© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
C6. Classifying a supply
GENERAL ​
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Nature and relevance of characterisation ​
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- Distinction between the single/multiple supply question and characterising a single supply
"[46]...The CJEU has itself recognised the difficulty of prescribing a definitive test in the context of identifying the number of supplies for VAT purposes (see CPP at [27] to [29]) because the diversity of commercial operations made it impossible to give exhaustive guidance as to how to approach the problem correctly in all cases. The same may also be said of the closely related characterisation question..." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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- Relevance of characterisation process
Whether supply is goods or services
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Which place of supply rule to apply
- HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121
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Whether exemption or reduced rate applies
- ​Mesto C-18/12
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- Identify the qualitatively predominant element from the point of view of the typical consumer
"[29] In order to determine whether a single complex supply must be categorised as a supply closely linked to sport within the meaning of art 132(1)(m) of the VAT Directive although that supply also includes elements not having such a link, all the circumstances in which the transaction takes place must be taken into account in order to ascertain its characteristic elements and its predominant elements must be identified...
[30] It follows from the case law of the court that the predominant element must be determined from the point of view of the typical consumer ... and having regard, in an overall assessment, to the qualitative and not merely quantitative importance of the elements falling within the exemption provided for under art 132(1)(m) of the VAT Directive in relation to those not falling within that exemption ..." (Mesto C-18/12)​
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Characterising a single supply with multiple elements​
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- Typical consumer determined on the basis of a group of objective factors
"[33] As for the question whether, in the context of such a single complex supply, the predominant element is the opportunity to engage in sporting activities falling within Article 132(1)(m) of the VAT Directive or, rather, pure rest and amusement, it is necessary to make that determination, as has been pointed out at paragraph 30 of the present judgment, from the point of view of the typical consumer, who must be determined on the basis of a group of objective factors. In the course of that overall assessment, it is necessary to take account, in particular, of the design of the aquatic park at issue resulting from its objective characteristics, namely the different types of facilities offered, their fitting out, their number and their size compared to the park as a whole." (Mesto C-18/12)​
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- Fact that some customers' intention does not relate to predominant element not relevant
"[35] On the other hand, the fact that the intention of some visitors does not relate to the predominant element of the supply at issue determined in this way cannot call that determination into question.[36] An approach consisting in taking account of the intention of each visitor taken individually as to the use of the facilities which are made available would be contrary to the objectives of the VAT system of ensuring legal certainty and a correct and straightforward application of the exemptions provided for in Article 132 of the VAT Directive. In that regard, it should be pointed out that, to facilitate the measures necessary for the application of VAT, regard must be had, save in exceptional cases, to the objective character of the transaction in question (see, to that effect, Case C‑4/94 BLP Group [1995] ECR I‑983, paragraph 24; Case C‑108/99 Cantor Fitzgerald International [2001] ECR I‑7257, paragraph 33; and Case C‑409/04 Teleos and Others [2007] ECR I‑7797, paragraph 39)." (Mesto C-18/12)
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- Predominant element test mandatory where it can be determined
"[47] The question remains whether Mesto goes further than the earlier cases referred to, and has established a principle of EU law that the predominant element test is the primary test to be applied in characterising a supply for VAT purposes. I have concluded that it has. In Mesto the CJEU gave authoritative guidance on the test for deciding how a single complex supply must be categorised for VAT purposes. The language used by the CJEU in setting out this test is mandatory. Where it is possible to do so, the predominant element must be determined. This is the primary test to be applied for this purpose." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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- Principal/ancillary single supplies: principal element will almost always be predominant
"[46] ... In CPP the principal/ancillary test was used to answer the question whether a supply was properly viewed as a single complex supply or as comprising multiple supplies, but could equally have been used to determine the appropriate characterisation of a single complex supply. However, that test can only be applied where it is possible to identify one principal supply (or element of the supply) to which the other supplies or elements are subordinate or so minor as to be capable of being disregarded. It is hard to see in what circumstances this test would produce a different answer from the predominance test since a principal element of a supply will almost always be predominant. I note in this context that the principal/ancillary test was applied by the CJEU in Purple Parking v HMRC (Case C-117/11) [2012] STC 1680 to decide whether there was a single complex supply of airport parking and transportation for passengers between the car park and the airport terminal, or whether these were distinct supplies. Nonetheless, in concluding that this was a single supply, the CJEU expressed the view that the parking service was predominant." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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- Complex supplies where no element predominates: overall characterisation of all elements
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"[48]...There may be cases where there is no predominant element in a single composite supply viewed through the eyes of a typical consumer. College of Estate Management might be regarded as such a case: in the context of a single supply of education, the typical student purchased the courses in order to obtain the qualification offered by the College. Viewed by the student, the supply of books was part of that larger composite supply of education with a view to qualification, and could not be said to predominate for the purposes of the Mesto test, even if the provision of books was regarded as an important element of the single supply. A similar analysis applies to Byrom (t/a Salon 24), where the supply was of "massage parlour services" to those offering their services to clients. An important element of the single supply was the provision of a room. But viewed from the perspective of the masseuse the provision of the room could not be said to predominate in the larger supply provided, which included toilet, changing and shower facilities, a seating and other areas for clients, bed linen and towels. In such cases, the overarching supply test might remain relevant, either to help decide whether a particular element predominates in the eyes of the typical consumer and the qualitative importance attached to a particular element of the single supply; or as reflecting how the typical consumer views the transaction where there is no predominant element so that the predominant element test cannot be applied. Equally, I do not rule out the possibility, given the diversity of commercial transactions to which these provisions might apply, that there may be cases where the economic reality justifies the application of the overarching supply test as a separate test to be applied." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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- Not to artificially dissect supply into elements when identifying predominant element
"[64] The approach adopted by both the FTT and the UT involved an artificial dissection of the introduction service supplied by G&F of a kind warned against by the CJEU. To treat this service as comprising two distinct components, the provision of expert (consultancy) advice and the provision of information, was an error of approach. It did not reflect the economic or commercial reality of the transaction. Just as the characterisation of the supply of education with a view to a qualification is not to be determined by dissecting the single service into its component parts and then deciding whether the books and printed matter or the lectures and teaching predominates, there is no basis for thinking that the typical consumer using G&F's service would view the G&F service as supplying advice and/or providing information. That is not what is contracted for." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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Process for characterising a single supply with multiple elements​
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- Is there an element of decisive importance to the customer?
