W M Morrison Supermarkets Ltd v Revenue & Customs [2012] UKFTT 366 (TC) (06 June 2012)
DECISION
Introduction
1.
The appellant is a well known supermarket chain. In the course of
business it sells what are known as “disposable barbecues”. This appeal
concerns the liability to output tax on sale of such barbecues. Put briefly,
the appellant contends that a reduced rate of VAT is payable on the sale of the
charcoal element of the supply with the remainder of the supply being subject
to the standard rate. The respondents contend that the whole supply is subject
to the standard rate.
2.
There is no dispute as to the underlying facts. The barbecues in
question comprise a rectangular foil tray which contains charcoal and lighting
paper and is covered by a metal grill. As the name implies, they are designed
to be disposed of after a single use. We need say little more about the facts
which are deceptively simple. The real issue between the parties is how
established legal principles apply in determining the rate of VAT on the
barbecues.
3.
The appellant has accounted for output tax at the standard rate on sales
of the barbecues. By letter dated 5 November 2010 the appellant claimed a
refund of VAT in the sum of £192,934.51. This reflected the difference between
VAT at the standard rate and VAT at the reduced rate on the charcoal element of
the supply over a period of some 4 years. The respondents have refused to make
the refund on the basis that the whole supply was properly treated as standard
rated.
4.
On 11 November 2011 the Tribunal directed by consent that the lead case
procedure should apply and that this appeal should be specified as a lead case
pursuant to Tribunal Rule 18(2)(a). We understand that there are two appeals
made by other supermarkets in relation to the same products which have been
stayed pending the outcome of this appeal.
5.
The appellant also seeks compound interest on the sums claimed. The
parties have agreed that if necessary this part of the claim should be stayed
pending determination by the higher courts of issues concerning entitlement to
compound interest.
6.
We set out below our analysis of the basic legal framework applicable in
the present circumstances. We then consider the parties’ written and oral
submissions and finally we set out our decision as to how our legal analysis
applies to the disposable barbecues in question.
Legal Framework
7.
Prior to October 2006 at least some retailers of disposable barbecues treated
supplies as having a mixed rate, that is a reduced rate for the charcoal and the
standard rate for other elements of the supply. On 19 October 2006 HMRC issued
a Business Brief 17/06 dealing with the supply of disposable barbecues.
HMRC set out what they considered to be the correct treatment of such supplies,
namely that they were a single, standard rated supply.
8.
Group 1 Schedule 7A Value Added Tax Act 1994 (“VATA 1994”)
makes provision for a reduced rate of VAT, presently 5%, on the supply of
domestic fuel. Item 1(a) is relevant for present purposes:
“Supplies for qualifying use of –
(a) coal, coke or other
substances held out for sale solely as fuel;”
9.
Note 1(1) then provides as follows:
“Item 1(a) shall be deemed
to include combustible materials put up for sale for kindling fires …”
10.
For the purposes of Item 1(a), qualifying use includes domestic
use. It is common ground that the sale of charcoal for use in barbecues
qualifies for the reduced rate. Similarly the sale of lighting paper used to
ignite charcoal would also qualify for reduced rate.
11.
Member States may apply a reduced rate pursuant to Article 98 Council
Directive 2006/112/EC (“the Principal VAT Directive”) which provides as
follows:
“1. Member States may apply
either one or two reduced rates.
2. The
reduced rates shall apply only to supplies of goods or services in the
categories set out in Annex III.”
12.
Annex III does not include supplies of fuel and it is not
therefore in point on the present facts. However it is referred to in a number
of authorities described below. By Article 99 the reduced rate shall be
fixed on a percentage of the taxable amount, which may not be less than 5%.
13.
Member States may also apply reduced rates on certain supplies
if a reduced rate was applied to those supplies prior to 1991. Articles 110 and
113 of the Principal VAT Directive provide as follows:
“110. Member States which, at 1 January 1991, were granting exemptions with deductibility of the VAT paid at
the preceding stage or applying reduced rates lower than the minimum laid down
in Article 99 may continue to grant those exemptions or apply those reduced
rates
The exemption and reduced
rates referred to in the first paragraph must be in accordance with Community
law and must have been adopted for clearly defined social reasons and for the
benefit of the final consumer.
