First-tier Tribunal (Tax)

The Evidence and our findings of fact

(1)        because the verandah extended the available living space by creating an outdoor area similar to a patio or decking outside a house;

(2)        because the pitch was uneven and without the verandah there would be no stable entrance; or

(3)        to facilitate access where the addition of steps directly to the caravan door would be awkward because of the profile of the pitch, and the steps to the verandah could be placed at a more convenient place.

The Relevant Law

(a) The zero rating provisions

"Item 1. Caravans exceeding the limits of size for the time being permitted for use on the roads of a trailer drawn by a motor vehicle having an unladen weight of less than 2030 kg.

... Note: this Group does not include --

(a) removable contents other than goods of a kind mentioned in item 3 of group 5 or ..."

 “The UK courts did this at first as a matter of domestic construction of domestic legislation without assistance from the ECJ. Thus in British Railways Board v Customs & Excise Commissioners 1977 FTC 221, the payment of £1.50 for a student Railcard was regarded as "a part payment in advance of the supply of transport by rail" and not as a separate supply: liability depended upon "the legal effect of the transaction considered in relation to the words of the statute." And per Brown LJ: "the question is whether, on the true construction of the Finance Act 1972 as applied to the undisputed facts documents, this was a zero rated supply. That is a question of law.".”

(1)        Whether a supply was single or multiple was very much a question of impression;

(2)        The answer required the application of common sense and the avoidance of artificiality;

(3)        The test to be applied was: in substance and reality was A an integral part of, or incidental to, B

(4)        Parliament should be taken not to have intended an absurd result.

"28. However, the Court held in [Faaborg] concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place.

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

“31. In these circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest there is a single service. ..."

"24. The fact that the supply of the caravan and its contents may be characterised as a single supply does not affect [the conclusion that the zero rate should be restricted to what was covered by the national legislation on 1 January 1991]. The case law on the taxation of single supply, relied upon by Talacre and referred to in paragraph 15 of this judgement does not relate to the [zero rating] with which article 28 of the Sixth Directive is concerned ... the case law does not preclude some elements of that supply from being taxed separately where only such taxation compliance with the conditions imposed by article 28(2) of the Sixth Directive ...".

“65. It seems to us that the reasoning of ECJ is not dependent upon a specific exclusion in the domestic legislation nor what was only expressly included in it, but hinges on what was intended to be encompassed in the domestic legislation so far is apparent from the legislation. The Advocate General said that "the form of the [domestic] rules determines which supplies are exempt from VAT" and added that that determination should be strictly observed. At paragraph 21 she noted that these are non-harmonised concessions that these non-harmonised concessions "depend on political decisions by member states” and at paragraph 25 that "the intensity of the court’s examination [of them] is restricted" as a result. These phrases look at the intention of the national legislature as expressed in legislation, not the words of the legislation. At paragraph 38 she says "in determining the scope of a supply all circumstances must be taken into account, including the specific legal framework [and] it is necessary to have regard to the particularity that the UK has established exemption in a particular way in accordance with its socio political evaluation." That again points to reasoning which depends, not on the specific semantic form of a national measure, but on the intention of the state expressed in the measures it enacted.

“66. The ECJ reflects this in paragraph 25: the “specific legal framework” - not the specific words – “must be taken into account”; and the determination of the UK "that only the supply of the caravans themselves should be subject to the zero rate" determines what was in force in 1991. The final words of paragraph 25 look again to the UK's intention: "[the UK] did not consider that it was justified to apply that rate also to the supply of the contents ...".

“67. The task we have to address therefore is what was "the content of the national legislation in force on 1 January 1991" (see judgement [22])? …

Construing the domestic legislation without reference to CPP

“68. During the hearing we asked whether there was an element of circularity which could be inherent in this process: (1) we had to consider the extent of the zero rating; (2) EU law in relation to what constitutes a single supply is part of domestic law; (3) the CPP principles therefore apply in considering UK legislation; (4) under those principles a single supply of land would be treated only as such; (5) is therefore "the content of the national legislation” to be seen through CPP principles; and (6) if there is under those principles a single supply there is no room to say that the purpose and meaning of the domestic legislation is to bifurcate that supply.

“69. It seems to us however that this knot is cut by Talacre. What is required is an understanding of what in 1991 would have been understood at that time to be the purpose and effect of the domestic provision. That is because (1) otherwise the premise (the exclusion of certain supplies from zero rating) of the Talacre decision would be wrong; (2) the emphasis of that decision (and the decision in the infraction proceedings) is on the policy of the state which is given voice in the domestic legislation and that legislation can only be taken to be in interpreted in accordance with the principles used by domestic courts at the time that legislation was adopted.

“70. Accordingly it seems to us that in construing the UK's zero rating provisions we need to approach them as a UK court would have done before the decision of the ECJ in CPP. It is for that reason that earlier in this decision we have dealt at greater length with the decisions of the UK courts in relation to single and multiple supplies before CPP.

…

“84. For completeness we should say that we reject the suggestion that Talacre requires any ancillary element of a composite otherwise zero rated supply to be dissected and taxed separately. Were that the case the jar in which honey comes, the plastic wrapper of a pack of biscuits, or the bag for potatoes should all be separately taxed. Our conclusion is that recourse must be had to what would have been treated as part of the zero rated supply on a domestic construction of the relevant provision without regard to the CPP principles. On that basis we believe that all these examples would have been wholly zero rated.”

"these matters are largely matters of first impression ... My impression is that this is not a single composite supply of services".

