CW Energy LLP

What’s in a name?

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:


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.

[Reverting to the wording of the voucher set out above, in somewhat smaller print, it also stated:

‘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.