England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
On Appeal from the VAT and Duties Tribunal

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th December 2003

Sir Francis Ferris :

1. The issue in this case is whether the provision of television listing magazines to subscribers to the cable television services provided by companies in the Telewest group is, for the purposes of VAT, zero-rated or subject to the tax at the standard rate. The former represents the correct treatment if the supply of the magazines stands alone as a separate supply. The latter is the correct treatment if both magazines and television services are the subject matter of a single supply.
2. This issue arises on an appeal and a cross appeal from a decision of the VAT and Duties Tribunal (Chairman Dr. Nuala Bruce) released on 20th January 2003. The Tribunal held that the magazines were supplied as part of a single supply the character of which was, for the purposes of VAT, determined by its dominant element, the provision of television services, and hence subject to VAT at the standard rate. From this decision the appellants, whose identities I shall explain in a moment, have appealed. They do not dispute that if the Tribunal was right to hold that there was a single supply, the characterisation of that supply and its VAT consequences were as the Tribunal found. But they contend that the Tribunal should have held that there were two separate supplies, one of television services and the other of magazines, and that the latter is zero-rated by virtue of the Value Added Tax Act 1994, Schedule 8, Group 3, Item 2, the effect of which is that "Newspapers, journals and periodicals" are zero-rated.
3. The cross appeal arises from the fact that although the Tribunal, in reaching its decision, accepted one line of argument advanced on behalf of the Commissioners of Customs and Excise ("the Commissioners") it rejected alternative arguments which were put forward by the Commissioners. By the cross appeal the Commissioners seek to rely on these arguments in case the argument on which they succeeded before the Tribunal is held to be wrong.

An overview of the case

4. The Telewest corporate group consists of a considerable number of companies at the head of which is Telewest Communications PLC, the first named appellant ("Telewest PLC"). The principal activity of the corporate group is the provision of television and telecommunications services to customers who are within the area of the cable network owned by one or more companies within the group and who subscribe to the services offered. It is convenient for the purposes of this appeal to ignore the telecommunications service and to treat the provision of television services as the only relevant service. There is no dispute that the supply of such services for consideration attracts VAT at the standard rate.
5. The actual provision of the television services is undertaken not by Telewest PLC but by some twenty eight regional companies each of which is an indirect but wholly-owned subsidiary of Telwest PLC. In most, but not all, cases the name of each regional company consists of the words "Telewest Communications" together with a description of a geographical area. An example is Telewest Communications (Midlands and North West) Limited. Each subscriber enters into a contract with one of these regional companies.
6. For the purpose of accounting for VAT the Telewest companies have formed a group referred to as the Telwest VAT group. The principal company in this VAT group is Telewest PLC. Each of the regional companies is a member of this VAT group. There may be other members but they do not matter for present purposes. The important point to note is that not every company which is within the Telewest corporate group is a member of the Telewest VAT group. One effect of membership of a VAT group is that supplies made by each member of the group are deemed to be made by the principal company in the group. Telewest PLC is thus the accountable party in respect of supplies made by each of the regional companies. It is not the accountable party in respect of supplies made by those of its subsidiaries which are not members of the VAT group.
7. In connection with the provision of its television services the Telewest group produces magazines which contain listings of the television programmes which can be viewed by subscribers to the service. Until July 2001 there was a single magazine, named Cable Guide, which was produced by a company named Cable Guide Limited of which Telewest PLC itself 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.
8. 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. However, on 2nd July 1999 the decision of a VAT and Duties Tribunal in the case of BSkyB (British Sky Broadcasting PLC v CEE [1999] V&DR 283) was released. The Tribunal held that this treatment was incorrect in relation to the supply of television services and a magazine made by BSkyB. As the arrangements adopted by the Telewest companies were substantially the same as those adopted by BSkyB the Commissioners gave notice to Telewest PLC that as from 1st August 1999 they would require Telewest PLC to account for VAT on the whole of each monthly subscription on the basis that it was paid in consideration of a single standard-rated supply.
9. The Tribunal's decision in BSkyB was to a large extent based on the reasoning of the European Court of Justice in CPP (Card Protection Plan Ltd v CCE, case C-349/96, [1999] STC 270, [1999] 2 AC 601). This decision was applied by the House of Lords when CPP was restored for final hearing (see [2001] STC 174). The Telewest companies concluded that BSkyB must be accepted as correct and that it would have the same impact in relation to the Telewest arrangements if they were left unchanged. The Telewest companies therefore set about devising new arrangements with a view to establishing that Cable Guide would in future be the subject of a separate zero-rated supply.
10. The initial step in the new arrangements was the incorporation of a new company, named Telewest Communications (Publications) Limited ("Publications") , which took place on 18th October 1999. Publications is a wholly owned subsidiary of Telewest PLC. It is thus a member of the Telewest corporate group. It did not, however, become a member of the Telewest VAT group. The object of the new arrangements was that Cable Guide would, from 1st January 2000, be the subject of a separate supply made, not by the appropriate regional company as had previously been the case, but by Publications which, not being a member of the Telewest VAT group, would be separately accountable for VAT on its own supplies without those supplies taking their character from other supplies.
11. It will be necessary to examine the new arrangements in some detail, but it is appropriate to state at once that the Commissioners do not accept that they have the desired effect. By a letter dated 24th May 2001 the Commissioners notified Telewest PLC of their decision that Telewest PLC should account for VAT at the standard rate on the full amount paid by customers of the regional companies both for the television services and for the magazine. In the same letter the Commissioners notified Publications of their alternative decision that Publications should account for VAT at the standard rate on the amounts paid by customers for the magazine.
12. The Tribunal's decision from which the appeal and cross appeal which are before me are brought was given on Telewest PLC's appeal against the first decision and Publications' appeal against the alternative decision.

The facts in more detail

13. The primary facts are not in dispute. They are set out in paragraphs 10 to 53 of the Tribunal's decision. However I must summarise many of them in order that this judgment may be understood.

(a) The supply of the magazine before January 2000

14. 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".