"…Such an approach may be perfectly sound when one is considering a single simple transaction or type of transaction involving two or more elements, and  one has to decide what is the true and substantial nature of the consideration given for the payment. That was the approach in fact adopted in the cases to which we were referred on which the most recent, British Airways plc v Customs and Excise Commissioners ... will serve as an example. That was the case in which the question was whether, by providing in-flight catering for its passengers, British Airways was supplying two separate services, one of transport by air ... and the other of in-flight catering ... The facts were undisputed and this Court held that as a matter of law British Airways had made only one supply, namely that of air transportation to which the supply of in-flight catering was merely ancillary.

"The difference in the present case is that, although there may be only a single commercial relationship between BNCC and the government of Bophuthatswana the individual supplies of goods and services in the course of that relationship appear to vary widely both in nature and in taxability or potential taxability. It cannot be right in my judgement to cast over them a blanket label "services of the sort ordinarily provided by a diplomatic mission" and to conclude that, since this label does not appear in the relieving provisions, the whole of the services must be charged at the standard rate. It is essential in to my mind, to analyse the individual supplies of goods and services by reference to specific taxing and relieving provisions of the 1983 Act, as a preliminary to deciding whether any of them are no more than ancillary or incidental to another or others, and to determine whether and if so how the moneys paid by the Bophuthatswana government should appropriately and fairly be apportioned between them. That effectively was the view formed by [Rose J] ... and I would uphold the order he made."

"I am not convinced that there is necessarily a single approach which is appropriate in all circumstances. The risk in canonising one particular method is that it disguises the true nature of the enquiry, which is essentially one of statutory construction. But I accept that the appellant’s submission that Jowitt J asked himself the wrong question. The issue is not whether one element of a complex commercial transaction is ancillary or incidental to, or even the necessary or integral part of, the whole, but whether one element of the transaction is merely ancillary or incidental to, or a necessary or integral part of, any other element of the transaction. The reason why the former is the wrong question is that it leaves the real issue unresolved; whether there is a single or a multiple supply. The proper enquiry is whether one element of the transaction is so dominated by another element as to lose any separate identity as a supply for fiscal purposes, leaving the latter, the dominant element of the transaction as the only supply. If the elements of the transaction are not in this relationship with each other, each remains as a supply in its own right with its own separate fiscal consequences.

"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 "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 to the payment" ..."

"In my judgement the approach adopted by this Court in the British Airways case is instructive. Lord Donaldson of Lymington MR said ... that the tribunal had asked itself the right question, viz- "was the supply of food and beverages incidental ["integral" might perhaps be a better word] to the air transportation?".".

“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 supplier.”

"It is clear from the position of that indent ... that the services involved [in the exemption] are provided outside hospitals and similar establishments and within the framework of a confidential relationship between the patient and the person providing the care, a relationship which is normally established in the consulting room of that person. In those circumstances, apart from minor provisions of goods which are strictly necessary at a time when the care is provided, the supply of medicines and other goods, such as corrective spectacles prescribed by a doctor or other authorised person is physically and economically dissociable from the provision of service".

“18. However, whatever Parliament may have thought, the question whether there is one supply or two involves the application of principles of European law in compliance with the Sixth Directive. In [CPP], para 26 the European Court of Justice (the Court of Justice) gave authoritative guidance on the test for deciding -

"whether a transaction which comprises several elements is to be regarded as a single supply or two or more distinct supplies to be assessed separately."

“19. In the course of argument your Lordships were referred, as were the courts below, to a number of cases, both in this country and in the Court of Justice which were decided before the [CPP] case ... their Lordships think that there is no advantage in referring to such early cases and their citation in future should be discouraged. The [CPP] case was a restatement of principle and it should not be necessary to go back any further."

"Applying the foregoing tests to the true legal issue between the parties, namely whether the supply here consisted constituted two separate supplies, being a zero rated supply of biscuits and a standard rated supply of tin, or a single zero rated supply of biscuits in a tin, we have no difficulty in concluding that, when the two separate elements are considered, the provision of a tin of the characteristics and quality narrated in the agreed facts is subordinate to the supply of biscuits, which could admittedly have been supplied in different and cheaper packaging of the kind used on most biscuits marketed. In essence in our opinion what was supplied with biscuits in a biscuit tin rather than a general-purpose container with biscuits in it. We accept that the tin had the potential afterlife as a general-purpose container, but on the agreed findings we do not consider it to be so elaborate, expensive or decorative as to qualify as a container in its own right. The tin was incidental to the biscuits rather than the biscuits being incidental to the tin (to take the other extreme) - or neither item being incidental to the other. This was the tribunal's conclusion.

"We would reach the same conclusion applying the test in its alternative wording. In our view the agreed facts disclosed that the tin was integral to the biscuits ...".

(1)        Whether a supply was single or multiple was very much a question of impression;

(2)        The answer required the application of common sense and the avoidance of artificiality;

(3)        The test to be applied was: in substance and reality was A a necessary or integral part of, or merely ancillary or incidental to, B; where merely ancillary meant subordinate or incidental or that A was so dominated by B as to lose its separate identity;

(4)        Parliament should be taken not to have intended an absurd result.

The Application of these Principles

(1)        as a matter of visual impression we thought that the verandahh was separate from the caravan. One would say “there is a caravan with a verandah”, not just “there is a caravan”;

(2)        we thought that the verandah qualified as a structure in its own right albeit a structure attached to the caravan. It was not like the tin in which the biscuits came;

(3)        the verandah was a substantial part of a purchase. It significantly extended the floor area available to the inhabitant and was a material part of the cost. We could not say that either physically or economically its purchase was a minor part of the transaction. 

(4)        whilst the caravan was the dominant element of the purchase it was not so dominant that the verandah lost all identity

(1)        it looked like an addition to the caravan rather than an extension of it;

(2)        it was not necessary to the caravan although the verandah was little use without the caravan;

CHARLES HELLIER

TRIBUNAL JUDGE

RELEASE DATE:  12 June 2013