MAN/03/55

VAT – flying club treating supplies of aircraft hired to members as mixed supply of exempt aircraft hire and standard rated fuel – was the supply of fuel a principal or ancillary supply – not the issue as there was one supply only – appeal dismissed
MANCHESTER TRIBUNAL CENTRE

	SHERBURN AERO CLUB LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Mrs E Gilliland  (Chairman)

Sitting in public in York on 20 November 2003

Mr Nigel Ferrington, VAT Consultant, for the Appellant

Mr N Mason of Counsel for HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Subsequent to correspondence between the parties and the issue of a notice of appeal on 19 December 2002 on behalf of Sherburn Aero Club Limited (the Appellant) it has been agreed between the parties that there is now only one issue for consideration by the tribunal namely as to whether in relation to flying lessons supplied by the Appellant there is a single exempt supply of services and fuel or separate supplies of exempt services and a separate taxable supply of fuel. A secondary point which had figured in correspondence and which related to the method has been agreed between the parties and is no longer a matter for the tribunal.  Mr. Nigel Ferrington has presented the Appellants case and it was he also who submitted the notice of appeal.  The clubs accountant Mr. Albert Gardner has given evidence on behalf of the Appellant and the commissioners have not called any witnesses.  

2.	The Appellant operates as a flying club trading from an aerodrome at Lennerton Lane Sherburn-in-Elmet Nr. Leeds West Yorkshire LS25 6JE.  The Appellant has been registered for vat with effect from 1 April 1973.  The history of the matter is that an officer of the commissioners namely Mr. James Barr visited the Appellant on four occasions in October/November 2002 and checked the Appellants books and records.  He noted that the Appellant was treating supplies of aircraft hired to members as mixed supplies of exempt aircraft hire and standard rated supplies of fuel.  He considered that the fuel should not have been standard rated as the supplies of fuel were merely ancillary to the main exempt supply of aircraft hire.  The Appellant responded with the submission of a special method containing a sector for fuel supplied to members and resulting in a 60% recovery on fuel.  This was not acceptable to the Commissioners who indicated to the Appellant that it should re-consider its proposal with a view to implementing an agreed method with the commissioners from the start of the tax year in which such method was proposed.  The formal ruling and liability with a schedule of errors was in Mr. Barr’s letter of 2 December 2002 and on 9 December 2002 an assessment was issued in the sum of £32,035.00 tax plus £2,890.82 interest covering accounting periods from 1 November 1999 to 31 July 2002.  As appears from a letter dated 16 April 2003 the assessments for the periods ending prior to 1 July 2001 have been withdrawn.  The amount now in issue is approximately £17,000.  It is not necessary for the tribunal to deal with any calculation and the parties are satisfied that agreement on the figures would be possible when the tribunal has determined the issue of principle.

3.	The grounds of appeal set out in the notice submitted by Mr. Ferrington were: 

“that the supply of aviation fuel is a separate taxable supply.  It is not an incidental supply to enhance the supply of the flying lessons.  It is clearly a separate supply in accordance with the test.  The input tax on the purchase of the fuel can be directly attributed or if not, the use of the standard method produces an unfair result and the use of a special method in identifying the sales of fuel is a fairer and more reasonable basis”.

4.	Under Article 13 of the Sixth Directive provision is made for “certain services closely linked to sport or physical education supplied by non-profit making organisations to persons taking part in sport or physical education” to be treated as exempt supplies.  This exemption has been incorporated into statute law in Section 31 (1) and in Group 10 of Schedule 9 to the Value Added Tax Act 1994 (the Act)

5.	There is no dispute that the Appellant is a non-profit making body and that it provides services to its members which fall within item 3 of Group 10.  The issue is whether the fuel supplied by the Appellant and which is included within the charges made for the hire of its aircraft for tuition purposes is to be regarded as part of the exempt services under item 3 or a separate taxable service.  

6.	The facts are not in dispute.  The Appellant hires out its aircraft to members at an inclusive rate per hour which in the case of students includes a charge for the hire of the aircraft the provision of an instructor and the supply of the fuel.  PPL members are charged a lower rate which includes a charge for the hire of the aircraft and for the fuel. Different hourly rates are charged for the hire of different aeroplanes.  The reason as explained by Mr. Gardner in cross-examination why the cost of the fuel was included as part of the hire charge was because there was an obligation on the Appellant to ensure that aircraft should be properly fuelled before use.  Mr. Gardner also acknowledged that the hiring of an aircraft together with the fuel was a single service which the Appellant provided for its members.   The evidence also shows that when a pupil/hirer has had to land to re-fuel at another airfield e.g. because he has flown further and longer than the designated hour he will be invoiced for the additional time but a deduction will be made for the fuel element in the hourly rate.  When a member returns the aircraft an invoice will be issued to the member giving a breakdown between the hire of the aircraft the cost of the fuel and any tuition.  The member will then pay the total invoice.  Copies of some invoices have been provided by the Appellant.  A typical invoice is invoice 90256 dated 5 June 2003 which was for 1 hours hire of a Cessna 150 at the student rate of £88.00 per hour.  It shows the charge for the hire of the Cessna 150 at £44.96 the fuel at £15.35 plus £2.69 VAT and tuition at £25.00 giving the total charge of £88.00.  As can be seen the cost of the fuel is a significant element in the overall hire charge in the case of invoice 90256 the fuel element (including the VAT of £2.69) is 20.5%.  In the case of a Warrior aircraft which is charged at £101.00 an hour the fuel charge is £22.00 (21.8%). 

