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|Judgments -- Commissioners of Customs and Excise v. British Telecommunications Plc.
Lord Clyde Lord Hutton
LORD SLYNN OF HADLEY
British Telecommunications Plc. ("B.T.") buys a large number of motor cars annually from different manufacturers. The cars are delivered by transport companies on behalf of the manufacturer to B.T.'s premises or at its direction. There is thus no intermediate wholesale or retail dealer. B.T. pays input value added tax to the manufacturer on the cost of transport and delivery; it seeks to set this off against its liability for output tax. Whether it is entitled to do so, and the commissioners contend that it is not, depends on whether the supply of the car and the provision of the transport are separate supplies for VAT purposes, or whether there is one supply of a delivered car. In the former case, B.T. can deduct the input tax paid on transport costs; in the latter, it cannot. The value added tax tribunal by decision released on 10 April 1996 and the Court of Appeal  S.T.C. 544 in its judgment of 18 March 1998 for different reasons found that B.T. could deduct the input tax; Dyson J.  S.T.C. 475 on 5 February 1997 held that it could not.
By article 2 of the Sixth VAT Directive (Council Directive of 17 May 1977 388/EEC/77):
By article 5: "'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner" and "'supply of services' shall mean any transaction which does not constitute a supply of goods" (article 6). The place of supply of goods is deemed to be, in the case of goods dispatched or transported, the place where the goods are at the time when dispatch or transfer to the person to whom they are supplied begins (article 8); the place "where transport services are supplied shall be the place where transport takes place, having regard to the distances covered" (article 9(2)(b)).
Title VIII is headed "Taxable Amount" and by article 11:
In respect of imported goods, paragraph B3 (as amended) provided:
Although the commissioners' decision rejecting B.T.'s claim and therefore the transactions to which it relates, occurred before the VAT Act 1994 came into force, it is convenient to refer to that Act, a consolidating Act (as the VAT tribunal did), rather than to the Act of 1983, since there are no material differences.
By section 19(2) of the Act of 1994:
and by section 21(2)(b):
The Value Added Tax (Input Tax) Order 1992 (S.I. No. 3222 of 1992) made pursuant to section 14(10) of the Act of 1983 (section 25 of the Act of 1994) (which empowers the Treasury to provide for the exclusion from any credit in respect of input tax of any specified supplies) provides that:
It is thus clear that if what happens here is simply the supply to B.T. as a taxable person of a motor car, there can be no deduction of input tax paid on any part of the supply.
In relation to article 11 A(2)(b) of the Sixth Directive, two questions were much discussed before the tribunal and on the two subsequent appeals. The first was whether this article had been incorporated into national law; the second, if it had, what was its effect?
The tribunal considered that no reliance could be placed on this article, since it had not been incorporated into the VAT Act, which merely spoke in section 19 of the value of a supply for consideration in money as being "equal to the consideration" plus the VAT chargeable. This was to be contrasted with section 21(2)(b) dealing with importations which, ignoring the point up to which the costs were relevant, repeated the words of article 11 B(3)(b): "commission, packing, transport and insurance."
Parliament, it is argued, had thus not provided for transport costs to be included in the taxable amount in respect of transactions other than importations and it was not justified to read general references to "consideration" as including transport costs as they were specifically mentioned in section 21.
I agree with Dyson J. that this was an incorrect reading of section 19. "Consideration" includes all the incidental expenses incurred and paid for in return for the supply, just as it includes all taxes and duties which are not mentioned in section 19 either, though they are mentioned in section 21(2)(a) of the Act of 1994. There is no justification for interpreting the legislation as if Parliament intended to comply with its obligations under the Directive in respect of imports, but not in respect of internal supplies.
It does not, however, follow that if this is so the commissioners are necessarily right in the result. The heading of Table VIII in which article 11 appears is "Taxable Amount" and paragraph A(2) begins "The taxable amount shall include . . . " It does not provide that transport is or is deemed to be part of any particular supply of goods or services any more than it provides that packaging and commission are part of such supplies. Like Nourse L.J., I fully agree with the statement of Mr. P.M. Horsfield, Q.C. in Plantifor Ltd. v. Customs and Excise Commissioners (1997) VAT Decision 14848 at p. 16, para 4.1 that:
The question thus remains, as under the Order of 1992, as to whether there was here simply "the supply . . . of a motor car."
