Debenhams Retail Plc v Customs & Excise

For VAT purposes, genuine contractual arrangements cannot be disregarded merely because they were introduced to mitigate tax or involve steps which were commercially unnecessary. The domestic contractual position is the starting point. It may be displaced only where the evidence shows that the apparent arrangements do not reflect the real transaction. Where a retailer clearly informs customers that card use requires a separate card-handling service and obtains their agreement, separate contracts may arise for the goods and the card-handling service. The service may be supplied to the customer even though it is performed through the retailer’s agent and chiefly enables the card payment to be accepted.

Debenhams Retail plc appealed against a London Tribunal Centre decision dismissing its appeal against a VAT assessment of £644,382 and interest. Under the PITA plan, customers paying with specified cards entered into arrangements under which 97.5% of the ticket price was payable to Debenhams Retail and 2.5% to its associated company, Debenhams Card Handling Services Ltd, for card-handling services.

The central issues were whether the arrangements created one contract or two, whether DCHS supplied services to customers, and whether the arrangements had to be disregarded as artificial, a sham, tax avoidance or an abuse of rights. The court also considered, but did not determine, the ancillary-supply issue.

1. Appeal allowed. The Tribunal erred in law in treating the arrangements as a single sale by Debenhams Retail at the full ticket price.
2. The notices displayed in the stores, together with the signed till slip, sufficiently informed customers that use of specified cards required card processing by DCHS for a fee of 2.5% of the ticket price. The notices were capable of forming part of the contractual arrangements. The reasoning in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 concerned particularly onerous or unusual conditions and had been wrongly applied by the Tribunal. The court preferred the more flexible approach of Bingham LJ.
3. A retail contract was not formed until the till operator pressed the acceptance button after verifying the card. The means of payment was an inseverable part of the offer and acceptance. By that stage the customer had signed the till slip, so the signed terms could affect the contracts. Two contracts were thereby formed: one between the customer and Debenhams Retail for the goods at 97.5% of the ticket price, and one between the customer and DCHS for card-handling services at 2.5%.
4. DCHS supplied a service to the customer. It procured the acceptability of the customer’s card and thereby enabled the customer to use the chosen means of payment. The fact that DCHS used Debenhams Retail’s employees as agents, supplied services only to its customers, or could have operated more widely did not negate the supply.
5. The contractual position was the starting point for VAT analysis. It could be displaced only if the totality of the evidence showed that the apparent contracts did not reflect the real transaction. No such conclusion was justified. The tax-mitigation purpose, the connection between the companies, the insertion of DCHS, and the absence of commercial necessity did not establish artificiality or require the contracts to be ignored.
6. The authorities on abuse of rights, including Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas Case C-110/99, did not assist the Commissioners. The plan did not frustrate a wider Community objective and there was no sufficient basis for treating the arrangements as abusive. The ancillary-supply argument was held over and was not decided.
7. Subject to that reserved issue, the assessment had to be adjusted so that, on a £100 ticket price, the taxable supply of goods was £97.50, comprising £82.98 for the goods and £14.52 VAT.

• London Tribunal Centre: dismissed Debenhams Retail plc’s appeal against the VAT assessment.
• High Court (Chancery Division): allowed the appeal, holding that the Tribunal had erred in law. The ancillary-supply issue was held over.