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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> T-Mobile (UK) Ltd v Revenue & Customs (Rev 1) [2008] UKVAT V20521 (30 January 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20521.html
Cite as: [2008] UKVAT V20521
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- This is an appeal by the Appellant ("T-Mobile") against a decision of HM Revenue and Customs ("HMRC") contained in a letter dated 27 September 2005, and against the review of that decision which is contained in a letter dated 1 December 2005 refusing a claim for overpaid VAT for the periods 08/03 to 07/05. The appeal is also against a decision of HMRC issued on 13 September 2006 refusing a claim for overpaid output VAT for the periods 08/05 onwards. Notices of appeal were filed on 21 December 2005 and 12 October 2006.
- All decisions and appeals relate to the same underlying dispute, and the issue for the Tribunal is whether the payment processing services provided by T-Mobile to certain of its customers from time to time in return for separate fees should be treated as exempt from VAT.
- T-Mobile carries on business providing mobile telephone services and other services delivered through a mobile telephone network. It is an incorporated company operating from premises at Hatfield Business Park in Hertfordshire. It was registered for value added tax with effect from 12 June 1991.
- On 31 August 2005 T-Mobile submitted a voluntary disclosure claiming a sum of £4,063,228.08 as overpaid output tax over a period from August 2003 to July 2005. The claim relates to a £3 charge which T-Mobile imposes on customers who pay for mobile telephone services otherwise than by Direct Debit and on which T-Mobile had previously accounted for VAT. The issue before the Tribunal is whether the charge represents consideration for a supply which is exempt under item 1 of Group 5 to Schedule 9 of the VAT Act 1994 ("VATA"), being separate from T-Mobile's mobile telephone services.
- The VATA provides:
- Article 13B(d) of the Sixth Directive provides:
- The Tribunal was referred to the following cases although not all are referred to in this decision:
- T-Mobile is the UK network of T-Mobile International and provides two principal types of service to its 16.9 million customers. Firstly it provides the basic mobile telephony service on a pre-pay or post-pay basis; in the case of post-pay this is typically for a set amount each month. Depending on the contract entered into by each customer, the customer may be entitled to make telephone calls of a certain duration and/or send a certain number of SMS ("text") messages and/or transfer certain amounts of data, e.g. via the internet.
- Secondly T-Mobile provides a range of additional services to its customers who choose to access such services, typically through their mobile telephone handsets. These services include music or game downloads, specific ring tones, memorable telephone numbers, itemised billing, `roaming' (using the mobile outside the UK) and so on. Customers who take such options pay separately identified fees for the services in question.
- Those customers who settle their monthly bills by a method other than Direct Debit or by the Bankers Automated Clearing System ("BACS") are charged £3, this charge being called a Separate Payment Handling Charge ("SPHC"). The SPHC is identified, applied and billed separately from other services by T-Mobile and covers three broad categories of payment option for post-pay customers: (1) debit or credit card processed via the internet or telephone; (2) payment by the customer using a third party agent (e.g. cash, the Post Office or Paypoint); (3) direct payment to T-Mobile (typically by cheque) by post, payment over-the-counter in a branch of T-Mobile's bank (HSBC) or via branches of any other bank into T-Mobile's Head Office Collection Account. Some 27.65% of T-Mobile's customers pay other than by Direct Debit or BACS.
- When a customer first signs up for T-Mobile's services, he has the option of completing a Direct Debit mandate to make payments under the contract. If a Direct Debit mandate has been completed then the £3 SPHC charge will not be applied to the customer's first bill, otherwise he will incur the SPHC charge each month until he changes the payment method to Direct Debit. Where a customer changes his method of payment, then the application of a £3 charge is determined by the payment method that he used on his previous bill, for example, if a customer is registered as making payments by Direct Debit, but for some reason does not pay by this method, his next bill will carry the SPHC charge. The customer's final bill will be treated in the same way. Even if this final bill was not paid by Direct Debit, if the customer's previous bill was paid by Direct Debit there is no SPHC charge. The bill separately identifies the SPHC charge. In circumstances where a customer pays a December bill by cheque, a subsequent bill will include a £3 charge in respect of that, if he does not pay his next month's bill, it will nonetheless include a £3 charge but in that case there would have been no handling involved. In those circumstances it was thought by T-Mobile that the charge was more akin to a late payment penalty and would be outside the scope of VAT. These arrangements have been in place since the Appellant commenced its business.
- Provision for the SPHC is made in the relevant (post-pay) customer Terms and Conditions, the Costs Brochures and also on T-Mobile's website.
- The Tribunal heard evidence from Adrian Steller the VAT manager of T-Mobile, and also from Mr Amit Chauhan, the Senior Support Analyst at T-Mobile.
- T-Mobile prefers its customers to pay by Direct Debit. It was deemed by them to be more efficient in terms of cost and staff time, it being said by Mr Steller to be more difficult to sort out problems which occur under other systems of payments. It was Mr Steller's opinion that there were only some 10 to 15 identifiable errors that would arise with either the Direct Debit or the BACS method of payment, whereas there was an infinite number via the other methods. None of the charts contained in a letter from Mr Steller dated 17 June 2005 sent to HMRC show the number of BACS failures. The charts do show that of the 52,122 cheques received 575 failed, which represented 1.10%. Of the 313,389 credit card transactions which were processed, 687 failed, representing 0.22% whereas in respect of Direct Debit payments, of which there were 1,546,525, of these 26,348 failed, being a failure rate of 1.71%.
- In the same letter Mr Steller also set out a chart showing a comparison between Direct Debit and BACS and other payment methods. It emerged from his evidence that the advantages which he had ascribed to collection by Direct Debit and BACS did not in all cases apply to payments received by BACS, for example, Mr Steller said there were relatively few errors in respect of the former, whereas, as stated above, Mr Steller did not in fact know how many errors there were in respect of BACS payments. The evidence (see above) is that there was a failure rate of 1.71% in respect of the Direct Debit payments, which is considerably higher than that for credit card payments, and somewhat higher than that for payment by cheque. In addition the evidence did not show that where refunds were concerned there would be an automatic collection of the current amount and credits would "self-correct". Similarly where, for whatever reason, a collection had not been able to be made, where BACS payments were concerned, a letter would not automatically be generated. It was also not clear from the evidence with regard to BACS payments that T-Mobile would know automatically how much and when the money would be collected, which, if it were the case would enable T-Mobile to govern its cashflow better, this being one of the reasons given for BACS being a preferred method of payment.