15. At the bottom of the leaflet was 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".

16. The Tribunal mentions in paragraph 18 what seems to have been a slightly later version of the leaflet the language of which was substantially the same.
17. 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 paragraph 19 of its decision a contract for a combined television and telephone package Clause H 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."

18. In relation to this the Tribunal found that "Services" were defined in clause 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".
19. 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"

(b) The Agency Agreement

20. After Publications had been incorporated it entered into an agency agreement with the regional companies. This agreement was originally made orally, although a draft of a written agreement was in existence at the time when it was made. The written agreement was not signed until 16th May 2000, but it was expressed to commence on 1st December 1999 and the Commissioners accepted that the oral agreement which preceded it was to the same effect and operated from that date. It was made between Publications and twenty seven out of the twenty eight regional companies. The twenty-eighth regional company, Cable London Limited, had been recently acquired by the group and it took some time for its procedures to be aligned with the other regional companies. It was not a party to the original oral agreement, but by a separate written agreement dated 16th May 2000 it became a party to the main agency agreement with effect from 1st April 2000.
21. The relevant terms of the agency agreement may be summarised 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 clauses 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.

(c) Notification of changes in the arrangements

22. In December 1999 customers of the regional companies were notified of certain changes in the arrangements for the provision of Cable Guide. The Tribunal described these notifications as follows:

"28. 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"

29. 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.

30 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."

(d) Arrangements with new customers after January 2000

23. Some alterations in the arrangements were also made in the case of new customers subscribing after the beginning of January 2000. Such customers would be shown a leaflet describing various packages at different prices. The packages would be described by reference to the various television channels included after which the words

"Plus Cable Guide Magazine (priced at £3.25)."

At the bottom of the leaflet appeared the words

"Effective January 2000. All prices include VAT at 17.5%. Prices subject to change"

24. On the reverse of the leaflet there appeared the following text

"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 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%"

25. A customer deciding to subscribe for a selected package is, after the beginning of January 2000, required to enter into a formal contract in printed form. This seems to be on the same lines as the form of contract used before January 2000, but there are certain changes. The form is printed on two sides of an A3 sized page. On the first side, when completed, there are such matters as the customer's name and address, particulars of the package ordered, places for the signatures of the customer and the representative of the regional company and a form of direct debit mandate (completion of which seems to be optional) authorising the customer's bank to pay direct debits initiated by "Telewest Communications".
26. On the reverse side are printed detailed conditions which are prefaced by the following words

"The words which follow set out in straightforward and plain language the agreement between "you" (the customer) and "us" ([name of the relevant regional company]). Please read them carefully."

27. The main obligation of the regional company is described in clause B.1 in the following words:

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

28. Section Q of the printed terms is as follows;

"Q CABLE GUIDE MAGAZINE

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"

29. Section R contains definitions including one of "Services" which reads

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

The significance of this is that, in agreeing in Clause B.1 to provide "the Services" the regional company appears, as a matter of language, to agree to provide, amongst other things, Cable Guide magazine.

(e) Operation of the arrangements from January 2000 onwards

30. From January 2000 onwards Cable Guide Limited invoiced Publications for the printing, posting, mailsort 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.
31. From January 2000 onwards customers have been sent monthly invoices specifying the amount due in respect of "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."

32. 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."

(f) Zap magazine

33. Cable Guide is for residential customers who subscribe to the analogue television service. Since September 2000 customers who subscribe to the digital television service which is also provided by the Telewest regional companies have received a different magazine called Zap. Like Cable Guide this is a monthly magazine with a cover price of £3.25. The Tribunal accepted that, in relation to Zap, there was an oral agreement between the regional companies and Publications similar to the written agency agreement in relation to Cable Guide. Subscribers to the digital service enter into a written agreement which is in substantially the same terms as the agreement referred to above, references to Zap being substituted for references to Cable Guide. Money paid by customers for Zap magazine has been collected by the regional companies and remitted or credited to Publications in the same way as money paid for Cable Guide magazine.

The Tribunal's decision

34. The Tribunal addressed three questions, namely

(1) Under the contractual arrangements is the supply of the magazines made by Telewest PLC (i.e. by the regional companies) or by Publications?

(2) As a matter of economic substance is the supply by Telewest PLC?

(3) If the supply is by Publications was it ancillary to the main supply by Telewest PLC?

35. On the first question the Tribunal's main concern was whether there were two contracts (one between the regional company and its customer, the other between the regional company and Publications) or three (the additional contract being between the customer and Publications). It rejected the argument of the appellants that each regional company had used its powers of variation under the pre-2000 contracts and the authority given to it by the agency agreement to bring into existence the third contract. Its analysis was largely, although perhaps not exclusively, a contractual one. Its conclusion, stated in paragraph 76 of its decision, was that

"having regard to the contracts between the regional companies and the customers, and all other relevant facts, the obligation to supply the magazines both to existing and new customers remained that of the regional companies and did not become that of Publications."

By existing customers the Tribunal meant those who had entered into their contract with a regional company before January 2000. New customers were those who entered into contracts during or after January 2000, although in relation to them it is a little strange to say that the obligation "remained" that of the regional companies, for their contracts were unaffected by the changes purportedly made in December 1999. It seems possible that the Tribunal's view was coloured by the fact that it had rejected the argument that those changes were effective to bring into existence a contract between the customer and Publications.

36. The Tribunal considered that its conclusion on the first question meant that the appeal of the Telewest companies must be dismissed as the other two questions would only arise if the supply of the magazines was made by Publications. Nevertheless it went on to consider those two questions, as it understood them, on the hypothesis that the supply was, contrary to their earlier decision, made by Publications.
37. On the second question the Tribunal held (paragraph 96) that

"if the obligation to supply the magazines to the customers had been that of publications, and if Publications had in fact supplied the magazines to the customers, we would not have held that the supply was by [the regional companies]. We do not discern a general principle that the economic substance is always to be preferred to legal reality, at least in those cases where there are genuine supplies and real and genuine economic activity."

38. On the third question the Tribunal concluded that, if the supply of magazines was by Publications, it was not ancillary to, and so not part of a single supply cable television services made by the regional companies because it was made by a separate taxable person.

