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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Tumble Tots UK Ltd v Revenue & Customs [2006] UKVAT V19530 (07 April 2006)
URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19530.html
Cite as: [2006] UKVAT V19530
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- Tumble Tots UK Limited ('Tumble Tots') is the franchisor of a well known activity programme for pre-school children. Children who participate attend, with their parents, 45 minute sessions of structured physical play run by a local franchisee.
- In order for a child to attend a session its parent must pay a fee to the franchisee of between £4 and £8.50 per session depending upon the area. But, apart from the child's first ever session, a child is not permitted to attend unless he or she is a member of Tumble Tots club.
- A child is enrolled as a member of the Tumble Tots Clubs on the submission of a registration form and the payment of a fee of £19. Following receipt of the registration form the Appellant provides a number of benefits including a special Tumble Tots T-shirt and 6 issues of Right Start Magazine.
- The issue in this appeal is the nature of the supplies or supply for which the £19 is consideration.
- The Respondents maintained before us that in return for the £19 Tumble Tots make a single supply of membership and that that supply is standard rated, although in their statement of case they put this slightly differently saying that the "membership subscriptions should be treated as a supply principally relating to the right of admission to the Tumble Tots sessions run by" the franchisees. If this argument is not accepted the Respondents say that the supply of Right Start magazine and the T-shirt are zero rated, but that there must be a proper apportionment of consideration between all the relevant supplies.
- The Appellants contend that Tumble Tots makes a mixed supply of standard rated and zero rated elements. If this argument is not accepted the Appellants say that if there is a single supply for VAT purposes then because the predominant supplies made by Tumble Tots in return for the £19 are zero rated, the single supply should also be zero rated.
- At the start of the hearing the Appellants made an application to postpone the hearing. Mr Allen said that in their skeleton argument the Respondents had raised arguments not previously made on the Statement of Case. In paragraph 16 of the Statement of Case the Respondents had said:
- Mr Allen said that they had come prepared to meet the right of admission argument rather than the membership argument, and were not prepared to deal with issues of apportionment.
- We directed that the hearing should continue. It seemed to us that the factual evidence and the analysis would be broadly the same whether the Respondents' contention was that the supply was of membership or related to a right of admission. If it became necessary to apportion the £19 between separate supplies and if the parties in such circumstances could not agree an apportionment, then that matter could come back before us at a later date.
- We had before us copies of:
- Mrs Veronica Pereira, the managing director of Tumble Tots, provided a witness statement and gave oral evidence before us.
- From the evidence we found the following.
- Tumble Tots has franchise agreements with about 100 franchisees who operate in territories which in total cover almost all the UK. Each franchisee will run several centres in its territory. Tumble Tots itself runs no centres. When a territory becomes available an applicant to operate the franchise in that territory is interviewed, vetted, and tested against Tumble Tots' criteria. If the applicant is successful it will be trained by Tumble Tots after the franchise is granted.
- Under the franchise agreement the franchisee pays to Tumble Tots an initial fee of about £2,500 and thereafter an annual fee of between £3,600 and £5,300 depending upon the territory. The franchisee is also required to purchase from Tumble Tots specified Tumble Tots equipment at a standard price of about £6,850.
- Tumble Tots is a registered trade mark. Under the franchise agreement the franchisee is granted the right to operate under the trade names and marks owned by Tumble Tots. Tumble Tots take action to protect their trade marks when infringed. The Tumble Tots brand is regarded by Tumble Tots as having been extremely important in the growth of its business.
- The franchisee enters into leases or licences of premises from third parties in which it provides the sessions. Tumble Tots may provide initial advice on the size of the premises and requires risk assessments to be made and Health and Safety guidelines to be followed.
- The franchisee provides sessions of 45 minutes of structured play. Under the franchise agreement it is required to charge an attendance fee for each child per session. The charge per session is between £4 and £8.60. Fees are usually paid in termly or half termly blocks in advance. If the fee for a session is not paid the franchisee will not allow the child access to the session even if the child is a Tumble Tots' member.
- The franchise agreement imposes a number of obligations upon the franchisee. Included among these are the following:
- Clause 12 of the Agreement provides that:
- Subclause (c) provides that the fees in (a) may be revised by the Company on 3 months notice. This appears to apply both to the attendance fee and the membership fee.
- Clause 14 provides that Tumbler Tots shall have the right to make rules and regulations in connection with the programme and the franchise is required to abide by them.
- Under the agreement Tumble Tots agrees to provide advice and materials in connection with the operation of the programme and under clause 9(e) agrees, upon receipt of a membership input form registration card and membership fees, to register the new member in the National Tumble Tots Club and to supply the Tumble Tots membership package to the new members It has no ability to refuse membership. On receipt of the membership Registration Forms from the Franchisee Tumble Tots enter them into their computer record thereby registering the child as a member.
- On receipt of the membership input and registration form together with the fee Tumble Tots sends a membership package to the child. This contains:
- In addition, following the registration of the child by Tumble Tots as a member, Tumble Tots provide during the course of the following year:
- The last three are the product of initiatives of Tumble Tots in which it commissions a team of experts to produce articles for the booklets.
- In addition a number of money saving vouchers for other supplies by other suppliers may also be included in the membership pack.
- On registration by Tumble Tots the child qualifies for the benefit of the personal accident insurance taken out by Tumble Tots which insures against disability or death sustained whilst engaged in Tumble Tots activities.
- When a parent decides that she would like her child to attend Tumble Tots' sessions, a registration form is completed. This form requires details of the child, its doctor, next of kin and contact phone numbers. It also includes the following paragraphs:
- The amount to be paid for membership is £19, which is subject to a reduction to £17.50 in the case of renewals of membership and for siblings but is not dependant on the geographical position of the centre at which the member joins (We use "£19" in this decision as shorthand for the membership fee whether it be £19 or £17.50.). Once a child is registered as a member, he or she can attend Tumble Tots' sessions provided by other franchisees or at other centres without the payment of a further membership fee, although the relevant session fees would have to be paid.
- A franchisee would not be permitted to refuse a child as a member of Tumble Tots unless the subscription money was paid.
- The franchise agreement requires the franchise to account weekly to the franchisor for all membership receipts.
