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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Prudential Assurance Company Ltd v Revenue and Customs [2005] UKVAT V19364 (05 December 2005) URL: http://www.bailii.org/uk/cases/UKVAT/2005/V19364.html Cite as: [2005] UKVAT V19364

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19364

EXEMPTION – supply by The Boots Company plc to the Appellant in connection with a co-branded card scheme under which payment was based on the use of the card – whether exempt as part of the supply of intermediation services or whether taxable as being for the right to participate in the scheme – the former – appeal allowed

LONDON TRIBUNAL CENTRE

PRUDENTIAL ASSURANCE COMPANY LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

KENNETH S GODDARD MBE

Sitting in public in London on 23 and 24 November 2005

Roderick Cordara QC and Paul Key, counsel, instructed by Ernst & Young LLP, for the Appellant

Rebecca Haynes, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. This is an appeal by the Prudential Assurance Company Limited against a decision in a letter dated 11 October 2002 as varied by a letter dated 26 February 2003 and an assessment to VAT made on 18 October 2002 of £696,033 subsequently reduced to £191,992. The Appellant was represented by Mr Roderick Cordara QC and Mr Paul Key, and Customs was represented by Miss Rebecca Haynes.
2. The issue in this appeal is whether a particular supply of services in relation to a co-branded credit card is exempt (as contended for by the Appellant) or taxable at the standard rate (as contended for by Customs).
3. We had two binders of documents and heard evidence from Mr Darren Pope, strategy Director of Egg Banking plc, who provided a witness statement and was called as a witness but was not cross-examined. We find the following facts:

(1) Egg Banking plc (formerly Prudential Banking plc) (to which we shall refer for convenience as the Appellant since the actual Appellant is the representative member of the group) is a 79 per cent subsidiary of Prudential plc. The Appellant's major product is a credit card, the Egg Card. It was looking for an association with a retailer with a loyalty scheme which would introduce the Appellant's card to its customers. They identified The Boots Company plc ("Boots") as a suitable retailer, having what the Appellant believed was the largest loyalty card scheme (the Advantage Card) in the UK retail market with 12m cardholders. At the same time Boots were seeking a partnership with a credit card provider. The Appellant's commercial objective was a new distribution for its financial services, in particular further use of the credit facility on its credit card on which it would earn interest. Boots' objective was understood by the Appellant to be to increase its sales through spending on the credit card much of which would be on credit which would generate Advantage Points that could be redeemed by making further purchases. Boots were also understood to be interested in expanding its sales through its website, about which the Appellant had expertise as an internet bank.

(2) Following about three months' negotiations, the Appellant and Boots entered into an agreement dated 12 April 2000 which was amended and restated in an agreement dated 14 March 2001. For the purposes of this appeal there is no material difference between them and we shall refer to the later agreement as "the Agreement." The Agreement provided for the combination of the Egg Card and the Boots Advantage Card in a single credit and loyalty card, the Advantage Card powered by Egg ("the CB [co-branded] Card") which was a Visa card having the Visa, Egg and Boots logos, the last being the most prominent. Boots Advantage Points would be earned by use of the CB Card whether in Boots or elsewhere. The rate was five points per pound spent for purchases in Boots' stores and one point for other transactions.

(3) The Agreement provided:

(a) The parties agreed to market the CB Card in accordance with a launch plan under which they shared the advertising and promotional costs equally, subject to a cap of £850,000 for Boots' expenditure. Boots would assist holders of Advantage Cards to apply for the CB Card; and the Appellant would offer the CB card to holders of Advantage Cards who met their lending criteria and would pay the external marketing costs. Both parties were required to have processing capabilities and an appropriate number of suitably qualified and trained staff.

(b) The Appellant paid for the design, creation and development of the necessary software and website.

(c) The Appellant paid for the production and postage of materials in connection with servicing the CB Card and paid up to £2 for the production of each CB Card, with Boots paying any excess. The Appellant was solely responsible for the issue and recovery of CB Cards, which remained its property. Boots had no responsibility for the operation of the CB Card.

