Ancillary elements of mixed supply?

The Upper Tribunal has held that the single supply approach does not allow one element of a transaction to be treated as ancillary to another element where there is no overall principal element: Queenscourt Ltd v HMRC [2026] UKUT 195. As such, it was not open to HMRC to argue that a dip pot was ancillary to the main hot food component of a meal deal whilst accepting that other elements of the meal deal constituted separate supplies.

Separately, the UT has also doubted the earlier decision in Zeman suggesting that an FTT may have jurisdiction to hear legitimate expectation arguments in circumstances where the underlying substantive assessments are made on a “best judgment” basis.

Background

The case involves the VAT liability of a KFC meal deals which included various elements such as a main meal, drink, cookies, yoghurt and dip pots. The taxpayer originally treated meal deals as a single taxable supply, but later made a reclaim for overpaid VAT on various elements including cookes, yoghurt and dip pots. HMRC accepted the first repayment claim, but a different inspector rejected the reclaim for VAT on the dip pots when a second claim was made, taking the view that (unlike cookies and yoghurt), a dip pot was simply a better means of enjoying the main, standard rated element of the meal deal. As a result, HMRC also sought to recover the VAT it had repaid in relation to supplies of dip pots under the first reclaim.

The taxpayer appealed arguing that either the supply of a dip pot was not part of a single taxable supply or that HMRC were prevented from recovering the VAT repaid on the first claim by the principle of legitimate expectation. The FTT held that the supply of dip pots was part of a single supply with the main hot food element of the meal deal and, whilst it held that it had the jurisdiction to hear public law arguments based on legitimate expectation, it rejected the taxpayer’s argument that this prevented HMRC recovering the VAT.

Single supply?

One argument raised by the taxpayer was that since HMRC accepted that some elements of the meal deal were separate supplies (cookies and yoghurt), it was not open to them to argue that the dip pots were part of a single meal deal supply. The FTT had rejected this argument. Whilst acknowledging that there was no specific authority on the point, the FTT noted that the ECJ in Card Protection Plan explained that, where "one or more elements" constitute the principal service, whilst "one or more elements" form an ancillary service, there will be a single supply. This clearly indicated that it is perfectly possible for some elements of a single transaction to be principal/ancillary supplies (and therefore a single supply) whilst there may be other elements which do not form part of that single supply as they are distinct and independent.

The UT has held that the FTT erred in law on this point. The question was whether in the context of a multi-element transaction which is not a single supply for VAT purposes, it is possible to isolate two or more (but not all) of the elements of that transaction and conclude that, viewed in isolation, they constitute a single supply, so that the number of supplies for VAT purposes is greater than one but less than the number of elements in the transaction.

Following a detailed examination of the case law and a careful review of the language used in those decisions, the UT has essentially held that either a transaction is a single supply as a whole or separate transactions. According to the UT, the important point to emerge from the language used in these cases is that an exception to the general rule that all elements should be distinct and independent is only in point where, in the context of a multi-element transaction, the otherwise distinct supplies must be considered to be a single transaction.

“The observation that a supply of one element on its own can be very different from a supply of the same element in combination with other elements is an important one. If the VAT analysis of a particular element can change depending on whether it is supplied on its own or in combination with other elements, it must follow that it would be artificial and potentially distortive to analyse an element otherwise than on the actual basis on which it was supplied. Put simply, if there is a transaction with 6 elements, the VAT liability should be determined on exactly that basis (a single 6-element transaction), not on a division of that transaction into (say) 3 separate transactions each of 2 elements. HMRC never explained on what principled basis the elements in a multi-element transaction could be divided between such hypothetical transactions. Such a level of unpredictability would not, in our opinion, be consistent with legal certainty or the efficient operation of the VAT system.”

Jurisdiction of the FTT to hear public law arguments

The UT agreed that, despite the point having been considered in numerous cases, there remains uncertainty as to the circumstances in which the FTT can consider arguments based on public law principles, such as legitimate expectation. However, broadly, the UT agreed with the suggestion that much depended on the specific construction of the relevant statutory provisions both in terms of the relevant substantive legislation and the related appeal rights.

The recovery assessments in this case were raised under VATA 1994 s.80(4A) which allows HMRC “to the best of their judgment” assess a taxpayer to recover excess amounts and the appeal was made under s.83(1)(t) with respect to a claim for crediting or repayment of an amount under section 80, an assessment under s.80(4A) or the amount of such an assessment. The second limb was very similar to the provision considered in Zeman where the UT held that a public law argument was not excluded. However, the UT has suggested (obiter) that the FTT in this case was wrong to conclude that Zeman was correctly decided and, on that basis, decide that it did have jurisdiction to entertain a legitimate expectation argument. In particular, the UT noted that in Beadle [2020] EWCA Civ 562 the Court of Appeal held that public law arguments were possible in “enforcement proceedings” except where excluded by the statutory scheme, but considered that Zeman was wrong to equate a taxpayer bringing an appeal against a tax assessment with, in substance, a defendant in enforcement proceedings.

In addition, the UT noted that earlier decisions in Marks & Spencer plc [1999] STC 205 and National Westminster Bank [2003] STC 1072 held that there was no supervisory jurisdiction under the first limb of s.83(1)(t) and, as such, it would be surprising if remainder of the provision allowed such an approach. In particular, the UT suggested that it is going too far to read the requirement for “best judgment” as carrying an obligation on HMRC to consider wider issues which might impact on the decision to assess other than the calculation of the correct amount.

Ultimately, the UT has held that the FTT made errors of law in concluding that it should follow the reasoning in Zeman and it should have undertaken a separate purposive examination of s83(t) to determine the question. Since the UT’s decision on this point would have been obiter in any event, the UT simply left open the question whether the FTT has jurisdiction to consider arguments based on legitimate expectation in this context to a case where the court has heard full submissions on the relevant statutory scheme and the issue would make a difference to the outcome.

Comment

The restriction on the single supply analysis appears somewhat arbitrary and based to a large extent on the use of singular rather than plural terminology in the earlier case law dealing with scenarios where a split of this nature (one element being ancillary to one part of a wider multiple supply) was simply not an issue. The logical conclusion would be that a pot supplied with a hot meal (and no more) for one price would be a single taxable supply but a pot supplied with a hot meal deal including other separate elements would not. It certainly seems counter-intuitive that the addition of extra elements to a transaction can somehow detach an otherwise ancillary element and require it to be treated as a separate supply.

It is also worth noting that in the recent Clearwater Hampers Ltd case, the FTT held that a lidded wicker basket provided as part of a hamper of food and drink was ancillary to two separate principal supplies (zero-rated food and standard rated drink and food). Whilst an element being ancillary to two separate supplies which are part of a multiple supply is not quite the same as an element being ancillary to one other supply which is part of a mixed (multiple) supply, it would be a surprising outcome if VAT jurisprudence allowed the one and not the other.