- In respect of pay-as-you-go customers, who prepaid, T-Mobile did not charge a fee because of the difficulties that would entail, even though such customers would very frequently pay by credit card. Business customers also were not charged the £3 if they did not pay by Direct Debit or BACS. Mr Steller's explanation for this situation was that the business was market-driven and the market would not accept it. It was accepted on behalf of T-Mobile that the £3 charge was made because it wanted to dissuade customers from paying other than by Direct Debit or BACS. It was also accepted by Mr Steller that the £3 charge bore no relation to the actual cost of processing the payments. He did not know what either the direct or the indirect cost was. In the letter of 17 June 2005 Mr Steller had set out a chart showing the differing costs per type of payment (see above), but in his evidence he accepted that there was no real difference in the cost of processing a cheque as compared with the cost of processing via BACS. However this was only said to be true if things proceeded smoothly; it was believed that it cost T-Mobile more when things went wrong.
- T-Mobile offered discounts in respect of T-Mobile's pay monthly and Mix It plans. Where a customer paid annually up front for a line rental a 5% discount was available. The "What It Costs" brochure of 1 July 2004 states: "If you commit to a SMS, MMS or t-zone allowance for a minimum of twelve months, you qualify for a 10% discount of the monthly recurring charge each month."
- T-Mobile's bank, HSBC, provide a service called "Lockbox". Where a customer put a cheque into a pre-paid envelope with a completed Giro slip the cheque and giro slip are received by Lockbox on behalf of T-Mobile. Lockbox sorts out the cheques and the giros and presents the cheques to HSBC. HSBC then deposits the funds into T-Mobile's bank account. HSBC generates two payment files, one for matched and one for unmatched payments which are sent to T-Mobile and uploaded into Excalibur. This service was simply for the administrative convenience of T-Mobile. It was not known what percentage of cheques were received via the Lockbox system. The situation where a customer makes payment at the Post Office or at a Pay-Point agent's premises is similar to the Lockbox system.
- Customers paying by debit and credit cards may register the card with T-Mobile and the details are held on Excalibur. On receipt of a monthly bill a customer calling T-Mobile gets to the Interactive Voice Response System (IVR). In those circumstances it is only if the IVR system goes wrong that a member of T-Mobile staff becomes involved. Where the card is registered, Excalibur passes the data on to Solve/SE. Solve/SE formats the data and generates an "APACS 30" message. APACS stands for `Association of Payment and Clearing Services'. An APACS 30 message consists of the house number + Post Code + CV2. It is an industry standard format. The house number and post code details are extracted from Excalibur. The CV2 number is that entered or advised by the customer. This message and the data are passed by Solve/SE to Retail Decisions Europe Ltd (ReD). ReD sends the APACS 30 message and the data to Barclays Merchant Services ("BMS") (which is Barclaycard who are T-Mobile's agent). BMS sends the APACS 30 and data to the issuing banks and the issuing banks check that the account is valid, amongst other things. The issuing banks then send the validation results to BMS who send the validation results to ReD. ReD sends the validation results to Solve/SE who sends them to Excalibur for T-Mobile's authorisation of the charge. Where the transaction is declined that is the end of the process. Where it is valid the customer is advised of the success of the payment and his account balance in Excalibur is updated. The transactions are then batched up into settlement files by Solve/SE and sent to BMS. BMS sends the settlement files to the issuing banks who send the money to BMS which BMS then sends to T-Mobile, thus ending the process. The ReDs service was both to and for the benefit of T-Mobile. ReD charged value added tax on its invoice to T-Mobile.
- An agreement dated 29 August 2003 between Barclays Bank Plc and T-Mobile provides at Clause 3 as follows:
- get authorisation through us, from the relevant card issuer for all card payments above your floor limit and (if we ask you to) for certain card payment below your floor limit;
- A Service Level Agreement between Barclay Merchant Services and T-Mobile provides at Clause 3.1.1:
- To the best of Mr Chauhan's knowledge, there had only been two or three occasions when he had had to ask Barclaycard for the authorisation code, i.e. it had not been possible to get it from the issuing bank. The authorisation code is included when the settlement files go back to Barclays.
- Mr Chauhan had in his witness statement described the authorisation process as having two distinct steps: (a) the card validation process undertaken by Excalibur, and (b) the transaction authorisation process undertaken by the customer's card issuer bank. He described this latter process as being "for T-Mobile". However, in cross examination he accepted that it was not correct that this was done for T-Mobile, there being no contract between the card issuer bank and T-Mobile. At the time when T-Mobile receives the authorisation code from ReD there has been no transfer of funds, but Excalibur will be updated to anticipate payment. Similarly nothing is transferred at the time when the files are batched up to Barclays and transferred. It is only when Barclays makes an onward transmission that there is a transfer of funds. If no money is received, Accounts Receivable (the relevant department at T-Mobile) would create payment entries for the missing payment or would reverse the payments. The customer account is debited once the settlement file has been received by BMS and processed.
- Attached to a draft statement of agreed facts was a flow chart diagrammatic illustration of the different payment processes that T-Mobile operates, together with an accompanying explanation narrative. Also attached was a flow chart diagrammatic illustration of the way in which the SPHC is applied to customers' bills. These flow charts are appended to this decision because they set out very clearly the different stages in the different processes, and are considered helpful in understanding the process (see Appendices 1-7).
- It is T-Mobile's case that the first matter to be decided by the Tribunal is whether or not the supply is an exempt supply within Schedule 9, Group 5 of VATA 1994 and Article 13B(d) of the Sixth Directive . It relies on the decision of the ECJ in Card Protection Plan v CEC and the judgment of Laws LJ in CCE v FDR for the proposition that logically it is necessary to consider whether there is a service that is exempt before determining whether such a service is part of a larger taxable supply. As the provisions from Article 13B(d) have direct effect, the Tribunal is required to construe the domestic provisions in the light of that Article (see CCE v BAA Plc).
- It being settled law that transferring, receiving and dealing with money is exempt for VAT purposes, Mr Peacock submitted that the services of a person in `transmitting' (or facilitating the transmission of) `money' from one person's account to another person's account has long been accepted as exempt: see FDR and British Hardware Federation.