…
113. Member States which,
at 1 January 1991, in accordance with Community law, were granting exemptions
with deductibility of the VAT paid at the preceding stage or applying reduced
rates lower than the minimum laid down in Article 99, in respect of goods and
services other than those specified in Annex III, may apply the reduced rate,
or one of the two reduced rates, provided for in Article 98 to the supply of
such goods or services.”
14.
The arguments addressed by the parties on this appeal concern the
relationship between a line of cases involving Card Protection Plan v C
& E Case C-251/05 (“CPP”) and a line of cases involving Commission
v France Case C-94/09.
15.
In CPP the ECJ was concerned with the question of the distinction
between single and multiple supplies. The principle is well established. In
deciding whether a transaction which comprises several elements is to be regarded
as a single supply or as two or more distinct supplies to be taxed separately,
regard must first be had to all the circumstances in which that transaction
takes place, taking into account:
"29. …
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,
secondly, that a supply which comprises a single service from an economic point
of view should not be artificially split, so as not to distort the functioning of
the VAT system, the essential features of the transaction must be ascertained
in order to determine whether the taxable person is supplying the customer,
being a typical consumer, with several distinct principal services or with a
single service.
"30. There
is a single supply in particular in cases where one or more elements are to be
regarded as constituting the principal service, whilst one or more elements are
to be regarded, by contrast, as ancillary services which share the tax
treatment of the principal service. A service must be regarded as ancillary to
a principal service if it does not constitute for customers an aim in itself,
but a means of better enjoying the principal service supplied: Customs and
Excise Commissioners v. Madgett and Baldwin (trading as Howden Court Hotel)
(Joined Cases C-308/96 and 94/97) [1998] STC 1189, 1206, para 24."
16.
The second line of cases commences with Commission v French Republic Case C-384/01. This concerned supplies of gas and electricity at a
reduced rate pursuant to Article 12(3)(b) Sixth Directive. Article
12(3)(b) is a provision specific to supplies of gas and electricity which
permits Member States to apply a reduced rate of VAT and had effect outside
what is now Annex III. French domestic legislation charged a reduced rate on
standing charges for supply of gas and electricity and a standard rate on the
consumption of gas and electricity. The Commission challenged the French
provisions. One ground was that the same rate must apply to the standing charge
as to the consumption of gas and electricity in accordance with the principle
of neutrality. The ECJ held that there was no requirement in Article
12(3)(b) to charge VAT at the same rate. At [27] and [28] the Court said:
“27. … there is nothing in
the text of Article 12(3)(b) of the Sixth Directive which requires that
provision to be interpreted as requiring that the reduced rate can be charged
only if it is applied to all supplies of natural gas and electricity …
28. Moreover, since the
reduced rate is the exception, the restriction of its application to concrete
and specific aspects, such as the standing charge conferring entitlement to
a minimum quantity of electricity on the account holders, is consistent with
the principle that exemptions or derogations must be interpreted restrictively.”
[emphasis
added]
17.
Mr Scorey described this situation as a “carve out”, where certain
elements of the supply were carved out of what would otherwise be a standard
rated supply. The reduced rate applied to the elements carved out. He went on
to develop the significance of this in his submissions.
18.
Talacre Beach Caravan Sales Ltd v Customs and Excise Commissioners
Case C-251/05 is a well known case concerning the VAT treatment of supplies
of fitted caravans. Group 9 Schedule 8 VATA 1994 applies to zero rate
supplies of caravans. Talacre relied on CPP and argued that there
was a single indivisible supply subject to a single rate of VAT which should be
the zero rate. The principal element of the supply was the supply of a caravan
and goods fitted in the caravan were ancillary to that supply.
19.
The Commissioners in Talacre argued that the zero rate should
apply only to the sale of the caravan and the standard rate should apply to the
contents. In particular they argued that Note (a) Group 9 Schedule 8 VATA
1994 specifically excluded the contents of a caravan from zero-rating. The
Note provides as follows:
“This Group does not include –
(a) removable contents
…”
20.
