Customs and Excise Comrs v British Telecommunications Plc

For VAT purposes, a transaction comprising several elements must be characterised by examining all its circumstances and essential features. A service is ancillary to a principal supply where it is not an aim in itself, but a means of better enjoying that supply. A single economic supply must not be artificially divided.

Separate pricing, physical or economic dissociability, and the customer's ability to make alternative arrangements are relevant but not conclusive. Transport and delivery supplied under a contract for a delivered motor car may therefore form part of the single supply of the car. Input tax attributable to that delivery is then excluded from credit by the Value Added Tax (Input Tax) Order 1992.

British Telecommunications Plc bought motor cars directly from manufacturers. The manufacturers arranged transport and delivery, for which amounts were separately identified in many of the contracts or invoices. The company sought to deduct the VAT attributable to those services as input tax.

The VAT tribunal held that transport and delivery were distinct supplies. Dyson J held that the deduction was unavailable, although he agreed that the services were separate. The Court of Appeal, in [1998] STC 544, held that the input tax was deductible.

The Commissioners appealed. The central issue was whether each transaction comprised a single supply of a delivered motor car, bringing the whole consideration within the motor-car input-tax exclusion, or separate supplies of a car and delivery services.

1. The appeal was allowed unanimously. Lord Slynn of Hadley and Lord Hope of Craighead delivered the substantive speeches. Lord Nicholls of Birkenhead, Lord Clyde and Lord Hutton agreed with both.

2. Per Lord Slynn and Lord Hope, the essential features of the transaction must be identified after considering all its circumstances. A service is ancillary where it is not an aim in itself for the customer, but a means of better enjoying the principal supply. A transaction constituting one supply from an economic point of view should not be artificially divided.

3. No single factor determines whether supplies are separate. A separately identified price does not necessarily create a separate supply. Nor is it decisive that the customer could have undertaken the activity itself or obtained it under another contract. Physical and economic dissociability is relevant, but it is not a universal or exclusive test.

4. Per Lord Slynn, section 19(2) of the Value Added Tax Act 1994 uses “consideration” broadly enough to include incidental expenses paid in return for the supply, including transport costs. Article 11 A(2)(b) of the Sixth VAT Directive concerns the calculation of the taxable amount after the supply has been identified. It does not itself determine whether transport constitutes a separate supply.

5. On the commercial substance of the sample contracts, the manufacturers supplied delivered motor cars. Delivery enabled the purchaser to complete the acquisition at a convenient place and was not an independent aim. Property and risk generally remained with the manufacturer until delivery. The possibility of collection or separate transport arrangements did not alter the transaction actually made.

6. Lord Hope regarded equal VAT treatment of comparable purchases through authorised dealers as an additional supporting consideration. The transport and delivery services formed part of the same supply as the cars. Article 7(1) of the Value Added Tax (Input Tax) Order 1992 therefore excluded the related input tax from credit. The order of Dyson J was restored, although on different reasoning.

1. House of Lords: Allowed the Commissioners’ appeal unanimously and restored the order of Dyson J, although for different reasons.

2. Court of Appeal: In [1998] STC 544, held that delivery was a separate supply and that the related input tax was deductible.

3. High Court: Dyson J, in [1997] STC 475, held that the input tax was not deductible. He nevertheless regarded delivery as a separate supply and reached his conclusion through article 11 A(2)(b) of the Sixth VAT Directive.

4. Value Added Tax Tribunal: By a decision released on 10 April 1996, held that transport and delivery were distinct supplies and that the input tax was deductible.