Pharmaceutical Society v Boots Cash Chemists

LONDON TRIBUNAL CENTRE

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

TONY RING FTII

JO NEILL ACA

Sitting in public in London on 24 – 28 and 31 March and 2 – 4 April 2003

David Milne QC and Fred Philpott and Andrew Hitchmough, counsel, instructed by Dario Garcia, solicitor of Ernst & Young, accountants, for the Appellant

Christopher Vajda QC and Philippa Whipple and Mario Angiolini, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

Debenhams Retail Plc ("DR"), the high street retailer, offers goods and services to customers through a number of retail stores in the UK and via the Internet.

DR appeals against a liability ruling contained in a letter from the Commissioners to DR dated 3 January 2001 and subsequently confirmed on review by a letter of 16 February 2001, stating that VAT remains due from DR on the full amount paid by customers of DR by means of a credit or debit card. The circumstances in which the decision has been taken are set out in more detail below.

As a result of the decision, on 28 February 2001, the Commissioners have issued an assessment for £644,382 plus interest and DR appeals against this.

Until 1 October 2000 DR, a 100% subsidiary of Debenhams Plc, used to sell goods whose price tag showed, for example, £100 ("the ticket price"). Where the customer used a credit card, a debit card or a store card to pay, DR then paid the credit or debit card handling company, or the company behind the store card arrangements, an amount of, say, £1.00 for its exempt card-handling supply. The result was a supply by DR of the goods for £100; and because the amount paid by DR to the card-handling company (the £1.00) was in return for an exempt supply, no VAT relief was obtained for that expenditure.

From 1 October 2000 onwards an arrangement was put in place. The arrangement was designed to change the terms on which "the Debenhams Group accepts credit cards in order to produce a position whereby less VAT is paid than was paid previously and for no other reason". Those words are taken from a letter dated 17 March 2003 written by Ernst & Young (E&Y), the architects of the scheme who have represented Debenhams in the hearing before this Tribunal. The changed arrangements were designed to make the card-paying customer enter into two purported contracts at the point of sale. One was with DR for the sale of the goods (ticket price £100) for £97.50. The other was with another company called Debenhams Card Handling Services Ltd ("DCHS"). DCHS is a wholly owned subsidiary of DR, but is not a member of the same VAT group as DR. Under the latter purported contract 2.5% of the total ticket price was said to be payable to DCHS for exempt card-handling services. The arrangement, if successful, results in DR making a supply of the goods for a consideration of £97.50, i.e. 97.5% of the ticket price.

DR contends that the arrangements produce exactly that effect. It is therefore chargeable to VAT on the £97.50; the balance of £2.50 goes to DCHS as an exempt card-handling fee. The Commissioners challenge that on four grounds:

The arrangements depend for their success on DCHS making exempt supplies of financial facilities to the customer falling within VAT Act 1994 Schedule 9 Group 5 items 1 or 2 coupled with Note (4). Item 1 covers the "transfer or receipts of , or any dealing with, money …". Item 2 covers the "making of any advance or the granting of any credit." Note (4) provides that Group 5 "includes any supply by a person carrying on a credit card, charge card or similar payment card operation made in connection with that operation by a person who accepts the card used in the operation when presented to him in payment for goods or services." See also Article 13B(d)(3) of the Sixth Directive.

The points at issue in the present appeal turn on the construction and application of the following provisions of EC and domestic legislation.

Article 2 of the First Directive (67/227/EEC) provides:

Article 2 of the Sixth Direction (77/388/EEC) provides:

the supply of goods or services effected for a consideration within the territory of the country by a taxable person acting as such;

the importation of goods."

Article 4 of the Sixth Directive provides:

The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions …"

Article 11A provides:

The above provisions of the Sixth Directive are implemented into domestic law by sections 3, 4, 5(2) and 19 of the VAT Act 1994.

Section 3 provides:

Section 4 provides:

Section 5(2) provides:

The arrangements with which this appeal is concerned were put in place with effect from 1 October 2000. The purpose and effect of those arrangements be best explained by first examining the state of affairs prior to those arrangements. After that, there follows a more or less chronological summary of the events from 1998 until October 2000 when the arrangements, by then referred to as "Project Pita", brought DCHS into play. Before addressing the issues, we shall make certain findings of fact that will be relevant to all issues. Findings relevant to particular issues will be made when we deal with those issues.

A "Marketing Agreement" dated 18 July 1990 as subsequently amended by a further agreement of 9 December 1997 governed the arrangements for these. The Marketing Agreement was between DR, Debenhams Plc and GEC Bank Ltd ("GE"). Under this GE was responsible for the marketing and issuing of Debenhams store cards as well as the handling of customer accounts so created and processing all payments made using such cards. In return, GE was entitled to a "merchant fee" of between 1 and 2% of the annual value of all sales effected using a store card. These financial services supplied by GE to DR were exempt for VAT purposes.

The Marketing Agreement was further varied on 26 June 1998 and the fee paid by DR was, from then on, subdivided between exempt services provided by GE and taxable marketing services provided by GEC Global Consumer Finance Ltd ("GCF"). Following this variation, DR paid a taxable "promotional fee" to GCF of about 75% and an exempt merchant fee of about 25% of the total fee. That arrangement led to no dispute between the parties to the present appeal.

The relationship between GE and the customer was governed by a regulated agreement under the Consumer Credit Act 1974 entered into when the customer applied (and was accepted) for a store card. Pursuant to such regulated agreement GE would supply credit facilities to individual customers and the customer would, in consequence, be liable to GE for any credit it received and for any interest charges relating to that credit. Supplies of those credit facilities by GE to the customer were, once again, exempt.

Whenever a customer used a store card to purchase goods or services from DR, a single contract for the supply of those goods or services came into existence between DR and the customer, and DR accounted for VAT at the appropriate rate on the total price paid by the customer, i.e. the ticket price.

Pursuant to its arrangement with GE and GCF set out above, DR then paid between 1 and 2% of the price charged to those customers as consideration for the financial and the marketing services, split as indicated above, supplied by them.

In summary, for VAT purposes, the following supplies came into existence:

A taxable supply of goods or services from DR to the customer for 100% of the ticket price.

An exempt supply of credit from GE to the customer.

An exempt supply of financial services from GE to DR enabling the card transaction to take place between customers and DR.

A taxable supply of marketing services from GCF to DR.

DR had an agreement with National Westminster Bank Plc ("NatWest") covering the arrangements for payments by customers using cards other than store cards to pay for goods or services. That agreement, dated 1 July 1990, authorized DR to accept a number of credit or debit cards and Streamline, the relevant part of NatWest, undertook to process those payments on behalf of DR. In return, DR agreed to pay NatWest a percentage of the price charged for sales paid by Visa and Mastercard, Visa Connect (Delta), Electron, Switch and Solo and JCB. The percentages varied from less than 0.1% upwards. The financial services supplied by Streamline to DR were exempt for VAT purposes.

Individual customers had regulated credit arrangements with their own card providers. The supply by card providers to customers was exempt. DR had no role or involvement in such credit agreements.

As with transactions financed by using store cards, whenever a customer used a credit or debit card to purchase goods or services from DR, a single contract for the supply of those goods or services came into being between DR and the customer and DR accounted for VAT at the appropriate rate on the total ticket price paid by the customer.

In summary, for VAT purposes the following supplies took place:

A taxable supply of goods or services from DR to the customer for 100% of the ticket price displayed.

An exempt supply of credit from the card issuer to the customer.

An exempt supply of financial services from Streamline to DR.

This summary is based on the evidence given by Gail Timmins, tax and risk financial controller of DR. Her evidence was based on a witness statement and on documents exhibited to it; and in the course of cross-examination Gail Timmins was referred to numerous other documents which will be identified where relevant. The other witness for DR was Karen Nobes, a taxation manager (compliance) of DR; she gave evidence in writing about the procedures that apply when customers buy goods at DR. Her evidence, which went unchallenged, is relevant to the arrangements that took effect on 1 October 2000. The relevance of most of the evidence summarized in paragraphs 24 to 50 goes to the findings necessary to support conclusions on the commercial reality and the tax avoidance issues.

At some time in late 1997 or early 1998 Gail Timmins heard about a VAT scheme designed by E&Y which, if successful, would allow the retail sales company adopting the scheme, to use Gail Timmins' words, to "save VAT on card-handling cost". Gail Timmins had a meeting in April 1988 with Messrs Garcia and Harley, both of E&Y. At that meeting E&Y presented their proposal entitled "Merchant Charges - Deduction of Acquired Commission from Taxable Turnover". The purpose of the presentation was to show how estimated VAT savings of around £4 million could be generated through the adoption of the scheme. Two variants of the scheme were presented, both of which essentially sought to "shift" the supplies made by the "acquirer" (i.e. GE and Streamline) to DR into direct or indirect supplies to the customer. One of the variants, which in principle was the scheme adopted, involved the creation of "a captive finance subsidiary" of Debenhams Plc.

Gail Timmins received further assistance from E&Y and on 28 May 1998 she sent a message to DR's in-house legal team outlining what she described as the "Credit Card Scheme", attaching a summary of the two options and of what she understood to be the benefits to DR of implementing the scheme. At the time she estimated the profits to DR from operation of the scheme to range from £0.5m to £2m per annum. The message states that the captive finance subsidiary option was her preferred option. Under this the customer would pay a fee of 2% of the VAT inclusive sales price, i.e. of the ticket price, to the captive. This would require a contract between the customer and the captive. She preferred this option to the other option of the customer paying the bank's fee of between £1 and £1.50 on a £100 transaction as "it does not erode the turnover and provides us with greater benefits in terms of profit improvement and cashflow" and it increased the profit, projected at that stage at £0.5m. to £4 m. p.a.. In the message Gail Timmins concluded, by way of summary:

She went on to identify the following advantages of the scheme, namely:

Gail Timmins had been asked by Matthew Roberts (financial director of Debenhams Plc and of DR) to assess a range of practical matters. These were set out in an e-mail of 8 June 1998 from Gail Timmins to E&Y. These included matters such as customer and media reactions, issues under section 75 of the Consumer Credit Act 1974, whether it would be possible to create a contract between the customer and the captive, and the question of misleading price indications under Part III of the Consumer Protection Act 1987, (i.e, if price is stated to be £117.50, is that a misleading price because part of the price may not be the price for the goods but a service fee?).

Gail Timmins sought to obtain more precise data for estimating the likely VAT savings to be obtained from implementing the scheme and, in a series of e-mails between 25 June and 6 July 1998 she wrote:

During the summer of 1998 Gail Timmins pursued enquiries in an attempt to obtain data necessary to make an accurate estimate of the potential savings. She explained the proposals to Debenhams "treasury" and she explored their feasibility with DR's "point of sale" team (as changes to the computer system could be expected) and she took legal advice. Asked by DR's internal systems department for an "overview of the business reasoning", Gail Timmins replied by e-mail of 8 July 1998 as follows:

On 22 July 1998 Mr Harley of E&Y e-mailed Gail Timmins as follows:

In a later e-mail of 11 September 1998 from Gail Timmins to a Mr Grant, she wrote:

A first estimate of the VAT savings arising from the scheme, produced by Gail Timmins on or about 16 September 1998, placed the likely savings as between £3m and £4.5m, these figures being dependent on the handling charge rate applied.

There then followed a meeting within Debenhams of 5 November 1998, the minutes of which include the following amongst "Issues Raised":

The minutes also state that:

On 9 November 1998 Gail Timmins presented the scheme to the executive directors of DR. This presentation, entitled "Tax Planning Opportunities" states as follows:

The presentation then sets out how the scheme works and goes on to state:

The scheme "Potential" was said to be:

Those are the benefits to DR as identified in the printout of the presentation. The consequence was that the executive committee decided to proceed to the stage of a further investigation. A report was called for. There are no further minutes of the executive committee at this stage.

The reaction of the card "acquirers" had not, apparently, been encouraging. Gail Timmins was worried that if DR waited, "Customs will step in and close the loop before we are able to obtain any benefit from the scheme." At this time E&Y were producing legal and technical advice and assistance. On 3 December 1998 a Mr LeBrocq of E&Y wrote to Streamline summarizing the proposed scheme, without specific reference to DR and its effect on the bank. Amongst other things, the summary states:

Commenting on that letter Gail Timmins said that they had been concerned to ensure

that, whatever method of payment was used by the customer, "ultimately the overall

price paid by all of our customers remained the same".

By then DR had created a project team. The team were concerned about the impact of the scheme on DR's customers. There was speculation whether the public perception might kill the scheme off. At the same time, it was envisaged that efforts would be made to ensure that customers would not be aware of any difference in "price" between cash sales and card sales. In an e-mail dated 10 December 1998 David Maxwell of DR's systems division wrote to Gail Timmins:

On 18 December 1998 Gail Timmins e-mailed back indicating that advice was being sought "as to what precisely the minimum requirements would be for the information needed on the credit card slip and till receipt." The advice received was that "something could be done to send the right message to the customer". At that time the plan was to print the credit card slip detailing the split but to keep the receipt produced as normal. In another e-mail of the same date she asked for information relating to till rolls and stated that:

A number of e-mails and other documents between 1998 and 2000 variously described the scheme as, among other things: "VAT Credit Card Tax Scheme", "Tax Credit Scheme", "Credit Card VAT Proposal", "VAT Proposal", "Card Handling Scheme for VAT purposes", "VAT Scheme", "VAT Initiative", "the Ernst & Young VAT Scheme" and, more frequently, "VAT on Credit". On or about 19 April 2000 the scheme was renamed "Project Pita". PITA, Gail Timmins explained, stood for "pain in the arse".