Mr Scorey described this argument as the mirror image of the carve out
identified above. Here the domestic legislation was carving out standard rated
elements of what would otherwise be a zero rated supply.
21.
The zero rating of caravans was in force on 1 January 1991. The question
referred to the ECJ in Talacre was as follows:
“…whether
the fact that specific goods are counted as a single supply, including both a
principal item which is by virtue of a Member State's legislation subject to an
exemption with refund of the tax paid within the meaning of Article 28(2)(a) of
the Sixth Directive [now article 110 of
the Principal VAT Directive] and items which that legislation excludes from
the scope of that exemption, prevents the Member State concerned from levying
VAT at the standard rate on the supply of those excluded items.”
22.
In its judgment the Court stated as follows:
“ 20 It is also common ground that the VAT
Act specifically excludes some items supplied with the caravans from exemption
with refund of the tax paid. It follows that, so far as those items are
concerned, the conditions laid down in Article 28(2)(a) of the Sixth Directive,
in particular the condition that only exemptions in force on 1 January 1991 can
be maintained, are not fulfilled.
21 Therefore, an exemption with refund of the tax paid in
respect of those items would extend the scope of the exemption laid down for
the supply of the caravans themselves. That would mean that items specifically
excluded from exemption by the national legislation would be exempted
nevertheless pursuant to Article 28(2)(a) of the Sixth Directive.
22 Clearly, such an interpretation of Article 28(2)(a) of
the Sixth Directive would run counter to that provision's wording and purpose,
according to which the scope of the derogation laid down by the provision is
restricted to what was expressly covered by the national legislation on 1
January 1991. As the Advocate General observed in points 15 and 16 of her
Opinion, Article 28(2)(a) of the Sixth Directive can be compared to a
'stand-still' clause, intended to prevent social hardship likely to follow from
the abolition of exemptions provided for by the national legislature but not
included in the Sixth Directive. Having regard to that purpose, the content of
the national legislation in force on 1 January 1991 is decisive in ascertaining
the scope of the supplies in respect of which the Sixth Directive allows an
exemption to be maintained during the transitional period.
23 Furthermore, as the Court has pointed out on a number of
occasions, the provisions of the Sixth Directive laying down exceptions to the
general principle that VAT is to be levied on all goods or services supplied
for consideration by a taxable person are to be interpreted strictly (see, to
that effect, Joined Cases C-308/96 and C-94/97 Madgett and Baldwin [1998] ECR I-6229, paragraph
34; Case C-384/01 Commission v France [2003] ECR I-4395, paragraph
28; Joined Cases C-394/04 and C-395/04 Ygeia [2005] ECR I-0000, paragraphs 15 and 16;
and Case C-280/04 Jyske Finans [2005] ECR I-0000, paragraph 21).
For that reason as well, the exemptions with refund of the tax paid referred to
in Article 28(2)(a) of the Sixth Directive cannot cover items which were, as at
1 January 1991, excluded from such an exemption by the national legislature.
24 The fact that the supply of the caravan and of its
contents may be characterised as a single supply does not affect that
conclusion. The case-law on the taxation of single supplies, relied on by
Talacre and referred to in paragraph 15 of this judgment, does not relate to
the exemptions with refund of the tax paid with which Article 28 of the Sixth
Directive is concerned. While it follows, admittedly, from that case-law that a
single supply is, as a rule, subject to a single rate of VAT, the case-law does
not preclude some elements of that supply from being taxed separately where
only such taxation complies with the conditions imposed by Article 28(2)(a) of
the Sixth Directive on the application of exemptions with refund of the tax
paid.
25 In this connection, as the Advocate General rightly
pointed out in points 38 to 40 of her Opinion, referring to paragraph 27 of
CCP, there is no set rule for determining the scope of a supply from the VAT
point of view and therefore all the circumstances, including the specific legal
framework, must be taken into account. In the light of the wording and
objective of Article 28(2)(a) of the Sixth Directive, recalled above, a national
exemption authorised under that article can be applied only if it was in force
on 1 January 1991 and was necessary, in the opinion of the Member State
concerned, for social reasons and for the benefit of the final consumer. In the
present case, the United Kingdom of Great Britain and Northern Ireland has
determined that only the supply of the caravans themselves should be subject to
the zero-rate. It did not consider that it was justified to apply that rate
also to the supply of the contents of those caravans.
