Baxi Group Ltd. v Revenue and Customs

For input-tax purposes, the court must identify the payment and ask whether the taxpayer obtained goods, services, or a right to have goods or services provided to a third party in return, and whether the benefit was used for its taxable business. A loyalty-scheme operator’s provision of reward goods to customers may therefore be a service supplied to the sponsoring business where it discharges the business’s own obligation to those customers. The fact that the business never possesses the goods does not prevent that analysis. Where reward provision is integral to the marketing scheme, the whole payment may be consideration for redemption services. The court left open whether the transaction involved one or two taxable supplies.

Baxi operated a customer loyalty scheme under which installers earned points when purchasing Baxi products and exchanged them for goods supplied by an independent operator, @1. Baxi claimed repayment of input VAT charged by @1 on the reward goods and related services.

The VAT and Duties Tribunal dismissed the claim, although it treated the goods as supplied to Baxi and required Baxi to account for output VAT on onward supplies. Lindsay J, on appeal, allowed Baxi’s appeal, holding that @1 supplied no goods to Baxi and that the arrangement constituted one indivisible supply of advertising and marketing services: [2006] EWHC 3353 (Ch). HMRC appealed. The central issue was whether the payments made by Baxi were consideration for services supplied to Baxi or third-party consideration for goods supplied to installers.

Disposition. The Commissioners’ appeal was dismissed unanimously. Sir John Chadwick gave the judgment, with Tuckey LJ and Maurice Kay LJ agreeing.

1. Under Article 17.2(a) of the Sixth Council Directive of 17 May 1977, reflected in sections 25(2) and 26 of the Value Added Tax Act 1994, the input-tax question requires identification of the taxpayer’s payment and consideration of whether the taxpayer obtained a business benefit in return. That benefit may consist of a right to have goods delivered or services rendered to a third party.
2. The reasoning in Customs and Excise Commissioners v Redrow Group plc [1999] UKHL 4 and Commissioners for HM Revenue and Customs v Loyalty Management UK Ltd [2007] EWCA Civ 965 permitted a supplier to make supplies to different persons in the same transaction. A supply to scheme participants did not prevent a separate service being supplied to the sponsoring business.
3. Installers acquired rights against Baxi to obtain reward goods on redemption of points. @1 had agreed with Baxi to provide those goods. By paying the full invoiced amount, Baxi obtained the discharge of its own obligation to the installers. @1 therefore supplied redemption services to Baxi. The provision of the goods was integral to the advertising and marketing services and was not economically dissociable from them. The whole payment could consequently be treated as consideration for services supplied to Baxi.
4. The argument that the payment could not support both a service supplied to Baxi and a supply of goods to installers was rejected. It was unnecessary to decide whether there was one taxable supply because no consideration was given for the reward goods, or two taxable supplies made for the same consideration. The court also left open whether the Commissioners were correct to account for VAT only on the consideration actually received by the supplier.

• Court of Appeal (Civil Division). The Commissioners’ appeal was dismissed: [2007] EWCA Civ 1378.
• High Court, Chancery Division. Lindsay J allowed Baxi’s appeal from the Tribunal and held that the arrangement was one indivisible supply of advertising and marketing services: [2006] EWHC 3353 (Ch).
• VAT and Duties Tribunal. The Tribunal dismissed Baxi’s appeal from the Commissioners’ refusal of the repayment claim: [2006] UKVAT V19431.