(d) Boots checked postal applications for the CB Card and carried out development work so that data held by it in relation to existing Advantage cardholders could be accessed by the Appellant; designed and developed a co-branded area on its website; and made changes to its systems enabling the transfer of Advantage Points from Advantage Cards to CB Cards. Its third-party expenditure was capped at £2.6m.

(e) Boots, at the Appellant's expense, had to ensure that promotional material about the CB Card in its stores and website was up to date.

(f) Boots agreed that CB cardholders would be entitled to earn Advantage Points in respect of all purchases made with CB Cards (less refunds) whether in Boots or elsewhere. Any improvement in the rate of accrual of Advantage Points would be applied to CB Cardholders. Boots could vary the Advantage Points in which case the Appellant at Boots' expense would update any promotional material. The Appellant could instruct Boots to withdraw the right to collect Advantage Points on expenditure in breach of the CB Card terms and conditions, and on unauthorised use of the CB Card.

(g) The Appellant maintained a website on which Boots had an area to display information about the Advantage scheme, and the Appellant had an area to hold information about shared customers and managed the operation and servicing of the CB card.

(h) The Appellant paid Boots the following payments in return for the intermediation services in respect of Boots' obligations to provide assistance with processing CB Card applications in relation to excluding Advantage Cardholders with default information against them on publicly available databases, sending partially pre-completed applications to Advantage Cardholders, checking applications made by post, and forwarding data to the Appellant for applications made by telephone or internet): (a) a fixed fee per card depending on whether it was an internet card or a standard card, including fees on the conversion of the latter to the former; (b) a fixed annual fee for each CB Card opened that remains active; (c) an adjustment to the payments in respect of (a) if the number of CB Cards was higher or lower than the agreed minimum level; (d) 0.7p for each pound spent on CB Cards which was rebated in accordance with a formula relating to dormant accounts (meaning no transactions within the previous 12 months) being the 0.7p times the proportion of unredeemed points on dormant accounts referable to the use of the credit function of the CB Card (as opposed to being earned on the existing scheme), with a further adjustment relating to negative points balances (which can arise if a customer makes a purchase, uses the resulting Advantage Points and then returns the purchase) ("the paragraph (d) payment"); (e) a fixed amount for each CB Card opened depending on whether the application was by post or telephone, subject to a minimum monthly payment. The supply of services other than in consideration of the paragraph (d) payment are now agreed by Customs to be exempt; the nature of the supply for which the paragraph (d) payment is the consideration is the point in issue in this appeal.

(4) The CB card was advertised as having the advantages that it doubled as a credit card, earned more Advantage Points in Boots, earned points at any outlet accepting Visa cards (19 million outlets worldwide), had a competitive interest rate (10.9 per cent APR for internet accounts and 14.9 per cent APR for standard accounts), and no annual fee.

(5) Mr Pope's evidence (which we accept) was that the paragraph (d) payment was an important part of the negotiations. Boots did not want to be financially disadvantaged by promoting use of the CB Card since it would bear the cost of redemption of additional Advantage Points issued on the CB Card. A calculation was necessary to determine the reasonable cost to Boots as a result of the distribution of additional points to customers using the CB Card. Boots were not prepared to allow the Appellant access to financial information to support the 0.7p figure. In the end the Appellant took a commercial view and accepted this figure. The purpose of the rebate formula was that where points were not redeemed Boots had not incurred any cost and should not therefore be paid the 0.7p. The Appellant had no interest in the Advantage Points or any change in their level; its concern was only in the amount spent.

(6) The Agreement came to an end because the take-up of the CB Card and the expenditure under it did not meet the expectations of either party.

