Goods and services tax - treatment of transitional services supplied as part of the sale of a business (that includes the supply of land)

All legislative references are to the Goods and Services Tax Act 1985 unless otherwise stated.

This Question We've Been Asked applies in respect of ss 5(24) and 11(1)(mb) of the Goods and Services Tax Act 1985.

Question

1. We have been asked whether transitional services provided by the vendor as part of the sale of a business (that includes the supply of land) will be zero-rated for GST purposes where:
   • the services and the sale of the business form part of the same contractual arrangement, and
   • the services are not provided for a separately identifiable consideration.

Answer

2. Whether transitional services provided by the vendor as part of a sale of a business (that includes the supply of land) will be zero-rated will depend on whether the transitional services and the business/land are part of the same supply.
3. Most often the business and related land will be part of the same supply. Transitional services will also be part of that same supply (and therefore zero-rated) where they are not an aim in themselves for the recipient, but rather are a means of better enjoying the business supplied. This will include situations where the transitional services provide merely ancillary, incidental, minor or peripheral benefits and are not in any real or substantial sense part of the consideration for which the payment is made. Whether the transitional services are an aim in themselves for the recipient is a question of fact that must be determined in each case.

Explanation

4. Section 11(1)(mb) provides that a supply of goods that is chargeable with tax under s 8 is zero-rated if:
   • (mb) the supply wholly or partly consists of land, being a supply-
     1. made by a registered person to another registered person who acquires the goods with the intention of using them for making taxable supplies; and
     2. that is not a supply of land intended to be used as a principal place of residence of the recipient of the supply or a person associated with them under section 2A(1)(c)...

5. The key elements of s 11(1)(mb) are:
   • There must be a "supply".
   • That "supply" must consist "wholly or partly" of land (ie it will apply no matter how small the land component part of the supply is).
   • The "supply" must be "made by a registered person to another registered person who acquires the goods with the intention of using them for making taxable supplies".
   • The land must not be intended to be used as a principal place of residence of the recipient or an associated person.
6. Where these requirements are satisfied, the supply of land and goods will be zero-rated.
7. Where services are provided as part of a supply for the purposes of s 11(1)(mb), s 5(24) applies to treat the services as a supply of goods. It states:
   • If a supply that wholly or partly consists of land is made, and the supply includes the provision of services, the supply of the services is treated as a supply of goods for the purposes of section 11(1)(mb).
8. The following analysis assumes the third and fourth requirements in paragraph [5] are met and that there is the sale of a business that includes the sale of the land. Where transitional services are supplied as part of the sale of a business that includes the supply of land, whether the transitional services are zero-rated will depend on whether they and the sale of the business/land are part of the same "supply".

What is a "supply" in terms of ss 11(1)(mb) and 5(24)?

