Sir Andrew Park:
Abbreviations, etc
- These are as follows:
| Customs & Excise |
HM Customs & Excise, the United Kingdom government department originally responsible for VAT. |
| Everett; the Everett case |
Everett v CCE, :LON/92/1912A; a VAT appeal decided by the Tribunal in 1994. |
| ECJ |
The Court of Justice of the European Communities. |
| FA |
Finance Act; e.g. FA 1972 is the Finance Act 1972. |
| Grieve; the Grieve case |
Grieve v HMRC, a VAT appeal decided by the Tribunal. The reference number of the case is 20149, and the decision was released on 16 May 2007. The full text of the decision is available in a transcript. I am informed that it is also available on-line at www.bailii.org/uk/cases/UKVAT/V20229.html. |
| Group 8 item 1 zero-rating |
Expression used in the judgment from time to time to refer to the zero-rating category now provided for by VATA 1994 Schedule 8 Group8 item 1. |
| HMRC |
Her Majesty's Revenue and Customs; the United Kingdom government department now responsible for VAT, in succession to Customs & Excise. |
| Tribunal, the |
The VAT and Duties Tribunal. |
| VAT |
Value added tax. |
| VATA |
Value Added Tax Act; for example VATA 1994 is the Value Added Tax Act 1994 |
Introduction and overview
- This is an appeal by HMRC against a decision of the VAT and Duties Tribunal (Chairman: Miss JC Gort). It is a comparatively unusual case because, unlike most VAT appeals, it does not concern whether VAT is payable on a supply of goods or services, but rather whether VAT is payable on an importation of goods into the United Kingdom. The taxpayer is Lt Commander Colin Stone. In 2005 he acquired a boat from a supplier in the Netherlands, and sailed it to the United Kingdom. The boat was a newly made replica Dutch barge, the Kei. The issue is whether as a matter of law VAT was payable by Commander Stone when he brought the vessel into this country.
- The principal VAT-charging section in United Kingdom law is s.1(1) of the VATA 1994:
1 Value added tax
(1) Value added tax shall be charged, in accordance with the provisions of this Act
(a) on the supply of goods or services in the United Kingdom (including anything treated as such a supply)
(b) on the acquisition in the United Kingdom from other Member States of any goods, and
(c) on the importation of goods from places outside the Member States,
and references in this Act to VAT are references to value added tax.
Apart from the issue raised on his appeal Commander Stone, when he brought the Kei into this country, would have been liable to pay VAT on its value by virtue of s.1(1)(b).
- However, s.30 of the Act introduces Schedule 8, whereby certain kinds of goods and services are zero-rated, and s.30(3) provides as follows:
(3) Where goods of a description for the time being specified in that Schedule
are acquired in the United Kingdom from another member State or imported from a place outside the Member States, no VAT shall be chargeable on their acquisition or importation, except as otherwise provided in that Schedule.
One description of goods described in Schedule 8 covers, as I shall explain in more detail later, 'any ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for recreation or pleasure'. This is contained in item 1 of Group 8 of the Schedule, and from time to time in the course of this judgment I shall refer to it as the Group 8 item 1 zero-rating. Commander Stone says that The Kei came within it. HMRC say that it did not. The tribunal agreed with Commander Stone, and allowed the appeal. HMRC have appealed to the High Court. However, I agree with the result reached by the tribunal, though perhaps for more elaborate reasons than the tribunal gave. I will therefore dismiss the appeal.
- It is not really possible for me to encapsulate my reasoning in short form here. I will develop it as this judgment progresses. But the following points may help a reader to follow the thread of what follows.
i) On the natural reading of the Group 8 item 1 zero-rating the Kei would in my opinion be a zero-rated vessel. The tribunal was right in that respect.
ii) However, HMRC contend that the words in the United Kingdom statute should be construed as having a different effect and as not covering the Kei. HMRC's reason for the contention is that the domestic statute should be construed so as to produce a result which (a) brings within it vessels which are covered by different wording found in article 15.5 of the Sixth Directive, and (b) excludes from it vessels which are not covered by that wording. The Kei is not covered by article 15.5. HMRC accept that the sub-article is not directly applicable in the United Kingdom, but they say that, so far as possible, United Kingdom provisions should be given meanings which are consistent with it. They also say that it is possible to construe the Group 8 item 1 zero-rating in such a way that it does not apply to the Kei.
iii) If it is relevant (which in my view it is not), I agree that the Kei is not covered by the words found in article 15.5. For the purposes of this judgment I will assume that, if the United Kingdom statute (the Group 8 item 1 zero-rating provision) does have to be construed, if possible, so as not to apply to the Kei, such a construction is just possible: it is an unnatural interpretation, but it may not be quite outside the bounds of what is possible.
iv) However, in my judgment HMRC's argument that article 15.5 is in point in this case is incorrect. The argument that it is rests on a misunderstanding of the VAT history of the United Kingdom legislation, and in particular of the history which lies behind the Group 8 item 1 zero-rating provision. There is a provision of the Sixth Directive which is relevant to the continuance in force of that zero-rating category, but that provision is not article 15.5. Rather it is article 28.2, pursuant to which the Group 8 item 1 zero-rating provision, the natural meaning of which covers the Kei, remains in force unless and until the United Kingdom legislature removes it. Further, against the background of article 28.2 and on the footing (which I believe to be correct) that article 15.5 has nothing to do with this case, the United Kingdom provision should be given its natural meaning; it should not bear a forced meaning driven by a misconceived notion that it ought, if at all possible, to be construed so as to accord with article 15.5.
- Before I become immersed in the details of the case there is a special feature of the events leading up to it which I should mention. In paragraph 2 above I wrote that the issue was whether as a matter of law VAT was payable when Commander Stone brought the Kei into the country. I included the apparently superfluous words 'as a matter of law' because, as I understand the position, HMRC have accepted that, because of statements made by officers of Customs & Excise in letters to Commander Stone when he was making arrangements to acquire the vessel, they will not require him to pay the VAT even if they are successful in their appeal. (Customs & Excise were the predecessor department within the United Kingdom Government with responsibility for VAT.) HMRC are, however, anxious to have the question determined. As I will explain later there has been, in a case called Grieve v HMRC, another decision of a differently constituted tribunal where, on similar facts, the opposite conclusion was reached. And for Commander Stone the outcome of the appeal could make a difference to the VAT consequences of future expenditure on the vessel on matters such as repairs and maintenance.
The facts
- I begin by quoting paragraph 11 of the tribunal's decision.
"11. Mr Stone, as a naval officer, was used to, and enjoyed, living in ships, as did his wife. They had at some time lived in Holland where they had seen Dutch barges. In anticipation of his retirement, which will be in about 2009, Mr Stone decided that he would like to spend his retirement living in a suitable boat which would be principally moored in the United Kingdom, but which he would be able to take to the canals of Europe from where he would be able to practise as a marine surveyor of small crafts. He had spent some time prior to the Tribunal hearing qualifying as a marine surveyor, and he intended to use the ship as the basis for his practice. The Kei was therefore intended for use both as living accommodation and as an office. Having seen Dutch barges when he lived in Holland, Mr Stone considered that one would provide sufficient room for his purposes, as they were practical and attractive ships."
