Ipsofactoj.com: International Cases  Part 9 Case 5 [SCIre]
SUPREME COURT OF IRELAND
(Inspector of Taxes)
- vs -
19 DECEMBER 2003
(delivered the judgment of the court)
This is an appeal from the judgment and order of Lavan J in the High Court in which he answered a Case Stated from the Appeal Commissioners by ruling in favour of a claim for repayment of value added tax ("VAT")
Where a supplier provides a package of services, questions occasionally arise as to whether there has been a single supply or the supply of two or more distinct services. This matters for the purposes of VAT, where one element is either exempt from VAT or taxable at a lower rate. Sometimes, the taxpayer treats a package of services as a single supply. On other occasions, as here, the taxpayer claims that two or more distinct services are involved. Sometimes, it is the revenue which mounts a challenge to the designation of transactions as adopted by the parties. Two such cases were cited in the argument.
The Respondents (described collectively as "the taxpayer") are, or were at the material time, suppliers of cable television and radio services, providing multi-channel viewing or listening. They charged under separate headings for the connection of the service and the service itself. The present appeal arises from a claim for a repayment of the VAT paid in respect of the former type of service. The taxpayer claims that it should have been charged at a lower rate applicable if such services were considered independently, whereas they were, in fact, charged at a higher rate on the basis that there was a single supply of a television or radio receiving service.
The Respondents made claims for the repayment of VAT paid in respect of two periods, March/April 1989 and September/October 1991. The Applicant rejected the claim. The Respondents appealed to the Appeal Commissioners, who conducted hearings in 1994. The Appeal Commissioners had to decide whether "the fee received by the Respondents in respect of the connection/re-connection of the customer to their cable television or MMDS (Multi-Channel Microwave Distribution) for the purposes of receiving communication signals was in respect of ...." the supply of a distinct and separable service, falling under one of a number of statutory descriptions or, in reality formed an inseparable part of the supply of the television cable service.
THE STATUTORY PROVISIONS
VAT was introduced by the Value-Added Tax Act, 1972 in order to give effect to the mandatory provisions of directives adopted by what was then the European Economic Community. Though it has since been much amended, the basic provisions of the VAT code are found, to give it its full title, in the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment.
The Directive requires Member States to subject to VAT all supplies of goods and services, and makes a number of special provisions, in particular, exempting the supply of certain goods and services. It does not, however, provide a detailed list of taxable goods and services. National legislation provides a number of specific headings or descriptions of goods or services to be taxed at a special, usually, as in this case, a lower rate. Where tax is applied at the full or standard rate, there is no need for special headings. The schedules to the act of 1972 have been amended on many occasions. It is necessary to mention briefly the statutory headings which have been debated in the course of the present repayment claim.
Unless they could be brought within one of the specific headings specified in certain schedules to the VAT acts, the connection and re-connection services supplied by the taxpayer, were be taxable at the standard rate. According to the Case Stated, this rate was 25% for the first repayment-claim period and 21% for the second.
The taxpayer claimed that the connection and re-connection services came within one or other of two headings. Confusingly, each of them was amended, so that a slightly different version applies to the two periods. The headings are:
Paragraph (iii) of the Sixth Schedule:
services consisting of the development of immovable goods, and the maintenance and repair of immovable goods including the installation of fixtures, where the value of movable goods (if any) provided in pursuance of an agreement in relation to such services does not exceed two-thirds of the total amount on which tax is chargeable in respect of the agreement.
This is paragraph (iii), one of a long list of headings in the Sixth Schedule to the act of 1972, introduced by the Finance Act, 1983, and amended in successive Finance Acts. In this case the above wording comes from the version of the Sixth Schedule enacted by section 51 of the Finance Act, 1985. It was in force for the first period of the repayment claim. This wording was removed from the Sixth Schedule and transferred with an amendment, immaterial to the present case, to the Third Schedule by section 86 of the Finance Act, 1991. The listed services were taxable at a special rate, originally set at 5%, but increased from time to time. It was 10% in respect of both the relevant periods.
