HM Revenue & Customs v Debenhams Retail Plc

For VAT purposes, the decisive question is whether goods or services are supplied for consideration. The concepts of supply and consideration have autonomous European meanings and cannot be determined solely by domestic contractual analysis.

Clear words are required before an ordinary retail customer will be taken to have entered a separate contract with an associated company for card-handling services. Directing part of the price to an associate or third party does not, without more, reduce the consideration for the supplier’s goods. Where payment is made at the supplier’s insistence for services rendered for the supplier’s benefit, it remains consideration for the supplier’s supply. The full ticket price was therefore subject to VAT.

HM Revenue and Customs appealed from the judgment of Lindsay J, reported at [2004] EWHC 1540 (Ch), which had allowed Debenhams Retail plc’s appeal from the London Value Added Tax and Duties Tribunal.

Debenhams had introduced arrangements under which a subsidiary, Debenhams Card Handling Services Ltd, was said to receive 2.5% of the price paid by customers using payment cards, while Debenhams Retail supplied the goods for the remaining 97.5%. The Tribunal rejected the arrangement on contractual and supply grounds. Lindsay J reached the opposite conclusion. The appeal concerned whether the arrangements created a separate customer contract with the subsidiary and whether the supplier’s VAT consideration was 97.5% or 100% of the ticket price. An abuse argument was also considered.

1. Disposition. The appeal was allowed unanimously. Mance LJ gave the leading judgment, with Sir Peter Gibson and Mummery LJ agreeing. The Tribunal’s decision was restored.
2. Under the Value Added Tax Act 1994, construed consistently with the European directives, the critical question is whether there was a supply of goods or services for consideration. Supply and consideration have autonomous European meanings. Domestic contractual analysis is an appropriate starting point, but it is not necessarily conclusive.
3. The objective analysis had to address the generality of Debenhams’ retail transactions. The relevant material included the notices, till slips, invoices, the ordinary customer’s background knowledge and the customer’s reasonable understanding of the transaction. The wording did not make sufficiently clear that the customer was required to enter a separate contract with Debenhams Card Handling Services Ltd. It naturally described one sale by Debenhams Retail at the full ticket price, with part of that price directed to another company for card processing.
4. A supplier cannot reduce the VAT consideration for its goods merely by requiring part of the price to be paid to an associate or third party. Amounts received for or on behalf of the supplier are treated as received by it. Accordingly, on the primary contractual analysis, Debenhams Retail supplied the goods for consideration equal to 100% of the amount paid.
5. Even if a separate contract with the subsidiary had been created, the 2.5% payment would have represented consideration for Debenhams Retail’s supply. The payment was required at Debenhams Retail’s insistence and was attributed to services rendered for its benefit. Its value was the value Debenhams Retail itself placed on those services.
6. The fact that cash and card customers paid the same total price reinforced the conclusion under European VAT law. The abuse issue did not need to be decided. The court indicated that a possible two-element Community-law abuse inquiry might be relevant, but the issue was left open and the appeal was not adjourned pending the European Court’s decision in Halifax.

1. Court of Appeal (Civil Division). The appeal was allowed and the Tribunal’s decision restored.
2. Chancery Division. Lindsay J allowed Debenhams Retail plc’s appeal from the Tribunal in [2004] EWHC 1540 (Ch).
3. London Value Added Tax and Duties Tribunal. On 3 June 2003, in (2003) VAT Decision 18169, the Tribunal decided the contractual and commercial-reality issues in favour of HM Revenue and Customs.