Flashback on ECJ Cases C-34/99 (Primback) – Interest-free credit does not reduce the retail VAT base

On 15 May 2001, the ECJ issued its judgment in Case C-34/99, Primback.

Summary

Facts: Primback sold furniture at an advertised price, payable in cash or through interest-free credit provided by a separate finance company. The finance company paid Primback less than the advertised price but recovered the full amount from the customer.
Issue: The dispute concerned whether the VAT taxable amount was the full price payable by the customer or only the net amount received by Primback after the finance company retained its charge.
Question to the Court: The House of Lords asked how Article 11A(1)(a) of Sixth Council Directive 77/388/EEC applied where the customer was unaware of the retailer’s separate financing arrangement.
Decision: The Court held that the taxable amount was the full advertised and invoiced price payable by the purchaser.
Argumentation: The customer received goods for the full retail price and did not pay separately for credit. The finance company’s deduction arose from a separate agreement with the retailer and did not reduce the consideration for the sale.

Facts

Primback Ltd sold furniture to retail customers. Goods were offered at an advertised price that did not vary depending on whether a customer paid in cash or used credit.
Customers could obtain interest-free credit from a finance company distinct from Primback. The finance company undertook to pay the advertised and invoiced price to Primback on behalf of the customer.
Under a separate agreement, however, the finance company paid Primback less than the advertised price. The difference represented the economic cost of providing the customer with interest-free finance.
The customer was unaware of that separate arrangement and repaid the full advertised price to the finance company.
Primback argued that VAT should be calculated only on the lower amount that it actually received from the finance company.

Issue

Article 11A(1)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 defined the taxable amount as everything constituting the consideration obtained or to be obtained by the supplier from the purchaser, customer or a third party.
The issue was whether the finance company’s retained amount reduced the consideration for the supply of furniture or instead represented a separate cost borne by Primback for arranging interest-free finance.

Questions

Question 1: “Where a retailer offers, at a single price, goods and the option of a period of extended credit to pay that price – the credit to be provided by a person other than the retailer, and at no additional cost to the customer – what is the taxable amount for which the retailer must account in respect of the goods supplied, having regard to Articles 11A (1) (a) and 13B (d) (1) of Council Directive 77/388/EEC? In particular, is the taxable amount

(a) the full amount payable by the customer;
(b) the full amount payable by the customer, less the value of the credit;
(c) (if different from (b) above) the amount actually received by the retailer; or
(d) an amount calculated on some other, and if so what, basis?”

Question 2: “If the taxable amount is the full amount payable by the customer, less the value of the credit (see Question 1. (b) above), how is that credit to be valued?”

Question 3“Is the answer to Question 1. above affected by the fact that

(a) the supply of goods to the customer is described as being on ‘interest free’ credit terms;
(b) the customer signs a loan agreement with a finance house at the time of the sale transaction, the terms of which include
(i) a promise by the finance house to pay the retailer a sum equal to the loan (which was for an amount equal to the advertised price of the goods);
(ii) a statement that the interest rate applying to the loan is ‘0%’; and
(iii) an authorisation by the customer to the finance house for it to pay the full amount of the loan to the retailer and an agreement by the finance house to do so; and
(c) as a result of a separate agreement between the retailer and the finance house (the existence and terms of which are not disclosed to the customer), the sum received by the retailer is a sum less than the full amount of the advertised price for the goods?”

Advocate General’s Opinion

In the case where a retail trader offers goods at a single price and offers interest-free credit for payment of that price – the credit being provided by a person other than the retail trader and at no additional cost to the customer -, and thus where the true costs of the credit are not separately indicated, the taxable amount for purposes of value added tax is the full amount payable by the customer.

Decision

The Court ruled as follows:

On a proper construction of Article 11A(1)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, where a supply of goods for consideration has the following features:

a retail trader sells goods in return for payment of the advertised price which he invoices to the purchaser and which does not vary according to whether the customer pays in cash or by way of credit;
should the purchaser so request, the acquisition of the goods is financed by the provision to him of interest-free credit by a finance company distinct from the seller;
the finance company gives an undertaking to the purchaser that it will pay to the seller on the purchaser’s behalf the sales price advertised and invoiced by the seller;
the finance company in fact pays to the seller, pursuant to agreements concluded with the seller but of which the purchaser is unaware, a sum less than the price advertised and invoiced; and
the purchaser repays to the finance company a sum equal to the price advertised and invoiced,

the taxable amount for purposes of calculating the value added tax payable on that sale consists of the full amount payable by the purchaser.

The ruling establishes that a retailer cannot reduce the VAT taxable amount by the financing charge retained under a separate arrangement with a third-party finance company.

Argumentation

The transaction between Primback and the purchaser was a sale of furniture for the advertised price. That price was stated on the invoice and remained the same whether the purchaser paid in cash or used credit.
The customer did not receive a separately priced financial service. From the customer’s perspective, the entire amount payable related to the purchase of the furniture.
The finance company’s payment discharged the customer’s obligation to Primback. The fact that Primback privately agreed to receive a lower net payment did not alter the amount of consideration provided on the customer’s behalf.
The amount retained by the finance company represented a cost incurred by Primback under a separate commercial arrangement. Like other business costs, it did not reduce the taxable consideration received for the retail supply.

Source

Similar ECJ Cases

C-18/92 Bally: Held that commission retained by a credit-card company did not reduce the taxable amount of the retailer’s sale.
C-317/94 Elida Gibbs: Addressed reductions in the taxable amount where a manufacturer funded discounts ultimately benefiting final consumers.
C-288/94 Argos Distributors: Examined the taxable amount where goods were purchased using vouchers previously sold at a discount.
C-404/99 Commission v France : Confirmed that compulsory supplements paid by customers form part of the consideration for the service.