VAT – Supply – Value Added Tax Act 194 – Lease of building with supply of cold water – Respondent landlord owning network of water pipes and supplying water to tenants – Supply of water to respondent’s network metered by water company but onward supply to respondent’s tenants charged in proportion to leased area not water used – Respondent exercising option to tax in respect of its land – Grant of leases therefore treated as standard-rated taxable supply – Whether provision of water a separate supply attracting zero-rating – First-tier tribunal overturning appellants’ determination that accommodation and water constituting single standard-rated supply – Appeal allowed
The respondent, one of the four Inns of Court, owned various buildings and land in respect of which it had exercised the option to tax under para 2 of Schedule 10 to the Value Added Tax Act 1994. It let certain buildings to barristers for use as chambers or to others for business use. The effect of the option to tax was that the grant of those leases was treated as a taxable supply chargeable to VAT at the standard rate. Cold water to the buildings was supplied though an underground network of pipes, which, for historical reasons, were in the respondent’s ownership. Although the relevant water company metered the supply of water to the network, and charged the respondent accordingly, the respondent did not meter the onward supply of cold water to its tenants. Instead, it billed them by means of a quarterly invoice, which separately itemised rent for the premises and the charge for cold water, which was calculated by reference to the area occupied. The respondent did not account for VAT on the amount charged for water.
The appellants assessed the respondent to VAT on the basis that there was a single composite supply consisting of the leasing of immoveable property, which incorporated the provision of cold water. On appeal from that decision, the respondent contended that it made two separate supplies to its tenants for VAT purposes, a standard-rated supply of the letting of land and a zero-rated supply of cold water under item 2 in group 2 of Schedule 8 to the 1994 Act. The first-tier tribunal (FTT) accepted that contention [2011] UKFTT 390 (TC). In reaching that conclusion, it found that the supply arrangements arose from an accident of history and that there was no economic advantage to the tenants in having both accommodation and cold water supplied together under the same contract. It found that there was nothing artificial about treating the position as separate supplies of accommodation and water, given that a supply of water would not normally be made under a lease.
The appellants’ appeal against the FTT’s decision was stayed pending the judgments of the Court of Justice of the European Union (CJEU) in Purple Parking Ltd v Revenue and Customs Commissioners Case C-117/11 [2012] STC 1680 and Field Fisher Waterhouse LLP v Revenue and Customs Commissioners Case C-392/11 [2013] STC 136; [2012] PLSCS 191. The CJEU subsequently issued a further relevant decision in BGZ sp zoo v Dyrektor Skarbowej Warszawie Case C-224/11; [2013] STC 2162.
Held: The appeal was allowed.
The FTT’s decision could not stand in light of the recent CJEU jurisprudence. There would be a single supply where two or more elements were so closely linked that they formed a single, indivisible economic supply, which it would be artificial to split. In order for different elements to form such a single supply, they had to be equally inseparable and indispensable from the point of view of the typical consumer. There was no absolute rule for determining whether two or more elements or acts were a single composite supply, subject to the same VAT liability, or several independent supplies that had to be treated separately for VAT purposes. The matter would be highly fact-sensitive. While some indicators might point in one direction or another, they were not individually conclusive. They had to be evaluated once all the circumstances of the case had been taken into consideration, having regard the economic reason or purpose of the whole transaction from the point of view of the typical customer. An important, but not decisive, factor would be the ability of the customer to choose whether to be supplied with a particular element of a transaction, in the sense of a genuine freedom to choose, which reflected the economic reality of the arrangements between the parties. Formally distinct services, which could be supplied separately, should be regarded as a single transaction if they were not independent: Levob Verzekeringen BV v Staatssecretaris van Financiën Case C-41/04 [2006] STC 766, Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG Case C-44/11 [2012] STC 1951, Field Fisher Waterhouse and BGZ applied; RLRE Tellmer Property sro v Financní reditelství v Ústí nad Labem Case C-572/07 [2009] ECR I-4983; [2009] STC 2006; [2009] PLSCS 180 considered.
The position was unaffected by the principle of fiscal neutrality, which was concerned with ensuring that supplies of similar goods and services, which were thus in competition with each other, were treated in the same way for VAT purposes. That principle was not a relevant factor to be taken into account in determining whether a transaction consisting of more than one element should be regarded as a single supply or as several independent supplies, since a complex supply of services consisting of several elements was not automatically similar to the supply of those elements separately. Accordingly, the fact that the UK zero-rated the supply of cold water was not relevant to the question of whether the different elements provided by the respondent were a single supply or several supplies: Purple Parking applied. The FTT appeared to have misapplied the principle of fiscal neutrality by taking into account the fact that treating the provision of cold water at the Inn as part of the supply of the premises would result in its being chargeable to VAT, while tenants operating similar businesses elsewhere would obtain water directly with no charge to VAT. The fact that the recipients of a supply carried on similar businesses was irrelevant when considering whether the principle of fiscal neutrality was engaged; the only consideration was whether the goods or services supplied were similar.
The proper conclusion was that the respondent made a single supply. Although the supply of water was an aim in itself, and not merely ancillary to the supply of accommodation, it was indivisible from the supply of the premises. It was irrelevant that the arrangements flowed from an accident of history. Likewise, it made no difference whether the single supply had a greater economic value than the elements supplied separately. It was relevant that there was a long established practice under which the respondent acted as a cold water supplier to its tenants, and that, under the terms of the leases, the water charges were calculated in proportion to the area of the leased premises and not the water used by the tenant. While tenants of premises elsewhere might obtain a supply of water directly from the water company, the tenants of premises in the Inn had no choice but to obtain water from the respondent. Both accommodation and water were essential if the tenants were to occupy and use the premises. The tenants therefore had to be assumed to require a combination of those two elements if the premises were to fulfil their economic purpose. They had no freedom of choice in that regard; their only choice was to take a lease of the premises that included the provision of water by the respondent or not to take any lease at all. In those circumstances, the leasing of the premises and the supply of water to those premises under the lease formed 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 were equally indispensable and inseparable. There was therefore a single supply of the leasing of immoveable property, which was chargeable to VAT by virtue of the respondent’s option to tax.
Raymond Hill (instructed by the legal department of HM Revenue and Customs) appeared for the appellant; Richard Bramwell QC and Michael Collins (instructed by Crowe Clark Whitehill LLP) appeared for the respondent.
Sally Dobson, barrister
