Independent VAT Consultant
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VAT: HMRC creates confused mess with craft box

A company that produced three sizes of its craft materials product successfully challenged the different VAT treatment applied by HMRC on the petite version.

20th Feb 2020
Independent VAT Consultant
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Kid creating something from scratch

The company concerned was Dodadine Ltd trading as toucanBox (TC07505).

It sold three products designed for children aged between three and eight, which consisted of reading matter and materials for craft activities, linked to a particular theme, eg kings and queens.

Crafty challenge

In the case of “super” and “grand” packages, which sold for £19.90 and £12.90 respectively, HMRC accepted there was a mixed supply of a zero-rated book and standard rated craft activities, so output tax was apportioned.

However, with the “petite” product, the book was replaced by a magazine so that it could slide through a letterbox when delivered to the customer, and the package was sold for £5.95. HMRC challenged the view that the “petite” was a mixed supply and assessed output tax, treating it as wholly standard rated.

I fail to see the difference in VAT terms between the packages:

  1. Book plus materials for craft activities
  2. Magazine plus the same craft materials

In the VAT legislation, magazines are zero-rated in the same way as books. Still, according to HMRC, the magazine was an incidental part of the supply and therefore ignored, so the whole payment for package B had to be standard rated.

This bizarre conclusion led to Dodadine Ltd being assessed for VAT of £697,656 for the periods from January 2014 to July 2017.

CPP case

For the last 20 years, any mixed supply challenge has reverted to the principles established in the landmark ECJ case of Card Protection Plan Ltd (C349/96).

This found that it is necessary to consider whether there is one dominant supply and the other supply or supplies are incidental and whether the customer expects both supplies when he pays his money, ie the customer’s perception must be fully considered.

Crucial evidence

Very impressively, the company carried out a customer survey and respondents in 91% of cases stated that they considered the magazine was an “important” or “very important” part of the package.

The company confirmed that the magazines were sold online as a single item (albeit in batches of 12 past editions), showing that it was an independent product with a clear purpose which was not an ancillary or minor part of the “petite” package. HMRC tried to claim that the survey was too limited in terms of the number of respondents, but this argument was rejected by the court.

FTT decision

The tribunal focused on the concept of how the product was viewed by the typical consumer and was satisfied that the magazine was an independent supply in its own right: “Each item is capable of standing alone”. The magazine consisted of 14 pages of educational material and was not an instruction book about how to use the craft materials. The appeal was allowed.

Unnecessary confusion

I find this case very worrying. The company adopted a consistent and sensible approach to its VAT decisions, and then HMRC put a spanner in the works by singling out one product for different treatment.

It is bizarre that HMRC accepted that a book qualified for zero-rating with the super and grand packages, but it did not like the fact that the petite package substituted the book for a magazine. In reality, the books and magazines were both a key part of the product being sold, intended to extend the children’s learning.

I hope that HMRC accepts this decision and does not seek to appeal.

Replies (4)

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By flightdeck
20th Feb 2020 10:54

Yes, not a good day for HMRC. They made a subjective assessment and tried to ride roughshod over the company.

Thanks (1)
By listerramjet
20th Feb 2020 11:16

There is an important question for HMRC and Government to answer here. What are the public policy grounds for HMRC to act in such an irrational if not entirely absurd way?

Thanks (3)
By chasmeehan
20th Feb 2020 11:50

Its clear that this was not a straighforward decision for the FTT given its carefully argued decision, but ultimately "what the customer thinks they are buying" and the firm's careful fact based assessment supported by the customer survey won out. In many mixed supply cases the value of the market is often a driver in a decision to appeal but frankly it looks like a "maybes aye, maybes no" or "teacakes" case with the result being fact specific in a limited market segment and no big issue of principle to motivate a policy related appeal.

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By scrasey
20th Feb 2020 14:34

typical of the prats at HMRC. no common sense, no appreciation of the real world and instead of insuring that tax is collected correctly, are simply trying to maximise tax revenues. and still ever few years the pillock at the top of this entirely dysfunctional organisation is made a dame or a knight. the latest deluded soul thinks he's joined the best HMRC in the world. sums it up really.

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