England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CROWN OFFICE LIST
MR JUSTICE COLLINS

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 20th February 2001

LORD JUSTICE ALDOUS:

1. With leave of this Court, the Greater Manchester Police Authority (Manchester Police) appeal against the order of Collins J of 22nd May 2000. In that order he dismissed Manchester Police's application for judicial review.
2. The issue between the parties concerns the construction of section 33 of the Value Added Tax Act 1994. In short, this Court has to decide whether Manchester Police can obtain a refund of VAT paid on the purchase of motor cars, marked and unmarked, during the period 1st January 1993 to 31st January 1995. The sum involved is about £500,000 and the decision affects other police authorities.
3. Manchester Police is a public body which is charged with certain public duties under the Police Act 1994. It is funded in part by central government and in part by local government. It also undertakes certain business activities for which it receives remuneration and in respect of which it charges VAT where appropriate. It was registered for VAT during the relevant period.
4. Manchester Police purchase and sell motor cars, both marked and unmarked, which they use to perform their public duties. They are charged VAT upon such purchases.
5. By letter dated 6th December 1998 to the respondents, the Commissioners of Customs and Excise (the Commissioners), Manchester Police sought a refund of the VAT paid on its purchases of new motor cars to be used for public duties. The Commissioners replied giving their view that Manchester Police was not entitled to a refund. Further correspondence ensued, but the Commissioners maintained their position with the result that the claim for a refund was finally refused on 26th March 1999. As no appeal was possible, an application for judicial review was issued on 21st May 1999. The form 86A sought an order quashing the decision of the Commissioners and a declaration that section 33 of the 1994 Act, when applied in conformity with Article 4(5) of the Council Directive 77/388/EEC, entitled Manchester Police to the refund of the VAT claimed. As I have said, the application was dismissed by Collins J. Before coming to his reasons, it is appropriate to set out the relevant legislation.
6. As is well-known, the concept behind VAT is that tax is charged on taxable supplies. Thus section 1 of the 1994 Act requires VAT to be charged on, amongst other things, the supply of goods and services in the United Kingdom. Section 2 sets the rate of VAT. Section 3 defines a taxable person as one required by the Act to be registered. Section 4 contains the requirement that a taxable person should charge VAT on a taxable supply of goods or services. A taxable supply is defined as a supply of goods or services made in the United Kingdom other than an exempt supply.
7. A person registered for VAT can reclaim (set-off) VAT paid by him. The provision for that concept is contained in sections 24-29 of the 1994 Act. Section 24 defines "Input Tax" and "Output Tax" as being respectively VAT on the supply of goods and services provided to the tax payer, and VAT on goods and services supplied by the tax payer. Section 25 provides for payment of VAT after crediting input tax against output tax. Subsection (1) states that the taxable person shall account and pay VAT in respect of supplies made by him and in respect of acquisitions by him from other member States of any goods. Subsection 2 entitles the tax payer to a credit for so much of his input tax as is allowable under section 26 and then to deduct that amount from any output tax. Subsection 7 enables the Treasury to make a credit exclusion order. It is in these terms:

"(7) The Treasury may by order provide, in relation to such supplies, acquisitions and importations as the order may specify, that VAT charged on them is to be excluded from any credit under this section; and –

(a) any such provision may be framed by reference to the description of goods or services supplied or goods acquired or imported, the person by whom they are supplied, acquired or imported, or to whom they are supplied, the purpose for which they are supplied, acquired or imported, or any circumstances whatsoever; and

(b) such an order may contain provision for consequential relief from output tax."

8. Section 26 is concerned with input tax allowable as a credit under section 25. For the purposes of this judgment it is sufficient to set out the first two subsections.

"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under the regulations as being attributable to supplies within subsection 2 below.

(2) The supplies within the subsection are the following supplies made or to be made by the taxable person in the course or in the furtherance of his business –

(a) taxable supplies;

…

(c) such other supplies ………… the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection."

