TC09596 - [2025] UKFTT 00895 (TC)

The concept of a “supply” is fundamental to the VAT system. In Adecco, Newey LJ (with whom both other members of the court agreed) set out the following propositions in relation to the scope of art. 2(1)(c) of the PVD, and the concept of a ‘supply’:

“38.

The following propositions can, I think, be derived from the case law:

i)

The concept of a "supply" is "an autonomous concept of the EU wide VAT system" (the Airtours case 2, at paragraph 20, per Lord Neuberger);

ii)

A supply of goods or services "for consideration", within the meaning of article 2(1) of the Principal VAT Directive, "presupposes the existence of a direct link between the goods or services provided and the consideration received" (Joined Cases C-53/09 and C-55/09 Revenue and Customs Commissioners v Loyalty Management UK Ltd and Baxi Group Ltd v Revenue and Customs Commissioners [2010] STC 2651, at paragraph 51 of the judgment of the Court of Justice of the European Union ("CJEU"); see also Case 102/86 Apple and Pear Development Council v Customs and Excise Commissioners [1988] STC 221, at paragraph 12 of the judgment);

iii)

A supply of services "is effected 'for consideration', within the meaning of art 2(1) of [the Principal VAT Directive], and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient" (Case C-653/11 Revenue and Customs Commissioners v Newey [2013] STC 2432, at paragraph 40 of the CJEU's judgment; see also Case C-16/93 Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509, at paragraph 14 of the judgment);”

When the Court of Justice of the European Union (“CJEU”) speaks of “reciprocal performance”, it is looking at the matter from the perspective of the supplier of the services and it requires that under the legal arrangement, the supplier receives remuneration for the service which it has performed. It is not necessary that the recipient of the service is legally responsible to the supplier for payment of the remuneration. It suffices that the arrangement is for a third-party to provide the consideration. Were it otherwise, taxpayers could structure their transactions so as to escape liability to pay VAT, so long as they could meet the “economic reality” test.

In Newey (CJEU), at [41], the court explained that:

“the supply of services is therefore objective in nature and applies without regard to the purpose or results of the transactions concerned and without its being necessary for the tax authorities to carry out inquiries to determine the intention of the taxable person.”

The case law from the European Court of Justice (“ECJ”) makes clear that, whilst the starting point is that every supply should normally be regarded as distinct and independent, there are circumstances where the supply of more than one item in a single transaction may be treated as a ‘single supply’ which takes its VAT treatment from whichever part of the supply predominates.  That case law has identified two particular situations where a supply which contains one or more elements as part of a single transaction may be treated as a single supply.

The first type of situation was explained by the ECJ in Card Protection Plan Ltd v C & E Comrs Case C-349/96 [1999] STC 270 (‘CPP’). The background to that case was that CPP provided its customers with protection against financial loss and inconvenience as a result of the loss or theft of credit cards and other items, such as car keys and passports.  In effect, the supply included both insurance and other more administrative services. The ECJ decided, at [30], that:

“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.”

The ECJ in CPP explains that, where “one or more elements” constitute the principal service, whilst “one or more elements” form an ancillary service, there will be a single supply. The ECJ cautioned, at [27], that:

“having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.”

This can be referred to as “the CPP situation”.

The second type of situation where there may be a single supply was considered by the ECJ in Levob Verzekeringen BV v Staatssecretaris van Financien Case C-41/04) [2006] STC 766 (‘Levob’). In that case, Levob entered into a contract to acquire a standard software package which would then be customised in various ways.  The ECJ concluded that, in addition to the situation described in CPP, there is a single supply:

“where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single indivisible economic supply, which it would be artificial to split.”

In HMRC v The Honourable Society of Middle Temple [2013] UKUT 250 (TCC) (‘Middle Temple’), the Upper Tribunal (“UT”) reviewed both CCP and Levob, as well as a number of subsequent decisions of the ECJ and set out, at [60], a number of key principles to be applied in determining whether a particular transaction should be regarded as single composite supply or as several independent supplies:

As the UT noted, at [57], there must not only be a genuine contractual freedom to choose, but the freedom of choice must reflect the economic reality of the arrangements between the parties.  A contractual freedom to choose to purchase items separately in circumstances where such a purchase would be significantly more expensive than buying them together does not reflect the economic reality of the arrangements.

As far as the “typical consumer” is concerned, the UT earlier noted, at [51], that:

“…it is necessary to have regard to the economic reason or purpose of the whole transaction from the point of view of the typical customer.”

The typical consumer is mentioned in [29] of CPP not as an arbiter of:

“.... whether one element of a supply is ancillary to another but rather as an aid to identifying precisely what has been supplied and whether that amounts to a single composite supply or several separate supplies.”

As was made clear by the UT in HMRC v The Ice Rink Company Limited [2019] UKUT 108 (TCC), at [19], this means a typical recipient of the package of supplies whose characterisation is in dispute - i.e., in this case, the flooring (carpet) and fitting.

