Death and Taxes

THE DECISION IN Co-operative Wholesale Society Limited v Commissioners of Customs and Excise [2000] STC 727 seemingly deals only with the frequently litigated issue of whether a particular transaction results in a single or multiple supply for VAT purposes, this time in the context of the exemption for funeral services. I shall argue that the case involves a far more interesting issue, namely the VAT treatment where one party agrees with a second party to make a supply to a third party on the occurrence of a contingent event.
The taxpayer, Co-operative Wholesale Society, carried on funeral services. Leeds Hospital Fund Ltd provided a number of health-related insurance policies for its members, including a policy to cover funeral expenses. The Co-operative Wholesale Society entered into a series of agreements (collectively referred to here as 'the agreements') with Leeds Hospital Fund, the cumulative effects of which were that the Society agreed on the death of a member of the Fund to provide either:
a funeral service to the deceased's estate up to the value of £1,000; or
facilitation and administration of the choice by the deceased's estate of an alternative funeral director (including the payment of up to £1,000 to that funeral director).
The Society charged the Fund £6 a year for each member in respect of the specified funeral service plus a one-off payment of £50,000 (by way of an administration fee) and £1.25 a year per member in respect of the facilitation and administration (I shall refer to these as the procurement services). The agreements lasted for three years.
The Society charged VAT on the £50,000 administration fee but not on the £6 or £1.25 charges. Customs (who assumed that the supplies were made to the Fund) agreed that the £6 charge was exempt from VAT under Group 8 of Schedule 9 to the Value Added Tax Act 1994, but contested that the £1.25 charge was not within Group 8 and was taxable at the standard rate. The Society argued, inter alia, that it made one supply in consideration of £7.25 which was exempt under Group 8. Group 8 provides exemptions for the disposal of the remains of the dead and the making of arrangements for or in connection with the disposal of the remains of the dead.
The Customs Book of Living and Dying
In the tribunal and the High Court, Customs won. In the Court of Appeal, Lord Justice Simon Brown, with whom Lord Justice Waller and Mr Justice Gage agreed, upheld the High Court's decision but on a different basis.
His Lordship stated that 'in so far as any supply here was being made by the Society to the Fund itself ... it was indeed the supply of a promise and not the supply of a Group 8 service ... the Fund were supplied merely with the Society's promise that in specified circumstances they would make (or facilitate) the supply of burial services to others'. His lordship did not dispute that an insurance fund or company could be supplied with funeral services. For example, an employer could pay for the funeral of an employee either when the employee actually dies or in advance and the supply to the employer would be exempt (agreements to provide funerals in return for advance payments are agreed by Customs in Notice 701/32/97 to be within the exemption).
Lord Justice Simon Brown did not explicitly explain his concern, but seemed to hold that this was not the case because the Society's principal obligation was to 'enter into a contract with the estate of the member or other person'. In other words, whatever the agreement between the Society and the Fund was, it was not an agreement for the supply of funeral services, this being the subject of a later contract. It is a tricky point to resolve: on the one hand, the absence of a refund mechanism in respect of the £6 payment (if the Society did not provide the funeral service) or the £1.25 payment (if it did) together with the fact that the agreements lasted for only three years, after which the Society had no further obligation to the Fund or to its members, suggest that the Society was providing a more intangible service to the Fund than the supply of funeral services. On the other hand, why should the manner in which the Society chose to charge for a service have a bearing on the characterisation of the nature of that service? For example, if the Society had simply agreed to provide the service to the members' estates in consideration of a lump sum paid in advance by the Fund, this would be an exempt supply under Group 8 and not the supply of a promise. In what way, other than the mechanism for payment for the service, does this type of arrangement differ from the agreements?
There are many subtle arguments here, but the Court of Appeal's judgment does not discuss them. Instead, having concluded that the supply was of a promise, Lord Justice Simon Brown stated that such a promise was liable to VAT unless exempted by virtue of it being an insurance contract under Group 2 of Schedule 9. (The Society was understandably reluctant to claim exemption under this head because it is not licensed to carry out insurance business. Not that Customs seemed particularly interested either – but I shall return to this point later.)
Not so fatal
Now things become a bit murky. Customs, with the Court's approval, advanced a different argument:
VAT is chargeable on the supply of goods and services;
the making of a contractual promise is not the same as the making of a supply;
the contractual promises were between the Society and the Fund, but the benefits were supplied to the estates of deceased members;
the supply of services was thus made to the estates of deceased members, not the Fund;
if the Society supplied funeral services to the estate, they were exempt but if the Society supplied procurement services to the estate, they were not.
