United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V19975

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Funeral Planning Services Ltd v Revenue & Customs [2007] UKVAT V19975 (12 January 2007)

19975

EXEMPTIONS – Burial and cremation – Making of arrangements for disposal of remains of the dead – Appellant sells a funeral plan devised by it – Plan enables customer to choose a funeral and pay for it in advance and without further cost when the funeral eventually takes place – Appellant receives payment for selling plan – Payment required to be lodged with trustees to meet eventual cost of funeral – Appellant entitled to retain for own use administration fee of £65 – Whether administration services supplied in return for administration fee are taxable supplies – No – Whether full amount paid by customer is consideration for making arrangements for or in connection with disposal of remains of the dead – Yes – VAT Act 1994 Schedule 9 Group 8 item 2

LONDON TRIBUNAL CENTRE

FUNERAL PLANNING SERVICES LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

RACHEL ADAMS FCA

Sitting in public in London on 6 and 7 December 2006

Michael Conlon QC for the Appellant

Ben Collins, counsel, instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION

1. Funeral Planning Services Ltd ("FPS") appeals against the decision of the Respondents ("the Customs") in a letter of 17 March 2005 to treat its supplies as taxable and not as exempt supplies falling within Schedule 9, Group 8, items 1 or 2 of the VAT Act 1994.
2. Section 31 of Group of Schedule 9 exempt from VAT :

"1. The disposal of the remains of the dead.

2. The making of arrangements for or in connection with the disposal of the remains of the dead."

3. The matter in dispute relates to FPS's supplies of a product, known as a Funeral Plan ("the Plan"), to its customers ("customers"). This enabled customers to choose a funeral and pay for it in advance, without further cost, when the funeral is eventually required. FPS has established a trust, known as the Funeral Planning Trust ("the Trust"), to hold and invest payments received from customers. The actual funeral is supplied by a third party undertaker.

Factual background

4. FPS was incorporated in 1995. Of its five founder directors, three had previous experience of the funeral business. It is registered as a member of the Funeral Planning Authority and of the National Association for Pre-paid Funeral Plans.
5. FPS's marketing brochure says of its "Easy Way Funeral Plan" that it "provides an inflation-proof guarantee that, once your payments are completed, the services itemized will be provided when required with no additional cost, no matter what the prices may be in the future." The concluding words of the brochure say –

"Upon receipt of the final payment Funeral Planning Services will send you a Funeral Plan Guarantee Certificate, confirming that the Funeral Directors' services listed will be provided when required, without further charge to you, your family or your estate."

Plans vary but typically the elements include:

providing guidance to the family on registration of the death and other matters relevant to the funeral;

transfer of the deceased to the funeral director's premises (subject to distance restrictions);

taking care of the deceased including preparation and, in some Plans, facilities for viewing;

a coffin;

making all funeral arrangements and providing a funeral director, drivers and bearers for the service;

a hearse;

a limousine for mourners;

dealing with flowers and charitable donations and providing a list of donors;

dealing with extra amounts allocated by the Customer for disbursements (e.g,. cremation or burial fees, flowers, ministers' fees, memorials).

Most of the Plans are sold through funeral directors and other parties, such as members of The Society of Will Writers. These are known as "Business Partners". Some plans are sold directly by FPS as a result of advertising and the internet.

