The issue in this case was whether the supply of cold water to barristers’ chambers (for which a separate supply was charged) formed part of a single supply of the leased premises for the separate supply of water. The case provides a detailed analysis of the legal principles to be applied in the UK with respect to the single/multiple supply issue. As noted by the Upper Tribunal, there is no absolute rule and each case is very fact sensitive.
Noting the reservations of Courts with regard to relying on overseas authorities in taxation cases, these legal principles have been accepted and applied in Australia by the Federal Court in cases such as Saga Holidays and also by the Commissioner in various rulings. This decision helpfully brings those principles together and provides an update on the current position of the law in the UK.
The Facts and the history of the proceedings
The facts were agreed and can be shortly stated:
- The Middle Temple holds land and buildings under a Royal Charter dating from 1608 and leases most of its buildings to barristers as chambers and to some others for business use. The leases are taxed at the standard rate.
- For historical reasons, the Middle Temple owned a network of underground pipes through which cold water was supplied by Thames Water. This supply was metered and Middle Temple was charged for it and then supplied the water to its tenants. The supply to chambers was not individually metered and the charge for cold water was calculated by reference to the area occupied.
- Each quarter an invoice was provided to the tenants which separately itemised charges for rent and cold water.
- The supply of cold water is zero-rated (GST-free) and Middle Temple did not account for VAT on the amount charged for cold water.
The First Tier Tribunal ( UKFTT 390) found that the grant of the lease of land and the provision of supply of cold water were separate supplies. The First Tier Tribunal also found the following facts:
- tenants had no practical alternative to taking their supply of cold water from Middle Temple;
- the cold water was supplied by Middle Temple because there was no practical choice of a supply from anyone other than the landlord
- on the appeal, it was accepted by both parties that the tenants had no possibility of having water provided under a separately metered system with separate pricing and invoicing.
The only issue on the appeal was whether Middle Temple made a single composite supply of the leasing of immovable property, which incorporated the provision of cold water, or two independent supplies of property and water.
The Upper Tribunal observed that reasoning of the First Tier Tribunal’s decision that there were two supplies included the following:
- there was nothing artificial about having a separate supply of accommodation and a separate supply of water and that a supply of water would not normally be made under a lease.
- the supply of water was an aim in itself because water is required for human life
- the packaging of the water and the premises in a single contract did not result in either service losing its identity
- the lease did not have any practical utility without the supply of water and that would also be true of any commercial lease
On appeal, the HMRC contended that there was a single composite supply of the premises. The Revenue’s submissions included the following:
- obtaining the supply of cold water from Middle Temple was a means of better enjoying the lease of the premises, and was not an aim in itself for the tenants because a supply of cold water was of no use without a lease of the premises.
- the two elements of letting the property and providing water formed a single indivisible economic supply, the economic purpose of which was to provide the tenant with functioning premises, which required a supply of cold water. Both supplies were so closely linked that in isolation, from the perspective of the average consumer, they did not have the necessary practical benefit for customers. The revenue referred to the following example (emphasis added):
A supply of hotel accommodation is an example of a transaction which it would be artificial to split into supplies of accommodation and water. A hotel guest expects the room rate to cover the supply of the room and the hot and cold water. From an economic or business point of view, the supply can only be categorised as a single supply of “hotel accommodation” and the zero rating in group 2 of Schedule 8 to the VAT Act 1994 is not engaged.
This contention is similar to the discussion of the treatment of accommodation by Stone J of the Full Federal Court in Saga Holidays at . Her Honour referred to the House of Lords decision in Beynon and approved of Lord Hoffman’s focus on “the social and economic reality” of the transaction.
The taxpayer sought to distinguish the supply of hotel accommodation on the basis that Middle Temple made separate charges for the supply of premises and the supply of cold water – in this context, the tenants were in exactly the same economic position as tenants of other premises who took water directly from Thames Water.
Case law on single/multiple supply
The Upper Tribunal then conducted a detailed review of the case law.
Firstly, it was observed (at ) that it was now well-established that the Courts recognised two distinct types of single composite supply, being:
- where one or more supplies constitute a principal supply and the other supply or supplies constitute one or more ancillary supplies which do not constitute an end in themselves but a means of better enjoying the principal service supplied (see Card Protection Plan Limited v HM Customs and Excise  STC 270); and
- where two or more elements or acts supplied by the taxable person are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split (see Levob Verzekeringen and OV Bank v Staatssecretaris van Fiancien  STC 766 “Levob”).
