Judgment summary
This decision concerns appeals by Frasers Group Financial Services Limited, known during the relevant period as Studio Retail Limited ("Studio"), against VAT assessments and related HMRC decisions. The dispute concerned the extent to which marketing costs, including photography and modelling costs, related to taxable supplies of goods and exempt supplies of credit, and how such costs should be apportioned for VAT recovery purposes (1)-(9).
Studio sold goods through catalogues and online, with most customers purchasing on a credit account (Studio Pay) that generated taxable supplies of goods and exempt supplies of credit via interest (3)-(4). HMRC assessed Studio on the basis that photography and modelling costs, along with other marketing costs, formed part of residual costs to be apportioned using the standard turnover method, resulting in approximately £2.7m of irrecoverable VAT each year (5)-(6).
Studio appealed on the basis that photography and modelling costs related solely to taxable supplies, and that the standard turnover method distorted the apportionment of residual marketing costs, proposing alternative methods (6)-(7). A separate appeal concerned HMRC's refusal of a 2023 partial exemption special method (PESM) proposed by Studio (8). Studio also argued that two assessments, for the 09/19 and 03/20 VAT periods, were made out of time (10).
The Tribunal found that the photography and modelling costs did have a direct and immediate link with the exempt supplies of credit, given the way photographs were used alongside prominent credit messaging in catalogues, on the website and in credit-focused leaflets (197)-(220). It rejected Studio's argument that an integrated or symbiotic business model alone could establish such a link where marketing materials made no reference to credit (234).
On apportionment, the Tribunal held that the standard turnover method, although not perfect, was fair and reasonable and did not produce significant distortion, and that neither of Studio's proposed alternative methods guaranteed a more precise result (269), (293)-(294). The appeal against the refusal of the amended 2023 PESM was also dismissed on the same basis (295)-(298).
On the time limit issue, the Tribunal found that the assessments for the 09/19 and 03/20 VAT periods were made within the one-year time limit under section 73(6)(b) VATA, inferring the assessing officers' opinions from the evidence of HMRC's partial exemption specialist, Mr Williamson (329)-(334). All of Studio's appeals were dismissed in their entirety (338).
Background
Studio sold a wide range of goods, including clothes, gifts, toys and homeware, through catalogues and online, with no physical shops (32). It offered a regulated credit account, Studio Pay, under which customers made minimum monthly payments and incurred interest, at a typical APR of 49.9% (later 39.9%), if balances were not paid in full (33)-(34). Around 90% of purchases were made on credit account, and 85% of credit account customers incurred interest (37).
Studio's business involved an integrated model in which the sale of goods generated credit interest and the availability of credit increased sales, described by the Tribunal as a symbiotic relationship (40). Credit interest consistently represented approximately 20%-24% of total revenues during the relevant period (38), (288).
Following an HMRC investigation into Studio's apportionment methodology after a 2005 PESM and a 2018 standard method override notice (SMON), HMRC found that Studio had excluded certain exempt interest income (received more than 12 months after a sale) from its calculations and had treated photography and modelling costs as attributable solely to taxable supplies (61)-(64). HMRC issued VAT assessments under section 73 VATA totalling a little over £5.6m, based on the standard turnover method (65)-(67). Studio's 2022 and 2023 PESM proposals were both rejected by HMRC (68)-(69).
Core dispute
The first issue was whether photography and modelling costs used to produce catalogue, website and leaflet images were attributable exclusively to the taxable supplies of goods, or whether they also had a direct and immediate link with the exempt supplies of credit, such that they formed part of residual costs requiring apportionment (70), (87).
The second issue was whether HMRC's standard turnover method of apportioning residual marketing costs between taxable and exempt supplies produced a distortion, and whether either of Studio's two remaining alternative methods, one based on an amended 2023 PESM using expected rather than actual interest, and one excluding interest paid by customers in a "non-trading position", guaranteed a more precise apportionment (71)-(73), (248).
A further issue was whether the Tribunal could allow Studio's appeal against HMRC's refusal of the 2023 PESM on the basis of proposed amendments to that method (74).
Finally, the Tribunal had to decide whether assessments for the 09/19 and 03/20 VAT periods were made within the time limit in section 73(6) VATA, given that they were accepted as being outside the two-year limit in section 73(6)(a), so that the question turned on when sufficient evidence came to HMRC's knowledge under section 73(6)(b) (75), (299)-(301).