- It was further submitted that the provision of `negotiation' services "concerning payments, transfers" is also exempt under Article 13B and, in the UK context, `intermediary services' in relation to a transaction comprised in (inter alia) Group 5, Item 1 by a person acting in an `intermediary capacity' is exempt. The Tribunal was referred to the case of Debt Management Associates at paragraphs 2 and 15 and to the HMRC Business Brief 30/2003 which states that: `Customs now accept that where a business negotiates payment terms between two parties this is `negotiating debts' within the scope of the finance exemption which applies to the provision of intermediary services by a person acting in an intermediary capacity and is thus exempt from VAT'. T-Mobile rely on HMRC's Notice 701/49 (August 2006) paragraph 2.5 "If you accept over-the-counter payments for household bills and charge for the service, your supply is exempt".
- It was submitted that it was the case that a person that handles payment by credit card in return for a separate fee is providing "negotiation" services in relation to the provision of the credit by securing, for the payer, the benefit of payment, on credit, through remote means, and T-Mobile falls squarely within the concept of "negotiation" within Notes 5 and 5A to the Schedule.
- A person who accepts transfers of money and discharge of chains of contractual rights and obligations created by a direct debit transaction provides exempt services: Sparekassernes Datacenter v Skatteministeriet ("SDS"), Customs and Excise Commissioners v FDR. In particular in SDS at paragraphs 54-56 of the judgment the ECJ contemplates three situations in which the exemptions could apply: (1) a customer can effect a payment himself or cause it to be made; (2) the transfer can be carried out by a data-handling centre (i.e. a party that is not a customer or a bank) and a customer; (3) the transfer can be carried out by a data-handling centre and a third (i.e. another) party acting at the customer's request. Thus the exemption is not limited only to those services provided by a bank to the end customer. It is not enough that an element is essential for completing an exempt transaction; the service must have the effect of transferring funds and entail changes in the legal and financial situation: SDS at paragraph 66. In deciding whether a particular supply "concerns" a transfer the Tribunal must look to the effect of the supply, does it result in a transfer of funds? and does it lead inextricably to a change in the legal and financial situation? The Tribunal was reminded that it is important to bear in mind that: (1) it is the nature of the supply not the identity of the supplier that is important; (2) the supply can be made by electronic means; (3) the supply can be to the provider of a "financial service" or to another person: SDS; (4) T-Mobile should be treated as making a separate payment processing service supply to the customer.
- With regard to payment by debit and credit cards, it was submitted that the processing of payments by debit or credit cards is a transaction that concerns payment and transfers and/or is negotiation concerning payments and transfers. T-Mobile's role as payment processor constitutes such transactions since it facilitates the completion of payment by electronic means. The transactions concern "payments" and "transfers" of money, and constitute "dealing" with money in electronic form, since the effect of its actions is to secure payment by the customer for the services provided to him or her and its actions entail a change in the legal and financial position of the customer. T-Mobile's actions in obtaining authorisation codes from the banks and the transmission of those codes effects payment by the customer, and its actions could not be distinguished from those in the case of Bookit where Bookit had obtained authorisation codes from issuing banks and transmitted those codes to Giro bank for it to process.
- The authorisation codes are obtained by T-Mobile through a request made via Barclaycard and such codes are transmitted as part of the settlement files back to the issuing banks via Barclaycard, as was the case in Bookit. Codes were obtained in Bookit via Girobank (see Clause 4.3.1 of the MSA referred to in Bookit at paragraph 16 and the reference and the evidence to the codes being passed via a secure line, paragraph 24 (Tribunal finding 5) of Bookit) so that there is an exact parallel between Bookit and the present case. What matters is not how the codes were obtained, but that the codes and the card/transaction details were transmitted by Bookit (via T-Mobile) to an entity (via Giro bank, here Barclaycard) that had a contractual obligation to process the files and credit Bookit (here T-Mobile): see Chadwick LJ at paragraph 35 of Bookit. The Tribunal was referred to Clause 3.1.1 of the Bookit MSA (paragraph 15 in Bookit) and Clause 2.1 of the MSA here.
- In respect of the other payment matters, the essential point is that T-Mobile has to take steps to collect such cash or cheques, transmit them to a central point or, as regards cheques, process the `promises to pay' so that they fructify into the receipt of money into T-Mobile's bank account. T-Mobile takes all the necessary steps itself or uses agents who provide (VAT exempt) services to it to achieve processing and to secure valid payments. For taking such steps which are inherently and necessarily financial services, T-Mobile charges a fee. That separate service can only be a financial service: it is not a mere administration service nor a mere receipt of payment, instead it is the processing of payments made via a particular payment route for which T-Mobile charges a fee. The whole of the relevant steps is supplied to customers in return for the SPHC.
- With regard to negotiation it was submitted that that refers to the activity of an intermediary who is not a party to the contract by which the financial services are delivered, and who plays a role different from the provider and recipient of the financial service: CSC Financial Services Ltd v Customs and Excise Commissioners ("CSC"). It is not necessary that there should be a contractual relationship between the negotiator and the ultimate provider or ultimate recipient of the financial service: Ludwig. It was submitted that T-Mobile "intermediates" between the various card issuing banks and the customer to ensure, on behalf of the customer, that a valid payment is made by the customer. Similarly the processing of a credit card payment is also a negotiation of credit. T-Mobile ensures payment is made, on credit terms, by the customer who then has at least 30 days in which to discharge the debt owed to the card issuer. The processing of the cheques and cash payments constitute negotiation concerning payments and transfers, and T-Mobile facilitates the completion of payment in "paper" form. Its actions concern "payments" and "transfers" of money (and constitute "dealing" with money) since the effect of its actions is to secure payment by the customer for the services provided to him or her, and its actions entail a change in the legal and financial position of the customer. They also constitute negotiation concerning payments and transfers.
- With regard to the issue of whether or not there is a single supply of telecommunications services, it is T-Mobile's case that steps taken by it are not merely administrative in nature, a separate charge is made for the separate service of processing what is to T-Mobile an inconvenient form of payment. That separate service for a separate fee is an example of a service covered by the exemption. Those who choose to make payments to T-Mobile otherwise than by Direct Debit or BACS receive a service that is separately identified, itemised, billed and paid for irrespective of the volume, type or nature of the telecommunications services provided by T-Mobile. The payment processing service must be paid for separately, it cannot be paid for using an allowance within a particular package of telecommunications services and is not subject to discounts offered on such telecommunications services, it is thus not part of the "taxable amount" for telecommunications services provided by T-Mobile.
