[2013] UKFTT 506 (TC)
TC02895
Appeal number: LON/2009/00673
Value Added Tax – reduced
rate – energy saving materials supplied as part of a supply of the whole or
part of a domestic central heating system – whether a single
supply subject to a single rate of VAT, a single supply subject to two or more
different rates of VAT or two or more separate supplies subject to different
rates of VAT
FIRST-TIER TRIBUNAL
TAX CHAMBER
|
|
AN CHECKER
HEATING & SERVICE ENGINEERS
|
Appellant
|
|
|
|
|
|
|
- and -
|
|
|
|
|
|
|
|
THE
COMMISSIONERS FOR HER MAJESTY’S
|
Respondents
|
|
|
REVENUE &
CUSTOMS
|
|
|
TRIBUNAL:
|
JUDGE NICHOLAS PAINES QC
|
|
|
|
Sitting in public at 45 Bedford Square, London WC1 on 25 and 6 April 2013
Mr David Milne QC and Mr
Charles Bradley, Counsel, instructed by McClure Naismith LLP, for the Appellant
Miss Kerry Bretherton,
Counsel, instructed by the General Counsel and Solicitor to HM Revenue and
Customs, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1.
The business of the Appellant, which I shall refer to as ‘AN Checker’, includes
the installation in residential accommodation of boilers and central heating
systems; the installations include components which, AN Checker contends, fall
within the definition of “energy saving materials” in Note 1 to Group 2 in Schedule
7A to the Value Added Tax Act 1994. I am not asked to decide whether that is
the case, but to assume it for the purpose of giving a decision in principle on
the issues raised by the appeal.
2.
The background to the appeal is that AN Checker has accounted for VAT on
the components, and on an apportioned element of the labour charges applicable to
their installation, at the reduced rate of 5% provided for by section 29A of
the Act. In January 2009 HMRC conducted an
audit of AN Checker’s VAT returns and in February 2009 wrote to them expressing
the view that, whilst the components would qualify for VAT at the reduced rate
if they were installed “in their own right”, where they were installed as part
of a larger installation – such as of a boiler or a central heating system – the
whole supply was standard-rated. HMRC subsequently raised an assessment in
respect of AN Checker’s accounting periods from 03/06 to 09/08.
3.
AN Checker sought a review of the
decision, but it was upheld. In March 2009 a notice of appeal against the
assessment was lodged at the Tribunal. From May of that year until February
2012 the appeal was stayed pending a decision in another case but, following
the withdrawal of the appeal in that other case, AN Checker requested that its
appeal be nominated as the new lead case. By an Order of 19 April 2012 the
Tribunal designated this appeal as a lead case pursuant to rule 18 of
the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, identifying the common or related issue of fact or law
between it and other related appeals as:
“Whether the supply of the
installation of energy saving materials together with services of installation
of boiler and other central heating products is a single supply subject to [a]
single rate of VAT or is a single supply subject to two or more different rates
of VAT or, in the alternative, are two or more separate supplies subject to
different rates of VAT.”
4.
HMRCs’ case on this is, in short, that the installation of energy saving
materials together with installation of a boiler or other central heating
components is a single supply, in accordance with the principles set out in Case
C-349/96 Card Protection Plan [1999] ECR I-973, [1999] STC 270 (“CPP”)
and other related cases, taxable at the standard rate. AN Checker’s case relies
on the CJEU’s judgment in Case C-94/09 Commission v France [2010] ECR
I-4261, [2012] STC 573 (hereafter Commission v France (undertakers), to distinguish
it from another Commission v France case) as establishing that the
reduced rate provided for by s 29A and Group 2 of schedule 7A applies to those
elements of the supply that are energy-saving materials, regardless of whether they
are elements of a single wider supply on CPP principles. I have
concluded, with some regret, that HMRC’s case succeeds.
The legislation
5.
Directive 2006/112 contains a number of provisions that allow Member
States to apply reduced rates of VAT, lower than the standard rate. Article 98
allows them to do so in respect of categories of supplies of goods or services
listed in Annex III to the Directive; article 102 allows them to do so in the
case of supplies of natural gas, electricity or district heating and articles
110 and 113 allow them to continue to apply reduced or zero-rating in respect
of supplies that received it in January 1991. Energy-saving materials are not
in the latter category and I was told of controversy between the United Kingdom and the European Commission as to whether the Directive permitted a reduced
rate in their case. I was not asked to consider whether their supply and/or
installation falls within any of the categories in Annex III but to assume that
reduced rating is available, subject to the issues I am asked to decide.
6.
Section 29A(1) of the 1994 Act provides that “VAT charged on any supply
that is of a description for the time being specified in Schedule 7A … shall be
charged at the rate of 5 per cent.” Group 2 in Schedule 7A reads, so far as
material, as follows (former references to installation of energy-saving
materials in buildings used for a charitable purpose having been deleted with
effect from 1 August 2013):
Group 2 Installation of
energy-saving materials
Item no.
1. Supplies of services of installing
energy-saving materials in residential accommodation.
