The Vat Categorisation Problem - The Card Protection Plan

Sunday 1st April 1973, the day the United Kingdom (UK) joined the European Union (EU). One prerequisite of joining the EU was the imposition of some form of Value Added Tax (VAT). The switch from purchase tax to VAT was a Ð''relatively quiet changeover' and in retrospect Ð''concealed the birth of the animal' (Lawrence et al 1999, pg. 2).

The animal that Lawrence et al speak of is one of growing complexity and complication in its mass of legislation and litigation, and one that stems from a common problem, the categorisation problem. It is well understood that Article 13 of the Sixth Directive lays out that certain items are to be exempt, and if it not, will be liable to tax. This becomes multifaceted in the UK where due to derogation, there are numerous zero-rated taxable items as well as those at a standard rate.

The problem lies in the fact it is not always obvious what category an item falls into; per se there is many a difference of opinion between the Customs and Excise (C&E) and the respective business. When this occurs, it is perceptible the dispute will end up in a court of law where a conclusion will be made. An ideal example of such a case is that of Card Protection Plan Ltd (CPP) v Customs and Excise Commissioners (C&E) (1999) STC 270, and one that is a leading case in the VAT categorisation problem of single and multiple supplies.

It is important to distinguish between a single (composite) supply and a multiple (mixed) supply. In a single supply, there is only one overall type of supply and only one VAT liability. In a multiple supply, a single inclusive price is charged for a number of separate supplies of goods or services each with their own VAT liability.

(Wareham and Dalton 2005, pg. 1058)

The CPP operated a Ð''plan' by which its members were protected against the loss or theft of credit cards and other valuable items which may result in financial loss or inconvenience. Ð''In return for the subscription, CPP keeps a record of members' credit cards and provides limited cover against loss from fraudulent use of the cards'

(2001). CPP were able to provide this cover through obtaining Ð''block cover via a broker from an insurance company (Continental) and a CPP customer would be named as "assured" under the policy' (Baldwin 1999).

Ð''The question for determination was whether CPP provided an exempt supply of insurance or of the making of arrangements for the provision of insurance' (1999a). For seven years C&E had considered that CPP made an exempt supply of insurance. In 1990 however, C&E had a change of tact, they now argued that:

- CPP provided a package of services based on a card registration service which was thus a taxable (single composite) supply; and

- There was no direct contractual relationship between the insurance company and CPP's customers, and hence no supply of insurance.

(1999a)

Although this change in stance was not a total unqualified disaster for CPP, it was a change by which CPP did not at all desire. While CPP would be able to recover VAT on which it was charged, i.e computer equipment and other services, the decision of the VAT tribunal to uphold Customs' view was a considerable disadvantage to CPP and its customers. This is especially true Ð''since the block policy premium constitutes a significant expense for the company, and that premium does not carry VAT' (Pincher 2001). Fundamentally, CPP's VAT cost would be undoubtadly substansive,

moreover, it was likely to have been the customers that took the brunt of the cost through higher prices. An outcome CPP disliked completely.

The Card Protection Plan still contended they made a single exempt supply of insurance, whilst C&E further argued that there was no privity of contract between the insurance company and the customer. Forth went the matter to the High Court.

The High Court concluded that CPP did make arrangements for the provision of insurance. However, certain other services were, in the court's decision, separate and not related to insurance. In which case, there were two supplies, some of which were exempt, the rest being subject to VAT at the standard rate.

(Pincher 2001)

This Ð''compromise' by the High Court was one that lead to uncertainty, and one that neither CPP or C&E approved of. The uncertainty arose in the apportinment of taxable and exempt supplies in the card registration service provided. CPP would only settle for a largely exempt supply and C&E vice-versa. Anything but a largely exempt supply would still bring a large VAT bill on CPP's doorstep and create a substantial

dent in their pocket. Unreservedly CPP appealed the decision Ð'- C&E cross-appealed. The court of appeal held the view of the cross-appelant on the same grounds found in the VAT tribunal.

CPP again appealed, this time to the House of Lords, who in turn asked the question to the European Court of Justice (ECJ). The House of Lords asked four specific questions to the ECJ, broadly these covered:

the general principle applicable to distinguish composite from mixed supplies; the