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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Smart Voucher Ltd v Revenue & Customs [2009] UKFTT 169 (TC) (15 July 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00131.html Cite as: [2009] UKFTT 169 (TC)

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[2009] UKFTT 169 (TC)

Smart Voucher Ltd v Her Majesty's Revenue & Customs [2009] UKFTT 169 (TC) (15 July 2009)
VAT - SUPPLY
Place of

TC00131

Appeal number LON/2008/2058

VAT – Ukash scheme – place of supply of services – para 7C, Sch 5 VATA – electronically supplied services – nature of supply – supplied where received

FIRST-TIER TRIBUNAL

TAX

SMART VOUCHER LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL: ROGER BERNER (Judge)

TYM MARSH (Member)

Sitting in public in London on 29 June 2009

Richard Barlow, Counsel, instructed by Lewis Golden & Co, for the Appellant

Richard Smith, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

1. Smart Voucher Limited ("the Appellant") appeals against assessments for the periods 1 January 2008 to 31 March 2008 and 1 April 2008 to 30 June 2008. Its grounds of appeal, which are identical in each case, clearly encapsulate the issue before the Tribunal:

The assessment is based on the respondent's contention that the relevant supplies are taxable because they are supplies of services and the appellant belongs in the UK and therefore that section 7(10)(a) of the VAT Act 1994 applies to determine the place of supply. The appellant agrees that it belongs in the UK but contends that the relevant services provided by it fall within paragraph 7C of Schedule 5 to the VAT Act 1994 as "electronically supplied services" and are accordingly supplied where they are received and are not taxable in the UK.

2. The parties agreed before us that we should decide this appeal in principle only. The quantum of the assessments was not in issue.
3. Richard Barlow of Counsel appeared for the Appellant and Richard Smith of Counsel appeared for the Respondents. There was an agreed bundle of documents and each counsel helpfully provided us with skeleton arguments and authorities.

The Facts

4. There was no dispute on the facts. The parties produced an agreed statement of facts. We derive the following summary from that agreed statement and from the documents in evidence before us.

(1) The Appellant is a UK company carrying on business in the UK as an issuer of electronic money (e-money). It is registered with and regulated by the Financial Services Authority as an electronic money institution (ELMI).

(2) Electronic money is defined by Article 3 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as follows:

"electronic money" means monetary value, as represented by a claim on the issuer, which is-

(a) stored on an electronic device;

(b) issued on receipt of funds; and

(c) accepted as a means of payment by persons other than the issuer

(3) The electronic money system operated by the Appellant is distinguished by the name "Ukash". The system can only be received electronically and is set around a patented system of process and technology. The following abstract for requested patent no GB2364816 describes the system in technical terms:

The invention concerns an electronic processor for use in processing cash transactions comprising an electronic processor and a database. The processor has: 1) an interface for receiving a request from a member using the system for generating a coded number representing a desired cash value to be purchased at a remote terminal, for receiving a request that a number previously allocated may be redeemed, for transmitting to the remote terminal a generated number and for transmitting a message to a terminal indicating that a received request for redemption is valid; 2) a validation section for determining whether or not received requests are valid; 3) a number generation section for generating a coded number in response to a valid request; and 4) a storage section for storing each number generated in response to a valid request in a first table of the database and for storing the total value of cash represented by issued coded numbers which have not been redeemed in a Fund table and for transferring a coded number the redemption of which is validated to a second table and decrementing the total value in the Fund table by the value represented by each coded number for which a validated redemption request is received so that every coded number issued can never cause more than one increase in the value represented in the fund table and every coded number redeemed can cause only one decrease in the stored value

(4) The Appellant's aim in providing the service of Ukash is to "digitise cash".

(5) At the material time the Appellant issued electronic money in three ways: through particular merchants who branded the product as their own; to provide a form of pre-payment for credit and debit cards; and as Ukash, which could be purchased by members of the public from participating retailers. It is Ukash with which we are concerned in this appeal.

