trusts set up for decommissioning costs.

7. Anti avoidance
There were a number of anti avoidance measures contained in the Budget. Further changes will be set out in Technical Notes to be published shortly.

8. Consortium Relief
Two changes are proposed to the consortium relief rules, to take effect when the legislation is published, in a Finance Bill to be introduced as soon as possible after the summer recess.
The first change will change the requirement that a “link company” must be a UK resident company to any company established in the EEA.
The second change introduces a further restriction on the amount that can be claimed from a consortium company to include the shareholder’s proportion of voting rights and the extent of control.

Comment:
The first of these changes brings the consortium legislation into line with the other group relief provisions and the second is an anti avoidance measure to avoid distortion in the flow of group relief.

9. Loan relationships and derivatives anti avoidance
To counter the effects of schemes reported to HMRC, further changes are to be made to extend the circumstances when the tax rules can override the accounting treatment to avoid the derecognition of loan relationship and derivative debits and credits when certain acquisitions and variations in capital interests in entities takes place.

Comment:
This is another targeted anti avoidance measure resulting from the improved flow of information received by HMRC on avoidance schemes.

10. Tax policy making: A general anti-avoidance rule
A discussion document has been issued setting out a number of proposals for improving the framework for developing legislation and implementing tax policy. As part of this review the Government is to examine whether a GAAR should be introduced as part of a new approach to the tax policy making process.

11. Worldwide Debt Cap Rules
A whole series of amendments are proposed, with effect from 1st January 2011 to the worldwide debt cap rules, as previously announced in Budget 2010.

Comment:
For UK upstream oil and gas companies the worldwide debt cap rules are unlikely to be of relevance due to the exclusion of ring fence debt from the measures. International groups or integrated groups will however still have to try and comply with the very complex rules.

12. Corporation Tax Reform
The Government intends to conduct a wide ranging review of corporation tax and will set out a detailed programme for reform in the autumn for consultation. It has stated that it believes “a broad tax base, a low rate, and a more territorial approach will improve competitiveness”. It has stated that it will establish a business forum to consult with multinational businesses on the UK’s tax competitiveness, including the long-term aims of reform of the corporate tax system.

13. International
As part of the Government’s “road map” to corporation tax reform they have acknowledged that reform of the CFC rules is a key priority for UK multinationals. The intention is to bring in new CFC rules in the 2012 Finance Act. The delay is to enable proper consideration of how to make the rules more competitive with other jurisdictions while maintaining adequate protection to the UK tax base. The intention is to however also make some improvements to the current regime in Finance Bill 2011.
Similarly there is an intention to move to a more territorial basis for the taxation of branch profits with consultation over this summer on options for retaining branch loss relief. Again the intention is to introduce any changes in the Finance Bill 2011 as part of a comprehensive package of measures dealing with non UK activities.

Comment:
The CFC rules do not typically create too many problems for the oil industry apart from where non UK assets are held in branches of third country jurisdictions. Any change to the exempt activities exemption that removed this anomaly would be welcomed. In the discussions to date on branch exemption there has been a clear divide between the financial community who have been pushing for a branch exemption against the integrated oil and gas companies which do not want to lose the relief for overseas exploration costs against non ring fence income. The Budget announcement suggests that the Government is moving more towards a hybrid system as used in some European jurisdictions under which relief for branch losses will be retained within an overall branch exemption regime with a claw-back once the particular branch becomes profitable.

Not a lot, it seems, is the short answer.

For a tax that was supposed to be simple, there are some things about VAT that it’s too easy to get wrong.  One of these is face-value vouchers.  I’ve written about these before and am coming to the conclusion that it’s taking them at face-value that’s the problem.

Unfortunately, with VAT, as with many other things, the key is often to go beyond the obvious, establish the facts of the situation and then to dot the i’s and cross the t’s.   And a dose of reality helps, too.

Taking it step-by-step

A good example of this is the recent appeal by Spa & Resort Operations Ltd – Spa & Resort Operations Ltd v the Commissioners for HMRC (MAN/06/238).  This was about the treatment of what the company termed Gift Vouchers andwhich it had used for some time as a means of promoting its business.

Spa operated a number of residential and day spas for health and beauty treatments. As part of its strategy to attract guests, it had a scheme under which these were provided automatically to guests purchasing treatment packages.  A typical voucher valid for 6 months read like this:

‘WELCOME TO PARADISE

Relax have fun and enjoy every moment of your precious life!

This £15 Gift Voucher is valid for six months.  This voucher may be deducted from your inclusive accommodation rates or used to purchase any item of your choice during your next stay with us.

Select the room of your choice – normal treatments included.

This voucher may be gifted as a present to one of your best friends to encourage them to visit your favourite Spa Resort.’

These were provided for no extra charge and it is the treatment of these vouchers with which the appeal was concerned.

