Tumble Tots (UK) Ltd v Revenue & Customs

This is an appeal and cross appeal from a decision of the London VAT and Duties Tribunal delivered on 7^th April 2006. It concerns the classification in terms of supply for VAT purposes of the consideration provided by the Appellant Tumble Tots UK Ltd (“Tumble Tots”) for the payment of £19 which was at the material time the price payable by a parent for (inter alia) the enrolment of his or her child as a member of the National Tumble Tots Club (“The Club”). Tumble Tots is the franchisor of a well known activity programme for pre-school children. Members of the Club attend, with their parents, 45 minute sessions of structured physical play run by franchisees (“the Classes”). For the attendance of a child at each Class, its parent or parents must pay a fee to the franchisee of between £4 and £8.50. Attendance at a class is permitted only if the child is a member of the Club.

In its lengthy and closely reasoned Decision, the Tribunal found as a matter of fact that the consideration provided by Tumble Tots for the payment of the £19 membership fee could for the purpose of analysis be subdivided into eight items, only one of which was the formal enrolment of the child as a member of the Club. The others were:

a T–shirt,

personal accident insurance for the child while attending the Classes,

a year’s supply of six editions of the Right Start magazine, published under licence from Tumble Tots by MacMillan Scott,

a DVD and a CD of nursery songs,

a membership card,

a member’s handbook,

a gym bag.

Having accepted for many years that the consideration provided by Tumble Tots for the membership fee was for VAT purposes a multiple (or mixed) supply, the Commissioners of Customs and Excise (now HMRC) ruled in a letter dated 4^th November 2004 that the consideration was to be treated as a single supply in the light of the jurisprudence of the European Court of Justice in the Card Protection Plan litigation, to be categorised for rating or exemption purposes as the provision of a right of admission to the Classes and therefore standard rated. I was told that prior to this decision, it had been accepted that, in terms of value, only 30% of the consideration for the membership fee was standard rated, the remainder being either zero rated or exempt.

In its Case to the Tribunal, Tumble Tots maintained that membership of the Club consisted mainly of the right of access to Classes, the right to receive six issues of the Right Start Magazine, the right to receive a T- shirt and the undertaking to provide ongoing support.

By its decision the Tribunal concluded that the proper categorisation of the consideration provided by Tumble Tots for the membership fee in terms of taxable supply was that it consisted of the conferring of the status of membership (described in paragraph 134 of the Decision as “the supply of the husk of membership”) and the supply of the T-shirt. All the other potentially separately identifiable elements of the consideration were treated as ancillary, and the Tribunal remitted for further consideration the question of a fair and reasonable apportionment of the £19 fee as between the two supplies so identified.

By its appeal, Tumble Tots maintains that the proper VAT categorisation of the consideration for the membership fee included at least the following:

registration as a member

insurance

the membership pack ( in particular the T- shirt and the Right Start magazine).

The question whether for VAT purposes a given transaction gives rise to a single composite supply or to two or more independent supplies is one which has vexed practitioners, United Kingdom courts and the European Court of Justice for many years. It matters because a taxpayer may under a single transaction make supplies of goods or services which, if properly regarded as distinct for VAT purposes include some which are standard rated, some which are zero rated, and some which are exempt. Zero rating relieves the taxpayer of its VAT burden, while entitling it nonetheless to recover attributable input tax. Exemption relieves the taxpayer both of the burden and of the right of recovery.

Guidance on the correct approach to this question was sought in the widest possible terms by the following question put by the House of Lords to the ECJ in Card Protection Plan v Customs and Excise Commissioners (Case C-349/96[1999] STC 270, as follows:

The guidance given in that case by the ECJ, to which I shall shortly refer, was described by Lord Hoffman in Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC55, at 60, as “ a restatement of principle” such that there was no advantage to be gained by referring to earlier cases, and their citation should be discouraged. Subsequently however, the meaning of the guidance given by ECJ in the Card Protection Plan case has been illuminated by careful review by the House of Lords in College of Estate Management v Customs and Excise Commissioners [2005] STC 1597, and by the ECJ itself in Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2006] STC766. That last decision was given on 27^th October 2005, but reported only after the hearing before the Tribunal in this case.

