Opticians Victorious

PETER JENKINS, head of indirect tax at Ernst & Young, considers the VAT tribunal's ruling upholding Leightons (17498) in the test case decision, Southport Visionplus Ltd (LON/2001/0505).

ON 17 MAY 2001, Customs revisited the VAT treatment of the supply of spectacles and contact lenses. Their decision was that opticians make a single standard rate of supply of goods and not separate supplies of standard-rated goods and exempt dispensing services. Thus a test case was brought on the matter following Customs' general review of policy in the whole area of composite and multiple supplies. This itself followed the European Court of Justice decision in Card Protection Plan v Commissioners of Customs and Excise (Case C-349/96) [1996] STC 2130 which they claimed should overturn the previous decision of the High Court in relation to the supplies of opticians (Commissioners of Customs and Excise v Leightons Ltd [1995] STC 458). Following this decision, apportionment between the exempt supply of medical care by the dispensing optician and the supply of goods (the optical appliances) had been allowed on the basis that there were two separate supplies.

The result

The appeal was upheld, confirming that the High Court decision in Leightons was in accordance with the principles set out by the European Court of Justice in Card Protection Plan and TP Madgett and RM Baldwin (trading as Howden Court Hotel) v Commissioners of Customs and Excise (Cases C-308/96 and C-94/97) [1998] STC 1189.

The evidence

The tribunal took careful evidence of the nature of opticians' services, from the prescription written by the optometrist following an eye test, to the work of the dispensing optician in fully assessing the patient's sight condition, the available lens and frame options and the final recommendation of the optical appliance best suited to the patient's requirements and needs. The tribunal adopted the evidence of Professor Taylor who defined the skill of dispensing optical products as being 'to convert an optical prescription into a pair of spectacles, or other optical appliance, appropriate to an individual patient's needs'.

Dr Brice, the tribunal chairman, accepted that there was a clear distinction between the supply of readymade spectacles, for example reading glasses, and the supply of corrective spectacles or contact lenses to suit the particular patient, where the value of the services of the dispensing optician exceeded 50 per cent in the case of spectacles and 75 per cent in the case of contact lenses, compared with the value of the goods. She saw the essential factor being that the customer wants and pays for two supplies: the skills of the dispensing optician on the one hand and a physical optical appliance on the other. The customer wanted optical appliances to be entirely appropriate to his individual needs. The fact that dispensing services and goods were inextricably linked was not in itself enough to create a single supply.

Interpretation of Card Protection Plan

The crux of the decision rested on Dr Brice's analysis of the meaning of Card Protection Plan, and the related European Court of Justice case quoted in it, Madgett & Baldwin. She approached the analysis under the following headings.

No exhaustive guidance

The Card Protection Plan decision was not exhaustive and should not be seen as overturning all previous decisions, unless they are clearly incompatible with it. In particular, the European Court had also referred to the importance of applying the mandatory exemption provisions in the Sixth Directive. If Customs' view were adopted, only peripheral services of dispensing opticians would enjoy exemption rather than their main service, and yet Article 13A1(c) provides that Member States shall exempt the provision of medical care. Similarly the United Kingdom exemption in item 1(b) of Group 7 of Schedule 9 to the VAT Act 1994 specifies that the supply of services by dispensing opticians is exempt. Dr Brice also said it was important to give effect to previous judgments dealing specifically with the position of optical appliances consistent with the principles laid down in Card Protection Plan, in particular European Commission v United Kingdom (Case C-353/85) [1988] STC 251 and the Leightons case itself. She saw the 1988 decision as clearly establishing that there could be standard-rated supplies of goods separate from the exempt supply of medical care, except where the supplies of goods were minor and indissociable from the services provided.

She also saw the High Court approach in Leightons as consistent with Card Protection Plan in concluding that because of the need to give effect to the intention of the legislator to provide exemption and the roughly even balance of the two elements in question, that there were two separate supplies, one of corrective spectacles and the other of the services of the dispensing optician.

The whole picture

All the circumstances of the transaction must be taken into account. Dr Brice emphasised the evident wishes of the customer in the transaction: he clearly wanted both the skills of the dispensing optician and also a physical optical appliance meeting his requirements and needs. The position where he buys readymade reading glasses is quite distinct, and here there is a single supply of goods.

No artificial splitting

Each supply is normally distinct and independent and a single economic supply should not be artificially split. Here Dr Brice placed weight on the need for a composite supply situation to be seen as a departure from the norm, which is that each supply under Article 21 of the Sixth Directive is seen as distinct and independent. Above all, supplies must not be artificially split in a way which distorts the functioning of the VAT system. This would happen if Customs had their way, because if the supply of corrective spectacles and contact lenses were treated as a single standard rated supply, the exemption would have no effect, despite being mandatory in the Sixth Directive, and despite applying to more than one half of the total supply.