26 Lastly, there is nothing to support the conclusion that
the application of a separate rate of tax to some elements of the supply of
fitted caravans would lead to insurmountable difficulties capable of affecting
the proper working of the VAT system (see, by analogy, Case C-63/04 Centralan Property [2005] ECR I-0000, paragraphs
79 and 80).
27 In the light of all the foregoing, the answer to the
question referred must be that the fact that specific goods are counted as a
single supply, including both a principal item which is by virtue of a Member
State's legislation subject to an exemption with refund of the tax paid within
the meaning of Article 28(2)(a) of the Sixth Directive and items which that
legislation excludes from the scope of that exemption, does not prevent the
Member State concerned from levying VAT at the standard rate on the supply of
those excluded items.”
Parties’ Submissions and
Discussion
23.
Mr Scorey sought to derive a general principle that the Principal VAT
Directive permitted dual rates of tax in the narrow field of exemptions. Certainly
that seems unobjectionable so far as it goes, but it says nothing about the
circumstances in which dual rates will apply or will be permitted to apply.
24.
In our view the reason dual rates were permitted in Talacre was
because the conditions in what is now Article 110 of the Principal
VAT Directive were not satisfied. The domestic legislation in force before
1991 exempted only the supply of caravans and specifically excluded the
contents. In those circumstances it is the domestic legislation which “… is
decisive in ascertaining the scope of the supplies in respect of which the
Sixth Directive allows an exemption to be maintained …”. Simply because
dual rates were applied in Talacre does not mean that they will or could
be applied in all cases where a supply could theoretically be split into
elements with different rates applying to each element. It is necessary to
consider the statutory framework to establish whether dual rates will or can
apply.
25.
Mr Scorey submitted that whenever a domestic derogation was involved a
reduced rate would apply to any element of the supply which was a “concrete
and specific aspect” of the whole supply. We note however that that language
was not used by the Court in Talacre to justify the dual rate applied in
that case. Rather it is language that appears to have derived from the Court in
Commission v French Republic (see above).
26.
We agree with Mr Scorey that Commission v French Republic and Talacre are in one sense different sides of the same coin. Each depends
on how a Member State chooses to enact in domestic legislation derogations
available in the Principal VAT Directive. A Member State might do so
either by carving out a reduced rate element from what would otherwise be a
standard rated supply (Commission v French Republic). Alternatively it
might carve out a standard rated element from what would otherwise be a reduced
rate supply (Talacre). The effect is the same. However we do not
consider that either case justifies a wider principle that whenever a
derogation is involved what would otherwise be a single supply can be dissected
into separate elements by a trader with different rates of VAT applying to the
different elements.
27.
Mr Scorey referred to Finanzamt Oschatz v Zweckverband zur Trinkwasserversorgung
und Abwasserbeseitigung Torgau-Westelbien Case C-442/05 (“Zweckverband”). There
transactions relating to the supply of water were chargeable to VAT at a
reduced rate in Germany by virtue of domestic legislation taking advantage of
what is now Annex III. The activities of the trader included the
collection, piping, treatment and supply of drinking water to customers. The
tax office took the view that the laying of a mains connection was distinct
from the supply of water and applied VAT at the standard rate to that element
of a transaction.
28.
The relevant question formulated by the ECJ was whether laying a mains
connection formed part of the water supplies covered by Annex III. The answer to
that question was yes. However the Court confirmed that a selective application
of the reduced rate could be applied by Member States to “concrete and
specific aspects” of a water supply such as the mains connection (see [38]
to [44] of the judgment of the Court). By analogy the Court relied on Commission
v French Republic. It appears that the German tax office had standard rated
the mains connection so that it was carving out a standard rated element from
what would otherwise be a reduced rate supply in a similar way to HMRC in Talacre.
It does not appear that this was justified on the same basis as the Court in Talacre
which was not cited. In particular there was no reference to any German
domestic legislation which restricted the scope of the exemption. Indeed the
answer of the Court to the question asked appears merely to recognise that
Member States may apply a reduced rate to elements of a supply without
identifying in what circumstances they can do, or indeed whether they must do
so. It does not seem to us that Zweckverband assists the appellant in
identifying any general principle beyond the previous cases.