Paragraph (xiib) of the Sixth Schedule, introduced by section 91 (c) of the Finance Act, 1986:
services consisting of work on immovable goods, other than services consisting of such work specified in paragraph (xiv) and services specified in paragraph (iii).
This was the version in force for the period covered by the first repayment claim. The words after "immovable goods" were amended by section 87(2) of the Finance Act, 1991, but not so as to materially affect the argument. The applicable rate was 10% during the first period and 12.5% for the second.
THE APPEAL COMMISSIONERS
The Appeal Commissioners heard evidence from two witnesses, a technical manager and a chief accountant of the taxpayer. Their findings of primary fact are central to the appeal and must be set out in full. They are as follows:
Based upon the evidence admitted or adduced at the hearing of the Appeal, we made the following findings of fact:-
As stated in the body of the Case Stated, it was accompanied by copies of the respective agreements entered into by customers in relation to the cable service and the MMDS service.
Before the Commissioners, the taxpayer, according to the Case Stated, contended that it had engaged in the development of immovable goods and that it carried on two separate activities:
firstly the supply of a connection to the house of a subscriber;
secondly, the supply of the signal.
In fact, it seems clear that the taxpayer must also have argued that the connection and re-connection service consisted in "work on immovable property." The Case Stated sets out the statutory provision covering this and, crucially, the Commissioners decided this point in favour of the taxpayer. The Inspector argued that there was no supply of fixtures and no development of immovable goods, but rather that there was a single supply, namely the provision of telecommunications signals.
The Commissioners held:
There were two separate services, firstly the supply of a connection and re-connection service and the supply of television and radio signals;
The appeal was concerned with the connection and re-connection service;
The application of the provision of paragraph (iii) of the Sixth Schedule relating to the value of goods supplied not exceeding two thirds of the total had not been argued before them and they made no determination concerning that issue;
The service did not consist in the development or the maintenance and repair of immovable goods or the installation of fixtures;
The service did consist of work on immovable goods.
The Inspector of Taxes having expressed dissatisfaction, the Commissioners stated the following question by way of Case Stated under the provisions of section 428 of the Income Tax Act, 1967, as applied to Value Added Tax by section 25(2) of the Value Added Tax Act, 1972:
The question of law for the opinion of the High Court is whether, on the foregoing facts and evidence, we are correct in finding that there are two separate services with two separate VAT tax rates.
It is important to note that the High Court was asked only to decide whether there were two separate services and not whether the particular tax heading chosen by the Commissioners, based on the hypothesis that there were two services, was correct.
THE HIGH COURT DECISION
The learned High Court judge upheld the decision of the Commissioners. He said that he was "satisfied that a rational approach to the supply of services by [the taxpayer] is to look at the contract .... and ascertain whether it encompasses a separate charging for connection and supply of services." He held that there were two separate services. He also stated:
The question of whether Cablelink had made on or two supplies is a question of law on which the Court is entitled and bound to form its own view. Customers pay an initial fee to obtain connection and then contract annually for the supply of the signal. This connection can be maintained and remain as the property of Cablelink notwithstanding the failure to continue to subscribe to the service. These are two distinct and separate services with two distinct and separate charges and consequently, two distinct and separate VAT tax rates.
The service with which this appeal is concerned is the supply of a connection/re-connection to the customers' premises.
I am furthermore satisfied that the facts are consistent with the inference that the service consists of work on immovable goods.
There is nothing in the finding of facts to support the contention that the service provided consists of the development or maintenance and repair of immovable goods. Neither does it consist of the maintenance and repair of immovable goods including the installation of fixtures.
The Inspector has appealed the decision of the High Court. It is appropriate to consider, firstly, the scope and extent of the appeal, having regard to a number of cases which identify limits to the scope of the courts to review findings of fact made by the Appeal Commissioners.
