Magic Memories Ltd v Revenue & Customs [2013] UKFTT 730 (TC)

FTT-Tax
Magic Memories Ltd v Revenue & Customs
[2013] UKFTT 730 (TC) · 2013-12-06
[29]Where the supply of goods or services is zero-rated, no VAT is charged on the supply, but it is otherwise treated as a taxable supply (s 30 VATA), entitling the supplier to recovery of attributable input tax.[30]The authority for a Member State to apply zero-rating derives from Article 110 of Council Directive of 28 November 2006 (“the Principal VAT Directive”) (2006/112/EC):
“Member States which, at 1 January 1991, were granting exemptions with deductibility of the VAT paid at the preceding stage or applying reduced rates lower than the minimum laid down in Article 99 may continue to grant those exemptions or apply those reduced rates. The exemptions and reduced rates referred to in the first paragraph must be in accordance with Community law and must be adopted for clearly defined social reasons and for the benefit of the final consumer.”
[31]The zero-rating description at issue in this appeal is that in Item 1 Group 3 Schedule 8 VATA. Group 3 is short, and the applicable version can be reproduced in full:
“ Group 3 — Books, etc Item No 1. Books, booklets, brochures, pamphlets and leaflets. 2. Newspapers, journals and periodicals. 3. Children's picture books and painting books. 4. Music (printed, duplicated or manuscript). 5. Maps, charts and topographical plans. 6. Covers, cases and other articles supplied with items 1 to 5 and not separately accounted for. [Note: Items 1 to 6— ( a ) do not include plans or drawings for industrial, architectural, engineering, commercial or similar purposes; but ( b ) include the supply of the services described in paragraph 1(1) of Schedule 4 in respect of goods comprised in the items.”
[32]Section 30 (2A) VATA treats certain services associated with the production of goods as zero-rated, if the supply of the goods would itself be zero-rated. It provides:
“(2A) A supply by a person of services which consist of applying a treatment or process to another person's goods is zero-rated by virtue of this subsection if by doing so he produces goods, and either— ( a ) those goods are of a description for the time being specified in Schedule 8; or ( b ) a supply by him of those goods to the person to whom he supplies the services would be of a description so specified.”
Discussion 33. Mr Ridley for HMRC argued, first, that the supply made by the Appellant to customers of the attractions consisted of the supply of photographic services which were standard-rated. Alternatively, if we concluded that the Appellant's supplies were supplies of goods, those supplies were predominantly supplies of photographs which were standard-rated and that the supplies of photo-books were ancillary to the supply of photographs. Further, if we concluded that the Appellant's supplies were predominantly those of photo-books, Mr Ridley argued that the photo-books were not books or booklets for the purposes of Item 1 Group 3 Schedule 8 VATA. 34. We shall deal with each of these issues in turn. Supplies of goods or services? 35. In advancing his first argument (that the Appellant's supplies were those of services rather than goods) Mr Ridley drew attention to the various contracts between the Appellant and the attractions and, particularly, to those provisions which referred to the Appellant supplying "services". 36. In addition, Mr Ridley referred us to the decision of the VAT Tribunal in Risbey’s Photography Ltd v HMRC, Digital Albums Ltd v HMRC (2008) VAT Decision 20783. In that case, as regards the first appellant, a professional photographer specialising in wedding photography, as part of the package sold to customers, was engaged by customers to take photographs (arrangements having been made for the photographs to be taken), made arrangements for the viewing of photographs and, finally, for the production of a wedding book displaying selected photographs of the wedding. The wedding book was dependent entirely upon the photographs having been taken and could not be purchased separately from the photographs. The first appellant retained the copyright in the photographs and used digital technology to design the wedding book. The Tribunal held that the first appellant had made a single supply of photographic services. The wedding book was ancillary to and a means of better enjoying the photographic services. 37. The facts in relation to the second appellant were slightly different. The second appellant produced wedding books for other professional photographers. The Tribunal found that the outside photographer commissioned the wedding book from the second appellant and paid a single price. The photographs were supplied by the outside photographer. The second appellant applied digital photographic processes to the materials supplied to produce the wedding book. The outside photographer retained the copyright in the photographs. The layout of the wedding book and the photographs were approved by the outside photographer. The Tribunal held that the second appellant made a single supply of photographic services by assembling the photographs supplied with the use of photographic processes. However, the Tribunal gave no reasoning to support its conclusion. 