England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
SIR FRANCIS FERRIS

		Royal Courts of Justice Strand, London, WC2A 2LL
		10 February 2005

Sir Christopher Staughton:

1. Telewest Communications Plc have a business of providing television programmes by cable. Customers for that service are enlisted by one of twenty-eight regional companies, which are owned and controlled by Telewest Communications Plc. We refer to the parent and its subsidiaries as "the Group". The twenty-eight companies are also organised in a smaller group for the purposes of value added tax.
2. Each customer has an elaborate printed form of contract, much of it in small print but still legible, at any rate until it has been photocopied several times (as it has been in preparing the papers for the Court of Appeal).

Besides the task of supplying television programmes there is also a monthly magazine supplied to the customers, listing the programmes to be expected in the coming month. That is produced by Cable Guide Limited, which is ultimately part of the Group as to 80 per cent. Until 1999, both the goods and services involved in providing television programmes and the listing magazines were supplied to the customers by one of the regional companies. Value Added Tax was required to be paid by the regional company at the standard rate on the television programmes. But the magazine, as goods that are zero-rated, did not give rise to an obligation to pay value added tax. The Commissioners of Customs and Excise accepted that the sum payable by the customers could be divided between that part attributable to the goods and services supplied in the provision of television programmes, and that part attributable to the magazines. Only the former was taxable; the magazines, as publications, were zero-rated.

Then there came the decision of the European Court of Justice in the case of Card Protection Plan v Commissioner of Customs & Excise (1999) STC 174. The company, here referred to as CPP, provided fifteen different services of which two were singled out, that is to say the arrangement of insurance for credit card holders and the registration of card numbers with the provision of a loss notification service. The House of Lords submitted this question to the European Court of Justice:

"1. Having regard to the provisions of the Sixth Directive and in particular of Art.2 (1)thereof, what is the proper test to be applied in deciding whether a transaction consists for VAT purposes of a single composite supply of two or more independent supplies?"

The answer of the Court of Justice (1999) STC 270, was as follows:

"32. The answer to the first two questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by CPP are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply."

3. The House of Lords held that the transactions performed by CPP were to be regarded as comprising a principal exempt insurance supply and the other supplies in the transactions were ancillary, so that they were to be treated as exempt. It was thus established that, at any rate in some cases, a mixed supply was not to be dissected into a taxable supply and an exempt supply, but rather treated as taxable or exempt in accordance with its principal character. This was a victory for the taxpayer in the CPP case – but not for others. In British Sky Broadcasting Plc v Commissioners of Customs & Excise (1999) V & DR 283 there was a supply of satellite television broadcasts, and a magazine called "Sky TV Guide". It was held by the Tribunal that there was a single integrated service, which was evidently the broadcasting service. So value added tax was payable at the standard rate on the whole of the amount charged by B Sky B.

The Scheme

4. The Telecom Group thereupon took advice, and set up a scheme which is claimed to have restored the arrangement that prevailed before 1999, that is to say payment of VAT in respect of the supply of television programmes and zero-rating for the magazines. There is a dispute as to whether that objective was achieved. The steps that were taken have been set out in the judgment of Sir Francis Ferris, sitting as a deputy judge of the High Court, on appeal from a decision of the VAT Tribunal. We set out what happened, somewhat abbreviated, from [2004] STC 517.
5. First, there was the incorporation of a new company named Telewest Communications (Publications) Ltd. on 18^th October 1999. That company, which we will call "Publications", is a wholly owned subsidiary of Telewest Communications Plc. However, it did not become a member of the (smaller) Value Added Tax group.
6. The existing procedure had been as follows, described by Sir Francis Ferris in his paragraph 14 onwards:

(a) The supply of the magazine before January 2000

Before January 2000, a customer wishing to arrange for a supply of cable television services was first shown a leaflet describing different packages at different prices. For example a standard service package was available for £17.99 per month and was described as:

"Over 50 Channels covering news, current affairs, family entertainment, children's channels, music, sport, foreign language and information including BBC 1 and 2, ITV and Channel 4 and 5 Plus Cable Guide Magazine."

At the bottom of the leaflet were printed the words: "Effective 1 November 1998. All prices include VAT at 17.5%." Overleaf were listed other optional charges which included: "Cable Guide: First copy included in monthly subscription. Additional copies £3.25 each".

The tribunal mentions in para 18 what seems to have been a slightly later version of the leaflet the language of which was substantially the same.

A customer desiring to accept what was offered would be required to enter into a formal written contract on a printed form. The tribunal recorded in para 19 of its decision a contract for a combined television and telephone package, cl H of which provided:

H. CHANGING THE AGREEMENT

1. …

2. We may amend or vary the terms of this Agreement … from time to time. However, you will have the right to terminate this Agreement if the changes are significant …

3. We will give you at least 30 days' notice of any increase to the charges or changes to the Services before they take effect either by writing to you direct or publishing the changes in Cable Guide."

In relation to this the tribunal found that 'Services' were defined in cl. Q as 'the services which you have ordered and which are described overleaf' and that 'Overleaf the services were described by reference to the particular package chosen by the customer, which of course included Cable Guide Magazine'.

The tribunal noted that in the contracts with the Yorkshire Cable regional company (YCCL) the provision for changing the agreement was worded somewhat differently and read:

'32. CHANGING THE AGREEMENT

A. Subject to your right to terminate under clause 15 YCCL may at any time change any of the terms and conditions of this Agreement by giving you not less than one month's prior notice'.

The provision of the magazine before the change was described by the judge in paragraphs 7 and 8:

"Until July 2001 there was a single magazine, named Cable Guide which was produced by a company named Cable Guide Ltd. of which Telewest Plc is, either directly or indirectly, the majority shareholder. Cable Guide is published monthly and has a cover price of £3.25 a copy. It could, and still can, be purchased from newsagents at this price, but the overwhelming majority of copies were, until the end of 1999, distributed by regional companies to their customers without any charge being made over and above the monthly subscription for the television services. In other words the monthly subscription was paid in return for a package consisting of the television services and the magazine.

Until the summer of 1999 the commissioners allowed Telewest Plc to account for VAT on the supplies made by the Telewest VAT group by attributing £3.25 out of each monthly subscription to the magazine Cable Guide and treating this as consideration for a zero-rated supply. The balance of each monthly subscription was attributed to the television services and treated as consideration for a standard-rated supply."

7. The next step in the scheme was an agency agreement between Publications and 27 of the regional companies. It was concluded orally, as the Commissioners accept, on 1^st December 1999, although not put into writing until 16 May 2000. The one remaining regional company became a party to the agency agreement on 16^th May 2000, by a separate agreement in writing. The judge summarised the terms of the agency agreement in his paragraph (21) as follows:

(1) Publications was required to provide each customer of the regional companies with one copy of each monthly issue of Cable Guide for so long as that person remained a customer;

(2) Publications was to procure that Cable Guide Ltd. supplied it with sufficient copies of Cable Guide in each month to enable it to fulfil its obligations under (1);

(3) Publications was not to supply Cable Guide to any persons other than customers as provided by the agreement;

(4) Clause 4 provided as follows:

"4.1 Publications hereby appoints each of the Regional Companies as its agent during the term and in the Territory solely for the purposes of

4.1.1 creating a contractual relationship between Publications and the Customers serviced by it for the sale to such Customers of the Magazine by Publications; and

4.1.2 collecting monies due from those customers serviced by it as contemplated in Clause 4.2.2 below

but not for any other purpose.