Preliminary issue on the continuing validity of the decision

4. Mr Cordara QC made an initial contention that Customs had changed their stance so much that the appeal should be allowed and a new decision letter made, for which Customs were out of time. He relied on BUPA Purchasing Ltd v HMRC Commissioners [2005] STI 1675. Miss Haynes denied that the changes were so fundamental and pointed to the existence of the assessment.
5. Initially the decision letter of 11 October 2002 claimed that, first, the services for which payments are made as described in paragraph 3(3)(h) above under (a) to (c) and (e) above were taxable, but that the matter would be reconsidered in the light of the decision in Customs and Excise Commissioners v BAA. Following the Court of Appeal decision at [2003] STC 35 Customs dropped this aspect by their letter of 26 February 2003, thereby reducing the assessment from £696,033 to £191,992. Secondly, the original decision letter claimed that was a separate taxable supply of Advantage Points by Boots to the Appellant in consideration of the paragraph (d) payment, which they maintained in the letter of 26 February 2003. Their Statement of Case (drafted by the late Hugh McKay) expressed their case as being that there was a separate supply of services, including Advantage Points, by Boots to the Appellant and by the Appellant to CB cardholders as rewards for using Egg products. During Mr Cordara's opening Miss Haynes clarified at the request of the Tribunal that she was no longer relying on an argument that Advantage Points were supplied by Boots to the Appellant and thence to CB Cardholders.

Reasons for our decision on the preliminary issue

6. In our view it is clear that Customs have maintained throughout that the services in consideration of the paragraph (d) payment were taxable, for which they made an assessment. Their analysis of why such services were taxable has changed from being for the supply of Advantage Points by Boots to the Appellant, through being for a supply including such Advantage Points, to being a supply not including such Advantage Points. We consider that the changes go to why they considered the supply to be taxable rather than anything more fundamental. BUPA Purchasing seems from the summary in Simon's Tax Intelligence to have concerned a change from assessing input tax to claiming different amounts as output tax, which is a far greater change. While it would have been preferable for Customs to have told the Appellant in advance that they no longer relied on there being any supply of Advantage Points, this had not prejudiced the Appellant other than to the extent of Mr Cordara's and Mr Key's skeleton having to deal with such issue, which can be dealt with in considering costs. In our view, therefore, the Appellant cannot say that the whole basis of the decision letter and assessment has been changed. Accordingly we do not accept Mr Cordara's contention that the appeal should be allowed on this basis.

The substantive issue

7. Article 13B of the Sixth VAT Directive provides:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;…

(d) the following transactions:

1 the granting and the negotiation of credit and the management of credit by the person granting it;…

3   transaction, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;…"

At the time Group 5 of Schedule 9 to the VAT Act 1994 exempted:

"…5 The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity."

Note (5) provided:

"For the purposes of item 5 "intermediary services" consist of bringing together, with a view to the provision of financial services?

(a) persons who are or may be seeking to receive financial services, and

(b) persons who provide financial services,

together with (in the case of financial services falling within item 1, 2, 3 or 4) the performance of work preparatory to the conclusion of contracts for the provision of those financial services, but do not include the supply of any market research, product design, advertising, promotional or similar services or the collection, collation and provision of information in connection with such activities."

8. In relation to the substantive issue in the appeal, Mr Cordara and Mr Key contend in outline:

(1) The Agreement should be looked at holistically. The service for which consideration was paid under paragraph (d) was in respect of an exempt supply of intermediary services.

(2) Even if one looked solely at the terms of the Agreement paragraph (d) was stated to be in return for the intermediation services of providing assistance with processing CB Card applications.

(3) The facts were indistinguishable from those in BAA and Customs and Excise Commissioners v Civil Service Motoring Association Ltd [1998] STC 111, and the same result followed.

(4) The supply for which the paragraph (d) payment was made was part of the single exempt supply of intermediary services.

9. Miss Haynes contends in outline:

(1) The service for which consideration was paid under paragraph (d) were for inducing the continuation of spending on the CB Card after it had been issued, by Boots permitting access to the Advantage Points scheme to the Appellant's cardholders, as in relation to the third-party scheme in Tesco v Customs and Excise Commissioners [2003] STC 1561.

