Since Card Protection Plan, the existence of composite and multiple supplies has been determined by reference, inter alia, to whether a customer intended to purchase one supply or two. There are several decisions of both the House of Lords and European Court of Justice which hold that the manner in which the parties to the transaction agree the pricing is not determinative in this regard. The judgment of the ECJ in T-Mobile suggests that the pricing structure agreed upon by the parties will be a matter of almost no significance whereas the ‘independence’ of the supplies will be a matter of increasing importance.
On 2 December last the European Court of Justice delivered its judgment in Everything Everywhere Ltd (formerly T-Mobile Ltd) v HMRC (Case C-276/09) (hereinafter ‘T-Mobile’). The case concerned the VAT treatment of a separate payment handing charge (SPHC) of £3 which was payable by customers who chose to pay their telephone bills other than by way of pre-paid top-up or direct debit.
T-Mobile had submitted a sizeable VAT reclaim on the basis that the SPHC paid by customers was a separate and exempt ‘payment handling service’ in accordance with either Article 13B(d)(1) or (3) of the Sixth Directive (now Articles 135(1)(b) and (d) Directive 2006/112/EC respectively).
The taxpayer argued that three significant factors pointed to there being a separate supply of payment handling services:
If T-Mobile were to have charged customers a single price for the telecommunications and payment processing services there would undoubtedly have been a single supply of telecommunications services. The nub of the question is, therefore, whether an explicit agreement with a customer to pay a separate charge for a separate service can transform what would otherwise be a composite supply into separate supplies.
In Card Protection Plan (Case-349/96) the ECJ stated that the charging of a single price is not determinative. Later, in Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) it held that: ‘[t]he fact… that separate prices were contractually stipulated for [the two supplies] is not of itself decisive. Such a fact cannot affect the objective close link [between the two supplies] nor the fact that they form part of a single economic transaction.’
These comments were in broadly similar terms to those of Lord Slynn in Customs and Excise v British Telecommunications [1999] STC 758 several years earlier where the learned Judge held: ‘the fact that separate charges are identified in a contract or on an invoice does not on a consideration of all the circumstances necessarily prevent the various supplies from constituting one composite transaction...’
The tone of Lord Slynn’s decision in this regard is much less absolutist than that of the ECJ in Levob and suggests that the legal form of the agreement between the supplier and customer has some level of significance. Lord Slynn’s circumspection is entirely understandable in light of the fact that the test laid down in CPP is, at its heart, a test which seeks to ascertain whether or not the customer intended to purchase two distinct supplies.
On appeal by T-Mobile, the High Court decided to stay the case and refer eight questions to the ECJ. The first seven of these questions concerned the scope of the exemptions, the eighth asked whether there was a composite supply. The ECJ dispensed with the need to answer questions 1 to 7 by deciding that the taxpayer was making a composite supply of telecommunications services.
The ECJ recited the usual criteria for determining whether or not a composite or multiple supply exists and then repeated the ‘independence test’ which was laid down in Part Service (Case C-425/06) and RLRE Tellmer Property (Case C-572/07). It stated: ‘… in certain circumstances, several formally distinct services, which could be supplied separately and thus give rise, in turn, to taxation or exemption, must be considered to be a single transaction when they are not independent…That is so in particular in cases where one or more elements are to be regarded as constituting the principal services, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service…’
The foregoing portions of the judgment are noteable because they characterise the principal/ancillary supply test as merely one aspect of an over-arching ‘independence test’. Whilst it has long been accepted that the principal/ancillary test laid down in CPP is not a test capable of universal application, it is becoming increasingly apparent that the ECJ views it as merely one factor to be considered in determining whether the supplies are ‘independent’.
The Court held that the customer’s desire was to obtain telecommunications services and that the payment handling service did not constitute for those customers an aim in itself. (Interestingly, the Court made no comment as to whether or not the card handing service was for the ‘better enjoyment’ of the principal service (the second part of the CPP test for ancillary supplies).) It justified this conclusion on the basis of the lack of independence of the supplies, stating that: ‘The supposed supply of [payment handling] services, which those customers are unable to access separately from the use of the mobile telephone service, can offer such consumers nothing that is independent of that service. It offers them only the opportunity to pay mobile telephone bills using the method of payment that appears to them to be most convenient’.
The fact that both the contract between the parties and the invoice issued by T-Mobile separately identified the payment handling service and the associated SPHC was held to be ‘of no decisive significance’. From the tenor of the judgment, one wonders whether the Court might just as easily have omitted the use of the word ‘decisive’.
The Court pointed out that the receipt of a payment and the handling of that payment are ‘intrinsically linked’ to any supply of goods or services for consideration. The Court concluded from the foregoing that T-Mobile customers: ‘do not intend to purchase two distinct supplies… From the customer’s point of view, the supply of payment handling services supposedly provided by [T-Mobile] must… be regarded for VAT purposes, as being ancillary to the principal supply.’
Three points are worthy of note. First, it was accepted by the Court that the customers enter into a contract to purchase both telecoms services and payment handling services but it was held, nonetheless, that they do not ‘intend’ to purchase two distinct supplies. This apparent incongruity goes to the heart of the dispute between the parties and the Court provided little by way of analysis which would reconcile this apparent conflict.
Second, the ECJ appears to have held not merely that the the payment handling service did not constitute a separate aim for the customer but that it was incapable of constituting a separate aim due to the lack of independence of the supplies. The consequence of this is that, no matter how clearly a supplier demarcates the constituent elements of his supplies, this will not assist in the disaggregation of those supplies from a VAT perspective if they would otherwise, from an objective analysis, constitute a composite supply.
Third, it is noteworthy in the context of the decisions in College of Estate Management [2005] STC 1597 and Dr Beynon [2005] STC 55, that the ECJ concluded that the supply of the card handling service was ‘ancillary’ and it explicitly referred to CPP in reaching this conclusion. This is an interesting divergence from the approach of the House of Lords, as it then was, which preferred to adopt a more expansive approach to the concept of composite supply free from the shackles of the CPP ancillary test. Having laid the groundwork for an analysis based only upon whether the supplies were ‘independent’ of each other, it is interesting that the ECJ ultimately couched its decision in terms of the ancillary nature of the supply.
Consequences
The effect of this judgment is that if a supply would be a composite supply where a single price was charged then it will remain a composite supply even where separate prices are specifically agreed between the parties. Furthermore the concept of ‘independence’ is likely to become the touchstone by reference to which all future such cases are determined. Airlines provide a useful illustration of the independence principle in action. For commercial reasons airlines have become adept at disaggregating the passenger transport service into its various components. One can choose to pay (or not to pay) separate charges for baggage handling services, on-line check-in and priority boarding, in addition to payment handling. In light of the T-Mobile judgment it seems certain that each of these separately agreed charges are payments made in respect of a composite supply of (often zero-rated) passenger transport. I understand that this accords with the current treatment of such supplies by airlines, who will no doubt breathe a sigh of relief at T-Mobile’s misfortune since they might otherwise have found themselves making several separate supplies – some taxable at the standard rate and some exempt with no right of deduction. By contrast, many airlines also offer the purchase of insurance and car hire at the time of booking but there would be no reason to believe that such contracts form part of the composite supply of passenger transport on the basis that the supplies have an existence and utility which is independent of the passenger transport function.
The issue of composite and multiple supply will continue to be a complex one but, in the aftermath of the decision in T-Mobile, it appears that the pricing structure agreed upon by the parties will be a matter of almost no significance whereas the ‘independence’ of the supplies will be a matter of increasing importance.
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Frank Mitchell, Tenant, Monckton Chambers
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