29.
The principal authority relied upon by Mr Scorey was Commission v France. This involved a supply of services by undertakers which appears in Annex III
giving Member States the opportunity to apply one or two reduced rates of VAT.
French domestic law provided that only transportation of the body was subject
to a reduced rate. All other services for funerals were subject to the standard
rate. The Commission commenced proceedings against France contending that all
supplies of goods and services by undertakers constituted a single supply which
should be subject to a single rate.
30.
The Court held as follows:
“ 24. The rules defined by those provisions [Article
99 and Annex III] are, in essence, identical to those set out in Article
12(3)(a), first and third subparagraphs, of the Sixth Directive and in Annex H,
fifteenth category, thereto.
25. The
Court has held, as regards Article 12(3)(a), third subparagraph, of the Sixth
Directive, that there is nothing in the text of that provision which requires
that it be interpreted as meaning that the reduced rate can be charged only if
it is applied to all aspects of a category of supply covered by Annex H to that
directive, so that a selective application of the reduced rate cannot be
excluded provided that no risk of distortion of competition results (see Zweckverband
zur Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien, paragraph
41, and, by analogy, Commission v France, paragraph 27).
26. The
Court has inferred that, subject to compliance with the principle of fiscal
neutrality inherent in the common system of VAT, Member States may apply a
reduced rate of VAT to concrete and specific aspects of a category of supply
covered by Annex H to the Sixth Directive (see Zweckverband zur
Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien, paragraph 43).
27. Since
Article 98(1) and (2) of Directive 2006/112 in essence repeats the wording of
Article 12(3)(a) of the Sixth Directive, the interpretation given by the Court
to the earlier provision should be extended to the provision replacing it.
28. It
follows that, where a Member State decides to make use of the possibility given
by Article 98(1) and (2) of Directive 2006/112 to apply a reduced rate of VAT
to a category of supply in Annex III to that directive, it has, subject to the
requirement to observe the principle of fiscal neutrality inherent in the
common system of VAT, the possibility of limiting the application of that
reduced rate of VAT to concrete and specific aspects of that category.
29. The
possibility thus granted to Member States of applying the reduced rate of VAT
selectively is justified, inter alia, by the fact that, since that rate is the
exception, the restriction of its application to concrete and specific aspects
is consistent with the principle that exemptions or derogations must be
interpreted restrictively (Commission v France, paragraph 28).
30. However,
it must be pointed out that the exercise of that possibility is subject to the
twofold condition, first, to isolate, for the purposes of the application of
the reduced rate, only concrete and specific aspects of the category of supply
at issue and, secondly, to comply with the principle of fiscal neutrality.
Those conditions seek to ensure that the Member States make use of that
possibility only under conditions ensuring the correct and straightforward
application of the reduced rate chosen and the prevention of any possible
evasion, avoidance or abuse.
31. The
Commission maintains that the Member States, when they make use of the
possibility available to them under Article 98 of Directive 2006/112 to apply a
reduced rate of VAT, must comply with the criteria identified by case-law in
order to determine whether a transaction including several elements must be
considered to be a single supply, subject to the same tax treatment, or to be
two or more separate supplies, which may be treated differently.
32. In
this connection, it must be recalled that those criteria, such as the expectations
of a typical consumer, to which the Commission refers, are intended to protect
the functioning of the VAT system in the light of the diversity of commercial
operations. However, the Court itself has acknowledged that it is impossible to
give exhaustive guidance on that issue (CPP, paragraph 27) and pointed out that
it is necessary to take into account all the circumstances in which the
transaction at issue takes place (CPP, paragraph 28; Levob Verzekeringen and OV
Bank, paragraph 19, and Case C-425/06 Part Service [2008] ECR I-897, paragraph
54).