2. Supplies of energy-saving materials by a
person who installs those materials in residential accommodation.
Notes
Meaning of “energy-saving materials”
1. For the purposes of this Group
“energy-saving materials” means any of the following—
(a) insulation for walls, floors, ceilings, roofs or
lofts or for water tanks, pipes or other plumbing fittings;
(b) draught
stripping for windows and doors;
(c) central
heating system controls (including thermostatic radiator valves);
(d) hot
water system controls;
(e) solar
panels;
(f) wind
turbines;
(g) water
turbines;
(h) ground
source heat pumps;
(i) air
source heat pumps;
(j) micro
combined heat and power units];
(k) boilers designed to be fuelled
solely by wood, straw or similar vegetal matter.
The evidence
7.
I was provided with a witness statement of Mr Stephen Checker, who also
gave oral evidence. AN Checker was founded by Mr Checker’s father, but I infer
that it is Mr Checker who now runs it. I shall set out a brief summary of the
relevant facts as I understand them. These are not to be treated as formal
findings of fact; I was invited to deal with the issues in the case in
principle, leaving it to the parties to agree, so far as necessary, what the
precise result in terms of tax liability should be on the basis of further
investigation of the facts by HMRC than has been so far conducted. It is not possible
to decide an issue in a factual vacuum and this does seem to me to be a case in
which I can conveniently decide the contested issues of principle on the basis
of a general understanding of the factual background without burdening the
parties with binding findings of fact which risk being incomplete or inaccurate
in their detail.
8.
AN Checker’s business includes the installation, improvement and repair
of domestic central heating installations; Mr Checker deals with the surveying
and estimating of jobs. When a prospective customer makes contact with the
business, an appointment is made for Mr Checker to visit the customer and
prepare a quotation for the work required. Mr Checker uses a computer to
prepare quotations. In order to enable the computer to calculate the VAT element
of the quotation Mr Checker attributes values to those elements of the job that
he considers to be taxable at the reduced rate; these are, in short,
thermostatic radiator valves, central heating timers, room thermostats, other
central heating system controls such as motorised valves controlled by a
thermostat, and insulation.
9.
In recent years AN Checker has used a piece of computer software known
as the ‘VAT optimiser’, which is operated by a colleague of Mr Checker to whom
he passes the job file. The papers for the hearing included a witness
statement of Mr Kevin Treanor, whose company markets the VAT optimiser, though
I was not asked to read it. I shall simply note that the VAT optimiser appears
to apportion materials costs between components of an installation regarded as
falling or not falling within the definition of energy-saving materials on the
basis of the installer’s purchase cost and to apportion labour costs between
the two categories of component on the basis of the installer’s labour rates
and industry standard labour times. It does not matter for the purposes of my
decision whether this apportionment is accurate or not; I have to decide
whether apportionment is permissible in principle. It appears that the
optimiser makes an apportionment even as regards the internal components of
items that the installer purchases as a single unit, such as insulation material
within a boiler.
10.
In his oral evidence, Mr Checker said that the majority of AN Checker’s domestic
central heating work involved installing new boilers into existing central
heating systems; he estimated that as amounting to some 75% of the business.
Full installations of central heating systems account for about 20% of AN
Checker’s business (I assume, measured by numbers of jobs rather than value),
and installations limited to energy-saving materials such as thermostatic
valves or insulation account for about 5%. Mr Checker explained that
Regulations introduced in 2005 had required new domestic boiler installations
to be of a condensing boiler and to be accompanied by the fitting (if not
already fitted) of thermostatic radiator valves to upstairs radiators, a room
thermostat on the ground floor and a hot water tank thermostat. Further
Regulations introduced in 2010 required thermostatic radiator valves to be
fitted to ground floor radiators also, except in the room fitted with the room
thermostat. A boiler replacement job therefore typically has to include the
supply and fitting of a number of components falling within the definition of
energy-saving materials. I was shown three sets of sample project
documentation and some brochure pages relating to thermostats and controls, but
it is not necessary to describe them further. The quotation and invoice
supplied to the customer do not break down the VAT between the reduced and
standard rate, the invoice simply stating a VAT-inclusive price.
The case-law
11.
For HMRC, Miss Bretherton relies on the familiar CPP line of
case-law, which holds that a supply comprising different elements is (in
general) a single supply for VAT purposes where some of the elements are
ancillary to the principal element or elements, or where the elements are so
closely linked that in objective economic terms they form a single supply which
it would be artificial to split. She contends that where AN Checker installs
energy-saving materials along with the installation of a boiler or of a
complete central heating system there is, on CPP principles, a single
supply which goes beyond and cannot be described as a supply of energy saving
materials; consequently, AN Checker’s supplies are wholly taxable at the
standard rate.
12.
Since Mr Milne QC and Mr Bradley, who appear for AN Checker, accept the
premise – though not the consequence – I do not need to analyse the CPP
case-law or its application to the facts of this case in any detail. I simply
record that I agree that the premise is correct; in my judgment, AN Checker’s
supplies of energy-saving materials along with boilers or central heating
systems are, in the CJEU’s terminology, complex single supplies and cannot be
described as supplies ‘of’ installing energy-saving materials listed in Group
2, though the supplies include that.