9. Part II of the 1994 Act (sections 30 to 40) deals with reliefs, exemptions, and repayments. Section 33 is concerned with refunds to bodies such as Manchester Police. It provides:

"33(1) Subject to the following provisions of this section, where –

(a) VAT is chargeable on the supply of goods or services to a body to which this section applies, on the acquisition of any goods by such a body from another member State or on the importation of any goods by such a body from a place outside the member States, and

(b) the supply, acquisition or importation is not for the purpose of any business carried on by the body,

the Commissioners shall, on a claim made by the body at such time and in such form and manner as the Commissioners may determine, refund to it the amount of the VAT so chargeable.

(2) Where goods or services so supplied to or acquired or imported by the body cannot be conveniently be distinguished from goods or services supplied to or acquired or imported by it for the purposes of a business carried on by it, the amount to be refunded under this section shall be such amount as remains after deducting from the whole of the VAT chargeable on any supply to or acquisition or importation by the body such proportion thereof as appears to the Commissioners to be attributable to the carrying on of the business; but where –

(a) the VAT so attributable is or includes VAT attributable, in accordance with regulations under section 26, to exempt supplies by the body, and

(b) the VAT attributable to the exempt supplies is in the opinion of the Commissioners an insignificant proportion of the VAT so chargeable,

they may include it in the VAT refunded under this section.

(3) The bodies to which this section applies are –

….

(f) a police authority and the Receiver for the Metropolitan Police District;

…

(6) References in this section to VAT chargeable do not include any VAT which, by virtue of any order under section 25(7), is excluded from credit under that section."

10. Finally I come to statutory instrument 1992 No. 3222 called the Value Added Tax (Input Tax) Order 1992. That order was made under section 14 of the Value Added Tax Act 1983 which was superseded by section 25 of the 1994 Act. The order applies as if it was made under section 25. The VAT (Input) Order 1992 contains provisions excluding VAT charged on inputs from being credited against outputs. Paragraph 7 is in these terms:

"7(1) Subject to paragraph (2) below tax charged on –

(a) the supply to a taxable person;

….

of a motor car shall be excluded from any credit under section 14 of the Act."

11. The case for the Commissioners before the judge was simple. Bodies, such as Manchester Police, were not taxable persons when carrying out their public functions. It followed that Sections 25 and 26 of the Act did not apply. But to satisfy the promise of the Government that VAT charged should not fall upon publicly funded bodies a refund scheme was necessary. Thus section 33 provided a scheme for refunds to bodies, such as Manchester Police, of VAT paid by them to carry out their public functions. Section 33(6) made it clear that such a scheme was subject to any exclusion in an order made under section 25(7). The 1992 Order was such an order. Article 7 of that order excluded recovery of VAT charged on purchase of motor cars. Thus no refund was payable. That submission found favour with the judge. He said:

"28. Accordingly, on its true construction section 33(6) does appear to impose as a bar to a refund the provisions of article 7 of the relevant order made under section 25(7). In those circumstances, the cars acquired by the Greater Manchester Police Authority, are caught, and the Commissioners were correct in their interpretation of the law in refusing to pay the relevant refund."