38. Mr Ridley relied on the Tribunal's findings in relation to the first appellant. In our view, however, his reliance on this decision was misconceived. As Mr Vallat put it, a wedding photographer would hardly arrive at a wedding uninvited, take photographs speculatively and produce a wedding album without consulting the happy couple. In this appeal, the visitors to the attraction did not engage the services of the Appellant to take their photographs. On the contrary, the photographs were taken by the Appellant on an entirely speculative basis. The evidence was that approximately two out of three photographs taken were never used. There was no contract between the visitor and the Appellant until the visitor agreed to buy a photo-book towards the end of the visit. The supply, therefore, consisted of what was bought by the visitor at the sales area. The supply did not consist of the activities of the Appellant preparatory and prior to that point. In our view, the supply consisted of the sale of photo-books (containing photographs) not of general photographic services and photographic digital processing expertise. Those services and that expertise were necessary for the production of the product sold to the visitors but they were not what the visitors bought. 39. The analysis was not changed by references in the agreements between the Appellant and the operators of the attractions to "services". Those agreements were between the Appellant and the attraction, not between the Appellant and the visitor and it is the latter supplies to which this appeal relates. The agreements were in the nature of licences to the Appellant which enabled it to carry on its activities on the premises of the attraction in consideration of the payment of a licence fee. The description of the permitted activities of the Appellant contained in those agreements cannot change the actual nature of the supplies made by the Appellant to the visitor. Furthermore, the London Zoo agreements referred both to services and products, whereas other agreements only referred to products. It is understandable that the Appellant might want a licence to be in broad terms, but that does not mean that its supplies made to visitors were as broad as those permitted by the license agreement. In any event, the question whether a supply is one of goods or services is not a question of labels used in agreements but a question to be determined objectively on the facts relating to the supply. 40. In our view, the facts of this case are somewhat more akin to those relating to the second appellant in the Risbey’s/Digital Albums , where the second appellant produced wedding books for other photographers who supplied their photographs to the second appellant. In other words, there was no initial engagement with the supplier of the wedding books to take photographs. The VAT Tribunal held that the second appellant had supplied services. The decision of the VAT Tribunal was considered by this Tribunal in Harrier LLC v HMRC [2011] UKFTT 725 (TCE) (Judge Berner and Mr Templeman). The Tribunal noted that in Risbey’s/Digital Albums the VAT Tribunal had not given reasons for its decision in relation to the second appellant. 41. With respect, we have some doubts about the decision in Risbey’s/Digital Albums in respect of the second appellant (as, we infer, did the Tribunal in Harrier ). This appeal is, however, clearly distinguishable on the facts from that decision. In this case, the visitors did not supply the Appellant with photographs which required processing (which customers did in Harrier where, in any event, this Tribunal held constituted a supply of goods with an ancillary supply of services). In the present appeal any processing required was done before any supply was made by the Appellant. The finished product – the photo-book, complete with photographs – was presented to the visitor as an item which the visitor could buy or not as the case may be. 42. As regards photograph postcards and CDs, these were tucked into the back pocket of the photo-book. In our view, these items were clearly ancillary to the main supply of the photo-book. 43. For these reasons, we have concluded that the Appellant made only a supply of goods when it sold photo-books to visitors. A single supply of goods? 44. Mr Ridley argued in the alternative that if we held that the Appellant supplied goods rather than services to the visitors, the supply made by the Appellant comprised both photographs and the photo-book. Mr Ridley submitted that the photographs constituted the dominant supply and that the photo-book was ancillary to the supply of the photographs and was supplied in order that the photographs may be better enjoyed by the visitors. 45. Mr Ridley referred to the decision of the Court of Appeal in International Masters Publishers Ltd v HMRC [2006] EWCA Civ 1455 . In this case the taxpayer supplied "CD books" which consisted of the supply of a binder containing a CD and bound pages describing the composer, historical context and musical extracts contained on the CD. The VAT Tribunal held that there was a single supply and that the CD was the predominant element of that supply even though the cost to the appellant of the book was greater than the cost of the CD. The VAT Tribunal's decision was upheld by the Court of Appeal. 46. The correct approach to be adopted in addressing this issue was summarised by Judge Berner in Harrier : “32. In this context it suffices for us to refer only to one authority, that of the ECJ in Levob Verzekeringen BV and another v Staatssecretaris van Financiën (Case C-41/04) [2006] STC 766 . That case concerned a supply of a customised version of standard software. The contract broke the price down into a sum payable for the basic software and the cost of customisation. The issue was whether there had been separate supplies of the basic software and the customisation services or a single supply. The ECJ held that there was a single supply which, in the light of the degree and importance of the customisation process, had to be classified as a supply of services.