Notwithstanding Lord Hoffman’s discouragement, both the Tribunal and I were referred to the decision of the Divisional Court in Commissioners of Customs Excise v The Automobile Association [1974] STC192, as providing a compelling structure for the analysis of the consideration which may be provided for the payment of a fee for membership of a club or association. To the extent that nothing in Card Protection Plan and subsequent jurisprudence compels a different analysis, there was in my judgment nothing wrong in the citation of the AA Case nor in the use by the Tribunal of the concepts to be found therein, in particular the concept of the husk of membership.

I consider it unnecessary in this judgment to set out a detailed explanation of the leading cases on this issue to which I have referred, still less to quote in extenso from the judgments of the House of Lords and ECJ. I will confine myself to a summary of what I perceive to be the applicable principles which emerge from those cases, to the extent relevant to this appeal. They are as follows:

Prima facie every supply of a good or of a service must normally be regarded as distinct and independent: see Card Protection Plan at paragraph 29.

Nonetheless the functioning of the VAT system would be distorted if what is in substance a single service from an economic point of view were artificially split: (ibid).

The relevant transaction must be analysed with due regard to all the circumstances in which it takes place: see Card Protection Plan at paragraph 28. Over-zealous dissection and analysis of particular clauses should be avoided: see Card Protection Plan on its return to the House of Lords [2001] STC 174, at paragraph 22.

The essential features of the relevant 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 or with a single service: see Card Protection Plan at paragraph 29.

The fact that the goods and/or services are supplied in consideration of a single price may suggest that for VAT purposes there is a single supply, but this is not decisive: see Card Protection Plan at paragraph 31, and see also the Levob case where the component parts of a single VAT supply were split into separately priced items.

Where elements of the consideration are ancillary to another element or elements which is or are identified as the principal service, then there will be a single VAT supply of the principal service, and the ancillary elements will be treated as part of that principal supply. A service will 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 Card Protection Plan at paragraph 30.

It does not follow that every distinct part of the goods or services provided pursuant to a transaction is a separate supply for VAT purposes unless it is “ancillary”. Separate non-ancillary parts of the consideration provided pursuant to a transaction may be so closely linked from an economic perspective as to constitute a single supply for VAT purposes: see College of Estate Management, per Lord Rodger at paragraph 12 and per Lord Walker at paragraphs 30 – 33; and the Levob case at paragraphs 21-22. Paragraph 22 is worth quoting in full. Following the reference to the distinction between principal and ancillary supplies established in Card Protection Plan, the Court of Justice continued:

In circumstances where the application of the principle in sub–paragraph (8) above leads to the identification of a single supply, its character for VAT purposes may be that of one or other of the constituent elements, if predominant. Alternatively it may have a unique character enjoyed by neither of the constituent elements: see Byrom v Revenue and Customs Commissioners [2006] STC 992, per Warren J at paragraphs 46-48 and 51.

Where it is necessary for the application of the above principles to identify the essential features of the consideration for a payment which consists of the right or opportunity to participate in a scheme conferring a range of benefits, it is “perhaps” useful to ask “why objectively people are likely to want to join it”: per Lord Slynn in Card Protection Plan, on its return to the House of Lords, at paragraph 25.

Neither Card Protection Plan nor the cases following it to which I have referred were about transactions conferring club membership. I was referred to the decision of the ECJ in Kennemer Golf and Country Club v Staatssecretaris van Financien (Case C-174/00) [2002] STC502, but that case was not concerned with the question whether to characterise the benefits of club membership as a single or mixed supply. By contrast, that was the issue in the AA case (supra). There, the Divisional Court was called upon to choose between the submission that the AA provided a single service, namely the permitting of the individual to join the association and become a member, or a package of individual benefits, in which each benefit constituted a separate supply. Giving the leading judgment, Lord Widgery CJ said this, page 197:

The Divisional Court’s conclusion that the taxable supply did not consist merely of membership of the AA flowed from their finding that the fact of membership gave no “cachet, no status in itself at all”… that is why they described it as the “husk” of membership. As is apparent for example from paragraph 134 of the Decision, the Tribunal approached its task in the present case with the conceptual analysis used in the AA case very much in mind. Although decided long before Card Protection Plan, Lord Widgery’s reference to “substance and reality” finds powerful echoes in the ECJ’s requirement to look at the transaction from the point of view of economic reality. Furthermore, the Divisional Court’s conclusion that the substance and reality of the transaction had to be ascertained, as a matter of law, from the terms of the rules defining the nature and benefits of membership is closely analogous with the focus called for by the ECJ and the recent House of Lords cases to which I have referred upon the objective analysis of the transaction by reference to what a supposed typical customer or subscriber may be thought to be seeking from it.