The Issues addressed on this appeal

39. On this appeal the issues addressed in argument have not been quite the same as those decided by the Tribunal. There were two main strands of argument. The first was whether, as a matter of VAT law, the magazines are to be regarded as supplied by the regional companies or by Publications. The second, which only becomes relevant if it is decided that the magazines are supplied by Publications, was whether that supply is ancillary to the supply of television services by the regional companies and, if it is, whether that supply takes the taxable character of the dominant supply, with the result that what would otherwise be a zero-rated supply of magazines is to be treated as if it were a standard-rated supply.
40. The words "as a matter of VAT law" which I have emphasised in describing the first strand of the argument are of some importance. Where a supply is made pursuant to a contract the answer to the general question "who makes the supply?" must, one would suppose, depend for purposes of the domestic law of England and Wales on the true analysis of the contract in the light of the relevant facts. But this cannot be conclusive where the issue relates to VAT because VAT law is European Community law and there cannot be two different answers to the question according to which system of domestic law is applied to the contract.
41. Accordingly although both sides on this appeal were content to accept that the analysis of the arrangements under the English law of contract is the starting point (c.f. Lloyd J in WHA v CCE [2003] STC 648 at 653), it is necessary also to consider whether the requirements of VAT law necessitate a modified analysis. I will refer to the analysis of the arrangements under the domestic law of contract as "the contractual analysis" and to the possible modification of this as "the VAT analysis".

The Contractual Analysis

42. The appellants argued that, on a true analysis of the documents, there are two contracts, one between the regional company and its customer for the provision of television services, the other between Publications and the customer for the supply of the magazine. The Commissioners argued that there is only one relevant contract, namely a contract between the regional company and its customer for the supply of a package consisting of the television services and the magazine. The fact that, by the agency agreement, the regional companies have arranged for their obligations in respect of the supply of the magazine to be performed by Publications, does not alter this.
43. In evaluating the appellants' argument it is necessary to consider separately the positions of existing companies, by which is meant those customers who contracted under the arrangements in force before January 2000, and new customers, who are those who contracted under the arrangements in force after that time.

(a) Existing Customers

44. There is no doubt that, at the time when they entered into their contracts, existing customers contracted only with the relevant regional company. The issue is whether the original contracts were modified in such a way as to bring into existence a new contractual relationship between the customer and Publications under which Publications, not the regional company, was to supply the magazine. Three routes were suggested by which this new contractual relationship was brought into existence, namely novation, assignment and variation pursuant to a contractual power to vary.
45. Novation is described in Chitty on Contracts, 28th edition, para 20-084 as follows

"There is no doubt that with the consent of both contracting parties all contracts of any kind may be transferred, and the term "novation" has been introduced from Roman law to describe this species of transfer. Novation takes place where two contracting parties agree that a third, who also agrees, shall stand in the relation of either of them to the other. There is a new contract and it is therefore essential that the consent of all parties shall be obtained; in this necessity for consent lies the most important difference between novation and assignment."

46. The appellants relied upon the fact that each regional company was, by the agency agreement, appointed to be the agent of Publications for the purpose, inter alia, of

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

47. It was contended that this is what the regional companies did by means of the notices to their customers referred to above.
48. I am prepared to assume that the regional companies intended the notices to have this effect and also that, despite the inconspicuous size and position of those notices which were included in the talk section of Cable Guide and the informality involved in the use of outserts by YCCL, the customers are to be taken to have received these notices. The difficulty which lies in the way of the appellants' argument is to show that the customers accepted the substitution of Publications for the relevant regional company as the contracting party in respect of the supply of the magazine.
49. In paragraph 20-085 of Chitty it is stated that

"The acceptance may be inferred from acts and conduct, but ordinarily it is not to be inferred from conduct without some distinct request."

The appellants relied upon the fact that, after being given the notice, customers continued to receive the services and the magazine and to pay their monthly subscriptions, which included a sum for the magazine. They also knew, from the wording of their monthly invoices, that

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

50. In my view this is wholly insufficient to establish the requisite acceptance. The wording of the notices does not suggest any change in the contracting parties. Indeed, even on the appellants' own case, the regional company continued to be the contracting party as regards the television services. I think that particular care in the wording is needed where the intention is to split what has previously been a single contractual obligation into two separate obligations, one of which is owed by a new party in exoneration of the old. Here the customer was not asked to agree to anything and was not given any choice of action in case he did not agree. On the contrary the whole transaction was framed in such a way as to suggest that nothing had really changed and that Publications was being introduced as part of some internal reorganisation within the Telewest group. The conduct on the part of the customer which is relied upon was essentially passive conduct. The customer continued to receive the television service, which was presumably his main interest, from the same regional company; he paid an unchanged monthly subscription to the same recipient as previously; and the magazine continued to arrive at his home as hitherto. In my view, the changes which occurred, namely that Publications became responsible for the delivery of the magazine and that the regional companies accounted to Publications for the monthly cover price of the magazine, savour of an internal reorganisation under which Publications agreed with the regional companies to discharge part of the regional companies' obligations to their customers, not of a new contract between Publications and each customer.
51. The appellants sought to draw a parallel between what was done in this case and the situation in Hart v Alexander (1837) 2 M&W 484. It seems to me that that case depended entirely on its own facts. The issue in that case was whether the customer of a banking business which had failed could seek to recover money deposited with the firm from a partner who had been a partner at the time when the money was deposited but had subsequently retired from the firm. In summing up to the jury at the trial the Chief Baron, Lord Abinger, directed the jury that

"where a partner retired from a firm, and a party trading with the firm, having a knowledge of that fact, went on trading with the firm, and entering into new contracts, by taking new rates of interest or otherwise, he thereby acquitted the retired partner, and consented to take the remaining partners for his debtors."

