Article edited by Elizabeth Wilson, Richard Vallat, James Henderson and Sarah Dunn, all from Pump Court Tax Chambers, and published in the April 2001 issue of "Tax Adviser". On 31 January 2001, the House of Lords released their decision in
Card Protection Plan Ltd v C&E Commrs [2001] STC 174, following the ECJ’s decision [2000] STC 270. Shortly afterwards, Customs and Excise released a new business brief, setting out the policy that they will now adopt to distinguish between a single composite supply and multiple independent supplies.
The ECJ laid down the following test for determining whether a transaction is a single composite supply or multiple independent supplies. One has to identify the essential features of the transaction and determine whether one or more element or elements constituted a principal service to which the others are ancillary. If so, there is a single supply. Elements are ancillary if they do not constitute for customers aims in themselves but rather enable the better enjoyment of the principal service. In contrast there would be separate supplies if the circumstances showed that customers intended to buy two distinct services.
Card Protection Plan (CPP) operates a scheme to protect its members against the financial loss and inconvenience that might result from loss or theft of credit cards or other valuable items. In return for the subscription, CPP keeps a record of members’ credit cards and provides limited cover against loss from fraudulent use of the cards (under a block policy taken out with a third party). There is a number which members can call if their cards are lost or stolen; CPP then notifies the issuing companies. CPP provides a number of other services including notifying card issuers of members’ changes of address, keeping a register of valuable items; issuing security tags; providing cash advances in emergencies and so on. The question of whether there is a single supply or several supplies is only important if one or more of the elements, on their own, would have different tax implications from one or more others. In Card Protection Plan, the first question was whether any of the services were exempt insurance services. The ECJ described the essentials of an insurance transaction as an undertaking by the insurer, in return for a premium, to provide an agreed service in the event of materialisation of the risk covered. It went on to say that the agreed service need not necessarily be a cash payment. It could be the provision of assistance in kind, of the type listed in the annex to EC Council Directive 73/239 (the insurance directive). Adopting this extended definition of insurance, a number of other services provided by CPP fell within it. Examples are notification of the insured’s credit card issuers of the loss or theft; the emergency cash advance; the lost luggage recovery service; the emergency medical cover and the emergency purchase of an air ticket home. Thus at least some of the services provided by CPP were exempt insurance services within art. 13(B)(a) of the sixth directive (implemented by VATA 1983, Sch. 6 Grp. 2, Items 1 and 3 and now VATA 1994, Sch. 9 Grp. 2, while other services were taxable. Accordingly, the House of Lords had to consider whether on the application of the ECJ’s test (i) there were multiple separate supplies so that the consideration paid by the member had to be apportioned between the exempt insurance transactions and the other taxable services, (ii) there was a single supply of exempt insurance transactions to which the other services were ancillary, or (iii) there was a single supply of taxable services to which the insurance services were ancillary.
The House of Lords held that CPP makes a single supply of exempt insurance services. Lord Slynn said that the ECJ’s judgment established that the task of the national court was to look at the essential features of the transaction to see whether there are several distinct principal services or a single service. If, from an economic point of view, there is a single service, this should not be artificially split. He went on to analyse some of the particular services provided by CPP. He accepted that it was possible to find that some of the services – if separated out and looked at in isolation – were not on their face insurance as commonly understood. Examples included the provision of computer records; the change of address service; and the printout and updating of registered card details. Others plainly were insurance of an obvious kind. The cover of £750 against fraudulent use prior to notifying CPP and the unlimited cover thereafter are obvious examples.
In trying to ascertain the essential feature of the scheme or its dominant purpose, Lord Slynn asked himself why, objectively, people might want to joint it. He concluded that it was to obtain insurance cover against loss arising from the misuse of credit cards or other documents. The services which are not themselves insurance are all ancillary or incidental to this main purpose.
The two alternative analyses were both rejected. One – that the insurance services were ancillary to the credit card registration service – was regarded by the House of Lords as simply unreal. It was not possible to say that some elements of the transaction were economically dissociable from the others. The other – that the services which were not themselves insurance constituted a separated supply – was rejected both because those services were not sufficiently coherent to be treated as a separate supply and because they were ancillary to the provisions of insurance.
Customs and Excise issued a business brief on 15 February 2001 in the light of the ECJ’s decision, as applied by the House of Lords. The business brief acknowledges that those who have previously relied on earlier UK litigation may find that applying the ECJ tests produces a different result. It anticipates that some supplies which were previously treated as multiple supplies will now be single supplies of a principal service. Obviously, this may mean an increase or decrease in the VAT payable.
The business brief will not affect a trader who has not relied on earlier UK litigation, or on rulings, trade agreements or statements of practice based on such litigation. He should already be applying the Card Protection Plan tests. In contrast, traders who have relied on earlier UK litigation, or on rulings, trade agreements or statements of practice based such litigation, will not be required to apply the ECJ tests until 1 June 2001. The purpose of this advance notification is said to be the need to give these traders time to review their position and to make necessary changes to their accounting systems. Customs does reserve the right to review past periods if they consider the supplies have formed part of a tax avoidance arrangement.
Obviously, a trader falling into the second category whose VAT liability would be reduced by applying the ECJ tests may apply them immediately. He may also claim repayment for previous periods subject to the three year cap and unjust enrichment rules.
What of the trader who is worse off under the ECJ tests than he would have been if he had relied on earlier UK litigation, but who never did rely on such litigation? He may feel aggrieved that until 1 June 2001 he will pay more VAT than his competitor who makes similar supplies, because his competitor has been relying on earlier UK litigation. British Sky Broadcasting Group, a satellite broadcasting company, supplied its subscribers with both broadcasting services and a listings magazine for a single price. The broadcasting services were standard-rated and the listings magazines zero-rated. Until June 1998, BSkyB was treated as making a mixed supply, as were a number of cable companies who made similar supplies. In June 1998, Customs reconsidered the position and determined that BSkyB was making a single supply of standard-rated services. BSkyB’s appeal against that determination failed. In August 1999, similar treatment was applied to the cable companies. The Sheldon principle prevented retrospective application of the single supply treatment to any of the companies. In BSkyB v C&E Commrs (8 February 2001), BSkyB applied to the High Court for judicial review. It complained that Customs had infringed the duty to act fairly by treating differently (between June 1998 and August 1999) companies whose positions were in fact identical in law. Elias J rejected BSkyB’s claim. The evidence established that Customs did not perceive the companies’ positions to be identical at the material time and that there were potentially material differences between them. He held that the duty to act fairly could not be infringed when Customs did not realize that the two companies’ positions were the same in law.
It is implicit in the decision that the material differences which Customs must perceive before different treatment is acceptable must be differences which could (albeit that they do not in fact) affect the strict legal position. The differences between the trader who has relied on earlier UK litigation, etc., and the one who has not, are (i) that reliance; and (ii) the need to change accounting systems. Might these
differences mean that their positions are not identical in law?
Finally, returning to Customs’ business brief, a new concession is proposed. This applies to non-profit-making membership bodies who, in return for subscriptions from members, supply a mixture of zero-rated, exempt and/or standard-rated benefits. Under the new tests, this would normally be treated as the supply of a principal benefit with one or more ancillary benefits. The VAT treatment of the latter would be disregarded. By concession, the membership body may choose to apportion the subscriptions to reflect the VAT liability of the individual benefits provided that the concession may not be used for tax avoidance purposes. Comments were invited by 11 May 2001.
Technical Department
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April 2001 by