- Other paragraphs of the decision give much information about the construction and design of the Kei. Any reader of this judgment who is interested in the details can refer to the decision. For present purposes I think that it is sufficient for me to extract the following points.
i) The vessel was specially designed for Commander Stone by a Dutch designer, and was built to that design.
ii) Despite being called a 'barge', it is not designed for the carriage of cargo, and is not intended to be used for that purpose.
iii) It is designed to be lived in as a permanent home.
iv) Given that Commander Stone also intended to use it for his post-retirement work as a marine surveyor, I can, I believe, take it that the design incorporated the provision of areas of internal space capable of use for business purposes.
v) The vessel has a motor and can proceed under its own power, as it did when Commander Stone brought it from the Netherlands to the United Kingdom. Commander Stone said in evidence that, for the Kei's size, the engine was low-powered, with a limiting speed of 9 to 10 knots.
vi) It is, I think, implicit in the foregoing and in the tribunal's decision that the Kei is not intended for and is not designed for recreational sailing.
vii) The vessel is quite large, and has a gross tonnage of more than 15 tons (the significance of which will appear later).
The VATA 1994 Schedule 8 Group 8 item 1; the Sixth Directive articles 15(5) and 28(2)
- Three statutory provisions are at the heart of this appeal, one in domestic United Kingdom law, and the other two in the EC Sixth Directive. The United Kingdom provision, the Group 8 item 1 zero-rating, was the basis of the tribunal's decision, and is relied on by Mr McNicholas before me. One of the provisions in the Directive (article 15.5) was the basis of the decision against the taxpayer in the case of Grieve v HMRC which I mentioned in paragraph 6 above. Article 15.5 is relied on by Mr Eicke in the present case, not as concluding the issue by itself, but rather as impacting on the construction of the domestic provision and leading to it being interpreted otherwise than in the way that the tribunal interpreted it. Mr McNicholas contends that article 15.5 is irrelevant, and that it is the other provision in the Directive, article 28.2, which is in point.
- There is one point of terminology which I should spell out here before I turn to the three statutory provisions. The United Kingdom VAT legislation has always used the expression 'zero-rated', and in this country the term 'zero-rating' has become familiar. The Directive has a similar concept, but does not use the same wording. In the Directive the equivalent of zero-rating is exemption with the right to deduct or to be refunded: exemption of the taxpayer's onward supplies (so that the prices payable by purchasers from the taxpayer are not increased by the addition of VAT), and a right of the taxpayer to deduct or have refunded VAT charged on inward supplies to him. Such VAT charged on inward supplies to a taxpayer is what the United Kingdom legislation calls 'input tax', a convenient expression but not one used in the Directive.
- I now set out the three contrasting provisions. The basis of our domestic VAT law is currently consolidated in the VATA 1994. Schedule 8 to that Act sets out the kinds of goods and services which are zero-rated. Supplies of them in the United Kingdom are not subject to VAT. And importations of zero-rated goods into the United Kingdom are not subject to the VAT charge which s.1(1)(b) or (c) (quoted in paragraph 3 above) would otherwise impose. There are sixteen 'groups' in Schedule 8, and most of the groups contain several different items. Relevant in this case is Group 8 (headed 'Transport') item 1, read with a definition in note (A1)(a):
Group 8 Item 1:
The supply, repair or maintenance of a qualifying ship or the modification or conversion of any such ship provided that when so modified or converted it will remain a qualifying ship.
Note (A1): In this Group
(a) a "qualifying ship" is any ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for recreation or pleasure.
It is because of the definition of qualifying ship that I have noted earlier that the Kei has a gross tonnage of more than 15 tons. The combination of Group 8 item 1 and the definition is what I refer to from time to time in this judgment as the Group 8 item 1 zero-rating.
- I now move to the Sixth Directive. Article 15 is headed 'Exemption of exports from the Community and like transactions and international transport'. There is an introductory sentence, and then fifteen sub-articles follow. The introductory sentence is:
"Without prejudice to other Community provisions Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse."
Before I turn to the critical sub-article 5 I should draw attention to article 17.3(b). The heading of article 17 as a whole is 'Origin and scope of the right to deduct', and the particular wording within the article which is relevant in this case is:
"3. Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:
(b) transactions which are exempt pursuant to Article
15
"
So an exemption required by article 15 is an exemption with the right to deduct or to have refunded what United Kingdom law would call input tax. Thus an article 15 exemption which the Directive requires Member States to introduce is the equivalent of a zero-rating in United Kingdom law.
- I now return to article 15 and in particular to article 15.5, which, so far as this case is concerned, needs to be read with article 15.4(a). Article 15.5 is as follows:
"5. the supply, modification, repair, maintenance, chartering, and hiring of the sea-going vessels referred to in paragraph 4(a) and (b) and the supply, hiring, repair and maintenance of equipment including fishing equipment incorporated or used therein;"
The particular words which are relevant in this case are 'the supply
of the sea-going vessels referred to in paragraph 4(a)'. Paragraph 4(a), so far as relevant, reads:
"
vessels:
(a) used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities."
- Finally I come to article 28.2. It was a provision to enable Member States to keep in force some provisions of their pre-existing VAT laws which otherwise would not, or might not, have been consistent with the Sixth Directive. When first adopted in 1977 article 28.2 provided, so far as relevant, as follows:
"Reduced rates and exemptions with refund of the tax paid at the preceding stage which are in force at 31 December 1975, and which satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained until a date which shall be fixed by the Council
"
It is accepted that the opening words of the sub-article cover zero-ratings in the United Kingdom. Article 28.2 was changed in several respects in 1992, but the changes are not material to this case (see further paragraph 33(viii) below). The sub-article was conceived of as a transitional provision. It is within Title XVI of the Directive, the heading of which is 'Transitional Provisions'. The later words of article 28.2 (which I have omitted from the quotation earlier in this paragraph) were directed at the termination, or at least at the winding-down, of this particular transitional provision. In the events that have happened the supposed transitional period is still running more than 30 years later. It is a notorious fact, of which I believe that judicial notice can properly be taken, that Member States are strongly resistant to giving up provisions like the United Kingdom's zero-ratings which are advantageous to the public in their respective jurisdictions and the removal of which would be electorally unpopular.
The United Kingdom provision, Group 8 item 1, taken by itself
- A most important question in this case is whether the status of The Kei as a zero-rated vessel or not falls to be determined by reference to Group 8 item 1 (including the definition of 'qualifying ship') taken by itself, or whether it has to be determined by reference to that provision considered against the background of, and construed so far as possible so as to accord with, article 15.5 of the Sixth Directive. First, however, I will set out my view on whether the Kei is a zero-rated vessel if the United Kingdom provision is considered by itself and without regard to article 15.5.
- If that is the correct basis I am firmly of the opinion that the Kei is a zero-rated vessel: it is a qualifying ship as defined. To be such it has to fulfil two conditions:
i) It must be of a gross tonnage of not less than 15 tons.
ii) It must not be either
a) designed for use for recreation or pleasure, or
b) adapted for use for recreation or pleasure.
As to condition (i), the Kei's gross tonnage is more than 15 tons. As to condition (ii), it is in my view alternative (a), not alternative (b), which is in point here. In that respect I disagree with one sentence in paragraph 41 of the tribunal's decision: 'However, we consider that the Kei is an adaptation.' In my view condition (ii)(b) ('adapted for use for recreation or pleasure') covers cases where a vessel was originally designed and constructed for a purpose which was not recreation or pleasure, but is later physically adapted with a view to being used for recreation or pleasure. The original design of the Kei may have been an adaptation of the traditional design of a Dutch barge, but the Kei itself has never been the subject matter of any adaptation. As regards condition (i)(a) (the relevant condition, in my opinion), the Kei was designed and constructed from the outset for the purpose of being used as a family home, together with some business use. In my firm opinion that is not 'use for recreation or pleasure'. In this respect I entirely agree with the following passages in paragraphs 39 and 40 of the tribunal's decision:
[From paragraph 39] "
it seems to us that, as a matter of plain English, it is impossible to say that the Kei has been designed or adapted for recreation or pleasure, if one accepts the Respondents' [HMRC's] position which is that the relevant stage is when it was designed by the Dutch builder in accordance with Mr Stone's plans."
