VAT grouping precludes separate supply analysis

The First Tier Tribunal (FTT) has held that a payment handling fee charged by a VAT grouped subsidiary of the Virgin Media group could not be separated from the main supply of Media services by the group: Virgin Media Payments Ltd v HMRC [2020] UKFTT 30. In those circumstances, it was not possible to rely on the principle in Telewest that supplies by different suppliers could not be treated as a single supply. Both supplies were treated as made by the representative member of the group and, following the CJEU decision in Everything Everywhere, the payment handling service was merely ancillary to the principal supply of the Media services.

The decision, which was many years in the making, is long and complex. However, the principal issue on which the decision stands appears to be relatively straightforward.

Background

From February 2007, Virgin Media Limited (VML provided TV, broadband and telephone services to residential customers in the UK under the Virgin Media brand (the Media Services). Customers made payment for the Media Services to Virgin Media Payments Limited (VMPL), a wholly owned subsidiary of VML and a member of the VML UK VAT group (the VAT Group). Any customers that paid for the Media Services other than by direct debit paid an additional £5 payment handling charge to VMPL (the PHC).

VML and VMPL (the VM Appellants) argued that the PHC was consideration for a separate exempt supply of payment handling services by VMPL to the customers (the PH Services). The VM Appellants relied on the exemptions from VAT at article 153(1)(d) of the Principal VAT Directive (the PVD) and / or items (1) and / or (5) of Group 5 to Schedule 9 of VATA 1994 (the Payment Exemptions).

The fact pattern was similar to that considered by the CJEU in Everything Everywhere Limited (formerly T-Mobile UK Limited) (EE). EE made supplies of mobile telephone services to customers. Where customers paid for the mobile telephone services other than by direct debit or BACS payment, EE charged an additional ‘separate payment handling charge’. The CJEU found that there was no distinct and independent supply of a payment handling service by EE, because that service was merely ancillary to the principal supply of the mobile telephone services.

The VM Appellants submitted that EE should be distinguished because the Media Services and the PH Services were supplied by two separate companies. Per the Court of Appeal decision in Telewest, supplies made by two separate suppliers cannot be treated as a single supply for VAT purposes.

The Tribunal disagreed with the VM Appellants both in terms of whether EE could be distinguished and on whether the PH Services, to the extent that they represented a separate supply, were capable of exemption from VAT.

The judgment runs to 76 pages excluding annexes and considers a range of issues relating to (a) the rules on single and multiple supplies, (b) the interaction between those rules and the rules on VAT grouping, (c) the scope of the exemption from VAT for transactions concerning payments and finally (d) the application of the Halifax abuse principle.

Single and multiple supplies and EE

The hierarchy of the Tribunal’s preferred and alternative decisions on the single and multiple supply point is not easy to follow, but the different conclusions appear to flow as follows.

Effect of s43 VATA 1994

VMPL was a member of the VAT group. Applying s43(1)(b) VATA 1994, any supply of goods or services by VMPL to a recipient that is not also a member of the VAT group is to be treated as a supply made by the representative member, in this case VML.

If VML is to be treated for VAT purposes as supplying both the Media Services and the PH Services to the customers, it followed in the Tribunal’s view that there was no basis for distinguishing EE.

Applying the CJEU decision in EE, the Tribunal concluded that VML could not be treated as making a distinct and independent supply of the payment handling services (paragraph 296).

Although the Tribunal appears to conclude that the above follows directly from EE (paragraphs 295 to 298), it nevertheless went on to consider whether, on the facts of the case, VML might be treated as making a distinct and independent supply of the PH Services. The Tribunal concluded that the evidence did not support a finding of separate supplies. In particular (a) a customer could pay for the Media Services in full, but if he or she did not pay the PHC, VML could discontinue the supply of Media Services, (b) the customer contract was described as a “2 way thing” notwithstanding that there were purportedly three parties and (c) the customer bills disclosed the characteristics of a single transaction.

Single indivisible economic supply

The Tribunal noted that, following Levob, it was possible to find a single composite supply where two elements are not in a principal / ancillary relationship, but are so closely linked that they form, objectively, a single indivisible economic supply which it would be artificial to split.

For customers that did not pay for the Media Services by direct debit, the Tribunal concluded that the Media Services and the PH Services were “not only inseparable but also indivisible in relation to the access to the Media Services”. Although, on the Tribunal’s preferred view, it was not possible to regard the Media Services as the principal element and the PH Services as an ancillary service, the two were so closely linked that they formed a single indivisible economic supply that it would be artificial to split (paragraph 325).

Ancillary supply

Alternatively, if the Tribunal was wrong on the single indivisible economic supply analysis, it appeared to adopt the conclusion given in paragraph 66 of the VAT and Duties Tribunal decision in EE, to the effect that the PH Service was an ancillary supply that took its VAT treatment from the principal supply of the Media Services. This was on the basis that, from the point of view of the typical customer, the PH Service was not an aim in itself (paragraph 334).

What if there is a separate supply?

The Tribunal then considered the position if it was wrong in concluding that VML is deemed to supply both the Media Services and the PH Services, and there is in fact a separate supply by VMPL.

The Tribunal’s preferred analysis was that any separate supply by VMPL was a supply of collection services provided to VML, which was to be disregarded as intra-VAT group and for which no consideration was paid (paragraph 337). Note the Tribunal did not say what impact this conclusion had on the VAT treatment of the PHC – presumably if no supply was made to the customers then the PHC had to be consideration for the supply of the taxable Media Services?