33. It follows that, while those criteria may be applied on
a case-by-case basis, in order to prevent, inter alia, the contractual
structure put in place by the taxable person and the consumer from leading to
an artificial splitting into a number of fiscal transactions of a transaction
which, from an economic point of view, must be regarded as a single
transaction, they cannot be regarded as decisive for the purpose of the
exercise by the Member States of the discretion left to them by Directive
2006/112 as regards the application of the reduced rate of VAT. The exercise of
such discretion requires general and objective criteria, such as those
identified in Commission v France and Zweckverband zur Trinkwasserversorgung
und Abwasserbeseitigung Torgau-Westelbien and reiterated in paragraphs 26, 28
and 30 of this judgment.
34. Accordingly, in order to rule on the merits of this
action, it is not necessary to examine whether, as the Commission maintains,
the supply of services by undertakers must be regarded as a single transaction
from the point of view of the expectations of a typical consumer. On the other
hand, it is necessary to ascertain whether the transportation of a body by
vehicle, in respect of which the French legislation provides for the
application of a reduced rate of VAT, constitutes a concrete and specific
aspect of that category of supply, as set out in Annex III, point 16, to
Directive 2006/112, and, if so, to examine whether or not the application of
that rate undermines the principle of fiscal neutrality.”
31.
Mr Scorey submitted and Mr Chapman accepted that the same principles
could be transposed to reduced rates arising pursuant to Articles 110 and 113.
However Mr Scorey went further to describe the way in which he submitted these
principles related to the CPP analysis. He submitted that the CJEU in Commission
v France had rejected a CPP analysis in cases where Member States
took advantage of a domestic derogation. CPP would apply where the Principal
VAT Directive provided for a supply to be standard rated, zero rated or
exempt but that where a domestic derogation was in point it was not simply a
question of applying CPP. The derogation would be applied, limited by
reference to any specific and concrete elements of the supply which fell within
the derogation. It was then necessary to apply the CPP analysis to what
was left. On the facts of the present case he submitted that it is necessary to
strip out the charcoal which was a concrete and specific aspect of the supply
and should be taxed at a reduced rate. What was left would then be treated as a
single supply of a barbecue grill taxable at the standard rate.
32.
In support of this approach Mr Scorey submitted that the draftsman could
have carved out disposable barbecues from the reduced rate in Schedule 7A
but had chosen not to do so. If Schedule 7A had been subject to such a
carve out then the position would have been as it was in Talacre and Purple
Parking (see below). However Mr Scorey submitted that HMRC were using CPP
to narrow the scope of the exemption when there was no such limitation in the
Act which introduced the exemption.
33.
Mr Chapman submitted that Commission v France simply confirmed
that a Member State could be selective in applying a reduced rate to goods and
services within Annex III and by analogy Articles 110 and 113. It
could do so by applying a reduced rate to certain aspects of a supply which
could be identified as concrete and specific aspects of that supply. In the
present case he said that the respondents were not being selective as to which
particular aspect of a supply should be subject to a reduced rate. Hence it
wasn’t necessary to embark upon any analysis as to whether charcoal was a
concrete and specific aspect of the supply of barbecues.
34.
In Purple Parking Ltd v Commissioners for HM Revenue & Customs Case
C-117/11 the CJEU was concerned with off-airport parking and park and ride
services. Group 8 Schedule 8 VATA 1994 applied to zero rate certain
transport services. However Note 4A(b) excluded from zero rating what
may be described as park and ride services. The matter came before the CJEU on
a reference by the Upper Tribunal and it applied a straightforward CPP
analysis.
35.
Mr Scorey identified what he described as 7 principles which could be
identified from the authorities:
(1)
As a general rule single supplies should have a single rate of tax so as
to give simplicity and uniformity.
(2)
The CPP analysis was a judicial creation dealing with harmonised rules
under the Principal VAT Directive.
(3)
Different considerations arise where there is a unilateral variation by
a Member State of the rate of tax, under Article 98 (Annex III) or
Article 113 or Article 110.
(4)
When considering a non-harmonised area, the CJEU has held that the CPP
analysis is not read across mechanically
(5)
The reason for this is that in a non-harmonised area it is a matter for
the Member State to define the scope and extent of the reduced rate or
exemption, rather than the Commission or the CJEU.
(6)
Once the scope and extent of the reduced rate has been determined by a Member State, a taxpayer cannot use a CPP analysis to widen the scope of the reduced
rate.