[33]Referring to the earlier case of Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270 , the Court affirmed that a transaction which comprises a single supply from an economic point of view should not be artificially split, and that there is a single supply in particular where one or more elements are to be regarded as constituting the principal supply, whilst one or more elements are to be regarded as ancillary supplies which share the tax treatment of the principal supply. The Court also held that the same is true where one or two elements or acts supplied by the taxable person are so closely linked that they form, objectively, a single, indivisible economic supply which it would be artificial to split.”47. In addition, in College of Estate Management v HM Customs and Excise Commissioners [2005] UKHL 62 the House of Lords held that mixed supplies should not in general the split into separate supplies where there was a principal supply and an ancillary supply of several articles. There were, however, cases in which it was inappropriate to analyse the transaction in terms of "principal" and "ancillary" supplies.48. In our view, applying the above principles, there was a single supply of the photo-book. It would, we think, be artificial to split the supply into two independent elements: the photo-book and the photographs. Until December 2011 visitors had the choice of buying the photo-book or buying nothing. The fact that they paid one price for the photo-book and its contents (photographs, postcards and CDs) is not determinative. Nonetheless, the product that they were offered and which they bought was the photo-book. There was no option to buy the photographs separately in the periods under appeal. In any event, even when this option was introduced in December 2011 (after the period under appeal) it accounted for only for 5% of sales.49. Furthermore, it seemed to us artificial to say that the photo-book's only purpose was for the better enjoyment of the photographs (including postcards). The photo-books contained information and printed photographs and were, in our view, a simple but attractive product in their own right, albeit that they were not sold separately. They were not, unlike a photograph album, of no interest or use without the photographs.50. The evidence of Mr Burns and, indirectly, of Mr Forer was that it was the photo-books that were attractive to customers, albeit personalised by the photographs. There was no evidence that it was the photographs which were of predominant value or attractiveness to visitors. Indeed the evidence of Mr Forer that sales increased after the introduction of the Appellant’s photo-books and the evidence of the lower price and volume of “photograph only” sales from December 2011 indirectly support the conclusion that the main value was not in the photographs.51. Mr Ridley submitted that a feature of the photo-books was that the photographs could be taken out and substituted with different pictures, suggesting that this was a deliberate and attractive design feature. This point was not put to the Appellant's witnesses in cross-examination and, accordingly, we did not think that this submission could fairly be put forward (see, for example, Joseph Okolo v HMRC [2012] UKUT 416 (TCC) at [50]-[61]).52. We have therefore decided that the only supply made by the Appellant was a supply of the photo-books (and not a supply of photographs with an ancillary supply of photo-books). Are the photo-books 'books or booklets'?53. It was common ground that the leading authority on the expression "books or booklets" for the purposes of Item 1, Group 3, Schedule 8 VATA was judgment of May J in Customs and Excise Commissioners v Colour Offset Ltd [1995] STC 85 in the High Court. That case concerned the issue whether diaries and address books came within the meaning of "books" or "booklets." May J decided that they did not do so. The learned

judge considered the meaning of those terms and said ([1995] STC 85 at 89 – 90):

[46]“In my judgment, the English word 'book', although it always refers to an object whose necessary minimum characteristics are that it has a significant number of leaves, now usually of paper, held together front and back by covers usually more substantial than the leaves, is a word with a variety of possible more particular meanings. For any particular use of the word, its particular meaning will be derived from the circumstances in which it is used. For instance, if a barrister in the clerks' room of his chambers points to a blank counsel's notebook and says to his clerk 'please hand me that book', he would not expect the answer 'that is not a book'. (Mr Tallon surprisingly submitted that a counsel's notebook might not be a book because it was perforated—a point which he also made in relation to a cheque book.) On the other hand if the same counsel, having a substantial collection of law reports and legal textbooks in his room, asked the same clerk to count all the books in his room, he would not expect the clerk to include blank counsel's notebooks in the count. If a testator uses the word 'books', the word obviously has to be understood in the context of the objects which the testator in fact has to bequeath. In the first instance, the only circumstance here is that the words 'books' and 'booklets' are used in the Schedule to a statute. They are accordingly relevantly devoid of context. Devoid of context, in my judgment the ordinary meaning of the word 'book' is limited to objects having the minimum characteristics of a book which are to be read or looked at. (The same applies to 'booklet', which I think is a thin book perhaps with a rather flimsy cover. I am not sure about the Shorter Oxford English Dictionary definition of booklet as 'a tiny book', since I would not myself call a tiny book with many pages a booklet.) If you ask of a particular object 'is this a book?', you immediately provide a context, which the words in the statute lack. You will get an answer which is affected by the context. If you ask instead what I regard as the right question here, i.e. 