Colaingrove: composite supplies for VAT purposes

A recent case that was decided by the First Tier Tribunal (FTT), Colaingrove Ltd -v- HMRC, suggests that in certain circumstances, composite supplies may be split for VAT purposes such that the various constituent elements of those supplies have a different VAT treatment. This is only an FTT judgment so should be treated with care, especially as HMRC is likely to appeal, but nonetheless it suggests that composite supplies may sometimes be split for VAT purposes in ascertaining the appropriate rate and, potentially, the element of the supply that is taxable or exempt.

This is particularly relevant in the context of a property rental business where landlords (both residential and commercial) may be making supplies of utilities (electricity, water, gas) to tenants which, if supplied on their own, would attract a lower rate of VAT. While of real interest to tenants which are unable to recover all or any of the VAT they incur, there may be cashflow advantages at the very least for all tenants.

It had generally been thought that the VAT concept of the composite supply (where there is one main supply and other supplies are ancillary, or where the separate elements in a supply are economically indivisible even where there is no one dominant supply) led to the entire supply being treated for VAT purposes in a uniform manner, taking its VAT characteristics from the nature of the composite supply rather than the constituent elements. In this case, the FTT did not seek to redefine what constitutes a composite supply (which it would not have had the power to do), but instead sought to apply two judgments, Talacre and the French Undertakers case, to argue that different elements of the composite supply could, in certain circumstances, be treated differently. In this case, the taxpayer supplied holiday lets of static caravans to consumers. Pursuant to a promotion that it had agreed with The Sun newspaper, it provided these caravans under a very short-term arrangement which meant that its normal practice of billing holidaymakers for electricity based on the metered supply used by them was impractical. Instead, Colaingrove simply charged a flat fee of £12 to each holidaymaker in respect of electricity. The FTT found that the supply of electricity and the supply of the caravan were one single composite supply, but the parties differed on the treatment of the electricity element. If the electricity had been supplied separately, it was agreed that that supply would be taxable at the reduced rate. However, HMRC argued that, as this was a composite supply, to apply the reduced rate to the electricity element and the standard rate to the main element of the supply (namely, the caravan itself) would undermine the entire principle of the composite supply and rob the line of cases culminating in CPP of any force. It would also open the floodgates for further claims arising from composite supplies and would undermine the principle behind the concept of the composite supply, which was one of simplification.

The taxpayer on the other hand relied on Talacre and the French Undertakers cases. The French Undertakers case, in particular, was an ECJ case that held that, in specific circumstances, a government could provide for a reduced rate of VAT to apply to concrete and specific aspects of a composite supply, provided that there was no distortion of competition. The FTT considered whether the elements in this case were concrete and specific and also examined the question of whether separate VAT treatment would give rise to a distortion of competition, concluding that the electricity was clearly a concrete and specific element of the overall supply, and furthermore, there was no distortion of competition to which HMRC could point. There were a number of submissions on what Parliament's intent was in enacting the provisions of the VAT Act relating to the reduced rating for a supply of domestic fuel and power. The FTT's conclusion was that the wording was sufficient to demonstrate that Parliament had intended the reduced rate to survive the incorporation of the supply into a single composite supply for VAT purposes. HMRC's arguments were perhaps not helped by its admission, and established practice, that had the supplies been metered (that is, based on the precise metered usage by the holidaymaker) it would have allowed the claim for the reduced rate. HMRC clearly has some concerns about this decision, arguing that it will allow taxpayers to make claims in relation to all manner of composite supplies. In addition, one might disagree with the FTT when it states that its decision is limited to the very specific set of facts where it is apparent from the legislation that the Member State has provided that a specific rate should apply even where the supply in question is subsumed into a larger composite supply. One might wonder whether this would affect, for example, the place of supply rules which might mean that different elements of a composite supply are treated as made in different places. However, on balance, it seems that the FTT's limited reading (and indeed French Undertakers) would not apply in that scenario and the floodgates argument is probably therefore somewhat overstated.

Clearly, this case is subject to appeal and indeed it would be surprising were HMRC not to appeal it so further developments can be expected.

Please click on the links below for the other articles in the June 2013 tax newsletter.

• Partnership taxation - HMRC consultation on avoidance involving partnerships
• Bristol & West plc
• Fidex Ltd -v- HMRC
• STICS - discounts go to Hades
• General anti-abuse rule (GAAR)
• WHA Limited -v- HMRC
• Middle Temple -v- HMRC
• The Royal College of Paediatricians -v- HMRC
• PPG Holdings BV - AG's opinion on VAT on management advice to pension fund
• Special Italian tax regime applicable to medium-long term loans: abuse of law?
• HMRC brief on SDLT overpayment relief for TOGCs following Robinson case