12. Mr Barling QC, counsel for Manchester Police, had submitted to the judge that section 33(6) only applied to refunds claimed under section 33(2), not subsection (1). That, he submitted, was clear from section 33. Section 33(1) solely concerned non-business activities of bodies. In that capacity they were not taxable reasons and therefore the credit system to which section 33(6) applied did not apply. It followed that orders applied by section 33(6) did not block refunds payable under section 33(1).
13. The judge rejected that submission because it effectively prevented the 1992 Order from having any effect. He also relied on the apparent width of the words in section 33(6). He concluded that if it had been intended to restrict the application of section 33(6) to section 33(2), it was surprising that section 33(6) had not said so explicitly. He accepted that there was factual merit in Mr Barling's submission that the Commissioner's approach meant the Government's promise had not been completely fulfilled, but concluded that the introduction of a blanket ban on recovery of VAT on motor cars was understandable as the difficulty of differentiating between different uses of motor cars was a general problem. The fact that that did not apply to Manchester Police was not decisive as the 1992 Order applied to such bodies as the BBC.
14. Before us, the submissions of the parties followed those made to the judge with added sophistication made necessary by the clarity of the judgment. Mr Barling started by reminding us that the accepted purpose of the refund scheme, contained in section 33, was to ensure that the imposition of VAT would not fall as a burden on rates or rate support grants (now Council Tax and Revenue Support Grant). A promise to that effect was made by the Government in a White Paper of 1972. The result, the refund scheme, was consistent with the EEC Directive 77/388/EEC which provided in Article 4(5) that bodies such as Manchester Police should not be considered as taxable persons in respect of their public duty activities and transactions.
15. Mr Barling also reminded us that it was accepted, and the judge held, that the motor cars in issue were acquired solely for use by Manchester Police to carry out its non-business public duties. Thus VAT charged did not qualify as a credit because Manchester Police was not a taxable person in respect of those purchases. It followed that recovery depended upon the refund provisions of section 33. It was submitted by Mr Barling that to construe section 33 to exclude the refund of VAT would produce a result contrary to the statement in the White Paper. Such a construction was not necessary. It would frustrate the mischief sought to be remedied by section 33, the intention of Parliament and the basic objects of the refund scheme. It would distort public funding by diverting funds provided for policing to central government and would penalise the police authority.
16. Mr Barling's primary contention was that the words of section 33(6) were clear. He relied first on the use of the words "VAT chargeable" in section 33(6). Those words appeared in section 33(2), but not in section 33(1) which used the words "VAT is chargeable". That, he submitted, indicated that section 33(6) only applied to section 33(2). Second, he pointed out that section 33(6) only applied to orders where VAT "is excluded from credit under that section" (section 25). Section 33(1) only applied to the refund of VAT paid during a non-business activity and therefore could not be credited under section 25. He submitted that it followed that the VAT to be refunded under section 33(1) could not be the VAT referred to in section 33(6), namely VAT which was excluded from credit under an order made under section 25(7). Section 33(6) could only apply to VAT chargeable under section 33(2) as a business VAT input tax that was possible if the business part was an insignificant proportion of the whole.
17. Mr Sales, who appeared for the Commissioners, did not dispute that the refund scheme was designed to prevent the burden of VAT falling on such bodies as Manchester Police, but that did not mean that section 33(6) should be construed as suggested by Manchester Police. The purpose of section 33(6) was to apply orders made under section 25(7) mutatis mutandis to the refund scheme of section 33.
18. However Mr Sales submitted that it would be right also to take into account the reason for the 1992 Order. It was introduced to deal with tax evasion in circumstances where it was difficult to differentiate between business and private use of motor cars. It could be seen as blunt instrument applying, as it does, to circumstances where cars could only be used for business use (see Royscot Leasing Ltd v Customs and Excise Commissioners[1999] AER (EC) 908). In those circumstances there was nothing illogical in applying it to public bodies, some of whom used cars both for public and private use. He went on to submit that the construction of section 33(6 was clear when construed against that background and in the context of the Act.
19. Mr Sales reminded us that an essential feature of the VAT regime was the concept that a registered person could credit input tax against output tax. That regime was subject to two circumstances where no credit was available. First, where the end supply was an exempt supply. In that case there was no output tax against which an input could be credited. Second, where an order was made under section 25(7) excluding the credit of certain categories of input tax. Mr Sales went on to submit that section 33(6) expressly excluded from the refund scheme of section 33 any VAT which was excluded from credit in an ordinary case by virtue of an order under section 25(7). Refunded tax under section 33 was tax paid by a public body in respect of its public duties. It was a refund made to a non-taxable person and therefore it could never be used as a credit under section 25. It followed that section 33(6) must necessarily be read as applying a provision (the 1992 order), which in an ordinary case prevents VAT on taxable supplies by taxable persons being used as a credit, to a regime which involves non-taxable supplies and non-taxable persons. Section 33(6) must be read as identifying the type of supplies which are excluded from the refund scheme of section 33. Thus an order made under section 25(7) must be read mutatis mutandis in the context of section 33. Mr Sales also submitted that to construe section 33(6) in the way suggested by Manchester Police would deprive it of any meaning or effect.
20. Section 33(6) states "References in this section to VAT chargeable do not include any VAT which …. is excluded from credit under that section". As was pointed out by Mr Barling, when making his first submission on construction, the words "VAT chargeable" only occur in section 33(2) and from that it is arguable that subsection (6) was only intended to apply to subsection (2). However there is force in Mr Sale's submission that the words "VAT is chargeable" in subsection (1) are equivalent, when read in context, to "VAT chargeable" and therefore no conclusion can be drawn from the difference. It is for that reason that I do not feel it right to rely upon the difference in wording to resolve the dispute on construction.