Court findings
On attribution, the Tribunal held that the primary function of the photographs was to display products, but that this had to be assessed in the context of the marketing materials as a whole (198)-(199). It found that prominent and, in some cases, superimposed references to Studio Pay and credit alongside specific product photographs, including in catalogues, on individual website product pages and in credit-focused leaflets, meant that the photographs were objectively used in relation to the supplies of credit as well as the supplies of goods (200)-(213). It rejected Studio's submission that only the textual references to credit, and not the photographs, promoted credit (202), (205).
The Tribunal declined to follow the contrary conclusion reached on similar facts in Littlewoods Limited v HMRC [2025] UKFTT 01602 (TC), attributing the different outcome to factual differences, including that credit messaging in Studio's materials was not "discreet" (209), (215).
The Tribunal further held that, had the photographs not actually been used in connection with credit promotion, the integrated or symbiotic nature of Studio's business would not, of itself, have established a direct and immediate link with the supplies of credit, declining to follow the reasoning in N Brown Group PLC v HMRC [2019] UKFTT 172 (TC) in light of Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA Civ 910 (229)-(234).
On apportionment, the Tribunal found that the standard turnover method did not produce significant distortion, noting that credit interest remained a broadly constant 20%-24% of total revenues across the relevant years (288)-(289). It held that marketing costs continued to be used, objectively, for the purposes of all later payments of interest relating to a particular sale, regardless of how long after the sale the interest was paid or whether the customer had been in default, rejecting the "erosion over time" reasoning in N Brown (282)-(290). Neither of Studio's alternative methods was found to guarantee a more precise result, partly because Studio had abandoned any approach based on excluding interest according to elapsed time, and partly because the alternatives substituted estimated or partial interest figures for actual interest received (269)-(293).
On the 2023 PESM, the Tribunal accepted it had jurisdiction to consider the method as amended by Studio's corrected assumptions about average customer purchases, but found that even as amended it did not guarantee a more precise apportionment than the standard turnover method (296)-(298).
On the time limit issue, applying the test in Pegasus Birds Limited v Customs and Excise Commissioners and DCM (Optical Holdings) Limited v HMRC [2022] UKSC 26, the Tribunal inferred, from the evidence of Mr Williamson, that the assessing officers shared his view that further information, including the rationale for the 12-month interest exclusion (received 30 April 2021) and underlying calculations for the 03/20 return (received 29 November 2021), was needed before assessments could be justified. On this basis, both assessments were found to have been made within the one-year time limit in section 73(6)(b) VATA (314)-(334).
Outcome
The Tribunal dismissed Studio's appeal against HMRC's refusal of the call centre apportionment and the 2022 PESM, these not being pursued (14). It held that the photography and modelling costs formed part of residual costs requiring apportionment, rather than being attributable solely to taxable supplies (335). It held that the standard turnover method was fair and reasonable and that neither of Studio's alternative apportionment methods, nor the amended 2023 PESM, guaranteed a more precise result (336). It held that the assessments for the 09/19 and 03/20 VAT periods were made within the statutory time limit (337). Studio's appeals against the various assessments and against HMRC's decisions were dismissed in their entirety (338).
Major issues / areas of contention
- Whether photography and modelling costs used to produce product images had a direct and immediate link solely with taxable supplies of goods, or also with exempt supplies of credit, so as to form part of residual costs.
- Whether the standard turnover method under Regulation 101 VATR and Article 174 PVD produced a distortion in apportioning residual marketing costs between taxable and exempt supplies.
- Whether either of Studio's proposed alternative apportionment methods, based on expected interest or excluding interest paid by non-trading customers, guaranteed a more precise apportionment than the standard turnover method.
- Whether the Tribunal had jurisdiction to allow an appeal against HMRC's refusal of the 2023 PESM on the basis of proposed factual amendments to that method.
- Whether an integrated or symbiotic business model, without reference to credit in marketing materials, could alone establish a direct and immediate link between marketing costs and exempt supplies of credit.
- Whether assessments for the 09/19 and 03/20 VAT periods were made within the time limit in section 73(6) Value Added Tax Act 1994, including identifying the evidence relied on by the assessing officers.