(2) The payment was in connection with the award of points, as was demonstrated by the rebate formula excluding the payment in respect of points not likely to be redeemed; it was not for the negotiation of setting up the CB Card system, as were the other payments.

(3) The service for which the paragraph (d) payment was made was that of promotional services in that Boots provided the Appellant with ongoing access to the pre-existing Advantage Card scheme in order to promote further use of the card. Such supplies are separate and distinct and economically dissociable from the intermediary services of setting up the CB Card scheme.

(4) BAA was distinguishable because the on-going commission fee was linked to the obligations of BAA to introduce persons requiring cards to the financial institution and assisting them in completing application forms and checking such applications for errors.

(5) Note (5) to Group 5 of Schedule 9 to the VAT Act 1994 excludes advertising and promotional services.

Reasons for our decision

10. In Civil Service Motoring Association a credit card scheme was introduced in which CSMA occupied a similar position to Boots, and Frizzell Banking Services ("FBS") to the Appellant. The case concerned the supply of services in consideration of a "commission calculated on the basis of 0.25 per cent of all credit transactions concluded between members of CSMA and FBS" (at 114a), which the Tribunal had described as commission "on card-generated sales" [1996] V&DR 340, 344A, in which case it was calculated in a similar way to the paragraph (d) payment in this appeal. Mummery LJ, with whom Pill and Hobhouse LJJ concurred, concluded:

"My reasons for following the same course as Sedley J are as follows:

(1) It is common ground: (a) that FBS entered into exempt transactions granting credit in the form of credit cards to members of CSMA; but the exemption is not limited to a supply by the person granting credit; (b) that CSMA supplied services to FBS in connection with the granting of that credit to its members and, in consideration of those services, received a commission calculated by reference to the total amount of credit granted; and (c) that there is no express reference in either the Sixth Directive or in Sch 6 to the 1983 Act to 'particular' transactions or to the 'specific' grant of credit.

(2) The critical question is whether the expressions 'negotiation of credit' and 'making of arrangements for any transaction for granting of any credit' are to be construed as implicitly restricted to activities in relation to particular transactions for the specific grant of credit. Neither the purpose nor the context of the exemption justify placing this restricted meaning on the wide general language of the directive and of the 1983 Act. Both the 'negotiation of credit' and 'the making of arrangements' for the granting of credit refer to the doing of things antecedent to, and directly leading to, the results sought to be achieved by the doing of those things. The result to be attained is of a general rather than a specific nature, namely the 'granting of any credit'. In some cases intermediaries between principals will be involved in achieving that result. In other cases they will not. It is neither expressly nor impliedly necessary that they should be involved as a condition of the application of the exemption to those who do not actually grant credit.

(3) The activities of CSMA, in respect of which FBS paid commission, can reasonably and sensibly be described as negotiation of, or making arrangements for any transaction for, the grant of credit. I am unable to detect either in the purpose of the exemptions or in the language and context in which they are expressed any distinction between (a) the negotiation, or making arrangements for particular transactions for the specific grant of any credit, and (b) these negotiations or arrangements planned and designed by joint efforts for the specific purpose of leading directly to the grant of credit by FBS to members of CSMA."