(5) By cl.4.2.1 to 4.2.3 each of the regional companies was (i) to provide Publications with a list of its customers and update this list on a monthly basis, (ii) to collect from each of its customers each month the cover price in respect of the magazine as agent for Publications and (iii) to remit the monies collected to Publications on a monthly basis;

(6) Publications was to pay to each regional company in respect of the regional company's debt collection costs an annual fee of 3% of the total monies collected.

Notification

8. The existing customers of the regional companies were notified of the changes in December 1999. The tribunal (in their paragraphs 28 to 30) and the judge described how that was done as follows:

"Some regional editions of the Cable Guide magazine had a few pages which contained text of specific relevance to that region. These pages were referred to as the "region-specific Telewest talks section". In the December 1999 edition of Cable Guide the following words were printed in the region-specific Telewest talks section.

"Cable Guide. With effect from 1 January 2000, Cable Guide will be provided to you by another member of the Telewest Group, Telewest Communications (Publications) Limited. There will be no change in your payment obligations as a result".

This text appeared at the end of twenty-one lines of very small print at the end of a page. The majority of the text contained information about free local telephone calls, telephone line installations, the Millennium channels, the Premium channels and general information.

However, residential customers in Yorkshire and West London were sent copies of the Cable Guide, which did not have a region-specific Telewest talks section. Instead, with the December 1999 or the January 2000 edition of Cable Guide, these customers received a leaflet (called an outsert) which was enclosed within the plastic shrink-wrapped envelope in which Cable Guide was delivered. On the leaflet was printed the same text as set out above'.

It was not argued, so far as we recall, that the size of the text or the place where it was displayed had the effect that it should be disregarded. We were referred to the judgment of Bingham L.J, in Interfoto Picture Library Ltd. v Stiletto Ltd (1989) 1 QB 433 at p.445, where he said:

"The defendants are not to be relieved of that liability because they did not read the condition, although doubtless they did not; but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention".

By contrast, there was nothing in the least unreasonable or extortionate as against the customers in the present case.

9. The notification of new customers was different. First, they were shown a leaflet, which contained amongst other information, the words –

"Plus Cable Guide Magazine (priced at £3.25)….Effective January 2000. All prices include VAT at 17.5%."

On the reverse of the leaflet there appeared this passage:-

"Cable Guide Magazine will be provided to you by Telewest Communications (Publications) Limited as part of any television services that you subscribe to. We will supply your name and address to Telewest Communications (Publications) Limited. Payment for Cable Guide Magazine will be due to Telewest Communications (Publications) Limited and we will collect the necessary amounts from you as agent for Telewest Communications (Publications) Limited. Effective January 2000. All prices include Vat AT 17.5%".

10. Customers who accepted the offer were required to sign a contract, which was in some respects different from the form of contract used before January 2000. In some instances there are reference in it merely to Telewest Communications. But at the head of one page there is this statement:

"SERVICE AGREEMENT FOR RESIDENTIAL CABLE TELEPHONE AND CABLE TELEVISION CUSTOMERS

The Terms of our Relationship

The words which follow set out, in straightforward and plain language, the agreement between "you" (the customer) and "us" (Telewest Communications (Midlands and North West) Limited).

Please read them carefully".

The Midlands North West was one of the twenty-eight regional companies.

11. Clause B1 in the conditions stated –

"Provided that you are able to comply with the terms of this agreement, we will, in return, provide you with the services."

In the block marked R there is a definition –

"Services" means the services which you have ordered and which are either described overleaf or referred to in Q above.

There is also this important provision in Block Q:

"'If you agree to subscribe for television services then you agree to the provision of Cable Guide Magazine as part of those services. Cable Guide Magazine will be provided to you by Telewest Communications (Publications) Limited and you agree that we may provide details of your name and address to Telewest Communications (Publications) Limited. Payment for Cable Guide Magazine will be due to Telewest Communications (Publications) Limited. We will collect the due amount from you as agent for Telewest Communications (Publications) Limited within the cost of your monthly subscription.'"

12. The judge made this comment on those terms:-

"The significance of this is that, in agreeing in Cl. B1 to provide 'the services' the regional Company appears, as a matter of language, to agree to provide amongst other things, Cable Guide magazine."

For our part, we do not arrive at that conclusion even as a matter of language, when we read the agreement as a whole. Clause R together with Clause Q acts as a proviso to Clause B; it modifies B1 by saying in Cause Q quite plainly that the magazine will be provided by Publications,

The procedure adopted from and after January 2000.

13. The judge summarised what happened as follows:

"Cable Guide Ltd invoiced Publications for the printing, posting, mailshot and wrapping of the copies of Cable Guide supplied to customers of the regional companies. The regional companies continued to collect from their customers their monthly subscriptions, but £3.25 out of each month's subscription was re-allocated to Publications by the group's central treasury function."

From January 2000 onwards customers have been sent 'Package and advance charges'. On the reverse of each invoice there appears, in addition to details of how to pay and similar matters, the following statement:

'Monies are being collected on behalf of and will be remitted to Telewest Communications (Publications) Limited for the supply of the magazine'.

There was a variation of this language in the case of customers in Yorkshire and West London on whose invoices the statement was:

'Cable Guide – As part of the Millennium package £3.25 will be collected on behalf of and will be remitted to Telewest Communications (Publications) Limited for the supply of the Cable Guide'.

14. For the digital instead of the analogue service, there is a different magazine called Zap. Those who wish to know more about it will find the information in the judgement of Sir Francis Ferris at paragraph 33.
15. Both the VAT Tribunal and Sir Francis Ferris on appeal held that the scheme did not have the result that no VAT was payable by the Group on the magazines.

The Contractual Analysis

16. The judge recorded that both sides in the appeal from the Tribunal were content to accept that the analysis of the arrangement under the English law of contract was the starting point – but that it was also necessary to consider what is called VAT law. The argument for the Group is that there are now two contracts, one between the regional company and its customer for television services, and another between Publications and the customer for the supply of the magazine. The VAT Tribunal and the judge rejected that argument, both for existing customers and for new customers.
17. For existing customers the argument of the Group was based on (i) novation or (ii) assignment or (iii) contractual variation. The object was to convert a contract between A and B into a contract or contracts partly between A and B and partly between A and C.
18. The first route, novation, has been known from Roman law; see Buckland's Institutions, para 113 –

"Novatio. This is discharge by substituting a different obligation for that already existing."

Novation still exists, and naturally requires the consent of all three parties. The case of In re European Assurance Society [1875] 1 Ch.D. 334 was cited as an example. Chitty on Contracts (28^th Edition) para 20-085 has this passage –

"Most of the reported cases in English law have arisen either out of the amalgamation of companies, or of changes in partnership firms, the question being whether as a matter of fact the party contracting with the company or the firm accepted the new company or the new firm as his debtor in the place of the old company or the old firm. That acceptance may be inferred from acts and conduct, but ordinarily it is not to be inferred from conduct without some distinct request. Thus where a banking firm consisted of two partners and one died, the acceptance by a customer from the surviving partner of a fresh deposit note for a balance of a debt due was held sufficient evidence of novation to discharge the estate of the deceased partner, as the customer took the money out of a current account and placed it on deposit at the request of the surviving partner".

This is unchanged in later editions, except in the numbering.

