Revenue and Customs v Aimia Coalition Loyalty UK Ltd [2013] UKSC 15

The Supreme Court held, by a 3-2 majority, that LMUK (Nectar's operator) could deduct as input tax the VAT on payments made to redeemers, because the CJEU's preliminary ruling rested on an incomplete factual picture and the redeemers supplied services to LMUK as well as goods to collectors.

Facts

The appeal concerned the Nectar customer loyalty scheme operated by Aimia Coalition Loyalty UK Ltd, formerly Loyalty Management UK Ltd (“LMUK”). The scheme involved four parties: LMUK as promoter; scheme members (“collectors”); retailers who paid for points to be credited to their customers’ accounts (“sponsors”); and retailers who provided goods and services to collectors in exchange for points (“redeemers”).

The scheme rested on a network of contracts. LMUK agreed with collectors that they could obtain points when buying from sponsors and could obtain goods and services free or at reduced cost on redemption. LMUK agreed with sponsors that it would credit collectors’ accounts and secure that rewards were made available; sponsors paid LMUK at an agreed value per point plus an annual marketing fee. LMUK agreed with redeemers that they would supply the rewards to collectors and provide various additional services to LMUK (information about availability, customer data, use of brands in marketing, complaint handling, replacing faulty goods), in return for “service charges” calculated per point redeemed at a value lower than that paid by sponsors. LMUK’s profit was the difference between its receipts from sponsors and its payments to redeemers.

Lord Reed emphasised that the language of “issuing” and “redeeming” points was metaphorical:

The “points” are a means of describing the collectors’ contractual rights to receive goods and services at no cost or at a reduced cost. The sponsors pay LMUK for the grant of those rights to collectors.

It was common ground that the provision of points to collectors in return for payment by sponsors was a taxable supply by LMUK, on which LMUK accounted for output tax. The Commissioners decided in 2003 that LMUK’s payments to redeemers were third party consideration for the redeemers’ supply of goods and services to collectors, so that the VAT was not deductible by LMUK as input tax.

Procedural history and the reference

The VAT and Duties Tribunal allowed LMUK’s appeal ([2005] BVC 2628), finding that redeemers supplied a composite service to LMUK, the service charge being directly linked only to that supply. Lindsay J allowed the Commissioners’ appeal ([2007] STC 536), relying on Auto Lease Holland BV v Bundesamt f”ur Finanzen (Case C-185/01) [2003] ECR I-1317; [2005] STC 598 and on a “robust and commonsensical” view of the payments. The Court of Appeal ([2008] STC 59) allowed LMUK’s appeal, Chadwick LJ applying Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408; [1999] STC 161 to hold that a supplier may make, in the same transaction, supplies to two different persons, and that the three Redrow questions (payment, consideration, business use) were all answered affirmatively in LMUK’s favour.

The House of Lords referred questions to the CJEU, which, joined with Baxi Group Ltd (Case C-55/09), ruled ([2010] STC 2651) that the payments “must be regarded … as being the consideration, paid by a third party, for a supply of goods to those customers or, as the case may be, a supply of services to them”, leaving it to the referring court to determine whether the payments also included consideration for a separate service.

Issues

The narrow issue was whether LMUK was entitled to deduct as input tax the VAT element of the payments it made to redeemers. That turned on two related questions: (i) how the Supreme Court should apply the CJEU’s ruling, given the court’s own statement that it would confine its assessment to the questions referred and had not examined the LMUK/sponsor relationship; and (ii) whether, as a matter of economic reality, the redeemers made a supply of services to LMUK in the same transaction as their supply of goods or services to collectors.

