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Modernising the VAT treatment of face value vouchers

Category Technical Articles
AuthorTechnical Department
Article by Adrian Rudd, summarising the Institute’s response to the consultation document published by HM Customs & Excise in June 2002. Adrian Rudd of PricewaterhouseCoopers is Tax Adviser’s representative on the Technical Committee.
This article appeared in the December 2002 issue of Tax Adviser.
The Institute welcomed the opportunity to contribute to the consultation, but was unable to accept the view of face value vouchers (FVVs) underlying the scheme proposed in the consultation document.

The nature of a face value voucher
Argos Distributors Ltd v C & E Commrs
(Case C-288/94) [1996] BTC 5,497 gives guidance on the nature of a FVV. The Court described it as ‘a document evidencing the obligation assumed by Argos to accept the voucher, instead of money, at its face value’. The Advocate-General considered that ‘it behaves as if it were a negotiable instrument’.

The essential feature of a FVV scheme of the kind considered in the consultation document is that there is a flow of money between issuer, customer, and supplier of goods or services. In the case of in-house schemes, the issuer and supplier are the same person. It is the absence of a flow of money that distinguishes FVVs of the kind considered in C&E Commrs v Granton Marketing Ltd [1996] BVC 355.

The Institute pointed our that in most cases, FVVs do not confer a right to receive goods or services – they merely confer a right to have the voucher accepted in payment or part payment for a supply of goods or services made by a supplier who is a party to the FVV scheme. This point was illustrated in Granton.

The consultation document is concerned with three classes of FVV:

FVVs issued by a person who does not supply goods or services to the person who redeems them. Book tokens issued by Book Tokens Ltd are one example. The books are supplied by a bookseller who is a member of the scheme. The issuer merely acts as an intermediary for the transfer of funds between the bookseller selling the voucher and the bookseller redeeming it. Luncheon vouchers issued by Luncheon Vouchers Ltd work in a similar manner;

FVVs intended to be used in payment or part payment of any goods or services supplied by the issuer. The gift tokens issued by large retail stores such as Boots plc and Marks and Spencer plc are examples. They can be exchanged for (say) food or children’s clothing (zero-rated), women’s sanitary products (reduced rate) or adult clothing, beauty products or computer games (standard rate), or a combination of them;

FVVs intended to be used in payment or part payment of specific goods or services supplied by the issuer. Thus, a postage stamp stuck on a postal packet is accepted as payment for delivery of the packet. Similarly, a BT ’phone card is the mechanism whereby the holder pays for a telephone call made in a call box.

The Institute considered that FVVs in the first two classes set out above are in the nature of financial instruments exempted from tax by art. 13B(d)(3) of Directive 77/388, the sixth VAT directive. FVVs in the third class arguably comprise a prepayment for a future supply of a known description.

Supply by issuer or intermediary
The Institute considers that the supply of a FVV is a supply of services, whether the issuer or an intermediary makes the supply. The consideration for the supply is the amount given, which may be face value or an amount greater or less than face value. Any excess over face value is taxed or exempted from tax according to the nature of the FVV.

Tax treatment of the supply made by an issuer or intermediary
There is no practical distinction between credit card, cheque trading and clearing house payment schemes (all of which have been held to be exempt) on one hand and book token and luncheon voucher schemes on the other hand. They are all concerned with flows of money between the parties. The Institute considers that book token and luncheon voucher schemes are exempted from tax by art. 13B(d)(3).

The gift voucher schemes promoted by retail stores operate on the same principles as the book token and luncheon voucher schemes. The sole distinction is that fewer parties are involved. The Institutes regards this as a distinction without a difference, and believes that gift vouchers are also exempted from tax by art. 13B(d)(3).

On the other hand FVVs of the kind considered in Granton are excluded from exemption because there is no circular flow of funds. They are nothing more than discount vouchers that, when supplied for a consideration, are taxable at the standard rate.

The consequence of exempting the issue or onward sale of a FVV is that an issuer or intermediary incurs irrecoverable input tax. Thus, the transaction is taxed by way of ‘hidden VAT’ rather than by way of output tax.

