Although the application of correct VAT rates to particular goods or services may seem to be a straightforward matter, this is not such a clear-cut issue if different types of goods or bundled goods and services are supplied together for a single fee. The problem of how to treat multiple supplies is growing more difficult as supplies become more complex, and goods are offered in combination with various services and financial or insurance arrangements.
General principles have been developing as the case law has come to grips over the past twenty years with the issue of distinguishing between multiple and composite supplies. Where there is a bundle of goods and services, it is necessary to distinguish between transactions involving a number of separate supplies made together (multiple supplies) and a supply with a single dominant element with some ancillary items (a composite supply).
There is an indistinct dividing line between multiple and composite supplies. For example, a supply of distance learning courses may be accompanied by the supply of books and manuals which would normally be zero-rated for VAT, but one fee might be charged for the whole package. Should this be separated into two items for VAT purposes? Subscriptions to professional bodies may give entitlement to members to receive a free monthly magazine (a VAT zero-rated item) for no extra charge. Large amounts of money may depend on the VAT treatment of these supplies which will differ according to their characterisation as multiple or composite supplies.
One of the most influential cases in this area of VAT is the Card Protection Plan (CPP) case which was heard by the European Court of Justice (ECJ). This involved a business that offered an insurance service for credit cards, including registration of cards, insurance cover for fraudulent use of cards, ordering replacement cards, change of address notification, lost luggage recovery, emergency medical cover and provision of emergency cash.
The ECJ had to decide if the service amounted to one VAT-exempt supply of insurance services or a multiple supply including exempt insurance and standard-rated credit card registration services. The Court reached the decision that the main service was of VAT-exempt insurance and that the other services were ancillary to the main objective of financial protection against loss. The registration of credit cards was necessary for CPP to take their protective action for customers and was closely linked to the service of insurance. All elements of the transaction were linked and could not be separated economically. This was therefore one composite supply of VAT-exempt insurance services.
Another leading ECJ case was Levob Verzekeringen where the Court decided that where two or more elements supplied are so closely linked that they form a single, indivisible economic supply this amounts to a composite supply. Levob argued that they had received a supply of customised software outside the EU (and therefore not subject to VAT) followed by a supply of customisation services that were subject to VAT. The ECJ concluded however that the whole transaction was a supply of functional software that was customised to Levob’s requirements, and was therefore one composite supply that was subject to VAT at the standard rate.
These approaches clarify a number of possible situations that might arise, but there are still supplies that are difficult to categorise, for example those involving exempt sales of distance learning courses which also include books or manuals that would normally be zero-rated. An important decision was reached by the House of Lords in the case of College of Estate Management where it was decided that there was one exempt supply of educational services, because the printed manuals supplied with the courses were only a means of better benefiting from the main supply of education. This was therefore one composite supply the whole of which was exempt from VAT. The House of Lords looked primarily at what the customer was paying for, which in this case was education, rather than the detail of what was physically provided in the course of making that supply such as the tutorials and manuals.
If a business decides that goods and services supplied to a customer are a multiple supply to which more than one VAT rate should apply, or that one supply is subject to VAT and the other is exempt, the price charged should include a separate calculation of the VAT relating to the different elements of the multiple supply. This may be difficult if there is one fee charged for the whole supply. The price would need to be apportioned between the two supplies, based on the cost or market value, and the appropriate VAT rate charged to each supply.
Some businesses might see this as an opportunity for exaggerating the value of a zero-rated supply and reducing the standard-rated element. However if HMRC disagree with the VAT treatment of the transaction, this will cost the business time and money in Tribunal proceedings in addition to potential damage to the relationship with HMRC in the longer term.
HM Revenue and Customs www.hmrc.gov.uk
“Value Added Tax” by Andrew Needham and Steve Allen, Bloomsbury Professional, 2009