The correct amount of VAT to charge on a mixed supply (a supply of both standard and zero rated goods or services) has been something of a challenge for accountants for many years. Today I will explain how HMRC has lost not one but two such cases in recent weeks and to misquote Oscar Wilde: “To lose one tribunal case on VAT and mixed supplies could be considered unfortunate, but to lose two in quick succession shows incompetence.”
Background to VAT Cases
A landmark case on mixed supplies was heard in the European Court of Justice (ECJ) way back in 1999, with the judgment supposed to give certainty over the VAT treatment of all mixed supply situations, but the subject continues to challenge HMRC.
The main principles established by the ECJ were as follows:
- Is there one main supply of goods or services with the other supply or supplies being ‘incidental’ or ‘ancillary’ to the main supply? If so, then the VAT liability wholly depends on the main supply.
- Is each supply an aim in itself? Does the customer expect to receive all elements of the supply as a priority? If so, this indicates a mixed supply.
The Court went on to give two practical examples to illustrate their judgment:
- A customer pays €400 for a luxury trip on the Orient Express train with a four course meal included in the package price.
- A customer pays €100 for a corporate package of food, drink and a top seat at a football match, and the package includes a match day programme, which would cost €10 if purchased separately.
In Example A, the Orient Express is providing a mixed supply of zero-rated rail travel and standard rated catering. Another way of looking at this issue is to consider if the customer would complain if he did not receive his four course meal? The answer is most definitely ‘yes’.
In Example B, the football package is a single supply subject to 20% VAT. The match day programme (which would be zero-rated if purchased alone) is a way of enhancing the customer’s enjoyment of the game (so he knows which teams are playing!) rather than being an aim in itself.
All crystal clear now? It may be to thee and me but not apparently to HMRC, so fast forward to the recent cases:
Case No1: The Ice Rink Company Ltd
The issue at the heart of this case was simple: when a child goes ice skating at a rink and pays to hire a pair of skates, as well as the admission charge to use the rink, does this involve one or two supplies for VAT purposes? In other words, is the child receiving a single supply to use the rink with the skates included, or a separate purchase of skates and rink hire?
This question would not be a VAT problem if both supplies were subject to the same rate of VAT but the hire of skates by children is zero-rated, whilst the admission charge is standard rated.
The court decided that the supplies were separate and should not be treated as a single, standard rated supply of “skates with admission” as HMRC concluded. The fact customers hiring skates and also paying admission pay a different price to what they would pay if they acquired the two supplies separately was irrelevant. The court felt that the customer was paying for two very separate benefits and it would be artificial to treat them as a single supply.
The VAT at stake in the Ice Rink case exceeded £600,000 and so it was a good result for the taxpayer.
Case No2: The Harley Owners Group (HOG)
The HOG was run as a business unit of Harley-Davidson Europe Ltd and was not a distinct legal entity, club or society in the conventional sense. When the members pay their annual subscription of £55 for full membership, they receive the following key benefits:
- A quarterly magazine in hard copy format – described by the tribunal as “attractively produced” and with a “general focus on the experience of owning and riding a Harley Davidson bike”
- A leather wallet
- Membership card
- Events guide and touring map
- Access to various websites and the chance to put photos on the site
- Discount opportunities eg at hotels
HMRC’s view was that the payment of £55 was wholly standard rated as a supply of membership. The HOG felt that the VAT liability of each specific benefit should be considered, especially as the most expensive part of the package was the magazines, which are zero-rated as printed matter. Not surprisingly, the tribunal ruled against HMRC.
The key comment in the tribunal’s conclusion was: “the typical member… places real value on the tangible items”, ie they were interested in the specific items rather than the overall prestige and status of being linked to the Harley Davidson brand.
This conclusion was supported by the results of a member survey carried out by the company, which showed that 89% of respondents regarded the magazine as “somewhat or very important.” The tribunal said that the key challenge was to focus on “what is (really) being acquired, rather than what motivates individual consumers to make the purchases…..the typical member wants the individual benefits.”
Not for profit organisations
In HMRC’s own Public Notice on the subject, there is a concession which operates for splitting different VAT rates for a package of benefits where the membership scheme is relevant to a ‘not for profit’ organisation such as a charity or members’ golf club.
If Harley-Davidson Europe Ltd had been a charity rather than a commercial organisation, then this case would not have reached the tribunal and the magazine element of the club subscription could have been zero-rated without any problem.
One has to therefore ask the question, why on earth did HMRC take this case to court as they only had to look in their own publication for the answer!
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.