The tribunal and Dyson J. set out the main provisions of the six contracts for the supply of motor cars from the six manufacturers to B.T. which had been taken as samples. I refer to those decisions without repeating all the details of the contracts. There are differences between the terms contained in the contracts made by Rover, Vauxhall, Citroën, Ford, Land Rover and Peugeot, but there are some common threads. Thus B.T. has the ability to order the number of cars it requires and they are to be delivered to B.T. In the case of all but Ford and Peugeot the delivery charge, or a group of charges including the delivery charge, are separately stated in the contract, though there is considerable divergence between the amounts charged. No separate delivery charge is specified in the agreements with Ford and Peugeot, though the invoices produced show a separate delivery charge by each of them. In the case of Ford, the contract price is said to include the cost of delivery, but the invoice specifies a charge for delivery. There are other internal inconsistencies--the delivery charge on the invoice is not always that specified in the contract and in the case of Vauxhall, the making of a delivery charge pursuant to a provision in the appendix to the contract appears to be inconsistent with the provision of clause 5.2, that "the prices payable by B.T. shall be inclusive of all non-returnable packing, delivery and all other charges associated with the goods." So with Citroën, one clause provided for a composite charge, including delivery, and another clause provided that the price payable shall be inclusive of delivery and other charges. In the case of Rover, although the contract provided for a specific delivery charge, the invoice showed only a total price and no specific charge for delivery. All of the contracts except that of Land Rover had what is called an entire agreement clause providing for variations only in writing.
On the basis that the question to be asked was: "What was the consideration for the payment he received? Was it a supply of goods, to which the supply of the services was ancillary [or incidental], or was it a supply of services, to which the supply of goods was ancillary [or incidental]? Or did he make two supplies?" (Customs and Excise Commissioners v. Leightons Ltd.  S.T.C. 458 at p. 462), the tribunal said:
Dyson J. agreed with that conclusion. He attached importance to the fact that the delivery service was an optional extra which increased the amount charged. He said that the service of delivery is both physically and economically dissociated from the supply of a car and that, had he not found for the Commissioners on the basis of article 11 A(2)(b), he would have dismissed the appeal.
Nourse L.J., with whom the other members of the Court of Appeal agreed, adopted Dyson J.'s reasoning and conclusion and said  S.T.C. 544, 547:
The characterisation of the supply as provided for here in the contractual documents is a matter of law (British Airways Plc. v. Customs and Excise Commissioners  S.T.C. 643). The Courts have been concerned in a number of previous cases with the task of deciding whether the provision of goods or services is one supply or two or more separate supplies. In doing so they have indicated the various tests to be applied to the facts of the particular case. Thus in the British Airways case the Court of Appeal had to decide whether the provision of inflight catering was a separate supply from the supply of air transportation. They held that it was not, the right question being whether the provision of catering was an integral part of air transportation. In Bophthatswana National Commercial Corporation Ltd. v. Customs and Excise Commissioners  S.T.C. 702, Nolan L.J. said:
In Customs and Excise Commissioners v. Leighton  S.T.C. 458, McCullough J. regarded this as a test of general application, and applying it, concluded that the services of dispensing opticians in taking measurements and giving advice as to inter alia lenses and frames was a separate supply from the supply of the spectacles.
It is said, however, that in Commissioners of the European Communities v. United Kingdom  E.C.R. 817 a different test was used. In that case although articles 13 A(1) of the Sixth VAT Directive required Member States to exempt from VAT the "(c) provision of medical care in the exercise of the medical and paramedical professions" the United Kingdom in the VAT Act 1983 Schedule 6 Group 7 exempted "the supply of services, and, in connection with it, the supply of goods" by a "registered medical practitioner." The question was whether the supply of medicines and other goods was part of the service of providing medical care. The European Court said at pp. 839-840:
In the Customs and Excise Commissioners v. Wellington Private Hospital Ltd.  S.T.C. 445 the question arose as to whether the supply of drugs was part of a composite supply of care or medical treatment or whether it was a separate supply. Millett L.J. at p. 462, used both sets of words:
The Court of Appeal by a majority concluded at p. 464 that:
I do not read the United Kingdom case as introducing a different test. The phase "economically and physically dissociable" was simply a description in that case of the difference between a supply of goods and the provision of services in question. It is to be noted that in Card Protection Plan v. Commissioners of Customs and Excise (Case C-349/96) (unreported) 25 February 1999 European Court of Justice the phrase "physically and economically dissociable" is not used. In answering the first two questions relating to the insurance and other services provided for card holders under the CP Plan the European Court said at para 26:
Having stressed the importance of the question for a number of purposes the European Court added "Whether the transaction in question comprises a bundle of features and acts regard must first be had to all the circumstances in which the transaction occurs."
