19034

SINGLE OR MULTIPLE SUPPLY – CD book as part of a series on classic composers comprising a CD and 12 pages of written material and illustrations – principal supply is that of the CD – appeal dismissed

LONDON TRIBUNAL CENTRE

	INTERNATIONAL MASTERS PUBLISHERS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					ROSALIND RUDD JP

Sitting in public in London on 19 April 2005

John Walters QC, counsel, instructed by Royds for the Appellant

Nicola Shaw, counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal by International Masters Publishers Limited against a ruling in a letter of 21 August 2003, confirmed in letters of 29 October 2003 and 19 April 2004 that the product described below was standard-rated.  The Appellant was represented by Mr John Walters QC and the Respondent by Miss Nicola Shaw.
2.	Mr David Moncur, legal affairs manager of the Appellant provided a detailed witness statement with exhibits and gave evidence.  We find the following facts:
(1)	The Appellant is a direct marketing company supplying products directly to the customer which are advertised through personally addressed mailings, media inserts, telemarketing, direct response television, websites and email marketing.
(2)	The Appellant’s business is that of distributing “continuity products.”  The product is a series entitled “the Classic Composers” comprising 63 “CD books” each devoted to a single composer (except for one which is a compilation of the works of various composers), 156 cards.
(3)	The method of supplying the product is to send a person a “gift certificate inviting him to apply for an introductory package which is free apart from postage and packing of £3.95 if he keeps it.  If he pays this sum he then receives two CD books, a bookshelf for displaying the complete series, a binder to hold the cards of which two packets of four cards are sent, and a promotional item, such as a small clock.  The customer had 10 days in which to decide to return the items.  Approximately every three weeks thereafter he receives a further instalment of a CD book and a packet of four cards for £9.99 on the same 10-day approval or return basis until the series in complete.  Cancellation can be made at any time.  At various stages the customer is given the option of receiving three CD books and packets of cards at a discount on the standard price (£26.97 instead of £29.97), which completes the set in 20 shipments (13 shipments for the cards which have a smaller number of total packages) over 15 months; this option is taken by about 55 per cent of customers.  Alternatively those opting to take one at a time receive 60 shipments (39 shipments for the cards) over a 45-month period.  Only about 5 to 10 per cent complete the whole series without cancelling.
(4)	The CD book is 15 cm high and 13.3 cm wide  (which is different in size from a normal CD in a case).  It comprises a hard-back cover in which a plastic CD case is fixed to the inside front cover plus 12 bound pages comprising a contents page, a four page biography of the composer, two pages of historical context, and 5 pages containing a brief description of the musical extracts contained on the CD.  In the case of the sample we saw devoted to Mozart after the four page illustrated biography, there are two pages listing some facts and dates during his lifetime and some text and pictures of other contemporary items, such as George III buying Buckingham House in 1761 in which Mozart played in 1764.  The listener’s guide, comprising the remaining five pages, contains a half a page (or on one page one-third of a page) piece on each (including an illustration) of the 11 tracks on the CD. The last page (headed “in depth” comprises two sections from a single work (here Mozart’s requiem) dealt with on a whole page also containing an illustration.  The back cover has acknowledgements inside the cover and a list of the tracks on the CD on the outside.  The CD consists of 11 separate tracks of excerpts from the composer’s music totalling 73 minutes 36 seconds of music.  Each track consists of single movement extracts, such as the overture to the Marriage of Figaro, the first movement of the clarinet concerto, and the second movement of piano concerto No.21.  The music is chosen to give an overview of the composer and the essential elements of his work, rather than to be a series of “greatest hits.”  
(5)	The cards in our sample shipment comprised card 6 entitled “Towards a New Art” of a series of cards on early music, card 38 on the Bach dynasty in the classical section, card 17 on the trombone in the orchestral instruments section, and card 16 of a glossary of musical terms.  The cards have printed material on both sides and have punched holes for inserting into a ring binder.  The Commissioners accept that this part is zero-rated.
(6)	The CD accounts for 29.5 per cent of the cost of the goods (which includes also the housing for the CD) but when packing, invoicing and postage is added this becomes 12.1 per cent of the total cost of the supply.  A CD containing similar extracts could be obtained on its own for £4.99 to £5.99.
3.	Group 3 of Schedule 8 to the VAT Act 1994 zero-rates:
“1.  books, booklets, brochures, pamphlets and leaflets.
…
6. Covers, cases and other articles supplied with items 1 to 5 and not separately accounted for.”
