The Commissioners for HMRC v Gray & Farrar International LLP

For a single composite supply for VAT purposes, the predominant element test is the primary test where a predominant element can be identified. The assessment is objective and looks through the eyes of the typical consumer at the qualitative and quantitative importance of the supply’s elements. The contract is normally the starting point because it identifies what the supplier promised and the customer bought, subject to the economic and commercial reality. A matchmaking business whose contractual service was to introduce clients to prospective partners supplied an introduction service. Advice, information, vetting and liaison were means of delivering that service, not separate consultancy or information supplies within article 59(c) of the Principal VAT Directive.

Gray & Farrar International LLP supplied matchmaking services to clients outside the UK and the EU during VAT periods between December 2012 and September 2016. HMRC considered the supplies taxable because they did not fall within article 59(c) of the Principal VAT Directive. The First-tier Tribunal dismissed G&F’s appeal by a majority decision, reported at [2019] UKFTT 0684 (TC).

The Upper Tribunal allowed G&F’s further appeal, set aside the FTT’s decision and remade it in G&F’s favour, reported at [2021] UKUT 0293 (TCC) and [2022] STC 94. HMRC appealed on four grounds concerning the predominant element test, the characterisation of the supply, consultancy services, and the construction of article 59(c).

The appeal was allowed unanimously. Lady Justice Simler gave the leading judgment, with Lord Justice Newey and Lord Justice Lewison agreeing. The First-tier Tribunal’s decision was restored.

1. Statutory framework. Article 59(c) of the Principal VAT Directive is a place-of-supply rule, not an exemption requiring strict construction. The relevant question was whether G&F supplied services of consultants or similar services, data processing, or the provision of information. Services are similar when they serve the same purpose as the listed services. Consultant services principally and habitually involve advice based on a high degree of expertise.
2. Characterisation of composite supplies. The predominant element test identified in Město Žamberk was the primary test where it is possible to identify a predominant element. The test is objective and is applied from the viewpoint of the typical consumer, considering all the circumstances and the qualitative and quantitative importance of the constituent elements. The principal/ancillary test remains available where one principal element can be identified. An overarching or economic-reality analysis may assist where no element predominates or where the circumstances justify it. The court endorsed the hierarchy described in HMRC v Metropolitan International Schools Ltd.
3. Contract and economic reality. For a transaction governed by written terms, the starting point is the parties’ contractual rights and obligations. The contract is not necessarily conclusive, but may determine the analysis unless inconsistent with the underlying economic and commercial reality or shown to represent only part of the parties’ relationship.
4. Application. G&F’s contractual obligation and economic purpose were to provide introductions to suitable prospective partners. The interviews, briefs, vetting, matching, advice, information and post-introduction liaison were means of supplying that introduction service and were not freestanding ends. Treating the service as separate consultancy and information elements artificially dissected the supply. The predominant element was the provision of introductions, which did not constitute consultancy, data processing or the provision of information within article 59(c). The supply was therefore within the scope of VAT.
5. Ground 1 failed because the predominant element test was the primary test. The court allowed the appeal on ground 2. It considered it unnecessary to decide HMRC’s grounds 3 and 4, including whether consultancy services were confined to liberal professions and whether data processing and provision of information were conjunctive requirements.

1. Court of Appeal (Civil Division) — In [2023] EWCA Civ 121, HMRC’s appeal was allowed on ground 2 and the FTT’s decision was restored. Ground 1 failed; grounds 3 and 4 were left undecided.
2. Upper Tribunal (Tax and Chancery Chamber) — In [2021] UKUT 0293 (TCC), reported also at [2022] STC 94, G&F’s appeal was allowed, the FTT decision was set aside and the decision was remade in G&F’s favour.
3. First-tier Tribunal — In [2019] UKFTT 0684 (TC), the FTT dismissed G&F’s appeal by a majority decision.