[From paragraph 40] "That recreation might take place on board the Kei, as it would, one hopes, inside any habitation, is irrelevant. It does not make sense to say that a house which is someone's home is designed for recreation or pleasure."
- In this connection it appears that, before Commander Stone's appeal came to be heard in the tribunal, the main argument for HMRC possibly the only argument was expected to be that the Kei was designed for recreation or pleasure. In HMRC's Amended Statement of Case, signed by counsel then appearing for them, they said:
"a. The Respondents' [HMRC's] primary case is that the words pleasure and recreation include use as a home
It follows that the barge was designed or adapted for recreation or pleasure, regardless of the fact that it might have been designed as a home, and is therefore not a qualifying ship.
b. The Respondents' alternative case is that there is no need to demonstrate that the barge was exclusively designed or adapted for recreation or pleasure in order for it to fall outside of the definition of a qualifying ship. Accordingly, even if it is established that the words pleasure and recreation do not include use as a home, and it is established that the barge is used as a home, it has also been designed for cruising, and so for recreation or pleasure, and is accordingly not a qualifying ship."
So HMRC had a primary case and an alternative case. Neither case placed any reliance on article 15.5 of the Sixth Directive, which is not mentioned anywhere in the Amended Statement of Case. (Nor had it been mentioned anywhere in the original Statement of Case.) However, the decision does record that at the hearing article 15.5 was referred to by counsel. But the decision does not give the impression that article 15.5 was the main plank in HMRC's argument which it certainly was in the hearing before me.
- There are three further points to make before I move on from my analysis of how the case would stand apart from HMRC's argument based on article 15.5 of Sixth Directive.
- First, in support of the conclusion that the Kei was designed for use for recreation or pleasure HMRC referred to the decision in Piddington v Co-operative Insurance Society Ltd [1934] 2 KB 236. The case concerned a motor insurance policy which excluded liability for loss or damage 'caused or arising while [the] motor car
is
being used for other than private pleasure.' Lawrence J said:
"In my judgment, the word 'pleasure' is used in this policy in contradistinction to 'business'."
In my opinion what the judge said was concerned only with the rather unusual terms of the particular policy. I do not accept that he was advancing an all purpose proposition that anything that is not done for business must be done for pleasure. A moment's thought demonstrates that that cannot be right. Suppose that a man drives his car to the supermarket so that he and his wife can do the week's shopping. He is not doing that for business, but he is not doing it for pleasure either. Or suppose that he is driving somewhere in order to attend a funeral. Those and many other examples show that there are many activities, and many uses of an item like a car or a boat, which are not business activities or uses, and are not pleasure activities or uses either.
- Second, it is true that Group 8 of VATA 1994 Schedule 8 is headed 'Transport', and I would accept that the way in which Commander Stone and his wife intend to use the Kei (and for which it was designed) is not aptly regarded as transport. It is also true that in another group of Schedule 8, Group 9, there is a zero-rating category for 'houseboats', the detailed conditions of which are not satisfied in the case of the Kei. Those factors do not deflect me from my conclusion that, if the question is taken solely on the terms of Group 8 item 1 (including the definition of 'qualifying ship'), and leaving out of account for the moment HMRC's argument based on article 15.5, the Kei is a zero-rated vessel. I accept that a heading in a statute should not be disregarded, and that it may be given some weight. But where the words of a provision are clear, they are not controlled or restricted by a short heading (in this instance a one word heading). Such a heading, after all, is only included in order to give a general indication of the main subject matter of the provision. Similarly, the fact that the Kei is not brought within the ambit of zero-rating by an item in a different Group in the Schedule (here by the item about houseboats) does not in any way prevent it from being brought within the ambit of zero-rating by a different item elsewhere in the Schedule.
- Third, still proceeding on the footing that HMRC's argument based on article 15.5 is left out of account, it seems unlikely to me that the tribunal's decision on the meaning of the words in Group 8 of the Act could be subject to appeal at all. The domestic law argument rests entirely on whether the Kei was 'designed or adapted for recreation or pleasure'. Those are ordinary English words, and if there is nothing to indicate that they should bear any meaning other than their ordinary meaning, the decision of the tribunal about them seems likely to be a decision of fact, unappealable in a context like this one where an appeal lies only on a question of law. See the well-known observations of Lord Reid in the House of Lords in Brutus v Cozens [1972] 2 All ER 1297 at 1299. There is no reason why that principle should not apply in a VAT context, and indeed Brooke J applied it in the VAT appeal of Customs & Excise v McLean Homes (Midland) Ltd [1993] STC 335.
EC Directives and national legislation: the principle of compatible construction
- An EC Directive is in the nature of a binding instruction from the relevant Community authority (which in the case of the Sixth Directive was the Council of the European Economic Community) to Member States. The Sixth Directive instructed Member States to enact their own VAT laws, to structure them in accordance with what the Directive required or permitted, and not to include in them anything which the Directive did not permit. At the time of the events which have given rise to this case the Sixth Directive was the principal VAT Directive in force, and the only one which may have impacted on the issues which I have to consider. With effect from 1 January 2007 the Sixth Directive has been superseded by a new Directive, which is broadly though not entirely in the nature of a consolidation. It does not affect the present case, and in this judgment I will refer only to the Sixth Directive and its predecessor, the Second Directive.
- A number of principles have been developed in the jurisprudence of the ECJ about the relationship between Directives and national legislation. One of them is sometimes referred to as the principle of compatible construction. National legislation of a member State dealing with subject matters covered by a Directive should, as far as possible, be construed so as to produce results which are compatible with the Directive. The principle is self-evidently appropriate where a national statute is enacted in order to implement something required by a Directive. It appears that the principle may go further and require or encourage national courts as far as possible to construe national laws compatibly with Directives even where the national law was adopted before the Directive. In that connection I refer to the words which I italicise in the following sentence taken from paragraph 8 of the ECJ's decision in the Spanish case of Marleasing SA v La Comercial Internacional de Alimentacion SA, Case C-106/89, [1990] ECR I 4135,:
"It follows that, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter
"
- The words 'as far as possible' should be noted. I interpret them as meaning that, although a national court should strive to adopt an interpretation of a national law which accords with a Directive and should be willing to strain the natural meaning of the language to that end, there are limits where the words of the statute simply cannot be stretched to accord with the Directive. Where that is so effect must be given to the statute as enacted and not to the Directive. The national legislature should, no doubt, put the matter right by amending its own statute, but it is not in every case that consistency of results between a Directive and national law can be achieved through the principle of compatible construction. (I have made the foregoing point, but, as I shall explain later, I do not think that, whether what I have said is right or wrong, it makes any difference to the outcome of this case. For reasons which I develop later I do not think that the principle of compatible construction requires that the relevant national provision in this case should so far as possible be interpreted so as to be consistent with article 15.5 of the Sixth Directive. In any case I have said in paragraph 5(iii) above that I write this judgment on the assumption that it would just be possible to interpret the Group 8 item 1 zero-rating provision so as to accord with the meaning of article 15.5, if that was what is required.)