13.
It was, I imagine, widely thought in the early days of the CPP
case-law that a single supply must receive a single VAT treatment. But that
has been established not to be entirely the case. Mr Milne relied in his submissions
on a line of CJEU case-law which establishes that different elements of a complex
single supply may nevertheless be taxed at different rates where national law
so provides.
14.
The first case in the series was Case 384/01 Commission v France [2003] ECR I-4416, which I shall refer to as Commission v France (gas and electricity).
It concerned the introduction by France of a reduced rate of VAT on the
standing charge element of the domestic tariffs of the (then still
nationalised) suppliers of gas and electricity. Claiming to be acting under
the predecessor to article 102 of the VAT Directive, France had notified the
European Commission of its intention, and there had followed an inconclusive
correspondence between France and the Commission on the question whether the
case fell within the relevant article. The charges appear to have related to the
connection to the gas or electricity network and (despite a suggestion to the
contrary in paragraph 28 of the Court’s judgment) not to any units of gas or
electricity supplied. In the ensuing infringement proceedings the Commission
relied, in addition to an argument that France had not acted in accordance with
the prescribed procedure, on a contention that the charges either fell outside
the article, as not relating to supplies of gas or electricity but merely to
supplies of a service of connection to the networks or – if the charges did
relate to supplies of gas or electricity – that they infringed the ‘principle
of neutrality’ by applying different rates of VAT to the element of the supply
remunerated by the standing charge and to the element remunerated by unit
charges.
15.
The Commission’s action failed, the Court holding that it had not
advanced an argument to substantiate the contention that the charges were not
in respect of a supply of fuel and had produced no evidence to show that the principle
of fiscal neutrality was infringed by “the selective application of the reduced
rate of VAT to one part only of the supply of gas or electricity”; it added
that
27 In
any event, there is nothing in the text of Article 12(3)(b) of the Sixth
Directive which requires that provision to be interpreted as requiring that the
reduced rate can be charged only if it is applied to all supplies of natural
gas and electricity. It is true that the French text of that provision uses the
definite article 'aux' before the term 'fournitures', but a comparison of the
different language versions, some of which do not use the definite article,
argues in favour of an interpretation that a selective application of the
reduced rate cannot be excluded, provided that no risk of distortion of
competition exists.
28 Moreover,
since the reduced rate is the exception, the restriction of its application to
concrete and specific aspects, such as the standing charge conferring
entitlement to a minimum quantity of electricity on the account holders, is
consistent with the principle that exemptions or derogations must be
interpreted restrictively.
29 It
must therefore be concluded that the Commission has failed to demonstrate that
the charging of a reduced rate solely on the standing charge conferring
entitlement to a minimum supply of energy necessarily requires that the same
reduced rate be charged on all other supplies of energy.
16.
The Court went on to hold that the Commission’s failure to take a
decision to the effect that the VAT treatment distorted competition meant that
it was to be deemed not to. It is to be noted that the CPP case-law was
not referred to in the judgment, paragraph 29 of which suggests that the Court
might have regarded the supplies remunerated by the standing charges as
separate supplies between the utility and the consumer. The relationship
between the principle that reduced rates can be applied selectively and the CPP
case-law was, however, discussed in two subsequent cases which make it clear
that a Member State can provide for reduced or zero-rating of a part only of a single
supply.
17.
The first of these is Case C-251/05 Talacre Beach Caravan Sales Ltd v
Commissioners of Customs and Excise [2006] ECR I-6269, [2006] STC 1671
concerning the zero-rate in the United Kingdom for caravans exceeding a
specified size (more often referred to as ‘mobile homes’). Talacre purchased and
resold them together with certain contents in what had been held to be a single
supply. The VAT Act, however, excluded most ‘removable contents’ supplied with
a mobile home from the zero-rate. The Court of Appeal referred to the CJEU the
question whether the fact that there was a single supply of the mobile home and
the contents precluded the taxing of the contents at the standard rate, Talacre
contending that different rates of tax could never be applied to elements of a
single supply.
18.
The Court’s contrary conclusion was heavily influenced by the Note to the
relevant Group in Schedule 8 to the Act explicitly excluding removable contents
from the zero-rate. It held that to extend zero-rating to contents by virtue
of their inclusion in a single supply would extend the zero-rate beyond the scope
it had had in 1991, contrary to what is now article 110; whilst it followed
from the CPP case-law that “a single supply is, as a rule, subject to a
single rate of VAT”, the case-law did not “preclude some elements of that
supply from being taxed separately where only such taxation complies with the
conditions imposed by [article 110] on the application of exemptions with
refund of the tax paid”.
19.
