England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(CROWN OFFICE LIST)

		Royal Courts of Justice Strand London WC2
		Friday, 26th November 1999

JUDGMENT
1. MR JUSTICE KEENE: This appeal raises once again the familiar problem of whether services and goods supplied are to be treated as one composite supply or as two or more separate supplies for the purposes of the VAT legislation. The issue is particularly important when, as here, one of the elements being supplied is exempt or zero-rated for VAT purposes and the other or other elements are standard rated.
2. The appellant is the parent company of Venice Simplon-Orient Express (VSOE), a company which operates the British Pullman train in the United Kingdom and the Orient Express in Continental Europe. VSOE offers various transport services to members of the public. These include travel from this country to destinations on the Continent of Europe, such as Paris or Venice, and day excursions within the United Kingdom. In addition VSOE offers charters of the train to travel companies and to other companies. This case concerns the treatment for VAT purposes of the catering supply on the Pullman train in the course of day excursions and charters. No issue arises as to the treatment of the supplies of catering to persons travelling on the Orient Express to or from the Continent, it being conceded by the respondents that the catering facilities supplied on these journeys are to be seen as part of one single composite supply along with the transport.
3. The supply of transport on a train is zero-rated, by virtue of the Value Added Tax Act 1994, Schedule 8 Group 8 -- transport, which under item 4 includes:

"Transport of passengers -- (a) in any vehicle, ship or aircraft designed or adapted to carry not less than 12 passengers."

4. The Tribunal in the present case held that the catering element supplied on both charters and day excursions was a separate supply from that of the supply of transport. The supply of catering was, therefore, held to be standard rated for VAT purposes. The appellant now appeals against that decision under Section 11 of the Tribunals and Inquiries Act 1992.
5. There was an agreed statement of facts presented by the parties to the Tribunal. That statement dealt separately with day excursions and charters. In respect of day excursions it stated amongst other things:

"7. Each year VSOE publishes a brochure detailing the day excursions available in the following year. The brochure contains details of each Day Excursion, the programme for the year (including dates), booking conditions and other general information. The brochure contains details of the price for each Day Excursion. Those prices include food and beverage made available on the train. The brochure details what food and beverage is available in the price. No reduction is made to the price if either food or beverage is not required or consumed. If a passenger requires additional food and/or beverage which is not available in the price, that is paid for separately to the train steward.

The cost to VSOE of providing inclusive food and beverage constituted 16.9 per cent of the total costs (£916K of £5429K) in 1997. In 1998 the percentage would be substantially lower because a new contract has been agreed with the suppliers. The average percentage varies marginally depending on the particular Day Excursion."

6. A number of examples are then given, including a day excursion to Folkestone, involving a return trip from Victoria costing £140 and involving nearly five hours' travel by train. Another example given was a Mother's Day Excursion from London Victoria at a price of £170 and involving nearly four hours' travel by train through the Kent countryside.
7. The agreed statements of facts indicates that train charters were offered on two different bases, depending on whether the journey was to be on a recognised train path for the British Pullman, such as London to Folkestone and return, or on a non-recognised train path where a new train path would need to be created. On these matters, the statement contained the following passages:

"13. Where the client wishes to Charter the Train for a journey on a recognised VSOE train path (eg, London to Folkestone and return), the client is normally charged the standard fare as advertised in the Day Excursion brochure less a 20 per cent discount. The standard fare includes the food and beverage as advertised in the brochure. The Charter price is therefore all inclusive of the food and beverage. These charters are referred to as All Inclusive Charters. On average, the cost to VSOE of providing food and beverage on an All Inclusive Charter is 16.9 per cent of the total cost of providing the charter. This percentage varies marginally depending upon the particular All Inclusive Charter. The invoice at paragraph 16 is an example of such a Charter.

Where the client wishes to Charter the Train for a journey on a non-recognised VSOE train path (eg, London to Harpenden), a new train path would need to be created for the journey. The Charter price quoted is a fixed price for operating the Train and a separate food and beverage charge dependent on the number of passengers travelling. Such Charters are referred to as Non-Inclusive Charters. For such charters, the charterers will select the appropriate meal to be served, eg lunch or brunch, and in relation to each type of meal, they will normally make a selection from a range of menus for each type of meal at the same price, ie lunch is charged at the same price for each type of lunch menu. The invoice at paragraph 17 is an example of such a charter.

