Commissioners of Customs and Excise v. British Telecommunications Plc

The House of Lords considered whether VAT charged by manufacturers on the transport and delivery of motor cars to a large purchaser (B.T.) was deductible as input tax or was part of the supply of the motor car and therefore blocked from deduction by the Value Added Tax (Input Tax) Order 1992 (the "Blocking Order"). The court applied the test from the European Court of Justice that the essential features of the transaction must be examined to decide whether elements are principal or ancillary (see Card Protection Plan). It held that, as a matter of commercial reality, B.T. had contracted for delivered cars and that delivery services were incidental or ancillary to the supply of the cars. Thus the VAT on the delivery formed part of the taxable amount of the supply of goods and was not recoverable as input tax under the Blocking Order.

This appeal concerned the right of British Telecommunications Plc (B.T.) to set off as input tax the VAT charged by car manufacturers on transport and delivery of vehicles supplied directly to B.T.'s premises. The Commissioners denied the deduction on the basis that the supply was simply of a motor car (blocked by the Input Tax Order). B.T. argued the transport and delivery were separate supplies of services so that the VAT charged on them should be deductible.

Procedural history:

• The value added tax tribunal (10 April 1996) found for B.T., allowing the deduction.
• Dyson J. (5 February 1997) held that the deduction was not permitted.
• The Court of Appeal ([1998] S.T.C. 544; 18 March 1998) reversed Dyson J. and held the transport was a separate supply, allowing B.T. the deduction.
• The Commissioners appealed to the House of Lords.

Issues framed:

• Whether the transport and delivery services were separate supplies or were incidental/ancillary to the supply of motor cars for VAT purposes.
• How article 11 A(2)(b) of the Sixth VAT Directive and domestic provisions (notably section 19 of the Value Added Tax Act 1994 and the Blocking Order) affect the taxable amount and identification of supplies.

Reasoning and decision:

• The House of Lords analysed contractual documents, commercial reality and relevant EU authorities. It accepted that article 11 A(2)(b) (incidental expenses including transport) relates to quantifying the taxable amount once the supply has been identified, rather than to identification of separate supplies.
• The court applied the Card Protection Plan guidance that the essential features of the transaction must be examined and that ancillary services are those which are not an aim in themselves but a means to better enjoying the principal supply.
• Looking at the commercial substance – risk and property passing on delivery, payment and invoicing arrangements, and B.T.'s need for delivered cars – the House concluded the delivery was ancillary to the principal supply of the car. The result avoided giving B.T. a more favourable VAT position than comparable purchasers buying through dealers.

The House allowed the commissioners' appeal and restored the order of Dyson J., concluding that the VAT on delivery formed part of the non-deductible supply of the motor car.

Appeal allowed. The House held that, on the true commercial analysis of the sampled contracts and taking account of the relevant provisions of the Sixth VAT Directive and domestic law, B.T. had contracted for delivered cars and the transport and delivery services were incidental or ancillary to the supply of the cars. Consequently the VAT on delivery formed part of the taxable amount of the supply of motor cars and was not deductible as input tax under the Value Added Tax (Input Tax) Order 1992.

Value Added Tax Tribunal decision (10 April 1996) in favour of B.T.; Dyson J. (first instance appeal) held against B.T. (5 February 1997); Court of Appeal reversed in favour of B.T. ([1998] S.T.C. 544; 18 March 1998); House of Lords allowed the commissioners' appeal ([1999] UKHL 3; 11 February 1999).