Customs and Excise Commissioners v. Madgett and Baldwin  S.T.C. 1189 was a case where hotel owners provided a package which included transport to Devon from the north of England. The European Court accepted that where services habitually associated with travel were provided by third parties and took up a small proportion of the package price compared to the accommodation these were "a means of better enjoying the principal service supplied by the trader." They were thus "ancillary." Where, however, services went beyond those traditionally provided and "cannot be carried out without a substantial effect on the package price charge . . . such services are not to be equated with purely ancillary services."
Card Protection Plan was concerned with the supply of two services whereas in the present case B.T. supplied goods (a car) and a service (delivery by a third party). The question is thus in my opinion whether the delivery is ancillary or incidental to the supply of the car or is it a distinct supply. It may be that "the physically and economically dissociable" test comes to the same thing but the ancillary test avoids the more difficult question as to whether something which is physically separate and economically separate (e.g. because a separate charge is identified) is thereby necessarily "dissociable."
On the authorities it is clear that the fact that one "package price" is charged without separate charge for individual supplies being specified does not prevent there being two separate supplies for VAT purposes. In my opinion 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 nor does it prevent one supply from being ancillary to another supply which for VAT purposes is the dominant supply. Even though it may be desirable to approach each supply as if it were a separate supply and even though each supply in a composite transaction may be an independent separate supply the essential features of a transaction may show that one supply is ancillary to another and that it is the latter that for VAT purposes is to be treated as the supply.
In the present case it is to be noted that in the Rover contract by clause 4 of the Schedule the risk passes on delivery and property passes when payment has been made. By clause 6 of the agreement payment is due after delivery of the cars and receipt of an invoice and delivery note. In the Vauxhall contract it is provided in clause 6.4 that "the principal [sic] behind the system is that B.T. shall not be making payment for any vehicle unless it has been delivered and an invoice has been received." Risk passes on delivery and the property and the goods when full payment has been made. In the Citroën contract risk passes on delivery but property passes on the earliest of (a) delivery (b) the issue of a vehicle availability sheet or (c) payment whether in whole or in part. "Vehicle availability sheets" are documents "the receipt of which by B.T. from the contractor" means that the production of the item has been completed and that the said item is available for use or collection by B.T. Where the vehicle is to be delivered, however, it seems the property passes on the earlier of delivery or payment.
In the Peugeot contract payment is due monthly in arrears after delivery except where delivery is to be in batches when payment is due after each delivery of a batch. Risk passes on delivery; the property passes on the earlier of delivery or payment. In the Ford contract payment is due within ten days after receipt of an invoice. Risk passes on delivery; property passes on the earlier of delivery, payment in whole or part or the issue of vehicle availability sheets so that it seems that in the present contract property will pass usually on delivery. In the Land Rover contract the contract is subject to "the standard conditions of contract for the purchase of goods set out in B.T. plc Form MD 801 (edition 1986)." These are not included in the papers before the House but they may well include conditions similar to those in clause 4 of the other contracts.
In my view here if the transaction is looked at as a matter of commercial reality there was one contract for a delivered car: it is artificial to split the various parts of the transaction into different supplies for VAT purposes. What B.T. wanted was a delivered car; the delivery was incidental or ancillary to the supply of the car and it was only on or after delivery that property in the car passed. The fact that delivery could have been arranged differently under a separate contract between B.T. and the transporter or by B.T. collecting the car itself does not mean that when there is a contract for a delivered car the two supplies must be kept separate. Of course B.T. had the option to make other arrangements as is argued but the fact is that B.T. did it this way as part of one contract and in my view as part of one supply. The fact that individuals buying a car or small companies buying a few cars cannot have the same arrangement which B.T. has and may have to buy from a dealer does not make the arrangement with B.T. so different that the supply must, like the provision of long distance pickup in the Madgett and Baldwin case  S.T.C. 1189 be regarded as not ancillary but as a distinct supply.
One result of this approach is that B.T. is in the same position in regard to VAT as companies buying a small number of cars from a dealer. They could not recover the input tax because of the provisions of the Order of 1992. If B.T.'s argument is right B.T. would have a considerable tax advantage over such other traders. That discrimination of this kind would be avoided may not be a reason for arriving at the conclusion which I have reached but the fact that such a result is not discriminatory may be some indication that it is right.