(6) The target market for Ukash is consumers who do not possess a credit or debit card or those who, for whatever reason, do not wish to use their credit or debit card to make online purchases. A particular target market is those under the age of 18.

(7) The Appellant enters into a contract with an issuing merchant network provider that can provide access to individual retail stores. It does not contract directly with the individual stores. Retailers belonging to a particular network (Paypoint, e-Pay or Payzone (Alphyra)) are then able to offer the Ukash facility. A consumer wishing to purchase Ukash will pay the retailer a sum of money and receive a piece of paper (described as a "voucher", but nothing turns on that in this appeal) on which there is set out a unique 19 digit number.

(8) The issuing network contracts separately with each retailer that issues Ukash and collects the takings, consolidates them, and pays the Appellant net of the issuing commission. The issuing network connects and integrates directly with the Appellant's system. The unique 19 digit numbers are issued electronically in real-time.

(9) There is no contractual relationship between the Appellant and the ultimate consumer who purchases Ukash. A consumer who has a problem may return to the retailer, but the Appellant also provides a customer support centre (Help Line) and other methods whereby the consumer may contact the Appellant directly. If a refund is due the Appellant provides it, either directly or through the retailer and issuing network.

(10) The acquisition by the consumer of the 19 digit number is one side of the equation. The other is redemption. The Ukash "voucher" expires after one year, but is usually redeemed within two hours of purchase.

(11) The appellant has contracted with merchants both in and outside the UK. This is done both directly and indirectly, in the latter case through payment service providers (PSPs). By virtue of these arrangements those merchants will accept Ukash as online payment for their products and services. In order to achieve this the merchants must first integrate their own websites with the Appellant's system. This is achieved through a bespoke software system reliant upon an application programming interface (API).

(12) A consumer having purchased Ukash and wishing to use it to buy a product or service from a participating merchant's website will input the 19 digit number when prompted on-screen by the merchant's website to do so. The 19 digit number cannot be verified without the API, which automatically checks the validity of the number and undertakes foreign exchange conversion and other requisite tasks. The transaction can only be completed if there is internet connectivity, as all validation and other automatic tasks take place in a real time electronic environment and cannot be undertaken manually.

(13) The Appellant settles monies owed to merchants or PSPs for all Ukash spent on merchants' websites, less the Appellant's commission. The sale and purchase relationship is between the merchant and the consumer; the consumer is the customer of the merchant and not of the Appellant. Ukash is simply the payment method used for the transaction. Because the merchant or PSP is integrated into the Appellant's system the online spend is confirmed and processed electronically at the very time the purchase is made. Once payment by Ukash has been accepted all queries in relation to a transaction are a matter for the merchant and its customer. The customer will only have grounds to contact the Appellant if there is a problem with Ukash itself.

(14) We were provided with copies of sample contracts between the Appellant and merchants. In each case these are comprised by a Merchant Agreement and a Service Level Agreement. We set out the relevant sections below:

Merchant Agreement

3. Merchant offers goods and services to its customers via its website … and wishes to integrate the Ukash payment service as a means of payment for goods and services to its customers. Ukash wishes to make its payment services available to Merchant for this purpose.

4. The Ukash payment service consists of an electronic voucher issuing and redemption system whereby customers can purchase Ukash vouchers via the Ukash issuing network (including via a Merchant point of sale device) or online via a Merchant or Ukash website, for defined values, and redeem Ukash vouchers on Merchant websites …

5. Ukash will process payment amounts due to Merchant and effect settlement to Merchant as set out below. Ukash will keep all monies received from voucher redemptions on behalf of Merchant separately from the assets of Ukash. Ukash will provide Merchant with on-line reporting of all monies processed by Ukash on behalf of Merchant.