- The Tumble Tots Operation's Manual requires the Franchisee to keep Child Record Cards. It says "Your child record cards form part of the membership registration forms and should be kept as a record at the centre".
- Tumble Tots personnel visit each franchisee at least twice a year. Extra visits take place if parents complained or if other issues arose.
- We now record certain elements of Mrs Pereira's evidence which are particularly relevant to the discussion which follows later.
- Mrs Pereira explained that Tumble Tots' objective in setting the programme for the franchisees to follow was to give each child the same experience. That experience was not just that of a gym or a child minding centre. Parents were required to attend, the experience was intended to be that of belonging to a club which provided an active lifestyle and promoted a sense of individual identity and belonging. These features built self esteem and confidence. The T-shirt which all Tumble Tots wore (and which came with the membership pack) helped with the sense of belonging, and the idea of belonging to a club worked hand in hand with the physical aspect of enjoying the sessions each week. The whole experience was intended as part of the social and physical development of the child. The ethos of Tumble Tots is to develop children's positive personality traits through 45 minutes of structured play: the Tumble Tots programme offered children far more than attending an activity session.
- Mrs Pereira said that there had been occasions on which children had been refused access to sessions by franchisees when she had been asked to intervene to secure a child's re-admittance to the sessions. She said that on such occasions that whilst she sought to represent the Tumble Tot member's interests she was not in a position to compel a franchisee to admit a child. A franchisee would not be compelled admit a child if it (or its parents) were badly behaved or if the session was fully subscribed. If the child was not admitted for other reasons, she would seek to talk to the franchisee and persuade him or her to take the child in. She said that if there was no good reason for exclusion, the franchisee would let the child in. Asked what Tumble Tots would do if the franchisee applied its own selective criteria, Mrs Pereira acknowledged that that would be a problem and that they would take it up. She admitted that the terms of the Franchise Agreement gave quite far reaching powers to Tumble Tots which could, either directly through their exercise, or through their existence gave Tumble Tots significant leverage over the franchise.
- When asked whether a parent would sign up for membership to get six issues of Right Start, Mrs Pereira agreed that "people would not just join for the magazines - they actually join for the whole works".
- The T-shirt was exclusive to Tumble Tots' members. It was like a badge. Absence of the T-shirt would, said Mrs Pereira, deprive a child of his sense of belonging. She also agreed that it was a way of stopping franchisees admitting, on payment of the session fee only, children who had not been registered as members, since it provided a form a visual control. Rogue franchisees who let in non-members were however very rare, but there had been occasions when Tumble Tots had taken steps to stop non-members participating - generally when a subscription had not been renewed. When asked whether a parent would pay the subscription mainly to acquire the T-shirt Mrs Pereira noted that sometimes people did just want the T-shirt.
- Mr Barnes asked Mrs Pereira whether the man in the street, if asked, what a parent was acquiring for the £19 would say "membership which allows the child to go to Tumble Tots"; Mrs Pereira replied that "I would have thought he would say "attending a physical play group which develops the children."."
- When asked why a child should be a Tumble Tots member, Mrs Pereira said: "if a parent wants a child to join, the whole ethos is to build a sense of identify and belonging (which leads to self esteem and self-confidence), so membership is part of that programme (the membership pack is part of this with the T-shirt waiting for them). The T-shirt, and belonging to a club works hand in hand with the physical aspect of enjoying the sessions every week."
- We drew the following inferences from the evidence before us.
- It was not clear to us how the typical customer pays the membership fee to the franchisee. The fee might be paid in cash, by a separate cheque made out to Tumble Tots or as part of a cheque, a cash, or card payment to the franchisee. However the franchisee is required to account for that fee to Tumble Tots and the fee is paid at the time the Registration form is completed. We concluded that, if the franchisee receives the amount of the membership fee otherwise than in the form of a cheque made out to Tumble Tots, the fee is received by him as agent or trustee for Tumble Tots and not for his own account.
- We concluded that the main reason that the typical parent pays the membership fee is to enable his or her child to attend Tumble Tots' sessions. The parent may well appreciate the benefits of Tumble Tots' ethos and philosophy and may wish his child to partake of them. For the typical consumer the way in which his child can partake of these benefits is to go to the Tumble Tots' sessions. The parent has to pay the fee before the child can attend, and in our view the overriding reason that the typical consumer pays is in order that the child can attend.
- We concluded that the typical consumer will be aware or will have been made aware before paying the £19 that the only way in which the child can get the T-shirt (and so be attired as the other attendees are) is to pay his £19, and accordingly we conclude that obtaining the T-shirt was an object of the typical consumer.
- We conclude that the typical consumer will know that personal accident insurance is provided as a result of this fee and that they will be sent a membership pack. We do not believe that these items will be a high priority for such a consumer. His or her principal interest in our view will be obtaining access to and the participation of his or her child (attired in the required T-shirt) in the Tumble Tots' session.
- The effect of the provision of the franchise agreement was to give Tumble Tots the ability to control the activities of the franchise in relation to the operation of the programme. Tumble Tots would have been able under its terms to compel the franchisee to admit a child to sessions (see above).
- Mr Barnes took us to the decisions of the House of Lords in Card Protection Plan v Customs and Excise Commissioners [2001] STC 174, and College of Estate Management v Customs and Excise Commissioners [2005] STC 1597. From these authorities, to which we shall return later, he submitted that we should first ask whether the supply by the Appellant of its membership is a single supply or two or more separate supplies. We should, in seeking to answer this question. take an overall view of the supply having regard to its essential features, and (a) we should note that what, from an economic point of view, is in reality a single service should not be split artificially; and (b) we should look for the essential purpose (objectively assessed) of the supply.
- On this basis Mr Barnes' submitted that Tumble Tots supplied a single supply of membership of the Tumble Tots' club rather than a number of separate individual supplies.
- In support of this submission Mr Barnes' noted:
- All these said, Mr Barnes pointed to a single supply of membership of Tumble Tots - the membership pack enhanced membership: it was an add-on or ancillary to the main supply of membership: it was not a separate supply of the items in the pack.