Three tribunal decisions
- The present case is the third of three cases which went to the tribunal about Dutch barges designed or modified so as to be suitable for use as homes. The first was Everett v CCE, LON/92/1912A, decided in 1994. The case was argued solely on the terms of the Group 8 item 1 zero-rating, which at the time was contained in the VATA 1983. (In that Act the relevant group was Group 10, but the wording was the same as appeared in the VATA 1994.) The tribunal's decision in the Everett case states:
"The issue agreed between the parties that I am asked to decide is whether or not the Amethyst Atoll and the Jadi are a 'ship designed or adapted for use for recreation or pleasure pursuant to [the provision then in force] "
The tribunal decided that agreed issue in favour of the taxpayer appellant. It found that the two vessels were not ships designed or adapted for use for recreation or pleasure:
"To my mind it stretches the ordinary meaning of the words recreation or pleasure well beyond their natural meaning to say that this encompasses a home or place of permanent habitation such as the Amethyst Atoll and Jadi have now become. I am satisfied that they are not ships designed or adapted for use for recreation or pleasure."
There is a brief allusion, towards the end of the decision, to article 15.5 of the Sixth Directive, but it appears to have played no effective part in the issues which the tribunal considered that it had to decide. I will, however, return to it at a later point in this judgment.
- CCE did not appeal against the decision in the Everett case, and for several years they accepted it. Indeed, in 2001 and 2003 Commander Stone received letters from Customs & Excise saying that the vessel he was in the process of acquiring (the Kei) would be zero-rated. The 2001 letter specifically referred to the Everett case.
- However, at a time which I do not know precisely but which seems likely to have been in 2005 Customs & Excise (or by then it may have become HMRC) changed their position on this issue. They formed the view that Everett had been wrongly decided, and they sought to apply VAT to taxpayers on the basis that Dutch barges were not zero-rated. Two tribunal cases have been heard after this change of view, and they are the second and third of the three cases which I describe in this part of my decision. There is a conflict between the decisions in them. The present case, Commander Stone's case, was the third of the three in the tribunal. The second was Grieve v HMRC, which I have mentioned earlier (see paragraph 6 above) and of which some details are set out in the Table of Abbreviations, etc, at the beginning of this judgment.
- This is a convenient point for me to record the respective dates in the tribunal of the Grieve case and of this case. Grieve was heard, by a tribunal of which the Chairman was Dr Brice, on 24 April 2007. Judgment was reserved, and, as I have said, the written decision was released on 16 May 2007. In the meantime Commander Stone's case, this case, had been heard by a differently constituted tribunal (the Chairman having been Miss Gort) on 3 and 4 May 2007. That tribunal also reserved judgment, and the written decision was released on 29 June 2007. I would be surprised if Miss Gort and her colleague who heard this case did not know that the Grieve case had been heard and that judgment was awaited: the same counsel appeared for HMRC in both cases. But there is no indication that they knew or took account of the decision in the Grieve case in reaching their decision in this case. They may well have taken the view, with which I would not disagree, that, having completed the hearing in this case, they should not allow their decision to be affected by a decision in another case when that decision had not been capable of being commented on in the hearing before them.
- I now wish to say more about the decision in the Grieve case. The tribunal decided the case in favour of HMRC. It did not follow the Everett decision of some thirteen years earlier. It based its decision substantially on HMRC's article 15.5 argument and the principle of compatible construction. Those matters have been the foundation of Mr Eicke's submissions to me in this case. I will quote a few extracts from the Grieve decision to demonstrate what I have said about it.
"[From paragraph 16] For the Respondents [HMRC] Mr Barnes argued that the Sixth Directive could be considered in the interpretation of the United Kingdom national law and went on to point out that the exemption in article 15.5 was for ships used for commercial purposes. It was the respondents' argument that article 15.5 had been implemented by Item 1 with Note A1(a) of Group 8 of Schedule 8 by the exclusion from the definition of a qualifying ship of a ship which was designed for recreation or pleasure."
"[From paragraph 17] In considering the relevance of the Sixth Directive the relevant principles are:
(3) that national courts are required to interpret their national law in the light of the wording and purpose of a directive in order to achieve the result required by the Directive to be given effect in national legislation (Marleasing [see paragraph 23 above])."
"[From paragraph 32] Although a reference had been made in correspondence to article 15 of the Sixth Directive, it does not appear that, at the hearing in Everett, the Respondents relied upon article 15 as an aid to the interpretation of the national legislation. We distinguish Everett on that ground and also on the ground that it had different facts."
"[The tribunal's conclusion in paragraph 33.] We conclude that we have to interpret Item 1 of Group 8 of Schedule 8 in the light of the wording and purpose of Article 15.5 of the Sixth Directive. The result required by article 15.5 is to zero-rate vessels used for commercial, industrial or fishing activities. The word 'pleasure' in Item 1 of Group 8 has to be interpreted within the context in which it appears and one possible interpretation is as the opposite of business or commercial. That interpretation enables us to achieve the result required by article 15.5. We therefore find that the 'HILDE' was not 'neither designed nor adapted for use for recreation or pleasure'within the meaning of Note A1(a) of Group 8 Schedule 8 of the 1994 Act."
- The third of the three tribunal cases is the present case. I have said most of what I need to say about it, but I will quote the tribunal's approach to HMRC's article 15.5 argument, an approach which is in marked contrast to that of the tribunal in the Grieve case. In paragraph 39 of the decision, part of which I have already quoted in paragraph 16 above, the tribunal says this:
"We accept Mr McNicholas' argument that it is not open to the Respondents to rely in this particular case on the Sixth Directive. The tribunal must first look at the United Kingdom legislation, and only if it is unclear on its face, then should it seek clarification from the Sixth Directive. In the present case in our opinion the wording of Schedule 8 of the VATA is perfectly clear and it seems to us that, as a matter of plain English, it is impossible to say that the Kei has been designed or adapted for recreation or pleasure
"
HMRC's article 15.5 argument: analysis and discussion
- The first question which I wish to address is whether the provision which is now, after two consolidations, item 1 of Group 8 to the VATA 1994, read with the definition of 'qualifying ship' in note (A1)(a), was introduced into United Kingdom law in order to comply with article 15.5 of the Sixth Directive. I will demonstrate that it indisputably was not introduced into United Kingdom law for that purpose. Yet a remarkable thing about this case and the other two tribunal cases is that, by the time that those cases arose, Customs & Excise (and now HMRC) were taking it as axiomatic that it was. Three passages from the tribunal decisions show that that was their opinion.
i) In connection with the Everett case I have mentioned earlier that the decision contained a brief allusion to article 15.5. The Chairman, Miss Plumptre, said that she had considered two similar letters written in 1993 to the two appellants by an officer in the relevant part of the VAT Administration Directorate. It begins:
"It may be helpful if I explain the background to the zero-rating for ships and houseboats. The relief for ships is derived from Article 15 of the EC Sixth VAT Directive
"
I need not quote any more. The letter goes on to summarise the contents of article 15.5, and it then deals with houseboats. The important point for present purposes is that the writer of the letter said that the zero-rating treatment which the United Kingdom makes available for ships was derived from article 15.5. As I will show later, it was not. I add for completeness that Miss Plumptre, having referred to the letters from the VAT Administration Direcorate, did not take them into account in reaching her conclusion. She was 'reminded' by counsel for the appellants that:
"I cannot consider the purpose or the intention of the legislation in the way in which these letters do. I must construe the actual words of item 1, group 10, in their ordinary meaning." (The statutory reference is to the relevant zero-rating provision in the earlier consolidating Act, the VATA 1983.)
ii) In the Grieve case HMRC made the same assertion that it was article 15.5 which was responsible for the zero-rating provision for ships appearing in the United Kingdom legislation. I repeat a sentence which I have quoted earlier:
"It was the Respondents' [HMRC's] argument that article 15.5 had been implemented by Item 1 with Note A1(a) of Group 8 of Schedule 8 by the exclusion from the definition of a qualifying ship of a ship which was designed for recreation or pleasure."