On the face of it, the reasoning in Talacre is limited to cases of
tax rates that are permitted to the extent that they existed in 1991. That feature
is absent, however from the two cases that followed. In Case C-442/05 Finanzamt
Oschatz v Zweckverband zur Trinkwasserversorgung und Abwasserbeseitigung
Torgau-Westelbien [2008] ECR I-1817], [2009] STC 1, the Zweckverband was a
municipal water and sewerage undertaking which charged a fee for connecting a
consumer to its water main. Germany had a reduced rate of VAT on the supply of
water, pursuant to what is now article 98, but the tax authority took the view –
similar to that of the Commission in Commission v France (gas and
electricity) – that laying the mains connection was not the same as
supplying water. The Bundesfinanzhof asked the CJEU whether laying a mains
connection formed part of the supply of water within the meaning of the
predecessors to Annexes I (activities of bodies governed by public law that are
in any event taxable) and III (supplies that may be reduced-rated under article
98) to the Directive.
20.
The Court held that the mains connection did form part of the supply of
water for the purposes of both annexes, on the ground that the mains connection
was essential in order for the water to be supplied. Unlike the Advocate
General, it did not specifically apply CPP reasoning or hold that the
mains connection was ancillary to the supply of the water. In the context of what
is now Annex III the Court added (perhaps unnecessarily, since the German
reduced rate appears to have applied to supplies of water generally) that
41 ....
there is nothing in the text of Article 12(3)(a) of the Sixth Directive which
requires that provision to be interpreted as meaning that the reduced rate can
be charged only if it is applied to all aspects of the water supplies covered
by Annex H to that directive, so that a selective application of the reduced
rate cannot be excluded provided that no risk of distortion of competition
results (see, by analogy, Case C-384/01
Commission v France [2003] ECR I-4395,
paragraph 27).
42 The
introduction and maintenance of reduced rates of VAT lower than the standard
rate fixed in Article 12(3)(a) of the Sixth Directive are permissible only if
they do not infringe the principle of fiscal neutrality, inherent in the common
system of VAT, which precludes treating similar goods and supplies of services,
which are thus in competition with each other, differently for VAT purposes
(see, inter alia, Case C-481/98 Commission
v France [2001] ECR I-3369, paragraphs 21 and 22, and Case C109/02 Commission
v Germany [2003] ECR I-12691,
paragraph 20).
43 Accordingly,
subject to compliance with the principle of fiscal neutrality inherent in the
common system of VAT, Member States may apply a reduced rate of VAT to concrete
and specific aspects of water supplies covered by Category 2 of Annex H of the
Sixth Directive, such as mains connections.
21.
In Commission v France (undertakers) France had applied a reduced
rate, pursuant to what is now article 98, to certain supplies by undertakers.
Whereas annex III to the Directive and its predecessor in the Sixth Directive
permitted the application of a reduced rate to the “supply of services by
undertakers ... and the supply of goods related thereto”, the French reduced
rate was limited, principally, to “the transportation of the body, before and
after it has been placed in the coffin” in specially equipped vehicles. Referring
to the CPP case-law, the Commission contended that this was contrary to
the Directive on the express ground that “all the supplies of services and of
goods by undertakers to the families of deceased persons constitute, for the
purposes of VAT, a single complex transaction which must, consequently be
subject to a single rate of tax”, whereas the French legislation artificially
split the transaction, contrary to that case-law. In response, France relied on Commission v France (gas and electricity) and Zweckverband.
22.
Agreeing with France, the Court rehearsed its case-law to the effect
that reduced rates under what is now article 98 can be applied selectively to
concrete and specific aspects of a category of supply listed in annexe III
provided that the principle of fiscal neutrality is complied with. It added
that, in doing so, they did not need to apply the CPP criteria in order
to determine whether a single supply was in issue. Accordingly it was “not
necessary to examine whether, as the Commission maintains, the supply of
services by undertakers must be regarded as a single transaction from the point
of view of the expectations of a typical consumer. On the other hand it is
necessary to ascertain whether the transportation of a body by vehicle ...
constitutes a concrete and specific aspect of that category or supply, as set
out in Annex III, point 16, to Directive 2006/112 and, if so, to examine
whether or no the application of that rate undermines the principle of fiscal
neutrality”. It held that the transportation of the body was a concrete and
specific aspect of an undertaker’s supply and that the Commission had not shown
that the principle of fiscal neutrality was infringed. Accordingly, “the
French legislation making the transportation of a body by vehicle subject to a
reduced rate of VAT fulfils the conditions required by relevant European Union
legislation”.
23.
Finally as regards CJEU case-law, Case C-117/11 Purple Parking v HMRC
(Order of 19 January 2012) was a case in the CPP line of authority which
discussed the Commission v France line of authority (as I shall call the
other CJEU cases that I have reviewed). The taxpayer provided off-airport
parking with transport between the car park and the airport terminal by bus.
It contended (perhaps ambitiously, given that the zero-rating legislation
contains a Note, similar to that in issue in Talacre, excluding such
transport from the zero-rate), that its supplies of transport should be
zero-rated and that the Note infringed fiscal neutrality; HMRC had ruled that
the taxpayer made a single supply of parking, to which the transport was
ancillary. The Upper Tribunal referred to the CJEU a series of questions on
the application of the CPP principles to the case and a further question
(which the Court did not answer) as to whether the Note in the legislation infringed
fiscal neutrality. In particular, the Tribunal asked the Court how it should
take into account in the CPP analysis the principle of fiscal neutrality
and Court’s conclusion regarding that principle in Commission v France
(undertakers).