- Mr Barnes accepted that Tumble Tots made supplies also to the franchisee - the right to use the trade mark, and of training, help and assistance, but those were irrelevant. He accepted that a supply was made by the franchisee to the child and was paid for by the session fees. The Respondents accepted that Tumble Tots did not provide a member with an absolute right to enter a session, but he submitted that membership was a right to enter a session unless there was some good reason why the child should not enter. If entry was unreasonably refused the child or parent would have a right of action against Tumble Tots. The granting of that right was the supply provided by Tumble Tots in return for the £19. It mattered not whether it was termed a right granted or simply a permission; either way it was something done which gave the parent a right to sue. That right, even if it was not expressed in any of the documentation, was an implied term in the contract necessary to give it business efficacy. There would be no point in paying the £19 if you did not get some right of access.
- The man in the street would say that in return for the £19 the parent gets the right of access for her child to gym classes. That was the common sense answer, and that right (however qualified) was a single principle supply to which all else was ancillary.
- The Appellant contends that the supply made by Tumble Tots is a mixed supply of standard and zero rated elements.
- Mr Allen argued that the first questions we had to ask was "what is supplied in consideration for the payment made. He said that it was clear that only the franchisee could grant the right of admission: could not therefore be a supply by the Appellant.
- He says that the idea that the Appellant makes a supply relating to admission is not sufficient to create a direct link for a consideration. We understand that by this he means that it is not enough to say "the £19 relates to admission", and that one must point to something done by Tumble Tots which relates to admission before there can be a supply relating to admission.
- Mr Allen says that the supply of membership is an uncertain type of supply: it depends upon what membership means. In the case of membership of a golf club it can mean the right granted by the club to use the club greens to play golf, or as in Kennemer the supply by the golf club of making the greens available for use if the member pays an additional fee.
- The question for us he says is what does the customer get for his £19? And the answer, he says, is the membership pack and the insurance. VAT is, he says, a tax on supplies not a tax on monies paid. What is supplied is the membership pack and the insurance.
- Mr Allen asked us not to confuse the supplies made by Tumble Tots to the franchisee (the right to use the trade mark and the help and advice), or the supply made by the franchisee to the customer with the supply made by Tumble Tots to the parent or child.
- Mr Allen gave examples of other circumstances in which before a supply could be received a condition had to be met. A child might have to acquire school uniform as a condition of attending a school, but the supply of the uniform was not a supply of or relating to education. It was a separate supply. Where a golf club charged a separate fee for the use of the greens but also charged for membership (as in Kennemer- see below), the membership fee was not a payment for using the greens even though it was a pre-condition for using them.
- Mr Allen took us to the decision of the tribunal (Chairman Stephen Oliver) in Rugby Football Union v Commissioner of Customs and Excise (VAT Decision 18075) in 2003. Debentures purchased from the RFU gave the holders the right to certain benefits - in particular to purchase from the RFU tickets to international rugby games. The issue of the debentures was held by the tribunal to be a single supply of exempt financial services within Schedule 9 Group 5 notwithstanding the provision of the benefits to the holder. It so held because it found that there was no link between the benefits and the consideration received. Mr Allen submitted that any "benefits of membership" other than the membership pack were in Tumble Tots' case supplied by the franchisee and accordingly even less of a link existed between those benefits and the consideration than could have existed in the RFU case.
- As paragraph 26 of the decision in the RFU case makes clear however, fundamental to that case was Customs & Excise' acceptance that no part of the subscription monies was to be ascribed to the benefits. There was no equivalent concession by Mr Barnes in this case - no acceptance that the whole of the £19 related to the membership pack.
- The question before the tribunal in RFU was whether there was a single exempt supply of the bundle of rights comprising the debenture. The tribunal held that the benefits were legally and in fact inseparable from the repayment rights under the debenture and that to attempt to separate them did violence to the arrangements. Taking all the circumstances into account the tribunal concluded that the arrangements produced a single supply of a benefit bearing instrument. The tribunal went on to hold that on the basis of the Commissioners' acceptance that no part of the subscription money was received for the benefits there was no basis for a taxable supply of the benefits because no consideration was actually received for them.
- It seems to us that this case illustrates how the tribunal looked at all the circumstances to reach its conclusion that there was a single supply. Those circumstances were specific to the facts of that case; we could not isolate any additional principle not described in the following section to help us with out decision in this case.
- Mr Allen also referred us to the Automobile Association case which we consider in more detail in the following section.
- Mr Allen noted that the facts of this case were not similar to those of Card Protection Plan. Here supplies were made to the customer both by the franchisee and by Tumble Tots; there were several things done by Tumble Tots and the question was how to characterise the things that were done. One should not take into account things done by the franchisee when determining the characterisation of things done by the franchisor. Card Protection Plan did not require that: it related to the things done by one person only.
- It was possible to apply Card Protection Plan to Tumble Tots' supply. That involved looking at what Tumble Tots did and determining whether there was a principal supply. What it did was to provide the membership pack, insurance and membership. The membership conferred no rights. This was a mixed supply. There were no elements which predominated and none which were ancillary to the main supply.
- Membership was not simply a supply relating to admission. It secured the benefits of being a member which were more than simply attending a gym session. It was too much to say that the right to attend outweighed the actual supplies received.
- Even if the supply of membership was a supply relating to admission it was one supply among many, and did not predominate.
- Article 6 of the Sixth Directive provides that any transaction which is not a supply of goods within Article 5 is a supply of services. If the supply is affected for a consideration Article 2 makes it subject to VAT. Article 5 defines a supply of goods to include the transfer of the right to dispose of tangible property as owner.
- These provisions are reflected in section 5 VAT Act 1994 which provides that anything which is not a supply of goods but is done for a consideration is the supply of services.
- Tumble Tots registers the child as a member, it supplies the membership pack and the insurance. These are therefore capable of being taxable supplies for the purpose of the Directive.
- Something is done for a consideration if there is a direct and immediate link between what is done and the consideration. Accordingly where a person's activity consists in providing services for no direct consideration, there is no basis of assessment and the free services are therefore not subject to VAT. A supply is made for a consideration only if there is a relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider being the value given in return for the supply.
- The relationship between provider and recipient need not be a specific legal relationship enforceable under any legal system but can encompass a relationship under which the reciprocal provision is binding in honour only, so long as there is a framework under which there is an exchange of performance from which a direct link is apparent.