The proposition that the United Kingdom zero-rating provision implemented article 15.5 was not controverted by the consultant who appeared as advocate for the taxpayer. In the circumstances the Tribunal accepted it, and it was fundamental to the reasoning which led the tribunal to decide the case in favour of HMRC. Lest I be misunderstood, I do not in any way criticise the tribunal for accepting what counsel, instructed by the Department, said was the origin of the United Kingdom provision. When such a statement is not questioned by the representative for the other party the tribunal will naturally accept it unless the members of the tribunal happen to have some personal knowledge of the detailed point to which the statement is directed.
iii) In the present case it seems that a similar argument about the origin of the Group 8 item 1 zero-rating provision must have been put forward in the hearing, although (as I have said earlier) there is no hint of it in HMRC's written Statement of Case. However, the tribunal, unlike the differently constituted tribunal in the Grieve case, did not accept the argument. In a passage which is reminiscent of what had been said by Miss Plumptre thirteen years earlier in Everett, the tribunal said:
"We accept Mr McNicholas' argument that it is not open to the Respondents to rely in this particular case on the Sixth Directive. The tribunal must look first at the United Kingdom legislation and only if it is unclear on its face, then should it seek clarification from the Sixth Directive."
As I have recorded earlier the tribunal did not consider the United Kingdom legislation to be unclear on its face.
- The passage which I have just quoted from the decision in the present case does seem to accept that the United Kingdom's zero-rating provision about ships (the Group 8 item 1 zero-rating) had a connection with the Sixth Directive. (There is, however, a somewhat obscure sentence in an earlier paragraph of the decision which suggests that Mr McNicholas questioned whether that was correct: 'With regard to the Commissioners' reliance on European law, it was not the vires for the United Kingdom's zero-rating which was in issue
') If HMRC's written statement of case was the only indication that Mr McNicholas had of what was going to be argued on behalf of HMRC, he had no reason to have researched into the origin of the United Kingdom provision. But he has had both the reason and the opportunity to do that in preparation for this appeal. I acknowledge my indebtedness to his researches for the account which I now give of how Group 8 item 1 (with the definition of a 'qualifying ship') comes to be part of the United Kingdom's domestic VAT legislation.
- I now give a full historical account, in the following subparagraphs.
i) In 1967, several years before the United Kingdom acceded to the EEC, the Council adopted the Second Directive. This required Member States to introduce their own VAT laws, but laid down structures and other requirements with which the various national systems had to comply. It also specified certain things which Member States might do if they chose. The vital one for the purposes of this case was contained in the fifth and last indent to article 17. I reproduce the relevant parts of it here:
"With a view to the transition from the present systems of turnover taxes to the common system of VAT, Member States may:
-- provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage
. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer
"
It will be recalled that 'exemptions with refund
of the tax paid at the preceding stage' are equivalent to zero-ratings in the United Kingdom. The other point to make about the Second Directive is that it contained absolutely nothing equivalent or similar to article 15.5 of the Sixth Directive.
ii) Pursuant to a treaty made in 1972 the United Kingdom acceded to the EEC in 1973. One of the United Kingdom's obligations was to introduce VAT in accordance with Second Directive.
iii) The United Kingdom complied with that obligation by provisions which were contained in FA 1972 and came into effect on 1 April 1973. The United Kingdom took advantage of the permission in the fifth indent to article 17 of the Second Directive by incorporating into the statute a system of zero-rating. This was done by s.12 and Schedule 4. Group 10 of Schedule 4 was headed 'Transport', and item 1 was as follows:
"The supply, repair or maintenance of any ship which is neither
(a) a ship of a gross tonnage of less than 15 tons; nor
(b) a ship designed or adapted for use for recreation or pleasure."
iv) On 17 May 1977 the Sixth Directive was adopted by the EEC Council, and Member States were required to comply with it not later than 1 January 1978 (article 1). The Directive did include article 15.5, but it also contained article 28.2. I have already quoted the relevant words of that sub-article, but it is critical to this part of my judgment, and I repeat it here.
"28.2 Reduced rates and exemptions with refund of the tax paid at the preceding stage which are in force at 31 December 1975, and which satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained until a date which shall be fixed by the Council
"
The background to article 28.2 is that many Member States (and I would not be surprised if it was all of them) had taken advantage in one way or another of the permission in article 17 of the Second Directive to enact, as parts of their national VAT statutes, reduced rates or systems of exemption with refund of VAT paid at the preceding stage. The United Kingdom had done the second of the two, in the form of the zero-rating provisions. Reduced rates and zero-rating systems were not really in accordance with the underlying principles of the Sixth Directive, but the Member States were not prepared to be obliged to give them up. The solution was for the Sixth Directive to allow existing reduced rates and zero-rating systems to continue for what was supposed to be a transitional period. And that is what article 28.2 did. As I have mentioned earlier, the transitional period is still running 31 years later.
v) The Finance Act 1977 contained a lengthy schedule, Schedule 6, which made numerous detailed amendments to the VAT provisions of FA 1972 in order to comply with the Sixth Directive. Schedule 6 was introduced by s.14, which was as follows:
"14. As from 1 January 1978 Part I of the Finance Act 1972 (which imposes the charge to value added tax) shall be amended as shown in Part I of Schedule 6 (these being amendments mainly to give effect to new Community provisions relating to the incidence and operation of the tax."
No change was made to any of the 1972 Act's provisions about zero-rating.
vi) In 1981 the Commission commenced an investigation into whether any of the zero-rating categories which the United Kingdom had introduced in 1972 and maintained in force after the Sixth Directive came into operation in 1978 failed to match up to the criteria in article 17 of the Second Directive of being for 'clearly defined social reasons and for the benefit of the final consumer'. Article 28.2 had expressly stated that those criteria had to continue to be satisfied if the zero-ratings were to remain in force under the Sixth Directive. It did so by the words 'and which satisfy the conditions stated in the last indent of article 17 of the Second Council Directive of 11 April 1967'. There were, I believe, 17 zero-rating groups by the time of the Commission's investigaton, and some of the items contained in six of them were challenged by the Commission. In the event some of the challenges failed and some succeeded. See EC Commission v United Kingdom, Case 416/85, reported at, among other places, [1988] STC 456. There was no challenge to any of the items in what was, by the time that the case was heard, VATA 1983 Schedule 5 Group 10 (Transport), the group of which item 1 stated that ships of a gross tonnage of not less than 15 tons and not designed or adapted for recreation or pleasure were zero-rated.
vii) As is implied by what I have said in the last subparagraph, in 1983 there was a consolidation of the existing VAT legislation into the VATA 1983. What had been FA 1972 Schedule 4 Group 10 item 1 became VATA 1983 Schedule 5 Group 10 item 1. The wording was identical.
viii) In 1992 some changes were made to article 28.2, but (as I said in paragraph 14 above) they are irrelevant in this case. The wording of the original sub-article as adopted by the EC Council in 1977 (reproduced in paragraphs 14 and and 33(iv) above) is substantially repeated in the relevant part of the 1992 amended version:
"Exemptions with refund of the tax paid at the preceding stage
which were in force on 1 January 1991 and which are in accordance with Community law, and satisfy the conditions stated in the last indent of Article 17 of the second Council Directive of 11 April 1967, may be maintained."