To confuse things, although I don’t suggest this was deliberate, Spa used the same term, Gift Vouchers, to describe other, similar, vouchers, which it sold separately from a package and which anyone could purchase for their full face-value.  These could, like those under appeal, be applied in payment for treatments or for accommodation at its residential spas.  HMRC accepted they were face-value vouchers supplied for consideration.  Following the rules in VATA 1994, Schedule 10A, therefore, Spa only needed to account for VAT on these vouchers on their redemption.    [The same broad effect was, incidentally, achieved by the original voucher rules pre-2003, when Schedule 10A was introduced.]

What HMRC didn’t accept was Spa’s contention that the same applied to the other vouchers supplied as part of a package. And that, in a nutshell, was what the dispute was all about.

There were thus essentially two issues –

• whether the vouchers were face-value vouchers and
• whether they were supplied free of charge.

So let’s look at the voucher rules

This is not really the time or place to discuss the detailed ins and outs of Schedule 10A.  Anyway, I’ve written about this in these columns before and readers may know my feelings by now.

In broad terms, the general effect of the Schedule is that VAT is not required to be accounted for when certain types of voucher are issued, or, in some cases, sold.  Tax is often only collected on redemption, and, if this never occurs, which happens quite a lot – in only 5% of the cases with Spa, any money received escapes tax altogether.

Whilst I am not suggesting we look at the whole of the Schedule, however, there are still one or two aspects that are relevant to this appeal.

The meaning of “face value voucher”

First of all, the Schedule deals with what it refers to as face-value vouchers.  These are specifically defined in Para 1(1) to mean:

‘…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’

Leaving aside a point I’ve made several times in the past – that they generally don’t confer any such right at all – the vouchers in this case, and those that were separately sold, clearly both had a stated value at which they could be redeemed.  The Tribunal, in holding that:

‘…that each such voucher represents the right to receive goods or services to the value of the amount stated on it.’

seems to have accepted they were face-value vouchers, so that particular box was ticked – although something they said later makes one wonder, perhaps, if they had quite thought this through.

But that still doesn’t give the full answer as, on basic principles, VATA 1994 s 5(2)(a) tells us that:

‘Supply’ in this Act includes all forms of supply, but not anything done otherwise than for a consideration.’

So, were they free?

Well, there is that reference in Schedule 10A Para 2 to the effect that:

‘The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act.’

so I suppose you might think that was done and dusted.

But, if you think about it, the whole point of Spa’s appeal was to attribute part of what the customer paid to the voucher.   As I have said, a feature of the rules in Schedule 10A is that, if  the vouchers are never redeemed, which was mostly the case here, part of what Spa received would escape tax altogether.  Much of the argument, therefore, was about whether the vouchers were supplied for consideration, for which purpose Spa needed to be able to split out part of an overall price as the particular vouchers at issue here were provided to guests purchasing treatment packages.

This brought into play HMRC’s alternative case based on Schedule 10A, Para 7(6), which reads:

’Where –

(a)        a face-value voucher (other than a postage stamp) and other goods or services are supplied to the same person in a composite transaction, and

(b)        the total consideration for the supplies is no different, or not significantly different, from what it would be if the voucher were not supplied,

the supply of the voucher shall be treated as being made for no consideration’

If that applied, the result would not have been what Spa was after.

But you always have to look at the facts, the actual arrangements.  

The actual arrangements

Now, I won’t repeat all that was described in the Decision as much of it goes over the same sort of ground.  It will help, though, to bear in mind that the particular vouchers in dispute were those provided to guests purchasing treatment packages.  They were referred to on their website and in most of Spa’s publicity.  They were also mentioned in other material and notices at the spas, in reception, in the bedrooms and in some other places.  So, one way or another, guests should clearly have been aware of what was on offer – but, and this may be key, they were not told, at that point, their value – or their terms and conditions.

The same vouchers were available to both Day and Residential guests, with Day guests paying for their packages in full beforehand and residential guests paying a deposit of £95 on booking.  Correspondence confirming bookings made reference to the vouchers and, in the case of a Day guest, the wording was on the lines of:

‘You will also receive a £15 gift voucher which can be used towards a future stay at Hoar Cross Hall.’

A guest visiting the Day Spa was also provided with a welcome note containing ‘information helpful in ensuring a most relaxing and enjoyable time with us’ and, under the heading Gift Voucher, this stated:

‘Included within your visit to Eden is a non-obligatory £15 gift voucher which may be used on a residential visit to Hoar Cross Hall’

The receipt the guest was given, however, showed a single sum – the cost of the package – and contained no indication that the voucher was being purchased or that its value would be given a refund at the end of the guest’s visit, should she write to Spa to ask for it.

If we look at the position of Residential guests, on departure, they will have received an itemised invoice.  This showed the total amount debited to their account, less the deposit and the value of any vouchers redeemed (the vouchers referred to being both those purchased separately from a package (not in dispute) and those obtained for no separate charge as part of an earlier package).  To the resulting sum, Spa added a 10% gratuity.

The invoice stated that the gratuity was optional, and could be deducted should the guest not wish to pay it.  It made no such mentioned, however, of the voucher that was supplied as part of the package.  And, on the evidence, the Tribunal inferred that Spa’s staff had been instructed to make no mention of the voucher when the guest received the invoice, unless this was raised by the guest herself.

