The debate on whether a supply is a mixed supply continues and in some cases appears to have turned full circle. With the well-versed logic of Card Protection Plan under threat from new challenges, historically accepted mixed supplies may be regarded as single supplies, with a single dominant feature. Furthermore single supplies are increasingly more likely to be challenged as mixed supplies with multiple VAT treatments. The fact that much hangs on someone’s view of what is in the mind of the customer when they make their purchase means uncertainty is likely to reign for the foreseeable future.
This article focuses on some of the practical and commercial considerations arising from the continued debate over mixed and single supplies.
What is a mixed supply?
A mixed supply is one which has two or more constituent parts, each one with its own purpose. Where the constituent parts are all subject to the same rate of VAT there is no great issue, but where the individual parts are subject to different rates of VAT, how are these to be valued? We have long relied on the ECJ decision in Card Protection Plan (Case C-349/96) [1999] STC 270) as a benchmark. Many useful pointers arise from this decision and subsequent cases such as Levob (Case C-41/04 [2006] STC 766). However the test that continues to cause most difficulty is effectively the question of where, in the eyes of the consumer, the value and benefit lies.
By way of example, Purple Parking (Purple Parking Ltd v HMRC [2009] SFTD 445) provides an airport service involving secure parking and transportation between the parking facility and the airport terminal. Supplied individually, the parking will be subject to VAT at the standard rate, whereas the passenger transport is zero-rated. Are there two separate dominant purposes resulting in a mixed supply with VAT due at the respective rates or is there a dominant supply or purpose resulting in a single supply with a single VAT rate?
The taxpayer had treated its supplies as entirely subject to VAT. It subsequently considered that part of the consideration should be zero rated as relating to supplies of passenger transport. The Tribunal, relying on Card Protection Plan, dismissed the appeal stating that the company was making a single supply of parking facilities with the transport element regarded as incidental. However, given a different commercial structure the dominant purpose may be regarded as the passenger transport, with the parking facility regarded as incidental.
Where a single supply is determined, the business needs to decide which part of the supply is dominant. This is not as easy to determine as it might first appear.
Purposive view
Recent decisions, from the Tribunal to the ECJ, have drawn on a purposive test, ie, what does the consumer think that he is getting, or what is the purpose of the supply in the eyes of the consumer? Clearly this can be extremely difficult for the supplier to judge as, given the Purple Parking scenario, now referred to the ECJ, one customer will consider that the sole purpose of the transaction is to get to the terminal building, whereas another will consider the purpose being the safe and convenient parking of his vehicle, and another will value both equally. So where does that leave the supplier in attempting to account for VAT correctly?
The decision in Purple Parking was contrary to the decision reached in 1984 for a similar service supplied by Courtland’s Car Services in which the parking and passenger transport were regarded as a mixed supply and valued appropriately. Presumably there are similar issues for any provider of park-and-ride facilities.
As consumer demand alters, so suppliers attempt to meet that demand and the nature and purpose of the supplies naturally evolve. Arguably, there is no purpose for the parking alone if the customer is not aiming to get to the airport terminal, hence the transport to the terminal is key in allowing the customer to achieve this aim. It surely cannot therefore be regarded as ancillary.
Linked goods/promotions
Many readers will be aware of linked goods promotions, such as nappies supplied with a toy box and biscuits supplied with a decorative tin – these specific commercial offerings were the subject of VAT litigation and while there are a number of concessions and specific VAT rules relevant to the scenarios in question, the commercial offerings serve to illustrate perfectly the purposive test. Similarly, magazines are often sold with free gifts attached to the front cover.
Leaving aside the cover mount concession and business gift rules, do such packages retain a single dominant purpose of a zero-rated paper publication with an ancillary gift, or do the free gifts provide a further dominant purpose resulting in VAT being due in respect of the gift element? Notwithstanding the predictable difficulties in valuing a ‘free’ gift, the purpose or motive for the consumer in purchasing a magazine with a free gift cannot be assumed. Many consumers remain fiercely brand-loyal and will purchase items regularly regardless of whether a competing product contains a promotional item. However, consumers can be swayed by the latest special offer, free gifts and BOGOF promotions.
Where a consumer regularly purchases a magazine but is not loyal to a particular title and the choice of publication is determined by the offer or freebie, does this and should this alter the VAT treatment of the underlying magazine? One of the main objectives of businesses offering promotions is to steal market share from competitors and to the extent that they periodically offer an additional item that their competitors do not, they are clearly taking the view that the consumer will be swayed by the additional item and place some value on it.
Increased sales figures for products during promotional periods bear testament to these consumer purchasing habits and this begs the question as to how a business can have any certainty about what is in the mind of an often varied customer base with different aims and objectives. Given the trend towards a purposive approach there remains scope for challenge and businesses should not assume that the VAT treatment applied in the past provides any certainty to retain the status quo for the future.
HMRC’s challenge to contractual arrangements
In Telewest Communications plc v C & E Comrs [2005] EWCA Civ 102, CA, Telewest supplied broadcasting services to subscribers and provided a monthly magazine containing programme listings. Until 1999 it treated the supply of the magazine as zero-rated; this approach was challenged by HMRC which issued a ruling that there was a single supply of standard rated subscription services. Telewest established a separate company to supply the magazine, with the payment collected by the broadcasting service company.
However, the Court of Appeal considered that there were two separate supplies made by two persons under two contracts and that these should not be combined to produce a single supply merely because the customer could not enter into one transaction without the other. Provided the arrangements are at an open market value and the customer is made aware of whom he is contracting with, the courts have regularly supported the viability of such structures. Following a number of cases which seek to split supplies and benefit from zero-rating HMRC have now issued draft legislation.
The purpose of the legislation is to prevent zero-rating where an item of printed matter is connected with a supply of services made by a different supplier. This seeks to break the approach confirmed by the Court of Appeal in Telewest, as above, by preventing zero -rating where the supply would be regarded as a single supply if it were supplied by the same person. HMRC have already received numerous valid comments on both the draft and the uncertainty that the legislation would create against the backdrop of commercial arrangements.
Hospitality and catering
HMRC have long considered that catering supplied with room hire is a single supply of catering and subject to VAT at the standard rate, irrespective of whether the supplier has made an option to tax in respect of the hired property, as per Best Images (2010) and others. The recent decision of the Upper Tribunal in Diana Bryce ([2010] UKUT 26 (TCC)] has introduced an alternative perspective. Diana Bryce supplied children’s parties consisting of the use of a hall and the provision of refreshments, with the package supplied for a single price.
The single supply approach of the hire of the hall adopted from Card Protection Plan was not considered appropriate by the First-tier Tribunal, and the supply was instead regarded as consisting of two separate elements, the exempt supply of the hall and the standard rated provision of refreshments.
The Upper Tribunal preferred that the taxpayer was providing a single transaction of children’s parties including entertainment and refreshments. The initial decision of the First-tier Tribunal suggests that the structure and substance of commercial arrangements may help to determine the VAT liability of the supplies. It is perhaps also reasonable to look to a purposive test to consider what is important in the eyes of the consumer.
The future
The above potentially means that businesses, in order to have certainty over VAT treatment, will be required to consider alternative arrangements which may not be commercially beneficial or even viable for the business. Does this remove the taxpayer’s right of legal certainty and/or legitimate expectation in that its motive for commercial transactions becomes more highly focused on ensuring that its arrangements cannot be challenged as abusive, rather than just considering whether the arrangements are commercially attractive to the business? The one certainty seems to be that the future is uncertain.
Julie Park, Director, The VAT Consultancy
Karen Mulcahy, Consultant, The VAT Consultancy