There is, I am sure, a reason why this provision refers to exemptions (and thus zero-ratings) in the laws of Member States which were in force on 1 January 1991 whereas the original wording of article 28.2 referred to national provisions which were in force on 31 December 1975, but I do not know what it is. It is, I believe, common ground that the recasting of article 28.2 in 1992 makes no difference to the outcome of this case.
ix) There was another consolidation of the United Kingdom's VAT legislation in 1994. What had been VATA 1983 Schedule 5 Group 10 item 1 became VATA 1994 Schedule 8 Group 8 item 1. The wording remained identical.
x) The wording in VATA 1994 was changed to the present wording by a statutory instrument of 1995: the VAT (Ships and Aircraft) Order 1995. So the statute now provides zero-rating treatment to a 'qualifying ship', and the words which trace back to FA 1972, referring to the gross tonnage of the ship and to it not being designed or adapted for recreation or pleasure, are now found in the definition of qualifying ship in note (A1)(a). This was a pure drafting technicality, and there can be no possible suggestion that it makes any difference.
- The foregoing is, I believe, a complete historical analysis showing how the present position has been arrived at. In the light of it, I make several observations.
- First, it clearly demonstrates that assertions by HMRC or their predecessor, Customs & Excise, that the relevant United Kingdom provision (the provision which I have referred to in this judgment as the Group 8 item 1 zero-rating provision) was introduced to give effect to article 15.5 of Sixth Directive are mistaken. The United Kingdom provision was introduced by FA 1972 at a time when the Sixth Directive did not exist. Further, from 1972 to 1977 it would have been impossible to construe it so as to be compatible with article 15.5, because that sub-article did not exist.
- Second, it is in my opinion not seriously arguable that, although the United Kingdom provision was not introduced to give effect to article 15.5, nevertheless once article 15.5 came into existence and took effect at the beginning of 1978, the United Kingdom provision somehow acquired a new status, needing to be regarded as existing only to give effect in United Kingdom domestic law to article 15.5 and now requiring to be construed, so far as possible, so as to produce the exact effect required by article 15.5, no less and no more. It is true that article 15.5 was a new provision in the Sixth Directive, not preceded by anything similar in the Second Directive; and it is true that FA 1977 contains no provision which seeks specifically to implement article 15.5 in United Kingdom domestic law. That may well imply that, in the view of the United Kingdom officials who were charged with the responsibility of deciding what was needed to give effect to the Directive in our law, the existing zero-rating provision for ships already did the job, and nothing more was needed. But that does not mean that the existing zero-rating provision should thenceforward be construed as if the only thing that it did was to implement article 15.5. If by its pre-existing terms it already covered the area to which article 15.5 was directed, but covered other matters as well, there was absolutely no reason why it should not continue to cover those other matters.
- I of course accept the principle of compatible construction, of which the foremost application is that domestic statutes enacted to give effect to a Directive should, as far as possible, be construed so as to achieve what the Directive sought to have achieved; further, they should also be construed, as far as possible, so as not to produce effects which would be contrary to those intended by the Directive. But I see no scope for those considerations to impact on the construction of the Group 8 item 1 zero-rating provision. The provision, contrary to what HMRC has apparently believed for some years, was not enacted to give effect to the Sixth Directive or to any of the provisions which the Directive contains.
- The words in the Marleasing case 'whether the provisions in question were adopted before or after the Directive' (see paragraph 23 above) suggest that, if there is an existing national provision already in force and a subsequent Directive dealing with the same subject matter comes into effect, it is necessary to look again at the national provision and to see whether there might be an inconsistency between it and the Directive. If there might be, it becomes necessary to consider whether the interpretation of the national provision can be shaded or modified so as to avoid the inconsistency. But that makes no difference in this case. When the Sixth Directive came into effect it is true that one of its provisions was article 15.5, but another was article 28.2. So would the natural interpretation of Group 8 item 1, including the definition of 'qualifying ship', be inconsistent with the Directive? Even if the answer would have been yes if the only relevant provision in the Directive had been article 15.5, the actual answer is no, because of article 28.2. That sub-article specifically permitted the United Kingdom to keep its existing zero-rating provisions in force (and conferred similar permissions for other Member States), and it made no difference whether or not any of the preserved zero-rating provisions would have been inconsistent with some other article of the Directive (like article 15.5). Once it is shown, first, that the Group 8 item 1 zero-rating provision was not enacted to give effect to article 15.5 and indeed was enacted before article 15.5 ever existed, and, second, that the Group 8 item 1 zero-rating was expressly permitted by article 28.2 to remain in force, it appears to me that HMRC's argument, ably though it was presented by Mr Eicke, is fatally undermined.
- At this point it is appropriate for me to refer to the very recent decision of the Court of Appeal in HMRC v EB Central Services Ltd [2008] EWCA 486. The judgments of the Court were handed down on 14 May of this year, after the hearing in this case before me had been concluded. No mention was made of the case in the course of the hearing, but before I had completed my judgment I received a message from Mr Eicke informing me of it. I have received written submissions by counsel about it, and I deal with it here.
- Superficially the EB Central Services case might appear to support HMRC's submissions in the present case, but on closer examination it does not; and if it has any relevance it supports the analysis which I have put forward in paragraph 38 above. The appellant company claimed that it was entitled to the benefit of zero-rating treatment because the services which it supplied (storage services at airports) were within the terms of two of the zero-rating items in Group 8 of Schedule 8 to the VATA 1994. HMRC's case was that the services were not within the terms of the corresponding provisions in article 15 of the Sixth Directive, and that the national provisions should be construed so as not to cover the services supplied by the company, even if the national provisions, upon being interpreted without regard to the Directive, would be held to cover the services. Part of the company's response to this argument by HMRC was to rely on article 28.2 of the Directive. The Court of Appeal decided in favour of HMRC, reversing the decision of the Chancellor in the High Court.
- The superficial similarity to the present case is apparent. Each case concerns a national provision which by itself would apply zero-rating treatment to the particular facts. In each case HMRC argue that the national provision has to be construed so as to produce a result compatible with a sub-article in article 15 of the Sixth Directive, and that the national provision, if so construed, does not apply zero-rating after all. In each case the taxpayer prays in aid article 28.2 as the reason why the national provision does not have to construed compatibly with the particular provision in article 15 of the Directive invoked by HMRC.
- In EB Central Services the taxpayer's argument in reliance on article 28.2 failed. Why should it not equally fail in the present case? The answer is: because on a proper analysis the origin of the zero-rating provisions sought to be relied upon by EB Central Services was critically different from the origin of the Group 8 item 1 zero-rating relied upon by Commander Stone in this case. The zero-rating provisions relied upon in the EB Central Services case were added to Schedule 8 by amendments made by statutory instrument in 1990 and 1993. The amendments purported to extend the ambit of zero-rating treatment under Schedule 8 to circumstances where zero-rating treatment had not existed before. Further, explanatory material issued at the time of the amendments explained that their purpose was to make the domestic provisions more consistent with the relevant sub-articles of article 15 of the Sixth Directive than they had been in the past. Two consequences followed.