The scheme involved DR's existing card handlers. In the early summer of 1999 Gail Timmins contacted GE with a view to securing alterations in its arrangements with DR and the introduction of new arrangements with the proposed captive. GE's consent was not readily forthcoming. On 24 August 1999 GE wrote to Gail Timmins raising, to use her words, "a whole host of queries and items for consideration". Among the points raised was the need for the captive to have a credit licence if it "does have any meaningful involvement in the provision of credit". Another point taken by GE was - "The notification at POS [point of sale] of the new fee structure is likely to prompt customers to query the scheme and then request discount for cash payments, although our assumption is that Debenhams is not planning to offer such a discount." Following a meeting with GE, Mr LeBrocq of E&Y wrote to GE on 27 September 1999 summarizing the proposed scheme in similar terms to those contained in his letter of 3 December 1998 to Streamline already mentioned above. It contains many of the statements already quoted. His summary to GE also states:

The response from GE to Gail Timmins, dated 27 November 1999 indicates that GE will only be prepared to support Debenhams' initiative "due to its longstanding relationship with Debenhams". The same letter emphasises that the creation of the captive credit card company will solely benefit Debenhams. Correspondence to similar effect took place with Streamline, and in May 1999 agreement was reached to proceed with the scheme so long as NatWest received an indemnity in the event of VAT penalties being imposed.

In January 2000 DR provided E&Y with three specimen till receipts. These were all "Retailer Copy". Two of the three drafts split out the cost of credit card handling from the price attributed to the sale of the goods. The third form does not split the price that way. In the event DR chose not to split the total price. In evidence Gail Timmins explained that the reason for taking this course was that it would have been too expensive, in terms of systems changes required, to have split out the price between the two elements. Gail Timmins admitted in cross-examination that there would have been nothing impossible functionally about splitting out the purchase price.

The minutes of a meeting of the "VAT on Credit" group on 19 April 2000 record that the project "offers a potential £4m per annum saving and is expected to run for 2-3 years". The minutes explain that the card acquirers have given their support for the scheme. They record that the copy of the credit card voucher slip to be produced at the point of sale, being the slip which the customer takes away, will not show the handling fee. Referring to the competition they note that Tesco has been working on a similar scheme and NatWest had received enquiries from other retailers. The notes of the meeting also refer to concern raised about the "Public relations implications of the scheme". The note records that it was felt generally that staff training would be an important aspect, "especially explaining to a customer that there is no reduction for paying by cash".

The next concern about the adoption of the scheme was how it would be presented in the management and statutory accounts. In an e-mail dated 24 May 2000 Gail Timmins indicated that turnover figures for DCHS would automatically be calculated by the system by taking 2.56% (of [which we take to be a misprint for "or"] whatever final percentage is agreed) of all credit card takings. The e-mail continued by noting "the [accounting] system … will remain unchanged to ensure that for management accounting purposes all data remains the same." We infer that, as management accounts relate to the group as a whole, rather than to individual component companies, the attribution of turnover to DCHS at the expense of DR (which might put DR in a loss-making position if the percentage attributed to DCHS were too high) would not appear.

On 25 May 2000 an e-mail from GE to Gail Timmins records that "The cost of amending the marketing agreement to incorporate the new VAT structure is estimated to be in the region of £25,000. As we have already made clear on a number of occasions this cost will have to be funded by Debenhams".

System changes had to be identified and programming work carried out. A draft of the "System Feasibility Study Report" was prepared. This is headed "Project PITA-VAT on Credit". It describes the "Purpose and Scope" of project PITA as follows:

The report then states as follows:

A later version of the same report was identical in most respects, though the wording in relation to "Purpose and Scope" had been slightly varied and the words "Required to implement the VAT on Credit scheme" had been replaced with "Required to support the introduction of a card handling subsidiary scheme". The document contained a revised "Cost/Benefit Analysis", setting out what were regarded to be the "costs and benefits of the project", indicating that "The proposal is projected to have a life expectancy of three years. The total revenue cost over this period is £543,000 …". The same page also indicates that the project required, among other things, the employment of four extra staff and capital expenditure of £264,000. These costs would, Gail Timmins accepted, have been irrecoverable if the project were to have been aborted.

On 8 June 2000 Gail Timmins wrote an internal e-mail that dealt with the possibility of a challenge by the Commissioners. This reads:

On 26 June 2000 Gail Timmins gave a further presentation to the executive directors of DR and of Debenhams Plc (the same people) setting out in further detail the proposed scheme. The printout of the presentation included the following information:

The same day the executive committee approved –

Gail Timmins accepted that the capital expenditure was for the purpose of Project Pita only. Following that meeting an off-the-shelf company, Candlehill Ltd, was acquired.

On 20 June 2000 a "Functional Requirements Specification for PITA/EPOS ENHANCEMENTS" had been produced. This was circulated in-house. Under the heading "Credit Card Voucher" are these words:

On 10 July 2000 an e-mail from GE to Gail Timmins raised some outstanding matters and requested a copy of the NatWest agreement as well as a written outline of the "new VAT structure". These were needed for a meeting with GE to be held the same day. A note of that meeting raised the question that "the impact on the current contract – should be little more than a name change?" There then followed a number of further letters between GE and DR and on 7 August GE reminded DR that it was to approach the Commissioners prior to launch. A letter from Gail Timmins of 8 August indicates that this had not been her recollection and in any event the launch was not due to take place until 1 October 2000.

In an e-mail of 31 August 2000 Gail Timmins forwarded a copy of the board paper (directed at the Boards of Debenhams Plc and DR) relating to the "credit card proposal". The board paper gave an overview of the proposal for consideration and stated, among other things:

On 14 September 2000 a meeting of the Board of DR took place. Gail Timmins gave a presentation, the printout of which is identical to that given to the executive directors on 26 June 2000 referred to above. On 22 September 2000 an internal memorandum was prepared, to be sent to all store managers. This included a question and answer passage and containing an explanation –

The Board of DR gave their approval to the scheme during the course of the meeting. The minutes of that meeting state:

Matthew Roberts' observation (here as in paragraph 47 below) demonstrates the concern about customer perception and the need to have a contingency plan to stop the Pita scheme should its existence damage DR's ordinary trading operations.

On 14 September 2000 Matthew Roberts wrote to Gail Timmins stating:

There then followed a meeting of the executive committee of DR and Debenhams Plc (the same individuals). This took place on 25 September. Gail Timmins presented an update on the credit card proposal among other things, this reported:

A further meeting of the executive directors took place on 27 September 2000. The first draft of the minutes, prepared in advance and submitted to E&Y for approval, contained this passage:

Following consultation the minutes were amended and the finalised set contains the following passage:

Also on 27 September 2000 a meeting of the directors of DCHS took place at which agreements and "side letters" between DCHS and GE, Streamline and DR were approved. Once again, the minutes for this meeting had been prepared in advance and submitted for approval some days earlier.

DR and DCHS entered into a "Second Supplemental Agreement" with GE and GCF on 27 September 2000. GE had stipulated that their fees should not be altered by the adoption of the arrangements. From DR's angle they wanted to ensure that the revision of the arrangements with GE and with Streamline did not enable the latter two parties to participate in the benefits of the scheme. Moreover it was no part of the arrangements that GE should be doing less than under the existing arrangements and that DCHS should be doing more than what DR had been doing. Subject to that the Second Supplemental Agreement purported to make the following changes to the supplies between the parties:

[The effect of this change was that the fee payable to GE would be calculated by reference to the ticket price of the goods, i.e. the total price paid by the customer as had been the case before. This, we infer, was important because GE entered into the arrangements on the basis that its financial position should not alter.]

[We infer that this provision was included to ensure that the changes would not alter the entitlement of GE.]

On 27 September 2000 DCHS signed a further agreement with Streamline which, together with a side letter dated 26 September, purported to make changes to the supplies between the parties which were similar to those set out above in relation to the GE arrangements. In essence, this further agreement with Streamline purported to affect the following changes:

Clause 1 of this agreement is expressly stated to include both the side letter of 26 September 2000 between Streamline and DCHS and a side letter to the Schedule of Commercial Terms dated 10 March 1999. The effect of those letters, as we read them, is that DR continues to be under an obligation to accept credit cards as a means of payment. Gail Timmins' evidence was that Streamline had only entered into the new agreement on the explicit condition that DCHS would procure that DR continued to comply with all relevant procedures as they had been before the introduction of Project Pita. The side letter of 26 September states:

On 27 September 2000 DR (referred to as "Merchant") and DCHS referred to as "Acquirer" also entered into a "Merchant Agreement" which provides among other things that:

By Clause 10 of the Merchant Agreement it is provided:

The purported effect of Clause 10 is (we infer) to make it clear that there is no supply of services for consideration from DCHS to DR.

A further undated "Supplemental Agreement" was entered into between DR and DCHS and this provides that, when customers use a debit card to settle an amount on their Store Card, they will be credited with the full amount and no "handling fee" will therefore be charged.

From 1 October 2000, the part of the credit card slip normally signed by the customer and retained by DR was changed to include the following wording, which we refer to as "the till slip words", from the Pita "Specification" (see para. 43 above):

The copy of the credit card slip retained by the customer remains the same as before and does not include the above wording. It simply states that "Notified terms and conditions apply".

At the same time, from around 1 October 2000, Project Pita has required DR to display on its entrance doors, on "toblerone" till notices and on the "mat" upon which customers sign their credit card slips notices which contain the following wording:

* Amex, Diners and Style excluded"

We refer to those words as "the Notification words".

The customer deals with the same personnel at the point of sale. Clause 1.6 of the Merchant Agreement (already mentioned in paragraph 53(iv) above) provides that "DCHS appoints DR to act on its behalf in its dealings with Cardholders (in particular for the purpose of entering into Cardholder Handling Agreements) …" We shall explain, when dealing with the contractual issue, above, the procedure by which a customer makes a purchase. We shall also summarize the evidence of customer perceptions. In this connection we should mention that the evidence does not satisfy us that in-store notices carrying the Notification words have always been displayed to customers.

The purported effect of the arrangements comprised in Project Pita will, where sales are paid for using in-house store cards, be that the following supplies come into existence:

A taxable supply of goods or services from DR to the customer for 97.5% of the ticket price.

An exempt supply of "card handling services" from DCHS to the customer for 2.5% of the ticket price.

An exempt supply of credit from GE to the customer, as before.

An exempt supply of financial services from GE to DCHS.

A taxable supply of marketing services from GCF to DR, as before.

In relation to sales paid for using Credit Cards, it is said that the following supplies now come into existence:

A taxable supply of goods or services from DR to the customer for 97.5% of the ticket price.

An exempt supply of "card handling services" from DCHS to the customer for 2.5% of the ticket price.

An exempt supply of credit from the card issuer to the customer, as before.

An exempt supply of financial services from Streamline to DCHS.

The overall effect of the arrangements, if successful, will be for DR to be liable for VAT on 97.5% of the ticket price, whereas before it was liable to output tax on 100% of the ticket price. The remaining 2.5% of the ticket price, still paid by the customer, will be an exempt supply of "card handling services" by DCHS.

Setting up the scheme between 20-40 people within the Debenhams Group were, at one stage or another, involved in the implementation of the proposed scheme which took two years to set up.

The design and positioning of the in-house store notices were worked on. The details of these are set out in paragraphs 96 – 105 below when we deal with the contractual issues.

Staff briefings were given by Gail Timmins to the regional directors of DR in July 2000. Each regional director was given the task of explaining the changes to store managers. The effect on customers was important to DR which was concerned to ensure that its customers would not be unduly affected. DR did not, for example, want customers to start querying the new procedures and spending too long at the till; DR was concerned that its cash-paying customers might even demand discounts. Media coverage, like "Watchdog", might be adverse. Store briefing packs were distributed on 22 September 2000. These provide a few Questions and Answers. These had been prepared following advice from DR's "store operations team". We quote two of these.

Does this mean that a customer is paying more for an item today by using a credit card than yesterday?

The explanation to customers with any general queries as to the change is said, in the same documents, to be as follows:

The recommended answers have not, we record, made any mention of the fact that the customer was allegedly entering into two contracts, one with DR and the other with DCHS. Nor is there anything, either in the store briefings or elsewhere, to alert customers registered for VAT that they would recover less input tax if they paid by credit card (other than Amex, Diners and Style cards).

Checks were made in the first few days of implementation of Project Pita to ensure that the in-store notices were displayed and that till procedures were correctly followed. Store audit reviews were amended to include checks on the display of the notices.

Changes were needed to make use of data held on the "data warehouse system" in order to calculate sales by reference to tender types accepted from the customer (ie cash, Amex, Diners and Style cards and other cards).