'what is the ordinary meaning of the word “book”?', you should get an answer which accords with the ordinary meaning to which I have referred. As Mr Richards submitted (although he accepted that these diaries and address books might be books or booklets within one possible meaning of those words), people generally think of books as things to be read rather than as blank pages bound together. A filled-in diary of historical or literary interest may be a book because it is retained to be read or looked at. But a blank diary is not a book in the ordinary sense of the word. Likewise a blank address book is not in the ordinary sense a book and it does not become one simply because its name includes the word 'book'. A cheque book is plainly not a book nor, in my view, is it a booklet in the ordinary sense of that word. The fact that in some contexts you would say of a blank diary that it is a book within one possible meaning of that word does not mean that it is a book within the ordinary meaning of the word. There is in my view no reason for reading the words 'books' and 'booklets' in item 1 of Group 3 of Sch 5 to the 1983 Act in a more extended meaning than their ordinary meanings.”54. We respectfully agree with the comments of May J and in reaching our decision we have applied the test as he stated it. We would add, however, that when a word is given its ordinary meaning, that meaning may change over time in accordance with common usage and understanding. In addition, we do not consider that May J, when he referred to “things to be read”, intended to limit the words “book” or “booklet” to books filled with words rather than content which was mainly pictorial, as his reference to “or looked at” we think makes clear, but was intending to point out that a book would usually have content rather than blank pages.55. We also consider, with respect, that there is a danger in reading May J’s formula as if it were a statutory definition. We can think of a number of examples of documents that would be generally considered to be books but which may fail one of May J’s tests. For example, a storybook for young children may have thick pages to assist youngsters turning the pages, but the covers may be no thicker than the pages. There is no doubt in our mind that this would be generally regarded as a book in the ordinary meaning of the word. May J’s guidance is of great assistance but there may be cases at the margin where the question may be more one of impression than definition (although, to be clear, we have not found it necessary to stray from May J’s formulation in reaching our decision).56. The words "book" and "booklet" therefore must be given their ordinary meaning, devoid of context. The test is objective and must have regard, as Judge Berner said in Harrier at [57] "to all the physical characteristics of the product in question. That includes both the external characteristics and the internal characteristics."57. In our view, the photo-books (with the exception of Great City Attractions version 1: see below) fall within the meaning of the word "booklet." The photo-books were thin or small books. They contained relatively few pages (five leaves, for example, in the case of London Zoo) and, therefore, seemed to us to be "booklets" (small books) rather than "books". Their covers (at least the front covers) were, in our view, marginally more substantial than the internal pages, although the difference was very slight. The rear covers seemed more substantial. As May J recognised, a booklet was likely to have a flimsy cover and, in our view, a booklet may often have a paper cover. The covers and leaves were generally were held together by a spiral binding. In one case, (Great City Attractions – version 1) the document was stapled together, but we do not think that such a method of binding pages together disqualifies that photo-book from being a "booklet." Their content was such that they were clearly intended to be read and their pictures (not just the photographs of the visitors, but the illustrations in the photo-book) looked at. Their purpose was not simply to hold the photographs of the visitors.58. Mr Ridley argued that the photo-books did not possess the basic characteristics of a "book" or "booklet". He drew attention to the flimsy covers, the inclusion of photographs, the small number of pages and the lack of a story element. We have already discussed the covers of the photo-books and do not consider that this aspect disqualifies them from being "booklets". Moreover, inclusion of photographs in the photo-book does not, in our view, prevent the photo-books being "booklets" as long as the other characteristics of the product were such that it fell within the ordinary meaning of the word "booklet." There is no reason why a book or booklet cannot be personalised. Moreover, there is no need for a "booklet" to tell a story in order to satisfy the minimum characteristics described by May J. It simply needs to have content which is to be read or looked at.59. Mr Ridley compared the photo-books with the wedding books in Risbey’s/Digital Albums . The photo-books were, in his submission, analogous to those wedding books or, alternatively, they were simply photograph albums and were not, therefore, books. It seems to us that attaching a label (e.g. “an album”) to an item and deciding that it was therefore not a "book" is the wrong approach. This error in approach was helpfully explained by

