Redcats (Brands) Limited v Her Majesty's Revenue & Customs

Facts

The appellant, Redcats (Brands) Ltd, formerly Empire Stores Limited, sells clothing and household goods by mail order through bi-annual catalogues such as Empire, The Store, La Redoute, Verbaudet and Daxon, and is the representative member of a VAT group. Until 2000 it sent its catalogues to existing and prospective customers free of charge. On the suggestion of Messrs Ernst & Young it then implemented a scheme under which it purported to introduce a charge for each catalogue — £4 for Empire, £3 for La Redoute, £2 for Daxon and Verbaudet, £4 for The Store — coupled with a matching discount off the price of the mainly standard-rated goods ordered, so that the customer paid no more than before. The change was communicated only through a retention of title and charging clause printed in the smallest type on page 1028 of the 1035-page catalogue. Redcats accounted for the catalogue "sales" as zero-rated under item 1, Group 3 of Schedule 8 to the Value Added Tax Act 1994, and admitted that the sole purpose of the scheme was to reduce output tax. HMRC, considering that the catalogues continued to be given away, assessed Redcats to VAT of £1,144,273 on 15 March 2002 for periods 03/00 to 12/00, and to £1,211,040 on 12 September 2002 for periods 03/01 to 12/01. Redcats appealed against those assessments.