52. On appeal the issue was whether there was evidence which could properly be left to the jury on the question whether the plaintiff had knowledge of the relevant fact. It was held that there was.
53. There was no challenge in Hart v Alexander to the correctness of Lord Abinger's direction on the law and in the present case Mr. Vajda, on behalf of the Commissioners, has not criticised it. But the facts of that case were very different from those of the present case. In particular that was a case where it was contended that the retired partner was fully relieved from the whole of the burden of the original contract, not just a part of it. Further the circumstances were such that the identity of the partners in the business must have been a matter of concern to the plaintiff (c.f. Lord Abinger's remarks at the foot of page 491 of the report in M&W). Here the identity of the party responsible for the supply of the magazine can hardly have been a matter of concern to the customer. Finally the element of entering into new contracts, which was a prominent feature of Lord Abinger's direction to the jury in Hart v Alexander, is wholly absent from this case.
54. As to assignment, the appellants accepted the principle that the burden of a contract cannot be assigned without the consent of the other contracting party. They cited passages from the speech of Lord Macnaghten in Tolhurst v The Associated Portland Cement Manufacturers (1900) Limited [1903] AC 414. In that case the House of Lords affirmed the decision of the Court of Appeal where Sir Richard Collins MR said ([1902] 2 KB 660 at 668)

"It is, I think, quite clear that neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor on to those of another without the consent of the contractor. A debtor cannot relieve himself of his obligation to somebody else; and this can only be brought about by the consent of all three, and involves the release of the original debtor."

There is nothing to be found in the speech of Lord Macnaghten or any of the other speeches in Tolhurst which doubts the correctness of this statement, which is cited in Chitty at paragraph 20-075 as authority for the proposition that the burden of a contract cannot in principle be transferred without the consent of the other party.

55. As I understood the appellants' argument on this point they relied upon the fact that Lord Macnaghten had said that there was nothing in the nature of the contract in that particular case, for the supply of chalk from particular quarries for particular cement works, which could not be performed by any person for the time being possessed of the quarries. They also relied upon the actual decision, which was that an assignment of the contract was effective. But it is clear that what was in issue in that case was the effectiveness of an assignment of the benefit, not the burden, of the relevant contractual obligation. Moreover there was no doubt that such an assignment had been made. Here I find it impossible to spell out of the agency agreement, which is the only possible source, an assignment from the regional companies to Publications of any contractual obligation. In any event, what would be required for the appellants' argument on this point to succeed would be an assignment of the burden of the contract in the form of the obligation to supply the magazine. This would require the consent of the customers, which is wholly absent.
56. The argument that the original contracts were varied by the exercise of a contractual power to vary was based on the contractual terms concerning changes to the agreement. It will be recalled that in most cases it was stipulated that

"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"

In the YCCL agreements the term was that

"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"

57. The argument was that these provisions gave each regional company the right, without any customer consent, to substitute a new party for itself in respect of any contractual obligation. 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. As Lord Millett said in Homburg Houtimport BV v Agrosin Private Limited, The Starsin [2003] 2All ER 785 at 848, 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."

(b) New Customers

58. The argument that a contract was entered into between Publications and new customers depends largely upon the wording of Section Q of the printed terms of contract which, for convenience, I set out again. It reads

"Q CABLE GUIDE MAGAZINE

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."

59. There is no doubt that the regional companies had, by virtue of the agency agreement, authority to bring into existence a contract between Publications and each customer for the supply of Cable Guide magazine (and after July 2000 Zap magazine) by Publications in return for the cover price of the magazine which was to be collected by the relevant regional company as agent for Publications. The issue is whether this is what the regional companies have in fact done. The appellants argued that Section Q shows clearly that the answer must be in the affirmative.
60. The Tribunal did not accept this argument and neither do I. Looking only at the language of Section Q, this is not, to my mind, appropriate to show that the customer was contracting not only with one of the regional companies but also with Publications. It is stated that the magazine "will be provided to you" by Publications. It is not said that Publications, acting by the regional company, agrees to supply and the customer agrees to acquire the magazine. The price of the magazine is not stated and the regional company's agency is only mentioned in the context of collection of the unspecified price. The customer's agreement to the provision of his name and address to Publications sounds as if it is directed to data protection laws. If it has any significance I think it points away from the appellants' argument. If the customer was really contracting with Publications there would be no need for the customer to consent to Publications being told his name and address.
61. These views concerning the effect of Section Q are strongly reinforced when the context is looked at. As I have already noted, the printed terms state that they set out the terms of the agreement between the customer and a regional company, not an agreement between the customer and any other party. The magazine is to be provided as part of "the Services" and it is the regional company, not some other party, which engaged itself to provide "the Services". The reference to the regional company collecting the money for the magazine as agent for Publications does not, in my view, conflict with this. Nor does the fact that this money is described as "the due amount" for it does not indicate to whom the money is contractually due.

(c) Conclusion on the contractual analysis

62. For the reasons which I have given, which are in substance the same reasons as the Tribunal gave, I conclude that no contract for the supply of the magazine was entered into with either existing or new customers.

The VAT analysis

63. Both sides accepted before me that the contractual analysis cannot be regarded as conclusive of the result for the purposes of VAT. The situation was described as follows by Laws J in CCE v Reed Personnel Services Ltd [1995} STC 588 at 595:

"First, as I have already said, the concept of "supply" for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third party involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so."

This passage was invoked, clearly with approval, by Lord Slynn in paragraph 14 of his speech in Eastbourne Town Radio Cars Association v CCE [2001] STC 606 at 612.

64. It is well settled, as the result of a number of decisions of the European Court of Justice, that the concept of "supply" in connection with VAT is an autonomous concept of Community law that cannot be determined by how the matter is classified under the national laws of member states. The most recent decision is Auto Lease Holland BV v Bundesamt fur Finanzen (Case C-185/01, judgment dated 6 February 2003. In that case the court said

"31. Under Article 5(1) of the Sixth Directive, '[s]upply of goods shall mean the transfer of the right to dispose of tangible property as owner'.

32. As the Court found in paragraphs 7 and 8 of Shipping and Forwarding Enterprise Safe, it is clear that the wording of that provision that 'supply of goods' does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property which empowers the other party actually to dispose of it as if he were the owner of the property. The purpose of the Sixth Directive might be jeopardised if the preconditions for a supply of goods - which is one of the three taxable transactions - varied from one member state to another, as do the conditions governing the transfer of ownership under civil law."

