Chris Allen considers Customs’ review of VAT and non-monetary consideration.
Published in the July 2002 issue of Tax Adviser Customs & Excise announced last year that they were undertaking a review of policy concerning value added tax (VAT) and non-monetary consideration (Business Brief 14/01, 9 Oc-tober 2001). I am not sure whether this is a good thing or a bad thing. Certainly there are plenty of areas of uncertainty concerning non-monetary consideration, as can be seen from a number of cases over the years. Clarification of Customs’ policy on some of these might be most useful, provided that the result is not a document setting out rigidly applied policies which may in some cases be contrary to the law.
The precedent judgments generally declare that they apply to the facts of the particular case, leaving flexibility for all sides to negotiate the treatment of fresh cases based on their own facts, while applying the general principles derived from the precedents. A statement of general policy can amount to a straitjacket (for Customs in particular), and may be inappropriate for an area so dependent on questions of fact and degree as that of non-monetary consideration.
Is it consideration at all?
Many commercial agreements contain, quite apart from the usual element of monetary consideration, a number of undertakings by both parties. Multi-partite agreements may become more complicated.
The question has to be asked, for each undertaking or obligation under the agreement, whether it represents consideration for something done by the other side (or sides).
I am not a lawyer so I may be speaking out of turn, but I suspect that any analysis based strictly on contract law would conclude that every undertaking by one side was consideration for something or another done by the other. This view would create a nightmarish position for analysing the VAT treatment. Fortunately, a more sensible approach has prevailed so far, and seems likely to continue.
It may be best to illustrate this with some examples:
Under a typical lease of a building, the landlord agrees to let the property to the tenant for a period, and probably to do things such as maintaining the basic structure, keeping it insured, and suchlike. The tenant undertakes to pay monetary consideration (a premium and/or a rental, and probably an amount equivalent to the landlord’s insurance premiums payable as rent), to keep the interior in good condition, and not to use the property for various nefarious purposes. There will also be provisions governing matters such as dilapidations on termination of the lease.
On the strictest analysis not only the tenant’s payment of premium or rental, but also the undertakings to maintain the interior and to abstain from improper use, could be regarded as consideration for the landlord’s supplies. They could also be regarded as supplies in themselves, by the tenant to the landlord, for non-monetary consideration consisting of the letting of the property and the other undertakings made by the landlord.
Fortunately, the traditional approach to analysing such transactions focuses on the core transaction(s). In the example above, the only supply which is ‘seen’ is the letting of the building, and the only consideration ‘seen’ is the monetary consideration. The other undertakings by the landlord and tenant are considered merely to provide a closer definition of the letting sup-ply and the responsibilities which go with it. This is just as well, not only because of the complexity of analysis which would otherwise follow, but also because of the VAT costs which could arise from the multiplicity of supplies in either direction, some taxable and some exempt.
Many property transactions are much more complex, with leases resembling a Brown finance bill and consisting of hundreds of clauses. Imagine sifting through those for supplies and consideration on the ‘strict’ basis.
That is not to say that consideration (or, indeed, a supply) can be made to disappear simply by wrapping it into a larger contract which involves monetary consideration. For instance, if on entering into a lease a tenant agrees to carry out works which would normally be the re-sponsibility of the landlord, this is likely to be seen as involving a supply by the tenant to the landlord and also the provision of non-monetary consideration for the landlord’s supplies under the lease.
Any complex transaction involving mutual obligations is capable of being analysed to produce non-monetary consideration (and supplies) in either direction. Like the skinning of an onion, it is a matter of judgment how far to go, and this is ultimately a matter for the courts – although it should rarely need to go so far if both Customs and taxpayers behave sensibly.
In the case of land transactions, the ‘normal’ relationships between landlord and tenant provide a good benchmark against which to judge what is likely to be regarded as involving non-monetary consideration and what is seen as merely an ordinary definitional part of the agreement. Other transactions are susceptible to a similar approach.
Is it consideration for VAT purposes?
It is time to mention the basics which should logically have been at the start of this article.
Value added tax is chargeable on supplies of goods or services effected for consideration within a territory by a taxable person acting as such (Directive 77/388, the sixth VAT directive, art. 2(1)). The taxable amount on which VAT is charged is ‘everything which consti-tutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies’ (art. 11(A)(1)).
It seems fairly clear from this that the taxable consideration includes non-monetary consid-eration. This has been confirmed by the European Court of Justice (ECJ), subject to the proviso that non-monetary consideration only counts as consideration for VAT purposes if it is capable of being valued in money terms (Staatssecretaris Van Financiën v Cooperatiëve Vereniging Cooperatiëve Aardappelenbewaarplaats GA (Case 154/80) [ 3 CMLR 337]) (the Dutch potato case).
