HMRC wins appeal over VAT on holiday park’s electricity supply

Reporter, Accountancy Daily [2010-2021]

15 May 2017

HMRC has won at the Court of Appeal in a long-running argument with a provider of caravan holiday parks over the question of whether the reduced rate for VAT on supplies of fuel applies

The argument centred around the ‘caravan on the hill’ issue and whether the supply of fuel would otherwise be treated for VAT purposes as part of a larger supply of other goods or services.

In Colaingrove Ltd and the Commissioners for Her Majesty’s Revenue and Customs, [2017] EWCA Civ 332, the appellant Colaingrove Ltd brought the appeal after an Upper Tribunal reversed an earlier First Tier Tribunal (FTT) ruling in its favour.

Colaingrove operates 37 holiday parks across the UK trading as British Holidays, Haven and Butlins. This includes an arrangement with News International Ltd, owner of the Sun, whose readers can book holidays in static caravans on the sites at discounted prices using promotions advertised through the newspaper.

It was a term of the holiday let that the customer would pay a sum for accommodation in the caravan and using its facilities, including electricity. The electricity was a minor part of the charge for the supply of the accommodation in the caravan, which carried VAT at the normal rate.

VAT principles

Under the general principles of VAT law, laid down in C-349/96 Card Protection Plan (CPP) [1999] AC 600, the supply of electricity was, subject to any special provision, treated as part of a single, composite supply of accommodation taxable at the rate for that supply.

There is a reduced charge for the supply of domestic fuel or power in Value Added Tax Act (VATA). A feature of the fuel charge is that it is defined by reference to the use of fuel, which must be domestic use.

However, HMRC determined that the fuel charge did not apply as the electricity was supplied as part of the holiday let.

Colaingrove disagreed and the FTT found in the company’s favour. This was on the basis of the decision of the European Court of Justice (CJEU) in C-94/09 EC v France (‘the French Undertakers case’), that CPP did not apply. Supplies could be taxed at separate rates where it was clear that Parliament intended this result, as it had done in Schedule 7A.

In the French Undertakers case, France had applied a reduced rate of VAT, which under EU legislation member states could apply to funeral services generally, only to that element of the service performed when the funeral undertakers transported the body.

The CJEU accepted that, where permitted by EU legislation, member states could apply a reduced VAT rate on an individual item of a single supply, subject to the principle of fiscal neutrality.

The FTT went on to hold that the individual element of a single composite supply of electricity had to be a ‘concrete and specific’ aspect of the larger supply. The result was that Coleraine was only liable to VAT on the supply of electricity at the lower rate.

HMRC appealed to the Upper Tribunal on the issue that the fuel charge on its true interpretation does not authorise the reduced rate where the supply forms part of a single composite supply, and the tribunal found in favour of this view.

At the Court of Appeal, Colaingrove sought to argue that EU law allows member states to carve out ‘concrete and specific’ parts of supplies and apply different rates. This would be a departure from the ‘CPP world’ and parliament had achieved this in the wording of VATA 1994, Sch 7A, Grp 1 which set out a ‘use-based’ test.

The company also claimed that the test of fiscal neutrality was not met if reduced rating was denied.

This ‘caravan on the hill’ argument was that on a Colaingrove site, holidaymakers do not get the benefit of the reduced rate but individuals who bring their own caravans do, as they receive a separate reduced rated charge for electricity.

HMRC’s case was that domestic legislation did not give any intention that the reduced rate could apply to a sub-element of a complex supply. The ‘caravan on the hill’ argument was two separate types of supply, one of serviced accommodation the other the use of a caravan pitch with optional electricity.

Counsel for HMRC suggests that the fact the treatment was different was ‘unsurprising’, as the two customers bought different things: one bought a single supply of serviced accommodation, and the other bought the use of a caravan pitch with optional electricity. On this basis, Colaingrove was not comparing like with like. The Sun holidaymaker has purchased a package of goods and services and paid a standard rate, fuel is not optional. The touring caravan owner has purchased the right to use a pitch, and optionally chosen to purchase electricity.

The judge in the case agreed with HMRC in rejecting the ‘caravan on the hill’ approach. He ruled the fuel charge is functional in that it applies according to domestic use, but it does not follow that all domestic use is included.

The judge said ‘there is no necessary reason why Parliament should have applied the fuel charge to composite transactions. Its purpose may have been limited to helping people in their homes rather than also subsidising the prices of self-catering accommodation for holidaymakers.’

He also said the doctrine of fiscal neutrality does not mandate any different result, stating: ‘The supply of holiday accommodation is a different transaction from the supply of fuel to the owner of a caravan parked on a pitch owned by the appellant.’

Comment

CCH tax writer James Johnson said: ‘This case is reminiscent of a long line of cases stretching back to the Automobile Association case at the High Court in 1974 (Customs and Excise Comrs v Automobile Association [1974] 1 WLR 1447) in which taxpayers have sought to apply reduced rating to components of a supply.

‘Although CPP established principles, such guidance can never deal with every eventuality, however, it remains the benchmark test. It also confirms that any attempt to invoke the intention of parliament in respect of legislative outcomes must be clearly set out rather than left to interpretation.

‘As the Court of Appeal inferred, was it ever the intention that parliament should subsidise holidays by way of a lesser VAT charge? Such arrangements would encourage the shifting of values that might not reflect the reality of a supply.’