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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Single supplies: where leasing or letting is just one element of a contract: case law about single supplies comprising a bundle of elements

The High Court in Byrom, Kane & Kane trading as Salon 24 (CH/2005/APP/662, &CH/2005/APP/706) applied the principle that a single supply can consist of a bundle of elements, which are integral to each other, but where it cannot be said that one single element is predominant with all others being ancillary, The court found that a single supply, of which a significant element was the supply of a room, was nevertheless properly classified as a standard rated supply of ‘massage parlour’ facilities/services.

The taxpayer operated a massage parlour in which self employed masseuses offered their services direct to the public. Each masseuse paid a fee to the taxpayer in return for a basically equipped room together with services such as access to a kitchen, showers, a washing machine, linen and towels, security and a reception. The taxpayer had treated its supplies to the masseuses as exempt. HMRC assessed the taxpayer for output tax.

Drawing on the College of Estate Management judgement (House of Lords) and Levob (ECJ), the court commented in paragraph 46 of its decision:

‘It seems…. that a single supply is capable, in some cases at least, of attracting a different tax treatment from that which would be attracted by even the main element within that supply. Where the nature of the over-arching supply is obvious, it is a straightforward exercise to look at Schedule 9 to VATA and ascertain whether it attracts any of the exemptions, that is to say whether the description of the over-arching supply falls within the description of an exemption.’

In finding that the business’s services in this case were taxable, the court commented in paragraph 70 of its decision:

‘…. In my judgment, the over-arching single supply is not to be treated as a supply of a licence to occupy land. The description which reflects economic and social reality is a supply of massage parlour services, one element of which is the provision of the room. That, in my judgment, is the correct conclusion even if, which for my part I think probably is the case, the provision of the room was, to the masseuse, the single most important element of the overall supply and, indeed, one predominating over the other elements taken together …’

In the case of Paul Newey C-653/11 the ECJ also concluded:-

“Contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a ‘supply of services’ ……… They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality…”

The following table contains some examples of supplies which include a number of elements (including the right to occupy property). HMRC’s views on the correct tax treatment are shown and where appropriate, reference is made to relevant case law. Further explanation of some of the examples is given later in this section or in following chapters.

Circumstances Nature of supply Why?
Lease of building. Landlord provides lighting and heating together with the letting for an inclusive price. Leasing or letting of immovable property (exempt unless the landlord has opted to tax) Lease is predominant element. Lighting and heating are ancillary.
Licence to occupy an office including use of telephones, computer system, photocopiers etc. Leasing or letting of immovable property (exempt unless licensor has opted) The provision of the other facilities is incidental to the predominant supply of office accommodation. However if the licensee has the right to choose what services he wants and pays for them separately there may be two supplies: an exempt supply of land (the office); and a taxable supply of services.
Licence to occupy office space, including the provision of secretarial services, such as typing, photocopying, mail sorting, etc. Standard rated supply of office services The inclusion of secretarial type services will normally result in the supply being characterised as the provision of “office services” and not the making available of property. See Pethericks & Gillard Ltd (VTD 20564) which supports such treatment.
Letting of a room containing specialised medical equipment or right to use a machine in a factory. Standard rated supply of use of equipment/machine Use of equipment is predominant feature. Lease is ancillary.
Hairdresser chair rentals. A salon rents chair space to individual stylists who have access to washbasins and reception. Standard rated supply of hairdressing facilities This supply comprises a bundle of elements, including for example reception services and use of washbasins, which are integral to each other. The overarching supply is not a licence to occupy.
Case law such as Christopher James Denyer (CH/2007/APP/0361) supports HMRC’s interpretation. For further information see Hairdressing salons - chair rentals in VATLP19830       
  Hire of space for exhibition stand Standard rated supply There is likely to be a package of services, but even if minimal additional services are provided, HMRC consider this to be a standard rated supply because the predominant aim of the agreement is to participate in an exhibition and benefit from the publicity of the event.
  Hire of facilities for wedding functions including a room for the ceremony, wedding breakfast, overnight accommodation, flowers, music and access to hotel grounds. Standard rated supply of wedding facilities. This was considered by the Tribunal in Leez Priory (VTD 18185).

The supply was seen as a package of wedding services and not room hire. A similar finding was reached in Chewton Glen Hotels Ltd (VTD 20686). More recent cases are Best Images Ltd [2010] UKFTT TC00480 and Drumtochty Castle Ltd [2012] UKFTT TC02111.

Further information about wedding packages is in VATLP11800.  
  The provision of storage facility in an immovable building or unit, or a container or other structures that is fully enclosed, including the provision of security, light and heat, with 24 hour access.
The Upper Tier judgement in the UK Storage case (UKUT359 (TCC)) confirmed the finding of the First Tier Tribunal and HMRC policy in this area. Standard rated supply of storage facilities. The provision of storage facility is the principal element of the supply. The additional service elements are for the better enjoyment of the space that has been made available for occupation. Further information about storage facilities is in VATLP17500.  
  Hire of sound recording studio Standard rated supply of sound recording facilities Supply comprising a bundle of elements. The right to use the specialist equipment is an integral, important part of the supply and may be the predominant feature of the supply. It is not ancillary to the use of the room.