DR had an arrangement in place with "Global Refund", an independent company, to enable overseas customers to reclaim VAT on departure from the UK in respect of purchases from DR. Under that arrangement Global Refund makes the refund and invoices DR for the sums refunded plus an administration fee. The arrangement with Global Refund was not altered to accommodate Project Pita. The refund to the customer has at all times been calculated on the basis that the total amount paid at the till (the ticket price) was subject to VAT. This is because Global Refund will not know how the customer has paid for his purchase. Given that DR has to pay Global Refund an amount which is greater than the VAT which it has charged to the customer, a mismatch results at DR's expense. Gail Timmins, as we understood her, recognized the mismatch as one of the costs of the scheme.

A special arrangement was needed to cover the situation where a store card holder used his credit card to pay off the debit balance on his in-store card account. In this situation no handling charge is taken by DCHS regardless of the fact that the Notification words say that "customers may pay by credit or debit card if they pay 2.5 % of the price so paid to DCHS." The reason for ignoring the terms of the Notification words in this situation, explained Gail Timmins, was that the handling fees are only charged when a customer pays for something in the store.

DR has a refund policy. This is expressed in a Note as follows:

Gail Timmins confirmed that "the purchase price" for the goods in question was regarded for purposes of the refund scheme as the ticket price irrespective of the fact that the customer may have paid by card when he bought the goods.

The fee used in the E & Y figures of May 1998 (see paragraph 25 above) was 2 % and the "profit" to DR from the adoption of the scheme was calculated on that basis. Gail Timmins said that she had determined the 2.5% rate on the following basis: a VAT inclusive rate of 2.4535% (rounded up to 2.5%) was determined as the most appropriate fee to be charged by DCHS. This fee, she said, "represents a straight average rate of the card charges made by external card acquirers to DR plus an uplift of 0.25% to cover charge back costs and ongoing capital expenditure and other matters." The uplift was deemed necessary by the directors of DCHS "to ensure a reasonable return given that it could not be known with absolute certainty the tender type that customers would use to pay for products purchased in DR stores".

That 2.5% represented a straight average rate of external card acquirer's charges to DR was not in dispute. However, that average included the relatively high rates charged by AMEX and Diners whose cards are excluded from the scheme. (The reason they were excluded was because DR had at the time been negotiating a reclaim relating to card fraud costs with Amex; and it was considered that the negotiation of new arrangements with GE and NatWest to accommodate Diners, Style and Amex would have taken too long.) Then it was pointed out that the average had been calculated by using the total fee charged by GE for its services (see paragraph 14) in processing the in-house Debenhams store cards. In fact GE's acquirer's fee was, as Gail Timmins accepted, only a quarter of that. The balance was a taxable promotion fee. Then, when presented with the figures Gail Timmins accepted that the actual level of "charge backs" was a tiny percentage of total sales. Gail Timmins's reference to "ongoing capital expenditure" (see paragraph 67 above) was directly contradicted by the accounts filed for DCHS for the periods to 31 August 2001 and 2002. These showed no capital expenditure either ongoing or otherwise and Gail Timmins accepted that no capital expenditure had been incurred by DCHS to date. Nor has any documentary evidence been produced to show that capital expenditure of DCHS was even under discussion. Other than £53,000 in 2001 and £60,000 in 2002 paid to DR for management fees DCHS has spent nothing else. Presented with figures produced by the Commissioners showing that the average of total fees charged by card holders as a percentage of total spend was 0.51% as compared with Gail Timmins's average rate of 2.5%, she accepted that her rate was "not entirely accurate". We think that 0.51% is the more reflective of costs as the average of the card handlers' fee before the implementation of Project Pita.

The "handling fee" to be charged by DCHS was, according to clause 3.6 of the Merchant Agreement between DCHS and DR, to be agreed between DCHS and DR at the commencement of the agreement and from time to time: see paragraph 53(vii) above. Gail Timmins' evidence was that 2.5% was settled on as a result of continuous discussions. Other than that, there is no record of any agreement in any minutes.

Our conclusion from the evidence as a whole is that the "handling" percentage of 2.5% was adopted to suit Project Pita and was not designed to represent a fair return to DCHS for card-handling services. It did not reflect risks assumed, or special expertise introduced, by DCHS. It could not, as Gail Timmins accepted, have been any higher because then DR would have made a loss. To the customer it was six of one and half a dozen of the other; insofar as he or she was concerned it would not have mattered whether the fee was fixed at 2.5% or 97.5% unless, of course, the customer was a registered trader or, eg, had to make a claim on his insurance policy for loss or damage to the goods in question. Indeed a 2.5% handling fee could have been charged for handling cash purchases as well as card purchases, though Gail Timmins explained that this might have had an adverse PR impact. Overall therefore we are satisfied that the 2.5% handling fee was scheme-driven. As noted in paragraph 68, it is in the region of five times the cost of earning it.

The Directors Report to the DCHS accounts for the period from 20 June 2000 to 1 September 2001 describe the principal activities of DCHS as "the provision of card handling services to Debenhams' customers". The Note to the entry in the accounts for turnover explains that turnover "comprises the provision of card-handling services to Debenham Retail plc". The same wording for both entries is found in the accounts for the year to 31 August 2002. The notes to the accounts show that DCHS has at all material times been a wholly owned subsidiary of DR.

Gail Timmins asserted that the wording of the Note had been a mistake. But she had been only one of the directors who had signed the accounts off. We heard nothing from the other directors, or indeed from their auditors, to confirm this. We can therefore place only limited weight on Gail Timmins' assertion.

Turnover is £30.8 million for 2001 and £35.6 million for 2002. This represents the "handling fees" of 2.5% of the ticket price for each of DR's sales. From those amounts are deducted as "cost of sales" £6.5 million and £7.3 million respectively; those figures are the "fees and charges" of GE and Streamline for their services. £53,000 and £60,000 were shown as administrative expenses; these are the payments made by DCHS to DR for its agency services, i.e. those services summarized later under the heading "DR's services to DCHS".

DCHS' current assets for 2001 were £17 million (i.e. debtors less creditors) and for 2002 were £36.7 million. No amount is shown for any fixed assets, plant, machinery etc. (and we understand there were not any).

The information derived from the accounts causes us to question the accuracy of the statement attributed by Gail Timmins to the directors of DCHS (referred to in paragraph 67 above) that they had been concerned to ensure "a reasonable return" from the fee charged to DR, let alone the 0.25% of uplift. DCHS's profits before taxation of £24 million and £28 million for 2001 and 2002 respectively compare more than favourably with the fees and charges earned by GE and Streamline. The £53/60,000 fees and the return were, we think, dictated by the tax-saving objectives of Project Pita.

Debenhams Plc has an arrangement in place with its bank whereby deposits and overdraft balances in nominated bank accounts throughout the group are accumulated to determine the overall cash position of the undertaking. The introduction of DCHS and the implementation of Project Pita has meant that substantial amounts payable by GE and Streamline for their services have been received by DCHS into its bank account. Those are the amounts that would previously have been paid direct to DR. By clause 3 of the Merchant Agreement DCHS is required to pay to DR the amounts due in respect of "relevant sales"; these are the equivalent to the 97.5% of the ticket prices. DCHS retains the remaining 2.5% of the amounts payable by GE and Streamline and from that amount discharges, by set-off, their fees and charges. Prior to 15 January 2001 DCHS had not been incorporated into the Debenhams Plc group banking arrangements; until then all the funds in its accounts had been transferred to DR and duly accounted for in inter-company loan accounts.

Project Pita required that the 2.5% handling fee be charged on sales both of DR's own stock and that of concessionaires operating within DR's stores. Prior to Project Pita the concessionaires had made sales to customers directly while DR had charged the concessionaires a percentage fee on sales of their stock. Project Pita involved the concessionaires selling their goods to DR at the point of sale in the DR stores and DR then making the sale to the customer. Some goods and services were excluded from Project Pita because DR did not want to be involved in the liability claims that might have arisen had it been the seller. For those concessionaires' sales that came within Project Pita, DR negotiated a VAT rate with Customs and Excise in order to produce an accurate self-bill invoice. DR had an arrangement with DCHS to cover cases where concessionaires continued to make sales as principals through DR's terminals. This contract provided that DCHS would pay to the concessionaire in question the total sale price of the goods less the commission payable to DR. The balance would be paid to DR less the 2.5% handling charge payable to DCHS. Additionally, concessionaires who processed sales through their own terminals were excluded from the arrangements since card settlement was made to them directly under their own contracts with their own acquirers, as opposed to via DR.

We now summarize what, according to the evidence in the documentation, DCHS actually does. This is particularly relevant to the commercial reality issue.

Its principal activity, described in the Directors Reports and Accounts, is "the provision of card handling services …". For all those services DR is appointed its agent. See the Merchant Agreement between DR and DCHS, clauses 1.6, 1.7 and 10 in paragraph 53 above. In the side letter of 27 September 2000 (see paragraph 52 above), Streamline agrees to DR's appointment as DCHS' agent for the purposes of the Merchant Services Agreement with Streamline; clause 7.1 of that agreement provides that Streamline is to be "the sole processor of all card transactions". The same arrangement is found in the agreement with GE. The effect of this Second Supplemental Agreement of 27 September 2000, summarized in paragraph 51 above, was to leave GE with the same obligation to provide the same card-handling services as had been the position before Project Pita started.

DCHS's accounts show no assets (other than cash and debtors) and no employees with which to conduct its so-called principal activity. For an outlay of just £53,000 in 2001 and £60,000 in 2002 (these are said to have been charged by DR for its agency services) it gets the benefit of, for example (i) DR's staff at the tills and DR's processing centre at Taunton handling over £1000 million worth of card transactions each year, (ii) DR's till systems and the central server system, (iii) DR's constant communication with GE and Streamline, (iv) DR's involvement in designing and displaying the in-store notices containing the Notification words, (v) DR's accounting systems that split the amounts payable by GE and Streamline between DR and DCHS and (vi) the setting-up costs of Project Pita (including the GE costs of £25,000 referred to in paragraph 38 above). DCHS is therefore effectively excluded from active involvement in all aspects of its "principal activity" of providing card-handling services. Together with the provisions in the agreements referred to in paragraph 79, which make clear that GE and Streamline are the sole processors of all card transactions, the most any service from DCHS to the customer could consist of is its securing for the customer of access to the card-handling services provided by GE and Streamline.

As DCHS does not process any card, the claim in its Directors Report and Accounts that it provides card-handling services is, we think, unreal.

Nor is there any evidence that that DCHS (through DR as its agent) ever "acquires" any of the customers' debts that arise from sales by DR. The Merchant Agreement describes DCHS as "acquirer". But bearing in mind that GE and Streamline (or the customer's own card issuer) are the real acquirers, the description of that DCHS as "acquirer" also appears to us to be unreal. The same goes for E&Y's assertion (see paragraph 34) that the customer would receive in return for the payment "not just the supply of goods but also the acquisition services currently provided by GE to Debenhams".

Another factor showing that DCHS actually "does" nothing is that, according to Gail Timmins' evidence, she could recall no board meeting of DCHS, other than those held when accounts were signed off and new agreements with GE were entered into. Nor could Gail Timmins, an executive director of DCHS, recall the circumstances in which the Merchant Agreement was approved by DCHS and in particular how DCHS came to agree (in clause 11) to pay £50,000 as a fee for DR's services or how £53,000 and £60,000 were subsequently agreed. Finally in this connection, we note that DCHS has had no staff of its own at any time.

There is no evidence that DCHS has done anything to authorize DR's acceptance of payment by card in respect of its sales to customers (see clause 1.1 of the Management Agreement) otherwise than through DCHS' appointment of DR as its agent. DR therefore has self-authorizing powers. In theory DCHS could bring to an end DR's agency to authorize acceptances of card transactions by terminating the Merchant Agreement. But that would totally destroy DCHS' means of carrying on any card-related activity. Nor is there any evidence that DCHS has done anything to direct or supervise DR's dealings, as DCHS' agent, with the banks as provided for in clause 1.6 of the Merchant Agreement. The initial agreements with the banks appear to have been set up before DR was finally appointed as DCHS' agent.

Seen in the context of all the relevant agreements covering the card handling services, DCHS has no independent role. If it provides any service at all, it provides this as a satellite supply to the supplies that DR makes to its customers. Only if DR accepts an offer from a customer to buy goods or services will DCHS be engaged. DCHS cannot under the Project Pita arrangements supply anything unless DR agrees to a card sale (not being an Amex etc card sale); it cannot under the Project Pita arrangements decline to make its "card-handling services" available if DR itself agrees to make a sale. DCHS is a creature of Project Pita and enters into no transactions other than (i) those automatically activated by DR's own sales to its customers and (ii) the fee-splitting function to which we now turn.

DCHS has responsibility for paying or securing payment to DR of the amounts due in respect of relevant sales by way of "settlement": see clauses 1.2 and 3 of the Merchant Agreement. By that means DR gets its 97.5% of the ticket price of goods and services covered by Project Pita. The accounting for this is, as we understand the position, done by and at the expense of DR; if DR has been reimbursed for the work it does, that has come within the fees of £53,000 and £60,000.