SPECIAL TERMS – FEES

No.	SERVICE ELEMENT	TRANSACTION FEES
1	Ukash Merchant Service Charge (MSC) transaction fee	UKASH MSC 6.00% of Ukash transaction value (minimum amount payable £250 per month. This will be waived for the first three months from the live date)
2	Ukash integration fee – this fee will be waived if integration is complete and the Full Service Date has been achieved within 60 days from the date hereof.	£2,000.00 ex. VAT
3	Monthly account administration fee	£25.00
4	Bank wire charges to Merchant bank account	£5.00 (UK), £ as incurred (Int.) per wire

SPECIAL TERMS – PAYMENT TERMS

Terms for Voucher Settlement

1. Vouchers Redeemed at Merchant for goods and services will be settled between the parties weekly, 4 weeks in arrears. Vouchers issued by Merchant and the monies collected by Ukash will be settled between the parties in the same time period.

2. Reconciliation of amounts due as between Ukash and Merchant pursuant to Point 1 above will be made daily and the net balance due will be paid by the relevant payer to the payee monthly in arrears in each case.

Terms for Payment by Merchant to Ukash

1. Payment to Ukash in respect of Transaction fees will be made by way of deduction at the time of settlement in respect of such Transactions in accordance with the section headed "Terms for Voucher Settlement". Payment in respect of all other fees shall in each case to [sic] be made within 1 calendar month of date of invoice by electronic transfer to Ukash's nominated account. …

Service Level Agreement

SCHEDULE A – SERVICES TO BE PROVIDED BY UKASH TO MERCHANT

1. Provision of a messaging interface to Ukash to provide Ukash Voucher Issuance and Redemption services.

2. Provision of a messaging interface from the Merchant website to Ukash to provide Ukash Voucher Issuance and Redemption services to customers accessing the Merchant website.

3. Access to reports showing Ukash Voucher usage (ie Ukash Vouchers issued from Merchant POS Terminals and Ukash Vouchers redeemed by Merchant) via Ukash secure extranet.

4. Provision of a Help Desk to support the Merchant Customer Service Desk.

(15) All elements of the Ukash system function electronically including the provision of reports which are neither sent physically nor by e-mail. The only elements referred to in the Merchant Agreement and the Service Level Agreement that require human intervention are the Help Desk and the accounting function for four-weekly settlement.

The Law

5. Section 7(10) of the Value Added Tax Act 1994 ("VATA") contains the basic rule that the place of supply of services is the UK if the supplier belongs in the UK. That rule can, however, be varied by Treasury Order made under s 7(11). One such Order is the Value Added Tax (Place of Supply of Services) Order 1992 (S.I. 1992/3121), article 16 of which (Services supplied where received) provides:

Where a supply consists of any services of a description specified in any of paragraphs 1 to 8 of Schedule 5 to the Act, and the recipient of that supply—

(a)     belongs in a country, other than the Isle of Man, which is not a member State; or

(b)     is a person who belongs in a member State, but in a country other than that in which the supplier belongs, and who—

(i)     receives the supply for the purpose of a business carried on by him; and

(ii)     is not treated as having himself supplied the services by virtue of section 8 of the Act,

it shall be treated as made where the recipient belongs.

6. Schedule 5, VATA sets out a list of services treated as supplied where received. Of relevance to this appeal is para 7C which provides for the inclusion of "electronically supplied services" as follows:

Electronically supplied services, for example—

(a)     website supply, web-hosting and distance maintenance of programmes and equipment;

(b)     the supply of software and the updating of software;

(c)     the supply of images, text and information, and the making available of databases;

(d)     the supply of music, films and games (including games of chance and gambling games);

(e)     the supply of political, cultural, artistic, sporting, scientific and entertainment broadcasts (including broadcasts of events);

(f)     the supply of distance teaching.

But where the supplier of a service and his customer communicate via electronic mail, this shall not of itself mean that the service performed is an electronically supplied service.