"[29] On the basis of these different criteria, the Gerechtshof te Amsterdam correctly concluded that there was a single supply of services within the meaning of Article 6(1) of the Sixth Directive, since those criteria in fact lead to the conclusion that, far from being minor or ancillary, such customisation predominates because of its decisive importance in enabling the purchaser to use the software customised to its specific requirements which it is purchasing." ​(Levob C-41/04)
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- Look at the physical characteristics of facilities provided
"[34] As regards, in particular, aquatic areas, it is necessary for the national court to take into account, inter alia, whether they lend themselves to swimming of a sporting nature, in that they are, for example, divided into lanes, equipped with starting blocks and of an appropriate depth and size, or whether they are, on the contrary, arranged so that they lend themselves essentially to recreational use." (Mesto C-18/12)
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- Begin with the written agreement, if any, governing the transaction
"[56] When deciding on the characterisation of a transaction governed by a written agreement and whether it falls within a particular legal description, the starting point, at least normally, is to identify the legal rights and obligations of the parties as a matter of contract and then consider whether that characterisation is vitiated by any relevant facts before going on to classify them: see Secret Hotels2 Ltd (formerly Med Hotels Ltd) v HMRC [2014] UKSC 16, [2014] STC 937...Lord Neuberger made clear that the subsequent behaviour or statements of the parties (while ordinarily irrelevant to construction of the contract) might also be relevant to show that the written agreement represented only part of the totality of the parties' contractual relationship." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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- Normally expect the predominant element to be what is promised to be supplied/paid for
"[58] Accordingly, my starting point is the G&F contract. The contractual terms cannot by themselves be determinative of the VAT analysis, but may be conclusive unless inconsistent with the underlying economic and commercial reality. One would naturally expect the predominant part of a supply to be what the supplier has promised to supply and what the consumer has promised to pay for..." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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Examples​
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- Matchmaker contract was for supply of introductions, provision of advice not mentioned - not consulting
"[59] G&F's only contractual obligation identified by the express terms of the contract was, accordingly, to supply introductions. The consideration paid by the client was for the supply of this service. While the contract contemplates that both parties will provide information to each other as part of that supply, the provision of information is not expressed as a freestanding obligation, and where information is provided by G&F, it remains the confidential property of G&F, not to be provided or disclosed to others. The provision of advice is not mentioned at all...
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[61] There can be no doubt that the typical consumer would regard the provision of introductions to prospective long-term partners as the qualitatively most important element of the service. Indeed, this was the UT's own conclusion at [90]. In light of the contract, this was the predominant element of the supply." (HMRC v. Gray & Farrar International LLP [2023] EWCA Civ 121, Simler LJ)
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GOODS OR SERVICES ​
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- Identify predominant element from point of view of typical consumer
"[61] To determine whether a single complex supply such as those at issue in the cases in the main proceedings should be classified as a ‘supply of goods’ or a ‘supply of services’, all the circumstances in which the transaction takes place must be taken into account in order to ascertain its characteristic elements and to identify its predominant elements (see, to that effect, inter alia, Faaborg-Gelting Linien, paragraphs 12 and 14; Levob Verzekeringen and OV Bank, paragraph 27; Aktiebolaget NN, paragraph 27; and Case C‑88/09 Graphic Procédé [2010] ECR I‑0000, paragraph 24).