4.	Mr Walters for the Appellant contends that the whole product is a book or booklet within item 1 of Group 3, or alternatively that the CD is within item 6.  The essential feature of the transaction is that a book with CD is supplied as part of a series at a single price comprising an encyclopaedia to be collected in instalments.  It is a single supply which it would be artificial to split.  The essential feature is that of an encyclopaedia in book form.  The dominant purpose is the provision of written material in book form.  The principal goods are the printed material representing 70.5 per cent of the direct cost.  The CD does not constitute an aim in itself but a means of better enjoying the printed material.  As a further alternative there are two supplies and he asks us to make findings of fact that will enable the Commissioners to determine whether extra-statutory concession 3.7 (VAT on minor promotional items supplied in linked supplies schemes) is satisfied.
5.	Miss Shaw, for the Commissioners, contends that the product is a CD with some ancillary sleeve notes bound into the same cover.  The notes are an integral part of the CD.  They would be redundant without the CD.  The customer’s primary aim is to buy the CD.  Objectively, the reason why people acquire the product is to acquire the CD.  The printed material does not constitute a book etc.
6.	The guidance by the European Court in Card Protection Plan Ltd v Customs and Excise Comrs (Case C-349/96) [1999] STC 270 starting at paragraph 26 on “whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately” includes the following (a) that regard must first be had to all the circumstances in which the transaction takes place (paragraph 28); (b) a supply which consists of a single service [and this must also apply to goods, as adopted in Kimberley-Clark v Customs and Excise Comrs [2004] STC 473: we substitute goods for services throughout the following summary] from the economic point of view should not be artificially split but the essential features of the transaction must be ascertained to determine whether the taxable person is supplying the typical customer with several distinct principal goods or with a single supply of goods (paragraph 29); (c) there is a single supply in cases where one or more elements are to be regarded as constituting the principal goods, whilst one or more elements are to be regarded as ancillary goods (paragraph 30); (d) a supply of goods is ancillary to a principal supply of goods if it does not constitute for customers an aim in itself, but a means of better enjoying the principal goods supplied (paragraph 30); (e) a single price is not decisive but may suggest a single supply; but if the circumstances indicate that the customer intends to purchase two distinct goods an apportionment should be made (paragraph 31).  In Dr Beynon and Patners v Customs and Excise Comrs [2005] STC 55 Lord Hoffmann at [31] said in relation to the test summarised at (b) above “In my opinion the level of generality which corresponds with social and economic reality is to regard the transaction as the patient’s visit to the doctor for treatment and not to split it into smaller units.”
7.	Applying these test is a matter of impression.  We look at the supply as a whole and regard this as consisting of two elements, the CD book on one hand and the cards, which give information unrelated to what is on the accompanying CD, and which are agreed to be zero-rated, on the other.  Even when consisting of part of this whole, we consider the CD book to be a separate supply having two elements, the CD and the written material which we agree is a book or booklet when looked at on its own.  In spite of Mr Walters’ persuasive arguments we regard the CD as being the principal supply and the written material as ancillary.  The CD provides over 73 minutes of music compared to which the written material is slight.  Including a small amount of written material with a CD is common in our experience.  We consider that a typical customer buying a series on the classic composers will be interested in listening to the CD and will regard the written material as an aid to enjoying the music, rather than wanting to read about composers and as an ancillary matter to listen to some of a composer’s music.  We regard the introductory leaflet as conveying this priority: 
“Take a look at the sample we have enclosed for you.  It is a compact disc and a hard-back book all in one!  You can listen to the superb digitally recorded disc of Mozart, and at the same time read the Listener’s Guide—a track by track description of the music and find out about the composer’s life and what inspired his music.”  
The written material in the CD book does not constitute an aim in itself but as a means of enjoying the CD.  Five of the 12 pages refer to the content of the CD and the rest is related as being the biography of the composer concerned or notes on the historical context of the composer’s life.  We regard the supply as very different from the typical case of a magazine supplied with a CD.  The purchaser will want the magazine anyway and if there is a free CD he will regard it as an extra.  We do not think that a purchaser here can be regarded as buying a book (or booklet) and treating the CD as an extra.  He is buying a CD with the written material as an extra.
8.	Since we regard the CD book as a single supply principally of the CD no question of apportionment arises.  In case we are wrong on this we record in relation to the concession that the Commissioners concede that the CD is not supplied separately from the book and that the cost of the CD is no more than £5 excluding VAT.  We have made findings on the proportion of the cost of the CD with and without postage and packing.  We do not propose to say anything on the interpretation of the concession or whether postage and packing should be included in calculating the percentage.
9.	 Accordingly we dismiss the appeal.  The Commissioners did not ask for costs.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 25 April 2005

LON/04/0930