7. Paragraph 7C was inserted into Sch 5 with effect for services performed after 30 June 2003 as a consequence of the temporary amendment of Article 9 of the VAT Sixth Directive (77/388/eec) by Council Directive 2002/38 for three years beginning 1 July 2003. From 1 January 2007 that part of Article 9, as amended, was replaced by Article 56(1)(k) of the Common System of VAT Directive (2006/112/EC). Article 56(1)(k) (which the parties agree did not alter the law in force prior to its adoption) specifies:

electronically supplied services such as those referred to in Annex II

The relevant wording of article 9 of the Sixth Directive was:

electronically supplied services, inter alia, those described in Annex L

8. Annex II to the Common System of VAT Directive is headed "Indicative List" and sets out the following:

(1)     Website supply, web-hosting, distance maintenance of programmes and equipment;

(2)     supply of software and updating thereof;

(3)     supply of images, text and information and making available of databases;

(4)     supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events;

(5) supply of distance teaching.

Annex L of the Sixth Directive contains a virtually identical list, but is headed "Illustrative List".

9. Article 11 of Council Regulation (EC) No. 1777/2005, which is directly applicable, makes further provision regarding "electronically supplied services". References in the regulation are to the Sixth Directive, but also cross-refer to the relevant paragraphs in the Common System of VAT Directive:

1. 'Electronically supplied services' as referred to in the 12th indent of Article 9(2)(e) of Directive 77/388/EEC and in Annex L to Directive 77/388/EEC shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and in the absence of information technology is impossible to ensure.

2. The following services, in particular, shall, where delivered over the Internet or an electronic network, be covered by paragraph 1:

(a)     the supply of digitised products generally, including software and changes to or upgrades of software;

(b)     services providing or supporting a business or personal presence on an electronic network such as a website or a webpage;

(c)     services automatically generated from a computer via the Internet or an electronic network, in response to specific data input by the recipient;

(d)     the transfer for consideration of the right to put goods or services up for sale on an Internet site operating as an online market on which potential buyers make their bids by an automated procedure and on which the parties are notified of a sale by electronic mail automatically generated from a computer;

(e)     Internet Service Packages (ISP) of information in which the telecommunications component forms an ancillary and subordinate part (ie packages going beyond mere Internet access and including other elements such as content pages giving access to news, weather or travel reports; playgrounds; website hosting; access to online debates etc.);

(f)     the services listed in Annex I.

ANNEX I

Article 11

1. Item 1 of Annex L to Directive 77/388/EEC—

(a)     Website hosting and webpage hosting

(b)     Automated, online and distance maintenance of programmes

(c)     Remote systems administration

(d)     Online data warehousing where specific data is stored and retrieved electronically

(e)     Online supply of on-demand disc space.

2. Item 2 of Annex L to Directive 77/388/EEC—

(a)     Accessing or downloading software (including procurement/accountancy programmes and anti-virus software) plus updates

(b)     Software to block banner adverts showing, otherwise known as Bannerblockers

(c)     Download drivers, such as software that interfaces computers with peripheral equipment (such as printers)

(d)     Online automated installation of filters on websites

(e)     Online automated installation of firewalls.

3. Item 3 of Annex L to Directive 77/388/EEC—

(a)     Accessing or downloading desktop themes

(b)     Accessing or downloading photographic or pictorial images or screensavers

(c)     The digitised content of books and other electronic publications

(d)     Subscription to online newspapers and journals

(e)     Weblogs and website statistics

(f)     Online news, traffic information and weather reports

(g)     Online information generated automatically by software from specific data input by the customer, such as legal and financial data, (in particular such data as continually updated stock market data, in real time)

(h)     The provision of advertising space including banner ads on a website/web page

(i)     Use of search engines and Internet directories.

4. Item 4 of Annex L to Directive 77/388/EEC

(a)     Accessing or downloading of music on to computers and mobile phones

(b)     Accessing or downloading of jingles, excerpts, ringtones, or other sounds

(c)     Accessing or downloading of films

(d)     Downloading of music on to computers and mobile phones

(e)     Accessing automated online games which are dependent on the Internet, or other similar electronic networks, where players are geographically remote from one another.

5. Item 5 of Annex L to Directive 77/388/EEC

(a)     Automated distance teaching dependent on the Internet or similar electronic network to function and the supply of which requires limited or no human intervention, including virtual classrooms, except where the Internet or similar electronic network is used as a tool simply for communication between the teacher and student

(b)     Workbooks completed by pupils online and marked automatically, without human intervention.