19. In the present case there is not said to be a complete, but only a partial, novation; the contract between the regional company and its customer remains in existence, deprived (in whole or in part) of its rights and obligations as to the magazine. The judge in paragraph 53 implied that there was a difference between relief from the whole of the burden on the one hand, and partial relief on the other. We do not see that a novation cannot be a partial novation. The issue is whether there has been acceptance to be inferred from the acts and conduct of the customer. Hart v Alexander (1837) 2 M & W 483 is a clear case where the plaintiff was shown to have been aware of the retirement of the defendant from the firm and continued to have an account with the firm. It was held that the defendant was discharged from liability.
20. We have some doubt as to whether acceptance "ordinarily …is not to be inferred from conduct without some distinct requests". When goods or services are supplied on a "periodical or continuous basis" (see para. 27 of the Group's skeleton argument), it is not to be supposed that the same supplier will perform the contract without limit of time; in this case the forms of contract do contain provision for termination, for the most part after one year has elapsed. Per contra, if there were only one supply to be made, it may well be expected that there will be no change of the supplier, but that is not this case. A contract for gas or electricity, or for that matter a milkman, is occasionally replaced by another supplier. It is the law that the customer is not bound to the new supplier come what may. But in our judgment little in the way of acquiescence is needed before the customer will have assented to the change. As Lady Justice Arden put it in the course of the argument, the less the significance of the change to the customer, the more readily can acquiescence be inferred by conduct.
21. The Group's skeleton argument stated that it could hardly be a matter of concern to customers as to who supplied the magazines. The Commissioners in reply described that as a proposition for which there was no evidence. In our opinion it was obvious. The judge (at para 53) agreed that the identity of the person responsible for the supply of the magazine could hardly have been a matter of concern. The only rational ground for refusing to continue as subscribers was, we presume, that the customer wanted to cancel before his minimum period had elapsed. But not everyone is rational.
22. It is said for the Commissioners in their skeleton argument –

"The judge correctly took the view that the Appellants did not ask for the consent of the relevant customers because it feared that some of those customers would not consent."

That may have been said in the course of the argument. It may, possibly, be true. But we were not referred to any evidence to that effect.

23. It is unnecessary for us to consider at length the two other arguments of the Group, that is to say assignment and variation. As to assignment, the case of Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd. [1903] AC 414 was relied on by the Group. Tolhurst had contracted to sell a quantity of chalk from his quarries to the Imperial Company for fifty years. The Imperial Company afterwards assigned the Contract and sold its land, works and business to the Associated Company, and went into voluntary liquidation and was wound up. The Associated Company nevertheless sought to enforce the contract and succeeded. That is clearly an assignment of the benefit of the contract by the Imperial Company to the Associated Company. The argument for the Group appears to have been that there was an assignment of the burden of the contract, but in our view there was no such assignment, nor was any needed.
24. The variation argument is based upon Clauses H2 and H3 set out in paragraph 7 above and the corresponding clause 32 of the Yorkshire Company. Sir Francis Ferris rejected the argument, as follows:

"As to this I need say no more than that the introduction of a new party as the person contracting with the customer is quite a different matter from the alteration of the terms and conditions of the existing contract. The notices given to customers did not purport to do the former and, if they had done so, this would, in my judgment, have been unauthorised and ineffective."

25. We are inclined to think that the terms of the contracts, both those of general use and the specific Yorkshire version, cannot alter the parties to the contract by a mere variation. The judge referred at this point to the case of Homburg Houtinport BV v Agrosin Private Ltd (The STARSIN) [2003] UKHL 12, including the observations of Lord Millett at para 175:

"The identity of the parties to a contract is fundamental. It is not simply a term or condition of the contract. It goes to the very existence of the contract itself."

However, we consider that there can have been a partial change of the parties by novation, if the language of the revised contract achieves that effect.

The interpretation of the contracts, both new and old

26. The Starsin Case was concerned with a conflict between "an apparently clear and unambiguous statement of the carrier's identity" on the face of a bill of lading compared with "the detailed conditions on the reverse of the bill in any one of the numerous contingencies that might arise for which those conditions made provision", with the additional help of the Uniform Customs and Practice for Documentary Credits. We do not suppose that the customers in this case, or the Telewest people or even the Commissioners of Customs and Excise were acquainted with the Uniform Customs, which are designed to protect bankers when they deal with letters of credit.

As regards the existing customers, the material available included the following:

(i) The heading to the printed contract as follows:

"The Terms of our Relationship",

Followed by a statement in the same terms as were later required for new customers, as set out in paragraph 12 above.

(ii) As between Publications and the regional companies, Publications appointed the regional companies as its agent to create a contractual relationship between Publications and the Customers, and to collect money from the Customers and to remit it to Publications.

(iii) The existing customers were told that the cable guide would be provided to them by Publications – and that there would be no change in their payment obligations as a result.

(iv) From January 2000 the Customers received a monthly invoice stating that monies were being collected on behalf of and would be remitted to Telewest Communications, with a slight variation in Yorkshire and west London. This procedure was adopted both for the existing customers and for the new Customers.

27. The judge found that those facts were wholly insufficient to establish the requisite acceptance. He thought that particular care in the wording was required in order to split a contractual obligation into two separate obligations; he observed that the customer was not asked to agree to anything and was not given any choice of action; he said that the whole transaction was framed in such a way as to suggest that nothing had really changed; the changes savoured of an internal reorganisation.
28. We are unable to agree with those conclusions. As a general rule inertia does not create a contract, but continuing to pay the monthly bill can amount to acquiescence. How the new arrangement was framed or savoured was immaterial if the question was what it meant. There is no special rule as to how one obligation can be split into two. In our judgment, the existing customers continued to pay for the cable television service and the magazine. Thereby they acquiesced in the new arrangements and became by partial novation contractually bound to Publications so far as concerned the magazine. That was clearly the intention of Publications and the regional companies, as the judge was prepared to assume. Some of the Customers may have paid by Direct Debit, but we do not know how many; and there was still acquiescence.
29. The case for new customers is different. It does not involve novation, or for that matter assignment or variation. The arguments for the Group must be that the contract is between the Customer, on the one side, and both the regional company and Publications on the other.
30. There is in the printed form for new customers a box with the words "Cable Adviser's Signature", and beneath that –

"(for and on behalf of Telewest Communications)

THIS IS A HIRE AGREEMENT REGULATED BY

THE CONSUMER CREDIT ACT 1974."

That would not appear to refer to the ephemeral magazine.

The judge said of the provisions in the revised Clause Q of the form for new customers, that it sounds as if it is directed to data protections laws. If that be the case, we do not find that to point one way or the other to any conclusion.

31. The judge (paragraphs 59 to 61) thought that the regional companies had authority to bring into existence a contract between Publications and each customer for the supply of the magazine. But he found that no such contract was created. That turns largely on Clause Q of the new version of the form for customers to sign. The judge points to Clause B2, which says that "we" (the regional company) will provide the services; but Clause Q makes special provision to the contrary. Generalia specialibus non derogant. Clause Q says in terms that the magazine will be provided by Publications, and that payment for the magazine will be due to Publications, and that the regional company will collect the due payment from the customer as agent for Publications. We regard this as plainly imposing contractual obligations between Publications and the Customer, in relation to the monthly magazine.
32. The Commissioners also relied on Section 47 (2A) of the Value Added Tax Act 1994:

"Where, in the case of any supply of goods to which subsection (1) above does not apply, goods are supplied through an agent who acts in his own name, the supply shall be treated both as a supply to the agent and as a supply by the agent."

It is said that, even if the supply of magazine is made by Publications, it is made through the regional company as agent. That may well be the case. But in our opinion the regional company is not acting in its own name in what it does in relation to the magazines. That would require the agent to adopt the posture of a principal. That is done by the regional company in relation to the supply of television programmes; but by contrast the regional company is at pains not to pretend that it is the principal supplier of the magazines. So the subsection does not apply.