6. FPS arranges to have the explanatory and advertising leaflet printed. Where these are printed to describe a particular Business Partner's plan, FPS makes a charge for printing and distribution. The particular Business Partner's name (e.g. X Y Co) will appear on the leaflet. The funeral Plan will then be marketed as "the X Y Co Plan". FPS's name will appear at all relevant parts of the literature. Where the Plan is not sold as the Plan of a particular funeral director/Business Partner, e.g. through a Will Writer/Business Partner or by FPS directly, the choice or the funeral director may be left to FPS taking note of any preference expressed by the customer. A minority of such customers express such a preference; usually FPS selects a firm of funeral directors with which it already has a Funeral Provision Agreement (see below) or using its contacts within the funeral directors' profession.
7. The customer who wishes to take out a Plan is required to fill in an application form specifying the type and standard of funeral required. As noted, customers will have frequently nominated a particular funeral director using the form prepared for that funeral director as Business Partner. Otherwise the choice may be left to FPS. The identity of the funeral director may, for reasons given later, change during the lifetime of the customer. The cost of a funeral to the standard required is calculated. An add-on is made for "disbursements" (namely goods and services to be provided by third parties and which are agreed at the time of purchase of the plan). The total price of the package ("the Plan Price") is specified in the contract entered into between the customer and FPS ("the Terms of Sale"). This is paid by the customer to FPS, either as a lump sum or by instalments. FPS issues a "pack" to the Customer setting out the ingredients of the Plan.
8. The Plan Price is paid by the customer to FPS by cheque or cheques drawn in favour of the Trust. As well as being required for regulatory reasons (see below), the Trust is an important component of the Plan because it provides long term security to the customer. When a customer takes out a Plan, moneys paid to FPS are paid into the Trust of which the custodian trustee is a bank. The management trustees, two of whom are directors of FPS, hold the trust funds on trust for the benefit of, inter alia FPS to enable FPS to order payments to be made to funeral directors.
9. The Plan Price is deposited with the custodian trustee. It becomes the trust fund. Payments are made from the Trust as follows. Initially, FPS draws an advance of £65, known as an administration fee, when the Plan is sold. If the Plan has been sold through a Business Partner, a commission is payable (although Business Partners who are also the nominated funeral directors may elect to roll-up their commissions in the Trust). When a funeral is required, the funeral director invoices FPS. FPS directs the Trustees to withdraw the appropriate payment from the Trust and this is paid to FPS. FPS then pays the funeral director.
10. From time to time surpluses arise in the Trust. These are certified by an actuary as representing the difference between the investment value of the Trust Fund and the actuarial cost of providing funerals at today's prices to Plan holders. The surpluses are distributed between FPS and participating funeral directors, according to an agreed formula.

The contractual framework

11. Where FPS markets its Plans through funeral director/Business Partners a "Marketing Agreement" will have been entered into with the particular funeral director. Clause 1 of the Agreement provided in evidence states "How the funeral plan works":

"1. The business partner sets the price and specification of one or more funerals in consultation with FPS. FPS produces brochures and publicity materials to promote the plan if and when required by the business partner.

The customer chooses a funeral, which is specified in the plan guarantee, selects a funeral director (with whom FPS has, or is able to obtain, an agreement) and pays the funeral plan price into the Trust.

The customer may also pay a contribution towards the cost of disbursements to other parties at the time of the funeral (such as crematorium fees, ministers' fees etc.) into the Trust …

FPS will deduct an amount from the Trust as notified from time to time, to cover administration costs and an amount as agreed from time to time for payment to the business partner as a marketing fee. The business partner may elect not to include a marketing fee in the plan price.

The plan price, less the administration costs and marketing fee, plus any contribution towards disbursements made by the customer, will remain in the Trust … .

The selected funeral director guarantees to provide the funeral as described, when required, for the customer in return for a payment from FPS, in accordance with an agreement between the selected funeral director and FPS."

12. The Marketing Agreement, as we read it, operates as a framework agreement with no immediate VAT consequence. Armed with the funeral director's "guarantee" to provide the funeral when required, FPS then has the wherewithal to "sell" the funeral Plan to the customer and accept the price from him. For this purpose FPS agrees to make good the undertaking to the customer, comprised in the "sale" when made, by assuming the responsibility to administer the plan and to contract with funeral directors for the provision of the funeral service to the customer.
13. It will be noted that the funeral director who is party to the Marketing Agreement undertakes to market and promote the plan, but not to provide the funeral. That remains the responsibility of FPS. The customer, when introduced by the Business Partner, will select his funeral director and that funeral director (who may or may not be the Business Partner who introduced him) will "guarantee" to provide the funeral in accordance with a separate agreement (the "Funeral Provision Agreement" – see below) between FPS and the selected funeral director. Where the Business Partner is not a funeral director, the Marketing Agreement will have substantially the same effect.
14. We move on now to examine the documents that cover the supply by FPS to the customer, i.e. the supply to which this appeal relates.