- In respect of the question of whether there is a separate service or a composite taxable supply, the Tribunal was referred to CPP and the principles laid down in that case. Those principles laid down by the ECJ were considered and applied in the UK in Doctor Beynon & Partners v CCE, and College of Estate Management v CCE. The question was also considered again by the ECJ in Levob and Aktiebolaget NN. It was submitted that in the present case on the basis of those principles it was clear that there is a separate supply of the payment processing service and not merely of an element of a larger composite supply. In particular, customers who choose to pay separately for the service are not required, contractually or commercially, to purchase any other services from T-Mobile. Each service is provided for a separately identified fee, and each service is separate in nature and cannot be seen as an artificially split element of a greater whole. It cannot be seen as merely a better way of enjoying other services, but is a valuable service in its own right.
- HMRC's principal argument as set out in the decision letter of 27 September 2005, is that the SPHC is not consideration for a separate and distinct supply, but is part of the consideration which T-Mobile receives in respect of its provision to each customer of a package of mobile telephone services, which provision constitutes a single supply of telecommunications services. HMRC rely, inter alia, on the judgment of the House of Lords in College of Estate Management v CEC, and the judgment of the ECJ in Card Protection Plan and Levob. The SPHC is simply part of the `taxable amount' as defined in Article 11(A)(1) of EC Directive 77/388 (Sixth Directive), for telecommunications services. It includes `taxes, duties, levies and charges' : Article 11A.2(a) of Sixth Directive. The Tribunal should determine this question before considering the question of whether there is an exempt supply.
- In the alternative, HMRC argue that to the extent that there are any "payment handling services" being supplied to the customer, the supply of those services is ancillary to the principal supply of telecommunications services.
- If, contrary to HMRC's primary position, the SPHC is properly to be regarded as being in respect of a separate and distinct supply from the telecommunications services, then it is contended that the supply is not, in any event, an exempt supply.
- In respect of the principal argument it was submitted that to separate out the various items shown on the monthly bill and regard each as a separate supply of a particular service would be to fall into the trap of which Lord Walker warned in College of Estate Management v CEC, and, as Lord Walker there made clear, in order to ascertain whether there is one or a number of supplies, it is necessary to ask what the essential purpose of the transaction (objectively assessed) is, to look at the commercial reality, and to avoid over zealous dissection.
- Applying those principles to the present case, the essential purpose of the customer entering into a contract with T-Mobile and paying monthly bills (by whatever method he chose) is to obtain mobile phone services which are, at least predominantly, telecommunications services. T-Mobile's essential purpose in entering into the contract is to provide the customer with mobile phone services. Neither party to the contract has the purpose of purchasing or providing any "payment handling service". The commercial reality is that the need for the customer to make payment to T-Mobile arises by reason, and solely in the context, of T-Mobile's provision of mobile phone services. There is no evidence that the SPHC has been set by reference to T-Mobile's costs of providing any "payment handling service" to those customers who do not pay their mobile phone bills by Direct Debit or BACS. T-Mobile's costs of receiving payment by a method other than Direct Debit or BACS can (depending on the method of payment used) be as little as a penny, and bear no relation to the £3 charge.
- The Tribunal was asked to consider the situation of a restaurant where customers are discouraged from bringing in their own bottle of wine by the introduction of a `corkage' charge. That charge will be part of the total consideration of a single supply of restaurant services, and the supply of restaurant services will also encompass any amount shown on the bill in respect of compulsory service charges and tips: Commission v France. The bill which the customer is paying is for an overall single service, and the bill presented will include food, drinks and service. This would be so if each of the restaurant identified an element of the service normally provided by a restaurant and stated that performance of that element would "incur a separate service charge of £3.00".
- In the event of the above argument not being accepted, it was the Commissioners' further case that to the extent that there are any "payment handling services" being supplied to T-Mobile's customers, the supply of those services is ancillary to the principal supply of telecommunications services, pursuant to the principles set out by the ECJ in CPP. Any "payment handling service" which the customer receives from the Appellant is not an end in itself, and has no independent existence or usefulness in isolation from the mobile phone service, it is simply the means by which T-Mobile administers its receipt of payment for the principal service, and is therefore ancillary to it: NV Netherland SE Spoorwegen v Staatssecretaris van Financien.
- If the Tribunal were to find that T-Mobile is making a separate distinct supply of payment handling services, it is the Commissioners' case that that supply is not exempt. The exemptions in Group 5 of Schedule 9 of the VATA are to be interpreted compatibly with the Sixth Directive, in particular, Item 1 of Group 5 is to be interpreted compatibly with Article 13B(b)(3). That Article is intended to cover "transactions [which] are, by their nature, financial services" see Velvet & Steel v Finanzamt Hamburg Eimsbuttel. Although a transaction may come within that exemption even if it is not carried out by a bank or other financial institution, all those transactions which come within the exemption are transactions relating "to the sphere of financial transactions". It is accepted that for the purposes of determining whether a transaction comes within the exemption the nature and identity of the person carrying out the transaction is unimportant.
- A further principle to be derived from the ECJ's judgment in SDC is that, where an entity (such as a bank) effectively outsources to a third party the performance of an element of a complete service which, if performed by that first entity, would have constituted an exempt financial service, the service performed by the third party will also be exempt, provided that it can properly be said to "form a distinct whole, fulfilling in effect the specific essential functions of a service described in [Article 13B(b)(3)]". The Court of Appeal judgment in Bookit fits within that principle because Bookit was performing a task which Giro bank was obliged under its standard Merchant Services Agreement to carry out as part of the merchant services (i.e. exempt transfer services) which it was providing.
- T-Mobile does nothing of substance which is different from that which other traders with significant turnovers do as a matter of course: receiving payments from customers by a number of methods, whether directly or through an agent (such as Post Office Ltd or Pay point). Certain of these methods (such as receiving payment by cheque) are ubiquitous among UK traders.
- With regard to T-Mobile's contention that its "payment handling service" comes within Item 5 of Group 5, read in conjunction with Item 1 or 2, the Commissioners see no basis on which T-Mobile can, by providing those services, realistically claim to be providing "intermediary services". Nor do the Commissioners see how the payment handling services are provided by T-Mobile acting in an intermediary capacity (as defined in Note (5A)). Where T-Mobile, having received a cheque from a customer sends that cheque to its bank, it is acting in the capacity of a person who wishes to receive the payment which that cheque instructs the payer bank to make. The same is true where the appellant is seeking to obtain a credit card payment. Any payment which is made by the payer bank is made pursuant to its pre-existing contract with the customer. T-Mobile has not brought together the customer and the payer bank; nor has T-Mobile done any work preparatory to the conclusion of any contract between the customer and his bank.
- It was submitted by Mr Bates that if T-Mobile succeeded it would have an advantage over those traders who do not make a charge to face the same handling cost.