9. It has been suggested that the concept of "supply" in ss 11(1)(mb) and 5(24) is wider than "supply" in the rest of the GST Act. However, the Commissioner's view is that "supply" in these sections should be given the same meaning as in the rest of the Act. Section 11(1)(mb) applies where "the supply wholly or partly consists of land". This suggests that it is necessary to first find a "supply" and then to determine whether land forms the whole, or a part of, that supply. Further, a zero-rating provision only applies where a supply would otherwise be taxable. The primary provision in the GST Act is s 8. Section 8 charges GST on "the supply" of goods and services. Section 11 then applies to zero-rate "a supply of goods that is chargeable with tax under section 8". This suggests that the supply being considered in s 8 is the same supply that is zero-rated under s 11. "Supply" should, therefore, be given the same meaning in both sections.
10. The courts have developed a number of principles to help determine the relevant "supply" (or supplies) made as part of a transaction. The leading New Zealand case on whether something is a separate supply or part of a larger supply is Auckland Institute of Studies v CIR (2002) 20 NZTC 17,685 (HC). This case concerned a taxpayer, the Auckland Institute of Studies (AIS), that specialised in providing educational services to overseas students. A subsidiary was incorporated to carry out AIS's overseas activities. The subsidiary was entitled to charge the students an "overseas assistance fee" for assistance provided to the students prior to their arrival in New Zealand. The students were not charged separately for the overseas assistance fee. Instead, it was part of the fee charged for tuition and other services. The issue was whether the overseas assistance fee was for a separate supply from the supply of tuition services such that the overseas assistance fee would be zero-rated as being for services performed outside New Zealand.
11. Hansen J reviewed the case law on the principles of apportionment, concluding that the cases in the United Kingdom under the Value Added Tax Act 1983 were of assistance. He observed that the approach of the United Kingdom courts had been to sever zero-rated or exempt supplies where it was "practicable and realistic" to do so (Rayner & Keeler Ltd v CEC [1991] VATTR 532 at 538). He stated that, for this purpose, an enquiry is made into "the true and substantial nature" of the consideration given for the payment (Bophuthatswana National Commercial Corp Ltd v CEC [1993] STC 702 (CA) at 708). In particular, Hansen J considered the following four cases:
    • British Airways plc v CEC [1990] BTC 5124 (CA)
    • CEC v United Biscuits (UK) Ltd [1992] BTC 5045 (IH acting as the Court of ExD)
    • CEC v Wellington Private Hospital Ltd [1997] BTC 5140 (CA)
    • Card Protection Plan Ltd v CEC [2001] 2 All ER 143 (HL).
12. Ultimately Hansen J found that the pre-arrival services were ancillary to the supply of tuition services to overseas students in that they helped to facilitate that supply. Therefore in that case the pre-arrival services were not a separate supply and the overseas assistance fee could not be zero-rated.
13. In College of Estate Management v CEC [2005] 4 All ER 933 (HL) the House of Lords clarified that a distinct element could be a separate supply even if it was not ancillary to the dominant element of the supply (see also CIR v Motorcorp Holdings Ltd (2005) 22 NZTC 19,126). College of Estate Management involved the provision of distance-learning courses. The College provided students with written materials, face to face teaching and examination services. The issue was whether the written materials were a separate supply. The tribunal found that the written materials were not an end in themselves for the students. Further, although the means of educating the students relied principally on the provision of the written materials that did not detract from the College providing overall a single supply of education.  The tribunal concluded that the College made a single supply of the provision of education and that the supply of the printed materials was an ancillary element and a means of better enjoying the provision of education.  The decision was upheld by the High Court and then overturned by the Court of Appeal. On appeal the House of Lords agreed with the tribunal's conclusion that the written materials were not an end in themselves for the students and that the College was making a single supply of education services. However, their Lordships disagreed with the tribunal's conclusion that the supply of written materials was ancillary to the provision of education. They stated at [12]:
    • But the mere fact that the supply of the printed materials cannot be described as ancillary does not mean that it is to be regarded as a separate supply for tax purposes.  One has still to decide whether, as a matter of statutory interpretation, the College should properly be regarded as making a separate supply of the printed materials or, rather, a single supply of education, of which the provision of the printed materials is merely one element.
14. And further at [30]:
    • ... there are other cases (including the Faaborg case, the Dr Beynon case and the present case) in which it is inappropriate to analyse the transaction in terms of what is ‘principal' and ‘ancillary', and it is unhelpful to strain the natural meaning of ‘ancillary' in an attempt to do so.  Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services (see the Faaborg case). Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services (see the Dr Beynon case).
15. The relevant principles taken from the above cases can be summarised as follows:
    • It is necessary to identify the essential features of the transaction to determine the nature of a supply. This requires consideration of the contract between the parties including identifying the true and substantial nature of the consideration provided for the payment made by the recipient of the supply. The true and substantial nature of the consideration is to be determined objectively.
    • All the circumstances in which the transaction takes place must be considered.
    • Where the supply involves one or more major elements and one or more other elements, the enquiry is to determine whether those non-major elements of the transaction (or consideration given) are:
      • a necessary or integral part of the major elements; or
      • merely ancillary to or incidental to those other elements.
      In either case there will be one supply (including both the dominant and ancillary elements).
    • Where more than one element is major, it is necessary to consider whether the elements are so closely linked as to form a single supply.
    • In either case, where an element is an aim (or an end) in itself for the recipient (rather than a means of better enjoying the overall supply) then it will be a separate supply.
16. Consequently, where a business is being supplied, most often the supply will include all of the elements that make up that business. For example, the supply of a farm may include land, farm buildings, stock, farm vehicles and miscellaneous farm equipment. However, there are circumstances where a single agreement and consideration could involve multiple supplies. An example may be where the agreement for the sale of the above farm also included the sale of a luxury yacht.
17. The following examples illustrate how these principles have been applied by the courts in different fact situations:

Examples from case law

• British Airways dealt with a transaction involving air transport. The court considered whether the in-flight catering was a separate supply from the air transport or whether it was merely ancillary/incidental to the air transport such that there was only one supply of air transport. The court accepted the supply of food and beverages was not necessary or essential to the supply of air transport but was merely an optional extra. The cost of the food and beverages was reflected in the price of the ticket but the food and beverages supplied were not in any real and substantial sense part of the consideration (objectively ascertained) for the payment made by passengers. The food and beverages were an ancillary, incidental, minor, or peripheral element of the transaction. Therefore, the court held there was only one supply of air transport.
• Sea Containers Ltd v CEC [2000] BVC 60 (QB) dealt with a transaction involving train travel. The court considered whether the food and drink provided on the day train excursions was a separate supply from the supply of transport. The court considered the catering was an important part of what the customer was paying for. The importance of the catering was demonstrated by the references in the marketing brochures (for the train travel) to "a unique series of lunch and dinner excursions". The court held that the significance of the catering went beyond the point where it could merely be seen as a way of better enjoying the transport element of the transaction. Instead, it was an aim in itself for the customers. Therefore, the court decided the food and drink provided was a separate supply from the supply of transport.
• In CEC v British Telecommunications [1999] BVC 306 (HL) the issue was whether a car and the delivery of the car were separate supplies. It was held that there was a single supply of a delivered car. The supply contracted for was a delivered car and the delivery of the car enabled the completion of the transaction.
• In Card Protection Plan, the House of Lords considered whether a card protection plan offered to credit cardholders was a single supply with some ancillary services or two independent supplies comprising an exempt insurance supply and a non-exempt card registration service. It was held that there was a single supply of insurance. The essential feature of the transaction was insurance against loss arising from the misuse of credit cards. The other features in the transaction (the maintenance of a register of credit cards, the ordering of replacement cards, a change of address service, lost key location tags and luggage stickers to ensure the quick return of lost keys and luggage) merely assisted in the administration of the insurance scheme.
• In Dr Beynon v CEC [2004] 4 All ER 1091 the House of Lords found that the personal administration of a drug (such as a vaccine) by a doctor was a single supply of medical services. Their Lordships held that the reality was that the transaction was the patient's visit to the doctor and should not be artificially split into the supply of medical services and the supply of a drug.
• In Tumble Tots (UK) Ltd v R & C Commrs [2007] BVC 179 (ChD) it was held there was a single supply of membership of a club that conferred on a child the right to attendance at classes involving structured physical play. Other benefits received on admission to membership (a DVD, CD, gym bag, membership card, T-shirt, personal accident insurance for a child while attending a class and a subscription for a magazine) were not separate supplies.