- First, article 28.2 could not be a justification for the extended zero-ratings being included in national law. The sub-article provided for the maintenance of zero-ratings which existed at 1 January 1991. (As to the 1991 date, in contrast to 31 December 1975, the date relevant in this case, see paragraph 33(viii) above.) The sub-article did not permit the extension of existing zero-ratings to new circumstances for the first time after that date. As Mummery LJ put it in paragraph 41 of his judgment:
"
the exemptions introduced in the national legislation would not come within article 28, as they involved extending the exemptions. They were not simply 'maintaining' in national legislation historic zero-rated provisions."
- Second, since the amendments were shown, by materials admissible for this purpose, to have been enacted in order to implement sub-articles of article 15 of the Directive, they ought to be construed, so far as possible, so as to produce results consistent with those sub-articles. The constructions put forward by the company, though possible purely as a matter of English law (and indeed the better constructions as a matter or English law), produced results which were wider than those required by the sub-articles of article 15. The restricted constructions put forward by HMRC meant that the national provisions corresponded to what the Directive required and did not go beyond it.
- The present case is different. Two points are crucial. First, the zero-rating provision relied on by Commander Stone existed on 31 December 1975, and therefore comes within article 28.2. That is so both on the terms of the original article 28.2 (which I have reproduced in paragraphs 14 and 33(iv) above) and on the terms of the revised article 28.2 as adopted by the EEC Council in 1992. In contrast the zero-rating provisions sought to be relied on by EB Central Services did not exist on 31 December 1975. Second, the Court of Appeal at several points confirmed that, if a zero-rating provision of United Kingdom law had existed on that date and therefore was maintained in force by article 28.2, the principle of compatible construction did not apply so as to require it to be interpreted consistently with other articles of the Directive, in particular with article 15. For example Mummery LJ says, at paragraph 19 (the italics being mine):
"The general presumption is that, when enacting legislation like the 1994 Act, Parliament intended to fulfil the obligations of the United Kingdom under the Directive. This means that, unless for some special reason, such as the transitional derogation provisions of Article 28, the presumption does not apply, the 1994 Act must be construed, if it is possible to do so, so as to be compatible with the Directive."
The learned Lord Justice continues the passage which I have quoted in paragraph 43 above as follows:
"If proper account is taken of these materials and of the terms of Article 28 itself, this is not a derogation case free from the principle of compatible construction."
Taking that sentence with the preceding sentence (see paragraph 43 above) the clear implication is that, if a case is one of simply maintaining in national legislation historic zero-rated provisions, then it is a derogation case free from the principle of compatible construction.
- In my opinion the present case is one of simply maintaining in national legislation a historic zero-rated provision, namely Group 8 item 1 which traces back to the FA 1972 and has not been altered in any material respect since. Therefore the principle of compatible construction does not apply. The provision does not have to be construed so as (if possible) to produce results consistent with article 15.5. Rather, it can receive its natural construction uninfluenced by article 15.5. The EB Central Services case does not support HMRC's argument. On the contrary it supports the argument advanced by Mr McNicholas on behalf of Commander Stone.
- I move on to a different point. Mr Eicke has suggested to me that article 28.2 might not have justified the continuation of what was then the Group 10 item 1 zero-rating (now, after two consolidations, the Group 8 item 1 zero-rating), because that zero-rating would not, or might not, satisfy the condition for article 28.2 to apply, namely that it was adopted by the United Kingdom 'for clearly defined social reasons and for the benefit of the final consumer'. This is a surprising argument for HMRC to raise, given the historical origin of the provision. As I have explained earlier, it was introduced by the first United Kingdom VAT statute, the Finance Act 1972, and was included in that Act pursuant to the fifth indent in article 17 of the Second Directive. That indent permitted Member States to provide in their domestic VAT laws for 'exemptions with refund of the tax paid at the preceding stage' (in our terminology, zero-ratings), on condition that such exemptions were 'taken for clearly defined social reasons and for the benefit of the final consumer'. In 1972 the United Kingdom obviously considered that what was then the Group 10 item 1 zero-rating, like everything else in FA 1972 Schedule 4, satisfied the condition. Otherwise the United Kingdom could not and would not have included the item in the Schedule. In what I have just written 'the United Kingdom' means, I suppose, in theory the Government and Parliament, and in practice the officials within HM Customs & Excise who were responsible for the introduction of VAT into our law. It does seem strange that HMRC now suggests that its predecessor Government Department acted unlawfully in 1972, no such suggestion having been made, so far as I know, at any previous time over more than 30 years.
- In any case, even if the compatibility with Community law of the Group 8 item 1 zero-rating (or indeed of any other relieving provision contained in the United Kingdom's own domestic statute) might now be questioned, there is no doubt that, as long as it remains in the national statute, taxpayers can rely on it. If the EC Commission considers that an exemption or other relieving provision in a member State's national law is not permitted by the Directive, the Commission may call on the Member State to remove it, and if the Member State declines the Commission can commence proceedings against it in the ECJ. But unless and until the offending provision is removed from the national law it remains in force, and taxpayers in the Member State can take advantage of it. In the infraction proceedings brought by the Commission against the United Kingdom (EC Commission v United Kingdom, referred to in paragraph 33(vi) above) some zero-rating provisions contained in the United Kingdom statute were held to fail the test of being for the benefit of the final consumer, and the United Kingdom had to amend some parts of what was at the time Schedule 5 to the VATA 1983. But as far as I know no-one suggested that taxpayers who had in the past benefited from the offending zero-ratings should be retrospectively deprived of the benefits which the national law had at the time provided for them.
- A further point to make about this aspect of Mr Eicke's argument is that the Commission, before commencing the infraction case against the United Kingdom, presumably reviewed all the zero-rating provisions which were included in United Kingdom law, identified the items in them which it considered to be incompatible with the Directive condition that the zero-rating must be for clearly defined social reasons and for the benefit of the final consumer, and brought proceedings in respect of those items. It did not bring proceedings in respect of the Group 8 item 1 zero-rating. The obvious explanation has to be that the Commission did not consider that that particular zero-rating provision in the United Kingdom statute failed the tests of being for clearly defined social reasons and for the benefit of the final consumer. It seems to me improbable in the extreme that the explanation was a different one, namely that, although the Commission believed that the Group 8 item 1 zero-rating may have failed those tests, it considered that the item was saved by the presence of article 15.5 in the Sixth Directive.
- I have two further points to make. The first has some affinities to what I have just said. It is in my judgment of some significance that, when the Sixth Directive took effect, the statutory predecessor of the Group 8 item 1 zero-rating provision (that predecessor being then contained in FA 1972) was left totally unchanged. Mr Eicke, if I have understood him correctly, has put forward the conjecture that the United Kingdom's post-Sixth Directive intention as regards its (the United Kingdom's) pre-existing zero-rating for ships was that it should thereafter operate strictly in accordance with the new article 15.5: it should achieve what article 15.5 required, no less and no more. I cannot accept this.
