18818
VALUE ADDED TAX – output tax — Direct Debit payments made by subscribers to trading company— subscriptions taken over by charitable company — subscribers sent Gift Aid forms inviting apportionment of payments between taxable subscription and donation — issue at to liability to tax — VAT A 1994 Section 1 (1) and 5 (2) — single price charged for TV services and magazine — whether two distinct services or magazine merely ancillary— VAT A Schedule 8 Group 3 — Appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 	
	THE ANGEL FOUNDATION LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr J H Fryer-Spedding CBE(Chairman)

Sitting in public in North Shields on Tuesday 8 June 2004

Mr R Barlow, counsel, for the Appellants 

Mr N Poole, counsel, for the Respondents 

	© CROWN COPYRIGHT 2004

DECISION

1.	This appeal concerns the status for the purpose of value added tax of various payments made by supporters (to use a neutral term) of the Appellant to the Appellant during 2002.  The appeal is made against two decisions of the Respondents:
(1)	The refusal to make a repayment of £36,900.96 claimed by the Appellants by a letter dated 29 April 2002, which decision was made by a letter dated 25 June 2002.
(2)	An assessment for the sum of £29,421 (with interest), relating to the period 1 March 2002 to 31 December 2002, notified to the Appellant by a Notice dated 26 February 2003.  

2.	The Appellant is a charitable company limited by guarantee.  Its main objects are the advancement of religion, the advancement of education and the relief of poverty.  To these ends, its total activities include television broadcasting, organising conferences, providing speakers, and the distribution of books and publications.  It also makes grants to relieve poverty overseas.  

3.	At the hearing, the only oral evidence was that of Mr Allan Hargreaves, a former Inspector of Taxes, who had advised the Appellant on charity law and taxation for the past eight years.  His evidence falls to be considered in conjunction with the bundle of documents provided by the Respondents.  

4.	The Appellant was registered for VAT with effect from 1 March 2000, as the representative member of a group comprising the Appellant, the Dream Family Network Limited (“DFN”) and Channel Publishing Limited.

5.	During 2001 the Appellants wrote to the Respondents seeking guidance on the liability to value added tax of payments made where such payments may have been intended to pay in part for broadcasting services made by DFN and in part by way of charitable donations to the Appellant.  Until 31 December 2001 DFN supplied television programmes.  Thereafter it sold advertising space on television programmes and gifted its profits to the Appellant.  By a letter sent out in about October 2001 Rory and Wendy Alec, described as GOD Digital Co-founders wrote: 
“Dear Subscriber
IT’S GOD DIGITAL’S 6TH BIRTHDAY
…
You have seen that the seed you have faithfully sown into this ministry has enabled us to be a Godly voice and have a strategic input in these crucial times.
THIS COULD BE THE LAST TIME YOU HEAR US CALLING YOU A SUBSCRIBER
We will be writing to you again soon with details of very exciting changes that will have dramatic impact on the development of the ministry.  Changes will enable us, through a covenant relationship with you, to fulfil our mandate in other parts of the world.  We have an opportunity to “reach the lost, and equip the church” in other continents such as Africa and Asia and you can play a strategic role in the fulfilment of such a wonderful opportunity. 
…
Please pray over the enclosed birthday card and consider a birthday gift to this ministry.  Every additional pound you give amplifies GOD Digital’s voice to the nations.  If you are a UK taxpayer please complete the Gift Aid Declaration, it would increase your seed by a further 28%….
P.S. you could also sow in this ministry by inviting others to become subscribers.”

6.	By a letter dated 14 December 2001 the Appellant wrote to its supporters:
“Dear Partner
As from 1 January 2002, as a registered charity, the Angel Foundation, rather than the Dream Family Network will collect all direct debits.  This name change will appear on your bank statements.  Your bank may send you a letter about this and they may report on your bank statement that we have collected a “First Payment”, under the Direct Debit Instruction.  
You do not need to take any action except look out for more details in the January edition of our new bi-monthly magazine, Partner News.”
At the foot of the letter there is a note headed  “The Direct Debit Guarantee” this includes the note:
“You can cancel a Direct Debit at any time by writing to you Bank or Building Society.  Please also send a copy of your note to us.”