33. In the end, it seems to us that the intention was to make Publications the supplier of the magazines. It was a lawful aim at common law, subject to the arguments on VAT law, which are yet to come. The attempt may not have been crystal clear, but it was plain enough. We should not try to defeat it for the good of the Commissioners.

Lady Justice Arden:

34. I agree with Sir Christopher Staughton for the reasons he gives that the appeal succeeds on the contract issue. Telewest has thus established that there were two suppliers: the regional company in respect of cable television services and Publications in respect of the supply of Cable Guide, that there was a separate contract between Publications and both new and existing customers of the regional company for the supply of that magazine. It follows from the circumstances as described in the judgment of Sir Christopher Staughton that the regional company was discharged from any obligation to new or existing customers to supply the magazine itself. The language of the notices, the invoices and clause Q contemplated that only Publications would be liable in relation to the Cable Guide. That leaves the issues of VAT law that arise on this appeal. The parties argued a number of points that in the light of the conclusion that there was a separate supply to the customer by Publications do not now arise. I will deal only with the live issues and the submissions that were directed to those issues. Accordingly it is unnecessary to express a conclusion on Telewest's argument based on Auto Lease Holland BV v Bundesamt fur Finanzen [2003] All ER (D) 75 that, even if Publications had contractual arrangements only with Telewest and not its customers so that there was only one contract between the customer and Telewest for the supply of cable television services and the magazine, nonetheless as a matter of VAT law there could be a supply of the magazine from Publications to the customer.
35. It is common ground that the supply of magazines is zero-rated and that Publications is not a member of the Telewest group for VAT purposes. It is also common ground that the VAT position does not necessarily follow the contractual position under domestic law (as to this, see for example CCE v Reed Personnel Services Ltd [1995] STC 588 at 595 per Laws J), and that the concepts in the Sixth VAT Directive are autonomous concepts of Community law. As to the facts, it is common ground that Telewest's subscribers could not decline to take the magazine. It is not suggested that the price for the magazine is artificial. Indeed the magazine is sold to members of the public for the same price as that at which it is sold to Telewest subscribers.
36. It is also common ground that this appeal turns on the meaning as a matter of Community law of the concept of supply as used in the Sixth VAT Directive (OJ L 145, 13.6.1977). The relevant provisions are

"Article 2

The following shall be subject to value added tax:

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

2. the importation of goods...

Article 4

1. 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity…

4. The use of the word "independently" in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links…

Article 5

1. 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner..."

37. The judge took the view that there was a single supply of both the magazine and the television services by Telewest. In reaching that conclusion he was influenced by the fact that the supply of television services and the magazine were part of a package. The fact that the regional company had an agency contract with Publications for the supply of the magazine did not make it a supply by Publications. However the judge also held that the CPP case (referred to in paragraph 3 and 4 of the judgment of Sir Christopher Staughton) would not have applied if there had been a separate contract between the customer and Publications, because that case only applied where there was a single supplier.
38. Telewest's case on this appeal is (in summary) that the VAT analysis should in this case follow the contract analysis. Telewest submits that the judge was in error in treating as relevant the fact that a customer could not subscribe for the television services without taking the magazine as well (this was called "the package argument"). It is not appropriate to ask whether the supply was ancillary to the principal supply of services by Telewest because the doctrine of ancillary supply in VAT law applies only where there is only one supplier ("the CPP argument"). In addition the jurisprudence does not support the argument that the VAT position should look to the economic reality of the situation and treat Publications and Telewest as a single supplier ("the artificiality argument").
39. The Commissioners' case on this appeal is (in summary) that, in the circumstances of this case, it does not follow, even if the customer entered into two contracts, that there were two independent VAT supplies by two taxable persons. This argument was developed in three stages: First, the Commissioners argue that the CPP case is applicable even though they accept that in that case there was only one supplier (this is the CPP argument). Second, the Commissioners submit that there were in fact two linked contracts here and accordingly those contracts did not give rise to two independent VAT supplies (this is the package argument). Third, the Commissioners argue that under the case law of the European Court of Justice ("the Court of Justice") this court should not follow the domestic contract law in a case such as the present. This is the argument referred to above as the artificiality argument. Finally the Commissioners submit that if this court is in any doubt as to the applicability of the CPP analysis here, it should request a preliminary ruling from the Court of Justice.

Submissions

The package argument

40. Mr David Milne QC, for Telewest, submits as follows. There is no authority for the proposition that under VAT law the fact that two items are sold as a package affects the VAT analysis. Indeed in C R Smith Glaziers (Dunfermline) Limited v CCE [2003] STC 419, the question was whether the court could interfere with a subjective apportionment of the consideration for a package of taxable goods (double glazing) and exempt services (insurance). The House of Lords held that the court could not interfere, and indeed went further and implied that in the absence of anti-avoidance legislation, the parties "could agree on any apportionment they liked": see [16] to [19], per Lord Hoffmann. Likewise there is no authority for the proposition that the fact that the provision of goods is marketed as a package with a provision of services can change the identity of the supplier of the goods determined in accordance with the basic provisions of Article 5.1 of the Sixth VAT Directive. The judge wrongly drew an analogy with Commission v France, Case C404/99, [2001] ECR 1-2667 ("the French Tips case") although he acknowledged at [78] that "the analogy ... is not perfect". Contrary to the judge's analysis, in that case there was only one taxable person, the restaurateur. The waiter was not capable of being a taxable person for the purposes of the Sixth VAT Directive. The question was what was the consideration for the supply. The Court of Justice held that this was "the consideration actually received by the service provider" and not what he had left after paying his employees. If the waiter had been self-employed, carrying on business in his own right, then the question for the Court of Justice would have been (as in CCE v Reed Personnel Services [1995] STC 588) whether the waiter had been providing his services to the restaurateur, who in turn was providing a comprehensive supply of services to the customer. In short, on Mr Milne's submission, the French Tips case is not relevant.
41. In this case, on Mr Milne's argument, there is an agency agreement between Publications and the regional company, which makes it clear that Publications supplies the magazine to the customers and that the regional company collects monies due from customers for the magazines as agent for Publications. In those circumstances, the difficulties which arose in CCE v Plantiflor [2002] STC 1132 (referred to below) do not arise in this case.
42. Mr Christopher Vajda QC, for the Commissioners, submits as follows. He submits that the essential feature of the supply by the Group, from a customer's perspective, is that the customer is receiving a single package of television services, which includes the magazine. The customer would only want the magazine to enable him better to enjoy the television service. As the judge found, there is an analogy between the package on offer here (television services plus compulsory magazine, for which there is now a separate specified charge) and the package on offer in a French restaurant (meal plus payment of a separately identified compulsory service): see the French Tips case, where the Court of Justice held that the two elements of that package constituted a single supply of a restaurant meal. It does not matter whether the ancillary element of a package is provided as a matter of contract by a person different from the person supplying the dominant element. Thus in the CPP case it was immaterial to the analysis that the insurance element of the package was provided, not by CPP (which had no authorisation to do so), but a third party authorised insurer.
43. Mr Vajda submits that the package argument does not depend on the contractual analysis, in the sense of asking with whom does the subscriber have a contractual relationship. Rather it depends on the undisputed fact that a customer cannot obtain the television services without the Cable Guide. The Commissioners accept that the mere fact that two items are sold as a package does not mean that there is one supply. It depends on the facts.
44. Mr Vajda submits that the CR Smith Glaziers case is not in point. That case proceeded on the basis that there were two separate supplies (double glazing and insurance) in that package. The sole point before the House of Lords was whether the offer of insurance complied with the UK VAT legislation on the manner in which the price of the insurance had to be disclosed.
45. The criticism of the judge's reliance on the French Tips case is, on Mr Vajda's submission, misplaced. The judge was doing no more than saying that there was a similarity between the situation here and the situation in the French Tips case. In both cases what is on offer is a package. In the French Tips case the issue was whether the restaurant had to account for VAT on the price of the meal paid by the customer, which included a compulsory service charge, or on the lesser amount which the restaurant actually kept for itself (under French law the restaurant was obliged to pay the service charge to the waiters). The Court of Justice held that the restaurant was liable for VAT on the full amount essentially because that was the consideration for the service supplied to the customer. The customer could not choose to have the meal and forego the service and pay a lesser amount. Likewise here the customer of a regional company could not choose to forego the Cable Guide and pay a lesser amount. The Advocate General pointed out at [41] to [42] in his Opinion in the French Tips case that VAT law does not permit a supplier to split up elements of what is supplied so that some elements fell outside the scope of VAT. To permit such an approach would be contrary to the principle of fiscal neutrality and would lead to a distortion of competition.