The Application Form, the Terms of Sale and the "Guarantee"

15. These documents comprise the contract and in summary, provide as follows:

(i) FPS undertakes to the customer, in return for payment of the Plan Price, to provide him with the funeral Plan of his choice, by arranging with a selected funeral director (i.e. the funeral director selected by the customer or one selected by FPS on the customer's behalf) to guarantee to provide it or, as a fall-back if the funeral director cannot do so when the time comes, to arrange the provision with an alternative funeral director (see the descriptions of FPS's and the funeral director's responsibilities in the Terms of Sale) and "to issue a funeral plan guarantee certificate" to the customer "confirming [the customer's] guarantee from the funeral director";

(ii) the "guarantee" states that it is "signed for and on behalf of FPS and the selected funeral director". (In practice FPS is the sole signatory to the "Guarantee"). It states that "funeral director's services as itemized in the enclosed plan description are guaranteed and will be provided" when required "by the named selected funeral director". It goes on to provide that "The plan also includes £x for disbursements as noted in the attached plan description and £65 administration costs."

16. Customers may cancel the plan as of right within a month (in which event the customer gets all his money back) or at any time after that (in which event he gets his money back less the administration costs or fee.) FPS, as noted, has the obligation to find another funeral director if the selected funeral director cannot provide it when the time arrives. Mr Williams, a director of FPS who gave evidence, stated that in certain events, such as the customer's emigration from the UK, FPS and the customer might mutually terminate the plan.
17. For completeness we refer to Clause 8.1 of the Terms of Sale. This provides:

"The agreement between you and FPS consists of the application form, the Funeral Plan Guarantee certificate and description of the funeral selected and these terms of sale. The terms cannot be varied unless agreed and signed by FPS and you."

18. As we read the agreements so far, FPS undertakes to the customer, as a continuing commitment lasting until the funeral has taken place, that the specified funeral arrangements will be provided and that FPS will retain the responsibility for ensuring that this happens. FPS's commitment is underpinned by the Funeral Provision Agreement and the Trust arrangement to which the customer is not a party and to which we now turn. These contain the continuing terms of business between FPS and the funeral director.

The Funeral Provision Agreement

19. This is between FPS and the particular funeral director (who will be one of many funeral directors whose services FPS uses). It recites:

"These are the terms which apply to the issue of the funeral plan guarantee on behalf of the funeral director by FPS, the provision of the funeral service by the funeral director when required, and of the payment to the funeral director from Funeral Planning Trust."

The funeral director undertakes to provide the guarantee and to authorize FPS to sign it on the funeral director's behalf and to provide the specified funeral service "in return for a payment from the trust, without making any extra charge to the customer except for "additional services" (which are to be paid for at "normal prevailing prices"). The funeral director agrees to provide FPS with an invoice for "an amount equal to the relevant payment from the trust". The payment to be made from the Trust is an amount equal to the price paid by the customer "less any marketing and administration fees deducted at the time of the Plan sale plus … if appropriate, an amount to reflect any increase in inflation for each year" since the customer purchased the Plan. The funeral director may cancel the Funeral Provision Agreement at any time on six weeks notice. FPS may cancel it if the funeral director is in breach or becomes unable to fulfil its responsibilities.