[62] It should also be pointed out that the predominant element must be determined from the point of view of the typical consumer (see, to that effect, inter alia, Levob Verzekeringen and OV Bank, paragraph 22, and Everything Everywhere, paragraph 26) and having regard, in an overall assessment, to the qualitative and not merely quantitative importance of the elements of supply of services in relation to the elements of supply of goods." ​(Bog C-497/09)
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- Predominant element depends on qualitative not quantitative importance of elements of supply
"[62] It should also be pointed out that the predominant element must be determined from the point of view of the typical consumer (see, to that effect, inter alia, Levob Verzekeringen and OV Bank, paragraph 22, and Everything Everywhere, paragraph 26) and having regard, in an overall assessment, to the qualitative and not merely quantitative importance of the elements of supply of services in relation to the elements of supply of goods.
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[76] Next, since what is concerned is a single supply, the classification of the transaction as a supply of goods or a supply of services will depend on all the factual circumstances, having regard to the qualitatively predominant elements from the point of view of the consumer." ​(Bog C-497/09)
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- Disregard the minimal services inherent in most supplies of goods (e.g. marketing)
"[63] It should be noted in this respect that, as the marketing of goods is always accompanied by a minimal supply of services such as the displaying of the products on shelves or the issuing of an invoice, only services other than those which necessarily accompany the marketing of goods may be taken into account in assessing the part played by the supply of services within the whole of a complex transaction also involving the supply of a product (Case C‑491/03 Hermann [2005] ECR I‑2025, paragraph 22)." ​(Bog C-497/09)
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- Basic actions to prepare goods (e.g. food) done continuously rather than in response to specific customer requests not predominant element
"[68] However, since the preparation of the hot end product is limited essentially to basic standard actions, which for the most part are done not in response to an order from a particular customer but in continuous or regular fashion according to the demand generally foreseeable, it does not constitute the predominant element of the transaction in question, and cannot in itself characterise that transaction as a supply of services." ​(Bog C-497/09)
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Examples​
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- Facilities available generally, whether a customer or not, do not form a service
"[73] The mere presence of those furnishings intended, not exclusively, possibly to facilitate the consumption of such food cannot be regarded as an element of supply of services such as to bestow on the transaction as a whole the quality of a supply of services." ​(Bog C-497/09)
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- Restaurant transactions are services, takeaway transactions are goods
"[64] The Court has held, more specifically, in Faaborg-Gelting Linien, paragraph 14, that restaurant transactions are characterised by a bundle of elements and acts, of which the provision of food is only one component and in which services largely predominate. They must therefore be regarded as supplies of services within the meaning of Article 6(1) of the Sixth Directive. The situation is different, however, where the transaction relates to food to take away and is not coupled with services designed to enhance consumption on the spot in an appropriate setting." ​(Bog C-497/09)
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- Supply of food with rudimentary facilities for immediate consumption is a supply of goods
""[70] The elements of supply of services mentioned by the referring court consist solely in the presence of rudimentary facilities such as counters to eat at, with no possibility of sitting down, enabling a limited number of customers to eat on the spot, in the open air. Such rudimentary facilities require only negligible human intervention. In those circumstances, those elements are only minimal ancillary services, and cannot alter the predominant character of the principal supply, [71] The above considerations apply likewise to sales of popcorn and tortilla chips in the foyers of cinemas such as those at issue in the main proceedings in Case C‑499/09." ​(Bog C-497/09)
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- Party catering: depends on the transaction, but normally a service
"[77] As regards the food delivered by a party catering service, it must be observed that, unlike food supplied from snack stalls and mobile snack bars and in cinemas, it is not as a rule the result of mere standardised preparation but contains a distinctly greater aspect of the supply of services and requires more work and greater skill. Food quality, creativity and presentation are elements here which are most often of decisive importance for the customer. The customer is frequently offered the possibility not only of choosing the menu but even of having individual dishes made to order. This service aspect is moreover reflected linguistically, in so far as in everyday language one generally speaks of a catering ‘service’ and of food ‘ordered’ rather than ‘bought’ from the caterer.
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[80] In the light of those considerations, it must be considered that, except in cases in which the caterer does no more than deliver standard meals without any additional service elements, or in which other special circumstances show that the supply of the food represents the predominant element of the transaction, the activities of a party catering service are supplies of services." ​(Bog C-497/09)
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- Customisation of software may be predominant element, depending on extent of customisation
"[27] Secondly, with regard to the question whether such a single complex supply is to be classified as a supply of services, it is vital to identify the predominant elements of that supply (see, inter alia, Faaborg‑Gelting Linien, paragraph 14).
[28] Apart from the importance of the customisation of the basic software to make it useful for the professional activities of the purchaser, the extent, duration and cost of that customisation are also relevant elements in that regard.
[29] On the basis of these different criteria, the Gerechtshof te Amsterdam correctly concluded that there was a single supply of services within the meaning of Article 6(1) of the Sixth Directive, since those criteria in fact lead to the conclusion that, far from being minor or ancillary, such customisation predominates because of its decisive importance in enabling the purchaser to use the software customised to its specific requirements which it is purchasing." ​(Levob C-41/04)
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