65. On this point I was referred not only to the Shipping and Forwarding Enterprise case [1991] STC 627] and Auto Lease but also to Muys' en De Winter's Bouw v Staatssecretaris van Finanzen (Case C-218-01, [1997] STC 665), Town and County Factors Ltd v CCE (Case C-498-99, [2002]STC 1263) and Maierhofer v Finanzamt Augsburg-Land (Case C-315-00, 16th January 2003).

(a) The Appellants' argument

66. On behalf of the appellants on this part of the case Mr. Milne referred first to the test laid down by the ECJ in Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-15/93; [1994] STC 509) which concerned a claim that a Dutch street musician was liable to account for VAT on the contributions made by passers by. Having referred to earlier decisions the court said

"14. It follows that a supply of services is effected 'for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient."

67. The necessary legal relationship may exist even though the arrangements are not legally enforceable. Thus in Town and County Factors Ltd v CCE (Case C-498/99, [2002] STC 1263) it was held that a sufficient legal relationship existed between the organisers of a spot the ball competition and participants in the competition, even though the obligation of the organisers to pay prizes was expressed to be binding in honour only. The Court said ([2002] STC at 1281):

"20. It must be observed, first, that it is common ground that where a competition such as that in issue in the main proceedings is organised there is reciprocal performance within the meaning of the Tolsma judgment between the organiser of the competition and the competitors, the remuneration received by the organiser in the form of entry fees constituting the value actually given in return for the service he supplies to the competitors.

21. It is clear, next, that adopting the approach of making the existence of a legal relationship in the Tolsma sense depend on the obligations of the provider of the service being legally enforceable would compromise the effectiveness of the Sixth Directive, in that it would have the consequence that transactions falling within that directive could vary from one member state to another because of differences which might exist between the various legal systems in this respect.

22. ...

23 . ...[I]t cannot be validly maintained that no legal relationship in the Tolsma sense exists, because the obligation on a provider of services is not enforceable, where the impossibility of seeking enforcement of that obligation derives from an agreement between the provider of services and the recipient, such an agreement constituting the very expression of a legal relationship in that sense."

68. Given this broad approach to what is required to constitute the necessary legal relationship, the appellants argued that the key requirement in a case of the present kind is that there shall exist the element of reciprocal performance. Here the remuneration received by Publications in the form of the cover price of £3.25 constitutes the value actually given by the customers in return for the magazines supplied by Publications. There is thus a taxable supply made by Publications, albeit one which is zero-rated, which excludes the possibility that the same goods are the subject of a taxable supply made by the regional companies.
69. The appellants also relied upon the decision in Auto Lease, to which I have already referred. In that case a company which leased vehicles to customers issued to participating customers a card enabling them to purchase fuel from filling stations in the name and at the expense of Auto Lease. The filling stations were paid for the fuel by Auto Lease, which recouped the cost from its customers by instalments. The principal issue in the case was whether the fuel was supplied by the filling station to Auto Lease or to the customer. As appears from the passage I have already quoted from the judgment of the ECJ, the court began its answer to this question by referring to the definition of 'supply of goods' in the Sixth Directive. It followed that it was necessary to determine to whom the right to dispose of fuel as owner was disposed. The court held that this was the lessee, who alone had the right to decide how the fuel would be used, Auto Lease having no power of decision. The court rejected the argument that, as the fuel was purchased in the name and at the expense of Auto Lease, it was supplied to Auto Lease. It said

"35. ... [T]he supplies were effected at Auto Lease's expense only ostensibly. The monthly payments made to Auto Lease constitute only an advance. The actual consumption, established at the end of the year, is the financial responsibility of the lessee who, consequently, wholly bears the cost of the fuel

36. Accordingly, the fuel management agreement is not a contract for the supply of fuel, but rather a contract to finance its purchase. Auto Lease does not purchase fuel in order subsequently to resell it to the lessee; the lessee purchases the fuel, having a free choice as to its quality and quantity, as well as the time of purchase."

70. The appellants argued that similar reasoning applies to the present case. Property in the magazines starts with Cable Guide Limited and passes thence to Publications. From Publications it goes direct to the customer without ever residing in the regional companies. Insofar as the Tribunal found that the correct analysis is that Publications supplies the magazines to the regional companies which then supplies them to customers, there was no justification for this. The fact that the price followed a different route from the property in the magazines is immaterial. The regional companies are mere conduits for the price paid by customers for the supply of the magazines by Publications. That price is the consideration for that supply.

(b) The Commissioners' argument

71. The argument for the Commissioners took as its starting point the principle that, in order to determine what is being supplied one must ascertain the essential features of the transaction irrespective of the way in which it might be artificially presented (see CPP in the ECJ [1999] STC 270 at 293 para 29; in the House of Lords [2001] STC 174 at 185 para 19; and Maierhofer at para 39). This is certainly the case when the issue is to characterise the supply (e.g. whether it is a supply of insurance services as in CPP or a letting of immovable property as in Maierhofer). I accept that it must also be so where the issue is the identification of the supplier.
72. The next step in the Commissioners' argument is that there must be a direct link between the supply made and the consideration received. This is, I think, well established. But it does not, to my mind, assist in the identification of the supplier of the magazines for VAT purposes in the circumstances of the present case. There is such a direct link, whether the supply is made by the regional companies or by Publications.
73. It is the next stage which is the crucial one. The Commissioners argued that the supplier of the magazines must be the regional companies, not Publications, because the magazines are only provided by Publications as part of a single package marketed and contracted for by the regional companies and thus supplied by the regional companies. Once this is recognised the only remaining issue is the characterisation of the package and, in accordance with BSkyB, this, as the appellants accept, is the supply of television services.
74. At some stages of the argument the Commissioners seemed to be asking what had changed, so far as the essential features of the transaction are concerned, as a result of the modifications made at the end of 1999. It seems to me that this is an unreliable argument for, in respect of customers who have subscribed for the first time in or after January 2000, there have been no changes in the arrangements. Yet, once the contractual arguments have been cleared away, the VAT position must be the same for these customers as it is for those who began to subscribe before 2000. I think, therefore, that the Commissioners' argument must be evaluated by reference to the current position in which the only contract is that between the customer and the relevant regional company, payment for the magazine is made to the regional company as part of a single monthly subscription, the regional company is obliged to and does account to Publications for the cover price of the magazines and property in each copy of the magazine passes from Cable Guide Limited to Publications and thence to the individual customer without going to the regional company itself at any stage.
75. The Commissioners relied upon the following features, most of which have been mentioned already:

(i) It is the regional companies, not Publications, which carries out the only marketing which is undertaken;

(ii) That marketing is for a package which includes the television services and the magazine in return for a monthly subscription whose amount depends upon the extent of the television services taken;

(iii) The customer is offered no choice in respect of the magazine. In particular he cannot obtain a reduction in his monthly subscription in return for foregoing the magazine;

(iv) Although the customer can, if he reads the small print of his contract carefully, ascertain that the magazine comes to him from Publications, he deals only with his regional company in respect of invoicing, payments and complaints.

76. Although the Commissioners did not emphasise it I think that it is also of significance that Publications is required to supply one copy of the appropriate magazine to every customer whose name and address are notified to it by a regional company and is not permitted to supply the magazines anyone else. The picture is therefore one in which the regional companies are in complete control and Publications only exists to do what the regional companies require it to do.
77. The Commissioners drew a parallel between the present case and The Commission v France (case C-404/99 [2001] ECR 1-1105). There the Commission successfully challenged an administrative concession allowed to French restaurateurs under which, subject to certain conditions, they were entitled to exclude from the amount on which VAT is payable compulsory service charges made to their customers. In paragraph 40 of his opinion, Advocate General Mishco said that

"The customer in a restaurant buys a comprehensive supply, made up of the meal he is going to eat, the use of the table at which he eats it, whatever he needs to eat it with and the service at the table; and the sum which he pays is a comprehensive payment for that comprehensive supply."

It would be unthinkable, the Commissioners submitted, that the waiters in the restaurant could be permitted to submit to the customer a separate invoice for the service charge and then, if they were below the VAT threshold, to avoid payment of VAT on one element of what, as the Advocate General explained, is a comprehensive supply. In the present case, however, the Commissioners said that the Telewest companies were seeking to do much the same thing. They were offering and being paid for a single comprehensive supply while seeking to split off a part of it and claim that it constitutes a separate supply made by a non-member of the Telewest VAT group.

(c) Conclusion on the VAT analysis

78. The analogy with The Commission v France is not perfect. There is a natural unity about the elements comprised in the supply of a meal in a restaurant which may be said to be absent from the supply of television services accompanied by a listings magazine. But it seems to me that the crucial factor is the way in which the elements are offered to the customer. If the television services and the magazine were the subject of separate offers, one made by the regional companies and the other by Publications, each separately charged for, it would be relatively easy to say that there are two separate supplies. But I have reached the conclusion that the offering of the two elements as a package governed by a single contract, brings in its train the result that the regional companies supply both elements. The fact that the regional companies employ the agency agreement with Publications as the means of making the supply does not mean that the magazines are to be regarded as being supplied, for the purposes of VAT, by Publications.
79. I find this analysis more convincing than the line of argument, based on the transfer of the property in the magazines, which represented the substance of the appellants' case.

Additional Points

80. There are a number of additional points which I find it convenient to deal with before coming to the ancillary supply issue.
81. First, as I have mentioned earlier, the Tribunal identified, as the second matter which it had to consider, the question whether, if the obligation to supply the magazines became that of Publications, the economic substance of the transactions was that the supply was by the regional companies. The Tribunal understood this question to be raised by a line of argument advanced on behalf of the Commissioners. Before me the Commissioners disavowed any such argument. I do not, therefore consider it in this judgment.
82. Secondly, the Commissioners made it clear that they wished to keep open an alternative argument based on the decision of the VAT and Duties Tribunal in Halifax PLC v CCE [2001] VATTR 71. The issue in that case has been referred to the ECJ and the Commissioners considered that it would not be profitable to argue it in this court before the outcome of the reference is known. However if that outcome is favourable to the Commissioners and this case proceeds further the Commissioners reserved the right to rely on it on any appeal.
83. Thirdly the Commissioners raised an argument based on Section 47(2A) of the VAT Act 1994 which provides that

"Where goods are supplied through an agent who acts in his own name, the supply shall be treated as a supply to the agent and as a supply by the agent."

84. This provision is said to implement Article 5(4)(c) of the Sixth Directive which provides that

"The following shall also be considered supplies within paragraph 1

...

(c) the transfer of goods [pursuant to a contract under which commission is payable on purchase or sale"

I confess to having some difficulty in seeing how the United Kingdom provision reflects this, but this may not matter as the point was argued before me on the basis of the language of Section 47(2A).

85. The Tribunal dealt with the argument as, in effect, an addendum to the contention, which it rejected as I have done, that there is a contract between Publications and the customer. It said, at the end of paragraph 69 of the Decision,

"Thus, in our view, the correct analysis is that there was a supply of the magazines to the regional companies by Publications and the regional companies acted in their own name in supplying the magazines to the customers as part of the complete package of services including the magazines."

86. It is not clear to me whether or not the Tribunal thought that a consequence of this was that Section 47(2A) was applicable and that this was what caused the supply to be made by the regional companies. If it did, I do not accept this part of the Tribunal's reasoning. In particular it does not appear to me to be right to say that the magazines were supplied to the regional companies before being supplied to the customers. In my view the property in the magazines passed direct from Publications to the customers, without residing in the regional companies at any stage. The reason why I consider that this results, for the purposes of VAT law, in a supply made by the regional companies, not by Publications, is that Publications was doing what it did as part of a package supply marketed and contracted for by the regional companies.
87. I cannot for my part see that Section 47(2A) has any part to play in this case. In the first place it does not appear to me that the magazines are being "supplied through an agent". The regional companies are not the agents of Publications for the purpose of making such supply (their agency extends only to the making of a contract with the customer on behalf of Publications, which in my view they did not do, and the collection of the cover price); nor is Publications the agent of the regional companies. Secondly I think that the appellants were correct in arguing that Section 47(2A) applies only where an agent supplies goods for an undisclosed principal. This, in my view, is what must be meant by the requirement that the agent "acts in his own name". But here, if there was an agency, the parts played by the regional companies and Publications respectively were apparent on the face of the contract.