Interestingly, the principle in Card Protection Plan has been expressly adopted in the Australian GST context (see eg, Saga Holidays), but it is unclear whether the second type of composite supply has been recognised in Australia (although that . The Upper Tribunal observed that the approach of the Court in Levob was outlined in the following extract from the Court’s decision (emphasis added):
19. According to the Court’s case law, where a transaction comprises a bundle of features and acts, regard must be had to all the circumstances in which the transaction in question takes place in order to determine, firstly, if there were two or more distinct supplies or one single supply and, secondly, whether, in the latter case, that single supply is to be regarded as a supply of services (see to that effect … Card Protection Plan…paras 28 and 29).
20. Taking into account, firstly, that it follows from art 2(1) of the Sixth Directive that every transaction must normally be regarded as distinct and independent and, secondly, that a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must in the first place be ascertained in order to determine whether the taxable person is making to the customer, being a typical customer, several distinct principal supplies or a single supply (see, by analogy, Card Protection Plan…para 29).
21. In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal supply, whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the same tax treatment of the principal supply (Card Protection Plan…para 30…).
22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.
The Upper Tribunal observed that it order for different elements to form a single economic supply which it would be artificial to split, they must, from the point of view of the typical consumer, be equally inseparable and indispensable. Some similarities to this approach are found in the views of the Full Federal Court in Luxottica  FCAFC 21 where the Court agreed with the Tribunal that the sale of spectacles was a single supply. At  the Court observed as follows:
We agree with the Tribunal that the sale of spectacles was a single supply. While “Supply” is defined broadly, it nevertheless invites a commonsense, practical approach to characterisation. An automobile has many parts which are fitted together to make a single vehicle. Although, for instance, the motor, or indeed the tyres, might be purchased separately there can be little doubt that the sale of the completed vehicle is a single supply. Like a motor vehicle, spectacles are customarily bought as a completed article and in such circumstances are treated as such by the purchaser. The fact that either the frame or the lenses may be purchased separately is not to the point.
The Tribunal noted that there was no absolute rule for determining whether two or more elements are a single composite supply or several independent supplies – there are some indicators which may point in one direction or another but they are not individually conclusive. Further, in each case the question is highly fact sensitive.
The Upper Tribunal reviewed a number of decisions and outlined the following “key principles”:
- Every supply must normally be regarded as distinct and independent, although a supply which comprises a single transaction from an economic point of view should not be artificially split.
- The essential features or characteristic elements of the transaction must be examined in order to determine whether, from the point of view of a typical consumer, the supplies constitute several principal supplies or a single economic supply.
- There is no absolute rule and all the circumstances must be considered in every transaction.
- Formally distinct services, which could be supplied separately, must be considered to be a a single transaction if they are not independent.
- There is a single supply where two or more elements are so closely linked that they form a single, indivisible economic supply which it would be artificial to split.
- In order for different elements to form a single economic supply which it would be artificial to split, they must, from the point of view of a typical consumer, be equally inseparable and indispensable.
- The fact that, in other circumstances, the different elements can be or are supplied separately by a third party is irrelevant.
- There is also a single supply where one or more elements are to be regarded as constituting the principal services, while one or more elements are to be regarded as ancillary services which share the tax treatment of the principal element.
- A service must be regarded as ancillary if it does not constitute for the customer an aim in itself, but is a means of better enjoying the principal service supplied.
- The inability of the customer to choose whether or not to be supplied with an element is an important factor in determining whether there is a single supply or several independent supplied, although it is not decisive, and there must be a genuine freedom to choose which reflects the economic reality of the arrangements between the parties.
- Separate invoicing and pricing, if it reflects the interests of the parties, support the view that the elements are independent supplies, without being decisive.
- A single supply consisting of several elements is not automatically similar to the supply of those elements separately and so different tax treatment does not necessarily offend the principle of fiscal neutrality.
Application of the principle to the facts
The Upper Tribunal observed that it could not disturb the finding of the First Tier Tribunal that the supply of water was an aim in itself for the tenants. Accordingly, the supply of water could not be regarded as a composite supply under the principal/ancillary supply analysis (Card Protection Plan) but that still left open the possibility of the indivisible/artificial to split single supply (Levob).
The Upper Tribunal found that there was a single economic supply which it would be artificial to split. From the point of view of the typical tenant, both the premises and the water are equally indispensable and inseparable.