21. To support his second submission on the construction of section 33(6), Mr Barling pointed out that it only excluded "any VAT which … is excluded from credit under" section 25. Thus he submitted the crucial question was – Did the VAT sought to be refunded comprise VAT that was excluded from credit under section 25? Mr Barling went on to submit that the answer to the question must be, no. His reason was that a credit for the VAT on the particular motor cars could never be allowed as an input under section 25 as the VAT charged could only be recovered under the refund scheme of section 33.
22. Mr Sales submitted that the question posed by Mr Barling did not give full effect to the words "any VAT" in section 33(6). The question posed by Mr Barling assumed that what was being excluded by section 33(6) was VAT which could have been the subject of a credit. VAT on motor cars was excluded from credit under section 25 by reason of the 1992 order. Such VAT had been charged to and paid by Manchester Police. It followed that the VAT was of the type which was excluded from credit and therefore it was excluded from the refund scheme of section 33.
23. The difference between the parties turns on whether section 33(6) should be interpreted as referring to VAT which was capable of being used as a credit by Manchester Police or whether it refers to VAT of the type which could be used as a credit.
24. In my view it is not possible to resolve the dispute between the parties from the words of section 33(6) alone. I am of the view that the fact that the approach of the Commissioners would make a hole in the refund scheme so that the promise of the Government that the burden of VAT paid by public bodies should not fall on public funding, does not mean that Manchester Police's construction should be adopted. Section 33(6) is designed to allow blocking orders to be applied to the refund scheme and both parties accept that the effect of section 33(6) and the 1992 order is to punch a hole in the refund scheme. The dispute turns on the size of the hole. In my view that dispute needs to be resolved taking account of the effect of the 1992 order in a section 25 environment. The 1992 order when applied to a section 25 case is a "blunt instrument" as can be seen from its application in the Royscot case. Such an instrument was thought necessary in respect of motor cars used for business alone or for business and private use. It would therefore not be surprising that Parliament intended to take the same approach in respect of public bodies.
25. I have not found it easy to resolve the dispute on construction. But I conclude that the judge was right for the reasons he gave. To construe section 33(6) as only applying the 1992 order to section 33(2) would deprive the order of any material effect. Section 33(2) is concerned with what can be called mixed supplies. It can be considered as containing two rights to a refund. First, a right to a refund of the amount which remains after the proportion that the Commissioners attribute to business activity has been deducted. That amount is not made by a taxable person and could not be credited. It would therefore not be affected by section 33(6) if it is construed as suggested by Manchester Police.
26. Second, the right to a refund of VAT attributable to exempt supplies attributable to business use, provided that it is an insignificant proportion. It is the second right that Mr Barling submits is affected by orders applied by section 33(6). He submitted that the effect of such an application of section 33(6) would be to block part of a refund which would not necessarily be an insignificant amount in total, although termed in the subsection as an insignificant proportion of the VAT chargeable. That was demonstrated by the facts of Haringey London Borough Council v Customs and Excise Commissioners [1995] STC 830. In that case Haringey expended about £37 million on the rebuilding of Alexandra Palace and claimed a refund of VAT, some of which related to mixed supplies containing an exempt element.
27. I accept that in certain cases the amount of money attributable to exempt supplies that may be included in a refund would be large although an insignificant part of the whole, but that does not establish that Parliament intended that orders applied by section 33(6) should be restricted to blocking that element of a refund. To the contrary, exempt supplies do not ordinarily attract credit under section 25. A taxable supply is defined in section 4 as "a supply of goods or services … other than an exempt supply". Section 25 only applies to taxable persons and taxable supplies. Thus the 1992 order does not and could not apply to exempt supplies.
28. In my view the only practical construction of section 33(6) is that advanced by the Commissioners. Subsection identifies the type of VAT which is excluded from the VAT refund scheme of section 33. Its form was chosen to apply the different types of exclusion to orders made and to be made with the result that the words needed to be of general application. To believe that Parliament restricted the effect of section 33(6) to "an insignificant proportion of the VAT so chargeable" appears to me to be unlikely. The concession in section 33(2) allowing some exempt supplies to be included in the refund scheme is there for practical reasons. The requirement that it should be an insignificant proportion indicates that Parliament considered the amount as being de minimis. It would therefore be contrary to that indication to construe section 33(6) as being directed solely to that proportion. The intention was to apply blocking orders directed to the scheme for crediting inputs against outputs in section 25 to the refund scheme mutatis mutandis.
29. Our attention was also drawn to the terms of the 1992 order. Article 7(1) is concerned with tax charged on "the supply to a taxable person". That is not surprising as the order is drafted pursuant to the power given by section 25(7). It therefore expressly applies to taxable persons and excludes from the credit scheme certain inputs on taxable supplies. In fact it could only apply to taxable persons as section 25 is only concerned with such persons and such supplies. But that does not mean that it should be read literally when applied to the refund scheme of section 33 by section 33(6). As I have said section 33(6) identifies the category of VAT that is excluded from the refund scheme and by definition the person seeking the refund is not a taxable person as they are not part of the refund scheme as the Directive makes clear. Thus to have effect as required by section 33(6), the order must be applied to public bodies such as Manchester Police who are not taxable persons.
30. Both parties sought to rely upon the Directive as an aid to construction. I, like the judge, conclude that its effect is neutral.
31. For the reasons given I would dismiss this appeal.

