[2010] UKFTT 13 (TC)

TC00332

VALUE ADDED TAX – zero-rating – choco lolly making kits – whether supply was a single supply – whether the predominant elements of the supply were the zero-rated items or the standard-rated items – whether the supply should be zero-rated or standard-rated – VATA 1994 s. 30 sch. 8, group 1 – Card Protection Plan principles applied – held supply was a zero-rated single supply – appeal allowed

FIRST-TIER TRIBUNAL (TAX CHAMBER)

 
 	
					SUPERCOOK UK LLP & DR. OETKER UK LTD	Appellants

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Ian Vellins (Judge)
		Beverley Tanner (Member)
			
Sitting in public in Manchester on 23 November 2009

Richard Barlow, counsel, for the Appellants

Jennifer Newstead, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

The appeal
1.	In this appeal the two Appellants are Supercook UK LLP (Supercook) who were registered for VAT from 2 September 2004 to 1 January 2008 and who were suppliers of foodstuff including choco lolly making kits, and Dr. Oetker UK Ltd (DR. Oetker) who were registered for VAT from 1 January 2008 and who acquired the share capital and trade and assets of Supercook and have supplied Supercook’s range of products and kits.  HMRC decided that the choco lolly making kits should be rated for VAT at the standard rate, and issued an assessment against Supercook in the sum of £95,896 plus interest in respect of periods 09/05 to 12/07, the assessment being notified on 11 September 2008.  HMRC also issued an assessment to Dr. Oetker in the sum of £9,007 plus interest in respect of periods 03/08 to 08/08, the assessment being notified on 23 October 2008.  The Appellants both appealed, arguing that the kits should be zero-rated.
The relevant legislation
2.	Section 30 of the Value Added Tax Act 1994 (“VATA 1994”) provides that a supply of goods or services is zero-rated if the goods or services are of a description for the time being specified in Schedule 8.
3.	Group 1 of Schedule 8 to the Act provides for the zero-rating of food, in the following terms (as relevant):
“The supply of anything comprised in the general items set out below, except – (b) a supply of anything comprised in any of the excepted items set out below, unless it also comprised in any of the items overriding the exceptions set out below which relate to that excepted item
General Items
Item no.
1. Food of a kind used for human consumption.
Excepted Items
Item no.
1.	Ice cream, ice lollies, frozen yoghurt, water ices and similar frozen products, and prepared mixes and powders for making such products.
2.	Confectionery, not including cakes or biscuits wholly or partly covered with chocolate or some other product similar in taste or appearance.
Notes;
(5) Items 2 and 3 of the items overriding the exceptions relate to item 2 of the excepted items; and for the purposes of item 2 of the excepted items “confectionery” includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any items of sweetened prepared food which is normally eaten with the fingers”
The issues for determination
4.	The parties indicated that they agreed that the supply of the kits was a single supply and not a multiple supply, but asked the tribunal to say whether or not the tribunal agreed with that point.  The issue between the parties was whether, as HMRC contended, the supply is a single supply in which the predominant elements are one or more of the standard-rated items and the zero-rated items are simply a better means of enjoying those elements, in which event the kits were standard-rated, or whether, as the Appellants contended, that the supply is a single supply in which the predominant elements are the zero-rated items, with the standard-rated items being simply a better means of enjoying those elements, in which event the kits should be zero-rated.
The background and findings of fact
5.	The background to this hearing can be set out as follows and which we find as facts.
6.	Both Supercook and Dr. Oetker supply foodstuffs and trade from addresses in Leeds.  Dr. Oetker acquired the share capital of Supercook and purchased Supercook’s trade and assets on 1 January 2008, and since that date Dr. Oetker has supplied Supercook’s range of baking products and kits.  This appeal concerns products called choco lolly kits, which are supplied by the Appellants to retailers such as supermarkets at a wholesale level for onward sale.  These kits are variously packaged.  We were shown a number of such kits.  The kit upon which HMRC made their decision was packaged as “Scooby-Doo Choco Lolly Kit”.  Other similar kits were packaged as Shrek Choco Lolly Kits, Barbie Choco Lolly Kits, Halloween Choc Bat Kits and Princess Sparkle Choco Lolly Kits.  The VAT rating for the various kits would be identical.
7.	The kits, such as the Scooby-Doo Choco Lolly Kit consisted of the following items, with the contents contained loosely in the box with illustrations and writings on the box;
		A bag of milk chocolate-flavoured edible buttons
		A bag of white chocolate-flavoured edible buttons
		Two tubes of decorative edible writing icing
		A plastic tray containing six molds depicting themes or characters in the cavities
		Twelve lolly sticks 
8.	The kits are designed to make six specifically-shaped or patterned milk choco lollies and six specifically-shaped or patterned white choco lollies.  The milk choco lollies are made by heating the milk chocolate flavoured buttons, placing a lolly stick in each of the molds, pouring the melted buttons into the individual molds and setting the choco lollies by placing them in the fridge.  After washing the molds, the white choco lollies are made by following the same procedure.  The buttons are not chocolate but are a compound which has the flavour of chocolate.  There are slight variations between the various kits, as the designs on the molds vary, some kits only have a single bag of chocolate flavoured edible buttons, and some of the kits have only one tube of decorative edible writing icing, for example.  The principle of preparation of the lollies remains the same.
