In this case the First Tier Tribunal considered the often difficult question of whether a transaction was to be properly characterised as a single supply – and if so, a single supply of what?
The taxpayer provided distance learning courses and, while both parties agreed that there was a single supply, the taxpayer contended that there was a single supply of manuals (books are zero rated or GST-free) and the Revenue contended that there was a single supply of education (taxable, not being within the exempt education provisions).
The taxpayer contended that the main element of the supply was the sale of the manuals, and the “add on” elements were ancillary and a means of better enjoying the principal supply. These ancillary elements included marking “Tutor Marked Assignments” (TMAs) which involved answering questions set out in the manuals, contact with “tutors” for assistance with the manuals (although the evidence was that little use was actually made of this service), and the ability to engage in a one or two-week practical course to practice their skills (the evidence was that the take up of the practical courses was low). No examinations were provided.
The revenue contended that one must look to the “overarching” characteristics of the supply and the only apt description of the entire supply was education. This was consistent with the “student’s economic purpose” which was to receive an education – it would be a mischaracterisation to say that his or her aim was receive manuals.
In coming to the view that there was a single supply of books, the Tribunal conducted a detailed review of the case law and the principles involved in determining the characterisation of a transaction. While caution must be had when having regard to overseas authorities, the approach of the Tribunal and the principles adopted do provide assistance on how similar issues may be resolved here.
The legal principles
Whether a single or multiple supplies
The Tribunal stated that the rules for determining whether a transaction constituted the provision to a single supply or multiple supplies were relatively straightforward:
- all the circumstances must be considered from an economic point of view, and from the perspective of a typical consumer;
- there will be one supply where one element is the principal supply and the other element or elements are ancillary to that principal supply;
- there will be one supply where from an economic point of view it would be artificial to split two elements into two separate supplies; and
- whether pricing is based on a composite price for the two elements, or separate prices for each element, may be relevant, but not determinative.
Identifying the nature of a single supply
The Tribunal identified four distinct tests that may be used (depending on the particular facts) to identify the nature of a single supply, and noted that there was possibly a fifth test, being the simple application of common sense:
- first – two or more distinct elements constitute a single supply because one element is the principal element and the other or others are ancillary. The single supply takes its nature from the principal element, and this subsumes the ancillary elements;
- second – identify, from an economic point of view, the single composite service that the customer wants. An example is a meal provided by a restaurant – the food is not ancillary to the restaurant services, but the predominant supply is nevertheless the provision of restaurant services;
- third – neither component can be said to be the principal or even the predominant element, but the two elements are of equal importance, such that they have to be put on an equal footing – the question then is whether the composite service, described in that way, is taxable or falls within a particular exemption;
- fourth – although there are various constituent elements to a single service, one description aptly covers the composite service, and the single service should thus be taken to be the service, as described in that overarching classification of all the components – the VAT nature of the single service is determined by reference to the “overarching” description of the composite service that aptly describes the entire service.
One can see that the taxpayer relied on the first test and the Revenue relied on the fourth test.
The Tribunal observed that the first step must be to ascertain the end results expected to be obtained by average customers from the supply or supplies made by the taxpayer. That was crucial because if it was concluded that there was one dominant end result sought by customers, with other elements being ancillary, those conclusions would inevitably lead to the conclusion that this is a case where there has been one single composite supply and not two or more distinct supplies. Furthermore a conclusion that there was one principal aim, with other elements of service being ancillary to the better enjoyment of that principal aim, is also likely or bound to govern the outcome of the second test for the identification of the correct description of the single service.
The Tribunal concluded that the end result sought by customers was to learn, and to accomplish that aim essentially by reading the vast amount of printed material. The Tribunal accepted that the taxpayer’s essential supply was the sale of manuals, and that the other features were appropriately regarded as “add-on” ancillary functions that ensured, where customers had a need or wish to request receipt of the various functions, that customers should simply go back to the manuals to the page or paragraph indicated, and re-read the manuals.
In coming to this view, the Tribunal distinguished the case from one where examinations were provided and the end result obtained was a qualification. In this regard, the Tribunal found that the case could be distinguished from the House of Lords decision in College of Estate Management v. HM C & E  UKHL 62, where the Court found that passing the College’s examinations and obtaining the College’s qualifications was the principal aim sought by the customers, the study of the books not being an aim in itself.