7.	The submissions of the commissioners have been that to separate the provision of fuel from the provision of lessons and aircraft hire generally is artificial and contrary to the law as set out in Card Protection Plan Ltd v Customs and Excise Commissioners [2001] STC 174 where the decision of the European Court of Justice was applied.  The Court of Justice had given its judgment on 25 February 1999 and referred the matter back to the House of Lords.  The Court of Justice referred back to the House of Lords the factual question of whether in the case in question Card Protection Plan transactions were to be regarded as comprising two independent supplies namely an exempt insurance supply and a taxable card registration service or whether one of those two supplies was a principal supply to which the other was ancillary.  Mr. Ferrington summed up the Appellants’ case as being that fuel was an essential part and not a minor part of the supply.  

8.	It is clear from the Card Protection case in both the European Court and in the House of Lords and in the other cases which have been referred to the tribunal that regard must be had to all the circumstances in which the transaction takes place and that this requires taking into account first that every supply of a service must normally be regarded as distinct and independent and secondly 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.  In paragraph 18 Lord Slynn quoted from the European Courts decision at paragraph 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 services which share the tax treatment of the principal service.  A service must be regarded 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 supplied (see Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) [1998] STC 1189 at 1206, para 24.”  It is clear also that the charging of a single price whilst it may indicate a single supply still has to be looked to see whether in fact any customer intended to purchase two distinct services.  In the Card Protection Plan case it was held that the dominant purpose of the scheme was to provide insurance and that the card registration service was ancillary to the exempt insurance services and thus also exempt. 

9.	The tribunal must therefore have regard to the “essential features of the transaction” to see whether it is “several distinct principal services” or a single service and what from an economic point of view is in reality a single service should not be “artificially split”.  Lord Slynn’s judgment went on to say that “… an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.” (para. 22)

10.	Mr. Ferrington for the Appellant has referred me particularly to the tribunal decision of Southport Visionplus Limited (LON/17502) heard on the 5 6 and 7 November 2001.  The tribunal set out in paragraph 36 of their decision certain principles derived from paragraphs 26 to 32 of the judgment of the European Court in the Card Protection Plan case namely:

i.	that these were not meant to give exhaustive guidance.
ii.	that regard must be had to all the circumstances and the essential features ascertained.
iii.	that each supply should normally be regarded as distinct and independent.
iv.	that a single economic supply should not be artificially split.
v.	that there is a single supply where there is one principal and one ancillary element.
vi.	that a single price is not decisive.

11.	Mr. Ferrington sought to apply these tests to the circumstances of the Appellants’ case. He submitted that the customer demanded to know the actual price of the fuel and by invoicing the vat was not distorted.  The club charged vat on the fuel.  The exempt supply related to services only and not to goods.  The fuel was a necessary component and a major part of the supply and 22% of the overall hourly charge.

12.	Accordingly I look at the facts to establish what the member obtained when he hired the aircraft for an hour.   First (if he was a student) he obtained tuition.   Secondly whether or not a student he obtained the use of the aircraft for the relevant period.  Thirdly he obtained the use of an aircraft which could be flown because it has sufficient fuel in its tank to enable it to fly for the relevant period.  It is in my view quite artificial to seek to treat the provision of the fuel in the aircrafts tank as something separate and distinct from the supply of the aircraft itself.  The whole purpose of the hiring of the aircraft is that it should be able to the flown and that cannot be done if it does not have the necessary fuel.  The provision of the fuel is an integral part of the supply and thereis a single supply namely the supply of an aircraft which can be flown immediately.  The single inclusive hourly hire charge includes the necessary fuel and supports the view that there was a single supply.  From an economic point of view the member was paying for a single package at an hourly rate inclusive of fuel and I do not accept the view that the member was intending to purchase two distinct services namely the use of the aircraft for an hour in a state in which it could not be flown and the provision of fuel to enable it to be flown.  In Southport Visionplus Ltd the tax payer agreed that the supply of dispensing services by an optician was a separate supply from the supply of the actual spectacles or contact lenses.  The commissioners contended in the reliance on the Card Protection case that there was a single supply of standard rated spectacles or lenses to which the supply of the dispensing services was ancillary.  It was held that there were two separate supplies namely that of the dispensing services and that of the provision of the spectacles or contact lenses and the view was rejected that the supply of the dispensing services was merely ancillary to the supply of the spectacles or the contact lenses.  The tribunal emphasised that the cost of the dispensing services was a substantial share of the total amount paid by the customer and that this cost element was an essential part of the meaning given to “ancillary” by the Advocate General in the Card Protection Plan case.  In paragraph 36 the Advocate General had said that a service was ancillary if first it contributes to the proper performance of the principal service and second it takes up a marginal proportion of the package price compared to the principal service.  The tribunal decided that their view had been endorsed by the European Court (paras. 24 to 26 of its judgment.  In the Southport Visionplus case however there was no doubt that two distinctive supplies were made – namely a supply of dispensing services and a supply of spectacles or contact lenses.  It was clear that dispensing services could not be provided without also supplying the spectacles or contact lenses which supply was standard rated.  It is equally clear that the dispensing services were specifically exempted from VAT.  If the dispensing services were regarded as ancillary to the supply of the spectacles and contact lenses the exemption of dispensing services would in effect become of little practical application.  

13.	In the present case however there is in my view merely a single supply and not two separate supplies.  The question of one supply being ancillary to the other does not therefore arise.  The Commissioners were correct in disallowing input tax.

14.	The appeal is dismissed.

15.	The Commissioners have not sought costs and accordingly I make no direction as to costs.

Mrs E GILLILAND  
CHAIRMAN
Released:
MAN/03/55