20. In evidence Mr Williams said of the Funeral Provision Agreement that it enabled FPS "to deliver the chosen funeral to the Plan purchaser, who is FPS's customer". We accept this. The Funeral Provision Agreement is a key ingredient in FPS's business method. It enables FPS to honour its commitment to the customer who "purchases" (the word used in the Application Form) the funeral plan at the price prevailing at the date of purchase for "delivery" at its death. Mr Williams explained that the identity of the funeral director may have changed between the date of purchase and the date of delivery, e.g. where the customer has moved to an area not serviced by the nominated funeral director.
21. The terms of the Funeral Provision Agreement reinforce our interpretation of the arrangements which is that FPS remains the "main contractor" throughout using the services of the funeral director as sub-contractor.

The financial arrangements and the Trust

22. All payment by the customer (both outright and instalment) are made directly to the "Funeral Planning Trust". As and when each plan is paid for FPS draws the administration fee from the Trust, i.e. the £65 referred to in the guarantee as "administration costs". The Business Partners may then withdraw their marketing fees.
23. The Trust Deed made on 14 November 1995 between (1) FPS, (2) some individual managing trustees and (3) a bank as custodian trustee, recites that "Funeral Payments" (i.e. the amounts payable to funeral directors for funeral services) will be trust property. The Trustees undertake to meet the expenses incurred in operating the funeral plan and the charges for funeral services made by the selected funeral directors. Annual actuarial valuations are made of the Trust Fund and its liabilities. Surpluses are released to FPS and other interested parties, such as Business Partners who have not withdrawn their marketing fees. Deficits are to be made good at FPS's expense.
24. Had there been no Trust, FPS would have been required to have obtained authorization from the Financial Services Authority. FPS ranks as a "provider" for purposes of Financial Services and Markets Act 2000 ("regulated Activities") Order 2001, as being a person that "undertakes to provide or secure that another person will provide a funeral for the customer": see Article 59(2). Article 60(1)(b) excludes the obligation to obtain authorization where, as here, the pre-payments are held on trust until earned.
25. At the end of each month, FPS sends to the Trust a "transfer statement" to inform the Trust of the various receipts and payments and the bank account transfers necessary, together with schedules of all the Plan sales and all the funerals paid for in that month.
26. Each year FPS's Trading and Profit and Loss account includes the aggregate of the administration fees earned on sale of each Plan (the £65) less the marketing fees earned by the Business Partners for which FPS is accountable. The net amount is brought into account as income and carried to profit and loss account. The distribution of surpluses from the Trust is separately stated in the profit and loss account.

The case for the Customs

27. The Customs, represented by Ben Collins, contend that FPS supplies taxable services to the customer with whom it enters into the Plan agreement. Those supplies consist of the administration of the Plan and in particular the arranging for the customer's money to be held in the trust and the identification of the funeral director to undertake to provide funeral arrangements or, where the customer has identified his own funeral director, to make arrangements for the selected funeral director to give such an undertaking. Further supplies of administration identified by the Customs include FPS's undertaking to arrange for an alternative funeral director to give such an undertaking if necessary, the making of arrangements of all payments to be made to funeral directors and the arranging of the necessary documentation. The consideration for that supply is in each case the £65 "administration cost" referred to in the guarantee certificate. FPS, say the Customs, does not supply the funeral to the customer; instead it arranges for a funeral director to do so; and activities such as those of FPS that merely lead to the provision of funeral services do not qualify because they are at a stage removed from those specified in Item 2 of Group 8 to Schedule 9. These, say the Customs, are "Arrangements which lead to arrangements for or in connection with the making of … arrangements" for the disposal of the dead. They are not, on the strength of Moses J's reasoning in his judgment in Network Insurance Brokers v Customs and Excise Commissioners [1998] STC 742 at page 752h, within Item 2.

The case for FPS

28. FPS, it was argued by Mr Conlon QC, acts as principal in supplying a single composite service to its customers. This service is the provision of the funeral Plan which is supplied in consideration of the Plan Price. The underlying arguments are essentially the reasons for our conclusion.