The Ancillary supply issue

88. The views which I have expressed so far are sufficient to result in the dismissal of this appeal. But in case I took a different view the Commissioners advanced an alternative argument which was fully deployed before me as it had been before the Tribunal. This was to the effect that even if, as a matter of VAT law, the magazines are supplied by Publications this supply is ancillary to the main supply of television services by the regional companies and so must take the same VAT treatment.
89. This proposition was said to be supported by a number of recent authorities. In the order in which they were decided they were Skatteministeriet v Henriksen (Case 173/88, [1990] STC 768); CPP in the ECJ [1999] STC 270 and in the House of Lords [2001] STC 174; the "French Laboratories" case (Commission v France, Case C-76/99, 11th January 2001) and CCE v Primback Ltd (Case C- 34/99,[2001] STC 803. I think it is necessary to discuss each of them briefly.
90. Henriksen concerned liability for VAT on a development of 12 separate garages erected in conjunction with a building development of 37 linked one-family houses. Some of the garages were let to residents of that development and others to neighbouring residents. The question was whether the lettings of the garages fell within the exemption for the leasing or letting of immovable property or the exclusion from that exemption of the letting of premises and sites for parking vehicles. It was argued for the taxpayer that the exclusion only applied to open spaces for the short-term parking of vehicles. The ECJ rejected this, but recognised that this gave rise to a problem where the letting of the parking space is closely linked to the letting of another property which falls squarely within the exemption. It decided

"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."

91. It seems probable that the two circumstances mentioned in paragraph 16 must both exist if the letting of the parking place is to fall within the exemption. But whether this is so or not, I do not think that the decision provides any real assistance to the Commissioners' argument. The case concerned the definition of the boundary line to be drawn between the exemption and the exclusion. It says nothing about one transaction sharing the tax treatment of the other.
92. CPP concerned a plan to protect credit card holders against loss arising from the loss or theft of their cards or other important documents. It comprised various elements, including insurance protection and card registration services. The insurance was provided by a third party under a group policy arranged by CPP. Payment for participation in the plan was made by card holders to CPP. There were thus at least three types of services involved, namely (i) the card registration services; (ii) the arrangement and keeping up of the group policy; and (iii) the provision of insurance cover. The case concerned only the first two types, which were provided by CPP. Liability for VAT in respect of the insurance cover, provided by the third party, was not in issue. The question was whether services falling within the first two classes fell to be treated as a single supply or as two or more separate supplies. If there was only a single supply the further question arose of how it should be categorised. In particular was it a standard-rated supply or exempt by reason of being an insurance transaction within the meaning of article 13B(a) of the Sixth Directive?
93. The House of Lords referred a number of questions to the ECJ, including the question what is the proper test to be applied for the purpose of deciding whether a transaction consists for VAT purposes of a single composite supply or two or more independent supplies and the question whether what was done by CPP consisted of or included an insurance transaction. The answers given by the ECJ led inexorably to the conclusion that CPP's making of arrangements for effecting and keeping up the group policy was an insurance transaction. It is, however, the answer to the other main question which is more relevant for present purposes.
94. On this the ECJ held ([1999] 2 AC 601 at 527) that

"29. ... [F]irst ... every supply of a service must normally be regarded as distinct and independent and, second, ... 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."

95. In giving effect to these rulings Lord Slynn, with whom the rest of their lordships agreed, asked himself

"what is the essential feature of the scheme or its dominant purpose, perhaps why objectively people are likely to want to join it?".

He answered this question by deciding that it was to obtain the provision of insurance. He concluded ([2001] STC at 184) that

"[T]he transaction performed by CPP for [its customer] is to be regarded for VAT purposes as comprising a principal exempt insurance supply and the other supplies in the transaction are ancillary so that they are to be treated as exempt for VAT purposes."

96. Although CPP thus speaks in terms of principal and ancillary supplies, the context in which this was relevant was very different from the circumstances of the present case. In particular it was clear that the services in issue there were supplied by CPP alone. The premise in which the Commissioners' ancillary services argument becomes relevant in the present case is that there are two separate supplies, one made by the regional companies and the other by Publications. I find in CPP nothing to justify the proposition that where this is the case the supply made by one supplier, Publications, takes the tax treatment applicable to the supply made by the other.
97. The French Laboratories case arose out of the system adopted in France for the taking and analysis of medical samples. In cases where the whole process could not, for reasons of French law, be carried out by the laboratory taking the sample three services were involved, namely (i) the taking of the sample (ii) the transmission of the sample to a specialist laboratory and (iii) the analysis of the sample by the specialist laboratory. It was accepted that items (i) and (iii) were exempt from VAT by reason of Article 13(A)(1)(b) of the Sixth Directive, under which there is exemption for

"hospital and medical care and closely related activities ..."

The question was whether the transmission of samples to the specialist laboratory was an activity closely related to the taking of the samples and the analysis of them by the specialist laboratory.

98. In answering this question the ECJ noted amongst other things that

"the Court has held that 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 CPP, paragraph 39)."

The Court then pointed out that the patient is indifferent whether the testing of the sample is carried out by the laboratory which takes the sample or by a specialist laboratory so long as the analysis is carried out as reliably as possible. It concluded that

"In these circumstances, the taking of the sample and the transmission of the sample to a specialised laboratory constitute services which are closely related to the analysis, so that they must be treated in the same way as the analysis for fiscal purposes and, accordingly, must not be subject to VAT."

