The Upper Tribunal (UT), reversing the decision of the First-tier Tribunal (FTT), has decided that the grant of a lease of land (an exempt supply but with the option to tax) and the supply of cold water (a zero-rated supply) by a landlord (taxpayer) to a tenant formed a single supply for VAT purposes. Although, in other circumstances, tenants would be able to obtain water from an entity other than the landlord, in the present case, due to the way in which water was supplied to a network of pipes owned by the taxpayer, the tenants could only choose either to obtain both elements from the taxpayer or to forego both elements. Neither element was ancillary to the other, the two elements were equally indispensable and inseparable, meaning that they formed a single economic supply, being a supply of a lease of land (which was chargeable to VAT due to the taxpayer’s option to tax).
The taxpayer let premises to barristers as chambers and to others for business use. The taxpayer had opted to tax the land so the grants of the leases were subject to tax at the standard rate. For historical reasons, the taxpayer owned a network of underground pipes through which cold water was supplied to its buildings. The water company charged the taxpayer (on a metered basis) for water entering its pipe network and the taxpayer supplied water through that network to its tenants, charging them by reference to the area occupied, rather than actual usage.
The taxpayer treated the supply of water as zero-rated for VAT purposes. However, HMRC contended that there was a single, standard-rated supply (comprising elements relating to the leases and the water supply). The FTT agreed with the taxpayer and HMRC appealed to the UT.
The UT’s decision
The UT allowed HMRC’s appeal, holding that there was a single, standard-rated supply. The UT reviewed the relevant case law from the European Court of Justice (ECJ) before applying the principles derived therefrom to the facts of the case.
In the UT’s view, the ECJ recognised two types of single, composite supply:
- one or more supplies constituting a principal supply and another supply, or other supplies, being ancillary and not constituting an end for customers but a means of better enjoying the principal supply (see Card Protection Plan Ltd v HMCE (Case C-349/96) (CPP));
- two or more elements being so closely linked that, objectively, they formed a single, indivisible economic supply, which it would be artificial to split (see Levob Verzekevingen BV v Staatssecratis van Financien (Case C-41/04)).
Guidance on what constituted a single indivisible economic supply is found in the decision in Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG (Case C-44/11). For different elements to form such a supply, they have to be equally inseparable and indispensable from the viewpoint of a typical consumer. The UT commented that the decision in RLRE Tellmer Property sro v Financni Reditelstvi v Usti nad Labem (Case C-72/07), referred to by the FTT, was consistent with this.
The UT also referred to the ECJ’s decision in Purple Parking Ltd v HMRC (Case C-117/11) which was given after the FTT’s decision in the present case. In Purple Parking, the ECJ held that the fact that, in other circumstances, the relevant elements could be supplied separately is irrelevant in determining whether there is a single supply in a particular case as that possibility is inherent in the concept of a single economic transaction. That decision demonstrated that the principle of fiscal neutrality was irrelevant in determining whether there was a single supply or several independent supplies, and indicated that the fact that one of the elements (here, the water supply) would be zero rated if supplied independently was irrelevant to that exercise. The UT concluded that the FTT had erred in applying the principle of fiscal neutrality to the present case (and in ruling that the supply of water should be taxed in the same way whether supplied to the taxpayer’s tenants by the taxpayer or to other tenants by the water company) as the question under that principle was whether the relevant goods or services were similar, not whether supply recipients carried on similar businesses.
The UT also considered the ECJ’s decision in Field Fisher Waterhouse LLP v HMRC (Case C 392/11), which was delivered after the decision of the FTT in the present case. In that case, the ECJ commented that there was no absolute rule for determining the extent of a supply and that all of the circumstances had to be taken into account. The ECJ stated that it was for the national court to determine whether there was a single supply or multiple supplies in any given case but commented that:
- the leasing of immovable property and supplies of services relating to the leasing could constitute a single supply;
- although not decisive, the lease including the services and giving the landlord the right to terminate if the tenant failed to pay the service charges suggested a single supply
- supplies having only an artificial link to the principal supply could not be regarded as part of a single composite supply;
- the fact that services could be supplied by a third party did not prevent them from being part of a single composite supply;
- the content of a lease might be a factor of importance in determining whether there was a single supply, although inclusion of services in a lease was not decisive;
- regard should be had to the economic reason for entering into the lease, which might include not only obtaining the lease but also obtaining services; obtaining the services might not constitute an end in itself for the tenant but might be a means of better enjoying the principal supply (the lease).
