Flashback on ECJ cases C-86/99 (Freemans) – Discount obtained at the time the action is performed – Price reduction after the action has taken place

On , the ECJ issued its decision in the case C-86/99 (Freemans).

Context: Sixth VAT Directive – Taxable amount – Discount accounted for at the time of the supply – Price reduction after the supply takes place

Article in the EU VAT Directive

Article 11A(1)(a), 11A(3)(b) and 11(C)(1) of the Sixth Directive (Articles 73, 79 and 90 of the EU VAT Directive 2006/112/EC)

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Article 79
The taxable amount shall not include the following factors:
(a) price reductions by way of discount for early payment;
(b) price discounts and rebates granted to the customer and obtained by him at the time of the supply;
(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.
The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged.

Article 90
1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.

Facts

Freemans sells its goods to customers by means of mail order, using catalogues which it sends to individuals in order that they may act as its agents. It has approximately 900 000 active agents, who order goods either for themselves (‘agents’ own purchases) or for other customers. Purchases are paid for under a self-financed credit scheme established by Freemans, the agents paying for the goods at the price set out in the catalogue (‘the catalogue price) in instalments, generally spread over a period of 50 weeks. Freemans has created in its books a separate credit account for the agents to which a sum equal to 10% of each payment made by an agent to Freemans is credited to her automatically, that sum comprising more precisely a 10% discount in respect of the agent’s own purchases (hereinafter referred to as ‘AOP discount) and a 10% commission in respect of purchases made for other customers (hereinafter ‘commission’).
The agent may withdraw the amount credited to her account at any time by cheque, by post office giro or by national lottery vouchers; she may also set off that amount against outstanding balances owed by herself or a customer, or use it against new purchases, which will entitle her to a further 10% discount. However, agents are not entitled to pay, from the outset, the catalogue price less the AOP discount.
If an agent does not pay an instalment due, the total balance owing on her account becomes immediately due and payable. In such a case, in principle, the AOP discount or commission cannot be paid out until the account is put in order.
Where the amount credited to the agent’s account is not claimed over a certain period, it is written off in Freemans books. However, in practice, even where agents delay in claiming their right to AOP discount and where that right is technically time-barred, they do not lose their entitlement to that right. In fact, a substantial amount of AOP discount remains unclaimed and is retained by Freemans.
Under the SMGT, Freemans was entitled to make an immediate deduction of AOP discount from its daily gross takings. Since 1 March 1997, the date of application of the OMGT, Freemans is required to calculate its daily gross takings without deducting AOP discount, unless and until the discount is withdrawn by the agent in cash or set against the purchase price of goods.
Despite the withdrawal of the SMGT, Freemans continued to calculate its VAT returns for the periods April and July 1997 on that basis, namely deducting the AOP discount from the catalogue price. The Commissioners nevertheless assessed Freemans’ transactions according to the new method, the OMGT. Freemans appealed against those assessments to the VAT and Duties Tribunal, London.
In the proceedings before that tribunal, Freemans submits that the taxable amount in respect of goods supplied to an agent for her own use is the catalogue price of those goods less the agent’s own purchase discount, since Freemans is never in a contractual position in which it is entitled to receive the full catalogue price from the agent.
The Commissioners contend, on the other hand, that upon a proper construction of the agreement between Freemans and its agent the consideration, within the meaning of Article 11A(1)(a) of the Sixth Directive, is the full purchase price of the catalogue goods which the agent is contractually required to pay to Freemans.
The VAT and Duties Tribunal points out that the Commissioners are not claiming from Freemans VAT on an amount greater than that actually paid by the final consumer. It adds that the time of supply of the goods leading to the AOP discount is before payment for the goods which gives rise to that discount. In its view, that tends to suggest that Freemans’ appeal should be dismissed.

Questions

What, on a proper construction of Article 11A and 11C of the Sixth Directive, is the taxable amount in respect of goods supplied by mail order from a catalogue to a customer for the customer’s own use where the supplier in operating self-financed credit terms allows a discount from the catalogue price to the customer (AOP discount) with the AOP discount being credited to the customer as and when instalment payments are made to the supplier (or use made of AOP discount in reducing or discharging an instalment payment) but where the AOP discount which has accrued on payments made is available for immediate withdrawal or use by the customer even though future instalment payments will be due from that customer?

Is the taxable amount:

(1) the full catalogue price of the goods sold to the customer less the AOP discount on that price; or
(2) the full catalogue price of the goods sold to the customer with a reduction as and when the AOP discount is credited to a customer; or
(3) the full catalogue price of the goods sold to the customer with a reduction as and when the AOP discount is withdrawn or used by a customer; or
(4) some other, and if so what, amount?

AG Opinion

Article 11A and 11C of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, must be interpreted as meaning that the taxable amount in respect of goods supplied by mail order from a catalogue to a customer for the customer’s own use, where the supplier in operating self-financed credit terms allows a discount from the catalogue price to the customer (‘AOP discount’) with the discount being credited to the customer as and when instalment payments are made to the supplier (or use made of the AOP discount in reducing or discharging an instalment payment) but where the AOP discount which has accrued on payments made is available for immediate withdrawal or use by the customer even though future instalments payments will be due from that customer, is the full catalogue price of the goods sold to the customer less the AOP discount on that price.

Decision

Upon a proper construction of Article 11A(3)(b) and C(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, the taxable amount in respect of goods supplied by mail order from a catalogue to a customer for the customer’s own use where the supplier allows the customer a discount from the catalogue price, a separate account being credited in the customer’s favour with the amount of that discount as and when instalment payments are paid to the supplier – a discount which may then be immediately withdrawn or used in another way by the customer – is the full catalogue price of the goods sold to the customer, reduced accordingly by the amount of that discount at the time when it is withdrawn or used in another way by the customer.

Summary

Discount obtained at the time the action is performed – Price reduction after the action has taken place

The taxable amount for goods supplied by mail order from a catalog to a customer for his own use, where the supplier grants the customer a discount from the list price with the amount of that discount being credited to a separate account at the time the installments are paid to the supplier – which discount can then be immediately withdrawn or otherwise used by the customer -, the full list price of the goods sold to the customer, which will be reduced accordingly by the amount of this discount at the time in which it is recorded or otherwise used by the customer.

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