- With regard to the question of the order in which the Tribunal should determine the issues, no substantive argument was put forward on behalf of the Commissioners as to why we should not follow the procedure adopted by Laws LJ in the case of FDR, in which the Court of Appeal was considering the following three questions which are set out at paragraph 26 as follows:-
- It is common ground that exemptions must be strictly construed, and they are concepts of community law which must be placed in the general context of a common system of VAT: see SDC at paragraph 20 and 21. SDC was an association of banks providing services to the member banks, including the execution of transfers. At paragraph 53 to 57 the ECJ gave the following guidance on the meaning of "transfer":-
- In that case whether or not SDC's services qualified for exemption was a decision for the national court. The case established that there must be a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and their respective banks. It was concluded by the Court at paragraph 65 that the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the service which that element represents is exempt. We therefore conclude that whether the SPHC is an exempt service depends on the functional aspects of the transfers.
- The case of FDR was carefully analysed by the Tribunal in the case of Axa UK Plc. The case of FDR involves the application of the law as laid down in SDC to the UK system of a company instructing BACS to make transfers following debit and credit card transactions. When a customer pays a shop ("merchant") with a credit card, in an electronic transaction in which the card is swiped through a machine, the merchant obtains FDR's authorisation (which obtains, or already possesses, authorisation from the bank that issued the card ("issuer") (if above a floor limit)); the bank to which the merchant is contracted ("the acquirer") gave the merchant's account; the acquirer recovers the payment from the issuer, which in turn is paid by the customer. FDR becomes involve in authorising the original transaction by the merchant; instructing BACS to credit the merchant and debit the acquirer; collecting together all transactions between acquirer and issuer banks in the day and netting them off, making the balance in payment by CHAPS. FDR may also be involved in instructing BACS to make payments between cardholders and issuers at the end of the month and also in instructing BACS to pay the commission on the card transactions from the merchant to the acquirer.
- The Court of Appeal in the case of FDR held that the instructions by FDR to BACS resulted in FDR making transfers and at paragraph 42 Laws LJ said:
- Before looking at the facts in the present case it is necessary to look in detail at the case of Bookit on which Mr Peacock relies and in which SDC and FDR were considered, and which Mr Bates distinguishes from the present case. Bookit is a member of the Odeon group which supplies services in connection with telephone and internet bookings for Odeon cinema tickets, for which it charged a customer an additional 50p per ticket. There is a helpful summary of the facts in Bookit to be found in Axa UK Plc at paragraph 17 as follows:
- The issue in Bookit was whether the handling fee was exempt. The Court held that, just as in FDR sending the file to BACS effected the transfer, in Bookit sending the file containing the card details and the issuer's authorisation codes to Girobank effected the transfer because Girobank was required to act on the information by crediting Bookit's account.
- On the question of whether that reply qualified for exemption the Court at paragraph 45 said:
- The Court then considered the relevance of the importance of the process to Bookit's customers and said:
- It was held in Bookit that by obtaining authorisation codes direct from the card issuers, Bookit was doing something that normally a bank would do, as in the cases of SDC and FDR. This was not the case with T-Mobile. Bookit was not just transmitting the information, but was also obtaining the authorisation codes. The Court of Appeal in Bookit upheld the finding of the Vice Chancellor in the High Court that Bookit's card processing transactions did come within the exemption by reason of the crucial fact that Bookit, having obtained authorisation codes directly from the relevant credit and debit card issuing banks, then transmitted those codes on to its merchant acquirer bank (Giro bank), which had the effect of making a transfer of funds inevitable. Accordingly the Court of Appeal held that Bookit's transactions have the two essential characteristics of an exempt financial transaction: they had "the effect of transferring funds" and "entail[ed] changes in the legal and financial situation". In the present case Barclays obtains the authorisation codes, and confirms this is done by copying the code to T-Mobile. When T-Mobile collects up the data, including the authorisation codes, that information has not been obtained by T-Mobile, but obtained by Barclays. We accept the Commissioners' argument that Bookit may be distinguished from the present case in that it was performing a task which Giro bank was obliged under its standard Merchant Services Agreement to carry out. Bookit had secured a significant discount on Giro bank's merchant acquirer charges by agreeing itself to obtain authorisation codes directly from the issuing banks and to pass those codes onto Giro bank. Giro bank was, therefore, outsourcing an element of its merchant acquirer services with the customer, and remunerating that customer by way of a discount on the charges which that customer had to pay. In the present case T-Mobile has no direct contact with the card issuer banks at all, and is not, unlike Bookit, performing a job which the banks would otherwise be performing. The fact that Bookit had secured a discount on Giro bank's merchant acquirer charges shows that Giro bank was outsourcing an element of its merchant acquirer services to Bookit, and giving Bookit a discount for so doing. In the present case T-Mobile gave Barclays the job of obtaining the authorisation codes and it is Barclays which is in the position of Bookit, not T-Mobile. In Axa the tribunal expressed surprise that where in relation to a debit card transaction the customer's bank rejected the debit, for example because the account was in overdraft, and Girobank re-credited the card issuer and charged back the debit to Bookit, the court held that this potential reversal of payments did not mean that Bookit had not made the transfer. In the present case when a payment method goes wrong T-Mobile has to perform a number of administrative tasks which fall outside the exemption.
- Another important distinction between this case and Bookit is that in Bookit the court considered relevant what the customer contemplated and intended when he employed Bookit's services. It cannot initially be in the contemplation of those choosing T-Mobile's telephonic services that if they do not pay by Direct Debit or BACS they will incur an extra charge.
- Where a customer posts a cheque drawn in T-Mobile's favour together with a giro slip in a pre-addressed envelope, this cheque is received by an entity called Lockbox who presents it to the HSBC bank on T-Mobile's behalf. This does not of itself have the effect of transferring funds and changing the legal and financial situation as between T-Mobile and the customer. Funds are only transferred and the customer's debt to T-Mobile thereby extinguished, if the customer's bank, having been presented by the customer's order in the form of a cheque, is willing to carry out that order. If the cheque has been stopped, or the account has been closed, or the account has insufficient funds, the customer's bank may decline the order. If it is declined, no funds are transferred and the customer's debt to T-Mobile remains unchanged, and the position is the same where a customer has made a payment in cash to an agent of T-Mobile such as the Post Office or Paypoint. By handing over the payment the customer has done enough to discharge his debt to T-Mobile, T-Mobile's administrative task in connection with its receipt of that payment can neither have "the effect of transferring funds" nor "entail changes in the legal and financial situation". Where a customer makes a deposit into T-Mobile's bank using a branch of T-Mobile's bank it is irrelevant that T-Mobile has subsequently to reconcile its receipt of the payment with the customer's mobile phone account record.