A client sometimes wishes to Charter the Train for a journey on a recognised VSOE train path (eg, Royal Ascot), but wishes a different package from the advertised package. A price is negotiated for operating the Train with a separate price for food and beverage. This is a Non-Inclusive Charter. The invoice at paragraph 18 is an example of such a charter.

A client sometimes wishes to Charter the Train for a journey on a non-recognised VSOE train path (eg, Oxford to Birmingham) and requires the price for the Train to be inclusive of food and beverage. This is an All-Inclusive Charter. The invoice at paragraph 19 is an example of such a charter.

14. VSOE's invoices reflect the pricing formula used. Where an all-inclusive price is agreed, no separate charge is made for food and beverage. Where separate prices have been agreed for the charter and the food and beverage, those separate prices are shown on VSOE's invoice. VSOE's invoice shows VAT on the food and beverage where a separate price is agreed. VSOE has accounted for VAT in all cases."

8. Examples of charters were then given.
9. The marketing of the Day Excursions can be seen from the appellant's brochure put before the Tribunal. In it, the "luxurious railway cars" are described as "palaces on wheels" dating from the 1920s and 1930s. The reader is then told:

"Now you can relive that age of sumptuous comfort, excellent cuisine and immaculate service on day excursions to England's most beautiful cities and historic landmarks ... Combining elegant surroundings and a relaxed atmosphere, the Pullman train provides the perfect setting for a quiet rendezvous, whether you are entertaining business colleagues or wining or dining someone special."

10. Photographs of the carriages and of travellers eating at tables laden with food are accompanied by such comments as:

"each tempting course is presented impeccably with attentive but discreet service ... Wining and dining someone special is even more enjoyable when the cuisine, the wine, the service and the setting are all of the high standard you will find aboard the Pullman."

11. Most of the excursions listed are to named places, but the first excursion described in the brochure is under the title "Lunch or Dinner in the English Countryside". The text which follows reads thus:

"Just imagine a delicious meal is spread before you. It has been carefully prepared, temptingly arranged and served immaculately. Chilled champagne offered in a sparkling crystal glass has set the mood. Your surroundings have an aura of elegance and refinement all of their own, while beyond the window at your elbow is an ever-changing vista of English landscape which no restaurant could ever hope to match.

You are dining aboard the Pullman carriages of the Venice Simplon-Orient Express, an experience unlike any other you have known. Now you can enjoy that legendary style as you board the historic carriages of the Pullman train for a unique series of lunch and dinner excursions throughout the year. Each one lets you enjoy to the full the superb cuisine, fine wines, attentive service and matchless ambience for which the Venice Simplon-Orient Express is renowned.

Departing from the cities of London, Birmingham, Chester and Manchester, each lunch or dinner trip includes a five course meal with champagne, wine and a liqueur, complemented by exquisite surroundings. Lunches depart at about noon and dinners at about 1930, returning three and a half hours later."

12. Examples are then given as to the type of countryside through which one would pass from each of the departure cities. The day excursions to specific places include such destinations as Canterbury, Bath, Salisbury and Warwick Castle. It will suffice to quote from the text dealing with an excursion to Leeds Castle, which describes the castle in the opening sentence and then states:

"After departure from London Victoria around 0900, a chilled glass of champagne and a continental breakfast will be served en route to Hollingbourne Station. The short coach ride from the station allows time for a brief introduction to the castle and on arrival you are free to explore at your leisure. After your visit, you will rejoin the train in Canterbury, to be served a three course lunch with wine and a glass of champagne on the return journey. The train arrives back at Victoria around 1630."

13. The brochure also refers to the possibility of chartering the train, stating:

"Many companies choose these luxurious surroundings to launch a new product, celebrate success or simply to say 'thank you'. Wherever there is a railway track, our train can travel and you may choose the menus and itinerary to suit the occasion and your budget."