The CPP argument

46. Mr Vajda submits that, in the CPP case, the main element of the package, namely insurance, was provided not by CPP but by a third party, namely an authorised insurer who agreed to indemnify CPP's customers. The question was whether those parts of the package provided by CPP itself could share the tax treatment of the supply of insurance by the third party. In setting out the test of when one part of a package could share the tax treatment of another part, the Court of Justice did not say that this test could not apply where elements of the package were supplied by different providers.
47. Mr Vajda submits that further support for the proposition that supplies by two suppliers are capable of receiving the same tax treatment comes from Commission v France (Case C76/99) [2001] All ER (D) 33 (the French Laboratories case"). In that case the Commission challenged France's different VAT treatment of two classes of transactions involving the taking, transmission and analysis of human tissue and blood samples. Under the first class of transaction, the sample was taken by the sample-taking laboratory, but the latter chose to sub-contract the analysis of the sample to a specialist laboratory, the latter charging a fee for the service. The sample-taking laboratory remained legally liable to the patient and the patient received a single bill for the analysis. The contract between the patient and the sample-taking laboratory was called a "collaboration contract". That transaction, and the cost of sending the sample from the sample-taking laboratory to the analysing laboratory for analysis, was treated as exempt from VAT. Under the second class of transaction, the sample was taken by the sample-taking laboratory but was required under French law to be transmitted to the analysing laboratory, with the latter in this case paying a transmission fee to the sample-taking laboratory (fixed by statute) for the service of transmitting the sample. The analysing laboratory performed the analysis and was liable to the patient for it. The patient received two bills: one from the sample-taking laboratory for taking the sample; and the other from the analysing laboratory for the analysis. Transactions in the second class were referred to generally as "fixed fee contracts". VAT was required to be paid on the transmission fee paid to the analysing laboratory.
48. Mr Vajda submits that the Commission's case was that, by subjecting the transmission fee in the fixed fee contract to VAT, France was in breach of Article 13(A)(1)(b) of the Sixth VAT Directive whereby Member States must exempt "hospital and medical care and closely related activities". Relying on Skatteministeriet v Henriksen [1990] STC 768 and the CPP case, France argued that "a series of transactions may only be classified as a single transaction for VAT purposes if the transactions in question are legally indistinct and effected between the same persons". Advocate General Fennelly dismissed this argument saying:

"The condition enunciated by the Court [in Henriksen] was that the two transactions must be closely linked so that they may be regarded as a unity. The fact that [the Court of Justice] proceeded to hold, on the facts of Henriksen, that this condition was satisfied, inter alia, because "both properties are let to the tenant by the same landlord, does not mean that the parties to the transactions at issue must always be the same (Henriksen judgment, [16]). I agree with the Commission that the identity of the parties should merely be viewed as an indication that the link between the transactions may be sufficiently close to justify their treatment as a single supply ... To my mind it follows clearly from the approach adopted in CPP that it is the nature and purpose of a transaction viewed from the consumer's perspective that it is critical. This approach is applicable in the present case…The mere fact that the [analysing laboratory] assumes clinical responsibility for the analysis and that the patient will, in those cases, receive two bills, one from it and one from the sample-taking laboratory, does not suffice to unbundle the nature of the overall single sample-analysis service provided to the patient". [27] [29]"

49. The Advocate General also emphasised the need for a "plausible economic distinction" to be identified to justify different VAT treatment of transactions which were identical [33]. Here there was no economic rationale for distinguishing the remuneration of the analysing laboratory is each class of case. The Court of Justice agreed with the Advocate General that in both cases the fee payable to the analysing laboratory fell within the exemption in Article 13(A)(1)(b), and dismissed France's argument. Relying on the CPP case, the Court of Justice held that the patient was indifferent to whether he is party to one or two contracts; the essential feature for him is to have a medical analysis carried out as reliably as possible [27] [28]. The Court of Justice did not refer to the passage from the opinion of Advocate General Fennelly quoted above.
50. My Vajda submits that the judge was wrong to distinguish the French Laboratories case on the basis that the case was limited to the terms of the "closely related" exemption in Article 13(A)(1)(b) of the Sixth VAT Directive because the French Laboratories case was argued by France by reference to cases that are not concerned with that exemption, namely the CPP case and the Henriksen case and the conclusions that France sought to draw from the cases (which Mr Vajda submits are the same conclusions that Telewest seeks to draw from those cases) were rejected. Mr Vajda submits that in any event if two closely related supplies by different suppliers can share the same tax treatment in the case of medical supplies, it follows that two closely related supplies in other economic sectors can also share the same tax treatment, as the Court of Justice postulated in the Henriksen case.
51. The Henriksen case concerned the inter-relationship between the letting of immovable property which was exempt from VAT and the letting of car parking spaces which was an exclusion to the exemption. Mr Vajda submits that nevertheless, the Court of Justice saw the letting of a garage (which falls within the exclusion) as capable of being exempt even though the exemption falls to be construed narrowly. Mr Vajda submits that it follows from the Henriksen case that closely-linked supplies can nevertheless fall within an exemption, even where the exemption does not in terms cover "related supplies" or some such formulation and even though exemptions from VAT are to be narrowly construed. He submits that the judge should have applied the Henriksen case.
52. Mr Vajda submits that further support for the proposition that a single supply can comprise elements from separate suppliers comes from CCE v Primback Ltd [2001] STC 803 where the Court of Justice held that:-

"Even if it were possible to distinguish the supply of services allegedly consisting in the supply of credit from the supply of goods, the former supply would in circumstances such as those in issue in the main proceedings, have to be construed as being in any event ancillary to the principal transaction consisting of the sale of the goods." [44]

