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ZERO-RATING – Whether a loose-leaf binder containing CD-Roms which is an educational learning programme for children to be used by young child with its parents is a book – Whether single or multiple supply – Card Protection Plan Ltd v Customs and Excise Commissioners considered 

LONDON TRIBUNAL CENTRE

	QUANTUM LEARNING CURVE (A  PARTNERSHIP)	Appellant

-	and –

	HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MR R L JENNINGS FCA FTII

Sitting in public in London on 9 June 2005

Mr A Pink, tax consultant, for the Appellant 

Mr M Angiolini of counsel, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal against a decision of the Respondents contained in a letter dated 28 November 2003 that supplies of the “FasTracKids” package of learning materials are standard rated for VAT purposes.  That decision was upheld by the Revenue on 9 March 2004 following an internal reconsideration.  

2.	The issue to be decided is whether the package in question is a book, and therefore zero-rated pursuant to item 1 of Group 3 of Schedule 8 to the Value Added Tax Act 1994.  If the package is not a book, the Revenue submit that it is a supply of goods which is standard rated.

3.	The parties accepted that the first issue to be decided by the Tribunal was whether the supply was a  single supply or multiple supplies.  It was not a matter of dispute between the parties that it was in fact only a single supply, and, having heard the evidence set out below, this was a view with which the Tribunal concurred.

The legislative provisions

4.	Under the Value Added Tax Act 1994 (VATA) section 1 VAT is charged on the supply of goods and services in the United Kingdom.  

5.	Section 30 of the VATA provides: 

(1)	Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on a supply apart from this section:

(a)	no VAT shall be charged on the supply; but 
(b)	it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2)	A supply of goods or services is zero-rated by virtue of  this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.

6.	Schedule 8 of the Act provides:

Group 3 – Books, etc

Item No

1.	Books, booklets, brochures, pamphlets and leaflets.

…

7.	On 23 October 2003, Customs and Excise (as they then were) issued Business Brief  20/03.  This provides inter alia as follows:

Clarification of single or multiple supply relating to books and magazines packaged together with another item

This Business Brief provides guidelines, in the light of the Card Protection Plan case, on how to deal with books or magazines that are packaged together with another item … 

It is not possible to give exhaustive guidelines to cover every eventuality, and the advice given here is intended as a general guideline only.

Multiple supply

Employing the tests outlined in VAT Information Sheet 2/01, it is Customs’ view that in most cases books or magazines which are packaged together with another item are likely to represent a multiple supply of the two elements.

Extra statutory concession 3.7, “VAT on minor promotional items supplied in linked supplies schemes” may be applied where a multiple supply exists.

Single composite supply

However, in the following circumstances there is likely to be a single composite supply –

(1)	Children’s books packaged with a tape or CD where there is audible interaction between the operation of the tape/CD and the book would be a single zero-rated supply.  Examples of audible interaction are –

	-	a noise to indicate the turning of a page, or 
-	an instruction to operate the tape/CD on specific pages of the book, or
-	exercises on the tape/CD which require the book to proceed.

(2)	Educational books with a tape/CD where there is clear interaction between the book and the tape/CD would be a single zero-rated supply.  The tape/CD must –

		-	be clearly subservient to the written material, and 
		-	have negligible independent use without the book, and
		-	not be available for sale separately.

(3)	An educational tape/CD incorporating a book, where the booklet is simply an instructional manual explaining how to use the tape/CD, would be a single standard rate of supply.

The evidence

8.	The Tribunal was provided with an agreed bundle of documents and the product itself.  Mr Nicholas Devine gave evidence on behalf of the Appellant.  The Tribunal watched a demonstration of three of the CD-ROMs which were part of the package, which is described more fully below.

9.	The product can best be described as an instruction manual contained in a loose leaf binder consisting of approximately 350 pages and 24 CD-ROMs.  The first page is headed “Develop your child’s gifts and talents.  Home study parent’s guide.”  There are dividers at regular intervals which are marked with the names of the different lessons which are contained within the binder.  There are 24 dividers marked with the name of the subject, each subject is divided into two principal and two minor parts; each divider has a CD relevant to four lessons.

10.	The cost of the product is £1,970 if paid for outright, it is £2,370 if the purchaser pays by instalments.  The course is aimed at parents of children between the ages of three and eight years of age. The promotional literature describes it as 

“A revolutionary programme designed to help parents enrich their children’s knowledge and to supplement traditional classroom learning.  