Arguments

LMUK (Mr Milne QC) argued that the payments were consideration for services supplied to it by the redeemers, used for the purposes of its business, so that article 17 of the Sixth Directive gave it a right to deduct. Relying on Redrow and Customs and Excise Commissioners v Plantiflor Ltd [2002] UKHL 33; [2002] 1 WLR 2287, it contended that the redeemers made supplies in both directions, and that only its analysis ensured that VAT was deductible by the person who actually paid it. It relied on Leesportefeuille “Intiem” CV v Staatssecretaris van Financi”en (Case C-165/86) [1989] 2 CMLR 856 to show that goods can be supplied to one person though physically delivered to another. It disavowed apportionment, though advancing it as a fall-back with a possible remittal.

The Commissioners (Mrs Whipple QC) argued that the CJEU’s ruling determined the appeal: the payments were third party consideration for supplies to collectors and were not deductible. They submitted that economic reality, as applied in Auto Lease, identified the recipient of the supply, and that Redrow was incompatible with the CJEU’s judgment and wrongly decided, while Plantiflor remained a correct example of the “delivery model”. They resisted any remittal on apportionment.

Judgment

The appeal was dismissed by a majority of Lord Reed, Lord Hope and Lord Walker; Lord Carnwath, with whom Lord Wilson agreed, dissented.

Lord Reed (lead majority judgment)

Lord Reed stressed that LMUK’s business differed fundamentally from in-house retailer loyalty schemes in which the issue of points involves no taxable supply, so decided cases on such schemes (notably Kuwait Petroleum (GB) Ltd v Customs and Excise Commissioners (Case C-48/97) [1999] STC 488) could not be assumed to govern it.

He was critical of the reference, observing that “the reference did not make sufficiently clear to the Court of Justice what the central issues were”, and that it did not direct the court’s attention to the tribunal’s findings which bore most directly on them. The CJEU itself had noted that the questions did not touch on the relationship between sponsors and LMUK. As a result, the CJEU left out of account that sponsors paid LMUK for granting collectors the right to receive rewards, that LMUK met the cost of the rewards out of those payments, that collectors were exercising a right already paid for, and that payments to redeemers were an essential cost of LMUK’s business.

On the constitutional relationship with the CJEU, Lord Reed relied on AC-ATEL Electronics Vertriebs GmbH v Hauptzollamt M”unchen-Mitte (Case C-30/93) [1994] ECR I-2305 for the separation of functions: the CJEU rules on interpretation on the facts put before it; the national court ascertains the facts and their consequences. While section 3(1) of the European Communities Act 1972 bound the court as to the meaning and effect of EU instruments, he concluded:

In the exceptional circumstances of this case, this court cannot therefore treat the ruling of the Court of Justice as dispositive of its decision, in so far as it was based upon an incomplete evaluation of the facts found by the tribunal or addressed questions which failed fully to reflect those arguments.

Applying the deduction principles drawn from Halifax plc v Customs and Excise Commissioners (Case C-255/02) [2006] Ch 387, RBS Deutschland Holdings GmbH (Case C-277/09) and Lebara Ltd v Revenue and Customs Commissioners (Case C-520/10) [2012] STC 1536, Lord Reed reasoned that VAT should be chargeable on LMUK’s taxable supplies only after deduction of VAT borne on its necessary costs, the most obvious being payments to redeemers. Only in that way would VAT be neutral as regards LMUK. That analysis was consistent with economic reality: there was a legal relationship involving reciprocal performance, and

The only economically realistic explanation of LMUK’s behaviour is the value to LMUK itself of the redeemers’ acceptance of points in exchange for the provision of goods and services.

He upheld Redrow and Plantiflor as correctly decided (expressing no view on WHA Ltd v Customs and Excise Commissioners [2004] STC 1081, then under appeal), but cautioned that Redrow must not be read as conflicting with the economic reality criterion, nor as excluding the possibility that a payment may be third party consideration where a business meets the cost of a supply of which it cannot realistically be regarded as the recipient. He also declined to treat Redrow as “laying down a universal rule”. Auto Lease did not assist the Commissioners, since it concerned identifying the recipient of goods, a point not in dispute.