24.
As regards the CPP issues, the Court found that the taxpayer made
“a complex single supply in which the parking element is predominant”. As
regards the significance of fiscal neutrality in the analysis, it said that it
was for the national court to decide whether supplies that were taxed
differently were similar, but pointed out that treatment of services as forming
part of a single supply “necessarily leads to tax treatment different from that
that those services would have received if they had been supplied separately”
and that “Accordingly, a complex supply of services consisting of several
elements is not automatically similar to the supply of those elements separately”.
Turning to Commission v France (undertakers), the Court said
40 Furthermore, as regards the importance of the judgment
in Case C-94/09 Commission
v France, referred to in the second question, it follows from paragraphs
25 to 29 and 31 to 34 of that judgment that it concerns the possibility for a
Member State to apply, in a selective manner, on the basis of general and
objective criteria, a reduced rate of VAT to certain aspects of a category of
supplies that is listed in the Sixth Directive and, accordingly, concerns a
different question from that raised by the first and second questions referred
for a preliminary ruling. Indeed, the sole purpose of the latter is whether two
services constitute, in the light of the specific circumstances of their supply
at issue in the main proceedings, a single supply.
25.
The Privy Council followed the Commission v France line of
authority in Director General, Mauritius Revenue Authority v Central Water
Authority [2013] UKPC 4 concerning the Mauritian VAT Act 1998 which is
modelled on the United Kingdom Act and thus indirectly on the Directive;
section 4(5) of the Act partially enacts the CPP principles, providing
that a supply of goods which is incidental to a supply of services is part of
the supply of services, and vice versa. The issue concerned the
recoverability of the Water Authority’s input VAT incurred in respect of purchasing
water meters and commissioning infrastructure works during a period when the
Act provided that “the renting out of a meter and the carrying out of
infrastructure works” by the Authority were exempt from VAT. The Privy Council
held it to be irrelevant whether providing meters and piping was merely an
element in a (non-exempt) supply of water, holding that their separate VAT
treatment (as exempt) was in accordance with Commission v France
(undertakers). Accordingly the input VAT was not recoverable.
26.
I was taken to two cases in the First-tier Tribunal in which taxpayers
had argued, in reliance on this line of case-law, that a particular element of
a supply fell to be taxed at the reduced rate. In Colaingrove Ltd v HMRC
[2012] UKFTT 116 (TC) the Tribunal (Judge John Walters QC and Mr John Robinson)
accepted a submission that the reduced rate of VAT applied to electricity or
gas provided (in return for a separate charge) to occupants of holiday caravans
and chalets notwithstanding that the electricity or gas was an element in a complex
single supply of serviced holiday accommodation. They directed themselves that
it was open to the national legislature, on the basis of the Commission v France
case-law, to legislate for reduced-rate taxation of an element in a wider
supply and held that the provisions of the Act legislation applying a reduced
rate to supplies of electricity and gas had by necessary implication done so;
this part of their decision turned on the particular wording of Group 1 and
some of the Notes to it. An appeal is pending against their decision. In WS
Morrison Supermarkets Ltd v HMRC [2012] UKFTT 366 (TC) the Tribunal (Judge
Jonathan Cannon and Miss Susan Stott) rejected an argument that the reduced
rate for fuel fell to be applied to the charcoal in a disposable barbecue;
their decision was upheld by a decision of Vos J in the Upper Tribunal,
released after I heard argument in this case, to which I refer below.
27.
Vos J held that the Commission v France line of case-law only
comes into play where national legislation seeks to restrict the application of
a reduced rate of VAT by legislating to the effect that it will apply to a
lesser extent than the Directive would have permitted. That case-law holds
that the national legislation will be compatible with the Directive if it
applies the reduced rate to a ‘concrete and specific’ aspect of the supply. If
so, it does not matter that the whole supply would have been regarded as a
single supply by the application of a CPP analysis. On the other hand,
the First-tier Tribunal had been right to regard the CPP case-law as
being concerned with defining the nature of transactions for VAT purposes and Commission
v France (undertakers) as being concerned with the power of Member States
to identify specific aspects of what would otherwise be a single supply and
treat them as falling inside or outside an exemption or reduced rate. The
Tribunal was also right to conclude that the legislation did not ‘carve out’
the charcoal element of the supply of a disposable barbecue so as to subject it
to a reduced rate. It was “precisely because the domestic statute did not identify
‘charcoal as part of disposable barbecues’ as being worthy of a reduced rate
that they do not attract one”.
Decision
28.