Conclusion

29. It is not in dispute that FPS does not itself dispose of the remains of the dead. That is carried out by the particular funeral director being either the one selected by the customer or FPS or one substituted by FPS. FPS has undertaken to arrange that the funeral director will "guarantee" to provide the funeral. Nor is it in dispute that FPS is entitled to take out of each of the Plan Prices received from the customer the administration cost of £65, while committing itself to keep the balance in the Trust and, when required to pay for the funeral, to arrange for payment to be made to the funeral director.
30. As we interpret the arrangements, FPS sells the Plan to the Customer and in consequence remains liable to the Customer to ensure that every component part of the Plan is duly carried out. In so doing FPS is, we think, making a single composite supply to the customer. The consideration for FPS's undertakings to the customer is the Plan Price.
31. The supply made by FPS to the customer extends beyond making the particular arrangements identified by Customs; FPS assumes all the responsibilities to the customers as principal and, we think, discharges these as main contractor. It does not, as the Customs' argument implies, agree to carry them out for some third party as administrator in return for an administration charge. The reality is different.
32. FPS devises, markets and sells the Plans to customers. As each sale is made a single and enduring contract comes into being between FPS and the customer. The purpose and function of the contract is to assure to the customer that when he has died his remains will be disposed of according to his specification. The essential characteristic of the arrangement is the assurance it provides that the up-front price charged to the customer at today's rates will be protected and ring-fenced by the operation of the Trust mechanism and the relevant Funeral Provision Agreement so that, when the customer dies, FPS will have the means of meeting the cost of the funeral. The customer gives a single consideration for that supply; in return he gets a single supply of arrangements for the disposal of his remains when dead.
33. So understood, we are satisfied that the full amount of the Plan Price paid by each customer for each funeral plan is consideration for "the making of arrangements for or in connection with the disposal of the remains of the dead"; the supply is exempt from VAT as falling within Group 8 of Schedule 9.
34. We have, in reaching this conclusion, taken into account the cases of Network Insurance Brokers Ltd v Customs and Excise Commissioners [1998] STC 742, Moses J, and of Cooperative Wholesale Society Ltd v Customs and Excise Commissioners [2000] STC 727, Court of Appeal (Simon Brown LJ). The essence of the decisions in both those cases was that the appellant in question occupied the role of an intermediary in the arrangements. In the Network case, the appellant had been appointed by CWS to market CWS's specified funeral services to affinity groups such as the "Hospital Fund". Network was not permitted to enter into contracts on CWS's behalf. Under a Supplemental Agreement, CWS had contracted as principal with the Hospital Fund to supply funerals. Network's role was confined to collecting from the affinity groups the annual payments of £6 per member. From this, Network retained a commission of some 21%. That was the context in which Moses J held that Network's services were at one step removed from arrangements for the disposal of the remains of the dead and were therefore outside the scope of the exemption.
35. The Co-operative case involved a refinement to the arrangements considered in Network. This allowed the choice of an alternative funeral director. A supplemental agreement had been entered into between CWS and the Hospital Fund in consideration of an additional annual payment of £1.25 per member. Under the Supplemental Agreement CWS had agreed to facilitate and administer the choice of an alternative funeral director and, where this option was taken up, to pay the alternative funeral director's fees up to a maximum of £1,000. The taxpayer's argument that the supplemental agreement had merely created alternative promises was rejected. The Court of Appeal held that the supplemental agreement had created a separate supply. The circumstances had shown that if an alternative funeral director had been introduced, CWS's role would not have been that of principal in the funeral arrangements but that of intermediary. The Court of Appeal, following Network, decided that the exemption did not apply.
36. Both Network and Co-operative are, we think, clearly distinguishable from the present case where FPS acts as principal in relation to all the relevant commitments in the Terms of Sale.
37. For the reasons given we allow FPS's appeal. We grant FPS their costs of an amount to be agreed and if not agreed to be referred back to this Tribunal for further directions.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 12 January 2006

LON/05/480