The High Court held that, for VAT purposes, it was necessary to apportion the consideration received from customers attending their first meeting to register on the taxpayer's weight loss programme between standard-rated support services and zero-rated printed materials. However, it would be artificial to differentiate between those supplies at subsequent weekly meetings wherethe taxpayer was in fact making a single supply of weight loss services.

Facts

The taxpayer company offered its customers a weight loss programme. Customers attending their first meeting paid a registration fee plus a meeting fee.

Thereafter, a weekly meeting fee was charged. New members received a handbook together with other items and, on an ongoing basis, they received a weekly leaflet and a monthly magazine.

The taxpayer submitted that the supplies delivered at meetings had two separate components: multiple supplies of standard-rated services and facilities; and zero-rated printed materials, neither component being ancillary to the other. In 2004, Customs conceded that there were mixed supplies with 80 per cent being zero-rated.

Customs accepted that there was a series of transactions with a separate supply at each meeting but submitted that each supply was a single standard-rated supply. In Customs’ view, the question was not whether the customers wanted the handbook and other printed materials separately, but whether it was artificial to split the supply into printed matter and other services. The commissioners submitted that it was artificial and that the supply should be treated as wholly standard-rated.

The VAT tribunal allowed the taxpayer's appeal, deciding that there were mixed supplies of standard-rated services and zero-rated printed matter, although the zero-rated content of the supply at the first meeting was clearly greater ([2007] BVC 2,383; Decision No. 20,038). Customs appealed.

Issue

Whether the tribunal had erred in law or applied the wrong legal test to the primary facts found.

Decision

Morgan J (allowing the appeal in part) said that, for the purpose of deciding, in a particular case, whether there was a single composite supply or separate supplies, there were two tests which could be used: the ‘principal/ancillary test’ and the ‘artificial to split’ test. Both parties agreed that the ‘artificial to split’ test should be applied in the present case.

Under the ‘artificial to split’ test, as expressed in Card Protection Plan Ltd v C & E Commrs (Case 349/96) [1999] BTC 5,121; [1999] ECR I-973, College of Estate Management v C & E Commrs [2005] BTC 5,673 and Levob Verzekeringen BV v Staatssecretaris Van Financien (Case C- 41/04) [2007] BTC 5,186; [2005] ECR I-9433, where two or more elements or acts supplied by a taxable person to a customer, being a typical consumer, were so closely linked that they formed objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constituted a single supply for purposes of the application of VAT.

The characterisation of a transaction as a single supply or separate supplies was a question of law, involving an assessment of fact and degree and evaluation or judgment as to how the legal test applied to the primary facts. In cases such as the present there was a need for circumspection before reversing a specialist tribunal merely because it would have put the case on the other side of the line even though the ultimate question was a question of law. However, the degree of circumspection needed was not (until a higher court said so in terms) so great as to amount to a requirement to apply the Edwards v Bairstow test (Beynon & Partners v C & E Commrs [2004] BTC 5,794 and Able (UK) Ltd v R & C Commrs [2008] BTC 3 considered).

Applying those principles to the present case, Customs had not succeeded in showing that the tribunal had failed to apply the correct legal test to the primary facts found by them. However, that was not the end of the matter. The question as to the correct characterisation of the transactions in the present case for VAT purposes was a matter of law and not a matter of fact. Accordingly, it was open to the High Court to reverse the tribunal if the court was persuaded that, applying the correct legal test to the primary facts, the answer to the point of law was different from that arrived at by the tribunal, bearing in mind the need for circumspection.

First meeting

As regards the first meeting, both sides to the dispute and the tribunal proceeded on the basis that there was a single transaction at the first meeting and the consideration for the transaction was the registration fee and the meeting fee for that week. The tribunal concluded that that transaction comprised separate supplies of services and printed materials. The question was whether, from an economic standpoint, and from the perspective of a typical consumer, it was artificial to split the transaction in that way. The tribunal were impressed by the ready dissociability of the services from the printed material and by the separate availability of the printed material for ‘At Home’ customers. They were impressed by the fact that the printed material was of considerable use separate from the meetings. The rival point of view was to give greater weight to the links between the meetings and the printed material. The package had been designed to operate to best advantage when it drew upon the services and the printed materials operating together.

The legal test to be applied was not cut and dried. There was no precise measure or yardstick. The courts had deliberately avoided a schematic analysis. That left considerable scope for the decision-maker to reach an evaluative judgment reflecting the impact of the matters of fact and degree in the individual case. The overall conclusion of the court was that, even if it was minded to put the case on the other side of the line from the tribunal, it would be wrong to go so far as to reverse the tribunal's decision in relation to the first meeting. That would be to ignore the very clear requirement to show proper circumspection before doing so. Accordingly, the appeal would be dismissed in so far as it related to the transaction involved in the first meeting.

Subsequent meetings

As regards the subsequent meetings, it would be artificial to differentiate between the printed material and the services provided at the meeting. The links between the services and the printed material were very strong; the purpose of the printed material was to contribute to the usefulness of the services provided at the meeting, and to strengthen the commitment and staying power of the member to the programme. It was more accurate to regard that which was provided at a subsequent meeting as a single supply of weight loss services. The position at a subsequent meeting was not a borderline case and if one applied the correct legal test to the primary facts found by the tribunal, the clear answer was that it would be artificial to differentiate between the services and the printed material at a subsequent meeting. Accordingly, the appeal in relation to the treatment of the transaction at a subsequent meeting would be allowed.

Chancery Division.

Judgment delivered 21 January 2008.