Mr Milne accepted that an installation of a boiler or a central heating
system by AN Checker was a single supply, but contended that it was subject to
taxation at mixed rates: the standard rate insofar as it did not comprise
energy-saving materials and the reduced rate insofar as it did. His primary
case was that the only questions to be answered by the tribunal were those
posed by Commission v France (undertakers): whether the energy-saving
materials were a ‘concrete and specific aspect’ of the installation and whether
taxation of them at the reduced rate was liable to distort competition. He
submitted that the energy-saving materials were a concrete and specific aspect
of the installation in the sense in which those words were used by the CJEU,
and I agree. He pointed out, accurately, that HMRC had not advanced any
argument to the effect that taxation of them at the reduced rate would distort
competition. Mr Milne’s primary case took it for granted that, if taxation of
the energy-saving materials within a wider installation was compatible with Commission
v France (undertakers), then that was how the legislation fell to be
applied; in response to the suggestion that there might be an issue of
statutory interpretation as to whether Parliament intended the reduced rate for
energy-saving materials to apply to their provision as an element of a wider
supply, Mr Milne backed up his primary argument with submissions, based on the
statutory history of the reduced rate for energy-saving materials, to the
effect that Parliament did so intend.
29.
For HMRC Miss Bretherton submitted that Parliament’s intention in
enacting Group 2 in Schedule 7A was purely to apply a reduced rate to a self-standing
supply of installation of the listed materials; nothing in the legislation
suggested that it applied when energy-saving materials formed part of a larger
supply taxable at the standard rate. The Commission v France line of case-law, she submitted, was purely concerned with the power of a Member State to apply the reduced rate selectively, and was not a departure from the
general principle that a transaction must not be artificially split; when it
came to determining the taxation of any particular transaction, application of
the CPP principles remained mandatory.
30.
In my judgment that submission is too extreme; it would lead to the Member State’s power to apply a reduced rate selectively being frustrated at the level of
day-to-day application of the tax. If applied to the legislation at issue in Commission
v France (undertakers), for example, it would make the reduced rate for
transportation of the body unavailable in practice in any case where – as is
common in Britain and, the judgment tells one, France – transport of the body
of the deceased is provided as an element in a wider supply of funeral
services. Applying Miss Bretherton’s approach would lead to the conclusion
that such a supply was in CPP terms a single supply of funeral services and
thus ineligible for the reduced rate which was confined to supplies that were,
in CPP terms, supplies of transport of the body. In oral submissions,
Miss Bretherton accepted that, if the legislator has legislated that a reduced
rate shall apply to an element of a wider supply, the taxpayer is entitled to
be taxed accordingly.
31.
As Vos J pointed out in Morrison, the Commission v France line of case-law is concerned with the power of Member States to apply a reduced
rate to a lesser extent than is permitted or envisaged by the Directive. The
cases establish that a Member State can do so, subject to fiscal neutrality and
the need to identify a concrete and specific aspect of the category of supplies
in question. Commission v France (undertakers) further establishes that
a Member State can do this even if the consequence is the taxation at different
rates of different elements of a single supply by a taxable person to his
customer.
32.
All the CJEU cases were ones in which, at first sight at least, the
wider supplies that were likely to be made were supplies that could, compatibly
with the Directive, have been taxed entirely at the reduced rate. The present
appeal, by contrast, is not concerned with whether in enacting Group 2 in
Schedule 7A Parliament has applied the reduced rate to a lesser extent than
envisaged by the Directive – an issue that I could not sensibly attempt to
resolve, not having heard any submissions on the (apparently controversial)
issue of the legal basis for Group 2 in the Directive. HMRC’s objection in
this case is to the application of the reduced rate to energy-saving materials
installed as part of a wider supply having a different character: installation
of a boiler or a central heating system. To the extent that there is an issue
of EU law in this case, it seems to me to be whether the Commission v France
line of authority allows a Member State to apply a reduced rate to
energy-saving materials when supplied as part of a wider supply if that wider
supply is not one to which the Directive would allow the reduced rate to apply as
a whole. That is a question to which the answer could not be described as acte
clair.
33.
I do not need to answer that question, however, since it is clear to me
that, even where EU law does allow a reduced rate to be applied to an element
of a wider supply, a separate issue of national law arises as to whether the national
VAT legislation does so. In both the Commission v France cases it was accepted that the national law did so: in gas and
electricity the reduced rate was explicitly limited to the network
connection charge and in undertakers it was explicitly limited to
transportation of the body. Similarly, in Zweckverband the Court’s ruling
was that “Member States may apply a reduced rate to concrete and specific
aspects”, inevitably raising an issue of national law as to whether a Member State has done so. In the Central Water Authority case the contested
exemption was in terms limited to the renting of the water meter and
infrastructure works; it is implicit in the Privy Council’s judgment that the
Minister had purported to amend the Act in such a way as to exempt those even
if they were elements of a wider taxable supply: the issue was whether he had had
power to do so. The First-tier Tribunal in both Colaingrove and
Morrison identified an issue as to whether the legislation provided for a
reduced rate for elements of a wider supply and the same approach is implicit
in the passage from Vos J’s judgment that I have quoted at the end of paragraph
28 above.
34.
I have therefore considered, as a matter of construction of the VAT Act,
whether it applies a reduced rate to the supply and installation of
energy-saving materials when provided as part of a wider supply of installation
of a boiler or a central heating system. Since I have been compelled to the
conclusion that the legislation does not do this, I do not need to reach a
conclusion on whether the Commission v France line of authority would
permit a Member State to apply a reduced rate in this way.