We see DCHS as an inactive wholly-owned subsidiary of DR "endowed" by its parent with bare responsibilities which it discharges solely through the agency of its parent and which enable it to make considerable profit. For an annual outlay of £53,000 and £60,000, DCHS has earned (according to its accounts) pre-tax profits of £24 million and £28 million in its first two years of trading.

Customers are told, by the Notification words, that they "may pay by credit or debit card if they pay 2.5% of the price they paid to DCHS". The balance, they are told, "will go to [DR]". They are then informed by the Notification words that "The total price paid is unaffected by the type of payment used".

The words giving permission to pay by credit or debit card have changed nothing. They reflect the position before the Project Pita was put in place. The total price the customer has to pay is unchanged by Project Pita. The change is that the exercise of the customer's right to pay by card is said to be conditional on 2.5% of the price so paid being paid by him to DCHS.

The message from the Notification words is that DR will not accept payment by card (other than Amex, Diners and Style cards) unless the customer pays 2.5% of the ticket price to DCHS. It is not however the customer's responsibility actually to pay the 2.5% to DCHS. The Notification words tell him that the total price paid is unaffected by the type of payment used. Nor is the sale of the item of goods in any way affected by an "internal" failure, i.e. a failure within the Debenhams companies to secure the transmission of the 2.5% to DCHS. Nevertheless, by acceding to the Notification words the customer is obtaining something, namely the right to pay DR by card. That "something" is conferred on him by DR. At the same time he may be putting himself at a disadvantage by acceding to those words. If, for example, he is a registered trader he loses the right to relief for input tax on the VAT ingredient in the full ticket price; relief will be limited to VAT on 97.5% of the ticket price. And there are other disadvantages summarized in paragraph 129 below.

The nature of the card processing service is unaltered by Project Pita. GE and Streamline continue to do exactly what they did before it was introduced, and they continue to charge the same fees for their services. In that respect the customer gains nothing from Project Pita as compared with what happened before. The only effect on him is that he is excluded from using his card unless he accedes to whatever the Notification words mean.

Project Pita has the effect of splitting "the total price paid" (to use the Notification words) between DCHS and DR. DCHS, as we have already noted, "earns" its 2.5% without risk, without effort and at nominal expense (i.e. £53,000 and £60,000 for 2001 and 2002 respectively). DR's turnover is correspondingly reduced. We mentioned in paragraph 70 that 2.5% was as much as could safely be paid to DCHS without causing DR to make losses on its sales. But between them DR and DCHS which are in a wholly-owned parent-subsidiary relationship lose no turnover. Their combined pre-tax profit is improved on the hoped-for basis that less VAT is incurred. None of those features is, however, either an advantage to or confers any immediate benefit on the customer.

VAT-saving apart we have been unable to detect any advantages of a commercial or business nature to either DR or any other companies in the Debenhams group. Gail Timmins referred in evidence to other opportunities that could have been and could still be exploited through the use of a financial services company such as DCHS. She said that DCHS might have had a role to play in a restructured deal with GE in coping with the "credit card issue". But from the start of Project Pita until now there is no evidence that DCHS has done anything or had any function other than to facilitate the reduction of VAT on DR's sales to customers. The staff briefing admittedly refers to "changes in the credit card market" as an answer to questions received from customers. We do not, however, read that as evidence of any commercial reason (tax-saving apart) for the change is required by Project Pita. The acronym implies that, tax apart, Project Pita was an irritation and a distraction to the Debenhams group.

The underlying issue here is whether at any time DCHS and the customer agree for the supply by DCHS of services to the customer in return for payment to DCHS by the customer of 2.5% of the ticket price of the particular item of goods. The relevance of the contractual issue is this. DR have to satisfy us that its supply of goods (or services) to the customer is for a consideration equal to 97.5% of the ticket price. To do so they have to establish that the customer has separately agreed with DCHS for the supply by DCHS of card-handling services. To address this we start by giving details of :

Throughout the rest of this Decision we shall use as a standard example the case of an item of goods with a ticket price of £100.

Attached to every product on sale to customers is a ticket price. This shows either a single price for the particular item on sale or a single price for a given quantity of the particular product (e.g. of fabric exhibited in rolls).

There are three different types of notice and on each one will be found, together with other messages, the Notification words.

An "opening times" notice is designed for display at store entrances. This notice is 30 centimetres square. Its basic colour is dark blue. Written across the top in white letters, 1.75 centimetres high, is the word "Debenhams". Below that are the words "Opening Times" in dark blue letters on a light blue background; each letter is one centimetre high. Below that, occupying half of the notice, are seven lines showing opening hours for Monday to Sunday; the lettering is in italics and is white and light blue on the dark blue background and each capital letter and number is one centimetre high. The bottom seven centimetres of the "opening times" notice contains three messages:

The most prominent message by far on the opening times notice is the clear white and light blue print stating the days and hours when the store is open. The Notification words are not eye-catching but they can be read with difficulty. Their colour and layout makes them unobtrusive and it requires a concentration of effort to read the small print that extends the whole way across the notice without any breakdown into columns.

A "toblerone" notice is designed for display at or near the tills. It is a 3-dimensional triangular strip with the same message on both upper sides. It is 30 centimetres long and each side is about 7 centimetres high. A white on black copy of one face of the toblerone is found in the Appendix at the end of this decision. The basic colour is dark blue. Along the top are colour reproductions of the seven credit/debit cards. At the bottom, centred and in white print, is the word "Debenhams" in letters 7 millimetres high; below that in white capitals are the smaller words "Britain's Foremost Department Store" and under that in white italics is the website address. In between (ie above the word "Debenhams") are printed, unlike the copy in the Appendix, in light blue against the dark blue background, the Notification words. The two main lines stretch the whole way across the toblerone and the upper case letters are about 2 millimetres high. Underneath are the words, in smaller print, "excepting Amex, Diners and Style".

The customer approaching the till may notice the more prominent message on the toblerone but would, we think, be unable to read the Notification words until he or she was close up and concentrating on nothing else but the two long lines of small print. The customer would need a fair amount of time to read the actual words. It would take considerably longer for the customer to try and work out what the words might mean.

A "signing mat" is placed on the counter by the till. This is 30 centimetres by 42 centimetres, laid out in landscape form. The top half (15 centimetres) is a white background with the words "Are you using your Card Today?" printed in 2 centimetres high blue letters. Below that, on a white background, is a 7 centimetres strip containing the message "Take 10% OFF for a whole week when you open an account today". The highest lettering is over 2 centimetres. The bottom 4 centimetres of the signing mat are a black strip; the seven colour reproductions of the credit and debit cards appear there with, below them and in white italics (upper case, 2 millimetres and lower case 1 millimetre), the Notification words. Unlike the other two notices these are written in three lines, each containing a single sentence. The mat has a lightly misted covering. The smallest print is not easily readable until the customer is close and on top of it and concentrating on nothing else. When the customer signs the credit card slip, his or her arm will cover the Notification words.

The other set of words (the till slip words) that refer to the role of DCHS are printed on the credit card slip (which we refer to as the till slip) that is signed by the customer and retained by DR. The procedure by which the slip is produced and signed is set out in paragraph 106(l)-(n) below. We will focus on these words (set out in paragraph 55 above) in paragraph 131. Before examining the procedures at the point of sale, we make some findings of fact relevant to the analysis of the contractual issue.

The in-store notices were, as Gail Timmins said in her e-mail of 18 December 1998 (see paragraph 32 above) designed "to send the right message to customers". One construction of this was her explanation in cross-examination that they were designed to inform the customers that a fee would be charged for handling services. She also said in evidence that "the main issue with the customer was to make sure that the customer was aware of what they were entering into when they went into the shop". Another construction of what she meant by "the right message" is found in her statement in the note of 28 May 1998 to DR's lawyers stating that "it would not be glaringly obvious to the customer that any change has occurred at all" (see paragraph 25 above). Later that year (in December 1988, see paragraph 33 above) Gail Timmins sought advice as to precisely the "minimum requirements" for the information on the till slip. Then on 20 June 2000 the "Functional Requirements" specified that "the message must be printed in as small a size as possible whilst still being legible". Those examples point, we think, to the real reason for the discrete positioning of the notices, the obscure wording of the Notification words and the non-committal words written in the retailer's copy of the till slip. In this connection we recall Mr Maxwell's "Notice behind the plant pot" expression in his e-mail of 10 December 1998 (see paragraph 32 above). Gail Timmins referred to those words as a private joke. But true words are uttered in jest, even in e-mails. That expression, we think, was no exception, particularly bearing in mind Gail Timmins' message of 28 May 1998 that referred to this arrangement being "advertised on a small sign near the till point" and to it not "being glaringly obvious to the customer that any change has occurred at all" see paragraph 25.

The choice of wording to comprise the Notification words was regarded as a public relations matter as well as a legal issue. Adverse customer reaction and customer queries were to be avoided. The till slip words were (as already noted) chosen following advice as to "what precisely the minimum requirements would be" (see paragraph 32) and approved by the executive directors of DR and DCHS. Those words were not printed on the copy taken away by the customer. Why the customer copy of the till slip did not split out the fee for card handling on the one hand and the price for the goods on the other can only be answered, we think and in the absence of any acceptable explanation (which Gail Timmins was unable to furnish), by the conclusion that the less the customer knew about the scheme the better for Debenhams and Project Pita.

We have already referred to the Memorandum to Staff and the statements to be made to customers. Nothing in these and nothing in the recommended answers to customers' queries gives (as we have already observed) any indication that the credit card-paying customer is entering into two contracts. At most that customer is to be told (in the answer to question 1) that DR is reducing the price of the purchase by an amount equivalent to DCHS's handling fee and, in the answer to question 5, that DR is discounting the price of the goods. Moreover the evidence (summarized later) from the customs officers who visited the stores and made purchases show from the till operators' answers to questions that DR's staff really did not understand what was going on.

Returning to the Notification words and the till slip words, we note that they make no mention of any reduction in price. This is in line with Gail Timmins' statement in evidence that they wanted to ensure that whichever method of payment was used by the customer "ultimately the overall price paid by all our customers was the same". By overall price we think she meant the ticket price; that after all is what the reassuring sentences at the end of both sets of words suggest. Certainly no discounted price is displayed anywhere. Moreover, the refunds scheme is operated on the basis that the purchase price means ticket price (see paragraph 66 above). These factors lead us to the conclusion that the ordinary customer has no other transaction price in mind at any time relevant to the present issue than the ticket price.

The procedures were explained by Karen Nobes, tax manager – compliance, of DR. She produced three unchallenged witness statements based on her experience of till transactions within DR stores.

If the transaction is either rejected by DR's central processing centre or Streamline/GE refuse authorization, a rejection message will be passed to the till.

We now summarize evidence from customers. All the witnesses were called by the Commissioners and were, we understand, officers of Customs and Excise.

One Monday in January 2001 a Mr M J Alderton went to a Debenham store in Crawley, Sussex. He was looking for signs explaining the card-handling arrangements. He saw nothing at the entrances. All he could see was the toblerones on some but not all of the tills. He could not see the writing on them when walking by. He was offered and applied for a Debenhams store card but saw nothing on the application form that related to the new card-handling arrangements. He noted that the 10% discount (on goods purchased within seven days of application) was calculated on the ticket price of the goods.

When Mr Alderton made a purchase and was given the till receipt to sign he asked for an explanation of the words – "I agree that 2.5% of the above value is payable to DCHS for card-handling services". The till operator explained that this was what the retailer had to pay the credit card companies and that the wording was because the retailer was using a new card company and that this did not affect him.

Six days later Mr Alderton revisited the store. He saw no notices about card-handling arrangements other than the toblerones on some, but not all, tills. The till printed a retailer's copy of the till slip showing a 10% discount calculated on the full ticket price and showed that he agreed to pay 2.5% of (words to the effect of) the face value of the goods. The till operator, when asked, said he had no clue what those words meant. Mr Alderton then crossed them out; the operator said that was "OK", took the voucher, put it in the till drawer and gave Mr Alderton the customer copy with no such words on it.

D L Davies visited a Debenhams store in Croydon in early January 2001. He noticed, and while not standing in the queue read, the Notification words on a toblerone. When he joined a queue the toblerone at the till was facing away from the sight of queuing customers. He read the words on the till receipt and did not ask any questions about them because there was a queue behind him and he did not want to hold other customers up. His next purchase took him to a till point where he saw no signs. When he asked for an explanation of the words on the till slip that had been presented to him for signature, the explanation given was "haltering and unclear". He deleted the till slip words. The sale was processed. He asked for a till receipt with the "I agree that …" words on. He was told that the staff were unable to provide this.

T M Bide went to a Weymouth Debenhams store to make a purchase in December 2000. He noticed no signs concerning DCHS and the till operator did not mention any such arrangements to him. When he signed the retailer's copy of the till slip he noticed no words concerning DCHS.