- T-Mobile was doing nothing of substance different from that which other traders with significant turnovers do as a matter of course: receiving payments from their customers by a number of methods, including cash, cheque, and credit or debit cards, or directly or through an agent (such as Post Office Ltd or Pay point). The "payment handling services" provided by T-Mobile were not, therefore, "by their nature, financial services, nor were the transactions carried out by T-Mobile transactions relating "to the sphere financial transactions". They neither have the effect of transferring funds, nor do they effect changes in the legal and financial situation. We do not consider it to be the fact that T-Mobile is `negotiating payment terms between two parties' as per HMRC Business Brief 30/2003. It is simply accepting a payment which it has previously agreed with its customer. Nor do we consider T-Mobile is able to rely on HMRC's notice 701/49 paragraph 2.5 (see para 27 above), as submitted by Mr Peacock. That provision is for shops and other outlets who onwardly transmit payment in respect of household bills.
- With regard to T-Mobile's contention, made in Mr Peacock's skeleton argument, but not forming part of the grounds of appeal, that its "payment handling service" comes within Item 5 of Group 5 read in conjunction with Item 1 or 2, we accept Mr Bates' submission set out in paragraph 47 above that T-Mobile is not providing "intermediary services", in that it is not "bringing together, with a view to the provision of financial services (a) a person who provides financial services, and (b) persons who provide financial services, together with the performance of work preparatory to the conclusion of contracts with the provision of those financial services" as per Note (5) to Group 5. Nor is T-Mobile acting in an intermediary capacity as defined in Note 5A.
- The Tribunal was referred by Mr Bates to the case of CSC at paragraph 39 where the ECJ said:
- We turn now to the Commissioners' principal argument, namely that the SPHC is not consideration for a separate and distinct supply, but is part of the consideration which T-Mobile received in respect of its provision to each customer of a package of mobile telephone services, which provision constitutes a single supply of telecommunications services. In the case of Card Protection Plan the ECJ said at paragraph 29:
- In the case of College of Estate Management Lord Walker at paragraph 29 and 30 said:
- In the present case, looked at from the customer's point of view, he is purchasing a supply of telecommunications services. The SPHC is simply part of the price he pays for the telecommunications service. The customer would expect to be able to pay by cheque or by credit card, and would also expect, if he put his mind to it, that whatever method he chose to pay by, the supplier would incur administrative costs. T-Mobile does not charge either Pay-as-you-go or business customers the SPHC and in respect of them treats the cost of processing the payments as part of its administrative costs, which in itself is ground for distinguishing this case from Bookit. There were no figures available for the number of errors on BACS payments, however where a customer paying by BACS gives an inaccurate T-Mobile account number, the same process has to be gone through as it does where there is an error when somebody has paid by cheque, it therefore is not simply a case of attempting to reduce staff time spent dealing with errors. It was accepted by Mr Steller that the benefit of the SPHC was to T-Mobile and not to the customers. It was also accepted that the £3.00 charge bore no relation to the actual cost of processing the payments. Neither the fact that the SPHC is made only to customers who pay by a non-preferred method, nor the fact that the SPHC appears as a separate item on the bill, has the effect of transforming the receipt of consideration in respect of the supply of the services into a separate distinct supply of a "payment handling" service: Levob. Any provider of goods or services for a consideration will incur administrative costs in respect of receipt of payment for the goods or services which it provides. They are the overheads of running a business. It is to be expected that by providing telecommunications services T-Mobile will receive remuneration. In our view it is inappropriate to analyse the transaction in terms of what is principal and what is ancillary. The supply of the SPHC in this case accounts for a small proportion of the price of the transaction as a whole, and does not constitute for customers an aim in itself.
- If we are wrong in holding that there is a single supply in the present case, then in our judgment the supply of the SPHC is an ancillary supply which takes on its VAT treatment from the principal service. The SPHC is not an end in itself, it has no independent existence or usefulness in isolation from the telecommunications services and is simply the means by which T-Mobile administers its receipt of payments for the telecommunications service.
- This appeal is dismissed. The Appellant is to pay the Respondents' costs of and arising out of this appeal. In the absence of agreement between the parties the matter is to be referred to the costs judge.
T-Mobile (UK) Ltd v Revenue & Customs (Rev 1) [2008] UKVAT V20521 (30 January 2008)
20521
EXEMPTION Customers of a mobile telephone company charged £3 in respect of all payment methods other than Direct Debit or BACS Whether an exempt charge Whether a single supply of telecommunications services Whether service ancillary to main supply of telecommunication services and takes on its liability Appeal dismissed
T-MOBILE (UK) LTD Appellant
Sitting in public in London on 17-19 September 2007
Mr Jonathan Peacock QC, instructed by Deloitte & Touche LLP, for the Appellant
Mr Alan Bates of counsel, instructed by the solicitor's office, for the Respondents
The Background
The legislation
19. Value of supply of goods or services
(1) For the purposes of this Act the value of any supply of goods or services shall, except as otherwise provided by or under this Act, be determined in accordance with this section and Schedule 6, and for those purposes subsections (2) to (4) below have effect subject to that Schedule.
(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.
Section 31 Exempt supplies and acquisitions
(1) A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9
Schedule 9 Group 5 of the VATA Finance provides:
Item No.
1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.
2. The making of any advance or the granting of any credit.
5. The provision of intermediary services in relation to any transaction comprised in Item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity.