- If something is done or goods are supplied for a consideration the next question is how the supply should be characterised for VAT purposes. This is where the Card Protection Plan cases become relevant. The language used is difficult because normal usage is to describe each thing done for consideration as a supply, but the goal is to determine whether or not there is for VAT purposes one supply or many. Accordingly, in the discussion which follows we shall use "Transaction" for any of the transactions done for consideration, and "supply" for the subject of the charge to VAT. The question is whether for VAT purposes Transactions are to be treated as separate supplies or merely as elements of some overriding supply.
- As Lord Rodger explained in College of Estate Management at paragraph 9 and in the remainder of his opinion, the guidance given by the ECHO in Card Protection Plan is not limited to services but extends to Transactions in goods and services.
- The ECJ's judgment in Card Protection Plan and the later House of Lords' decisions makes clear that the task for the tribunal in seeking to determine the nature of the supply must be approached thus:
- In College of Estate Management, Customs & Excise persuaded the tribunal and Lightman J that the supply of voluminous and important printed materials by the college was ancillary to the College's principal supply of education. Lord Rodger discussed that argument as "hard to swallow". But he then made clear that the mere fact that that supply of materials could not be described as ancillary still left open the question as to whether there was a single supply because the ancillary analysis was only one way in which a number of Transactions could be treated as one supply. The key lay in analysing the transaction.
- In the House of Lords in Card Protection Plan was an example of the principal/ancillary analysis, Lord Slynn said at paragraph 25:
- He proceeded to opine that the other services were ancillary. For us the importance of his approach to finding the essential features is this: he asked objectively why people wanted the services supplied they contracted for. This seems to us to parallel the use of the words of the ECJ that the task is:
- In CCE v The Automobile Association [1974] STC 192 the Court of Appeal considered the nature of the supply made to a member of the AA in return for his membership subscription. The commissioners contended that only one supply was made by the AA namely the permitting of the individual to give the consideration and become a member; the AA contended that the supply consisted of a number of benefits (the handbook, the availability of roadside assistance etc) and that separate VAT treatment applied to each benefit depending on its nature.
- Lord Widgery CJ gave the only judgment. He referred to what is now section 5(2) VATA 1994:
- Lord Widgery then said that the importance of this section in the argument before the Court of Appeal was that, giving the words their ordinary meaning in the English language, it would not, he thought, be regarded as appropriate to describe the conferring of membership of an association as a supply of services. However, if the conferment of Membership was properly regarded as the granting of any right within the meaning of section 5(2)(b), then that difficulty was overcome because however incongruous the language, for the purpose of the Act the granting of membership will be the granting of a right and therefore, for the purpose of the Act, a supply of services.
- Lord Widgery expressly declined to opine on whether the granting of membership of the AA was the granting of a right so as to bring it within section 5(2)(b), but said that even if it did:
- He continued:
- Later in his judgment his Lordship referred to the decision of the Court of Appeal consisting of the same members and given on the same day in Barton v Commissioners of Customs & Excise [1974] STC 200 (which related to whether the granting of membership of the Alpine Club was a supply), in which the Court approved the formulation of the essential question for the tribunal as being "what does a member get for his subscription?"
- Mr Barnes urged on us that this case was decided before Card Protection Plan and so should not affect our reasoning. We agree with him that the approach adopted by the Court of Appeal in that case - as to whether there was one supply or many must be subject to the later decisions of the ECJ and the House of Lords, but the issue of the nature of a membership subscription is a different issue from the question of the proper categorisation of a supply for VAT purposes. In our judgment the question we have to ask is "what did the member get for his subscription?" - Was the subscription paid for the mere husk of membership or was it paid for something else as well? And it is possible that it may have been paid for the "husk of membership" if that membership in itself confers catchet, status or (we add) other collateral benefits and if the granting of that membership falls within section 5(2)(b); but possible also that it may have been paid for something else provided by the person to which it was paid - as it was found to have been in the AA case and in Barton. These will be questions of fact.
- In the course of the argument we discussed the decision in Kennemer Golf & Country Club v Staatssecretaris van Financiën [2002] STC 502. The Kennemer Golf Club owned a golf complex. Members paid an annual membership fee as well as admission fees for the use of the course. Various questions were referred to the ECJ. The second of those questions was essentially whether the annual membership fees constituted consideration for the services provided by the club to its members. The ECJ held that the services provided by Kennemer constituted the making available to its members, on a permanent basis, of sports facilities, even though members might not use the facilities and, when they did, had to pay separate admission fees. We take from this case simply that for VAT purposes the nature of the conferring of membership depends on the facts: in Kennemer case membership effectively consisted of the making available of the course - this was what the members got in exchange for their membership fee.
- We divide our consideration of the issues into four headings:
- Who did What?
- In this appeal one of the most difficult features appears to be to determine what was done and by whom in return for the payment of the £19. This is the first step in the analysis; it must not be elided with the later steps. Having determined this, the questions of the attributable consideration and the classification of any supply follow.
- John enrols Jemima at the Tumble Tots run by Kameel. Jemima has already had a taster session. John fills in the Registration form and pays Kameel £19 plus £48 (being eight sessions at £6 per session for the next half term). Kameel records Jemima as a member. Kameel sends £19 to Tumble Tots. Tumble Tots registers Jemima on its list of members. Tumble Tots sends Jemima the Membership pack (card, T-shirt, DVD, CD, gym bag and hand book) and at later times makes available at Kameel's sessions copies of 'Right Start' and provides the newsletters and booklets. Tumble Tots also ensures that the Tumble Tots' personal accident insurance policy is extended to cover Jemima. Kameel admits Jemima to the next eight 45 minute Tumble Tot sessions. All these things are done: a question for us will be to decide which are done for a consideration. But there is a prior question. It is whether or not this list is complete: is there something else done by Tumble Tots?
- In answering that question it is not relevant whether a benefit is received by Kameel or Jemima because VAT is not a tax on receipts but is a tax on things done by a person, or in the terms of the 6th Directive "transactions". What is relevant is whether a supplier does something - or "transacts".
- The Respondents submit that to the transactions set out above in paragraph [?] above that there should be added another - namely that Tumble Tots agree to procure that Jemima will not unreasonably be refused participation in Tumble Tots sessions. This they say is an essential feature of membership - this "right related to" access.