E P Nunn visited the Gloucester Debenhams in late January 2001. He saw no signs at the entrances explaining the card-handling arrangements. At the till he could see part of the words on the toblerone but could not read them as they were obscured by another notice. Asked about the words on the retailer's copy of the till slip, the till operator said that there had been a change in legislation requiring these words to be shown on the till slip. He crossed the words out. The till operator said this was OK and put the slip in the till. Mr Nunn inspected all five floors of the store. The basement floor had six tills, four of which had toblerone notices standing by them. The first floor had thirteen tills, five of which had toblerone notices. The second floor had five tills four of which had toblerone notices. The third floor had three tills, one of which had a toblerone notice. A till on a landing had no notice.

R J Lever, a Customs officer specializing in the taxation of retail traders, said that he was aware of 27 VAT registered entities including DR that had been operating arrangements involving the charging of a fee of 2 to 2.5% for acceptance of payment by card. DR was the earliest case of which he was aware. He had calculated a potential VAT loss, if all card expenditure fell within such arrangements and charges were kept down to 2.5% of the gross amount tendered, of the order of £271 million in 2001.

Mr Lever produced letters from various members of the public. These did not all relate to Debenhams purchases. One writer complained that the scheme deliberately set out to make him a dishonest citizen. Another letter complained that the handling charge arrangements raised the possibility that he was paying more than he should. In another letter the writer had complained that she had not seen any in-store notices explaining the arrangements. Her complaint had been met with the response that the store had lots of complaints and that the notice was intended for business customers only. Another complaint had been that even if the writer had paid by cash there would still have been a 2.5% deduction. Another complaint was from a customer who was registered for VAT and had asked for a VAT receipt. That showed tax on an amount equal to the ticket price less the 2.5% handling fee. This restricted his right to relief for input tax. His complaint was that he had been misled and duped. Another registered trader complained that, had he known, he would have used a form of tender that did not restrict his right to recover input tax.

In a later statement Mr Lever updated the "VAT losses" for 2002 as "in the region of £301 million". He referred to more complaints from registered traders whose input tax recovery had been reduced because they used cards to pay for their purchases.

The evidence summarized above went unchallenged. It was pointed out for Debenhams that that evidence was unrepresentative. Otherwise, no evidence was produced by DR to respond to the statements and letters referred to above or to present a different picture. Recognizing that the evidence of customer perceptions has been obtained and collected by Customs officers, we nonetheless find as follows:

DR's case, shortly stated, is that the customer who seeks to pay by card (i.e. in-house store card, credit card or debit card, not being an Amex, a Diners or a Style card) agrees that 2.5% of the sum paid will be for credit handling services by DCHS and that the customer agrees that the remaining 97.5% of the ticket price, and only that sum, is paid for the goods. Thus when a customer has selected an item of goods from a shelf with the ticket price of £100 and has presented it at the till asking that the £100 be charged to his card, that customer proceeds to enter into two contracts:

The former contract, say DR, contains the terms of the Notification words taken alone or in association with the till slip words. The Notification words, as displayed on the in-store notices, and the till slip words are sufficient to make them terms of the contract between the customer and DCHS. Moreover, it is argued, the customer does not contract with either DCHS for its processing or handling services or with DR for the purchase of the goods until at the earliest the signing of the till slip and the pressing of the "Accept" button (stage (m)) and, more likely, the moment when the till operator hands the bagged goods together with card and customer's copy of the till slip to the customer.

The Commissioners' response is that no contract, or alternatively no enforceable contract, is created between DCHS and the customer. The correct analysis, they say, is that the customer agrees to pay DR the £100 for the goods in the example; and at no stage does the customer agree (i) to pay a different price for the goods, (ii) to pay anything to DCHS, as a third party principal, or (iii) to purchase the services of "processing card payments" or "card handling services".

It is well established that when goods are on offer in a self-service environment, the display of those goods for sale at a specified price is an "invitation to treat". That invitation is taken up by the customer who selects the particular item of goods. The customer then makes an offer to the store to purchase that item of goods when he presents it at the check-out. See Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 at 407 and Fisher v Bell [1961] 1 QB 394 at 399. It follows that when, in the case of a transaction in a DR store, the customer who takes the chosen item of goods to the till and indicates that he wishes to pay by credit card must, on DR's analysis, be doing (in the contractual sense) either of two things:

We have to determine whether either or both of these is sustainable. DR contends that the Notification words will in principle become a term of the contract between the person displaying the notice and the person to whom the words are addressed. The Notification words have been reasonably adequately displayed; they are for the customer's convenience and have no detrimental effects on the customer's rights. But, as noted above, they say there is no contract for the sale of the goods to the customer until the till slip is signed and the "Accept" button is pressed; only then does DR accept the price.

The first stage in the exercise is to determine the point at which the contract or contracts are concluded. On this will depend the issue of whether the till slip words can form part of any contract; because if, as the Commissioners argue, the agreement for sale is entered into at stage (c) in the procedure set out in paragraph 106, the till slip words will come too late to be part of that agreement for the supply of goods or services.

Is this when the till operator scans the goods into the till and the prices are displayed on the screen? On the Boots Cash Chemists analysis that could mark the customer's offer to purchase at the till price. One approach is to say that the agreement to sell is struck when the till screen shows the price (i.e. stage (c)); anything that happens after that, such as authorization and signing of the till slip, will be steps required to discharge that agreement. This approach would suit a cash-only retail sales outlet; and, if it be right, it has the merit of simplicity as regards all retail sales outlets. But with a multi-tender store the question of whether the till operator's action amounts to acceptance may depend on the real nature of the offer and the real nature of the acceptance. So, disregarding for the moment any special features introduced by the Notification words, we observe that a modern retail sales environment of the sort found at Debenhams will frequently involve the following:

the customer chooses a number of items of goods from the "shelves";

the customer may not make up his mind about how to pay until he knows what his purchases will cost him;

the customer may, in any event, have several options as to how to discharge the purchase price, e.g. through cash, card-backed cheque, gift voucher, credit card and debit card, and will want to keep his options open until he knows the total price payable;

the customer will expect, if he proffers a card as payment or part-payment, that the retailer will need to have authorization through the card-processing system and

the customer will expect that, if his chosen method of payment fails to be acceptable to the retailer because, for example, the notes are forgeries or the card is not authorized, the deal will be off and can only be revived by presenting a different form of tender or by offering to buy goods within the price range that he can afford.

On that latter approach, the till operator's acts of scanning in the barcode, displaying the price for each item on the screen and then totalling them up amounts to mere calculation. They do not in reality signify DR's unqualified acceptance of the customer's offer to buy each item. This is because in this sort of retail environment the expectations of both sides are, we think, that the offer will be backed by an acceptable form of payment and acceptance will be held in suspense until the store is satisfied that the customer has done everything on his part to effect payment.

The latter approach is not out of line with the decided cases. Boots Cash Chemists and Fisher v Bell , as already noted, established that the display in a self-service store of goods for sale at a specified price is an invitation to treat and not an offer. Lacis v Cashmarts [1969] 2 QB 400 (a criminal case) establishes that property in goods for sale at a retail store only passes on payment; but it does not resolve the question of the moment of time at which the agreement to sell was reached. In re Charge Card Services Ltd [1988] 1 Ch 497 establishes that a customer discharges his obligation to pay when his card is accepted by the supplier of the goods (in that case a filling station) and not later when the card issuer discharges the debt so created to the supplier. In that case it was accepted that property had passed at the earlier stage when the customer had filled his tank with petrol on the garage forecourt. What those cases demonstrate is that there is no hard and fast rule determining the time at which the contract is made; everything depends on whether and when the offer is matched by the acceptance. And when, as in this sort of environment, the means of payment is an inseverable part of both offer and acceptance, acceptance will be in suspense until the offeror has produced an acceptable means of payment. This will not be until, at the earliest, the till operator has pressed the accept button (i.e. at stage (m) in the procedure set out in paragraph 106 above).

Our view, very much on balance, is that the agreement for sale does not come into being until stage (m). This means that the words on the retailer's copy of the till slip may form part of the agreement. But for the purpose of determining the terms of the agreement we shall cover both eventualities. Common to both is the question whether the Notification words are part of the agreement for sale of the goods. Do they result in a contract between the customer and DCHS whereby the customer agrees to engage the services of DCHS to process his card payment in consideration for a fee equal to 2.5% of the ticket price of the goods that he is buying from DR under a separate agreement with DR?

The display of words on a notice can result in those words becoming a term of a contract between the party displaying the notice and the persons to whom they are addressed. This principle is well recognized and illustrated in cases such as Thompson v LM&S Railway Co [1930] 1 KB 41, Parker v South Eastern Railway Company (1877) 2 CPD 416, Olley v Malborough Court Ltd [1949] 1 QB 532 and Thornton v Shoe Lane Parking [1971] 2 QB 163 . Thompson was a railway excursion ticket case where the ticket had been issued subject to conditions. The Court of Appeal, stressed that the exemption in a condition could be relied upon so long as the conditions were not "tricky and illusory" and the railway company had done all that was reasonably necessary as a matter of ordinary practice to call attention to those conditions. In Thornton , at 170B, Lord Denning MR summarized the law:-

Lord Denning went on to make a point to which we shall revert later. He observed that the exempting condition in that case was "so destructive of rights":-

We approach the issue of whether the Notification words, taken alone, can be terms of agreements between customer and DCHS on the one hand and customer and DR on the other by two steps. First, are those words inherently capable of constituting terms of such contracts? Secondly did DR do what was reasonably sufficient in all the circumstances to give the customers notice of them?

The first sentence of the Notification words reads as a limited statement of fact. No explanation is given of what DCHS is, what functions it performs as a card processor or what procedures have been changed. That sentence does not on its own read as a term of contract. The last sentence clearly and unequivocally assures the customer that the total price paid remains unaffected whatever form of payment he tenders. This leaves the second sentence. The expression "Customers may pay …" conveys nothing unless it is read as meaning "Customers may pay for goods purchased by them". Then the words – "The price so paid" needs explaining. Read in full, the expression must mean – "the price for the goods paid by credit or debit card". Thus, if the second sentence is to have any meaning, it says that the customer who chooses to pay by card is to pay the ticket price for the goods he purchases and 2.5% of that goes to DCHS. So read, the second sentence and the third sentence convey to the customer that if he uses his card he pays the ticket price of the goods and no more. That is stating the obvious; it does not introduce a new term into the contract. Still less is it telling the customer that if he offers to buy the goods, his offer will only be accepted if he enters into a separate agreement with DCHS to engage its card processing services for 2.5% of the ticket price. If that is the meaning the Notification words are designed to convey, they do so, we think, by illusion only (see the words of the Court of Appeal in Thompson , supra). For that reason we do not think that the Notification words can operate as terms of the necessary contracts. We add that, in the light of the evidence summarized under the heading "customer perception" in paragraph 110-113 and 117(iii) above, DR's till operators themselves have difficulty in giving a meaning to the Notification words.

Even if we were wrong and the Notification words were sufficiently clear to form part of the relevant contracts, the Commissioners say that they should be excluded because they purport to introduce potentially adverse consequences for the customer without bringing them to his attention. Reliance was placed on Interfoto Picture Library Ltd v Stilletto Visual Programmes Ltd [1989] 1 QB 433. That was a decision of the Court of Appeal, Dillon and Bingham LJJ. Interfoto ran a photographic transparency lending library. Following a telephone enquiry by Stilletto, Interfoto delivered to them 47 transparencies together with the delivery note containing nine printed conditions. The second condition stipulated that all the transparencies had to be returned within 14 days of delivery otherwise a holding fee of £5 a day and VAT would be charged for each transparency retained thereafter. Stilletto, the borrowers, who had not previously used Interfoto's services, did not read the conditions and return the transparencies 4 weeks later. Interfoto sent them a bill for £3,783. Stilletto refused to pay and Interfoto sued to recover that sum. The Court of Appeal dismissed Interfoto's claim. The reasoning behind the decision was, in essence, that where clauses have been incorporated into a contract and contain particularly onerous or unusual conditions, the party seeking to enforce the condition (Interfoto in that case) had to show that it had been brought fairly and reasonably to the attention of the other party. In the circumstances Interfoto had done nothing to draw the attention of Stilletto, the borrower, to the condition. Consequently, on Dillon LJ's approach, that condition never became part of the contract. Bingham LJ decided the same way but on the basis that Stilletto were relieved from liability under the clause; this was based on a principle of fair and open dealing which imposed on Interfoto a duty in all fairness to draw to Stilletto's attention specifically the high price payable if the transparencies were not returned in time.

The Commissioners point to specific detriments that a customer may suffer if the price for the goods reduces, on account of his using a card, to 97.5% of the ticket price for the goods or the balance of 2.5% of the ticket price relates to DCHS's alleged handling services. These detriments are:

We are satisfied that these are significant potential detriments. DR argue that they are insignificant and unlikely detriments. Nevertheless they are, as we see them, actual detriments and any notice that exposes a customer to those detriments ought, on Interfoto principles, to explain the detriments and be prominently and legibly displayed. Otherwise the contents of the notice will not become part of any contract with the customer.

