Associated Newspapers Ltd v HM Revenue & Customs

For input VAT deduction, the direct and immediate link between an input and taxable transactions is determined objectively. Expenditure on a free promotional benefit may be a cost component of the taxable business which that benefit objectively promotes. The free onward provision of the benefit does not itself determine the link.

A free supply of services falls within Article 26 only if it is for private or other non-business purposes. A supply made exclusively to fulfil a commercial promotional scheme need not be strictly necessary to the business in order to be business-related. However, where Value Added Tax Act 1994, Schedule 10A, paragraph 4(2) deems the direct issue of a retailer voucher to be for no consideration, no VAT is due on that issue and the purchaser has no corresponding input-tax deduction.

Associated Newspapers Ltd operated two newspaper-circulation promotions. Customers who met the conditions received retailer vouchers without making a separate payment. Under SPICE, the vouchers were bought directly from retailers. Under Mail Rewards, they were acquired through an intermediary which charged VAT.

The First-tier Tribunal held that no output tax arose on the free supplies and that input tax was deductible. The Upper Tribunal, in [2015] UKUT 641 (TCC), upheld the output-tax ruling and the deduction for intermediary supplies, but held that Schedule 10A, paragraph 4(2) prevented deduction for directly issued retailer vouchers.

HMRC appealed the output-tax and indirect-input-tax rulings. Associated Newspapers appealed the ruling on direct retailer vouchers. The central issues were the economic link required for input-tax deduction, the scope of Article 3 of the Value Added Tax (Supply of Services) Order 1993, and the effect of Schedule 10A.

1. Both appeals were dismissed. The Upper Tribunal had correctly held that VAT on vouchers acquired through the intermediary was, in principle, deductible, and that no output tax was chargeable on their free provision to customers. It had also correctly held that no input tax was deductible on retailer vouchers issued directly to Associated Newspapers.

2. Under Articles 1(2) and 168 of the Principal VAT Directive, the relevant link is assessed objectively. Inputs must have a direct and immediate link with taxable output transactions or with the taxable person’s economic activity as a whole. Applying the approach in Sveda, the vouchers were acquired as an objectively identifiable means of increasing newspaper circulation and associated advertising sales. Their cost was therefore a component of Associated Newspapers’ taxable business. The free provision of the vouchers did not sever that link merely because it was the immediate use of the vouchers.

3. Article 26, unlike the provision for goods in Article 16, treats a free supply of services as taxable only where it is for private use or, more generally, a purpose other than the business. The requirement that a supply be strictly business-related means that it must fulfil a business purpose and no other purpose. It does not impose a test of strict necessity. The vouchers were supplied under contractual promotional arrangements designed to increase sales. They were therefore supplied for business purposes and were not taxable under Article 3 of the Value Added Tax (Supply of Services) Order 1993.

4. Schedule 10A, paragraph 4(2) of the Value Added Tax Act 1994 deems the direct issue of a retailer voucher to be for no consideration. That removes the issue from VAT. The VAT ultimately accounted for on redemption is VAT on the retailer’s supply to the voucher holder, not VAT on the issue to Associated Newspapers. There was consequently no VAT due or paid on a taxable supply to Associated Newspapers for the purposes of Article 168(a). The domestic provision did not conflict with EU law and required neither conforming construction nor disapplication.

5. The existing CJEU authorities made the issues acte clair. No reference was necessary.

• Court of Appeal (Civil Division): Dismissed HMRC’s appeal on output tax and indirect voucher input tax, and dismissed Associated Newspapers’ appeal on directly issued retailer vouchers: [2017] EWCA Civ 54.
• Upper Tribunal (Tax and Chancery Chamber): Allowed HMRC’s appeal concerning input tax on directly issued retailer vouchers, but otherwise dismissed the appeals. It upheld the First-tier Tribunal’s conclusions on output tax and intermediary-supplied vouchers: [2015] UKUT 641 (TCC).
• First-tier Tribunal: Allowed Associated Newspapers’ appeal on output tax in a decision released on 24 January 2014. In a further decision released on 13 August 2015, it held that input tax on the vouchers was deductible.