Judge Berner in Harrier whose views we respectfully adopt:

[53]"53. With respect, we are unable to follow the tribunal’s approach in Risbey’s . In our view it does not properly follow the approach adopted in Colour Offset , namely to consider the ordinary meaning of “book” as one having the minimum characteristics of a book which is to be read or looked at. The basis of the tribunal’s decision was that the fundamental character of the item in question was as a wedding album, essentially because it was in essence a collection of photographs which was of interest only to the persons immediately connected to the wedding. It seems to us that this analysis falls into the error of attaching a label to an item which does not feature in any specific exempting or zero-rating provision, and concluding that such an item must therefore be standard-rated (see Bophuthatswana National Commercial Corporation Ltd v Customs and Excise Commissioners [1993] STC 702, per Nolan LJ at p 708). The diaries and address books in issue in Colour Offset did not fall outside the description of books or booklets because those labels could be attached to them; they failed to satisfy the test of being a book or booklet because, on account of the blank pages within them, they did not fall within that description, according to the ordinary meaning. We do not ourselves consider that it follows from the application of the description “wedding album” to something that has the characteristics of a book that the item is not a book for VAT purposes. A wedding album will in many cases not have the characteristics of a book, but if it does, we can see no reason why it should not be a book for these purposes.[54]In particular, we do not share the tribunal’s views on the weight to be attached to matters such as the limited interest in the contents, the tribunal’s assessment that the text did not convey information and had no value in its own right, or the label attached to the book in its marketing. Nor do we consider that the tribunal was right to attempt to construe the label “wedding album” by reference to the principle of equal treatment. The question was not whether the item was a wedding album, but whether it was a book."60. We agree that the question was not whether the photo-books in this case were photograph albums but whether they were books or booklets in the ordinary meaning of those words. In our view, for the reasons given, we consider that the photo-books were "booklets." Whether they could also be described as souvenirs, photograph albums or photograph wallets seems to us to be addressing the wrong question.61. There is one further matter that needs to be addressed. In Harrier at [58] it was held that the nature of the binding was also an essential minimum characteristic of a "book" or "booklet":
"We consider that a book or booklet must have the spine, which will be narrower in the case of the booklet than it is with a book. For this reason, in our view, a product that is simply spiral-bound does not have the necessary minimum characteristics [of a book or booklet]." 62. With respect, we disagree. In our view, there is no reason why a document which is spiral-bound should be disqualified from being a book or booklet. This was not an essential characteristic listed by May J in Colour Offset. That there must be some form of binding is clear enough – a set of unattached sheets of paper would not be a book in the ordinary sense of that word. Also, the binding should in most cases have some degree of permanence. Thus, a ring-binder file would not generally be regarded as a book but, by contrast, we consider that stapling would have sufficient permanence provided the other characteristics of a "book" or "booklet" are present. It is, of course, possible to remove staples (as it is possible to tear pages from a spiral-bound or conventionally bound book) but that will usually result in the disintegration of the stapled document. A ring-binder, by contrast, can have its pages removed without damage to the ring-binder or the pages. 63. These considerations apart, the nature of the binding does not seem to us to be material. We take notice of the fact that there are many spiral-bound documents, to use a neutral word, which would most certainly be regarded as books within the ordinary meaning of that expression. For example, many school textbooks and student course books are spiral-bound (as are many cookery books) for the simple reason that the book can be opened and laid flat, with both pages on view. In the course of his submissions, Mr Vallat produced a book of short stories by a well-known contemporary writer which was spiral-bound. There was no doubt in our minds that this was a book and would be regarded as a book in the ordinary common usage of that term. There are certainly many other examples that could be given. Accordingly, we consider the fact that most of the photo-books were mainly spiral-bound (and one was stapled) does not disqualify them from being "books" or "booklets."
In argument, Mr Ridley did not press the point and seemed content to accept that spiral binding did not prevent a document from being a "book" or "booklet" and we consider that he was right to do so. Decision 64. We have therefore decided that in the periods under appeal, when the Appellant sold a photo-book to a visitor: (1) the Appellant supplied goods (the photo-books) and not services; (2) the Appellant made a single supply of photo-books; and (3) the photo-books were "booklets" within the meaning of Item 1 Group 3 Schedule 8 VATA. 65. Accordingly, we allow this appeal. 66. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. GUY BRANNAN TRIBUNAL JUDGE RELEASE DATE: 6 December 2013

Cited in 1 later judgment