John McHugh: Reduced VAT rating remains a sticky area

John McHugh is an Edinburgh-based Partner in the Dispute Resolution team at Harper Macleod.

The High Court issued a judgment in a case involving those taking discounted holidays via the Sun newspaper. The holidays were in caravans run by a company called Colaingrove.

The holidaymakers were required to pay Colaingrove both a fee for accommodation and a fixed charge to cover gas and electricity anticipated to be used during their stay.

Domestic gas and electricity generally benefits from reduced rating at 5 per cent for VAT purposes. The holiday attracts standard 20 per cent VAT. Colaingrove applied 5 per cent to its power bills to the holidaymakers but HMRC took issue with this and indicated that 20 per cent should apply to the whole transaction, following the general legal position that a single supply of goods or services may not be artificially split in order to benefit from a reduced VAT rate. HMRC regarded the supply of the power as being merely a subsidiary of the supply of the holiday accommodation.

The Court of Justice of the European Union had recently decided in an appeal regarding French tax that a split could be made where multiple services are being provided.

In that case, involving undertaking services, the Court allowed the element of transporting a body to benefit from a reduced rate of VAT even though the service was provided in the context of wider undertakers’ services. The Court stated that this was justified where the lower taxed element was a “concrete and specific element” of the services being supplied.

This allowed Colaingrove to argue successfully before the First-tier Tribunal in its case that the power was a discrete element which should benefit from the reduced rate. However, Colaingrove’s victory was short-lived, having lost twice on appeal, now most recently at the Court of Appeal.

The Court of Appeal was not swayed by the argument that it would be illogical for the caravan of a Sun holidaymaker to pay 20 per cent for its power whereas a caravan next door occupied by its owner would receive the benefit of the 5 per cent rate and that different treatment would interfere with the principle of fiscal neutrality ie that tax should not distort the market.

The Court took account of similar recent attempts to split supplies and benefit from the French case. The supermarket Morrisons had an unsuccessful case arguing that, as fuel, the charcoal in an instant barbecue should benefit from the 5 per cent rate (the Upper Tribunal ruled the barbecue including the charcoal should be regarded as a single supply).

The Court of Appeal in Colaingrove noted that the legislation failed to state specifically that it was intended that supplies incorporated in a wider supply should benefit from the reduced rate. The Court thought Parliament may have intended the reduced rate only for those using power at homes, not on holiday.

Although the Court of Appeal decision in the Colaingrove case spells the end of the argument in relation to their particular circumstances, and the Sun holidaymaker will lose out, it seems likely that taxpayers in future will continue to argue the position in order to benefit from the reduced rate.

Parliament has provided reductions in VAT to achieve certain social purposes such as those for domestic fuel and the installation of energy saving products. It is hard to see why, having identified and specified the areas where the benefit should be given, the courts’ interpretation of the law then prevents the benefit being taken advantage of in many situations where it would otherwise apply, thereby undermining the apparent intention of Parliament. The French undertakers case seemed to have provided an opportunity for those social purposes to be recognised even when they arise as part of a wider transaction.

It remains to be seen whether future taxpayers will have greater success in their arguments.

John McHugh is an Edinburgh-based Partner in the Dispute Resolution team at Harper Macleod.