Finally, the UT considered the ECJ’s decision in BGŻ Leasing sp. z o.o. v Dyrektor Izby Skarbowej w Warszawie (Case C-224/11) which was given after the decision of the FTT in the present case. The ECJ in BGŻ considered that:
- insurance relating to a lease reduced the risks faced by the lessee and facilitated the enjoyment of the leased property but this derived from the nature of insurance and did mean that the insurance had to be ancillary to the lease and did not prevent the insurance being an end in itself for the lessee;
- The fact that insurance might be taken from a third party showed that the requirement under the lease for insurance did not, in itself, mean that a supply of insurance by the lessor formed an indivisible supply with the granting of the lease (the UT in the present case opined that this showed that the ability to choose the supplier was an important (albeit not decisive) factor in determining whether there was a single supply but that there had to be a genuine freedom of choice reflecting the economic reality between the parties);
- separate pricing and invoicing of the various elements indicated distinct supplies but this was not determinative;
- a provision in a lease allowing the lessor to terminate the lease if the lessee fails to pay charges for other services may indicate that the grant of the other leases forms a single supply with the other services but this is not determinative and does not dictate the analysis if the transactions cannot be objectively regarded as constituting a single supply;
- the question, following Levob, was whether the leasing and insurance services could be seen as so closely linked that, objectively, they formed a single, indivisible economic supply that it would be artificial to split.
- did not disturb the FTT’s finding that the supply of water was an aim in itself for the tenants, but stated that this did not mean that the supply of water was necessarily indivisible from the supply of premises;
- saw it as irrelevant that the pipe system, necessitating the arrangements in question, had been installed a long time ago; the analysis would be the same in the case of a similar system installed more recently;
- considered that the principle of fiscal neutrality did not require the provision of water in the present case to be taxed in the same way as a supply to tenants direct by the water company;
- stated that ECJ case law does not advocate an economic value test that considers whether a single, composite supply has a greater or lesser economic value than its constituent elements taken separately – in the view of the UT, such a consideration is irrelevant when determining whether there is a single, composite supply;
- Commented that the test was not whether there would be anything artificial about separate supplies of the different elements, but whether, in all of the circumstances, there was a single, indivisible supply, from an economic point of view, that it would be artificial to split.
In the present case, the relevant circumstances included the long-established practice under which the taxpayer acted as the supplier of cold water to its tenants and that the leases provided for the charges for water incurred by the taxpayer to be paid by the tenants in proportion to the areas let rather than in accordance with actual usage.
The starting point was that every transaction was to be regarded as distinct and independent, and a transaction that comprised a single supply from an economic perspective should not be split artificially.
However, the UT stated that, in light of Field Fisher Waterhouse it was necessary to consider the economic purpose or reason for the transaction as a whole from the viewpoint of a typical customer (regardless of the type of composite supply under consideration). Contrasting that case with Tellmer and BGŻ, the UT opined that if there was a genuine contractual freedom to obtain the relevant service and consequently a separately identified charge for that service, this supported the existence of independent supplies, rather than a single composite supply, for VAT purposes.
In the present case, the tenants had no practical alternative to obtaining water from the taxpayer. The tenants’ choice was either to take both the lease and the water supply from the taxpayer, or not take the lease at all. As both the premises and the water were essential for occupation, the UT assumed that the tenants required a combination of those two elements if the premises were to fulfill their economic purpose. As both elements were equally indispensable (meaning that neither was ancillary to the other) and inseparable, the UT held that the grant of the lease and the supply of water formed a single economic supply for VAT purposes. This was a supply of the leasing of immovable property, which was chargeable to VAT due to the taxpayer’s option to tax.
Whether there is a single, composite supply, or multiple supplies, for VAT purposes, must be determined on the particular facts of the case under consideration. There is no absolute rule for determining this: that has been confirmed by the ECJ in Field Fisher Waterhouse. However, this case provides a useful discussion of the ECJ case law in this important area and highlights the impact of the more recent cases, such as Purple Parking, Field Fisher Waterhouse and BGŻ.
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