The question whether something which is (in contractual terms) consideration is capable of being expressed at a money value and so of being consideration for VAT purposes is potentially tricky, as shown by the Dutch potato case.
In practice, if the parties have themselves put a value on something, the courts will accept that it is capable of valuation (they will not necessarily accept the value placed by the parties, if that is fatuous, but that is a topic for a different article) and therefore constitutes consideration.
Increasingly, at least in the United Kingdom (UK), the courts seem to be missing out the step of wondering whether something can be valued and, instead, proceeding on the assumption that it can be valued and agonising over the most appropriate way of doing this. I will not attempt a comprehensive summary of the approaches the courts have chosen, because it is not appropriate to an overview type article and it would occupy this entire issue and the next one. However, a good deal of insight into the current approach of the courts can be found in the judgment of the Court of Appeal in the related cases of C & E Commrs v Littlewoods Organisation plc; Lex Services plc v C & E Commrs; C & E Commrs v Bugeja; Kuwait Petroleum (GB) Ltd v C & E Commrs  EWCA Civ 1542.
What is the VAT value?
The question of valuation is covered (or ducked) in the previous section. Courts choose various approaches to valuation depending on the facts of the particular case.
The important thing to remember is that, if your case involves a supply by A to B, with B providing non-monetary consideration, the valuation of the non-monetary consideration provided by B is relevant only as the measure of the value (or taxable amount) for the supply made by A. If B’s provision of non-monetary consideration involves a supply in itself, the value of it is determined separately, by reference to the consideration received from A or others (which may or may not be non-monetary). This is because the legislation specifies that the value (or taxable amount) for a supply constitutes the consideration received or receivable in return.
By way of illustration (and I cannot think up a good example of this occurring in practice):
Suppose that X makes a supply to Y in return for a supply which Y makes to X. The supply by X is worth £1,000, and the supply by Y is worth £100. For VAT purposes, the supply by X has a value of £100 (the consideration received) and the supply by Y has a value of £1,000 (again, the consideration received). What a strange world.
As far as VAT is concerned, the quality of the standard contractual text emanating from lawyers’ word processors has improved enormously over the last few years. It is rare nowadays to see anything which does not make the point that all amounts mentioned in the agreement are VAT exclusive and (on a good day) that it is agreed that VAT is to be added where applicable. It is rare, however, to see terms in the VAT clauses which are sufficiently wide to cover the possibility of non-monetary consideration.
In my view, the usual clauses do not cover the position once non-monetary consideration is identified (either by the parties or by Customs). I think that this could be dealt with fairly easily by some change to the general wording. In the meantime, ensure that you and/or your clients have proper protection as far as your agreements are concerned.
The treatment of vouchers is a particularly difficult area, and has become no less so following recent cases. The UK has provisions which ‘desupply’ the sale of vouchers giving the right to receive goods or services up to the face value of the vouchers concerned, the intention being that the value represented by such vouchers is taxed when the vouchers are redeemed. This makes a lot of sense compared with taxing the vouchers when issued, because a lot of vouchers might be exchanged for items liable at different rates (for instance, an HMV voucher might be exchanged for a zero-rated book or for a standard-rated CD).
Things get very complicated, though, because of the variety of vouchers or tokens which may be used nowadays for consumers to make purchases, and also because (for marketing reasons) vouchers may follow a different path to final consumers and back to suppliers from that pursued by the supplies themselves. It is not just a matter of ‘bought’ vouchers, like book tokens or HMV vouchers, but all sorts of other things as well. In particular it is not unusual for retailers or manufacturers to issue vouchers directly to the public at no charge (by direct mailings, or including the things in the public press).
In the case of a ‘free’ voucher issued by a retailer, it is clear that the encashment of this cannot be seen as involving the provision of non-monetary consideration by the private customer. The position may be different where the manufacturer issues the vouchers and pays retailers for accepting them.
The treatment of vouchers is complex and, as far as I can see, is mainly viewed by the courts as being based on legal considerations rather than economic considerations. Approach it with caution.
When I started writing this, I did not expect to provide a blueprint for dealing with non-monetary consideration, and my expectations were correct.
All I can say is, approach with caution and, after lighting the blue touch paper, retire to a safe distance.
Chris Allen FCA, is a chartered accountant and independent VAT consultant. Tel: 01865 750995; email: email@example.com.
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July 2002 by