- Whether or not such an obligation is undertaken - or something less than it - perhaps a warranty or a representation made, is a question of the proper construction of the arrangement between Kameel ands John. We shall call such an obligation, or the liability arising from such a warranty or representation, an Admission Liability. The starting point for that exercise of construction is the terms of the contract between John and Tumble Tots, and the starting point for determining those terms is the Registration Form which John signs.
- That form indicates that "children attending Tumble Tots' classes must be members of the National Tumble Tots' club". Neither those words nor any other part of the form indicate that such membership affords any right (conditional or otherwise) relating to admission. Thus if any Admission Liability is undertaken it must derive from circumstances surrounding the formation of the contract.
- John, we believe, will generally know nothing of the contractual arrangements between Kameel and Tumble Tots. He should know that it is a franchise operation if Kameel has made this clear on his signage in accordance with the terms of the franchise agreement, and he may know that from discussion with other parents. But that will tell him little about the relationship between Tumble Tots and Kameel. In particular it cannot be assumed that John will know about the degree of control which Tumble Tots may exercise over Kameel. Thus whether or not Tumble Tots can compel Kameel to take Jemima seems irrelevant to the question of whether an Admission Liability is part of the contract between John and Tumble Tots.
- We have seen no evidence that the franchisee would make any particular representation to John about Tumble Tots' liabilities in relation to membership. It would seem unlikely that it would. Stories from other parents - myths or fact - also seem to us irrelevant in determining the terms of Tumble Tots' liabilities.
- Nothing on Tumble Tots' web site or its other published material so far as shown to us indicates any undertaking of an Admission Liability. We therefore conclude that there was no express Admission Liability in the contract between John and Tumble Tots.
- But the Respondents submit that such a liability was an implied term of the contract. A term may be implied in a contract (a) when it is necessary to give business efficacy to the contract and (b) if the term represents the obvious, but unexpressed, intention of the parties.
- It does not seem to us that the undertaking of an Admission Liability by Tumble Tots is necessary for the efficacy of John's contract with Tumble Tots. John is dealing with Kameel when he makes the contract. In all likelihood Kameel has told him that Jemima will be accepted. The Tumble Tots' membership is a fence to be jumped, not something whose terms overly concern John.
- Neither does it seem to us that if John and Kameel (acting on behalf of Tumble Tots) had been asked at the time the £19 was paid whether an Admission Liability was being assumed, they would have replied "oh, of course."
- Thus we do not believe that it is an implied term of the contract between John and Tumble Tots that Tumble Tots assume an Admission Liability. We are comforted in this conclusion by the consideration that it would seem odd to imply into a contract a term extending an express written term of the contract, namely the written term in the Registration form which is noted above.
- But for VAT purposes our enquiry does not stop at the terms of the contract. Tumble Tots may have undertaken a non-contractual obligation. An obligation binding in honour only. We see no reason for concluding that it did, but as will become apparent it seems to us that whether or not it did is irrelevant.
- Thus our answer to the first question: did Tumble Tots do anything other than these things set out in paragraph 90 above is: no, save possibly that it may have assumed some form of non-binding obligation for example, use its best endeavours to secure admission for Jemima .
- Does Tumble Tots acquiescence to Jemima's participation constitute something done?
- The effect of Jemima's subscription monies being paid is that she is no longer prohibited from attending Tumble Tots sessions. But the terms of the franchise agreement do not require Tumble Tots to do anything before Jemima can attend - they merely say that she must not be allowed to attend unless the £19 has been paid and the Registration Form completed. In fact Jemima does not even have to be recorded as a member by Tumble Tots (because the definition of Tumble Tots member in the franchise agreement is not dependent upon registration by Tumble Tots, but merely on payment and completion of the Registration Form - and once she is registered by Kameel (not Tumble Tots - see paragraph 18(ix) above) as a member she is no longer subject to the prohibition on admission). Tumble Tots does not have to do anything before Jemima can attend. It does not even have to receive the registration form.
- Article 6 of the Sixth Directive indicates that a supply of services can include "obligation to .. tolerate an act or situation". Tumble Tots however does not tolerate Jemima's participation : If the franchise agreement provided that no child could participate without Tumble Tots consent, then by consenting it would tolerate Jemima's participation. John is not paying however for toleration in this way because once the money is paid and the form filled in, Tumble Tots cannot object. Tumble Tots does not become "obliged" to "tolerate" Jemima's presence; instead it loses the ability to object to her presence.
- Thus the passive acquiesce of Tumble Tots does not in our view constitute a thing done or a transaction by Tumble Tots.
- Which things were done for a consideration?
- The next question for us is which of these things that were done were done for consideration, because it is only such things which are, or can be components of, supplies for VAT purposes. Something is so done only if there is a direct and immediate link between the thing or the transaction and the consideration.
- The Registration Form sets out three things which will result from membership:
- From these it seems to us that there is clearly a link between the membership subscription payment and the following things which are done:
- What is less clear, is whether there is a direct link between the membership subscription and the contents of the membership pack. John may not know what it will contain. He may have read the website which contained a description of its contents, he may have heard from other mothers or fathers, or he may have been told by Kameel. But he may have none of this information. Nevertheless, it seems to us that the typical parent will know that this child will get a membership pack which he will know will contain at the very least a T-shirt and which he may know will contain a DVD, a CD a gym bag, a handbook and a membership card. We therefore conclude that there is a direct link between the consideration and the T-shirt, the DVD, the CD the gym bag, the handbook, and the card sufficient to make it possible that these items are supplied for consideration.
- On the other hand if Tumble Tots undertook any Admission Obligation binding in honour only we see no link between it and the consideration paid. That is because we can seen no grounds for holding that John would have anticipated or known that such an obligation was assumed. He may have known the high standards of Tumble Tots, he may have assumed that Tumble Tots would help sort out difficulties, but we cannot see how a typical consumer could have known that such an obligation would have been undertaken in return for his payment when he had no knowledge of how it might be enforced by Tumble Tots. There was no framework of reciprocal performance under which any such obligation was related to consideration received.
- The supply of the termly Tumble Tots newsletter, the positive parenting booklet, the Eat Fit and Keep Fit booklet, the information on the National Children's Activity week, and the money saving vouchers do not seem to us to be linked to the payment of the £19. They are more in the nature of promotional or image enhancing material freely supplied as marketing material rather than in a manner directly linked to the membership fee.