“The FasTracKids Programme consists of a library of 96 fun-filled interactive learning modules designed to challenge, stimulate and develop your child’s communication, creativity and confidence in the comfort and convenience of your own home.  Children learn with their parents from the innovative computer-driven lessons as they participate in discussions and practical activities.”

The process is described as “Accelerated Learning”, and the material continues: “Some of us prefer visual stimulation, others respond better to oral communication, while others are more tactile and prefer to learn by experience.

“The FasTracKids  developers recognised the need to incorporate all of these learning styles into the course and have created a unique learning method which leads the way in experiential learning. With stories, practical experiment, parent-child discussions and visual activities, the children’s attention is always engaged and fully focused.”

11.	The first page of the manual itself is an introductory letter from the chairman and chief executive officer of FasTracKids International Ltd.  The following nine pages set out the contents of the binder and give instructions on how to use the contents.  In addition to the written text and the CD-ROMs, a purchaser of the product is given the name of a related website and in the appendix to the manual there is an instruction sheet which tells the purchaser how to obtain access to the website.

12.	The instructions advise the purchaser to read the introductory section of the manual in full before using any of the CD-ROMs.  The purchaser is also advised to “read the chapter in this section entitled ‘Using the FasTracKids Home Study CDs’ to ensure that your home computer meets the minimum hardware and software requirements.”  Having confirmed that the purchaser has the required hardware and software on his computer, the purchaser is then instructed to play one of the CDs to enable him or her to become more familiar with their operation.  The introduction continues: “As you review the CD for the upcoming lesson, please turn in this manual to the support documents that accompany this topic.  For instance, if you are reviewing Lesson 1 on Creativity, please review the documents in the Creativity section of this Parent’s Guide that correspond to that lesson.”  The supporting materials are described as consisting of ‘Coaching Tips’ and ‘Supporting Activities’.  The ‘Coaching Tips’ give to parents suggestions about what can be done to help the child get the most out of the lesson in question and also advise how the parent can prepare the lesson.  The ‘Supporting Activities’ give printouts which support the lesson.  These printouts are available for three-quarters of the lessons, but not for all of them.

13.	Each individual lesson is intended to last for one hour and each subject consists of eight lessons. The first lesson is Biology 1A.  There are two pages of typescript for the parent to read. The first paragraph outlines the content of the lesson, and lists some of the vocabulary used. Such as “species” and “micro-organisms”. The second paragraph is headed “Introduction to the Science of Life” and outlines the content of the CD. The CD itself shows two characters, Sam and Samantha Bear, who travel to various parts of the world and look up various plants and animals.  The third paragraph is headed “Plant or Animal Game” and describes an interactive game.  An icon appears on the screen and the child has to click on it when deciding whether the images shown are plants or animals.   The plants and animals are described in detail on the screen. 

14.	The fourth paragraph is headed “The Smallest and Largest Birds in the World” and describes a “creative activity”.  Following this text there are eleven pages, ten of which are numbered.  On the first (unnumbered) page there is a drawing of a humming-bird.  The child is instructed to draw an outline of his or her hand on the page beside the humming-bird which he is informed is the world’s smallest bird.  The numbered pages one to ten consist of a drawing of an ostrich (which the child is told is the world’s largest bird) which has been cut into ten equal parts  and the child has to create a life size mural by putting the pages in the right order.  In both cases the child is encouraged to colour in the picture of the bird in question.  The coaching tips at the end of this paragraph suggest that the parent may help the child find  more information on each of the birds by using the internet, or wild life or encyclopaedia computer programmes or books.

15.	The fifth paragraph is headed “Take a Trip with Sam and Samantha”.  An optional activity is suggested whereby the parent uses a world map or globe to locate the different stops visited by Sam and Samantha.  It states: “Before the trip begins, a brief overview of rivers, lakes, oceans, the tundra, forests and deserts is provided.   Discuss the meanings of these words and help the child to find each location on the map or globe.”    
                      
16.	The final paragraph is headed “A Trip to the Amazon”.  In this part of the lesson the child has to guide ‘the Explorer’ through a maze of rocks and other obstacles which appear on the screen to reach the rain forest by using the appropriate buttons on the computer.  There is also a video of the Amazon river.  This provides information about each plant and animal.  The child is then asked to create full sentences describing something interesting or unusual about those plants and animals.  Various other related activities are suggested.

17.	The final heading for the parent is a supply list for the activities and the list comprises a handout of the humming-bird and the ostrich numbered sections, crayons or markers, glue or tape and finally a world  map or globe which is described as optional.