I would accordingly allow the appeal and, though for different reasons, restore the order of Dyson J.
LORD NICHOLLS OF BIRKENHEAD
I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Slynn of Hadley and Lord Hope of Craighead. For the reasons they give, and with which I agree, I too would allow this appeal.
LORD HOPE OF CRAIGHEAD
The question in this appeal is whether the respondents ("B.T.") are entitled to deduct as input tax the VAT on that part of the consideration paid by them for motor cars purchased direct from the manufacturer which relates to the amounts charged by the manufacturer for the services of transporting and delivering the motor cars to B.T.'s premises from the factory.
The deduction as input tax of the VAT paid on the supply to a taxable person of a motor car is disallowed by article 7(1) of the Value Added Tax (Input Tax) Order 1992 (S.I. No. 3222 of 1992) ("the Blocking Order"). The argument for B.T., which was decided in their favour by the tribunal and Dyson J. (who allowed the commissioners' appeal but for different reasons) and by the Court of Appeal, is that the VAT which is charged on the services of transportation and delivery does not fall within the scope of the Blocking Order, as the tax was charged not on the supply of the motor cars but on a separate supply of transport and delivery services. In other words, the contractual arrangements between B.T. and the manufacturer gave rise to two supplies, not one. The answer to the question whether the courts below were right to sustain this argument must depend upon an analysis of the extent of the transaction for the supply to B.T. of the motor cars. Was the supply of the services of transportation and delivery merely incidental or ancillary to the supply of the motor cars? Or was it a distinct and independent supply which can properly be regarded as separate from the supply of the motor cars and thus outside the scope of the Blocking Order?
It is necessary first to identify the test which must be applied as to whether a particular supply is incidental or ancillary to another supply or is distinct and separate from it. In Card Protection Plan Ltd. v. Commissioners of Customs and Excise (Case C-349/96), (unreported), 25 February 1999 - which was not available to the Court of Appeal when it issued its judgment in this case on 18 March 1998 - the European Court of Justice said that, while it was not possible to give exhaustive guidance on how to approach the problem correctly in all cases, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer with several distinct principal services or with a single service: paragraphs 27 and 29. In paragraph 30 the Court said:
As regard must be had to all the circumstances, no single factor will provide the sole test as to whether the supply in question is a distinct and independent supply or is incidental or ancillary to another principal supply. The fact that price for the supply in question has been or can be separately identified as having been charged for additionally, as the tribunal held after considering the sample transactions in this case, is not the test. Nor is the fact that the supply in question is an optional one which the taxable person could have provided for himself, and so did not need not take when as a matter of convenience he took the other supply to which it is said to have been ancillary. The Court of Appeal attached considerable importance to this point, as also did the tribunal and Dyson J.:  S.T.C. 544, 547F. But in my opinion it is just one of the factors to be taken into account in the examination of all the circumstances.
Nor is the question to be resolved by asking, as the respondents contend, whether the two supplies are "physically and economically dissociable". That phrase is taken from the decision of the European Court of Justice in Commission of the European Communities v. United Kingdom (Case 353/85)  S.T.C. 251, paragraph 33. In Customs and Excise Commissioners v. Wellington Private Hospital Ltd.  S.T.C. 445, 462F-G Millett L.J. suggested that it expressed the same concept as that which is contained in the words "integral," "incidental" and "ancillary." But the facts and the questions to be decided in those two cases were different from those in the present case. In Commission of the European Communities v. United Kingdom the problem related to the interpretation of the term "medical care" in the context of article 13 A(1) of the Sixth Directive, and in particular as to whether the exemption covered goods such as corrective spectacles supplied to patients in connection with the provision by the doctor or other authorised person of medical care. As Millett L.J. recognised in the Wellington Private Hospital case at p. 459C-E, the Court was not laying down a general rule of classification for use in all cases where the question is raised as to whether a particular supply is or is not incidental or ancillary to another supply.
It may be said that before the supply can be regarded as a separate and distinct supply it must, at least to some degree, be physically and economically dissociable from the other supply. But it would not be right to take this factor as the sole criterion as to whether the supply was separate and distinct from the other supply or was merely incidental or ancillary to it. If that were so, it would mean that in every case where it was possible to dissociate the two economically and physically (for example, because one supply was of goods and the other supply was of services and the price for each supply could be separately identified) the two supplies would have to be treated as separate supplies for VAT purposes. That would not be consistent with the guidance which the Court gave in Card Protection Plan Ltd v. Commissioners of Customs and Excise, paragraph 29 that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system.
