Case Report: Luxury Hampers a Basket Case for HMRC

As such, the lidded basket was not a separate standard-rated supply, despite HMRC’s arguments (based on their own guidance and not case law/legislation) to the contrary.

Context

• The appellant in this case is an online retailer of food and drink gift hampers, trading from its website.
• The hampers subject to this appeal (“Relevant Hampers”) are comprised of a curated collection of food and drink items presented in a lidded basket, designed to be gifted by the purchaser to another.
• Some of the food and drink items are standard rated for VAT, whereas others are zero-rated. The appellant therefore calculated a composite VAT rate to account for output VAT, based on the relative value of standard-rated items and zero-rated items within each Relevant Hamper.
• The appellant submitted an error correction notification in relation to the Relevant Hampers, claiming a repayment of £425,529, on the basis that the composite VAT rate applied should have been calculated by reference to the value of the food and drink items alone, excluding the value of the lidded baskets.
• However, HMRC refused the repayment claim, and the appellant appealed.
• The issue in this case revolves around single vs multiple supplies for VAT purposes.

Single vs Multiple Supply

• The starting point is that every supply must normally be regarded as distinct and independent such that each supply is liable to VAT at the applicable rate.
• However, where different elements combine, a single supply may still exist. Case law has established the following circumstances:
  1. One or more elements constitute a principal supply with the other element(s) being merely ancillary to the principal supply, e.g. sauce packets provided as part of a meal.
  2. Two or more elements are so closely linked as to form a single, indivisible economic supply which it would be artificial to split, e.g. the lease of land together with a supply of water.
• There are principles for each circumstance separately, but the following principles are relevant for both:
  • There is no absolute rule, and all the circumstances must be considered in every transaction.
  • The fact that, in other circumstances, the different elements can be or are supplied separately by a third party is irrelevant.
  • The principle of fiscal neutrality is not a factor to be taken into account.
  • The viewpoint to be adopted is that of a typical consumer.

Arguments

• The appellant’s primary argument is that the lidded basket is incidental to the supplies of food and drink being made, as:
  • It is of little importance to the consumer,
  • The cost component of the listed basket is only a small percentage of the total price, and
  • Consumers do not have any regard for potential secondary use of the lidded basket as the Hampers are intended as gifts.
• On the other hand, HMRC referred to S. 6.3, VAT Notice 701/14 which provides that, in essence, hampers and picnic baskets are separate supplies in their own rights (and that the lidded baskets are “hampers” for these purposes).
• Moreover, HMRC noted S. 8.2, VAT Notice 700 states “if the packaging is more than is normal and necessary then there’s a multiple supply (read paragraph 8.1) and VAT is due on the packaging”.

Discussion

• The FTT noted it was common ground that each hamper contained a minimum of two supplies: a standard rated food/drink supply and a zero-rated food/drink supply. The point of this appeal was whether there was a distinct third standard-rated supply of the lidded basket or not.
• Furthermore, the FTT held that the existence of two principal supplies would not preclude the lidded basket from being ancillary to the supplies. Otherwise, ancillary packaging of a gift would not be a separate supply if the gift had a single tax treatment but would be a separate supply if the gift had both zero-rated and standard-rated elements, despite the situation being the same in every other respect.
• In terms of HMRC’s arguments, the FTT were unimpressed that HMRC was passing its own guidance off as law. There is no legislative provision requiring that lidded baskets or ‘hampers’ be considered distinct supplies.
• The FTT noted the following factors present in this case:
  • The fact that the lidded basket is capable of reuse does not necessitate the conclusion that it is more than ancillary and an aim for the purchaser in itself.
  • The purchaser has no option over which container is used in relation to the hampers.
  • As the lidded basket was used for hampers ranging in price from £95 to £899 yet only cost the appellant between £9 and £15 depending on size, the FTT did not consider that the lidded basked would constitute an aim in itself.
  • The lidded basket serves the purpose of presenting and protecting the food and drink supplies in a way commensurate with their value, size, and weight.
• The FTT concluded that, therefore, the supply of the lidded basket is therefore ancillary to the food and drink supplies, and shares their tax treatment, such that the composite VAT rate calculated as a whole is to be determined from the relative value of the zero-rated and standard-rated food and drink supplies alone.
• As such, the appeal was allowed and the taxpayer won.

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