Characterising a single complex supply for VAT purposes

The Court of Appeal has held that, when seeking to characterise a single complex supply for VAT purposes, the primary test to apply is one based on the predominant element of the supply: HMRC v Gray & Farrar International [2023] EWCA 121. The Court held that, based on CJEU jurisprudence, the “predominant element” test has been recognised as the mandatory and primary test in this context.

However, the Court went on to hold that both the FTT and the Upper Tribunal had misapplied the test on the facts to determine whether matchmaking services fell within the scope of the place of supply rules applicable to supplies of consultants. The lower tribunals had failed to give sufficient weight to the contractual terms and had artificially dissected elements of the supply in a way the CJEU had warned against.

Background

The case concerned the correct categorisation of supplies made by Gray & Farrar (G&F), which operated as a bespoke matchmaking business. G&F argued that the services that they provided, which included interviewing clients and carrying out research from their own as well as other databases to find a match, were correctly categorised as “services of consultants” such that they were outside the scope of VAT when provided to clients based outside the UK and EU.

The FTT held that the services did not qualify as consultancy services, but on appeal the Upper Tribunal held that the FTT had made an error of law in not applying the correct test to categorise the single supply made by G&F. The correct approach was the “predominant element test” and the failure to apply that test led the FTT to fail to correctly characterise the supply as one of consultancy services or similar services. HMRC appealed that decision, arguing that the “predominant element test” was not a mandatory test in this context.

What is the correct test to characterise a single complex supply?

It was accepted in this case that G&F made a single supply to its clients that involved a number of elements. These included the drawing up of a “brief” describing the client and the characteristics of the person they are seeking, following an interview, the identification of potential matches from their database and other sources, the making of introductions and following up to seek feedback from the client. The question was whether this was properly characterised as a supply of the “services of consultants… and other similar services, as well as data processing and the provision of information” within Article 59 of the Principal VAT Directive (and transposed into UK law in VATA 1994 Schedule 4A paragraph 16).

The Court of Appeal considered CJEU jurisprudence on the correct categorisation of a single supply made up of a number of elements. The Court noted that, in this context, there was no dispute concerning the continuing supremacy of EU law general principles. In particular, the Court looked at the decision of the CJEU in Mesto Zamberk Financini (Case C-18/12) which the Upper Tribunal had considered was authority for the proposition that where it is possible to identify a predominant element amongst the elements that characterise the single complex supply, the primary test for characterising the supply is the predominant element test. The Upper Tribunal also considered that the predominant element must be determined from the viewpoint of a typical customer having regard to an overall assessment of the objective characteristics of the supply.

HMRC argued that there was no mandatory test and no single test, as a matter of law. Differing tests might be adopted according to the different circumstances of any particular case. As such, the Upper Tribunal had been wrong to hold that the FTT had made an error of law. The Court of Appeal has rejected that argument.

The Court of Appeal has held that the decision in Mesto went further than earlier cases and has established a principle of EU law that the predominant element test is the primary test to apply in characterising a supply for VAT purposes. The language used by the Court in Mesto was mandatory. Where it is possible to do so, the predominant element must be determined. This may not always be possible and the Court considered that there was a hierarchy of tests to apply in those circumstances moving from (1) the predominant element test to (2) the principal/ancillary test and (3) a test based on the overarching supply test.

As such, the Court agreed with the Upper Tribunal that the FTT had made an error of law in its approach.

What was the correct categorisation of the supplies made by G&F?

HMRC argued that even if the predominant element test was a mandatory test, the UT had misapplied it. In particular, HMRC pointed to the fact that the UT had said “the qualitatively most important element to the typical consumer was the introduction of a prospective partner” but had also said “the predominant element of the supply from the point of view of the typical consumer was the advice which was provided as part of the matchmaking service combined with the information relating to a potential match”. The UT had erred in identifying two predominant elements without explaining which predominated.

The Court of Appeal has pointed out that when deciding on the characterisation of a transaction governed by a written contract, the starting point is to identify the legal rights and obligations of the parties as a matter of contract and then consider whether that characterisation is vitiated or undermined by any relevant facts. The contractual terms cannot be determinative by themselves of the VAT analysis, but may be conclusive unless inconsistent with the underlying economic and commercial reality.

In this case, the G&F contract with clients contained only one contractual obligation and that was to supply a minimum of 8 suitable introductions within 12 months. The Court accepted that in practice there were pre-contract discussions with clients and additional elements of service such as post-introduction liaison services, but “even accepting that these elements also formed part of the service supplied, this does not in any way undermine or vitiate the conclusion that the very purpose of the contract was for G&F to introduce its clients to a minimum number of suitable prospective partners in exchange for a fee”. This was the predominant element of the supply.

In separately identifying constituent elements of the supply by G&F such as the provision of advice and information, the approach adopted in this case by both the FTT and the UT had involved an “artificial dissection of the introduction service supplied by G&F of a kind warned against by the CJEU. To treat this service as comprising two distinct components, the provision of expert (consultancy) advice and the provision of information, was an error of approach”. There was no basis for thinking that the typical customer using G&F’s service would view it as supplying advice and/or information. That is not what they contracted for.

As such, the service provided by G&F was not one habitually supplied by consultants giving expert advice to a client. Nor was it data processing or the supply of information. Accordingly, it did not fall within the scope of Article 59 and was within the scope of UK VAT.

Comment

The decision is an important confirmation that the primary and mandatory test for determining the correct characterisation of a single complex supply involving separate elements is one based on identifying the predominant element. Other approaches that had been used by the courts prior to the CJEU decision in Mesto must be read in that light and might continue to be helpful where the predominant element test cannot be applied for any reason.

More generally, the case also highlights that even where the correct legal principles can be identified, the task of applying them to any particular fact pattern can still be problematic and different courts can (and will) come to different conclusions. Again, the emphasis placed by the Court of Appeal in this case on the contractual arrangements is not new, but is a welcome clarification of the importance of the contractual terms in determining the correct classification.