ROBERT WALKER LJ:

32. Value added tax ("VAT") was introduced in the United Kingdom by the Finance Act 1972. Its structure has from its inception been shaped by Community legislation, including (most relevantly to this appeal) the Sixth Council Directive of 17 May 1977 (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes ("the Sixth Directive"). Article 4.5 of the Sixth Directive provides as follows:

"States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities."

33. Annex D lists various activities of a commercial nature, such as transport, telecommunications, and the supply of water, gas and electricity. Article 13 provides for exemptions for services of a social nature such as healthcare, education and non-commercial sport and broadcasting. Article 28 contains transitional provisions.
34. The scheme of the VAT legislation, now embodied in the Value Added Tax Act 1994 ("the 1994 Act") makes use of a number of key concepts defined in the 1994 Act. Many of these definitions are succinct and their practical effect can be understood only by reference to more elaborate provisions in Schedules to the 1994 Act, as supplemented by statutory instruments. Some of the most important of these definitions are set out in the judgment of Aldous LJ, which I have had the advantage of reading in draft. I need not repeat them here. It is sufficient to call attention to the key concepts of taxable person (section 3 and Schedules 1 to 3), taxable supply, and the imposition of VAT on taxable supplies made "by a taxable person in the course or furtherance of any business carried on by him" (section 4), input and output tax and the credit mechanism (sections 25 and 26), zero-rating (section 30 and Schedule 8) and exempt supplies (section 31 and Schedule 9).
35. The distinction between zero-rated supplies and exempt supplies is not immediately obvious but is of great practical importance, since a zero-rated supply, although not an occasion for charging VAT, is treated as a taxable supply and comes within the credit mechanism. An exempt supply, on the other hand, is by definition not a taxable supply and is generally (but, on the appellant's case, not always) outside the credit mechanism. The credit mechanism may lead to a taxable person, all or most of whose supplies are zero-rated, receiving regular payments of 'VAT credit' (see section 25(3)). Such a payment could be loosely described as a refund but in fact the draftsman has scrupulously avoided that word in section 25, preferring 'VAT credit', and has used the word 'refund' only in section 33 (refunds of VAT in certain cases).
36. The lists of groups in Schedule 8 (zero-rating) and Schedule 9 (exemptions) reflect what is either permitted or required by the Sixth Directive and other Community measures. Schedule 8 contains sixteen groups, some very familiar to consumers (such as food, books and newspapers and children's clothing and protective clothing). Schedule 9 contains thirteen groups, including many concerned with services of a public nature, such as education, health and welfare, and burial and cremation. (Another important public service, sewerage and water, is however included in Schedule 8).
37. The net result of these provisions is that a large local authority may find that its activities fall into three distinct categories for VAT purposes: the performance of public, non-commercial functions ("public functions"); commercial activities which are treated as making exempt supplies; and commercial activities which are treated as taxable supplies. One example of an activity in the second category would be running adult education classes and running a crematorium might be another (although that may be controversial in the light of a recent tribunal decision about a graveyard, Rhondda Cynon Taff CBC v Commissioners of Customs & Excise, 16 December 1999). Running a restaurant or a canteen would be an example in the third category. All these possibilities need to be in mind in considering the legislative purpose and effect of section 33 and its interaction with the Value Added Tax (Input Tax) Order 1992 (S.I. 1992 No. 3222, now repealed - "the 1992 order").
38. The 1992 order was made under what is now section 25(7) of the 1994 Act. Section 25(7) confers a wide power enabling the Treasury to order in relation to specified supplies that "the VAT charged on them is to be excluded from any credit under this section". The 1992 order had that effect in relation to the supply of a number of specified goods or services to a taxable person, including (para 4) works of art, (para 5) goods or services for business entertainment, (para 6) certain goods built into a dwelling and (para 7) motor cars, subject to the exceptions in para 7(2), covering certain hire cars and other special cases. It is common ground that the purpose of the exclusion made by para 7 was to prevent tax evasion, because of the difficulties (encountered not only in the United Kingdom but throughout the Community) of monitoring and controlling the use of company cars for private purposes. It is also common ground that the exclusion as framed in the 1992 order was wider than was necessary in order to achieve its objective, and that no doubt explains why it has been repealed and replaced by different provisions (this appeal relates, in effect, to VAT paid and not refunded during the last ten quarters for which the 1992 order was in force). But the European Court of Justice has upheld the validity of the 1992 order as being authorised by Articles 11(4) and 17(6) of the Second Directive, EC Council Directive 67/228: see Royscot Leasing v Commissioners of Customs & Excise [1999] STC 998.
39. Both sides agree that section 33 lies outside the main scheme of the VAT legislation. It was permitted (rather than required) by Community law in order (as the judge put it)