53. The court relied on the CPP case in so deciding [45]. In the Primback case, the credit was supplied by a third party finance house. The court thus sanctioned the notion of two supplies by different suppliers sharing the same tax treatment where one was ancillary to the other. Mr Vajda thus submits that the judge was wrong to dismiss this case on the basis that the Court of Justice was there only concerned with the supply by Primback of either furniture or credit.
54. The judge relied on two dicta of Millett LJ (as he then was) in CCE v Wellington Private Hospital [1997] STC 445 that supplies made by different suppliers cannot be fused together to make a single supply. Mr Vajda submits that the passage relied on was obiter. The issue in the case was whether the supply by hospitals of drugs and other items of medical care was to be treated as a single supply or whether there was a separate supply (by the hospital) of drugs. The Court of Appeal (by a majority) held the latter. So when Millett LJ observed at 462 that supplies made by different suppliers cannot be fused together to make a single supply, he was not addressing himself to any point that needed to be decided. Secondly, he submits that Millett LJ's obiter dicta cannot stand with the later observations of the Advocate General in the French Laboratories case. The Advocate General expressly stated that two invoices did not mean that one could unbundle what in reality was a single supply.
55. Mr Vajda also criticises the judge's reliance on Nell Gwynn House Maintenance Fund Trustees v CCE [1999] STC 79 in which Lord Slynn rejected an argument based on the Henriksen case and endorsed Millett LJ's dicta in the Wellington case. He submits that Lord Slynn's analysis of the Henriksen case does not "sit comfortably" with that of the Advocate General in the French Laboratories case. He submits that the later view of the Advocate General is to be preferred.
56. In conclusion, Mr Vajda submits that the judge should have found that the two supplies were closely linked from the point of view of the customer and that the supply of the magazine was ancillary to the supply of television services.
57. Mr Milne seeks to uphold the judgment of the judge on this issue. The judge examined the cases relied on by the Commissioners. He then examined two cases relied on by Telewest, namely the Wellington Private Hospital Limited case and the Nell Gwynn case. He held that passages in the judgment of the House of Lords in the latter case were directly contrary to the Commissioners' submission and that it was not supported by the authorities on which they relied. Accordingly he rejected the arguments of the Commissioners on the supply issue.
58. Mr Milne further submits that in the CPP case the Court of Justice did not suggest that two transactions involving the provision of goods or services by two separate taxable persons could be regarded as a single supply.
59. Mr Milne also relies on [70] of the opinion of Advocate General Jean Mischo given on 3 October 2002 in Assurander-Societat acting on behalf of Taksatorringen v Skatteministeriet [2003] All ER (D) 274:-

"Finally, it is necessary to reject the argument derived from the fact that Taksatorringen supplies an ancillary service to insurance transactions, so that it should follow the tax arrangements for insurance, because, although the CPP judgment confirmed the principle of the application, to the ancillary supply, of the tax treatment of the principal supply, it had in mind services which are both supplied to the end customer by the same service provider."

60. Mr Milne submits that there is no authority for the proposition that the fact that the two transactions are linked, in the sense either (a) that the customer cannot enter into one without the other, or (b) that the two suppliers are in the same corporate group, requires the two transactions to be treated as a single supply. Indeed, Mr Milne submits that (b) is contrary to the decision of the Court of Justice in Staatssecrekaris van Financien v Heerma [2001] STC 1437. In that case the Court of Justice emphasised the court could not go behind the concept of "taxable person" in the Sixth VAT Directive simply because the parties were connected. Unless a Member State has exercised its discretion under Article 4.4 of the Sixth VAT Directive in such a way as to treat the connected parties concerned as a "single taxable person", those parties are for VAT purposes "independent" within the meaning of Article 4. As is common ground, Publications is not a member of the Telewest group for VAT purposes.

The artificiality argument

61. Mr Vajda submits as follows. Artificiality is a well-established (and autonomous) concept of community law. In this case, the contractual arrangements were artificial for the following reasons:-

(a) Since an indivisible package was being sold to the consumer there was no need to create a second contract.

(b) connected parties were involved. In support of this contention Mr Vajda relies on Muys' en De Winter's Bouw-en Aannemingsbedrijf BV v Staatssecretaris van Financien [1997] STC 335 ("the Muys case") at [12] of Advocate General Jacobs' opinion.

(c) there was no change in fact. In support of this submission Mr Vajda relies on Eastbourne Town Radio Cars Association v CCE [2001] STC 606, [11] [13] [24] and [38].

(d) The motive of Telewest was to avoid VAT. If the sole intention behind a particular contractual arrangement is the obtaining of a tax benefit, that arrangement does not automatically dictate the VAT supply position since the choice made must not offend the principle of neutrality, see (for example) the Muys case and Rudolf Maierhofer v Finanzamt Augsburg-Land [2003] STC 564 ("the Maierhofer case"). A taxpayer is entitled to structure his affairs so as to reduce or mitigate his tax, as long as in so doing he does not create an artificial situation which breaches the principle of neutrality. Thus the taxpayer in CCE v Cantor Fitzgerald International [2001] STC 1453 could, for example, have granted a sub-lease rather than an assignment and would thereby have mitigated its VAT burden.

62. Mr Vajda also submits that Debenhams Retail plc v CCE [2004] STC 1132 and the Plantifor case are distinguishable. It is unnecessary for me to deal with the Debenhams case, and I do not propose to do so as we are informed that there is a pending appeal in that case to this court.
63. Mr Milne submits that none of the cases cited by the Commissioners in support of this argument are concerned with the question whether the question which arises on this appeal, namely which taxable person has made the supply?
64. Mr Milne submits that, in cases such as the Muys case and the Meierhofer case, the Court of Justice emphasised that it was necessary to look at the essential features of the transaction, and not how it is "artificially presented". This means that it is necessary to look at what is actually supplied from the supplier to the customer, and not if different how the contract describes it. Thus in the Muys case there was in fact just a supply of land, and no supply of credit, and the contract misdescribed part of the consideration for the land as "interest". In the Maierhofer case, at [39] the Court of Justice simply confirmed that the terms which taxpayers used in their contracts could not determine what was actually being supplied.

Conclusions

The package argument

65. The principal authority in support of the Commissioners' stance on the package argument was, in my judgment, the French Tips case.
66. The Commissioners submit that the result of that case would have been the same if there had been two contracts, one by the restaurateur for the supply of food, and the other by a third party for the supply of services. In my judgment, that is a very different situation from the one under consideration by the Court of Justice. In any event, the supply of a meal in a restaurant is not normally easy to separate into two transactions for the supply of food and services, in such as way that they could be supplied by different parties. In my judgment, the principle which Mr Vajda seeks to extrapolate from the French Tips case, namely that linked transactions will be treated as a single supply, cannot be extrapolated in this way.
67. A further submission of Mr Vajda was that there had to be a direct link between the consideration provided by the customer and the supply: in support of this argument, Mr Vajda relied on CCE v Church Schools Foundation [2001] STC 1661, [28]-[33], [44]. However, in this case, the customer knew from the documentation (if he was interested to find out), that there was a separate supplier in relation to the magazine. He also knew the price of the magazine. In those circumstances, there seems to me to be a sufficient link for VAT purposes between the supply of the magazine and the consideration provided by the customer.
68. In my judgment, there are further objections to treating the transactions of the supply of television services and the supply of a magazine as a single supply, merely because the customer could not enter into one transaction without the other. Such treatment might logically mean that one only of the two suppliers would be liable for the whole of the VAT payable on the transaction. Indeed, the Commissioners contend that there is a single taxable person, Telewest (Respondents' skeleton argument, [66]). We were not shown any machinery which would enable one supplier to recover from the other supplier the due proportion of VAT attributable to his part of the transaction. Moreover, linked transactions are common in commercial life. This is illustrated by the C.R. Glaziers case, in which a double glazing company supplied double glazing and procured insurance from a third party, and by the Plantifor case, in which a plant grower supplied plants and the service of postage and packing to the purchaser.
69. At a certain point, the package argument merges into the CPP argument and the artificiality argument. In my judgment, as appears below, there are limits to the extent to which transactions can be in recharacterised in VAT law, or, to put it another way, taxpayers can be denied the exemptions on which they seek to rely. Accordingly, I would accept Mr Milne's submission that the expectation of the customer is relevant to the question whether two contracts constitute, for VAT purposes, principal and ancillary contracts, but not to the question of whether there is more than one supplier.

