Baxi Group Ltd v HM Revenue & Customs

For VAT purposes, the person who pays for goods is not necessarily the person to whom they are supplied. The decisive question is who receives the right to dispose of the goods as owner. Where goods pass directly from the supplier to customers, and the intermediary neither owns nor controls them, there is no supply of those goods to the intermediary.

A transaction involving goods and services must be analysed by reference to its economic and commercial reality. Separate elements should not be artificially split where they form one economically indivisible service. A loyalty scheme may therefore constitute a single marketing service, including the provision of rewards to customers, where the rewards are integral to achieving the scheme’s promotional purpose.

Baxi Group Ltd, the representative member of a VAT group, operated a boiler-installer loyalty scheme through @1 Limited. Installers earned points by installing Baxi boilers and redeemed them with @1 for goods and services. @1 bought, held and delivered the rewards, invoiced Baxi at recommended retail price, and accounted for VAT.

The VAT tribunal dismissed Baxi’s appeal, holding that the rewards were supplied to Baxi and then disposed of by Baxi to installers. Baxi appealed under section 11 of the Tribunals and Inquiries Act 1992. The central issues were whether @1 supplied the rewards to Baxi or directly to installers, and whether the scheme involved a single indivisible marketing service or multiple supplies.

1. Appeal allowed. There was no supply of the reward goods by @1 to Baxi. Under Article 5 of the Sixth Directive, the relevant issue was who obtained the right to dispose of the goods as owner. @1 owned the goods initially and the installers acquired that right directly. Baxi never possessed, selected, controlled or had power to direct or revoke the delivery of particular goods. Payment by Baxi did not alter that conclusion.
2. The domestic provisions produced the same result. Under section 5(2)(a) and Schedule 4 to the Value Added Tax Act 1994, @1 made a supply of goods directly to the installers. Baxi’s payments were consideration supplied by a third party within Article 11 of the Sixth Directive and did not create a separate supply of the goods to Baxi. There could not be concurrent supplies of the same goods by @1 to both Baxi and the installers.
3. The proper VAT analysis of mixed supplies requires attention to all the circumstances, the economic and commercial reality, the dominant purpose, any principal and ancillary elements, and whether the elements are economically dissociable. The rule against artificial splitting applies to goods, services and mixed supplies.
4. The BDS was a single indivisible service supplied by @1 to Baxi. The provision of rewards was not an economically separate supply of goods. The catalogue, points system, registration, acquisition and storage of rewards, delivery, complaints handling and marketing information together formed the mechanism by which the rewards promoted loyalty to Baxi and sales of its boilers.
5. All VAT charged by @1 under the BDS was accordingly deductible by Baxi as input tax. No apportionment was appropriate. The tribunal’s alternative conclusion under paragraph 5 of Schedule 4 was also wrong because the goods were never Baxi’s business assets and were not disposed of by Baxi.

The appeal was brought from the decision of the Manchester Tribunal Centre dated 20 January 2006, which dismissed Baxi’s appeal and held that Baxi could recover input tax but had to account for output tax on certain rewards exceeding £50. The High Court allowed Baxi’s appeal.