What happened to the supply of a promise to the Fund, which in the previous paragraph the Court considered was taxable unless exempted under Group 2? The Court simply held that it was not a supply, just a contractual promise. The consideration paid by the Fund was paid not for the promise made to it, but for the funeral or procurement services the Society agreed to supply to members.
But section 5(2), VAT Act 1994 states that 'anything which is not a supply of goods but is done for a consideration ... is a supply of services'. This surely encompasses the agreements between the Society and the Fund. The Fund was not simply prepaying for services to be supplied to members pursuant to a contract distinct from the agreements: the 'contract' between the Society and the deceased member's estate (presumably dealing with practical matters such as the location of the grave and the type of music) could not be a true legal contract because the estate would not supply any consideration. If the Society had failed to act in accordance with the agreements, the Fund had the right to sue for breach of contract.
Section 6(4) of the Act is not helpful to the Court of Appeal either. By virtue of this section, the Society's supply is treated as taking place at the time at which it received payment. But when the Society receives premiums from the Fund, the recipients of the funeral services are unknown and unascertainable. This is not in itself fatal because I am not aware that there is a requirement as such that a recipient of services must be ascertainable or even exist at the time the services are supplied. It is a rather odd state of affairs though, and a point which one might reasonably have expected the Court of Appeal to have considered.
Redrow another nail in the coffin
The above analysis is consistent with the House of Lords in Commissioners of Customs and Excise v Redrow Group plc [1999] STC 161. In that case, the taxpayer building group entered into agreements with various estate agents for the sale of prospective Redrow purchasers' homes whereby it agreed to pay the estate agents' fees plus VAT if the prospective purchaser completed the acquisition of a Redrow home. If the prospective purchaser did not complete, the purchaser alone would be liable for the fees. The question was whether the taxpayer was entitled to an input credit in respect of the VAT paid on the fees. The House of Lords held that the taxpayer was entitled to the credit (and in doing so overturned a Court of Appeal in which the lead judgment was given by none other than ... Lord Justice Simon Brown).
Lord Hope held that 'the estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow'. This is very similar to the present case: the Fund entered into the agreements with the Society, negotiated with the Society and paid the premiums. Indeed, the Court of Appeal seemed to begin its judgment by accepting this to be the case, before performing an abrupt volte-face and denying that the Fund received any services at all.
What was the VAT status of the supplies of funeral or procurement services to the deceased's estate when made? The bottom line is that the Society could not provide services (in the VAT sense) to the deceased member's estate. If one takes the view that it provided funeral or procurement services to the Fund, then the actual burial or facilitation of the burial of the dead member is itself the completion of that contract. If the Society provided a promise to the Fund, then the burial or facilitation of the burial is a contractual consequence of its promise to do one of two things on the occurrence of a certain event.
Gravely wrong!
The Court of Appeal certainly got it wrong in holding that there were two supplies to the estates of the deceased. We are left with two possibilities as to what the correct answer is. Possibility one is that there was one supply of exempt funeral services and one supply of standard-rated procurement services by the Society to the Fund. This is what the tribunal and the High Court held, and what Customs thought until prompted to change its mind by the Court of Appeal. As neither the tribunal, the High Court nor the Court of Appeal considered in depth the precise scope of Group 8, it is difficult to come to any firm conclusion whether the Court of Appeal was correct in holding that it did not fall within it.
Possibility two is that there was a supply of a promise (it does not matter if it is viewed as a single or multiple supply) to the Fund. It is possible that it would be exempt as a supply of insurance services under Group 2, but the Society did not claim this because it is not authorised to supply insurance services. Given that the Court of Appeal incorrectly held that no supply had been made to the Fund, the judgment only alludes to the exemption. Had the Court of Appeal correctly held to the contrary, it would have had to have considered the issue. It would have been unsatisfactory if the Court, as it hinted it might, avoided considering the point because neither of the parties pleaded it, notwithstanding that Lord Justice Simon Brown thought that a typical insurance transaction 'precisely describes the nature' of the agreements. After all, neither of the parties commenced the litigation claiming that the supply was made to the estates, but this did not prevent the Court from unilaterally expressing its reservations with the pleadings.
The irony is that Customs, had it known what was going to happen, could have taken a far more robust line in the lower hearings. It could have argued that the Society made a supply of a promise to the Fund and that this was taxable unless (shock, horror) the Society was illegally entering into insurance contracts. In this situation, there is every possibility that the Society would have settled earlier and for a higher amount.

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