The European Court of Justice’s (ECJ) decision in Granton Advertising BV v Inspecteur van de Belastingdienst Haaglanden/kantoor Den Haag7 confirms that the use of “discount cards” do not constitute “payment” under the Directive and that the relevant taxable transaction for VAT purposes is the sale of the cards to the consumer. The ECJ also confirmed that such cards are not covered by the exemptions contained in Article 79 Principal VAT Directive. This judgment is consistent with the approach taken in the UK.
Between 2001 and 2005, Granton Advertising BV (Granton) sold the “Granton” card to consumers at a cost of €15 to €25. The card entitled the holder to obtain goods and services from various shops, including restaurants, cinemas and hotels, at discount. Those businesses had entered into agreements with Granton Advertising to attract customers. After the agreement was signed, no payments or fees passed between Granton and the affiliated businesses. The cards themselves were transferable, but could not be exchanged for money or goods.
In 2005, the Dutch revenue authorities formed the view that the sale of the cards constituted a transaction subject to VAT. This decision was appealed with Granton arguing that the cards were exempt from VAT because they fell either under the exemption relating to “other securities” or that relating to “other negotiable instruments” found in Article 13B(d) Sixth Directive (77/388/EEC)8.
Upon appeal, the Gerechtshof te’s-Hertogenbosch referred the matter to the ECJ for a preliminary ruling.
In its Order for Reference, the domestic court had characterised the cards as providing “partial payment” for goods and services received by the customer: a relatively complex formulation of the nature of the transactions involved for VAT purposes.
The ECJ found that the correct approach was to consider the conditions governing the sale of the cards to the consumer in order to determine the nature of that transaction. After that step, the only function of the card was to compel the affiliated business to charge less than its normal prices. In other words, to provide a “price discount”. Article 11(A)(3)(b) Sixth Directive9 informs us that the difference between the “normal price” and the discounted sum is irrelevant for VAT purposes. All that matters is what is ultimately charged.
This approach is eminently sensible as there is virtually no link between the sum paid for the card and the discount obtained from the various businesses since calculating the discount value would necessarily depend on uncertain factors such as the customer’s use of the card and the availability of offers.
On the subject of exemption, it is well established that the exemptions must be interpreted strictly. The ECJ found that to be “other securities” and “other negotiable instruments” a transaction must be comparable in nature to the other items mentioned in the exemption: “shares”, “debentures” etc. for the former and “current accounts”, “debts”, “cheques” etc for the latter). Transactions in both of these exemptions are “financial transactions” and although the card entitled the holder to price reductions, it did not constitute a payment instrument since it could not be exchanged for money or goods. Consequently, the ECJ concluded that neither exemption applied.
Ultimately, the correct analysis proved quite simple: the VAT attached to the sale of the card to the customer. As the ECJ put it: “ … the taxable amount of the taxable transaction corresponds to the consideration paid by the consumers in order to acquire the Granton cards, the calculation of the VAT on that basis should not entail any particular difficulties.”
Sometimes correct solutions also benefit from being the simplest.
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