11. In BAA the company occupied a similar position to Boots, and Bank of Scotland ("BoS") to the Appellant. BAA's wholly-owned subsidiary, BAAE, endorsed a co-branded card as an extension to its WorldPoints scheme. BAA at its own expense operated the WorldPoints scheme and other benefits such as parking, upgrades on train fares to airports. BoS paid a one-off introduction and processing fee in relation to the issue of cards, and also paid an on-going commission fee related to usage of the card. This consideration was expressly linked to the obligations of BAAE in relation to introducing persons to BoS, assisting applicants in completing application forms, checking them, screening applications and submitting them to BoS for approval (at [8(5)]). Sir Andrew Morritt V-C, with whom Mummery and Tuckey LJJ concurred, said:

"[34] Accordingly the outcome of this appeal rests on the fourth submission of counsel for Customs & Excise [that the nature of the services provided by BAAE should have been characterized as the sale of a customer list alone or coupled with the joint promotion and marketing of a financial product (see [29])]. How should those services be characterised? I do not accept that they amount to no more than the sale of BAAE's relevant databases. On the contrary BAAE is required to do all the introductory work not to all those on its databases but only to those who comply with the conditions imposed by BoS. Nor can they be confined to the joint promotion and marketing of a financial product. The promotion and marketing is of the grant of credit which is the essential preliminary to obtaining any benefit under the BAAE Agreement by either party.

[35] In my judgment Etherton J was correct to characterise the services of BAAE as the negotiation of credit within art 13B(d)(1) in the way that he did in para 47 of his judgment. First, the First Schedule to the BAAE Agreement contains the details of the credit to be offered to an applicant by the issue of a card unless and until varied by BoS. Whether and to what extent it was the result of negotiation between BAAE and BoS is immaterial. The fact is that the introduction by BAAE of one of its members or customers to BoS is an introduction to a source of credit on terms agreed by BAAE and BoS.

[36] Second, the introduction is preceded by screening processes carried out by BAAE so as to ensure that those whom BAAE introduces comply with BoS pre-conditions. Whether or not an application is accepted is a matter for BoS alone but the introduction is effected by BAAE.

[37] Third, BAAE is remunerated by the commission payable by BoS in accordance with cl 4 of the BAAE Agreement. This comprises a commission and an introduction and processing fee. The latter is payable, subject to certain conditions, in respect of each card account opened in a specified period. The former is an ongoing commission based on the value of the usage of the card. Thus the services of BAAE are remunerated by one party to the grant of credit as a distinct act of introduction or mediation.

[38] Fourth, it is clear that BAAE is not itself a party to the grant of credit by BoS to a card-holder, nor is it a sub-contractor of such a party. The introductory services it performs are, by definition, not typical of the services performed by the grantor or grantee of credit.

[39] The true analysis, in my judgment, is that BAAE provides access to some of its customers or members for BoS to supply them with credit on terms previously agreed between BAAE and BoS. Of course, each derives benefits from the transaction. Accordingly each is eager to promote the scheme and enlist the support of the other party for that purpose too. But all the benefits to be obtained by either party depend on the issue of the co-branded credit card. In those circumstances I agree with the parties in treating the services as composite. Equally the introductory services of BAAE without which the card is not issued and the benefits cannot be obtained seem to me to be properly characterised as 'negotiation of credit' within the European concept denoted by that phrase as described by the Court of Justice in CSC."