The CPP argument

70. Mr Vajda submits that, although the CPP case in fact dealt with one supplier, the principles established in [26] to [32] of the judgment of the Court of Justice extend to a situation where there are two suppliers who ought to be treated as one. He accepts that this is an extension of the CPP case. In its judgment, the Court of Justice held:-

"26. By its first two questions, which should be taken together, the national court essentially asks, with reference to a plan such as that offered by CPP to its customers, what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately.

27. It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provisions in the Sixth Directive. In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.

28. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2412, paras 12 to 14, concerning classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place.

29. In this respect, taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer being a typical consumer, with several distinct principal services or with a single service.

30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see Customs and Excise Comrs v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24).

31. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, if circumstances such as those described in paras 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this (see, to that effect, Madgett and Baldwin (at 1208, paras 45 and 46)).

32. The answer to the first questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by CPP are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply."

71. In my judgment, this passage does not support Mr Vajda's argument. There is no suggestion in this part of the judgment of the Court of Justice that the concept of principal and ancillary contracts can apply where there is more than one supplier. Moreover, I take some comfort from the passage from the opinion of the Attorney General in the Taksatorringen case quoted above, even though the opinion of the Attorney General cannot constitute a binding precedent for the purposes of Community law, and the point in question was not dealt with by the Court of Justice.
72. Mr Vajda also relies on the Primback case. In that case, the issue was whether the retailer of furniture who sold goods to a customer for the full retail price, was in fact only liable for VAT on that price after the deduction of a commission he had to pay to a finance company when the customer took credit from that finance company as part of the transaction. The Court of Justice held that, since the parties had agreed on the full retail price as the consideration for the sale, it was not open to the supplier to act in this way. At paragraph 44, the Court of Justice said:-

"With regard to the transaction concluded between Primback and the final customer, which alone is relevant in the main proceedings, it should be added that, even if it were possible to distinguish the supply of services, allegedly consisting in the supply of credit, from the supply of goods, the former supply would, in circumstances such as those in issue in the main proceedings, have to be construed as being in any event ancillary to the principal transaction consisting at the sale of goods."

73. In my judgment this paragraph would only serve to assist the Commissioners' case on this appeal if the Court of Justice were here considering the case of a tripartite contract between Primback (the seller), the customer and the finance company. It is clear from the opening words of this paragraph that it was only considering a bipartite transaction between the seller and the purchaser.
74. In the CPP case at [29] the Court of Justice emphasised that a single supply from an economic point of view should not be artificially split so as to distort the functioning of the VAT system. Mr Vajda submits that to treat the supply by Telewest and the supply by Publications as separate supplies amounts to artificially dividing them into separate transactions. I do not consider that the CPP case supports the submission that the two contracts should not be treated as separate supplies. The passage relied upon is dealing with the situation where it is sought to analyse a single supply with two or more elements. I agree with the judge's conclusions at [96] of his judgment that there is nothing in the CPP case "to justify the proposition that where [there are two separate contracts] the supply made by the one supplier, Publications, takes the tax treatment applicable to the supply made by the other."
75. I have set out, above, Mr Vajda's detailed submission on the French Laboratories case. I accept that in its reasoning the Court referred to the CPP case but it did so for the purpose of drawing an analogy between the concept of an ancillary supply and the concept of a closely-related supply for the purposes of Article 13(A)(1)(b) of the Sixth VAT Directive. I accordingly agree with the judge's conclusion on this case that it is not "authority for [a] general proposition that, where one supply can be said to be ancillary to another, even though they are made by separate suppliers, both suppliers must share the same tax treatment." ([99]) In the circumstances, reliance cannot be placed on the more general approach in [29] of the Advocate General Fennelly. This approach was not adopted by the Court of Justice.
76. The judge also considered Mr Vajda's argument (summarised above) on the Henriksen case, which is based on paragraphs 15 and 16 of the judgment of the Court of Justice:

"15. Thus the letting of premises and sites for parking vehicles cannot be excluded from the exemption where the letting thereof is closely linked to the letting of immovable property to be used for another purpose, such as residential or commercial property, which is itself exempt, so that the two lettings constitute a single economic transaction.

16. That is so, on the one hand, if the parking place and the immovable property to be used for another purpose are part of a single complex and, on the other, if both properties are let to the tenant by the same landlord."

77. I agree with the judge's interpretation of this part of the judgment of the Court of Justice. He held:

"[91] It seems probable that the two circumstances mentioned in para 16 must both exist if the letting of the parking place is to fall within the exemption…"

78. It seems to me that in [16] the judgment of the Court of Justice the words "on the other hand" (which is also used in the French text of this case) must bear the meaning of "in addition", rather than as introducing an alternative condition. The preceding text does not suggest that an alternative condition is intended. The exclusion for parking sites from the exemption from VAT for letting immovable property included closed, as well as open, garages. Accordingly the Court of Justice was not concerned with the question whether, on the facts of the Henriksen case, the letting of a garage was ancillary to the letting of a house. I note that, in the French Laboratories case, Advocate General Fennelly interpreted [16] of the judgment of the Court of Justice in the Henriksen case in the same way as the judge: see the citation from the Advocate General's opinion above.
79. That leaves for consideration the Wellington case and the Nell Gwynn case. These cases contain passages which the Commissioners accept are directly contrary to their case. In the Wellington case, Millett LJ, with whom Hutchison LJ agreed, expressed the view, obiter, that supplies by two separate suppliers could not be treated as principal and ancillary supplies. In the Nell Gwynn case, Lord Slynn, with whom the House agreed, concurred with the view of Millett LJ. In my judgment, the point was not obiter in the Nell Gwynn case as in that case there were two suppliers. Be that as it may, having regard to my conclusions regarding the French Laboratories case, I do not accept the submission of Mr Vajda that the passages in the Wellington case and the Nell Gwynn case are now superseded as a matter of Community law by the French Laboratories case. Accordingly I agree with the judge on this point too [105]. Nor do I accept the further submission by Mr Vajda that Millett LJ's observations turned on the contractual analysis, and did not take into account that the concept of supply is an autonomous concept of Community law. Millett LJ was not dealing with the domestic contractual analysis but with the problem of two "supplies" by different suppliers.

The artificiality issue

80. The Commissioners focus here on the change in the arrangements which Telewest has been able to achieve. Previously it was the sole supplier of television services and a magazine. It has been able to bring in a third party, and on the face of it, produce a different result. Accordingly, Mr Vajda argues persuasively, the Court should look at the economic reality and ignore these artificial steps.
81. I observe that there is no evidence that Publications is a mere cipher for the regional company. Nor is there any evidence of value shifting in this case. Nor is there any suggestion of fraudulent conduct or abuse of an exemption arising on the specific facts of this case (c.f. Centros v Erhvervs-og [2000] 2 BCLC 68 [25] to [27].
82. In my judgment, there is an objection in principle in this field of law to taxing transactions according to their economic reality. The economic reality of a transaction is antithetical to legal certainty. If VAT is payable according to economic reality, the seller will not know what VAT to account for, and the purchaser will not know what to VAT to pay. The system for the collection of VAT would no longer be straightforward. Accordingly, there seem to me strong policy reasons against the course which Mr Vajda invites us to take. The principle of legal certainty is one recognised and applied by the Court of Justice in this field (see, for example, the Cantor Fitzgerald case [33]).
83. The principal authority on which Mr Vajda relies is the opinion of the Advocate General in the Muys case. There, the question was whether a company building houses, which gave customers a deferral of payment of the purchase price on terms that they paid interest, was supplying credit as well as building services. It was held that the building company was additionally providing credit. Advocate General Jacobs, in his opinion, dealt with a point which was not dealt with by the Court. He opined as follows:-

"11. I see no merit in requiring that the credit should be granted under a special loan agreement which is independent of any contract for the supply of goods or by a person other than the supplier of the goods. The fragility of such requirements is demonstrated by the fact that a supplier might in any event be able, without altering the substance of a transaction, to draw up a separate loan agreement or provide credit through a separate finance company set up for that purpose. One consequence of this would be to discriminate unfairly between firms which have sufficient resources or trade to set up an independent finance company and firms which do not. That would hardly be consistent with the fundamental principle of neutrality.

