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HMRC internal manual

VAT Valuation Manual

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HM Revenue & Customs
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Apportionment of monetary consideration: is there a single consideration: principles arising

While it is not possible to lay down hard and fast rules from these two cases alone that would give a definitive test as to whether there are one or more considerations in any given case, they do provide a number of indicators that are of assistance.

In Geddes, the charge for the “warranty” was made known to prospective purchasers before the contract was concluded. Customers had the option of purchasing the car without the “warranty” at £250 less if they so desired. In Thorn, the hirers had to sign separate contracts which showed how much each of the two subsidiary companies was charging for its own supply. Although the hirer was unable to hire the television without the insurance, the charge for each supply was made known to the customers before the contracts were concluded.

This would suggest that the customer has to know the charge for each particular supply before it can be accepted that there is more than one consideration. You would therefore be entitled to question the genuineness of purported separate considerations when the customer has only been aware of a single price for all the supplies.

Following on from the above point, while it is unlikely that separate considerations would be accepted as existing when a customer has never been made aware of separate charges, it is not always the case that simply showing two amounts on an invoice or receipt will mean that there is definitely more than one consideration. You should take into account:

  • whether or not the transaction has been completed by the time that the customer receives the document
  • whether or not the customer could have obtained any of the supplies separately from the trader
  • how the supplies were advertised to potential customers
  • whether or not the supplier ever makes the supplies independently of each other, and
  • if he does, whether the charges on those occasions differ from when the supplies are supplied together.

The Thorn case concentrated primarily upon the supply question and the Tribunal never ruled explicitly that there were two separate considerations. That conclusion was implicit from the finding that there were two related, but separate, suppliers.

However, where the suppliers are closely associated, by being members of a group registration for example, it is possible that there may be circumstances in which it is still possible to view the payments from customers as single considerations. Support for this approach can be derived from the High Court decision in Kingfisher Plc (CO /2485/90), which was not decided until after the Thorn case.

The issue in Kingfisher was whether or not retail members of the group and a member that made supplies of credit services acting through the representative member of the group, were to be regarded as a single taxable person because of the provisions of what is now the VAT Act 1994, section 43. The Court found in Kingfisher’s favour, as had the Tribunal, that the section operated to create a single taxable entity for VAT purposes.

The supply decision in Thorn was based largely upon there being two suppliers, from which it followed that there were two supplies and, by implication, two considerations. It is arguable that, since Kingfisher, the position for VAT purposes may well be different because the two suppliers now have to be treated as a single taxable person.

A single supply argument is no longer necessarily precluded and, even if there are still two supplies, there may be a single, apportionable consideration rather than two separate considerations. You should note that this would only be arguable where the companies involved are part of the same VAT group. Please consult Policy Group before issuing any assessments on such a basis.

Even if there are separate considerations for two or more supplies made by a supplier, there is a possibility that the arrangement can still be challenged if it is purely a “sham”. This situation had been envisaged by the Tribunal in Geddes, in which the Chairman said:

“We certainly could figure a case where two supplies are made with the consideration of each supply being falsified, so as to confer a tax advantage by overstating the exempt or zero-rated supply.”

One such case in which this applied was Centurions (LON/91/2158):

The Appellant sold second-hand cars with accompanying warranties. In the particular transaction considered by the Tribunal the Appellant sold a car for £2,850 with an additional charge of £1,045 being attributed to a warranty. The car had cost £2,650, giving a taxable output of £200 under the margin scheme. The warranty had cost £72. A schedule of 55 other sales prepared by the VAT Office showed that in 36 cases all of the profit had been derived from the warranty. The Tribunal found the charging scheme to be a “sham”. It approved Customs’ assessment that had apportioned the profits in the same ratio as the costs of the two supplies.

If the arrangement is not a “sham”, the general rule is that we have no powers to redistribute value between considerations that are genuinely separate.