UT/2023/000009 - [2024] UKUT 00162 (TCC)

Article 1 of the PVD establishes a common system of VAT, the principle of which entails a general tax on consumption applied to goods and services however many transactions take place before the stage at which the tax is charged. Article 1(2) provides that:

Article 2 specifies the transactions that are subject to VAT which include Article 1(a), the supply of goods, and Article 1(c), the supply of services.

There is no dispute that it follows from the second subparagraph of Article 1(2) of the PVD and Article 2 that each supply must be regarded as separate and distinct. As explained by the CJEU in Frenetikexito – Unipessoal Lda v Autoridade Tributária e Aduaneira (Case C-581/19) (“Frenetikexito”) this is subject to three well established exceptions which arise where:

Article 132 PVD includes the following relevant exemptions:

The medical exemption provisions are transposed into domestic law through the provisions of Group 7 Schedule 9 Value Added Tax Act 1994 (subparagraph 132(1)(b) corresponds to Item 4 of Group 7, and sub-paragraph 132(1)(c) corresponds to Item 1 of Group 7). In this appeal, nothing turns on the way the UK transposed the Directive. While the arguments before the FTT and the parties’ written pleadings referred to Item 1 and Item 4, we refer for simplicity and consistency to the b) and c) exemptions of Article 132(1).

Generally, a single supply will have a single tax treatment: Stadion Amsterdam CV (Case C-463/16). That caseconcerned a stadium tour where, to visit the museum in the stadium, one had to participate in the stadium tour. The referring court asked whether, where there was a single supply but there were different VAT rates, and if the fee could be split in correct proportion to the different elements, different VAT rates should be applied to those elements. The CJEU answered no: that approach would run counter to the case-law pursuant to which the elements were considered to be a single supply. It held at [26]:

That was the case even if it was possible to identify the price corresponding to each distinct element forming part of the single supply ([27]).

As to which elements of a complex single supply dictate the classification of the supply (for instance, as regards tax rate, whether the rate is exempt, standard rated, reduced-rate or zero-rated) the Court of Appeal in HMRC v Gray and Farrar International [2023] EWCA Civ 121 (“Gray and Farrar”)clarified that the primary test, in accordance with the CJEU’s decision in Město Žamberk v Finanční rěditelství Hradci Králové (Case C-18/12) (“Město”)is to determine the predominant element. There is no dispute that, in general terms, the effect of a complex single supply bearing the single tax treatment of the predominant element means that there will be elements within the supply, which, if they had been viewed separately, would have been classified differently. As Mr Henderson, who appeared for HMRC, pointed out, that is implicit in the test of predominance.

The core issue in this case is whether a different analysis arises in respect of the c) exemption in Article 132 (as that provision has been interpreted European Commission v UK (Case 353/85) (“EC v UK”) and Finanzamt Dortmund-West v Klinikum Dortmund gGmbH (Case C-366/12) (“Klinikum”)). Spectrum’s case, which the FTT rejected, is that those authorities mean the supplies of drugs and contraceptives here can never be part of a composite single supply under the CPP/Levob principles. The supplies must be regarded as separate supplies.

Given the centrality of EC v UK and Klinikum to Spectrum’s case and the role it played in the FTT Decision it is convenient to outline those cases at the outset.