(7)
It follows that the reverse is equally true. The scope and extent of the
reduced rate is determined by the domestic provisions. The Member State cannot limit the scope of the reduced rate other than by legislation.
36.
We were told that there is no case where a CPP analysis has been
used in a non-harmonised area to extend or restrict the scope of a reduced rate
supply. In Zweckverband the mains connection was treated as part of a
supply of water. Having identified the supply of water, the Court held that it
was open to Member States to apply a reduced rate to concrete and specific
aspects of that supply such as the mains connection. However the Court does not
appear to have applied CPP principles in identifying a single supply of
water. Similarly, the Advocate General in that case did not apply a CPP
analysis in his opinion (see [48] and [49]) although the CPP analysis
did appear to confirm his view that the mains connection was part of a water
supply (see [54] to [56]).
37.
Mr Scorey submitted that in the present case the respondents were
seeking to carve out disposable barbecues from the reduced rate without any
legislative authority. He submitted that the respondents were being selective.
They were seeking to exclude from Schedule 7A a supply which would
otherwise be within it. The position in Talacre was analogous. On the
one hand there was a zero rated caravan with standard rated items, and on the
other reduced rate charcoal with a standard rated grill.
38.
Mr Chapman did not take issue with principles 1-6 identified by Mr
Scorey and set out above. He did take issue with principle 7 which he submitted
did not follow from the earlier principles and was not supported by any
authority. Talacre was dealing with the question of whether or not a CPP
analysis could be used to effectively extend an exemption. He relied upon
paragraphs [21] and [22] referred to above. He was not seeking to resile from the
judgment in Talacre. Rather it was dealing
with a different issue. Nor was he seeking to effect a carve out of disposable
barbecues by the back door. He also relied upon paragraphs [35] to [37] of the
Advocate General’s opinion in Talacre which read as follows:
“35. If
one were to apply the principles developed in the case-law on composite
supplies irrespective of the particular circumstances of the present case, one
might conclude that caravans and their removable contents in fact constitute
one single supply. Only one rate of VAT would then have to be applied to that
supply, namely the rate applicable for the principal element of the supply.
Assuming that the principal element is the caravan, the zero rate would have to
be extended to the ancillary supply of the removable contents.
36. However,
in the present situation the extension of the exemption would be contrary to
the objectives of Article 28 of the Sixth Directive, as set out above. This
conflict between the principle that national exemptions under Article 28(2)(a)
of the Sixth Directive should not be extended and the rules developed in the
case-law for the treatment of composite supplies can be resolved by comparing
the purpose of each principle.
37. The
rules established in CPP and other relevant decisions are based on the
consideration that splitting transactions too much could endanger the
functioning of the VAT system. In contrast to this objective, is the concern to
limit national derogations from the rules of the Sixth Directive to those which
are absolutely necessary.”
39.
Mr Chapman submitted that Commission v France was about the ability of a Member State to effect a carve out, a question which does not
need to be asked in the present appeal. He also suggested that there was
a danger if the CPP analysis was “trumped” by that in Commission v France. Mr Scorey highlighted that no examples of how this risk might materialise in
practice had been provided and this was not surprising because it concerned a very
narrow area. The appellants were simply seeking a return to the way in which
VAT applied to disposable barbecues prior to the Business Brief in 2006. The
principle they relied on was only concerned with the narrow field of domestic
variations to rates of tax in the transitional period.
40.
We do not accept that there is any question of the analysis in Commission
v France “trumping” that in CPP. It is clear from the judgments of
the CJEU that they are not alternatives as such. Whether or not one analysis or
the other is appropriate will depend on the circumstances of the case.
41.
Mr Chapman relied upon Purple Parking in support of his
submission, in particular at [40] where the CJEU said:
“ 40. Furthermore, as
regards the importance of the judgment in Case C‑94/09 Commission v France,
referred to in the second question, it follows from paragraphs 25 to 29
and 31 to 34 of that judgment that it concerns the possibility for a Member
State to apply, in a selective manner, on the basis of general and objective
criteria, a reduced rate of VAT to certain aspects of a category of supplies
that is listed in the Sixth Directive and, accordingly, concerns a different
question from that raised by the first and second questions referred for a
preliminary ruling. Indeed, the sole purpose of the latter is whether two services
constitute, in the light of the specific circumstances of their supply at issue
in the main proceedings, a single supply.”