We now ask whether, having regard to the difficulties of comprehension about the words themselves and the potentially adverse effects on customers, DR did what was reasonably sufficient to give the customers notice of them. Here the inescapable inference is, we think, that DR did not want to have its customers reading and digesting the contents of the Notification words. The Notification words were unobtrusively printed in small type and were laid out in a way that has made reading extremely difficult. The in-store notices, and particularly the toblerones, were placed where they could not be read except by the most eagle-eyed and attentive customer who was not at the time distracted by what he was required to do at the till. We conclude from Gail Timmins' evidence, referred to in paragraph 61 above, that this was precisely the intention of DR which did not want customers wasting time by asking for a 2.5% discount if they paid in cash or otherwise asking awkward questions. Nor did Debenhams want adverse press publicity. On Interfoto principles, therefore, we think that the Notification words did not become part of any contract with the customer. This means that the agreement for sale of goods between DR and the customer stands without the inclusion of the Notification words; the goods are therefore sold at their ticket price. It follows also that no agreement between customer and DCHS comes into being; the customer provides no consideration, all going to DR under his agreement with DR.

On the basis that the agreement with DR for sale of the goods does not take effect until stage (m) in the procedure, i.e. until after the customer has signed the retailer's copy of the till slip and the till operator has pressed the accept button, the significance of the till slip words needs to be considered. Are words capable of forming part of a relevant contract? The words "I agree that 2.5% of the above value is payable to DCHS for card-handling services" read as words of acknowledgment. The customer might just as well be agreeing that the paper he is signing is white. Even if the till slip words were read in conjunction with the Notification words, they would add nothing. Nothing explains who DCHS is and what card processing functions it performs. No one explains that the till operator is accepting on DCHS' behalf. So reverting to scenario [A] in paragraph 120 it follows that whether the right time for determining whether in principle the till operator accepts, for DR, the customer's offer to buy the goods for £97.50 and, for DCHS, the offer to acquire DCHS's card-handling services for £2.5 (as DR contend) be stage (c) or stage (m), the answer will be the same. Neither the Notification words alone nor the Notification words taken in conjunction with the till slip words will form part of any contract with the customer.

Reinforcing the conclusion that the customer's offer to DR is to purchase the chosen goods for their ticket price are the terms of the Price Marking Order 1999 (S.I. 199/3042). The Price Marking Order was introduced in response to Directive 98/6 EC on "Consumer protection in the indication of the prices of products offered to consumers". Article 2 of that Directive defines selling price as the final price for a unit of the product or a given quantity of the product, including VAT and all other taxes. Article 4.1 states that - "The selling price and the unit price must be unambiguous, easily identifiable and clearly legible." Article 1(2) of the Price Marking Order defines "selling price" as "the final price for a unit of a product, or a given quantity of a product, including VAT and all other taxes." Article 4(1) provides:

Article 7(1) of the Order provides as follows:

"(1) The indication of selling price … shall be –

Those provisions, argued the Commissioners, show that where as here the customer takes the goods to the cash till and makes an offer to purchase them at the ticket price, that offer is to pay the full ticket price, whatever his intended means of payment. DR responded with reference to section 20 of the Consumer Protection Act 1987. This makes it a criminal offence for a trader to give a misleading indication as to the price at which any goods are available; "price" in relation to goods is defined in section 20(6) to mean - "the aggregate of the sums required to be paid for or otherwise in respect of the supply of the goods". Here the 2.5% payable to DCHS by the customer using her card is nonetheless part of the "price" of the goods, which, as we understand the argument, remains the price for purposes of the Consumer Protection Act and the selling price for purposes of the Price Marking Order.

It seems to us that DR have fully complied with the Price Marking Order by exhibiting the ticket with its unambiguously stated price near the item of goods for sale. In doing so DR have committed no violation of the Order. To the extent that they rely on the Notification words, however, to support what they claim to be two prices, they would have violated article 7(1) of the Order by indicating the price to the potential card paying customer in an ambiguous, hardly identifiable and barely legible manner. Nothing in the Consumer Protection Act alters that. We prefer to construe the arrangements in a manner that involves DR in no violation of consumer law. They have clearly and unambiguously exhibited the ticket price as the price for the goods. By that means they have invited the customers to offer to purchase the goods at the ticket price and no other. The customer's offer cannot on that basis be construed as, for example to purchase goods with a ticket price for £97.50 from DR and to purchase other services from DCHS for £2.50.

The counter offer issue arises from what we have referred to in paragraph above as "the counter-offer scenario". The scenario is that the customer offers to buy the goods from DR for their ticket price (e.g. £100). The till operator, acting for both DR and DCHS makes a counter-offer, or more accurately two counter-offers, when presenting the credit card slip to the customer for signing. The counter-offer of DR is to sell the goods for £97.50. The counter-offer for DCHS is to provide handling services for £2.50. The customer then accepts both counter-offers when he signs the slip which, it will be recalled, contains the words:

The slip with those words on is retained in the till while a slip without those words on is given to the customer. This issue arises because we are against DR in its argument that the customer's offers to DR and to DCHS are accepted by those two companies at stage (m).

The question whether there has been a counter-offer falls to be resolved by determining whether (to use Kerr J's words in Global Tankers v Amercoat Europa [1975] Lloyd's List Reports 666 at 671) "a reasonable person in the position of the recipient" would consider that a new term had been introduced. And the fact that the recipient would have proceeded as he did in any event is not evidence of his acceptance of the counter-offer: see Hirst J in Lark v Outhwaite [1991] Lloyd's List Reports 132 at 140 where Hirst J says:

In essence, both parties must have the intention to create legal relations on the basis of the counter-offer; the intention falls to be determined primarily by objective evidence, but the intentions of each party will be relevant (see Lark at page 41). Finally on the principles, we note the observation of Rix J in Jayaar Impex v Toaken G [1996] 2 Lloyd's List Reports 437 at 445 that the acceptance of the counter-offer or variation must be evidenced by "the plainest evidence of assent".

We are not satisfied on the facts of the present arrangements that there is any consensus between DR as counter-offeror, acting either on its own or for both itself and DCHS, and the reasonable person in the position of the recipient, i.e. the ordinary customer, as to the terms of the alleged counter-offer. The customer will have seen the price displayed on the screen at stage (c); he will have presented his card as the means of payment. What is revealed to him on the retailer's copy of the till slip are words that do not, we think, read as a counter-offer. They read, as we have already noted, as words of assent which appear to relate to an unknown party's card-handling services that are no concern of his and he will have no idea what DCHS's services are. Nothing about those words indicates that there has been any change in the contractual relations between him and DR. Any possible need to question those words will have been allayed by the final sentence. So what the customer does when he signs is to complete the payment arrangements and not, expressly or implicitly, to give a matching acceptance to a counter offer. Hence it is not possible to conclude that the arrangement demonstrates the plainest evidence of assent to the terms of a counter-offer on the customer's part. It is relevant to mention in this connection a particular till slip put in evidence as an exhibit to Karen Nobes' evidence. This slip relates to a purchase made by a Customs officer in her presence. The total of the ticket price of his purchase amounted to £40. He paid £20 by a card and £20 in cash. The till slip that he signed (and which was kept by DR) referred to both payments (making a "sale transaction" of £40) and contained the words – "I agree that 2.5% of the above value is payable to DCHS for card handling services. The total payment I make remains the same." Whether that was an exceptional event is something of which we have no evidence. But it does show that the words of alleged acceptance can leave both parties in the dark as to what the terms of the deal really are.

Is the customer's act of signing the till slip, bagging and taking the goods motivated by factors other than the existence of the alleged counter offer? The question is strictly academic in the light of our conclusion that the till slip words cannot and do not form part of any contract with the customer. Nonetheless the answer, we think, is clearly yes. The customer wants to complete the payment procedure and take the goods that he has come to buy. It is quite unreal to assume that he is at that stage agreeing to make use of DCHS's card handling services; so far as he is concerned those services, whatever they may be, are being provided to DR.

For those reasons we are not satisfied that the issue and signing of the till slip amount to an offer on DR's part to accept the abated price for the goods and the customer's matching acceptance. It follows, in our opinion, that customer enters into no separate agreement for card-handling services with DCHS. The only contract is between customer and DR. It is an agreement for the sale of the goods (or services). The price is the ticket price. The routing of the money via DCHS takes place with the assent of the customer; but there is no contract between the customer and DCHS for card handling services.

The Commissioners argued that the alleged Card Handling Agreement between DCHS and customer (see clause 1.3 of the Merchant Agreement) was based on the pretence that the customer was obtaining card handling services from DCHS in return for the 2.5% "Handling Charge". On that basis and applying the reasoning of the House of Lords in Antoniades v Villiers [1988] 3 All ER 1058 (for example, that of Lord Templeman at 1067-1068) the alleged card-handling obligations of DCHS should be disregarded and the contractual arrangements taken to be for the sale of goods or services by DR to the customer. DR say that DCHS does indeed provide card-handling services, albeit vicariously through GE and Streamline. We think that the "Card Handling Agreement" is a misnomer and a pretence that disguises the true character of the agreement which is that the customer buys the goods at their ticket price. GE and Streamline are the card processors, DCHS is not. GE and Streamline do the card processing as principals and not as agents of DCHS and DCHS cannot properly be described as vicariously providing those services. We refer to paragraphs 80 – 85 above.

The Commissioners also argued that any contract between customer and DCHS was to be disregarded as " non est factum " principles. We do not agree. The customer expects to sign as part of the procedure by which he meets his obligation to pay the ticket price of the goods. To that extent the contract cannot be treated as a non-event

The Commissioners submit that even if, contrary to their contentions on the contractual issue, there is a contract between DCHS and the customer, this results in no supply for VAT purposes. The approach, they say, is that of commercial reality and not contract. The commercial reality is to be determined by the tribunal in the light of the commercial and economic realities of the relevant relationships. So determined, it is contended that there is one supply only and that is DR's supply of goods (or services) to the customer for the shelf price of the product. This argument, the Commissioners stressed, is based on the proposition, which long antedates cases such as Halifax [2002] V&DTR 71 that private law contracts between parties are not determinative of the VAT analysis.

An overview of the many authorities referred to us in argument by both sides shows that that approach may be legitimate in appropriate circumstances. We refer to a few of those decisions. Muys' en de Winter's Bouw v Staatssecretaris van Financien [1997] STC 665 , Case C-218/91, contains a passage in the opinion of the Advocate General (Jacobs) making it plain that the VAT analysis did not follow the contractual position. In paragraph 12 he said that "in the case of transactions between connected parties who might seek artificially to convert the consideration for a taxable supply of goods and services into consideration for an exempt grant of credit" and (in paragraph 24) where a supplier wishes to reduce the full value of the goods by his financing costs "even if he purports in the contract to pass them on as interest charges distinct from the purchase price of the goods". See also paragraph 18 of the judgment of the Court. The ECJ in Maierhofer , case C-315/00, held (in paragraphs 38-39) that in order to determine whether a transaction is a taxable or exempt transaction, "account must be taken of its essential features … irrespective of the way in which it might be artificially presented." Even more recently in Auto Lease Holland BV v Bundesamt für Finanzen (6 February 2003) the ECJ held that a fuel management agreement, whereby a lessee of a car agreed with his lessor that the lessor would meet his petrol bills, was not a contract for the supply of fuel but rather a contract to finance its purchase, and that the fuel was for VAT purposes supplied to the lessee of the car even if the car was filled up in the name and at the expense of the lessor company (see paragraphs 36 and 37). That approach has been used to determine whether there is a single or a multiple supply: see for example Card Protection Plan as decided by the ECJ in [1999] STC 270 in paragraphs 28 and 29 (at page 293c-e) where the Court stressed that supplies should not be artificially split. See also the decision of the House of Lords [2001] STC 174 per Lord Slynn at paragraph 22. The approach has been applied in determining whether there is a supply of goods or services, see cases such as Faaborg-Gelting [1996] STC 774 in the decision of the ECJ on page 783a-d and in British Telecom [1999] STC 758 (House of Lords) per Lord Slynn at page 766e-g and Lord Hope at page 769c-e. The approach has also been applied in determining the place of supply: see DFDS [1997] ECR 1-1005, 1030.

A reason why the ECJ looks at the economic substance rather than the way in which the transaction is legally structured is to ensure neutrality and uniformity in the application of the tax. Only if transactions are looked at in this way can similar transactions be treated similarly regardless of variations of national law (see the opinion of Advocate General Lenz in BLP v Customs and Excise Commissioners [1995] STC 424 at paragraph 51 and the Court at paragraph 24 and Elida Gibbs v Customs and Excise Commissioners [1996] STC 1387 at paragraph 20); and specifically to prevent traders from being able to avoid tax by structuring their transactions in certain ways and thereby distorting competition: see First National Bank of Chicago [1998] STC 850 at paragraph 33 on page 872. Distortion of competition is a consequence of Project Pita (see paragraph 170 below).

