Article by Chris Orchard, Management Group, PricewaterhouseCoopers, published in the June 2001 issue of Tax Adviser. It is not surprising that the question of whether a transaction with more than one element is one supply or many supplies has been a thorny problem since the inception of VAT. For the VAT system to work, it is essential to determine first what has been done. The earliest tribunal decision on this issue was number 31 (there are now over 17,000). It concerned the number of supplies made in a launderette transaction (Mander Laundries).
Its importance is highlighted by the many articles written on the topic that have focused on case law developments and the various authors’ interpretations of the implications of relevant judgments. This article intends to provide a slightly different perspective, that is, to consider the recently published Customs & Excise policy outlined in Business Brief 2/2001.
Customs’ new position is outlined in Business Brief 2/2001. This effectively states that previously decided cases, and rulings, are now back in the melting pot They say that they intend to adopt the tests outlined in Card Protection Plan Ltd v C & E Commrs  STC 174 with effect from 1 June 2001. Businesses therefore have until that date to consider the tests and decide if any multi-element transactions they are involved with may be affected.
In the Business Brief, Customs note (and the author agrees) that it is not possible to give exhaustive advice on how to approach the problem correctly in all cases, which may sound like manna from heaven to VAT specialists and those involved in VAT litigation. It is an essential part of the analysis of multi-element transactions to establish the precise facts. Given that facts will often differ, even for ostensibly similar transactions, exhaustive guidance is unlikely to ever be possible.
Given Customs’ proposal to require businesses to reconsider the VAT liability and get it right from 1 June 2001 it is necessary to consider the issues that arise from Business Brief 2/2001. These can be summarised as:
- what are the CPP tests?
- are the CPP tests so radical that they override earlier
principles and judgments – some of which go back over 20 years?
- are the tests sufficiently clear so that businesses and their advisers know how they should be applied?
- in post CPP litigation, has it been demonstrated that Customs & Excise comprehensively understand the very tests that they are seeking to apply?
The CPP tests are outlined in the Business Brief as follows:
‘As its starting point, the ECJ relies on its earlier judgment in Faaborg-Gelting Linien, where it held that, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place.
‘At the same time, two fundamental principles must be taken into account. Every supply must be regarded as distinct and independent, and a supply which comprises a single supply from an economic point of view should not be artificially split, so as to distort the functioning of the VAT system. With all this in mind, the essential features of the transaction must be ascertained in order to determine whether the customer, being a typical customer, is being provided with several distinct principal supplies or with a single supply.
‘The Court goes on to say that there is a single supply in particular where one or more elements are to be regarded as constituting the principal service, while one or more elements, by contrast, are to be regarded as ancillary services which share the tax treatment of the principal service. It indicates that 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.
‘The charging of a single price is not decisive. A service provided to customers that consists of several elements for a single price may suggest there is a single service. But if the circumstances of the transaction indicate that customers intended to purchase two distinct services to which two different tax liabilities apply then the single price would need to be apportioned.
‘Customs consider that the tests laid down by the Court will be appropriate in the great majority of cases, and will apply to transactions, whether the individual elements are of goods or services or a combination of both. Customs also consider that (as held in the House of Lords British Telecommunications plc case) no single factor will provide the sole test, and therefore the ECJ tests should be applied as a package.’
It can be noted that the tests are referred to as the ECJ tests. Whilst the House of Lords of course applied the ECJ judgment, it is noteworthy that they also referred to prior decisions, in particular the ‘economically and physically dissociable’ test referred to in the ECJ decision in EC Commission v UK  STC 251.
Businesses however know the tests that are being applied – they are the ECJ tests referred to in the Business Brief.
However, it may not be as simple to apply the tests as businesses would like.
The CPP tests – a radical approach?
The approach adopted by the tribunaI, as far back as 1973, in the Automobile Association case for determining the number of supplies in a multi-element transaction involved asking ‘what in substance and reality is the service for which the subscription is paid?’. The High Court considered that that tribunal answered this question as a matter of fact.