"to fulfil the promise, made by the Government on the introduction of VAT in the United Kingdom, that provisions would be put in place to ensure that the imposition of VAT would not distort the funding of public bodies."

The public bodies ("section 33 bodies") to which the section applies are listed in section 33(3). Local authorities are mentioned first in paragraph (a) and are no doubt the largest and economically most important constituent of the section 33 bodies. The appellant, the Greater Manchester Police Authority ("the Authority") comes in under paragraph (f). The Authority, like a local authority, is funded partly by central government grants and partly by local payers of council tax and non-domestic rates; and it is distortion of the balance as between central government and local funding which the section is intended to prevent. Most of the Authority's activities are public functions but it has a few activities (such as providing facilities and instruction to members of the public at its driving school) which are classified as business activities.

40. Counsel did not however agree as to the general means by which section 33 attains its objective. Mr Philip Sales (for the Commissioners of Customs & Excise) initially suggested that the section assimilates the position of a section 33 body which acquires an asset for the purposes of its public functions to that of a taxable person who acquires an asset for the purposes of making taxable supplies in the course of his business. However Mr Sales then modified this position, suggesting (if I understand his submissions correctly) that the crucial part of the assimilation or analogy is between the VAT credit which a trader can obtain under section 25(3) and the refund available under section 33 which, although given a different name, has broadly the same economic effect. Against that Mr Gerald Barling QC (appearing with Miss Julie Anderson for the Authority) emphasised that (in relation to its public functions) the Authority is not a taxable person and should not be equated with one. That point was the basis of many of Mr Barling's submissions as to the correct construction of section 33.
41. The issue of statutory construction raised in this appeal is in the end a fairly short point, although it has called for quite a lot of preliminary explanation to get to it. Each side contended that its construction corresponded to the natural and literal meaning of the words of the statute, and that that literal construction was confirmed by the scheme and purpose of the 1994 Act.
42. Mr Barling pointed to the use of the indicative tense in section 33(6) ('is excluded') and to the fact that VAT paid by someone who is not a taxable person is not and cannot be excluded by the 1992 order (or any order under section 25(7)) since the credit under section 25 is available only to a taxable person. He supported that literal interpretation by reference to the contrast in language between subsection (6) and subsections (4) and (5) of section 33. He also supported it by three main arguments concerned with the structure and purposes of the legislation (two of these arguments were positive in character and the other was designed to refute an argument put forward by Mr Sales). Mr Barling's first positive argument (which the judge described as having "some factual merit") was that the 1992 order was aimed at tax evasion and that there was no risk of that occurring with either marked or unmarked cars belonging to the Authority. His other positive argument was that Article 4.5 of the Sixth Directive favoured his interpretation because its general intention was that section 33 bodies should not be treated as taxable persons, which would be the effect of applying para 7 of the 1992 order to them.
43. Mr Sales pointed out that if section 33(6) had been intended to modify subsection (2) only, nothing would have been easier than to say so. On the language which Parliament had actually used it was a contorted construction, as he sought to demonstrate by setting out the terms of subsection (6) in parentheses in subsections (1) and (2). Subsection (6) was simply identifying a category of VAT. In relation to the first of Mr Barling's positive arguments he accepted that this was a case where the anti-evasion measure had been in wide terms; but (he said) the terms were clear and had been upheld by the Court of Justice. In relation to the second argument he said that the Sixth Directive was neutral. The main argument on the scheme and purpose of the legislation deployed by Mr Sales was that if section 33(6) were limited in its effect to the circumstances covered by subsection (2), its practical purpose would be frustrated and it would be deprived of all or most of its practical effect.
44. Although it is set out in the judgment of Aldous LJ the terms of section 33(2) call for repetition. Dyson J (in Haringey LBC v Commissioners of Customs & Excise 1995 STC 830, 834) described the corresponding subsection in the Value Added Tax Act 1983 as divided into a 'first part' and a 'tailpiece'. The first part can be abbreviated as follows:

"Where goods ... so supplied [ie for public functions] to ... [a section 33] body cannot be conveniently distinguished from goods ... supplied to ... it for the purposes of a business carried on by it, the amount to be refunded under this section shall be such amount as remains after deducting from the whole of the VAT chargeable on any supply to ... the body such proportion thereof as appears to the Commissioners to be attributable to the carrying on of the business; ... "

The tailpiece continues:

"but where -

(a) the VAT so attributable is or includes VAT attributable, in accordance with regulations under section 26, to exempt supplies by the body, and

(b) the VAT attributable to the exempt supplies is in the opinion of the Commissioners an insignificant proportion of the VAT so chargeable,

they may include it in the VAT refunded under this section."

So the main part of the subsection provides a procedure for apportionment without affecting the general principle that the refund is available to a section 33 body only for VAT on goods acquired for public (and non-business) purposes. The tailpiece makes a limited exception to that principle in the cases in which it applies.

45. Mr Barling relied on section 26(2) of the 1994 Act, under which a taxable person's credit for VAT attributable to supplies made by him in the course of his business include not only taxable supplies but also (under para (c) of the subsection) such exempt supplies as the Treasury may specify by order. The relevant order was the VAT (Input Tax) (Specified Supplies) Order 1992. Its scope was extremely limited, as is recognised in the Customs & Excise Manuals (Part 15, Chapter 1.2) to which Mr Barling referred. The fact that a tiny handful of exempt supplies may exceptionally be treated as if they were taxable supplies, for the purposes of attribution of input tax, cannot be a reliable guide to the scheme of the legislation or to the purpose of section 33(6).
46. The judge preferred Mr Sales' submissions. So do I. To my mind Mr Barling's submissions as to the literal meaning of the provisions would produce a strained construction putting too much weight on the use of the indicative tense in subsection (6), and too little weight on the improbability of Parliament framing section 33 as it did, if the only purpose was to disallow some (at least relatively) insignificant inputs which might otherwise be allowed, exceptionally, in respect of exempt supplies. The point on the contrast between the language of subsections (4) and (5) and that of subsection (6) is not to my mind a strong one.
47. Mr Barling's point as to the language of subsection (6), on which he placed much reliance, seems to me (with great respect to him) literal almost to the point of pedantry. Suppose that rule 25(7) of the rules of a club enables the committee to exclude members from the use of specified parts of the club premises. Suppose also that under rule 33 of the club's rules members of another club are permitted to use the first club's premises, but (under rule 33(6)) not including any parts of the premises from which members of the first club are excluded under rule 25(7). A visiting member of the second club who tries to insist on using some excluded part of the first club's premises will be regarded as pedantic as well as ill-mannered if he objects that rule 25(7) does not apply to him because he is not a member of the first club. It is true that rule 25(7) does not apply directly to him, but it is obviously being used by rule 33(6) to identify a restriction which does apply to him. I would not wish to say anything to discourage the draftsmen of statutes from keeping their language as simple as possible, without unnecessary subjunctives or 'as if' clauses.
48. Mr Barling's strongest purposive argument was that the 1992 order is concerned with tax evasion in the form of private use of cars acquired for business purposes, and that section 33 is concerned not with business purposes but with public functions. That argument calls for serious consideration. But although the improper use of police cars may be unthinkable, the improper use of cars by some employees of some section 33 bodies is by no means unthinkable. If the effect of section 33 is to assimilate section 33 bodies to taxable persons for some purposes (and I accept Mr Sales' modified submission on this), it is not obvious why the diversion of public resources to private enjoyment should not be regarded as being just as objectionable as the diversion of business resources to private enjoyment.
49. For these reasons, as well as for the reasons given in the judgment of Aldous LJ, I would dismiss this appeal.