- Accordingly we conclude that the only things done, or transacted, by Tumble Tots which could be directly linked to the payment of the £19 were:-
- Was all or part of the £19 consideration for a supply by the franchisee?
- We have considered this issue only in case it could affect our conclusion on the nature of the supply or supplies made by Tumble Tots.
- John deals with Kameel. John has to pay £6 per week to Kameel and £19 to Tumble Tots. John pays. He pays for Jemima's admission. He does not care to whom he pays so long as Jemima gets in. The £19 is, in our view, paid for the same purposes and the same reasons as the £6 per week. Clause 10(9) of the Franchise Agreement provides that "no child shall participate unless he has registered with the Franchisee as a member". Accordingly Kameel will not let Jemima in unless both sums are paid and Jemima is registered (because the franchise agreement so provides). So John pays.
- We have already noted that the condition imposed in the franchise agreement for attendance is registration, not with Tumble Tots, but with Kameel, and that Kameel is required by the Tumble Tots' Manual (whose provisions are imposed on Kameel by the franchise agreement) to keep child record cards which "form part of the membership registration forms and should be kept on a record at the centre". It seems to us therefore that objectively viewed, the typical consumer might be regarded as paying the £19 as consideration for the service provided by the franchisee and not for the benefits provided by the Tumble Tots' membership pack.
- But we have already found that Kameel is liable to account to Tumble Tots for the £19 he receives from John, and that therefore Kameel holds the £19 if it is paid directly to him on trust for Tumble Tots. The £19 cannot therefore itself be consideration received by Kameel for the service he provides. However, if A makes a supply to B and requires B to make payment to C then it seems to us that A's supply is a supply for consideration for the purposes of the VAT Act. The monetary consideration is not obtained by A, but A has received what he required, namely that B pay C. The fact that the consideration received by A is not money does not prevent the supply being one made for a consideration. The value of that consideration is the value placed on it by the supplier objectively determined, and that might be £19.
- It was not argued before us that John's payment of £19 was consideration or additional consideration for Kameel's supply of admission. No franchisee appeared before us to argue otherwise. We cannot in this decision, and do not, make any finding which affects the franchisee.
- However even if the payment to Tumble Tots were consideration for the supply by Kameel the question already before us in relation to the supply by Tumble Tots remains the same. Tumble Tots actions remain the same albeit that they would flow from Kameel's remission of the cheques for the £19 to Tumble Tots: John makes those payments to secure admission. Kameel receives one of those payments for his own benefit and accounts for, or remits the cheque for, the other to Tumble Tots. In return for Kameel's action of remitting the £19 and the Registration form to Tumble Tots, Tumble Tots register Jemima and send out the membership pack to John – thus, save to the extent (if at all) that Kameel's action are additional consideration for Tumble Tots' supply of franchise services to him, the only difference would be that Tumble Tots' supply could be said to be in return for the consideration it receives from Kameel rather than (or as well as) the £19 it receives from John.
- It was assumed in the argument before us that the transaction was between John and Tumble Tots only and we proceed on that basis because it seems to us that the nature of the supply made by Tumble Tots to John and Jemima will be unaffected by whether the consideration for it comes from John, from Kameel or from both of them.
- The Nature of the supply or supplies
- In the AA case, Lord Widgery expressly left open the question as to whether the granting of membership was the grant of a right within section 5(2)(b). It seems to us that Tumble Tots does not grant a right when it records Jemima as a member. No substantive legal obligation is conferred on Jemima other than to prevent Tumble Tots denying that she is a member. However section 5(2)(b) is not limited to the giving of rights: it encompasses anything done for a consideration. Tumble Tots does do something in return for the payment: it recognises Jemima as a member. It records Jemima as a member. That is doing something and doing it for a consideration. It is therefore capable of constituting a supply for the purpose of section 5.
- We have set out in paragraph 90 above the things which the Appellant does on receipt of the consideration of £19 paid to it by the typical customer. The question we now address is what is (or are) the nature(s) for VAT purposes of the supply (or supplies) constituted by these things. It is now for us to determine whether the transactions performed by Tumble Tots are to be regarded for VAT purposes as comprising a number of independent supplies, or whether there is a single supply only, or whether one or more of those transactions is a principal supply.
- We have no doubt that the reason that John pays the £19 is to obtain Jemima's admission to the sessions. That can be achieved only by securing Jemima's membership of the Tumble Tots Club and perhaps also by acquiring for her the distinctive T-shirt. Put another way, if we ask ourselves why objectively a person may wish their child to be a member, we have no doubt that it is to obtain the membership registration because that permits their child to participate in the sessions.
- We are reinforced in this conclusion by the consideration of the £17.50 membership renewal fee and the £17.50 membership fee for siblings. It seems clear to us that for the typical consumer this would be paid to retain or acquire membership and not for additional DVDs, CD, handbooks, gym bags or copies of Right Start.
- The essential feature of the membership transaction is that it is membership of the Tumble Tots club which secures admission for Jemima. And this is why John pays the £19. This is a case where that membership secures collateral benefits - not perhaps benefits of status or cachet, but other benefits not provided directly by the supplier of membership. In this case, unlike the situation in the Automobile Association case, or in Kennemer, the service or products provided by the membership organisation are secondary to merely being a member: because in this case simply being a member confers the key to the door of attendance at sessions. The AA case makes clear that whether the supply of the husk of membership is the real supply is a question of fact. In this case a mere husk is valuable because it confers on the purchaser the ability to attend (or for his child to attend) the sessions which enable the child to enjoy and the activities at the sessions and to benefit from the ethos and principles promulgated by Tumble Tots.
- The facts in this case are not akin to the purchase of a theatre ticket - ostensibly a piece of paper but in substance a licence to enter and an undertaking to provide a performance, or the acquisition of AA membership - ostensibly simple membership but in substance the right to certain services, or the membership of the Alpine Club - ostensibly the mere membership but in reality the provision of books and periodicals, or the membership of the Kennemer golf club - ostensibly mere membership but in substance the provision of available greens. Instead they have more in common with the payment of a fee for being granted membership of a university on being conferred a MA degree (or, were it legal, a payment to secure a peerage) where the mere fact of being an MA is what is paid for because of the status it is felt to secure. In this case the membership secures the ability for the child to attend the sessions.