14. A document setting out the tariffs in 1998 for chartering the train identifies the two charter packages available for companies. One, referred to as 'a la Carte', deals with charters on non-recognised train paths. In such cases, the cost is said to be based on 'a fixed price for the train (regardless of the number of passengers) and a price per person for the catering'. The prices for the train itself vary according to the distance out of London being travelled, and vary between £18,200 and £26,000. Catering is said to be charged on a per person basis, and sample prices are quoted. Then the 'table d'hote' basis of chartering is described, dealing with itineraries featured in the British Pullman brochure and following the same departure times, meals and any guided tours.
15. Neither party seeks to distinguish between the supplies made on the day excursions and those made on the charters, nor between those charters where separate prices are quoted for the train and the catering and those charters where there is an all-in price per person.
16. On behalf of the appellant, Mr Lasok QC, criticises a number of passages in the Tribunal's decision. The Tribunal had accepted that the test to be applied was the one indicated by Lord Justice Millett, as he then was, in Customs & Excise Commissioners v Wellington Private Hospital Ltd (1997) STC 445 at 462 D-F:

"The proper enquiry [that is to determine whether there is a single or a multiple supply] is whether one element of the transaction is so dominated by another element as to lose any separate identity as a supply for fiscal purposes, leaving the latter, the dominant element of the transaction, as the only supply. If the elements of a transaction are not in this relationship with each other, each remains as a supply in its own right with its own separate fiscal consequences."

17. The Tribunal then said at paragraph 32 of its decision:

"The question to which we address ourselves is what in substance and reality VSOE is supplying as consideration for the payment made by the customer or charterer. Looking at all the circumstances here, in our opinion, even where an inclusive price is charged, VSOE is making two supplies, transport and catering. Neither in the circumstances of this case dominates the other and they are truly complementary, the one to the other. Where separate prices are charged, there is in our view no question but that these are separate supplies. In our judgment, there is no warrant for lumping together as one supply what the parties have dealt with in reaching their agreement as two supplies at separate prices."

18. A little later in its decision, the Tribunal described the factual situation as being one:

"Where it is not possible to say sensibly that one service is so dominant as to drown out the other as having no relevance for VAT purposes."

19. Mr Lasok submits that the Tribunal was applying the wrong test in requiring one element to be so dominant as to drown out the other. That is too extreme an approach. All that is required is that an element is seen to be ancillary to another element which can be regarded as the principal service being supplied. In support of that proposition, reference is made to the decision of the European Court of Justice in Card Protection Plan Ltd v Commissioners of Customs & Excise (1999) STC 270 at 293. Criticism is also levelled at the Tribunal's reliance on the fact that a separate price is quoted for catering in respect of some of the charters. It is submitted that the Tribunal treated that feature as determinative, which is contrary to dicta in the House of Lords case of Commissioners of Customs & Excise v British Telecommunications Plc (1999) STC 758.
20. These criticisms of the Tribunal do not seem to me to be soundly based. It is clear that, in the passage from the Wellington Private Hospital case cited earlier, Lord Justice Millett was simply seeking to restate the test of whether or not one element was merely ancillary to another element. Immediately before that passage to which reference has been made, the learned judge said:
21. "The issue is not whether one element of a complex commercial transaction is ancillary or incidental to or even a necessary or integral part of the whole, but whether one element of the transaction is merely ancillary or incidental to or a necessary or integral part of any other element of the transaction." See page 462 D-E.
22. He then reformulated that in the words already quoted, to which Mr Lasok refers as the "dominance" test. Of course, it is right that the Tribunal below did at one point put this in terms of asking whether one service was so dominant as to drown out the other, but it is important not to overlook the following words, namely "as having no relevance for VAT purposes." The Tribunal was undoubtedly approaching this within the fiscal context and it cannot in my view be said to have departed from the test as described by Lord Justice Millett.
23. Again, I do not read paragraph 32 of the decision as treating the existence of separate prices as determinative, as is submitted. The Tribunal's reference to that factor follows on immediately after its conclusion that, even where an inclusive price is charged, the appellant was making two separate supplies. It then went on to refer to separate prices in certain of the instances as reinforcing that earlier conclusion in those cases. That was an entirely proper approach and not open to legitimate criticism.
24. In any event, these and other criticisms of the Tribunal's reasoning are not central to this appeal. It is well established that the question of whether there is a single supply or more than one supply is a question of law for this court. As was said in British Airways Plc v Customs & Excise Commissioners (1990) STC 643, it is a question on which the court is entitled and bound to form its own view.
25. On that fundamental matter it is contended by the appellant that the supply of catering in these instances is to be regarded as ancillary to the supply of transport. Mr Lasok argues that this case is no different from the British Airways case, where the Court of Appeal held that the supply of catering on British Airways domestic scheduled flights was part of and integral to the supply of air transportation. In the judgment of Lord Justice Stuart-Smith in that case, it is made clear that a supply can be incidental to another element, even if it is not necessary for that other element.
26. In the present case the essential feature, says Mr Lasok, was the provision of transport, albeit at a certain level of comfort. He refers to the tests set out in the Card Protection Plan case at paragraphs 29 and 30:

"29. In this respect, taking into account, first, that it follows from article 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 spread so as not to distort the functioning of a 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. The 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 & Excise Commissioners v Madgett and Baldwin, trading as Howden Court Hotel (1998) STC 1189 at 1206 paragraph 24."

