Thursday Law Report: Input tax on delivery could not be set off

WHERE A taxpayer paid input tax on the cost of transport and delivery of motor cars by a transport company on behalf of the manufacturer, the delivery was ancillary or incidental to the supply of the car, and the taxpayer was, accordingly, not entitled to set off that input tax against its liability for output tax.

The House of Lords allowed the appeal of the Commissioners of Customs and Excise against a decision of the Court of Appeal that the taxpayer, British Telecommunications plc, was entitled to set off input tax paid on the delivery costs of motor cars delivered to it on behalf of the manufacturers.

BT bought a large number of cars annually from different manufacturers. The cars were delivered by transport companies on behalf of the manufacturers to BT's premises or at its direction. BT paid input tax to the manufacturer on the cost of transport and delivery, and sought to set that off against its liability for output tax, contending that the supply of the car and its delivery were separate supplies for the purposes of VAT, rather than being a single supply of a delivered car.

The VAT tribunal held that BT could deduct the input tax paid on transportation costs. The Commissioners successfully appealed to the High Court, but that decision was reversed on BT's appeal to the Court of Appeal.

Michael Kent QC and Nicholas Randall (Solicitor for the Customs and Excise) for the Commissioners; David Milne QC and Rupert Baldry (Solicitor to British Telecommunications) for BT.

Lord Slynn said that the courts had been concerned in a number of previous cases with the task of deciding whether the provision of goods or services was one supply or two or more separate supplies.

On the authorities, namely British Airways plc v Customs and Excise Commissioners [1990] STC 643, Bophthatswana National Commercial Corp Ltd v Customs and Excise Commissioners [1993] STC 702, Customs and Excise Commissioners v Leighton [1997] STC 458, Commissioners of the Eurpoean Communities v United Kingdom [1998] ECR 817, Customs and Excise Commissioners v Wellington Private Hospital Ltd [19997] STC 445, and Card Protection Plan v Commissioners of Customs and Excise (unreported, Case C-349/96) it was clear that the fact that one "package price" was charged without separate charge for individual supplies being specified did not prevent there being two separate supplies for VAT purposes.

The fact that separate charges were identified in a contract or on an invoice did not on a consideration of all the circumstances necessarily prevent the various supplies from constituting one composite transaction, nor did it prevent one supply from being ancillary to another supply which for VAT purposes was the dominant supply.

Even though it might be desirable to approach each supply as though it were a separate supply and even though each supply in a composite transaction might be an independent separate supply, the essential features of a transaction might show that one supply was ancillary to another, and that it was the latter which for VAT purposes was to be treated as the supply.

If the transaction in the present case were looked at as a matter of commercial reality, there was one contract for a delivered car: it was artificial to split the various parts of the transaction into different supplies for VAT purposes. What BT wanted was a delivered car. The delivery was incidental or ancillary to the supply of the car, and it was only on or after delivery that property in the car passed.

The fact that delivery could have been arranged differently under a separate contract between BT and the transporter or by BT collecting the car itself did not mean that when there was a contract for a delivered car the two supplies must be kept separate.

Kate O'Hanlon,

Barrister