Article 11(A)(1) of EC Directive 77/388 (Sixth Directive) provides:
(1) The taxable amount shall be:
(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes a consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;
(2) The taxable amount shall include:
(a) taxes, duties, levies and charges, excluding the value added tax itself;
Without prejudice or other Community provisions, Member States shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;
(a)
(b)
(c)
(d) the following transactions:
1. the granting and the negotiation of credit and the management of credit by the person granting it;
3. transaction, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, that excluding debt collection and factoring;
The British Hardware Federation VAT Decision 216
NV Nederlandse Spoorwegen v Staatssecretaris van Financien, Case 126/78, [1980] 1 CMLR 144
Muy's en De Winter's Bouw-en Aannemingsbedriff BV v Staatssecretaria van Financien, Case C-281/91 [1997] STC 665
Sparekassernes Datacenter (SDC) v Skaterministeriet (Case C-2/95) [1997]STC 932
Card Protection Plan Ltd v Customs & Excise Commissioners Case C-349/96 [1999] STC 270
Axa UK Plc (VAT Decision)
C&E Commissioners v British Telecommunications plc [1999] STC 758
Velvet & Steel v Finanzamt Hamburg-Eimsbόtel (Case C-455/05)
Customs & Excise Commissioners v FDR Limited [2000] STC 672
Card Protection Plan Ltd v Customs & Excise Commissioners [2001] STC 174
Commission v France, Case C-404/99
CSC Financial Services Ltd v Customs & Excise Commissioners Case C-235/00 [2002] STC 57
Debt Management Associates Limited v Commissioners of Customs & Excise VAT Decision 17880
Customs & Excise Commissioners v BAA Plc [2003] STC 35
WHA Ltd and another v Customs and Excise Commissioners [2004] STC 1081
Kingscrest Associates Ltd v Customs & Excise Commissioners Case C-498/03 [2005] STC 1547
Dr Beynon and Partners v Customs &Excise Commissioners [2005] STC 55
College of Estate Management v Customs & Excise Commissioners [2005] STC 1597
Levob Verzekeringen BV and another v Staastssecretaris van Financien [2006] STC 766
Bookit Limited v Revenue and Customs Commissioners [2006] STC 1367
Aktiebolaget NN v Skatteverket, Case C-111/05
Volker Ludwig v Finanzamt Luckenwalde, Case C-453/05
The Facts
Your responsibilities
3.1 Accepting cards
You must accept all cards as payments
You may charge different amounts for certain card payments, however, in all other respects you must treat purchases by card in exactly the same way as cash purchases.
3.2 Authorisation
You must :
When you ask us for authorisation we contact the card issuer to approve the card payment. Authorisation is not a guarantee of payment and it does not prevent us from charging the card payment back to you if any of the reasons set out in condition 4.1 apply. In particular, you should be aware that accepting a card holder not present payment is done so at your own risk, and the card issuer will not offer any guarantee of payment.
Overview
The Tandem is used to provide an authorisation service for card transactions made at Barclaycard Merchant Services acquired merchants.
Barclaycard Merchant Services acquired transactions are received by the Tandem from the appropriate point of sale device and forwarded to the relevant cardscheme for onward submission to the Card Issuer to action the request. The response is received by the Tandem and passed back to the point of sale.
In the event of connection problems with Card Issuers or Schemes, the Tandem can provide stand-in authorisation decisions, subject to pre-set parameters.
It appears that when the authorisation code is received by T-Mobile, T-Mobile does not know if it comes from the bank or from Barclays. Mr Steller did not know if the settlement files which were batched up by Solve/SE and sent to BMS included the authorisation code or not. It appears that all T-Mobile is doing is giving back to Barclays the authorisation codes which Barclays has obtained. No transfer of funds has taken place at this stage, it being assumed by T-Mobile that the transaction will proceed. It is only when the information has been sent to the issuing banks that money is received.
The Appellant's case
The Respondents' case
Reasons for decision
"The first is: on the facts do FDR make `transfers' within Art 13B(b)(3)? The second is: given that on any view FDR carry on a number of different activities in the execution of their contractual obligations as to issuers and acquirers, should at least some of these activities be treated as a `core' or `principal' supply, and thus a single supply (so as to attract a unitary tax treatment for the purposes of VAT even though the same activities, if treated individually, would or might attract differing tax treatments), and, if so, how should the core supply be described? The third is: if there is a core supply, what should its tax treatment be taxable or exempt?"
At paragraph 28 Laws LJ said:
"In my view the first of these three questions, as I have set them out, also falls logically to be addressed first."
We will therefore determine the question of whether or not the SPHC is an exempt transfer within Article 13B(b)3 before considering the question of whether or not there is a single supply.
"53. On this point, it must be noted first of all that a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. It is characterised in particular by the fact that it involves a change in the legal and financial situation existing between the person giving the order and the recipient and between those parties and the respective banks and, in some cases, between the banks. Moreover, the transaction which produces this change is solely the transfer of funds between accounts, irrespective of its core. Thus, a transfer being only a means of transmitting funds, the functional aspects are decisive for the purpose of determining whether a transaction constitutes a transfer for the purposes of the Sixth Directive.
"55. The contractual links between the bank and its customers do not diminish the role of the data-handling centre. It is from those links that the customer derives the right to have transactions effected, even if they are invoiced as services provided to the bank and also alter the bank's financial situation.
"56. Moreover, if point (3) of Article 13B(b) of the Sixth Directive covered only the service which a financial institution provides the end customer, only certain acts concerning transfers or transactions could be exempt. Such an interpretation would restrict the exemption in a way which is not supported by the wording of the provision in question. That wording does not restrict the exemption to that relation and it is sufficiently broad to include the services provided by operators other than banks to persons other than their end customers.
"57. It follows from the foregoing that an interpretation restricting application of the exemption provided for by point (3) Article 13B(b) to services provided directly to an end customer is unfounded."
" it is in my judgment that of the first importance to recognise that BACS for its own part exercises no judgment or discretion whatever. Once the relevant tape is prepared (and that is admittedly done by FDR) and delivered to BACS, the process is, as I have said, automatic. Moreover the inevitable outcome is a redistribution of the rights and obligation of payer and payee - a `change in the legal and financial situation' the very circumstances which in my judgment constitute a transfer of funds for the purposes of art.13B(d)(3). As far as I can see that result would only not be arrived at if the BACS hardware or software were to break down, or if (assuming this were possible) FDR were to countermand its instructions during the BACS payment circle. In those circumstances BACS is in my judgment merely the agency by which FDR effects transfers, in the full situation I have identified. Any other conclusion would be contrary to the good sense of the general law: qui facit per alium facit per se (he who does a thing through another does it himself). I cannot in this see the least affront to the reasoning in SDC; quite the contrary: it is a conclusion which conforms to the letter and spirit of art 13B(b) as it was explained in that case."
The reason why FDR's instruction to BACS was, in the words of the Court in SDC, "the execution of an order for the transfer of a sum of money from one bank account to another" was because BACS automatically carried out the instruction and so by giving the instruction FDR was effectively executing the order.