27. It is submitted that the catering provided on the British Pullman train was simply a means of better enjoying the principal service provided, namely the conveyance of passengers. The mere fact that the conveyance was being done not so much as a method of getting passengers from one place to another, that is from A to B, but rather for the purpose of pleasure or enjoyment does not stop it being the "transport of passengers" and the catering provided was incidental to such conveyance. Mr Lasok rebuts a point made by Mr Parker QC for the respondent, namely that the services provided are really competing with restaurants rather than other means of transport, by noting that the appellant is always levying a substantial charge directly or indirectly for the train, amounting on a charter to around £20,000 or more. Finally on behalf of the appellant, emphasis is placed on the agreed fact that the cost of food and beverages amounted to only 16.9 per cent of the total costs. That too, it is said, points to the supply of catering being incidental to the transport element.
28. Mr Parker for his part draws attention to the way in which the facilities are marketed, with heavy emphasis on the wining and dining. He submits that there is a distinctive and important catering element. He adopts the test for what is an incidental element as set out in the Card Protection Plan case in the European Court of Justice and argues that here the catering is to be seen as an aim in itself and not merely as a way of better enjoying the transport element.
29. It is also contended that one should have regard to the commercial reality of the transaction, as was said by Lord Slynn of Hadley in the British Telecommunications case at page 766(e), and to the "substance and reality" of the matter, to use Lord Hope of Craighead's words in the same case at page 769(e). Mr Parker puts forward an analysis of the possible situations which, applying those tests, can arise. Those are: (i) Transport with a meal added in as a purely incidental or ancillary element to the transport. A single supply. (ii) A feast which occurs on a moving medium. Here, he says, the meal is dominant and the wheels are incidental. A single supply once again. (iii) A journey in which the meal forms such an important aspect of the transaction that it is unsound to regard either element as 'dominant' or either element as 'ancillary'. In that situation there will be two supplies.
30. There is little disagreement between the parties as to the basic principles to be applied as a matter of law to this issue. I had occasion to seek to set them out in some detail in a recent judgment in Co-operative Wholesale Society Ltd v Commissioners of Customs & Excise, a judgment of 10th November 1999, and I merely summarise here what the decided cases establish. There is no single factor which is determinative of this issue and although the existence of a single price or separate prices is a relevant factor, it should not be treated as determinative. The court should have regard to the commercial reality of the transaction. If two or more distinct elements in the supply can be discerned, it needs to be asked whether or not one or more can be seen as ancillary to a principal element or elements, applying the Card Protection Plan approach to which I have already referred.
31. Applying those principles, it seems to me that Mr Parker's analysis of the possible situations is helpful. At times he seemed in his submissions to be getting close to arguing that the transport element in what the appellant provides should be seen as ancillary to the catering, but, of course, he does not have to go that far. That situation would be the "feast on wheels" one, where there would be a single supply. For that reason his comparison of the services provided by the appellant to those of the restaurant seeks, in my judgment, to prove too much. The proper approach is to see whether the catering element here is to be regarded as significant in its own right, rather than merely as a means to the better enjoyment of the transport.
32. It is not possible to accept Mr Lasok's submission that this case is indistinguishable from that of British Airways Plc v Customs & Excise Commissioners. Lord Donaldson MR in that decision pointed out that the air passenger under consideration was choosing between various grades of air transportation, not between grades of transportation and separate grades of in-flight catering; see page 647E-F. One can well understand how in-flight catering on scheduled flights was seen as merely incidental to the transport element. But that is in marked contrast to the role played by the catering supplied by the appellant. The marketing brochures provide a valuable indication of that role, with their references to, for example:

"A unique series of lunch and dinner excursions throughout the year."