HALE LJ:

50. I am reluctantly driven to the same conclusion. There are two reasons for that reluctance, one relating to the policy of the legislation and the other relating to its language.
51. The policy underlying section 33 of the 1994 Act has nothing to do with the internal logic of the VAT scheme. Article 4(5) of EEC Directive 77/388/EEC provides that 'states, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of activities or transactions in which they engage as public authorities, . . . ' Accordingly our law does not treat bodies such as the Greater Manchester Police Authority as taxable persons, save in respect of any business activities they may carry on in addition to their public functions. They do not have to charge VAT on services they supply, but having no output tax they also have nothing against which to credit any input tax paid on goods or services supplied to them. There is nothing in the directive to require central government to reimburse tax paid by local and other authorities upon supplies made to them for the purpose of carrying out their public functions. This is part of a broader political and constitutional question of whether public authorities, and those funding them, should be expected to contribute towards central government funds in this way. No doubt for very good reasons, a policy decision was taken when VAT was introduced that these authorities would not have to bear it.
52. Once that is agreed, there is no particular reason why it should not apply to cars, even if taxable persons cannot claim credit for them. It can indeed be difficult to distinguish between business and private use of cars, but in this case the person gaining the illegitimate benefit (of using the car like an ultimate consumer but not paying tax like an ultimate consumer) does not in this case bear the tax. The local and central taxpayers who fund local services, who get no benefit at all from the abuse, are doing so.
53. Secondly, the language of section 33(6) and the 1992 Order do not at first sight cover the situation. Section 33(6) excludes from section 33 'any VAT which, by virtue of any order under section 25(7) is excluded from credit under that section.' Article 7 of the 1992 Order excludes from credit taxed charged on the supply of a motor car 'to a taxable person'. It is irrelevant for this purpose that the police authority happen to be a taxable person in respect of some limited business activities carried on by them. The Commissioners' argument would be just the same even if they were not.
54. However, the 1992 Order is only phrased in terms of supplies to a taxable person, because it is only tax on such supplies which is capable of being input tax within the definition in section 24(1) and thus being credited against output tax under section 25(2). (Certainly all the articles in that order to which our attention has been drawn refer in one way or another to such supplies). For the purpose of relating the Order to section 33(6), it might have been simpler if its articles did not refer to supplies to a taxable person at all, because there is no need to do so. But it is impossible in context to regard those words as cutting down the scope of the application of section 33(6).
55. I would attach no importance at all to the fact that section 33(6) relates only to references to 'VAT chargeable'. Those exact words only appear in section 33(2), whereas section 33(1) begins 'where VAT is chargeable'. But if the draftsman had meant section 33(6) only to apply to section 33(2) he would have said 'the reference in subsection (2) above . . ' rather than 'references in this section . . . ' In the end, therefore, although I do not share the view that restricting its application to the second part of section 33(2) would necessarily be so small as not to be worth doing, I cannot see any warrant in the section for so restricting it. The clear object of section 33(6) is to retain the possibility of excluding some VAT from the refund scheme should it be thought desirable so to do.
56. I would therefore dismiss this appeal.
ORDER: Appeal dismissed with costs; application for permission to appeal to the House of Lords refused.
(Order does not form part of approved Judgment)