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HMRC internal manual

VAT Valuation Manual

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HM Revenue & Customs
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Non-monetary consideration: establishing the monetary equivalent of a non-monetary consideration

There are several principles that have been established by the European Court that assist in determining the monetary equivalent of a non-monetary consideration. These can be found in two key cases Naturally Yours Cosmetics Ltd. (Case 230/87) and Empire Stores Ltd (Case 33/93).

Naturally Yours Cosmetics Ltd

Naturally Yours were wholesalers of cosmetics. They sold goods to beauty consultants who then resold them at parties, which the consultants had encouraged hostesses to arrange. The consultants purchased the goods at wholesale prices and sold them at retail prices recommended by Naturally Yours. Hostesses who arranged parties were given a pot of cream by the consultants as a reward. When a pot of cream was used for this purpose, the consultant could purchase it from Naturally Yours for £1.50 instead of the usual wholesale price of £10.14 that the consultant would otherwise have had to pay. Naturally Yours argued that VAT was only due upon the £1.50 actually paid by the consultant. Customs argued that VAT was due upon the normal £10.14 wholesale price. The ECJ found VAT was due on £10.14. The consultants were providing Naturally Yours with a service in addition to the cash paid. The value of the services was £10.14 less the £1.50 payment.

The Advocate General’s opinion, which was followed by the Court, describes in some detail the points that are essential in identifying non-monetary consideration and in placing a value upon it:

  • Article 73 (Article 11(A)(1)(a) of the Sixth Directive in force at the time) was not confined to monetary payment but had to be given the broadest interpretation as to what could constitute consideration for determining the taxable amount. Therefore, both goods and services can be consideration.
  • In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply. This constitutes the direct link that is essential before a service can be regarded as consideration for a supply. In Naturally Yours this requirement was clearly satisfied because, if the consultant had not arranged for a hostess to hold a party, the cream could only be obtained by the payment of £10.14.
  • The service had to be capable of being evaluated and expressed in monetary terms before it could constitute a non-monetary consideration.

The Advocate General said that the value had to be “subjective” in that it had to be assigned by the parties to the transaction.

The fact that the price is reduced only if the party actually takes place, whereupon the pot of cream will be given to the hostess, shows that the parties subjectively assigned to the service provided a value corresponding to that price reduction. Since the portion of the price of the goods which was not paid initially must be paid subsequently if the party is not in fact held, it is clear that, as regards that portion, the goods are paid for either by provision of the service or by a specific sum of money in lieu of that service.

He then went on to express that principle more broadly:

In a case such as this one, the relationship between the consideration given by one contracting party and that given by the other is such that it is possible to discover what value they attributed to the service which constituted part of the consideration. That value is calculated, indirectly, by reference to the normal wholesale price of the product; there too, however, it is not a question of an abstract value but rather of a specific price, applied by the same contracting parties in “normal” transactions, and moreover that price will be charged for the goods in question if the promised service is not provided.

The general rule deriving from this decision therefore, is that a non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply. However, because we are required to ascribe a subjective value, we are not simply putting the question: “What would anyone else have paid for this supply in money?”

You could view the proper question as being: “What would this particular recipient have paid this particular supplier for this particular supply had the payment been in money?”

In a “Naturally Yours” situation the alternative monetary consideration is not difficult to establish because the normal price chargeable is self-evident from the contractual arrangement between the parties to the transaction. Alternatively, the monetary equivalent may be set out in a catalogue or price-list which shows what the recipient of the supply will have to pay when he provides no non-monetary consideration. The commonest example of this type of arrangement is where persons providing selling or introductory services to a mail-order trader are entitled to receive catalogue goods for a reduced cash payment or no cash payment at all. However, the position is less straightforward when the goods supplied in return for such services are not otherwise sold to the provider of the service at all. This was the situation which the European Court considered in the case of Empire Stores Ltd.

Empire Stores Ltd

In the Empire Stores case, the European Court was faced with a twofold question:

  • Did introducing oneself or others as potential new customers constitute a service capable of being non-monetary consideration for the supply of a “reward good”?
  • If it did, how could this non-monetary consideration be valued in respect of those “reward goods” supplied which were not sold at all by Empire Stores?

Empire Stores are a mail order company that sell goods via catalogues. Two schemes were introduced to attract new customers: a “self-introduction scheme” and an “introduce-a-friend scheme”. Under the first scheme, a person was entitled to select an item from a list for no extra charge once they had supplied their personal details, been approved as a customer and placed an order for goods from the catalogue. Under the second scheme, established customers could also select an item if they recommended a friend as a potential customer, the friend had been approved and then made a first payment on an order for goods.

The “reward goods” in question were items that were not advertised for sale in Empire’s catalogues. Empire had accounted for VAT on the cost price of these goods. Customs argued that VAT was due upon the tax-exclusive cost plus a 50% “mark-up” on the ground that this is what the sale price would have been if the items had been offered for sale in the catalogues. The Court found that VAT was only due upon the cost price of the items. Concluding as follows:

  • The introductory service provided by the customer was non-monetary consideration because there was a direct link between its provision and the supply of the “reward good”. The link had to be direct because in the absence of the service no “reward good” would be supplied.
  • There was no doubt that the value of the services could be expressed in monetary terms because they were remunerated by a supply of goods.
  • Where the value was not a sum of money agreed between the parties:

    “… it must, in order to be subjective, be the value which the recipient of the services constitutinobtain and must correspond to the amount which he is prepared to spend for that purpose. Where, as here, the supply of goods is involved, that value can only be the price which the supplier has paid for the article which he is supplying without extra charge in consideration of the services in question.”