33. I accept Mr Lasok's point that transport as a concept is not confined to the conveyance of passengers from A to B; it does include conveying passengers on what might be described as pleasure trips, where the object of the exercise is the travel itself, perhaps on a round trip with no destination separate from the point of embarkation. But that still leaves the question of whether the catering element is incidental to that travel or is to be seen as a separate aim in itself.
34. It is, as has been said in the cases, a matter of fact and degree where the end result may sometimes be a matter of impression. But in the present case, I am in no doubt that the provision of catering was as a matter of commercial reality to be seen as a distinct and separate supply. The evidence shows that it constituted a very important element in its own right in what was being provided by the appellant. Its significance in these transactions went well beyond the point where it could be seen merely as a way of better enjoying the transport element. In the words used by the European Court of Justice in the Card Protection Plan case, it constituted for customers an aim in itself. Not, of course, the sole aim but, given its prominence in the marketing literature, clearly a separate aim from the travel element. The emphasis upon this aspect of the facilities provided is very striking. The fine meals and wines were a vital part of what the customer was paying for, whether by way of a separate or an all-inclusive price. The fact that the cost of the food and beverage amounted to only about 17 per cent of the total cost, while a relevant consideration, cannot overcome the commercial reality to which I have referred.
35. I conclude, therefore, that there were here two separate supplies and that the catering supplies are to be treated for VAT purposes as distinct from the supplying of transport and not as ancillary thereto. It follows that the Tribunal was right in the conclusion which it reached and, therefore, that this appeal must be dismissed.
36. MR PARKER:My Lord, I apply for costs.
37. MR JUSTICE KEENE: You cannot resist that, Mr Lasok.
38. MR LASOK: I am not going to resist it. The question arises of leave to appeal to the Court of Appeal.
39. MR JUSTICE KEENE: Yes
40. MR LASOK: In our respectful submission, this is a case which does merit the grant of leave. Essentially what has happened is that your Lordship in your judgment has focussed on one particular element. I am not saying that your Lordship ignored everything else, because your Lordship clearly did not. That one particular element is the role of the commercial material in characterising a supply, dealing with the particular question that arises in the present case.
41. The problem, we submit, in relation to that approach, which as a matter of argument -- because I am putting it forward as an argument to justify the conclusion that your Lordship ought to grant leave. The problem, we submit, with focussing on promotional material is that, of course, promotional material can alter. Hence one can have a situation in which slight changes to the wording of promotional material could, if the promotional material was regarded as the critical factor, radically alter the tax analysis of a particular supply.
42. Now, I am putting that forward as simply an argument to demonstrate, as we submit, that there is a possibility that the Court of Appeal might reverse your Lordship's decision. I am not saying that they would because --
43. MR JUSTICE KEENE: There is always that possibility.
44. MR LASOK: There is always that possibility. We say, in our respectful submission, that in the circumstances it is justified to grant permission.
45. MR JUSTICE KEENE: Do you want to say anything on this, Mr Parker?
46. MR PARKER: My Lord, save to say that reference to promotional material is done all the time in order to discover what the true character of the supply was to establish the substance of reality. So I submit there is nothing new in that.
47. I would say quite generally, my Lord, that this is a case where both the Tribunal and this court has come to a firm view. I would submit there is no realistic prospect of success in this matter and, therefore, permission to appeal should be turned down.
48. There is this further matter, my Lord, which I simply draw attention to. Although it is classified as a question of law, it is in fact quite an odd question of law. The legal test has been laid down in Card Protection Plan. It is a question of legal classification. In other branches of the law, such as income tax, where there are questions such as "Is it a trade?", Lord Radcliffe in Edwards v Bairstow said really it is a rationality test. So, in a way, it is a rather odd question of law. I submit that Mr Lasok ought to go to the Court of Appeal if he wants permission.
49. MR JUSTICE KEENE: Do you want to say anything further, Mr Lasok?
50. MR LASOK: No, my Lord.
51. MR JUSTICE KEENE: I am not prepared to grant permission essentially for this reason: I regard my decision as being the result of applying some fairly well-established principles of law to the facts of this case. In that circumstance, it does not seem to me that it is justified that I should grant permission to the appellant. You will have to seek it from their Lordships in the Court of Appeal if you wish to do so.
52. Therefore, I make the order for costs that I have indicated already in favour of the respondents. Thank you.