The European Court of Justice (ECJ) ruled that the fact that specific goods were counted as a single supply, including both a principal item which was by virtue of a member state's legislation subject to an exemption with refund of the tax paid within the meaning of art. 28(2)(a) of Council Directive 77/388 (the sixth directive) and items which the national legislation excluded from the scope of that exemption, did not prevent the member state concerned from levying VAT at the standard rate on the supply of those excluded items.

Facts

The taxpayer sold both new and used static caravans and there was agreement that those were zero-rated under the Value Added Tax Act 1994, Sch. 8, Grp. 9, item 1. An issue arose as to the correct VAT treatment of standard features sold with new caravans. The items in question included bathroom suites, floor coverings, curtain rails and curtains, cupboards, kitchens, including appliances, tables mirrors, wardrobes and beds. The taxpayer had historically accounted for VAT on such items at the standard rate and it was common practice in the trade for VAT to be charged on standard features included in the sale of caravans.

The taxpayer relied on the case of Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] BTC 5,121; [1999] ECR I-973, an analysis of which, it contended, led to the conclusion that a single supply of a fitted-out caravan was made. In the taxpayer's view, the standard features could not be regarded as constituting discrete supplies, but were a minor part of the supply of a caravan. It maintained that that view was consistent with the finding in C & E Commrs v British Telecommunications plc [1999] BTC 5,273, where Customs successfully argued that the consideration paid upon purchase of cars included the delivery charge and that there was a single taxable supply. The taxpayer submitted that there was a parallel with the present case: the customer wanted a fully-fitted caravan, not something that required further equipping before being capable of use, and that was the only supply available as the taxpayer did not supply caravans without the standard features. The taxpayer's customers paid a single price, which was apportioned between the caravan and the standard features for no reason other than to comply with Customs’ requirements. From every other point of view, the customer paid a single price for a single supply; he had no option of buying the caravan without the standard features. On the other hand, a customer could buy optional extras, such as steps or a television, and he would rightly be charged VAT at the standard rate for those items.

Customs argued that the decision in Card Protection Plan Ltd could not be used to override clear legislative provisions and that the legislation in Sch. 8, Grp. 9 was clear. It correctly implemented what was required and permitted by the sixth directive and could lead only to the conclusion that the standard features were to be taxed at the standard rate. In Customs’ view, if the taxpayer was correct, the result would be that the UK must exceed the limits of the derogation permissible under art. 28 of the sixth directive by zero-rating supplies that were not previously zero- rated.

The VAT tribunal dismissed the taxpayer's appeal, holding that whilst the supply of a caravan to include standard features was one single supply for VAT purposes, such consideration as was attributable to items falling within Grp. 9, Note (a) was taxable at the standard rate, whilst the rest was zero-rated. That decision was upheld on appeal to the High Court ([2004] BTC 5,478).

The taxpayer appealed to the Court of Appeal which referred to the ECJ for a preliminary ruling on the interpretation of art. 28(2)(a) of the sixth directive.

Issue

Whether, where a member state had, by its domestic legislation, exercised its right of derogation pursuant to art. 28(2)(a) of the sixth directive to zero-rate a supply of specified goods but had identified items to be excluded from the scope of the zero rating, the fact that there was a single supply of goods (together with the excluded items) precluded the member state from charging VAT at the standard rate on the supply of the excluded items.

Decision

The European Court of Justice (First Chamber) (ruling accordingly) said that, in authorising member states to apply exemptions with refund of the tax paid, art. 28(2) of the sixth directive laid down a derogation to art. 12(3), which governed the standard rate of VAT.

It was also apparent from the wording of art. 28(2)(a) that the application of exemptions with refund of the tax paid was subject to a number of conditions. Those exemptions must have been in force on 1 January 1991. In addition, they had to be in accordance with Community law and established for clearly defined social reasons and for the benefit of the final consumer.

In the present case, it was not disputed that, in so far as VATA 1994 exempted with refund of the tax paid caravans of the kind supplied by the taxpayer, those conditions were fulfilled: it was acknowledged that the zero-rate was in force on 1 January 1991 and that it was established for social reasons. It was also common ground that VATA 1994 specifically excluded some items supplied with the caravans from exemption with refund of the tax paid. It followed that, so far as those items were concerned, the conditions laid down in art. 28(2)(a), in particular the condition that only exemptions in force on 1 January 1991 could be maintained, were not fulfilled.

Therefore, an exemption with refund of the tax paid in respect of those items would extend the scope of the exemption laid down for the supply of the caravans themselves so that items specifically excluded from exemption by the national legislation would be exempted nevertheless pursuant to art. 28(2)(a) which would run counter to its wording and purpose, according to which the scope of the derogation laid down by the provision was restricted to what was expressly covered by the national legislation on 1 January 1991. Article 28(2)(a) could be compared to a stand still’ clause, intended to prevent social hardship likely to follow from the abolition of exemptions provided for by the national legislature but not included in the sixth directive. Having regard to that purpose, the content of the national legislation in force on 1 January 1991 was decisive in ascertaining the scope of the supplies in respect of which the sixth directive allowed an exemption to be maintained during the transitional period. Furthermore the provisions of the sixth directive laying down exceptions to the general principle that VAT was to be levied on all goods or services supplied for consideration were to be interpreted strictly.

The fact that the supply of the caravan and of its contents might be characterised as a single supply did not affect that conclusion. The case law on the taxation of single supplies relied on by the taxpayer did not relate to the exemptions with refund of the tax paid with which art. 28 was concerned. While it followed that a single supply was, as a rule, subject to single rate of VAT, the case law did not preclude some elements of that supply from being taxed separately where only such taxation complied with the conditions imposed by art. 28(2)(a).

In that connection, there was no set rule for determining the scope of a supply from the VAT point of view and therefore all the circumstances, including the specific legal framework, had to be taken into account. In the present case, the legislature had determined that only the supply of the caravans themselves should be subject to the zero-rate. It did not consider that it was justified to apply that rate also to the supply of the contents of those caravans. Finally there was nothing to support the conclusion that the application of a separate rate of tax to some elements of the supply of fitted caravans would lead to insurmountable difficulties capable of affecting the proper working of the VAT system.

European Court of Justice (First Chamber) Judgment delivered 6 July 2006.