Having concluded that the supply consisted of a package of benefits rather than simply the conferring of the status of membership, the Divisional Court did not think it necessary then to analyse the package, so as to identify whether certain benefits were ancillary to others, or whether they were all part of an indissoluble whole in economic terms. In that respect the law as defined by the ECJ in the Card Protection Plan and Levob cases and explained by the recent House of Lords decisions has moved on and imposed further stages in the analysis than those which the Court of Appeal considered necessary.

I turn finally to the legal consequences arising from the fact that this is an appeal. Generally, questions of characterisation of transactions for VAT purposes are questions of law. But the question whether the consideration furnished by the taxpayer under a single transaction is a single or mixed supply, and if the latter, the identification of those mixed supplies, will involve issues of mixed fact and law. If not vitiated by an error of law, I should therefore approach the Tribunal’s decision with an appropriate degree of deference before concluding that it is wrong within the meaning of CPR 52.11(3)(a). In that respect, the fact that this is an experienced specialist tribunal should lead me to be cautious before concluding, merely because I might reach a different view on a question of inference or analysis, that its view was wrong.

I find it unnecessary to set out the facts in any detail. The Tribunal did so in painstaking and admirable detail, distinguishing carefully between the evidence given and the facts found, and between findings of primary fact, and factual inference. Appropriately close reference was made to the terms of membership of the Club to be ascertained from the Registration Form completed and submitted with the £19 fee by parents and, as a necessary part of the background, to the terms of the standard form franchise agreement between Tumble Tots and the franchisee responsible for holding the Classes.

The primary facts found by the Tribunal (and set out in paragraphs 12-33 of the Decision) were not challenged, nor was the Tribunal’s summary of the evidence of Mrs Pereira, the Managing Director of Tumble Tots, criticised as inaccurate.

The Tribunal drew the following factual inferences relevant to this appeal and cross appeal:

The overriding reason for the payment of membership fees by parents was so that their child could attend the Classes. This conclusion is stated numerous times in the Decision, but its fullest expression is to be found in paragraph 43, as follows:

That the acquisition of the T–shirt was “an object” of the typical consumer but that, although the evidence was that some parents paid the fee solely to obtain the T-shirt, the typical parent would not pay the fee solely for that reason: see paragraphs 44 and 132 of the Decision.

That none of the other items (which I have listed in paragraph 2 above) forming part of the consideration for the fee, including in particular the insurance and the Right Start magazines were main objects of the customer in paying the subscription. Rather, they were “ad-ons or unnecessary extras which no doubt the typical consumer was willing to receive but he or she did not see as a main objective of the transaction”: see paragraphs 45 and 130 of the Decision.

That although Tumble Tots did not itself provide the Classes it would be in a position to compel its franchisees to admit any child who was a member of the Club to Classes, in the absence of some reasonable ground for refusal (such as the child’s previous conduct, or the particular class being already fully subscribed): see paragraph 46 of the Decision.

Tumble Tots challenged the first and third of those inferences. In particular it criticised the categorisation either of the insurance or of the Right Start magazine as “add-ons”. HMRC challenged the second inference. I shall address these challenges later in this judgment. For present purposes, it is to be noted that there is no challenge to the Tribunal’s inference that by conferring the status of member of the Club on a particular child, it created the opportunity for that child to attend the Classes, upon payment by his or her parent of the appropriate class fee to the franchisee.

Having reminded itself of the need to identify that which the transaction required to be done in consideration for the payment of the fee, and of the ECJ’s judgment in Card Protection Plan, as amplified in College of Estate Management, the Tribunal treated the AA case as the best analysis of the nature of the grant of membership of a club, and came to this conclusion on the correct approach as a matter of law, at paragraph 86 of the Decision:

The Tribunal then embarked upon a detailed legal analysis of the tripartite relationship between Tumble Tots, a parent and a franchisee, designed to ascertain precisely what things were done by Tumble Tots for the consideration consisting of the £19 membership fee. Its conclusion, at paragraph 114, was as I have described in paragraph 2 of this judgment. There is no challenge to that conclusion. In particular, it is accepted (and in my judgment plainly correct) that although Tumble Tots did not provide for the parent a right for his or her child to attend Classes run by the franchisee, the effect of the conferring of membership of the Club upon the child was an essential part of what the parent had to do to secure that child’s attendance. Membership of the Club therefore conferred a status on the child without which the parent could not secure the child’s attendance at Classes.