Discussion

10. Each of the parties argued the case on the basis that the Appellant made a single supply of services. Accordingly, we have approached our decision in that way.
11. Absent the Respondent's argument as to the true nature of the Appellant's supply, which we consider below, we would have no hesitation in deciding that the services supplied by the Appellant which are the subject of this appeal do constitute "electronically supplied services". Mr Smith, for the Respondents, did not seriously challenge that proposition. His analysis of the proper interpretation of para 7C (guided by the interpretation of Article 56(1)(k) of the Common System of VAT Directive), put very briefly that the key feature that needs to be present is a digitised product, follows from his argument on the nature of the supply, but cannot affect our conclusion that, if the nature of the supply argument fails, the core services supplied by the Appellant were supplied electronically.
12. The essence of the Ukash system, on the agreed facts, is that the services that the Appellant supplies to the merchants are supplied only through electronic means. (It was not argued that the Appellant made supplies of services to any person other than the merchants, and we find that it did not.) The system operates online, is automatic, and performs its functions in real time. The Tribunal had no difficulty in concluding that this is an electronically supplied service.
13. This conclusion is not affected by those elements of the operation that do involve human intervention. On the facts before us these matters are confined to the Help Desk and the accounting function through which cash settlement is made by the Appellant to the merchants. Mr Smith argued that these services (as opposed to the verification service) could not be digitised and that accordingly the supply overall was not electronically supplied. We agree that those particular elements of the service were not themselves supplied electronically, but we do not agree that this affects the classification of the overall supply. We accept Mr Barlow's submission that these elements were purely ancillary to core verification service and do not therefore affect the characterisation of the main supply as an electronically supplied service.

Nature of the Supply

14. We turn to what we consider to be Mr Smith's principal argument. He says that the Tribunal should first focus on the real nature of the supply being made by the Appellant to the merchants. The verification of the 19 digit code number when a consumer seeks to make a purchase from the merchant's website, he submits, focuses only on one part of the service the Appellant supplies to the merchants and does not properly identify it. The objective nature of the supply has to be looked at in the round.
15. Apart from those parts of the service which involve human intervention (the Help Desk and the accounting function), which we have found to be ancillary and not therefore affecting the characterisation of the main supply, Mr Smith identifies the supply as firstly, that of setting up and running the Ukash scheme, and secondly, that of bringing to the merchants a new market of consumers who might not otherwise make, or be able to make, purchases online. This, he agues, is a supply of a commercial advantage that is of benefit to the merchants. This alone explains why the merchants are prepared to cede the 6% transaction fee, and pay a minimum fee of £250 per month even if sales in that month would result in a lower charge, along with the monthly administration fee. Mr Smith submits that, on this analysis of the Appellant's supply, it is not supplied electronically and accordingly is not an electronically supplied service.
16. In support of his proposition Mr Smith relied upon Customs & Excise Commissioners v Diners Club Ltd and another [1989] STC 407, and Customs & Excise Commissioners v High Street Vouchers Ltd [1990] STC 575. In Diners Club the two taxpayer companies concerned, Diners Club Ltd ("Diners") and Cardholder Services Ltd ("CSL"), operated credit card schemes. In each case Diners and CSL agreed to buy, at a discount, accounts and debts created by use of their cards. The Commissioners claimed that Diners and CSL were making supplies of the benefit of their credit card operations to the retailers, and that those supplies were exempt supplies. The card companies argued that the retailers were making supplies to the card companies and that the payments made by the card companies were merely consideration for those supplies. In the Court of Appeal, dismissing the companies' appeals from the judgment of Kennedy J in the High Court, it was held that even if there was an assignment of the credit card debts from the retailers to the card companies that did not mean that there was not also a supply for VAT purposes by the card companies. Where a purchaser provided services in addition to making payment there was not necessarily only a single supply by the vendor. In such circumstances the precise position had to be resolved by examining the whole transaction. On this basis the Court of Appeal determined in Diners Club that the making of the payment by the card companies to the retailer was itself a supply of services by the card companies the consideration for which was the discount.
17. Mr Smith relied in particular on the following passages from the judgments, first of Woolf LJ and secondly of Dillon LJ:

" … it is clear that Diners and CSL undoubtedly do make supplies. They set up and operate their respective credit card operations. They provide a means by which the retailer can increase his business by holding himself out as being prepared to accept the credit cards of either Diners or CSL. They ensure that the retailer will receive payment, apart from in those exceptional cases referred to in the contracts. If Diners or CSL had charged the retailers an annual fee to become authorised retailers of the respective schemes, in my view it would be clear beyond doubt that Diners and CSL were making supplies of services within the meaning of s 3(2)(b) and that those services were for a consideration, namely, the annual fee. Does it make any difference that no annual fee is in fact charged? In my view, it does make a difference because of the impact of s 4(3) which defines the time of supply as when the service is performed, since there can be no relevant supply unless it is for a consideration. Because of this the operation of the schemes in general by the taxpayer companies can only be regarded as the background against which a supply which can be relied on by the commissioners takes place. This supply is the making of the payments to the retailer pursuant to the contractual obligation to make that payment placed on Diners and CSL by their respective contracts with the retailer. Viewing that payment in accordance with the approach indicated by Ralph Gibson J, it is not a payment merely for a supply simplicitur by the retailer which would not also constitute a supply by the card company. The entire transaction when objectively determined demonstrates that the payment is also the supply of a service to the retailer by Diners and CSL.

Is it, then, a service which is supplied for a consideration? The answer is 'Yes'. If you seek to ascertain, from an examination of the terms of the entire transaction, why there is the provision for a discount (that is to ask what this consideration is for?) the answer which the entire transaction provides is that it is for the benefits which the scheme operated by the credit card company confers on the retailer, which include the service of providing the payment which is assured by the credit card company." (per Woolf LJ at p417)

"What happened is clearly shown, in CSL's case, by the terms of CSL's Beefeater scheme established with Whitbread. There was an agreement between CSL and Whitbread under which CSL agreed to issue charge cards in an agreed form to cardholders, to renew those cards, and to operate the scheme (ie a charge card scheme for Whitbread) in an efficient and businesslike manner at the expense, except as otherwise provided, of CSL and make the appropriate discounted payments to scheme members. Each authorised establishment had to become a scheme member and execute an accession agreement accepting the terms of the master agreement. In those circumstances there was, in my judgment, a supply of services by CSL in setting up and running the scheme and making discounted payments to the scheme members and it was a supply to all the scheme members as well as to Whitbread. The value for value added tax purposes of the service supplied to the authorised establishments as scheme members is properly to be taken, in my judgment, as the amount of the discounts earned by CSL from operating the scheme with those scheme members." (per Dillon LJ at p419)

18. Mr Smith argues that the Ukash scheme operated by the Appellant is analogous to that operated by a credit card company, save that the consumer pays for the Ukash voucher in advance, rather than paying a bill in arrears as with a credit card. He suggests that the position is indeed clearer than that described by Woolf LJ in Diners Club as, he says, the Appellant charges a monthly fee, so there is no question of there being no consideration for the operation of the scheme as described by Woolf LJ. In any event, Dillon LJ held that the proper legal analysis was that there was a supply of services by the card companies in setting up and running the scheme and making discounted payments to the scheme members.
19. Mr Barlow argued that Diners Club was not relevant to this appeal. In contrast to Diners Club there was in this case no tripartite arrangement. There was no contract between the Appellant and the consumers, and the nature of the supply should be determined by what was agreed between the Appellant and the merchants.
20. We are not persuaded by Mr Smith's arguments. We do not consider that Diners Club is authority for the proposition that he seeks to advance in the circumstances of this case. In Diners Club the question before the court was whether there was any supply by the card companies to the retailers. Taking the entire transaction into account, the court essentially held that something of value was obtained by the retailers, for which they were prepared to pay in the form of the discount. This case is far removed from the circumstances in Diners Club. In this case it is not in dispute that there is a supply of services by the Appellant to the merchants, and it is for the Tribunal to determine, on the basis of the evidence and taking into account the entire transaction, the true nature of the supply. We do not regard Diners Club as authority that in a general sense payment services of the nature with which we are here concerned fall to be analysed or treated in the same way as in that case.
21. Mr Smith also argued that a further analogy could be drawn between this case and the voucher issue in High Street Vouchers. In that case the taxpayer operated a scheme by which vouchers branded with particular retailers' names could be redeemed at those retailers' stores. The retailer would redeem the vouchers periodically and be paid the face value of the voucher less a 10% discount. McCullough J held that the 10% discount was the price paid by the retailer for the benefits of participating in the scheme. The learned judge said (at pp580-581):

