Court of Appeal: Supply of electricity was part of single composite supply

"Many supplies consist of a number of different elements. This case illustrates the difficulty of benefiting from a reduced rate of VAT on part of a larger composite supply," said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.

Colaingrove owned a holiday park with static caravans. Customers would pay a sum for accommodation in the caravan and using its facilities, including electricity. The fee for the use of the electricity was a small part of the overall cost. The supply of caravan accommodation is subject to VAT at the standard rate of 20%, whereas the supply of domestic fuel or power is subject to a reduced rate of VAT of 5%.

HM Revenue & Customs (HMRC) said that VAT was payable at the standard rate on the whole of the fee charged to customers, including the fee for the electricity. It argued that, following the principle in the Card Protection Plan case, the supply of the electricity was part of a single, composite supply of accommodation which was taxable at the standard rate.

In the Card Protection Plan case, following a decision of the European Court of Justice, the House of Lords decided that the provision of a package of goods and services making up a credit card protection plan constituted a single composite supply of exempt insurance services.

Colaingrove appealed and the First tier Tribunal allowed its appeal. The tribunal decided that because of the further decision of the European Court of Justice in EC v France, relating to French undertakers, that the Card Protection Plan case did not apply. The tribunal said that supplies could be taxed at separate rates where it was clear that Parliament intended this result, as it had done in the case of the reduced rate of VAT for domestic fuel.  

In March 2015, the Upper Tribunal reversed the decision of the FTT and found that the supply of electricity was part of a composite supply and was standard rated. Colaingrove appealed to the Court of Appeal.

In the Court of Appeal, Colaingrove argued that EU law permits a member state to apply a reduced rate to an individual element of a composite supply and that this was what Parliament had intended in enacting the lower rate of VAT for domestic fuel. It argued that if the electricity had been supplied directly to the customer by the energy company it would have benefited from the reduced rate. It also argued that the fact that customers parking their own caravans on Colaingrove's sites got the benefit of a reduced rate of VAT for electricity supplied offended the principle of fiscal neutrality.

Lady Justice Arden said that the reduced rate of VAT for domestic fuel did not apply where the supply was a composite supply of some other service.

She said that section 29A VAT Act does not look at the use of the supplies but applies the reduced rate of VAT to supplies which are "of a description" specified in schedule 7A. Here the fuel was supplied as part of a composite supply so did not satisfy the condition. She said: "Use is necessarily a defining characteristic but need not be a defining purpose. While … every supply must be for residential use, not every provision of fuel for domestic purposes will be within the fuel charge."

Because under schedule 7A the fuel charge depends on a supply of fuel, there would have to be specific wording in order for the legislation to apply to a composite supply, she said.

Lady Justice Arden dismissed Colaingrove's arguments that this interpretation did not give effect to the intention of Parliament to apply the reduced rate to any use of fuel for domestic purposes.

She said that there was no necessary reason why Parliament should have applied the fuel charge to composite transactions. Its purpose may have been limited to helping people in their homes rather than also subsidising the prices of self-catering accommodation for holidaymakers. She said this was a rational distinction, and enabled the provision to be purposively interpreted on the basis of the language of the provision.

Although schedule 7A and 8 of the VAT Act contain a number of provisions for apportionment, none of them applies where the fuel is part of a composite supply of fuel and some other goods or services. Lady Justice Arden said that if it had been Parliament's intention that the reduced rate should apply to an element of the supply, it would have inserted some apportionment provisions.

She also said that the doctrine of fiscal neutrality did not mandate any different result in this case as the supply of holiday accommodation is a different transaction from the supply of fuel to the owner of a caravan parked on a pitch owned by Colaingrove.