Alternatively, if VMPL did make a supply of services to the customers, that supply was analogous to the supplies made by the independent local agents in Tierce Ladbroke SA and could still be treated as ancillary to the principal supply of the Media Services (paragraph 342).

Neither of these alternative conclusions was expanded upon.

Exemption from VAT

To the extent that there was a separate supply of the PH Services and that supply was a principal rather than ancillary supply, the Tribunal found that the PH Services did not in any case fall within the Payment Exemptions.

Together the CJEU decisions in Bookit, NEC and DPAS have considered the application of the Payment Exemptions in the context of debit and credit payments, card processing and direct debits.

It follows from Bookit and NEC that where a taxpayer debits or credits an account directly, or intervenes by making accounting entries, those circumstances permit a finding that there is a payment or transfer for the purpose of the Payment Exemptions. Card processing activities, which although necessary to complete the payments under consideration in those cases, were not on their own considered to be exempt activities.

Here the Tribunal concluded that in processing the various types of customer payment, VMPL did no more than instruct the relevant financial institutions to take steps to effect the payments. Although those instructions may have been necessary to complete the payments, giving the instructions was not on its own an exempt activity.

Halifax abuse

The original appeal lodged in 2009 concerned supplies made in periods up to 31 March 2009. In August 2013, the VM appellants lodged a second appeal that related to supplies in the period 1 April 2009 to 31 March 2013. In response to this second appeal, HMRC served an amended statement of case which introduced a further argument that (a) the essential aim of the VM appellants in interposing VMPL into the Media Services supply chain was to achieve a VAT advantage and (b) that step represented an abusive practice per Halifax.

At the first appeal hearing in November 2013, the VM Appellants objected to the late introduction of HMRC’s abuse argument. In the event the appeal hearing was adjourned to September 2014, and the abuse argument was admitted and expanded upon in further and better particulars. In support of the abuse argument HMRC relied on documentary evidence demonstrating that the decision to introduce VMPL had been influenced by tax considerations. HMRC also asserted that VMPL did not act independently of VML because, among other things, (a) VMPL owned no assets and employed no permanent staff, (b) its operating costs were for the most part paid by VML and recharged, (c) the sort codes and account numbers of the bank accounts used by the customers did not change when VMPL took over and (d) at the end of each day payments into those bank accounts were swept routinely into a central VML bank account. ¹

Having considered the evidence, the Tribunal concluded that there was nothing artificial or manufactured about the way in which VMPL operated. The Tribunal accepted the evidence that the 2007 rebrand of ntl:Telewest into Virgin Media had been a “perfect opportunity” to streamline the underlying legacy ntl and Telewest businesses and that it was “not unreasonable for VM to have put the income receipts into one part of the organisation and the payment collection facility into another”.
The fact that the interposition of VMPL was tax driven was not decisive. The Tribunal noted that it was unfortunate that the VM Appellants’ representatives had consistently denied that tax considerations had been relevant.

Comments

Any appeal will have to address why s43(1)(b) VATA 1994 should not operate to treat the Media Services and PH Services as both supplied by VML, and thus capable of being treated as a single supply notwithstanding Telewest. At first glance the Tribunal’s analysis is an attractive one and begs the question why VMPL was not subject to a separate VAT registration. Given the clear wording of the legislation to the effect that supplies by or to a member of a VAT group are to be treated as supplies made by or to the representative member of that VAT group, any appeal against this part of the Tribunal’s decision will not necessarily be easy. It will require the taxpayers to demonstrate that the deeming in s43(1)(b) (which the Tribunal found was applicable “for VAT purposes” generally) is disregarded for the purpose of determining whether a single supply exists.

If the taxpayers are able to get over this hurdle, they will then have to demonstrate that the Tribunal was wrong to conclude as a matter of law that the payment processing activities carried on by VMPL did not represent an exempt activity, notwithstanding the CJEU decisions in Bookit and NEC and the Tribunal’s finding that VMPL was doing no more than instructing the relevant financial institutions and third party service providers to effect payments.

Other thoughts

Over five years passed between the second appeal hearing in September 2014 and the decision in January 2020. Some of these delays were undoubtedly beyond the control of the parties, but problems do appear to have stemmed from what the Tribunal described at paragraph 31 as the difficulty (for both the Tribunal and the parties) “in identifying many key facts”. Following the second appeal hearing the parties appear to have been directed to agree certain facts, and when they were unable to do so, two separate chronologies were produced on the movement of monies in February 2015. A further witness statement was served in October 2016, and two further sets of written submissions appear to have followed in 2017 (the first on whether the evidence should be admitted, the second on its effect).

In August 2018 the Tribunal took the unusual step of issuing draft findings of fact. Further written submissions followed in November 2018, the VM Appellants sought to introduce additional documentary evidence in June 2019 and revised draft findings of fact were issued in August 2019. More correspondence followed in Autumn 2019, and the decision was handed down in January 2020.

The fact patterns relating to the legacy ntl and Telewest businesses prior to 2006, the movement of monies within the corporate group and the group structure generally were undoubtedly very complex. The case emphasises the value in seeking to agree facts (to the extent possible) with HMRC at an early stage. Engaging with a statement of agreed facts will flush out the areas of factual disagreement between the parties early on, and inform the appellant that it needs to focus on those areas its witness evidence. A well-drafted statement of agreed facts can also give the Tribunal a good starting point for drafting its decision, and lead to more concise and meaningful judgments for the benefit of both the parties and any appellate courts.

¹ Between the first and second hearings, the VM Appellants adduced extensive evidence regarding the group structure and its operations. The Tribunal devotes several pages of the decision to setting out its view on this evidence, but does not explain the relevance of the evidence to the issues in the case until paragraph 412!