42.
Save in relation to the submission referred to at paragraph 40 above, we
accept Mr Chapman’s submissions.
43.
In Purple Parking the question of whether there could be a carve
out did not arise. Hence the CJEU was concerned only with the CPP
analysis. In our view, CPP is concerned with defining the nature of transactions
for VAT purposes. In particular whether a transaction is to be construed as a
single supply or as multiple supplies. In contrast, Commission v France is concerned with whether Member States can identify specific aspects of what
would otherwise be a single supply and treat them as falling inside or outside
an exemption or reduced rate. It is not concerned with any general principle
beyond identifying the circumstances in which Member States are entitled to
treat a single supply as comprising different elements to which different rates
can apply. In the present circumstances the UK domestic legislation does not
seek to carve out the charcoal element of the supply so as to subject it to a
reduced rate. Nor does it seek to carve out the barbecue grill so as to tax it
at a different rate to the charcoal.
44.
In all the cases we have been referred to above the ECJ has described
the principle of applying dual rates of tax in terms of Member States having
the possibility of limiting the application of a reduced rate. To use Mr
Scorey’s terminology, they are concerned with domestic provisions which Member
States may choose to use to carve out elements of a supply so as to give rise
to a dual rate of tax. They are not concerned with identifying any obligation
on Member States to carve out elements of a supply.
45.
It is not open to a taxpayer to carve out an element of what would
otherwise be treated as a single supply in order to apply a reduced rate to
that element of the supply. We were not referred to any authority in which such
a general principle has been established.
46.
It follows that we do not accept Mr Scorey’s 7th principle,
at least in the sense he seeks to employ it. The scope of an exemption or
reduced rate by way of derogation is defined by the terms of the domestic
legislation, provided that it is consistent with the Principal VAT Directive.
In the present context the respondents are not seeking to limit the scope of
the reduced rate in Schedule 7A by excluding from that reduced rate a
supply that would otherwise fall within it. They are simply seeking to apply Schedule
7A which on its terms has no application to the supply of a disposable
barbecue.
Application of our analysis to the disposable
barbecues
47.
For the reasons given above we do not regard it as open to the appellant
to treat the supply of barbecues as anything other than a single supply at a
single rate. Mr Scorey on behalf of the appellant did not suggest that if the
supply was to be treated as a single supply at a single rate then it should be
treated as a supply of charcoal at a reduced rate.
48.
Schedule 7A applies to supplies of charcoal. Supplies of
disposable barbecues are not supplies of charcoal and as such they do not fall
within the scope of Schedule 7A. In the circumstances we find that the
supply of disposable barbecues is standard rated.
49.
For the sake of completeness, if a dual rate could or should have been
applied we deal with the parties’ arguments as to whether charcoal is a
concrete and specific aspect of the supply.
50.
Mr Chapman submitted that if there was a single supply it was artificial
to split it. All elements of the supply had come together to make a new item,
namely a disposable barbecue. That is a simple product and the simpler the
product the harder it is to identify concrete and specific aspects of the
product. In Commission v France it was straightforward to split the
transport element because of the temporal distinction.
51.
We do not accept that submission. In our view it is clear that the
charcoal is a concrete and specific aspect of the supply. It can very easily be
identified and could easily be removed from the product. It is a tangible
element of the supply that can be readily recognised as such. However this does
not affect our conclusion in relation to the appeal.
52.
For the reasons given above we dismiss the appeal. In the circumstances
it is not necessary for us to make any direction concerning the claim to
compound interest which falls with the appeal.
53.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for permission
to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier
Tribunal) (Tax Chamber) Rules 2009. The application must be received by this
Tribunal not later than 56 days after this decision is sent to that party. The
parties are referred to “Guidance to accompany a Decision from the First-tier
Tribunal (Tax Chamber)” which accompanies and forms part of this decision
notice.
TRIBUNAL JUDGE
RELEASE DATE: 6 June 2012