The taxpayer, as respondent to the appeal, contends that the findings of fact made by the Appeal Commissioners are not open to reversal on the grounds stated in Mara (Inspector of Taxes) v Hummingbird Ltd  I.L.R.M. 421 and subsequent cases. The leading statement is to be found in the judgment of Kenny J, in that case at page 426:
A case stated consists in part of findings on questions of primary fact, e.g. with what intention did the taxpayers purchase the Baggot Street premises. These findings on primary facts should not be set aside by the courts unless there was no evidence whatever to support them. The commissioner then goes on in the case stated to give his conclusions or inferences from these primary facts. These are mixed questions of fact and law and the court should approach these in a different way. If they are based on the interpretation of documents, the court should reverse them if they are incorrect for it is in as good a position to determine the meaning of documents as is the commissioner. If the conclusions from the primary facts are ones which no reasonable commissioner could draw, the court should set aside his findings on the ground that he must be assumed to have misdirected himself as to the law or made a mistake in reasoning. Finally, if his conclusions show that he has adopted a wrong view of the law, they should be set aside. If however they are not based on a mistaken view of the law or a wrong interpretation of documents, they should not be set aside unless the inferences which he made from the primary facts were ones that no reasonable commissioner could draw. The ways of conducting business have become very complex and the answer to the question whether a transaction was an adventure in the nature of trade nearly always depends on the importance which the judge or commissioner attaches to some facts. He will have evidence some of which supports the conclusion that the transaction under investigation was an adventure in the nature of trade and he will have some which points to the opposite conclusion. These are essentially matters of degree and his conclusions should not be disturbed (even if the court does not agree with them, for we are not retrying the case) unless they are such that a reasonable commissioner could not draw them or they are based on a mistaken view of the law.
This passage was further considered by Blayney J in Ó Culachain v. McMullan Brothers Ltd.  I.R. 217. At page 222, he extracted the following principles:
Findings of primary fact by the judge should not be disturbed unless there is no evidence to support them.
Inferences from primary facts are mixed questions of fact and law.
If the judge's conclusions show that he has adopted a wrong view of the law, they should be set aside.
If his conclusions are not based on a mistaken view of the law, they should not be set aside unless the inferences which he drew were ones which no reasonable judge could draw.
Some evidence will point to one conclusion, other evidence to the opposite: these are essentially matters of degree and the judge's conclusions should not be disturbed (even if the court does not agree with them, for we are not retrying the case) unless they are such that a reasonable judge could not have arrived at them or they are based on a mistaken view of the law.
In the present appeal, neither party has sought to question the Commissioners' primary findings of fact, in particular those set out at paragraph 3.1 of the Case Stated and quoted above. Indeed, the Inspector, far from challenging them, places strong reliance on certain of the findings to support the appeal. There has, therefore been much discussion about the proper characterisation of the conclusions of the Commissioners, which I have summarised. Counsel for the taxpayer attached importance to Kenny J's remark that the court should not set aside "inferences which [the Commissioners] made from the primary facts [unless they] were ones that no reasonable commissioner could draw." It is not clear whether the judge was using the word, inference, in its normal connotation, as, for example, where, for the purposes of the exercise its appellate jurisdiction, this court draws a clear line between findings of primary fact and inferences from those facts (see Hay v O'Grady  I.R. 210).
In my view, the question in the present case is whether the Appeal Commissioners' decision was one of law or one of fact. As already indicated, the primary findings are not in issue. What the Commissioners did was to reach a conclusion, based on those findings, but without making any additional findings or drawing any inferences of fact.
Lavan J considered that the question of the proper tax treatment of the services provided by the taxpayer was a matter of law. In this, he is supported by the views of two members of the Court of Appeal in England in British Airways plc v Customs & Excise Commissioners  STC 643. Stuart-Smith J (at page 648) stated that the question whether British Airways
make one supply, namely transportation with in-flight catering as an integral part of it, or two supplies, namely transportation and catering, is a question of law.