35.
This part of Mr Milne’s argument relied on the legislative history of
the 1994 Act and the development of the CPP case-law. Provision for
reduced rates was first introduced into the Act with effect from 1 April 1995
by the Finance Act 1995. This introduced additional subsections into s 2
(rate of tax) and an additional Schedule A1. New s 2(1A) provided that
“VAT charged on any supply for the time being falling within paragraph 1 of
Schedule A1 ... shall be charged at the rate of 8 per cent”. Apart from
amendment of the rate to 5 per cent, the subsection remained in these terms
until 10 May 2001. The Schedule included supplies of fuel but did not
initially refer to energy-saving materials; a new paragraph 1 was substituted
with effect from 1 July 1998 by the Value Added Tax (Reduced Rate) Order 1998;
this contained additional subparagraphs referring to:
(b) supplies
to a qualifying person of any services of installing energy-saving materials in
the qualifying person's sole or main residence; and
(c) supplies
of energy-saving materials made to a qualifying person by a person who installs
those materials in the qualifying person's sole or main residence.
36.
“Energy-saving materials” were defined as insulation for walls, floors,
ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings;
draught stripping for windows and doors; central heating system controls; and
hot water system controls. A qualifying person was someone aged 60 or over or
receiving certain social security benefits. It was also provided that “A
supply to which sub-paragraph (1)(b) or (c) above applies is a supply falling
within this paragraph only to the extent that the consideration for it is or is
to be funded by a grant made under a relevant scheme”.
37.
The Finance Act 2000 further amended paragraph 1 by introducing
references to
(aa) supplies of services of installing List A energy-saving
materials in residential accommodation ...;
(ab) supplies of List A energy-saving materials by a person who
installs those materials in residential accommodation ...;
(b) supplies to a qualifying person of any services of installing
List B energy-saving materials in the qualifying person's sole or main
residence;
(c) supplies of List B energy-saving materials made to a qualifying
person by a person who installs those materials in the qualifying person's sole
or main residence.
38.
The energy-saving materials that had been covered by the previous
version became List A energy-saving materials and the “qualifying person” and
grant funding requirements were removed in respect of them; the requirements
were retained for the additional category of List B energy-saving materials
that was introduced. Mr Milne showed me that the relevant part of the Notes on
Clauses to the Finance Bill 2000; these described the clause as extending the
reduced rate to all homes and said that the reduced rate would apply “when
‘List A’ energy-saving materials are fitted” in residential accommodation.
39.
By way of background the Notes also said that the United Kingdom had a disproportionately high level of winter deaths and that recent
research had established a link between cold homes and winter death and
illness. They continued “The Government is, therefore, widening the reduced
VAT rate to cover installation of energy-saving materials in all homes in order
to reap the widest benefit in health terms. The cut in the VAT rate ... will
apply to all insulation, draught stripping and central heating system controls
that people pay to have fitted in their homes”.
40.
Finally, the Finance Act 2001 recast the reduced rate provisions of the
Act into the general form that they currently take, with the repeal of the
reduced rate subsections of s 2, the introduction of s 29A and the
replacement of Schedule A1 by Schedule 7A, organised in Groups as was already
the case with Schedules 8 and 9 dealing with exemption and zero-rating. Group
2 in Schedule 7A has remained as originally enacted apart from the addition of
further categories of energy-saving materials and the recent deletion of
references to installation in buildings used for a charitable purpose.
41.
Mr Milne submitted that it would have been an odd choice for the
Treasury and Parliament in 1998 and 2000 to have decided to continue to apply a
reduced rate to fuel but to circumscribe the reduced rate for environmentally
beneficial energy-saving materials by restricting its operation to the minority
of cases where they were supplied as a stand-alone supply rather than in
conjunction with a boiler or as components of a newly installed central heating
system. Miss Bretherton’s interpretation, he submitted, produced the
particularly anomalous result (which she agreed that it produced, though I
would reserve judgment on that) that, despite the conferring of a reduced rate
on the installation of a boiler burning non-fossil fuels (Note 1(k) to Group 2),
the installation of such a boiler would not attract the reduced rate where it
was installed as part of a new central heating system, because the supply in CPP
terms would be analysed as being of a central heating system and not of a
boiler. Mr Milne’s explanation of why the legislation was worded in a way that
enabled Miss Bretherton to argue for this result was that it was drafted before
the CPP notion of a complex single supply became fully established. He
instanced the differing outcomes at various stages of the CPP litigation,
where the service supplied by CPP had been analysed as a single standard-rated
supply by the VAT Tribunal, as two distinct supplies by Popplewell J in the
High Court, as a single standard-rated supply by the Court of Appeal and as a
single exempt supply by the House of Lords.
42.