After conducting an (ultimately irrelevant) analysis of the question whether any part of the £19 fee was consideration for a supply by the franchisee, the Tribunal then carried out its VAT characterisation of the benefits provided by Tumble Tots in consideration of that payment as follows.

First, it described the status or “husk” of membership as securing the collateral benefit of Class attendance “because in this case simply being a member confers the key to the door of attendance at sessions.” That was the mechanism by which the payment of the £19 fee secured for the parent his or her main objective in making that payment : see paragraph 126 of the Decision, in which that was described as “the essential feature of the membership transaction”.

The Tribunal categorised all the other benefits provided by Tumble Tots, save for the T- shirt, as ancillary, because they were ad–ons rather than the main objective of the customer in paying the subscription: see paragraph 130 of the Decision.

Thirdly, the Tribunal identified the obtaining of the T-shirt as something more than ancillary, and therefore sufficient in substance to constitute a separate supply, distinct from the conferring of the status of membership of the Club. It is worth quoting the Tribunal’s reasons for that conclusion in full in paragraph 131 – 133 of the Decision:

In the light of this conclusion that everything provided by Tumble Tots for the £19 fee other than the conferring of membership and the T-shirt was ancillary, it was unnecessary for the Tribunal to consider whether any of those items were in economic terms indissoluble from the other two, (in the Levob sense). But in the light of its conclusion that the provision of the T-shirt was not ancillary to the conferring of the status of membership, with its collateral benefit of securing admittance to Classes, it was incumbent upon the Tribunal to consider whether those two elements of what Tumble Tots provided were indissoluble in economic terms. It does not appear to me that the Tribunal carried out that analysis, still less the characterisation of the single supply constituted by the provision of those two items, if they were indissoluble in economic terms. That omission may not be surprising, since the Levob case had not been reported and was not cited to the Tribunal, and since the underlying facts of the College of Estate Management case were so different from those of this case.

In my judgment the Tribunal was entitled and indeed right to infer that the main purpose of the payment of £19 fee by the typical parent was to unlock the door to his child’s attendance at Classes, and that this was achieved by the conferring on the child of the status of membership of the Club. That conclusion was both supported by the evidence and, in my judgment, objectively correct as a matter of common sense. In addition to the evidence expressly relied upon by the Tribunal in that regard, I have in mind the explanation given by Mrs Pereira in paragraph 3 of her witness statement as to the rationale for the founding of Tumble Tots by Bill Cosgrave, an ex British Olympic gymnastic coach, and its ethos in developing a child’s positive personality through classes consisting of 45 minutes of structured physical play, together with a sense of belonging and identity. The Tribunal were right to reject the acquisition of the T-shirt as the primary purpose of a typical parent for paying the £19 fee.

To be fair, Tumble Tots did not by its appeal suggest any other primary purpose, but rather that no single primary purpose could properly be identified from the evidence. I reject that submission, in substance for the reasons given by the Tribunal.

Leaving aside the T-shirt, the Tribunal was also both entitled and correct to treat all other parts of the consideration provided by Tumble Tots in return for the £19 fee as ancillary. For present purposes the only two candidates meriting separate treatment are the insurance and the Right Start magazine. I will take each in turn. The insurance consisted of personal accident cover for a child while attending a Class. While I appreciate that such insurance may be a matter of real importance to parents when taking their children to physical activity sessions even when they are expected to be in attendance, it is in my judgment an ancillary benefit. It has no separate existence apart from the child’s attendance at Classes, and cannot possibly be an end in itself. Even if its relative importance (compared for example to the DVD and the CD included in the membership pack) might give pause for thought as to whether it was truly ancillary, the provision of insurance of that type is plainly economically indistinguishable from the provision of the key to the door of attendance at Classes. On that analysis, if it were aggregated with the conferring of membership as a single indissoluble service, it would not alter the character of the supply constituted by that service. Any contrary view would be to allow the tail to wag the dog.