Lord Donaldson, in his judgment, followed a ruling to similar effect by the Court of Appeal in British Railways Board v Customs & Excise Commissioners  STC 221. The latter case concerned a special arrangement for student travel under which students paid £1.50 for a card giving the right to travel half-fare for six months. The question was whether value added tax was chargeable on the £ 1.50 or not. If it was a payment for a transport service, which was VAT exempt, it was not. Lord Denning has this to say on the question of whether this was a question of law:
I do not myself think that it is a matter of fact for the tribunal. We are told that some tribunals hold that value added tax is payable on these sums of £ 1.50 paid by students; and that other tribunals hold that it is not payable. That will never do. Either value added tax is payable on all these sums of £ 1.50, or on none of them. It cannot depend on the state of mind of any individual student by asking him or her: what did you pay the £ 1.50 for? It must depend on the legal effect of the transaction considered in relation to the words of the statute. And that is a question of law.
In my view, the conclusion of the Appeal Commissioners on the issue of whether there were one or two supplies is one of law and not of fact. It did not, in my view, entail the drawing of any inferences of fact. It is important to add, however, that it was a conclusion based on their appreciation of the facts that they had found based on the evidence they had heard. It behoves the Court, therefore, to be particularly careful to give full effect to those findings of fact. It should not interpret them so as to diminish their value. They were clearly sufficient to convince the Commissioners that the connection and re-connection service involved actual work on immovable property. From their findings, in this respect, as set out in paragraphs 3, 4 and 5 of paragraph 3.1, set out above combined with their conclusion that this constituted work on immovable property, it is clear that they considered that the connection and re-connection services involved real work. I will return to this matter when I turn to consider the correctness of the decision.
Mr. Daniel O'Keeffe, Senior Counsel, placed particular emphasis on the following findings:
That the objective of both systems (Cable and MMDS) is to deliver multi-channel TV reception (finding no. 6);
That the taxpayer will not install the boxes or decoders without subscription for the multi-channel service (finding no. 7);
That the installations remain the property of the taxpayer (finding no. 8);
That the installation work may not be done by other than the taxpayer or its agents (finding no. 14).
He cited British Airways plc v Customs & Excise Commissioner. In that case, the issue was whether the airline supplied two services, air transportation (which was zero-rated) and in-flight catering (which was taxable) on domestic routes within the UK. One single ticket price was charged; no part of it was attributed to the catering. Lord Donaldson MR. thought that passengers chose "from what [was] on offer, and paid for whichever degree of luxury or lack of it he requires, but the choice is between grades of air transportation, not between grades of transportation and separate grades of in-flight catering." (see page 647). He also thought that the matter might be one of first impression. It seems that Lord Donaldson would exclude any consideration of the motive or intention of the person receiving the service as a relevant factor. This, as will appear, would appear to be at variance with the views of the Court of Justice. Stuart-Smith J expressed himself in very similar terms. He also thought that the question was whether the in-flight catering was an integral part of the transport. He considered that it was not.
In Customs & Excise Commissioners v United Biscuits Ltd  STC 325, the Commissioners sought to tax decorative biscuit tins rather than allow them to benefit from the zero-rating of the biscuits they contained. The Inner House of the Scottish Court of Session rejected the argument. They held that "what was supplied was biscuits in a biscuit tin rather than a general purpose container with biscuits in it."
Mr. O'Keeffe also cited the decision of the Court of Justice in Case C-349/96 Card Protection Plan  ECR I-973. That case involved the supply of a package of services offered to holders of credit cards. It was a plan intended to protect purchasers of the service against financial loss and inconvenience resulting from the loss or theft of their cards or of certain other items such as car keys, passports and insurance documents. A key element of the package was insurance against certain financial loss. Insurance services are exempt from VAT. On the question of whether it would be possible to segregate the exempt and non-exempt aspects of the service, the Court said, having recited earlier case law to the effect that "where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place" continued:
In this respect, taking into account, first, that it follows from Article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.
There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (Joined Cases C-308/96 and C-94/97 Commissioners of Customs & Excise v Madgett & Baldwin  ECR I-0000, paragraph 24).
In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances such as those described in paragraphs 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this (see, to that effect, Madgett & Baldwin, paragraphs 45 and 46).
The last paragraph would suggest that the Court of Justice, unlike Lord Donaldson, considers the intention of the consumer to be relevant. Mr. O'Keeffe relied on this passage also for the proposition that a service cannot be separate if it is merely a means "of better enjoying the principal service supplied."
