The High Court held that the supplies made on receipt of a fee as a condition of enrolment to the taxpayer's activity club for children were ancillary to a standard rated supply of club membership for VAT purposes.

Facts

The taxpayer was the franchisor of an activity programme for pre-school children. The programme involved the attendance of children with their parents at sessions of structured physical play run by local franchisees. Parents were required to pay the franchisee up to £8.50 per session and, to be eligible to attend, the child was required to enrol as a member of the Tumble Tots Club. That involved submitting to the taxpayer, via the franchisee, a registration form together with a fee of £19. On admission to membership, the taxpayer provided a number of benefits including a T-shirt, DVD, CD, gym bag, handbook, membership card, personal accident insurance and six issues of a magazine.

Customs took the view that the £19 fee was consideration for a single standard rated supply of membership. Alternatively, they contended that if there were multiple supplies, a proper apportionment of the consideration had to be made between the zero rated items, such as the T-shirt and magazines, on the one hand and various membership rights on the other. The taxpayer argued that it made a mixed supply comprising standard-rated and zero-rated elements or, alternatively, that if there was a single supply it should be zero-rated because the predominant element of the supply was zero-rated.

Customs relied on the principles established in Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] BTC 5,121; [1999] ECR I-973 and College of Estate Management v C & E Commrs [2005] BTC 5,673 and submitted that the tribunal should first ask whether the supply by the taxpayer of membership was a single supply or two or more separate supplies. They argued that the tribunal should take an overall view of the supply having regard to its essential features. On that basis the taxpayer made a single supply of membership and the membership pack merely enhanced the membership: it was ancillary to the main supply and was not a separate supply made up of the items in the pack. Customs further submitted that the man in the street would say that in return for the £19 the parent received the right of access for his or her child to the classes. That right, they added, was a single principal supply to which all else was ancillary.

The taxpayer argued that the first question was what was supplied in consideration for the £19 payment? It could not be the right of admission since that could only be granted by the franchisee. In the taxpayer's view, there was insufficient link between its supply and admission to the classes to justify Customs’ contentions. The taxpayer argued that what the customer received in return for the payment was a membership pack and personal accident insurance cover.

The tribunal dismissed the taxpayer's appeal concluding that the proper categorisation of the consideration provided by the taxpayer for the membership fee in terms of taxable supply was that it consisted of the conferring of the status of membership and the supply of the T-shirt. All the other potentially separately identifiable elements of the consideration were treated as ancillary, and the tribunal remitted for further consideration the question of a fair and reasonable apportionment of the £19 fee as between the two supplies so identified ([2006] BVC 2,673; Decision No 19,530).

The taxpayer appealed to the High Court contending that the proper VAT categorisation of the consideration for the membership fee included at least: registration as a member, insurance, the membership pack (in particular the T-shirt and the magazine). By their cross-appeal, Customs maintained that the tribunal should simply have confirmed their original ruling that the consideration consisted of a single rather than mixed supply.

Issue

Whether the supplies by the taxpayer made on receipt of a fee as a condition of enrolment to the taxpayer's activity programme were several supplies of goods or a single supply of membership for VAT purposes.

Decision

Briggs J (dismissing the appeal and allowing the cross-appeal) said that the identification of the taxable supply or supplies made by the taxpayer pursuant to a particular transaction was, at least where the transaction consisted of a contract, limited to the goods and or services provided by the taxpayer for which the payment was consideration. Article 2 of Directive 77/388 (‘the sixth directive’) subjected the supply of goods and services to VAT only if made for a consideration.

The essential features of the relevant transaction had to be ascertained in order to determine whether the taxable person was supplying a typical customer with several distinct principal services or with a single service. The fact that the goods and/or services were supplied in consideration of a single price might suggest that for VAT purposes there was a single supply, but that was not decisive (C & E Commrs v Automobile Association [1974] STC 192, Card Protection Plan Ltd and Levob Verzekeringen BV v Staatssecretaris van Financiën (Case C-41/04) [2005] ECR I-9433 and Dr Beynon & Partners v C & E Commrs [2005] BTC 5,366 considered).

Where elements of the consideration were ancillary to other elements which were identified as the principal service, there would be a single VAT supply of the principal service, and the ancillary elements would be treated as part of that principal supply. A service would be regarded as ancillary to a principal service if it did not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.

It did not follow that every distinct part of the goods or services provided pursuant to a transaction was a separate supply for VAT purposes unless it was ancillary’. Separate non-ancillary parts of the consideration provided pursuant to a transaction might be so closely linked from an economic perspective as to constitute a single supply for VAT purposes (Card Protection Plan Ltd, College of Estate Management and Levob considered). Where the application of that principle led to the identification of a single supply, its character for VAT purposes might be that of one or other of the constituent elements, if predominant. Alternatively it might have a unique character enjoyed by neither of the constituent elements.

In the present case, the tribunal had been entitled and right to infer that the main purpose of the payment of £19 fee by the typical parent was to unlock the door to his child's attendance at classes, and that that was achieved by the conferring on the child of the status of membership of the club. That conclusion was both supported by the evidence and objectively correct as a matter of common sense.

On the evidence, apart from the T-shirt, the tribunal was also both entitled and correct to treat all other parts of the consideration provided by the taxpayer in return for the £19 fee as ancillary. As regards the T-shirt, the tribunal's decision that, not being ancillary, the provision of the T-shirt was a separate supply for VAT purposes was wrong. The tribunal did not consider whether the provision of the T-shirt was economically indissoluble from the provision, by the conferring of membership, of the means of access to classes. It was plainly indissoluble. First, its purpose leaving aside questions of decency and warmth) was to contribute to that sense of belonging or of being like others in a group, which was a main purpose of the classes themselves, and of club membership. Applying the test of economic indissolubility posed in the Levob case, it would be artificial to split off the provision of the T-shirt from the provision of membership of the club, and accordingly the provision of those two elements constituted a single supply. Furthermore, the aggregation of the provision of the T-shirt with the provision of membership did not convert the single supply into a zero-rated supply of children's clothing. Accordingly, the taxpayer's appeal should be dismissed and the Revenue's appeal allowed. Since there was no mixed supply, there was no issue of apportionment to be remitted for further consideration.

Chancery Division.
Judgement delivered 30 January 2007.