12. I do, however, agree with the Danish and German governments that the contractual arrangements and terms must be such that the credit transaction is clearly dissociable from the main supply of goods. Although it seems unnecessary to consider this point in detail in the present case, I think that requirement would generally be satisfied where, for example, a contract for the supply of goods contained one or more specific clauses offering the customer a credit facility and setting out in full the terms on which the credit was granted, including a specified rate of interest. As the German government points out, by virtue of the introductory words of art 13B member states may lay down any further conditions that are necessary to ensure the correct and straightforward application of the exemption and to prevent evasion, avoidance or abuse. This may be of particular importance in the case of transactions between connected parties who might seek artificially to convert the consideration for a taxable supply of goods or services (or of credit by inflating the interest rate; this is much less likely to occur in the case of an arm's length) into consideration for an exempt grant of transaction. Like the German government, I consider that the risk of evasion or abuse may be satisfactorily counteracted by suitable measures adopted by the member states and does not justify an across-the-board inclusion of credit interest in the taxable amount as suggested by the Commission."

84. In my judgment, Advocate General Jacobs was not suggesting that there was a general doctrine of economic reality. He was dealing with two separate points, first, whether the "credit" element of the transaction was clearly shown: for this purpose it had to be "clearly dissociable" from the main supply of goods, and, second, whether there was a risk of value shifting if connected parties were involved in a transaction like that under consideration in the Muys case. I do not consider that paragraph 12 of his opinion supports the proposition that where two transactions are carried out between connected parties on the one hand and the customer on the other hand, that the court should approach the matter on the basis that the transaction should be treated as a single supply between one (or both) of them and the customer, if the circumstances give the transaction the appearance of artificiality.
85. We have been taken to a great number of cases in VAT law showing that, at least where it appears that the relevant transaction is artificially presented by the parties, the Court of Justice will look at the essential features of a transaction in order to identify the reality of the situation. Such a case was the Auto Lease case above, where the court treated a contract for the supply of petrol by a car leasing company as the supply of credit to the customer, not the petrol, to reflect what actually happened. The customer incurred the credit when he obtained petrol from a garage using a card provided by the leasing company. The customer then had the right to use the petrol. In those circumstances, the Court of Justice found that the reality of the situation was that the leasing company was supplying credit, not selling petrol. This approach is consistent with the principle of Community law, which is common ground in this case, that parties cannot mandate the application of a particular Community concept simply by the labels which they use. The same problem of identifying the substance of the supply as arose in the Auto Lease case has arisen in relation to contracts for the supply of goods and provision of services by a third party. The court has to analyse the transaction to determine whether the supplier is the seller of a service or acts as an agent for a third party. This point arose in Chassures Bally SA v Belgium [1997] STC 209. This case involved the sale of goods by a customer using a credit card for the full legal sale price. The credit card company paid the seller of the goods the full price less a commission. The Court of Justice held that the seller was bound to account for VAT on the full sale price. The same principle was applied in Lex Services plc v CCE [2004] STC 73, the Primback case and the Eastbourne Town Radio Cars case. In the last mentioned case, the House of Lords held that the true inferences to be drawn from the constitution of an association, even as amended, was that it was supplying services to its members. Other cases to which we were taken include the Plantifor case, and the Maierhofer case.
86. This line of authority is, in my judgment, inconsistent with the argument which the Commissioners seek to run. The mere fact that the court seeks to find the commercial reality of a transaction does not mean that it would seek to apply the economic reality of the transaction. The economic reality of the transaction may have nothing to do with either the essential features of what the parties agreed or the legal structure of their transaction. Moreover, as this court said in Tesco plc v CCE [2003] STC 1561: "Economic purpose is not the same as economic effect" [159] (emphasis added in original).
87. Economic reality must also be distinguished from economic neutrality, which is a principle of VAT law. This principle, illustrated by the French Tips case, precludes inter alia persons carrying on the same activities from being treated as regards the levying of VAT in different ways. Thus, in the French Tips case, charges made by restaurants had to be treated in the same way for the purpose of VAT whether or not the restaurant could bring itself within the conditions for exemption from VAT on service charges. The Court of Justice has developed a variety of doctrines in VAT law to prevent the distortion of competition in this way. For further examples, see also First National Bank of Chicago v CCE [1999] QB 570, [33]; the Muys case, per Advocate General Jacobs at [11] and [12]. However, the authorities do not support the proposition that the doctrine of neutrality entails the proposition that the Court should treat two separate supplies as a single supply because the suppliers are related parties and their supplies are linked. To do this would require an extension of the case law for which there would, in my judgment, need to be a more specific principled basis than simply the doctrine of neutrality. The Heerma case (above), on which Mr Milne relies, shows that Community law has not yet reached that stage of development. In that case the Court of Justice applied the established concept of taxable person and rejected the argument that it should not do so even though the supplier (a partnership consisting of a man and his wife but an independent entity under Netherlands law) and the customer (one of the partners) were connected. Likewise, in the Cantor Fitzgerald case the Court of Justice rejected the argument that the transaction under consideration should be treated as a transaction within the exemption for the letting of land simply because the parties could have arranged their transaction in that way, and the economic impact would have been comparable. Thus, if the original tenant under the lease in question had surrendered his lease to the landlord and made a payment to obtain the landlord's consent to his doing so, the transaction would have been within one of the exemptions from VAT. As it was, he paid the sum to the appellant, who took an assignment of the lease from him. The Court of Justice held that "The principle of the neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other." [33]
88. Finally, there is a general fairness point made by Mr Vajda. Why should the supply of a magazine be zero-rated when, if it had been supplied by Telewest, it would have been a taxable supply? The answer, in my judgment, is first that the concept of supply in VAT law turns on the Sixth VAT Directive and not on the court's assessment of fairness, and, secondly, the supply was in any event made by Publications on the contractual documentation as construed by this court.

The Halifax Issue

89. Before the Tribunal and the judge, the Commissioners reserved their argument on the principle in Halifax v CCE (No. 1) [2001] V&DT 73, said to be the principle that transactions whose sole purpose was tax avoidance, were not supplies for VAT purposes, pending the decision of the Court of Justice in that case. No argument was addressed to this Court on the Halifax issue.

Disposition

90. For the reasons given above, I would allow this appeal and dismiss the Commissioners' cross-appeal. In my judgment, it would not be appropriate for this court to refer any question for a preliminary ruling by the Court of Justice.

Lord Justice Kennedy :

91. I agree with both judgments.

ORDER: Appeal allowed with the cross-appeal dismissed. Respondent to pay the appellant's costs of appeal, the cross-appeal and costs below (to include VAT and Duties Tribunal) to be assessed. The parties to submit written submissions re permission to appeal by 18^th February 2005.

(Order does not form part of approved Judgment)