Application to transitional services

18. The following factors will be useful for determining whether transitional services are a separate supply or part of the supply of the business/land:
    • The length of time the transitional services are to be provided for.
    • The nature and extent of the services (for example if they are in the nature of a vendor being made available for "trouble-shooting", this is more likely to suggest that they are part of the same supply. On the other hand if they are more like the provision of a full-time consultant/manager this is more likely to suggest that they are an end in themselves).
    • Whether the services are provided for in a separate contract with the payment of a separately identifiable fee. This item assumes that the services are provided in the same contract and without a separately identifiable consideration. A separate contract and consideration may suggest a separate supply. However, this would not be determinative.
    • Where the agreement to provide transitional services is entered into subsequent to settlement of the sale of the business/land. This would suggest that the transitional services are provided as a separate supply.

Examples

19. The following examples are included to assist in explaining the application of the law.

Example 1 - Basic services provided as part of the sale of a business

20. Valerie Snips (a registered person) enters into an agreement with Sally Shears (a registered person) to sell her hairdressing business. The sale and purchase agreement includes the sale of the land and building where the hair salon is located. The agreement also provides that Valerie will be onsite for a week from the day of transfer to show Sally how the business operates, to answer any questions that Sally has and to facilitate a smooth transfer of the business. No separate consideration is provided for these transitional services in the agreement. How should these services be treated for GST purposes?
21. The transitional services are part of the supply of the business and should be zero-rated under ss 11(1)(mb) and 5(24) along with the land and business. The dominant element of the agreement is the supply of the business (including land). The services are not extensive and are provided for only a short period of time. Further, the nature of the services is to facilitate a smooth transfer of the business to Sally. Consequently, the services provided are ancillary and incidental to the supply of the business. They do not constitute an aim in themselves, but rather are a means for Sally to better enjoy the supply of the business.

Example 2 - Extensive services provided as part of the sale of a business

22. Sam Dryer (a registered person) enters into an agreement with Tim Cleaner (a registered person) to sell his dry cleaning business. The agreement includes the land and premises where the dry cleaning business is situated. Tim lives overseas and does not intend to run the dry cleaning business himself. Consequently, as part of the agreement Sam will manage the dry cleaning business for Tim for an initial period of 12 months. These services are included in the purchase price of the business. How should these services be treated for GST purposes?
23. There are two supplies - one of the land/business and one of transitional services. The supply of these transitional services should be standard rated, as ss 11(1)(mb) and 5(24) do not apply. The services are relatively extensive and are provided over a 12 month period. They are an aim in themselves for Tim who requires someone to run the dry cleaning business on an on-going basis.
24. As noted, no amount of consideration has been attributed to the transitional services. Therefore, the total consideration provided for under the agreement will need to be apportioned between the zero-rated supply (the business/land) and the standard rated supply (the transitional services).

References

Subject references
Land
Supply
Transitional services
Zero-rating

Legislative references
Goods and Services Tax Act 1985, ss 5(24), 11(1)(mb)

Case references
Auckland Institute of Studies v CIR (2002) 20 NZTC 17,685 (HC)
Bophuthatswana National Commercial Corp Ltd v CEC [1993] STC 702 (CA)
British Airways plc v CEC [1990] BTC 5124 (CA)
Card Protection Plan Ltd v CEC [2001] 2 All ER 143 (HL)
CEC v British Telecommunications [1999] BVC 306 (HL)
CEC v United Biscuits (UK) Ltd [1992] BTC 5045 (IH acting as the Court of ExD)
CEC v Wellington Private Hospital Ltd [1997] BTC 5140 (CA)
CIR v Motorcorp Holdings Ltd (2005) 22 NZTC 19,126 (CA)
College of Estate Management v CEC [2005] 4 All ER 933 (HL)
Dr Beynon v CEC [2004] 4 All ER 1091 (HL)
Rayner & Keeler Ltd v CEC [1991] VATTR 532
Sea Containers Ltd v CEC [2000] BVC 60 (QB)
Tumble Tots (UK) Ltd v R & C Commrs [2007] BVC 179 (ChD)