That, in a nutshell encapsulates the difficulties of single versus multiple supplies, where it is not uncommon for what is provided to contain several distinct elements, one of which may even clearly seem to predominate, at least from the point of view of cost, but for what is actually taxed to be something completely different, with a different liability. This is a particular problem in the UK because of the number of zero-rate supplies, which should be protected, but not extended.
The primary single supply principle was enshrined years ago in the familiar words of Card Protection Plan case1 (CPP):
“There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, while 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...”
However CPP is not the end of the matter. It is also possible for there to be a single supply when several different elements are provided, none of which are ancillary to any other, where all are interdependent and of equal use to the typical consumer, and pointless without each other. The problem then arises when these elements have different VAT liabilities – what exactly is the single supply? This is answered by determining what the typical customer wants, and the economic reality of the situation. The economic reality may be that the elements come together to create a supply that is slightly different from all of them individually. So in the Deutsche Bank case2 the two elements of arranging transactions in securities (exempt) and analyzing and monitoring the assets held by the client investors (taxable) became a single taxable supply of managing a portfolio with the ultimate aim of fulfilling the investment strategy selected by the customer. And in the case of Morrisons3 , the charcoal (reduced rate) and the grill (standard rate) came together to become a single standard rate supply of a disposable BBQ.
Over the years, some cases have expanded the meaning of ancillary from the “better enjoying” definition in CPP above, to incorporate its dictionary meaning of subordinate, subservient or ministering to. This may mean that supplies which were not ancillary if just the CPP definition is used become so.
The problem here is always that the ancillary supply, or one or more of the intertwined elements loses its independent VAT identity. Where it would have been zero rated, reduced rated or exempt if supplied separately, the loss of identity creates a VAT cost. Should the taxable person’s entitlement to a relief enshrined in legislation always have to be sacrificed on the altar of EU case law?
Another recent UK case (appealed instantly by HMRC however) suggests that in some situations all of the above is disapplied and the ancillary supply does retain its separate VAT identity. In the case of Colaingrove4, CPP principles would have led to the conclusion that there was a single standard rate supply of serviced holiday accommodation. Users of holiday chalets paid a set amount for unmetered fuel and power each week which applying CPP would be for the better enjoyment of the accommodation. However fuel in holiday accommodation is classed as domestic fuel and is subject to the reduced rate under UK law.
The First Tier Tribunal disapplied CPP and held there was a separate supply of reduced rate domestic fuel and power because of the way the UK’s reduced rate fuel legislation itself ignores CPP by allowing a single supply for mixed domestic and commercial use to be apportioned and allowing certain de minimis supplies to be taxed as domestic fuel no matter what the actual use of the fuel might be. The FTT relied heavily on the “French Undertakers” the CJEU case5 in reaching this conclusion. Is this UK position replicated in any other countries?
This is not a straightforward area of VAT. The starting point of the authorities is often to tax the entire charge at the standard rate if any part of the supply would be standard rated, because any reliefs and exceptions must be construed strictly. But that approach may not always be right.
If the principal element is zero, reduced rate or exempt, consider whether a wider definition of ancillary might make an otherwise standard rate supply ancillary. Consider what the “typical customer” wants, and the economic reality of the position. Is it artificial to split the supply or could the elements legitimately be divided into separate supplies, not all of which are standard rated? Finally does the relevant domestic legislation support the disapplication of CPP in any situations?
In any case where the elements would be taxed differently from the sum of their parts it may be worth challenging the official line to see if the client’s liability can be reduced, while always bearing in mind the Halifax abuse principles, and the fact that a single supply should not be split artificially, of course.
1 Case C-349/96, Card Protection Plan, 25 February 1999.
2 Case C-44/11 (Deutsche Bank AG), 19 July 2012.
3 W M Morrison Supermarkets Ltd), 6 June 2012.
4 Colaingrove Limited , 29 January 2013.
5 Case C-94/09, European Commission v French Republic, 6 May 2010.