9.	An officer of HMRC visited the Appellants, uplifted kits, sought guidance, and entered into correspondence with the Appellants as to the VAT rating of the kits, which the Appellants had supplied as zero-rated supplies, and which HMRC considered were standard-rated supplies.  Finally HMRC notified the Appellants that HMRC had decided that the kits were standard-rated, and assessed the Appellants for un-declared VAT.  The Appellant requested local reconsiderations which upheld the decision, and on 21 November 2008 the Appellant appealed the assessments.
10.	As the buttons were of a sufficient quantity to make twelve lollies, and as there were six cavities in each plastic mold container, it was clearly intended that the molds should be used twice in order to achieve twelve lollies.  The Appellants, in a letter dated 19 September 2008, describes the mold as “flimsy, and the Appellant contended that the molds were not sufficiently strong for repeated use beyond the two heatings.  It was suggested by the Appellants that in order to release the cooled lollies from the molds the plastic had to be pressed or bent to flip out the lollies, so that the molds were not strong enough for repeated use.  The Appellants also maintained that there would be storage problems or cleaning problems involved with the thin plastic molds.  HMRC did not accept those contentions and argued that the molds were strong enough for repeated use.
11.	In correspondence with HMRC, the Appellant identified the respective costs of the elements of the kit as follows:
Components					Cost (£)			% of total
2 packets of chocolate-flavour buttons		0.209				48.95
12 plastic lolly sticks				0.046				10.77
1 mold						0.034				7.95
2 tubes of icing					0.138				32.31
Total							0.427				100.00
12.	In the letter from the Appellants to HMRC dated 19 September 2008, the Appellants stated:
“The packaging of the product comprising of an external cardboard carton with the individual items packed loosely inside is obviously a cooking product as opposed to confectionery.  I am sure nobody would buy it on the basis that they are purchasing chocolate flavoured buttons and this is reinforced by the fact that the buttons are unattractively packaged in a clear plastic bag.  Additionally, the purchaser without reading the package or opening it would be unaware that the box contained chocolate flavoured buttons.  The pricing of the item is also not commensurate with what a person would pay if they were seeking a bag of chocolate flavoured buttons only.”
13.	The writing on the boxes of the kit is directed to parents who would prepare the lollies with or without their children.  The directions recommend that children do not heat the buttons themselves, but indicate that the kit is intended to be used for entertaining children who may play a part in the cooking indicating that the making and eating of the lollies are fun.
14.	Both parties agree that the buttons form a compound of chocolate flavour, and are not in fact chocolate in the legal sense of the word.  Both parties have also agreed that the buttons are not confectionery.  They do agree that both the buttons and the icing are foodstuffs which, at least if sold separately, would be zero-rated.  The parties have agreed the cost breakdown of the elements of the kits and that the food elements of the kits account for 81.26% of the cost.  Photographs in the agreed bundle show how supermarkets supplied by the Appellants have marketed the kits by placing them with other mixes such as pancake mixes and Smarties funny face kits.  Supermarkets have priced the kits to be sold to customers of the supermarkets at prices varying from £1.99 to £2.29.  In correspondence the Appellant have stated that the kits were sold as baking products within the baking aisles of supermarkets.
15.	In correspondence the Appellants maintained an alternative argument that paragraph 3.7 of HMRC’s Notice 48 was relevant.  That Notice related to VAT on minor promotional items supplied in linked supplies schemes.  At the hearing both parties agreed that that extra-statutory concession was not relevant, as both parties maintained that the supply was a single supply and not a linked supply, and further both parties agreed that any appeal concerning such an extra-statutory concession could only be brought by judicial review with the tribunal having no jurisdiction to overrule a decision relating to an extra-statutory concession.  
16.	Accordingly the parties have agreed for the purpose of the appeal that;
(1)	The buttons do not contain any cocoa butter and consequently are not chocolate
(2)	The kits are not confectionery
(3)	The buttons (if held out for sale as a cooking item) and the icing in the kits would be zero-rated if sold independently, and
(4)	The supply is a single supply.
17.	The issues for determination by the tribunal were expressed by the parties as being narrow and were;
(1)	Are the predominant elements of the kits one or more of the standard-rated items or the zero-rated items?
(2)	If the predominant elements of the kits are one or more of the standard-rated items, are the zero-rated items simply a better means of enjoying those elements?  If the predominant elements of the kits are the zero-rated items, are the standard-rated items simply a better means of enjoying those elements, ie are they ancillary?
