In accordance with the law applicable in the United Kingdom, the sale of caravans is subject to a zero rate based on the relevant article of the Sixth VAT Directive on VAT exemption, while the sale of the contents of caravans is taxed at the standard rate of VAT as an exception to the relevant article of the VAT Directive on tax exemption.
Talacre was of the opinion that the sale of caravans and the sale of their contents constitute a single supply, which should thus be taxed at a single rate of VAT. Therefore, it applied the VAT rate applicable to the principal element (caravans),namely VAT exemption.
Although the UK authorities did not dispute that there was a single supply of goods in this case, they found that the zero tax rate can only be applied to the caravans.
Main question referred to the European Court of Justice
What tax rate should be applied to specific goods that are counted as a single supply of goods if the principal element of the single supply of goods is subject to VAT exemption, while the other element includes items excluded from such exemption?
The ECJ had the opinion that if tax exemption was applied to all elements of the single supply of goods, it would extend the scope of VAT exemption applicable to caravans. However, this would be contrary to the restrictive interpretation of VAT exemption regulated in the Sixth VAT Directive.
The ECJ stated that it theoretically follows from its relevant case-law that a single supply of goods must be taxed at a single rate of VAT. However, some elements of the supply may be taxed separately if the conditions to be fulfilled to apply VAT exemption can only be satisfied in that way. Thus, a separate tax rate may be applied to the VAT taxable part of a single supply of goods consisting of both items subject to VAT exemption and items subject to VAT, if it applies to an item that is excluded from VAT exemption as a specific exception.
In its judgement, the ECJ fine-tuned the principles specified in the earlier judgements made in the relevant Card Protection Plan (Case C-349/96) and Levob (Case C-41/04) cases. Based on this case, the characteristics of multiple transactions can be summarised in the following non-exhaustive, conclusive listing:
- As a general rule, a single supply of goods must theoretically be taxed at a single rate of VAT.
- However, the situation is different if a particular item is specifically named as an exception to VAT exemption; if, for instance, the tax exemption does not apply to the movables/contents of the caravans. In this case, it is not disputed that the sale of the caravans together with the sale of their contents constitute a single supply, but taken that the contents are specifically excluded from the scope of exemption as exceptions, no tax exemption can be applied to them.