In HMRC v Coinstar Limited [2017] UKUT 256 (TCC), the UT held that services which consisted of exchanging coins for more convenient vouchers were exempt under item 1, Group 5, Schedule 9, Value Added Tax Act 1994 (VATA).

Background

Coinstar Limited (Coinstar) operates around 2,000 self-service coin kiosks in major supermarkets throughout the UK. Customers deposit loose coins in the machines in exchange for either a cash voucher or to make a donation to charity. The display screen indicates to the customer that the cash voucher option is subject to a service fee. If the cash voucher option is selected, Coinstar charges a 9.9% commission fee. 

The kiosk contains sensors which detect the number of valid UK coins that have been inserted. This information is shown to the customer on the display screen. If the customer opts to receive a cash voucher, it is printed for the face value of the coins less the service fee. The voucher can then be redeemed at the supermarket’s cashier for cash, or used as part payment for the customer’s supermarket shopping.

In 2000, HMRC advised Coinstar that where a voucher was issued it considered the supplies made by Coinstar to be exempt from VAT under item 1, Group 5, Schedule 9, VATA. This view was confirmed later in 2001, although HMRC added that where vouchers were used to pay for goods there could be a taxable supply within paragraph 5, Schedule 6, VATA.

Since Coinstar had no way of knowing whether the customer would redeem the voucher for cash or goods, it took the pragmatic approach to exempt the whole commission. However, following a VAT inspection, in July 2015 HMRC changed its position and advised that the commission fee supplies were not exempt. Coinstar appealed this decision to the FTT.

The FTT allowed Coinstar’s appeal and held that there was a single exempt overarching service of exchanging coins for a voucher and that was a VAT exempt transaction in securities for money within item 1, Group 5, Schedule 9, VATA.

HMRC appealed to the UT.

UT’s decision

HMRC’s appeal was dismissed.

Although it was common ground between the parties that the FTT had correctly concluded that Coinstar made a single overarching taxable supply, HMRC argued before the UT that the FTT had failed to consider the contractual analysis in its decision and the agreement was for a coin counting service. HMRC also argued that the FTT had incorrectly concluded that the transaction fell within the terms of the finance exemption.

With regard to the contractual arrangements, the UT confirmed that it was clear from the FTT’s decision that it had had the contract firmly in mind and that the customer’s election to take vouchers or donate to charity demonstrated that the customer was contracting with Coinstar to receive vouchers in consideration for payment rather than a coin counting service.

The UT held that, as a matter of economic reality, the transaction was not simply limited to coin counting. The 9.9% fee was consistent with that analysis. As the FTT correctly observed, the kiosk did not return the coins and a customer would not pay 9.9% of the value of the coins just to have them counted and returned. The mere fact that the service provided by Coinstar included the counting of coins did not mean that the overarching supply was one of coin counting.

The UT dismissed HMRC’s argument that the FTT had mis-characterised the supply. It agreed with the FTT’s analysis that the coin counting aspect was merely the necessary pre-condition to the issue of the voucher (which was the main aim of the transaction). It was clear to the UT that in this case the typical customer was seeking to exchange inconvenient loose change for a more convenient voucher and that the counting of the change was necessary to ensure that a voucher in the correct amount was issued. 

HMRC also sought to challenge the FTT’s conclusion that there was no relevant difference between Coinstar’s transaction and a foreign exchange transaction. The UT said that the FTT was entitled to reach this view. There was no material difference between exchanging one currency for another and exchanging one form of Sterling (coins) for another form of Sterling (vouchers).

Finally, the UT rejected HMRC’s view that the VAT finance exemption was restricted to situations where the tax base was difficult to determine. That was clearly not the intention of the CJEU in Velvet & Steel Immobilien und Handels GmbH (C-455/05). If that were so, all financial services supplied in consideration for an identifiable fee would fall outside the exemption. The UT derived support for its view from Skandinaviska Enskilda Banken AB Momsgrupp v Skatteverket (C-540/09) where the CJEU applied the VAT finance exemption even though there was no difficulty in determining the tax base and despite referring to Velvet & Steel.

Comment

The UT confirmed that the FTT had been correct in concluding that the economic reality was that the arrangement was one for obtaining vouchers and the level of commission charged meant that the supply went beyond just a coin counting service and was a single supply of exchanging coins for a more convenient payment format in the form of vouchers. Nothing in the VAT Directive prevents the scope of the exemption from applying to a service consisting of exchanging Sterling in one denomination for Sterling in another.

A copy of the decision is available to view here.