Whilst there has been a lot of case law since the AA case, including argument over whether the issue is a question of fact or a question of law, that basic approach does not seem to have been challenged. CPP does not alter the starting position – that is, establishing what was done for the payment(s) received. Indeed, as noted above, the European Court adopted the same test in Faaborg-Gelting Linien  STC 7747).
There is nothing new about having regard to all of the circumstances in which a transaction takes place. There may of course be issues as to where the boundaries lie, that is which circumstances constitute ‘all of the circumstances’ but there is little additional guidance provided by the decision in CPP. What CPP does is to re-state the test in a number of statements, e.g. by pointing out that a single consideration may not be determinative of the number of supplies. You have to look at what is done by the supplier in return for any payment received.
Similarly, there have been numerous cases which considered the concept of ancillary elements which are subsumed within a principal suppIy – whether the term ‘ancillary’ had been used or some other term. However, CPP has provided assistance in determining what is considered to be an ancillary supply using the concept provided in the ECJ judgment of C & E Commrs v Madgett (t/a Howden Court Hotel) (Joined Cases C-308/96 and C-94/97)  STC 167 that a supply may be regarded as ancillary if it does not constitute for the consumer an aim in itself but provides a means for the better use and enjoyment of the principal supply.
A different approach considers the ‘typical consumer’
Where CPP does depart from previous approaches is by suggesting that the question requires consideration of the perspective of the ‘typical consumer’. However, it should be borne in mind that VAT is a self-assessed tax. It is usually the supplier who has to account for the tax and therefore determine the liability of any supplies it makes. It is also the case that consideration for supplies is subjective, that is the consideration for any particular supply is the amount agreed between the parties.
It is possible to foresee different views between Customs and taxpayers as to who constitutes a ‘typical consumer’. Similarly it is clear that the issue of what are the objectives in supplying a typical consumer will lead to continued disputes. It seems to the author that the taxpayer can in most circumstances know what he is selling to his ‘target market’. However, individual purchasers may have very different objectives from the vendor. Given that the number of supplies can be relevant for both the supplier and for the recipient, it is easy to foresee circumstances where the vendor and the purchaser disagree on the number of supplies involved in a single transaction.
Another possibility is that a purchaser may look for alternative suppliers to confirm the disaggregation of supplies which Customs may seek to treat as a single supply if provided to the purchaser in a package.
In short, it does not seem that the CPP tests are a radical departure from the established case law. There are some elements of the tests which pose further questions which will doubtless be addressed by the courts in due course. They may point to deficiencies in the prior application of the test in the trbunal or courts. However, why should businesses now have to second guess which of these decisions should be re-examined in the wake of CPP?
Customs success at applying the CPP tests
Businesses may ask how effective Customs & Excise have been in applying the CPP tests themselves. Since the ECJ has delivered judgment there have been several cases where CPP has been argued by Customs & Excise in support of the position they have adopted. In several cases, both before the tribunal and before the Higher Courts their position has been rejected (e.g. Appleby Bowers No. 16,719,  STC 175. In a very recent tribunal decision considering the liability of supplies at a stables involving stabling and livery, the tribunaI invited both parties to make further submissions following the House of Lords judgment (John Window (No. 17,186)). Neither party took up to the offer. Customs’ contentions in that case were rejected.
The author makes no comment regarding the merits of arguments submitted in that case, but uses the case as a means of illustrating that even post CPP, and the publication of the guidance contained in the Business Brief, Customs are far from guaranteed to be correct in their analysis.
Whilst there is no doubt that the CPP judgment is a significant one it is unlikely to have such a far reaching impact on previous judgments as Customs and Excise may suppose. Each case will be based on its own facts. Interpretation of the tests will be a battleground. With VAT now over 27 years old, it may not be the beginning of the end for this issue but it may be the end of the beginning.
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June 2001 by