12. At [39] the Court points out that the benefits to both parties depend on the prior issue of the card. In other words, the whole purpose of the card is to generate credit (presumably both the free period of credit before any payment is required to be made to the card issuer, and the further credit for which interest is charged which the user may decide to take). First one has to issue the card, and then its use directly generates the credit. In relation to both, BAAE's introductory services amount to the negotiation of credit. The Court clearly does not adopt Miss Haynes' approach of regarding the issue of the card and its use as separate matters. Its approach is that BAAE's introductory services lead to the issue of the card, which in turn leads to the generation of credit by the use of the card: "The promotion and marketing is of the grant of credit which is the essential preliminary to obtaining any benefit under the BAAE Agreement by either party" (at [34]). The consideration was expressly linked to the obligations of BAAE to provide introductory services. Both the initial introduction and processing fee and the continuing commission based of use of the card were for the negotiation of credit.
13. We see no material difference between BAA and this appeal. In both, there were payments for services directly related to the issue of the card and then continuing payments based on the use of the card. The payments here are also linked by the Agreement to Boots' obligations to provide assistance with processing CB Card applications. The logic is the same: without the introductory services there will be no card, and without the card there will be no credit. The ultimate purpose of the card is to generate credit.
14. Under the Agreement both parties were undertaking a commercial venture for the financial benefit of each of them. Some expenditure, such as advertising, was paid for jointly, other expenditure and obligations were incurred by one or other of the parties. Various payments were made by the Appellant to Boots, many specifically in relation to card applications, and also the continuing payment in paragraph (d) which was directly linked to expenditure on the CB Card on which Advantage Points would accrue, although at a different rate depending on whether expenditure was at Boots (whether in stores or their website) or elsewhere. The rebate formula ensured that no paragraph (d) payment was made in respect of points earned by the use of the credit function on the CB Card on dormant accounts, for which Boots were unlikely to have to redeem the Advantage Points. Commercially, after each party had paid for the expenses required under the Agreement, the Appellant stood to gain from interest payments on credit supplied under the CB Card, and Boots stood to gain from increased sales subject to the burden of having to redeem the additional points earned on such increased sales. The paragraph (d) payment is a negotiated figure by which the Appellant gives up some of its advantage to Boots who directly suffered a detriment in redeeming points as well as obtaining the advantage of the increased sales. In other words, the paragraph (d) payment was directly related to expenditure on the CB Card on which Boots might be expected to have to redeem Advantage Points. In turn, expenditure on the CB Card directly relates to the generation of credit, and so the supply of the service in consideration of the paragraph (d) payment directly relates to the negotiation of credit. Indeed we regard it as more directly so related than the setting-up costs which are an essential preliminary to there being any credit; payment relating to the use of the card is even more directly to the generation of credit. There is no distinction between the service for which the paragraph (d) payment and the other payments were made; they are all payments for a single supply of exempt intermediary services, just as they were in BAA.
15. Miss Haynes relied on Tesco plc v Customs and Excise Commissioners [2003] STC 1561, particularly in relation to the third-party schemes, for the proposition that the payment by the third party to Tesco was for the right to participate in the scheme, and so therefore was the paragraph (d) payment. In that case, Tesco had a Clubcard scheme under which persons purchasing premium goods at Tesco's stores received points which were converted into vouchers that could be tendered in payment for other goods (redemption goods) at Tesco's stores. In addition other retailers could join in the Clubcard scheme and points would be awarded for spending in their stores which could be redeemed in Tesco's stores. One such scheme was a joint venture company between a Tesco subsidiary and Royal Bank of Scotland that involved a credit card, expenditure on which earned additional points. The joint company paid Tesco for the costs incurred in support of the joint venture equal to 93 per cent of the face value of the points or vouchers, being the estimated rate of redemption of points. It is important to understand the point being argued in that case. In relation to the Clubcard scheme, Tesco contended (as the Tribunal had found) that part of the payment for the premium goods was paid for the vouchers, with the result that the vouchers were issued for consideration and such consideration was disregarded for VAT. When used to pay for the redemption goods, the value of the vouchers would be included as a receipt, with the result that if vouchers were not redeemed no VAT would be payable on their value. The Court of Appeal held that the vouchers were not issued for consideration. The same analysis applied to the third-party schemes; the payment to Tesco by the other retailer (or the joint venture card company) was not consideration for the vouchers, but not the right to participate in the scheme (at [178]). Whether such payment in relation to the joint venture card company was exempt was not in issue. We do not therefore consider that the Court's decision that such payment was not for a voucher but was for something else is inconsistent with the payment under paragraph (d) in this appeal being for the negotiation of credit. In Tesco the nature of the "something else" was not an issue; the Court did not need to go further than deciding that the payment was not consideration for the vouchers.
16. Accordingly we allow the appeal with costs of and incidental and consequent on the appeal to be assessed in default of agreement by a Taxing Master of the Supreme Court by way of detailed assessment on the standard basis.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 5 December 2005

LON/2002/983