The case law
18.	The Court of Justice of the European Communities (“ECJ”) gave the following guidance in Card Protection Plan Ltd v Customs and Excise Commissioners [1999] STC 270 at p. 293 about how the National Courts should approach the question whether there is one supply or several supplies in a transaction that contains several elements which do not all, if taken separately, have the same tax treatment:
“26. By its first two questions, which should be taken together, the national court essentially asks, with reference to a plan such as that offered by CPP to its customers, what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately.
27. It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provisions in the Sixth Directive.  In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.
28. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2412, paras 12 to 14, concerning the classification  of restaurant transactions, 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.
29. In this respect, taking into account, first, that it follows from art 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 customer, with several distinct principal services of with a single service.
30. 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 to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplier (see Customs and Excise Comrs v Madgett and Baldwin (trading as Howden Court Hotel) ( Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24).
31. 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 paras 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, them 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 and Baldwin (at 1208, paras 45 and 46)).
32. The answer to the first two questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by CPP are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply.”
19.	The Card Protection Plan case involved insurance services.  In Dr. Beynon & Partners v Customs and Excise Commissioners [2005] STC 55 the House of Lords decided a case involving goods rather than services and applied the Card Protection Plan principles.  Lord Hoffman stated:
“[19] In the course of argument your Lordships were also referred, as were the court below, to a number of cases, both in this country and in the Court of Justice, which were decided before the Card Protection case.  Submissions were made as to whether the principles upon which those cases were decided had application to this case.  Their Lordships think that there is no advantage in referring to such earlier cases and their citation in future should be discouraged.  The Card Protection case was a restatement of principle and it should not ne necessary to go back any further.
[31] Besides raising the question of what authority a doctor would have to dispense drugs to patients who were not reg 20 patients, this approach seems to me to involve the kind of artificial dissection of the transaction which the Court of Justice warned against in its judgment in the Card Protection case [199] STC 270, [1999] ECR I-973, para 29.  In my opinion the level of generality which corresponds with social and economic reality is to regard the transaction as the patient’s visit to the doctor for treatment and not to split it into smaller units.  If one takes this view, then in my opinion the correct classification is that which the NHS has always taken of the personal administration of drugs to non-reg 20 patients, namely that there is a single supply of services.”
20.	In College of Estate Management v Customs and Excise Commissioners [2005] STC 1597 Lord Walker considered the approach of a tribunal, in the light of the Card Protection case, as follows:
“[30] In the course of this appeal there has been much discussion of para 30 of the ECJ’s judgment.  in my opinion it is clear that this paragraph (which uses the introductory words ‘in particular’) is dealing with a particular case exemplified by Madgett and Baldwin.  It is not asserting that every distinct element of a supply must be a separate supply for VAT purposes unless it is ‘ancillary’.  ‘Ancillary’ means (as Ward LJ rightly observed ([2004] STC 1471 at [39]) subservient, subordinate and ministering to something else.  It was an entirely apposite term in the discussion in British Telecommunications (where the delivery of the car was subordinate to its sale) and in Card Protection Plan itself (where some peripheral parts of a package of services, and some goods of trivial value such as label, key tabs and a medical card, were subordinate to the main package of insurance services).  But there are other cases (including Faabord, Beynon and the present case) in which it is inappropriate to analyse the transaction in terms of what is ‘principal’ and ‘ancillary’, and it is unhelpful to strain the natural meaning of ‘ancillary’ in an attempt to do so.  Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services (Faaborg).  Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services (Beynon).
 [31] This is the only point on which I can find any significant error in the approach of the tribunal.  The evaluative findings which the tribunal made at paras 61-64 of its decision, set out above, were conclusions which were open to it on the evidence.  The only error was the addition, in para 68, of the statement that the written materials were ancillary to the provision of education.  The tribunal may have thought that authority required it to make this additional finding.  In my view it was not necessary, nor (on any sensible use of the word ‘ancillary’) was it correct.  But it did not invalidate the tribunal’s earlier conclusions, which were determinative of the matter.