A single supply if one element is ancillary to the other

The most important evidential point here was whether the reference in Card Protection Plan to Madgett and Baldwin was, as Customs maintained, only to the principles of 'aim in itself' and 'better enjoyment of the main supply' and not to the other principles established in the case, in particular the principles of 'proportion of price', i.e. whether it takes up a small proportion of the package price, and 'frequency', i.e. whether it is 'habitually associated rather than supplied on an occasional basis'. Dr Brice found that there was no case whatsoever for claiming that the European Court of Justice had not adopted the whole of the meaning of the word 'ancillary' from Madgett and Baldwin, simply because that appeal concerned the tour operators' margin scheme. The word 'ancillary' therefore only applied to a supply which took up a small proportion of the total price, and which was only made occasionally.

Dr Brice also found that in any event the dispensing service could not be seen as the means of 'better enjoying' the optical appliance in the Card Protection Plan sense, since a dispensed optical appliance could not be enjoyed at all without the dispensing service.

A single price is not decisive

Here, Dr Brice simply confirmed the correctness, in her view, of the apportionments allowed by Customs following the Leightons decision where there was a single price.

Finally Dr Brice concluded on Card Protection Plan that, although the decision in European Community Commission v United Kingdom would prevent there being a single exempt supply, nonetheless had she been forced to conclude that there was a single supply, that is how she would have seen it. She pointed out that in terms of cost it was the supply of goods which was ancillary to the supply of the exempt services, particular so in the case of contact lenses where the value of the goods was only 25 per cent of the total supply (and included six months after-care).

Subsequent authorities

Dr Brice also examined in some detail authorities subsequent to the Card Protection Plan case, in particular the House of Lords decision in Commissioners of Customs and Excise v British Telecommunications plc [1999] STC 758, the High Court and Court of Appeal decisions in Commissioners of Customs and Excise v Cooperative Wholesale Society [2000] STC 727, and the High Court decision in Sea Containers Services Ltd v Commissioners of Customs and Excise [1999] STI 1886. She noted that the House of Lords had referred to Leightons and did not disagree with it, Lord Hope emphasising that the question in composite or multiple supply cases was one of fact and degree taking account of all the circumstances. The same point had been made by Mr Justice Keene in Cooperative Wholesale Society, where he had said that no single factor provided the sole test of whether there was a single supply or more than one supply, but again it was a question of fact and degree in the light of all the circumstances including the commercial reality of the transaction.

Dr Brice saw the critical point as being that the customer who purchases dispensed spectacles wants both the skills of the dispensing optician and the physical optical appliance, and there was no question of the dispensing service being merely ancillary under the Card Protection Plan test. Finally she saw Sea Containers (where catering had been seen as a distinct supply despite being only about 17 per cent of the cost) as supporting her view, since if a supply which is only 17 per cent of the total supply can be separate, it was unlikely that a supply which exceeds 50 per cent will be ancillary. Dr Brice also found no problem of incompatibility with the decision of Mr Justice Laws in FDR Ltd (16040) or the final judgment of the House of Lords in Card Protection Plan, where Lord Slynn had found there to be a single supply of the predominant element, insurance, with the other elements such as the registration service being incidental to it.

Analysis

This looks to be a well founded and well argued decision by Dr Brice, squarely based on Card Protection Plan principles as adopted in subsequent United Kingdom case law. Such is the effectiveness of the demolition job done on their counsel's argument, it is difficult to see how Customs can mount aneffective appeal on points of law, and it may be that they will now accept the decision as a sensible confirmation of the existing United Kingdom case law in line with Card Protection Plan principles, rather than drag out an appeal. Their arguments about the limited application of the ancillary test established in Madgett and Baldwin look particularly weak in law.

Dr Brice protects her position by making clear that no one factor has influenced her decision, but rather she is, as instructed by the European Court and following the dicta of the higher courts subsequent to Card Protection Plan, considering the transaction in the round and taking account of its commercial nature, as well as asking the critical question: what does the customer really have as his aim? She concludes that the services of the dispensing optician are clearly a separate supply, partly on grounds of the proportion they bear to the total price of the optical appliances; partly because they have real substance as a key element in the overall transaction which the customer has entered into; and partly because, on a proper reading of the test in Card Protection Plan and Madgett and Baldwin, they cannot be ancillary to the supply of the goods.

It is of particular importance for other cases that Dr Brice has found that the ancillary test includes the 'proportion' and 'frequency' tests taken from Madgett and Baldwin.

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