VAT – Is it One Thing or Two?

There are numerous old chestnuts in the world of VAT and one such is single -v- multiple supplies.  In English – for VAT – is it one thing or two? Should the sale be treated as one single thing with VAT due at the same rate? or two or more separate things with VAT following the nature of the components?  A recent case centred on children’s activity packs has recently rehearsed the arguments and goes to underline the need to tread carefully when handling VAT in unusual situations.

Dodaline Ltd T/A Toucanbox [2019] TC07505 was challenged by HMRC who contended that sales of children’s activity boxes were a single supply of VATable craft activities.  Although a magazine was included in the pack, HMRC’s view was that Toucanbox made a single composite supply and the magazine was ancillary such that the sale price could not be apportioned and could not be partly zero-rated. 

Toucanbox disagreed and argued that the magazine was could and was sold separately and the two elements could be enjoyed independently.  Accordingly they made a multiple supply and VAT was not due on the magazine element.

In reaching its decision the tribunal adopted the principles from previous the precedent cases which have been distilled over many years and are worth setting out in full, as below.  In adopting this approach the tribunal found in favour of the Toucanbox but these cases are resolved on a subjective basis and as such need careful handling.

The following principles derived from CJEU cases all carry the same weight and therefore all need to be taken into account when considering the single -v- multiple supply question.

The key principles for determining whether a particular transaction should be regarded as a single composite supply or as several independent supplies may be summarised as follows:

1. 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
2. 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 distinct principal supplies or a single economic supply.
3. There is no absolute rule and all the circumstances must be considered in every transaction.
4. Formally distinct services, which could be supplied separately, must be considered to be a single transaction if they are not independent.
5. 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.
6. 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.
7. The fact that, in other circumstances, the different elements can be or are supplied separately by a third party is irrelevant.
8. 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.
9. 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.
10. 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.
11. The ability 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 supplies, 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.
12. Separate invoicing and pricing, if it reflects the interests of the parties, support the view that the elements are independent supplies, without being decisive.
13. 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.’

Answering the question for VAT – is it one thing or two? involves complex considerations that must be approached objectively and not optimistically. Too many taxpayers have been challenged on this mixed supply question and the only way to avoid problems is to think about what is being supplied in advance of committing to how VAT will be handled. Remember sooner is always better. If you’re ever not sure, why not give us a call?

Originally drafted for ICPA June 2020 magazine