- This is not a case akin to the supply of a meal in a restaurant where there is a bundle of Transactions which make up a single supply. The ancillary benefits of the membership pack are different from and not part of the registration of the child as a member: they are not properly to be treated as part of the single membership supply. Instead it is a case akin to Card Protection Plan where there is a clear single objective for the typical consumer and the extras which come with the principal supply are not what the consumer really wants.
- We do not believe that the supply of the Right Start magazines, the DVD, the CD the gym bag, the handbook or the insurance are for the typical consumer the reason for the typical consumer wanting to join. Whilst their supply was directly linked to the receipt by Tumble Tots of the £19, obtaining these items was not the object of typical parent in paying the subscription: as we record above, when Mr Barnes asked Mrs Pereira what was a parent was acquiring for the £19 she replied "attending a physical playgroup which develops children" and described the benefit of the ethos of Tumble Tots' services in building a sense of identity and belonging. She said that the T-shirt and belonging to the club were important aspects of this. Although she mentioned the membership pack, its contents, apart from the T-shirt, were not specifically referred to in her answer and did not appear to us from her answer to be part of what she thought the typical parent principally sought when paying the £19.
- We conclude that obtaining the DVD, the CD, the insurance and the Right Start magazines were not main objectives of the customer in paying the subscription, but items which may have enhanced the overall benefit obtained in participating in the Tumble Tots programme. These items may not have been in every case supportive of, or subservient to the principal benefit, but they were in our view add-ons or unnecessary extras which no doubt the typical consumer was willing to receive but which he or she did not see as a main objective of the transaction.
- If it were not for the T-shirt we would have no hesitation in holding that the husk of membership is the single principal supply made by Tumble Tots in return for the £19. But the T-shirt was significant: we accept that being able to wear it may give a child a sense of belonging or of being like the others in the group, that wearing it may enhance or appeal to a child's desire to conform, and that its possession will afford decency and warmth to the child.
- Mr Pereira indicated that some people did just want the T-shirt, but we did not believe that such people were typical consumers. When asked in cross examination about the statements in Tumble Tots' marketing material which related to membership instilling a service of belonging, Mrs Periera indicated that the only element of the membership pack which was particularly significant in this respect for the child was the T-shirt.
- The T-shirt operated as an admission card. Like the registration of the child's membership it opened the door to admission to a session. It also instilled for the child a sense of belonging. It was for the typical consumer not as important as membership (since that is what the form told the consumer he had to have before the child could attend) but was nevertheless an end in itself. It did not simply enable membership to be enjoyed better, but enabled attendance at the sessions to be better enjoyed. It was thus an end in itself.
- Accordingly we conclude that in return for the £19 Tumble Tots made two principal supplies: the first was the supply of the husk of membership - the registration of the child as a member, and the second was the supply of the T-shirt.
- That leaves the question of the division of the consideration between these supplies. That question was not argued before us but our initial impression was that only a small proportion of the consideration was attributable to the supply of the T-shirt. Unless the parties can agree an apportionment the matter will need to come back before us for a decision.
- Mr Barnes did not apply for costs. These were difficult issues. We did not feel it appropriate to award costs.
- Our decision was unanimous.
19530
SUPPLY – Nature of supply by franchisor of children's activity play groups in return for payment by parent – Whether several supplies of goods or single supply of membership – Payment of fee precondition to admittance by franchisor – Whether supply relates to admission
LONDON TRIBUNAL CENTRE
TUMBLE TOTS UK LIMITED Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: CHARLES HELLIER (Chairman)
CYRIL SHAW FCA
Sitting in public in London on 20 January 2006
L Allen of Dorsey & Whitney for the Appellant
Matthew Barnes of Counsel, instructed by the Acting solicitor for HMRC, for the Respondents
The Appellant's Application
"The Respondents contend that the membership subscription should be treated as a supply principally relating to the right of admission to the Tumble Tots' sessions…All other benefits services and items provided as part of the membership are ancillary to the principal supply…";
previous correspondence from the Respondents had made the same argument. By contrast in the Respondents' skeleton argument they said:
"It is the Respondents' case that there is a single supply of membership, at a cost of £19, which is standard rated. If their argument is not accepted, the Respondents accept that the supply of Right Start and the T-shirts are zero rated, but does not accept the values placed on them."
The Evidence
(i) the Tumble Tots' Operations Manual, a manual produced by Tumble Tots and supplied to its franchisees;
(ii) a pro forma franchise agreement between Tumble Tots and a franchisee;
(iii) copies of correspondence between the Respondents and the Appellant and its representatives;
(iv) a sample of the Appellant's Health and Safety materials;
(v) a copy of the Tumble Tots members' handbook supplied to members on registration; and
(vi) a copy of the registration (or membership application) form.
Findings of Fact
(i) the franchisee must use, and purchase from Tumble Tots the initially specified equipment and such other items of equipment as Tumble Tots may reasonably require;
(ii) the franchisee must offer for sale Tumble Tots' merchandise;
(iii) the franchisee must operate the programme of pre-school gymnastics and movement strictly in accordance with the literature provide by Tumble Tots;
(iv) the franchisee must maintain a minimum number of sessions per week;
(v) the franchisee must employ in relation to the operation of the programme suitable people only;
(vi) the franchisee must dismiss such persons from employment as Tumble Tots consider unsuitable or objectionable;
(vii) the franchisee must indicate that the programme is operated under franchise in signage;
(viii) the franchisee must submit Tumble Tots weekly all completed membership forms and cards together with the monies paid for Tumble Tots' membership;
(ix) the franchisee must ensure that no child shall participate in the programme at any centre unless that child "has registered with the Franchisee as a [Tumble Tots'] member and has paid the requisite attendance fee, save that a non-member may be permitted to participate in the programme for one "trial" session only on payment of the attendance fee "[We have added the emphasis in relation to the requirement as to the person with whom the child is registered];
(x) the franchisee must maintain public liability, personal accident, employer's liability, material damage, business interruption and loss of money insurance at levels specified and in the joint names of the franchisee and Tumble Tots;
(xi) the franchisee must "comply with all the franchisor's instructions whether contained in the [literature provided] or otherwise, provided that such instructions do not conflict with the terms of [the] agreement"; and
(xii) the franchisee must undertake and ensure staff undertake the required training.
