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HMRC internal manual

VAT Valuation Manual

Non-monetary consideration: valuation of reward goods under schemes with cash commission alternatives

In the majority of reward goods cases, the recipient of the goods is only able to receive specified goods in return for his services for a reduced monetary payment or no monetary payment at all. However, some traders operate schemes under which the provider of the services can choose between taking a cash commission or selecting catalogue goods at a lower price. The most recent court decision to consider this situation was the April 1997 ruling in the Court of Appeal by Rosgill Group Ltd [1997] STC811.

Rosgill Group are in the business of selling clothing and other goods via a party-plan arrangement. Self-employed organisers show and sell the products at parties held in the homes of hostesses. In return for permitting a party to be held in her home, a hostess is entitled to take a cash payment or obtain goods from Rosgill’s catalogues at a reduced price. The amount of cash or reduction to which she is entitled depends upon the volume of sales achieved at the party. The amounts of cash and price reduction are not equal. In the sample transaction considered by the Tribunal, the hostess had the option of £2.89 in cash or a “discount” of £7.23. She opted for the “discount” on a blouse that would have cost her £27.99 if she had paid the listed retail price, making a cash payment of the £20.76 “price difference”.

Rosgill argued that VAT was only payable on the £20.76 actually paid by the hostess. Or alternatively, that the value of the consideration was only the cash actually paid plus the amount of cash commission waived - a total of £23.65. Rosgill used the ECJ decisions in Elida Gibbs and Argos in support of their arguments. Customs argued that, when the transaction was viewed as a whole, it was obvious that the total consideration for the blouse was both the holding of the party and the £20.76 actually paid and the appropriate measure for the value of the holding of the party was the “discount” given to the hostess. The Court of Appeal agreed with the tribunal chairman’s findings in favour of Customs. In his judgement Sir Richard Scott commented that:

On the facts of this case, therefore, Rosgill has itself attributed a value of £7.23 to the non-monetary consideration it received from Mrs Leaver. It supplied the blouse in consideration for not only the payment of £20.76 but also of the holding of the party to which it attributed a value of £7.23. Accordingly, in my judgement, section 10(3) of the 1983 Act requires VAT to be calculated on the sum of £20.76 and £7.23. The tribunal came, in my judgement, to the correct conclusion…

In Rosgill, the Tribunal and the Court of Appeal effectively followed the Naturally Yours principle. The points that you should remember for application to similar cases in the future are as follows:

  1. The value adopted in Rosgill, like Naturally Yours, was not the application of an objective open market value. It was the value which the parties had subjectively attributed to the service of holding the party. It was plain from the contractual terms of the transaction that had the hostess not provided the service; she would have had to pay the normal retail price for the blouse.
  2. The fact that the recipient of the price reduction could have opted to take cash instead does not prevent the “usual” non-monetary consideration valuation rules applying in those cases where the price reduction is selected rather than the cash option.
  3. In Naturally Yours, the amount of price reduction was a single, constant amount. The fact that the amount of the reduction can be variable does not prevent the “Naturally Yours rule” from applying.