7.	In the sequence of correspondence there follows a letter headed: “IMPORTANT ANNOUNCEMENT!” co-signed by Rory and Wendy Alec.  It bears no date, but Mr Hargreaves said that it was sent out in late December 2001 or very early January 2002.  It reads:
“Dear Partner
…
We are pleased to inform you that in December 2001 we transferred the Dream Family Network Limited to our registered charity, The Angel Foundation.  This means that instead of paying your monthly subscription to a company, you are now making a valuable partnership contribution to a charity.  In addition, your monthly payments will now go further because we can now claim back valuable GIFT AID tax benefits from the government.  
However, we need your help.  To enable us to claim back this valuable tax benefit, and to be sure that you understand and agree to this change, we need you to sign the enclosed reply paid card and rush it back to us as soon as you possibly can.  Just by doing that, you will helping this ministry.  
Now that you are partnering with a charity, there are also some changes to the terms and conditions, which are detailed on the reply paid card…
Please send the reply card back today!”
Attached to the above letter was the card.  It was headed “URGENT: PLEASE COMPLETE HELP US & RETURN THIS CARD TODAY.”  The card comprises a common form Gift Aid declaration.  It includes the wording:
“I am a UK taxpayer and I want The Angel Foundation to treat all donations I make from today/ 6 April 2000 (delete as appropriate), until I notify you otherwise as GIFT AID donations….”
At the foot of the document there are certain notes.  Note (c) reads:
“The covenant partner TCP agrees that the portion of the partnership contribution liable for VAT will be fixed at £5 (GOD Digital Partners) or £2 (GOD Revival on Sky) and that the balance of the partnership contribution will be eligible for GIFT AID.”  

8.	Also sent out in late December 2001 or early January 2002 was issue number one (January 2002 of a publication entitled “Partner News”, described as “GOD DIGITAL COVENANT PARTNER MAGAZINE”. This is a twenty page magazine.  Three pages of this comprise letters from Rory and Wendy Alec encouraging readers to become “covenant partners”.  Three pages describe the weekly programmes for January and February 2002 on GOD Digital.  The remainder of the document relates to various aspects of the Appellant’s work.

9.	By an undated “Reminder Letter”, Rory and Wendy Alec wrote:
“Dear Partner,
We hope you enjoyed your copy of the first edition of Partner News.
In it, we enclosed a Gift Aid reply paid card which will enable us to claim a 28% tax repayment on most of your partnership contribution.
We need everyone to sign and send back this card to us as quickly as possible… we are enclosing another card for you to complete and sign.  Please help us by sending it back by return of post.”
There follows a similar reminder letter sent to “Partners” also undated signed by Klaus Leweling, Chief Operating Officer GOD Digital.
On 15 March 2002 Mr Jonathan Booth FCA, Treasurer of the Appellant circulated a document to the Appellant’s supporters.  This is headed “Confirmation of change of trading status from the Dream Family Network to The Angel Foundation, It read:
“On 1 January, 2002 the Angel Foundation took over the activities and trading operations of it subsidiary The Dream Family Network.  The effect of this transfer is that the Angel Foundation, as a registered UK charity, offers the same facilities as the Dream Family Network.  However, this will be for a service element charge of £5 per month (VAT inclusive), with the remainder of your monthly payment known as “the ongoing partnership contribution” being a freewill offering and therefore eligible for Gift Aid that we will claim back from the Inland Revenue (but only if you are a UK taxpayer).
We are about to make our first claim for Gift Aid repayment from the Inland Revenue.

For this to succeed we have been asked to ensure that all our present Covenant Partners (used to be known as Subscribers) understand that the regular free will contribution (that amount in excess of the service element of £5) is a charitable donation.  This means that for those Covenant Partners who pay UK tax we are eligible to claim Gift Aid on it as per UK tax regulations.
…
If we hear nothing from you we can then tell the Inland Revenue that all our Partners totally understand that, excluding the service element, they are making a free will charitable contribution for the promotion of religious activities worldwide. 
…”

10.	Mr Barlow, for the Appellant, submitted that the two issues that arose on the appeal were these:
(1)	Whether or not payments received by the Appellant in part at least were donations or whether they were payments in respect of television broadcasting services.
(2)	Was the supply of the magazine to people receiving the TV programmes part and parcel of the TV service or the separate supply of a magazine?
Mr Poole, for the Respondents, said that he agreed that the above were the issues to be determined by the Tribunal.  In relation to the first issue, it was agreed by the Respondents that any elements of donations would be outside the scope of tax.  In relation to the second issue, the figures were not in dispute.  The Respondents agreed that the magazine was a magazine was capable of being zero rated.  The issue in principle was whether or not it should be so in the present case.

11.	On the first issue the Appellant’s case, shortly put, was that the effect of the documents sent out in late December 2001 or early January 2002 was to change the status of their supporters from “Subscribers” to “Partners” and the documents had the effect of changing the nature of any payments made by “Partners” thereafter from subscriptions to part-subscription and part donation.

12.	On the first issue, however, Mr Poole said that no change was made in the nature of payments made by supporters until the clarification was effected by the document dated 15 March 2002.  He referred to pages 2 & 3 of the January 2002 Partner News which referred to “Covenant Benefits” but made no reference to a financial change relating to future payments comprising an element of subscription and an element of donation.