"(a) The fees payable by each individual Tumble Tots' Member participating in the Programme shall be as follows:
(i) an attendance fee;
(ii) an annual membership fee of £19.00 in respect of the membership of the National Tumble Tots Club.
(b) The annual membership fees collected by the Franchisee in respect of the Centres shall be paid to the [Franchisor] weekly together with the membership input form and registration cards for membership."
(i) a membership card;
(ii) a T-shirt (a special yellow Tumble Tots shirt);
(iii) a DVD;
(iv) a CD of nursery songs;
(v) a members' handbook;
(vi) a gym bag;
and may contain a copy of the latest issue of Right Start magazine.
(i) 5 further issues of 'Right Start' magazine;
(ii) a termly Tumble Tots' newsletter;
(iii) a positive parenting booklet;
(iv) an Eat Fit and keep fit booklet;
(v) information on National Children's Activity Week.
"All children attending Tumble Tots classes must be members of the National Tumble Tots club. Please return this form with your annual membership fee.
"I understand that my child's membership of Tumble Tots includes six issues of Right Start magazine each year, which I will collect from my Tumble Tots centre.
Signature………………………..
Date …………………………
"All members over the age of 6 months are automatically insured for personal accident while participating in classes, which is in respect of death, loss of limb and eyes, or permanent total disablement sustained. In addition, members of all ages are covered by public liability insurance.
….
"If you do not receive your membership pack within 21 days please ring [a number]."
Mrs Pereira's evidence
Inference of facts
The Respondents' arguments
(i) without membership children could not attend sessions;
(ii) although the sessions were operated by the franchisees, it was clear that the franchisees were closely controlled in relation to the programme and the sessions;
(iii) membership of Tumble Tots is a valuable and desirable commodity: he quoted Mrs Pereira's witness statement the "programme is not merely a playschool or a gym activity but… designed to instil in children a sense of belonging and identity in order to develop their self confidence, self esteem and independence.";
(iv) attendance at Tumble Tots' sessions, said the Operation Manual, " is exclusive to members and by wearing the membership T-shirt a child gains that special identify. The parent is assured that there will be consistently high standards of service and care.";
(v) the Tumble Tots' website explains: "As a member of Tumble Tots, your child will receive a host of discounts and other privileges that have been specifically selected;
(vi) the membership pack provides the child with its identity as a Tumble Tots' member - the website says:
"The club is designed to instil a sense of belonging and identify. Children receive a new improved Membership pack that includes a membership T-shirt, six issues of 'Right Start' magazine,…";
(vii) the Operations' Manual says: "Failure to register a child also deprives that child his, or her, identify as a Tumble Tot because the membership pack is only distributed on receipt of the membership application form.
The Appellant's arguments
The Legal Background
(i) regard must be had to all the circumstances in which the transactions take place;
(ii) every "supply" must normally be regarded as distinct and independent but there are cases where a taxpayer is to be regarded as making a single supply even though it comprises more than one element;
(iii) a supply which comprises as single supply from an economic point of view should not be artificially split;
(iv) regard must be had to the essential features of the transaction;
(v) having regard to those features, the question is whether there is a single supply or several distinct supplies as made to a typical consumer. In this process an overall view should be taken and an over zealous dissecting analysis of particular clauses should be avoided;
(vi) there may be cases where there is a single supply comprised of more than one element and no transaction which is ancillary to the principal supply (this may be the "table top" referred to by Laws LJ at paragraph 53 of Customs & Excise Commissioners v FOR [2000] STC 672 @ 692 and is exemplified by supplies by hoteliers and of meals in restaurants) but alternatively there may be cases where one Transaction predominates and is the dominant or principal supply and the other Transactions are to be regarded as ancillary Transactions - transactions which do not constitute for customers an aim in itself but a means of better enjoying the principal supply.
"If one asks what is the essential failure of the scheme or its dominant purpose, perhaps why objectively people are likely to want to join it, I have no doubt that it is to obtain a provision of insurance cover against losses arising from the misuse of credit cards or other documents."
"to determine whether a taxable person is supplying the customer, being a typical consumer, with several distinct principal supplies or with a single service."
Membership
"(2) subject to any provision made by… Schedule [4] and to Treasury orders…
(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
(b) anything which is not a supply of goods but which is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."
"It seems to me quite impossible to contend on the facts of this case seen as a whole that all the member gets for his subscription is the privilege of being a member. It is no disrespect to the association to say that the mere fact of membership gives no cachet, no status in itself at all, and I do not think as a matter of law that the contract existing between the member and the association is one which is limited in the rights which it confers on the member simply to the right to be a member, all else being incidental and gratuitous on the association's part."
"I think that the proper way to approach the matter at this last stage is to ask oneself or for the tribunal of fact below to ask itself: what as a matter of substance and reality is the right answer? As a matter of substance and reality is the subscription paid simply for the husk of membership, or is it paid for the benefits to which under the contract in my view the member is entitled to share….It seems to me quite unarguable that anybody would be said to be paying his subscription simply for the husk of membership and without regard to the individual benefits which would follow. And not only is that the view which I would take if it were proper for this court to decide questions of fact, but it is the approach which the tribunal of fact adopted."
Discussion
(i) Who did what?
(ii) Which things were done for a consideration?
(iii) Was the £19, or any part of it, consideration for a supply by the franchisee?
(iv) What was the nature of the supply or supplies constituted by the things done for a consideration?
(i) first that the membership includes six issues of Right Start Magazines each year - to be collected by the member;
(ii) second, that the child will be insured for certain bodily injuries or death; and
(iii) third (because of the phrase: "If you do not receive your membership pack within 21 days, please ring 0121 585 7003") that a membership pack will be received.
(i) the provision of the Right Start Magazines;
(ii) the provision of insurance; and
(iii) the recording of the child as a member.
(i) the T-shirt;
(ii) the insurance;
(iii) the Right Start Magazines;
(iv) the DVD and CD;
(v) the membership card;
(vi) the handbook;
(vii) the gym bag; and
(viii) the recording of Jemima's membership.
Costs
LON/05/0028