This approach is found in the reasoning of Laws J (as he then was) in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 at 595. That case concerned the issue as to whether an agency which provided temporary nursing staff to hospitals supplied nursing services. Page 595 contains the holding that the concept of supply for the purposes of value added tax may not be identical with that of contractual obligation. The terms of the contract might or might not determine the right tax results; they did not necessarily do so. He went on to observe that the tribunal had relied upon the contracts but had rested its decision on its overall view of the facts; its conclusion, that the agency supplies the nurses and the nurses supply the nursing services, could not be faulted. That therefore is an example of arrangements in the contractual documents that were in fact found to define the VAT treatment. The House of Lords endorsed the Reed Personnel approach in Eastbourne Town Radio Cars Associations v Customs and Excise Commissioners [2001] STC 606 .

That approach is, we think, open to us so long as we can be satisfied as to the economic and commercial reality of the deal between the parties. It is axiomatic that where as here the tax is imposed on supplies of goods or services effected for a consideration, the starting point must be the determination of the apparent contractual position. It is only if the totality of the evidence reveals something other than the apparent contractual position that it is legitimate to replace those contractual relationships with what is determined to have been "the real deal". When the apparent contractual relationships show clearly and unequivocally a supply of particular goods or services for a particular consideration, it will not, in the absence of either the "sham" doctrine of English law (which is not the case here) or the Halifax approach or the "abuse of rights" principle, be legitimate to disregard these relationships. But where the contract does not tell the whole story or is equivocal as to who is supplying what and to whom, it will be permissible to substitute it by, or fill its gaps by reference to, the real deal. The approach necessarily requires an analysis of the apparent contractual relationships and a clear finding as to the real deal.

What then is the analysis of the apparent contractual relationships here? (For the purpose of this "commercial reality" issue we have to assume that there is a contractual relationship between DCHS and the customer.) The written material evidencing the contract starts with clause 1.3 of the Merchant Agreement between DR and DCHS. This is referred to in paragraph 53 above. It states that DCHS will "for separate consideration ("Handling Charge") enter into separate agreements with Card Holders to pay to" DR the amount due for the goods or services. Each agreement between DCHS and each customer is referred to in the Merchant Agreement as a "Card Handling Agreement". The rest of the wording is found in the Notification words and the till slip words. These, for convenience, we repeat :

The case for DR is that those words could not be clearer. When the customer contracts, it is said, he makes two distinct contracts. He buys the goods (for the ticket price of £100) from DR for £97.50 and the card-handling services from DCHS for £2.50. On this basis there is a contract between customer and DCHS under which, in return for a consideration of £2.50 paid by the customer, DCHS agrees to do something of value for the customer. That "something", argued DR, is DCHS itself by vicarious performance supplying the service of card-handling to the customer using GE, Streamline and to some extent DR as its sub-contractors. There is, therefore, and on the strength of Lord Millett's reasoning in Customs and Excise Commissioners v Redrow [1999] STC 161 at 171e, a supply of services from DCHS to the customer for the consideration paid.

The wording set out above does not, we think, reveal such a clear matching of consideration to supply. Apparently DCHS agrees to process the customer's card payment and the customer agrees that 2.5% of the price for the goods or services purchased from DR by credit card or debit card is to be paid to DCHS. But DCHS cannot supply more than what it has the capacity to supply. We have already observed (in paragraph 84 and 85 under the heading "the Activities of DCHS") that DCHS has no capacity to contract independently of DR. Its supply (of whatever services it supplies – a point we shall come to) is activated by DR's acceptance of the customer's offer to buy the goods or services from DR. DCHS has no separate capacity to contract with a customer except in circumstances where DR is making a sale. DCHS has no separate capacity to decline the customer's offer to use its services. In essence DCHS's supply is locked into DR's supply. It is as if DR is saying to the customer – "You can buy the goods and pay for them by card, but only if 2.5% is paid to DCHS"; and for this purpose DR has an open offer from DCHS, given it by the terms of the Merchant Agreement, to allow 2.5% to be received by DCHS.

The card processing function cannot, we think, be counted in when determining the real service (if any) supplied by DCHS to the customer. That function is reserved to Streamline by clause 7.1 of the Merchant Service Agreement of September 2000 and to GE by the Second Supplemental Agreement. See paragraph 79 above. DCHS has no role to play at all, either as principal or agent. Nor, as we pointed out in paragraph 82 above, is DCHS a card "acquirer". But, for the duration of the Merchant Agreement with DR, DCHS is entitled to receive, after allowing a set-off for their charges, the amounts periodically payable by GE and Streamline; it is required to pay to DR an amount equal to 97.5% of the aggregate of the ticket prices and it retains the balance.

If there is any contract for any supply from DCHS to the customer, the contract secures to the customer access to the card-handling services supplied by GE and Streamline. It is not, as we have pointed out, an independent contract that produces a stand-alone service; it is dictated by DR's acceptance of a customer's card-backed offer. The function of DCHS' supply, such as it is, is to facilitate DR's sale of goods where payment is offered by card; its character is neither to provide card handling services to the customer nor even to facilitate the provision of such services.

For those reasons we think that the meaning of the assumed contract is equivocal. It does not identify who is supplying what and to whom. We therefore move on to try to determine what, if anything, is the real deal between customer and DCHS. DCHS is not, for reasons we have given, agreeing under the real deal to provide card-handling services to the customer. Nor is DCHS giving its consent to the customer's use of his card to discharge the purchase price; for the duration of the Merchant Agreement it has no capacity to withhold consent. Indeed the only evidence we have had shows that the till operators are indifferent to the customers' refusals to sign the words on the till slip (i.e. that 2.5% of the above value is payable to DCHS for card handling services). The most that can, we think, be said of the real deal between the customer and DCHS is that by putting his signature to the words agreeing that 2.5% is payable to DCHS, the customer is securing DR's acceptance of his card-backed offer. That is not, however, a benefit being supplied to him by DCHS; the right to use the card is supplied by DR and the card-handling facilities are provided by GE and Streamline. Nothing of value is done by DCHS to the customer. The Redrow approach does not, therefore, assist DR's argument.

Nor, as we have determined the real arrangements between customer, DCHS and DR, can it be said that the customer provides any consideration, in VAT terms, for card-handling services of DCHS. The only thing for which the customer gives consideration is the goods (or services) selected off the shelf. There is no direct link or sufficient reciprocity between the customer's payment and the card-handling services allegedly provided by DCHS. This is confirmed by the fact that the customer gets a refund of 100% of the ticket price if he returns the chosen goods (see paragraph 66). Further, as we have already concluded, the customer gets no benefit from services allegedly provided by DCHS. His benefit, to the extent that one can be identified in connection with the use of his card at all, lies only in being able to use the card in the first place. But that is a benefit bestowed by DR in accepting the card in settlement of the price of the goods; it is not bestowed by DCHS. DR, as we have already noted, is obliged to do so. See the side letter from Streamline dated 26 September 2000 referred to in paragraph 52 above.

The real deal, we think, is the sale and purchase of the goods for £100 with £2.50 being paid at DR's expense to DCHS. On that basis we would be inclined to rationalize the 2.5% payment received by DCHS as an expense that is incidental to the supply of the goods. Article 11A.2(b) of the Sixth Directive provides:

Article 11A.2(b) provides, therefore, that the expenses that are incidental to the supply of goods are to be treated as part of the supply of the goods for VAT purposes. This, as we read it, is consistent with looking at the commercial reality. In Muys , referred to above, the Advocate General (Jacobs) at paragraph 16 of his opinion stated that incidental expenses mentioned in that provision are those which are "inextricably linked to the sale and transport of goods to the customer." He went on to say that – "There is no such link in the case of interest on credit granted by a supplier which is an optional service, offered in addition to the supply of goods." Thus where, as here, such expenses are mandatory, as distinct from optional, and are offered as part of the same price (i.e. for no additional payment), they are part of the main supply; and the 2.5% can fairly be said to be charged by DR as supplier. They are simply routed into DCHS' bank account through the machinery of Project Pita.

For all those reasons we are satisfied that even if a contract has been created between customer and DCHS, no supply of card-handling services has been made by DCHS to the customer for VAT purposes. For completeness we add that DR recognized that the effect of Project Pita was the shifting to DCHS of part of the value of what had previously been its supply with the object that the shifted value supplied by DCHS to the customer should be exempt for VAT purposes. Arrangements with this effect had, it was said for DR, been given the seal of approval by the House of Lords in CR Smith Glaziers (Dunfermline) Ltd v Customs and Excise Commissioners [2003] STC 419 and [2003] UKHL 7 . Emphasis was placed on passages the speeches of Lord Hoffman in paragraph 27 and of Lord Slynn in paragraph 34. It followed (so the argument ran) that in the absence of a specific anti-avoidance provision of the sort that the Commissioners had unsuccessfully attempted to invoke in that case (i.e. Notes 3 – 5 to Group 2 in Schedule 9 of VAT Act 1994 introduced in pursuance of Article 13B(a) of the Sixth Directive) there is nothing to counteract an arrangement like the present one, which separates out, in advance of the supply transactions, the exempt from the standard-rated ingredients and ascribes a value to the former. Were we satisfied that DCHS supplied card-handling services to this customer then that argument might have some substance. But here, as we have found, DCHS supplies no such service. We do not, therefore, think that Smith Glaziers advances DR's case. Nor does it alter our conclusions as to the commercial reality of the relevant transactions.

The argument for the Commissioners is that if indeed there is a supply by DCHS to the customer, that forms part of a single supply by DR to the customer and shares the same tax treatment as the supply by DR to the customer. This of course requires us to make the assumption that we are wrong on the two conclusions that we have already reached. In essence the Commissioners' submission is that the VAT liability of DCHS's supply, which should be seen as an ancillary supply, must follow that of DR's supply which is the principal supply. This contention is based on the basic principles outlined in Card Protection Plan (ECJ) which require that any service which is a means of better enjoying the principal service (or goods) supplied must be treated as ancillary. The further submission is that it is not a pre-requisite of a single composite supply that all the components be supplied by a single taxable person. Reference here is made to the decision of the ECJ in Case C-76/99 Commission v France (sometimes referred to as the " French Laboratories " case), judgment in which was given on 11 January 2001. Moreover, it is argued, it is irrelevant that the price for each ingredient part of the service is broken down to show a separate price for card handling services. Reliance is placed on the British Telecommunications case, supra, per Lord Slynn at 765.

It is not necessary for us to have to decide this issue. It would, we think, be misleading and difficult to do so, bearing in mind the number of assumptions that it requires us to make. More to the point, however, is the fact that we understand that a comparable argument is to be advanced in the High Court in the forthcoming appeal in Telewest Communications Plc and Telewest Communications (Publications) Ltd v Customs and Excise Commissioners (2002) VAT Dec 17986. We therefore note that the point was argued before us and observe that, for the reasons given in relation to the commercial reality issue, such supplies (if any) as DCHS makes are in our view ancillary to DR's supplies of goods and services to customers.

These issues would only arise were we to hold that a separate and exempt supply from DCHS to the customer has, on the facts, made. We have already rejected DR's case that such a supply arose. Nonetheless, should we be wrong on those points, the Commissioners would still contend that DR's appeal should fail on the grounds that the Project Pita arrangements have no VAT significance because the relevant transactions have been inserted solely for tax avoidance reasons. That argument would be based on the principle set out in the Halifax decision which is now under reference to the European Court of Justice. We therefore make the relevant findings of fact to enable a court to determine whether DR succeeds or fails on the basis of the Halifax decision – if that principle survives the reference. We will then go on to make findings of fact relevant to the possibility that the "abuse of rights" principle comes into play.

In the context of the Halifax principles, the Commissioners contend that DCHS is not a taxable person acting as such; DR alone makes the supply to the customer. The sole role of DCHS is to be party to transactions that have no economic substance. Because DCHS's sole function is avoidance of tax this has no VAT significance. The principle rests in part on analogous cases where the ECJ has stated that transactions or activities which are "wholly alien" to the objectives of the Sixth Directive fall outside the scope of the Directive. We refer to Case 269/86 Mol [1988] ECR 3627 (with particular reference to the Court's decision at pages 3649-3650. We refer also to Case 289/86, Happy Family [1988] ECR 3655 (with reference to the decision at pages 3674-3675) and to Case C-283/95 Fischer [1998] ECR 1-3369 (with reference to the court's observations at page 3395, paragraph 19). In those cases the persons concerned were not "taxable persons acting as such" within the language of article 2 of the Sixth Directive.

Then the Commissioners say that DCHS is carrying on no economic activity. To make good that contention the Commissioners argue that the facts in the present case show that the sole purpose of the contractual changes made to implement Project Pita and other agreements entered into between DR and DCHS was to avoid tax on DR's supplies. In economic terms, the Commissioners say, nothing has changed in relation to the supply which the customer receives and DR is therefore making a supply of goods or services for the full amount of the ticket price. Moreover the Commissioners argue that if those contractual changes were to have any effect in VAT terms, this would lead to a distortion of competition.

The Commissioners contend that if the changes required by Project Pita were effective, the result would fail to give effect to the overall purpose of the Sixth Directive which is meant to be a tax on consumption directly proportional to the value of the goods or services provided. This follows from the fact that the tax on consumption would, were DR to be right in its analysis, be levied at 97.5% of the total price even though the reality is that 100% of that price goes on consumption of the chosen goods (or services).