"The tribunal were impressed by the fact that the agreement between the retailer and HSV entitles the retailer to no more than the discounted face value. It followed, they thought, that the retailer gives nothing to HSV. Counsel for HSV's submission is to the same effect.

I do not think that this is right. Were he not participating in the scheme the retailer would expect to receive the full price for the goods he sold. To accept only 90% of the price of the goods sold to customers who present vouchers is to forgo the other 10%. The fact that the retailer has made an earlier agreement with HSV to forgo this 10% does not detract from the fact that he does forgo it.

A corresponding benefit accrues to HSV. Without the discount from the retailers HSV would not sell vouchers at a discount; without the discount there would be no scheme. This answers counsel for HSV's submission that HSV obtains nothing. To say, as he does, that HSV's ability to sell vouchers at a discount is separate from the discount given by the retailer to HSV on redemption is to fail to have regard to the 'entire transaction'. In reality the discount is the price paid by the retailer for the benefits of participating in the scheme. One can test it, as counsel for the Crown suggested, by asking what would have been the position had HSV and the retailer agreed that vouchers would be redeemed at face value upon the retailer remitting to HSV the used vouchers plus 10% of their face value. Plainly this would have been the price. The arrangement in fact made has the same effect. The discount is the price. It is paid by the retailer and received (or obtained) by HSV in return for the services it provides."

22. In our view Mr Smith's reliance on High Street Vouchers fails for the same reason as it fails on Diners Club. High Street Vouchers is not authority for any general proposition as to the nature of the services provided. That case is, we consider, a case on whether services that were admitted to be supplied were supplied for a consideration. In that particular case the supplies were of the benefit of participating in the scheme, but that does not provide any authority or guidance to apply the same analysis to the different facts of this case.
23. We turn therefore to consider the true nature of the supply in this case by examining the entire transaction. We consider that the services provided by the Appellant to the merchants are those set out in the Merchant Agreement and the Service Level Agreement, and nothing more. To argue that the Appellant has in addition made a supply of the right to participate in the scheme or of the benefit of access to a wider market of potential customers is, to our minds, as Mr Barlow submitted, to confuse the real supply with, on the one hand, the contractual relationship between the parties under which the supply is made and, on the other, with the motive of the recipient of that supply. In many a case of a supply of goods or services an analysis could be made that the creation of a right to something to be supplied is itself a supply of that right or that a benefit sought by a buyer, and which is satisfied by the supplier by making an actual supply, is something additional that is supplied by the seller to the buyer. In a system of VAT that depends on identifying the nature of a supply to determine its taxability, such an analytical approach would be distortive, and cannot in our judgment represent the correct approach in law.
24. For these reasons we decide that there was no separate supply by the Appellant of the right to participate in the Ukash scheme nor of the benefit of a wider market or anything else other than the services described in the agreements with the merchants. As we have earlier decided, all those services, other than those we have determined were purely ancillary, were supplied electronically and accordingly we decide that the supply by the Appellant is of "electronically supplied services".

