HM Revenue & Customs v David Baxendale Ltd

For VAT purposes, transactions containing several elements must be assessed objectively from the standpoint of the typical consumer and from an economic perspective. The question is whether the elements form a single, indivisible economic supply which it would be artificial to split. Physical, temporal and spatial separation may be relevant circumstances, but they are not separate legal tests. Separate utility is also a factor, not a decisive test. A single price is relevant but not conclusive.

Where food products and support services are economically interdependent and the consumer purchases the combination as a programme, the transaction may be a single composite supply even though neither element is ancillary to the other. The character of that supply may be services rather than food, so that it is standard rated.

HM Revenue and Customs appealed, and David Baxendale Limited cross-appealed, against the decision of the VAT and Duties Tribunal released on 30 July 2008. The Taxpayer operated as a counsellor under the LighterLife weight-loss programme.

The Tribunal held that participants paid consideration for both food packs and support services, but that these were two separate supplies. It apportioned the consideration between them in the ratio of 2:1. HMRC challenged the finding of separate supplies. The Taxpayer challenged the apportionment and argued that, if there were one supply, it was a zero-rated supply of food. The central issues were whether the transaction was a single composite supply and, if so, whether its character was food or services.

1. Appeal and cross-appeal. HMRC’s appeal was allowed and the Taxpayer’s cross-appeal was dismissed. The supply was a single composite supply of two non-ancillary elements, namely food packs and support services. It was a standard-rated supply of services, not a zero-rated supply of food.
2. Applicable test. The court adopted the approach summarised by the Court of Appeal in Revenue and Customs Commissioners v Weight Watchers (UK) Ltd [2008] EWCA Civ 715. The court must consider all the circumstances objectively from the viewpoint of the typical consumer. The relevant perspective is economic. The issue is whether the elements form an objectively single, indivisible economic supply which it would be artificial to split. A single price is relevant but not conclusive.
3. Physical, temporal or spatial links are not independent tests. They may be circumstances relevant to the economic analysis. Similarly, the separate practical utility of each element is relevant but does not determine the issue.
4. Application. The Tribunal’s findings showed that the typical customer wanted the combination of food packs and support services. The two elements reinforced each other and were bought as part of the LighterLife programme. The Tribunal had given undue prominence to physical factors, separate utility and an asserted distinction between initial weight loss and later weight management. Applying the correct legal test, it was artificial to split the transaction.
5. Character of the supply. The support services were not subservient, subordinate or ministering to the food packs. Applying the approach in Byrom (t/a Salon 24) v HMRC [2006] STC 992, the character of the composite supply was services. It was therefore standard rated.
6. The apportionment issue did not arise. The court made no formal ruling on it, although it regarded the Taxpayer’s proposed 91:9 apportionment as extreme and the Tribunal’s 2:1 apportionment as broadly consistent with the facts.

• VAT and Duties Tribunal: Decision released on 30 July 2008. The Tribunal found that the food packs and support services were separate supplies and apportioned the consideration between them in the ratio of 2:1.
• High Court (Chancery Division): The appeal was allowed and the cross-appeal dismissed. The Tribunal’s decision was reversed on the issue of separate supplies.