13.	Section 1 of the Value Added Tax Act 1994 provides:
(1)	Value Added Tax should be charged, in accordance with the provisions of this Act-
(a)	On the supply of goods or services in the United Kingdom …”
Section 5 of the Act relates to the “meaning of supply”.  Section 5(2) (a) provides:
““Supply in this Act includes all forms of supply, but not anything done otherwise than for a consideration;”
In relation to the first issue, therefore, it is necessary to determine whether parts of the payments made to the Appellant by the supporters during the period in issue were made otherwise than in the nature of consideration for benefits received from the Appellant.  It is clear that the payments made to DFN by supporters were wholly in the nature of consideration for benefits received.  It also appears from the letter dated 14 December 2001 of the Appellant that the direct debit payments made by supporters would continue automatically after 1 January 2002 although the payee would change from DFN to the Appellant” 

14.	I do not consider that unto the English Law of Contract it was open to one party to the contract, the Appellant, to vary the contract unilaterally albeit such variation may not have been in any way to the detriment of the other contracting party.  I have not seen the original Direct Debit Instructions.  It is clear from the letter of 14 December 2001 that it will have been open to the Appellant to vary the amounts paid under the Direct Debit Instruction.  There is, however, no evidence of the Appellant being empowered to change the nature of such payments.
In relation to Issue (1), therefore, I consider that the payments received by the Appellant from Supporters during the period in issue were not in part donation unless the Supporter, prior to the payment being made, had completed the Gift Aid form.  There was no evidence before the Tribunal that any Gift Aid forms had been completed.  

15.	In relation to this issue, I should add that there is the somewhat unsatisfactory position that it was not clear on what date the Gift Aid forms were sent out by the Appellants.

16.	I should say that, following the release of the decision of the Tribunal in Church of England Children’s Society v Customs and Excise Commissioners case number 18633 on 8 June 2004 (the day of the hearing in the present case), I considered whether there might be a good argument that the payments in issue in the present case should have been apportioned.  Such an approach was rejected in Customs and Excise Commissioners v Tron Theatre Limited 1994 STC 177, a decision of the Court of Session, followed by the Tribunal in High Peak Theatre Trust Limited v Customs and Excise Commissioners Case Number 13678. In the Church of England Children’s Society case, at paragraph 54, the Tribunal doubted whether the legal principles established by Tron should be followed, particularly in the light of the decision of the Court Of Appeal In Customs and Excise Commissioners v Church Schools Foundation Limited 2001 STC/1661.  After the conclusion of the hearing, I asked the Tribunal office to request counsel to make any further submissions which they might wish to make following the release of the Church of England Children’s Society decision.  I am grateful to Mr Barlow for the written submissions which he sent.  However, after consideration, I conclude that the present case turns upon the special fact of the existence of the contract subsisting before 1 January 2002, which could not be unilaterally varied.

17.	I then come to the second issue which relates to the incidence of tax on Partner News.  I have already referred, in outline, to the contents of the magazine, which was sent to all subscribers/partners.  Mr Barlow admitted that the magazine contained the listing of television programmes.  However he said that it comprised “a good deal else besides”.  It was intended to further the aims of the organisation generally.  He referred to the judgement of the Court of Justice in Card Protection Plan Limited v Customs and Excise Commissioners 1999 STC 270.  The Court held that in order to determine whether a transaction which comprised several elements was to be regarded as a single supply or two or more distinct supplies accessible separately, it was necessary to ascertain the central features of the transaction.  There would be a single supply where one or more elements constituted the principal service and others were merely ancillary.  Where a single price was charged for a service consisting of several elements, if the circumstances indicated that purchasers intended to purchase two distinct services, it would be necessary to identify the part of this single price which related to each supplier.  Mr Barlow argued this was a separate supply of the magazine which should be zero rated.  Mr Poole, on the other hand, argued that the magazine was simply a better means of enjoying the television broadcasts.  He agreed that the Card Protection Plan case test was applicable.  

18.	Having regard to the January 2002 Partner News, provided to the Tribunal, my view is that it relates, in the main, to the television services provided. Clearly the detail of programmes is important but much of the remainder of the publication relates to the television broadcasting function of the Appellant.  I consider on balance that the provision of this publication was merely ancillary to a main function of the provision of television services.  This is, therefore, a case of a single supply.  

On both issues, therefore, my decision is in favour of the Respondents.  It follows that the appeal is dismissed.

MR J H FRYER-SPEDDING
CHAIRMAN

RELEASED: 21 October 2004
MAN/03/0482

££Angel Foundation Ltd v Customs and Excise [2004] UKVAT V18818 (22 October 2004)