According to this guidance, the question is one of fact and degree, taking account of all the circumstances. Cases can be envisaged, such as the tours provided in connection with the hotel accommodation in Customs and Excise Commissioners v. Madgett and Baldwin  S.T.C. 1189, where the relationship between the two supplies would be so disproportionate as not to enable the transaction to be regarded as comprising one supply. Another example, where the supply was of transport and delivery services, would be where the goods were transported by special arrangement with the purchaser by unusual methods or over unusually long distances. The facts of this case do not fit into that category.
The examination of the question in the present case is, in my opinion, assisted by the terms of article 11 A 2(b) of the Sixth Directive. This paragraph of the article states that the taxable amount shall include:
I think that this paragraph helps to show that the supply of services such as transport of goods from the factory to the purchaser's premises can be treated as incidental or ancillary to the supply of the goods by the manufacturer to the purchaser, although this need not be so, and accordingly is not deemed to be so, in all cases.
In the present case the essential feature which can be seen in each of the sample transactions is the purchase by B.T. from the manufacturer of a delivered motor car. Property and risk were to remain with the manufacturer until the point of delivery. B.T. could have gone to the factory to take delivery of the motor car, but it was more convenient to get the manufacturer to deliver the car to B.T. This seems to me to be a good example of the kind of case, in the context of a transaction which involves the supply of both goods and services, which the Court had in mind when it referred in Card Protection Plan v. Customs and Excise Commissioners, paragraph 30 to a service which did not constitute for customers "an aim in itself, but a means of better enjoying the principal service supplied."
In this case, because of the volume of their purchasing power, B.T. were able to deal directly with the manufacturer instead of, as others do who buy cars for their businesses, purchasing their cars through dealers in motor cars. The sole purpose of obtaining and paying for the transport and delivery services was to enable B.T. to complete the purchase transaction by taking physical delivery of the cars at a place of their own choosing which was more convenient for them than the factory. The commercial reality was that they were, by this means, obtaining the equivalent of what they would have got had they purchased the cars from an authorised dealer who had obtained the cars from the manufacturer and made them available for sale on its premises. The dealer would have recovered from them the cost of transporting and delivering the cars to its premises from the factory, together with the price paid to the manufacturer, all as part of the cost of the supply of the motor cars to the customer. In that case there would plainly have been only one transaction, not two. The substance and reality of the matter is that that also is true of the transactions which were entered into between B.T. and the manufacturers.
There is one other factor which, in my opinion, supports the view that the supply of the transport and delivery services were incidental or ancillary to the purchase of the motor cars and are not to be regarded as a separate and distinct supply for VAT purposes. As a matter of general principle comparable transactions should for VAT purposes, so far as possible, be treated equally. Taxable persons who purchase motor cars for business use from authorised dealers are precluded by the Blocking Order from recovering as input tax the VAT paid on the price charged by the dealer for the supply. This includes the cost of transporting and delivering the cars to the dealer's premises from the factory, which the dealer recovers from the customer. If B.T. were able to recover as input tax the VAT charged by the manufacturers on the service of transporting and delivering the cars to their premises from the factory, they would be obtaining more favourable treatment than that available to others in the market for the purchase and delivery from authorised dealers of the same motor cars.
It may be that in some instances the rules compel such a result because, on their true construction, they leave no room for any alternative: see Svenska International Plc. v. Customs and Excise Commissioners  1 W.L.R. 769. But in this case we are being asked to draw a conclusion from the facts, not to construe the statutory rules under which VAT is charged. The same treatment of similar transactions for VAT purposes can be achieved in this case by recognising that the supply of the transport and delivery services to B.T. by the manufacturers formed part of the same transaction as the supply of the motor cars.
For these reasons, and for the reasons given by my noble and learned friend Lord Slynn of Hadley, whose speech I have had the advantage of reading in draft and with which I agree, I too would allow the appeal.
I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Slynn of Hadley and Lord Hope of Craighead. For the reasons they give, and with which I agree, I too would allow this appeal.
I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Slynn of Hadley and Lord Hope of Craighead. For the reasons they give, with which I agree, I too would allow this appeal.
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