"It was the VAT treatment of this payment that was in dispute. Bookit services consisted of: (1) checking with Odeon the availability of tickets for the performance requested by the customer; (2) on receipt of confirmation from Odeon, informing the customer of the cost and the additional charge for card bookings; (3) taking card details and security information from the customer; (4) transmitting that information to Girobank (which seems to carry out the role of the acquirer bank in FDR) and obtaining Girobank authorisation for transactions in excess of a floor limit (it is also under an obligation to check card details below the floor limit); (5) confirming the purchase of tickets to Odeon; (6) confirming the booking to the customer who later collects the tickets from the cinema before the performance by putting the card into a machine that issues the ticket and card receipts; (7) during the night after the booking batching all card transactions that day per card issuer and transmitting details to each issuer; (8) the issuers provide an authorisation code for each transaction (or where it is not authorised, the reason; where this is "out of funds" Bookit may present the transaction the next day); (9) still during the same night, collating the authorised transactions and transmitting the details, including the authorising codes, to Girobank, (10) Girobank processes the payment, credits Bookit's account with Girobank with the price of the tickets and the handling charge within one or two days, and also debits the customer, and within one banking day transfers the credit by BACS to Bookit's nominated bank account (Girobank is under no obligation to make any payments to Odeon); (11) Bookit pays Odeon the price of the ticket (but not exceeding the amount received by Girobank from the card issuer) and retains the card handling charge; (12) Bookit pays Girobank a fee of 1.165% for Visa and Mastercard transactions and 6p per Switch transaction."
A matter of fact which is not referred to in this summary, but which is to be found at paragraph 24 of the judgment of Chadwick LJ in Bookit and which was a further finding of fact made by the tribunal in that case, which had had a further hearing following the initial hearing in order to make further findings of fact, is as follows:
"9. By obtaining authorisations from Card Issuers Bookit was able to negotiate lower charges by Girobank "
"Because the fourth component of the service supplied by Bookit [transmitting the card information with the necessary security information and the card issuer's authorisation cards to Girobank] to the customer does have the effect that funds are transferred to Bookit's account with Girobank in accordance with the obligations of Girobank under cl 3.1.1 of the MSA that the Vice Chancellor reached the conclusion that the exemption for which art 13B(b)(3) provides was available in the present case. In my view he was correct to do so."
"46. I accept that the machinery by which payment would be effected is unlikely to have been in the mind of the customer when he requested and accepted services from Bookit. But, as it seems to me, there can be no doubt that, in requesting and accepting Bookit's services, the customer contemplated and intended that some payment would be made which would enable him, on his attendance at the cinema of his choice, to collect the tickets which he needed; and intended that Bookit would arrange for that. The services which Bookit supplied as identified by the tribunal did have the effect which the customer contemplated and intended that they would have. The fact that the customer was indifferent to the machinery by which that effect was achieved seems to me irrelevant. The relevant questions are (i) what services were supplied by Bookit to the customer and (ii) did those services attract the exemptions for which art 13B(b)(3) provides. "
The Court held that the services did attract the exemption, and the case established that by passing the card information together with the authorisation codes to Girobank, the acquirer bank, Bookit, an outsider to the banking system, made the transfer. Bookit's role was therefore somewhat similar to that of FDR.
"39. It is not necessary to consider the precise meaning of the word `negotiation', which also appears in other provisions of the Sixth Directive, in particular, Article 13B(d)(1) to (4), in order to hold that, in the context of Article 13B(d)(5), it refers to the activity of an intermediary which has not occupied the position of any party to a contract relating to a financial product, and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contract. Negotiation is a service rendered to and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out its useful opportunities for the conclusion of such a contract, making contact with another party or negotiating, in the name of and on behalf of a client, the detail of the payment to be made by either side. The purpose of negotiation is therefore to do all that is necessary in order that the two parties may enter into a contract, without the negotiator having any interest of his own in the terms of the contract."
It is the case here that, whilst it might possibly be said that T-Mobile intermediates between the various card issuing banks and the customer to ensure that a valid payment is made by the customer, it is unquestionably the case that T-Mobile has an interest of its own in the terms of the contract. T-Mobile does not bring together the customer with the card issuer, nor is it performing work preparatory to the conclusion of a contract. Any payment made by the payer bank is made pursuant to its pre-existing contract with its customer. It is not T-Mobile who has bought it together with the customer, nor has T-Mobile done any work preparatory to the conclusion of any contract between the customer and his bank. For all the above reasons we do not find that the SPHC is an exempt charge.
"29. In this respect, taking into account, first, that it follows from Article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, 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 a transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, 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 (see Customs and Excise Commissioners v Madgett & Baldwin (trading as Howden Court Hotel)).
31. In those circumstances, the fact that a single price is charged is not decisive."
"29. In Card Protection Plan Lord Slynn in paragraphs which I have already quoted emphasised the need to take an overall view, without `over-zealous dissection', and to look for the essential purpose (objectively assessed) of a transaction. In Customs and Excise Commissioners v British Telecommunications Plc he referred to the need to look at the commercial reality. In the same case Lord Hope of Craighead said that a supply which comprises a single service from an economic point of view should not be artificially split. In Beynon Lord Hoffman explained:
`The Court of Justice observed that the diversity of commercial operations made it impossible to give exhaustive guidance as to how to approach the problem correctly in all cases. Regard should always be had to the circumstances in which the transaction took place. Every supply of "a service" is by definition distinct and independent but a supply which "from an economic point of view" comprises a single service should not be artificially split into separate "services". What matters is "the essential features of the transaction".'
"Lord Hoffman then went on to quote paragraph 30 of the ECJ's judgment in Card Protection Plan (see above)
"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 (see Customs and Excise Commissioners v Madgett & Baldwin) "
"In the course of this appeal there has been much discussion of paragraph 30 of the ECJ's judgment. In my opinion it is clear that this paragraph (which uses the introductory word `in particular') is dealing with a particular case exemplified by Madgett & Baldwin. It is not asserting that every distinct element of a supply must be a separate supply for VAT purposes unless it is `ancillary'. `Ancillary' means (as Ward LJ rightly observed) subservient, subordinate, and ministering to something else. It was an entirely apposite term in the discussion in British Telecommunications (where the delivery of the car subordinate to its sale) and in Card Protection Plan itself (where some peripheral parts of a package of services and some goods of trivial value such as labels, key tabs and a medical card, were subordinate to the main package of insurance services). But there are other cases (including Faaborg, Beynon and the present case) in which it is inappropriate to analyse the transaction in terms of what is `principal' and `ancillary', and it is unhelpful to strain the natural meaning of `ancillary' in an attempt to do so. Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services (Faaborg). Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services (Beynon)."
LON 2006/0011