In short, how things typically proceeded was that the guest paid her account, and, in return, was given a receipt and an envelope containing her voucher.  Thus she had paid for her package in full before she received her voucher and had no opportunity to suggest that its value be deducted from the account.  Not only that, but until she received the voucher, she will have been unaware of its actual terms and conditions.

‘Our gift voucher is issued and may be used by each guest for each night of each stay (this gift voucher may not be exchanged for cash, can only be exchanged for goods or services at Hoar Cross Hall Spa Resort). The purchase of this gift voucher is not compulsory. Please hand this gift voucher to our cashier upon departure (not to be used in conjunction with any other offer)’.]

Some perspective?

To put all this in context, this voucher scheme had been operating at the time for 8 years and, during the whole of that period, some 55,000 vouchers had been issued each year.  On the documentary evidence before the Tribunal, however, only two guests had applied by letter for a refund.  Both had been paid, although in one case, payment was accompanied by a letter in which it was described as a gesture of goodwill for your niceness.

Also, as I noted earlier, less than 5% of the vouchers issued annually by Spa to its guests were ever redeemed.

In all the years the scheme had been operating, only one guest, apparently, rejected her voucher on the spot, demanding a cash refund by deducting its value from her bill.  It so happened that she was a VAT Inspector, although her visit, it appears, was a purely private one.  She was told by the duty manager at the place she visited that it was company policy to make a refund only on writing a letter requesting it.  Eventually, though, she got her way.  As the Tribunal remarked:

‘The impression of Mrs. McDonald’s behaviour I was given by Mr. Joynes, albeit that he was not involved in the incident so that his evidence was hearsay, was that her demand was forceful and vociferous, and might have been overhead by other guests. It appears to me that it was to discourage other guests from following Mrs McDonald’s example that the duty manager acted as he did.’

We were told that:

‘Despite Mrs. McDonald’s visit being a purely private one, Operations wrote to HMRC complaining about her behaviour and accusing her of having abused her position.’

So, what’s in a name?

Well, to come back to the title of this article, there seem to be categories of voucher that were mentioned.

Face-value vouchers

The vouchers the Schedule deals with what are face-value vouchers.  I’ve said already what that that means.  The vouchers in dispute in this case, like those that were sold on their own, clearly had a value stated on them at which they could be redeemed, so that particular box was ticked.

However, leaving aside a point I’ve made before that they generally don’t confer the necessary right to receive goods or services implicit in the Statutory definition, it is interesting, is it not, that the Tribunal later decided that, having found that vouchers were supplied for no consideration, it seemed naturally to follow that they must also find that they were discount vouchers.  So what the vouchers here really, conferred was the right to a reduction in the price.

Gift vouchers

The vouchers were also, you will recall, described as gift vouchers.  Now this is not a term of art.  It’s not part of the law and just amounts to a matter of common usage.  It merely denotes the fact that people tend to use them as gifts in lieu of going out and buying someone a more tangible present.  In fact, this could well be how many of the guests saw them – gifts from Spa that they were free to use on future occasions.  As the Tribunal pointed out, somewhat confusingly, Spa described both types of voucher they used as gift vouchers – a fact which in itself, the Tribunal said, might have mislead those reading the information provided.

Discount vouchers

What HMRC contended, and what was ultimately accepted by the Tribunal was that, in reality, what the vouchers were was discount vouchers, simply conferring a right to a discount on the price of a future stay at one of Spa’s operations. Indeed, if you look back at the wording of a typical voucher I showed you earlier, it actually said that the voucher could be:

‘ …. deducted from your inclusive accommodation rates or used to purchase any item of your choice.’

So you pay your money (or not, as the case may be) and take your choice.  

At the end of the day, though…

In the end, Spa lost because the Tribunal said the vouchers were not supplied for a consideration and I can’t say I’m entirely puzzled by this.  They declined, though, to address the question of whether vouchers were supplied as part of composite transactions falling outside paragraph 7(6) of Schedule 10A to the 1994 Act, and thus for no consideration.

Of course, it may just be that people sometimes see an apparent opportunity that’s open to be taken.  If the law is less than clear in the first place, as happens with the rules on vouchers, who can blame them?   I make no judgment about how this case might go on appeal.  I have ceased to be surprised at how things may turn out and there are enough potential points in dispute to allow this case to run … and run.

You can, of course, understand how the Tribunal came to its decision.  When all said and done, it was in Spa’s interest that the vouchers should not be redeemed and it wasn’t exactly made easy for a guest to refuse payment for the voucher or to obtain a refund. But the possibility of a refund was there, albeit that the terms and conditions said the vouchers weren’t exchangeable for cash.  Who can say how the matter might go on appeal?   But there are still some inconsistencies here, are there not and it will be interesting to see what, if anything is made of these at a later stage.

One thing I would say, is that I feel the days of Schedule 10A and our voucher rules must, realistically, be numbered.  For something that was meant to clarify things, they seem to have just made the situation even more complicated.