I have had slightly more difficulty with the Right Start magazine. It is apparent (from the copy provided to me at the hearing of the appeal, and presumably also to the Tribunal) that it is not on its face a Tumble Tots house magazine. It is separately published and, whether successfully or not, marketed separately from membership of the Club. In paragraph 30 of her witness statement, Mrs Pereira said that the magazine had previously been produced and published by a subsidiary of Tumble Tots but was by the time of the hearing before the Tribunal licensed to Macmillan Scott. She said that the publisher sought to sell the magazine at many outlets and that Tumble Tots was just one, albeit probably the largest, of the publisher’s customers.

In the edition shown to me, Tumble Tots and the Club was given modest coverage among other articles on parenting, and a substantial amount of advertising content. Viewed separately, the magazine could be said to be capable of being the subject of an independent purchase by a typical parent, separate and distinct from attendance at the Classes. It could not in my judgment be said that the purchase of the magazine was economically indissoluble from the obtaining of access to the Classes.

Nonetheless the question remains whether the acquisition of a year’s supply of editions of the magazine (published every two months) was, objectively, more than ancillary having regard to all the circumstances and to the objective purpose of the typical parent in paying the full £19 subscription. In my judgment the Tribunal were entitled on the evidence to conclude that it was not. As is apparent from its web page, from the Registration Form and from the other materials put in evidence before the Tribunal and on this appeal, the central focus of Tumble Tots’ business is the provision of educational and recreational benefits to the child, rather than the supply of anything capable of being enjoyed (as in the case of the magazine) only by the parent. The peripheral nature of the magazine to the package offered by Tumble Tots is also apparent from reading Mrs Pereira’s witness statement as a whole, and from the absence of any suggestion (in circumstances where the content of the evidence was largely within the control of Tumble Tots) that any parent, still less any typical parent regarded the acquisition of the magazine as an end in itself.

Those conclusions are sufficient to require the dismissal of Tumble Tots’ appeal. I turn therefore to the issue raised by the cross appeal, namely whether the provision of the T-shirt should have been treated by the Tribunal as a separate supply distinct from the provision of the benefit of membership. I have set out in full Tribunal’s reasons for rejecting HMRC’s submission that, like everything else other than membership itself, the T-shirt was ancillary. Having looked at the sample T-shirt provided to me at the hearing, I consider that the Tribunal were plainly correct to conclude that the typical parent would not pay £19 membership fee solely or even primarily to obtain the T- shirt.

I have some difficulty with aspects of the Tribunal’s reasoning, in particular its conclusion that possession of the T-shirt would “afford decency and warmth to the child”: at paragraph 131 of the Decision. So it would, if the relevant comparison is with a child attending classes bare-chested, but in reality, absent the T-shirt the child would attend with some other form of decent and warm clothing, if that were permitted. Nonetheless, I am reluctant to supplant the Tribunal’s view that the provision of the T-shirt was not merely ancillary, with my own preferred view that it was.

In my judgment the Tribunal’s decision that, not being ancillary, the provision of the T-shirt was therefore a separate supply for VAT purposes was nonetheless wrong, because the Tribunal did not consider whether the provision of the T-shirt was economically indissoluble from the provision, by the conferring of membership, of the means of access to Classes. In my judgment it plainly was indissoluble. First, its purpose (leaving aside questions of decency and warmth) was to contribute to that sense of belonging or of being like others in a group, which was a main purpose of the Classes themselves, and of Club membership. It was the Tumble Tots Club badge or uniform, not unlike a sailing club burgee.

Applying the test of economic indissolubility posed in paragraph 22 of the Levob case, it seems to me that it would indeed be artificial to split off the provision of the Tumble Tots T-shirt from the provision of membership of the Tumble Tots Club, and accordingly the provision of those two elements ( if the T-shirt is not ancillary) constitute a single supply.

The final question (also not addressed by the Tribunal) remains whether if those two items are to be treated as a single supply, how that supply should be characterised for VAT purposes. In my judgment the Tribunal’s finding that the securing of attendance at classes was the overriding reason of the typical parent for paying £19 membership fee leads inevitably to the conclusion that the single supply had the same VAT character as the provision of membership itself. The aggregation of the provision of the T-shirt with the provision of membership did not convert the single supply into a zero-rated supply of children’s clothing.

Accordingly, I dismiss Tumble Tots’ appeal and allow HMRC’s appeal against the decision of the Tribunal. Since there is no mixed supply, there is no issue of apportionment which needs to be remitted for further consideration.