Making supplies composed of two elements which, separately, qualify for two different rates of VAT raises a question: should each supply be subject to VAT at their own rate, or should one rate of VAT be applied to both as a single composite supply?
For taxpayers, it can be an advantage to apply a particular rate of VAT (e.g. the zero rate) to the entire supply, or at least to ensure that an adverse rate of VAT does not apply to both elements. It is therefore important to understand the method for determining which rate(s) of VAT applies to mixed supplies.
An example of this issue arose in Colaingrove Ltd v Revenue and Customs Commissioners ( UKUT 0002, published 15 January 2015). The taxpayer had been making sales of static caravans and verandas. There is a provision for zero-rating the supply of static caravans (Schedule 8, Group 9, VAT Act 1994). There is no zero-rating provision specifically for verandas, but sold together do they make a single composite supply at the overarching zero rate of VAT? Ideally, it would benefit the taxpayer if the supply of a caravan and veranda constituted a single supply which fell within the zero-rating for caravans.
The First-tier Tribunal had decided that, in a very limited number of composite supply cases, supplies should attract their individual VAT liabilities; and that, specifically, verandas were not part of the zero-rated supply of a caravan and should be subject to the standard rate of VAT. The Upper Tribunal (UT) has now reversed that decision. The UT reasoned that the proper test is in two parts:
- whether the elements constitute a single supply or multiple separate supplies (Card Protection Plan C-394/96); and if so,
- whether the legislation restricts the application of a particular rate of VAT (Talacre Beach Caravan Sales Ltd C-251/05).
Under the first test, it was agreed by all parties that the supply of a caravan and veranda was a single supply.
In applying the second test, the UT concluded that the legislation in the UK had not restricted zero-rating from applying to non-zero rated items when included in a single composite zero rated supply. Verandas when included in the sale of a caravan could therefore be zero rated.
In recent years, many mixed supplies have been challenged in the courts, including Goals Soccer Centres PLC (report), Antiques Within Ltd (report) and Brockenhurst College (report). HMRC is clearly resisting the extension of advantageous VAT rates to non-qualifying supplies when provided with qualifying supplies. On this occasion, the UT found in favour of the taxpayer. However, the UT’s reasoning was complex and it would not be surprising if this case were further appealed.
Where supplies consist of more than one element, it is important to consider the rate of VAT which should be applied. Justifications are required before simply extending an advantageous rate of VAT across all elements of a supply, as a challenge from HMRC can be expected at some point. Where in the past HMRC has restricted applications of an advantageous rate of VAT, taxpayers should consider their grounds for mounting a challenge in light of this case.
For further information and help on VAT and mixed supplies, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.