The Commissioners argument that DCHS is not carrying out any economic activity relies on the absence of any economic substance in the transactions carried out by DCHS. Nor, say the Commissioners, is DCHS a supplier of services. None of its activities have any demonstrable commercial or business purpose; its functions are wholly to avoid tax.

The evidence, written and oral, reveals no reason or purpose for, or any object of, any of the transactions or arrangements other than tax avoidance. We shall examine the arrangements as they affect the Debenhams companies, the customer and the card processing companies (GE and Streamline).

That tax saving was the Debenhams company's purpose for the agreements put in place in September 2000 and the subsequent arrangements is demonstrated by the factors that follow. From the outset VAT saving was the design. In April 1998 the E&Y paper showed an estimated VAT saving of £4 million (see paragraph 24 above). This tax saving was described by Gail Timmins in her messages of May and July 1996 as an increase in profit (paragraphs 25 and 27). Her e-mail of July 1998 refers to "my tax scheme" (paragraph 26) and that of September to "a very lucrative tax planning opportunity". Gail Timmins's perception of the tax planning opportunities refers to potential savings of £10.7 million over five years and an ongoing opportunity "unless legislated against by Customs" (paragraph 30). There was concern that if DR waited "Customs will step in and close the loop" (paragraph 31). Different descriptions for the scheme are given in paragraph 33. E&Y stressed the difficulties that would be faced by the UK authorities were they to try to stop the scheme (paragraph 34); they estimated that counteracting measures would take "a number of years" to enact. The System Feasibility Study (referred to in paragraph 39) sets out the potential tax saving as £4 million a year and states that – "Due to the level of potential profit opportunity available there is a desire to introduce the scheme as quickly as possible". Gail Timmins' presentation to the executive directors of DR and Debenhams Plc points out, among other things, that the potential saving of VAT, £3.4 million, was "within the fee", which we assume to be that to be charged by DCHS. We find Matthew Roberts (financial director of Debenhams Plc) writing on 14 September 2000 to congratulate Gail Timmins for her work on the scheme that had been signed off that day (paragraph 47). Finally, the executive directors received Gail Timmins' update of 25 September 2000 with an assurance of a strong "counsels opinion that Customers would need a legislative change to stop this" (see paragraph 48). Those features underpin the E&Y concession in their letter of 17 March 2003 referred to in paragraph 5 above.

The absence of any commercial advantages to DR or to any other company in the Debenhams group can be inferred from the lack of any positive evidence to this effect and from the facts that DR had a contingency plan to "pull" Project Pita if it actually damaged the trade and from the fact that the Debenhams participators took care to keep the customers in the dark. The only evidence we heard was from Gail Timmins who referred to other opportunities that could have been and could still be exploited through the use of a financial services company and that DCHS might have had a role to play in a restructured deal with GE in coping with the "credit card issue" (see paragraph 93 above). We mention in this connection the passage in the board papers of 31 August 2000 (referred to in paragraph 45 above) to DCHS providing "the opportunity for greater business focus on card transactions in related customer data basis including credit card fraud." We do not, for reasons we have given, place any reliance either on Gail Timmins' evidence or on the passage in the board papers as evidence satisfying us that there was a commercial or business purpose for the part DCHS played in Project Pita. Nothing has actually been done to exploit DCHS' potential as a financial services company. At most the financial services company idea was a possibility; it did not, we think, have the status of a purpose of the executive directors of DR and DCHS. The passage in the board papers, as we read it, was put there to substantiate the commerciality of the proposal (to use the phrase adopted by Gail Timmins in her "update" of 25 September – see paragraph 48 above).

Obviously the Project Pita arrangements were not designed to improve sales or customer perceptions. This is clear from DR's preoccupation with making the minimum possible disclosure to its customers; see for example the specification of 20 January 2000 that "for POS (point of sale) … the message must be printed in as small a point size as possible" (paragraph 43). DR chose not to split out the prices charged by DR and, purportedly, by DCHS on the customer's copy of the credit slip (see paragraph 35). From the start it had been part of the plan that it would not be "glaringly obvious" that any change had occurred at all (see paragraph 25). Finally on this point, the obscurity of the Notification words and of the words on the retailer's copy of the till slip (which DR keeps) are consistent with a plan to keep the customer as much in the dark as to the true nature of the deal as is possible.

We therefore find, as regards DR and DCHS, that VAT saving reasons alone dictated the decision to place DCHS, a wholly-owned subsidiary of DR but in a different VAT group from DR, between GE and Streamline on the one hand and the customers on the other. It was there to facilitate Project Pita. Such activity (if any) as DCHS undertook could be removed from the supply chain without causing any disturbance to DR's retail operations. Indeed, as will be seen from the remarks of Matthew Roberts (referred to in paragraphs 46 and 47 above) Project Pita could and would have been "pulled" if it were to interfere with DR's business. The only consequence of pulling Project Pita and removing DCHS from the chain of supply would have been the disappearance of the toblerones and other notices and the re-routing (or rather recomputing) of the amounts payable by GE and Streamline to DR. The artificiality of the scheme is driven home by the large disparity between the fee of £50,000 that DCHS is expected to pay under clause 11 of the Merchant Agreement in return for DR's "agency" services on the one hand and the virtually pure income of £24 million to £28 million "earned" by DCHS on the other. And there was no evidence as to how that fee was agreed. We observe in passing that had a higher fee for agency services been charged by DR, that fee would have borne VAT which would not have been recoverable by DCHS. To that extent the profitability of the Project Pita scheme would have been reduced.

There was no commercial advantage to either GE or Streamline. It will be recalled from GE's letter to Gail Timmins of 27 November 1999 that GE said it would only be prepared to support the initiative "due to its long-standing relationship with Debenhams". The same letter emphasizes that the creation of the "captive credit card company" will solely benefit Debenhams. Correspondence with Debenhams and Streamline was to similar effect: see paragraph 34 above.

A unique feature of Project Pita, in the experience of this tribunal, is that it depends for its success as a tax avoidance exercise on the participation of members of the public who come in off the street. Each card-paying customer is required by the scheme to enter into a Card Handling Agreement (to use the expression found in the Merchant Agreement) with DCHS. DR is, for reasons that we have already alluded to, concerned to assure the customer that little or nothing is changed and that the total price he pays is unaffected by the arrangements. The explanations given by the till operators, whether they use the question and answer sheet (see paragraph 61 above) or extemporize in the manner summarized under the heading "customer perceptions" (see paragraphs 110, 111 and 113 above), do nothing to disclose any commercial advantage to the customer. Indeed Project Pita will be positively disadvantageous to, e.g., customers who are registered traders and to customer falling within the other categories summarized in paragraph 129 above. It follows that nothing from the customers' angle introduces any commercial or economic purpose into Project Pita. As the acronym implies, it has no commercial purpose. It is therefore left as a tax avoidance scheme and nothing else.

Regarding distortion of competition, it seems to us self-evident that Debenhams, by adopting the tax avoidance scheme and thereby improving its profit margins, is putting itself at a competitive advantage as compared with fellow retailers who do not adopt the scheme.

On the strength of those findings we conclude that DCHS is not a taxable person acting as such in relation to any transactions with customers. Those transactions are neither economic activities nor supplies for VAT purposes. They can be removed from the chain without affecting the real supply of goods or services by DR to customer at the ticket price; in this respect the present case is different from the circumstances considered by this Tribunal in WHA Ltd (2002) VAT Dec. 17605 where the Tribunal concluded that the "Gibraltar loop" could not be removed from the chain.

This issue would only arise if we were wrong in the conclusions we have already reached. For the record the Commissioners argue that the arrangements comprised in Project Pita constitute an abuse of the First and Sixth Directives by DR in order to bring part of its taxable supplies outside the scope of VAT, by rendering them exempt, and thereby to avoid taxation of part of the consideration received for such supplies. By that means they ensure that the purposes of those two Directives are not achieved. The result, according to the Commissioners' case is that the advantage sought by DR is to be denied and VAT becomes due on the whole amount paid by the customer on the basis of the economic reality of the supplies.

For this purpose the Commissioners submit that the two conditions for application of the abuse of rights doctrine as laid down by the ECJ in Case C-110/99, Emsland-Starke , are fulfilled. The ECJ held in that case that there were two elements required for a finding of an abuse to be made. The first of these is a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. The second is that a subjective element, consisting in the intention to obtain an advantage from the Community rules by artificially creating the conditions laid down for obtaining it is present.

The Commissioners submit that the first condition is fulfilled in the present circumstances. The purpose of the VAT system is to tax final consumption of all goods and services in a neutral manner and in a manner that does not distort competition. The arrangement between DR and DCHS, if successful, would violate the principle of neutrality as to transactions which are, from the point of view of the consumer, absolutely identical would, before and after implementation of those arrangements, be taxed in a different way. The purported insertion of DCHS as an extra link in the chain of supply would cause the same transactions to be differently taxed, contrary to the principle of neutrality. Further, if the percentage agreed between the parties were to be varied over time, the tax treatment of identical transactions would vary at the will of DR and DCHS. Likewise, by reason of Project Pita, the tax levied on a taxable supply by DR would not be directly proportional to the price paid by the customer. The customer's price goes to "consume" the goods or services he has chosen. Moreover, the Commissioners contend, the principle of VAT should be applied in a way that does not distort competition between undertakings is an equally important principle of VAT. In the present circumstances, it is argued, DR has achieved the situation whereby, if successful, part of the amount received by it for taxable supplies of goods or services would not be taxed. DR has done this by taking advantage of, and abusing, the rules exempting certain supplies and would lead to a distortion of competition with the UK.

For the same reasons as were advanced by the Commissioners (in paragraph 174) we are satisfied that the first condition is fulfilled.

We turn now to the second condition laid down in Emsland-Starke . This depends on the existence of a subjective element consisting in the intention to obtain an advantage from the Community rules by artificially creating the condition laid down for obtaining it. In the present case, the Commissioners submit, DR intentionally has sought to obtain an advantage, namely the avoidance of VAT on part of the consideration received for taxable supplies of goods or services to customers, and is doing so by creating an artificial supply chain. But for the tax advantage, DR would not, it is said, have entered into the arrangements at issue here and there would have been no "supplies" from DCHS, whether to the customer or to DR, nor any purported alteration to the supply from GE and Streamline to DR.

We have already concluded, in the context of the Halifax issue, that the transactions comprised in Project Pita were carried out solely for the purpose of avoiding tax. Other than tax avoidance there were no commercial or economic reasons for introducing DCHS into the supply chain. The arrangement was wholly artificial. The artificiality is driven home by the facts that the arrangements were administratively burdensome and a contingency plan was in place to "pull" them should they actually cause harm to DR's ordinary trading activities.

For those reasons we think that the second condition laid down in Emsland- Starke is satisfied in the present circumstances.

In May 2002 the UK submitted to the VAT Committee of the Commission established under Article 29 of the Sixth Directive a question concerning the treatment of card-handling schemes such as the one we have been examining in these proceedings. The question was backed by a description of the scheme said to have been adopted since late 2000 by "more than 30 leading UK retailers". The VAT Committee gave its opinion. They recited the question as concerning –

Referring to the decisions of the ECJ in Chaussures Bally ((C-18/92), Card Protection Plan (C-346/96), Henriksen (C-173/88), Primback (C-34/99) and Muys' en De Winter's Bouw (C-281/91), the Committee observed that the key underlying principle of neutrality was achieved by ensuring that tax was due on what the customer actually paid for a supply. This method of payment could not alter the amount of tax due. Any charge made before delivery for arranging alternative methods of payment were, in the Committee's opinion, merely further consideration for this principal supply. Thus, in their view –

Several meetings of the Committee took place. On 20 March 2003 the Commission drew up the following guidelines under the heading - "Taxable amount when goods are purchased by credit card". This reads:

At the present hearing DR challenged the Committee's opinion. The question the committee had set themselves was, said DR, tendentious and had led to the answer they had given. They had wrongly seen the issue as a replay of Chaussures Bally when they should have directed themselves to the questions of what was the supply and what was the consideration in the first place.

Guidelines issued by the Commission through the VAT Committee are not legally binding; but the Committee is established by the Sixth Directive as a body to be consulted and to advise on the application of Community provisions on VAT (see Article 29.4). In the spirit of Article 10 of the Treaty, which imposes an obligation on Member States and their institutions to cooperate we have taken the Committee's opinion and the guidelines into account. Because of the nature of the appeal system in this country we have not approached the matter by the same route as that taken by the Committee. Nonetheless the decision we have reached, following a long hearing and the examination of a considerable amount of evidence, has produced the same result.

We dismiss the appeal. We were asked to defer the question of costs until the parties had had the opportunity of reading our decision and making submissions, if costs cannot otherwise be agreed.

We were asked to consider referring appropriate questions to the ECJ. We decided against this course. The "contractual issue" is of key importance and is a domestic issue. Before any reference is made we feel that it is preferable that the parties should have the opportunity of appealing to the domestic courts on that and any other issues.

Pursuant to the Value Added Tax Tribunals Appeals Order 1986 we certify that this decision involves points of law relating wholly or mainly to the construction and application of the statutory provisions set out in paragraphs 8 – 11 above so far as they relate to the questions raised in this appeal.

LON/01/266