- Mr Eicke's suggestion amounts to this: the policy of the United Kingdom was that from 1 January 1978 onwards zero-rating for ships should cease to have the detailed content and manner of operation which it had had from 1972 to 1977 (in which period the United Kingdom provision was already in force but could not have been influenced by the non-existent Sixth Directive). Instead it should have a different detailed content and manner of operation as described in article 15.5. If that had been the policy I have little doubt that the draftsman would have been instructed to redraft the United Kingdom provision so as to accord better with the terms of article 15.5. The two provisions obviously have affinities with each other: they are both about ships, and they both provide for zero-rating treatment if their detailed terms are fulfilled. But there are many differences of detail between them. For the United Kingdom provision to apply a gross tonnage condition has to be satisfied. For article 15.5 to apply it does not. Under the United Kingdom provision all sufficiently large vessels qualify unless they are designed or adapted for recreation or pleasure. Under article 15.5 the test is that the vessel has to be used for navigation on the high seas, for carrying passengers for reward, or for commercial, industrial or fishing activities. Obviously most vessels which pass or fail the United Kingdom tests would also pass or fail the article 15.5 tests. But the tests and the structures of the two provisions are very different from each other.
- FA 1977 made a lot of changes to the pre-existing United Kingdom provisions in order to make them consistent with the Directive. To my mind the absence of any change to the Group 8 item 1 zero-rating provision (at the time, of course, the Group 10 item 1 zero-rating provision) clearly shows that the intention was that it should continue to operate in future in the same way as it had in the past (as article 28.2 permitted); it should continue to be construed in accordance with its natural meaning; and it should not be construed restrictively and unnaturally so as only to produce results which would coincide exactly with article 15.5 of the Directive.
- Finally I need to spend a little time considering another argument which Mr Eicke advanced. The argument did not feature in the grounds of appeal. It was not mentioned in Mr Eicke's skeleton, and, if my recollection is correct, it was only developed in the course of his reply. I have a note of him saying the following towards the end of the reply:
"To take the benefit of a zero-rating by virtue of article 28.2(a) the taxpayer must demonstrate that there was a political decision by the United Kingdom to utilise article 28.2(a) in order to maintain the particular zero-rating in force."
The point seems to be that, even if the Group 8 item 1 zero-rating precisely covers Commander Stone's case, and even though it remained part of United Kingdom statute law after the Sixth Directive, nevertheless HMRC can deny the benefit of it to him by saying that the United Kingdom never took a political decision to maintain that particular zero-rating. Indeed, the argument is even more striking: HMRC say that the burden rests on Commander Stone to show positively that the United Kingdom actually did take such a political decision. If that is the argument I do not accept it. If it is not the argument I am afraid that I have not understood the point. It is worth adding that, as far as I know, the argument has never been advanced before in any of the numerous appeals about zero-rating which have come before the Tribunal and the courts in the thirty years which have passed since the Sixth Directive, and in particular article 28.2 of it, took effect. If the argument is sound it would have been available in the Everett case, the Grieve case, and this case when before the Tribunal. It is, I think, clear that the argument was never mentioned at those hearings.
- The argument may have some connection with the word 'may' in article 28.2:
"
exemptions with refund of the tax paid at the preceding stage which are in force at 31 December 1975
may be maintained until a date which shall be fixed by the Council
"
That meant that the United Kingdom did not have to remove from its domestic VAT legislation zero-rating provisions which were inconsistent with the provisions of the Directive other than article 28.2. Of course, if the United Kingdom chose to remove one or more of its existing zero-ratings from its law it could do so. But if the United Kingdom left a zero-rating provision in force and the provision exactly covered a taxpayer's situation, I cannot believe for a moment that the United Kingdom can deny the benefit of it to the taxpayer on the ground which Mr Eicke's words seem to mean.
- It is worth remembering that there was much more than the Group 8 item 1 provision (strictly at the time the Group 10 item 1 provision) contained in the zero-rating schedule, Schedule 4, to FA 1972. The Schedule contained 14 Groups and many of the fourteen extended zero-rating treatment to several different items. Group 10 (the Group headed 'Transport' which contained the particular provision around which this case has revolved) contained ten separate items. If I have counted correctly the 1972 Act specified 49 different items to which zero-rating applied. There may have been a change or two in the next few Finance Acts which were enacted between the 1972 Act and the commencement of the Directive, but there would still have been about 50 zero-ratings which were part of United Kingdom VAT law on 1 January 1977 when the Directive took effect. If a taxpayer was clearly covered by one of them, how did he stand as between himself and Customs & Excise? In my judgment it is plain that he was entitled to the benefit of the zero-rating. It cannot be right that he needed to find out whether 'the United Kingdom' (whatever that may have meant in the context) had or had not taken a positive 'political decision' that it did choose to maintain the specific zero-rating. If that was the position how was the taxpayer supposed to find out whether his particular supply or importation was zero-rated or not? It has not been suggested by Mr Eicke that Customs & Excise, or some other Government authority, published a list of the zero-ratings which it did choose to maintain and of those which it did not, and I am quite sure that no such list existed. I also believe that an official of Customs & Excise would have felt bemused if he had received a letter from a taxpayer explaining that he had made a supply or importation which came within one of the zero-rated items, but still needed to know whether a political decision had been taken to maintain the zero-rating concerned.
- I may be wrong, but I think that Mr Eicke's 'political decision' argument is said to derive support from two sentences in the opinion of Advocate-General Kokott in Talacre Beach Caravan Sales Ltd v CCE, Case C-251/05, [2007] STC 1671:
"In derogation from this, under article 28.2(a) of the Sixth Directive, transactions that do not belong to the category of exempt or reduced-rate transactions which the Directive itself defines, may be given favourable treatment. These are non-harmonised additional concessions for social reasons that depend on political decisions by the Member States."
In my opinion the 'political decisions' referred to are the original decisions by the various individual Member States to enact their own zero-ratings or reduced rates. In the context of this appeal it is a reference to the decision taken by the United Kingdom Parliament to include in the Finance Act 1972 the zero-rating for ships which is the subject matter of this case. The Advocate-General is not alluding to a political decision whether or not to take advantage of article 28.2 and to leave in force the pre-Sixth Directive zero-ratings which the sub-article authorised Member States to retain if they wished.
- The correct position, surely, is that, if a Member State decided, whether on political or other grounds, that it did not wish to maintain an existing zero-rating in force as part of its own law, it was permitted by the Directive to eliminate it. But the mechanism for it to be eliminated was a matter of national law, not of Community law. Under United Kingdom law, if a statutory provision conferred favourable treatment on taxpayers in certain circumstances and the Government did not want that to continue, the statutory provision had to be repealed or suitably amended by Parliament (or possibly by Statutory Instrument, since there is power in some circumstances to amend the zero-rating Schedule in that way). If and so long as any particular zero-rating item is left in force as part of the United Kingdom's statutory law of VAT, the item continues to take full effect.
- In this case the United Kingdom did leave the Group 8 item 1 zero-rating provision in force as part of our statute law, and it is still there over 30 years later. It was part of our statute law when Commander Stone brought the Kei into the country. Article 28.2 gave and still gives continuing validity to the provision. In my judgment its natural meaning covers this case. I can see no reason for departing from the natural meaning. In particular article 15.5 does not, in my judgment, provide any such reason. I conclude, therefore, that by virtue of s.30(3) and Schedule 8 Group 8 item 1 of VATA 1994 there was no VAT liability upon the importation of the Kei into the country.
Conclusion
- The result of the foregoing is that I agree with the conclusion of the tribunal. Given the nature of the arguments presented to me, and given also the decision of the differently constituted tribunal in the Grieve case, I have gone into more detail in this case, so far as concerns the article 15.5 argument, than did the tribunal. The result is still the same. I dismiss the appeal.
