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June 26, 2017
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Redwood Birkhill Ltd v HMRC - Is a Bulk Buying Scheme a Taxable Supply?

In the case of Redwood Birkhill Ltd v HMRC, the First-Tier Tribunal found that a scheme whereby a third party arranged discounts on behalf of other business in return for retaining a portion of the discount received was a taxable supply on which VAT was due.

Businesses using similar arrangements may wish to examine their own VAT responsibilities in light of the Tribunal’s decision.

Background

  • Redwood Birkhill Ltd (“Redwood”) negotiated on behalf of different types of public houses which can be broadly divided between (a) Redwood’s own establishments which it managed, and (b) public houses run by tenanted publicans or which Redwood only part invested in (“the Publicans”).
  • Redwood negotiated with two major brewers ("the Brewers") for a range of beer, lager, cider, wines, spirits and minerals.
  • By arranging the orders on behalf of itself and the Publicans, Redwood was able to negotiate a discount from the Brewers.  The Brewers would normally pay this discount directly to Redwood.
  • Redwood would in turn pass on a portion of the discount to the Publicans and would retain a portion for itself.  The retained element was not disclosed to the Publicans.
  • This arrangement effectively allowed Redwood to make a profit from organising the discounts and allowed the Publicans to obtain higher discounts than they would otherwise be able to obtain if they dealt with the Brewers individually.
  • In 2015 HMRC issued a ruling that Redwood was making a taxable supply of purchasing services to the Publicans for which the consideration was Redwood’s retained discount.

The Case

The central issues for the Tribunal were:

  1. Who was making a supply?
  2. What was the supply?
  3. Whom was it made to?

A number of arguments and counterarguments were advanced by both parties but the key ones were:

  • Redwood’s argument that it was not acting as an agent for, or on a commission sharing arrangement with, the Publicans.  Redwood insisted that there was no written agreements, it was under no obligation to pay the whole discount, and that the Publicans could not sue for it.
  • HMRC’s assertion that it was Redwood who made supplies to the Publicans; the supply being the service of achieving discounts for the Publicans.  Redwood dismissed this saying that any money that did change hands was from Redwood to the Publicans, not the other way round as is usually the case with a buyer and seller.
  • Redwood’s argument that if there were supplies it was only of the Publican’s barrelage to Redwood or exclusivity arranged by Redwood to the Brewers.  This argument was complex but broadly meant that Redwood would not have been obliged to account for VAT on its retained discount.

The Decision

The Tribunal noted that ‘supply’ is not defined in the VAT legislation and that it had to look at the economic and commercial reality of the transactions.

The Tribunal found in favour of HMRC and held that there was a supply by Redwood which consisted of arranging and obtaining the Publicans’ discount.  The consideration for this service was Redwood’s retained discount upon which VAT was due.

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