18.	   We have set out the contents of the first lesson in full because the other lessons are for the most part in a similar format.  Throughout the guide there are a 171 activity sheets, which gives an average of 14.25 per subject, although as pointed out above, a quarter of the lessons contain no activity sheets. There are only some twenty-four lessons out of the ninety-six which do not have handouts (or activity sheets) available for colouring in or otherwise involving the children.  One such lesson which we viewed was the technology lesson.  That lesson demonstrated how washing machines, refrigerators, vacuum cleaners, ovens, clocks, light and electricity worked.  In that particular lesson there are various creative activities suggested, in particular in respect of the refrigerator and the vacuum cleaner several experiments are recommended, all of which need the involvement of the parent.

19.	The CD-Roms we viewed lasted approximately 17 minutes. For the most part we viewed them continuously, whereas when used by the parent and child they would be interrupted every two or three minutes. We have no reason to doubt Mr Devine’s evidence that each lesson typically lasted one hour in total, and about one-third of that time only was taken up with viewing the CD-Rom.  

20.	  The website contained stories which the parent could print out for the child to read, and there were also colouring books which could be downloaded.  We accept Mr Devine’s evidence that the home study website was seldom used. Less than 30% of purchasers registered to use the website, and only a small percentage of those returned to the website.  The website was not intended to be a major resource, the parent was expected to get what was needed from the binder itself.  The binder was supplied in a box, with the CD-Roms contained in plastic envelopes within the binder; having purchased the binder, there was no need to purchase anything further.  

21.	As stated above, each CD-Rom was divided into four lessons, and one lesson was intended to be given to the child each week.  The teaching method had been derived from classroom-based material, where teaching notes had been collated.  The aim was to focus on the child, rather than the parent, which would be the case if the parent were to be passing on the knowledge rather than it coming from the CDs.  The CDs themselves were constructed so that every two to three minutes there was a change of emphasis, and either a new topic was introduced or some form of interaction had to take place.  The approach was called ‘Zig-Zagging’, and was designed to cater for a small child’s limited concentration span.  It was essential that a parent was with the child all the time.  It was Mr Devine’s unchallenged evidence that the research showed that children forget information taken from CD-Roms very quickly, but they learn fast where there is interaction with an adult and an associated activity. 

22.	In the introductory section on using the CD-Roms it is stated: “Everything you need to implement the FasTracKids instructions is stored and operated from the CDs enclosed.”  We accept Mr Devine’s explanation that this sentence should be read in the context of the CD-Roms, and in particular should be read in conjunction with the general introduction which states: “This manual will also help to guide you through the 96 hours of weekly instruction that you will complete with your child during the next two important years.”  The CD-Roms are only one component of the whole learning programme.  Similarly Mr Devine did not accept that the material in the binder was simply supporting the lessons in the CD-Rom, but considered that they were co-dependent and each was necessary for the child to get the full educational experience.

The Appellant’s case

23.	The Appellant relied on the intention behind the zero-rating legislation, which made no distinction between educational books and others.  It was submitted that it was considered by the legislators that the dissemination of information was to be encouraged, and that zero-rating was for those things which the tax system did not wish to discourage.  Technology had overtaken the situation, and in the present case the information which was available on the CD-Roms could equally be available in a book.  

24.	Mr Pink relied on the adoption of the common sense approach to the issue and submitted that the test should be what an ordinary person would say was being supplied.  This approach was supported by the Business Brief.  It was submitted that the case was not about any kind of  “underlying reality” or “substance” of  the supplies, but was about the physical characteristics of the product supplied.  An examination of the physical product revealed that, despite the inclusion of CD-Roms, the product was clearly a book rather than a collection of CD-Roms, and therefore came within item 1 f Group 3 of Schedule 8 of the VATA 1994.  In support of his submission that it should properly be classified as a book, Mr Pink urged the Tribunal to look at the time devoted to each element of the package by the user, the underlying cost of the different elements of the package and the physical side of each element of the package.

25.	Mr Pink accepted that the product could be described as an “enhanced educational programme”, as urged by the Revenue, but submitted it could also be                described as a book and the phrases were not mutually inclusive.  The content of the material was of secondary importance to what in reality the product was.  

26.	He submitted that whilst the Revenue had emphasised the CD-Rom element, there was no more logic to that than emphasising the description of it as a book.  The CD-Roms did not contain lessons which were supported by the pack, they gave the basic information, and the book set the CD-Roms in context by providing interactive activities.  

27.	Mr Pink distinguished the case of Customs and Excise Commissioners v FDR Ltd [2000] STC 672 relied on by the Revenue on the basis that that case concerned a provision of services whereas the present case was about the supply of goods.  In the present case Schedule 8 did not require that one went beneath the surface to some other reality.  Any further enquiry was a step too far down the route of artificiality.  

