Revenue and Customs Commissioners v. Findmypast Ltd., [2017] CSIH 59

After discussion the leading cases on point, Lord Drummond Young noted (at para. 20) that additional cases raised by counsel for HMRC “were relied on in large measure because they appeared to provide analogies to the factual situation found in the present case,” and stated (also at para. 20):

It seems to us that the application of tax law is through principle rather than analogy; in every case the underlying basis of the court’s reasoning must be discovered, and it is the principles contained in that reasoning that govern future cases.

Findmypast carried on the business of providing access to genealogical and ancestry websites which it owned or in respect of which it held a licence. The search function (which only revealed that a particular set of records, e.g., the Register of births for a particular town and period, was available, but not the record contents) was available free of charge to the general public, but to access and download particular documents, customers could either take out a subscription for a fixed period or use a system known as Pay As You Go (“PAYG”) which involved the payment of a lump sum in return for which the customer received a number of “credits” (also referred to as vouchers) used to view records. The credits were only valid for a fixed period, but unused credits could be revived if the customer purchased further credits within two years. During the period in question the taxpayer accounted for value added tax (VAT) on the price of PAYG vouchers at the time when they were sold. The result was that tax was paid both for redeemed vouchers and the significant number of vouchers that remained unredeemed. The taxpayer claimed repayment of the VAT accounted for in respect of unredeemed vouchers during the period.

A preliminary issues was whether VAT should have been accounted for at the time when the vouchers were sold or when they were redeemed, having regard to s. 1(2) of the Value Added Tax Act 1994 (the “1994 Act”), which provided that “VAT on any supply of goods or services … becomes due at the time of supply” and s. 6(3) of the 1994 Act providing that generally a supply of services is to be treated as taking place at the time when the services are performed (to be read along with generally similar VAT Directive language).

Lord Drummond Young found (at paras 28, 33) respecting this issue, that a supply of services was made only at the time that particular records were downloaded:

[T]he search function cannot be considered an end in itself; it is no more than a means towards the customer’s ultimate end, namely viewing and downloading documents about the family that is being researched. … .

… The consideration for the payments made by customers to obtain PAYG credits is the ability to view or download particular items on the taxpayer’s website, and does not extend to the general search facility that is available both to customers and to the public. …

Findmypast carried on the business of providing access to genealogical and ancestry websites which it owned or in respect of which it held a licence. The search function (which only revealed that a particular set of records, e.g., the Register of births for a particular town and period, was available, but not the record contents) was available free of charge to the general public, but to access and download particular documents, customers could either take out a subscription for a fixed period or use a system known as Pay As You Go (“PAYG”) which involved the payment of a lump sum in return for which the customer received a number of “credits” (also referred to as vouchers) used to view records. The credits were only valid for a fixed period, but unused credits could be revived if the customer purchased further credits within two years. During the period in question the taxpayer accounted for value added tax (VAT) on the price of PAYG vouchers at the time when they were sold. The result was that tax was paid both for redeemed vouchers and the significant number of vouchers that remained unredeemed. The taxpayer claimed repayment of the VAT accounted for in respect of unredeemed vouchers during the period.

The principal issues were (i) whether VAT should have been accounted for at the time when the vouchers were sold or when they were redeemed, having regard to s. 1(2) of the Value Added Tax Act 1994 (the “1994 Act”), which provided that “VAT on any supply of goods or services … becomes due at the time of supply” and s. 6(3) of the 1994 Act providing that generally a supply of services is to be treated as taking place at the time when the services are performed (to be read along with generally similar VAT Directive language); and (ii) whether on the purchase of a PAYG voucher the customer should be viewed as prepaying for services within the scope of s. 6(4) of the 1994 Act which provided, notwithstanding s. 6(3), that if before the time applicable under s. 6(3) “the person making the supply … issues a VAT invoice in respect of it or if, before the time applicable under [s. 6(3)] … receives payment in respect of it, the supply shall, to the extent covered by the invoice or payment, be treated as taking place at the time the invoice is issued or the payment is received.”

After finding a supply of services was made only at the time that particular records were downloaded, Lord Drummond Young then turned to the s. 6(4) prepayment rule (as informed by the corresponding VAT Directive rule in Art. 65), and found that it did not apply. He first noted (at para 46), that under the Court of Justice jurisprudence on Art. 65

VAT may be payable in advance of that date [of the supply] if the requirements of article 65 are satisfied, but for that to happen there must be precise identification of the goods and services that are to be supplied.

He further found (at paras 48, 51, 52, and 53):

When a customer acquires PAYG vouchers and makes a payment to the taxpayer, a number of matters are uncertain. First, and most importantly, it is uncertain whether the chargeable event – redemption of a credit by viewing or downloading a document - will ever occur. … Secondly, it is not clear when redemption will occur, and by that time a number of features of the service might have changed. … [T]he possibility that the available documents might have changed appears to be a real one. In its contractual terms and conditions the taxpayer expressly reserves the right to make changes to the website…[and] the number of credits charged to view a record may be changed from time to time.

[T]he elements of uncertainty… are sufficiently important to exclude the application of the prepayment rules contained in section 6(4) … and article 65.. . . of the Principal VAT Directive. If a prepayment is to be chargeable to VAT, it must relate to a particular supply of goods or services, with a direct link between the goods or services and the consideration paid in advance.

… [W]e are of the opinion that the uncertainties in the present case are so material that the payment made when PAYG credits are purchased cannot be considered a prepayment towards the cost of any particular search. …

… The supply is the viewing and downloading of documents, but it cannot be known at the time when the payment is made how many credits will actually be used and how many will remain unredeemed. That makes it impossible at that stage for the taxpayer to know how much VAT should be accounted for. … In essence, article 65 and section 6(4) proceed on the proposition that a deemed supply takes place, but if the extent of that supply cannot be known at that point the system of accounting for VAT becomes unworkable.

The European VAT rules had a prepayment rule broadly similar to ETA s. 152(1), which Lord Drummond Young noted (at para. 46) had been interpreted by the European Court of Justice so as to only apply where there is “precise identification of the goods and services that are to be supplied.” He found that this test was not satisfied for a genealogical website, whose customers would purchase credits that could be applied during specified time periods to download historical records (e.g., birth and death records) whose number was determined in accordance with parameters that were subject to change by the site – and with a significant number of the credits never being applied in the periods in question.

Since the prepayment rule did not apply, there was only a taxable supply of services when the credits were applied by downloading particular records rather than at the time of the prior purchase of the credits.