99. The Commissioners fastened on the references to ancillary services in the judgment and in the opinion of the Advocate General and to the Court's conclusion that the transmission, being closely related to the analysis, must be treated in the same way for fiscal purposes as supporting the proposition advanced by them in the present case. In my judgment they do not do so. The one and only question before the Court was whether the transmission service came within the exemption, which applied not only to "hospital and medical care" but also to "closely related activities". The concept of one service being ancillary to another was, it appears to me, introduced only as a test of whether one activity is closely related to another. I do not find in the case authority for any general proposition that, where one supply can be said to be ancillary to another even though they are made by separate suppliers, both supplies must share the same tax treatment.
100. In Primback a furniture retailer offered its customers the option of paying for goods by means of 'interest free credit'. Customers taking advantage of this option entered into an agreement with a finance company nominated by the retailer under which they borrowed a sum equal to the advertised price of the goods purchased and agreed to repay this sum by instalments over a period. By a separate agreement between the finance company and the retailer, of which the customer was unaware, the finance company agreed to pay the retailer a sum equal to the advertised price of the goods less a 'commission' which represented the cost of the credit. The question was whether the retailer was accountable for VAT on the advertised price of the goods or only on the reduced amount received from the finance company. The ECJ held that the transaction between the retailer and the customer was a single transaction for the sale of goods at the advertised price, the full amount of which was the consideration for VAT purposes.
101. The part of the judgment of the ECJ which was relied upon on behalf of the Commissioners is that set out in the next two paragraphs, in which the court said

"44. With regard to the transaction concluded between Primback and the final consumer, 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 of 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 goods.

45. Indeed, it follows from the court's case law that, where a transaction consists of several elements, there is a single supply, particularly where one element is to be regarded as constituting the principal service, whilst another is to be regarded as an ancillary service sharing the tax treatment of the principal service; and a service is to be regarded as ancillary to a principal service when it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see [CPP])."

102. In my judgment this passage cannot sustain the weight which the Commissioners sought to place upon it. It has to be appreciated that the ECJ was concerned only with identifying the supply made by Primback and, having done this, ascertaining the consideration for this supply. The court was saying that the supply was a single supply of goods for the advertised price. In the two paragraphs relied on it went on to say that, even if that view had been wrong and the supply by Primback had two elements, one of goods and the other of credit, the result would be the same because the supply of credit would be ancillary to the supply of goods and would take its character, for the purposes of VAT from the dominant element. But all this was said in a context where the only relevant supply, whether of goods or of credit, was made by Primback. I cannot see how it applies where there are two separate supplies each by a different party, which is the hypothesis to which the Commissioners' ancillary supply argument was directed in this case.
103. On behalf of the appellants I was referred to two English cases as showing that the proposition advanced on behalf of the Commissioners is fallacious. The first was CCE v Wellington Private Hospital Ltd [1997] STC 445 one of the issues in which was whether the supply of drugs to patients admitted to a private hospital was to be treated as part of the same supply as the provision of accommodation and nursing care or a separate supply. Millett LJ, with whom Hutchinson LJ agreed said (at page 462)

"In determining whether what would otherwise be two supplies should be regarded as a single supply the court has to ask itself whether one element is an integral part' of the other or is 'ancillary' or 'incidental' to the other or (in the decisions of the Court of Justice) whether the two elements are 'physically and economically dissociable'. This, however, merely replaces one question with another. In order to answer this further question the court must consider what is the true and substantial nature of the consideration given for the payment' ... There are, however limits to this process. Where supplies are made by different suppliers, they cannot be fused together to make a single supply, and it is probably only in relatively simple transactions that the reduction of multiple to single supplies is appropriate."

Later on (at page 464) he said

"It is to be observed that in all the cases which have previously come before the court, the question has been whether a single transaction for a single price should be properly apportioned into two or more supplies, What the contracting parties have joined together, the commissioners may put asunder, but what the contracting parties have themselves separated, I do not think that the commissioners can join together."

104. The second case was Nell Gwynn House Maintenance Fund Trustees v CCE [1999] STC 79 which concerned the liability to VAT of the trustees of a maintenance fund in respect of maintenance payments made by lessees, In relation to one issue it was accepted that if the maintenance had been undertaken by the lessor the supply of the relevant services would be exempt from VAT by virtue of the exemption applicable to the leasing or letting of immovable property. But it was contended that the position was different where, as in the Nell Gwynn case, the maintenance was undertaken by trustees who were separate from the lessor. Lord Slynn, with whom the rest of their lordships agreed, rejected an argument based upon Henriksen. He said (at page 92)

"In Henriksen one of the lettings was exempt as a letting of immovable property and the other was excluded from the exemption as 'premises and sites for parking vehicles'. The question was how one interpreted the exemption read with the exclusion in a situation where there is a close relationship between the two lettings. In the present case we are dealing with immovable property in art 13B(b) which is exempt but not with any of the exclusions from the exemption. The supply of services is quite separate from any of the exclusions and is by a different taxpayer. Accordingly it does not seem to me that the linking of two services so as to treat them as one arises."

Lord Slynn then cited the first of the two passages from the judgment of Millett LJ which I have set out above and said he agreed with him as to the conclusion in the final sentence where he said

"Where supplies are made by different suppliers, they cannot be fused together to make a single supply, and it is probably only in relatively simple transactions that the reduction of multiple to single supplies is appropriate."

105. These passages from the Wellington Hospital and Nell Gwynn cases are directly contrary to the argument advanced on behalf of the Commissioners. I think Mr. Vajda found himself constrained to admit this. But he said that these cases were decided before the French Laboratories case (which, of course, is true) and he contended that if Millett LJ and Lord Slynn had had the benefit of knowing what the ECJ decided in that case they would have expressed themselves differently. I do not accept this. For the reasons which I have endeavoured to explain I consider that the French Laboratories case was concerned with a quite different issue. It is, in my view, distinguishable on much the same grounds as those on which Lord Slynn distinguished Henriksen.
106. I therefore reject the arguments advanced by the Commissioners on the ancillary supply issue. Mr. Vajda invited me, if I took this view, to refer the question to the ECJ. I decline to do this for two reasons. First I consider the matter to be sufficiently clear not to call for a reference. Secondly, having regard to my conclusions on other parts of the case, the point would not be determinative of this appeal even if I were wrong in rejecting it.

Overall Conclusion

107. For the reasons which I have stated in dealing with the VAT analysis I conclude that this appeal fails and must be dismissed.