I have considerable sympathy for Mr Milne’s argument. I note first that
the original provision for energy-saving materials referred to “supplies to a
qualifying person of any services of installing energy-saving materials”
(my emphasis). If the word ‘any’ in the expression ‘any services’ is not
redundant, it could only widen the scope of the services covered, and could
arguably extend them in the manner Mr Milne contends for. Secondly, while I
accept Miss Bretherton’s submission that introducing a reduced rate limited to
the ‘retro-fitting’ of energy-saving materials into existing installations
could be a perfectly rational legislative choice, designed to encourage people
to improve the efficiency of their heating systems in this way, it is not
obvious to me why Parliament would not have wished to people to give a similar
tax relief in respect of energy-saving materials fitted in new installations.
43.
I have nevertheless found myself unable to accede to Mr Milne’s
submission, for the following reasons. The first is that it requires a
departure from the clear literal meaning of the legislation. Both the former
s 2(1A) and the current s 29A of the VAT Act refer to a reduced rate
for a “supply”, and s 29A reinforces that with a requirement that the
supply must be “of a description” contained in Schedule 7A. To read the
provisions as applying the reduced rate applied to elements within a supply
would be to depart from the unambiguous meaning of the words used. I would
need to be “abundantly sure” that that was the result that was intended and
that “by inadvertence the draftsman and Parliament failed to give effect to
that purpose”: see Inco Europe Ltd. v First Choice Distribution [2000] 1 WLR 586 at 592. Mr Milne’s thesis is that Parliament expected its legislation
to achieve the result he contends for by virtue of the energy-saving materials
being analysed as a separate supply. I am far from being abundantly sure that
Parliament was misled by the state of the case-law on complex supplies into
believing that the words used would achieve that result in that way.
44.
Though there was uncertainty about the correct approach to classifying a
complex supply, the principle that different elements could amount to a single
supply was well established by 1994. In giving judgment in CPP in the
Court of Appeal in that year ([1994] STC 199) Balcombe LJ set out the
principles that:
“2. The
question whether there is one supply or two is a question of law on which the
court is entitled and bound to form its own view (see British Airways plc v
Customs and Excise Comrs [1990] STC 643.
3. In
deciding whether there is one supply or two where two separate elements are
present, the test is whether one element is ‘incidental to, or an integral part
of’ the other (see Customs and Excise Comrs v United Biscuits (United
Kingdom) Ltd (trading as Simmers [1992] STC 325).”
45.
Balcombe LJ went on to echo Parker LJ in the British Airways case
in referring to the impracticality of treating a simple transaction as
involving more than one supply, and to contrast the “big commercial contract
clearly involving the provision of goods and services of various kinds” in Bophuthatswana
National Commercial Cpn Ltd v Customs and Excise Comrs [1993] STC 702, to
which Mr Milne also referred in his submissions. Balcombe LJ proceeded to
reach the conclusion, with which the other members of the court agreed, that in
CPP the provision of insurance was incidental to the provision of a
credit card registration service. (The House of Lords came to the opposite
conclusion, partly because the CJEU had in the meantime held that a larger
number of the elements of the supply amounted to insurance for the purpose of
the Sixth Directive.)
46.
Irrespective of what precise outcome might have been foreseeable as
regards the CPP litigation, in which the House of Lords made a reference
to the CJEU in October 1996 and the Court gave judgment in February 1999, it
does not seem to me that Parliament in 1995 or the Treasury in 1998 could have
had any confidence that an installation of energy-saving materials as part of
an installation of a boiler or a central heating system would be analysed as
involving a separate supply of the energy-saving materials to which the reduced
rate would apply. Such a result had become even more unlikely by 2000,
following the ECJ’s judgment.
47.
The other indications, helpful to Mr Milne’s case, that I have
identified are not in my judgment strong enough satisfy the Inco Europe test.
The words “any supplies” did not feature in the ‘List A’ part of the
legislation as it was framed in 2000; if the Treasury attributed significance
to them in 1998, Parliament did not do so in 2000. The reference in the Notes
on Clauses to “all insulation”, etc., could include energy-saving materials fitted
as part of a wider installation, but is nevertheless ambiguous and could equally
refer to what I have termed ‘retro-fitting’.
48.
I am therefore compelled to reach the conclusion that when AN Checker
installs energy-saving materials along with a replacement boiler or as part of
the installation of a central heating system, it is making a standard-rated
supply of which the energy-saving materials are elements. That conclusion must
in my view follow whether AN Checker is itself installing an individual item,
such as a thermostat, which falls within the definition of energy-saving
materials or installing a larger item, such as a boiler, into which
energy-saving materials such as insulation have been incorporated by its
manufacturer. Even if I had concluded that the reference to “installation of
energy-saving materials” included such installation as part of a wider supply,
I would not have concluded that the words were apt to cover installation of,
say, a boiler in which energy-saving materials had been included by its
manufacturer. Accordingly I decide the issue identified in the Tribunal’s
earlier Order as follows:
“The supply of the
installation of energy saving materials together with services of installation
of a boiler or of a central heating system is a single supply subject to a
single rate of VAT at the standard rate.”
49.
This document contains full reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
NICHOLAS
PAINES QC
TRIBUNAL JUDGE
RELEASE DATE: 24 September 2013