Goods or services supplied when the FVV is redeemed
FVVs are redeemed in payment or part payment for a supply of goods or services. In cases where the supplier redeems a voucher issued by someone else (e.g. book tokens and luncheon vouchers), the value of the supply is determined by reference to the amount receivable from the issuer. This is the amount due before deduction of any fee charged by the issuer in accordance with the terms of the scheme. It is normally the face value of the voucher.

In cases where the voucher is both issued and redeemed by the same person, the value of the supply is determined in accordance with Argos Distributors Ltd, namely the discounted price at which the voucher was issued (if the voucher was issued at a discount which can be quantified), or face value (in other cases).

Tax avoidance
The Institute felt that the approach adopted in the consultation document is unnecessarily complex. Any alternative arrangements should meet the following objectives:

  • they should ensure that the VAT element of the price paid by the final consumer is the same regardless of the number of intermediaries involved; and
  • they should ensure that VAT is charged at the proper rate on the goods or services supplied to the final consumer.

Criticism of the consultation document
The proposed changes are confined to FVVs supplied for a consideration where the vouchers are redeemed by either:

  • the person who supplies them (‘the issuer’) or
  • a body corporate included in the VAT group as the issuer.

The stated consequences of the proposed change are as follows:

  • FVVs supplied to a ‘customer’ are treated in the same way as at present.
  • FVVs supplied to an ‘intermediary’ are charged to tax, whether the purchaser is an independent third party. The consideration for the supply is treated as VAT-inclusive in each case.

One immediate issue is how to distinguish a ‘customer’ from an ‘intermediary’? Strictly, an individual purchasing ten FVVs as Christmas presents is just as much an intermediary as a businessman purchasing ten FVVs for onward supply.

The supply made by an intermediary
The stated reason for imposing a charge to tax on intermediaries is to prevent avoidance of tax.

It is entirely proper for anti-avoidance measures to be introduced. However, the purpose of anti-avoidance legislation is to suppress a mischief. The proposals set out in the consultation document go further than this. They also impose a charge to tax on FVVs supplied to and by intermediaries standing at arm’s length from the issuer concerned. The Institute has concerns about the extension of the tax base in this manner.

The consideration for a FVV is to be treated as an advance payment for a future supply of goods or services chargeable at the standard rate. In practice, the supply may be zero-rated, eg if a gift token (which can be exchanged for any goods) is exchanged for food, children’s clothing or a book. In this case, tax is collected when it should not be.

The tax point becomes the time when the FVV is supplied rather than the time when a taxable supply of goods or services takes place. Although art 10(2) of the Sixth Directive allows the receipt of a payment to constitute a tax point, this applies only if “a payment is to be made on account before the goods are delivered or the services performed”. Given that the VAT due on a supply of goods or services becomes due at the time of supply (VATA 1994 s 1(2)) it is therefore necessary to determine how much tax (if any) is due at that time. As the nature of the supply is not known when a general FVV is issued or sold on by an intermediary, it is impossible to know whether any tax is due and, if so, how much.

While the vast majority of FVVs are redeemed for goods or services, some are not. Case law indicates that a payment in respect of a future supply that does not take place does not amount to consideration for a supply of goods or services. The cases also indicate that receipt of the payment does not bring into existence a supply that has not taken place. It follows that any VAT accounted for on unredeemed FVVs must be repaid. This gives rise to two problems:

Issuers are in a position to know how many vouchers are unredeemed at any one time. However, they will need to keep records to distinguish between FVVs supplied to intermediaries and FVVs sold to customers. Moreover, it is necessary to devise a scheme for claiming repayment.

Intermediaries have no such information. As they are unable to make any claim, the Exchequer makes a windfall gain and is thereby unjustly enriched.

The Institute agreed that there is a tax avoidance problem in need of a solution. However, the proposals outlined in the consultation document go further than this. They create a charge to tax where none should exist and give rise to practical difficulties for which no solution is offered. In short, while attempting to solve one problem the proposals give rise to many others. The Institute cannot support them.

Technical Department
020 7235 9381

December 2002 by Adrian Rudd


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