The Respondents’ case

28.	It was accepted by Mr Angiolini that the test should be a simple one, namely would an ordinary person describe it as a book? to which he submitted that the answer was “No”.  Nobody would say “I am buying a book”, they would say that they were buying an educational system.

29.	The question of the purpose of zero-rating relied on by the Appellant was irrelevant, there was no evidence as to what was the purpose, and in any event the particular provisions predated the introduction of value added tax, having been in existence at the time of purchase tax.  The proper approach to zero-rating was the same as for exemptions, namely that a restrictive approach should be adopted. 

30.	The Revenue contended that, having regard to the essential features of the learning package, as well as the marketing literature and other available material, it was clear that the dominant purpose of any customer purchasing the learning package was to obtain a computer-based learning programme, where the CD-Rom contained the lessons and “Everything [needed] to implement the FasTracKids instruction”.  The lessons and activities were “managed” through the CD-Roms, which constituted the principal supply, and the printed material was no more than ancillary to the CD-Roms themselves (and perhaps the website containing additional material).  Mr Angiolini pointed to the fact that the opening part of the printed material was little more than an explanation of how to use the website and the CD-Rom; the “Coaching Tips” relating to each individual lesson were largely an explanation of the contents of the CD-Rom lessons to the parent or teacher and  were virtually useless unless there was access to the CD-Rom at the same time; the other printed material was closely linked to the lessons contained on the CD-Roms and in most cases could not be properly used without having gone through the CD-Rom lessons first. Most of the lessons, including many of the activities, could be carried out solely by using the CD-ROMs without any reference to the printed material.  The reverse, i.e. the CD-ROMs being ancillary to a supply of the printed material, could never be the case on the particular facts and taking into account the essential characteristics of the product.

31.	The Tribunal was urged not to take account of the analysis of one of the lessons undertaken by a researcher called Armande Robinson on behalf of the Appellant.  No information was given as to how the calculations as to the relevant apportionment of time of each element of the lessons was calculated. Furthermore this approach produced a type of artificial dissecting which Laws LJ in the case of CCE v FRD (supra) had warned against at paragraph 54 where he said:

“While I hope this observations are helpful I think there is some danger of over-elaboration and needless complexity in this field.  We are not here concerned with deep legal principle, but with the articulation of a fair and reasonable approach to those cases where there is a question of how should the consideration given by a supplier for his reward be categorised for the purposes of VAT, when there are multiple acts of supply involved.  The simpler it is the better, so long as it is kept consistent with the doing of justice.  With respect I apprehend (but I by no means propose to lay down any rule) but where this sort of issue arises, the first question to be asked may be couched as Nolan LJ put it:  “What is ‘the true and substantial nature of the consideration given for the payment’”.  That will identify the apex or the table top.  The second question will be whether there are other supplies which are ancillary to the core.”

32.	The Tribunal was urged to look at the way the product was marketed, which was as a CD-Rom-based series of lessons.  It was the CD-Rom which managed the activity, there were spoken parts and then activity.  It was submitted that the choice of the Tribunal was not between a book or a CD, but between a book and something other than a book.  

33.	The Tribunal was referred to Card Protection Plan Ltd v Customs and Excise Commissioners [1999] STC 270, Case C-349/96 where at paragraphs 27-30 the ECJ stated:

“27.	It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provisions in the Sixth Directive.  In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.

“28.	However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) at 783 … concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of  features and acts, regard must first be had to all the circumstances in which that transaction takes place.

“29.	In this respect taking into account, first that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent, and second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the function of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable supply is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.  

“30.	There is a single supply in particular cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment as a principal service.  A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied …

“31.	In those circumstances, the fact that a single price is charged is not decisive.  Admittedly, if the service provided to customers consist of several elements for a single price, the single price may suggest that there is a single service.  However, notwithstanding the single price, the circumstances such as those described … above indicated that the customers intended to purchase two distinct services … then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. …”

34.	Whilst the above citations were originally relied on by Mr Angiolini in support of his contention that there was a single supply, they were further relied on by him in support of his main contention that the supply was of  something other than a book.  His concluding submission on the issue whether it was a single or a multiple supply, was that the Tribunal was invited to adopt a common sense approach and hold that the predominant character, the essential feature, the true and substantial nature of the consideration given and the core of the single supply by Quantum to its customers with that of an integrated computer-based learning programme for children.