Scope of "electronically supplied services"

25. That would be sufficient to dispose of the appeal, but because we were addressed at some length on the question of the interpretation of para 7C, Sch 5, and in case we are found to have erred on the issue of the nature of the supply, we consider here the position were the Respondents to have succeeded in persuading us that the nature of the supply was wider than we have found it to be.
26. On that footing, Mr Smith submitted that the right to participate in the Ukash scheme is not itself electronically supplied. It is a service supplied by the Appellant to the merchants by virtue of the contract between them that the latter are to take part in the scheme. Whilst agreeing with the Appellant that the lists in Annex L to the Sixth Directive and Annex II to the Common System of VAT Directive were not exhaustive, they were nevertheless important guides to the construction of the generic term "electronically supplied services". He referred to recital (4) of Council Directive 2002/38/EC, which temporarily amended Article 9 of the Sixth Directive, which states that: "To define electronically supplied services, examples of such services should be included in an annex to the [Sixth] Directive". The burden of Mr Smith's argument was that the services must have the key feature of being digitised products – a description taken from para 2.1.1 of the opinion of the EU Economic and Social Committee on the proposal for the temporary amendment – and that the right to participate in the scheme could not be characterised in this way.
27. For his part Mr Barlow urged upon us that the list of services in the annexes to the Directives is not an attempt at a definition and that the expression "electronically supplied services" is to be given its natural meaning. The literal meaning is any service supplied electronically. This points to the means whereby the service is delivered, regardless of the nature of the underlying service itself. He argued that notwithstanding the illustrative or indicative lists, the Tribunal should have regard to the "potency of the term defined", a concept derived from Bennion on Statutory Interpretation (Butterworths, 4^th Ed.) and approved by Lord Scott in Oxfordshire County Council v Oxford City Council and another [2006] 2 AC 674; see also Commissioners of Customs and Excise v Savoy Hotel Ltd [1966] 2 All ER 299.
28. In our view the important point is not the description or analysis of the nature of the service, but the manner in which it is supplied. A supply of music, or of films or games, for example, though included in the illustrative or indicative lists in the Directives and in para 7C itself, is not inherently an electronically supplied service. It may be rendered such, not by its nature, but by the manner in which it is delivered. We consider that the expression "electronically supplied services" should be construed according to its natural meaning. This seems to us to be supported by the fact that communication by a supplier of a service with his customer via electronic mail is specifically excluded from qualifying as an "electronically supplied service". The perceived need to make this exclusion to our minds also demonstrates that the expression is capable of having broad application.
29. In this case, apart from in respect of those matters which we have found to be ancillary, the only means of providing the services of the Appellant to the merchants – however they might be characterised – was electronically. The service of participation in the scheme, or in providing the benefit of access to a wider market of consumers, if those would indeed contrary to our view be recognised as separate supplies, would not in our view properly be regarded as supplied on the entry into the contractual arrangements with the merchants, but would be ongoing services throughout the relationship. The means of providing those services and benefits would, along with the other core services, be through the electronic medium created by the Appellant. Accordingly, in our judgment, all such services would be electronically supplied services.

Costs

30. At the commencement of the hearing, the Tribunal directed that, having regard to the fact that the appeals against the assessments were made in August and September 2008, to ensure that the proceedings are dealt with fairly and justly, pursuant to para 7(3), Sch 3, The Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, rule 29 of the Value Added Tax Tribunals Rules 1986 shall apply to this appeal, and rule 10 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 shall be disapplied.

Decision

31. For the reasons we have given, we allow the appeal with costs to the Appellant to be assessed if not agreed.

The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) rules 2009. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 15 July 2009

Cases cited in skeleton arguments or in oral argument and not referred to in the decision:

Card Protection Plan Ltd v Customs & Excise Commissioners [1999] STC 270

College of Estate Management v Customs & Excise Commissioners [2005] STC 1597

Levob Verzekeringen BV and another v Staatsecretaris van Financiën [2006] STC 766

Maatschap M J M Linthorst and J Scheres cs v Inspecteur der Belastingdienst/Ondernemingen Roermond [1997] STC 1287

Customs & Excise Commissioners v Redrow Group plc [1999] STC 161

RIXML.org Limited v Customs & Excise Commissioners (2004) VTD 18717