None of the cases cited is sufficiently close to the facts of the present one to be of real assistance. In both British Airways and United Biscuits, the revenue attempted to separate out elements of transactions which had been conducted as one. Services and goods respectively had been supplied for one price. The revenue contention in British Airways was particularly far-fetched. The judges seem to have treated the matter as one of first impression. One could envisage a case, however, where, unlike in United Biscuits, the container of foodstuffs was of so great a value that it would be an abuse to claim a zero rating, when what was really being sold was the container.
While it is clear that whether single or separate prices are charged is not decisive, I have no doubt that in many cases it will be helpful. The charging of separate prices genuinely related to the nature, the cost or, perhaps, the optional nature, of different elements might point in the direction of more than one supply. The English and Scottish courts, British Airways and United Biscuits made some attempt to develop general principles. Lord Donaldson considered that the correct question to ask was whether the supply of food and drink was incidental to the air transport, though he preferred the word "integral." Stuart-Smith L.J. thought that "while something that is necessary for the supply will almost certainly be an integral part of it, the converse does not necessarily follow."
I am not convinced that it is possible to extract any principles of general application. The legislation provides no guidance. Community law has no relevance to decisions concerning the application of purely national headings of charge. However, I find the approach of the Court of Justice persuasive. It says that "regard must first be had to all the circumstances in which that transaction takes place." It attaches particular weight to the economic character of the supply of services. A single economic service should not be artificially divided and ancillary elements should share the tax treatment of the principal service. A single price may not be decisive but may be indicative of a single service. Equally, in my opinion, separate prices may suggest separable supplies. I do not consider that the statement that "service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied" should be regarded as laying down a principle of general application.
Before deciding whether there are distinct supplies here, namely the connection and re-connection service and the delivery of the signal, it is necessary to refer to the findings upon which the Appeal Commissioners based their conclusion. Paragraphs 3, 4 and 5 of the findings show that the connection and re-connection service entails the supply and installation of main cables, drop cables, junction boxes and connection boxes (in the case of the cable service) and antennae and down converters (in the case of MMDS). The specimen contracts show that the taxpayer charged separately for connections and rental, meaning the supply of signal. The connection charges would vary depending on the number of points for which connections were required. From all of this, it is clear that the supply of connection and re-connection services entails the performance of substantial work and the supply of substantial quantities of goods. It is true, of course, that the sole purpose of the connection and re-connection service is to enable the television and radio service to be delivered and that the equipment remains the property of the taxpayer.
Several features of the entire service nonetheless warrant treating the connection and re-connection service as a distinct supply.
Firstly, this work is physically and temporally distinguishable from the delivery of the signal itself. It must be performed before the service can be switched on and requires work on site.
Secondly, and for the same reason, it is capable of being separately costed both in respect of the labour and materials.
Thirdly, the extent to which a connection or re-connection service is required will vary over time and from one customer to another: a new customer will have to pay for a full connection only when it is made for the first time and not over ensuing periods, unless he is disconnected for non-payment and has to be reconnected; a customer moving into a house or flat already fitted with the service will not have to pay to the same extent as if the dwelling has to be newly cabled. This will make the charge proportionate to the service actually provided.
Fourthly, it is hypothetically possible that the connection service could be performed by an independent company. In that case, there can be no doubt that there would be an independent supply.
I conclude therefore, that the learned High Court judge was correct in upholding the decision of the Appeal Commissioners. The question raised in the Case Stated should be answered in the affirmative. I would dismiss the appeal.
Mara (Inspector of Taxes) v Hummingbird Ltd  I.L.R.M. 421; Ó Culachain v. McMullan Brothers Ltd.  I.R. 217; Hay v O'Grady  I.R. 210; British Airways plc v Customs & Excise Commissioners  STC 643; British Railways Board v Customs & Excise Commissioners  STC 221; Customs & Excise Commissioners v United Biscuits Ltd  STC 325; Card Protection Plan  ECR I-973
Value-Added Tax Act 1972: 6th Sch. Para (iii), Para (xiib)
Sixth Council Directive 77/388/EEC, 17 May 1977
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