The UT’s conclusion in Middle Temple, at [57], that “the ability of the customer to choose whether or not to be supplied with a particular element of a transaction is an important factor” as long as it is “a genuine freedom to choose which reflects the economic reality of the arrangements between the parties” followed its review of the decision of the ECJ in BGZ Leasing sp z oo v Dyrektor Izby Scarbowej w Warszawie (Case C-224/11) [2013] STC 2162 (‘BGZ’).  BGZ was a case where a leasing company leased goods to its customers, but required them to insure the goods.  The leasing company offered insurance which was taken up by many of the lessees.  There was, however, no contractual obligation for them to do so and they could have arranged insurance with a third party.

The ECJ concluded, at [39] to [42], that the insurance and the leasing were not so closely linked that they form a single transaction, and also that the insurance was not ancillary to the leasing as the insurance was an end in itself and not only the means to enjoy the lease under the best conditions. In particular, the ECJ noted, at [43], that the lessee had the option of insuring the goods with a third-party, which meant that:

“the requirement for insurance cover cannot, in itself, mean that a supply of insurance by the lessor....is indivisible or ancillary to the supply of the leasing services.”

The ECJ had already determined that the insurance was not ancillary to the leasing.  The ability to choose whether to obtain the insurance from the lessor, or from a third-party, was relevant only in the sense that this did not mean that the requirement in the leasing contract that the goods had to be insured meant that the insurance was nonetheless indivisible from, or ancillary to, the leasing.

The case of Lower Mill Estate (Warren J and Judge Wallace) involved a freeholder of land (‘LME’) with the benefit of planning permission for up to 575 residential homes, subject to a condition that they could not be occupied as principal places of residence. For VAT purposes, they were therefore regarded as second, or holiday, homes. The development of the land took place by LME granting agreements for lease of particular plots to third-party customers. Leases for 999 years were then granted by LME pursuant to those agreements, and VAT was charged on those leases. During the period covered by the assessment, those customers also signed build agreements with CBL to construct a holiday or second home on each such plot. The build agreements provided for stage payments to be made to CBL as various stages of the building works were completed. LME was assessed to VAT on those transactions.

HMRC contended that the leases and build agreements should betreated as effecting single supplies of completed holiday homes and, therefore, standard-rated. On LME’s appeal, the tribunal rejected that contention. However, the tribunal held that the transactions concerned constituted an abuse of rights such that the VAT treatment fell to be redefined in accordance with the principle in Halifax plc v C & E Comrs (Case C-255/02) [2006] STC 919, [2006] Ch 387 (‘Halifax’). In relation to the single supply issue, the tribunal had referred to a number of decisions of the ECJ, including CPP.

The UT held, at [43], that:

“43.

In our judgment, apart from any abuse or sham, it is not possible to combine supplies by two suppliers under two contracts so as to result in one supply for VAT purposes. The issue was considered extensively in the judgment of Arden LJ in Telewest. Given that the Court of Appeal itself declined to referany question for a preliminary ruling, we do not consider that we could properly refer any question ourselves unless the case law of the Court of Justice since the decision in Telewest gives rise to real doubt about the correctness of the decision of the Court of Appeal. In the absence of such doubt, we consider that Telewest provides a conclusive answer against HMRC’s contentions.”

And, at [46], the UT said this:

“46.

In our judgment, the correct treatment for VAT purposes, absent abuse, is that there are separate taxable supplies by LME, of leases of building plots, and by CBL, of building services. We reject HMRC’s alternative formulations whichever basis is relied on. These are (i) a straightforward single supply of completed holiday homes by LME to customers, (ii) a supply of building services by CBL to LME with a supply by LME of completed holiday homes to the customers, (iii) a joint supply by LME and CBL of holiday homes to customers and (iv) a supply by LME of completed holiday homes to customers by reference to some economic reality different from the apparent contractual arrangements. We consider that the decision in Telewest (with which we would not want to disagree even if it were open to us to do so) leads us inevitably to the conclusion which we have reached.”

As is apparent from the decision, the UT in Middle Temple considered the decision of the Court of Appeal in Telewest Communications plc v C & E Comrs [2005] EWCA Civ 102, [2005] STC 481 (‘Telewest’). The Telewest decision raised what is commonly known as “the package argument”. In Telewest, cable television was supplied by one of the regional companies in the Telewest group and, following arrangements implemented with the specific object of achieving supplies which were not ancillary to the provision of cable television services, a subsidiary of Telewest Communications Ltd (the parent company of the group) was formed to provide copies of the Cable Guide magazine. Viewed as a separate supply, the latter provision was zero-rated as a publication. The Court of Appeal rejected the argument that separate supplies could be fused together.

There can usually only be a single, composite supply if the same supplier is supplying all elements. In Lower Mill Estate, at [43], the UT said this:

“…apart from any abuse or sham, it is not possible to combine supplies by two suppliers under two contracts so as to result in one supply for VAT purposes.”

In Secret Hotels, at [57], the court however cautioned that one must be careful before stigmatising the contractual documentation as being “artificial”, bearing in mind that EU law, like English law, treats parties as free to arrange or structure their relationship so as to maximise its commercial attraction, including the incidence of taxation.

For the purposes of this appeal, if there is a single supply (which is of course disputed by the Appellant), it must be on the basis that the supply of the fitting services is ancillary to the supply of the carpets and other flooring.