Lord Hope

Lord Hope said it “was a pity that a preliminary ruling was sought in this case”, noting the absence of an Advocate General’s opinion. He analysed the CJEU judgment closely and concluded that it did not say the payments were consideration “solely” for supplies to collectors, nor did it reject LMUK’s contention that redeemers supplied “both” LMUK and collectors; the question remitted (whether the payments were consideration for two or more separate supplies, engaging apportionment) was not the question in issue. It therefore fell to the Supreme Court, as a matter of fact and economic reality, to decide whether redeemers made supplies in both directions, and he answered that affirmatively. He defended his own formulation in Redrow but qualified Lord Millett’s:

Payment for the mere discharge of an obligation owed to a third party will not, as he may be taken to have suggested, give rise to the right to claim a deduction.

Lord Walker

Lord Walker, concurring, emphasised that modern marketing arrangements are “more like a web than a chain”, that no authority established that a payment by A to B cannot be both consideration for a service supplied to A and third party consideration for a supply by B to C, and that he now recognised, with hindsight, that the reference had been unnecessary.

Lord Carnwath (dissenting, with Lord Wilson)

Lord Carnwath considered the appeal “bound to succeed” in the light of the CJEU judgment and found the majority’s approach difficult to reconcile with the 1972 Act. He objected to going behind the House of Lords’ decision to refer or the agreed questions, and to deciding that the real issues were questions of fact. In substance the CJEU had adopted the European Commission’s reasoning: the reward supply was a distinct transaction; article 11 and article 17(2) are not symmetrical, so a payer of third party consideration has no corresponding right to deduct; and the contractual obligation to supply goods to collectors was not itself the supply of a service to LMUK. He saw the outcome as a natural extension of Auto Lease, distinguished Intiem, preferred the Commissioners’ earlier view that Redrow was distinguishable on its facts, rejected remittal on apportionment as raising factual issues not taken below, and observed that “Interpretation of the directive is ultimately a matter for the CJEU, not the domestic courts.”

Implications

The decision is significant on two levels. First, on VAT principle, the majority confirmed that a single payment may be consideration for a supply of services to the payer even though the same transaction involves a supply of goods or services to a third party, and that Redrow and Plantiflor remain good law — but subject to the qualification that the Redrow questions must be answered through a realistic appreciation of the transaction, and that Lord Millett’s “anything – anything at all” formulation cannot extend to mere payment to discharge an obligation owed to a third party. The majority also stressed fiscal neutrality: because LMUK accounted for output tax on the consideration received for granting collectors the right to rewards, treating the redeemers’ supply as made only to collectors would produce tax on both the right and its satisfaction.

Secondly, on the relationship between domestic courts and the CJEU, the majority treated the ruling as non-dispositive where it proceeded on an incomplete factual basis and on questions that failed to capture the real issues, relying on the AC-ATEL division of functions. That approach was expressly presented as exceptional and attracted a strong dissent; it is not authority for a general power to depart from preliminary rulings, and Lord Carnwath’s reasoning illustrates the contrary view.

Practically, the case is a caution about the drafting of references: parties and courts must ensure that the questions and the recited facts capture the findings and arguments genuinely in dispute. Its limits should be noted: the analysis is closely tied to LMUK’s unusual business model, in which the grant of points was an agreed taxable supply, and the majority expressly declined to lay down universal rules or to comment on WHA, then under appeal. Apportionment was not decided, LMUK having disavowed it, and the court deferred the form of order pending written submissions.

Verdict: The appeal by HMRC was dismissed by a majority (Lord Reed, Lord Hope and Lord Walker; Lord Carnwath and Lord Wilson dissenting). The decision of the Court of Appeal was affirmed, so that LMUK was entitled to deduct as input tax the VAT element of the payments made to redeemers, with the parties to be given an opportunity to make written submissions on the form of order.

Source: Revenue and Customs v Aimia Coalition Loyalty UK Ltd [2013] UKSC 15