Reasons for decision

35.	In reaching our conclusion that there was a single supply, we were not assisted by any argument to the contrary by either party.  We therefore accepted that the approach advocated by Laws LJ in the FDR case was the appropriate one, and, also taking account of the fact that neither the written material would be of use to the purchaser without the CD-Roms, nor would the CD-Roms be of any use without the written material, there was in fact a single supply.  Furthermore, applying the test referred to by the European Court in Card Protection Plan, the customer would not have intended to purchase anything other than one item, albeit an item with two (or three, including the website) components.

36.	Whilst a description of the product is that of a binder containing printed material and CD-Roms, such a binder could also be described as a loose-leaf book with CD-Roms, which we consider to be the proper description in this case.  Accepting the approach advocated on behalf of both parties, namely what would the reasonable man in the street consider it to be, we have no doubt that he would give some such description as the above.  We do not accept the Revenue’s submission that no reasonable person could consider it to be a book, quite the contrary.    Apart from the inclusion of the CD-Roms, the product shares many characteristics with De Voil’s Tax Binder, which was originally a bound book but the format was altered to allow for the insertion of additional material.  The product in the present case is in binder form to allow for the extraction of material.

37.	Whilst, as stated above, both the cases cited by Mr Angiolini were initially cited in support of his argument that there was a single supply, there is a further distinction to be made in that the Card Protection Plan case was concerned only with a supply of services, and the FDR case was concerned with whether the supply was one of goods or services.  That question did not arise in the present case, despite the description of the product as an enhanced educational programme, at no point was it suggested by either party that it could properly be described as a supply of services.

38.	Whilst it was disputed on behalf of the Revenue that the timings of the relevant parts of the lessons as calculated by Mr Robinson could be relied on, nonetheless, having listened to three lessons in full, we find that, at the very most, the CD-Rom part of  the lesson only takes up one-third of an hour and in fact the ones we listened to took up barely over one-quarter of an hour. Whilst of course it would be possible for anyone to play the CD-Roms straight through ignoring the text and accompanying documents, that would completely obviate the point of the learning programme. The purpose of this product is to involve the parent with the child in learning. This is only achieved if the parent is on hand and follows the instructions given in the text, as well as assisting the child by providing the items suggested in the supporting activities section. The programme is based on the limited attention span of the child and it is for this reason that the CD-Rom is frequently stopped, and is not a continuing flow of dialogue and pictures. The child has to interact with it, and a child of the age of three is only going to be able to interact appropriately with the assistance of an adult. Whilst the text cannot be described as providing a narrative in the way that, say, a history book would, it is nonetheless similar to the type of instruction one might find in a language learning text book which is accompanied by a CD.

39.	Whilst the product cannot, as the Appellant recognised, properly be fitted into any of the categories set out in the Business Brief 20/03, nonetheless it has great similarities. In particular, whilst it cannot be described as a children’s book as required by paragraph 1, where “a tape or CD where there is an audible interaction between the operation of the tape/CD and the book would be a single zero-rated supply”, nonetheless it seems to us to be invidious to distinguish between children’s books and the text in question which here is designed for an adult to read for the benefit of a child.  In the present case the item in subsection (c) “exercises on the tape/CD which require the book to proceed” is clearly fulfilled.

40.	Paragraph 2 of the Business Brief is relevant to educational books with a tape/CD and where there is a clear interaction between the book and the tape/CD this is deemed to be a single zero-rated supply.  Whilst the requirement under sub-paragraph (a) that the tape/CD must “be clearly subservient to the written material” is not necessarily fulfilled here in that the CD-Rom is of equal importance to the written material, the criteria set out in sub-paragraph (b), namely that the CD should have negligible independent use without the book is clearly fulfilled for the reasons set out above. In the present case the parent is instructed to turn in the manual to the documents accompanying each lesson, and the supporting activities give the parent printouts which are needed to support the lesson.  A large proportion of the activities outlined on the CDs need the book to proceed and certainly need the parent to have read the book to enable the child to carry out these activities.

41.	We accept the Appellant’s argument that the book is not simply an instruction manual explaining how to use the tape/CD as set out in paragraph 3 of the Business Brief.  Of the 350 pages of the book, only 9 contain instructions on how to use the home-study programme.  96.8% of the pages are parental guides/tips and activity sheets that are required to complete the activities in the curriculum as outlined on the CDs.  Only 3.2% are instructions for the operational use of the programme material.

42.	For all the above reasons we find that in the present case there is a single supply of a book and this appeal is allowed.

43.	The Appellant’s costs.  Liberty to apply to the Tribunal if these are not agreed.

MISS J C GORT
CHAIRMAN

RELEASED: 26 July 2005

LON/04/0011