[32] Lightman J perceived this difficulty and sought to deal with it in para 34 of his judgment, which I have already quoted.  But he seems, with respect, to have been hindered by the same perception that every case had to be squeezed into a matrix of what was ‘principal’ and what was ‘ancillary’.  What the judge called ‘a component part of a single supply’ may be (in the fullest sense) essential to it – a restaurant with no food is almost a contradiction in terms, and could not supply its customers with anything – and yet the economic reality is that he restaurateur provides a single supply of services.  Without the need to resort to gnomic utterances such as ‘the medium is the message’, the same sort of relationship exists between the educational services which the College provides to a student who takes one of its distance-learning courses and the written materials which it provides to the student.
[33] Where ancillary goods or services are relevant to the analysis, Lightman J’s description of them as ‘add-on’ may be helpful, so long as it is borne in mind that they may be optional extras (such as in-flight catering on some but not all airlines) or goods or services which, although undoubtedly subsidiary, are for practical purposes indispensable (the ignition key of a car being a simple example).  Experience (and the authority of the ECJ in Card Protection Plan (at para 27) both indicate that this is an area in which it is unwise to attempt any exhaustive schematic analysis.”
21.	In International Masters Publishers Ltd v Revenue and Customs Commissioners [2007] STC 153 Pill L.J. referred to the use by a tribunal of common sense in considering the relevance of the cost or value of an element of a supply.
Decision
22.	We apply to the supplies made by the Appellants of their choco lolly kits the criteria identified by the ECJ in the Card Protection Plan case which can be summarised as follows:
(1)	All the circumstances in which the transaction takes place should be considered.
(2)	Every supply should be considered distinct but a single supply from the economic point of view should not be artificially split.
(3)	The essential features of the transaction should be ascertained in order to determine whether the taxable person is supplying a typical consumer with several distinct supplies or with a single one.
(4)	If some elements are only ancillary to a principal element then there is only one supply.
(5)	An element must be regarded as ancillary if it is only a better means of enjoying the principal element.
(6)	A single price is not decisive.
23.	The Appellants argue that the supplies made by the Appellants are a zero-rated supply when the above criteria are applied.  HMRC contend that the supplies are a standard-rated supply when the criteria are applied.  We have considered all the circumstances and concluded, applying the criteria, that the Appellants’ supplies of the kits are a single zero-rated supply.
24.	We find that an essential feature of the supply is that the Appellants supply retailers such as supermarkets who sell the kits to customers who are put in a position to make an item of food which would be zero-rated if bought already manufactured.  We find that the essential features of the transaction include the packaging and general presentation of the kits which make it clear to the potential purchasers, namely the supermarket’s customers, that the kits will enable them to make lollies.  We find that lollies identical in all material respects to those that such consumers will make, not being chocolate, would be zero-rated items if purchased ready-made.  This will be known to the Appellant’s customers – being the supermarkets – and would affect the price structure of the items.  We find that the kits are similar to ready-to-mix items sold in supermarkets, such as bake scone mixture or Yorkshire pudding batter mix, which are zero-rated.  Photographs in the bundle in this appeal show such products illustrated, and show that supermarkets place the products of the Appellants alongside cake mixes and the like on their shelves.  We find that the packaging of the kits is designed to make it clear that the preparation of the food is the intended purpose of the sale of the kits, as would be the case with scone mixes and cake mixes.  It is not intended that children should merely eat the buttons.  We find that the typical ultimate customer for the kits will be a parent or carer to a child who wants to involve the child in the process of food preparation.  We find that the fact that the end product is something that will appeal to children in no way detracts from the product being a food item.
25.	We do not agree with the contentions of HMRC that the essential features support a finding that the supply is standard-rated.  We do not agree with HMRC that the shape or theme of the molds constitutes the main essential feature of the supply.  We find that the purpose of the kits is to make choco lollies, albeit that the lollies will have a shape or theme when they emerge from the molds.  The packing and presentation of the kits do contain images of the shapes and themes that can be made in the lollies, and it is made clear to the typical consumer that the finished product is a lolly with a particular shape or theme.  We find that that is not an essential feature of the product, and that the essential feature is to make choco lollies, which is a food product.  The fact that the kits appeal to children does not lead us to conclude that the shape or theme of the mold is such an essential feature as to detract from the product being a food item.  Having considered and ascertained the essential features of the transaction we find that the Appellant are supplying a typical consumer with a single supply and not several distinct supplies, and that that single supply is of zero-rated food.  We find that the food element of the kit is the principal element, that the molds and lolly sticks are only ancillary to the principal element, and that there is only one supply.
