In HMRC v Colaingrove Limited2 , the Upper Tribunal (UT) has allowed HMRC’s appeal against the First-tier Tribunal’s (FTT) decision that, in very limited circumstances, a composite supply could be split for VAT purposes so that the various constituent elements of those supplies are treated differently for VAT purposes.
Colaingrove Limited (Colaingrove) is the representative member of the Bourne Leisure Group Limited VAT group, which provides serviced chalets and static caravans at holiday parks, including Haven and Butlins. The appeal centred on the provision of electricity as part of the supply to holidaymakers enjoying the use of promotional offers which had appeared in The News of the World and The Sun newspapers.
Separate amounts were charged to the holidaymakers in respect of accommodation and power. The charge for accommodation was collected by the newspaper and held by it until the holiday had taken place, when it would be remitted to Colaingrove. Although the electricity supplied was metered, in practice (for simplicity) a fixed charge for power per night would be collected separately by Colaingrove from customers at the time they made their holiday reservation.
The charge for power was not optional, and if not paid by a specified date would result in the holiday being cancelled. At Colaingrove’s parks were also pitches for static and touring caravans, to which a supply of electricity would be made, but on a metered basis. HMRC did not oppose the reduced rate being applied to customers in those circumstances and the appeal did not concern such cases.
It was common ground that EU law allows Member States to apply a reduced rate to supplies of natural gas, electricity and district heating, provided there was no risk of distortion to competition.
The UK applied such reduced rates through the operation of section 29A and Schedule 7A, Group 1, VAT Act 1994 (VATA). Group 1 provides for various types of fuel or power, including (amongst others) coal, gaseous hydrocarbons, and electricity. Note 6 expressly provides (at paragraph (c)) that the supply of such fuel will be for domestic use if supplied for use in self-catering holiday accommodation or a caravan.
The UT identified the essential issue before it as being whether Schedule 7A demonstrated an intention on the part of Parliament to tax the supply of power at a reduced rate of VAT, even if, from an objective economic point of view, it is part of a larger supply transaction (the provision of serviced holiday accommodation), which would otherwise be taxed at the standard rate.
The UT was influenced significantly by the decision of the UT in WM Morrison Supermarkets v HMRC3 , which was released shortly after HMRC had submitted its grounds of appeal in this case. HMRC had argued that that decision was indistinguishable from the instant case. This view was rejected by the UT. One particular distinguishing feature was that the WM Morrison case centred on charcoal sold with disposable barbeques, and so a “leisure item … not likely to be used as a regular means of using solid fuel for domestic cooking”. By contrast, the provision of electricity to self-catering holiday accommodation had been expressly envisaged by Parliament as a context in which the reduced rate could apply.
The UT acknowledged that it had some sympathy for the taxpayer’s position, however, in its view, the “stumbling block” for Colaingrove was the combined effect of the CPP4 line of cases, concerning the test for single/multiple supplies (ie not artificially splitting single supplies), and that section 29A of VATA provides that a reduced rate of VAT may only be charged on a “supply that is of a description for the time being specified in Schedule 7A”.
In this case, the supply (the single composite supply of serviced accommodation) is not specified within Schedule 7A, even though a supply of electricity to such accommodation is.
The cases on single/multiple supply which reach the tax tribunals almost inevitably fall into the grey area created by the CPP line of cases. The UT found the process of establishing the economic reality of the transaction in this case more difficult than in WM Morrison, where the splitting of the supply was difficult to justify. Although the UT felt bound by case law and the relevant prescriptive statutory provisions to view the supply as a whole, it will be interesting to see whether the taxpayer seeks to appeal to the Court of Appeal.
To read the decision click here.