26.	In considering the ancillary elements we find that the choco lolly cannot be made without the compound of chocolate-flavoured buttons.  We find that it is not likely that a parent would make the buttons at home from raw ingredients.  We find that a parent could make a lolly from the buttons if the parent had anything which would be suitable as a mold, and using lolly sticks that could be bought separately and easily.  We find that the purpose of the molds is to facilitate the making of the buttons into finished lollies.  We find that the molds and sticks which would be standard-rated if sold separately, are ancillary to the mains supply of the zero-rated items.  We find that a parent with a Yorkshire pudding tin or a small tin tray could make lollies from buttons, and we find that the molds simply add an element of enjoyment for the children because they shape the lollies into shapes that are attractive to children.  We apply the criterion of the ECJ in the Card Protection case, that anything which is merely a better means of enjoyment of the principal element of the supply must be categorised with that principal element.  We do not agree with the argument of HMRC that the molds are the predominant elements.  We do not agree with their contention that the lolly cannot be made by the typical consumer without the molds.  We bear in mind that the molds are not sold independently and that Scooby lolly could not be made without the molds, although a choco lolly could be made by using a Yorkshire pudding tray or ice cube tray.  We do not agree with HMRC’s contention that the buttons and icing are simply a better means of enjoying the molds.  We do not agree that it is probable or likely that typical consumer would purchase chocolate and icing and then make a choco lolly with the molds, without using the buttons and icing provided in the Appellant’s kit.
27.	We have considered the economic elements of the supply.  The kit is sold at a single price, but we bear in mind that one of the criteria in the Card Protection case is that a single price is not decisive.  We find however that there is a single supply from an economic point of view.  The kits are sold as kits.  They are pre-packaged by the Appellants for sale in that fashion and that fashion only.  This is recognised and reflected in the price.  The kit sells at a price of £2.29.  We find that the buttons would be sold much more cheaply and in a very different packaging if sold separately.  The buttons are merely contained in two plastic containers inside the package, without individual marking.  The food elements of the kit, namely the buttons and icing, amount to 81.26% of the cost of the elements of the kit, with the molds and lolly sticks costing only 18.74%.  We find that the breakdown of the cost supports the Appellant’s contention that there is a single supply and also that it is a zero-rated supply, as it adds to the relevant facts the fact that overwhelmingly the most significant cost element is the food element and, is indicative that there is a single supply of zero-rated food.  We have taken into account the criterion in the Card Protection case that cost is not decisive and the guidance in the International Masters Publishers case that circumstances can arise where as a matter of common sense the more substantial element of the supply in terms of cost or value falls to be treated as ancillary to the other item.  However, we find as a matter of common sense that such circumstances do not arise in the present appeal.  Even though a typical consumer would not be concerned about the underlining cost of the component parts, we find that it would be common sense for such a consumer to realise that the cost of the buttons and icing would be substantially more than the cost of the plastic mold and lolly sticks.
28.	Accordingly we have decided this appeal by applying the principles and criteria set out in the Card Protection Plan case.  We have further applied Lord Hoffman’s words in the Dr. Beynon case, namely considering the social and economic reality, and have found that the social and economic reality in relation to the Appellants’ kits is that there is a single supply of zero-rated food goods.  We have endeavoured to avoid over-analysis.  We have endeavoured to use common sense.  It seems clear to us that the food element is principal and the molds and sticks ancillary.  We find that the economic reality is that there is a provision of a single supply of goods which is zero-rated.  We find that the molds and sticks can be regarded as “add-on” and undoubtedly subsidiary.
29.	We conclude that the supply of the kits is zero-rated, as contended by the Appellant.  There is a single supply of zero-rated goods.  We allow the Appellants’ appeals and decide that the assessments should be discharged.  These appeals were begun during the period to which the VAT Tribunal Rules applied and under the transitional arrangements we have the power to apply those rules.  As the Appellant began their litigation under those rules the Appellants are entitled to expect that those rules will be applied in respect of costs.  We accordingly order and direct that HMRC pay the Appellants’ costs in this appeal.
MAN/2008/1466 & 1467

IAN VELLINS
JUDGE
Release Date: 8 January 2010